According to one estimate, in the developing world outflows of Illicit finances ranged $620-970 billion in 2014, with inflows ranging between $1.4 and $2.5 trillion. The estimated dollar levels of illicit outflows are said to be largest in Asia. Outflows are estimated to have grown between 9-9.8 percent per year from 2004 to 2014, reaching between $272 and $388 billion in the latter.
The narcotics trade is said to be one of the most prominent sources of funds for illicit financial flows (IFFs), linking four neighbouring focus countries: Afghanistan, Pakistan, Tajikistan, and Kyrgyzstan.
Afghanistan has been identified as the origin country of the drugs, with Kyrgyzstan and Tajikistan often acting as consumption and transit countries for drugs bound for Europe, as well as an intermediary for handling finance. Consumers in Europe provide the funds back to Afghanistan. Pakistan is said to operate as a consumption country and as a financial centre for drug money.
Afghanistan is said to be the largest opium producer and exporter in the world. The UNODC has estimated that in 2016 opium production was 43 percent more than in 2015. Figures show that southern Afghanistan has the largest share of national opium production, at 54 percent, with the northeastern, northern and central regions accounting for 10 percent of opium production.
A report from June 2014 published by FATF, the global standard-setter on anti-money laundering and counterterrorist financing, explains in detail some of the ways in which the money associated with Afghanistan's narcotics trade is laundered.
A key role is said to be played by money or value transfer services (MVTS), which FATF defines as "financial services that involve the acceptance of cash, cheques, other monetary instruments or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary by means of a communication, message, transfer, or through a clearing network to which the MVTS provider belongs." Transactions involved may use intermediaries and a final payment to a third party. In South Asia in particular, hawala or hundi are the main terms used for this process, and hawaladars (hawala brokers) provide the service.
The 2014 FATF report notes that money from those buying the drugs in, for example, Western Europe, is transferred to producers in Afghanistan via the formal banking system in intermediary countries, namely Pakistan, Iran, the UAE and China.
Dubai operates as a central "clearing house" for many of these transactions. This highlights the fact that the formal banking sector in countries such as Dubai plays as important a role as informal banking. The money from these intermediary countries is then transferred to a hawaladar in Afghanistan, who deals with fund transfers on behalf of the drug trafficker, at times without knowledge of the illicit source of finance. Illustrative of the crossover between drug trafficking and legitimate trade, the drug trafficker might use hawaladars to assist in importing goods to legitimise the money. As noted by the FATF report, "by the time the goods or money arrive in Afghanistan, it is often impossible to link them to their illicit origin."
Reference has also been made to illicit activities of import-export companies registered elsewhere that may transfer funds into Afghanistan, as well as hawaladars in Afghanistan controlling import-export companies to transfer money to recipients in other countries. This is likely to be part of trade-based money-laundering schemes. Some transactions may show under- or over-invoicing, or simply use fictitious invoices, to avoid customs duties in both countries. This is a way to move illicit payments for drugs out of the country, or they may be used to balance debts between hawaladars.
One case from Russia's financial monitoring service highlights the involvement of Central Asian countries in drug trafficking, particularly as coordinators and fixers. In this case, an individual based in Kyrgyzstan was identified as a regional coordinator for the smuggling of heroin from Afghanistan to Russia through Kyrgyzstan, Tajikistan and Kazakhstan. The finance was handled in the UAE. They allegedly redistributed trafficking proceeds to pay members of criminal networks and buy vehicles with secret compartments to hide heroin.
Money may also be moved in simpler ways, such as using couriers to physically fly money out of the country. For example, according to Afghan customs records, more than $3 billion in cash was 'openly flown out of Kabul International Airport' between 2007 and 2010. Although this money was suspected to be a mix of aid money and proceeds of corruption, profit from the narcotics trade was also thought to be included. Furthermore, US investigators believe that top Afghan officials were involved in this activity.
Counterfeit Currency: Last year's demonetisation drive in India, in which old 500 and 1,000 rupee notes were stripped of their legal tender, was aimed not only at tackling corruption and increasing tax revenues, but also at combating counterfeit notes, which the government views as a serious crime problem. At the time, Prime Minister Narendra Modi specifically referenced fake Indian currency notes (FICN) as being one of the reasons for the demonetisation initiative. Indian officials have blamed neighbouring Pakistan for this phenomenon. In December 2015, then Minister of State for Home Affairs Haribhai Parthibhai Chaudhary stated that FICN were printed in "sophisticated presses" and that this enterprise is said to have "created a self-sustaining criminal network in the South and South-East Asian Region for infusing FICN into India."
These notes are smuggled from source into India via Bangladesh, Nepal, Sri Lanka, the UAE and Thailand. The Indian border countries are used because of the ease with which goods, illicit or otherwise, are able to cross the border.
Following the demonetisation drive, in February 2017 it was reported that the Indian Border Security Forces had started to intercept packages of counterfeit 2,000 rupee notes at its borders. Typically, counterfeit notes are sold to a large number of low-level distributors, who then integrate the notes into the economy by purchasing goods and services, selling counterfeit currency to members of the public, indulging in gambling, etc. The proceeds of trade in counterfeit notes are most often smuggled abroad by cash couriers. A 2013 FATF report highlights the reported link between organised crime, terrorist financing and counterfeit notes in India.
Pakistan, too, is said to be a victim of counterfeit notes. Such notes are said to cross over to Pakistan via Afghanistan and Iran.
Cross-Border Trade and Movement of Goods: IFFs are said to be facilitated by porous, unofficial or poorly managed borders, particularly in the South Asian context. They are facilitated by cross-border trade-based money laundering, which is the "process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins."
Border communities traditionally trade common goods with counterparts in neighbouring countries, not necessarily using official border crossings. Insufficient official border crossings between countries in the region encourage the use of informal border crossing routes.
Formal border crossings are often poorly managed and vulnerable to exploitation. India's land border stretches for 15,000 km, which makes it unmanageable to police in its entirety. Pakistan's land border with Afghanistan alone covers as much as 2,500 km. The India-Nepal border is open and border officials are complicit with smugglers, resulting in the facilitation of goods crossing the border. This is also particularly true of the Tajikistan-Afghanistan-Pakistan border.
There is also illicit activity on the border between India and Bangladesh, with kingpins involved in organised crime, human smuggling and the smuggling of FICN into India. Small traders are involved in duty arbitrage, where products are bought on one side of the border and sold on the other. Prescription drugs containing narcotic drugs and psychotropic substances are a key example, which are increasingly sold illegally to supply a growing demand in South Asia. The tactics involved in this illicit trade include diversion from India's pharmaceutical industry, illicit manufacture and cross-border smuggling.
The 2016 annual report by the UN's International Narcotics Control Board notes that the manufacture, smuggling and abuse of amphetamine-type stimulants are significant in South Asia. It highlights the illicit production at clandestine factories in India, smuggling of methamphetamine from Myanmar's border to Bangladesh, and an escalating trend in trafficking of psychotropic substances to Nepal.
The way in which trade is reported is also an issue. With China-Kyrgyzstan cross-border trade, there is a discrepancy in the customs figures between Beijing and Bishkek. Kyrgyzstan's customs authorities reported that in 2015 it imported $1.05 billion of goods from China, but the Chinese claimed $4.3 billion. Under-invoicing of exports was also an issue. Someone might sell goods to somebody in the UK for £100, but report it as being sold for £80. The additional £20 goes to an offshore account, and is unreported.
The increase in ASEAN economic integration through the economic community, as well as intra- Asian trade initiatives such as the China-ASEAN and India-ASEAN Free Trade Agreements, have been noted by the UNODC as risks for heightened illicit trade.
Regional integration "has facilitated the illegal flow of substances [drug and precursor chemical trafficking] within the region and exploited connections with neighbouring regions." Indeed, the illicit trade in drugs, precursor chemicals and counterfeit medicines between South Asia and ASEAN is growing, as are illicit flows of environmental goods.
In particular, heroin and synthetic drugs are trafficked into Southeast Asia from Myanmar and India, while the diversion of precursor chemicals from licit trade channels are used for methamphetamine, heroin and other drug production and "increasingly involved pharmaceuticals from legitimate manufacturers." This illicit trade has now started to "spill over" into countries such as Brunei, the Philippines and Singapore. Moreover, the link between Central, South and Southeast Asia can be seen through the flows of the heroin trade - narcotics from Afghanistan are increasingly moved by Pakistani networks to Malaysia where the drugs are redistributed to China and Australia, among others.
The UNODC report noted that the criminal drug-trafficking networks in Indonesia originate in India, Nepal and Pakistan and have recruited Cambodian, Indonesian and Thai nationals. As for counterfeit medicines, greater trade facilitation in Southeast Asia, along with stricter law enforcement in India and China over time, has helped to enable criminal groups exploit countries with weaker legislation, such as Myanmar and Vietnam, and relocate key aspects of production to these countries.
(Source: RUSI research paper - Illicit financial flows and corruption in Asia)