Why you must be wary of illicit funds

By Christine Kasemiire

Kampala. In 2017, Uganda Revenue Authority (URA) and prosecutors met to discuss illicit financial flows (IFFs).
One would wonder why IFFs would draw the attention of URA and legal fraternity.
IFFs are money or valuable assets associated with crime and corruption including tax evasion usually with a focus on cross border flows.
They are executed through money laundering, the process of transforming profits from illegal activities into legitimate assets.

While Ugandans have only recently geared up against IFFs, this is a global challenge that has scared some countries’ tax revenues globally.
To evade taxes, trade misinvoicing has been the most commonly used method by the businesses, a 2018 report by Global Financial Integrity (GFI) indicates.
Development Initiatives defines trade misinvoicing as the act of conniving between importers and exporters to misdeclare values of shipments.

Trade misinvoicing can also happen in the segment of services for instance, accounting services procured from outside the country.
In fact, Mr Raymond Baker, the GFI President, says trade misinvoicing has been normalised in many categories of international trade leaving poverty, inequality and insecurity in emerging markets such as Uganda.
GFI put Uganda’s annual loss to trade misinvoicing at 12.7 per cent of the combined tax revenue from the years 2002-2011.
A 2018 report indicates that from 2006 to 2015, trade misinvoicing for commercial imports amounted to $4.9b (Shs18.5 trillion) as $1.7b (Shs6.4 trillion) was for the commercial exports.

In other words, the $4.9b (Shs18.5 trillion) loss in trade misinvoicing of commercial imports is more than the country’s 2018/19 targeted tax revenue of Shs16 trillion.
While efforts to strengthen tax administration such as round table discussions ensue in Uganda, corruption has been highlighted as a major propellant of tax evasion.

Corruption from all points such as customs agents to top level government officials sees the vice lurk in the corners of major trade areas.
However, illicit financial flows are sometimes created by gaps in a country’s policy.
Tax avoidance is legal yet clever means for people to dodge paying taxes. For instance, corporate companies whose headquarters are stationed in tax havens have dodged paying taxes in countries in which they operate since most of the money is moved to headquarters in tax havens with lower taxes.

This robs developing countries where they operate, a chance for increasing their tax base.
The act of transferring money to other sister companies is known as transfer pricing. Corporate companies, however, use this to send money from other subsidiaries to sister companies in tax havens such as Mauritius and Netherlands, among others.
URA has on multiple occasions vowed to crack the whip on multinationals, saying they need to pay more. The whip has however not been felt, GFI says.

Combating illicit financial flows

The Financial Intelligence Authority, (FIA) has been strongly moving to combat illicit financial flows, especially money laundering.
In a recent stakeholder meeting with non-government organisations (NGO), Mr Sydney Asubo, the Financial Intelligence Authority executive director, urged NGO’s to critically analyse their source of funding to eliminate chances of money laundering.

The meeting came after the National Risk Assessment report by FIA pegged non-governmental organisations as the most likely conduits for terrorism financing and money laundering, among others.
To strengthen the fight against IFFs, developing countries should, in the words of Development Initiatives, provide technical assistance, build understanding, strengthen their own money laundering practices at home, and act on specific cases through legal cooperation or sanctions.

Little is done

According to research conducted by Mr Tom Calderone from Global Financial Integrity, in most developing countries, few or nobody at all is doing sufficient work to address the problem of illicit financial flows.
It only keeps getting worse and it appears there is not nearly enough focus given to the problem.
He says there is a lot of talk, meetings and conferences but little in the policies, laws instituted to address IFFs. There is not nearly enough action to address the problem.


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