What are the key takeaways from your recently released report on Tackling Illicit Financial Flows for Sustainable Development in Africa?
This report is extremely timely because we have 10 years left to achieve the SDGs [Sustainable Development Goals], and then we have the ongoing COVID-19 crisis. Africa needs adequate financial resources to implement the SDGs and tackle the pandemic and its fallouts. There is a need for domestic resource mobilization, so that countries are equipped with the adequate financing to address these challenges head on.
In March this year, the President of the UN General Assembly and the President of the UN Economic and Social Council established a 15-member panel on Financial Accountability, Transparency and Integrity (FACTI Panel) to look at ways to address IFFs, among other issues. Before then, in 2015, the Thabo Mbeki-led High-level Panel on Illicit Financial Flows from Africa presented a report that brought the problem of IFFs to light.
Our new report updates the discussion on IFFs in Africa and looks deeply at the numbers.
We identified four broad categories of IFFs - tax and commercial practices, illegal markets, theft type and terrorism financing, and corruption.
The analysis in the report focuses on trade mis-invoicing and capital flight. This is important for Africa because the continent gets 85 percent of its resources from the extractive sector. Most IFFs are happening in that sector. Africa loses between $30 billion ($1=M15) and $52 billion per year due to trade mis-invoicing, particularly under-invoicing in the extractive sector.
This report is not just about putting a number on the amount of IFFs, it is also about its impact on development. And there is a significant impact on development. IFFs are not only a drain on domestic financial resources; they also correlate with lower government spending on key areas for development. Many African countries with large amounts of IFFs spend 25 per cent less on the health sector and 58 per cent less on the education sector than countries without such problems.
The report indicates Africa is losing a whopping $88.6 billion annually?
Yes. We have estimated that some $88.6 billion per year leave the continent due to capital flight. The numbers are large, and they are growing. To give an idea, curbing the current annual illicit capital flight from Africa could bridge about half of Africa’s annual SDG financing gap of $200 billion.
Broadly, what is the impact of IFFs on countries’ ability to achieve the SDGs?
Africa needs approximately $200 billion a year to implement SDGs. It follows that the capital flight as a result of IFFs is already almost half of the $200 billion the continent needs annually. In addition, this capital flight is more than the flows of ODA [Official Development Assistance] coming into the continent and more than FDI [Foreign Direct Investment] coming in as well. This affects not only development prospects for the continent but also countries’ ability to accumulate capital and service their debts.
Why are African countries unable to stem IFFs?
Well, it’s due to several factors: not having strong institutions, not having the right capacity and not collecting the right data. When you collect data, you can see who is accountable and who's not accountable.
Also, many African countries do not have the capacity to monitor the large multinational firms operating in the extractive sector. Therefore, there is a clear need to collect more and better data, build strong institutions and enforce regulatory tax measures.
Remember also that harmonization of taxation, coupled with strong tax regimes, will very much support the implementation of the African Continental Free Trade Agreement [AfCFTA], which is set to start trading next year.
That’s a good question because, first, IFFs are not just an African issue, it is a global issue, and you have to have a global response to it, including global cooperation and partnerships. Second, multinational companies need to step up, and African countries need to actively participate in the global tax review regimes such as the Global Forum on Transparency and Exchange of Information for Tax Purposes, the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) the United Nations Committee of Experts on International Cooperation in Tax Matters or the United Nations, the World Bank, International Monetary Fund and OECD [Organisation for Economic Co-operation and Development]-managed Platform for Collaboration on Tax.
Currently, African countries are invited only as observers, but they need to play an active role so that they can contribute to the global policy on tax regimes and tax systems that are put in place for multinational companies.
African countries must have a stake the tax review regimes too t. We are strongly recommending that the African Union (AU) has a committee that deals with taxes, and that they give that committee authority and power to ensure a harmonization of tax regimes.
Because, right now, there's a race to the bottom in the extractive sector. Several countries are trying to set lower taxes in the hope that multinationals will come to their country.
How do you think the home countries of these multinationals can help tackle IFFs?
As I said, it must be a global effort. Donor countries, leading global economies should encourage their multinationals to share data on the extractive sector. Governments need to know what has been taken out of Africa. Multinationals must be transparent about this.