Alex Booth, an associate managing director with Kroll, a corporate investigations and risk consulting firm, has advised the Nigerian government and other governments in African countries to improve on policies aimed at curbing illicit financial flows as well as capital flight.
According to him, initiatives such as Nigeria’s Voluntary Assets and Income Declaration Scheme (VAIDS) introduced with the aim of lessening the impact of capital flight, is a step in the right direction, but it may not solve the issue “especially when global financial structures are organised in such a way to make these efforts difficult to implement and enforce.”
Nigeria’s VAIDS is an effort to recover funds taken overseas by high-net-worth Nigerian citizens and encourage them to pay their taxes, as at mid-2018, the country’s apex tax collecting agency, Federal Inland Revenue Service (FIRS) estimated that over N30 billion had been recovered as a result of the scheme.
But Booth in his report on “How can Africa solve its capital flight problem?” noted that the initiative as well as other well-intentioned policy initiatives to combat corruption and curb illicit outflows being worked on by countries like Kenya and Angola, have their efforts been primarily focused internally and not networked well to the global financial or law enforcement communities.
“Until such global initiatives are in place, it is the responsibility of governments, both in Africa and the West to spot the red flags of capital flight from the continent and take action, before the problem grows even further,” Booth advised.
Booth explained that improving on these policies may entail a more balanced engagement with governments of the western countries where these funds are taken too, as well as more vigilance by the local banks.
He noted in his report noted that estimates from the Organisation for Economic Co-operation and Development (OECD) suggest that each year Africa loses up to $50bn through money laundering, tax evasion, diverted revenues, offshore investments and other forms of capital flight, while privately, experts acknowledge that the real figure is likely to be much higher with Sub-Saharan Africa recorded as the region facing the issue more than any other region in the world.
“Such high levels of capital outflows and lost revenues deprive African governments of the ability to mobilise domestic resources and have a material impact on economic development,” he said.
He added that “when countries are losing more in capital flight than they receive in aid and investment, we can no longer dodge the problem. These countries in SSA lose more through capital flight than they receive in the form of aid or foreign private investment altogether.”
In explaining why the problem is peculiar in Africa, Booth said that almost every country in Africa suffers from some form of capital flight, whether legitimate or illegitimate. The phenomenon impacts a number of oil-rich countries globally, and the issue is particularly prominent in the oil-based economies of Nigeria and Angola.
Over the past 10 years, Booth mentioned that Nigeria and Angola have made vast amounts of dollars through the oil industry, and whilst the revenues may flow to national oil companies, there is no guarantee that they will be remitted into national treasuries and therefore flow into the national economy.
He explained that, taking advantage of lenient tax offerings to house investments outside Africa may be perfectly legitimate, but corrupt politicians using jurisdictions prone to secrecy to launder funds, disguise ultimate beneficial ownership of assets or obscure conflicts of interest is illegitimate.
A further perusal of the problem by the expert indicates that capital flight may not be a lack of investment opportunities within the home country; “it may be that investments there are more visible and thus more liable to legal action or seizure, more vulnerable to political change or simply less prestigious,” he said.
Booth also highlighted an entirely separate capital flight channel as transfer pricing, where legally related entities misprice goods or services.
According to him, the United Nations Economic Commission for Africa, says transfer pricing accounts for 60 percent of the capital leaving the continent.
“Ghana and Nigeria are currently the only countries in West Africa that have put in place dedicated policies on transfer pricing to monitor capital outflows from the oil sector.
With only two nations trying to tackle the problem, clear disparities and loopholes that exist across borders need to be plugged,” he said.
To therefore address the capital flight challenge, Booth suggested a consideration of how each country is a separate pocket of the wider African economy, and the differences between them in terms of corruption, exposure to the West and other markets, and levels of engagement from other global markets too.
“In Mozambique, for example, corruption is rife across the economy, but the few South African-owned firms there are more exposed to international correspondent banking relationships, and have higher compliance standards than the indigenous Mozambican banks as a result. Equally, there is a disconnect between the funds leaving Africa and their absorption into Western economies in terms of an audit trail.
Governments at a national level in Africa are aware of the corruption taking place and the individuals responsible for transferring the funds out of the country, but don’t have the ability to stop them or find the destination of the funds in the West.
Conversely, in more regulated Western economies, governments may know where the money is but don’t know the backstory, profile, reputation or history of the individual(s) behind the transaction, so law enforcement officials are unable to join up and prosecute these wanted persons.
The issue is exacerbated by how easy it is for the system to be manipulated.
Not only are compliance checks low, the key challenge is the lack of information sharing between banks across Africa and around the world. Equally, there is a vested interest within some African governments not to look into these matters.
Ultimately, their officials and ministers are often the ones benefiting from these illicit fund transfers, so clamping down on this activity will not be an easy task.”
Overall Booth stated that “whilst there is undoubtedly a long way to go, financial institutions can start to spot the signs of capital flight and inform the relevant authorities as a first step to tackling the problem.”