The Organisation for Economic Cooperation and Development released a report on illicit activities in West African states. The report, titled Illicit Financial Flows: The Economy of Illicit Trade in West Africa looks at how illicit and criminal activities interact with the economy, security and development in these states. The Daily Vox team takes a further look at the report and its broader context.
Illicit financial flows or IFFs are defined as money which is illegally earned, transferred or used. The primary source of IFFs is criminal activity. It is seen as a threat of sustainable development as it constrains the financial resources of the government.
The OECD report looks at how IFFs affect development and the challenges for good governance. The report focused on West African states because many of these states are characterised by weak governance which contributes vastly to the economy of illicit trade in these states. The report looks at how in the states the lines between licit and illicit trade are interwoven in West Africa and this is mainly because the informal economy makes up 60-70% of the economy. Additionally, the problem is amplified by the fact that public officials oftentimes wear multiple hats as people in public office but also as a private individuals with personal networks which can be connected to criminal and illicit activities. In the informal economy, this line is further blurred.
Another major contributing issue to the problem of illicit financial flows is the informal finance system that exists in many of these countries. The environment where these illicit activities happen is facilitated by the low levels of inclusion of a significant amount of the population. The formal banking system is very expensive and therefore, many transactions take place outside of government regulation.
The OECD report is significant especially because it also includes recommendations for how the West African states can deal with IFFs. These recommendations include the Economic Community of West African States (Ecowas) working together to develop and implement strategies for dealing with the issue. This is because of the great interdependence that exists between states in West Africa.
The report also recommends that policy actors in the government and civil society and elsewhere need to develop policy that not only addresses the criminal economic but also the socioeconomic and governance issues that enable them. Importantly the report also calls for the support of alternative livelihoods as a way of combating the the illicit trade in West Africa.
While the report is very relevant for looking at illicit financial flows in West Africa, it raises the question as to how South Africa fares with regards to the same issue.
According to recent estimates from Global Financial Integrity, South Africa lost more than $100.7 billion over for the period 2002-2011. SA is also ranked number 13 in terms illicit financial flows among developing countries.
The Tax Justice Network (TJN) published its Financial Secrecy Index for 2018. This index shows which countries are the secretive about their offshore financial activity – either hiding funds overseas, or opening their banking system to offshore financial flows. South Africa has a relatively low level of tax secrecy at number 50 on the list and the lowest ranking on the list of all African nations that are on the index.
“The South African Revenue Service has indicated that the country is at very high risk of illicit financial flows, and particularly transfer pricing, and that some of the largest companies listed on the Johannesburg Stock Exchange, including SAB Miller and Anglo American, have been implicated in tax avoidance stories relating to other countries,” according to TJN.
TJN said that “According to South African civil society group African Monitor, the country’s legal and regulatory framework for anti-money laundering from criminal activity and counter-terrorist financing is robust, but ‘there is little focus on other forms of illicit financial flows, especially those perpetrated by the multinationals’.”
In the index, the TJN have also said that: “Secrecy in South Africa and secrecy jurisdictions used by the country’s elite and multinational companies hurt the nation. If left unchecked, it will continue to allow a cosy relationship between capital and politics that undermines democracy and the rule of law.”
During his inaugural reply to State of the Nation Address (SONA) debate, President Cyril Ramaphosa reiterated that SA would be playing a role through the OECD and G20 to fighting tax avoidance. Ramaphosa gave this reiteration when called upon by Economic Freedom Fighters (EFF) chief whip, Floyd Shivambu to deal with tax avoidance and pass legislation dealing with illicit financial flows.
Writing for The Daily Maverick, Erwan Malary, a researcher said SA should reform publication requirements for companies to make transparency the rule as well as make it a rule that multinationals have to operate by the laws of the country and that companies breaking the law should be punished.