The socio-economic impact of Illicit Financial Flows

In 2003, South Africa signed the UN Convention against Corruption. As part of his concluding remarks, Pravin Gordon made some remarkable points.

1.  No matter how well intentioned our laws are, without political will the fight against corruption and IFFs will not be won.
2. Citizens must be educated to understand the IFFs flows phenomenon. This constitutes an important democratic factor in demanding accountability from government and companies.
3. Coordination by enforcement agencies is very important and no to silo mentality.
4. Multi-National Corporations (MNCs) must stop their aggressive tax practices and this calls for a fundamental shift in culture, values and practice.
5. Taxes must be paid where value is created to safeguard fiscal capabilities of producer countries.
6. There must not be any sacred cows; all countries must be subjected to the similar standards and conformity which is measurable and demonstrable in the fight against IFFs.
7. Tax havens must be closed.

Understanding the seemingly elusive definition of IFFs was the first discussion point for the conference. There are several definitions of Illicit Financial Flows (IFFs). It is important to flag out that how the problem is defined has a bearing on understanding the causes and the solutions that can be applied to solve that particular challenge.

The inherent risk here being a poorly defined IFFs problem can lead to a diagnostic measures which waste resources without achieving the intended impact.

Most definitions on IFFs from World Bank Group (WBG), Organisation of Economic Corporation and Development (OECD) and Global Financial Integrity (GFI) have one common thread. That is, the illegal nature of IFFs activities.

GFI defines IFFs flows as money that is illegally earned, transferred or utilised across borders. The WBG dimension considers the illegality of IFFs if they are in violation of the laws of the country of origin.

The strength of defining IFFs through the prism of illegal activities gives room to focus on solutions that are simply steeped in administrative efficiency in terms of enforcing compliance as well as reviewing of legislation. Caution was drawn, complicated laws and administration burden incentivizes noncompliance.

It is interesting though to look at the IFFs definition from the High Level Panel report known as the Mbeki report. Tax avoidance, though not deemed illegal but against the spirit of the law, is an added on feature to the illegal activities in the definition of IFFs by the Mbeki report.

Likewise, the amount of funds lost due to IFFs varies depending on the source. United Nations Economic Commission for Africa (UNECA), for instance, estimated that Africa is losing $50 billion annually.

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