By: Soliu Ayatullahi
Illicit financial flows (IFFs) are movements of money and assets across borders that are illegal in source, transfer, or use, according to the report entitled “Tackling illicit financial flows for sustainable development in Africa”.
These outflows include illicit capital flight, tax and commercial practices like mis-invoicing of trade shipments and criminal activities such as illegal markets, corruption or theft.
UNCTAD’s Economic Development in Africa Report 2020 stated that an estimated $88.6 billion, equivalent to 3.7% of Africa’s GDP, leaves the continent as illicit capital flight.
It shows that these outflows are nearly as much as the combined total annual inflows of official development assistance, valued at $48 billion, and yearly foreign direct investment, pegged at $54 billion, received by African countries – the average for 2013 to 2015.
“Illicit financial flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions,” said UNCTAD Secretary-General Mukhisa Kituyi.
IFFs related to the export of extractive commodities ($40 billion in 2015) are the largest component of illicit capital flight from Africa. Although estimates of IFFs are large, they likely understate the problem and its impact.
African Economic Outlook (2012) reveals that had the flight capital from Africa been invested efficiently, its outcome could have reduced the headcount poverty ratio for the continent by an additional 4 to 6 percentage points, thus halving extreme poverty by 2015 – a critical Millennium Development Goal (MDG) that eluded the region. Development experts have expressed concern that large-scale IFFs from Africa are draining the continent of critical resources necessary to drive development agenda.
Africa’s extractive industries are particularly vulnerable to IFFs because of the complex and elaborate global value chains associated with the sector, which often transcend national borders. Among other things, elements of IFFs in the extractive sector include tax evasion, mis-invoicing, fraud and money laundering.
Africa’s fight against IFFs needs regional, international cooperation
Regional knowledge networks to enhance national capacities to tackle proceeds of money laundering and recover stolen assets, including within the context of the African Continental Free Trade Area (AfCFTA), are crucial in the fight against corruption and crime-related IFFs, reports haave revealed.
Tax revenues lost to IFFs are especially costly for Africa, where public investments and spending on the SDGs are most lacking. In 2014, Africa lost an estimated $9.6 billion to tax havens, equivalent to 2.5% of total tax revenue.
Tax evasion is at the core of the world’s shadow financial system. Commercial IFFs are often linked to tax avoidance or evasion strategies, designed to shift profits to lower-tax jurisdictions.
Due to the lack of domestic transfer pricing rules in most African countries, local judicial authorities lack the tools to challenge tax evasion by multinational enterprises.
Solutions to the problem must involve international tax cooperation and anti-corruption measures. The international community should devote more resources to tackle IFFs, including capacity-building for tax and customs authorities in developing countries.
African countries need to strengthen engagement in international taxation reform, make tax competition consistent with protocols of the AfCFTA and aim for more taxing rights.