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.
The irony of the Extractive Industries Transparency Initiative issue is that, though it was launched in 2004, the United States did not apply as a “candidate country” until March 18, 2014 and it is still pending.
“US candidacy will serve as a role model for other countries interested in implementing EITI that are dealing with complex federal systems,” said Paulo de Sa, Manager of World Bank’s Sustainable Energy, Oil, Gas, and Mining Unit in a statement.
Policy Recommendations
Since the report was released, Kar says they have had some response from African governments that have been mostly positive.
“They recognize that this is a serious issue, that they need to focus on this, but I’m not aware of any negative comments, you know sort of ‘I don’t believe it’ or that they think we’ve exaggerated or anything like that,” Kar told AFKInsider. “So there is a lot of support in different quarters, both from the academic as well as from the political side, the policy side, that they need to focus on this issue.”
Kar says they haven’t heard anything from the US government.
In order to garner greater transparency in domestic and international financial transactions and shut down the channels through which illicit money flows, the report recommends a number of steps these five countries can take.
This includes boosting their customs enforcement to better detect intentional misinvoicing of trade transactions.
Insufficient data and limited processes for questioning invoices are plaguing efforts of each government to curtail trade misinvoicing and reduce the reach of the shadow financial system since customs authorities are not usually collecting, or do not have the ability to collect, the data they need to understand the magnitude of illicit flows of capital, according to the report.
“The countries we studied are moving in this direction with the establishment of electronic customs systems and, in some cases, the creation of financial intelligence units, which are responsible for monitoring issues of financial crime and opacity,” notes the report.
Other recommendations include: “create central, public registries of meaningful beneficial ownership information for all companies formed in their country to combat the abuse of anonymous shell companies; and require that all banks in their country know the true beneficial owner of any account opened in their financial institution; and participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the G20 and the OECD.”
The report also urges Kenya and Uganda follow the lead of Ghana, Mozambique, and Tanzania in joining and complying with the Extractive Industry Transparency Initiative.
“The scope is pretty large just for these five countries. But then if you want to go into the details of commodity breakdown, that becomes a much larger project and financing also becomes an issue. So we have to go with what the contract says and the contract didn’t say that we should look into this commodity breakdown.” Kar told AFKInsider.
“But yes, commodity trade also affords a more focused analysis of what commodities and countries where there is a high risk of misinvoicing.” Kar told AFKInsider.
Getting a handle on tracking trade revenue is even more important now in light of a new World Bank report that notes developing countries are headed for a year of disappointing growth, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity.
According to the World Bank’s Global Economic Prospects report, released June 10,
national budgets of developing countries have deteriorated significantly since 2007. The reports states: “In almost half of developing countries, government deficits exceed 3 percent of GDP, while debt-to-GDP ratios have risen by more than 10 percentage points since 2007. Fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa.”
“In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth,” notes the World Bank.