Understanding the socioeconomic impacts and policy implications of Illicit Financial Flows in Africa
Cross-border capital movements that serve to conceal illegal activities or evade taxation have been recently placed at the center of the continental agenda. Trade mis-invoicing, profit shifting by multinational corporations, and offshore bank deposits to conceal the proceeds of crime or simply to avoid taxes, all deprive national treasuries of much needed resources - which could otherwise be invested in development. Vulnerable populations in developing countries are the most affected by the harmful consequences of illicit financial flows. Revenue losses due to illicit financial flows compromise development and impede the effective provision of public services in affected countries.
Illicit financial flows have long been at the center of discussions on development in Africa, particularly due to the existence of a wide consensus on their negative impacts on development financing in Africa. The loss of trillions of resources for public use has become a matter of major concern everywhere, not least because it hinders the achievement of the Sustainable Development Goals.
Over the last 50 years, Africa is estimated to have lost more than $1 trillion in illicit financial flows (IFFs) (Kar and Cartwright-Smith 2010; Kar and Leblanc 2013). This sum is roughly equivalent to all the official development assistance received by Africa during the same timeframe.2 Currently, Africa is estimated to be losing more than $50 billion annually in IFFs. But these estimates may well fall short of reality because accurate data do not exist for all African countries, and these estimates often exclude some forms of IFFs that by nature are secret and cannot be properly estimated, such as proceeds of bribery and trafficking of drugs, people and firearms. The amount lost annually by Africa through IFFs is therefore likely to exceed $50 billion by a significant amount.
The revenues drawn from natural resource extraction should result in greater domestic revenue mobilization, which can serve to finance social expenditures and public investments. An abundant literature, however, indicates that this is not the case, in part due to high levels of commodity trade-re-lated IFFs. The latter may result from trade mispricing (under-invoicing of commodity exports to reduce export duties and corporate income tax) or abusive transfer pricing (trade mispricing between affiliates of the same multinational group).
These outflows are of serious concern, given inadequate growth, high levels of poverty, resource needs and the changing global landscape of official development assistance. Although African economies have been growing at an average of about 5 per cent a year since the turn of the century, this rate is considered encouraging but inadequate. It is, for example, below the double-digit growth that has propelled transformation in parts of Asia. Further, the benefits of this growth have mostly been con-fined to those at the top of the income distribution and it has not been accompanied by an increase in jobs. Aside from the equity issues that this raises, it also means that this growth may not be sustainable due to possible social unrest. The global commodity super-cycle that has contributed to Africa’s growth is coming to an end, while macroeconomic factors such as debt reduction might be a once-off effect.
Poverty remains of serious concern in Africa in absolute and relative terms. The number of people living on less than $1.25 a day in Africa is estimated to have increased from 290 million in 1990 to 414 million in 2010 (United Nations, 2013). This is because population growth outweighs the number of people rising out of poverty. Moreover, GDP per African was around $2,000 in 2013, which is around one-fifth of the level worldwide (IMF, 2014). Poverty in Africa is also multidimensional, in the sense of limited access to education, healthcare, housing, potable water and sanitation. This situation puts the loss of more than $50 billion a year in IFFs in better perspective.
Investment requirements to realize the Sustainable Development Goals in Africa are estimated at between $600 billion and $638 billion annually, equivalent to about one third of the continent’s GDP. Infrastructure spending alone amounts to approximately $72 billion annually,
but the annual financing gap stands at between $50 billion and $93 billion. Countries in Africa need to do more to mobilize domestic resources to finance sustainable development, including by improving tax revenue management, plugging illicit financial outflows, reducing the cost of transferring remittances from abroad and developing capital markets to attract private investment.
Current developments in the global arena in fact make the challenge posed by IFFs more acute. The resources that Africa receives from external partners in the form of official development assistance are stagnating due to the domestic fiscal challenges of partners, who in response are seeking to reduce such expenditures. Africa will therefore need to look within the continent to fund its development agenda and reduce reliance on official development assistance.
IFFs are also of concern because of their impact on governance. Successfully taking out these resources usually involves suborning of state officials and can contribute to undermining state structures, since concerned actors may have the resources to prevent the proper functioning of regulatory institutions
Cognizant of the detrimental effects of IFFs on Africa, the 4th Joint Annual Meeting of the AU/ECA Conference of Ministers of Finance, Planning and Economic Development adopted Resolution 886 mandating the establishment of a High-Level Panel on Illicit Financial Flows from Africa. The Panel is chaired by H. E. Thabo Mbeki, former President of the Republic of South Africa, and comprised nine other members both from within and outside the continent.
Furthermore, the African Union dedicated the year 2018 to combatting corruption under the theme “Winning the Fight against Corruption: A Sustainable Path for Africa’s Transformation”.
Since then there has been a lot of movement forward. Comprehensive strategic and policy recommendations were released by the High Level Panel on the IFF to guide IFF policy frameworks at national, sub-regional and continental levels; the Addis Tax Initiative resulted from the Third Conference on Financing for Development, held in Addis Ababa in 2015, and Sustainable Development Goal 1 contains a specific target (16.4) to reduce the level of illicit financial and arms flows. In addition, many national activities organized under the Extractive Industries Transparency Initiative have been effective in strengthening public debate and promoting policy options around signature bonuses, unpaid royalties, fuel subsidies and the theft of crude oil and refined products. In addition, the inclusion of the notion of “real property” (roughly equivalent to beneficial ownership) in the Extractive Industries Transparency Initiative (EITI) Standard, in theory will have strengthened the power of the Initiative to help to prevent IFFs in the extractive sector. Action is being taken by some countries to improve financial transparency. For example, some countries have taken steps to create public registries of information on the ‘beneficial owners’ of all firms, namely those who have the right to receive the profits generated from the firm (Global Financial Integrity, Trust Africa, the Tax Justice Network – Africa, the Pan African Lawyers’ Union, CRADEC and Civil Society Legislative Advocacy Centre, 2017).
However, financial outflows through illicit tax practices from developing nations can be reduced and stemmed only by enhancing and improving relevant capacities across the board, including policy-mak-ers, representatives of member States working in their respective tax and revenue authorities, media researchers and professionals.
It is against the above background that the African Institute for Economic Development and Planning of the United Nations Economic Commission for Africa, the African Capacity Building Foundation and TrustAfrica are collaborating to support African countries efforts in building a critical mass of skilled middle career and senior governments official, civil society organization and media actors on “the socio-economic impact and policy implications of illicit financial flow in Africa”.
The overarching objective of the course is to contribute to understand the socio-economic impacts and the complex web of policies related to illicit financial flow, and in particular to highlight the issue of legislation, coherence; capacity and measurement that arise and how they can be addressed. Specific objectives of the course include :
- Enhancing the knowledge and technical skill of governments officials, legislators, media professionals, development activists and researchers on the IFF through an online and insitu trainings;
- Equipping the target audiences in countries with appropriate tools to counter illicit financial flows in a coherent way;
- Strengthening the capacity of African countries, and Regional Economic Communities (RECs) in planning, designing and implementing appropriate policy and measures to counter illicit financial
- Promoting functional institutional governance to build a coordinated and coherent approach to implementing risk mitigating policies to prevent and deter illicit financial flows encompassing all the relevant government departments and agencies.