- Illicit financial flows causing major losses to Tanzania’s mining industry.
- Experts cite tax avoidance as the leading motive behind Illicit financial flows.
- Tanzania moves to enforce strict laws to curb Illicit financial flows.
Illicit Financial Flows (IFFs) in Tanzania’s mining sector has become rampant despite government efforts to control the sector. Last month, almost 16 kilogrammes of smuggled gold were seized at the Dar es Salaam Port, a pointer to rising crime amid efforts by the East African country to power growth through increased investment in the mining industry.
Illicit financial flows refers to “the cross-border movements of illegally earned, transferred, or utilized financial capital that deprive countries of essential resources, undermining development and the well-being of citizens.”
IFFs are basically the result of investors seeking to earn profits above a given sector’s average. To do this, the unscrupulous businesses avoid taxes and generally view corporate tax and even corporate social responsibility requirements, as expenses that lower their profits and must be avoided at all costs.
“In Tanzania’s mining sector, the mechanisms behind illicit financial flows are complex and deeply entrenched,” notes Deputy Information Officer for the Federation of Miners’ Associations of Tanzania (Femata), Mr. Hassan Kulwa.
In an interview with local media recently, the officer said; “a prevalent method used to conduct IFFs is mis-invoicing; investors underreporting the value of exported goods or overstating the cost of imported goods.”
The mining sector is a huge contributor to Tanzania’s Gross Domestic Product (GDP). Last year, the mining sector contribution to the GDP rose to 9.0 per cent up from 7.3 per cent in 2021. Players in this business are also credited with the creation of jobs for locals. However, due to IFFs, the true potential of the mining sector, and others, is undermined.
The Federation of Miners’ Associations of Tanzania officer said illicit financial flows are most common particularly in the mining, oil, and gas industries because these sectors are susceptible to manipulation due to the high value of commodities in these industries.
The sector expert said through mis-invoicing transactions, unscrupulous traders siphon millions of dollars in profits and/or outright evade taxes thereby denying the country its due returns from the sale of gold and other minerals.
“Another common method involves using complex corporate structures, shell companies, and tax havens to obscure the true ownership and origins of wealth,” he said.
Also; “By exploiting loopholes and regulatory gaps, both domestic and multinational companies operating in the mining sector can shift profits to low-tax jurisdictions, depriving Tanzania of vital revenue.”
Another method used to conduct illicit flows is transfer pricing; this is a situation where a parent company charges their subsidiaries inflated prices for goods and services thereby raising the companies operating costs and expenses.
“This practice effectively shifts profits out of Tanzania, reducing the tax base and limiting the government’s ability to fund essential development initiatives,” he explained.
According to him, the impact of illicit financial flows on Tanzania’s economy is illustrated by examining key economic indicators over the past decade. Tanzania’s GDP growth rate has fluctuated significantly, reflecting the volatility introduced by illicit cash flows.
The effects of IFFs in Tanzania’s extractive sector are devastating, they impact both local communities and the nation at large. At the community level, when due revenue is lost to IFFs, the local government authorities lose their ability to provide their communities vital social welfare services like developing their infrastructure or providing healthcare, and education.
Generally speaking, IFFs causes and sustains poverty in a country, IFFs trap African countries in ever worsening cycles of poverty and underdevelopment.
For example, according to the World Bank, Tanzania’s GDP growth rate peaked at 7.0 percent in 2013 but has since then declined significantly to the lows of 4.8 percent.
While there are other reasons to this fluctuation, the expert suggests that IFFs have a role to play; “This downward trend (of the GDP) suggests that IFFs have undermined the country’s economic stability and resilience, constraining its ability to maintain consistent, high-level growth,” he told press.
Further still, Tanzania’s tax revenue as a percentage of GDP has remained relatively stagnant over the past decade, waddling around 12-14 percent, and Mr. Kulwa is of the opinion that IFFs are partly to blame.
“This low tax-to-GDP ratio is a direct consequence of the erosion of the country’s tax base due to IFFs, as companies and individuals engage in various forms of tax evasion and avoidance,” he said.
The inability to mobilize sufficient domestic resources has limited the government’s capacity to invest in critical public services and development initiatives.
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Illicit financial flows crippling African economies
Tanzania is not the only country affected by illicit financial flows, the problem is prevalent in almost all African countries, especially those with large mining and energy sectors. According to the Global Financial Integrity Organization, Tanzania loses approximately $3.5 billion every year to illicit financial flows. Across East Africa, the loss is estimated at a whopping $6 billion.
The research institute Policy Forum cites; “estimates from entities like Global Financial Integrity (GFI) and the United Nations Conference on Trade and Development (UNCTAD) suggest annual losses amounting to trillions of dollars due to IFFs.”
The institute warns that developing countries bear a disproportionate burden, with illicit outflows often surpassing official development assistance and foreign direct investment.
In a recent media brief, the institute said; “In contrast to developed nations, where income tax stands as a primary revenue source, developing countries heavily rely on trade-related taxes…and recent research by the Anti-Corruption Evidence initiative (ACE) reveals a significant rise in rent-seeking behavior over the past 15 years.”
The brief says, rent-seeking is attributed to trade mis-invoicing and smuggling which results in substantial revenue losses. It further cites that estimates indicate trade mis-invoicing alone accounts for two-thirds of all illicit financial flows, totaling $600-900 billion for developing countries annually.
“Tariff evasion, while a global issue, exacerbates in nations struggling with enforcement of tariff rates and customs regulations, leading importing firms to engage in trade mis-invoicing to evade tariffs or move capital abroad,” reads the brief in part.
Tanzania efforts to tackle illicit financial flows
To stop smuggling, Tanzania has taken several measures including bringing mineral markets closer to the mining sites. In the case of tanzanite mining for instance, Tanzania has built a wall around the single known mining zone of the mineral.
The country has also created a special task force to assert actual mineral production levels at mining sites and to also see to it that mining consignments arrive at their designated buying centers.
Tanzania has also strengthened its tax administration and enforcement and invested in capacity building of the Tanzania Revenue Authority (TRA). The authority is taxed with tax collection, auditing, and compliance monitoring with special emphasis to the mineral and energy sectors that are plagued with illicit financial flows.
Still, experts call for robust transfer pricing regulations to be implemented and enforced effectively to prevent multinational corporations from engaging in profit shifting and tax avoidance.
“Increasing transparency in the extractive industries by requiring comprehensive public disclosure of payments made by companies to the government is also crucial,” Mr. Kulwa advices.
