Over the last 50 years, Africa is estimated to have lost more than $1 trillion in Illicit Financial Flows (IFFs) according to experts Kar, Cartwright-Smith, and Leblanc.
This sum is roughly equivalent to all the Official Development Assistance (ODA) received by Africa since independence of most African states.
These outflows are of serious concern, given inadequate growth, high levels of poverty, resource needs and the changing global landscape of ODA.
“Although African economies have been growing at an average of about 5 per cent a year since the turn of the century, this rate is considered encouraging but inadequate,” notes Juma Ignatius Maiyah, a senior projects coordinator at Thomas Reuters Foundation.
Further, he adds that the benefits of this growth have mostly been confined to those at the top of the income distribution.
However, they have not been accompanied by an increase in jobs.
The resource needs of African countries for social services, infrastructure and investment also underscore the importance of stemming IFFs from the continent.
Population Trends in Africa and Effect on Development
At current population trends, Africa is set to have the largest youth population in the world.
Notably, by 2050 the median age for Africa will be 25 years, while the average for the world as whole will be about 36 years according to the United Nations Population Division.
In Kenya for example, infrastructure constraints act as a brake on growth, just as do the low savings and investment rates of the continent.
Coupled with its recent development of an extractive industry, this East African nation has in recent years maintained steady economic growth with a current GDP of $79.66 billion, GDP per capita of $1,796, and an average GDP growth rate of 4.8 per cent a year.
Kenya is believed to have lost as much as $1.51 billion between 2002 and 2011 to trade mis-invoicing.
Effect of the Lost Monies on African Economies
A study funded by the Danish government on five of its priority countries of Ghana, Kenya, Mozambique, Tanzania, and Uganda shows that Kenya’s tax loss from trade mis-invoicing by multinational corporations and other parties could be as high as 8.3 per cent of government revenue.
This hampers economic growth and results in billions in lost tax revenue.
In terms of annual carats produced, the Democratic Republic of Congo is the second-largest diamond-producing nation in the world as well as the largest exporter of cobalt ore.
A combination of such highly sought resources and recent political struggles have made the Central African nation one of the most affected by the illegal exploitation of its resources.
Conflicts within the Democratic Republic of Congo have reduced national output and government revenue.
Also Read: Kenya to Benefit from Ksh145 Billion World Bank Loan
Even in its post-conflict status, years of unchecked and ongoing IFFs out of the Democratic Republic of Congo still affect the country’s national revenue.
The Democratic Republic of Congo is an especially relevant case in the fight against IFFs because its mining sector is regarded as the economic foundation for the country’s post-conflict reconstruction.
How to Reduce Illicit Financial Flows (IFFs)
To reduce IFFs and increase domestic resource, there is need for public and private institutions to provide a framework for cooperation and coordination among various stakeholders, including governments, regulatory bodies, financial institutions, and civil society.
According to Maiyah, shared institutions play a pivotal role in reducing illicit financial flows and increasing domestic resource mobilization by providing a platform for cooperation, setting standards, sharing information, building capacity, and promoting international coordination.
Examples of shared institutions that play a role in addressing IFFs and DRM include the Financial Action Task Force (FATF) for anti-money laundering and countering the financing of terrorism.
Additionally, other institutions include the Organization for Economic Co-operation and Development (OECD)for tax transparency and exchange of information, and the International Monetary Fund (IMF) and World Bank for supporting fiscal and economic reforms.
Shared institutions often provide technical assistance and capacity-building programs to help countries strengthen their financial regulatory and law enforcement capacities.
Such institutions can facilitate the development and implementation of common legal and regulatory frameworks to combat IFFs.
The Role of Shared Institutions in Reducing Money Flow from Africa
They do this through international agreements, conventions, and treaties that set standards for transparency, anti-money laundering, and combating the financing of terrorism.
“Shared institutions can help establish tax and fiscal policies that promote domestic revenue generation. Shared institutions can serve as platforms for member countries to share information and exchange data related to IFFs,” proposes Maiyah.
This can include databases, reporting mechanisms, and information-sharing protocols that enable countries to identify and track illicit financial transactions.
Data sharing can help improve tax collection and revenue forecasting. Shared institutions can establish mechanisms for monitoring progress in reducing IFFs.
They may also produce regular reports and assessments that track the effectiveness of policies and actions taken by member countries.
Also Read: Why African Philanthropy Should be Redefined
Shared institutions can establish peer review mechanisms to assess and monitor countries’ compliance with anti-IFF measures.
These reviews can help hold countries accountable for their commitments and encourage them to improve their practices.
Shared institutions provide a forum for coordination among member countries to develop common policies and strategies to tackle IFFs to help create a more cohesive and effective response to these challenges.
