Africa loses $50 billion a year through tax avoidance and fraud, report states

Addis Ababa, 19 May 2015- (ECA) – Africa’s money that could be used to improve lives and reduce poverty is leaving the continent through illicit financial flows defined as money illegally earned, transferred and used.

As the Chairperson of the High Level Panel on Illicit Financial Flows from Africa, the former South African President, Mr. Thabo Mbeki, will present the Panel’s Report to the Pan African Parliament in Midrand, South Africa on 21 May 2015.

Considering the rapid population growth of the past two decades resulting in the largest youth population in the world, and that in 2010 about 414 million people compared to 290 million in 1990, lived on less than $1.25 a day, these IFFs are a huge drain and a hindrance in addressing the developmental needs of the African people.

This money, usually made from laundering proceeds of crime, abuse of power, market or regulatory abuse with a considerable portion emanating from tax abuse, comes from commercial and criminal activities, and abuse of entrusted power through corruption.

Companies may hide wealth, avoid taxes and dodge custom duties through transfer pricing and trade mispricing. Underreporting of profit and misinvoicing of services are also common practices. Criminals make their money by keeping transactions from view of law enforcers through trafficking of people, drugs and arms, smuggling of oil and minerals.

Illicit financial flows will always thrive in environments where governance and regulatory structures are weak. When states do not possess the technical and human capacity to address sophisticated crime syndicates, money will leave the continent. The destination is most likely a tax haven or a state with financial secrecy jurisdiction making it impossible for African governments to demand those funds returned to the country of provenance.

The AU Convention on Preventing and Combating Corruption and the African Peer Review Mechanism are some of the methods African governments use to put fetters on the IFFs. They also try to recover frozen assets through global initiatives though “access to information by African countries is made conditional”, the report states.

With less capital at their disposal, African governments become weakened and are hard pressed to deliver appropriate infrastructure. Their control of domestic fiscal policies is reduced. Without IFFs, Africa’s capital stock would have expanded by 60%. The rate of domestic investment to GDP would have risen from 19% to 30%, potentially creating more growth and jobs.

Transparency in financial markets, international trade and investment laws is requisite in tackling IFFs. African states can closely monitor routes of illicit financial flows; train technical experts on law and tax to track trade activities and halt or reduce corruption in their own governments; and collaborate with global initiatives as a way of fighting IFFs. Ultimately, the success in addressing illicit financial flows is a political issue, the report asserts.