In DepthSoapboxIllicit financial flows are bleeding Africa

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Posted on Thursday, 12 December 2013 16:44

Illicit financial flows are bleeding Africa

By Dev Kar

Governments must fight against trade misinvoicing, tax evasion, terrorism financing and other forms of illicit financial flows that sap the continent's strength.

 

In May 2013, Global Financial Integrity (GFI), in collaboration with the African Development Bank (AfDB), produced a report showing that Africa was a net creditor to the world to the tune of $1.4trn over the period of 1980-2009.

In other words, during this period more money flowed out of Africa than into it.

Illicit financial flows were, in varying degrees, the main culprit behind the net drain of resources from African countries and not other commonly cited financial flows like debt repayments.

illicit flows drain foreign exchange reserves, reduce tax collection and worsen poverty in the poorest developing countries

Such financial outflows involving the cross-border transfer of the proceeds of corruption, trade in contraband goods, criminal activities and tax evasion have long been the bane of Africa.

Sub-Saharan Africa, particularly West and Central Africa, dominates the pattern of illicit outflows.

The loss of scarce capital has serious con- sequences for economic development and stability. In fact, illicit outflows seriously reduce the effectiveness of aid.

Economists estimate the adverse impact of illicit outflows by netting them out from recorded inflows.

These inflows of capital include official development assistance, remittances, foreign direct investment and commercial loans contracted at market rates of interest.

The net result of inflows and outflows is called the net resource transfer.

Apart from purely economic consequences, massive illicit outflows can create the conditions for civil unrest and heighten risks to national security.

Speaking at an International Monetary Fund (IMF) event in Washington DC last year, Helen Clark, the administrator of the United Nations Development Programme (UNDP), noted that illicit flows drain foreign exchange reserves, reduce tax collection and worsen poverty in the poorest developing countries.

The destabilising role played by massive illicit flows in the face of entrenched poverty and high unemployment – which led to social and political upheaval in Egypt, Libya and Tunisia – is well known.

The capacity of unrecorded illicit funds to finance all kinds of nefarious activities including terrorism is recognised by the very fact that international provisions defining an anti-money laundering (AML) regime are almost always cobbled together with measures to combat the financing of terrorism (CFT).

Africa needs to be vigilant on all these fronts. On the one hand, some African countries have managed to attain higher rates of economic growth in recent years.

However, that growth has not been inclusive, leaving vast swathes of their populations in abject poverty.

On the other, massive illicit flows together with endemic corruption and political instability have pushed other African countries to become failed or near-failed states.

A faster rate of economic growth is not a panacea because weak governance and inadequate social benefits typically result in growth enriching only a tiny sliver of the population.

Indeed, economic expansion may not even lead to a commensurate increase in tax revenue.

This is because the high-net- worth individuals and corporations that face a higher tax burden on larger incomes are loath to shoulder the costs, thereby driving more illicit outflows.

Hence, illicit financial flows can adversely impact countries with widely different rates of economic growth.

Recent studies at GFI indicate that Africa had the second-highest rate of growth in illicit outflows over the past decade, and the continent leads other regions in terms of outflows as a percentage of gross domestic product.

Nigeria and South Africa (ranked 7th and 12th) are among the top 15 exporters of illicit capital.

Hence, all indications are that Africa needs to do much more to curtail outflows of illicit capital.

A GFI report commissioned by the UNDP for discussion by ministers of the least developed countries (LDCs) in Istanbul in May 2011 found that African LDCs accounted for 69% of total illicit flows from the group.

Roughly, 65-70% of outflows were due to the deliberate misinvoicing of external trade.

We found that over the period of 1990-2008, trade misinvoicing in LDCs as a whole increased at a rate of 5.8% per annum, while their merchandise trade grew at 9.5%.

This indicates that without significant improvements in governance – including strengthened customs administration and other regulatory oversight – trade misinvoicing will continue to increase along with trade.

The GFI/AfDB report made several recommendations to curtail illicit flows, including promoting transparency in the financial system, entering into automatic exchanges of tax information, undertaking tax reform to widen the tax base, reforming customs administrations and strengthening AML/ CFT initiatives and enforcement.

International organisations and African states need to do more to curtail illicit flows.

In March 2010, the IMF announced that it was assisting 16 African countries to combat illicit financial flows arising out of corruption involving their gold and diamond industries.

A range of IMF technical assistance programmes aims at helping these countries combat the financing of terrorism through the misuse of their natural resource industries.

African countries must seize such initiatives to strengthen governance in order to break the cycle of illicit flows, poverty and social and economic instability. ●

Dev Kar Chief economist, Global Financial Integrity and former senior economist at the International Monetary Fund



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