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Illicit Financial Flows: Africa’s hemorrhage of funds

24 April 2014, 14:58

Today, the term “illicit financial flows” has not only become a catchy phrase often used in global summits, but also significant in the international political economy thesaurus. Illicit Financial Flows (IFFs) cause nerve-racking damage to Africa’s economic development.

IFFs have caused Africa’s financial hemorrhage, which threatens Africa’s development and the future of African continent. Economic development in Africa is stunted as significant funds that could be spent on infrastructure projects and social delivery services are darted out of Africa through IFFs. Evidence has shown that these funds are higher than the official development assistance (ODA) that flow into Africa. Efforts by African economies to build democratic institutions and improve public finances are clearly smothered by the scale and systematic operations of IFFs.

African economies have begun to take the bull by the horns with the establishment of the High Level Panel (HLP) on Illicit Financial Flows from Africa to tackle the devastating challenges posed by IFFs from Africa. African economies are now saying enough is enough!

Recently, the Chairman of the HLP on IFFs from Africa, Thabo Mbeki, stated that IFFs from Africa is estimated at about $50bn annually. The HLP in a recent Progress Report noted that gross domestic product (GDP) in Africa would have risen by at least 16% higher, but for IFFs from Africa. Global Financial Integrity (GFI) 2012 report showed that though IFFs increased in every region of developing countries, Africa accounted for the lion’s share among other regions. At the country-level, the magnitude of losses in investment capital and revenues from IFFs is mind-boggling. Some African countries, for example Zambia, have lost through IFFs about 50% of their annual GDP. Nigeria’s losses from IFFs are undoubtedly significant. GFI showed that between 2001 and 2010 Nigeria recorded $129bn in cumulative illicit financial outflows; hence ranking among the top 10 economies with high cumulative illicit financial outflows in the world. With these large leakages from the continent it is not surprising that African Development Bank’s (AfDB) study shows Africa as a net creditor to the rest of the world.

IFFs are typically the proceeds from tax evasion, corruption and crime, and are driven by illegally earned, illegally transferred, or illegally spent money. Recently, Raymond Baker, the Director of GFI, noted that international trade is the most common means illicit money (which accounts 60-65% of illicit flows) is moved across borders. The Progress report of the HLP noted that the chunk of IFFs is comprised of laundered commercial transactions, tax evasion, criminal activities- such as drug trafficking, racketeering, counterfeiting, contraband and terrorist financing- and proceeds from bribery and misappropriation of funds by public officials. All these views encapsulate channels through which IFFs flow.

There is a chain of financial secrecy between the parties involved. They also enjoy tax haven. This allows large amount of funds to be concealed from public scrutiny, potentially reducing revenues that could be used to finance development projects. The time is running out on Africa to break the chain of secrecy that fosters the activities of parties to IFFs.

Africa needs less financial secrecy than it needs benefits from open trade and rule-based business environment, foreign investments by socially conscious investing partners, and increase in private sector growth. Africa needs more concerted efforts with global partners through transparency and accountability in global financial system than it needs partners in financial secrecy that siphons huge funds out of Africa. Private sector players facilitate activities in IFFs, for example, by paying kickbacks to government officials to bypass well-established due process and using their personal connections to sterilize transparency and accountability.

Though African economies have begun to take actions to curtail the widespread of funds leaving the continent through IFFs, some African economies are still fiddling at the edge of the issue. It is high time African economies realized that it is up to Africa to establish what is needed to curtail IFFs from Africa. Africa can, and must, do it. Charity begins at home. Individual economies can start with developing and implementing measures at national level, and subsequently share with other African economies. Jointly African economies can develop and implement at regional level the agreed measures in the African Union.

Africa needs global partners to tackle the challenges posed by IFFs. It is markedly noticeable that Africa lacks the capacity to address some of the issues. Thus African states need international cooperation to build relevant capacities on the continent. In the global partnership, African states should be clear-cut on what they need from the international community to curtail IFFs from Africa.

Global partners on their part need to show high level of political will to commit to their pledge. Though recent OECD report shows commitments countries have made in fighting against IFFs, but words should be translated into more actions, particularly from G8 and G20. A mere provision against IFFs may be unable to deter players, except concerted efforts in financial transparency and accountability, and involuntary exchange of tax information.

The time is therefore ticking at a lick for a concerted approach with a high level of political buy-in. It would make much difference if illicit financial flows were incorporated into the Post-2015 MDGs. By that, governments will then act to close loopholes that provide fertile ground for illicit financial transactions; hence curtailing Africa’s hemorrhage of funds. 

The author is a development economist and a member of the Nigerian Economic Society who is passionate about purposeful and sustainable leadership in Nigeria and Africa in general.

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

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