For the 2030 Agenda for Sustainable Development to be actualized appropriate financing is required and remains a major challenge, added to concerns over insufficient financial accountability, transparency and integrity. The President of the UN General Assembly and the President of the UN Economic and Social Council instituted a 15-member panel on Financial Accountability, Transparency and Integrity (FACTI) in March 2019, to look at ways to address illicit financial flows (IFFs), among other issues. Earlier, the problem of IFFs was brought to light by the Thabo Mbeki-led High-level Panel on Illicit Financial Flows from Africa in a 2015 report. Tackling the issue further the United Nations Conference on Trade and Development (UNCTAD) released the Economic Development in Africa Report 2020 titled, Tackling Financial Flows for Sustainable Development in Africa. All these efforts serve to highlight the urgency with which world leaders need to deal with this issue.
Losing Billions That Could Be Used For Development
According to the UNCTAD report in 2020 IFFs are movements of money and assets across borders, these movements being illegal in source, transfer or use. It states four broad categories of IFFs – tax and commercial practices, illicit markets, theft – type and terrorism financing, and corruption. Through these illegal channels, Africa is losing US$88.6 billion annually, and between 2000 and 2015, the total illicit capital flight amounted to US$836 billion. These figures are alarming as they show that Africa’s riches are leaking out while the continent remains poor. Africa’s total external debt stock in 2018 was US$770 billion, and this is lower than the entire capital flight between 2000 and 2015.
The largest component (US$40 billion) of illicit capital flight is related to the export of extractive commodities, namely gold (77%), diamond (12%) and platinum (6%). The remaining 5% covered commodities such as petroleum and base metals. These commodities were under invoiced exports which left the continent. Tax avoidance by multinational enterprises (MNEs) cost African governments considerable revenue. In 2015 US$67 billion was earned from corporate tax in Africa, and a tenth of that amount is estimated to be lost in tax avoidance. Global-level analyses show that 20 to 30 per cent of private wealth in many African countries is held in tax havens (Global Financial Integrity 2017). Illicit flows from other criminal activities generated revenue from 11 crimes – trafficking in drugs, weapons, humans, human organs and cultural property; counterfeiting; illegal wildlife trade, fishing trade, logging and mining; and crude oil theft.
Effects of IFFs on African Economies
According to UNCTAD’s Secretary-General, “Illicit financial flows and corruption are inhibiting African development by draining foreign exchange, reducing domestic resources, stifling trade and macroeconomic stability and worsening poverty and inequality. These illicit flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions….” Africa needs approximately $200 billion a year to implement SDGs, and losses from IFFs can cover almost half of this figure. In countries with high IFFs, governments spend 25% less than countries with low IFFs on health and 58% less on education. This compromises efforts by African states to achieve SDGs.
IFFs are not only causing adverse fiscal effects, but the illegal activities have a direct impact on prospects for achieving economic, social and environmental goals. For instance, the illicit trade of counterfeit products, namely substandard malaria medicines, was responsible for the deaths of over 100,000 children in sub-Saharan Africa in 2013 alone, according to the World Economic Forum 2017.
Illegal waste trafficking is also a little-known source of illicit flows that has significant consequences for human health and the environment. The most common channels are the sale of waste on the black market, the fraudulent declaration of hazardous waste as non-hazardous and the classification of waste as second-hand goods. (Economic Development in Africa Report 2020).
The lack of peace in some African regions results from IFFs that contribute to the financing of terrorism in Africa. The United Nations, Security Council, 2019 highlights protracted armed conflict in African countries and regions rich in natural resources. On the other hand, the high levels of corruption associated with IFFs contribute to weakening governance and institutional systems. This includes undermining the rule of law, hindering transparency and accountability, and ultimately destabilising the foundations of democracy and progress.
The Fight against IFFs
Africa alone cannot win the fight against IFFs; instead, there must be a global effort from both the developed and the developing countries since the problem affects both. Nigeria is currently championing the fight against IFFs within the AU.
Nigerian president, His Excellency Muhammadu Buhari, highlighted the need for a global effort by stating that, “Illicit financial flows are multidimensional and transnational in character. Like the concept of migration, they have countries of origin and destination, and there are several transit locations. The whole process of mitigating illicit financial flows, therefore, cuts across several jurisdictions. These jurisdictions may protect fake charitable organisations, facilitate money-laundering, warehouse disguised corporations and conceal anonymous trust accounts. Ironically, the fact remains that the funds involved often come from jurisdictions with scarce resources for development financing, depleted foreign reserves, drastic reduction in collectable revenue, tax underpayment or evasion and poor investment in-flows.” This statement sums up the complexity of the overall multilateral effort required to fight IFFs.
To tackle IFFs, there is need for harmonisation of taxation across the continent, coupled with strong tax regimes, which will also support implementing the African Continental Free Trade Agreement (AfCFTA). African countries also need to actively participate in the global tax review regimes such as the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) amongst others. At present Africa only takes part as observers, but they must contribute to the global policy on tax regimes and tax systems put in place for multinational companies.
In the long-term, value addition to Africa’s extractive commodities or natural resources may help address IFFs. This can be achieved through vast economic diversification and processing of commodities on the continent. Economic improvement may be achievable through the successful implementation of AfCFTA, which looks to improve trade within the continent and build the capacity needed to expand manufacturing and value addition to commodities. In the medium-term, better resource governance is necessary. This could begin with collecting better trade data to help detect risks related to IFFs, as one would be able to see whom accountability rests with. More resources must also be allocated to the recovery of stolen assets.
The Long Road Ahead
Africa Renewal’s Kingsley Ighobor interviewed Paul Akiwumi, UNCTAD’s Director, Division for Africa, LDCs and Special Programmes, about the Economic Development in Africa Report 2020. Mr. Akiwumi highlighted that UNCTAD is conducting a lot of outreach within the continent and abroad (with some developed countries and overseas development agencies) to bring to light the issue of IFFs. Technical discussions and outreach to all AU Member States are also underway. UNCTAD has also made considerable outreach to NGOs and civil society.
The road ahead is a long one, but it is encouraging to see that steps are already being taken and are beginning to bear fruit.