Illicit money flows as motives for FDI

We examine the role of FDI in facilitating money laundering and illegal capital flight, focusing on transition economies' FDI outflows because they largely reflect current investment decisions rather than the inertia of past decisions. We estimate a model of FDI outflows in which illicit money flows influence the volume of FDI directed toward countries considered to be centers of money laundering. We show that traditional models of FDI are not able to account for these investment flows and that our results are robust when additional explanatory variables such as host country tax rates, governance, corruption, and cultural differences between the home and host country are included in the model. We estimate that 6-10% of total FDI outflows and over 20% of FDI to money-laundering countries from our sample were made to facilitate illicit money flows.

► Foreign direct investment facilitates illicit financial flows such as capital flight and money laundering. ► We find that large apportion of FDI outflows is directed toward money laundering countries. ► An econometric model shows that illicit flows distort both the location and volume of outward FDI. ► Results are robust to alternative explanations of FDI outflows and definitions of money laundering host country.