Illicit Transfers Cost Africa US$1.5 Trillion Each Year
A report has chastised multinational corporations for the illicit transfer of most of the $ 1.5 trillion they make in Africa each year back to the developed countries, draining hard currency reserves from the continent, stimulating inflation, reducing tax collection and deepening income gaps.
The report on Illicit Financial Flows from Africa: Scale and Developmental Challenges is adamant about the role of multinational corporations in what some call Africa’s greatest economic sabotage, because it “perpetuates Africa’s economic dependence on other regions”, it says.
It adds the depletion of investments and stifling of competition caused by these illicit transfers actually undermine trade and worsen 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, according to the Information and Communication Service of ECA.
The report 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 the stolen moneys back to the continent. It is chaired by the former South African leader, Mr. Thabo Mbeki.
The report says that since the early 1960s when multinationals entered Africa, “foreign direct investment by the multinationals could have been as high as US$ 1.5 trillion 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”, it adds, referring to the World Trade Organisation which estimates that corporations control about 60 per cent of world trade, which amounts to about US$ 40 trillion.
Others estimate that Africa lost about US$ 854 billion in illicit financial flows over the 39 year period (1970-2008); corresponding to a yearly average of about US$ 22 billion, 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 timeframe - a record level of US$ 46 billion 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 US$ 279 billion in 2008”, the report adds.
It notes that the trend has been increasing over time and especially in the last decade, with an annual average illicit financial flow of US$ 50 billion between 2000 and 2008 against a yearly average of only US$ 9 billion for the period 1970-1999.
It records great variations between regions, countries and even between sectors of activities.
“Two-third of the outflows was attributed to only two regions, namely West Africa and North Africa, with 38 per cent and 28 per cent, respectively.
“Each of the other three regions (Southern, Eastern and Central Africa) registered about 10 per cent of total 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, according to the report findings.
“Ultimately, Illicit financial flows 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 US$ 10 for every US$ 1 received in aid is both economically and financially detrimental to the continent”, it says.
The report makes a useful distinction between illicit financial flows and capital flight quoting the United Nations, Global Financial Integrity, the World Bank and other institutions which have defined “IFF as money that is illegally earned, transferred, or utilised.”
“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 emphasises 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 explains.
It describes capital flight as encompassing both licit and illicit cross-border transfers of funds, but says that part of capital flight which strictly pertains to illegal movement of funds, illicit financial flows is not covered extensively in the present report.
On what causes illicit outflows it points to structural and governance elements, saying they are the leading drivers. It suggests that “increasing trade openness without adequate regulatory oversight and non-inclusive economic growth essentially leads to rising income inequality and may lead to a higher number of individuals that seek to avoid domestic taxes.”
It quotes the 2009 report by Global Witness on 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 wealth has or had been captured by an unaccountable few.
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.
It identifies trade mispricing as the most popular way of transferring illicit capital saying “the change in amount for this type of illicit financial flows is directly related to the change in volume of trade during the period.”
Other forms of illicit commercial activities include tax avoidance and tax evasion. 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, saying 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 contends that a significant amount of illicit outflows have not been recorded in government statistics because of what it calls the ‘revolving-door’ nature of outflow operations.
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, the growth in foreign debt was largely accompanied by increased level of outflows, a phenomenon that is known as the ‘revolving door’.
“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 is very refreshing in the sense that it adds a new dimension to Africa’s underdevelopment dilemma.
Having identified the sources, challenges, and current policy responses to illicit financial flows from Africa, the report proposes a series of policy options to effectively address this issue at the national, regional, and global levels.
At the national level it proposes the creation of disincentives to trade mispricing; the development and implementation of effective capital repatriation schemes; the strengthening of regulatory frameworks.
At the regional level, it calls for strengthening of the stolen asset recovery regime; and the development of an effective regional advocacy and sensitisation strategies; while there is need to support and expand specific initiatives and conventions against illicit financial flows, the report stipulates.
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. The aim is 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).