Institute for Security Studies (Tshwane/Pretoria)

27 March 2012

Africa: The Challenges of Curbing Illicit Financial Flows From the Continent

analysis

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.

Charles Goredema is Senior Research Fellow in the Transnational Threats and International Crime Division of the ISS.

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