Addressing illicit financial flows in Africa. How broad is the whole of government approach supposed to be?
| DOI | https://doi.org/10.1108/JFC-01-2016-0002 |
| Published date | 03 October 2016 |
| Date | 03 October 2016 |
| Pages | 1074-1091 |
| Author | Bernd Otto Schlenther |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Addressing illicit nancial
ows in Africa
How broad is the whole of government
approach supposed to be?
Bernd Otto Schlenther
Department of Case Selection, South African Revenue Service,
Pretoria, South Africa
Abstract
Purpose – This paper aims to identify the underlying key components of illicit nancial ows (IFFs)
and highlights the priority areas where government resources should be pooled under a whole of
government approach to mitigate the risks posed by IFFs. These areas are tax avoidance and tax
evasion (specically intra-company prot shifting, investment and prot shifting within the extractive
sector, fraud and benecial ownership), anti-corruption measures, governance and accountability
measures, anti-money laundering effectiveness and effectiveness in the detection of falsied customs
declarations.
Design/methodology/approach – The concept of IFFs is emerging as an umbrella term for bringing
together seemingly disconnected issues. The concept is ill-dened, but there are various identiable
components supporting the term IFF such as capital ight, corruption, money laundering, tax
avoidance, tax havens and transfer pricing practices. The author identies the key areas of concern
through a literature review and recommends prioritization of short- to medium-term risk areas and
long-term policy imperatives.
Findings – In the short- to medium-term, an effective “whole-of-government” approach should be
based on uniform risk identication and prioritization between mandated government agencies and in
the long run, it should be focused on building responsive and effective institutions through a process of
good governance and effective taxation.
Originality/value – A large body of literature deals with “IFFs” and the “whole-of-government
approach” as separate concepts. This paper draws on the existing literature and identies priority areas
for addressing IFFs, and, for these to be successful, they are entirely dependent on a
whole-of-government approach – both in the short and long run.
Keywords Corruption, Governance, Tax evasion, Tax avoidance, Money laundering,
Illicit nancial ows
Paper type Literature review
1. Introduction
There are various reasons for illicit nancial ows (IFFs). These include tax evasion,
smuggling of illegal goods, trafcking in people, transfer pricing and false declaration
or trade mispricing, customs fraud, the failure of anti-money laundering (AML) controls,
corruption and terrorist nancing. Illicit nancial ows deplete state coffers and pose a
risk to the stability of global nancial markets. IFFs can also lead to suboptimal
investment decisions, undermine tax morality and can add to growing income
inequality within and between countries (Reuter, 2012, p. 10).
The current issue and full text archive of this journal is available on Emerald Insight at:
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JFC
23,4
1074
Journalof Financial Crime
Vol.23 No. 4, 2016
pp.1074-1091
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2016-0002
Global nancial integrity (GFI) (2014, p. 1) ascribes the massive ow of illicit funds
out of Africa:
[…] to a global shadow nancial system comprising tax havens, secrecy jurisdictions,
disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and
money laundering techniques. The impact is felt in the draining of hard currency reserves,
heightened ination, reduction in tax collection, investment cancellations, and restricted free
trade. It has its greatest impact on those at the bottom of income scales in their countries,
removing resources that could otherwise be used for poverty alleviation and economic growth.
Recovering funds can be arduous for states, especially so where legislation is outdated,
when staff are poorly trained and where bank secrecy in foreign jurisdictions and the
use of opaque corporate vehicles make the tracing of assets nearly impossible.
In 2012, the World Bank, in conjunction with the Norwegian Government, produced
a comprehensive study on the subject of illicit ows under the heading Draining
Development (Reuter, 2012). The publication unpacks various aspects associated with
illicit ows covering illegal markets, the extent to which corporations facilitate illicit
ows, the political economy of IFFs and policy interventions with the latter focusing on
tax havens, AML controls and corruption.
This paper briey highlights the scale of IFFs, the denitional problems of IFFs and
then the key areas which require a whole-of-government approach[1] that are identied
with a breakdown of what needs to be done, e.g. taxation challenges associated with
multi-nationals are juxtaposed with the developmental role multinational enterprises
(MNEs) play in Africa; actions are identied which can improve AML effectiveness,
areas of cooperation between tax authorities and regulators are prioritised, the need for
institutional cohesion in inter-departmental cooperation in as far as dealing with
corruption is emphasised and, lastly, the international tools (such as the OECD
Standards, Financial Action Task Force [FATF] Recommendations and the recently
launched BEPS initiative) available to address IFFs are discussed.
2. Dening illicit nancial ows
“IFFs” is an ill-dened term, and its boundaries are disputed primarily for the reason
that “illicit” does not equate with “illegal”. According to Reuters, the dening
characteristics of “illicit” are:
That the acts involved are themselves illegal (corruption or tax evasion) in a regime that has
some democratic legitimacy, or the funds are the indirect fruits of illegal acts […] thus illicit
funds are not merely the consequence of bad public policy and do not include all international
illegal ows from illegitimate regimes.
Blankenburg and Khan (2012, p. 23) dene an illicit capital ow as a ow that has a
negative impact on an economy if all direct and indirect benets in the context of the
specic political economy of the society are taken into account. According to the
authors, their denition allows one to make sense of the perception that not all illegal
ows are necessarily illicit, while some legal ows may be illicit. The use of the notion of
illicitness suggest that damaging developmental outcomes may not always correspond
to violations of the law[2] and that it is therefore necessary to precisely dene social,
economic and political damage.
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Illicit nancial
ows
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