In an effort to curb the widespread issue of illicit financial flows plaguing Africa’s extractive sector, African nations have been urged to adopt global best practices and standards, a move seen as essential for addressing the continent’s persistent challenges in managing the economic value of its natural resources, Mining Zimbabwe reports.
By Ryan Chigoche
This call comes as African nations face an increasing challenge of fairness, with mineral-rich countries failing to collect tax revenues that reflect the true value of their resources.
According to United Nations Trade and Development (UNCTAD) data, Africa’s mining sector is estimated to lose around $40 billion annually through illicit financial flows, with the majority of these losses concentrated in the gold trade (77%), followed by diamonds (12%) and platinum (6%), representing a significant portion of the continent’s total illicit financial outflows.
The Global Financial Integrity also reported that Africa bears the most disproportionate burden of unrecorded cross-border financial outflows as a percentage of gross domestic product (GDP), representing approximately 8.6% of the continent’s GDP.
This shows that, over the years, cross-border illicit financial leakages have been draining away much-needed resources that would otherwise be available to finance development priorities across the continent.
Speaking to Mining Zimbabwe, Mineral Economist and Deputy Chairman at the Institute of Mining Research, Lyman Mlambo, acknowledged the prevalence of illicit financial flows in the continent’s extractive sector and called on Africa to adopt global best standards to combat the vice.
“Illicit flows in the sector are common throughout Africa because of a lack of effective transparency and accountability mechanisms. As a continent and as individual countries, Africa suffers from transfer mispricing, thin capitalization, and re-invoicing, which are all profit-shifting measures practiced by big multinational mining corporations whose headquarters are in other continents.”
“To combat illicit flows in the mining sector in Africa, all African countries need to adopt international best practices in transparency and accountability, such as the EITI and other standards consistent with responsible mining, sourcing, and traceability. This will definitely destroy the illicit networks across Africa and related networks outside the continent. This requires the collaboration of African countries,” Mlambo said.
The Extractive Industries Transparency Initiative (EITI) is a global standard that promotes transparency and accountability in the management of oil, gas, and mineral resources. It requires companies to disclose information about payments to governments and revenues to the public and promotes public understanding of natural resource management.
Common methods of illicit financial flows in the mining sector include trade misinvoicing, transfer pricing, and underreporting of mineral quantities. Trade misinvoicing involves misstating the value of exports or imports to evade taxes, while transfer pricing allows companies to manipulate prices within their subsidiaries to shift profits across borders and avoid paying proper taxes. Underreporting mineral quantities, on the other hand, enables firms to conceal actual production levels, further depriving governments of critical revenues. Together, these deceptive practices undermine economic stability and hinder national development by diverting vital funds away from public coffers.
Illicit financial flows are hidden by nature, making it difficult for tax authorities to detect and tax them. Illegal exploitation also creates space for the under-declaration of production, leading to under-taxation in the mining sector. With a large portion of the sector operating informally (ASMs), it is important that the informal sector be formalized so that African countries can account for all their minerals.
Other experts who spoke to this publication were of the view that good governance is key to mobilizing adequate domestic resources and plugging loopholes that facilitate illicit financial outflows. Good governance entails the ability to formulate and implement effective strategies, policies, laws, and regulations for mobilizing optimal revenues from the mineral sector.
Africa is home to over 30% of the world’s mineral reserves. The Democratic Republic of Congo (DRC) alone accounts for over 70% of global cobalt production, while countries like Zimbabwe, Mozambique, and South Africa hold significant shares of the world’s lithium, graphite, and platinum reserves.
However, despite this abundance, the continent is missing out on potential economic benefits due to illicit financial flows.