An Ad Hoc Expert Group Meeting is being organized by the African Minerals Development Centre (AMDC) and the Macroeconomic Policy Division (MPD) to review the Study on The Impact of Illicit Financial Flows on Domestic Resource Mobilization: Optimizing Africa’s Resources on 6-7 July 2015 in Addis Ababa, Ethiopia.

Over the last decade, the economic performance narrative for Africa has been increasingly optimistic in light of its sustained impressive growth rates. However, this narrative continues to be tainted by several challenges, which continue to hinder the continent’s sustainable and inclusive development. Indeed, there are growing concerns with respect to the colossal amounts of financial resources, which illicitly flow out of Africa every year. It is obvious that such Illicit Financial Flows (IFFs) reduce the levels of resources available to African countries to finance their development objectives.

While IFFs occur in many countries around the world, their social and economic impact on Africa is far more severe given its smaller financial resource base and markets. IFFs impact adversely on both public and private domestic expenditure and investment. In concrete terms, this implies fewer hospitals and schools, less roads and bridges and fewer power plants. Furthermore, many of the activities, which generate the illicit funds, are criminal. Whilst financial crimes such as money laundering, corruption and tax evasion are damaging to all countries, the effects on developing countries are particularly corrosive.

It is in this context that IFFs out of Africa are becoming a growing concern given the scale and negative impact of such flows on Africa’s governance and development agenda. By some estimates, illicit flows from Africa could be as high as USD 50 billion per annum. In fact, conservative estimates have shown that without IFF from the continent, Africa’s Gross Domestic Product (GDP) would have been at least 16% higher.

IFFs include practices such as transfer mispricing, falsified invoicing and round tripping. Tax abuse by Multinational Corporations (MNCs) places a disproportionate burden on smaller domestic firms, which are typically responsible for most employment in African countries. This is confirmed by the Progress Report on IFFs from Africa, presented in March 2014 at the Seventh Joint Annual Meetings of the ECA/African Union Conference of Ministers of Finance, Planning and Economic Development. The Report highlights that commercial activities, such as tax evasion, aggressive tax avoidance and harmful tax holidays, were by far the largest component of IFF.

It cannot be emphasized enough that the loss of funds through IFF reduces revenues as well as the fiscal and other benefits from the mineral sector and other economic sectors. In addition, it also considerably weakens African countries’ ability to mobilize resources generated to fund development plans for the structural transformations of their economies. The opportunity for companies in the mineral sector in particular to minimize their tax costs through IFF practices is an incentive for them to move their profits out of Africa, where they operate. This in turn reduces the extent to which mining companies in Africa will re-invest their profits through greater value-adding linkages on the continent. The most obvious effects are the loss of investment capital and revenues that could be used to finance public services including infrastructure, education and health.

It is against this background that the Macroeconomic Policy Division (MPD) and the Africa Minerals Development Centre (AMDC) at the United Nations Economic Commission for Africa undertook a study on the impact of illicit financial flows on domestic resource mobilization in the mining industry. The purpose of the study is to enable the ECA to gain a deeper insight into the challenges of IFF in Africa. The Study is also intended to support mineral exporting African countries to gain deeper appreciation of the nature and magnitude of IFF related policy gaps and challenges. It is envisaged that this work will increase collaboration and cooperation among African countries, their regional economic communities (RECs) and external partners in addressing the challenges posed by IFFs.

In order to obtain empirical data, the ECA commissioned four country studies in Zambia, Tanzania, the Democratic Republic of Congo (DRC) and South Africa. The study assesses the policy and regulatory frameworks and practices related to IFF and Domestic Resource Mobilization (DRM) in the mining sector in the four countries in order to elucidate the main sources of revenue leakages. These countries were selected because of the significant importance of the mineral sector to their respective economies as well as the diverse tax challenges that they face. These sample countries also allow for wider coverage of different mineral types. The Democratic Republic of Congo is a diversified mineral producer with copper, gold, diamonds and coltan while Tanzania and Zambia are principally gold and copper producing countries respectively. A further consideration was given to the fact that there exists a considerable body of literature on these countries to allow for both in-depth analysis and comparative inquiry.

The key findings of this study were generated through two principle methods of inquiry: literature review and primary data collection through a survey administered in the four sample case countries. The study-report is presented as follows. Chapter 1 provides an introduction to the study. Chapter 2 addresses the importance of DRM along with its challenges and opportunities. The third chapter provides a definition of IFF, its estimated magnitude in Africa, causes and consequences for the governments of the Democratic Republic of Congo (DRC), Tanzania, South Africa and Zambia. The fourth and fifth chapters examine the regulatory and policy frameworks, which have been put in place in the 4 countries for domestic resource mobilization. These chapters also examine the gaps in the tax and fiscal frameworks for the mining sector to determine the sources of leakages for domestic resource mobilization and illicit financial flows. The final chapter proposes policy recommendations that should be implemented in African countries to combat IFFs.