A pothole in Kampala. Corruption, a form of illicit financial flows, is robbing Ugandans of proper public services. PHOTO / MICHAEL KAKUMIRIZI


The lost battle over illicit financial flows

What you need to know:

 When multinational companies  do not pay their income tax but instead bank it in offshore accounts, the national treasury has missed an opportunity to collect revenue.

By 2030 – barely seven years away, the rate at which illicit financial flows bleed the economy, should be mitigated. In the same time-frame, according to Sustainable Development Goal targets, strong measures supporting recovery and return of stolen assets should be enforceable.     And all African countries including Uganda, should combat all forms of organised crime.

Annually, an estimated $886b leaves Africa in Illicit Financial Flows (IFFs). This is equivalent to 3.7 percent of Africa’s Gross Domestic Product.

IFFs refer to the movement of money and value from one country to another that is illegitimately earned, transferred, and/or utilised, according to Global Financial Integrity. 

It mainly manifests through commercial activities such as tax evasion, trade-based money laundering, smuggling, abusive transfer pricing, and aggressive tax planning.

Other facets are also in criminal activities, including poaching, illegal mineral trade, trafficking of people and drugs, arms smuggling, fraud, money laundering, stock market fraud and forgery. And, corruption which according to studies, serves as a breeding ground for IFF.

Undermining development
While there are several forms of IFFs, they negatively affect development. In Uganda, the potential loss from common trade-based money laundering, specifically over and under-invoicing was approximately $4.9b for imports and about $1.7b for exports between 2006 and 2015.

Trade-based money laundering, according to the Financial Action Task Force (FATF), is a process of concealing the proceeds of crime and moving value through the use of trade transactions to legitimise their illicit origins. It is sophisticated as it resembles licit trade.

IFFs undermine the efforts of Uganda to boost its domestic revenues as it is being swindled. Mr Moses Talibita, a legal compliance officer at Uganda National Health Consumer’s Organisation, says when Multinational Companies do not pay their income tax but instead bank it in offshore accounts, the national treasury has missed an opportunity to collect revenue from the earnings made here, hence narrowing the tax base. 

This financial year, 2023/24, Uganda Revenue Authority’s tax collection target is Shs29.2 trillion. Despite the numerous modifications to the tax administration and systems in place, Uganda’s tax collecting operations still fall short of the projections in terms of revenue collected, compelling the government to finance its budget through both donor support and foreign borrowing.

However, that also means more tax administration policy changes to enable the tax body to meet its target. 

Trade based money laundering
In Uganda, a report by ACODE says trade based money laundering leaves a higher tax burden on transparent economic activities – most of which are already shouldering a heavy tax burden since the high net worth individuals or most multinational companies are evading a fair share of taxes.

Currently, Uganda’s debt burden stands at Shs89 trillion - about51.9 percent of GDP. 

Trade mis-invoicing, a form of trade based money laundering in Uganda, is considered a major cause of revenue loss to the country. GFI estimated the total value gap as $6.6b in trade from Uganda between 2006 and 2015.

To clear the burden, each of the 45 million Ugandans will need to make a one-off contribution of at least Shs1.7 million. However, Mr Talibita says that would not be so if borrowed money was not robbed by corrupt officials or if it was used for the intended reasons.

Bleeding corruption
Corruption, a form of IFF, is also robbing Ugandans of proper public services.

 For instance, in 2014, a non-existing company EUTAW Construction Company had been contracted to do the Katosi Road construction works, worth Shs24.7b but only did works estimated at 3 percent and valued at Shs6b. That delayed road works, increased travelling times as well as transportation costs which negatively affected the road users and the businesses.

IFFS also incapacitate the government in funding investment in essential public services such as healthcare, education, and justice. 

Mr Talibita says access to public service can be viewed as ‘virtual Income’, which accounts for a much larger proportion of income for the poor. For example, the introduction of free primary education was followed by higher enrolment numbers, especially for girls while the increase in well-facilitated health centre numbers means improved maternal and neonatal health. However, free education has suffered corruption.

Case in point is in 2012, where a Shs3.6b project involving Pearson Publishers, Longman Publishers, Fountain Publishers, and Sterling Publishers where 1,490 schools were supposed to receive the books was mishandled.

Owing to that, the Public Procurement and Disposal of Public Assets Authority (PPDA) recommended to the World Bank to declare the award of tender to supply textbooks for Universal Secondary Education by the four publishing firms a ‘mis-procurement’. That means the students missed out on textbooks.

In health centres, this means procuring drugs that are nearing the expiry date hence no medicine in facilities.

Subsequently, IFFs erode governments’ ability to subsidise households’ essential services such as health, education and other critical needs for all revenue that the government ought to get is swindled.

While there are several causes of inflation such as imported inflation and increased costs of production, IFFs can cause inflation, hence making basic and lifesaving commodities extremely expensive and thus hard to get.

While many companies, including MNCs enjoy tax holidays in Uganda with a view that after the given period, they will have stabilised, hence employing more Ugandans and improving the export volumes, many end up leaving once the incentives expires.