Nigeria, S’Africa, Ethiopia, Congo Account for 50% Illicit Financial Flows in Africa

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Ndubuisi Francis in Abuja

Nigeria, South Africa, Democratic Republic of Congo and Ethiopia account for 50 per cent of illicit financial flows (IFFs) in Sub-Saharan Africa, Brookings Institution, a globally renowned American research group, said in a new report.

The report, titled Illicit Financial Flows in Africa: Drivers, Destinations, and Policy Options, said revelations around illicit financial gains by Isabel dos Santos, Africa’s richest woman and daughter of former Angolan president Eduardo dos Santos, once again brought the topic of illicit financial flows to the forefront of the conversation on domestic resource mobilisation in Africa.

Unfortunately, the report noted that illicit flows “are not new to the continent: While between 1980 and 2018, sub-Saharan Africa received nearly $2 trillion in foreign direct investment (FDI) and official development assistance (ODA), it emitted over $1 trillion in illicit financial flows.
“These flows, illicitly acquired and channelled out of the continent, continue to pose a development challenge to the region, as they remove domestic resources that are crucial for the continent’s development,” the reported added.

It stressed that over a 38-year period, between 1980 and 2018, Africa exported an aggregate $1.3 trillion of illicit financial flows, adding that IFFs saw a notable increase in the 2000s in correspondence to increases in trade from Africa.

The report, however, said while the high aggregate amount of illicit financial flows might appear alarming, it was important to note that the relative share of illicit financial flows seemed to be steady or declining.

“In 2018, illicit financial flows only made up 5 per cent of GDP, down from 8 per cent in 2012 and 2008. Illicit financial flows as a share of trade also fell from 14 per cent in 2008 to 11 per cent in 2018.

“The top four emitters of illicit flows—South Africa, the Democratic Republic of the Congo, Ethiopia and Nigeria—emit over 50 per cent of total illicit financial flows from Africa.

“Among the top 10 emitters of illicit flows, nine countries attribute a significant portion of total exports to natural resources: mining products in South Africa, the Democratic Republic of the Congo, Botswana, and
Zambia, and oil and gas in Nigeria, the Republic of the Congo, Angola, Sudan, and Cameroon.

“Natural resources provide countries with opportunities to expand the volume of total trade, which is correlated with the volume of illicit financial flows; studies also suggest that extractive industries are particularly prone to illicit financial flows,” the Brookings Institution’s report said.
It pointed out that as a percentage of trade, illicit financial flows are highest—in excess of 50 per cent in São Tomé and Príncipe and Sierra Leone, noting that small countries tend to have higher illicit flows as a percentage of trade.

It said: “This suggests that these countries lack the capacity to sufficiently regulate their domestic resources. Notably, however, and in contrast to this trend, Ethiopia and the Republic of the Congo are found in both the top 10 emitters of total illicit flows and the top 10 emitters of illicit flows as a percentage of trade.”

But the report added that larger economies like Nigeria “have higher levels of illicit financial flows. Indeed, we find that the top four emitters of illicit flows—South Africa, the Democratic Republic of Congo, Ethiopia, and Nigeria—emit over 50 percent of total illicit financial flows from sub-Saharan Africa.

“We also find that higher taxes and higher inflation lead to higher illicit financial outflows, suggesting that firms seek out relatively more stable or favourable fiscal environments for their funds.

“Furthermore, we find that emerging and developing economies in Asia and the Middle East have become major destinations for illicit financial flows from Africa in recent years. While part of this shift can be explained by the reduction in trade levels with developed economies, the large upsurge of illicit flows to these economies cannot solely be explained by those increased values.”
On policy options to check illicit flows and repatriating funds, the report observed that curbing illicit financial flows required cooperation at the global level.

Over the past decades, the global community, it noted, has begun to undertake a number of initiatives aimed at reducing illicit financial flows, including initiatives to curb money laundering and improve the sharing of tax information across countries.
It cited three initiatives—the Financial Action Task Force (created 1998), the Global Forum on Transparency and Exchange of Information for Tax Purposes (created 2009), and the Inclusive Framework on Base Erosion and Profit Shifting (created 2016) as having provided strong recommendations and standards for reducing illicit financial flows.

Noting that implementation has been challenging, the report said many African countries and other developing countries lacked the resources and capabilities to dedicate to curbing illicit financial flows.

Furthermore, the delay of many advanced economies in fully committing to these initiatives has prevented full transparency and contributed to the continuation of harmful tax practices.

While stopping illicit outflows of capital before they happen is important, the new report said repatriating funds that had been smuggled out could also be an important tool to solidify the domestic resource base of African countries.

“In fact, just last month, the U.S. and the British dependency of Jersey agreed with Nigeria to repatriate more than $300 million stolen by Nigeria’s former military ruler General Sani Abacha. Challenges to repatriation efforts are numerous, however. Many developing countries lack the judicial capacity necessary to produce legitimate requests for asset recovery.

“Moreover, differences in legislation between the place where money is laundered and the place where the theft occurs are a hindrance to asset recovery. In addition, there can be a lack of cooperation from developed economies when asked for funds recovery. Overall, more needs to be done both to repatriate funds and to halt financial flows before they exit countries,” the report said.