Fraudulent misinvoicing of trade channeled tens of billions of dollars illegally into or out of the five African countries during a ten year period. The result has been a hampering of economic growth from billions of dollars in lost tax revenue decimating government revenues. In fact, trade misinvoicing is part of a larger the global shadow financial system.

“A global shadow financial system provides measures of opacity to disguise
and move this illicit money throughout the world, including dozens of secrecy jurisdictions and multiple layers of confusing and concealed ownership structures,” notes a new report from Washington, D.C-based Global Financial Integrity.

“These outflows, and the shadow financial system in which they thrive, represent one of the most damaging conditions undermining economic growth and development, governance, and human rights in Africa and around the world.”

Economic Impact

The illicit financial flows are taking a serious toll on the economies of Ghana, Kenya, Mozambique, Tanzania, and Uganda, according to a May report from the Washington, DC-based Global Financial Integrity, which finds that the “over- and under-invoicing of trade transactions facilitated at least $60.8 billion in illicit financial flows into or out of in or out of Ghana, Kenya, Mozambique, Tanzania, and Uganda from 2002-2011.”

According to the May 2014 report, Hiding in Plain Sight: Trade Misinvoicing and the Impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania, and Uganda: 2002-2011, “Trade misinvoicing has been undermining investment and domestic resource mobilization in the countries we studied to the tune of billions of dollars. From 2002–2011, cumulative trade misinvoicing—export under-invoicing, import under-invoicing, export over-invoicing, and import over-invoicing—totaled $14.39 billion in Ghana, $13.58 billion in Kenya, $5.27 billion in Mozambique, $18.73 billion in Tanzania, and $8.84 billion in Uganda.”

“The Hiding in Plain Sight report basically was focused on getting an idea about the scale of the problem and the shifting pattern of misinvoicing over time in these five countries,” Global Financial Integrity chief economist Dev Kar told AFKInsider in an interview.

The study, funded by the Ministry of Foreign Affairs of Denmark, estimates that, collectively, trade misinvoicing may have cost the taxpayers of these five African nations $14.4 billion in lost revenue over the decade.

“We estimate that the governments in each case also lost a portion of these totals from the evasion of taxes and tariffs: $386 million for Ghana, $435 million in Kenya, $187 million for Mozambique, $248 million in Tanzania, and $243 million in Uganda, on average per year. These are not just figures on paper; curtailing these illicit outflows of capital could be a development game-changer in these countries,” according to the report.

This means less funds for development, thus stymieing economic growth in these countries.

“This additional tax revenue could have been used for investments in development, including providing greater access to education, healthcare, or infrastructure improvements. The lost opportunity to provide these public goods is a symbol of the real, tangible harm trade misinvoicing and illicit financial flows cause in developing countries,” states the report.

What’s scary is that Global Financial Integrity cautioned that their numbers are conservative and that there are likely to be more illicit flows into and out of these countries that are not captured by the models.

“They are very conservative because illicit flows, a significant part of it often tend to be settled in cash, like drug trafficking, human trafficking, sex trade, smuggling, trade and contraband, illegal arms trade all these things tend to be settled in cash which do not leave a print on economic data,” Kar told AFKInsider. “Our methodology is based on economic data not guesstimates.”

The estimates also do not include misinvoicing in services or intangibles and same-invoice trade misinvoicing.

Natural resources

One main focus of the report was extraction of natural resources, such as mining, oil and gas. The disclosure – or lack of disclosure – of payments to governments by private companies operating in the extractive industries is a major source of corruption in many countries “at the highest levels.”

“The problem is the link between the extractive industries and illicit flows and illegal capital flight,” Kar told AFKInsider. “So when they enter into agreements with the multinational mining corporations, oil exploration and all that, it’s linked to the corruption that is sort of institutionalized in these countries.”

Of the five countries highlighted in the report, Ghana and Mozambique are members of the Extractive Industries Transparency Initiative, which requires companies and governments to provide and publicize information on extractive revenues.

Tanzania, which has become economically strong due to their natural resource wealth, including newly discovered natural gas reserves, has committed to improving transparency by implementing the Extractive Industries Transparency Initiative.

But according to the report, “Despite the recent discovery of oil, Kenya has not signed on to the Extractive Industries Transparency Initiative. Particularly in light of Kenya’s issues with government corruption, requiring companies and the government to provide and publicize information on extractive revenues will be crucial to ensuring that the growth of Kenya’s nascent extractive industries remains aboveboard and beneficial to the Kenyan people.”

Uganda, where oil companies have invested at least $2 billion in exploring and developing the oil fields since oil reserves were discovered in 2006, has pledged to join the Extractive Industries Transparency Initiative soon.