Stopping the haemorrhage: The case for a global framework to stem illicit financial flows from Africa

Rado Ratovonarivo — Mon, 30 Jan 2023 22:56:00 +0000

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Opening of Debate of 77 Session of General Assembly

UN Photo/Cia Pak

A wide view of the General Assembly Hall as Secretary-General António Guterres (at the podium and on screens) addresses the opening of the seventy-seventh session of the General Assembly Debate. © UN Photo/Cia Pak

By Rui Xu

As the COVID-19 pandemic highlighted structural inequalities in the global economy, it also exposed vulnerabilities on the African continent, including pervasive illicit financial flows (IFFs) depriving African countries of resources that could go toward financing their development. To end this financial haemorrhage, a global framework against IFFs must be established, as the UN General Assembly (GA) called for in its resolution A/RES/73/222 for renewed “international cooperation to combat illicit financial flows and strengthen good practices on assets return to foster sustainable development.”

IFFs shrink financial resources for Africa’s sustainable development

Curbing IFFs across Africa could close the financing gap for the Sustainable Development Goals (SDGs) by 33 per cent, according to the UN Conference on Trade and Development (UNCTAD). The continent is estimated to lose more than US $85 billion per year from IFFs, more than 3.5 per cent of its Gross Domestic Product (GDP). Capital flight, which serves as a proxy for IFFs, is also significant, reaching US $2 trillion per year between 1970 and 2018, not to mention the socioeconomic impact of COVID-19, which reduced real GDP growth by more than 2 per cent in 2020.

These losses far outstrip Africa’s inflows, including the US $48 billion the continent receives from Official Development Assistance (ODA) and the US $54 billion from Foreign Direct Investment (FDI) per year. Therefore, tackling IFFs is crucial for Africa’s sustainable development. It should be an integral part of the continent’s domestic resource mobilization, underpinning initiatives toward achieving the 2030 Sustainable Development Agenda and the Africa Union’s Agenda 2063.

Transforming regional initiatives into a global agenda

The African Union established a High-level Panel on Illicit Financial Flows from Africa, the Mbeki Panel, in 2015. This panel identified that commercial practices related to trade and tax abuse contributed to more than half of IFFs.

Then, a High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda, the FACTI Panel, was established by the UN in March 2020. In a report published in February 2021, the panel advocates for a “Global Pact for Financial Integrity for Sustainable Development,” underscoring the importance of tackling IFFs at the source, including financial institutions and professional services firms in developed countries.

Understanding this global nature of IFFs is key, as these illicit flows often originate from “enablers” in multiple sectors and countries. For example, Africa has been plagued by IFFs caused by multinational enterprises (MNEs) in other countries, as they are shifting profits away from the continent to affiliates in tax havens, exploiting loopholes in tax rules to reduce income tax liabilities.

A global initiative tailored to African realities

A new global framework for tackling IFFs in Africa should also look at the realities in developing and developed countries. While African countries are trying to enact policies to tackle IFFs, including those outlined in the 2022 policy brief of the UN Office of the Special Adviser on Africa (OSAA), we must recognize that many international instruments and regulations to stop, track, and trace IFFs were established based on economic and financial frameworks from the Global North that do not consider the African context and perspective.

For example, this is the case for a global tax deal achieved through an OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Although significant in establishing a minimum 15 per cent tax rate for MNEs, the agreement was implemented without considering reservations from the Global South. In several African countries, the average corporate tax rate is notably higher. The deal would do little to prevent MNEs from shifting profits away from African countries to low-tax havens.

A blueprint for building a coordinated international framework

The UN could support the implementation of an international framework for tackling IFFs, where UNCTAD, the UN Tax Committee and the Financing for Sustainable Development Office (FSDO) could play key roles given their expertise. The Organization could also ensure that the process of establishing this framework is transparent and inclusive, with adequate participation from developing countries, including those in Africa.

This global framework must lay out a blueprint for priority policy actions, establish a strong global governance system, facilitate the exchange of knowledge across jurisdictions, and provide capacity-building support to less advanced economies.

When it comes to IFFs, the FACTI Panel said it best: “Track it. Stop it. Get it. And use it to finance the SDGs.” The implementation of an effective global framework to tackle IFFs from Africa with support from the UN and a robust engagement of the international community is an important step toward achieving this goal.

The author is an Associate Economic Affairs Officer in the policy analysis and coordination team of the Office of the Special Adviser on Africa at the 51�Թ�.

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Office of the Special Adviser on Africa - FACTI Panel

Stopping the haemorrhage: The case for a global framework to stem illicit financial flows from Africa

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By Rui Xu