Illicit Financial Flows Pick Africa’s Pockets

Illicit Financial Flows Pick Africa’s Pockets
Foreign corporations and corrupted African officials are bleeding Africa

AFRICANGLOBE – Between 2002 and 2012 South Africa lost $100.7 billion (about R1.1 trillion at yesterday’s rate) as a result of illicit financial flows, Masiiwa Rusare of African Monitor told delegates at the Alternative Mining Indaba in Cape Town yesterday.

The retention of this money would have helped considerably to support the rand and make it less vulnerable to the massive withdrawal of funds by international investors in recent weeks.

Rusare said in South Africa – and across all of Africa – illicit financial flows were on the increase and that powerful multinational corporations were responsible for about 65 percent of this “loss”.

Drugs are thought to account for about 32 percent and corruption for 3 percent of global illicit financial flows.

Savior Mwambwa, the policy and advocacy manager at Tax Justice Network Africa, said illicit financial flows helped to explain why, in spite of its extensive natural resources and international aid, the African continent remained poor.

Mwambwa said between 1980 and 2009, Africa lost up to $1.4 trillion as a result of illicit financial flows. Southern Africa, including South Africa, Mauritius and Angola accounted for $370bn of this.

The unacceptably high level of illicit financial flows helped to explain why communities across Africa did not see sufficient benefit from their resources and why there were increasing levels of opposition to global mining companies.

Rusare said the higher the level of exports from a country, the greater the likelihood of illicit financial flows.

Mwambwa explained that about 60 percent of international trade happened within the same corporate group, so although trade crossed national borders it frequently involved the same corporate entity operating on both sides of the border.

He said that this made it extremely difficult for country-based regulators to control the illicit flows. “Most of it escapes their radar.”

While progress has been made locally in combating money laundering, regulators such as the SA Revenue Service, the Reserve Bank and the Financial Services Board have not been able to do much to stop the illicit financial flows.

“African countries do not have the capacity to even detect let alone monitor these flows,” Rusare said, adding that it would require a much greater effort at regional level in particular from tax authorities.

The primary illicit financial flow mechanisms used by multinational corporations are “transfer mis-pricing”, mis-invoicing of trade transactions and, using mis-priced financial transfers. He said the process was “driven by a web of perpetrators and facilitators who exploited a sophisticated but poorly regulated international financial and trading system to their unfair advantage”.

In addition to multinational corporations, the perpetrators included lawyers, accountants, bankers and tax havens.

Tax havens were particularly problematic as they enabled companies to operate in secrecy and protected them from the prying eyes of regulators.

Attempts by the Organisation for Economic Co-operation and Development and the UN to rein in transfer mis-pricing had been ineffective because large multinationals were so easily able to manipulate their global financial flows.

As a result of this lack of success, he said that there was increasing pressure on governments to force multinational companies to provide financial statements on a country-by-country basis. And given that tax avoidance is a major factor behind illicit financial flows, there is also a push for companies to be taxed on revenue generated in individual countries rather than profit, which can be manipulated. – Business Report


By: Ann Crotty