The Real Black Economy

A Global Financial Integrity report conservatively estimates that between 2003 and 2012 $529 billion left Sub-Saharan Africa through illicit flows, growing an average 13.2 percent each year. If $529 billion seems hard to grasp, it's almost twice what Sub-Saharan Africa received in foreign direct investment and one-and-a-half times what it got in official development assistance in the same period. So for every $1 of foreign investment and aid, 84 cents leaves illegally. The system's like a sieve with billions of dollars falling through the cracks.

The lost billions are tied to expanding basic human rights and turning the continent's successful economic growth into things like jobs, service delivery, education and health. A leader of the World Bank has called illicit financial outflows a global priority, the White House has recognised the problem, the United Nations has a team on it and so does the African Union. On Monday, Global Financial Integrity president Raymond Baker said, “This is the ugliest chapter in global economic affairs since slavery.”

The Thabo Mbeki foundation traces the origins of illicit financial flows from Africa back to the 1960s, when elites in newly-independent governments were uncertain about stability and sought to stash money away in Western institutions. At the same time large corporations were globalising and looking to minimise corporate taxes. Essentially, the practice is the illegal transfer of money from one country to another, when funds are illegally earned, transferred or used. Think of tax havens and shell companies, a politician transferring dirty money offshore, criminal organisations laundering their cash through trade, terrorists doing wire transfers, or traffickers carrying suitcases of cash across borders.

Most importantly, think of multinational companies. According to Global Financial Integrity, corruption accounts for about five percent of illicit flows, criminal activity like drug trafficking and smuggling 30 to 35 percent, and transactions from multinational companies 60 to 65 percent. Addressing the African Union this year, Mbeki, chair of the high level panel on illicit financial flows, agreed “that large corporations are by far the biggest culprits responsible for illicit outflows, especially given their ability to retain the best available professional legal, accountancy, banking and other expertise”. They do it mostly through mis-invoicing, or lying about the commercial value of a transaction on invoices submitted to customs. It's often easy, because trading partners write their own invoices. Companies can evade taxes, claim certain tax incentives, and shift money into tax havens and secret accounts.

It's estimated that at least $122 billion was illegally transferred out of South Africa between 2003 and 2012, recording the tenth highest illicit outflows in the world (Nigeria was ninth). Ceasing illicit transactions does not mean the money would be available directly to spend on services, but to put it into perspective, the $29 billion estimated to have illegally left the country in 2012 exceeds the total 2015 education budget. It's something like 1,300 Nkandla upgrades. Curbing illicit financial flows would significantly boost tax collections in developing countries. Currently, these countries struggle to collect taxes from much of the population and those who can afford to pay, wealthy citizens and international companies operating in the area, are doing all they can to avoid paying, leaving governments with fewer resources to improve the lives of citizens. “Clearly, massive reductions in existing human rights deficits could be achieved by allowing poor countries to collect reasonable taxes from multinational corporations and from their own most affluent nationals, assuming the resulting revenues were appropriately spent,” said Yale University's Professor Thomas Pogge.