Exactly two decades ago, the International Community began expressing sentiments of a rising Africa. These hopes were raised by quite a number of economic success stories in the region and the expectations that the narrative of ‘the poorest continent in the world’ would be long forgotten.
However, a recent report by the United Nations Economic Commission for Africa (UNECA) reveals that the developmental consequences of illicit financial flows (IFFs) from Africa are becoming increasingly high and have the potential of dashing away the progress made so far.
The report estimates that between US $30 billion to US$ 52 billion is lost every year in Africa due to illicit financial flows. Furthermore, IFFs in Africa contribute US$ 88.6 billion to capital flight, the report highlights.
“These losses accumulated every year are equivalent to three-fourth of the amount needed to make progress on the SDG3, one-quarter of the amount is needed to achieve SDG4, and still one-third of the amount is needed to achieve SDG9.”
Thus, financial resources that should have stayed in economies across the continent are misdirected to other overseas countries.
UNECA defines IFFs as “activities considered as criminal offenses but also to some behaviour related to tax and commercial practices.” Essentially, there are four main types of activities that can generate IFFs: tax and commercial activities, corruption, theft-type activities and financing of crime and terrorism, and illegal markets.
Illicit activities are difficult to measure, and so the channels that are used to transfer funds abroad (i.e. trade or financial transactions) are used in the measurement.
According to the report, IFFs of at least US$ 40 billion are linked to extractive commodity exports from Africa; Gold accounts for 77%, 12% are in diamonds, 6% are in platinum and 5% accounts for other commodities. Petroleum and base metals, together represent only 5% of the total.
Loopholes in African economies that elicit IFFs
Corruption and money laundering
Corruption and money-laundering are long established as closely interrelated. For instance, there is significant evidence of a correlation between illicit ivory trade and state corruption.
On the one hand, corruption facilitates money laundering, on the other hand, money-laundering makes grand corruption possible and profitable.
Using the example of ivory trade, corruption within institutions mandated to protect wildlife makes it difficult to curb illegal wildlife trade whereas this same illegal trade, estimated to be a multi-billion dollar business provides funding to finance the bribing of Public officials.
Tax avoidance and evasion
The laxity in tax treaties provide avenues for tax avoidance and tax evasion. Many tax treaties signed by African countries are high risk as they omit many of the clauses that are available through internationally or regionally set model tax conventions.
A very important clause in the United Nations and the OECD Model Tax Conventions include a provision that protects developing countries against tax avoidance through indirect transfers of real property.
Unfortunately, most tax treaties signed by developing countries still omit this provision opening up vulnerability to the avoidance of capital gains tax.
Trade mis-invoicing involves the fraudulent issuing of an invoice, to shift funds abroad. The largest shares of commodities that are illicitly transferred abroad are precious metals, iron and steel, and ores.
It is estimated that 50 percent of illicit trade outflows from Africa are generated via trade mis-pricing and Zambia alone accounts for 65 percent of trade mis-invoicing in copper.
African Economies and their share of illicit financial flows
Consequently, a summary of country-level estimates of IFFs in Africa spanning long periods of time affirm an increasing trajectory as earlier noted. In the case of Angola, capital flight estimated to have occurred between 1986 and 2015 amounted to US$60 billion.
Similarly, capital flight that occurred in Cote d’Ivoire between 1970 and 2015 was US$32 billion. Oil export mis-invoicing in Nigeria was US$44 billion during the period, 1996 to 2014 whereas capital flight during 2013 to 2014 only was US$48 billion.
Zambia, which is a major exporter of copper in the region and the eighth largest producer in the world recorded a net export mis-invoicing of copper at US$14.5 billion between 1995 and 2014.
These illicit trade activities are huge in Ghana too. Ghana is reported to abnormally undervalue exports of gold and cocoa by US$3.8 billion and US$12.6 billion respectively between 2011 and 2017. Accordingly, other countries that have exhibited significant trade mispricing are Egypt, Kenya, Democratic Republic of Congo.