Tackling Illicit Financial Flows

00:00:03: Hello and welcome to Blickwechsel, the VIDC podcast for a new view of the world.

00:00:08: My name is Sibel Straubinger.

00:00:10: I'm the director of the Vienna Institute for International Dialogue and Cooperation.

00:00:15: And once a month, this podcast focuses on an international topic.

00:00:19: As we speak today, delegates from around the world are gathering in Nairobi, Kenya.

00:00:25: They are negotiating a new, potentially historic UN framework agreement on international tax cooperation.

00:00:32: An agreement that would put the United Nations at the center of the global tax system for the first time.

00:00:39: The fact that we are at this turning point is largely due to the African group at the United Nations.

00:00:45: This is because African countries, like many other countries in the global south, are structurally disadvantaged in the current international tax system.

00:00:55: And the consequences are serious.

00:00:57: Billions in tax revenues are missing, revenues that are urgently needed for health systems, education, social security and climate adaptation measures.

00:01:09: A key problem in this story are so-called illicit financial flows, international money movements that are illegal at some point in their origin, transfer or use.

00:01:20: Illegal financial flows can therefore arise from both legal economic activities, such as aggressive tax avoidance and clearly criminal acts.

00:01:31: Why all this is so important and what can be done politically and technically to curb these flows is what we will be discussing today with our guests.

00:01:41: Lakista Mjandasi, tax and IFF expert at the African Union Commission in Addis Abiba.

00:01:48: She coordinates the African Union tax and IFF strategies and supports member states in mobilizing their own revenues.

00:01:57: Previously, she was Africa coordinator for the tax inspectors without borders program at the United Nations Development Program.

00:02:05: Lachistar has worked for years on tax justice, illicit financial flows and development finance.

00:02:11: So there is hardly anyone better placed to explain how all these issues are connected and what is at stake.

00:02:19: Welcome, Lachistar.

00:02:20: Good to see you and thanks for taking your time.

00:02:23: Thank you so much and thank you for having me on your podcast today.

00:02:27: Lakista, you have been working on taxes for many years now and now also on illicit financial flows.

00:02:33: To begin with, can you explain for non-experts what exactly are illicit financial flows and how are they related to taxes?

00:02:43: Well, when we talk about illicit financial flows or IFFs, as we like to call them in short, we mean that this is money that is illegally earned.

00:02:53: transferred or used and usually crosses borders.

00:02:58: There's generally three categories of ways that illicit financial flows occurs.

00:03:04: The first way is commercially.

00:03:06: And this is through sometimes what we call trade-miss invoicing.

00:03:11: This is like underestimating the amount of goods that you're exporting for tax avoidance, for example.

00:03:19: It can also stem from what we call transfer pricing.

00:03:22: This is companies selling to each other and underpricing the prices of what they've sold versus the price that that amount would be in a common market.

00:03:32: The second way that illicit financial flows takes place is criminal activities.

00:03:37: These include things like drug trafficking, money laundering and racketeering.

00:03:43: And then the third way that illicit financial flows mostly occurs is through corruption.

00:03:48: Now corruption is generally in all the other two categories.

00:03:52: in commercial activities and in criminal activities, corruption also occurs.

00:03:57: So it's a cross cutting issue, but it can also be standalone when you have issues such as bribery and embezzlement and you have abuse of trusted powers.

00:04:07: So this is how illicit financial flows occurs.

00:04:11: And can you give us maybe some examples, what types of activities do they include?

00:04:17: So a few practical examples and how do we distinguish between these legal and illegal components?

00:04:24: Okay, so I will give an example of transfer pricing.

00:04:28: Now transfer pricing is a way that companies are allowed.

00:04:32: Transfer pricing is usually a legal method where, for example, if my company called Luckystar is based in Kenya and I have a branch in Vienna, I can trade between the Luckystar in Kenya and the Luckystar in Vienna.

00:04:47: so we can exchange goods or we can exchange services.

00:04:51: For example, I can have people from the office come and teach people in Kenya, I can have goods transferred from Vienna to Kenya.

00:04:59: So transfer pricing is allowed.

00:05:01: So it's sort of intercompany exchange and trading with each other, which is allowed.

00:05:06: However, when it becomes illicit and where it crosses the line and it's part of illicit financial flows, is for example, when I don't declare to the Kenya government that I have people from Vienna coming to work in the Laki Star core in Kenya, and then the amount that I am paying.

00:05:22: them or I also underestimate the amount that I am paying them when they come to offer these services to the Kenya office.

00:05:30: And maybe I declared that I am already paying them in Vienna.

00:05:33: So you see, then this becomes illegal because I'm already conducting illicit financial flows and avoiding taxes, not only in Austria, but I'm also avoiding taxes in Kenya, in Nairobi.

00:05:46: So it also occurs.

00:05:48: And an example for Illegal businesses like human trafficking or drug smuggling are the other way where all components are illegal.

00:05:58: Yes.

00:05:59: So those are definitely illegal illicit financial flows.

00:06:03: So money laundering, which is done with the intent of actually evading or hiding money that has not been gotten legally.

00:06:11: So that is also part of the criminal element of illicit financial flows.

00:06:15: So

00:06:16: the commercial element of illicit financial flows sometimes is very hard to detect because then we have to, you know, you have to approach the example of Lucky Co, the mother company.

00:06:27: eat in Kenya, be it in Vienna to actually get into my books and know that I'm avoiding taxes.

00:06:33: And sometimes this is very difficult.

00:06:35: But with the criminal element, it's also sometimes cut throat because it's drug trafficking, money from drugs, proceeds from drugs that are illegally transferred, money laundering, racket tearing.

00:06:46: So these are straight illegal activities.

00:06:49: And can you give us an idea of the scale?

00:06:52: So how much money does Africa lose each year through illicit financial flows?

00:06:58: That is a very good question because there was a report that highlighted that was done first in twenty fifteen, a very big report.

00:07:07: other reports before that, I think about two.

00:07:09: But this one for Africa specifically was called the Mbeki report.

00:07:14: that was done from a high-level panel that was called a high-level panel on illicit financial flows.

00:07:21: And it's called Mbeki report because that panel was chaired by the former president of South Africa, His Excellency, Taboom Beki.

00:07:28: Now, this panel had demanded to look comprehensively assess the issue of illicit financial flows in Africa.

00:07:36: finding out and proposing practical recommendations for stopping illicit financial flows.

00:07:42: So they came up with a figure, as you've asked, and that was fifty billion that Africa was losing a year to illicit financial flows.

00:07:51: Now, this was in twenty fifteen.

00:07:53: Now, in twenty twenty, we had another big report.

00:07:57: This one now came from the UN organization for trade and development, which in short is called UNCTED.

00:08:04: And they came up, so this is the most recent report that came out in September of twenty twenty and in their estimates they also looked at how Africa loses illicit financial flows and they put the figure at a figure of eighty eight point six billion per year lost to illicit financial flows.

00:08:23: So a significant increase between twenty fifteen to twenty twenty on what Africa loses to IFS.

00:08:30: And that's more than Africa received in official development assistance in the last years, I think.

00:08:37: Yes, absolutely.

00:08:38: And this is why, again, illicit financial flows and the issue of taxation become core, because when you say this, so this figure was more than what Africa gets through aid, official development assistance, which in twenty twenty three was up to approximately sixty billion.

00:08:57: So if you're losing almost ninety billion a year through illicit financial flows and only getting sixty billion, this shows that if we were able to carbon-licid financial flows.

00:09:07: Essentially, Africa does not need as much aid as it's usually the common perception that Africa is aid dependent.

00:09:16: It is aid dependent because we are essentially a net creditor instead of a net debtor.

00:09:21: So this is why it's a development issue and it's also something that affects people, as you said in your introduction, affects what governments can get into funding schools, funding hospitals, funding infrastructure.

00:09:36: So where does this money go to?

00:09:38: Are there recipient countries or regions that appear frequently?

00:09:43: Yes, so well illicit financial flows is not.

00:09:46: the money does not just disappear into thin air.

00:09:49: Most of the time the money that is illicitly especially gotten from Africa.

00:09:54: research has shown that it goes into a more developed country.

00:09:58: and these more developed countries and also secrecy jurisdictions.

00:10:03: So these are jurisdictions that offer very little transparency and also very little tax is put is imposed.

00:10:10: So this is where people tend to hide their money because the essence of having hidden wealth is also to avoid taxes.

00:10:18: So most of the time you find that it's mostly in financial centers and secrecy jurisdiction that are often in rich countries.

00:10:25: So sometimes in the global north.

00:10:28: sometimes in Europe, and this is where some of this money has been found to go once it's illegally gotten from mostly developing countries, especially those in Africa.

00:10:38: And which sectors are particularly vulnerable?

00:10:41: Is it the raw materials, agriculture, the financial sector, or others?

00:10:46: Actually, you would be shocked because for Africa, you would expect it to be in agriculture or something like that.

00:10:53: No, illicit financial flows usually takes place in sectors such as extractives industries, in trade and customs.

00:11:01: in public procurement processes and in financial and real estate because the reason for this is because here you have bigger money and you have bigger.

00:11:11: let's say for example when it comes to the extractives industry you can have a day when they discover oil and it gets windfall.

00:11:20: And when they have windfall, then they get a lot of money and the temptation is easily to hide it somewhere.

00:11:27: What are the specific consequences of these cash outflows for people and for society in Africa?

00:11:34: Yes, sometimes the numbers may seem a bit abstract, but they have real consequences and very concrete consequences on the people on the ground.

00:11:43: One, as we've said, the main one is that it takes away money that the governments would have used to fund public goods and services.

00:11:51: We're talking schools, we're talking hospitals, we're talking clean water.

00:11:55: And more increasingly now, we're also talking climate resilience in Africa.

00:11:59: So money that would have gone there, but underfunding of public services.

00:12:04: This is a huge issue that has outcomes in health.

00:12:07: We saw this during COVID, for example, when countries needed money to fund their social protection for the people in healthcare.

00:12:16: against COVID.

00:12:18: We've seen high debt in Africa and austerity because of this.

00:12:21: Because of the lack of funds, then governments need to borrow again to fund public goods.

00:12:27: And then this situation, because they're borrowing, for example, at very high interest rates that they cannot pay.

00:12:32: eventually.

00:12:33: It means that then countries go into debt distress.

00:12:36: Right now we have about twenty five countries in Africa in debt distress.

00:12:41: We have distorted economies because businesses are not paying, businesses are operating in those countries, but they are not paying their taxes that are due to those countries.

00:12:51: So it also encourages, discourages investments in those countries.

00:12:56: And eventually we have erosion of trust.

00:12:58: We have a broken social contract because the idea is that citizens like us pay taxes and we expect also the companies to pay taxes and we expect trust in the government.

00:13:10: And then we share things like illicit financial flows, corruption, multinationals not paying tax.

00:13:16: So then there is that distortion of trust in our governments also.

00:13:20: The problem is not new.

00:13:22: As you said in two thousand and fifteen, there was already an report and the African Union also has been working for years to reduce illicit financial flows.

00:13:32: So what concrete measures is the African Union taking and how successful are they?

00:13:39: Thank you so much.

00:13:39: So first, we need to, the African Union itself has been very much doing its part because we, as the AU and UNECA, the AU was the one that commissioned the Mbeki report to actually find out first the numbers.

00:13:54: And we've been working closely with also other UN agencies to investigate what is going on with illicit financial flows.

00:14:01: So one of the things that institutionally the African Union has done is create what we call a subcommittee on tax and illicit financial flows made up of technical specialists who are looking at strategies to curb illicit financial flows at the national level.

00:14:17: So this brings in expertise from all the fifty-five African member states and they look at strategies for example on tax administration to strengthen them, improving exchange of information in Africa and tax transparency, looking at boosting beneficial ownership registry so that we actually know who owns some of these companies and tackling base erosion and profit shifting.

00:14:41: So discouraging some of these activities that cause illicit financial flows.

00:14:46: The AU is also working very, very closely with institutions such as the African Tax Administration Forum, Tax Justice Network Africa, which is a civil society on the advocacy and campaign spot, working together with the United Nations Economic Commission for Africa, UNEY Down Research Africa Capacity Building Foundation, and other institutions that work on various elements, including health, education, just to try and see how we can coordinate.

00:15:15: efforts towards ending illicit financial flows.

00:15:18: And then, of course, on the global level, We have been spearheading and the AU was the first to also, with the Africa group, introduce the idea of having a UN framework convention on tax cooperation.

00:15:32: And this is something that is being discussed.

00:15:35: And the idea of having this convention eventually, the discussions are expected to end in twenty twenty seven and discussing various protocols of this convention is that we will have a document that has been decided to and debated on globally where all countries are.

00:15:50: are included on an equal footing, where they can have a say on the outlook of international tax.

00:15:57: And so we can work with each other globally with other countries to stop illicit financial flows.

00:16:03: Yeah, because you need the world, you need a lot of countries as well, when we talk about illicit financial or financial flows.

00:16:10: So these UN negotiations are really a big success.

00:16:14: And yeah, we all are very helpful about it.

00:16:17: But what role can or should the... European Union play.

00:16:21: Is it a helpful role that they were playing?

00:16:24: That's indeed also another good question.

00:16:26: And I think in answering that, I'll also borrow from previous experiences, because I have worked for a long time within an organization within the EU, I think Tank, and also the experience I have.

00:16:37: And they're now working on the Africa side for a few years.

00:16:41: I think the EU has a dual role and responsibility, rather, if I may call it that.

00:16:46: It's both one of the biggest development partners for African countries, and it's also home to some of the financial center and multinationals involved in tax-related IFFs.

00:16:57: So when I talk about it being a development partner, I always say that you cannot give with one hand and take with the other.

00:17:05: So we coordinate very well because in terms of being a development partner, I think the EU is very conscious and I need to say that no country wins when illicit financial flows occurs.

00:17:17: We've also seen scandals, luxe leaks and all these other scandals within the EU that have really shown that European countries are also losing a lot of tax because when a company or an individual is taking part in avoiding taxes in one jurisdiction, the idea is not that I want to go and pay taxes anywhere.

00:17:35: The idea is I want to pay zero to no tax.

00:17:38: So in this regard, I think the EU has a very big role to play.

00:17:42: I think the EU has been collaborating well, especially with the Africa Union when it comes to capacity building.

00:17:48: But we are also talking about supporting the Africa Union when it comes to tax-related IFFs.

00:17:53: to try and stop this IFS and have companies within the European Union also be accountable for the work and the activities that they are doing in developing countries in Africa and what taxes they are paying so that they are not able to hide and that the guise of being protected under European Union law.

00:18:12: You have worked on tax evasion and illicit financial flows for a long time now, also for organizations such as tax inspectors without borders, Action Aid and the DEX Justice Network Africa.

00:18:25: Do you think that the awareness of the problem in these fields has increased in Africa in all those years and why?

00:18:32: Yes, when you talk about when I first started working on the issue of tax, I, of course, tax started working at Tax Justice Network Africa.

00:18:41: And when you, a lot of the work that we were doing at TGNA was on advocacy and campaigning for tax justice, what we called tax justice and companies paying their fair share of taxes.

00:18:54: So at that time, I think it was mostly a civil society that was quite prominent in the area of illicit financial.

00:19:01: flows and taxation.

00:19:03: And it was a very niche topic.

00:19:05: And to compare it to the next, let's say almost, fourteen years and with the Mbeki report, with the Anchorage report and this other report, I'd say that the issue has actually grown a lot in terms of being a subject matter.

00:19:19: And why it's grown, in my opinion, is because we've started as a globe to ask ourselves a lot of questions about development financing and who funds our own development for our city.

00:19:31: Where does money go?

00:19:32: There's also been a lot of questions about aid and self-reliance.

00:19:36: And for example, right now with the Africa Union, we have our own development agenda, which we call Agenda, and within that agenda of Africa's development until the question was, where will the financing come from?

00:19:52: And the idea is to have seventy-five percent of financing come from domestic resource mobilization.

00:19:58: But then if the money that we immobilize using domestically is lost through illicit financial flows, then it becomes a disablement of our economies and a disablement of our people.

00:20:08: Then you also have the issue now, as you're saying, it's gained prominence until it was mentioned within Agenda and specifically SDD, sixteen point four, that talks about ending illicit financial flows.

00:20:23: So in all, honestly, I would say that I'm very impressed at the growth of this topic, that it's taking center stage in a lot of the development discussions and a lot of our work, even on financing for development conference, FFD in Spain recently, the financing part really takes precedence and then illicit financial flows is discussed.

00:20:44: that, you know, we need to also curtail it.

00:20:47: and have this money sent back.

00:20:48: So if I compare from where I started, where it was just campaigns and advocacy work, to now it's being a technical policy work.

00:20:57: It's at the UN.

00:20:59: It's being discussed at the Africa Union Oil Policy Forum.

00:21:02: I'd say it's gained prominence because it's been recognized as not just being a technical issue and also just an issue of CSOs, but an issue of sovereignty, development, and justice for African people.

00:21:16: So as we come to the end of this podcast, and I try to end every podcast a little bit with hope.

00:21:22: So I would like to ask you what gives you hope that the international negotiations at the UN tax convention will actually bring progress or will succeed.

00:21:34: That's a very good question, and we all live in the African Union.

00:21:37: We like to have hope and not just agonize about the issue.

00:21:41: But within the UN discussions, I was present for the discussions from the very beginning.

00:21:46: I was present recently in New York, and now in Nairobi, the discussions that are taking place following very kindly online.

00:21:53: But you can see that the presence of nearly every country in the room, in attendance, the countries that have been able to, and I think it's even, if realistically, maybe the UN can give us data, but more than half of the UN member states are able to attend this discussion, shows you that there is interest in having a product that will help everyone.

00:22:15: There is an understanding that this is not just a developing country issue.

00:22:19: I think even developed countries want to come together.

00:22:22: There's countries that share the same perspective about this issue of illicit financial flows.

00:22:27: And I genuinely don't even think even the rich countries are looking forward to their taxes being avoided.

00:22:33: and they're looking forward to negotiating a strong document.

00:22:35: So first, I think the presence of many countries, I think the quality of the discussions that are currently taking place is quite powerful because this is a very technical discussion.

00:22:46: Some of the things are legal, some of the things are financial, tax technical, but they're being broken down for everyone to understand in the room, all stakeholders.

00:22:56: There's also been given access because it's not only the countries negotiating, but you have a session.

00:23:02: where also civil society independent interested experts are given time to also give their feedback on the document and how it can be strengthened.

00:23:12: And finally, I think the point where we are in international development.

00:23:18: I think what we're seeing going on in some of the world's big economies, in small economies, I think we're seeing a shift and we're seeing a lot of interest in self-financing of development in all countries.

00:23:30: So I think there is a momentum and I think this is the best time for this discussion to be there and I'm very hopeful that we are going to see a lot of success in the next.

00:23:40: two to three years on this tax issues and carbon illicit financial flows.

00:23:44: Yeah,

00:23:45: that sounds really hopeful.

00:23:47: So to sum it up, when we talk about global justice, it's not just about development.

00:23:52: It's also about countries being able to raise their own revenues.

00:23:56: Illegal financial flows are a massive justice issue, but also an area where political reforms can really make a difference.

00:24:04: And the current UN negotiations, as you pointed out, could be really a turning point here.

00:24:11: So thank you very much, Lacista, for taking the time to explain this complex subject in such an understandable way.

00:24:18: Thank you very much.

00:24:20: Thank you.

00:24:21: And thank you for having me on the podcast.

00:24:23: It was a pleasure.

00:24:24: And it's always been a pleasure to interact and know of the work that VIDC does.

00:24:30: Thank you very much.

00:24:32: So this was Blickwechsel, the VIDC podcast for a new view of the world.

00:24:37: If you would like to know more about the work of VIDC, please visit our website at vidc.org and have a good day and see you again at Blickwechsel in December.