By Elly Twineyo Kamugisha
(Author: Why Africa Fails: The Case for Growth before Democracy, 2012); Founder: African Centre for Trade and Development (ACTADE) – a think-tank; Consultant at Uganda Management Institute (UMI))
For Comments: firstname.lastname@example.org / email@example.com
Some experts and leaders in Africa have been arguing that because most African countries
exports are sold in their raw or primary form (as fruits and vegetables, coffee beans, cotton
lint, iron ore), these countries are actually ‘donors’ to the developed countries that buy from
the continent. That jobs are exported. And that this accounts for the current unemployment
and slow growth of some of the economies in SSA. Are they wrong? Partly no. An economy
which does not export a value added and manufactured product face stiff competition in the
market for primary or raw materials – and fetches little. On the other hand, countries that
export processed or manufactured products fetch higher prices. Those that export IT solution
and especially software can even not meet the rugged international logistics or transport
hurdles. They can even attach a file to an email and click and it is sent. Such a file may be
an export of more than US$1 million! A sack of coffee beans is cheaper than some small
sized pack of Nescafe!
How about illicit financial flows from SSA countries that end up in developed countries?
Global Financial Integrity (GFI 2010) simplifies the definition of illicit money. It states that
“Illicit money is money that is illegally earned, transferred, or utilized. If it breaks laws in its
origin, movement, or use it merits the label” . Illicit money violates the national government’s
criminal and civil codes, tax laws, customs regulations, VAT assessments, exchange control
requirements, or banking regulations of those countries out of which the unrecorded/illicit
flows occur2. Illicit flows are residual an unaccounted for external funds flows (explained by
the World Bank Model below), and generated through the mispricing of trade transactions, is
captured by the trade mis-invoicing. There are several other ways of illicit flows that cannot
be captured by economic models – the activities of the ‘shadow’ economy. These include illicit
flows generated through smuggling, transactions in narcotics and other contraband goods,
human trafficking, violations of intellectual and property rights, and the sex trade.
1 Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for Development”,
2 Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for Development”,
World Bank Residual model3 compares a country’s source of funds with its recorded use of
funds. Sources of funds the countries inflows of capital include increases in net external
indebtedness of the public sector and the net inflow of foreign direct investment. The net
external indebtedness is derived by calculating the change in the stock of external debt which
was obtained from the World Bank’s Global Development Finance database. The use of funds
includes financing the current account deficit and additions to central bank reserves. Both
these data series along with data on foreign direct investment were obtained from the IMF
Balance of Payments database. According to the model, whenever a country’s source of funds
exceeds its recorded use of funds, the residual comprises unaccounted-for, and hence illicit,
Trade mis-invoicing4 has long been recognized as a major conduit for illicit financial flows. By
overpricing imports and underpricing exports on customs documents, residents can illegally
transfer money abroad. To estimate trade mis-invoicing, a developing country’s exports to
the world are compared to what the world reports as having imported from that country,
after adjusting for insurance and freight. Additionally, a country’s imports from the world are
compared to what the world reports as having exported to that country. Discrepancies in
partner-country trade data, after adjusting for insurance and freight, indicate mis-invoicing.
However, note that this method only captures illicit transfer of fund abroad through customs
GFI 2010 quotes that smuggling5 tends to be rampant when there are significant differences
in cross-border prices in certain goods between countries that share a long and porous
frontier. The profits from smuggling often end up as part of outgoing illicit flows since
smugglers seek to shield their ill-gotten gains from the scrutiny of officials, even as smuggling
distorts the quality of bilateral trade. As a result, trade data distortions due to smuggling may
indicate that there are inward illicit flows into a country when in fact the reverse is true.
In 2010, the US based Global Financial Integrity released their analysis of illicit financial flows
from Africa in the report titled, “Illicit Financial Flows from Africa: Hidden Resource for
Development” . In this report, they show that for 38 years from 1970–2008, illicit financial
flows from the continent may be closer to US$1.8 trillion. According to Governor of Kenya
central Bank, Mr. Ndung’u (2007) capital flight has had adverse welfare and distributional
3 Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for Development”,
4 Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for Development”,
5Global Financial Integrity (2010:8): “Illicit Financial Flows from Africa: Hidden Resource for Development”
6 Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for Development”.
consequences on the overwhelming majority of poor in numerous countries in that it
heightened income inequality and jeopardized employment prospects .
The GFI 2010 report shows that in absolute figures, all regions of Africa have had increasing
illicit financial flows. It also shows that in even given the rates of change (real 2008 deflated)
are also increasing. The same report shows (with this caveat in mind) that the estimates
indicate that Africa lost around US$29 billion per year over the period 1970-2008, of which
the Sub-Saharan region accounted for $22 billion. On average, fuel exporters including
Nigeria lost capital at the rate of nearly $10 billion per year, far outstripping the $2.5 billion
dollars lost by non-fuel primary commodity exporters per year8.
There is a critical comparison showing that the ratio of illicit financial flows (IFF) to ODA is
increasing. There is more IFF out of Africa than ODA into Africa according to the GFI 2013.
In 2009, illicit financial flows out of Africa were over three times the amount of ODA received.
This is a big loss to the economies on this continent and there is need to curtail illicit financial
flows. The doing business indicators and governance of these countries need to improve.
Improvements in governance and the business climate can improve the productivity of both
domestic and foreign capital (FDI) needed to boost economic growth and transform the
economies depending on agriculture gradually to industries and services.
According the report authored jointly by the African Development Bank and the US based
Global Financial Integrity 2013, indicates that Africa was a net creditor to the world, as
measured by the net resource transfers, to the tune of up to US$1.4 trillion over the period
1980-2009 (adjusted for inflation). That is a period of 29 years. The report also shows that
the distribution of gains and losses of transfers among African countries was asymmetrical,
resulting in a net loss of transfers from Africa. The top five countries that gained transfers
over the period 1980-2009 are South Africa, Sudan, Tunisia, Morocco, and Cote d’Ivoire,
while Algeria, Libya, Nigeria, Botswana, and Egypt lost such transfers. The volume of
transfers lost from the latter five countries far outstripped those gained by the former five9.
The same report indicates (that based on the broad measure of recorded transfers), Africa’s
transfers increased from an average inflow of about US$27 billion per annum in the 1980s
and 1990s before declining to US$8.7 billion in the last decade ending 2009. However, the
broad measure10 does not show that Africa swung from net debtor to net creditor to the
7 Cited in Global Financial Integrity (2010:6): “Illicit Financial Flows from Africa: Hidden Resource for
8 Global Financial Integrity (2010:11). “Illicit Financial Flows from Africa: Hidden Resource for Development”
9 Joint Report by African Development Bank and Global Financial Integrity Africa Progress Panel, “Illicit
Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009”, May 2013.
10Narrow Measure: In real terms, the financial account or Narrow measure declined from an average annual
inflow of US$9.6 billion for Africa as a whole in the 1980s (or 2.3 percent of GDP) down to US$4.6 billion
in the 1990s (or 1 percent of GDP). In the last decade (up to 2009), it is estimated that about US$30.4
billion per annum (or 3.2 percent of GDP) flowed out of Africa in net recorded transfers (as measured by
Narrow Measure). About 80 percent of these outflows, or US$25.2 billion, was out of North Africa. (See
world in the 2000s mainly due to substantial current and capital transfers such as remittances,
migrant transfers, debt forgiveness and write-offs, and other non-financial transfers which
provided off-setting effects
. The report also notes the following:
i) In resource-rich countries, the natural resource sector is usually the main source
of illicit financial flows. These countries generally lack the good governance
structures that would enable citizens to monitor the amount and use of revenues
from the natural resource sector.
ii) In resource-poor countries, illicit financial flows largely arise from the mispricing
of trade by companies of all sizes. This activity is a form of money laundering and
Urging Developed countries help stop capital flight out of Africa
Most political leaders in Africa have got fat bank account and properties in the rich capitals
of Europe, USA and recently in East Asia. “Illicit financial flows facilitated by tax haven secrecy
and anonymous shell companies are the most damaging economic problem facing the African
continent” . According to Baker (2013), anonymous shell companies are the most-widely
used method for laundering the proceeds of crime, corruption, and tax evasion. These
phantom firms facilitate sex slavery, terrorism, and tax evasion. Therefore, central public
registries of meaningful corporate ownership information are essential to curtailing these
pernicious crimes .
Former Secretary General of the UN and Chair Africa Progress Panel has requested the rich
countries to remove the veil of secrecy on companies which has been the protection of illicit
financial flows from Africa. Mr. Annan14 puts it that “It is time to draw back the veil of secrecy
behind which too many companies operate. He continues that “Every tax jurisdiction should
be required to publicly disclose the full beneficial ownership structure of registered
companies. Switzerland, Britain and the United States all major conduits for offshore finance
GFI 2013 p.17).Broad Measure: which, in addition to the financial account balance, includes net current
transfers (e.g., workers’ remittances) and net capital transfers (e.g., debt forgiveness and write-offs) and
is therefore more representative of the African flows given the prominence of remittances and debt
forgiveness in African economies (See GFI 2013 p. 17).
11 Joint Report by African Development Bank and Global Financial Integrity Africa Progress Panel, “Illicit
Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009”, May 2013, p.2
12 This was said by GFI President Raymond Baker, a longtime authority on financial crime at the launch of
GFI 2013 report on Africa (Source: http://www.gfintegrity.org/content/view/616/70/ (accessed on
13 This was said by GFI President Raymond Baker, a longtime authority on financial crime at the launch of
GFI 2013 report on Africa (Source: http://www.gfintegrity.org/content/view/616/70/ (accessed on
14 Source: http://www.gfintegrity.org/content/view/616/70/ (accessed on 11/23/13)
should signal intent to clamp down on illicit financial flows. And the G-8 and the G-20 should
work together to expand the scope and reach of the Dodd-Frank (which contains provisions
concerning the use of minerals to finance military operations in eastern Congo (Kinshasa))”15
With regard to conflicts and efforts at democracy, the foreigners should work with the
neighbours of a country in question, the AU (and the UN later). The foreign governments
have to help reduce wars in the world. It is in the interest of all to solve wars and conflicts.
Some conflicts in Africa or Asia may have spillover effects for US and Europe. But how a
foreigner intervene matters and can’t do it alone.
Joint Report by African Development Bank and Global Financial Integrity Africa Progress
Panel, “Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-
2009”, May 2013
Global Financial Integrity (2010): “Illicit Financial Flows from Africa: Hidden Resource for
15Dodd-Frank: In July 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which contains provisions concerning the use of minerals to finance military operations in
eastern Congo (Kinshasa). All companies registered with the U.S. Securities and Exchange Commission
(SEC) that sell products containing cassiterite, columbite-tantalite, gold, or wolframite are required to
disclose whether these minerals originated from Congo (Kinshasa) or adjoining countries. Companies that
sell products containing cassiterite, columbite-tantalite, gold, or wolframite that originated in Congo
(Kinshasa) or adjoining countries are required to submit annual reports to the SEC describing the due
diligence measures taken, the smelters that processed the minerals, and the companies’ efforts to
determine the mine of origin (See Thomas R. Yager, Omayra Bermúdez-Lugo, Philip M. Mobbs, Harold R.
Newman, Mowafa Taib, Glenn J. Wallace, and David R. Wilburn(2012: 1.2), “The Mineral Industries of
Africa”2010 Minerals Yearbook: Africa, USGS).