The crash in oil and gas prices, triggered by the coronavirus pandemic and the slump in economic activity, has dealt a blow to the plans and public finances of major oil- and gas-producing countries. But a group of countries in sub-Saharan Africa once designated as “prospective producers” are facing a different challenge.
How can Africa solve its capital flight problem?
When countries are losing more in capital flight than they receive in aid and investment, we can no longer dodge the problem.
Whilst illicit financial flows are widespread, systemic and aggressively international in nature, Africa is perhaps most vulnerable to their existence and impact.
- 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;
- Privately, experts acknowledge that the real figure is likely to be much higher.
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.
Sub-Saharan Africa faces this issue more than any other region in the world.
- Recent estimates from the University of Massachusetts Amherst’s Political Economy Research Institute show that a sample of 30 African countries lost a staggering $1.4trn through capital flight over a 46-year period from 1970-2015.
- The issue is not going away, either. Figures from think tank Global Financial Integrity demonstrate the extent to which capital flight is continuing to hurt the region, with average illicit outflows totalling between 7.5% and 11.6% of Sub-Saharan Africa’s total trade between 2005 and 2014.
- These countries lose more through capital flight than they receive in the form of aid or foreign private investment altogether.
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, these countries have made vast amounts of dollars through the oil industry. 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.
Taking advantage of lenient tax offerings to house investments outside Africa may be perfectly legitimate. Corrupt politicians using jurisdictions prone to secrecy to launder funds, disguise ultimate beneficial ownership of assets or obscure conflicts of interest is illegitimate.
- Also, the problem 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.
An entirely separate capital flight channel is transfer pricing, where legally related entities misprice goods or services. According to the United Nations Economic Commission for Africa, this accounts for 60% 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.
Border barriers: To address the capital flight conundrum, we first need to consider 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.
Finding a solution
We are already seeing some African governments introduce initiatives with the aim of lessening the impact of capital flight.
- Nigeria’s Voluntary Assets and Income Declaration Scheme (VAIDS), for example, is an effort to recover funds taken overseas by high-net-worth Nigerian citizens and encourage them to pay their taxes. Whilst certainly a step in the right direction, it takes more than one governmental initiative to solve the issue, especially when global financial structures are organised in such a way to make these efforts difficult to implement and enforce.
- Similarly, Kenya and Angola are both working on well-intentioned policy initiatives to combat corruption and curb illicit outflows; however, to date, these efforts have 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.
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.
Bottom line: 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.