Illicit financial flows (IFFs): What you should know

Illicit Financial Flows (IFFs) explain the concept of the transfer of illegally-earned money across borders. IFF is facilitated by corruption, crime, terrorism, and tax evasion. It is known to rob nations of important resources. This is because:

1. The acts themselves are illegal (e.g., corruption, tax evasion); or
2. The funds are the results of illegal acts (e.g., smuggling and trafficking in minerals, wildlife, drugs, and people); or
3. The funds are used for illegal purposes (e.g., financing of organized crime).

In this report, Fact-Check Ghana explains all that you need to know about illicit financial flows (IFFs) and how it is affecting countries like Ghana.

How Big is the Problem?

IFFs have been identified as a bleed on the global economy and the economy of nations that target the Sustainable Development Goals 16.4.1 which enjoins countries to drastically reduce it by 2030.

The Organisation for Economic Co-operation and Development (OECD) estimates that Africa loses as much as $60 billion each year in illicit financial flows.

In Ghana, Illicit Financial Flows show its face through money laundering, tax evasion, under-invoicing, internet fraud, the extractive industry and the real estate sector. It has also emerged in Ghana’s fishing industry, forex market, and imports.

In 2019, the Economic and Organised Crime Office (EOCO) reported that an audit of Customs Management Systems discovered that about 1.8 billion dollars had been transferred outside the country. With regards to exports, EOCO with support from the Precious Minerals Marketing Commission (PMMC) examined about 10 gold companies for the period of 2018 to 2020 and from these 10 companies, it was noticed that about 1.1 billion dollars worth of gold was transferred outside the country.

How IFF is affecting Ghana

• Ghana is also estimated to lose USD 3 billion through IFFs every year.
• According to a 2015 report by Global Financial Integrity, Ghana lost some USD $ 40 Billion between 1960 and 2012 through trade-based IFFs.
• A report by Integrated Social Development Centre (ISODEC) in 2014 on trade mispricing from Ghana’s trade with the EU and USA, estimated $3 billion lost in revenue due to trade mispricing during the period of 2000 to 2012
• A study by a group of Ghanaian researchers on losses from gold and cocoa found that Ghana lost an estimated $6.7 billion from gold exports and $2.3 billion from cocoa exports between 2013 and 2016 due to illicit financial flows.
• An audit conducted into Ghana’s Custom Management System in 2019 revealed USD $ 1.8 billion was transferred outside the country for which no goods came into the country.
• An investigation conducted by the Economic and Organised Crime Office EOCO on 8 Gold Export Companies for the period 2019 to 2021 revealed a total of USD $ 1,147,350,106.74 illicitly flowed out.

Role of the Media

Interestingly while IFFs are prevalent in Ghana and resulting in the country losing millions of dollars, coverage in the area is low.

For many Journalists, sophistry involved in illicit financial flows requires genius and critical journalism to expose it.  Again, the risk involved is high while, issues on IFFs are technical and funding is a challenge.

To help promote media interest in the fight against illicit financial flows there is the need for capacity building, dedication and the commitment of funds to help journalists produce in-depth stories about on the topic.

What is being done to combat IFFs and to Stem the Flows?

Solutions to addressing IFFs differ from country to country. Actions however involve preventing the aforementioned criminal activities, identifying and sanctioning serious and substantial illegal tax evasion. Despite the numerous existing interventions, Experts believe curbing IFFs requires a new and reinvigorated approach. These include:

• Greater coordination and cooperation around key issues and players, including the private sector, governments, international organisations and civil society. This is why Ghana and Nigeria have instituted Inter-Agency Coordination and Collaboration committees to bring all key state and non-state actors together to tackle the problem.
• Also, apart from the new laws and reforms of old laws, new institutions like the Financial Intelligence Centre (FIC), and Transfer-Pricing Unit TPU) need to be resourced enough to better fight IFFs in all its forms.

There are also several international efforts, including the establishment of:

• Financial Action Task Force (FATF) which sets the standards for international action against money laundering and terrorist financing.
• Global Forum on Transparency and Exchange of Information for Tax Purposes which sets standards for the automatic exchange of financial account information, including revealing the real owners of anonymous legal structures.
• OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) which tackles tax avoidance by improving the coherence of the international tax rules and addressing new tax challenges arising from the digitalization of the economy.
• Extractive Industry Transparency Initiative (EITI) which promotes open and accountable management of natural resources, and the World Bank’s work in related areas.

Who needs to take action?

• Developed countries need to take the lead on preventing inflows of illicit money while developing countries like Ghana must address weaknesses in their legal and regulatory regimes that make them susceptible to the activities that lead to IFFs.
• Civil society organizations have a role to play as advocates to increase transparency around revenues and expenditures, as well as to monitor the behaviour of public and private officials.
• The international community needs to address countries and firms seeking to profit from illegal behaviours that undercut national efforts to implement effective and transparent tax and trade policies.

This article has been published as part of MFWA’s ongoing project Strengthening Civil Society and Media Capacity for Fiscal Justice.