Africa and Europe join forces to fight Illicit Financial Flows (IFFs) in Africa

The African Union is today launching a €7 million Multi Donor Action with the European Union and the German Federal Ministry of Economic Development and Cooperation.

The joint action will enhance efforts to combat the scourge of IFFs on the African Continent.

HE Birgitte Markussen, EU Ambassador to the African Union said: “This project is of strategic importance both for Africa and Europe and aligns with the commitment made to fight IFFs in Africa during the EU-Africa Summit in Abidjan. Fighting illicit financial flows is part of efforts to collect more and spend better to support countries’ development.”

Co-financed by the European Union (EU) with €5 million and the German Federal Ministry of Economic Development and Cooperation (BMZ) the initiative will be implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) through the Good Financial Governance in Africa Programme.

The African Union Commission launched this Multi-Donor Action during the African Union’s Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning and Integration.

Illicit Financial Flows (IFFs) have been at the centre of discussions in Africa due to their negative impact on development financing, sustainable development and growth. The emergence of the COVID-19 pandemic has exacerbated the fiscal deficit situation in some African countries, highlighting the need to address illicit outflows and to strengthen domestic resource mobilisation.

AUC Commissioner Harison said: “To build better and more resilient economies and mitigate future crises, Africa is committed to spare no effort to improve domestic resources mobilisation and fight against IFFs. We would like to thank the EU and German Government for supporting Africa in this endeavour through this €7 million Multi Donor Action”.

HE Stephan Auer, German Ambassador to Ethiopia and the African Union added: “In a true Team Europe spirit, the EU and the Federal Republic of Germany, in close partnership with the African Union Commission, are joining forces in the fight against IFFs with this important joint action. Germany is strongly committed to supporting the AU and African states in their efforts to curb the outflow of illicit funds and strengthen the collection of domestic resources.“

The project will strengthen the coordination of the African Union Commission’s anti-IFF policies via the following pan-African networks: African Tax Administration Forum (ATAF); Collaborative Africa Budget Reform Initiative (CABRI); African Organsiation of Public Accounts Committees (AFROPAC); and the African Organisation of Supreme Audit Institutions (AFROSAI).

Finland has expressed an interest to join the initiative, which will support five in-country pilot projects to tackle IFFs at national and regional level.

The Action is embedded in wider international initiatives including the Addis Tax Initiative, the resolution on the Impact of IFFs on Development Finance and the AU Special Declaration on IFFs.

Background information

Domestic Resource Mobilisation (DRM) is one of the most promising sustainable development financing sources. Tax-to-GDP ratios in most of African countries have remained extremely low – averaging only 18 percent in 2018. This tax revenue under-collection can also be linked to IFFs. A recent report by the United Nations Conference of Trade and Development (2020) estimated losses at about US $89 billion annually. These outflows are of tremendous concern, given the various socioeconomic challenges still faced by the continent. The amount of Official Development Aid (ODA) of US $48 billion and foreign direct investment of US $54 billion received on average annually between 2013 and 2015 is nearly the same as the amount lost in illicit outflows.

To address the existing and emerging gaps, several initiatives are being undertaken to curb the fight against IFFs on the continent. The establishment of the High-Level Panel (HLP) on Illicit Financial Flows led by H.E. Thabo Mbeki, former President of South Africa was a stepping stone to ensure Africa’s accelerated and sustained development, relying as much as possible on its own resources that includes strengthening the fight against IFFs. Interrelated, the Consortium to Stem IFFs was established under the leadership of H.E. Thabo Mbeki to implement the recommendations of the HLP Report and to ensure a more streamlined collaboration on the anti-IFF agenda while leveraging on partnerships to stem IFFs from Africa. The AU dedicated the year 2018 to “Winning the Fight against Corruption: A Sustainable Path for Africa’s Transformation,” a concerted effort of the organization’s willingness to combat poor financial governance, misallocation of budget resources, obstacles to productive investment, and systemic increase of inequality across the continent. As part of the activities to support the objectives, the Commission, through the Department of Economic Affairs, published a book on “Domestic Resource Mobilization: Fighting against Illicit Financial Flows and Corruption”. The book is a collection of best practices from various member states and partners on their efforts to combat IFFs. The African Union and its Members States are also in strategic partnerships for closer collaboration in addressing the existing and emerging challenges and gaps in the fight against the outflows. Such partnerships include the African Tax Administration Forum (ATAF) partnership; the Global Forum on transparency and exchange of information for tax purposes, the Financial Action Task Force (FATF); the IFFs and oil commodity trading- AUC and OECD joint project; among others.

Illicit Financial flows are often associated with the extractive sector as extractive industries are particularly vulnerable to IFFs due to the complex and elaborate global value chains associated with the sector. More so, the lack of financial transparency in the extractive sector all too often allows for sector-wide corruption and prevents governments from collecting the needed revenue. Illicit financial flows related to the export of extractives commodities ($40 billion in 2015) are the largest component of IFFs in Africa, serving to further drain the continent of critical resources necessary to drive its development agenda. The Extractive Industries Transparency Initiative (EITI) and the International Council on Mining and Metals (ICMM) along with international donors have provided a wealth of lessons learned and best practices. Concerted efforts, strengthened capacities, coordination and political will we be necessary to further advance this agenda.

Learn more about the Extraordinary Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning and Integration convened under the theme, “Securing Africa's Taxing Rights, Stemming Illicit Financial Flows and developing payment system for AfCFTA" .