African economies, including Uganda, will continue to bleed unless governments plug loopholes that enables illicit financial flows (IFFs) to easily leave the continent, experts have warned.

Global Financial Integrity defines IFF as money that is illegally earned, transferred or utilised. And the High Level Panel report defines it as money illegally earned, transferred or used.

Africa as a whole is estimated to be losing more than $50b in illicit financial flows every year, according to the High Level Panel on Illicit Financial Flows from Africa report.

Uganda alone is estimated to be losing in the excess of Shs2 trillion annually and it is feared that this could get worse once commercial production of oil and gas begins.

Magnitude of loss

The amount lost in illicit financial flows every year is nearly an equivalent of the budget allocated to the Ministry of Works and Transport, which accounts for the lion’s share of the national budget.

The same estimates is also nearly the amount of budget committed to paying off interest accrued on loans that the country has since borrowed.

As for the continent, the High Level Panel report, which was chaired by the former South African President, Thabo Mbeki, indicates that over the last 50 years, Africa is estimated to have lost in excess of $1 trillion in illicit financial flows.

This sum, according to the report is roughly equivalent to all of the official development assistance received by Africa during the same timeframe.

How money is lost

Mostly, IFFs are being perpetuated by the multinational companies in Africa, which through illegal and immoral actions, deny the continent its due share of revenue.

It is normally done through tax evasion, money laundering and false declaration.

Other illegal methods used include overpricing, transfer pricing, tax evasion, money laundering, corruption and false declarations, hampering economic growth and resulting in billions and in some cases trillions in lost tax revenue.

“Commercial activities are by far the largest contributors to IFFs, with more than 60 per cent,” policy, tax and investment expert at Tax Justice Network Africa, Mr Jared Maranga told participants attending the Regional Dialogue on Curbing Illicit Financial Flows from Africa in Kigali, Rwanda.

“This is followed by organised crime, then public sector activities,” he added.

It emerged in his presentation that IFF from Africa is growing at an alarming rate, which is an obstacle to internal revenue mobilisation and subsequently financing development in Africa.

Way forward: Curbing illicit financial flows

Knowledge Management Expert, at the African Capacity Building Foundation, Mr Frejus Thoto in his presentation further emphasised that corrupt practices play a key role in facilitating illicit financial flows.

As a way forward he cited strengthening of technical and human capacity, proper understanding of issues related to IFFs and dealing with financial crimes.

Lack of enough data, he said, and shortage of funding as well as lack of coherence between institutions are the other challenges bedeviling the fight against IFF.

He suggested that capacity to address the drivers of IFFs (poor governance, corruption, weak regulatory structures) be instituted by governments.

The capacity to determine and verify the amount and nature of transactions of revenue officials must also be enhanced.

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Escalating the role of Parliament and Civil Society in curbing IFFs from Africa

Promoting increased transparency of decision making on tax and financial transparency

The African Forum and Network for Debt and Development (AFRODAD) in partnership with the Centre for Economic and Policy Priorities (CEPP) held the 2nd Regional Dialogue on Curbing Illicit Financial Flows (IFFs) from Africa from 21-22 March 2018 in Kigali.

Background

United Nations Member States adopted the Sustainable Development Goals (SDGs) in September 2015 as the development blueprint for the next 15 years. SDGs represent a much wider agenda than the original Millennium Development Goals (MDGs), thus the emphasis on the critical need for effective domestic resource mobilization by member states to ensure the attainment of this more ambitious agenda.

The Addis Ababa Action Agenda (AAAA) outcome document identifies domestic public resources as one of the seven action areas under its global framework for financing development post-2015. Furthermore, Agenda 2063 and Agenda 2030 all recommend countries to strengthen domestic resource mobilisation as a means for Africa to become self-reliant and finance its own development.

AFRODAD believes that success in mobilizing domestic resources as a primary source of financing development in Africa hinges on combating illicit financial flows (IFFs) and addressing the ‘natural resource curse’ cataclysm which haunts many mineral resource rich countries in Africa. This is grounded on the AFRODAD 2016-2020 Strategic Plan, whose main goal is to contribute to the development and implementation of transparent, accountable and efficient mechanisms for mobilization and utilization of domestic resources in Africa.

With a view to contribute to the reduction of IFFs from Africa and increase domestic resources for the SDGs, AFRODAD hosts an annual regional dialogue to engage allied Parliamentarians and actors including CSOs from a variety of fields (climate and gender groups, journalists, trade union associations, private sector and religious groups) to share ideas, information, and discuss strategic approaches to halting illicit financial flows from Africa.

AFRODAD efforts are in line with paragraph 23 of the Addis Ababa Action Agenda (AAAA):

“We will redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them, including by combating tax evasion and corruption through strengthened national regulation and increased international cooperation. We will also reduce opportunities for tax avoid­ance, and consider inserting anti-abuse clauses in all tax treaties. We will enhance disclosure practices and transparency in both source and destination countries, including by seeking to ensure transparency in all financial transactions between Governments and companies to relevant tax authorities.

We will make sure that all companies, including multinationals, pay taxes to the Governments of countries where economic activity occurs and value is created, in accordance with national and international laws and policies.”

Why combating IFFs from Africa is key?

Volumes of IFFs from Africa are huge and have been increasing over the years. Evidence from literature on the subject of illicit financial flows, including the report of the High Level Panel on illicit financial flows from Africa, argues that if illicit outflows are curbed, and the funds used domestically, the scale of the flows involved will have significant positive impact on development, and reduce Africa’s reliance on aid and external borrowing to finance development.

Currently, illicit financial flows from Africa are estimated to be as much as USD 50 billion per annum. IFFs limit government expenditure on some of the most critical sectors such as health education. Furthermore, IFFs compromises equitable control, access and ownership of natural resources.

It is in this view that combating IFFs remains a prerequisite for effective and efficient domestic resource mobilization and financing sustainable development. There is therefore need to escalate the role of Parliament and Civil society in combating IFFs from Africa.