Over the past 50 years, Africa is estimated to have lost more than $1 trillion in illicit financial flows (IFFs). This sum is roughly equivalent to all of the official development assistance received by Africa during the same timeframe. Currently, Africa is estimated to be losing $89 billion annually to illicit financial flows, equating to 3.7% of its GDP, while tax incentives contribute to a further $220 billion loss. However, these estimates may well fall short of reality because accurate data do not exist for all African countries, and these estimates often exclude some forms of IFFs that by nature are secret and cannot be properly estimated, such as proceeds of bribery and trafficking of drugs, people and firearms. The amount lost annually by Africa through IFFs is, therefore, likely to exceed $89 billion by a significant amount.

These outflows are of serious concern, given inadequate growth, high levels of poverty, resource needs and the changing global landscape of official development assistance. Although African economies have been growing at an average of about 5 per cent a year, this rate is considered encouraging yet inadequate. These challenges require intensive efforts to promote fiscal transparency & efficiency in tax administration.

The 3rd Meeting of the Sub-committee on Tax and Illicit Financial Flows that took place in Yaoundé, Cameroon, from 8 to 10 May 2024, sought to address this matter and provide frameworks to mitigate the issue. The committee decided that its work would add value only by taking a different approach in accordance with its structure. They accordingly placed our emphasis on matching original research with advocacy and inclusive consultations while exploring the policy dimensions of IFFs.

Committee’s research on Kenya

Coupled with its recent development of an extractive industry, this East African nation has in recent years maintained steady economic growth with a current GDP of $79.66 billion, GDP per capita of $1,796, and an average GDP growth rate of 4.8 per cent a year. Kenya is believed to have lost as much as $1.51 billion between 2002 and 2011 to trade misinvoicing. The role of IFFs and their adverse effect on the country’s GDP cannot be ignored. A recent study funded by the Danish government on five of its priority countries (Ghana, Kenya, Mozambique, Tanzania and Uganda) shows that Kenya’s tax loss from trade misinvoicing by multinational corporations and other parties could be as high as 8.3 per cent of government revenue, hampering economic growth and resulting in billions in lost tax revenue.

Way forward

Policy dimensions

The Committee’s work is ultimately focused on helping governments formulate appropriate policies to combat IFFs. In past reports they focus on identifying the key actors involved in IFFs, characterising the nature of such flows and their drivers and enablers, and proposing possible policy responses nationally, regionally and internationally.

Advocacy

From its inception, the committee has utilised advocacy as an essential part of its work. Accordingly, they framed a communications strategy that included the creation of a website, publication of a brochure on the Panel’s work, development of a fact sheet on IFFs, and related slogans and promotional banners.

The team also adopted the mobilising slogan “Illicit Financial Flows from Africa: Track it. Stop it. Get it” to underpin its advocacy efforts. The Chair and the Technical Committee members continue to be invited to make presentations and interact at various forums on the question of IFFs.

Implications to Member States

The African Union and its functional committees have advocated for all member states to be vigilant regarding issues related to IFFs. They have worked to enhance states’ understanding of IFFs by providing training opportunities, monitoring commercial activities for signs of abuse, and addressing issues such as tax evasion, money laundering, and corruptionThe African Union and its functional committees have advocated for all member states to be vigilant regarding issues related to Illicit Financial Flows (IFFs). They have worked to enhance states’ understanding of IFFs by providing training opportunities, monitoring commercial activities for signs of abuse, and addressing issues such as tax evasion, money laundering, and corruption.

The Committee has formed partnerships with regional organisations, leveraging their advocacy efforts within their respective regions. One such example is the East African Community (EAC), which has advocated for compliance with solutions to Illicit Financial Flows (IFFs) in its member states. The EAC continues to advocate for compliance through the Ministries stationed at each member state. The organisation is set to push for compliance with trades and tricks that govern IFFs’ activities, including the telecommunication industry with the rising threat of SIM Box fraud.

With SIM box fraud, individuals or organisations buy thousands of SIM cards offering free or low-cost calls to mobile numbers. The SIM cards are then used to channel national or international calls away from mobile network operators and deliver them as local calls, costing the operators revenue. Formerly an issue that was only prevalent in Europe and other parts of the world, African governments are now also suffering losses of potential tax revenue from this scam with the massive growth of the mobile industry on the continent. In Kenya alone, approximately $440,000 per month worth of taxable revenue is lost to SIM box fraud.

(Source: Report of the High Level Panel on Illicit Financial Flows from Africa)