The Challenges of Curbing Illicit Financial Flows from Africa
On 18 February 2012, the United Nations Economic Commission for Africa set up a High Level Panel to study illicit financial flows out of Africa. It is hoped that this will improve countries’ tax revenues.
Charles Goredema, Senior Researcher Fellow, Transnational Threats and International Crime Division, ISS Cape Town
On 18 February 2012, the United Nations Economic Commission for Africa
(UNECA) established a High Level Panel to examine what it referred to as ‘the
debilitating problem of illicit financial outflows from Africa’. In a statement
issued a day ahead of the launch of the panel, UNECA asserted that:
Illicit financial
outflows constitute a major source of resource leakage from the continent,
draining foreign exchange reserves, reducing tax collection, dwindling
investment inflows, and worsening poverty in Africa. The methods and channels
of illicit financial outflows are many and varied including tax havens and
secrecy jurisdictions, over-invoicing, underpricing, and different money
laundering strategies. This source of resource outflows is far bigger and
higher in terms of scale and magnitude than the normal corruption channels,
which are focused upon globally.
Former South African President Thabo Mbeki chairs the panel. The
concern with a net leakage of resources from Africa is as old as the
anti-colonial politics of liberation. It has, however been given new impetus,
generally as part of anti-corruption initiatives but specifically in the wake
of declining levels of aid from developed countries. There is a growing
perception that the gap between the available finance and what is required can
perhaps be filled by the closure of the most significant avenues of resources
drainage. The extent of such drainage remains a matter of speculation, with the
figures pertinent to Africa ranging between $50 billion and $80 billion per
year. Various sources have attempted to quantify the scale of the problem,
including Transparency International (2004), financial research group Global
Financial Integrity (2005), Christian Aid (2007) and the Tax Justice Network
(2007).
The absence of unanimity on this score is probably attributable to the
fact that the terrain concerned is quite broad, and each organisation can only
be exposed to part of it at any given point in time. It is less important to
achieve consensus on scale than it is to achieve it on the measures to be taken
to stem illicit financial outflows from Africa.
Several months ago, I lamented the absence of concerted efforts by the
relevant authorities against abusive transfer pricing
transactions, despite their suspected prevalence in African countries. The
UNECA initiative offers some hope of a consensual and systematic approach to
such transactions. The UNECA Panel has undertaken to study the nature, pattern,
scope and channels of illicit financial outflows from Africa. It will use the
data gathered to sensitize governments, citizens, policy makers, and political
leaders in Africa. It pledged to mobilise the support of development partners
for effective measures to curb such outflows to be adopted. It is ultimately
its goal to influence policies at national, regional and international levels
to ‘neutralize’ illicit financial outflows from Africa.
It goes without saying that tackling this age-old
problem will not be a walk in the park. The Panel will probably be aware of
some of the thorniest challenges that have impeded previous initiatives. It is
somewhat odd that the unavailability of good quality, comprehensive and up to
date information is among the most critical. Researchers who have done
substantial work in this area, such as Raymond Baker, have found this an
insurmountable challenge. Part of the blame for this may be laid on the absence
of consensus among countries that are linked together through trade of what
information is tax-relevant to them. An agreement on this should be followed by
the extraction, from the sectors concerned, of as much of that information as
is available, so that it can be shared. As Mr Mbeki observed, sometimes there
are glaring disparities between exporting and importing countries on the
quantity or quality of commodities exchanged between them. Since intra-African
trade is relatively low compared to that between African and non-African
countries, much of the tax-relevant information will be located beyond the
continent. How much of it is accessible to African countries?
The term ‘illicit financial flows’, to the extent that
it is limited to trade-based flows, encompasses revenue movements based on at
least three types of transactions; firstly the mispricing of commodities
exchanged between unrelated parties, secondly the mispricing of commodities
exchanged between related parties (for example within the same multi-national
corporation) and finally one-sided fraudulent transactions. The Panel will be
aware that each type of transaction calls for a specific method of detection
and quantification. The challenges of securing the information required are
also different. Money laundering is undoubtedly a common outcome of all of
them, but that is probably where the similarity ends. While the Panel has
undertaken to deliver tangible results within a year, some of the challenges
stemming from information gaps might just make this impossible.
The Panel is more likely to succeed if it trims the
immediate agenda, to focus primarily on determine the data available on
international business transactions that are most likely to facilitate illicit
financial flows, as described in the three categories above. It will find that
in many African countries, this data is scanty, clouded in a mixed mass of
information and scattered in disparate locations. Hopefully the Panel will have
the mandate and authority to summon the data, as some sources are reluctant to
share it. Revenue collecting, and mining departments rank among the more
intractable data sources.
There is broad
consensus that global illicit financial flows have been aggravated by the
proliferation of massive multi-national corporations, coupled with the
innovative use of numerous tax havens located around the world. The latter
exist in many forms, but share the common feature of offering space to secrete
proceeds of profitable activities conducted elsewhere, with minimal risk of
losing them through taxation or foreign authorities. Tax havens are located in
both developed and developing countries. Multi-national corporations (MNC) raise
the risk of illicit financial flows through mispricing of not just commodities,
but also services, exchanged between related parties. Using subsidiaries
situated in disparate locations, any MNC is able to allocate and distribute
costs and income among them to maximize stakeholder value. Thus costs accruing
to one or more subsidiaries could be increased or reduced if expedient to do
so. In their current reckoning, tax authorities in producer countries, some of
which are in Africa, are not among the stakeholders to benefit from intra-group
manipulation of costs and income. One of the tests of its effectiveness will
surely be whether the Panel can strike some deals for tax authorities in
Africa. It will do well to learn some of the lessons that have already been
learnt from previous initiatives.
