Esther Dzviti Mapungwana economist
Illicit financial flows have been a major problem for most countries, especially developing countries. Cross-border capital movements for the purposes of concealing illegal activities and evading taxes continue to pose major challenges to developing countries. These activities deny the country concerned desperately required resources for private and public investment and in so doing, hamper potential economic development and growth. Some research has shown that illicit financial flows are also directly linked to dominant party-political interests resulting in failing compromised state institutions and increasing corruption.
The definition of illicit financial flows (IFFs) has been varying but the general sentiment is that IFFs refer to cross-border movements of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred or used that crosses borders. Some argue that a definition for illicit financial flows that is less contentious especially among international institutions excludes tax avoidance out of IFF definition. According to the World Bank, the concept of IFFs are emerging as a powerful and constructive umbrella to bring together previously disconnected issues. The term emerged in the 1990s and was initially associated with capital flight. The concept of IFFs has been largely looked upon as a legal matter but recent arguments have observed the concept also as an ethical issue.
The United Nations Conference on Trade and Development (Unctad) earlier this year published a report titled — Tackling Illicit Financial Flows for Sustainable Development in Africa. One of the sections in the report focused on the analysis of export under invoicing (that is, a positive trade gap) as it is the most relevant conduit for IFFs in the context of primary commodity exports from Africa. The report stated that trade under invoicing is often motivated by exporting Multinational Enterprise (MNE) incentives to shift foreign exchange abroad to settle foreign transactions, to pay for smuggled goods or to avoid foreign exchange controls (Uneca, 2015; Unctad, 2016). Global Financial Integrity (2019) notes that globally, sub-Saharan Africa has the highest propensity for trade under-invoicing and is the only region in which outflows exceed inflows. In 2015, IFFs (as reported in United Nations Comtrade) were estimated at US$45 billion and illicit outflows were equal to US$23 billion. The present report’s estimate of US$40 billion in export under-invoicing is based on the net export gap and is the sum of all positive individual country estimates in 2015 (covering 21 African countries and the eight selected commodity groups). Despite significant differences in methodologies for trade-related illicit outflows from the continent, some convergence on findings exist; IFFs are large, have increased over time and trade in primary extractive commodities is a major contributor.
The report added that trade statistics reported by developed countries are generally more accurate and thus discrepancies in partner-country trade statistics are mainly driven by trade-related IFFs from developing countries. Therefore, the mirror trade gap is usually calculated vis-à-vis developed countries only and then scaled up by their share in total trade. This does not allow for the analysis of intra-African discrepancies nor account for the fact that although primary commodities are still traded in Europe, the latter is no longer the largest consumer. Another concern is attributing partner-country trade gaps as being directly linked to illicit flows, which has been widely criticised in the literature for being too simplistic. Other sources of error being of a purely logistical nature have gained insufficient weight in recent discussions.
The average trade value, meaning the sum of all trade values divided by the number of observations, of extra-continental African trade is seven times as large as intra-African trade, US$63 million versus US$8,5 million. The maximum trade value for extra-continental African trade is seven times as large as for intra-African trade. Imports recorded by the rest of the world stemming from the continent are on average larger than exports recorded by African countries.
“Some general trends emerge. First, the trade gap for gold from South Africa (since 2011) has a significant impact on the overall African trade gap. South Africa has a distinctive trade recording system, as illustrated by the observed gold trade reporting. Gold from South Africa, for historic reasons, had no trading partner country assigned before 2011. Since then, gold has been reported in the United Nations Comtrade, and therefore included in this report, even though the reporting of this commodity remains special (Ndikumana and Boyce, 2019). Second, all high-value commodities, gold, platinum and diamonds (for example, from Eswatini, Lesotho, South Africa and the United Republic of Tanzania) tend to have a positive trade gap, whereas petroleum and copper exports tend to exhibit a negative one. In fact, all major petroleum exporting countries (Algeria, Angola, Nigeria and Tunisia) to some extent have large negative export trade gaps, with the exception of Egypt, which has a large positive gap. On average, iron, aluminium and manganese also have positive export gaps,” the report stated
