Tighten Screws on illicit Financial Flows

By Retlaw Matatu Matorwa

United Nations Economic Commission for Africa (UNECA) estimates the continent is losing US$50-60bn per annum through illicit Financial Flows (IFFs). According to Economic Outlook Report the figure represents 4% Gross Domestic Product (GDP) for the period 2003-2012. The report also noted that IFFs outpaced Development Assistance (ODA) and Foreign Direct Investment (FDI) which averaged between USD 42.1 billion and 43.8 billion respectively. This level of financial loss impact negatively on developing countries by reducing their domestic resources and tax revenue needed for poverty eradication and provision of social services. Furthermore, IFFs related activities remains a threat to regional economic, social and political security.

Illicit Financial Flows involves the illegal cross border movement of money which has been unlawfully earned, transferred and utilised. Common perpetrators involved in IFFs activities include but not limited to; drug dealers, government officials, traders, human traffickers, terrorists, multi-national corporations, and financial institutions. These perpetrators exploit sophisticated but poorly regulated financial and trading system to their unfair advantage.

As a result, Sub Sahara Africa suffered the largest loss emanating from illicit financial flows averaging 6% of its GDP in 2015. Africa’s economic giants South Africa and Nigeria are losing averagely between US$209.22bn and correspondingly US$178.04bn per annum, Liberia’s illicit outflows in 2015 were pegged at 61.6% of the country’s GDP and Equatorial Guinea estimated to be approximately US$ 4000 per person (GFI 2015). Whilst the continent grapples with IFFs losses, the activities are escalating at an alarming average rate of 20.4% per year since 2012 (Trust Africa org, 2013). 

According to African Union (AU) and UNECA, large corporations are responsible for 65%, organized crime 30% and corruption 5% of IFFs transactions in the region. Even though Corruption is as low as 5% of illicit Financial Flows, its effect must not be underestimated. Referring to the pertinence of curbing corruption to reduce IFFs; Khalil Goga, a researcher with Institute of Security Studies noted that “Tackling corruption is as important as stopping IFF’s in Africa.” Corruption is at the heart of IFF’s in Sub Sahara Africa as it diverts public resources to private and individual consumption. Private consumption has much lower positive multiplier effects than public spending on social services. Proceeds of corruption or criminal activities will generally be spent on consumption of 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. The situation is worse particularly, where resources are taken out of the country hidden somewhere instead of benefiting the already ailing economy.

Illicit Financial Flows creates an underworld system which pause a serious threat to regional peace and security. The loopholes in world financial systems and prevalent rate of IFFs activities may be responsible for sustaining terrorism and organized crime. How do terrorist groups such as Boko Horam, Al-shabaab and others able to secure resources to arm and conscript others into their systems? How does organized crime networks fund and buy their way through the justice systems, customs and law enforcement agencies?

In essence, IFFs reduce the ability of African countries to achieve their development goals, draining the continent’s capital stock and shifting resources from more productive activities with strong after-tax returns to less productive activities with high pre-tax returns (Stephanie Keene, 2015). In this case, tax burden is transferred to poor citizens and loss on social spending- as states no longer receive equitable share of tax income. The poor remain poorer whilst inequality increases.

Despite widespread concerted effort to curb IFFs in developing countries; International financial institutions supposed to anchor financial integrity are paying huge fines for their involvement in IFFs related offences. In 2012 alone, HSBS was fined US$1.921 million, Standard Chartered Bank US$ 677 million (BBC 2012; New York times 2012), ING US$ 619 million (United States department of treasury 12a, 12b) and many other financial institutions such as JP Morgan, Lloyds Bank, RBS (AN AMRO) and Riggs Bank have all been sanctioned for their involvement in IFF’s irregularities. Frankly, these institutions are benefitting a lot from this practice. The fact that they are able to pay such huge fines and still remain afloat is an indication of the lucrative nature of this business. Stiffer penalties and more restrictive approaches need to be considered to discourage financial institutions to partake in this malpractice.

In addition, the absence of political will on the part of African kleptocracy to curb illicit Financial Flows is derailing progress in this regard. The reality on the ground suggests that African political and business elites have unjustified deposits stashed in financial institutions in the west.  Spooner (2015) reported that Eritrea a country which was ranked 182 out of 187 countries in the 2014 United Nations Human Development Index (HDI) report – topped the list, with a single client banking a whopping $695.2-million.  The son of President Teodoro Obiang of Equatorial Guinea was compelled to remit US$230 million worth of assets and funds stashed in the United States and France. As a matter of fact, for more than half a century the Alpine nation of Switzerland has built a reputation as the world’s center for tax evasion, fraud, money laundering, racketeering, safe haven and above all a staunch ally of corrupt African leaders and great beneficiary of third world corruption ( Rakgomo, 2016). This is a worrisome situation!

However, given the high levels of corruption, susceptibility to bribes among law enforcement agencies, public officials, and compounded with inadequate training- tightening the screws on IFFs is a mammoth but doable task. Progressive and commendable efforts by African Union, United Nations and civil society organizations such as Thabo Mbeki Foundation and Trust Africa can only bear fruits in the presence of genuine commitment from the region. Protecting the integrity and stability of international and regional financial systems, cutting off resources available to terrorists and making it more difficult for those engaged in crime to profit from their criminal activities can impact positively on regional peace and security.

Curbing corruption and bribery which further weakens the ability of judiciary, police and public institutions from effectively discharging their roles and duties remains central to this challenge. Above all, Africa must spearhead a lobbying and advocacy initiative calling upon financial institutions from the west to adhere to ethical financial practices based on transparency and accountability.

Ndomafungiro angu

@ blackSeptember 2016

Africa brand Review

By Retlaw Matatu Matorwa

A brand is an expression of essential truth or value of an organization, product and services (James Heaton). It communicates characteristics, values, and attributes of what a brand represents. Good branding complements and goes beyond marketing activities and roles.

Late 2015, I met a group of Europeans of German origin in Ethiopia wearing T-shirts written “Building hope for Africa.” The message made me think deep about the perceptions, image and brand Africa is known for. Do we have a brand to talk about? What kind of a brand is Africa associated with? What message does our brand communicate? Is there need to create or salvage our brand, if so how?

Simply put, the existence of Africa as a continent makes it a brand. Undeniably, the African brand has been shinning world over in areas of academia, sports, entertainment and other non political-economic forte. According to World Bank (2013) the world’s youngest population is set to increase by 50%, of which half of them will be in Africa. This creates enormous investment opportunities for the region. Africa is endowed with favorable climate, land, minerals and raw materials which strategically position the region for industrial and technological advancement. No wonder, Africa is top on the bucket list of international investors, each struggling to control and expand their influence.

However, the greatest cloud consuming the African brand is mainly political. Most of our problems have roots in our systems of governance. Africa is battling unemployment, dictatorship, impunity, civil wars and internal conflicts, corruption, poverty and food insecurity amongst others. Provision of social services such as access to safe and clean water, education and health care facilities remain challenging. Conflicts and civil wars continue to derail economic well being and social progress in countries such as Burundi, Sudan, and the Democratic Republic of Congo. The absence of good governance and democracy in countries like Zimbabwe, Lesotho, Sudan, Eritrea, Madagascar and many others has curtailed and disrupted positive political, economic and social transformation.

International Monetary fund (2012) revealed that African governments spend 40% of their budgets on military and defense at the expense of investing in social services such as health and Education. Africa has the highest number of internally displace people in the world (UNHCR 2013) International Organisation for Migration (IOM) 2015 statistics indicates that 80%  of refugees and Asylum seekers in Europe are from Sub-Sahara Africa. Despite being rich in mineral and raw materials most African governments remain stuck in a culture of dependency (Aid Statistics at Glance to 2015).

Notably, the African brand is affected by the absence of trust, and responsibility between policy makers and the governed. Most of the challenges mentioned in this article represent symptoms relating to lack of trust in our people and institutions. It is this level of trust which permeates from individual states to the regions as a whole. The primitive politics in most African countries coupled with impunity and dictatorship is the reason we lack a strategic response to resolve prevailing challenges. To this end, Africa is seen as a continent of under-developed, power hungry and divided people, incapable of resolving their own problems for greater good of the continent. The world see and judge Africa through the lenses of its malnourished and tattered clothed children, diseases, war and conflict ravaged images. Of recent, the Ebola scourge played into the hands of western stereotypes feeding into the notion of an African continent infested with deadly diseases.

Nevertheless, Africans have a collective responsibility to improve the perceptions, correct stereotypes and create a positive narrative for the region. Addressing pertinent issues of governance, rule of law, democracy and accountability, food security and social service delivery goes a long way. Concept of leadership has to be revamped from the micro level of the family locating its role in the broader scheme of governance, through the societal and central governance.  Industrialization is key; our focus must be on processing raw materials, value addition and technological advancement. This will translate into job creation socio-economic transformation of the continent and its people.  

Africa must embrace technology, changing its attitude and the way of doing things. For example it is very critical to mechanize and adapt technology in Agricultural sector. Given the massive land and labour available mechanization, enhanced access to short term high yield varieties, access to affordable fertilizers and markets can increase productivity thereby improving food security in the region.

Media play an important role in influencing and changing the mindset. Media is dominated by western powers who hardly reports positively on the continent. Our media must begin to repackage and contribute towards a narrative aimed at positioning Africa in a positive light. Above all, every African is a brand Ambassador of the continent; we must in our individual right thrive to contribute towards re-branding and repackaging Africa.

Ndomafungiro angu

@Blackseptember 2016