The effect of illicit financial flows on government revenues in the West African Economic and Monetary Union countries

Abstract

This is a study of the effect of illicit financial flows on government revenues in the West African Economic and Monetary Union countries. The study uses data from 8 countries and covering the 1996–2013 period. Using an empirical investigation with instrumental variables, the study found that illicit financial flows had a negative and significant effect on government revenues and that this effect was tied to per capita income, corruption and governance. It further highlighted the significance of the per capita income in the relationship between illicit financial flows and government revenues. The study therefore recommends that the governments should strengthen their tax collection capacity to better identify and prevent certain illegal activities associated with illicit financial flows. At the regional level, the West African Economic and Monetary Union Commission should consider setting up an appropriate illicit financial flows consultative body that would bring together state and non-state actors and serve as a platform for consultation and discussing illicit financial flows issues. With regard to the per capita income as the main transmission channel, governments should put in place the incentives that people need to keep and invest a large part of their profits and savings in their countries origin.