.
For African governments desperate for more cash to invest in infrastructure and public services, there exists a deep well of untapped resources: the estimated $50 billion that the continent loses through illicit financial outflows every year. That sum—which vastly exceeds the amount of foreign aid, loans, and other money that Africa receives from external sources—consists of proceeds from all sorts of criminal activities, such as trafficking and money laundering. In total, between 1980 and 2009, illicit financial outflows added up to a staggering $1.4 trillion—proving that the age of plundering Africa is far from over.
When it comes to the facilitators of illicit financial outflows, it’s not only organized crime groups who are guilty. Multinational corporations are also to blame for their use of tactics like aggressive tax avoidance and profit-shifting measures to squirrel away revenues from the grasp of tax authorities.
Of course, illicit financial outflows are a global problem, even in developed economies like the EU, where governments have been pushing to find ways to make digital giants like Google and Facebook pay higher taxes. But they are an especially urgent issue in developing countries in Africa, where capital flight is one of the main obstacles preventing governments from achieving the Sustainable Development Goals (SDGs). After all, tax revenues in these countries are already very low—averaging 17% of GDP versus about 35% in wealthier states—as authorities lack sufficient resources to tackle the deep-seated corruption and complex tactics used by corporations to avoid paying their full bills.
It was in this context that the Tax Justice Network Africa, the UN Economic Commission for Africa, and other stakeholders organized the Pan African Conference on Illicit Financial Flows and Tax in Nairobi last week, where experts discussed ways for governments to try to claw back some of the vast sums of money siphoning out of their countries. While such recognition of the problem at the multilateral level is certainly welcome, it is not enough on its own; individual governments must also commit to more concrete measures to crack down on tax avoidance, improve transparency and oversight of the most corrupt industries, and crack down on illicit trade.
First, African governments should push for aggressive tax avoidance to be included in the international definition of illicit financial outflows. So far, the UN Office on Drugs and Crime and the UN Conference on Trade and Development have been reluctant to do so, thanks in part to successful corporate lobbying. Yet without recognizing aggressive tax avoidance as a major contributor to developing nations’ lack of capital, it will be impossible to coordinate global action against the problem.
Even if tax avoidance doesn’t immediately gain international recognition as an issue worth fighting, there is much that individual countries can do in the meantime to curb tax avoidance and reform tax incentives. This includes compelling large corporations to regularly disclose the details of their operations to ensure that their profits are properly taxed. Governments must also investigate the enablers of illicit capital outflows, especially banks, which often help cover up the cash hemorrhaging out of the continent.
Certain industries—such as mining, oil, and gas—are also rife with opportunities for tax avoidance, bribery, and the generation of illicit financial outflows. In fact, insufficient oversight and opaque management of the extractive industries are a main reason why African nations continue to suffer from high levels of poverty and inequality, despite often possessing vast natural resources. The Democratic Republic of Congo, for instance, is one of the world’s most important sources of minerals such as copper and cobalt, with up to $10 billion worth of these resources mined and sold overseas. Yet the multi-stage value chain of such commodities offers numerous opportunities for aggressive tax avoidance and corruption. According to recent reports, the state-owned mining company operates as a “closed book in terms of revenue management”—a main reason why a piddling 6% of the DRC’s yearly mining exports make it to the government’s coffers. As a result, rather than becoming a source of prosperity for the Congolese people, the extractive industry as it stands has only further privatized wealth in the hands of a few and fueled violent conflict throughout the country.
In addition to the tempting tax avoidance and corruption opportunities offered by the extractive industries, trade in regulated or illegal products such as tobacco is also a highly lucrative wellspring of illicit financial outflows. One estimate put yearly losses in Africa at over €10 billion, as local tobacco companies sell cigarettes to partners in markets where tax rates are low, which are then shipped as contraband to countries where taxes are high. In recognition of this, in recent years, some African governments have been taking steps to combat these practices.
In Kenya, where more than 22 million cigarettes are smoked every day, the government has been imposing new regulations to both deter smoking and crack down on illegal trade in cigarettes. Despite legal opposition from corporations like British American Tobacco, which has an estimated 70% market share in the country, Nairobi nevertheless succeeded launching the Excisable Goods Management System in 2015, which is intended to verify tobacco and other products throughout the supply chain with methods such as track and trace technology.
Of course, the tobacco industry has been strongly opposed to such measures and has been pushing their own—questionable—in-house tracking methods. But they are fighting a losing battle, with authorities elsewhere in Africa as well as in the EU also taking steps to implement independent track and trace systems.
For revenue-strapped governments in sub-Saharan Africa taking steps to crackdown on illicit financial flows should be no brainers. But faced with stern opposition from industries like Big Tobacco, Big Oil, and Big Mining, which draw substantial benefits from such financial outflows and have the financial clout to throttle legislative progress, stamping out the practice is an uphill struggle. But with $50 billion annually at stake, the battle is one worth fighting.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
a global affairs media network
Illicit Financial Flows: How to Patch Up Africa’s $50 Billion Hole
October 30, 2017
For African governments desperate for more cash to invest in infrastructure and public services, there exists a deep well of untapped resources: the estimated $50 billion that the continent loses through illicit financial outflows every year. That sum—which vastly exceeds the amount of foreign aid, loans, and other money that Africa receives from external sources—consists of proceeds from all sorts of criminal activities, such as trafficking and money laundering. In total, between 1980 and 2009, illicit financial outflows added up to a staggering $1.4 trillion—proving that the age of plundering Africa is far from over.
When it comes to the facilitators of illicit financial outflows, it’s not only organized crime groups who are guilty. Multinational corporations are also to blame for their use of tactics like aggressive tax avoidance and profit-shifting measures to squirrel away revenues from the grasp of tax authorities.
Of course, illicit financial outflows are a global problem, even in developed economies like the EU, where governments have been pushing to find ways to make digital giants like Google and Facebook pay higher taxes. But they are an especially urgent issue in developing countries in Africa, where capital flight is one of the main obstacles preventing governments from achieving the Sustainable Development Goals (SDGs). After all, tax revenues in these countries are already very low—averaging 17% of GDP versus about 35% in wealthier states—as authorities lack sufficient resources to tackle the deep-seated corruption and complex tactics used by corporations to avoid paying their full bills.
It was in this context that the Tax Justice Network Africa, the UN Economic Commission for Africa, and other stakeholders organized the Pan African Conference on Illicit Financial Flows and Tax in Nairobi last week, where experts discussed ways for governments to try to claw back some of the vast sums of money siphoning out of their countries. While such recognition of the problem at the multilateral level is certainly welcome, it is not enough on its own; individual governments must also commit to more concrete measures to crack down on tax avoidance, improve transparency and oversight of the most corrupt industries, and crack down on illicit trade.
First, African governments should push for aggressive tax avoidance to be included in the international definition of illicit financial outflows. So far, the UN Office on Drugs and Crime and the UN Conference on Trade and Development have been reluctant to do so, thanks in part to successful corporate lobbying. Yet without recognizing aggressive tax avoidance as a major contributor to developing nations’ lack of capital, it will be impossible to coordinate global action against the problem.
Even if tax avoidance doesn’t immediately gain international recognition as an issue worth fighting, there is much that individual countries can do in the meantime to curb tax avoidance and reform tax incentives. This includes compelling large corporations to regularly disclose the details of their operations to ensure that their profits are properly taxed. Governments must also investigate the enablers of illicit capital outflows, especially banks, which often help cover up the cash hemorrhaging out of the continent.
Certain industries—such as mining, oil, and gas—are also rife with opportunities for tax avoidance, bribery, and the generation of illicit financial outflows. In fact, insufficient oversight and opaque management of the extractive industries are a main reason why African nations continue to suffer from high levels of poverty and inequality, despite often possessing vast natural resources. The Democratic Republic of Congo, for instance, is one of the world’s most important sources of minerals such as copper and cobalt, with up to $10 billion worth of these resources mined and sold overseas. Yet the multi-stage value chain of such commodities offers numerous opportunities for aggressive tax avoidance and corruption. According to recent reports, the state-owned mining company operates as a “closed book in terms of revenue management”—a main reason why a piddling 6% of the DRC’s yearly mining exports make it to the government’s coffers. As a result, rather than becoming a source of prosperity for the Congolese people, the extractive industry as it stands has only further privatized wealth in the hands of a few and fueled violent conflict throughout the country.
In addition to the tempting tax avoidance and corruption opportunities offered by the extractive industries, trade in regulated or illegal products such as tobacco is also a highly lucrative wellspring of illicit financial outflows. One estimate put yearly losses in Africa at over €10 billion, as local tobacco companies sell cigarettes to partners in markets where tax rates are low, which are then shipped as contraband to countries where taxes are high. In recognition of this, in recent years, some African governments have been taking steps to combat these practices.
In Kenya, where more than 22 million cigarettes are smoked every day, the government has been imposing new regulations to both deter smoking and crack down on illegal trade in cigarettes. Despite legal opposition from corporations like British American Tobacco, which has an estimated 70% market share in the country, Nairobi nevertheless succeeded launching the Excisable Goods Management System in 2015, which is intended to verify tobacco and other products throughout the supply chain with methods such as track and trace technology.
Of course, the tobacco industry has been strongly opposed to such measures and has been pushing their own—questionable—in-house tracking methods. But they are fighting a losing battle, with authorities elsewhere in Africa as well as in the EU also taking steps to implement independent track and trace systems.
For revenue-strapped governments in sub-Saharan Africa taking steps to crackdown on illicit financial flows should be no brainers. But faced with stern opposition from industries like Big Tobacco, Big Oil, and Big Mining, which draw substantial benefits from such financial outflows and have the financial clout to throttle legislative progress, stamping out the practice is an uphill struggle. But with $50 billion annually at stake, the battle is one worth fighting.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
