Illicit Financial Flows In Africa’s Extractive Sector Impacts Development

By: Christian Kpesese

Africa reportedly loses an estimated amount of $60 billion annually to illicit financial inflows (IFF) according to the African Development Bank as reported by the Organisation for Economic Co-operation and Development in 2023.

IFFs, according to the International Monetary Fund (IMF) is the movement of money across borders that is illegal in its source while the World Bank says it is money illegally earned, transferred, or used across borders.

Data available from an audit initiated into Ghana’s Custom Management System in the year 2019 indicate that some $ 1.8 billion was transferred offshore from Ghana without recorded of recorded of actual trade in goods.

Africa’s extractive sector is believed to one such critical sector bedeviled with numerous illicit financial inflows.

With specific reference to Ghana, the Africa Centre for Energy Policy in 2015 reported that, an estimated $702 million is lost each year in Ghana’s extractive sector due to IFFs.

Ghana’s Economic and Organised Crime Office for instance investigated some Gold export companies from 2019 to 2021 and revealed that over US$1 billion flowed out from the country illegally.

ACEP again reported in 2022, that the African continent lost some $40 billion to IFF in extractive commodities only.

Negative Impact of IFFS

According to economists and tax experts, Illicit Financial Flows expecially in the extractives drain African countries of hard currency reserves, heightens inflation, deflates investments, undermine trade, worsens poverty and widens income gaps among citizens.

Experts claim IFFs reduce the much needed tax revenue for the continent for the provision of public services such as roads, healthcare, housing, education among others.

Ghanaian Tax Expert, Dr Ali Nakyea posits that, IFFs reduce forex resources and negatively affects the ability of nations to invest in critical infrastructure and businesses.

It makes beneficiaries of the act grow wealthier and are able to exercise greater influence in the politics within the states they operate and affects the ability for the passage of important regulatory mechanisms.

According to Dr Nakyea, IFFs impact negatively on growth and job creation since there is lack of reinvestment and the related expansion by companies do not take place and weaken local currency as it is import dependent.

 In the extractive sector, IFFs is evident in profit shifting, lack of clarity about beneficial ownership, and inadequate reporting of payments, and the procurement of machinery.

Way Forward

In order for Ghana and the rest of Africa to wean themselves off the the albatross of IFFs in their extractive sectors, it is crucial for governments to adopt comprehensive forwarwarf looking measures.

Among these are; the urgent need for African governments to own and invest in the high-risk extractive sector through the necessary capital injection and strenthenning of their National Oil Companies (NOCs and mining firms.

Local business people should be incentivized to venture into the extractives to curb the phenomena where the multinational firms repatriate benefits associated with their investments and the associated irregularities.

  Africa should avoid classifying the extractive sector as Foreign Direct Investment (FDI) domain and invest in knowledge acquisition, skills and technology training of its people to take charge of the sector.

 Additionally, the regulatory framework and existing laws which aide the siphoning of monies outside the shores of the continent by multinational companies should be reviewed as a matter of urgency.  

Training of law enforcement officers, tax officals and all people along the extractive sector value-chain is key to enable them appreciate the issues and to do the right thing.

Is is also important for African countries to develop a comprehensive database of importers and exporters to control trade mispricing.

Duty bearers must also ensure greater accountability and transparency in the contracting process in an inclusive manner for the contnent to derive maximum benefits from its natural resources.

By: Christian Kpesese/www.eagleghana.com