Illicit financial flows and Nigeria’s arrested development

SULAIMON OLANREWAJU writes on how illicit outflow of funds from Africa and Nigeria impedes the development of the duo. 


While addressing the opening session of the 16th conference of the Committee of Intelligence and Security Services of Africa (CISSA) in Abuja last Thursday, President Muhamadu Buhari said Africa loses about $60 billion to illicit financial flows (IFFs) yearly.

Illicit financial flows are illegal movements of money or capital from one country to another. This can be in form of money laundering, the use of shell company to transfer proceeds of corruption to a bank account in another country or trade mis-invoicing to evade customs duties or payment of tax.

President Buhari, who called on security agencies in Africa to tighten the loop against IFFs, blamed the rising security challenges in Africa on people who siphoned funds out of the continent illegally and use same to procure ammunition to foist unrest on the people.

BREAKING: Armed gang kidnap four Turkish expatriates at drinking joint in Kwara

According to the President, “Criminals and their collaborators cheat the system through various practices, including trade mis-pricing, trade mis-invoicing, tax abuse and evasion, as well as money laundering. Several unfair commercial agreements and illegal resource extraction by multinational companies, in cahoots with their local collaborators, also create routes for illicit financial outflows.”

Buhari noted that terrorist networks, organised criminal syndicates of drugs, arms and human traffickers actively undermined the security and stability of countries because of their access to illicit funds, he therefore called on security agencies, especially the intelligence community, to vigorously fight and defeat illicit outflow of funds from the continent.

The day before President Buhari raised the alarm concerning the adverse impact of IFFs on Africa, Oxfam, a confederation of 20 independent charitable organisations focusing on the alleviation of global poverty, had called the attention of the government and the people to the negative effect of IFFs on the Nigerian economy.

Oxfam identified needless tax incentives as one of the channels used for illicit outflow. According to the organisation, Nigeria loses as much as N580 billion yearly to needless tax incentives,

Oxfam’s Country Director in Nigeria, Constant Tchona, while speaking at the presentation of Fair Tax Monitor Index and the Commitment to Reducing Inequality Index in Abuja last Wednesday, said, “Official Federal Inland Revenue Service (FIRS) numbers suggest that the entire tax system is fraught with crippling challenges of weak enforcement, corruption and outright evasion. The records show that about 30 per cent of companies in Nigeria are involved in tax evasion and also 25 per cent of registered companies in the country are not paying tax.”

He added, “Taxpayers often opt to negotiate with corrupt tax administration staff in return for gratifications and reduced sums to the coffers of the government. This is despite the sanctions imposed by the same Company Income Tax Act for such conduct.”

Tchona later called on the National Assembly to enact laws that would criminalise the actions of banks, auditors, accountants and lawyers that facilitate illicit financial flows from the country.

He implored the legislature to introduce cutting-edge technology that would curb illicit outflow and also enact laws to punish enablers of tax evasion to face fines of up to 100 per cent of tax evaded.

He also said, “When such professionals act contrary to existing regulations, they should be held accountable in Nigeria. This can be enforced through strengthened professional association bodies.

Illicit financial outflow is not a recent development in Africa; it has been on since the 1960s and it has been a source of serious concern to Africans and non-African alike. Many African leaders are convinced that the slow pace of development on the continent is due to IFFs.

A report by the United Nations titled Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980–2009, states that between 1980 and 2009 Africa lost about $1.4 trillion to illicit financial outflows.

However, a study commissioned by the African Union and Economic Commission for Africa Conference of Ministers of Finance, Planning and Economic Development in 2015 (AU/ECA report), shows that illicit fund outflow affects Nigeria more than other African countries.

According to the study, Nigeria lost $217.7 billion, representing 30.5 per cent of the total illicit financial outflows for Africa between 1970 and 2008. The study shows that while Nigeria lost $217.7 billion during the period of study, Egypt lost $105.2, (14.7 per cent), South Africa $81.8bn (11.4 per cent), Morocco $33.9 billion (4.7 per cent), Angola $29.5 billion (4.1 per cent), Algeria $26.1 billion (3.7 per cent), Cote d’Ivoire $21.6 billion (3.0 per cent), Sudan $16.6 billion (2.3 per cent), Ethiopia $16.5 billion (2.3 per cent), and Congo Republic $16.2 billion (2.3 per cent).

The report also adds that Africa loses over US$50 billion annually to illicit financial flows, while it had lost more than one trillion US dollars over the last 50 years.

According to the report, oil-exporting countries accounted for the largest share of illicit financial flows with Nigeria registering about a third of all IFFs between 1970 and 2008.

The report reveals that five countries benefitted the most from illicit fund outflow from Nigeria during the period; they are the United States of America (29.0 per cent), Spain (22.5 per cent), France (8.7 per cent), Japan (8.5 per cent), and Germany (7.7 per cent).

A United Nations Conference on Trade and Development (UNCTAD) 2016 study shows that in transacting business with five of her 17 major trading partners, Nigeria experienced export under-invoicing, while it experienced export over-invoicing with the remaining 12 partners.

The study also reveals that the largest amount of trade under-invoicing was with the United States US$69.7 billion. This is followed by Germany (US$23.9 billion). The report adds that “It appears that the bulk of oil exported to The Netherlands by Nigeria is not recorded in The Netherlands, while the bulk of oil exported by the Netherlands to Nigeria is not recorded in Nigeria.”

All of the studies identify major enablers of IFFs in Nigeria as poor governance, weak regulatory structures, tax incentives, the existence of financial secrecy jurisdictions and tax havens and beneficial ownership.

Speaking on the impact of IFFs on Nigeria at a conference organised by his committee, Professor Itse Sagay, Chairman, Presidential Advisory Committee Against Corruption, said, “Most of the financial assets pillaged from state coffers find their way out of the country as part of the illicit financial flows.

“The immediate impact is that Nigeria is deprived of the capacity to realise the sustainable development goals of the United Nations officially known as ‘Transforming Our World’.

“These goals include no poverty; zero hunger; good health and well-being; quality education; clean water and sanitation; and affordable clean energy.

“None of these goals is affordable in a developing economy whose wealth is haemorrhaging and flowing to already developed societies.

“The concept note of this conference informs us that the annual flow of proceeds of criminal activity is estimated at US$1tn to US$1.6tn and that half of these flows come from developing and transitional countries.

“It is therefore vital that we, as a country and Africa as a continent, improve our capacity in understanding and stemming the illicit financial flows, this haemorrhaging, if we are to have a chance to meet our sustainable development goals or if we are ever to dream of transformation from third world to something better even by 2030.”

Speaking in a similar vein, Mr Ibrahim Magu, Acting Chairman of the Economic and Financial Crimes Commission (EFCC), said “The adverse effects of illicit financial outflows include, drain on Nigeria’s foreign exchange reserves, reduced tax revenue, stifled trade and investment inflows and a weakening of the financial system.”

According to Irene Ovonji-Odida and Algresia Akwi-Ogojo, in an article, Illicit financial flows: Conceptual and practical issues, “There  is  a  direct  link  between  the  seeming  inability  of African countries to overcome their development challenges  and  the  current  global  political-economy  that  promotes illicit  financial  flows  from  Africa  through  sanitised  and generally  accepted  principles,  rules  and/or  practices  for conducting  world  trade  and  business.  The  design  and  application of Double Taxation Treaties (DTTs); the operation of  the  international  tax  system;  the  systems  of  tax-cutting and financial deregulation; the existence of tax havens, off-shore  funds  and  accounts;  the  practices  of  corporate  tax dodging;  the  half-hearted  strategies  aimed  at  addressing these  injustices  such  as  the  Organisation  for  Economic  Co-operation  and  Development  (OECD)  led    investigation  on the ‘base erosion and profit shifting’ (BEPS) process; and the  activities  of  Multi-National  Corporations  (MNCs);  to name  but  a  few,  are  some  of  the  ways  the  globalisation project  has  been  conceptualised  to  undermine  any  real chance  for  African  countries  to  meet  the  United  Nations Sustainable Developments Goals (SDGs) and targets.”

Concerned about the arrest of development occasioned by IFFs, the African Union (AU) set up a high level panel headed by Mr Thabo Mbeki, former South African president, to look into the matter and come up with recommendations on how to arrest the menace. Mbeki’s panel presented its report in 2015 with a number of recommendations addressing the commercial, criminal and corruption components of IFFs.

The panel recommended that governments should be more transparent in their dealings by ending badly structured resource extraction contracts that deny African countries legitimate earnings from royalties or tax; strengthening regulatory capacities of their agencies such as the customs, immigration and others to end under-declaration of quantities of exported goods; promoting global cooperation and transparency to stop aggressive tax avoidance and  trade mispricing; and supporting  international  cooperation  in  regulatory law reform and systems such as harmonising anti-money laundering laws to avoid double non-taxation.

According to Magu, as a way of stemming the rise of IFFs in Nigeria, the country has entered into agreement with several countries including the Swiss, UK, UAE and the US for the return of stolen assets.

He said, “Agreement to this effect was signed at the Global Forum on Asset Recovery, GFAR, which took place in December 2017 at Washington DC USA. In the same vein, United Kingdom returned assets worth $85Million from the controversial $1.3 billion USD Malabu deal which revolves around “OPL 245” believed to be the most valuable oil field in West Africa in a case that is being described as the largest corruption scandal ever witnessed in global oil industry involving Malabu Oil and Gas and oil giants Shell and ENI. Efforts are ongoing for the recovery of hundreds of millions of dollars of the Abacha loot stashed in financial institutions in London, Paris, Jersey and Liechtenstein.”

But in spite of these efforts and the recommendations of the Mbeki panel, not much has changed as African countries continue to lose a huge fortune to IFFs on a yearly basis.

Commenting on this Mr Alex Betiku, a business consultant, said the issue is that many government officials in Africa are involved in illegal business transactions with many of the multinationals that rip off African countries, so it is difficult for them to act against their own interest. While agreeing that there might be international conspiracy against Africa, he argued that the scheme would have failed had Africa been blessed with selfless leaders.

His words, “African leaders are the major culprits in IFFs. Many presidents are working against the interests of their countries, so it is difficult for them to stop IFFs because they benefit from the proceeds. If you go through the Panama Papers, released by the International Consortium of Investigative Journalists (ICIJ) in 2016, you will find names of many African leaders who have stashed away funds from their own countries in offshore companies. So, if the leaders do this against their own people how are they going to fight against foreigners who capitalise on the weaknesses in the system?”