Sub-Saharan Africa lost an estimated 5.7 percent of its GDP over a ten-year period to illicit financial outflows, preventing millions of people in Africa from accessing better health and education, according to a new report by a US-based organization, Global Financial Integrity (GFI).
These illicit outflows link to tax evasion, corruption, crime, and other unlawful activities, and they harmed the sub-Saharan region proportionally more than any other region in the period measured between 2002 and 2011, the report, Illicit Financial Flows from Developing Countries: 2002-2011, said.
“At an average of 5.7 percent of GDP over the period studied, the loss of capital has an outsized impact on the continent,” the report said.
Misinvoicing accounts for about 80 percent of the world’s illicit financial flows, the GFI report said, referring to the deliberate falsification of import and export declarations in order to evade tax.
“Since the act of deliberately falsifying invoices is illegal in most countries, we consider our trade misinvoicing estimates to reflect completely illicit outflows,” it added.
Trade misinvoicing should not be confused with abusive transfer pricing, the GFI report said. Abusive transfer pricing is the practice by multinational companies of distorting internal accounts to reduce tax liability by shifting profit from high-tax jurisdictions to low-tax jurisdictions. Although a serious problem for developing countries, this issue is not captured in this December report, GFI said.
In resource-rich countries, the natural resource sector is usually the main source of illicit financial flows, according to a joint report by the GFI and African Development Bank published in May 2013, citing Angola as an example.
In May 2012, the IMF said it still wanted an explanation on why US$4.2 billion appeared to be missing from Angola’s national accounts.
In resource-poor countries, illicit financial flows largely arise from the mispricing of trade by companies of all sizes. This activity is a form of money laundering and tax evasion, the report, published in May 2013, said.
In 2011, the developing world lost US$947 billion from illicit financial outflows, an increase of 13.7 percent over 2010. This figure represents roughly ten times the amount of official development assistance flowing in from advanced economies, GFI said.
In its 2013 Africa Progress Report on oil, gas, and mining in Africa, the Africa Progress Panel highlighted the need for more transparency in the extractives sector and called for solutions to tax avoidance and evasion and illicit transfers of wealth.
Increased transparency – including public registries of the true, human owners of businesses, trusts, and foundations – will be critical to reducing illicit financial outflows from developing countries, the GFI report said.
DISCLAIMER: The purpose of the ICF Newsletter is to compile and share relevant information for its users regarding the investment climate in Africa. The focus of this information will predominantly be on the latest reforms in customs, taxations, commercial justice, business registration and licensing, land registration and relevant events relating to the ICF’s mission.