By Thomas Yapo, Trade Expert at the ECA African Trade Policy Centre
Remittance flows to Sub-Saharan Africa reached USD 48 billion in 2019, but the true total is likely to be significantly higher. This sustainable source of unconditional development financing brings a positive impact as it supports communities in lieu of a defaulting state.
But there are flows going in the opposite direction that are rarely discussed. Indeed, some flows, potentially exceeding investment and aid flows in volume, illegally flee African countries. These illicit financial flows (IFFs) negatively affect the economy of the countries involved as they result in fewer hospitals and schools, fewer roads and bridges as well as fewer police officers in the field.
What are illicit financial flows?
IFFs are transfers of capital from a country where reprehensible practices committed by an unscrupulous economic agent (individual or company) have occurred, to another country or financial institution. Illicit is broader than illegal. It refers to activities that are not considered morally acceptable. To assess if funds are in the IFF category, one has to consider the legality of the source of funds, the legality of the transfer of funds and the legality of the use of funds. IFF activities are not sanctioned by law, rule, or custom. Usually, they include cross-border financial transfers related to:
corruption: When a civil servant uses his/her public office for personal gain. Undue favors are requested in exchange for bribes. Needless to say, that corruption is not an Africa-specific problem, but it is widely accepted that Africa has an endemic corruption problem.
money laundering: When funds come from an illegal source, the owner tends to use protocols to disguise their origin in order to introduce them into the legal economic system. Mostly financial institutions, but also lawyers or accountants, are complicit in these criminal actions, by facilitating the transactions and transfers and providing opacity as a shelter from prosecution.
trade mis-invoicing to move money illicitly: When trade operators use invoice manipulation (falsification of the prices, quantities or quality of imports or exports) to conceal wealth or send money abroad. The porosity of borders, lack of cooperation between countries and corrupt customs officers facilitate this trade fraud.
tax fraud (including corporate tax dodging): When an economic agent conceals his/her/its revenues or doesn’t report them. This can happen where the tax authorities do not have adequate resources and there is a sprawling informal sector.. Taxes should be paid where profits have been generated but some companies exploit loopholes in outdated fiscal legislations.
As the perpetrators of crimes don’t want to display their lavish lifestyle to defrauded citizens, they send the money away. These IFFs are left in financial institutions or converted into real estate. When the ill-gotten gains cannot leave the country, perpetrators accumulate/build real estate locally. When built, these assets may provide one-time employment for locals or generate laundered revenues, but developing countries need investments in companies not in concrete. Note that because of the fear of the freezing of assets in the country where the criminal behaviors occurred, perpetrators favor IFFs. Sending money away also proves the lack of confidence fraudsters have in their own country. When people love their country, they don’t steal from it. Perpetrators of IFFs are therefore unpatriotic besides being criminals.
What are the causes?
Considering the extremely high levels of corruption in Africa, it would be logical to state that African institutions have failed. The lack of governance makes it possible for people to game the system. Because the perpetrators have low faith in the local system or because they want to take wealth away from the prying eyes of fellow citizens or from where it might be confiscated, they decide to send money away. Moreover, weak governance in developing countries and impunity for a certain type of criminal cause corruption to be a glorified career option. Unpunished bribery or blatant conflicts of interests have become the norm among public servants. The fact that the justice system is run at the behest of corrupt, politically exposed persons does not help.
What are the consequences?
There's a general consensus that IFFs have a highly deleterious impact on African society:
They deprive countries of access to financial resources that could fund development: They drain national private and public capital, handicapping the continent’s efforts to achieve sustainable development. This is especially true of Africa, where there is an acute gap in financing infrastructure and productive capacity.
IFFs undermine the rule of law: As leaders don’t set a good example and as crime does pay, confidence in institutions is impaired.
IFFs worsen macroeconomic conditions: The indirect consequence of IFFs is non-rational choices from corrupt decision makers that lead to higher costs for the country.
IFFs reduce the benefits of economic activity: Illicit flows almost never finance the economy of the country they are generated in.
IFFs harm welfare and increase inequality in society: Embezzling money halts development opportunities. The funds that cross borders are the social spending that will never occur.
What are the solutions?
Are the damages too severe to be fixed? As corruption is the main driver of IFFs, combatting IFFs should start with efficient anti-corruption measures. But in a system where the main offenders are likely to be the law makers, what incentives do they have to act? It is unrealistic to expect a kleptocracy to auto-regulate its criminal practices or not use its influence to stop anti-IFF policies. There is no political will to follow that path, only a façade of voluntarism that leads to no concrete action. Non-action has created a vicious circle where weak institutions encourage IFFs that undermine institutions even more. Since IFFs are transboundary, there is a need for international cooperation, such as exchange of information, to seize ill-gotten wealth and recover stollen assets.
Financial criminals often demonstrate more ingenuity than enforcement agencies, which find themselves one step behind. In response, countries must demonstrate a strong will to strike. They must equip counter-IFF measures with adequate means – for example improving investigative capacity -- to combat IFFs. The return on investment would be financially positive and for the welfare of the population. Of course, it is always easier to criticize than to act when hurdles are so numerous.
But where there is a will, there is a way.
For more information, please contact:
Economic Commission for Africa
PO Box 3001
Tel: +251 11 551 5826