On 8 August 2023 the OECD issued policy guidance for policymakers and practitioners on managing the problem of Illicit Financial Flows (IFFs) in oil commodity trading. The Policy Guidance on Mitigating the Risks of Illicit Financial Flows in Oil Commodity Trading considers ways of improving integrity as the industry faces the energy transition.
The extractives sector, particularly oil commodity trading is a sector where IFFs are prevalent. In sub-Saharan Africa IFFs are almost the same in amount as the combined inflows of official development assistance (ODA) and foreign direct investment. The IFFs occur through tax evasion, trade mispricing, trade-based money laundering and bribery, with flows often being routed through offshore corporate entities and subsidiary vehicles.
These illegal practices in oil commodity trading are a problem for developing countries as in oil producing countries the export revenues are an important factor in domestic resource mobilisation, and significant government revenue is lost through IFFs in the sector. Most developing countries, including the oil rich economies, have high levels of public debt and the number of countries at risk from debt distress is increasing. The revenue lost from IFFs is worsening the problem. As countries transition to green energy the same practices that led to IFFSs in the sector are likely to continue in the renewable energy sector, especially in relation to carbon emissions trading.
Providers of overseas development assistance need to increase their understanding of IFF risks and to take those risks into account in designing projects. The countries providing ODA could increase their engagement with national oil companies by helping to build capabilities for financial management, due diligence, compliance and risk management.
The ODA providers could consider the possibility of an IFF advisory facility that would provide information to operations that are susceptible to IFFs. The ODA providers could collaborate with dedicated policy networks to manage issues relating to offshore networks and enablers of IFFs. Relevant organisations that could collaborate with ODA providers include the OECD Investment Committee, the Working Party on Responsible Business Conduct and the Working Party on State-Owned Enterprises (SOEs). The Financial Action Task Force (FATF) could advise on trade-based money laundering and the International Institute of Finance could assist with policy guidance on the transparent and sustainable provision of credit. The skills and engagement of the IMF could also be used to provide guidance on transnational IFF risks and to provide surveillance and advice under Article IV of the IMF’s articles of agreement.
Intermediaries are used by large trading companies to secure business in countries and to facilitate operations, but the use of agents is associated with risks of corruption. The Extractive Industries Transparency Initiative (EITI) partnership can be a vehicle to support efforts to enhance integrity in the selection of suppliers and intermediaries. Also, the EITI’s forthcoming guidance on making data disclosure more successful and impactful could assist in identifying the relevant data that would enable stakeholders to examine the behaviour of commodity traders and ensure accountability.
