African Union commits to fight Illicit Financial Flows

Illicit Financial Flows (IFFs) are illegal movements of money or capital from one country to another. The term emerged in the 1990s and was initially associated with capital flight. It now generally refers to cross-border movement of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred or used that crosses borders. According to Global Financial Integrity, IFFs have an adverse effect on the developing world as they result in a loss of what are often desperately needed resources to fund public initiatives or critical investments.

Collectively, for developing countries, this often represents hundreds of millions of dollars in lost or foregone tax revenues that could have otherwise been collected and used for supporting sustainable economic growth, creating jobs, reducing inequality, poverty, and addressing climate change, among other things. As per the World Bank, illegal financial flows fall into three main areas: 1) Illegal acts such as corruption and tax evasion; 2) Funds resulting from illegal acts such as smuggling and trafficking; and 3) Funds used for illegal purpose such as financing of organized crime. Illicit financial flows pose a grave challenge to political as well as economic stability around the world and this problem is most severe in developing countries.

The Non-Alignment Movement (NAM) has taken note of the problem of IFFs. At the 18th NAM Summit held at Baku, Azerbaijan in 2018, the Heads of State and Government of the NAM Member States expressed their concern over illicit financial flows and related thereto tax avoidance and evasion, corruption and money laundering, by using certain jurisdictions and practices, with negative impacts for the world economy and, in particular for developing countries. However, NAM is of the opinion that while there is increasing recognition of the importance of international cooperation on tax matters, there is still no single global inclusive forum for international tax cooperation at the intergovernmental level. The Movement further believes that there is also not enough focus on the development dimension of these issues.

Among the developing world, Africa is one continent that is hit hard by the menace of IFFs. These flows originate from several sources: revenues from illegal activities, tax avoidance, abusive profit-shifting, trade mis-invoicing, corruption, and others. IFFs divert resources from social development and raise serious problems for financing development in Africa. According to the Economic Development in Africa Report 2020 by the UN Conference on Trade and Development (UNCTAD), Africa loses about US$88.6 billion, 3.7 per cent of its gross domestic product (GDP), annually in illicit financial flows.

The African Union has taken cognizance of this issue. The African Union Commission, through its department of Economic Development, Trade, Tourism, Industry, and Minerals (ETIM) organized the first meeting of the Sub-Committee on Tax and Illicit Financial Flows (IFFs) of the AU Specialized Technical Committee on Financial, Monetary Affairs, Economic Planning and Integration from 6 to 8 April 2022 in a Hybrid format in Harare, Zimbabwe. The meeting was held under the theme: Tax Incentives – Implication of the Global Tax Reforms for Africa. The meeting was organized with an overall objective to facilitate discussion on the implications of the global tax reforms for African countries’ tax incentives regimes. In addition, the STC had discussed the frameworks to effectively curb trade-related illicit financial flows to achieve sustainable development on the continent. The meeting was officially opened by Clemence Chiduwa (MP), Deputy Minister for Finance and Economic Development of the Republic of Zimbabwe. In his statement, the deputy minister highlighted the importance of having efficient and effective financial policies across the continent. He said that countries should debate and form a common position around taxation matters to give added advantage and value proposition to revenue collection challenges on the continent.

Albert Muchanga, Commissioner, Economic, Development, Trade, Tourism, Industry and Minerals stressed that IFFs have become a major concern because of their scale and the negative impact they pose toon Africa’s development and governance agenda. He said that IFFs are damaging African economies and impact overall capital outflows and ultimately increasing corruption, undermining governance, shrinking tax revenues and expediting global organized crime.

The Chairperson of the Meeting of the Sub-Committee, Mr. Raymond Nazar, Deputy Head, International Economic Policy Unit, Ministry of Finance of Ghana in his statement highlighted the importance of developing a harmonized continental tax policy to collectively address a variety of tax matters including the new global tax rules and tax incentives. He also emphasised the implication of the new tax rule on Domestic Resource Mobilization (DRM) that have a direct effect on profit allocation, tax incentive policy design, and combatting Illicit Financial Flows.

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