Financial Transparency Coalition

Money laundering and trade mispricing were some of the topics discussed by the panel discussion in a Capitol Hill briefing yesterday on the ninth African Economic Outlook (AEO).

The AEO is produced annually by the OECD Development Center, African Development Bank and United Nations Commission for Africa. Although the report provides a comprehensive analysis of economic, political and social developments, the main topic of discussion surrounded the illicit outflow of money from the continent via money-laundering, transfer pricing and tax evasion.

Global Financial Integrity Director Raymond Baker explained how the flow of illicit money out of Africa into developed countries, such as the United States, is impeding the economic progress of the continent.

Baker said the following:

“I’m all for more foreign aid, more FDI [foreign direct investment], more debt relief, more free trade for Africa, but there’s no question in my mind over the years that I’ve spent involved with the continent that the greatest thing we can do for Africa is to curtail our receipt of the illicit money that pours out of the continent, which damages resource mobilization, capital mobilization and hurts the collection of taxes in the continent. That’s the greatest thing we can do.”

Baker emphasized that there is a “two-way street between Africa and the Western world.” Citing GFI’s report on Africa, “Illicit Financial Flows from Africa: Hidden Resource for Development,” Baker said that Africa lost more than $US850 billion in illicit money between 1970 and 2008. And that is a conservative estimate. If the missing data resulting from holes in reports, smuggling and money transferred via trade mispricing is approximated, the estimate jumps to a loss of US$1.8 trillion over the 39 year period.

To put it further into perspective, Africa lost between 90 and 169 billion dollars in illicit money in 2008 alone, Baker added.  Additionally, the money is not just leaving Africa —  it is generally a permanent loss. Africa is the hardest hit by illicit financial flows, according to Baker.

Yes, illicit money is pouring out of Africa, but where is it going? Baker chastised the Western world for placing the blame elsewhere.

“We in our western countries like to point the finger overseas and suggest that it’s all due to that corruption that takes place in those countries over there…,” he said. “By far the greatest part of this, 60 to 65 percent, of the global total is commercial tax evasion in which multinationals are certainly participants.”

Baker did not simply paint a picture of doom. He made three recommendations to begin the process of stopping illicit money from leaving Africa: curtail money laundering, curtail abusive transfer pricing and require country-by-country reporting.

He acknowledged that the complexity of transfer pricing makes it a difficult problem to solve, and that although the AEO’s recommendations for legislative action fell short, the authors of the report could hardly be blamed. Instead of establishing more rules and regulations, Baker recommended that both parties should sign their name to the fact that the transaction is legitimate. Something as simple as the conscience would help curtail the flow of illicit money.

Either way, the message was that something needs to be done. “This massive transfer of illicit money out of the poorest countries into the richest countries is quite frankly an inexcusable reality here at the dawn of a new millennium,” Baker said.

Baker was joined on the panel by Jean-Philippe Stijns, Economist, OECD Development Center; Mthuli Ncube, Chief Economist, African Development Bank; and Witney Schneidman, Senior Adviser, Leon H. Sullivan Foundation. Congressman Donald M. Payne, Chairman of the House Foreign Affairs Subcommittee on Africa and Global Health was the event chairman.

Watch Mr. Baker’s full commentary below: