IFFs draining Malawi’s hard-earned resources

By Joseph Kayira

Malawi has lost US$646 million between 2006 and 2015 years due to illicit financial flows (IFFs), according to a 2019 Global Financial Integrity (GFI) report – in a country often described as the poorest on earth, most of this money could have been used towards the country’s poverty alleviation programmes.

Financial experts and a government official agree that IFFs are costing the country much needed revenue and that there is an urgent need to curb this phenomenon.

IFFs are classified as movement of funds illegally earned, transferred, and /or utilized across an international border, according to GFI, a Washington DC think-tank that produces IFF analysis.

Ministry of finance spokesperson Davies Sado says, “The way forward is for Malawi to continue implementing the measures already in place to deal with illicit financial flows.”

Sado: Illegal externalisation of foreign currency is a major problem currently

However, Mathews Burton Kafunda of the British charity Oxfam in Malawi warns that the country needs to revise and strengthen some of its laws if it is to tackle the problem.

The GFI says with billions of dollars estimated to be illicitly leaving developing countries every year, this drain of public resources undermines the efforts of countries to mobilize more domestic resources in order to meet the internationally agreed Sustainable Development Goals (SDGs) by the target date of 2030.

Sado acknowledges, “the problem is there in Malawi and the country has lost about US$646 million through illicit financial flows mainly through import and export mis-invoicing and illegal externalization of foreign currency.”

He referred to the case currently under investigation where Malawi according to the Reserve Bank, lost $394.60 million (about K240 billion) through unauthorised externalisation of foreign exchange by some multinationals in the country through transfer pricing – a method of pricing goods and services transferred within a multinational or trans-national company in order to reduce tax burdens and maximise profits. 

“Illegal externalization of foreign currency is a major problem currently. Some of the enablers are corruption, fraud and disjointed efforts among stakeholders. One area that is of great concern is that there are enablers in the value chain,” Sado says.

He says government’s various law and financial agencies signed a Memorandum of Understanding (MOU) in June last year that set up Malawi Taskforce Against Financial Crime. He argues that Malawi has adequate legislation to tackle IFFs.

The GFI says when weaknesses in the financial system are not regulated effectively; organised crime and illegal economies can thrive.

Further, it says reduced tax earnings have a direct negative effect on public and private investment as well as the provision of public services.

Tax expert and former legislator, Alexander Kusamba-Dzonzi from the main opposition Malawi Congress Party (MCP) says Malawi needed political will to ensure that implementation of any measures introduced reduce IFFs.

He says most problems flourish under “weak institutions and poor leadership bent on corruption and a lack of transparency and accountability in the way government conducts its business.”

Stuart Yikona, a senior financial sector specialist with the World Bank, who was one of the authors of the report ‘Ill-gotten Money and the Economy: Experiences from Malawi and Namibia’ wrote in an article ‘How corruption and tax evasion distort development’ “the revenue lost through corruption and tax evasion represents a diversion of financial resources away from the national budget toward private spending.”

“Corruption is estimated at 5% of GDP and tax evasion, at a whopping 8-12% of GDP. Meanwhile, we estimated that tax revenue actually collected by the Malawi Revenue Authority is only 22% of GDP. Thus, if the national tax authority had successfully collected all the taxes it was due, government revenue would increase by 50 percent,” he says in the same article adding that this is approximately the same amount Malawi receives in foreign aid (11.7 percent of GDP).

Yikona explains: “Policymakers in governments and development institutions such as the World Bank cannot afford to ignore issues that stand in the way of achieving economic progress, because it means that many people remain in poverty.”

Kafunda, the Oxfam official, says it has been recognized that tackling IFFs requires the involvement of multiple countries to successfully end it.

“That is why tax justice campaign is calling for countries to ratify policy that calls for country by country reporting,” he says.

He acknowledges that the tax regime or system in Malawi remains weak with a lot of loopholes that international companies are exploiting.

“It is important that Malawi revises its mining act in tandem with taxation regime in relation to multinationals. Things like double taxation treaties need to be revised to ensure that Malawi is not giving a lot of benefits to multinational companies while losing out on the much-needed revenue,” Kafunda says.

*This story was produced by The Lamp magazine. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in collaboration with the Institute for the Advancement of Journalism. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.

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