Illicit Financial Flows, an albatross around Ghana’s socio-economic development

Africa Illicit financial flows
Africa Illicit financial flows

Africa is said to have lost in excess of 1 million trillion United States Dollars (USD) within the last 50 years through Illicit Financial Flows (IFFs), Global Financial Integrity (GFI) Annual Report for 2014 says.

The developing world lost 6.6 trillion USD in illicit outflows between 2003 and 2012 with Sub-Saharan Africa (SSA) losing 528.9 billion USD.

Mineral and fuel producing African countries are losing an estimated 50 billion USD per annum through IFFs (Kar and Carthwright-Smith, 2010).

Other estimates showed that approximately 854 billion USD has been moved out of Africa over a 39 year period, making the continent a net creditor to the rest of the world (Ndikumana and Boyce, 2003, 2008).

The African Centre for Energy Policy (ACEP), a policy think tank here in its February 2015 report on IFFs and the extractive industry in Ghana indicated that cumulative gross illicit flows from trade mis-invoicing amounted to 14.39 billion USD between 2002 and 2011.

The report further indicated that IFFs through trade mis-invoicing in the country from 1960 to 2012 amounts to 40 billion USD.

The think tank, again estimates IFFs from illegal mining in Ghana in 2013 to be about 1.7 billion USD.

The Nana Addo Dankwa Akufo-Addo government’s first Budget Statement and Economic Policy for the 2017 financial year presented to the Parliament of Ghana by Finance Minister, Ken Ofori-Atta on March 2, 2017 projected to spend GH₵58,137.4 million or 12,862. 257 million USD.

A greater chunk of the region’s resources is being lost through IFFs; that is, money that ends up benefiting a few local and foreign elites rather than the general population. This often takes the form of corruption, illegal exploitation, and tax evasion. During the period of sustained economic growth in SSA, the pace of illicit flows from the region also accelerated relative to previous decades (Murisa, 2013).

Available evidence suggests that there is a statistically significant positive relationship between oil exports and illicit financial flows—for each extra US dollar in oil exports, an additional 11 to 26 cents leaves the country as illicit capital flight (Boyce and Ndikumana, 2011).

An International Monetary Fund (IMF) study in 2000 observes that faster economic expansion with rising income levels can actually drive capital flight if growth is not accompanied by genuine economic reform and better governance. Some analysts attribute this to the low levels of transparency and high corruption in the natural resource sectors (Williams 2010).

Chairman of the Public Interest and Accountability Committee (PIAC), Dr. Steve Manteaw at a forum recently on IFFs observed the nation is losing a lot through the practice.

“Ghana loses 340 million dollars annually and this is quiet substantial. We lose all these monies and we go about borrowing, when we can pluck the holes and get these monies out of illicit financial flows”, he stated.

Dr. Manteaw says the loopholes in revenue generation is the cause and urged the Ghana Revenue Authority to up its game.

“There are exploitation of leakages in our revenue generation agencies. Our policies and laws must be reinforced to close the gaps, that way, we can make a lot”, he added.

Chairman, Tax Justice Coalition Ghana, Vitus Azeem, observed while he was encouraged by the expressed commitment and efforts by African governments, under the auspices of the African Union (AU) to fight IFFs, he was worried that in spite of the commitments, huge amounts of potential tax revenue continued to be lost through IFFs.

Mr. Azeem emphasized the menace emanates from an unjust economic and power relations between Africa and the developed world that has historically impoverished Africa and enriched the western world.

Speaking at the launch of a campaign against financial leakages in Ghana and Africa, he warned the menace could bring the continent on their knees if not checked.

Managing Partner of Ali-Nakyea & Associates, Abdallah Ali-Nakyea told this reporter in an interview the practice is widespread, especially in the extractive sector.

“In Ghana, the natural resources sector is one significant area of concern in this regard. Imports and exports also show such IFF tendencies, through over-invoicing and under-invoicing with bribery and corruption at the bottom.”

Among the negative impact of IFFs to the Ghanaian economy include:

· IFFs drain hard currency reserves, heighten inflation, cancel investment, undermine trade, worsen poverty, and widen income gaps.

· Reduce tax revenue for the provision of public services such as health, education etc.

· Reduce forex resources thereby inhibiting growth and the ability of nations to invest in infrastructure and businesses.

· IFF beneficiaries grow wealthier and are able to exercise greater influence over the polity within the states they operate. This can curtail the ability of governments to pass transformative policies.

· When monies are moved out of Ghana, the economy does not benefit from the multiplier effects of the domestic use of such resources, whether for consumption or investment.

· Such lost opportunities impact negatively on growth and ultimately on job creation in the country.

· When economic profits on activities performed in Ghana are illicitly transferred out of the country, reinvestment and the related expansion by companies do not take place.

· Overdependence on this sector for foreign earnings weaken the local currency (cedi) as it is import dependent.

· Weak institutions and inadequate regulatory environment.

· People and corporations behind IFFs often compromise state officials and institutions.

· Multinational corporations engage in base erosion and profit-shifting activities, so the bulk of the tax burden as a result falls on small and medium scale enterprises and individual taxpayers.

· Reduced ability of governments to provide social services but also as a result of the resentment of corruption arising from IFFs.

· IFFs, it has been argued contributed to the fiscal constraints that hampered meeting the Millennium Development Goals (MDGs).

· Over the years, IFFs ranging from profit shifting to lack of transparency, financial secrecy of jurisdictions, lack of clarity about beneficial ownership, and inadequate reporting of payments in the extractive sector have attracted the attention of G8 and G20 countries.

Mr. Ali-Nakyea proposes a number of measures to check IFFs in the country.

· The need to design a real time model that can monitor imports to avert trade mis-pricing.

· The Customs Valuation Units here should be resourced to build data on import prices of various import destinations.

· The need for training of Customs Officers to understand and operate the systems to be designed.

· The need to further strengthen rules and regulations on transfer pricing as well as ring fencing for the extractive industries.

· The need for a transfer pricing database to guide revenue officers in the determination of arm’s length transactions to avert transfer pricing abuse.

· The need to check collusion between clearing agents and customs officials of revenue authorities.

· The need to keep a database of importers and exporters which will be subject to review to “weed” out dubious ones engaged in trade mispricing.

· With the greater potential for abuse, trade transactions with secrecy jurisdictions should be treated with the highest level of scrutiny by customs and law enforcement officials.

· More research, developments and training of government regulatory personnel from the relevant sector ministries and agencies should be encouraged and better equipment provided to assist them in the detection of trade mis-invoicing.

It is the expectation of well-meaning Ghanaians that if political will coupled with cooperation at the international level on anti-IFFs, the government will generate thousands of dollars which would have otherwise left the shores illegally to pursue its socio-economic development. Enditem

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