Illicit Financial Flows from Africa: Why we should all be interested?

Illicit Financial Flows (IFFs), is a term that became popularly used in the 1990s due to a lot of money leaving developing countries, though it is a practice that has lasted much longer than that. Africa’s relations with the rest of the world have also been categorized by losses, and Illicit Financial Flows (IFFs) are now forming a very significant part of these losses. Taking the last 50 years, Africa’s losses through Illicit Financial Flows have been estimated to be in excess of $1 trillion; equivalent to all the development assistance it received during the same period. With that amount, Africa is estimated to be losing more than $50 billion annually in IFFs, an estimate which is likely to be inaccurate due to lack data[1].

 

What Illicit Financial Flows Are.

Illicit Financial Flows refer to money that is illegally earned, transferred or used; implying that the flow of these monies are in violation of laws in their origin, during their movement or use. The ultimate intention is to hide the money, even money that may have been legitimately earned[2]. Illicit Financial Flows can be broken down into three main types:

  1. Proceeds from corrupt dealings: e.g. corporations and wealthy elites paying bribes to secure public contracts/permits or declaring false corporate profits, especially by mining or oil exploring companies in order to evade tax payment.
  2. Proceeds from criminal activities: concealing the origins of illegally obtained money (e.g. from human trafficking, drugs trafficking, or sale of illegal arms), and taking advantage of bank confidentiality to transfer such money to foreign banks, or investing it in legitimate businesses – a process known as “money laundering”.
  3. Proceeds from commercial tax abuse: corporations and wealthy elites abusing tax by evading taxes (illegal) and/or avoiding (legal but morally wrong) taxes using, e.g. anonymous shell companies in secret places/countries that hide information from tax authorities about the real owners/beneficiaries. Companies (MNC’s) can also over quote imports or under quote exports, to hide the real value of products, and therefore profits – a process known as “trade mispricing”[3].

 

Different Forms of Illicit Financial Flows from Africa

Individual countries in Africa have encountered IFFs of various kinds. For instance between 2002 and 2011, Kenya is believed to have lost about $1.51 billion to trade misinvoicing (trade mispricing), an aspect of IFFs. Further analysis of Kenya’s tax losses from trade misinvoicing by multinational corporations and other parties could be as high as 8.3 per cent of government revenue. In a similar case of trade mispricing to avoid taxes, Mozambican records for timber exports in 2012 showed that it had exported 260,385 cubic metres to its markets worldwide, while records from China alone showed that 450,000 cubic metres of the same products were imported from Mozambique at that time.[4]

Loopholes in the tax laws and administrative systems of the African countries, have been aiding IFFs through outright tax fraud, tax evasion, aggressive tax avoidance, tax exemption, and keeping minimum capital in the countries where they make profits (thus affecting the poor African countries that are trying so hard to attract investors). Well intentioned acts such as tax holidays to attract foreign investment, have been used by such corporations to avoid and evade taxes, sometimes by claiming fictitious losses. This means loss of revenue by the African countries. Corporations and rich individuals prefer to transfer a good part of their wealth from African countries to other countries (called tax havens) which have low tax rates and relaxed tax laws (sometimes termed as “tax friendly” countries).

Money Laundering is a form of IFF gaining ground in Africa. Those dealing in drugs and other economic criminals like human traffickers and terrorists have perfected the art of circumventing regulations in banks and financial institutions on money laundering. Second-hand car bazaars, real estate construction businesses, supermarket chains, the running of the public commuter transport, running a pub business and buying stocks in the financial or stock exchange markets are easy targets for “cleaning” illegal money as customers pay in cash. The high volume and diversity of cash based transactions, lack of an adequate legal framework to regulate it and the existence of alternative remittance avenues also make it hard to curb money laundering in Africa. The growing information and communications technologies has made it possible to transfer huge sums of money at the click of a mouse or button.

Globally, Kenya is among those states with the highest Offshore (private household) wealth compared to the total wealth produced in the country[5]. The 2004 Kroll Commission identified over KSh130 billion ($1.3 billion) hidden by Kenyans in nearly 30 countries using a web of shell companies, secret trusts and front men[6]. The many banks and other financial institutions in Kenya, including mobile money transfer services, make the country a financial hub in the region. These regulated financial services also sit side by side with unregulated networks of other unlicensed cash-based hawala transfer systems, mostly used by foreign nationals. They lack transparency and operate with minimal, or no Government control.

Ponzi Schemes or pyramid companies offering quick returns for investments also possibly circumvent tax and other related regulations to take money out of the country. Additionally, the crime of poaching in Africa is steadily increasing with evidence suggesting the collusion of some security and political officials in the poaching and selling of wild life products like animal products (ivory, rhinoceros horns, pangolin scales) and also illegal logging and wood from endangered tree species.[7]

Bribery and corruption are part of the IFFs in Africa, facilitating all the other aspects of IFFs. The reasons for this focus is that corruption is both part of the IFFs, it enables IFFs and it makes combating of IFFs difficult. There is a feeling in many African countries that corruption is the greatest source of IFFs in the countries. Such corrupt dealings can be cited in the extraction industries like the mining and logging sector. For instance, in Guinea, a mine that is estimated to generate revenue of up to $140 billion in twenty years was granted to a multinational corporation for only $165 million dollars in 2008. For Africa which relies on natural resources as the main source of government revenue, this is a matter of huge concern. Corruption deprives the countries in Africa of the much needed revenue.[8] This is because annually officials, individuals, and corporations hide away illegally acquired funds in highly secretive foreign banks abroad. And according to the two, this trend is rather high in Africa and rising since 2000[9]. The increasing trend of IFFs in Africa coincided with a period of relative high economic growth, denying the countries and people the expected positive impact of increased economic growth[10]. This has depleted the already meager public resources and led to suboptimal investment and rising debt levels. This also undermined tax moral accountability between citizens and the State[11].

To avoid confiscation of the illegally acquired assets, or due to fear of political instability and exposure, the perpetrators transfer the funds to places that are out of reach to the government. Ways of ‘cleaning’ the money include using the cash to buy real estate abroad, or investing it in legitimate businesses through buying shares in multinational companies. Such money is taken away from the country’s revenue base and becomes unavailable for investment to address Kenya’s development needs for minimizing poverty and reducing inequality.

Big companies in the countries where tax rates are high merging with smaller companies in tax friendly countries to reduce the tax burden. An international call with a number which seems to be like a local one with poor quality, is probably an indication that the local network operator is changing this through a fraudulent practice called SIM box fraud to avoid paying higher taxes.[12]

What Causes Illicit Financial Flows

The practice of IFFs is driven by a number of “push” and “pull” factors. The leading factor is the obvious desire to hide illicit wealth and the ways by which such wealth is created. Other factors include: poor governance, the weak regulatory structures, agreements between countries to avoid charging enterprises twice (called Double Tax Agreements), tax incentives and the existence of places that can secretly keep the money.

Why should the Public be interested in the issue of Illicit Financial Flows?

It is important for the citizenry in the African countries to show interest in the issue of IFFs because the money being talked about is linked with public finances, especially in the form of tax revenue. Such public finances should go to the government treasury and be used for public expenditure.

  1. It may be stolen from public coffers by corrupt officials and transferred illegally somewhere
  2. It may be money that a business corporation or individual illegally earns by under-declaring business earnings to avoid paying the right amount of tax.
  • The money can also be earned through criminal activities like trafficking drugs, people, and poaching.

The occurrence of IFFs undermines state capacity since people and corporations have to try and compromise state officials and institutions to be able to transfer money. Corruption is both a source and an enabler of IFFs as it encourages private gains rather than development in public interests. This can lead to discontent as the government fails to provide social services. When multinational corporations engage in profit-shifting activities, the bulk of the tax burden consequently falls on the small and medium scale enterprises and individual tax payers. This is so much against the idea of progressive taxation – those who earn more should contribute a larger percentage of the tax revenues. Such corporations and individuals that evade or avoid taxes continue to benefit from physical and social infrastructure most of which is still provided by the public sector in Africa which needs revenue for this. Reduced tax earnings resulting from hiding taxable funds affect the provision of public services such as schools, clinics, sanitation, security, water and social protection. Benefits such as job creation that could accrue if the IFF monies were invested or used in Africa, are lost.[13]

Why Jesuits are Getting Involved in issues of IFFs.

Being part of the African community, the members of the Society of Jesus would like to seek ways for meaningful engagement with partners and allies in addressing such challenges like the IFFs facing the African continent. For them and for the Catholic Church, this is a call that became explicit from the 34th and 35 General Congregations and the Superior Generals of the Society of Jesus. Specifically for Africa, the calls emphasized for members of the Society of Jesus and their lay cooperators to develop and implement more projects that can address the multiple crises confronting millions of people, including economic impoverishment. In the face of these, the Church in Africa is called to offer a credible and prophetic voice to the millions of Africans who are disempowered and impoverished by bad governance and bad predatory economic policies and violent social realignment. As part of its social apostolate, the Society of Jesus is getting involved in analyzing these issues, the opportunities, challenges and needs facing the African societies so as to propose just, concrete and durable solutions to these crises that affect millions in Africa. This requires collaboration, training and unprejudiced mutual sharing of ideas that fully recognize the richness of Africa’s different cultures and the particular gifts of the African Jesuits can offer to the society. These is better guided by values of cooperation, unity and community.[14]

[1] Economic Commission for Africa. (2015). Illicit Financial Flow: Report of the High Level Panel on Illicit Financial Flows from Africa. Addis Ababa: United Nations Economic Commission for Africa.

[2] Ibid.

[3] Waris, A. (2017). Illicit Financial Flows: Why We Should Claim these Resources for Gender, Economic and Social Justice. Toronto: Association for Women’s Rights in Development.

[4] Economic Commission for Africa. (2015). Op cit.

[5] Alstadsæter, A., Johannesen, N., & Zucman, G. (2017). Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality. Cambridge MA.: National Bureau of Economic Research.

[6] Kahura, D. (2017). FOLLOW THE MONEY: How To Make Dirty Cash Clean Without Omo. Nairobi: The Elempant.

[7] Economic Commission for Africa. (2015). Op cit.

[8] Economic Commission for Africa. (2015). Op cit.

[9] Ndikumana, L., & Boyce, J. (2012). “Capital Flight from Sub-Saharan African Countries:Updated Estimates, 1970–2010.”. Amherst.: Political Economy Research Institute, University of Massachusetts.

[10] Economic Commission for Africa. (2015). Op cit.

[11] Letete, E., & Sarr, M. (2017). Illicit Financial Flows and Political Institutions in Kenya , Working Paper Series N° 275. Abidjan: Africa Development Bank.

[12] Economic Commission for Africa. (2015). Op cit.

[13] Economic Commission for Africa. (2015). Op cit.

[14] Isaac Kiyaka SJ. (2008). http://www.sjweb.info/documents/cis/pdfenglish/200811907en.pdf