One of the challenges Anti-Money Laundering specialists face is employing a risk-based approach through the study and application of international trends, typologies, and recommendations to their specific regions. While it is well accepted that the use and transfer of illegal funds commonly known as illicit financial flows (“IFFs”) impact negatively on economies, not much research with attention to the African context had been conducted until the past few years.
The publication of the report of the African Union and UN Economic Commission for Africa High-Level Panel on IFFs out of Africa in 2015 brought the issue of African IFF’s to the fore. The report estimated that Africa loses approximately U$50 billion due to IFFs annually. Further, this was considered to be an underestimate as transactional data is found wanting in most African countries.
According to the IFF panel’s 2013 African Progress report at the World Economic Forum, the continent was reported to be losing more through IFFs than it receives in aid and foreign direct investment. Similarly, the Mbeki commission reported an annual average of US$73 billion left Africa between 2000 and 2015. Losses annually in recent years range as high as $100 billion. Growth rates are at their lowest in more than 20 years, reflecting sharp declines in investments and trade. For many countries, the long-term average has exceeded 10 percent of their recorded Gross Domestic Product (“GDP”) which inadvertently drains them of the necessary financial resources needed to achieve sustainable development goals.
There are four main components of IFFs, namely; laundering of the proceeds of crime, which also involves hidden transactions with illegal capital; corruption and theft of state assets, , which also involves hidden transactions with illegal capital; corporate and individual tax abuse, which involves illicit or illegal transactions with legally obtained capital; and hidden ownership to hide conflicts of interest and to facilitate market abuse.
One doesn’t have to be well-read or learned to be aware of the rife corruption, tax abuse, and money laundering cases frequently courting our headlines and news stations. However, the result of these gasping daily stories begs the question: We know it’s bad, but how bad is it? In addition to the consequences to the taxman, IFFs strain our continent’s capacity to strengthen governance, discourage transformation and undermine international development cooperation.
Often money illegally shifted abroad is lost forever. This is primarily because some financial secrecy havens welcomed IFFs for decades until the recent pressure by the likes of the Financial Action Task Force to enforce morality and clean up IFFs forced them to open their books. In a sweeping sea of change, some global efforts such as the US Kleptocracy Asset Recovery (KAR) Initiative, the World Bank’s Stolen Assets Recovery Initiative and UN’s Office of Drugs and Crime are encouraging.
The Response of African Governments to Illicit Financial Flows
Closer to home, the Namibian government boldly condemned IFFs. However, shortly after that, the SME Bank was reported to have lost approximately N$200 million in dubious investments to South Africa. It cannot be negated that IFF’s aid in widening the gap between developed and developing countries. On a positive note, according to the Transparency International Corruption Perception Index, Namibia has moved up the rank which is demonstrative positive efforts to curb corruption.
Namibia amongst other African countries also recognises the importance of tackling IFF especially through money laundering. Various countries have taken steps to establish legislation, tighten existing laws and create anti-IFF mechanisms. These well-intentioned reforms have also brought about additional requirements for the man on the street such as the establishment of a source of funds at onboarding and the de-risking (exclusion) of customers by financial institutions due to the increased compliance costs and risk of hefty sanctions.
Other regional efforts include membership with Inter-Governmental Action Groups against money laundering such as the Egmont Group and the Eastern and Southern African Money Laundering Group; a Financial Action Task Force regional body. However, despite their efforts aimed at curbing IFFs and related problems, the magnitude of the challenges experienced by these institutions overwhelms their implementation capacities.
Further commendable initiatives have led to the successful recovery of IFFs include the curtailing of aggressive tax avoidance by multinational corporations in South Africa, Swiss officials have returned U$380 million siphoned by General Sani Abacha during his tenure and the return of U$145 million to source countries through the KAR Initiative. Noteworthy is that these examples pale in comparison with the amounts siphoned away and yet to be recovered. Egypt is still unable to recover an estimated US$11 billion believed to have been transferred illicitly from the public purse during the era of the former President Hosni Mubarak.
Future Initiatives to Successfully Address Illicit Flow of Funds
Lack of transparency gives rise to IFF. During the 2013 World economic forum on Africa, Kofi Annan stated that all foreign-owned companies should be required to disclose the ultimate beneficiaries of their profits. The report raised concerns over the structure of investment activity by foreign companies operating in Africa. It was characterised by the extensive use of offshore-registered companies and low tax jurisdictions and in some cases the complex use of shell corporations. “These arrangements come with weak public disclosure and extensive opportunities for tax evasion,” the report said. The revenues generated for major companies in many cases dwarfed the GDP of the countries where they operate.
If Africa is to ensure that priority is placed on flows with the most adverse impact on sustainable development, the continent must encourage the capacitation of regional studies and initiatives to improve transparency and identification of beneficial owners. This will aid significantly in the prevention and recovery of IFFs. Anti-Money Laundering and Financial Crime Specialists alike can drive this effort by working hand in hand with competent authorities to proactively prevent IFFs and effectively identify the beneficial owners of all their legal entities. As for the general public, the call to action will be to report all suspicious IFFs to competent authorities for action i.e. if you see something, say something.
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Njeri Siska is the head of anti-money laundering at Capricorn Group and is a Certified Anti-Money Laundering Specialist (CAMS) as well as Certified Fraud Examiner (CFE)
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