How to curb illicit financial flows in Africa

A communique issued by African finance and planning ministers recently indicated that they were 'deeply troubled' by illicit financial flows. An estimated $89 billion is siphoned out of Africa, denying the continent desperately needed resources that it could have used 'for the people'. Douglas Kigabo, an Economist with the UN Economic Commission for Africa, spoke to CNBC Africa shedding light on the severity of the issue. Kigabo emphasized that the latest estimates indicate a staggering $83 billion lost annually to illicit financial flows, which accounts for 5.2% of African GDP and is more than double the official development assistance received from donors. He pointed out that these figures are likely conservative and deeper investigations into individual country cases could reveal even higher losses. The problem of illicit financial flows is widespread across the continent, with each country affected, according to Kigabo. While it is challenging to pinpoint specific countries leading in illicit financial activities, ongoing research across 12 African nations is expected to showcase the extent of the issue. Kigabo highlighted that multinational enterprises engaging in tax avoidance and aggressive tax planning are significant drivers of illicit financial flows. These companies operate through sophisticated profit-shifting schemes that require substantial detection and intervention capabilities. The lack of capacity in African countries to discern and address these complex financial strategies poses a significant challenge. In industries like mining, where there is vast potential for domestic resource mobilization, loopholes in tax laws and tax incentives intended to attract foreign direct investment are exploited by high-skilled investors to illicitly amass profits. Moreover, the mining sector's reliance on foreign-based parent companies often leads to the manipulation of income and profits, further contributing to illicit financial flows. To confront this crisis effectively, Kigabo outlined the need for comprehensive reforms at institutional, policy, and operational levels. He stressed that institutions must be equipped with clear mandates to track, identify, and halt illicit financial flows. Policy reforms targeting investment regulations and tax laws are crucial to closing existing loopholes and preventing further exploitation. Additionally, operational reforms focusing on enhancing institutional capacity and transparency mechanisms are essential. A coordinated approach involving various stakeholders such as tax administrations, commercial banks, anti-corruption agencies, and ministries of justice is vital to combatting illicit financial flows effectively. Without cohesive efforts and well-defined roles within this coordinated framework, the challenge of illicit financial flows in Africa will persist, hindering the continent's economic growth and development.