Africa and the danger of illicit financial flows


Retlaw Matatu Matorwa Correspondent
The United Nations Economic Commission for Africa (UNECA) estimates the continent is losing $50-60 billion per annum through illicit financial flows (IFFs). According to the Economic Outlook Report, the figure represents 4 percent Gross Domestic Product (GDP) for the period 2003-2012.

The report also noted that IFFs outpaced development assistance (ODA) and Foreign Direct Investment (FDI) which averaged between $42,1 billion and 43,8 billion respectively. This level of financial loss impacts negatively on developing countries, by reducing their domestic resources and tax revenue needed for poverty eradication and provision of social services. Furthermore, IFFs related activities remain a threat to regional economic, social and political security.

Illicit financial flows involve the illegal cross border movement of money which has been unlawfully earned, transferred and utilised. Common perpetrators involved in IFFs activities include drug dealers, government officials, traders, human traffickers, terrorists, multinational corporations, and financial institutions. These perpetrators exploit sophisticated but poorly regulated financial and trading systems to their unfair advantage.

Sub-Saharan Africa suffered the largest loss emanating from illicit financial flows, averaging 6 percent of its GDP in 2015. Africa’s economic giants South Africa and Nigeria are losing averagely between $209,22 billion and correspondingly $178,04 billion per annum. Liberia’s illicit outflows in 2015 were pegged at 61,6 percent of the country’s GDP and Equatorial Guinea estimated to be approximately $4 000 per person (GFI 2015).

While the continent grapples with IFFs losses, the activities are escalating at an alarming average rate of 20,4 percent per year since 2012 (Trust Africa org, 2013).

According to African Union (AU) and UNECA, large corporations are responsible for 65 percent, organised crime 30 percent and corruption 5 percent of IFFs transactions in the region. Even though corruption is as low as 5 percent of illicit financial flows, its effect must not be underestimated. Referring to the pertinence of curbing corruption to reduce IFFs, Khalil Goga, a researcher with Institute of Security Studies, noted that; “Tackling corruption is as important as stopping IFF’s in Africa.”

Corruption is at the heart of IFF’s in Sub Saharan Africa as it diverts public resources to private and individual consumption. Private consumption has much lower positive multiplier effects than public spending on social services. Proceeds of corruption or criminal activities will generally be spent on consumption of luxury vehicles, or invested in real estate, art, or precious metals (World Bank, 2006). The social impact of a euro spent on buying a yacht or importing champagne will be different from that of a euro spent on primary education. The situation is worse, particularly where resources are taken out of the country and hidden somewhere instead of benefiting the already ailing economy.

Illicit financial flows create an underworld system, which poses a serious threat to regional peace and security. The loopholes in world financial systems and prevalent rate of IFFs activities may be responsible for sustaining terrorism and organised crime. How are terrorist groups such as Boko Horam, Al-shabaab and others able to secure resources to arm and conscript others into their systems? How do organised crime networks fund and buy their way through the justice systems, customs and law enforcement agencies?

In essence, IFFs reduce the ability of African countries to achieve their developmental goals, draining the continent’s capital stock and shifting resources from more productive activities with strong after-tax returns to less productive activities with high pre-tax returns (Stephanie Keene, 2015). In this case, the tax burden is transferred to poor citizens and loss on social spending, as states no longer receive equitable share of tax income. The poor remain poorer, while inequality increases.

Despite widespread concerted efforts to curb IFFs in developing countries, international financial institutions supposed to anchor financial integrity, are paying huge fines for their involvement in IFFs related offences. In 2012 alone, HSBS was fined $1,921 billion, Standard Chartered Bank $677 million (BBC 2012; New York Times 2012), ING $619 million (US department of treasury 12a, 12b) and many other financial institutions such as JP Morgan, Lloyd’s Bank, RBS (AN AMRO) and Riggs Bank have all been sanctioned for their involvement in IFF’s irregularities.

Frankly, these institutions are benefitting a lot from this practice. The fact that they are able to pay such huge fines and still remain afloat is an indication of the lucrative nature of this business. Stiffer penalties and more restrictive approaches need to be considered to discourage financial institutions to partake in this malpractice.

In addition, the absence of political will on the part of African governments to curb illicit financial flows is derailing progress in this regard. The reality on the ground suggests that African political and business elites have unjustified deposits stashed in financial institutions in the West. Spooner (2015) reported that Eritrea, a country which was ranked 182 out of 187 countries in the 2014 United Nations Human Development Index (HDI) report – topped the list, with a single client banking a whopping $695,2 million.

For more than half a century the Alpine nation of Switzerland has built a reputation as the world’s centre for tax evasion, fraud, money laundering, racketeering, safe haven and above all a staunch ally of corrupt African leaders and a great beneficiary of third world corruption ( Rakgomo, 2016).

  • Matorwa is a researcher and consultant. This article first appeared on his blog.


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