Tax havens, corruption siphoning Africa’s wealth

African countries lost $789 billion to capital outflow between 1980 and 2012, according to a study by the Global Financial Integrity (GFI) and other experts. The study, which assesses the impact of capital flight on developing countries, said the ongoing financial leak has left developing countries battling with poverty and inequality while they serve as net creditors to the rest of the world.

The study found developing countries, including China, lost $16.3 trillion to both licit and illicit transactions. The recorded transactions include debt forgiveness and write-offs, as well as illegal gains stored mostly in tax havens. Governments in developing countries lose out on tax revenue from funds stored offshore and also potential domestic investment from other stolen monies. GFI explained these losses leave governments unable to sufficiently finance basic services.

“There is perhaps no greater driver of inequality within developing countries than the combination of illicit financial flows and offshore tax havens,” GFI president Raymond Baker said in a statement.

Assets stored in tax havens by residents of Sub-Saharan Africa grew at an annual rate of more than 20 percent between 2001 and 2011—a rate higher than any other developed or developing region. The continent now loses an average of $80 billion annually to illicit money flow.

Illicit cross-border flow of money mostly occurs through commercial channels, Baker told me. A company running a business in a developing country could, for instance, inflate the cost of a transaction on an invoice or over record financial transfers. Once the transaction is complete, the company shifts the remaining money through a disguised company into a tax haven. Corruption and criminal activities also contribute to the problem. Gen. Sani Abacha, a former Nigerian army general and de-facto leader, stole between $3 billion and $5 billion.

This continuous outflow of money affects a country’s fiscal policies, which are tied to the government’s capacity to raise funds through taxation. The greatest impacts surface through continuous poverty and inequality in developing countries, the study said.

“The institutions that enable significant illicit activity to persist in a particular country redirect productive resources away from those economic activities designed to improve living standards and reduce inequality for the country’s citizens,” the report explained.

In a bid to control the legal flow of funds into and out of developing countries, GFI called for stronger trade legislation to curb the overpricing or underpricing of exports and imports. Improved regulation on business ownership also would make it more difficult to illegally transfer funds, the group said, reiterating calls for public registries of company ownership.