Africa's illicit financial flows

When one dollar enters Africa, two dollars leave

Every year, huge amounts of capital are illegally transferred out of developing countries. These illicit financial flows deprive developing countries of resources that could be used to finance essential public services, whether security, justice or basic social services such as health and education, resulting in a weakening of their financial systems and economic potential. 

There are three forms of unregistered money moving across borders: 

• Corrupt. Income from bribery and theft by government officials.
• Criminal. Income from drug trafficking, human trafficking, counterfeiting, smuggling and countless other forms of activity. 
• Commercial. Revenue from import and export operations carried out with a view to the administration of customs duties, VAT, income taxes, excise duties or other sources of public revenue.

There is a sad paradox: while in 2018 Africa received $29.7 billion in official development assistance (ODA), it simultaneously lost more than $50 billion in illicit financial flows (IFF). In fact, according to the latest interim report of the High-Level Panel, the average amount of IFF Africa loses annually is between $50 billion and $148 billion (CEA, 2013). Several other estimates, including one entitled "Financing the Development Agenda for Africa beyond 2015" show that between 1970 and 2008, illicit financial flows caused Africa to lose between $854 and $1.8 billion, while in the same period the continent has received $1.07 trillion in official development assistance (OECD, 2012a)

Without this hemorrhage, Africa could, in theory, do without ODA, the weight of its foreign debt and be able to operate the structural transformation it so badly needs.

Although it is difficult to accurately assess the amount of illicit financial flows, due to their secret nature, all estimates show that Africa has been a net creditor to the rest of the world, not a debtor, due to massive outflows of illicit capital from the continent.

A relevant aspect to consider is that these IFFs are precisely aimed at its main economic trading partners and are also its creditors, and I am referring to the United States, Canada, Japan, the Republic of Korea, France, Germany, Spain, etc., and emerging economies (mainly China and India). For example, in 2008, more than 75% of the Nigerian oil sector FFI ended up in just five countries: United States, Spain, France, Japan and Germany.

Every dollar that leaves one country must end up in another. Very often, this means that illicit financial outflows from developing countries ultimately end up in banks in developed countries such as the United States and the United Kingdom, as well as in tax havens such as Switzerland, the British Virgin Islands or Singapore.

This does not happen by accident. Many countries and their institutions actively facilitate (and make huge profits from) the theft of huge amounts of money from developing countries. Developed countries have a responsibility, along with developing countries, to reduce the flow of illicit money.

The four major emitters of illicit flows, South Africa, the Democratic Republic of the Congo, Ethiopia and Nigeria, account for more than 50 per cent of Africa's total illicit financial flows. Among the top ten issuers of illicit flows, nine countries attribute a significant portion of total exports to natural products and products such as mining in South Africa, the Democratic Republic of the Congo, Botswana and Zambia, and oil and gas in Nigeria, the Republic of the Congo, Angola, Sudan and Cameroon. Natural resources provide countries with opportunities to expand the volume of total trade, which is correlated with the volume of illicit financial flows; studies also suggest that extractive industries are particularly prone to illicit financial flows (UNCTAD, 2016).

Governance is at the heart of responses to the continent's development challenges. Despite steady progress in Africa over the past decade, governance problems, including lack of transparency and accountability, remain serious concerns that hamper social, economic and political progress at different levels. Illicit financial flows (IFF) and corruption are serious consequences of these governance deficits. Even if the phenomenon is not specific to Africa, it is clear that it is on the continent where it has the most negative impacts due to the small size and weakness of its economies and the fragility of its financial systems.

For Ibrahim Mayaki, co-chair of the High Level Panel on International Financial Accountability, Transparency and Integrity to Achieve Agenda 2030, the fight against illicit financial flows is part of an urgent funding context for the Sustainable Development Goals (SDAs).

Illicit financial flows have direct consequences on the development and well-being of populations. "They feed organized crime, or they come from organized crime and can feed terrorism," Mayaki said. "They are diverting resources from social needs to corruption. This has a great impact on poverty reduction policies," he added. The eradication of poverty is the first of 17 SIDS that states have committed to achieve by 2030.

In African countries, tax revenues represent only about 18% of the Gross Domestic Product (GDP), while the average tax/GDP ratio is 34% in OECD countries. One of the reasons for this is the weak capacity of some African tax administrations to enforce tax laws and combat IFFs. Sub-Saharan Africa has one of the highest rates of illicit financial flows of any region in the world. The amount lost annually by Africa to IFFs, largely due to tax evasion, was estimated to be over $50 billion by 2015. Former South African President Thabo Mbeki noted at the African Union (AU) High-Level Group (HLG) inter-ministerial meeting on IFFs, held in Abuja, Nigeria, in October 2018, that the loss had reached about $80 billion at that time. In the outcome document of the Third United Nations International Conference on Financing for Development held in Addis Ababa from 13 to 16 July 2015, Heads of State and Government and senior officials pledged to "spare no effort to significantly reduce illicit financial flows by 2030 with a view to eliminating them completely, in particular by combating tax fraud and corruption, strengthening domestic regulations and enhancing international cooperation".

One of the most characteristic methods belonging to the family of IFFs is fraudulent invoicing, which occurs when importers and exporters in a coordinated and deliberate manner adulterate the prices on invoices of goods they trade as a tool to illicitly move securities across international borders, evade taxes and/or customs duties, launder money from criminal activities, evade exchange controls and hide capital gains abroad (offshore).

By fraudulently manipulating the price, quantity or quality of a good or service on an invoice sent to customs, criminals can easily and quickly move substantial amounts of money across international borders.

Commercial fraud is the act of deliberately manipulating the value of a commercial transaction by falsifying, inter alia, the price, quantity, quality and/or country of origin of a good or service by at least one of the parties to the transaction.

This type of invoicing is a well-established method of conducting illicit financial flows within the international trading system, as well as evading or manipulating Customs control regimes. 

In general, there are four main reasons for fraudulent invoicing in foreign trade operations:

• Money laundering. Criminals or public officials may try to launder the proceeds of crime or corruption.
• Direct evasion of taxes and customs duties By not declaring the value of the goods, importers can immediately evade important customs duties or other taxes.
• Claiming tax incentives. Many countries offer generous tax incentives to domestic exporters who sell their goods and services abroad. Criminals may try to abuse these tax incentives by over-invoicing their exports.
• Avoiding capital controls. Many developing countries have restrictions on the amount of capital a person or company can bring in or take out of their economies. Investors attempting to break these capital controls often mistakenly charge for business transactions as an illegal alternative to bringing money into or out of the country.

At the time, some governments, through their Central Banks and Ministries of Finance, contracted the supervision of their foreign trade to inspection companies (surveyors) to carry out Preshipment Inspection Services (PSI) in the ports of origin with the mandate to control the quality, quantity and price of the goods shipped in order to avoid over-invoicing, under-invoicing and tax (tariff) evasion at the various customs offices. Today, these contracts have fallen into disuse, although some are still in force in Africa and Latin America. There is now a trend towards mere verification of conformity (VOC).  It is now a priority for governments to support international trade while protecting consumer health, safety and the environment. Most regular national organizations, acting within a legislative framework, advocate the intervention of independent third party companies as a way to maintain full control over goods entering the national market.

To give a couple of examples:

Conformity verification program. The Ministry of Trade of the Federal Democratic Republic of Ethiopia has decided to enforce mandatory standards to improve competitiveness and protect consumers. Accordingly, a notice to importers was published on the website in December 2013, announcing that goods imported at ports of entry, under the list of mandatory Ethiopian standards, should be accompanied by a certificate of conformity from an authorized third-party inspection body of the Ethiopian Ministry of Trade.

The inspection company is mandated by the Government of Morocco to implement the program to verify the conformity of imports of products under Law 24-09 on the safety of products and services supplemented by Decree No. 02-212 -502 and Order No. 3873-13.

Depending on the products, the verification of conformity is carried out in the country of export or at the destination at the border posts. These products are subject to specific technical regulations or mandatory Moroccan standards.

Each shipment is subject to verification and must be accompanied by a certificate of conformity for customs clearance in Morocco.

• Pre-shipment inspection services for sea imports: quality (through visual inspection), quantity, customs classification, value for customs purposes (as defined by the Brussels value), FCL stamping and bonding of goods shipped as loose cargo or in LCL, post clearance reconciliation of import declarations and revenue collection; pre-shipment inspection services for exports, quality, quantity, price.
• Documentary inspection of destinations for air imports: customs classification, value for customs purposes (according to the Brussels value definition) according to the documents provided by the importer. Issuance of a certificate of documentary inspection. 
• Physical inspection in Liberia. 

Transnational movements of illicit financial flows range from $1 trillion to $1.6 trillion, a figure that makes $135 billion in annual foreign aid seem insignificant. Since the 1970s, African countries alone have experienced $1 trillion in capital flight, while their total external debts do not exceed $200 billion. In other words, Africa is one of the main net creditors of the planet, but those assets are in the hands of a rich elite and protected by the secrecy of the offshore world; while the weight of its debts falls on the shoulders of the vast majority of the African population. 

• GLOBAL FINANCIAL INTEGRITY (2012), “Illicit Financial Flows from Developing Countries 2001-2010”, Dev Kar and Sarah Freitas, Global Financial Integrity, Washington, DC, disponible à: www.gfintegrity.org/content/blogsection/11/75
• “Accélérer le Programme d’Action de Lutte contre les FFI dans les Pays Africains Global Financial Integrity TrustAfrica Tax Justice Network-Africa“ (TJN-A) Pan African Lawyers’ Union (PALU) Centre Régional Africain pour le Développement Endogène et Communautaire (CRADEC) Civil Society Legislative Center (CISLAC) Janvier 2017
•  “Transparency” International Secretariado Internacional Alt-Moabit 96, 10559 Berlín, Alemania
• Bureau veritas,SGS,Intertec 
• "Corruption Perception Index 2019" Transparency international 
• The Financial Secrecy Index (FSI) classifies jurisdictions according to their financial secrecy and the size of their offshore financial activity. A politically neutral ranking for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight.