Global South Dialogue on Economic Crime & Institute of Security Studies, Africa Tax-Related Illicit Financial Flows: Perspectives from the Global South Policy Outcomes

In April/May 2021, the Global South Dialogue on Economic Crime (GSDEC) and Enhancing African capacity to respond more effectively to transnational organised crime (ENACT) put out a call for blog submissions focusing on Tax-Related Illicit Financial Flows: Perspectives from the Global South.’ As a result of the blogs submitted, the two organisations co-hosted an online webinar on 30th June 2021 around the same topic. The herein document presents the policy outcomes and recommendations from the webinar aimed at presenting countries of the global south with a set of options on how to tackle tax-related illicit financial flows.

Background 

The problem of Illicit financial flows (IFFs) out of the Global South

Illicit financial flows (IFFs) out of Global South countries have become a matter of significant concern because of the scale and negative impact of such flows on the countries’ development, governance, economic and financial agendas. Through the loss of billions of dollars, IFFs negatively affect domestic resource mobilisation by reducing the tax collection base and investment inflows. Generally, IFFs deprive countries of resources that could have been invested in providing public goods and services such as education, infrastructure, and health care during a crisis, such as the COVID-19 pandemic. These flows differ across countries and regions and may originate from several sources, such as criminal, commercial, and other activities.

IFFs are recognised globally. In the 2030 Agenda for Sustainable Development, countries are called to significantly reduce illicit financial flows and arms flow, strengthen the recovery and return of stolen assets and combat all forms of organised crime by 2030. In addition, under the Addis Ababa Action Agenda, countries have committed to redouble efforts to substantially reduce IFFs by 2030 by tackling tax evasion and corruption through strengthened national regulation and increased international cooperation. Nonetheless, there is still much debate around the definition, nature, measure, and best tackle IFFs.

It is in this context that GSDEC and ENACT invited scholars, including academics and stakeholders from civil societies, regional and international organisations, national authorities, and think tanks that are interested in or with expertise on the different types of illicit financial flows (IFFs), to submit a blog post on the topic from perspectives drawn from countries in the Global South. As a result, we received two blogs, one on ‘Influence of Governance Indicators on Illicit Financial Outflow from Developing Countries’ by Anselm Komla Abotsi (PhD), Senior Lecturer in the Department of Economics Education, University of Education, Winneba. The other one, ‘Modern Slavery: Exploring Exploitation-type Activities underlying Illicit Financial Flows,’ by Kathy Nicolaou-Manias and Yuchen Wu. Both blogs were published on the GSDEC. A webinar with five sessions and speakers who are high-level thought leaders, including policymakers, academics, and practitioners from respective fields around the issue of IFFs, was then held on 30th June 2021. Amongst the speakers was Kathy Nicolaou-Manias, one of the blog writers.

Objectives

The online webinar involved policy discussions on the Tax-Related Illicit Financial Flows: Perspectives from the Global South, including:

The intended outcome of the webinar was to come out with this report, including policy recommendations that GSDEC and ENACT can present to partners and various stakeholders to encourage more significant action from countries of the global south towards combatting Tax-Related Illicit Financial Flows.

Webinar Summary

  1. Narrow and Broad Definition of IFFs. Tax-related Illicit financial flows can be regarded from the narrow perspective of avoidance and crime. However, they can also be more broadly defined as the conversation between legal versus illegal in terms of commercial activity such as trade mispricing, tax evasion, aggressive transfer pricing, versus the broader context of aggressive tax avoidance and exploiting the loopholes in double tax agreements.
  2. The Scale and Magnitude of IFFs in Africa. In the African continent, the magnitude of illicit financial flows has been growing despite the efforts of the continent to curb it. A recent study by United Nations Conference on Trade and Development (UNCTAD) puts the figure at about 89 to 90 billion dollars, almost doubling the scale of illicit financial flows from the continent from previous reports from the African Union, for example. [1]
  3. Lack of Data. There are no rudimental figures of the national level, which has contributed to a policy challenge of legislation because national-level statistics cannot be mentioned.
  4. Limited Capacity. Because of the challenges of related capacity and the complexity of the legal frameworks at the national level, it becomes difficult to legislate against tax-related illicit financial flows.
  5. A lack of a government framework to regulate corporate transparency contributes to tax-related illicit financial flows. In addition, this lack of a government framework makes it very difficult to ascertain the level of intracompany trade.
  6. The largest source of IFFs. It is estimated that over 70% of intracompany trade happens in companies that are related[2]. As a result of this, intracompany trade has been alleged to contribute to the largest source of illicit financial flows resulting from policy abuse.
  7. Double tax agreements, tax incentives and tax havens are a significant source of tax-related illicit financial flows. Double tax agreements because they are outdated and can be exploited, and tax havens because they keep the loot, act as a magnet, and provide safety for tax-related illicit financial flows.
  8. Global South countries have difficulty recovering proceeds of tax-related illicit financial crimes from countries where they are kept. Of the enormous assets frozen and confiscated in countries of the North, very little get back to countries from where they were taken. A study from 1999 to 2012 revealed that of the $5.8 billion frozen or recovered, only about 3% had returned to countries of their origin when the report was published, which is a challenge for developing countries.
  9. Developmental Cost. Tax-related illicit financial flows have a negative multiplier effect on the development of the victim countries in every area, ranging from infrastructure, education, health, roads, and so on.
  10. Legislative Implications. State actors, stakeholders and policymakers need to develop legislation that considers the economic problems associated with tax-related illicit financial flows, examine already-existing legislation, and affect them. In addition, in situations where Global South countries do not have the laws or policies related to combatting tax-related illicit financial flows, such laws and policies should be proposed.

 
Policy Recommendations

  1. Measures need to be put in place that will improve corporate transparency, such as beneficial ownership and company registries, which will contribute to shedding more light on the ownership of companies.
  2. There needs to be a global framework where all countries will come under the table and design rules that are not just beneficial for those that are the recipient countries of illicit financial flows.
  3. More data-driven research and analysis are required. International Organisations, including and statistical organisations and countries of the global south, need to cooperate on making data on tax-related IFFs available to fill the information gaps that result in tax-related illicit financial flows.
  4. Spontaneous and automatic exchange of information between willing and participating countries can be used as a powerful tool in combatting tax-related illicit financial flows.
  5. Tax administrators can enforce mandatory disclosure regimes for companies and multinationals to promote transparency and tax accountability and to dissuade and penalise enablers of tax-related illicit financial flows.
  6. Using new technologies like blockchain as a tool in fighting tax-related illicit financial flows. Digital registers of taxpayers who can draw on other information available in government departments can be created. Such registers can be employed in terms of risk assessment and terms of track and trace technology. The possibility of a unique digital identifier for every taxpayer in the world can also be explored.
  7. Interagency cooperation between agencies of a state needs to be improved upon. Where necessary, remuneration structures can be reviewed to not act as a barrier to cooperation between government departments. If there is legislation in place that prevent interagency collaboration, such legislation needs to be reviewed. With inter-agency cooperation, information can be garnered to counter tax-related illicit financial flows.
  8. Client-attorney privilege is often misused and employed in frustrating investigations of Financial Intelligence Units of tax administrations. There needs to be a dialogue with the legal profession that hopefully will lead to what is acceptable and what is unacceptable in terms of trying to use client-attorney privilege to frustrate investigations.
  9. Civil society organisations need to pressure governments to use measures where transparency and accountability mechanisms can be used by enterprises, labour firms and bargaining councils.
  10. Enabling environments need to be created to ensure that legislation and double tax agreement regimes in the continent are aligned and supportive of domestic resource mobilization.
  11. Individual taxpayers and corporations need to comply with the spirit and the letter of the law, to be aware of the intent of anti-illicit legal flows legislation, and to respect that intent.
  12. Countries of the global south need to be aware of how much they lose to illicit financial flows, and how the loss affects them in order to create policies and measures to fill the gaps.
  13. Global tax committees need to have more representation from emerging economies and from developing countries in order to best serve their interests, and coordinate their positions.
  14. Mandatory disclosure regimes need to be put in place for companies and multinationals to detect and forestall potentially aggressive cross-border tax planning.
  15. Relevant enablers of illicit financial flows need to identified. Legislation should be made to curtail their activities. There should be penalties for going against the rules, and the penalties should be proportional to their actions.
  16. In addition to know your customer (KYC) regimes, know your supplier (KYS) regimes should be put in place to curb modern slavery and exploitation-type related illicit financial flows.
  17. Large businesses should be required to publish annual statements outlining how they’re performing due diligences and taking necessary actions to reduce more modern slavery risks in their business operations and across the entire value chain. This is to ensure that they promote responsible and sustainable enterprise.
  18. Transparency and accountability mechanisms need to be used by enterprises, labor firms and bargaining councils, who can work together on the spectrum from self-regulation through compliance to the laws and regulations of their countries.
  19. There needs to be greater awareness around conflict of interest, illicit financial flows, corruption and the interrelationship between them in order to create a more adequate system to monitor such issues.
  20. Countries that are victims of stolen assets need to be willing to collaborate with requested states in the utilization of their returned assets.
  21. Global south countries need to take frontal initiative in, and be transparent in exhibiting clear political will to prevent further flows of both proceeds of corruption and IFFs out of their borders.

 
Global South Dialogue on Economic Crime & Institute of Security Studies, Africa

Theme: Tax-Related Illicit Financial Flows: Perspectives from the Global South

Event Schedule:

Start Time: 2.00 pm SAT

End Time: 3.30 pm SAT

Moderators: Luckystar Miyandazi | Dr. Nkechi Azinge-Egbiri | Richard Chelin

Time Slot Speaker Topic
2.00 pm – 2.05 pm Introduction and Welcome to Webinar: Luckystar Miyandazi
2.05 pm – 2.15 pm Alvin Mosioma,

Executive Director,

Tax Justice Network of Africa

 Types of Illicit Financial Flows
2.25 pm – 2.35 pm Professor Jeffrey Owens,

Director of the WU Global Tax Policy Center (WU GTPC) at the Institute for Austrian and International Tax Law, Vienna University of Economics and Business (Wirtschaftsuniversität Wien, WU).

 Countering Tax Evasion and Avoidance
2.35 pm – 2.45 pm Kathy Nicolaou-Manias,

Consultant/IFF Advisor

United Nations Economic Commission for West Africa

 Illicit Financial Flows in Context –

Modern Slavery: Exploring Exploitation-Type Activities underlying Illicit Financial Flows
2.45 pm – 2:55 pm Emmanuel Akomaye,

Legal Practitioner/Corruption Consultant

 Developmental Impact of Stolen Assets Recovery in Global South Countries
2.55 pm – 3.05 pm Richard Chelin,

Senior Researcher,

ENACT: Enhancing Africa’s Response to Transnational Organised Crime

 Conflict of Interest, Corruption and IFFs: Looking at the Inter-Relationship between the Three with Regards to Public Sector Corruption
3.05 pm – 3.20 pm Question and Answer Session
3.20 pm – 3.25 pm Conclusion and Way Forward

 

[1] UNCTAD [2020], Economic Development Report in 2020. Tackling Illicit Financial Flows for Sustainable Development in Africa

[2] Powel Folfas [2007], Intra-Firm Trade and Non-Trade Intercompany Transactions: Changes in Volume and Structure During 1990–2007 p. 3