How to steal a trillion dollars

“The continent has over the past 30 years fed the global financial system through illicit financial flows”

Windhoek – African leaders should wake up to the debilitating impact of illicit financial flows and build capacity to combat the global drain on the continent’s resources, which researchers estimate to run into trillions of dollars.

A report by the African Development Bank (AfDB) and Global Financial Integrity (GFI), a US-based research organisation, says Africa has been a long-term net creditor to the entire world.
This is contrary to widely-held perceptions and the traditional view of Africa benefitting from the West through aid and private sector investments.
The continent has over the past 30 years fed the global financial system through illicit financial flows, which dwarf money that has come into the continent either as official development assistance or FDI.
Illicit financial flows are generally described as proceeds of theft, bribery and any other forms of corruption, criminal activities, tax evasion and laundered commercial transactions.
It is estimated that Africa lost US$1.4 trillion in net resources outflows between 1980 and 2009 and the resource drain is holding the continent’s development back.
“The resource drain from Africa over the last 30 years ‑ almost equivalent to Africa’s current gross domestic product (GDP) is holding back Africa’s lift-off,” Professor Mthuli Ncube, AfDB vice-president and chief economist, said.
Raymond Baker, the GFI president added, “The traditional thinking has always been that the West is pouring money into Africa through foreign aid and other private sector flows, without receiving much in return. Our report turns that logic upside down – Africa has been a net creditor to the rest of the world for decades.”
The bulk of monies are moved out of Africa through trade mispricing or transfer pricing, and thanks to banks secrecy and the enclave nature of tax havens, Africans governments lack capacity to trace where money generated in their countries ends up.
The most significant perpetrators of transfer pricing are multinational corporations, which because of their strong global presence and influence, facilitate illicit transfer of funds.
The World Trade Organisation (WTO) estimates that multinational corporations control about 60 percent of world trade, which amounts to US$40t.
Other forms of illicit commercial activities such as tax evasion shift money beyond the reach and appropriate use of domestic authorities, the UN said recently.
“More than one trillion dollars flowed illicitly out of Africa over the past 30 years, dwarfing capital inflows, and stifling economic development,” GFI’s chief economic Dev Kara said.
During this period, West and Central Africa are said to have lost US$494 billion, North Africa US$415b and Southern Africa US$370b.
In the decade to 2009, it is estimated that about US$30b annually (3.2 percent of Africa GDP) flowed out of Africa in net recorded transfers. About 80 percent of these outflows (US$25.2b) were out of North Africa.
Nigeria, Republic of Congo, Cote d’Ivoire, Egypt, Algeria, Libya, South Africa, Mauritius, Angola and Zimbabwe top the list of countries with the largest outflows.
Studies have also shown that outflows have increased over the past years in line with African countries’ rise in external debt burdens.
The report says that the figure of US$1.4t might actually be an understatement due to missing data from some countries.
Overall, Nigeria, South Africa and Egypt are the three largest exporters of illicit capital from the continent, the study found out.
The study also found out that when illicit flows are ranked in terms of outstanding external debt, countries with lower debt such as Equatorial Guinea, Botswana and Namibia, are actually ahead of Nigeria, while South Africa and Egypt, the two largest exporters, are not amongst the top ten.
The study also sampled four countries to estimate the loss per capita, finding out that per capita loss increase to US$638 over the 2000s from US$411 during the 1980s.
Southern Africa lost nearly US$2 000 per person (on average), while countries in West and Central Africa lost about US$1 293 per capita.
“Over the 30-year period 1980 to 2009, Africa provided net resources to the world which, on a cumulative basis, ranged from at least US$597 billion to as much as US$1.4 trillion,” the study says.
“In spite of increasing recorded inward transfers through the balance of payments, most African countries experienced a net drain of resources over the 30-year period, driven largely by illicit outflows.”
Offshore financial centres, commonly known as tax havens or secrecy jurisdictions and banks in developed countries facilitate the absorption of illicit capital from developing countries.
“Although issues related to opacity of tax haven operations have been brought to the forefront of public debate, less attention has been paid to the secrecy surrounding bank information particularly pertaining to private sector deposits of developing countries allegedly due to confidentiality requirements,” the study says.
The report recommends that banks and offshore financial centres be compelled to report to the Bank for International Settlements (BIS) detailed deposit data by sector, maturity and country of residence of deposit holders.
BIS must also be compelled to widely disseminate cross-border banking data for specific source and destination countries.
“At the domestic level in Africa, know-your customer provisions in the laws governing financial institutions should be strengthened to make it illegal for banks and other financial institutions to open new accounts without knowledge of the nature of the person(s) owning the account,” the study says.
The study also recommends that African countries must enter into agreements which enable automatic exchange of tax information (AEI), a process which would require countries to collect and exchange data from financial institutions on income, gains and property of non-resident individuals, corporations and trusts.
“These huge outflows of capital play a significant role in undermining the potential for a developmental role of the state in Africa in the continent through draining tax revenues and scarce foreign exchange resources, stifling growth and socio-economic development, and weakening governance…the developmental state in Africa must have the political will and the necessary capacity to overcome the challenges of illicit financials flows,” the UNECA said earlier this year.
UNECA estimates that Africa loses up to US$50b per year – and this is double the amount of aid that the continent receives.
The UN agency says illicit outflows “have detrimental impact on Africa’s development and governance” by stifling socio-economic progress, draining scarce foreign exchange reserves, reducing tax revenues, increasing corruption, aggravating foreign debt and increasing economic dependency.
“The governance challenges of (illicit financial flows) include weakening public institutions and domestic private sector development; as well as reduction in the capacity of the state to provide public goods and services to improve people's welfare.”
In February last year, UNECA inaugurated its High Level Panel on Illicit Financial Flows from Africa, headed by South Africa’s  Former President, Thabo Mbeki.
According to one Global Financial Integrity study, in Southern Africa, Angola leads with losses of US$71.513bn.
Botswana lost US$1.828b, the DRC lost US$30.725b; South Africa lost US$36.161b; Zimbabwe lost US$22.623b, and Zambia lost some US$24.412b.
Mozambique, Malawi and Swaziland lost US$14.520b, US$2.293b and US$2.088b respectively. Nigeria is the country with the biggest estimated losses in Africa at US$296.221b, followed by Angola’s plus-US$70b losses.

June 2013
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