Preventing Illicit Financial Flows in Africa Focus of Joint Second Committee, Economic and Social Council Meeting

23 October 2015
Seventieth Session, 17th Meeting (AM)

Preventing Illicit Financial Flows in Africa Focus of Joint Second Committee, Economic and Social Council Meeting

Panellists Agree Multinational Companies Should Become Part of Solution

Capturing illicit financial flows could provide a “hidden resource” for funding development, delegates heard today at a joint meeting of the Second Committee (Economic and Financial) and the Economic and Social Council.

Calling for a “development lens” to address illicit financial flows, Amr Nour, Representative of the Economic Commission for Africa (ECA), said that such flows in some African countries had reached up to 16 per cent of gross domestic product (GDP).  That was the case even as the number of those living on less than $1.25 a day had increased from 290 million in 1990 to 414 million in 2010.

Recalling the experience of Bolivia, he added that by renegotiating its contracts, the country had boosted its revenues from the hydrocarbon industry from $287 billion in 2004 to $1.6 billion in 2008.

James Zhan, Director of Investment and Enterprise at the United Nations Conference on Trade and Development (UNCTAD), speaking via video link from Geneva, stated that illicit financial flows undermined institutions, drained the State and led to higher domestic tax burdens.  While institutional reforms and creating anti-corruption commissions were critical, African countries could not do it alone.

UNCTAD and other similar agencies could advise African Governments on handling tax avoidance, but multinational companies should also become an important part of the solution, he said.

That sentiment was echoed by Erika Dayle Siu of the Independent Commission for the Reform of International Corporate Taxation, who noted that corporate tax rates in all economies had dropped significantly.  Encouraging developed countries to establish a minimum corporate income tax, she said the world had changed and so must the tax system, which was created in the 1920s.  Today, half of global GDP came from economic activity in developing countries.

Stressing that tax abuse was not a victimless crime, she added that it increased the burden on other taxpayers and limited the resources that could be spent on reducing poverty and realizing human rights.

In the ensuing discussion, the representative of Liberia said that destination countries were also responsible for repatriating the funds that flowed out of Africa illicitly.  Lesotho’s delegate underscored that the entire responsibility was not just on the “victim” but also on the countries where the criminal activities had originated.

The representatives of the United Kingdom, Ethiopia, United Republic of Tanzania, Sudan and the United States also spoke in the discussion.

The Second Committee will meet again at 10 a.m. on Monday, 26 October, to begin its general discussion on Palestine.


The Second Committee, in a joint meeting with the Economic and Social Council, this morning held a panel discussion on “illicit financial flows and development financing in Africa”.  The event, chaired by Andrej Logar (Slovenia), featured Oh Joon, President of the Economic and Social Council, who delivered opening remarks, and James Zhan, Director of Investment and Enterprise, UNCTAD, who made introductory remarks by video link.  The panellists were:  Mothae Maruping, Commissioner for Economic Affairs of the African Union; Amr Nour, Representative of the Economic Commission for Africa (ECA); James Boyce, Professor at the Department of Economics, University of Massachusetts at Amherst; Erika Dayle Siu, Independent Commission for the Reform of International Corporate Taxation; Junior Roy Davis, Economist, Division for Africa, Least Developed Countries and Special Programmes at UNCTAD; and, Shari Spiegel, Chief of the Policy Analysis and Development Branch, United Nations Department for Economic and Social Affairs.

Opening Remarks

Mr. LOGAR said that the fourth Joint African Union Conference of Ministers of Economy and Finance and ECA, Conference of African Ministers of Finance, Planning and Economic Development, held in 2011, had mandated the ECA to establish a High-level Panel on Illicit Financial Flows from Africa.  After a rigorous investigation, the Panel had concluded that combating such flows was no longer a choice; it had become an imperative.  The Panel report had called upon the African Union to engage with its partner institutions to elaborate on a global governance framework to determine the “conditions under which assets are frozen, managed and repatriated”.

Calling on delegates to reflect how the United Nations could assist African countries in tackling illicit financial flows, he added that it was important to discuss how the Organization could stimulate greater global cooperation and coordination among the entities involved at tackling such flows, be it Governments, donors, financial institutions or international organizations.  Other questions included how best to streamline the many new initiatives that were taking place such as the Organisation for Economic Cooperation and Development (OECD) Action Plan on Base Erosion and Profit Sharing or the World Bank Stolen Asset Recovery Initiative.

Mr. OH stated that African countries were fundamentally transforming their economies and had to finance a wide range of investment requirements in order to achieve their multiple economic and social goals, such as creating jobs, reducing poverty, combating inequality, empowering women and achieving sustainable development.  The UNCTAD World Investment Report 2014 and other sources had highlighted that the total investment needs in developing countries in the key sectors would be in the range of $1 trillion every year, for the next 15 years.

Like other regions, he continued, Africa would have to mobilize resources from within the continent, and the illicit outflows of finance represented an important loss of foreign exchange reserves, an erosion of legal tax base and bygone investment opportunities from natural resource rents.  With an estimated $50 billion per year in illicit financial flows, the effectiveness of domestic resource mobilization would be significantly curtailed if such illicit flows continued.

Panel Discussion

Mr. ZHAN, via video link from Geneva, said that tackling illicit financial flows was essential for Africa to achieve the Sustainable Development Goals.  The estimated resources leaving Africa in the form of illicit financial transfers was nearly $530 billion between 2002 and 2012.  That was a huge cost for the continent’s development as those resources could have been invested into Africa’s economic development and structural transformation.  Illicit financial flows undermined institutions, drained the State of much needed economic resources, reduced the development resource base and led to higher domestic tax burdens to fill the resource gap.  Serious governance was needed to address that issue, particularly in the area of natural resources revenue.

Africa was the only region where illicit financial flows reached about 5 per cent of GDP, he said, urging the promotion of transparency and accountability through the strengthening of civil society.  Promoting institutional reforms and creating anti-corruption commissions were critical.  African Governments had a big responsibility to tackle the problem but so did the international community.  African countries could not do it alone, he said, calling for greater regional cooperation.  Multinational companies and foreign direct investment (FDI) were also an important part of the solution.  United Nations agencies such as UNCTAD could offer advice to African Governments to design investment policies and handle tax avoidance and illicit practices by multinationals.

Mr. MARUPING said that dealing with illicit financial flows had become even more pressing for developing countries as the task of financing the Sustainable Development Goals loomed on the horizon.  Africa was by far the “greatest loser”, as illicit financial flows from the continent composed a much larger percentage of GDP than any other region.  The continent was aspiring for transformative economic growth, human development and the eradication of poverty.  As early as 2011, the African Union had formed the High-level Panel to probe the illicit financial flows from Africa.  While come challenges could be overcome in the short terms, others were in the long term.

Africa could not effectively tackle illicit financial flows on its own, he continued.  Recalling that paragraph 24 of the Addis Ababa Action Agenda provided the basis for the Second Committee of the General Assembly and the Economic and Social Council to enter the arena, he urged the Committee to establish a panel of experts to carry the endeavour forward.  Further, the Economic and Social Council should consider activating the Vienna Commission on Crime Prevention.  Illicit financial flows should remain at the centre of the radar screen of both bodies.

Mr. NOUR said that illicit financial flows were not only an African problem but a global one.  Those transactions represented a huge transfer of financial resources out of developing countries.  Capturing those “hidden resources” could help fund development.  The impact of illicit financial flows was particularly felt in Africa, as in some countries those transactions reached up to 16 per cent of GDP.  He expressed serious concern over the high levels of poverty, saying that the number of people living on less than $1.25 a day increased from 290 million in 1990 to 414 million in 2010.  Africa was conservatively estimated to be losing more than $50 billion annually to illicit financial flows.

It was also important to hold accountable any corporations that participated in illicit financial flows, he said.  Capacity-building was crucial in the context of the 2030 Agenda.  He expressed support for data collection and the preparation of a document to be made available to all African countries on operational measures to adopt policies against illicit financial flows.  It was important to learn from past experiences, he said, pointing to Bolivia, which had reached an estimated $287 billion in revenue from its hydrocarbon industry in 2004.  By 2008, revenue skyrocketed to $1.6 billion through the renegotiation of contracts.  He called for political will and commitment by the African Union, a “development lens” to address the illicit financial flows, and upscaling regional and international cooperation.

Mr. BOYCE said that while “capital flight” and “illicit financial flows” were used interchangeably, they were distinct concepts, with the first usually defined as unrecorded capital outflows and measured as the missing residual in the balance of payments.  The broader universe of illicit financial flows included not only capital flight but also payments for smuggled imports, transactions connected with illicit trade in narcotics and other contraband, outflows of illicitly acquired funds that were domestically laundered before flowing overseas through recorded channels and transfer pricing by the corporate sector.

Turning to policy responses, he said there had been some success in efforts to recover and repatriate stolen assets, as for instance with the $700 million held in Swiss bank accounts by Nigeria’s former military ruler Sani Abacha and his family.  Over the past two decades, the international community had begun building institutional infrastructure to assist in stolen asset recovery.  As a result, when investigators identified substantial foreign holdings of politically exposed persons and others suspected of criminal activity, asset holders could be required to prove that the wealth was acquired legitimately.  The creation of an impartial body to adjudicate cases of odious debts would further strengthen that international architecture.

Ms. SIU said that 60 per cent of illicit financial flows were attributable to commercial trade transactions, and further losses were caused through corporate tax avoidance.  Developing countries alone lost $100 billion annually and the International Monetary Fund (IMF) had estimated that they lost three times more than developed countries.  At the same time, corporate tax rates in all economies had dropped significantly.  Recalling the report of the Special Rapporteur on extreme poverty and human rights, she added that “tax abuse is not a victimless practice”, and it limited the resources that could be spent on reducing poverty and realizing human rights.

Tax abuse by multinational corporations, she added, also increased the tax burden on other taxpayers.  The world had changed and so must its tax system.  The current international tax framework was developed in the 1920s when cross-border trade occurred in commodities.  Today, nearly half of global GDP came from economic activity in developing countries and services dominated over goods.  Noting with concern that only three African countries had transfer pricing units in their internal revenue services, she added that capacity-building at the national level was a start, but international tax cooperation and global governance were essential.  Rather than taxing a multinational corporation’s subsidiaries as separate entities, a corporation should be taxed as a single and unified entity.  Further, developed countries should establish a minimum corporate income tax.

Mr. DAVIS said regulations must be developed both for transparency of trade and financial flows.  The issue of illicit financial flows was exacerbated by a lack of harmonization in the area of regulating financial services.  That was particularly a reflection of a lack of skills and capacity to maintain oversight.  Regional integration was key and could be seen in East Africa in the management of financial regulation and institutions.  He also emphasized the importance of technical assistance, including automated systems of data to allow better monitoring of trade mispricing and export and imports.  Those measures allowed information to be exchanged more swiftly.  Unfortunately, commodity dependence was growing over the last decade, rather than declining, and countries that depended on resource revenue exclusively were most affected by illicit financial flows.  That posed huge losses for development.

As much as 15 per cent of GDP of some countries had been lost and as a consequence, many African countries were returning to the international capital markets for funds.  Illicit financial flows expanded dependence on external financing, and hindered and reduced the potential for future fiscal and export revenues throughout the continent.  Government leadership, regional action and vision were critical to address that.  Countries had to shift from dependence on raw commodities to high-value added goods and services.  If well-managed, Africa’s mineral resources could catapult the continent into unlimited growth.  African Governments would need to engage multinational organizations to reinvest in local communities to aid the development on the ground.

Ms. SPIEGEL said that the fact that there was a discussion about illicit financial flows represented a real change in policy.  A wide range of issues had been discussed, from transparency to budget issues; from corruption to investment to debt.  Many of those items had also been discussed in the Addis Ababa Action Agenda, including the importance of capacity-building to tackle illicit financial flows.  As a result, there was already international agreement on combating the problem.  While international financial institutions must provide support to countries tackling illicit financial flows, it was not clear exactly how such flows could be tracked, since, by nature, they were illicit.  At the same time, it was important to agree to a single definition of illicit financial flows.

The flip side, she added, was that, given the wide breadth of issues covered under the term, it was important to address them separately.  While there should be synergies, the actual policy adjustments needed to be tailored to specific problems.  Turning to investment, she noted that a lot of the money leaving developing countries illicitly could be invested domestically.  Even if the problem of illicit financial flows was solved, that money might not go to the areas where financing was needed.  Therefore another important challenge was how to incentivize that money to go into areas of public investment.  A good place for that discussion could the Financing for Development Forum.

Interactive Dialogue

When the floor was opened up, the representative of the United Kingdom said that action on tackling illicit financial flows should not be delayed as a clear commitment had been outlined in the Addis Ababa Action Agenda.  On a national level, the United Kingdom had taken action to toughen anti-laundering policy, investigate citizens committing bribery and strengthen the capacity of tax authorities.  It was important to address how recovered money was used and focus on coordinating efforts.  On asset recovery and rapid response capability, the United Kingdom had to deal recently with a number of complicated cases, namely in the Arab Spring and with the conflict in Ukraine, he said, urging the establishment of an international asset recovery body.  Mr. BOYCE agreed that there was a need to develop an internationally coordinated mechanism.  Institutional innovation was absolutely necessary, he said, including in the area of adjudication of odious debt, which was not the same as debt forgiveness.  It meant challenging the legitimacy of the subset of debt which could be identified as illegal under international law.  Africa should not be asking for debt forgiveness, rather the creditors to that continent should be asking the people of Africa to forgive them for lending debt that did not benefit the people, but only corrupt rulers.

The representative of Liberia said that countries that were the destination for the outflows of funds also had a responsibility to help Africa repatriate those flows.  He asked what actions the African Union had taken as its primary responsibility was the economic and social development of the continent, as well as how illicit flows had increased even though the international community had given the issue more attention.  Mr. MARUPING said that illicit financial flows exacerbated inequalities and that was a pressing issue that needed to be addressed soonest.  Mr. NOUR said that many developing countries were net creditors to developed countries.  As it stood now, many of the global initiatives could not be implemented because technically countries were not able to do so.

Lesotho’s delegate said that criminal activities seemed to have been committed in developing countries by corporations from the developed world and yet “the victim has to take the action for the solution and not the countries where the criminal activities are coming from”.  He said there were proposals from the United States included in one of the panellist’s presentations and the United Kingdom had also taken to the floor but mostly the message was that poor African countries had to resolve the problem themselves.  He asked whether developing countries would ever be able to extradite individuals responsible for corruption in their countries so that they could be prosecuted.  He pointed to a case where Lesotho could not prosecute criminals because they were being protected by their Governments.  Addressing Lesotho’s query, Mr. BOYCE said that destination countries had grave responsibilities in addressing the problem of illicit financial flows and must go beyond their roles as safe havens.  The role of the destination countries was more than just “where the money goes”.  It was a huge mistake to put all the responsibility on African countries.

The representative of Ethiopia underscored the importance of inclusive economic growth to broaden the tax base and revenue.  The many legal loopholes that multinational corporations could take advantage of made it impossible to argue that something was unethical and downright illegal, he said.  Ms. SIU emphasized that the issue of legal loopholes was central to governance.  Corporations had lobbied strongly and invested a lot of money to create loopholes to work in their favour.  It would take the role of the Government, the private sector and civil society to tackle such loopholes.  Mr. DAVIS said that tackling the leakage of resources from countries was hindered by tremendous capacity constraints.  It was a challenge both nationally and regionally, therefore the United Nations would be critical in assisting in those efforts.

The representative of the United Republic of Tanzania said that without examining tax havens it would be difficult to curb illicit financial flows.  Sudan’s delegate highlighted how illicit financial flows were a critical problem in her country and called for greater regional coordination to deal with that.

The representative of the United States pointed to the fundamental difference between criminal activities and a lack of policy.  Having good laws and effectively implementing them was critical to addressing illicit financial flows, he said, pointing to initiatives his country was involved in.  At the international level, standards and regulations complemented such efforts, he said.

For information media. Not an official record.