Tanzania Leads East Africa in Illicit Money Flows

Tanzania leads the list of East African states that have lost billions of dollars to money laundering, tax evasion, government graft and other illegal operations, according to a report by a US-based financial watchdog group.

The report “Illicit Financial Flows from Africa: Hidden Resources for Development,” by Global Financial Integrity, states that the country has lost $8.9 billion over the past four decades through the illicit means. Kenya lost $7.3 billion while Uganda lost $6.4 billion over the same period.

The three East African countries thus lost a total of $22.6 billion, money that would be sufficient to wipe out their combined outstanding external debt while leaving several billion dollars available for fighting poverty and spurring economic growth.

The study points out that the impact of these losses is felt most acutely by the poorest Africans. The illicit outflow of money also “drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment and undermines free trade,” the study says.

Tanzania is ranked 13th among the top 15 countries with cumulative illicit outflows after Angola, Republic of Congo, Cameroon, Côte d’Ivoire, Ethiopia, Gabon, Ghana, Madagascar, Mozambique, Nigeria, South Africa and Sudan. Zambia and Zimbabwe take the 14th and 15th positions respectively.

Already, Global Financial Integrity has started collecting signatures to petition the G20 Transparency at the G20 summit this June. The organisation is looking for 100,000 signatures from all over the world to forward to Canadian Prime Minister Stephen Harper, the current president of the G20. “Our goal is to show him the names of 100,000 people from all over the world who support ending banking secrecy, increasing financial transparency, and finally attacking the root causes of poverty.”

The report says: “So long as illicit capital continues to haemorrhage out of poor African countries over the long term at a rapid pace, efforts to reduce poverty and boost economic growth will be thwarted as income distribution becomes ever more skewed, leading to economic and political instability.”

Tanzania’s Finance and Economy Minister Mustafa Mkulo told The EastAfrican from Dodoma that in order to reverse this situation, the country has set up a Financial Intelligence Unit within the ministry to join international community in fighting money laundering and financing of terrorism.

“This problem indeed exists. At regional level, within the East African Community and the Southern African Development Community, we have seen this problem thrive for a long time and decided to jointly act against it,” he said. (See related story, “Will electronic tax registers stem the tide of pilfering?”)

The report says that the figure for Uganda likely understates the true volume of illicit outflows. It notes that civil strife in the Great Lakes region during parts of the 1970-2008 study period resulted in “incomplete and poor quality data” for Uganda, Rwanda, Burundi and Congo.

In all cases, adds the study that encompassed all of Africa, actual losses due to systematic looting are likely to be far greater than the study estimates.

Researchers Dev Kar, a former senior economist at the International Monetary Fund, and Devon Cartwright-Smith, an economist at Global Financial Integrity, note that their figures do not take account of proceeds from smuggling and some of the ways in which trade and services are mis-priced by commercial swindlers.

The actual totals might be more than double the $22.6 billion listed in the report for the three East African countries if those other sorts of illicit outflows were included in the computations, a Global Financial Integrity spokeswoman told The EastAfrican.

Bribery and theft involving government official accounts for only a three per cent share of the money that moves across borders illicitly, the study says.

“Criminal proceeds generated through drug trafficking, racketeering, counterfeiting and more are about 30 to 35 per cent of the total,” the study adds. “The proceeds of commercial tax evasion, mainly through trade mis-pricing, are by far the largest component at some 60 to 65 per cent of the global total.”

Trade mis-invoicing, described in the report as “a significant problem for Kenya,” involves the overpricing of imports and the underpricing of exports on Customs documents, the study explains.

For Africa as a whole, total illicit outflows are said to have amounted to at least $854 billion across the 39 years encompassed in the study.

The top five countries with the highest outflow measured were: Nigeria ($89.5 billion) Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion). Most of that money has gone into Western financial institutions, the study says.

“This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mis-pricing and money laundering techniques,” Mr Kar and Mr Cartwright-Smith write. “The impact of this structure and the funds it shifts out of Africa is staggering.”

The researchers argue that the existing global financial system, shaped by liberalisation and deregulation of financial markets, has ended up generating ever-rising illicit flows and losses in government revenues. Economic growth without credible reform could lead to more, not less, capital flight, as the increase in incomes would simply finance the increased accumulation of foreign assets.

According to the United Nations’ Millennium Development Goals, $348 billion will be needed to cover MDG costs by 2010 and $529 billion by 2015. The United Nations report World Economic Situation and Prospects 2010 notes that a large gap still separates Africa from its MDGs.

By all accounts, official donor aid commitments will probably fall well short of the required funding of MDGs, leaving open the serious possibility that related targets will recede even further.

SOURCE: The East African.