Tax experts say a weakness in the definition of illicit financial flows is helping looters make away with money from Africa, weakening its growth.
Now, they want that definition expanded to include tax evasion and other benefits that emanate from transnational crimes, bribery, embezzlement, and other illegal activities.
This broad definition, they argue, would allow for more effective policymaking, fostering international cooperation and enhancing transparency.
“We need to expand the definition because many of the Global North countries right now only consider the illegal activities of the companies to fall under this particular topic,” said Chenai Mukumba, executive director of the Tax Justice Network Africa (TJNA).
“The definition needs to be expanded because there are other activities that businesses are engaging in that are not illegal but have far reaching financial implications on domestic resource mobilisation.” There is no universally accepted definition of illegal financial flows (IFFs), leading to a spectrum of interpretations.
Illicit financial flows involve illegal or illicit financial transfers across borders, such as money laundering, tax abuse, and terrorist financing. They pose a significant threat, especially to developing economies.
IFFs, fuelled by corruption, tax evasion, organised crime, and money laundering, have been often seen as undermining public trust, drain resources from sustainable development, and exacerbate poverty. Such flows lead to revenue losses, particularly in Africa, weakening domestic institutions, decreasing private investments, and escalating inequalities.
International organisations such as the G20, World Bank, IMF, the European Commission and the African Union Commission (AUC) are paying keen attention to IFFs, striving to define, address and mitigate them.
Yet the scope has often been limited to illegal activities including tax evasion, which may bring clarity and focus and makes law enforcement possible, but is also criticised for allowing other, broader forms of illicit flows to persist.
“A holistic definition of illicit financial flows is key in developing comprehensive measures to address not only illegal but also ethically questionable illicit financial activities to capture the full scope of financial pressures undermining Africa’s economic stability,” Ms Mukumba said.
Financial leakage
It is proposed that the European Commission take a development approach to the definition of IFFS, which would expand its scope including intentional tax avoidance aimed at minimising the tax liability that is abusive in nature, whether illicit or illegal, across borders.
The developmental definition sets the tone for ensuring that all components of the IFFs are included, even if they are more difficult to enforce.
The debate to define the IFFs comes at a time when financial leakage in Africa is approximately $90 billion annually, which is equivalent to the last replenishment of the International Development Association. Additionally, $220 billion is lost yearly to tax avoidance and incentives provided to multinational enterprises.
Domestic resources
These losses account for over half of the estimated $500 billion needed annually to finance development in Africa.
“Illicit financial flows are depriving the continent of approximately $390 billion a year, approximately 75 per cent of the amount needed to finance development in Africa,” said Dr Patrick Ndzana Olomo, acting head of economic policy and sustainable development, Department of Economic Affairs at the AUC.
“So, the fight against illicit financial flows is a developmental issue as it impedes our ability to mobilise domestic resources and to channel investment in productive sectors such as agriculture, industry and services to drive inclusive growth and sustainable development.”
Former South African President Thabo Mbeki is leading a war against illicit financial flows (IFFs) from Africa, as the head of African Union’s 10-member High-Level Panel on IFFs.
As billions are extracted from the continent, more than 400 million Africans live on less than $1.25 a day (the threshold for absolute poverty), and the GDP per capita on the continent is just $2,000, which is a fifth of the global average, according to Mr Mbeki’s panel’s report, “Track It! Stop It! Get It!” Mbeki says Africa is losing at least $50 billion annually in illegal transactions.
Some reports suggest the continent may have lost up to $1 trillion in the past 50 years. The main channels for IFFs as listed include nefarious commercial activities of multinational companies, drug trafficking and smuggling, and bribery and embezzlement.
