Money laundering and tax evasion: Do international measures have a significant impact in sub-Saharan Africa?

Dirk Kohnert

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Abstract: Sub-Saharan Africa (SSA) accounts for a third of the countries on the Financial Action Task Force (FATF) grey list. In the Money Laundering and Terrorist Financing (ML/TF) Ranking and Risk Assessment Tool, the region performed poorly in terms of resilience to ML/TF, with more than 60% of countries falling into the high-risk category. Although countries on the grey list are not subject to sanctions, inclusion on the list has a significant impact on their economies. This includes a significant reduction in capital inflows and foreign direct investment. The four main sources of illicit financial flows from SSA, South Africa, the Democratic Republic of Congo, Ethiopia and Nigeria, accounted for more than 50% of total illicit financial flows. While SSA received nearly $2 trillion in foreign direct investment (FDI) and official development assistance (ODA) between 1980 and 2018, it issued over $1 trillion in illicit financial flows. These illicitly acquired funds and diverted from the region continue to pose a development challenge. Illicit financial flows increased overall, but not concerning trade. In the 38 years from 1980 to 2018, they increased significantly in the 2000s, in parallel with the growth of African trade. Emerging and developing countries in Asia and the Middle East have become key targets. Previous initiatives to curb money laundering and improve the exchange of tax information between countries have largely failed, including the three most important: the Financial Action Task Force (founded in 1998), the Global Forum on Transparency and Exchange of Information for Tax Purposes (founded in 2009) and the Inclusive Framework on Base Erosion and Profit Shifting (founded in 2016). First, African countries lack the resources and capacity to address illicit financial flows. Second, many advanced economies are not sufficiently engaged in these initiatives. However, the repatriation of illegal funds is an important tool for strengthening the resource base of African countries. In 2020, for example, the United States and the self-governing British Crown Dependency of Jersey, one of the world's most notorious tax and money laundering havens, reached an agreement with Nigeria to repatriate more than $300 million stolen by Nigeria's former military dictator General Sani Abacha.

Keywords: Money laundering; Embezzlement; Corruption; tax evasion; Terrorism financing; Informal economy; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: D23 D25 D53 D63 D74 E21 F35 G28 O17 Z13 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-afr, nep-int and nep-iue
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:300868

DOI: 10.5281/zenodo.12570406

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