Institute of Development Studies

Illicit Financial Flows from Africa: Hidden Resource for Development

Friday 21 May 2010 – Eric Manga

IDS held a seminar on 11 May to discuss the findings of a study recently completed by Global Financial Integrity (GFI) on illicit financial outflows from Africa. GFI’s Director Raymond Baker presented the report which shows that from 1970 and 2008, Africa lost a staggering $854 billion in illicit financial outflows – a figure that could rise to U$ 1.8 trillion or even higher if adjusted to missing data.

To arrive at these figures, the study relied on two models: World Bank’s residual model and IMF direction of trade statistics.  These findings build on the ground-breaking 2009 report, Illicit Financial Flows from Developing Countries: 2002-2006 which estimated that developing countries were losing as much as $1 trillion every year in illicit outflows.

Other key report findings of the report include:

• Total illicit financial findings outflows from Africa, conservatively estimated, were approximately $854 billion
• Total illicit outflows from Africa may be as high as $ 1.8 trillion
• Sub-Saharan African countries experienced the bulk of illicit financial outflows with the West and Central Africa region posting the largest outflow numbers
• The top five countries with the highest outflow measured were: Nigeria (&89.5 billion) Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion)
• The financial outflows from the entire region outpaced official development assistance going into the region at a ratio of at least 2 to 1
• Illicit financial outflows from Africa grew at an average rate of 11.9 percent per year

These financial flows, which are mainly from Africa to Western countries, are in the forms of mispricing, money laundering, smuggling, and bribery among others but most is tax evasion by corporations. Much of it passes through the global shadow financial system specifically designed to facilitate transactions that shift illicit, unrecorded money across borders.

Far reaching consequences

According to Raymond Baker, the amount of illicit outflows continues to increase every year with far reaching consequences in the continent.  “The amount of money that has been drained out of the Africa - hundreds of billions of decade after decade - is far in excess of the official development assistance going into African countries”.

The study traces the problem of illicit financial flows from Africa to 1960s and attributes it to two factors. One, decolonisation of the continent during this period which created an enabling environment for capital flight. Two, the continued spread of multinational corporations across the world and other infrastructures which facilitate financial flows across borders. Raymond noted that the amount of outflows continues to increase unabated mainly because Western countries have done little to address the problem. They instead provide an enabling environment for the vice to thrive. “There are now more than 60 tax heavens compared to the 1960s when they were about four in the world. Some are in the form of fake foundations where contributors are also beneficiaries.”

Reducing illicit flows

According to Raymond, the following measures can significantly reduce the  amount of illicit financial outflows from the Continent:  laws requiring financial institutions to demand transparency on actual (‘beneficial’) ownership for instance listed companies instead of next layer beneficiaries; country- by- country reporting by companies showing their financial transactions; automatic information exchange among tax authorities; and harmonisation of anti-money-laundering laws. He was categorical that “All countries should have a common stand on what constitutes accountable money or not, and the proceeds of tax evasion should be declared illegal.”  In order to address the issue of mispricing he stated the following: “We advocate two signatories (i.e. buyer and seller) should append their signature against a paragraph stating that their transactions do not violate laws such as  anti money laundering laws. This will not curtail the problem but  instead will reduce it a great deal.” He informed the participants that Global Financial Integrity is already working with other organisations through a task force to lobby governments and other corporate organisations to institute these measures.

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