The socio-economic impact of Illicit Financial Flows

Significantly, focus should not be on the varying IFFs estimates. Clearly, the varying estimates carry one important message. Amounts involved are quite substantial and pose a huge roadblock to Africa development agenda.

Official Development Assistance (ODA) and Foreign Direct Investments (FDIs) traditional known anchors of development finance are dwarfed by IFFs.

Moreover, Africa’s huge external debt problem can be settled by a portion of lost revenue due to illicit flows. The UNECA Report noted that Africa’s external debt stood at $279 billion in 2008 and the debt constituted a third of amount lost to IFFs at that time.

The Mbeki report was endorsed by African head of states, a signpost that IFFs are a major threat to Africa’s development initiatives.

The Third Conference on Finance for Development held Addis also conceded that IFFs poses a major risk to development and measures must be put in place to mitigate and stop the illicit flows by 2030.

There is a causal relationship between IFFs and lost social and infrastructure investment opportunities. This relationship though must not detract the necessity of analysing if past and current public investments are transparent and efficient so as to underline if curbing IFFs will yield the intended results. In other words, focus on IFFs should not overshadow work that drives efficient public investments.

IFFs also give unfair advantage to companies who enjoy the use of public infrastructure which they are not also keen to finance through payment of taxes to government. Inequality is perpetuated and worsened by IFFs small to medium enterprises and consumers bear the disproportionate burden of taxation.

My own take is that the impacts of IFFs financial flows are broader than socio-economic and governance issues. The impact also extends to the environment especially for the extractive sector. By nature, the extractive sector is ominously destructive to the environment. Ostensibly, IFFs can incentivize mining companies to make illegal profits at the expense of the environment.

Whereas the argument that minerals are an intergenerational wealth is quite prominent, the ecological debt brought by mining is another intergenerational ecological debt issue which must not be overlooked at all costs. It will be folly to try to maximize the benefits from the extractives without comprehending the underlying costs, the environment costs in particular. Notably, if compliance mechanisms remain weak, IFFs will not solve the environmental challenges related to the extractives.

Although IFFs strip revenue through illegal activities such as tax evasion and not so illegal but nonetheless immoral aggressive tax avoidance strategy, essentially, resource rich countries are also stripping themselves of taxation rights through harmful tax incentives. Hence the discussion on revenue leakages should not solely pivot on IFFs but should also consider the impact of harmful tax incentives.

Continued next page

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