Multinational corporations operating in Africa are involved in illicit transfer of most of the $ 1.5 trillion they make in Africa each year back to the developed countries, hurting African economies in the process, a new report shows.
The report on Illicit Financial Flows from Africa: Scale and Developmental Challenges blames multinational corporations for draining hard currency reserves from the continent, stimulating inflation, reducing tax collection and deepening income gaps.
It faults the multinational corporations for “perpetuating Africa’s economic dependence on other regions”.
“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,” the report says, calling on countries to strengthen regulatory frameworks.
Some 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.
Richard Tusabe, the Deputy Commissioner General and Commissioner for Customs at Rwanda Revenue Authority (RRA), speaking yesterday, said illicit profit transfers from Africa is indeed a problem, but noted that in Rwanda the tax body “works with organisations advanced in international taxation as part of efforts to mitigate illicit cash transfer.”
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 and seek repatriation of the stolen moneys back to the continent.
The panel is chaired by the former South African leader Thabo Mbeki.
The report records great variations between regions, countries and even between sectors of activities.
Two-thirds of the outflows was attributed to only two regions, 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.
Illicit financial flows, the report says, worsen 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.
On what causes illicit outflows, it points to structural and governance elements, saying they are the leading drivers.
It says “increasing trade openness without adequate regulatory oversight and non-inclusive economic growth essentially may lead to a higher number of individuals that seek to avoid domestic taxes.”
The World Trade Organisation estimates that corporations control about 60% of world trade, which amounts to about US$40 trillion.
Tusabe says, “With globalisation, countries can’t do away with them [corporations], they come with their challenges, but we try to counter the phenomenon of illicit cash transfers.”
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.
It is estimated that Africa lost about US$854 billion in illicit financial flows over the 39 year period (1970-2008).
A yearly average of about US$ 22 billion is lost 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,” the report adds.
“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”,
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 compared to a yearly average of only US$9 billion for the period 1970-1999.
It contends that a significant amount of illicit outflows have not been recorded in government statistics.
Experts say the report adds a new dimension to Africa’s underdevelopment dilemma.
On possible solutions, the report proposes the creation of disincentives to trade mispricing and the strengthening of regulatory frameworks.
“We try to identify the actual transfer prices that these companies charge their subsidiaries and see if they are not over inflating,” Tusabe says.
At the regional level, it calls for strengthening of the stolen asset recovery regime; and the development of an effective regional advocacy and sensitisation strategies.
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.