Office of the Special Adviser on Africa - Illicit financial flows

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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Tackling IFFs, a matter of survival for Africa’s development

Anonymous — Fri, 05 Mar 2021 00:18:00 +0000

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UN Photo, Jorge Vazquez Costa, OSAA

Tackling illicit financial flows (IFFs) is a matter of survival for Africa’s development and must be treated with urgency.

There is broad consensus that the funds being bled out of Africa, could be channeled towards the continent’s development if successfully retained.

According to the Economic Development in Africa Report 2020 by the UN Conference on Trade and Development (UNCTAD), Africa loses about US$88.6 billion, 3.7 per cent of its gross domestic product (GDP), annually in illicit financial flows. The High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel) report released in February 2021 cautions that IFFs — from trade misinvoicing, tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development, as well as worsen inequalities, fuel instability, undermine governance, and damage public trust.

The 51�Թ� Office on Drugs and Crime (UNODC), in its Strategic Vision for Africa 2030 launched in February 2021, notes that illicit financial flows remain a key impediment to Africa’s attainment of the 2030 Agenda and the African Union Agenda 2063. Given the multidimensional and transnational nature of IFFs, significant domestic resources – illicitly acquired and channelled out – pose a continent-wide development challenge. Stemming the inflow and outflow of money-laundering linked to terrorism, organized crime, corruption and other crimes would make a significant contribution to economic growth, the vision states.

“Given the magnitude of illicit outflows, these resources, if recovered or retained, have immense transformative potential,” the FACTI report states, noting that tackling these leakages would enable developing countries to provide their citizens with basic social services, such as adequate water, sanitation, electricity healthcare, and housing. Curbing IFFs, according to UNCTAD, could almost halve the $200 billion annual financing gap Africa faces to achieve the sustainable development goals (SDGs).

Under-Secretary-General and Special Adviser to the UN Secretary-General on Africa, Cristina Duarte says while the systems that enable IFFs to thrive are well known, action to tackle them has been limited at national, regional and international level.

“Everybody knows that illicit financial flows are a shared problem between developed and developing countries, we are clear on the mutual accountability. Everybody knows the global enablers of illicit financial flows, among which are the key foundations of the international taxation system behind the IFFs; the selected mechanisms for tax evasion, tax avoidance and money laundering; the global actors of the network of tax evasion, tax avoidance and money-laundering; the data opacity across value chains and the special case of extractives behind the IFFs,” Ms. Duarte says.

The FACTI panel report aptly sums up this view, stating that “global finance is currently skewed, as gaps, loopholes and shortcomings in rules, and their implementation, allow tax abuses, corruption, and money laundering to flourish.”

“These illicit financial flows represent a double theft: an expropriation of funds that also robs billions of a better future. This situation undermines trust in public ethics, drains resources, pushes people into poverty and hamstrings efforts to tackle global challenges, including COVID-19 and the climate crisis,” the report adds.

Yet, despite this knowledge and the negative impact of IFFs, remedial action falls short.
The Strategic Vision for Africa 2030, points out that “a lack of data, together with the absence of a universally accepted methodology to monitor IFFs, limits understanding of both the size of estimated flows and the policy required to address them.”

However, Ms. Duarte notes that some of the challenges cited, such as limited data, lack of clarity on the concept of such financial flows, the absence of a uniform and consensual definition of IFFs and a deficit in global leadership to tackle the scourge, are excuses for inaction.

At the global level, Ms. Duarte says addressing IFFs requires tackling the imbalance in the international financial and trade systems, while curbing such flows at national and regional levels requires confronting weak institutions that have prevented Africa from exercising the necessary ownership over economic and financial flows, such as managing natural resources, particularly in the extractive industry.

Stemming the flow of money-laundering linked to terrorism, organized crime, corruption and other crimes would make a significant contribution to economic growth, the FACTI report says. It further acknowledges that African countries are increasing their ability to trace and recover laundered assets from human trafficking, corruption and wildlife crime, as well as other types of crime, with the forfeited assets being used to support development, including COVID-19 relief efforts. However, the report notes that Africa still faces a multitude of challenges in repatriating stolen assets, with a wide gap between the levels of frozen or confiscated assets and those returned. The FACTI report adds that many practitioners lack the recovery expertise to enforce, prosecute and confiscate assets. In line with the AU Common African Position on Asset Recovery, effective, accountable and transparent institutions are required to effectively address corruption and accelerate the repatriation of assets stolen from Africa.

In fact, the FACTI report states, taking action to strengthen financial integrity would directly contribute to the realization of SDG 16, which calls for the promotion of just, peaceful and inclusive societies, including by providing access to justice and building accountable and inclusive institutions.

The COVID-19 pandemic has been the most disruptive phenomenon to impact the world in the last two decades. Yet, encapsuled within the crisis lies the opportunity to address some of Africa’s long-standing challenges and build a better continent, Ms. Duarte says, adding that this calls for collective efforts to seize the opportunities created by the COVID-19 crisis in Africa.

“Amidst the ongoing COVID-19 crisis, it is more important than ever to invest in and foster societies that are resilient to the threats of tomorrow. We can make this investment by working towards balanced drug control; stronger measures against transnational organized crime, terrorism and violence; protecting Africa‘s resources from illegal exploitation; safeguarding Africa’s economies from corruption, economic crime and illicit financial flows; and more effective criminal justice systems and capabilities,” says Ghada Waly, UNODC Executive Director.

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