This policy brief provides a broad introduction to illicit financial flows (IFFs), some key IFF mechanisms, and how these flows serve to undermine industrial development, particularly in developing countries. IFFs are usually connected to tax havens, and serve to maximise income for a handful of people while eroding the tax base, undermining government capacity and harming industrial development. There is strong evidence to suggest that IFFs are happening at significant scale in South Africa. This is likely to have a negative effect on the country’s existing industrial base and industrialisation efforts via a number of channels that require policy attention. Government departments and agencies with the authority to act on these illicit channels, including via industrial, competition and procurement policy, need to develop the capacity to do so. The brief concludes with recommendations of industrial policy measures that can be implemented to limit the extent and impact of illicit financial flows on industrial development in South Africa.
This policy brief is based on the Working Paper Illicit financial flows, tax havens and industrial development in South Africa. It can be accessed at the following link: main report.
Illicit financial flows (IFFs) of various kinds, and the role of tax havens in facilitating these flows, have come under increased scrutiny since the global financial crisis of 2007-2009. A series of high-profile scandals and leaks of sensitive information about how corporates and individuals organise their financial affairs to escape their social obligations have contributed to this interest.
This report explores the relevance of these for South Africa. It looks at definitions and basic mechanisms, and provides an overview of methodologies used to estimate IFFs. It presents a set of case studies that illustrate how these mechanisms operate in practice, and provides an indication of the scale of IFFs and which tax havens play a significant role in facilitating these. It then explores the channels through which IFFs and tax havens affect industrial development, and makes the case for an active role for industrial policy in protecting South Africa’s industrial base from IFF and tax haven exposure, setting out a number interventions that the Department of Trade, Industry and Competition and other government agencies may develop to reduce the impact on industry in South Africa, accompanied by research proposals aimed at enhancing such efforts.