According to UNCTAD’s Economic Development in Africa Report 2020, every year an estimated $88.6bn, equivalent to 3.7 percent of Africa’s GDP, leaves the continent as illicit capital flight.
Illicit financial flows (IFFs) are movements of money and assets across borders which are illegal in source, transfer or use, according to the report entitled “Tackling illicit financial flows for sustainable development in Africa.”
It shows that these outflows are nearly as much as the combined total annual inflows of official development assistance, valued at $48bn, and yearly foreign direct investment, pegged at $54bn, received by African countries – the average for 2013 to 2015.
“Illicit financial flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions,” said UNCTAD Secretary-General Mukhisa Kituyi.
These outflows include illicit capital flight, tax and commercial practices like mis-invoicing of trade shipments and criminal activities such as illegal markets, corruption or theft.
From 2000 to 2015, the total illicit capital flight from Africa amounted to $836bn. Compared to Africa’s total external debt stock of $770 billion in 2018, this makes Africa a ‘net creditor to the world,’ the report says.
IFFs related to the export of extractive commodities ($40bn in 2015) are the largest component of illicit capital flight from Africa. Although estimates of IFFs are large, they likely understate the problem and its impact.
The report shows that curbing illicit capital flight could generate enough capital by 2030 to finance almost 50 percent of the $2.4 trillion needed by sub-Saharan African countries for climate change adaptation and mitigation.
The report’s analysis also demonstrates that IFFs in Africa are not endemic to specific countries, but rather to certain high-value, low-weight commodities.
Of the estimated $40bn of IFFs derived from extractive commodities in 2015, 77 percent were concentrated in the gold supply chain, followed by diamonds (12 percent) and platinum (6 percent).
According to the report, specific data limitations affected efforts to estimate IFFs. Only 45 out of 53 African countries provide data to the UN International Trade Statistics Database (UN Comtrade) in a continuous manner allowing trade statistics to be compared over time.
The report highlights the importance of collecting more and better trade data to detect risks related to IFFs, increase transparency in extractive industries and tax collection.
African countries also need to enter an automatic exchange of tax information agreements to effectively tackle IFFs.
Although IFFs are a major constraint to domestic resource mobilization in Africa, African governments are not yet sufficiently engaging in the reform of the international taxation system.
Tax revenues lost to IFFs are especially costly for Africa, where public investments and spending on the SDGs are most lacking. In 2014, Africa lost an estimated $9.6bn to tax havens, equivalent to 2.5 percent of total tax revenue.
Tax evasion is at the core of the world’s shadow financial system. Commercial IFFs are often linked to tax avoidance or evasion strategies, designed to shift profits to lower-tax jurisdictions.
Due to the lack of domestic transfer pricing rules in most African countries, local judicial authorities lack the tools to challenge tax evasion by multinational enterprises.