Illicit outflows from Africa are costing the continent as much as US$60 billion per year. Or US$30 billion per year. Or US$100 billion. That’s according to the seminal reports on the matter, published by a panel appointed by the AU and UN Economic Commission for Africa (UNECA), as well as Global Financial Integrity (GFI), respectively.

Despite these huge numbers, it’s telling that we have only two widely accepted research studies on the problem. Sure, Africa is complex. There are 55 countries straddling eight regional trade blocs and economic communities.

Added to this is the fact that illicit financial outflow (IFF) is a difficult concept to define. The AU/UNECA panel report – Illicit Financial Flow: Report of the High Level Panel on Illicit Financial Flows from Africa – says that for the purposes of its work, it ‘agreed on a definition of IFFs as money illegally earned, transferred or used’, and that ‘the difficulties in estimation arise from the very nature of IFFs, which by definition are mostly hidden and therefore difficult to track’.

So it’s not as simple as hauling out a calculator. But it is an enormous problem.

In the short run, massive capital outflows and drainage of national savings have undermined growth by stifling private capital formation

According to the report, in its ‘own empirical research, focusing mainly on the merchandise trade sector, the panel found that illicit financial outflows from Africa had increased from about US$20 billion in 2001 to US$60 billion in 2010’. This figure has become generally accepted. Money that simply disappears.

So, too, the figure from the GFI 2010 report – Illicit Financial Flows from Africa: Hidden Resource for Development. It states that ‘Africa is estimated to have lost in excess of US$1 trillion in illicit financial flows’ over the last 50 years.

The panel report makes the point that, according to Economic Co-operation and Development (OECD) data, ‘this sum is roughly equivalent to all of the official development assistance received by Africa during the same time frame’.

In a speech to the Pan African Lawyers Union in June 2014, former president of South Africa Thabo Mbeki – who chairs the AU’s high-level panel on Illicit Financial Flows from Africa – said: ‘By any measure, these are enormous volumes of capital, which Africa needs to address its many challenges.’

In a 2007 address to his African peers, then governor of the Central Bank of Kenya Njuguna Ndung’u said: ‘The costs of this financial haemorrhage have been significant for African countries. In the short run, massive capital outflows and drainage of national savings have undermined growth by stifling private capital formation.

‘In the medium to long term, delayed investments in support of capital formation and expansion have caused the tax base to remain narrow. Naturally, and to the extent that capital flight may encourage external borrowing, debt service payments also increased and further compromised public investment prospects.’

The word ‘illicit’ in defining these outflows is important, given that sometimes the activities aren’t strictly illegal but they ‘go against established rules and norms, including avoiding legal obligations to pay tax’, says the panel. It also suggested that while existing estimates put ‘commercial activities as accounting for 65% of IFFs, criminal activities for 30% and corruption for around 5%’, the reality of the African context is perhaps a lot more ‘nuanced’.

These problems are not unique to the continent, and the means by which tens of billions disappear annually through commercial activities, read like a list you’d find in any country on the planet: ‘abusive transfer pricing, trade mispricing, misinvoicing of services and intangibles and using unequal contracts, all for purposes of tax evasion, aggressive tax avoidance and illegal export of foreign exchange’.

Remember, this is a world where government revenues are under significant pressure. No wonder there’s a spotlight on many of these mechanisms.

The blame is mostly laid at the door of the private sector. In presenting a report to the AU in January, Mbeki said: ‘Indeed, following extensive research and consultations, the panel agrees with the view that large corporations are by far the biggest culprits responsible for illicit outflows, especially given their ability to retain the best available professional legal, accountancy, banking and other expertise.’

Mbeki also made the point that they are ‘particularly prevalent in the extractive and natural resources sector, which is a key contributor to our national economies’.

In his earlier address, Mbeki also noted that of ‘critical importance is the obvious fact that the resources, which leave Africa illegally, do not evaporate into nothingness, but end up somewhere else in the world’.

‘The most damaging effects of illicit flows related to corruption cannot be captured solely in numerical or financial terms’

Trafficking, smuggling and criminal activities might not be primarily designed to generate IFFs, the panel report argues, ‘but criminality contributes substantially to such outflows because of the desire to hide the proceeds’, the panel says.

Corruption was perhaps the most contentious of the sources of the outflows. General public perception is that corruption is the largest contributor to IFFs, but the panel suggests that this ‘abuse of entrusted power … makes a cross-cutting contribution to IFFs without the officials concerned necessarily exporting their illegally acquired wealth’.

Yet there have been striking examples of huge amounts of money moved out of the continent by well-connected political elites.

Khalil Goga, a researcher at the Institute for Strategic Studies (ISS) in Pretoria, wrote in a report: ‘A sophisticated example of the link between IFFs and corruption, and the corrosive effects it can have on the state institutions, policy and the economy can be drawn from the case of former Tunisian president, Zine El Abidine Ben Ali.

‘According to a World Bank report, Ben Ali and his family had manipulated regulations for their own personal and commercial benefit, damaging free trade within the country. The family were then able to move a large portion of their fortunes offshore with relative ease.’

Another example often cited is that of the family of President Teodoro Obiang Nguema Mbasogo, who seized power in Equatorial Guinea in 1979. In March last year, the president’s son, Teodoro Nguema Obiang Mangue, was reported to be under investigation in France on allegations of money laundering.

According to a BBC report, Obiang junior has a six-storey Paris villa estimated to be worth more than US$100 million. In October last year, he reached a settlement with the US government to pay it about US$34 million, according to the Wall Street Journal.

The US Justice Department had accused him of ‘a three-country shopping spree of more than US$100 million’ using looted assets from Equatorial Guinea. He had to sell a mansion in California, a Ferrari and some of his extensive Michael Jackson memorabilia collection, but was allowed to keep a private jet and a yacht.

In August 2014 the Justice Department was granted a judgement against assets of the late Nigerian dictator Sani Abacha for about US$480 million and is still pursuing legal action for US$120 million from Abacha’s ‘alleged co-conspirators’.

‘The most damaging effects of illicit flows related to corruption cannot be captured solely in numerical or financial terms,’ said Goga in the ISS report.

‘Corruption related to IFFs can cause political and social damage undermining state institutions such as banks, financial intelligence centres, the police and the judicial system, creating further impediments to investigate these flows. In time, the very institutions of accountability become corrupt, maintaining the power of corrupt political and economic elites.’

When it comes to corporates, expert opinions are hard to come by. The global advisory, audit and tax firms that would typically have points of view on such matters are directly conflicted, given that they offer consulting services to clients who are precisely looking to ensure ‘efficient’ transfer pricing and tax ‘strategies’.

Transfer pricing is at the heart of how multinationals account for their operations. The OECD defines it as ‘a price, adopted for book-keeping purposes, and used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises’.

Illicit financial flow issues should be incorporated and better co-ordinated across United Nations processes and frameworks

A 2011 World Bank paper estimates that two-thirds of all business transactions worldwide take place between related parties.

In its report of Africa’s transfer pricing landscape, PwC suggests that transfer pricing is considered a development finance issue, and ‘as a result, scrutiny of multinational corporations’ tax footprints in Africa has increased recently’.

It’s not as simple as regimes being implemented. ‘While many African nations have transfer pricing regimes or provisions in their tax code based on the arm’s length standard, they often also have special tax rules and considerations for particular industries, especially mining, oil and natural gas,’ says PwC.

‘Many African governments recently noted that existing contracts allow multinational corporations to exploit their country’s natural resources without providing adequate compensation. As a result, there is speculation that some resource-rich nations, such as South Africa and Ghana, may impose a “super tax” on excess profits from mining. Nigeria claimed that it has lost US$5 billion in tax revenue because of off-shore oil contracts.’

Earlier this year, Mbeki made the point that it ‘can indeed be said that illicit financial flows are an African problem with a global solution’.There are at least a dozen forums and initiatives under way at a global level to tackle IFFs. Many of these are driven by the OECD, with the US, the G20 and G8 also proactive.

On the continent, however, adequate regulatory frameworks – and their enforcement thereof – are clearly lacking. And, where government agencies are active, the panel report highlights the ‘challenges of duplication, overlapping of functions and lack of co-ordination among different agencies’.

Mbeki said: ‘One key issue we wish to bring to the attention of the [AU] assembly is the need to establish or strengthen the capacities of such institutions and agencies of government as the financial intelligence units, anti-fraud agencies, customs and border agencies, revenue agencies, anti-corruption agencies and financial crime agencies.’

Easier said than done. The panel report makes a number of specific recommendations. It says it is ‘absolutely certain that with the necessary institutions – many of which are in place – and which are staffed by officials with the requisite skills, and with transparent systems across the board, Africa can reverse illicit financial outflows’.

Among the panel’s findings were that the ‘dependence of African countries on natural resources extraction makes them vulnerable to illicit financial flows; new and innovative means of generating illicit financial flows are emerging; tax incentives are not usually guided by cost-benefit analyses; corruption and abuse of entrusted power remains a continuing concern; more effort needed in asset recovery and repatriation; money laundering continues to require attention; weak national and regional capacities impede efforts to curb illicit financial flows; and development partners have an important role in curbing illicit financial flows from Africa’.

Illicit financial flow issues should be incorporated and better co-ordinated across United Nations processes and frameworks.

‘As as a result of our collective action, approximately US$50 billion a year will become available to finance Africa’s identified developmental needs,’ according to the panel.

What is also needed, according to Goga, is more use of the law. ‘Without significant anti-corruption measures on national, continental and international levels, African states will continually expose themselves to the risks of corruption and IFFs,’ he wrote. ‘Establishing financial intelligence centres and anti-corruption bodies, and making them effective, are integral to limiting these corrupt outflows. The use of civil asset recovery procedures is also gaining traction.

‘At the same time, the failure to recognise and appropriately punish those who facilitate illicit outflows will remain a stumbling block until stronger steps are enforced – including criminal prosecutions.’

By Hilton Tarrant
Image: Gallo images/Alamy/Glyn Thomas