Africa is not doing enough to stem illicit financial flows

Leaders across Africa agree that illicit financial flows are a contributory factor to inadequate resources on the continent but have so far not come up with the necessary efforts to stop the leakage, writes Cornelius Adedze.

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FROM 'legitimate' international tax systems to dodgy accounting arrangements by multinational companies, Africa has since the colonial days been losing billions to the international world of business.

African countries are not the only countries suffering from the loss of a huge chunk of their resources through this means, but given the great impact of this loss on the lives of the people, it is a major blow to Africa's socioeconomic development. It is estimated that Africa lost over $854 billion in illicit financial flows between 1970 and 2008, a yearly average of about $22 billion. Current estimates put illicit financial outflows from Africa at $50 billion a year. Meanwhile, official development assistance to Africa stood at $46.1 billion in 2012.

A report published in 2012 on Illicit Financial Flows from Africa: Scale and Developmental Challenges noted that 'Just one-third of the loss associated with illicit financial flows would have been enough to fully cover the continent's external debt that reached US$279 billion in 2008.' It went on to state that some two-thirds of the outflows came from only two regions, West Africa and North Africa, with 38% and 28% respectively, whilst 'each of the other three regions (Southern, Eastern and Central Africa) registered about 10% of total of Africa's illicit financial flows', perhaps because of lack of data and due to the poor quality of available data.

The total result of all this, the report concluded, is that multinational corporations operating in Africa are involved in illicit transfer of most of the $1.5 trillion they make in Africa each year back to the developed countries, hurting African economies in the process. Ultimately, the multinational corporations continue 'perpetuating Africa's economic dependence on other regions'.

Various means, legal and illegal, are responsible for this haemorrhaging of Africa's finances. These include undocumented commercial transactions, purely criminal activities like overpricing, transfer pricing, tax evasion, money laundering, corruption and false declarations. Tax havens and secrecy jurisdictions complete the picture.

These activities constitute a drain on foreign exchange reserves, reduce tax collection, cancel out investment inflows and contribute to worsening poverty.

The African Union and the United Nations Economic Commission for Africa, fully aware of the situation and in an attempt to stem it, established in 2012 a 10-member High-Level Panel on Illicit Financial Flows from Africa headed by former South African president Thabo Mbeki.

The panel has the mandate to undertake extensive and in-depth studies on the extent and ramifications of illicit financial flows on national economies as well as their impacts on the population. It is also to offer possible initiatives that can help African countries either individually or collectively to stem the flows and repatriate the stolen funds.

The panel has so far held consultations in Kenya, Tunisia, Liberia, Mozambique, Nigeria, the Democratic Republic of Congo and Zambia.

'It is important that we fight this evil together so that Africa can use the money to solve its poverty and development problems,' Mbeki noted recently.

Africa's situation is compounded by the fact that the judicial systems of most African countries are not sophisticated enough to ensure successful prosecution of tax offenders. 'When the matter ends up in court, the judicial system gets overwhelmed by the expertise brought to court by the private company,' Mbeki added.

They also lack tax experts who can painstakingly track these illicit transactions and bring the perpetrators to book.

The panel is expected to publish a report on illicit financial flows in March 2014.

For most African countries that depend largely on commodities, their situation is worse because they do not know how much of the commodity is produced and exported by the multinationals. They either lack the means of verification or have officials who are compromised through bribery by the multinational companies.

The work of Mbeki's panel is supposed to complement increased attention by leaders of the G20 major economies grouping to the issue of capital flight from the developing world. The G20 has asked developing countries to join the Extractive Industries Transparency Initiative (EITI), a body that compares the revenue disclosed by governments with tax declarations by the companies working in the extractive industry. However, the EITI has so far been able to furnish the 2010 figures of what the extractive sector had contributed - just a little over 1% of GDP, a mere fraction of what was expected. Analysts said that while joining the initiative may bring in some level of transparency, it would not be enough to plug leakages.

In a related development, Roserio Osseman of the Mozambique-based Institute for Social and Economic Studies has also pointed to another major area of resource outflow from Africa that needs to be looked at. According to him, 'Licit capital flows that are largely related to excessive and redundant fiscal incentives to megaprojects are huge, accounting for several hundreds of millions of US dollars' also lost to Africa in the name of attracting foreign direct investment.

The G7 and G8 leading industrial countries have talked about the need to stem the tide of illicit flows globally, with a promise by Britain's Chancellor of the Exchequer George Osborne that 'Britain has made reducing global tax evasion and avoidance a priority for its G8 presidency'. It is yet to be seen, however, how this promise translates into reality, given that it is mostly the G7and G8 countries' companies that benefit from the illicit flows. Already, certain steps taken by some financial institutions in the developed world to help the situation have been ridiculed as merely 'sugar-coating'.

Attempts by the Swiss government under a 'clean money strategy' that may force banks to ensure their foreign clients are tax-compliant in their home countries have been rubbished by some analysts.  Even before the dust settled on the proposal, Thomas Sutter, spokesman for the Swiss Bankers' Association, was reported as saying, 'As a bank, if you have a client give you money you have to trust and believe them ...You can't be responsible for whether clients have paid their taxes.' As others have pointed out, it cannot be a bank's responsibility (indeed would be asking too much of a bank) to find out if a client is tax-compliant in his home country before accepting his money. No matter how successful this approach may be, it would only scratch the surface of the issue. 

In the face of these great challenges, some have suggested that African countries increase their capital gains tax and also work with each other to exchange tax information. An African coalition as well as a global one to deal with the challenge is another hopeful approach that may help in the fight against illicit flows from Africa. Given the great development challenge that they pose to Africa, illicit flows deserve more research and collaboration among African countries and civil society groups to advocate for and promote policies that would help stem the flow.                    

Cornelius Adedze is the Editor of African Agenda, from which this article is reproduced (Vol. 16, No. 4, 2013). African Agenda is published by Third World Network Africa, the Africa section of TWN.

*Third World Resurgence No. 281/282, January/February 2014, pp 14-15