In 2011, the African Union and United Nations Economic Commission for Africa formed a ‘High Level Panel on Illicit Financial Flows’ to investigate the extent to which illicit financial flows (IFF) are likely to hamper African development. The Panel defined
IFFs as “money that is illegally earned, transferred or utilized. These funds typically originate from three sources: commercial tax evasion, trade misinvoicing and abusive transfer pricing; criminal activities, including the drug trade, human trafficking,
illegal arms dealing, and smuggling of contraband; and bribery and theft by corrupt government officials”.
The Panel released its report into IFFs in February 2015 and the findings make uncomfortable reading for African countries, multinational corporations and the wider global banking community. The panel estimates that African countries collectively lose USD$50bn
each year through IFFs, which, put into perspective, is approximately equivalent to the annual GDP of Ethiopia. The report made use of a number of country case-studies to illustrate the impact on development that IFFs were having. Kenya was one good example,
having achieved a consistent annual GDP growth rate of 4.8% which is pitted against tax avoidance schemes which may amount to as much as 8.3% of government revenue, depriving the public of billions of dollars of tax-funded investment.
The report stated that there were two main culprits for IFFs: multinational corporates involved in tax evasion and corrupt government officials looking to hide assets offshore. The wider banking community is not directly criticised in the report but is implicated
to the extent that IFFs cannot exist without the capability for funds to be moved offshore. The vast majority of financial institutions will be unwitting participants in the movement of illicit funds as their source will be disguised through a variety of money-laundering
Due to the scale of IFFs, it is important that banks and other financial institutions take appropriate precautions to protect against being used by individuals or organisations looking to move criminally obtained funds. One of the most obvious techniques
to combat money-laundering is to put in place a comprehensive risk-based approach to ‘know your client’ (KYC). There are two main components to KYC which have to operate in tandem to deliver a truly effective programme. The first aspect is putting in place
clear, robust processes to manage clients through each stage of their engagement. The second is that banks must install adequate systems that equip staff with the appropriate tools to identify suspicious customers.
There is often a degree of fatigue when matters such as barriers to African progress are raised because there is sometimes a view that the problems are self-inflicted. The Panel’s report certainly does not ignore that corruption is a factor in the scale
of IFFs, however it is clear that IFFs can be combatted by financial institutions making it harder for criminal groups to launder funds.