How Do Policy Reforms Impact the Flow of Funds From Corruption?

In December 2025, I wrote about my discussion with Daniel Haberly, an expert in illicit financial flows based at the University of Sussex Centre for the Study of Corruption (CSC), regarding how to map the networks that facilitate flows of corrupt funds around the world. In this second piece from our conversation, I drill down into his 2023 paper Corruption, Shell Companies, and Financial Secrecy: Providing an Evidence Base for Anti-Corruption Policy, which is based on Haberly’s (and others’) research. The paper was written under the Governance & Integrity Anti-Corruption Evidence (GI ACE) program, hosted by the CSC and funded by the UK’s Foreign, Commonwealth & Development Office. 

Given my background in international development, including working on programs to advance anti-corruption through policy reform, I was specifically curious about one of Haberly’s findings, namely: “Good governance reforms may have the unintended consequence of increasing corrupt capital flows.” In fact, Haberly explained, there are a number of “paradoxes,” as he termed them, revealed by his work. Does this mean that donor-funded projects supporting governance reforms should be reconceived? Such programs were a major part of USAID’s portfolio; if the US were to reinvest in international development in the future, how should his findings inform the work? The important insight, Haberly shares, is that not all countries have the same track record, and so reform assistance should not be cookie-cutter.

One mechanism through which these unintended consequences play out is the formation of shell companies, particularly by actors in countries with high levels of corruption or a history of communist rule. When these countries undergo reforms towards economic liberalization, there is frequently a push to improve the rule of law first, focusing on investor protections and property rights. Paradoxically, these types of basic institutional strengthening reforms actually seem to lead to a spike in the formation of offshore companies—potentially reflecting a catch-22 of institutional reform in countries where existing institutions are weak, and thus unable to constrain insider abuse of the reform process itself. Reinforcing this idea, Haberly says, is the fact that the link between rule of law and property rights reforms and shell company formation is not observed in countries with historically lower levels of corruption and without a communist past. In such countries, reforms to the basic legal institutional framework do not seem to trigger any changes in shell company formation, as compared to its long-term baseline.

The links between state sector size and privatization reforms regarding offshore company formation also appear to be counterintuitive. As has been documented, poorly managed privatizations in former communist countries have often created opportunities for illicit wealth transfers and capital flight. However, the link between privatizations and shell company formation, in former communist countries, seems to be weaker than the impact of basic legal institutional reforms. Meanwhile, in countries with no history of communism, regardless of corruption level, a larger state sector actually seems to be associated with more shell company formation, with shell company formation seeming to decrease during privatization. This appears to reflect the fact that the size of the state sector, in countries without a communist past, is mainly linked to the share of mineral rents in the economy, rather than processes of institutional restructuring. In countries with no history of communism, the state sector seems to act as a pathway for the offshoring of mineral rents, with corruption apparently only impacting the way that this offshoring happens, which can run the gamut from anything from well-managed sovereign wealth fund investment to wholesale kleptocratic theft.

The implications for anticorruption practitioners working in developing and transition economy contexts, Haberly said, are “to be careful what you’re advocating for when you talk about good governance.” He cautions against advocating for a fixed package of reforms that do not take context into account, but instead “taking a pair of tweezers to what kinds of reform you’re advocating.” For example, he notes, basic legal and other institutional reforms, which are beneficial from a long-term standpoint, might be tied to the introduction of short-term capital controls to help stem the reform-linked offshoring of wealth, with international donor organizations such as the IMF potentially providing external capacity support, though Haberly says, such an approach does not “fit neatly into a particularly ideological framework.” Of course, when countries are going through a reform process, typically multiple bilateral and multilateral donor agencies are engaged. Donors would need to agree and coordinate which reforms to support and which to hold back, and as those who have worked in the sector know, donor coordination is extremely difficult, even in the best of circumstances.

Marc Schleifer

Governance, Democracy and Economic Development Expert