Parliamentary Budget Offices (PBOs) could play an important role in the development of mechanisms to trace and stop illicit financial flows. These illegal activities cost developing African countries billions of dollars that could be used to grow economies and contribute towards Africa’s Agenda 2063, the framework for the socio-economic transformation of the continent.

This observation emerged during the second Annual African Network Parliamentary Budget Offices (PBOs) Conference, where Parliaments from Africa, Europe and Canada shared best practices and experiences on the roles of the PBOs.

Illicit financial flow is defined as money that is illegally earned, transferred or used. These funds originate from three sources: commercial tax evasion, trade misinvoicing and abusive transfer pricing; criminal activities, including drug and human trafficking, illegal arms dealing, and the smuggling of contraband; and bribery and theft by corrupt government officials.

In 2011, the African Ministers of Finance, Planning and Economic Development, jointly convened by the African Union Commission and the United Nations Economic Commission for Africa, identified these illicit capital outflows as constituting a major obstacle to the continent’s development efforts, and they decided to form a High Level Panel chaired by former South African President Mr Thabo Mbeki to investigate and make recommendations about what Africa should do to stop these illicit financial outflows.

A report from this High Level Panel exposed how Africa is losing over $50 billion annually through these illegal financial outflows. Furthermore, this figure is an underestimate, as it excludes such things as trade in services and intangibles, proceeds of bribery and trafficking in drugs, people and firearms.

The panel reported that large commercial corporations are the biggest culprits of illicit flows, followed by organised crime. Some commentators have defined illicit financial flows as “a new form of colonialism and undermined Africa’s developmental agenda”.

Mr Seeraj Mohamed of the South African PBO told the conference that the developmental impact of illegal capital flight is “less money for public investment, social services and infrastructure. Capital flight reduces public and private domestic investment and economic growth. It may be an important reason for low growth on the African continent over an extended period,” he said. This is because capital flight that occurs through under or over invoicing of exports and imports and the illicit export and concealment of wealth abroad leads to a reduction of the tax base.

Mr Mohamed said researchers estimated that African countries could have increased the annual average rate of poverty reduction by between 1.9 and 2.5 percentper annum fromthe period from 2000 to 2010, if flight capital had been invested.

A representative from the Collaborative Africa Budget Reform Initiative (CABRI), Mr Neil Cole, asked: “If money lost through illicit financial flows were to return, how capable are we to invest it in service delivery for the development of our economies? If systems are weak, we might see a recurrence of the illicit flows.”

Mr Yunus Carrim, the Chairperson of the Standing Committee on Finance and member of the PBO Advisory Panel, said perpetrators of illicit flows were always ahead of governments. “What capabilities do we need to put in place as skills get more sophisticated, so that we can trace, stop and return these financial flows?” he asked.

PBOs provide information and financial analysis to MPs, independent from the executive, to help them understand the budget process and conduct effective fiscal oversight. The conference felt that PBOs could assist in the development of mechanisms to stop illicit financial flows.

Sakhile Mokoena
17 August 2017