Curb illicit financial flows to ease poverty

Admire Mutizwa: economist

ILLICIT financial flows (IFFs) are among the greatest challenges to human development in Africa, hampering organic growth, and the ability of governments to provide infrastructure, deliver public services and reduce poverty.

On March 21 and 22, 2019, civil society organisations, churches, government ministries, revenue authorities, regional parliamentary forums (Southern African Development
Community and East African Community), academics and media houses convened in Gaborone, Botswana, for a regional dialogue on IFFs organised by the African Forum and Network on Debt and Development (Afrodad).

IFFs represent critical revenue leakages from the African continent, undermining public service delivery, and the attainment of social and economic rights. The Afrodad regional conference sought to share ideas, solutions, successes and challenges on curbing the immorality.

There is no settled definition of IFFs and their measurement is complex. IFFs are driven by crime (bribery and terrorism), corruption, embezzlement, drug trafficking, money laundering, capital flight in violation of currency controls, tax evasion and tax avoidance (Forstater, 2018). Global Financial Integrity (2015) defined the IFFs as those funds
crossing borders but illegally earned, transferred, and/or utilised.

Thus, IFFs comprise trans-national financial transactions which contravene domestic and international law in both letter and spirit or are normatively and morally unacceptable.

Broadly, some define IFFs as money legally owned but illegally transferred, money illegally owned but legally transferred, or money both illegally owned and illegally transferred.

IFFs from Africa increased from an estimated US$50 billion in 2015 to above US$70 billion by 2017 (Bokosi, 2019). Global Financial Integrity data and other sources show that

IFFs peaked in 2009 at nearly US$85 billion. Between 2009 and 2013, an estimated US$173 billion left SADC yet nearly an equal amount of US$175 billion was attracted through foreign direct investment (FDI) and official development assistance (ODA).

Zambia is among the worst affected countries, with IFFs increasing from about US$2 billion in 2009 to US$4,2 billion in 2012. Malawi is estimated to have lost an estimated annual average of US$650 million.

For Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) estimated a loss of US$3 billion between 2015 and 2017, while research by Afrodad estimates that US$2,7 billion was lost from the mining sector between 2009 and 2013.

The RBZ further posited that an estimated US$684 million was remitted outside Zimbabwe or externalised under dubious and unwarranted circumstances in 2015, while Global
Financial Integrity data shows that Zimbabwe lost an estimated US$670 million through trade mis-invoicing in 2015.

The magnitude of the revenue leakages shows that the continent is not poor but actually rich. Africa has never been poor and is not poor; there is an abundance of resources. If efforts to attract FDI and ODA were to be matched with efforts to curb IFFs, Africa’s development would reach phenomenal levels. The continent has great resource potential to drive organic economic transformation through infrastructure investment and significantly improve public expenditure on health, education and social security for the attainment of social and economic rights.

Some empirical findings on IFFs include the following:

Trade mis-invoicing accounts for the largest share of reported IFFs (around 87% of all illicit outflows in 2014) (Salomon and Spanjers, GFI 2017);
It is generally accepted that the volume of IFFs is very high, continues to rise and they pose a significant development challenge;
Volume of IFFs from Africa far outstrips the amount of ODA and FDI coming into Africa;
In 2015, Africa lost US$203 billion in multi-national corporations (MNCs) shifting profits, IFFs and climate change adaptation compared to US$161 billion coming in the form of grant aid and personal remittances (Health Poverty Action et al);
Only 2% of illicit funds are repatriated to developing countries due to lack of expertise and institutional capacity, poor political will, lengthy and complex asset recovery processes and mechanisms), lack of reliable paper trail and poor implementation of tax law and policy; and
Governments are deprived of resources to progressively realise economic, social and cultural rights and to combat extreme poverty.

Factors jeopardising the capacity to curb IFFs include liberalisation and deregulation as governments seek to attract and compete for investors. It is within the policies which seek to balance between the interests of investors (maximisation of returns and profits) and those of the nation (society) that illicit financial flows occur.

As business became global, governments attempted to balance between not being tax havens (offering minimal tax liabilities to foreign individuals or businesses) and a risky country. The spaces in between, particularly created by corruption, weak institutions, lack of expertise, information asymmetry, technological backwardness, lack of policy implementation, are exploited by business, politicians, criminals and individuals resulting in IFFs.

The digital economy has also become a significant driver of IFFs, as it comprises internet-based companies, telecommunications, electronic commerce, digital payments, cyber-security, sharing economy and digital skilling that make taxation complex. Physical companies are fast transforming to global online-based companies, yet laws are still stuck on taxing physical companies.

Laws provide for the taxation of companies based on income sources and location yet online companies are difficult to locate due to their multiple presence within the global economy. Block chain, crime (offered as a service business model), block transactions, electronic sales suppression zappers and value networks make the digital economy a driver of IFFs. With most Sadc countries struggling with taxing the informal economy, the digital economy becomes more complex.

Addressing challenges posed by the digital economy calls for dynamic legal and regulatory framework for the digital economy, responsive digital infrastructure, creation of departments within revenue authorities to detect movement of the digital wealth, and train and capacitate inspectors and auditors in revenue departments. More importantly, there is need to invest in skills and capacitate personnel to better negotiate contracts and agreements.

Resources are leaving African countries at a time the continent is privatising the provision of public services through private-public partnerships, excluding the poor and the marginalised from accessing such services. More so, Africa is burdened with a debt crisis as eight African countries are in debt distress, 15 countries are at high risk of debt distress, 23 are in moderate risk of debt distress and only eight are in the low risk of debt distress category.

The urgent need to combat IFFs should be informed by the need for resources to reduce poverty, resolve the debt crisis, declining developmental resources from the north and
growing need to fund pan-African development projects enshrined in Agenda 2063 and Vision 2030. Thus, governments must prioritise domestic resource mobilisation, mobilise remittances from the diaspora, curb IFFs and renegotiate mineral contracts to expand Africa’s fiscal space.

In order for governments to curb IFFs, there is need for greater political will, push for the Stolen Asset Recovery Initiative, enforcing the Addis Tax Initiative, improve transparency in contract negotiation, strengthen the oversight role of Parliament in contracts negotiation, increase public access to information and increase global cooperation against financial flows.

Strengthening the role of parliaments is pivotal. Countries must not sign agreements without the approval of the legislature.

Importantly, deals and contracts with investors must be open and transparent (investors need to go through competitive bidding, less reliance on tax incentives that fuel race to the bottom), improve on fiscal transparency, create regional mineral value chains based on countries’ capabilities and establish policy and regulatory support for the artisanal small-scale miners.

Mutizwa is a development economist working with the Zimbabwe Council of Churches as a programme officer for Economic Justice and Youth Empowerment. Gwanyanya is a banker, financial and economic analyst who founded Percycon Advisory Services. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. — kadenge.zes@gmail.com and cell +263 772 382 852.