Vulnerability and Exposure to Illicit Financial Flows Risk in Africa

Abstract

It is well established that illicit financial flows affect the economies, societies, public finances and governance of African countries - as they do all other countries. Following the ground-breaking work of the African Union and UN Economic Commission for Africa High Level Panel on Illicit Financial Flows out of Africa (2015), a consortium of stakeholders in Africa is working together to stem illicit financial flows and follow-up recommendations of the report. The consortium’s technical working group comprises the African Union Commission, the UN Economic Commission for Africa, the African Development Bank, the African Tax Administration Forum, Tax Justice Network Africa, and the African Capacity Building Foundation. A global target to reduce the volume of illicit flows was adopted in the UN Sustainable Development Goals. The UN process has struggled to reach consensus on indicators for the agreed target 16.4, since high-quality estimates of these deliberately hidden phenomena are inherently difficult to construct. And at the national level, even high-quality estimates of the total dollar value lost do not necessarily provide a full basis for policy decisions.

A particular issue is the difficulty of identifying the relative importance, in a given country context, of the many channels within which illicit financial flows may occur, and the multiple economic partner jurisdictions in each channel. We address this research gap by elaborating on an approach pioneered in the High Level Panel’s report which can be used to generate proxies for illicit financial flow risk by combining bilateral data on trade, investment and banking stocks and flows, with measures of financial secrecy in the partner jurisdiction.

Here we present the resulting risk profiles for individual African countries, based on a range of relative and absolute proxy measures of illicit financial flow vulnerability. This allows granular comparison of illicit financial flow risks across countries and by channel, in turn highlighting the most dangerous partner jurisdictions. In this way, the bespoke national risk profiles provide clear signposts to guide individual countries’ audit and monitoring activity, international tax and transparency policies and negotiation priorities. It also can assist regional and international organisations in directing their interventions and support in curbing the risks identified in this paper.

An important finding is that Africa is importing the overwhelming majority of its risks in illicit financial flows from outside the continent. This is hardly surprising given the relative importance of economic relationships African countries have with countries outside the African continent compared to intra-African intensity of economic relationships. Yet there are some noticeable differences in each of the economic channels. For example, the risks in trade appear to be concentrated with Europe and Asia, whereas the risks in direct investment are more concentrated in Asia. Portfolio investments stem largely from the Americas, while banking risks emanate mostly from the European Union. Across all the channels, the disproportionate role of the European Union dependent jurisdictions, and especially those of the United Kingdom, is striking. The insights from this analysis provide policymakers with guidance for their next steps in countering illicit financial flows: where and how to start tackling the issues.

I. Enhance data availability:

Broadening the availability of statistical data on bilateral economic relationships is a first step for enabling both in depth and comprehensive analyses and meaningful regulation of economic actors engaged in cross-border transactions. In the process of collecting statistical data according to IMF standards, governments would need to build registration and monitoring capacity that likely helps improve overall economic governance.

II. Consider pan-African coordination on countering IFF risks:

The bulk of IFF risks at the moment is imported into Africa from outside the continent. This finding could help foster joint negotiation positions at the level of the African Union Commission, the African Tax Administration Forum and others when engaging in multilateral negotiations around trade, investment or tax matters. Pan-African alternative minimum standards for trade, investment and financial services could be crafted in order to safeguard against illicit financial flows emanating from secrecy jurisdictions and corporate tax havens controlled by European and OECD countries. The proposal for a United Nations Convention on tax should be evaluated at the pan-African level for its value as an instrument to tackle illicit financial flows, based on an African common position. In the interim African countries, through their continental bodies, could further enhance regional cooperation for integrated financial policies and legislation in Africa.

III. Embed IFF risk analyses across administrative departments:

A holistic approach to countering illicit financial flows requires capacity to identify and target the areas of the highest risks for illicit financial flows. IFF risk profiles can assist governments to prioritize the allocation of resources across administration departments and arms of government, including tax authorities and customs, the central bank, supreme audit institutions, financial supervisors, anti-corruption offices, financial intelligence units and the judiciary. Within these departments, the IFF risk profiles would support the targeting of audits and investigations at an operational level as well as the negotiation of bilateral and multilateral treaties on information exchange at a policy-making level. Whether on tax, data, trade or corruption related matters, capacity building strategies at a continental level should include IFF risk analysis.