Illicit Financial Flows Inhibit Development

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SEATTLE, Washington — Some people argue that foreign aid creates dependency. The goal of avoiding dependency is, in part, what is behind the rationale for the current administration’s proposed cuts to foreign aid. Sub-Saharan African nations will bear some of the harshest cuts. Rep. Barbara Lee (D-CA) questioned the justification of the cuts, accusing the administration of prejudiced “attitudes toward the continent” based on comments the president had previously made. The counter-argument to a nation’s dependency on foreign aid is the acknowledgment of illicit financial flows.

What Are Illicit Financial Flows?

The idea that developing countries are dependent upon foreign aid is not supported by the data. A 2016 report from Global Financial Integrity found that developing countries have lost more money over the last three decades to developed countries than they have gained. Financial inflows include aid and investment while outflows include business profits and loan repayments. A 2017 report found that this is also true of sub-Saharan Africa, specifically with 48 countries that are losing $41 billion every year to the rest of the world.

While most of these financial losses are legal, a key part is illegal. Referred to by experts as “illicit financial flows” (IFFs), these illegal profits are a combination of money made from organized crime, trade in illegal items, tax evasion and other illegal activities. The same report found that total outflows from illicit financial flows were $67.6 billion per year, more than triple the $19.7 billion in aid countries in sub-Saharan Africa have received. This puts the total outflows at $202.9 billion annually.

Acknowledging IFFs

María Fernanda Espinosa Garcés, President of the U.N. General Assembly, recently highlighted illicit financial flows as a key issue facing African countries. “I encourage you to build your efforts and the power of ideas to strengthen the voice and impact of Africa – to make progress on issues such as illicit financial flows,” she said while speaking at the Council on Foreign Relations in Ghana. Garcés is not the only one who sees the problem.

IFFs were also highlighted earlier this month by Professor Bolaji Owasanoye of the Nigerian Institute of Advanced Legal Studies. Owasanoye is a law professor and also the head of a Nigerian government commission investigating corruption. “These monies go out by various measures and the big chunk was by tax evasion, under-hand business and practices by multi-national corporations, among others,” he said. Professor Owasanoy was recently nominated as Chairman of the Independent Corrupt Practices and other related offenses Commission, ICPC.

What can be done to fight illicit financial flows?

Luckily, there are policy solutions to the problem of IFFs. The main policy that experts recommend is to improve the enforcement of existing tax codes. This can take many forms. Early 2019, the U.N. Economic Commission for Africa suggested the adoption of new technologies that would make taking stock of financial flows more efficient.

Dr. Janvier D. Nkurunziza, an economist with the U.N. Conference on Trade and Development, has suggested several reforms around improving transparency. These include requiring outbound shipments to be inspected to verify the amount and value of the goods they contain and encouraging governments to make public their data on financial inflows and outflows. Dr. Nkurunziza argues that resources must be prioritized for poverty reduction programs in order to maximize the impact of reducing illicit outflows.

However, since IFFs are a relatively small portion of total outflows, fighting illegal money dovetails well with a broader agenda of the governments developing countries to increase tax revenues, including those in sub-Saharan Africa. This year’s UNECA report also found that the “race to the bottom” approach of lowering taxes in the hope of attracting investment has not been effective for African nations overall. In fact, there was only a 1 percent increase in investment for every 20 percent reduction made in tax revenue. “African countries should thus avoid joining the race to the bottom and lowering taxes to attract foreign investment since the gains will be much smaller than the revenue loss,” the report’s authors write.

Looking Ahead

UNECA argues that, instead of lowering taxes, governments should adopt programs that boost demand for domestic manufacturing, diversify the economy and improve data collection and assessment for harder-to-measure areas of the economy. It also argues that the proposed African Continental Free Trade Agreement will increase investment without having to give up government revenue. And an increase in foreign aid, keeping in mind that countries in sub-Saharan Africa receive only $19.7 billion annually in aid but lose $202.9 billion to outflows, many of which are illicit financial flows, could also go a long way to outweighing outflows.

Sean Ericson
Photo: Flickr

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