The scale and impact of illicit financial flows

The recent revelation of corporate connivance in the illicit flow of finance around the world demands that more light be shed on such practices within Nigeria. Global Financial Integrity (GFI), an international think tank documents Nigeria as the leading source of illicit financial outflow from sub-Sahara Africa during the past decade (going by records from years 2000 to 2009.)

Last week, Britain-based global bank, HSBC was found to be complicit in the act of tax evasion for wealthy clients, via its Swiss-based private banking arm, exposing the role of trusted financial institutions in the act of contravention. 

In Nigeria, Illicit financial flows have occurred through corporate sharp practices – mostly through tax dodging, illicit outflows (comprised of illegal capital flight and illegally earned, transferred or spent funds) and collusion with the authorities. Other methods are trade mis-invoicing, wire transfers in connivance with local and foreign banks, and cash haulage across borders.

In a United Nations Economic Commission for Africa (UNECA) investigation, evidence was presented of large-scale cash smuggling across land borders and through airports, notably on private and chartered aircraft. The case of a former Nigerian governor who used different shell companies, multiple bank accounts and the movement of money through several jurisdictions to launder ill-gotten wealth was a notorious example that came up in the course of the Commission’s work.

ActionAid Country Director for Nigeria, Hussaini Abdu, notes that “Nigeria is among the countries severely affected by Illicit Financial Flows (IFF) in the world with annual losses alone calculated to be in the region of $15.74 billion”.

“In view of the huge impact of illicit financial flows on the Nigerian economy, especially at this time when the country’s major revenue source, the crude oil money, has been eroded, it is time Nigeria takes the lead in ensuring that the recent Mbeki Panel Report is received by Africa’s Heads of Government and their Finance Ministers”, Abdu said.

Every year huge sums of money are transferred out of developing countries illegally, says the Organization for Economic Cooperation and Development (OECD). These illicit financial flows strip resources from developing countries that could be used to finance much-needed public services, from security and justice to basic social services such as health and education, weakening their financial systems and economic potential. While such practices occur in all countries – and are damaging everywhere – the social and economic impact on developing countries is more severe given their smaller resource base and markets. Estimates vary greatly and are heavily debated but there is a general consensus that illicit financial flows likely exceed aid flows and investment in volume. The most immediate impact of illicit financial flows (IFFs) is a reduction in domestic expenditure and investment, both public and private. This means fewer hospitals and schools, fewer police officers on the street, fewer roads and bridges. It also means fewer jobs. Furthermore, many of the activities which generate the illicit funds are criminal; and while financial crimes like money laundering, corruption and tax evasion are damaging to all countries, the effects on developing countries are particularly corrosive. For example, corruption diverts public money from public use to private consumption. We know that in general private consumption has much lower positive multiplier effects than public spending on social services like health and education. Proceeds of corruption or criminal activities will generally be spent on consumption of items such as luxury vehicles, or invested in real estate, art, or precious metals (World Bank, 2006). The social impact of a Euro spent on buying a yacht or importing champagne will be very different from that of a Euro spent on primary education. On another front, money laundering is harmful to the financial sector: a functioning financial sector depends on a general reputation of integrity, which money laundering undermines. In this way, money laundering can impair long-term economic growth, harming the welfare of entire economies. (With excerpts from OECD).

EDOZIE IFEBI