Renowned for its vast mineral wealth, Africa remains a significant source of fiscal revenues and holds a crucial position in global mineral reserves. Nonetheless, the continent grapples with the challenge of translating its abundant resources into sustained prosperity for its citizens, with Illicit Financial Flows (IFFs) emerging as a formidable obstacle. These insights were gleaned during the enlightening "Track it, Get it, Stop it: Exploring Illicit Financial Flows and Their Barriers to Domestic Resource Mobilization" breakfast debate, organized by Policy on the last Friday of September 2023 at the British Council in Dar es Salaam
Africa, known for its vast mineral wealth, remains a vital source of fiscal revenues and contributes significantly to global mineral reserves. However, the continent faces a formidable challenge in translating its abundant resources into lasting prosperity for its citizens. Illicit Financial Flows (IFFs) are emerging as a major hurdle in achieving this goal. Africa's mineral wealth is undeniable, with the continent accounting for more than 70% of African exports. It boasts substantial reserves of platinum group metals (54%), diamonds (78%), chromium (40%), and phosphate (60%), along with significant deposits of industrial minerals. As a result, it ranks among the top destinations for mining investment, closely following Australia, Europe, and North America.
Despite this potential, the continent struggles to convert its mineral riches into sustained economic development for its people. Experts argue that IFFs play a significant role in perpetuating this challenge.
IFFs are explicitly addressed in Target 16.4 of the Sustainable Development Goals (SDGs), emphasizing the need to combat them by 2030, as highlighted in the Addis Agenda. The African Mining Vision (AMV) also underscores the adverse impact of IFFs on the continent.
The financial drain caused by IFFs is staggering, estimated at over US$ 50 billion annually. These flows stem from various sources, including commercial tax evasion, trade mis-invoicing, abusive transfer pricing, and even criminal activities. Companies exploit gaps in national and international tax systems to minimize their tax liability, perpetuating an unjust system.
Furthermore, IFFs undermine the integrity of tax systems, erode tax morality, and create a perception of unfairness in the tax system. They also harm competition by giving global multinational enterprises a competitive advantage over domestic companies.
In the quest to build effective developmental states in Africa, IFFs and Domestic Resource Mobilization (DRM) stand in opposition. IFFs hinder countries' ability to mobilize essential domestic resources for development, ultimately impeding the emergence of developmental states on the continent. Good governance is deemed crucial for successful DRM, requiring effective strategies, policies, laws, and regulations for maximizing mineral sector revenues.
Policy and compliance gaps that allow vested foreign and domestic interests to profit from tax evasion and weak state institutions are often at the root of IFFs. Corrupt tax administration further complicates efforts to curb illicit capital flows.
Mining companies exacerbate the problem by borrowing internally from their affiliates, taking advantage of tax deductions on accrued interest from debt. Many mineral-rich African countries also fail to utilize geological information effectively, treating it as records rather than datasets for tracking IFFs.
Confidentiality clauses and misaligned stability clauses contribute to the challenge, and most African countries lack windfall taxes (excess profit tax). Governance reforms that align with the African Mining Vision (AMV) are seen as key to addressing these issues.
Tanzania has made strides in combatting IFFs through measures like specific transfer pricing guidelines, anti-money laundering laws, and beneficial ownership disclosure requirements for extractive companies. Despite these efforts, Tanzania still loses approximately $1.5 billion annually due to trade-based money laundering and IFFs.
The negative impact of IFFs on Domestic Resource Mobilization and development in Africa cannot be overstated. Recommendations to combat IFFs include establishing inclusive and transparent global governance frameworks, increasing technical support for Base Erosion and Profit Shifting (BEPS) initiatives, and fostering progressive African leadership for international tax cooperation.
Efforts should also focus on policy consistency, capacity strengthening through interagency coordination, and promoting local content to maximize the benefits of resource extraction. While eliminating IFFs entirely may be challenging, addressing this issue is crucial for realizing Africa's full potential and fostering sustainable development for all its citizens.
Image by UNCTAD