A new report estimates that Africa is losing $60 billion each year from illegal outflows of capital. The Illicit Financial Flows report was released by a panel run by the United Nations and the African Union, and it delves into the sources of the fraudulent activity and offers solutions to remedy this ongoing problem. Because of these illegal outflows, Africa is missing out on valuable tax revenue as well as development opportunities.
The panel, which was led by former South African President Thabo Mbeki, discovered that scams to defraud governments of tax dollars were numerous and wide-ranging. One common scam involved understating export figures in order to pay lower taxes. One of these scams became apparent to the panel when it compared the export figures for Mozambique timber to import figures reported by China. In this case, Mozambique’s declared exports were half of the amount of the imports reported by China. Scams like this deprive African governments of tax dollars that are essential for further economic development.
Illicit outflows of capital are not unique to Africa; in fact, developing nations lost nearly $1 trillion in 2012 through illegal channels. However, Africa seems to suffer the most because its governments generally do not have the expertise and resources to discover and stop the flight of capital. In Nigeria, a decentralized regulation system exists, with over 12 agencies playing some role in stopping illicit capital outflows. A system that is this decentralized is extremely inefficient and is easily penetrated by fraudulent activities.
Currently, Africa’s 54 countries have little to no exchange of tax information, which makes it extremely difficult to detect tax dodgers. The report recommends that a system be put into place through which tax information can be automatically exchanged. This would help to end existing tax fraud, and also prevent illegal schemes that may have otherwise occurred.