Symposium Posts

The exponentially growing discomfort around Illicit Financial Flows (IFFs) globally is an indicator of the undesirable effects that result from the IFFs, ranging from social, economic and even political consequences. There is a general concurrence that IFFs take away substantial amounts of finances from the developing countries, which finances could otherwise be utilised in domestic investments, provision of public services such as education, security, health etc., and offsetting foreign debts. It is on this basis that discussions about IFFs in developing countries should not be postponed.

It is common knowledge that several African economies have a nagging public debt burden. However, in real terms, outside of Oceania, Africa has the lowest public debt in the world. The challenge with Africa is that most of its debt is owed to non-African creditors and the debts are contracted in foreign currency thereby exposing African countries to currency volatility. Another challenge is that these non-African creditors consider the African market as risky, thereby charging higher interest on our loans. While African countries are struggling to finance public debt which ordinarily should be within the capacity of African economies to accommodate, it is estimated that Africa loses about $140 Billion annually to corruption.

This blog provides an alternative approach, described as a potential abusive tax avoidance (PATA), to evaluate incidences of illicit financial flows (IFFs) in Africa. By way of a working definition, PATA arises when there is a greater probability that a proposed tax legislation is susceptible to abusive tax avoidance. The abuse contemplated under the PATA is similar to Steve Dean’s argument of how considerable degree of taxpayer autonomy– under the guise of tax deregulation - can negatively impact a nation’s tax system. PATA provides a complimentary mechanism to examine how a proposed international tax framework can result into IFFs. The author undertakes this analysis using the global minimum tax proposed by the OECD to address the tax consequences of the digitalized economy.

The escalating concentration of global extreme poverty is particularly pronounced in Africa, where the continent presently accounts for 55% of the total worldwide poverty. Reports indicate that these numbers are expected to rise due to the enduring impacts of climate change, the COVID-19 pandemic, and the conflict in Ukraine. As we hit the six-year mark before the designated milestone for achieving the Sustainable Development Goals (SDGs), it is apparent that African nations are still notably behind in making substantial strides toward the specific targets outlined in the SDG Agenda. Expanding upon the United Nations Millennium Development Goals (MDGs), which concluded in 2015, the SDGs underscore the commitment to addressing a broad spectrum of global challenges. The SDG Agenda tackles 17 pivotal development challenges, spanning areas such as poverty, health, gender equality, crucial aspects of economic growth, urgent global warming issues, social justice, and the promotion of peaceful and inclusive societies. Globally, there is a recognition that countries bear the primary responsibility for addressing systemic issues leading to revenue loss, and global cooperation is essential to supporting national efforts in achieving the SDGs. Within the African context, there have been calls to African leaders to address structural barriers impeding domestic resource mobilization as a key to the successful implementation of development projects aimed at enhancing the lives of African citizens. This is viewed as a sustainable solution to confront the severe and multidimensional nature of poverty in African nations, requiring concerted efforts from leaders to reshape policies that currently facilitate capital outflows.

The evolution of IFFs as we understand it is intricately linked to the progress of technology. The case of cloud computing serves as a prime example of how advancements in tech can facilitate the growth of IFFs. The nexus between cloud computing and IFFs through transfer pricing presently remains an elusive subject due to a lack of substantiating data. This gap in data can be attributed to several factors: the opacity and complexity inherent in cloud computing transactions that span multiple jurisdictions; the intricate corporate strategies surrounding transfer pricing that are typically shrouded in confidentiality; and the swift pace of technological advancement that often outpaces regulatory oversight and data collection methods. Furthermore, stringent privacy laws protect corporate financial information, and the lack of a standardised global reporting framework complicates the task of monitoring and comparing financial flows.

Africa is unquestionably confronted with substantial development financing needs, which are further exacerbated by two independent, yet interrelated problems that are depleting the already scarce resources: illicit financial flows (IFFs) and a growing burden of unsustainable debt. To effectively tackle the complex challenges of Africa’s development; including achieving the SDGs, combating the effects of climate change, and resolving human rights issues; it is imperative to address IFF by promoting tax justice and to confront unsustainable debt through debt justice. Given the importance of establishing this link, this blog post delves into the challenges and nexus between IFF and unsustainable debt and provides high level policy recommendations.

In the last decade, there have been seven major leaks of financial documents in tax havens which have exposed the international web of financial flows, mechanisms to facilitate these flows and the major role players in these activities. In each leak, questions often arise on how both legal loopholes and illicit means are used to facilitate the outflow of funds from low- and middle-income countries to tax havens by corporations, wealthy individuals, and politically exposed persons (PEPs). These leaks are often the result of whistleblower-led investigations and the release of these financial documents has become a primary resource in understanding how financial corruption works globally. The effects of these leaks have seen heads of government sacked or resigned in some cases while little to no action takes place in other countries. However, what is undeniable is the role of whistleblowers is increasingly becoming central to curbing illicit financial flows (IFFs) especially as the global digital economy and stronger privacy-enhancing technologies make the detection of IFFs harder. Within Africa, very few countries have comprehensive national laws for whistleblowers despite the majority ratifying international agreements for the protection of whistleblowers. Using Nigeria, Kenya, and South Africa as case studies, this note reviews the regulatory landscape in the countries and the extent to which current laws and practices aid or hinder whistleblowing on IFFs.

There is no gainsaying the fact that Illicit Financial Flows (IFFs) constitute a major impediment to Africa’s sustainable development. In fact, IFFs have a direct impact on a country’s ability to raise, retain and mobilise its own resources to finance sustainable development. Its negative impact further includes draining a country’s foreign exchange reserves, reducing domestic resource mobilization, preventing the flow of benefits of foreign direct investment, and worsening insecurity, poverty and economic inequality.

Contributors to the symposium offer unique perspectives and draw on different theoretical and methodological approaches to the practice and scholarship related to IFFs in African states and beyond. Several themes were addressed by the contributors, including tax justice, technology, corruption, accountability, political will, repatriation, recovery of Assets, migration, whistleblowing, international investment, and real estate.

Globalisation of commercial activity extends into international investments, evidenced by over 2,500 bilateral investment treaties (BIT) or International Investment Agreements (IIA) in the international investment regime. Within these BITs is an embedded Investment State Dispute Settlement (ISDS) system executed through an Arbitration Mechanism. The ISDS system serves as a dispute resolution tool for achieving the purpose of the IIA. The purpose of the IIA is for the protection of foreign investment from the harmful policies and governance of host states. In addition, many IIAs contain certain common standards and principles that regulate the investment relationship, such as the notorious fair and equitable treatment (FET), stabilization clauses, and so on. Thus, the overarching aim behind the norms and principles of international investment management is the creation of a system of legal safeguards against the actions of the host states. This simplistic paradigm of international investment law regime has become increasingly problematic due to the expansion and inclusion of various indirect stakeholders in the investment agreements, the growing recognition of public socio-economic realities like regulatory rights, and development rights, that are being pushed for larger consideration from ignored stakeholders mostly like the public.