Illicit Financial Flows: A Silent Threat to Africa’s Development

Illicit Financial flows (IFFs) are becoming a serious setback to economic growth and development in Africa. The IFFs, defined as illegal movements of capital across borders, are draining Africa’s vital resources. Currently, an annual loss is estimated to stand at $88 billion, or rather 3.7% of Africa’s total GDP. This happens in seasons when Africa is striving to fight poverty, improve infrastructure, and boost its healthcare and education systems.

What Are Illicit Financial Flows?

To understand illicit financial flows, it is prudent to understand the enablers of criminal networks. It encompasses activities such as tax evasion, money laundering, corruption, and trade mispricing. African governments are losing revenue while also eroding the transparency of their institutions, which sums up to increased reliance on foreign aid.

Trade mispricing is a significant contributor to the influx of IFFs. Companies manipulate import and export values, shifting profits to jurisdictions that have low tax rates. For instance, if a nation undervalues its exports or inflates its imports costs, it creates artificial losses in nations that have higher tax rates.

The Scale of the Problem in Africa

Recent reports show that Africa is losing more in illicit financial Flows than it is gaining in foreign direct investments. Over $50 billion is lost annually through trade-related illicit flows alone. This figure dwarfs the $25 billion in annual aid received by African countries. Moreover, nations that should be thriving in the economy of Africa are hit the hardest by these Illicit Financial flows. Nigeria, the Democratic Republic of the Congo, and Angola, for instance, lead in these IFF scandals.

The surge in IFFs often emanates from weak governance and corruption, which enables resource exploitation without adequate compensation.

Root Causes of Illicit Financial Flows

1.     Weak Governance

When a nation is still facing governance issues, it becomes a victim of IFFs. Corruption and lack of transparency due to weak regulatory institutions create opportunities for a surge in IFFs. It becomes so easy for officials to collude with private actors to divert public resources. The results are devastating to the innocent citizens.

2.     Tax Avoidance and Evasion

When multinational corporations exploit loopholes in tax laws, especially in African nations, it eats into their tax profits. The situation even worsens when nations have complex tax arrangements. Furthermore, nations failing to share tax information even exacerbates the problem.

3.     Corruption and Criminal Networks

Africa still faces bribery, embezzlement, and organized crime challenges, which play a bigger role in IFFs. Proceeds from IFFS often get a safe haven in the offshore accounts, hence not easy to trace.

4.     Lack of Regional Cooperation

Africa’s regulatory frameworks do vary. This variation makes it hard for nations to come together and have a collective bargain against IFFs. For instance, if a nation has weak anti-money laundering systems, it becomes a haven for money launderers across borders.

How Illicit Financial Flows Are Impacting Development

Illicit financial flows are impacting development in various sectors, from revenue to governance and social equity.

Revenue Loss

Governments are left at the mercies of financial aids when they fail to zip the loopholes that facilitate illicit financial flows. For instance, potential tax revenues are lost limiting spending on infrastructure, education, and health care.

Debt Dependency

African nations still have the highest debt-to-GDP ratios because they need to finance revenue shortfalls. Average debt to GDP in Africa is now at 65%, something that spells doom for the development and independence of Africa.

Illicit Financial Flows undermines Governance

IFFFS fosters corruption, compromising and weakening institutions. The result is a vicious cycle, where weak governance becomes an enabler for the strong participants in the illicit financial flows.

IFFs It creates social inequality

IFFs widen the gap that exists between the poor and the rich. The elites in the society begin to siphon resources that would have otherwise benefited the lower class in the society. These funds being siphoned to offshore accounts are beneficial in improving academia, healthcare, and infrastructure for the lower class.

Addressing IFF challenges in Africa

Well, it’s no secret that the world is now concerned, and they all agree that Africa needs urgent attention. The issue of IFFs needs a solution by mobilizing domestic resources to stem illicit financial flows. Stemming out the loss of $90 billion annually could be a game changer on the continent by cutting down the reliance on foreign aid.

Emphasizing transparency and accountability can also solve the IFF issue. African legislative sectors should emphasize laws that close the tax loopholes. Secondly, they should enforce financial regulations, and even with capital penalties for the participants.

International organizations like the OECD advocate for the automatic exchange of financial information between countries. This could help trace illicit money and recover lost funds.

Policy Recommendations to Gap Illicit Financial Flows

1. Governments can strengthen governance by improving transparency and accountability. For instance, using digital systems for tax collections and finance management can reduce corruption cases. Kenya, for instance, implemented a digital revenue collection system that has seen the rise in collections in some institutions like KWS by over 43%.
2. African countries should attempt to harmonize tax policies through collaborations. They can enact regional tax treaties which can prevent profit shifting and ensure fair taxation of multinational corporations.
3. Anti-money laundering frameworks should be enforced. This includes tracking suspicious transactions and imposing penalties on financial institutions that fail to comply.
4. Blockchain and data analytics can improve the traceability of transactions. These tools can also identify patterns of trade mispricing.
5. Initiatives like the African Continental Free Trade Area (AfCFTA) should include mechanisms to combat IFFs. Unified regulations and collective action are essential.

What International Partners Can Do to Gap Illicit Financial Flows

Developed nations have a responsibility to support Africa in combating IFFs. This includes cracking down on tax havens, returning stolen assets, and sharing financial intelligence. The Financial Action Task Force (FATF) and other global bodies can play a crucial role in setting standards and monitoring compliance.

Success Stories

Some African countries have made progress. Nigeria’s whistleblower policy led to the recovery of over $370 million in stolen public funds within a year. Similarly, Kenya’s Financial Reporting Centre has successfully tracked suspicious transactions, leading to multiple prosecutions. Kenya also reported an increase in its revenue collections when they implemented a digital revenue collection system.

Also read: Fintech is Transforming Finance in Africa & Driving Growth

Final Thoughts

Illicit financial flows are a major obstacle to Africa’s development. They rob the continent of resources needed for growth, exacerbate inequality, and undermine governance. Addressing IFFs requires a multi-faceted approach involving governments, regional bodies, and international partners. With strong policies and collaboration, Africa can reclaim its resources and accelerate its development agenda.