Poor accountability partly to blame for IFFs, Danish envoy

Uganda loses about Shs2 trillion every year in illicit financial flows (IFFs) – that is, money illegally earned, transferred or used. This is almost equal to Uganda’s current health sector budget of Shs2.3 trillion. A recent study by the Danish Embassy warns that these funds, channeled through avenues like tax avoidance and evasion, money laundering and terrorism financing, transnational organised crime, bribery and corruption, have severe impacts on Uganda’s political economy. Denmark’s Charge d’ Affaires (also Head of Mission) in Uganda, Ms Majbrit Holm Jakobsen, told Daily Monitor’s Ismail Musa Ladu that IFFs thrive because transparency and accountability have been compromised. Excerpts:

Why did the Danish Embassy commission the IFF scoping study?
Denmark is concerned about IFFs as they negatively impact development. Uganda currently has an average revenue mobilisation rate of only 14 per cent of Gross Domestic Product (GDP). More money is needed for the necessary public services and closing all revenue leakages is essential.
We commissioned the scoping study to get a better understanding of the nature of IFFs in Uganda. We hope the results will guide both government and development partners to design specific interventions to fight this problem.

How important is this topic of IFFs for Danish development assistance in Uganda?
The Danish Embassy in Kampala has just commenced the implementation of a new Country Programme for five years (2018-2022). One of the thematic objectives is, “to enhance accountability, stability, deepened democracy and respect for human rights.”
We believe that curtailing IFFs is one way of meeting this objective – though it is not necessarily an easy task. IFFs manifest in different forms including avoiding taxes, human trafficking, drug trade, illegal arms dealings, smuggling, as well as bribery and theft by corrupt government officials. All these activities thrive in an environment where transparency, accountability and respect for human rights have been compromised.

Studies from around the world show these activities are typically carried out by the rich and powerful at the expense of the poor and weak. For example, powerful civil servants that misuses public funds and invest them in another country deprive Ugandans of services such as education and health. Therefore, an attempt to curb IFFs addresses a wide range of development issues – both governance and service delivery-related - which are at the core of our assistance to Uganda.

Is this a new area of engagement for the Danish Embassy in Uganda?
Denmark has supported related initiatives, like the Democratic Governance Facility (DGF), a multi donor facility which primarily supports state and non-state institutions working in areas of democracy, accountability and human rights. We have also supported the Inspectorate of Government (IG) to investigate and prosecute corruption. This is in addition to the Ministry of Finance’s Public Financial Management Reform Programme, which has also focused on revenue mobilisation and taxation.
We think it is interesting to explore further to what extent Uganda could benefit from curbing these practices, and which institutions we must support to do so.

What picture has the scoping study painted of IFFs and revenue mobilisation in Uganda and our ability to finance public services?
An independent consultant with vast global experience researching IFF patterns [Global Financial Integrity] has finalised the report. It looks at the broader political and economic dynamics which present opportunities for IFFs. According to the report, opportunities include a large number of state-owned enterprises with limited oversight; mineral and natural resource wealth that is not effectively managed; a large financial sector that facilitates absorption of illicit funds; a large informal sector; and the growing gambling industry.
We are also looking at how government, development partners, and other stakeholders, can best support institutions mandated to fight IFFs, like Uganda Revenue Authority, the Financial Intelligence Authority, and the Inspectorate of Government.

What area should be prioritized in reducing revenue leakages out of Uganda?
It is difficult to pick a priority in terms of initiatives to reducing leakages because every little effort helps. However, building the capacity of mandated institutions is as important as encouraging citizen participation in addressing the problem is important.

Has the embassy taken any actions?
Some of our on-going engagements (IG, FINMAP, DGF) are indirectly addressing this issue. We are, however, yet to decide if we need a specific programme targeting IFFs.
The report covers a broad scope - from tax avoidance and evasion, mis-invoicing international trade, money laundering (especially of corruption proceeds), double taxation agreements, and others. Which channel of revenue loss should Ugandans be most worried about?
The report clearly highlights that trade mis-invoicing is the most significant area of IFFs in Uganda that can be estimated using publicly available data. It is, however, difficult to say which channel of revenue loss Uganda should be most worried about. This is because the other channels which are ‘illicit’ (carried out undercover) are more difficult to measure and track.

The oil sector, which may become a major driver of Uganda’s economy in a few years, is mentioned as a major channel of revenue loss. Is Denmark engaged in this sector in Uganda?
Yes, to an extent through our support to DGF. But as development partners, we also coordinate engagements and focus areas with a country like Norway, which is strong on the possibilities and challenges related to extractive industries – both in Uganda and globally.

This interview was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation in partnership with the African Centre for Media Excellence.