Capital Flight: Africa needs to track, plug financial leaks


The continent of Africa is bleeding, as it is losing a lot of money annually due to illegal financial flows (IFFs) – money that is illegally earned, transferred, or utilised.

IFFs suffocate development, drain hard currency reserves, heighten inflation, reduce tax collection, cancel investment, undermine trade, worsen poverty, and widen income gaps.

The United Nations Economic Commission for Africa in its 2014 report titled “Illicit financial flows: Why Africa needs to ‘track it, stop it and get it’”, agrees that IFFs stifle Africa’s socio-economic progress by draining scarce foreign exchange resources, reducing government tax revenues, deepening corruption, aggravating foreign debt problems and impeding private sector development.

“IFFs have considerable repercussions in Africa and pose multiple threats. First, they drain resources and tax revenues by eroding the much-needed tax base for public investment and social spending. They also curb domestic savings, which are needed to reduce the continent’s annual US$31 billion infrastructure financing gap and to tackle climate change and youth unemployment.

“Second, IFFs lead to governance issues, for example, by exacerbating inequality and by encouraging rent-seeking rather than productivity maximisation. 

This practice can be damaging to countries, as it undermines institutions such as banks and financial intelligence units and legal mechanisms for detecting and prosecuting perpetrators of illicit financial flows,” notes the report.

It further notes: “Such flows perpetuate Africa’s economic dependence on external aid. This is reflected by the proportion of official development assistance in the budgets of African governments.”

Afrodad Policy Director, Tafadzwa Chikumbu, concurs that IFFs weaken African states in their effort to mobilise domestic resources and transform the lives of citizens. “Illicit financial flows undermine the role of states in mobilising internal resources and therefore take a leading role in social transformation,” says Chikumbu.

The continent of Africa, therefore, needs mechanisms and strategies to tackle illicit financial flows and indeed, curtailing illicit financial flows could become a key delivery mechanism for sustainable development, according to the UNECA report.

Countries across the continent must embark on serious reforms to cut back IFFs and transform those funds into a powerful tool for enhancing domestic resource mobilisation, as a way of furthering the continent’s development.

The key to achieving success is adopting strong laws, regulations and policies that encourage transparent financial transactions.

Transparency International vice Chair Akere Muna concurs, “There is the need for better transparency and tighter oversight of international banks and offshore financial centres that absorb these flows.

“African governments, as a matter of necessity, must establish comprehensive and transparent public registry of companies to make the investigation of corporate structures easier.”

Muna also urges African countries to fight corruption – a serious cancer that is halting development on the continent. “Corruption siphons funds that would otherwise have been dedicated towards fighting poverty,” says Muna.

“While the sources of illicit financial flows may be many and diverse, corruption remains the single crosscutting driver.”

Lena Diesing of the Organisation for Economic Cooperation and Development believes that combating cross-border tax evasion provides so many answers to the problem of IFFs. She adds that the exchange of information between tax authorities is also a key weapon against cross-border tax evasion.

Journalists can also help stop IFFs from Africa by playing a stronger watchdog role. Yinka Adeyemi, Head of Information and Communications Services of the Economic Commission for Africa, urges journalists to help “track IFFs, stop IFFs in addition to get IFFs” as he believes it is their sacred duty to be the voice of the voiceless.

He says: “Journalists should assist African governments in exposing the sources of illicit flows with credible writing and investigative reports which will, in turn, arm citizens with the knowledge to hold their governments accountable.”

Sharing same views, Wynne Musabayana, Deputy Head of Department of Information and Communication of the African Union Commission, concurs and says because citizens have the right to know, the media serves as the interlink between institutions and the people.

Frankly, tackling the issue of illicit financial flows requires concerted efforts by countries of origin and destination countries alike.  The legal and financial approach must therefore be transparent and the international asset recovery regime integrated, in an effort to curb these outflows and unlock the much-needed resources for the continent of Africa.

December 2014
« Nov   Feb »