The January revelations around illicit financial gains by Isabel dos Santos, Africa’s richest woman and daughter of former Angolan president Edoardo dos Santos, have once again brought the topic of illicit financial flows to the forefront of the conversation on domestic resource mobilization in Africa. Unfortunately, illicit flows are not new to the continent: While between 1980 and 2018, sub-Saharan Africa received nearly $2 trillion in foreign direct investment (FDI) and official development assistance (ODA), it emitted over $1 trillion in illicit financial flows. These flows, illicitly acquired and channeled out of the continent, continue to pose a development challenge to the region, as they remove domestic resources that are crucial for the continent’s development.
Illicit financial flows often occur through trade misinvoicing, one of the primary methods of illegally transferring money to another country. It occurs when exporters or importers deliberately misreport the value, quantity, or nature of goods and services in order to evade taxes, take advantage of tax incentives, avoid capital controls, or launder money.
Illicit financial flows have been increasing overall, but not in terms of share
In our recent policy brief, we use a methodology based on that of Global Financial Integrity to generate estimates for illicit financial flows and find that over the 38-year time span from 1980-2018, Africa exported an aggregate $1.3 trillion of illicit financial flows. Illicit financial flows saw a notable increase in the 2000s in correspondence to increases in trade from Africa. While the high aggregate amount of illicit financial flows may appear alarming, it is important to note that the relative share of illicit financial flows seems to be steady or declining (Figure 1).
In general, and as expected, larger economies have higher levels of illicit financial flows. Indeed, we find that the top four emitters of illicit flows—South Africa, the Democratic Republic of Congo, Ethiopia, and Nigeria—emit over 50 percent of total illicit financial flows from sub-Saharan Africa. We also find that higher taxes and higher inflation lead to higher illicit financial outflows, suggesting that firms seek out relatively more stable or favorable fiscal environments for their funds. Furthermore, we find that emerging and developing economies in Asia and the Middle East have become major destinations for illicit financial flows from Africa in recent years. While part of this shift can be explained by the reduction in trade levels with developed economies, the large upsurge of illicit flows to these economies cannot solely be explained by those increased values.
Policy recommendations: Stopping the flows and repatriating the funds
Curbing illicit financial flows requires cooperation at the global level. Over the past decades, the global community has begun to undertake a number of initiatives aimed at reducing illicit financial flows, including initiatives to curb money laundering and improve the sharing of tax information across countries. As we discuss in our policy brief, while three initiatives—the Financial Action Task Force (created 1998), the Global Forum on Transparency and Exchange of Information for Tax Purposes (created 2009), and the Inclusive Framework on Base Erosion and Profit Shifting (created 2016) —have provided strong recommendations and standards for reducing illicit financial flows, implementation has been challenging. Many African countries and other developing countries lack the resources and capabilities to dedicate to curbing illicit financial flows. Furthermore, the delay of many advanced economies in fully committing to these initiatives has prevented full transparency and contributed to the continuation of harmful tax practices.
While stopping illicit outflows of capital before they happen is important, repatriating funds that have been smuggled out can also be an important tool to solidify the domestic resource base of African countries. In fact, just last month, the U.S. and the British dependency of Jersey agreed with Nigeria to repatriate more than $300 million stolen by Nigeria’s former military ruler General Sani Abacha. Challenges to repatriation efforts are numerous, however. Many developing countries lack the judicial capacity necessary to produce legitimate requests for asset recovery. Moreover, differences in legislation between the place where money is laundered and the place where the theft occurs are a hindrance to asset recovery. In addition, there can be a lack of cooperation from developed economies when asked for funds recovery. Overall, more needs to be done both to repatriate funds and to halt financial flows before they exit countries.