Unsplash/Jason Leung UNCTAD’s Economic Development in Africa Report 2020 states that illicit financial flows rob Africa of $89 billion each year.
Every year, an estimated $88.6 billion, which is equivalent to 3.7% of Africa’s GDP, leaves the continent in the form of illicit capital, according to UN trade and development agency UNCTAD’s Economic Development in Africa Report 2020, launched on Monday.
Illicit financial flows (IFFs) are movements of money and assets across borders which are illegal in source, transfer or use, according to the new report entitled “Tackling illicit financial flows for sustainable development in Africa.”
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 – which represents the average investment between 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.
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, says UNCTAD.
From 2000 to 2015, the total illicit capital flight from Africa amounted to $836 billion. Compared to Africa’s total external debt stock of $770 billion in 2018, this makes Africa a “net creditor to the world”, the report says.
IFFs related to the export of extractive commodities ($40 billion in 2015) are the largest component of illicit capital flight from Africa.
SDG progress at risk
IFFs represent a major drain on capital and revenues in Africa, undermining productive capacity and Africa’s prospects for achieving the Sustainable Development Goals (SDGs).
For example, the report finds that in African countries with high IFFs, governments spend 25% less than countries with low IFFs on health, and 58% less on education. Since women and girls often have less access to health and education, they suffer most from the negative fiscal effects of IFFs.
Africa will not be able to bridge the large financing gap to achieve the SDGs, estimated at $200 billion per year, with existing government revenues and development assistance.
Infrastructure, services suffering
The report finds that tackling capital flight and IFFs represents a large potential source of capital to finance much-needed investments in, for example, infrastructure, education, health, and productive capacity.
Sierra Leone for example, which has one of the highest under-five mortality rates on the continent, curbing capital flight and investing a constant share of revenues in public health could save an additional 2,322 of the 258,000 children born in the country annually.
In Africa, IFFs originate mainly from extractive industries and are therefore associated with poor environmental outcomes.
The report shows that curbing illicit capital flight could generate enough capital by 2030 to finance almost 50% of the $2.4 trillion needed by sub-Saharan African countries for climate change adaptation and mitigation.
All that glitters
The report’s analysis also demonstrates that IFFs in Africa are not endemic to specific countries, but rather to certain high-value, low-weight commodities.
Of the estimated $40 billion of IFFs derived from extractive commodities in 2015, 77% were concentrated in the gold supply chain, followed by diamonds (12%) and platinum (6%).
The report aims to equip African governments with knowledge on how to identify and evaluate risks associated with IFFs, as well as solutions to curb IFFs and redirect the proceeds towards the achievement of national priorities and the SDGs.
It calls for global efforts to promote international cooperation to combat IFFs. It also advocates for strengthening good practices on the return of assets to foster sustainable development and the achievement of the 2030 Agenda for Sustainable Development.
Tax revenues syphoned off
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, according to UNCTAD. 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 multinationals.
But IFFs are not just a national concern in Africa, said Nigeria’s President Muhammadu Buhari: “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.”
Solutions in plain sight
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 taxation rights, said the UN trade agency.