Sub-Saharan Africa lost $52bn in illicit financial flows in 2011, mostly through commercial transactions by multinational companies, representing the highest levels of illegal capital flight relative to economic output of any region in the world, new data from Global Financial Integrity indicate.
The world’s poorest region saw the equivalent of 5.7 percent of its total GDP siphoned off its economy, compared to an average 4 percent across other parts of the world, according to the watchdog’s latest report, Illicit Financial Flows from Developing Countries: 2002-2011.
The amount of money illegally drained out of sub-Saharan Africa increased by 20.2 percent every year over the decade ended 2011, second only to the Middle East and North Africa. Countries in the region lost a total $419.1bn, far exceeding inflows of aid and foreign investment.
The problem is most acute in Nigeria and South Africa, Africa’s two largest economies. Nigeria, the continent’s biggest oil producer, hemorrhaged $142.3bn in illegal outflows between 2002 and 2011, compared to aid inflows of $27.7bn. Platinum and gold-rich South Africa lost $100.7bn over the same period.
“The direct and indirect consequences of illicit financial flows – including reduced investment and revenues for health, education, employment, income – are major constraints for Africa’s transformation,” the African Development Bank said it a recent report.
Global Financial Integrity says while transfers from criminal cartels and terrorist organisations are a growing problem, the majority of illegal financial activity stems from trade misinvoicing by international corporations. That process is a kind of trade fraud involving a mis-reporting by exporters or importers on the value of their goods. The data does not take account of transfer pricing – another technique used by multinationals, in this case shifting profits between subsidiaries of the same company – which is thought to account for hundreds of billions of dollars of lost tax revenue globally every year.
Illegal commercial transactions and tax avoidance are often linked to lucrative extractives sectors. “Resource exporters are by far the biggest movers of illicit money abroad. Multinationals are frequently involved in underpricing their exports out of Africa and overpricing the equipment and raw materials that they bring in to produce minerals or oil,” says Raymond Baker, president of Global Financial Integrity.
The rise in illicit capital flight comes as the region experiences a growth surge, outpacing global averages. The International Monetary Fund predicts an acceleration in sub-Saharan Africa’s output to 6 percent in 2014 from 5 percent in 2013, driven by investment in infrastructure and better global conditions.
Financial transparency has been high on the international agenda in 2013 as developed nations – led by the G20 and the Organisation for Economic Co-operation and Development – try to crack down on tax avoidance by multinationals. G20 members say they will begin automatically exchanging tax information for resident businesses by 2015. There has also been a push for anonymous shell companies, often used as a veil for illicit transfers, to disclose their real – or ‘beneficial’ – ownership. Legislation from the US and EU is also demanding that registered companies report on the payments they make to governments for access to oil, gas and minerals.
The United Nations Economic Commission for Africa (Uneca) has set up a high level panel on illicit financial flows from Africa, but at the same time governments in Kenya and The Gambia are making attempts to set up their own offshore tax havens. Kenya is currently the easiest country in the world to set up a shell company.
Illicit outflows are likely to increase on the continent if current trends persist, because “it is easy to do”, Mr Baker argues.
“There are very few regulatory checks on mispriced trade in Africa, and inadequate checks on money laundering and the use of disguised entities,” he says. “The unfortunate truth is that both multinationals and Africans themselves take advantage of the porosity that is available and move money abroad.”
Across the world, illicit financial flows from developing countries increased 13.7 percent to $946.7bn between 2010 and 2011.
“Illicit financial flows from developing countries drain those countries of resources; deny them the democratic choice on how to spend what is rightfully theirs; and reinforce aid dependency,” says Richard Murphy, the founder of Tax Research LLP. “All three deny developing countries hope, and in too many cases, their populations a chance for a better life.”