Illicit financial flows (IFFs) are usually defined as the cross-border movement of funds that are illegally earned, transferred, and/or used.
This definition covers a broad range of illegal activity, from trade misinvoicing (where the true value of exports or imports differs from the value reported to officials) and tax evasion to the transfer of proceeds from criminal activities (eg corruption, fraud and the trafficking of drugs, people and firearms). IFFs do not cover issues around capital flight, transfer pricing or tax avoidance, all of which are legal.
How is this relevant to mining?
A link between IFFs and the extractive industries (including mining) is frequently suggested. The July 2015 Financing for Development Conference – one of the lead-up events to the launch of the Sustainable Development Goals – highlighted IFFs as a major issue, and explicitly underlined the importance of corporate transparency and accountability of all companies, but especially those active in the extractive industries.
The United Nations Economic Commission for Africa’s February 2015 high level panel on illicit financial flows from Africa also identified a clear relationship between countries that are highly dependent on extractive industries and the incidence of IFFs; in part, this is because of extensive underreporting of the quantity and sometimes quality of natural resources extracted for export. The panel also found that none of the six countries in their study - Algeria, Democratic Republic of the Congo, Kenya, Liberia, Mozambique and Nigeria - had their own independent means of verifying the precise amount of natural resources extracted and exported. Instead, these states depend on reports filed by the operators, who - the panel suggested - have too much incentive to under-report.
Given the opaque nature of IFFs, a complete picture is hard to obtain. However, a study by the NGO Global Financial Integrity estimates that China, Russia, Mexico, India and Malaysia have experienced the largest illicit outflows in the last decade, with China estimated to have lost as much as US$1.39 trillion. The same analysis estimated Africa has lost in excess of US$1 trillion through IFFs over the last 50 years: about the same amount that it has received in Official Development Assistance during that time. Given the high level of poverty in Africa, even if the estimate is halved, the scale of the lost resources Africa is enormously damaging.
It’s often difficult for mining companies to respond to accusations of illicit financial activity without disclosing confidential information. However, mining companies can still make a concerted effort to help raise the capability of officials to inspect and calculate the value of goods a company is importing or exporting. And ensure that the full value is always accurately reflected on the invoice.