Munich Security Conference panel on illicit financial flows
20 October 2020
The UNCTAD Economic Development in Africa Report 2020 finds that $88.6 billion leave the African continent in form of illicit capital flight every year (2013-2015). Some $31.5 billion of these illicit financial flows (IFFs) are generated per annum in conflict areas of the continent. This is likely an underestimate of the scale of IFFs from conflict areas.
We define IFFs as movements of money and assets across borders that are illegal in source, transfer or use. This implies that all forms of IFFs are a direct threat to the rule of law, peace and security, not only those directly related to theft-type and terrorism financing.
There are four broad categories of IFFs. They can take the form of tax and commercial practices, illegal markets, terrorist financing and theft, or corruption. IFFs contribute to the financing of terrorism in Africa and it is likely that terrorism is to some extent funded through financial proceeds of crime including, trafficking of humans, drugs, cultural artefacts, stolen motor vehicles, illegal poaching and the trade of various illicit goods.
The mismanagement of natural resources plays a key role in enabling illicit financing of conflict. For example, it is estimated that the illicit exploitation of natural and environmental resources (including gold, diamonds, oil, and others) accounts for 64 percent of finance linked to security threats and conflict. Estimates on overall environmental crime range from $110 billion to $281 billion annually, of which illegal mining totals $12 billion to $48 billion. Gold, tin, tantalum, and tungsten fuel conflicts in many countries. Especially gold is at high risk of money-laundering by organized crime networks and smuggling.
Conflict and instability are both cause and effect of illicit financial flows. Limited state capacity to ensure security leaves the country highly vulnerable to capital flight. At the same time the continued existence of IFFs can increase state fragility and cause conflicts in Africa. IFFs harm institutional development through the proceeds of crime but also by limiting investment in health, education, etc. holding back institutional development. For example, African countries with high levels of IFFs spend 25 per cent less on health and 58 per cent less on education compared to otherwise similar countries.
What can be done?
- African countries need higher capacity to conduct suspicious transaction reports to uncover potential risks. For example, we are working on adapting UNCTAD’s customs automation system ASYCUDA to help do this and serve as an early warning system for African policy makers. This can help increasing transparency in resource management such as envisioned by the Extractive Industry Transparency Initiative.
- African countries can also domesticate the African Mining Vision to improve management of natural resources and make resource extraction more sustainable; African countries should build on lessons learned from past engagement on international commodity governance magnitude of the extractive sector as a source of IFFs
- UNCTAD supports UN member states in responding to these challenges and is providing technical assistance in fighting corruption, tackling trade misinvoicing, and building capacity to ensure security and manage resources sustainably. UNCTAD is also consulting with international partners such as Germany’s GIZ on ways of delivering their Global Project on “Combatting illicit financial flows”.
