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Illicit financial flows in Africa: Drivers, destinations, and policy options

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Abstract

Since 1980, an estimated $1.3 trillion has left sub-Saharan Africa in the form of illicit financial flows (per Global Financial Integrity methodology), posing a central challenge to development financing. In this paper, we provide an up-to-date examination of illicit financial flows from Africa from 1980 to 2018, assess the drivers and destinations of illicit outflows, and examine policy options to reduce them.

P

Payce Madden

Senior Research Analyst - Africa Growth Initiative

Using trade misinvoicing and balance-of-payments discrepancies to estimate illicit financial flows, we find higher real GDP is associated with higher illicit financial flows due to the increased opportunities to channel illicit resources abroad generated by higher economic activity, suggesting a need for increased diligence as countries grow.

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.

We further find that, over the past decade, there has been an increase in illicit outflows of capital toward emerging and developing economies (e.g., China) as trade between Africa and these countries has increased.

We conclude with policy recommendations to address illicit financial flows in order to shift the discussion toward effective policies applicable to all countries.

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