Going back to at least 1987 when the Global Financial Integrity (GFI) began tracking Botswana’s illicit financial flows, an estimated P40 billion has left the country under mysterious circumstances. All in all, a study that examines a 39-year period between 1970 and 2009, says that between US$854 billion and $1.8 trillion illicitly flowed out of Africa. This estimate does not include illicit flows generated due to smuggling, trade in narcotics and contraband, violations of intellectual property rights, human trafficking, sex trade, and other illegal activities.
“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 mispricing, and money laundering techniques. The impact of this structure and the funds it shifts out of Africa is staggering. It drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment, and undermines free trade. It has its greatest impact on those at the bottom of income scales in their countries, removing resources that could otherwise be used for poverty alleviation and economic growth,” GFI says in a report. GFI’s tracking begins in 1970 but for 16 years would not undertake such activity for Botswana. When that began in 1987, the amount of illicit financial flows out of the country in that year alone totalled US$316.9 million.
The tracking was inconsistent which is why there are no figures for the next six years. When it resumed in 1994, the figure dropped to $99.2 million and rose to $139.4 million the following year. No figures are provided for 1996 but in 1997 illicit financial flows were estimated at $130.6 million. Thereafter, they rose steadily for two years ($174.8 million in 1998 and $196.6 million in 1999) before dipping to $181.2 in 2000. The next two years (2001 and 2002) were most peculiar: in the former only $26.1 million illicitly left Botswana but the following year, the figure dramatically shot up to $571.4 million. However, the biggest volume would come in 2004 when $768.1 million illicitly flowed out of the country.
Typically, GFI reports do not provide an analysis of the reasons underlying the flows. In the case of Botswana, this leaves hanging the vexing question of why illicit flows tend to go up in an election year. Given what commodity would be on sale (political power and influence) one would expect such flows to be incoming than outgoing but that is not what happens. With the exception of 1994, the levels of illicit flows went up in 1999, 2004 and 2009. If the trend holds, it will be replicated in 2014. GFI says that the billions of dollars lost in cumulative capital flight can not only wipe out Africa’s total external debt outstanding of around US$250 billion (at end-December, 2008) but potentially leave US$600 billion for poverty alleviation and economic growth.
It is generally believed that much of Africa would literally starve to death without foreign aid. Conversely, GFI says that developing countries lose at least $10 through illegal flight capital for every $1 they receive in external assistance. For the period under review, the burden of capital flight as a percent of GDP was higher for Sub-Saharan Africa (61 percent) than for Latin America (22 percent). Another study found that total capital flight from Sub-Saharan Africa over the period 1970 to 2004 accounted for nearly 82 percent of the total regional GDP in 2004. By way of comparison, this study found that Africa as a whole (which includes the North African countries Algeria, Egypt, Libya, Morocco, and Tunisia) lost about 56 percent of its total 2008 GDP through illicit flows over the 39-year period in question. During the 2000-2008 period, Sub-Saharan Africa registered the highest growth rates in over 30 years. This growth was underpinned by high commodity prices, improved macroeconomic policies, and structural reforms in a number of countries.
The acceleration was in oil-producing countries with capacity increases in Angola and the Republic of Congo and new production in Mauritania. However, in the period that Sub-Saharan Africa enjoyed its strongest period of sustained economic growth, the pace of illicit flows from the region also accelerated relative to previous decades. GFI says that some of the acceleration in illicit outflows “was undoubtedly driven by oil price increases and increased opportunities to misinvoice trade that typically accompany increasing trading volumes.” By United Nations estimates, $529 billion will be needed to cover MDG costs by next year. however, the international body also notes that a large gap still separates Africa from its MDGs, that official donor aid commitments will probably fall well short of the required funding of MDGs and that if the problem of illicit flows is not addressed as a matter of high priority, the poor will likely experience a further decline in access to basic services in the face of grinding poverty. GIF arrived at its estimates through use of an economic model developed by the World Bank – the “World Bank Residual Method” it is called.
Two main channels through which illicit capital can leave a country have been observed. The World Bank Residual model captures the first channel through which illicit capital leaves a country through its external accounts. The second type of illicit flows, generated through the mispricing of trade transactions, is captured by the Trade Misinvoicing model which uses the IMF Direction of Trade Statistics. GFI says that trade misinvoicing has long been recognised 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 misinvoicing, 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 misinvoicing,” says GFI, adding that that this method only captures illicit transfer of funds abroad through customs re-invoicing.
“IMF Direction of Trade Statistics cannot capture mispricing that is conducted on the same customs invoice.” The flight of capital from Africa has been largely made possible by the global financial system because deregulated financial markets generate ever-rising illicit flows and loss in government revenues. GFI recommends that policy measures must be taken to address the factors underlying illicit outflows. “In addition, African countries must impress upon the G-20 the need for better transparency and tighter oversight of international banks and offshore financial centres that absorb these flows,” it says. In Botswana, the government has established the Financial Intelligence Agency to deal with this and other finance-related problems.
