Countries in the East African Community saw a combined $1.33 billion moved out of the region through illicit financial transactions over the past decade, a new report shows, raising questions over the efficiency of regulations meant to curb illegal capital outflows.

Uganda leads the pack in the EAC, ranking 66th out of 143 economies surveyed, with illicit financial transactions costing it at least $680 million over the 10-year period.

According to the Global Financial Integrity report, Tanzania, which was ranked 86, lost $333 million over the same period. Rwanda was ranked at 106, having lost $158 million. Kenya lost an estimated $112 million while Burundi, the region’s smallest economy, lost $49 million.

EAC countries have been grappling with capital flight, with individuals setting up companies and accounts in tax havens.

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The estimates by GFI are based on parameters such as smuggling, cross-border movements of cash and trade mis-pricing in invoices exchanged between importers and exporters.

Tax havens
The researchers said they lacked reliable figures, meaning the illicit flows from emerging markets and developing countries could be much higher.

Most of the billions stashed away in foreign bank accounts by influential businessmen and powerful politicians are suspected to be proceeds from defence and security-related contracts and payment of fake debts.

“Astronomical sums of dirty money flow out of the developing world into offshore tax havens and developed country banks,” GFI director Raymond Baker said.

“Whatever strengthened financial regulations may be in place or may be contemplated, cannot yet be seen to have an effect on the continued passage of funds out of poorer countries, through the global shadow financial system, and ultimately into richer Western economies,” said Mr Baker in the report titled “Illicit Financial Flows from Developing Countries.”

In June, the Swiss National Bank (SNB), the central bank of Switzerland, said EAC countries had at least $1.3 billion stashed in the country. Kenya topped the list with $857 million followed by Tanzania ($178 million), Uganda ($159 million), Rwanda ($29.7 million) and Burundi ($16.7 million).

Global pressure has been rising on Switzerland to compel its banks to share information about their clients with foreign governments. It is suspected that foreigners holding illicit wealth in Swiss banks may be moving their funds out for fear of being exposed due to growing scrutiny.

The news about growing illicit outflows comes as the EAC countries battle budget deficits that have seen them go on a borrowing spree.

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Kenya’s public debt currently stands at 48.6 per cent of GDP, having marginally declined from the 48.8 per cent recorded in 2011.

Uganda plans to borrow at least Ush2.6 trillion ($1 billion) this year, while Rwanda’s total external debt (including guaranteed debt) is projected to rise to $1.3 billion in 2012 (19.1 per cent of GDP). As at March 2012, Tanzania’s debt stood at Tsh20 trillion ($12.8 billion).

Anti-graft activists said huge unreported flows of money are leaving the EAC countries every year, ending up in rich countries or tax havens, denying nations desperately needed tax revenues.

They argue that tracing, freezing, confiscation and repatriation of stolen assets is a cumbersome process because of differences in legal systems, the high costs of co-ordinating investigations, inadequate international co-operation and bank secrecy laws.

“Invoice manipulation seems to be a very serious issue. It relates to multinationals and people who export products,” said Mwalimu Mati who heads MarsGroup, an anti-graft lobby.

“It is a product of a combination of a weakness in our own tax systems and a lack of understanding of this phenomenon, as well as corruption,” added Mr Mati.

According to GFI, capital flight can also be traced through a country’s balance of payments where the source of funds and the use of funds do not balance out.

GFI also implicates the private sector in developing countries, saying that it transfers illicit capital into the global shadow financial system through different channels.

“Where the private sector is involved, it is important to understand the processes that are being used to siphon the funds out of the region. I think, in terms of grand corruption, a lot of gains have been made in Kenya,” said Patrick Obath, chairman of the Kenya Private Sector Alliance, adding that there was no way the region was losing these amounts of money without the knowledge of the authorities.

China, which is swiftly becoming one of the largest trading partner of the region, has not only been listed as the country that loses the most money in the world but also been as one of the biggest beneficiaries of illicit financial transactions from the East African region.

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“China’s role in driving illicit flows from developing countries remained strong, accounting for an average of 47 per cent of all illicit outflows over the decade,” notes the GFI report.

GFI, which describes illicit financial flows as funds that are illegally earned, transferred and used and cover all unrecorded private financial outflows, said that China lost $2.74 trillion over the 10-year period followed by Mexico which lost $476 billion.

The report, which shows that many oil and mineral rich countries cannot account for billions of dollars, has been released at a time when the East African region is becoming a hot spot for explorers and mineral prospectors.

“Saudi Arabia and Nigeria, which are exporters of oil, are now becoming more important sources of illicit capital. Oil prices and illicit outflows seem to be significantly correlated,” notes GFI in the report.

The lack of transparency, experts warned, could see the value of illicit financial transactions go up in Uganda and also Kenya, where oil and other minerals are being discovered.

“The cure is in having transparent systems. People need to know how much has been extracted, what are the market values, how the money is being used,” said Samuel Kimeu, the executive director Transparency International Kenya.

“There is no concerted effort by governments in the region to curb corruption and the flow of these funds from the region, so the oil and other minerals, which usually come as a windfall, may not end up benefiting citizens,” Mr Kimeu added.

One of the reasons for high number of illicit financial transactions is the lack of mechanisms that can help track the flow of funds, analysts said.

In April this year, Kenya operationalised the Financial Reporting Centre, which receives and analyses information on unusual or suspicious transactions that may be associated with money laundering and forwards them to appropriate authorities for action.

READ: Kenya FRC to fight money laundering

Accounts growing

However, Kenya’s Anti-Money Laundering Advisory Board is yet to gazette anti-money laundering laws and it has remained on an international watch list of countries with weak anti-money laundering laws, together with Tanzania and Nigeria.

“The accounts have been growing with time. It is a big task for governments to find out the sources of these funds and the owners,” said John Githongo, a Nairobi based anti-corruption campaigner.

“The incidence of money being stashed abroad usually rises around elections, so it is expected Kenya’s share will grow in the coming months to the March 4 elections,” added Mr Githongo, a former ethics and governance permanent secretary.

The research and advocacy organisation says that among the countries that lose the most money worldwide are Malaysia, Russian Federation, Philippines, India, Indonesia, and the United Arab Emirates.

Mr Kimeu said that a high level of illicit financial transactions is linked to corruption and bribery and Uganda which has the highest illicit financial transactions in the region, according to GFI, also topped the Transparency International 2012 East African Bribery Index.

The latest Corruption Perceptions Index by Transparency International ranked Rwanda at position 50 out of 174 economies, Tanzania at 102, Uganda at 130, Kenya at 139 and Burundi at 165.

READ: Burundi ranked most corrupt for second year