29 Mar 2019
Illicit Financial Flows (IFFs) are one of the greatest challenges to human development in Africa, hampering organic growth, and the ability of governments to provide infrastructure, deliver public services and reduce poverty.
There is no settled definition of IFFs and their measurement is complex. IFFs are driven by crime, bribery, terrorism, corruption, embezzlement, drug trafficking, money laundering, capital flight in disobedience of currency controls, tax evasion and tax avoidance (Forstater, 2018)[1]. Global Financial Integrity (2015) defined the IFFs as those funds, crossing borders but illegally earned, transferred and or utilized. Thus, IFFs comprise transnational financial transactions which contravene domestic and international law in both letter and spirit or are normatively and morally unacceptable. Broadly, some define IFFs as money legally owned but illegally transferred, money illegally owned but legally transferred, or money both illegally owned and illegally transferred.
IFFs from Africa increased from an estimated US$50 billion in 2015 to above US$70 billion by 2017 (Bokosi, 2019)[2]. Global Financial Integrity data and other sources show that IFFs peaked in 2009 at nearly US$85 billion. Between 2009 and 2013, an estimated US$173 billion left SADC yet nearly an equal amount of US$175 billion was attracted through foreign direct investment (FDI) and Official Development Assistance (ODA). Zambia is among the most affected countries, with IFFs increasing from about US$2 billion in 2009 to US$4.2 billion in 2012. Malawi is estimated to have lost an estimated annual average of US$650 million. For Zimbabwe, the RBZ estimated a loss of US$3 billion between 2015 and 2017 while a research by AFRODAD estimates that US$2.7 billion was lost from the mining sector between 2009 and 2013. The RBZ further posited that an estimatedUS$684 million was remitted outside Zimbabwe or externalised under dubious and unwarranted circumstances in 2015 while Global Financial Integrity data shows that Zimbabwe lost an estimated US$670 million through trade misinvoicing in 2015.
Revenue linkages from the continent confirm its richness, Africa has never been poor and is not poor, resources are yet to be exhausted. If effort to attract FDIs and ODA is equated to efforts to curb IFFs, development will be phenomenal in Africa. The continent has great resource potential to drive organic economic transformation through infrastructure investment and significantly improve public expenditure on health, education and social security for the attainment of social and economic rights.
Some empirical findings on IFFs include the following:
Among the factors jeopardizing capacity to curb IFFs include liberalisation and deregulations as governments seek to attract and compete for investors. It is within the policies which seek to balance between the interests of investors (maximisation of returns and profits) and those of the nation (society) that illicit financial flows occur. As business became global, governments policy attempt to balance between not being tax havens (offering minimal tax liabilities to foreign individuals or businesses) and a risk country. The spaces in-between, particularly created by corruption, weak institutions, lack of expertise, information asymmetry, technological backwardness, lack of policy implementation, are exploited by business, politicians, criminals and individuals resulting in IFFs.
The digital economy has also become a significant driver of IFFs as it comprisesinternet-based companies, telecommunications, electronic commerce, digital payments, cyber security, sharing economy and digital skilling that makes taxation complex. Physical companies are fast transforming to global online based companies,yet laws are still stuck on taxing physical companies. Laws provide for the taxation of companies based on income sources and location yet online companies are difficult to locate due to their multiple presence within the global economy. Block chains, crime (offered as a service business model), block transactions, electronic sales suppression zappers andvalue networks makes the digital economy a driver of IFFs. With most SADC countries struggling with taxing the informal economy, the digital economy becomes more complex.
Addressing challenges posed by the digital economy calls for dynamic legal and regulatory framework for the digital economy, responsive digital infrastructure, creation of departments within revenue authorities to detect movement of the digital wealth, and train and capacitate inspectors and auditors in revenue departments.More importantly, there is need to invest in skills and capacitate personnel to better negotiate contracts and agreements.
Resources are leaving African countries at a time the continent is privatizing the provision of public services through private-public partnerships, excluding the poor and the marginalised from accessing such services. More so, Africa is burdened with a debt crisis as 8 African countries are in debt distress, 15 countries are in high risk of debt distress, 23 are in moderate risk of debt distress and only 8 are in the low risk of debt distress category[3]. The urgent need to combat IFFs should be informed by the need for resources to reduce poverty, resolve the debt crisis, declining developmental resources from the north and growing need to fund Pan-African development projects enshrined in the agenda 2063 and Vision 2030. Thus, governments must prioritise domestic resource mobilization, mobilise remittances from diaspora, curb IFFs and renegotiate mineral contracts to expand Africa’s fiscal space.
In order for governments to curb IFFs, there is need for greater political will, push for the Stolen Asset Recovery Initiative,enforcing the Addis Tax Initiative, improve transparency in contract negotiation, strengthen the oversight role of Parliament in contracts negotiation, increase public access to information and increase global cooperation against financial flows. Strengthening the role of Parliament is pivotal, countries must not sign agreements without the approval of Parliament. More importantly, deals and contracts with investors must be open andtransparent (investors need to go through competitive bidding, less reliance to tax incentives that fuel race to the bottom), improve on fiscal transparency, create regional mineral value chains based on countries capabilities and establish policy and regulatory support for the artisanal small-scale miners.
On 21 and 22 March 2019, civil society organisations, churches, government ministries, revenue authorities, regional parliamentary forums like Southern African Development Community (SADC) and East African Community (EAC), academics and media houses convened in Gaborone, Botswana, for a regional dialogue on IFFs. The event was hosted by the African Forum and Network on Debt and Development (AFRODAD). IFFs represent critical revenue linkages from the African continent, undermining public service delivery, and the attainment of social and economic rights. Hence the AFRODAD regional conference shared ideas, solutions, successes and challenges on curbing the immorality.
Admire Mutizwa is a development economist working with the Zimbabwe Council of Churches as a Programme Officer, Economic Justice and Youth Empowerment. Views expressed in this article are personal and they do not, in any way represent the official position of the Zimbabwe Council of Churches or the African Forum and Network on Debt and Development (AFRODAD).
[1]Maya Forstater (2018). Illicit Financial Flows, Trade Misinvoicing and Multinational Tax Avoidance: The Same or Different?
[2]FanwellKokosi. Presentation on the Developmental Impacts of Illicit Financial Flows in SADC. 2019 Regional Dialogue on Curbing Illicit Financial Flows from AfricaGaborone, Botswana
[3]Tirivangani Mutazu (2019). Analysis of the link between Debt and IFFs. Presentation during the AFRODAD Regional Dialogue on Curbing Illicit Financial Flows, 20 – 21 March 2019; Cresta Lodge, Gaborone Botswana
