Continent losing over $50b annually in illicit transfer of funds

Saturday January 31 2015

The Songo Songo gas plant in Tanzania. African countries depend on the extraction of natural resources for their exports and tax revenues, a sector that is vulnerable to illicit financial outflows. PHOTO | FILE

Tax dodgers, organised crime masterminds and corruption cartels deny Africa over $50 billion in revenues every year, money that could significantly reduce child deaths and tackle other pressing development needs.

A report by a high-level panel of the African Union, due to be tabled at the Heads of State summit in Addis Ababa, estimates that the continent lost at least $500 billion in illicit foreign flows in the past decade.

“Africa is bleeding, and it is getting anaemic,” said Dr Anthony Mothae Maruping, the AU Commissioner for Economic Affairs, adding that the continent’s focus on its 50-year development framework, Agenda 2063, aims to shift contributions to the GDP from raw materials to inclusive and sustainable growth.

Anxiety over illicit financial flows from the continent had been bubbling under the surface at the AU headquarters ahead of the Heads of State Summit. The panel, chaired by former South African president Thabo Mbeki, was set up as part of ongoing AU efforts to reduce the continent’s dependence on official development assistance.

READ: Africa losing $58b annually to the world

Its findings are likely to reinforce the work of another AU panel, led by former Nigerian President Olusegun Obasanjo, which presented proposals for raising revenue to fund the AU’s $1.2 billion annual budget. Donors foot 72 per cent of the AU’s annual budget, with member states meeting only 28 per cent.


The highlight of the Mbeki panel’s findings is that large corporations account for 65 per cent of all illicit financial flows out of Africa, manifest in mispricing, wrong invoicing, shell companies and poorly thought out tax incentives that are offered without cost-benefit analyses.

Large corporations, says Mr Mbeki in his foreword to the report, have the means to retain the best available professional legal, accountancy, banking and other expertise to help them perpetuate their aggressive and illegal activities.

The report notes that African countries depend to a large extent on the extraction of natural resources for their exports and tax revenues, but this sector is vulnerable to illicit financial outflows through transfer mispricing, secret and poorly negotiated contracts, overly generous tax incentives and under-invoicing.

READ: $2.48b: What Dar has lost through trade mis-invoicing

“Reliance on extractive industries for revenue and export earnings in Africa usually means that the sector has a high degree of discretionary power and political influence. This is the source of the secret and unequal contracts that African countries sometimes enter into with multinational mining companies,” says the 124-page report.

The illicit transfer of funds from the continent costs nations anywhere between 1 and 20 per cent of their GDP.

Besides commercial activity, tax revenue is lost through criminal activities, ranging “from trafficking of people, drugs and arms to smuggling, as well as fraud in the financial sector, such as unauthorised or unsecured loans, money laundering, stock market manipulation and outright forgery.”

United States authorities reportedly told the panel about a case of money laundering totalling $480 million involving Lebanese banks in which sales of second hand cars were used to launder drug money, with a paper trail going across Benin and Togo to European countries and Lebanon. The panel also obtained evidence of large-scale cash smuggling across land borders and through airports, notably on private and chartered aircraft.

READ: EU must expose anonymous companies to curb money laundering

“Organised criminal organisations, especially international drug dealers, have the funds to corrupt many players, including and especially in governments, and even to ‘capture’ weak states,” Mr Mbeki adds.

The money lost across the continent, according to analyses by the United Nations Economic Commission for Africa, could accelerate the realisation of the Millennium Development Goals such as the reduction of child deaths.

Between 2001 and 2010, the five East African nations lost an estimated $16 billion in illicit financial flows arising from the illegal earning, transfer or use of money by commercial activities, criminal enterprises and corruption.

While acknowledging that illicit financial flows occur in secrecy, making information hard to come by, the panel nevertheless examined three different research studies and commissioned the United Nations Economic Commission for Africa to carry out another using existing data.

It also utilised case studies in six countries and collaborated with Oxfam, Global Financial Integrity, ActionAid International, Christian Aid, Transparency International, the Chr. Michelsen Institute, Tax Justice Network, and the Pan-African Lawyers Union, which have been campaigning against poverty and for social justice.

Case studies and consultations by the panel revealed a clear relationship between countries that are highly dependent on extractive industries and the incidence of illicit foreign flows.

“We found there is extensive underreporting of the quantity and sometimes quality of natural resources extracted for export be it crude oil, diamonds, coltan, gold, shrimp or timber, yet none of the countries we studied and visited had their own independent means of verifying the precise amounts. Instead, they depend on reports filed by the operators, who have an incentive to under report,” the report says.

The panel’s findings sound alarm bells for East Africa’s economies, which are placing their hopes of prosperity on finds of natural gas in Tanzania and oil in Uganda and Kenya. The discovery of oil, natural gas and rare earth have not been followed by the signing of the Extractive Industries Transparency Initiative, and collaborating on the “Publish What You Pay Initiative” driven by civil society organisations.

“There is no doubt that Africa is losing resources, but what we need to focus on are the concrete actions within the control of African governments,” said Saviour Mwambwa, advocacy director at Tax Justice Network Africa.

Last year, Global Financial Integrity, in its report, Hiding in Plain Sight, noted that “Kenya is the single easiest jurisdiction in the world in which to form an anonymous shell corporation, meaning that traders engaging in mis-invoicing have ready avenues to disguise and utilise their ill-gotten gains.”

The report argues that accepting tainted funds should be rendered highly unattractive to banks, and that those found to have been complicit in receiving such funds should not be allowed to keep them once they have been frozen. It suggests the creation of an institutional escrow system in which regional development banks are designated to hold such funds.

Sipho Muthathi, the executive director of Oxfam in South Africa, believes that exposing companies that are involved in illicit foreign flows could demonstrate how the practice occurs. She cites the case where civil society organisations exposed Lonmin in South Africa for repatriating $250 million in six months out of the country at a time when its striking workers had died during a pay protest.

“The government couldn’t deliver services but was instead allowing money to leave the country — that is theft and a crime against the people,” said Ms Muthathi on the sidelines of the AU meeting.

The Mbeki report makes a raft of recommendations, including tighter tax regimes, continent-wide information sharing and collaboration with international institutions to curb illicit financial flows.