Author: The Africa Growth Initiative (AGI) at Brookings conducts high-quality, independent research, which helps establish long-term strategies for economic growth and strong policies for development in Africa. Africa Growth Initiative believes that the time is right for Africa to sustainably and inclusively converge with the rest of the world in terms of standards of living, opportunity, and GDP per capita income. AGI achieves its goal through two objectives, which help ensure that African partners and their U.S.-based institution help “maintain the momentum” and “expand the benefits” of economic growth in Africa.

Date of publication: March 2020

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Organisation’s site : Africa Growth Initiative

Les flux financiers illicites (FFI) sont tous les fonds obtenus, transférés ou utilisés illicitement au-delà des frontières d’un pays. En général, on distingue trois (3) catégories de flux financiers illicites selon leur source ou leur utilisation : les transferts illégaux dans le cadre d’activités commerciales courantes ; les transferts de capitaux d’origine illégale (blanchiment d’argent provenant de diverses activités criminelles, y compris la corruption, la contrefaçon et la trafic d’êtres humains) ; les transferts de fonds utilisés à des fins illégales (financement du crime organisé, y compris le terrorisme, mais aussi l’argent destiné à payer des pots-de-vin dans les pays étrangers).

Alors qu’en 2018, l’Afrique a reçu 29,7 milliards de dollars d’aide publique au développement (APD), elle a simultanément perdu plus de 50 milliards de dollars en FFI! En 2013, selon la Commission économique des Nations unies pour l’Afrique, le montant moyen des flux financiers illicites perdus par l’Afrique chaque année se situe entre 50 et 148 milliards de dollars. Il est indéniable que les flux financiers illicites constituent un obstacle au financement du développement en Afrique. Sur la base des statistiques, l’Afrique pourrait se libérer de l’APD, du lourd fardeau de la dette qui l’étrangle et, surtout, réaliser la transformation structurelle nécessaire à son développement.

WATHI a choisi ce rapport qui examine d’autres tendances des FFI en provenance d’Afrique.  En effet, les auteurs montrent qu’entre 1980 et 2018, l’Afrique subsaharienne a reçu près de 2 000 milliards de dollars en investissements directs étrangers (IDE) et en APD, mais a émis plus de 1 000 milliards de dollars en flux financiers illicites. Leurs études montrent que plusieurs États et secteurs d’activité ont tendance à contribuer de manière disproportionnée aux flux financiers illicites.

En particulier, les industries d’extraction pétrolière et minière sont particulièrement vulnérables aux distorsions de flux financiers, et quatre des principales économies du continent – l’Afrique du Sud, la République démocratique du Congo, l’Éthiopie et le Nigeria – sont responsables de plus de la moitié des flux financiers illicites en Afrique. Toutefois, en termes de flux financiers internationaux par rapport au commerce, des pays comme Sao Tomé-et-Principe et la Sierra Leone ont les parts les plus élevées des flux illicites relatifs au commerce, ce qui indique que ces pays n’ont pas la capacité de réguler suffisamment leurs ressources intérieures.

Why did we choose this document ?

Illicit financial flows (IFFs) are all funds illicitly obtained, transferred or used beyond the borders of a country. Generally, three (3) categories of illicit financial flows are distinguished according to their source or use: illegal transfers within the context of regular trade activities; capital transfers of illegal origin (money laundering from various criminal activities, including corruption, counterfeiting and trafficking in human beings); funds transfers used for illegal purposes (financing of organized crime, including terrorism, but also money intended to pay bribes in foreign countries).

While in 2018 Africa received $29.7 billion in official development assistance (ODA), it simultaneously lost more than $50 billion in IFFs! In 2013, according to the United Nations Economic Commission for Africa, the average amount of illicit financial flows lost by Africa annually is between $50 billion and $148 billion. It is undeniable that illicit financial flows are a barrier to financing development in Africa. Based on statistics, Africa could free itself from ODA, the heavy debt burden that is strangling it and, above all, achieve the structural transformation necessary for its development.

WATHI chose this report which examines other trends in IFFs coming from Africa.  Indeed, the authors show that, between 1980 and 2018, sub-Saharan Africa received nearly $2 trillion in foreign direct investment (FDI) and ODA, but emitted over $1 trillion in illicit financial flows. Their studies show that several nations and sectors tend to contribute disproportionately to illicit financial flows.

Specifically, the oil extraction and mining industries are particularly vulnerable to financial flow discrepancies, and four of the continent’s prominent economies South Africa, the Democratic Republic of the Congo, Ethiopia, and Nigeria are responsible for more than half the illicit financial flows in Africa. However, in terms of IFFs relative to trade, countries as Sao Tomé and Principe and Sierra Leone tend to have higher illicit flows as a percent of trade, suggesting that these countries lack the capacity to sufficiently regulate their domestic resources.

Les auteurs montrent que les FFI se sont déplacés des économies plus industrialisées vers les économies émergentes. Cette évolution s’explique en partie par la baisse du niveau des échanges avec les économies développées. Des efforts supplémentaires pour limiter les sorties illicites s’avèrent nécessaires afin de freiner la perte des ressources financières nationales.

Les décideurs africains devraient s’efforcer davantage de travailler avec leurs principaux partenaires commerciaux du Moyen-Orient et d’Asie pour élaborer des politiques visant à réduire les sorties illicites de ressources de développement de l’Afrique. Ainsi, les efforts de rapatriement des flux illicites en provenance de tous les partenaires commerciaux continueront à assurer une voie de retour des flux vers l’économie nationale. Toutefois, les efforts de rapatriement se heurtent à de nombreux défis. En effet, de nombreux pays en développement ne disposent pas des capacités judiciaires nécessaires pour produire des demandes légitimes de recouvrement de biens et il peut y avoir un manque de coopération de la part des partenaires lorsqu’ils sont sollicités pour le recouvrement de fonds.

Quelques efforts de rapatriement ont néanmoins abouti à la zone WATHI. C’est le cas du Nigeria, qui a lancé en 1998 une enquête contre l’ancien président Abacha. Cette enquête a permis de récupérer 504 millions de dollars sur les 3 milliards de dollars détournés. Dans un autre exemple, en 2012, la Suisse a rapatrié en Angola 64 millions de dollars de fonds pillés qui auraient été détournés entre 2004 et 2012. Ces efforts devraient également s’accompagner d’initiatives ou de mécanismes supplémentaires destinés à dissuader les sorties financières illicites en premier lieu.

What lessons for the countries of the WATHI zone ?

The authors show that IFFs have shifted from more industrialized economies to emerging ones. Part of this shift can be explained by the reduction in trade levels with developed economies. Further efforts to limit illicit outflows prove necessary in order to curb the loss of domestic financial resources.

African policymakers should make greater efforts to work with their key trade partners in the Middle East and Asia to develop policies to stem the outflow of development resources from Africa. Thus, repatriation efforts of illicit flows from all trading partners will continue to ensure a path for the return of flows to the home economy. However, repatriation efforts face numerous challenges. In fact, many developing countries lack the judicial capacity necessary to produce legitimate requests for asset recovery and there can be a lack of cooperation from partners when asked for funds recovery.

Repatriation efforts have nevertheless resulted in the WATHI zone. This is the case of Nigeria, which in 1998 launched an investigation against former President Abacha. This led to the recovery of $504 million the stolen $3 billion. In another example, in 2012, Switzerland repatriated $64 million in looted funds to Angola that were allegedly stolen between 2004 and 2012. Such efforts should also be accompanied by additional initiatives or mechanisms designed to deter illicit financial outflows in the first place.

Extracts from the document, pages: 2-3; 5-10; 12; 15-16

Introduction

While the international development community often focuses on the amount of aid and investment that enters the African continent, the other part of the balance sheet the funds exiting the continent has often been overlooked. Between 1980 and 2018, sub-Saharan Africa received nearly $2 trillion in foreign direct investment (FDI) and official development assistance (ODA), but emitted over $1 trillion in illicit financial flows. These flows, illicitly acquired and channeled out of the continent, continue to pose a development challenge to the region, as they remove domestic resources which could have been crucial for the continent’s economic development.

There is no widely agreed-upon definition of which specific forms of capital movement constitute illicit financial flows. Global Financial Integrity, a non-profit, Washington, D.C.-based research and advisory organization, defines illicit financial flows as “the illegal movement of money or capital from one country to another.” This narrow definition of illicit financial flows covers activities including hiding the proceeds of crime, channeling funds towards criminal destinations, and evading tariffs and taxes through misreporting of transactions. Wider definitions generally focus on actions that are not strictly illegal, but which are undesirable because they result in reduced tax revenues, including tax avoidance actions such as strategic transfer pricing.

Trade misinvoicing is one method of laundering money for illegal transfer to another country. It occurs when exporters or importers deliberately misreport the value, quantity, or nature of goods and services in order to evade taxes, take advantage of tax incentives, avoid capital controls, or launder money.

Illicit financial flows in Africa

Illicit financial outflows from Africa are concentrated in a few countries and a few sectors in particular, the extractive and mining industries. In fact, fuel exporters were responsible for nearly half of the illicit financial flows from Africa between 1970 and 2008. Notably, it is found that oil price increases are associated with increases in illicit flows. Moreover, there is a statistically significant relationship between oil exports and illicit financial flows. In addition, oil is not the sole resource conducive to illicit outflows of capital. In South Africa, the vast majority of illicit capital flows arise out of transfer pricing from the mining sector.

Fuel exporters were responsible for nearly half of the illicit financial flows from Africa between 1970 and 2008

Resource-exporting countries are more prone to exporting large amounts of illicit financial flows due to several factors. First, large exports of oil provide more opportunities for trade misinvoicing. Second, in oil industries, the line between private and public interests is often blurred, as government officials often own stakes in state-owned companies. Moreover, the funds created from extractive industries provide political leaders with a certain level of independence, then removing the need for accountability from politicians involved in those industries.

Third, extractive industries require a high level of expertise, which leads to relatively low levels of competition, creating oligopolies who may collaborate with governments and competitors for contract negotiations, joint ventures, and other arrangements. The low levels of competition can also lead to companies working together to export illicit capital outflows. Finally, resource-rich countries tend to have higher rates of corruption, further compounding challenges associated with illicit financial flows.

Impact of illicit financial flows

Illicit financial flows drain resources that could be used for the continent’s development, meaning that a reduction in illicit financial flows could potentially lead to a corresponding reduction in aid dependence by increasing the availability of domestic resources. While illicit financial flows are a constraint to development financing in Africa, it remains difficult to assess the link between illicit financial flows and poverty reduction, as the channel through which this link materializes is through reduced government funding for poverty reduction programs such as in health and education, or through indirect channels such the negative effect of low investment on incomes.

Illicit financial outflows have been found to have a strong and negative effect on investment rates, notably private investment. In addition to foregone investment, illicit financial flows are presently curtailing Africa’s savings rate. In fact, Janvier Nkurunziza refers to illicit financial outflows as a “dissaving”: In African countries where savings and investments are strongly correlated and traditional sources of investment provide limited funding, this “dissaving” effect is even stronger.

While increased savings can open the door for increased investments in human development, the relationship may be circuitous. A 2015 paper on financing investment in sub-Saharan Africa, for example, finds that human development coupled with good governance has a positive impact on savings rates. The paper claims that investments in education and health can lead to a more prosperous economy, which generates larger tax revenues and can increase domestic savings. It is possible that if decreasing illicit financial flows leads to increased savings, then these funds can be reinvested in activities that improve human development, which will in turn improve the savings rate.

Analysis of illicit financial outflows from Africa

Our analysis uses data that ranges from 1980 to 2018. We find that, over the 38-year time span, Africa exported an aggregate $1.3 trillion of illicit financial flows. Illicit financial flows saw a notable increase in the 2000s in correspondence to increases in trade from Africa. Despite one noticeable dip in the 2000s which occurred during the 2008 financial crisis aggregate illicit financial flows have remained relatively high, reaching a peak of $114.5 billion in 2012.

While the high aggregate amount of illicit financial flows may appear alarming, it is important to note that the relative share of illicit financial flows seems to be steady or declining. In 2018, illicit financial flows only made up 5 percent of GDP, down from 8 percent in 2012 and 2008. Illicit financial flows as a share of trade also fell from 14 percent in 2008 to 11 percent in 2018.

The top four emitters of illicit flows South Africa, the Democratic Republic of the Congo, Ethiopia, and Nigeria emit over 50 percent 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.

Small countries tend to have higher illicit flows as a percent of trade, suggesting that these countries lack the capacity to sufficiently regulate their domestic resources

As a percent of trade, illicit financial flows are highest in excess of 50 percent São Tomé and Príncipe and Sierra Leone. Small countries tend to have higher illicit flows as a percent of trade, suggesting 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 percent of trade.

Illicit flows have a non-exhaustive list of drivers. Analysis of African countries shows that the extent of illicit flows can be affected both by structural factors and by domestic policies targeting illicit flows with strong compliance mechanisms.

Macroeconomic indicators

We find a positive and significant relationship between real GDP and illicit financial flows (aggregate). Inflation is also positively correlated with aggregate illicit financial flows. These findings could indicate that macroeconomic fluctuations, such as inflation, weaken confidence in a country’s macroeconomic environment and encourage people to send their capital abroad. We further find a positive and significant correlation between illicit flows as a share of trade and tax revenue as a share of GDP. Likewise, we find a positive and significant correlation between illicit flows as a share of GDP and tax revenue as a share of GDP. When governments collect a large share of taxes, individuals and corporations have incentives to store capital abroad, away from government appropriation.

Governance indicators

Some authors have found a significant relationship between poor governance and illicit financial outflows. Exportation of illicit funds often, though not always, requires using illegal means that involve corruption. We use the World Governance Indicators to assess the link between illicit financial flows and governance. Developed by the World Bank, the six indicators measure control of corruption, government effectiveness, political stability, rule of law, regulatory quality, and voice and accountability.

The indicators are scored between 0 and 100, where higher scores correspond to better governance. In the correlation analysis, we find that, throughout sub-Saharan Africa, there seems to be no statistically significant correlation between illicit financial flows and good governance.

Improvements in political stability are correlated with decreases in illicit flows

While there is a negative correlation between political stability and illicit financial flows, the relationship is not statistically significant when all sub-Saharan African countries are included in the analysis. Some of the difficulty in drawing a clear relationship between illicit flows and governance stems from the extent of illicit financial flows out of South Africa, a country that performs relatively well on most governance indicators. When we exclude South Africa from the analysis, we find a negative, though statistically insignificant, relationship between illicit financial flows and most governance indicators as well as a negative and statistically significant relationship between aggregate illicit financial flows and political stability, implying that improvements in political stability are correlated with decreases in illicit flows.

Destinations of illicit financial flows from Africa

While good domestic policies are necessary for reducing illicit flows, destination countries also carry part of the responsibility to fight illicit financial flows: Tax evasion, for example, though not by definition illegal, can be a key component of illicit financial flows, and is often done by multinationals from advanced economies.

Identifying major destination countries can encourage them to take the precautions necessary to reduce the share of illicit financial flows they host. To study the destination of illicit financial flows, we examine the countries with which sub-Saharan Africa has recorded the largest levels of trade misinvoicing. We note that our approach is limited because it excludes the net errors and omissions measures included in the aggregate estimates of illicit financial flows, as they are measured at the country level and not as a flow between countries.

The majority of illicit financial flows from Africa between 1980 and 2018 have been hosted in the Europe and Central Asia or East Asia and Pacific regions

The majority of illicit financial flows from Africa between 1980 and 2018 have been hosted in the Europe and Central Asia or East Asia and Pacific regions; the volume of intra-African illicit flows is also large. As a percent of trade, however, illicit flows from Africa are highest in the Middle East and North Africa region.

China hosts the greatest extent of illicit flows, almost twice as much as the second-position United States. Between 1980 and 2018, China hosted 16.6 percent of all estimated illicit flows from sub-Saharan African countries, while the United States hosted 9.1 percent, the United Kingdom 5.4 percent, and India 5.0 percent. Reflecting the drastic increase in China-Africa trade in the past two decades, the majority of China’s illicit financial flows from Africa have occurred in recent years: Our analysis finds that 85 percent of total illicit flows to China have taken place between 2010 and 2018.

Mexico has the highest extent of illicit flows as a percent of trade, at over 50 percent of all trade, followed by Bahrain. Two sub-Saharan African countries Benin and Niger are among the top 10 hosts of illicit flows as a percent of trade.

Analyzing the two largest hosts of total illicit flows, we see that total illicit financial flows to China have increased commensurately with trade since 2000, while total illicit flows to the U.S. remained fairly constant, increasing slightly in correspondence with an increase in total trade from 2008 to 2011. As a percent of trade, illicit flows to the United States followed a decreasing trend from 2000 to 2018. In contrast, in China, the evolution of illicit financial flows has followed a more complex pattern: As a percent of trade, illicit flows remained below 15 percent from 2006 and 2010, increased dramatically between 2011 and 2014 to a peak of 26 percent in 2014, and then declined to an average of 14 percent from 2015 to 2018.

Between 1980 and 2018, China hosted 16.6 percent of all estimated illicit flows from sub-Saharan African countries

The change in illicit financial flows as a percent of trade to China during the 2008-2010 period provides insight into the pattern of illicit flows to China over the past two decades. After dropping to their lowest levels in a decade in 2008, coinciding with the global financial crisis, illicit financial flows as a percent of trade toward China increased noticeably after 2010. In the post-crisis era, the Chinese government created a $586 billion stimulus package to minimize the impact of the financial crisis and boost the country’s economy. The package led to a 3.2 percentage point increase in China’s GDP growth and to increased investment, consumption, and trade.

Initiatives in place to combat illicit financial flows

As the case of China demonstrates, curbing illicit financial flows requires cooperation at the global level. Indeed, the past decade has seen increased effort from the global community toward reducing illicit financial flows. Such efforts range from creating initiatives to curb money laundering to improving the sharing of tax information across countries. One of the first legal instruments created to combat illicit outflows of capital was the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988, also known as the Vienna Convention. This instrument includes rules against money laundering and urges parties to work together to allow for the identification, tracing, and seizure of illicitly acquired financial proceeds.

Other notable initiatives that aim to combat illicit outflows include 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).

Curbing illicit financial flows requires cooperation at the global level

Repatriation efforts

While stopping illicit outflows of capital before they happen is important, repatriating funds that have been smuggled out can also be an important tool to solidify the domestic resource base of African countries. Challenges to repatriation efforts are numerous. For instance, 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 is a hindrance to asset recovery. In addition, there can be a lack of cooperation from developed economies when asked for funds recovery.

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