Top 10 Questions About Illicit Financial Flows and Africa

1. What are illicit financial flows (IFFs)?

Global financial infrastructure by way of banks, multinational corporations, and international finance institutions has facilitated both the legal and illegal flow of money across borders. Illicit financial flows are defined as “money that is illegally earned, transferred or used” [Global Financial Integrity and High Level Panel (HLP) Report]. Usually, when we think of illicit flows, organized crime and government corruption comes to mind. However, commercial corporations are responsible for the largest portion of illegal outflow of money from Africa [HLP Report]. There is an emerging movement in Africa and across the globe working to expose corporate offenders and demand an end to the IFFs that extract on average $60 billion annually from Africa.

2. How is this done?

Some of the strategies outlined below demonstrate how large sums of money are being siphoned out of African countries using both “legal” and illegal means. About the same amount of tax revenue that’s being collected every year is also being lost by African countries through “illegitimate” means that are not explicitly “illegal.” So, $60 billion dollars a year is a very conservative estimate of how much illegal money is bleeding from Africa.

Illicit financial flows are done in secret. Whether it’s very generous tax breaks given to companies or avoiding taxes altogether, these deals are not transparent and do not benefit the average person. Weak government institutions make countries vulnerable to corruption and exploitation from foreign companies. These companies retain the best bankers, accountants and lawyers to take advantage of weak public institutions and to cover up their shady deals [HLP Report].

Here are a few ways that corporations facilitate illicit financial flows:

  • Hide who owns the company – This makes it difficult to track down who is responsible for the illegal activity and who benefits from it. The 2016 Panama Papers scandal blew the lid off the issue of shell companies by leaking millions of documents related to secret companies and corrupt politicians that were hiding money in tax havens. Shell companies and banks exist on paper but have no physical presence in the country where it is incorporated.
  • False invoicing — Companies report wrong information on the value of either imports or exports to get out of paying customs duties and taxes. This is often used to both evade taxes and launder money.
  • Tax evasion — These are illegal actions taken by an individual or company to avoid paying their taxes by hiding their income.
  • Tax avoidance — A company may legally minimize a tax bill by taking advantage of existing tax regulations. It becomes a problem when an African country does not have sufficient regulatory rules in place.
  • Tax havens — These are the countries or jurisdictions with low or zero tax rates. Individuals and companies take advantage of havens by setting up a shell company and stashing their money in banks there. Tax havens protect companies that want to launder their money—oftentimes these are the proceeds of tax evasion [HLP Report]. Tax havens are not only located in small places like Switzerland, Luxembourg, the Cayman Islands, Panama, and Hong Kong, but also the United States (especially the states of Delaware, Nevada, and Wyoming), Germany, and Japan.

According to Stop The Bleeding, an African-based campaign addressing this issue, stopping illicit financial flows means that we should “look beyond the illegal to include all the unjust systems and structures that undermine domestic resource mobilization and drain resources from Africa” [STB website].

3. What do IFFs look like?

Multinational corporations that extract money from Africa use the above-mentioned strategies to steal and hide their money in tax havens. African civil society organizations have reported many cases in Africa, ranging from the mispricing of shrimp from Mozambique to tax evasion of oil companies in Nigeria. Companies illegally hiding profits and moving them out of African countries, such as mining companies in South Africa, also weaken the bargaining power of their workers when they try to negotiate for better wages.

4. Who is complicit?

IFFs are a global problem. We cannot point the finger only at multinational corporations (MNCs); political structures allow MNCs to take funds in secret and hide the money. There are a number of actors that civil society organizations are pressuring to change the policies and practices that lead to IFFs. This includes African governments, the private sector, international organizations, and governments in Europe and North America. It’s in the interest of African governments to deal with this issue because tax revenues, if applied to capacity building and social and economic projects, can help create sustainable development. Conversely, the U.S. government can play an important role in strengthening and enforcing laws that require all corporations with ties to the U.S. to publically share information on the ownership of companies and their earnings; organizations in the U.S. are working to strengthen these laws.

5. How do IFFs impact Africa?

Think about this: In 2012, the countries in Sub-Saharan Africa collectively received $39.9 billion in development assistance. This money was intended for development projects in areas such as health, education, water and sanitation, road construction, irrigation systems, and energy. (By the way, some of this assistance is loans, not grants, and Africa’s debt is rising.) That same year, these countries lost $68.6 billion to the illegal outflow of money, much more than the development aid they received. As you can imagine, the bleeding of Africa’s wealth and resources threatens attempts to build strong political and economic institutions. Strong institutions that work in the interest of the masses of people are important because they help break the cycle of aid dependency in Africa by promoting homegrown economic development.

Illicit financial flows are a mere symptom of a much bigger structural problem of unjust economic and power relations between Africa and the developed world that has historically impoverished Africa and enriched the West. If one looks at structural causes, it becomes clear that illicit financial flows are more than a matter of transparency in the limited sense of corporations disclosing what they pay to the state by way of taxes, royalties and other fees and the state declaring these payments in national accounts. Actually, the bigger disclosure should be what is not paid, and is illicitly siphoned out of the country. [STB website]

6. Does the issue affect people in the U.S.?

Absolutely! The same kinds of consequences of IFF in Africa apply to low-income communities in the U.S. The U.S. loses about $135 billion each year in tax revenues as a result of offshore tax havens – more than any other country. To put this into perspective, Congress voted to cut $3 trillion in social programs over the next ten years. Low-income communities were the targets of these cuts in education, Pell grants, health subsidies, tax credits, and SNAP (formerly food stamps) benefits. The revenues lost to IFFs directly impact the lives of poor people in the U.S.—particularly poor people of color. And lower-income residents in both the U.S. and African countries, who can ill afford it, are paying more than their fair share of taxes because wealthy corporations avoid paying their share.

So, the next time you see a product made by Apple Inc., for example, keep this in mind. The company has devised strategies to minimize their tax bills by moving large sums of money (about $181 billion) to tax havens all over the world. They have used legal means to avoid paying their fair share. American tax dodgers like Apple Inc. are avoiding paying annual taxes on a total of $1.4 trillion by taking advantage of tax loopholes in other countries. This all happens at the expense of everyday people, whether in the U.S. or Africa, who often pay more than their fair share in taxes.

7. Who is working on this issue in Africa?

Despite the challenges, there is political will within African nations to end IFFs, recover the funds lost, and address the asymmetrical power relations in Africa. In June 2015, the Stop the Bleeding Campaign was launched by a coalition of six Pan-African networks. These include the Tax Justice Network – Africa, TrustAfrica, FEMNET, ITUC-Africa, AFRODAD, and Third World Network – Africa.

Two international non-governmental organizations are key allies also working on these issues globally and with their national affiliates in Africa, ActionAid International and Oxfam International.

8. Who is working on this issue in the United States?

The US-Africa Network is working with Stop the Bleeding to educate activists in the U.S. about this issue. The FACT Coalition, Global Financial Integrity, and Jubilee USA are a few of the U.S.-based organizations working on the issue.

9. What can I do about this issue?

This issue is political, and it is as much global as it is local. That’s because multinational corporations must be pressured to open their books and disclose their revenue sources. The success or failure of such measures largely depends on the ability of both poor and rich nations to coordinate policies that require companies to report all of their earnings as well as ownership. Campaigning on this issue, especially as it relates to Africa, is in its nascent stage, and the US-Africa Network is committed to coordinating with our civil society partners in Africa on how best we can help on this side. We are getting the word out on this issue and hope to scale up our work in the future.

10. Where can I get more information?

Click here to find a list of reports, articles and videos on IFFs from Africa.