While development gains in Africa are often viewed as dependent on western aid, pouring money into Africa may be less important to creating a continent free from poverty than preventing money pouring out, writes National Security and Resilience Studies research analyst Cathy Haenlein.
“It is contradictory for rich countries to provide aid while failing to address the effects of a global tax framework that enables the bleeding of Africa’s resources”
2015 was heralded as the ‘year of development’. It was the year when the world took stock of the achievements of the Millennium Development Goals (MDGs) – described by the UN as the ‘most successful anti-poverty movement in history’.
It was the year the EU dedicated explicitly to the theme, and one in which the international community struck a new deal on development financing. On top of this, it was the year the world mobilised behind the new Sustainable Development Agenda – the most ambitious global poverty-reduction framework ever seen.
At the core of this framework are seventeen Sustainable Development Goals (SDGs). Together, they form a set of universal targets and indicators unprecedented in their scope and significance.
The goals are not perfect. Critics have described them as sprawling and unfocused and faulted their reliance on ever-increasing extraction, production and consumption – regardless of the planet’s capacity.
The goals have nonetheless now been agreed as the official global roadmap to a world free of poverty and inequality by 2030.
Paying for the SDGs
It is around these goals that UN member states will now frame their agendas. How they do so will depend on the world’s ability to afford the $2–3 trillion/year price tag that comes attached.
To foot the bill, the UN has called for substantial increases in aid to poorer countries and for greater contributions from the private sector.
Such calls follow the orthodoxy on which development in the global South depends, namely on rich countries pouring in the money. This logic has traditionally applied above all to sub-Saharan Africa – where development gains since 2000 are attributed in large part to the aid funnelled in under the MDGs.
Illicit Outflows from Africa
In fact, pouring money into Africa may be less important to the SDGs than preventing money flowing out. Indeed, it is little known that Africa is a net creditor to the rest of the world, due to the vast unrecorded money flows seeping from it in growing volumes.
These flows are illicit – money or capital earned, utilised or moved illegally from one country to another. Though impossible to gauge precisely, in 2013 alone illicit flows from the developing world as a whole were estimated by NGO Global Financial Integrity at a staggering $1.1 trillion.
Since 2004, they have grown at an annual rate of 6.5 per cent – well over average GDP growth rates in many states. Africa’s weak governance and regulatory structures make it a prime target for such transfers.
At current levels, illicit outflows simply dwarf the loudly publicised flows of aid and investment into Africa. These quiet illicit flows may be the single greatest impediment to funding the laudable goals of the Sustainable Development era.
Understanding Illicit Flows
Thanks to expanding research, there is a growing awareness of the issue. The UN Economic Commission for Africa recently established a High Level Panel on Illicit Financial Flows. The Panel highlights three main forms of money flows out of Africa.
The first and most significant arise through commercial practices. These occur as companies operating in two or more countries seek to conceal wealth, evade or aggressively avoid tax, or dodge customs duties through transfer pricing, trade mispricing or misinvoicing of services.
Trade mispricing, most significantly, is a practice frequently used to maximise profits. It involves transferring declared profits from sales in a country where tax rates are deemed high, to one where taxes are low or non-existent. Corporations thus decide where and how they pay tax unconstrained by the reality of their operations. By inflating the cost of imported inputs or deflating the value of exports, they deprive host countries of the tax rightfully owed to them, damaging the public interest.
A second source of illicit flows lies in criminal activities. These arise from profits made through the drugs trade, human trafficking or through illegal arms dealing, to give a few examples.
Illicit flows here result from the desire of perpetrators to hide the proceeds of crime and avoid detection. These actors populate the shadowy world of organised crime – and the ability to launder proceeds of their activities is key to their success.
Also crucial is their ability to corrupt public officials – who act as a gateway for their operations. Indeed, corruption forms the final core component of illicit money flows, facilitating off-the-books money flows in both criminal and commercial spheres.
Yet corrupt officials also act as a source of illicit flows in their own right. Huge flows are siphoned rapidly abroad into foreign bank accounts where these officials abuse public office purely for private gain.
In all cases, the impact on affected countries is severe. Global Financial Integrity’s calculations point to the scale of the corrosive impact on development aspirations.
For the seven years between 2004 and 2013, they show, illicit outflows towered over aid and foreign direct investment. In 2012, every dollar of aid that flowed into the developing world was undercut as ten times that amount flowed out unrecorded.
Particularly in Africa where resource bases are smaller, these outflows have a negative effect on income growth and distribution. When funds are illicitly transferred out of African states, their economies do not benefit from the multiplier effects of those resources’ domestic use.
The heaviest impact is felt by the poorest as growth and job creation fall. In tandem, illicit flows remove money that governments could have used on much-needed public services to provide them a safety net.
Specific calculations of the economic and developmental impact of illicit money flows bring this home. Global Financial Integrity puts Africa’s illicit outflows at the largest in the world relative to GDP, amounting to a full 6.1 per cent.
To give a specific example, in Kenya rapidly rising illicit outflows have eaten away at the country’s 4.8% GDP growth. A recent Danish government study shows Kenya’s tax loss from trade misinvoicing alone to be as high as 8.3 per cent of total government revenue.
In real terms, this resulted in an alarming $1.51 billion lost between 2002 and 2011. In a country already struggling with weak regulatory capacity, the further stress on this capacity, added to the impacts on economic growth, are substantial.
This is not to mention the impact on the credibility of domestic political systems. By eroding governments’ ability to provide basic services, illicit flows dangerously undermine the contract between citizens and their elected representatives.
Responding to Illicit Outflows
The Millennium Development Goals said nothing of illicit money flows. The Sustainable Development Goals redress this, committing in Goal 16 to ‘significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime’.
Last year’s development finance summit concluded with a call for all states to ‘substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them’. Together, these calls show growing recognition of the corroding impact of illicit flows on efforts to boost growth and eliminate poverty.
Though positive, this recognition in global poverty-reduction frameworks is not enough. Urgent and coordinated policies and action are now required.
Promising initiatives are building in momentum: in recent years, frameworks have emerged under the UN, African Union, G20, G8 and World Bank. Many of these have focused on financial transparency in the commercial sector. The Publish What you Pay initiative requires companies in the extractive sector to report payments to national governments – and requires the latter to disclose what they receive.
Other initiatives attack corruption more broadly. The 2003 UN Convention Against Corruption, the first global legally-binding anti-corruption instrument, set out preventative policies, and required member states to criminalise acts of corruption and cooperate to fight them worldwide.
More recently, regional bodies such as the African Union Convention on Preventing and Combating Corruption have grown up around this. In parallel, the Financial Action Task Force, an intergovernmental body housed at the Organisation for Economic Co-operation and Development, has developed global standards and a stream of recommendations to combat money laundering and terrorist financing. Many African states are implementing these recommendations, establishing financial intelligence units and adopting anti-money laundering and counter-terrorist financing legislation.
What Else Can Be Done?
These efforts have not been enough to curb today’s escalating illicit flows. Above all, more must be done to tackle their commercial components: of the $1 trillion leaving poor nations annually, Global Financial Integrity linked a full 83 per cent – over $800 billion – to trade misinvoicing.
This must now become a focus in the fight against illicit outflows. It is contradictory for rich countries to provide aid while failing to address the effects of a global tax framework that enables the bleeding of Africa’s resources.
A wide range of actors must play a role. International organisations such as the World Customs Organisation do valuable work on various aspects of illicit outflows, but must ensure more coordinated action around commercial activities.
The UN, for its part, should focus on the target in SDG 16 – to significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime – whose success will hinge on the indicators attached to it. A suitable indicator should be an annual country-level estimate by a qualified international institution of illicit outflows against an established country-level baseline. Only this level of tracking will ensure that progress is adequately assessed.
The private sector must also assume a stronger stance on ensuring that they are not accomplices to illicit movements of funds. This will require participation in global moves to enhance transparency and reform global tax regimes – moves which will ultimately be essential in eliminating illicit flows in the commercial sector.
Meanwhile, policy-makers in all states must require multinationals to publicly disclose revenues, profits, losses, sales and taxes paid country by country. Non-African states must also ensure that their jurisdictions do not serve as conduits or destinations for illicit flows. Some countries have taken a firm position in this regard, while others have put in place mechanisms that actually encourage these flows; financial secrecy jurisdictions are known to act as a major pull factor for illicit flows.
Finally, and most importantly, African countries must themselves develop the capacities needed to tackle illicit flows, establishing institutions such as transfer pricing units, and adequately resourcing these institutions.
Here, coordinated external support and capacity building could prove crucial. Though African governments have a strong interest in stemming these flows, many remain stymied by a relative lack of knowledge and an uneven institutional architecture through which to respond.
In the end, however, success will depend not just on technical capacity, but on the political will of all parties. Illicit money flows are not just an African problem, but an issue of global governance that calls for concerted action on multiple fronts.
Progress on this issue requires recognition that, alongside today’s stagnating aid levels, illicit financial flows remain central to the development equation. If the world is serious about eliminating poverty and inequality by 2030, these money flows are an issue the world cannot afford to ignore.
Expanding research and awareness of the harm caused by illicit financial flows is a promising sign. All actors must now build on this basis to ensure real progress towards eliminating them.
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