Report blames multinational illicitly
for transferring most of the $1.5 trillion made in Africa each year
ECA Press Release 129/2012
Addis Ababa, Ethiopia 27 July 2012
(ECA) – A report has chastised multinational corporations for the illicit
transfer of most of the $ 1.5 trillion they make in Africa each year back
to the developed countries, draining hard currency reserves from the continent,
stimulating inflation, reducing tax collection and deepening income gaps.
The report on Illicit Financial Flows
from Africa: Scale and Developmental Challenges is adamant about the
role of multinational corporations in what some call Africa’s greatest
economic sabotage, because it “perpetuates Africa’s economic dependence
on other regions”, it says.
It adds the depletion of investments and stifling
of competition caused by these illicit transfers actually undermine trade
and worsen the socio-economic fabric of poor communities in Africa, leading
to shorter life expectancy due to limited spending in providing social
services such as health care, according to the Information and Communication
Service of ECA.
The report has been circulated among members
of the High-Level Panel on Illicit Financial Flows from Africa; an
African Union-endorsed think-tank charged with recommending appropriate
policies to counter the phenomenon and seek repatriation of the stolen
moneys back to the continent. It is chaired the former South African leader,
Mr. Thabo Mbeki.
The report says that since the early 1960s
when multinationals entered Africa, “foreign direct investment by the
multinationals could have been as high as US$ 1.5 trillion a year, although
most is directed towards the developed world.”
“In addition to local businesses, the most
significant perpetrators of trade mispricing are multinational corporations”
because of their “strong global presence and influence, which facilitate
the illicit transfer of funds”, it adds, referring to a the World Trade
Organisation which estimates that corporations control about 60% of world
trade, which amounts to about US$ 40 trillion.
Others estimate that Africa lost about US$
854 billion in illicit financial flows over the 39 year period (1970-2008);
corresponding to a yearly average of about US$ 22 billion, which is a considerable
amount compared to both the external debt of the continent and the official
development aid (ODA) received over the same period.
“Indeed, it is equivalent to nearly all the
ODA received by Africa during that timeframe - a record level of US$ 46
billion in 2010. Just one-third of the loss associated with illicit financial
flows would have been enough to fully cover the continent’s external debt
that reached US$ 279 billion in 2008”, the report adds.
It notes that the trend has been increasing
over time and especially in the last decade, with an annual average illicit
financial flow of US$ 50 billion between 2000 and 2008 against a yearly
average of only US$ 9 billion for the period 1970-1999.
It records great variations between regions,
countries and even between sectors of activities.
“Two-third of the outflows was attributed
to only two regions, namely West Africa and North Africa, with 38% and
28%, respectively.
“Each of the other three regions (Southern,
Eastern and Central Africa) registered about 10% of total Africa’s illicit
financial flows” perhaps because of lack of data and due to the poor quality
of available data, the report warns.
The consequences of these illegal transfers
on Africa are dire, according to the report findings.
“Ultimately, Illicit financial flows worsens
the socio-economic fabric of poor communities and leads to shorter life
expectancy due to limited spending in providing social services such as
health care, the loss of US$ 10 for every US$ 1 received in aid is both
economically and financially detrimental to the continent”, it says.
The report makes a useful distinction between
illicit financial flows and capital flight quoting the United Nations,
Global Financial Integrity, the World Bank and others institutions which
have defined “IFF as money that is illegally earned, transferred, or utilized.”
“The focus on hidden resources and their
potential impact on development places the issue of capital flight firmly
in the broader realm of international political economy which emphasizes
the role of governance at both the origin as well as at the destinations.
“This stands in sharp contrast to the conventional
models of capital flight, which tend to place the burden on developing
countries rather than understanding the shared responsibility between developed
and developing countries”, the report explains.
It describes capital flight as encompassing
both licit and illicit cross-border transfers of funds, but says that part
of capital flight which strictly pertains to illegal movement of funds,
illicit financial flows is not covered extensively in the present report.
On what causes illicit outflows it points
to structural and governance elements, saying they are the leading drivers.
It suggests that “increasing trade openness without adequate regulatory
oversight and non-inclusive economic growth essentially leads to rising
income inequality and may lead to a higher number of individuals that seek
to avoid domestic taxes.”
It quotes the 2009 report by Global Witness
on a number of case studies about bank customers in Equatorial Guinea,
Republic of Congo, Gabon, Liberia, Angola and Turkmenistan as countries
in which the national resource wealth has or had been captured by an unaccountable
few.
Nearly all of the banks doing business with
these customers that featured in the Report are major international banks
such as Barclays, Citibank, Deutsche Bank, and HSBC, all of which
make broad claims about their commitments to social responsibility.
The main components of illicit financial
flows include proceeds of theft, bribery and other forms of corruption
by government officials; proceeds of criminal activities including drug
trading, racketeering, counterfeiting, contraband, and terrorist financing;
and proceeds of tax evasion and laundered commercial transactions.
It identifies trade mispricing as the most
popular way of transferring illicit capital saying “the change in amount
for this type of illicit financial flows is directly related to the change
in volume of trade during the period.”
Other forms of illicit commercial activities
include tax avoidance and tax evasion. These activities basically shift
money beyond the reach and appropriate use of domestic authorities.
The report underscores the vulnerability of
African countries to the financial structures facilitating these illegal
activities, saying it has become a matter of serious concern because of
the scale and negative impact of such flows on Africa’s development and
governance agenda.
It contends that a significant amount of illicit
outflows have not been recorded in government statistics because of what
it calls the ‘revolving-door’ nature of outflow operations.
Over the last three decades, African countries
followed a growth model that relied heavily on external grants and debt
to finance their economic development programmes. However, the growth in
foreign debt was largely accompanied by increased level of outflows, a
phenomenon that is known as the ‘revolving door’.
“Outflow of capital follows a ‘revolving-door’
pattern in that external borrowing leads to capital outflow, which in turn
facilitates additional debt followed by further outflow of capital.
The report is very refreshing in the sense
that it adds a new dimension to Africa’s underdevelopment dilemma.
Having identified the sources, challenges,
and current policy responses to illicit financial flows from Africa, the
report proposes a series of policy options to effectively address this
issue at the national, regional, and global levels.
At the national level it proposes the creation
of disincentives to trade mispricing; the development and implementation
of effective capital repatriation schemes; the sstrengthening of regulatory
frameworks.
At the regional level, it calls for sstrengthening
of the stolen asset recovery regime; and the development of an effective
regional advocacy and sensitization strategies; while there is need to
support and expand specific initiatives and conventions against illicit
financial flows, the report stipulates.
The High-Level Panel on Illicit Financial
Flows from Africa was established last year following a resolution of the
4th Joint Annual Meetings of the ECA/AU Ministers of Finance, Planning
and Economic Development in Africa in March 2011.
The Panel was established by a resolution
of the Conference of African Ministers of Finance, Planning and Economic
Development co-convened by the African Union and Economic Commission for
Africa. The aim is to undertake extensive and in-depth studies to shed
light on the extent and ramifications of illicit financial flows on national
economies as well as on the human impacts of the phenomenon.
Another recent landmark regional initiative,
which places the fight against illicit financial flows at the heart of
its agenda is the African Regional Anti-corruption Programme (2011-2016),
established by the United Nations Economic Commission for Africa in collaboration
with the African Union Advisory Board on Corruption (AUABC).
For more information on the activities of
the High-Level Panel please
contact:
1. Mr Mukoni
Ratshitanga, Thabo Mbeki Foundation, Tel: +27823003447 mukonit@gmail.com
2. Yinka
Adeyemi, UNECA Tel: +251911201798 Yadeyemi@uneca.org
3. Aloysius
Fomenky, UNECA Tel: +251 910 163565 AFomenky@uneca.org
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