Africa could gain an estimated $89 billion annually by curbing illicit financial flows (IFFs), according to the Economic Development in Africa Report 2020 published by the United Nations Conference on Trade and Development (UNCTAD). These illicit outflows represent 3.7% of the continent’s GDP and nearly equal the combined total of official development assistance and foreign direct investment Africa receives each year. Stemming the tide of IFFs could nearly halve Africa’s $200 billion annual financing gap for achieving the Sustainable Development Goals (SDGs).
IFFs are defined as illegal cross-border transfers of money or assets. They arise from activities like tax evasion, trade misinvoicing, corruption, and criminal enterprises, all of which rob African nations of much-needed resources. According to UNCTAD Secretary-General Mukhisa Kituyi, “Illicit financial flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions.”
IFFs as a Barrier to Development
UNCTAD’s report highlights that from 2000 to 2015, Africa lost $836 billion to illicit capital flight. This figure exceeds the continent’s external debt stock of $770 billion as of 2018, positioning Africa paradoxically as a “net creditor to the world.” The report underscores that illicit capital flight, particularly from the export of extractive commodities like gold and diamonds, is the largest component of IFFs. In 2015, IFFs linked to extractive industries amounted to $40 billion, with 77% stemming from the gold trade alone.
The impact of IFFs is far-reaching, particularly in the social sector. Countries with high levels of IFFs spend 25% less on healthcare and 58% less on education than nations with lower levels of illicit outflows. This disproportionately affects women and children, as reduced spending on essential services limits their access to healthcare and education, widening inequality and stalling development.
The Path to Sustainable Development
Curbing IFFs could provide a critical source of capital for African nations to address key development challenges, including infrastructure deficits, healthcare needs, and educational shortfalls. For instance, in Sierra Leone, where the under-five mortality rate was 105 per 1,000 live births in 2018, tackling illicit capital flight could potentially save an additional 2,322 children annually by redirecting resources to public health.
Furthermore, IFFs are also linked to poor environmental outcomes, especially in extractive industries. Reducing IFFs could help sub-Saharan African countries finance up to 50% of the $2.4 trillion needed by 2030 for climate change adaptation and mitigation efforts. By redirecting illicit outflows into climate resilience projects, Africa could bolster its environmental sustainability while addressing the economic losses caused by capital flight.
Solutions to the IFF Challenge
The UNCTAD report offers several recommendations to help African governments combat IFFs and redirect resources toward achieving the SDGs. One key recommendation is the collection of better trade data to detect IFFs more effectively. Only 45 out of 53 African nations currently provide continuous trade data to the UN International Trade Statistics Database (UN Comtrade), limiting the ability to track discrepancies and prevent illicit flows. Tools such as the UNCTAD Automated System for Customs Data (ASYCUDA) and its new module for monitoring mineral production (MOSES) are proposed as potential solutions for enhancing transparency in trade and extractive industries.
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African countries are also encouraged to engage in automatic exchange of tax information agreements, which can help track cross-border financial activities and combat tax evasion. At a regional level, the African Tax Administration Forum provides a platform for cooperation on taxation matters, and could be crucial in improving the continent’s ability to recover stolen assets and prevent money laundering, particularly in the context of the African Continental Free Trade Area (AfCFTA).
International Cooperation and Reform
Tackling IFFs requires not only national and regional action but also international cooperation. IFFs are often facilitated by global tax havens, with Africa losing an estimated $9.6 billion to tax avoidance schemes in 2014 alone. Tax competition between African countries and multinational corporations exacerbates this issue, as weak transfer pricing regulations make it difficult for local authorities to challenge tax evasion.
African leaders, including Nigerian President Muhammadu Buhari, have called for stronger international collaboration to address the transnational nature of IFFs. As President Buhari noted, “Illicit financial flows are multidimensional and transnational in character. Like the concept of migration, they have countries of origin and destination, and there are several transit locations. The whole process of mitigating illicit financial flows, therefore, cuts across several jurisdictions.”
The UNCTAD report makes it clear that curbing illicit financial flows is essential for Africa to achieve sustainable development. By tackling IFFs, African countries could unlock billions in lost revenue that could be reinvested into critical sectors such as healthcare, education, and infrastructure. However, doing so will require a concerted effort at both the national and international levels, including stronger trade data collection, tax cooperation, and regulatory reform to combat corruption and illicit capital flight. By addressing these challenges, Africa can move closer to bridging its SDG financing gap and securing a brighter, more sustainable future for its people.
