Stopping the Money Drain: Tackling Illicit Financial Flows in Tanzania

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A Short Summary: A massive outflow of funds is robbing African nations of the resources they need to invest in their people, stifling economic growth and hindering progress in critical areas like healthcare, education, and access to clean water. Illicit financial flows (IFFs), money that is illegally earned, transferred or used across international borders, manifest through practices such as tax evasion, money laundering, and corruption, posing significant threats to economic stability and social progress.

This article explores the extent of IFFs in Tanzania, the ongoing efforts to combat them, and the lessons learned. It concludes by proposing actions for Tanzania to curb IFFs, emphasizing the crucial role of parliament and the need for concerted action from all stakeholders.

The Magnitude of IFFs in Africa and Tanzania Over The Years

To effectively address the issue, it is crucial to understand the scale of the problem within the Tanzanian context. The figures for Africa are astronomical. According to the Economic Development in Africa Report 2020 by the U.N. Conference on Trade and Development (UNCTAD), Africa loses about US$88.6 billion or 3.7 per cent of its GDP, annually in illicit financial flows. This is more than Africa receives in foreign aid.

Like many African nations, Tanzania grapples with the substantial challenge of IFFs. The country loses approximately a crippling $1.5 billion annually due to trade-based money laundering and IFFs, according to Global Financial Integrity (GFI), representing a massive depletion of resources from Tanzania.

GFI had earlier looked at the period between 2002 and 2011 and determined a cumulative gross loss of more than $18.73 billion in illicit flows drained out due to trade mis-invoicing, an average of $1.87 billion a year, and an average tax loss of $248 million a year, which seriously undermines the country’s fiscal balance.

For Africa and Tanzania, these are valuable financial flows being drained out that could have otherwise been used to fund better social services like health care education and improve infrastructure and agricultural extension services, key drivers in economic development. IFFS also create an unfair playing field for businesses, making it harder for honest companies to compete.

Apart from mis-invoicing, there are other aspects of IFFs like poaching and wildlife trafficking, which represent severe security risks like funding terrorism and the U.S. now considers it a national security threat due to increasing evidence that in Tanzanian’s northern neighbour Kenya, statistics suggest that there may be links between the terrorist group al-Shabaab’s increased attacks in the country and increased killing of elephants.

Like elsewhere in Africa, elephant poaching is a significant problem in Tanzania. “A significant portion of ivory reaching international markets, especially in Asia, is derived from elephant populations in Tanzania,” says an Interpol report and recommends more collection and analysis of data that will provide evidence that links the trafficking to fraud, tax evasion, and money laundering.”

Corruption, although making a small share of illicit capital flight from Tanzania, is on the increase in Tanzania in terms of both public perception and reported acts. The country continues to perform poorly in Transparency International’s Corruption Perceptions Index (CPI), ranked 119th of 175 in 2014 with a score of 31 out of 100 (from 111th out of 177 in 2013 with a 33 out of 100). These perceptions can be mainly attributed to the history of grand corruption in the Tanzanian media that has occurred for decades.

For instance, in procurement and contracting, there was an exposé that bribery was involved in the Tanzania government’s acquisition of a radar from BAE Systems. The scandal was finally resolved in late 2013 with GB Pounds 30 million (USD 47 million) returned to Tanzania.

Delays in returning the money resulted from indecision on what it should be used for (eventually, it was used to purchase school books). BAE Systems avoided prosecution, as did the Tanzanian intermediaries and the government officials.

Another recent historical example can be found in what is now termed the IPTL Escrow Scandal, which in 2014 involved U.S. $250 million being transferred from the Bank of Tanzania, the country’s central bank, and distributed illegally among government officials and other individuals.

However, it is worth noting that IFFs, as far as Tanzania is concerned, are not always about flows out of Tanzania. Criminal activities are known to have brought money into the country. In April 2012, 4.5 million euros ($5.9 million) were allegedly transferred to Tanzania in suspicious circumstances through the Federal Bank of the Middle East (FBME) based in Dar es Salaam. The Financial Intelligence Unit (FIU) intercepted the transfer, froze it and sent the money back to Italy.

In July 2014, the U.S. Treasury Department named the bank a “financial institution of primary money laundering concern” with a “large shell company customer base” facilitating the evasion of anti-money laundering regulations for its clients. This prompted the Tanzania Central Bank to take over the bank’s management soon after.

Efforts Aimed at Curbing IFFs in Tanzania

Tanzania has initiated various efforts to curb IFFs. These efforts are integral to strengthening regulatory frameworks, improving financial intelligence capabilities, and enhancing international cooperation. Additionally, measures to promote transparency, such as joining global initiatives against tax havens, contribute to the broader strategy.

Strengthening Legislation: Tanzania has progressively made efforts to address the problem of IFFs, including enacting legislation and regulations to improve its legal infrastructure against money laundering and the financing of terrorism. One notable measure is the passage of the Anti-Money Laundering Act in 2020, establishing a Financial Intelligence Unit (FIU) to bolster the nation’s capabilities in addressing money laundering and terrorism financing.

Nevertheless, as per the Financial Action Task Force (FATF), an organization dedicated to establishing standards and facilitating the effective implementation of legal, regulatory, and operational measures against money laundering, terrorist financing, and related threats to the international financial system, Tanzania finds itself on the grey list due to identified strategic deficiencies in its national frameworks for combating money laundering, terrorist financing, and proliferation financing.

Another effort is through the Finance Act of 2020, which introduced changes to the 2002 Companies Act to require the disclosure of Beneficial Ownership (B.O) information. The Act and its regulations aimed to improve corporate accountability by reducing the risk of conflict of interest, discouraging corruption during license allocation, providing an equal playing field for all companies intending to bid, and lowering the risk of transfer mispricing and tax evasion. The Finance Act furthermore amended the Anti-Money Laundering Act, the Trustees Incorporation Act and the Income Tax Act by establishing provisions relating to beneficial ownership rules.

However, the Act and its regulations created a quandary regarding the percentage of B.O. companies must disclose and failed to provide a comprehensive definition of B.O. Following such flaws in the Act, the government amended the Companies Act (Cap 212) Section 2 in 2022 by deleting the definition of B.O. and replacing it with a comprehensive explanation from the Anti Money Laundering Act, which includes a thorough explanation and obligates legal entities with a shareholding percentage of 5% and above to disclose their B.O. Apart from helping reduce ion and illicit financial flows, the amendments can increase transparency and improve the business climate.

In a significant step towards enhancing transfer pricing transparency and consistency, Tanzania publicly released its Transfer Pricing Guidelines in May 2014. These comprehensive guidelines aim to provide taxpayers with straightforward and practical guidance on addressing transfer pricing issues, fostering a more predictable and compliant tax environment.

By establishing a standardized framework for determining arm’s length prices for controlled transactions, the Transfer Pricing Guidelines help to reduce uncertainty and potential disputes between taxpayers and the tax authorities. This clarity is crucial for businesses operating across multiple jurisdictions, enabling them to make informed pricing decisions that align with international best practices.

Moreover, the guidelines are vital in educating taxpayers about their obligations under the Income Tax Act and the Tax Administration (Transfer Pricing) Regulations. This enhanced understanding of tax requirements helps businesses proactively manage their transfer pricing risks, reducing the likelihood of costly tax audits and penalties.

The introduction of the Transfer Pricing Guidelines marks a positive development in Tanzania’s tax landscape, signalling the government’s commitment to promoting a fair and transparent tax system that supports responsible business practices and economic growth.

Working with the donor community and increasing international cooperation: The development partners are also assisting Tanzania to build its capacity to curb IFFs. Norway supported the country’s efforts to enhance tax administration through its ‘Tax for Development Programme’, which focuses on several areas such as the development of Tanzania’s capacity in the administration of large taxpayers, the taxation of natural resources and international taxation, including transfer mispricing.

The Norwegian government supported the Tanzania Extractives Industry Transparency Initiative (TEITI) under its ‘Oil for Development Programme’ to improve revenue disclosure in extracting natural resources.

Britain’s Department for International Development (DFID) also supported Tanzania’s ‘Tax Modernisation Programme’ aimed at enhancing the Tanzania Revenue Authority’s (TRA) ability to collect taxes effectively, expanding the number of taxpayers to promote equity and fairness in tax administration and improving tax technology, and enhancing tax enforcement mechanisms.

More has to be done by the international community, however. While some efforts have been seen, the international community, including organizations like the OECD, could do more given the task’s scale. For example, as the OECD is leading the process to create a multilateral system for automatic exchange of information, it should make more efforts to include tax administrations that are not from its member countries.

There is a belief from the developing South, however, that the OECD is citing governance and capacity limitations of African countries as reasons to limit their full participation from the beginning, as this could slow down the process.

The Financial Transparency Coalition (FTC) has echoed this by asserting that the OECD has done little to dispel its reputation as the “rich men’s club” by effectively ruling out the active participation of developing countries in shaping the tax reform agenda. Developing countries’ communication channels with the OECD process are restricted to the U.N., the Task Force on Tax and Development, and the OECD Global Relations Programme, which the OECD says will provide “useful insights” and a “useful platform” for “the particular concerns of developing countries.” FTC continues: ‘Restricting developing country participation to these separate venues should not be confused for equal participation in the OECD’s decision-making process.’

In recent positive developments, however, the international community is set to advance plans to establish a U.N. convention to define global regulations on tax and combating IFFs. Despite opposition from key players such as the E.U., United States, and U.K., a campaign led by these entities failed to thwart the initiative.

During a debate and vote in New York on Wednesday (22 November), a resolution addressing the ‘promotion of inclusive and effective international tax cooperation’ and the proposal for a U.N. tax convention, presented by Nigeria on behalf of the Africa group at the U.N., secured approval with 125 votes in favour and 48 against. Notably, most of the 48 opposing votes came from the EU27, with additional opposition from the United States, the U.K., and Japan.

Involvement of Parliamentarians as Actors against IFFs: Parliament plays a crucial role in the fight against IFFs. Lawmakers can enact and amend legislation to create a more robust legal framework, provide oversight to ensure effective implementation and advocate for policies that enhance transparency and accountability. Legislators can also source materials from and work with researchers and think tanks to address knowledge gaps and issue knowledge products and reports for parliamentarians on issues of IFFs.

Recently, the Tanzania National Caucus on the African Parliamentary Network on Illicit Financial Flows and Taxation (APNIFFT) launched as a positive step towards improving the fight against IFFs in Tanzania.

The caucus aims to bring together Tanzanian parliamentarians to work together on this critical issue, and it promises to enhance coordination, knowledge sharing, and advocacy efforts, including helping to galvanize political support for legislative measures to combat IFFs, strengthen cooperation in international tax matters and scrutinizing government spending on anti-IFF initiatives.

Challenges of Addressing IFFs, Key Lessons and Best Practices

Despite concerted efforts, addressing IFFs in Tanzania presents numerous challenges. Firstly, there is a lack of a critical mass from within Africa: Although there are several civil society organizations working on curbing IFFs out of Africa, there still lacks a mass movement to raise public awareness on the magnitude of the problem, how it happens and the consequences for people experiencing poverty.

The barriers to building on this critical mass include low public awareness and engagement levels on the impact of IFFs on people’s lives and development in Africa, from the grassroots to national policy spaces.

There is also a lack of political will from subnational, national and regional actors to make necessary decisions and impact required policy changes. The few civil society organizations working in Africa are not adequately coordinated and strategically poised to maximize impact. Challenges in framing an international ask: articulating what is needed from the international community to address the Africa-specific problem. Challenges in obtaining in-depth data and the capacity to analyze it.

One of the critical lessons to be considered is that it is essential to have the buy-in of the private sector by inviting them to a multi-stakeholder platform to address IFFs. Initiatives involving businesses, governments and civil society bring together expertise from different perspectives and are crucial in the emergence of standard solutions to complex problems concerning IFFs.

For instance, the Kimberley Process (K.P.) is a joint initiative involving governments, businesses and civil society to curtail the flow of conflict diamonds (also known as blood diamonds) that help to finance rebel insurgencies and bids to overthrow legitimate governments.

Examples of other multi-stakeholder platforms are The Extractive Industries Transparency Initiative (EITI) for transparency of transactions between governments and companies in the mining and oil industries and the Global Reporting Initiative (GRI) for comparable reporting on economic, ecological and social impacts of company activities.

Tanzania can adopt best practices from other nations that have successfully curbed IFFs. Key elements include strengthening institutions, promoting financial literacy, and fostering international collaboration. Additionally, leveraging technology for better financial tracking and enhancing the capacity of law enforcement agencies can significantly contribute to the cause.

These include improving the international accounting system, including creating a multilateral system for automatic exchange of information, universal beneficial ownership and country-by-country reporting. These mechanisms for transparency will make it easier to uncover instances of IFFs.

South Africa, for example, has implemented measures such as enhancing the capacity of law enforcement agencies and improving international accounting systems. The country has been proactive in adopting international standards for financial transparency.

The United Kingdom has made significant strides in addressing IFFs through initiatives like establishing the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO). The UK has also been a proponent of international collaborations for information exchange. Norway has a comprehensive system for tracking financial transactions and ensuring transparency. It has successfully implemented universal beneficial ownership and country-by-country reporting measures to deter illicit economic activities.

Apart from parliament, as mentioned above, collaboration with civil society, the private sector, and international organizations is vital. Civil society can advocate for transparency, while the private sector can adopt ethical business practices. International organizations can provide technical assistance and facilitate cross-border cooperation to combat the global nature of IFFs. These may include legal complexities, limited resources, and the adaptability of illicit actors. Drawing lessons from these challenges is essential for refining strategies and developing more effective countermeasures.

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