Multinationals blamed for illicit money transfer from Africa to developed countries

Accra, July 31, GNA - Multinational corporations have been blamed for the illicitly transfer of most of the 1.5 trillion dollars they generate annually in Africa, to developed countries.

Experts say consequently, the situation had drained Africa of hard currency reserves, stimulating inflation, reducing tax collection and deepening income gaps.

These were contained in report on a research on “Illicit Financial Flows from Africa: Scale and Developmental Challenges,” issued by the Information and Communication Service of Economic Commission of Africa (ECA), in Addis Ababa, Ethiopia and copied to the Ghana News Agency in Accra on Tuesday.

The report, however, is silent on the role of multinational corporations in what some call Africa's greatest economic sabotage, because it “perpetuates Africa's economic dependence on other regions”.

The document said the depletion of investments and stifling of competition caused by these illicit transfers, actually undermined trade and worsened the socio-economic fabric of poor communities in Africa, leading to shorter life expectancy due to limited spending in providing social services such as health care.

The report, which has been circulated among members of the high-level panel on Illicit Financial Flows from Africa, an African Union-endorsed think-tank, charged with recommending appropriate policies to counter the phenomenon and seek repatriation of stolen moneys back to the continent, is chaired by former South African President, Mr. Thabo Mbeki.

It said, “Since the early 1960s when multinationals entered Africa, foreign direct investment by the multinationals could have been as high as 1.5 trillion dollars a year, although most is directed towards the developed world.

“In addition to local businesses, the most significant perpetrators of trade mispricing are multinational corporations because of their strong global presence and influence, which facilitate the illicit transfer of funds”.

The report said, the World Trade Organisation estimated that corporations controlled about 60 per cent of world trade, which amounted to about 40 trillion dollars.

It said: “Others estimated that Africa lost about 854 billion dollars in illicit financial flows over the 39-year period (1970-2008); corresponding to a yearly average of about 22 billion dollars, which is a considerable amount compared to both the external debt of the continent and the official development aid (ODA) received over the same period.

“Indeed, it is equivalent to nearly all the ODA received by Africa during that time frame - a record level of 46 billion dollars in 2010. 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 279 billion dollars in 2008”.

The report noted that the trend had been increasing over time and especially in the last decade, with an annual average illicit financial flow of 50 billion dollars between 2000 and 2008 against a yearly average of only 9 billion dollars for the period 1970-1999 and it recorded great variations between regions, countries and even between sectors of activities.

It said two-thirds of the outflows were due to only two regions, namely West Africa and North Africa, with 38 per cent and 28 per cent, respectively.

The report said: “Each of the other three regions (Southern, Eastern and Central Africa) registered about 10 per cent of Africa's illicit financial flows perhaps because of lack of data and due to the poor quality of available data, the report warns. The consequences of these illegal transfers on Africa are dire.

Ultimately, Illicit financial flow worsens the socio-economic fabric of poor communities and leads to shorter life expectancy due to limited spending in providing social services such as health care, the loss of 10 dollars for every 1 dollar received in aid is both economically and financially detrimental to the continent”.

It made a useful distinction between illicit financial flows and capital flight quoting the United Nations, Global Financial Integrity, the World Bank and others institutions, which have defined “IFF as money that is illegally earned, transferred, or utilized.”

“The focus on hidden resources and their potential impact on development, places the issue of capital flight firmly in the broader realm of international political economy, which emphasizes the role of governance at both the origin as well as at the destinations.

“This stands in sharp contrast to the conventional models of capital flight, which tend to place the burden on developing countries rather than understanding the shared responsibility between developed and developing countries”.

The report explained that capital flight encompassed both licit and illicit cross-border transfers of funds, but said that part of capital flight, which strictly pertained to illegal movement of funds, illicit financial flows was not covered extensively in the present report.

On what causes illicit outflows, the document pointed to structural and governance elements and said they were the leading drivers.

The report suggested that “increasing trade openness without adequate regulatory oversight and non-inclusive economic growth, essentially lead to rising income inequality and may lead to a higher number of individuals that seek to avoid domestic taxes.”

It said the 2009 report by Global Witness indicated a number of case studies about bank customers in Equatorial Guinea, Republic of Congo, Gabon, Liberia, Angola and Turkmenistan as countries in which the national resource and wealth have or had been captured by an unaccountable few.

The report said, “Nearly all of the banks doing business with these customers that featured in the report are major international banks such as Barclays, Citibank, Deutsche Bank, and HSBC, all of which make broad claims about their commitments to social responsibility.

The main components of illicit financial flows include proceeds of theft, bribery and other forms of corruption by government officials; proceeds of criminal activities, including drug trading, racketeering, counterfeiting, contraband, and terrorist financing; and proceeds of tax evasion and laundered commercial transactions.”

The report identified trade mispricing as the most popular way of transferring illicit capital, and said “the change in amount for this type of illicit financial flow is directly related to the change in volume of trade during the period.”

It cited other forms of illicit commercial activities as tax avoidance and tax evasion and said these activities basically shift money beyond the reach and appropriate use of domestic authorities.

The report underscores the vulnerability of African countries to the financial structures facilitating these illegal activities, and added that it has become a matter of serious concern because of the scale and negative impact of such flows on Africa's development and governance agenda.

It contended that a significant amount of illicit outflows had not been recorded in government statistics because of 'revolving-door' nature of outflow operations.

The report said over the last three decades, African countries followed a growth model that relied heavily on external grants and debt to finance their economic development programmes.

However, it said, the growth in foreign debt was largely accompanied by increased level of outflows, a phenomenon called the 'revolving door'.

It said, “Outflow of capital follows a 'revolving-door' pattern in that external borrowing leads to capital outflow, which in turn facilitates additional debt followed by further outflow of capital.

The report said that was refreshing and added a new dimension to Africa's underdevelopment dilemma, identified the sources, challenges, and current policy responses to illicit financial flows from Africa.

It proposed a series of policy options to effectively address this issue at the national, regional, and global levels.

At the national level, the report proposed the creation of disincentives to trade mispricing; the development and implementation of effective capital repatriation schemes and the strengthening of regulatory frameworks.

At the regional level, it called for strengthening of the stolen asset recovery regime; and the development of an effective regional advocacy and sensitization strategies as well as stressed the need to support and expand specific initiatives and conventions against illicit financial flows.

The High-Level Panel on Illicit Financial Flows from Africa was established last year following a resolution of the 4th Joint Annual Meetings of the ECA/AU Ministers of Finance, Planning and Economic Development in Africa in March 2011.

The Panel was established by a resolution of the Conference of African Ministers of Finance, Planning and Economic Development co-convened by the African Union and Economic Commission for Africa with the aim to undertake extensive and in-depth studies to shed light on the extent and ramifications of illicit financial flows on national economies as well as on the human impacts of the phenomenon.

Another recent landmark regional initiative, which places the fight against illicit financial flows at the heart of its agenda is the African Regional Anti-corruption Programme (2011-2016), established by the United Nations Economic Commission for Africa in collaboration with the African Union Advisory Board on Corruption (AUABC).

GNA