Curbing Illicit Financing: The Next Assignment of Africa

In a speech before the UN General Assembly last December, Nigeria’s Finance Minister, Ngozi Okonjo-Iweala, said that “this is the right time for pursuing intensive international action against illicit financing in developing countries, which undermines the domestic resource mobilisation effort and become a matter of major concern due to the scale and negative impact on Africa’s development and governance agenda.”

Indeed, illicit financial flows are depriving Africa billions of dollars each year, which amounts to more than the continent received in overseas development aid or foreign direct investment combined. This money is usually generated from criminal activities, corruption, tax evasion, bribes and transactions from cross-border smuggling. 

The figures regarding illicit financing in Africa are shocking. Between 2002 and 2012, USD589 billion has left Africa in illicit financial flows. The figure becomes even bigger when considering the illicit financial flows from Africa since 1980, which reached upwards of USD1.4 trillion. That’s roughly the equivalent of Africa’s current Gross Domestic Product (GDP), according to a report published in December 2013 by Global Financial Integrity, a research and advocacy organization.

This is why illicit capital outflows in Africa became the main topic during two regional meetings held last month in Ethiopia. The 3rd Tana High-Level Forum, held in Bahir Dar, was attended by Ethiopian Prime Minister Hailemariam Desalegn, Sudanese President Omar al Bashir, South Sudanese President Salva Kiir and Puntland’s President Abdiweli Mohammed Ali (PhD). Senior African policymakers also gathered in Addis Ababa last month to debate one of Africa’s most pressing topics: Capital Flight. In both meetings, African leaders referred to the illegal migration of money from Africa as a security threat and called for measures to curb the menace.

 “Weak states have turned Africa’s wealth of natural resources from a golden avenue [towards] economic growth to a curse and source of conflict,’’ said Carlos Lopes (PhD), Executive Secretary of the Economic Commission for Africa, during the Tana Forum. 

Currently, seven of the top ten African states with the highest yearly average of capital flight — including Nigeria (USD11.9 billion) and Egypt (USD3.4 billion) — are categorized as relatively unstable countries. However, Africa’s fairly stable states are also not spared by hemorrhaging capital outflows. South Africa and Ethiopia, relatively stable states in Africa, hold the second and seventh rank in the top ten list with USD3.01 billion, and USD2.01 billion capital flight, respectively.

Africa's illicit outflowsThe high yearly average volume of illicit capital outflow from Ethiopia, which stood 39th out of 144 developing countries, according to the report, affected the economy in the form of undermining its effort to finance its own mega projects currently being undertaken. The USD2 billion annual average illicit financing flow from Ethiopia can cover 40Pct of the cost of building the Grand Ethiopian Renaissance Dam.

Yet, at the international level, Africa has the smallest share of the USD589.9 billion annual average illicit financial out flows from developing countries between 2002 and 2012. Illicit outflows from Africa comprised just 7.7Pct of developing country outflows, while developing countries in Asia account for 39.6Pct of total illicit outflows. Developing counties in the western hemisphere, such as Mexico and Brazil, contribute 19.6Pct to the total illicit outflows from the developing world, while Illicit outflows from the Middle East region account for 11.2Pct of total outflows on average.

The figures, however, tell only part of the story. Illicit financial flows also affect income distribution as Africans face higher taxes and austerity measures designed to finance external debt obligations. Higher tax burdens disproportionately burden poorer citizens and impinge on the ability of the government to provide social services. The report states that “the illicit hemorrhage of resources from Africa is about four times Africa’s current external debt.” 

The composition of these outflows challenges the traditional thinking about illicit money. According to estimates by Global Financial Integrity, corrupt activities such as bribery and embezzlement constitute only about 3Pct of total illicit outflows from Africa, while criminal activities, such as drug trafficking and smuggling, make up 35Pct. Money stolen by corrupt governments, which constitute close to 2Pct, remains insignificant compared to the other forms of illicit outflow. Meanwhile, commercial transactions by multinational companies make up a whopping 65Pct.

At the Tana Forum, Prime Minister Hailemariam stressed the need to access information on deposits in foreign banks by corporations that avoid taxation in their African host countries: “It would not be possible to implement change if African governments continue to be known for corruption in their dealings with foreign countries and international companies.” 


2nd Year . June 2014 . No.15


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