Curbing illicit financial flows will increase domestic revenue

Priscilla Naisanga

What you need to know:

  • Deliberate efforts. Institutions such as Uganda Revenue Authority need to be strengthened to curb illicit financial flows.
  • There must be deliberate efforts to prioritise strengthening the Authority to tackle illicit financial flows and to work with other entities.

Illicit financial flows (IFFs) have become an issue of great concern over the last years as huge sums of money are transferred out of developing countries illegally. This strip resources from developing countries that could be used to finance the much-needed public services, from security and justice to basic social services such as health and education, weakening their financial systems and economic potential. While such practices occur in all countries and are damaging everywhere, the social and economic impact on developing countries is more severe given their smaller re-source base and markets.

Many of the activities which generate the illicit funds are criminal. Financial crimes like money laundering, trade mis-invoicing, corruption and tax evasion are corrosive to developing countries. For example, corruption diverts public money from public use to private consumption, hence hampering economic growth and development.

The most commonly used method by the business community to evade taxes on Uganda’s economy is trade mis-invoicing. It is a form of customs and/or tax fraud involving exporters and importers deliberately misreporting the value, quantity, or nature of goods or services in a commercial transaction. According to a report released by Global Financial Integrity (GFI), $6.7b (Sh25 trillion) was swindled from Uganda to a shadowy financial system overseas through over and under-invoiced imports and exports in the 10 years from 2006 to 2015. The extent of money siphoned from Uganda to other nations through trade mis-invoicing, could be as high as $8b (about Shs30 trillion) for the last decade due to lack of oversight of multinational firms. The gross sum lost money is sufficient to fund more than half of Uganda’s current Shs30 trillion national Budget, covering expenditure on roads, healthcare, education, energy and mineral development, justice, security and interest payment on public debt.

Such IFFs in developing countries is a bane to social and economic development because it drains hard currency reserves, heightens inflation, reduces tax collection. We know that in general, private consumption has much lower positive multiplier effects than public spending on social services like health and education. Proceeds of corruption or criminal activities will generally be spent on consumption of items such as luxury vehicles, or invested in real estate. Uganda is estimated to lose about Shs2 trillion to IFFs each year. The loss of tax revenue resulting from IFFs hampers governments’ ability to provide services and infrastructure for the citizens. The loss of capital impedes the organic growth of the economy.

Double taxation agreements (DTAs) are used by countries to share taxing rights related to foreign direct investment. Uganda has ratified a number of DTAs with countries that are considered to be tax havens such as Mauritius and Netherlands. However, they have also been abused by multinationals deliberately by shifting profits to countries with low withholding tax rates. This strategy, is known as ‘treaty shopping’, which is particularly problematic when it involves secrecy jurisdictions to avoid taxation. This robs the developing countries where they operate of a fighting chance to increase their tax base. A recent presentation by Oxfam Uganda showed that as much as $300m could be lost in one oil block in western Uganda though it is DTA with Netherlands alone.

Another form of IFF is where developed countries provide aid and loans for infrastructure development and dictate that their home companies are contracted as well as paying interest. Data from the US-based research think-tank, Brookings, shows that China is working on at least 89 projects shared between 45 Chinese companies. According to the Ministry of Finance, the value of disbursed and outstanding loans from China to Uganda grew to Shs6 trillion ($1.6b) as of March 2018 from Shs4.12 trillion ($1.10b) in 2016, accounting to Uganda’s total indebtedness.

Uganda’s laws and regulations on financial transparency and anti-money laundering have the strongest influence on illicit financial flows. There are notable gaps in the framework the Government of Uganda has in place to address the sources, transfer methods, and motivations of IFFs in the country. In particular, laws governing corporations in Uganda are generally weak in so far as they do not require the official identification of the beneficial owners of companies or the complete identity of all shareholders in a company.

The government’s anti-money laundering regime mostly exists on paper and could do with strengthening. The Financial Intelligence Authority, which was only recently established, acknowledges this shortcoming and is working to enhance its performance in helping to prevent, track, and prosecute money launders in the country. Uganda’s extractive sector and the presence of numerous transnational crime markets add to the importance of both financial transparency and anti-money laundering.

Institutions such as Uganda Revenue Authority need to be strengthened to curb illicit financial flows. There must be deliberate efforts to prioritise strengthening the Authority to tackle illicit financial flows and to work with other entities like banks, and private sector institutions and civil society organisations to track and stop illicit financial flows. Transform aid into a process, with much greater national and international scrutiny over cooperation programmes. If aid is to benefit developing countries, it must be delinked from Western corporate interests.

In conclusion, prioritising policies to curb trade mis-invoicing outflows from Uganda will provide an enabling domestic financial resources to successfully implement health, education, domestic investment, etc to reduce reliance on foreign debt

Ms Naisanga works with Uganda Debt Network.
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