CLAREMONT, California — Economic development in Uganda, Ghana, Kenya, Mozambique and Tanzania has been severely hindered by illegal movement of capital over the past several decades. A recent report from financial transparency groups revealed that more than $60 billion has been moved in and out of these African nations via tax havens over the past 10 years.
The nonprofit research organization Global Financial Integrity (GFI) stated that the money moving illegally in and out of African countries is more than double the amount of international aid received.
However, this illegal flow of capital from developing nations is nothing new. The African Development Bank (AfDB) and GFI report released on May 29 found that Africa lost more than the equivalent of $597 billion and $1.4 trillion between 1980 and 2009, taking illegal outflows into account along with the recorded net transfers.
“The traditional thinking has always been that the West is pouring money into Africa through foreign aid and other private sector flows, without receiving much in return,” GFI president Raymond Baker said in the 2014 report. “Our report turns that logic upside-down – Africa has been a net creditor to the rest of the world for decades.”
The report explains that illegal net outflow occurs when multinational companies incorrectly state the value of imports and exports in their invoices. Importing companies pretend to be paying more than they actually are, and the extra money goes into offshore financial banks, areas where taxes are lowered or do not exist, increasing profit for the importer. GFI research implies that approximately 45 percent of illegal transfers end up in offshore financial banks, and the other 55 percent go to developed countries.
While the report does not look at the factors driving invoice fraud or causes in specific African countries, many nations are susceptible to the same risk.
Though invoice fraud affects countries all over the world, African countries are particularly vulnerable since local government officials are more likely to be swayed into corrupt trade agreements. Companies take advantage of officials to reap easy money, and as a result, development in some of the world’s poorest countries is extremely hampered.
The impact of illicit financial flows goes beyond the economic damage, disrupting the ability for governments, society, and victims of crime to function and receive attention. The GFI explains that they instead promote organized crime, foster an environment of corruption and decrease tax revenues.
Without invoice fraud and illicit financial flows, Africa would be in a much better position to fund its own development. Experts say that helping to end these illegal transfers would be beneficial to the West and Africa, since the fraud has long term affects on both economies.
“Curtailing these outflows should be paramount to policymakers in Africa and in the West because they drive and are, in turn, driven by a poor business climate and poor overall governance, both of which hamper economic growth,” said GFI Chief Economist Dev Kar in a GFI Press Release. “The slower growth rate results in more aid dependency with foreign taxpayer funds filling the shortfall in domestic revenue—to the extent that tax evasion is a part of illicit flows.”
To increase net resource transfers out of Africa and decrease illicit flows, the AfDB and GFI recommend regular bank and tax haven reporting to the Bank for International Settlements, requiring confirmation of ownership of anonymous trusts and foundations, strongly enforcing anti-money laundering rules, requiring country specific reporting of sales and transfers and more.
For African countries, ending illicit financial flows is a key step towards increasing development and their net transfers in the world economy.
“The time for concerted action is now, with clear roles for national and international actors,” said Manager in AfDB Research Issa Faye in the GFI press release. “African countries need to accord policies to stem these flows the same urgency as other priority policy measures.”
Sources: Global Financial Integrity 1, The Guardian, Global Financial Integrity 2
Photo: Rade Law