Tracking Noxious Funds: Strategies And Techniques For Whistleblowing By Kayode Oladele

Africa is estimated to have lost over $1 trillion in illicit financial flows (IFFs) within the past 50 years, with drainage of over $50 billion annually. These outflows, according to the African Union and Economic Commission for Africa (AU/ECA) High Level Panel on Illicit Financial Flows (IFFs), refer to “money that is illegally earned, transferred or utilized”.



These funds typically originate from three main sources. Firstly, commercial tax evasion, trade mis-invoicing and abusive transfer pricing, that involves mostly multinational enterprises (MNEs). These account for 65% of Illicit Financial Flows. The second aspect involves criminal activities, including the drug trade, human trafficking, illegal arms dealing, and the smuggling of contraband etc., which account for 30% of Illicit Financial Flows. The third component comprises corruption, bribery and theft by corrupt government officials, which account for 5% of IFFs, according to the Report of the AU/ECA High-Level Panel on Illicit Financial Flows of 2014.

On the issue of tax evasion, weak tax administrations coupled with multinational tax-avoidance schemes, and the engagement of major players in the private sectors in transfer pricing and other cross-border intragroup transactions, the negotiation of tax holidays and incentives, as well as the use of offshore investment accounts constitute about 60 percent of illicit financial flows from Africa.  Such aggressive transfer pricing – which involves the inflation of profits in low-tax jurisdictions and lower profits in high-tax jurisdictions – is a problem affecting developed and developing countries alike. Despite efforts to implement the “arms-length principle” in regulating trade between related parties and affiliates, African governments are often short-changed due to the inability to monitor major players in the private sector effectively. It is also often impossible for African governments to monitor or review transaction costs declared by the private sector – for example, with respect to intellectual property rights – which force the governments to accept the numbers reported by these companies without verification.

Unfortunately, some of our systems provide opportunities for the tax that facilitates the illicit movement of resources out of Africa in particular, as they create incentives for corporations to shift their profits. Apart from offering low to no taxes at all, tax havens offer very strong banking secrecy to both companies and individuals, making it extremely difficult, and in most instances impossible, for foreign authorities to obtain information about the account holders and the source of money.

As such, the opacity of tax havens prevents developing African countries from obtaining the information needed to collect full taxes owed to them by individuals and multinational corporations. As a consequence of this profit shifting, African countries are experiencing an erosion of their tax bases. Dealing with the trans-boundary flow of resources requires cooperation between source countries and tax havens, particularly on the automatic exchange of information for tax purposes.

On the issue of criminality and noxious funds, let me say that transactional organized crime is big business. In a recent estimate, it was credited with the generation of $870 billion- an amount equal to 1.5% of the global GDP, annually. That is more than six times the amount of global official development assistance and the equivalent of close to 7% of the world’s exports of merchandise. Transnational organized crime is not stagnant, but is an ever-changing industry, adapting to markets and creating new forms of crime. In short, it is an illicit business that transcends cultural, social, linguistic and geographical boundaries and one that knows no border or rules.

Many of the so-called insurgency groups, as well as organized criminal groups, are in the big businesses of human trafficking, drug trafficking, illegal oil bunkering, commodity smuggling, foreign exchange round tripping and so on. They also align themselves to political institutions, powerful politicians, and public officials to act as facilitators of the illicit activities. Once illegal money has entered the global and financial markets, it becomes much harder to trace its origins and the laundering of ill-gotten gains may perpetuate a cycle of crime and drug trafficking.

The third type of noxious funds transferred relate to those relating to corruption, bribery, and theft by corrupt government officials. As a key enabler of corruption, tax havens become the natural choice for corrupt politicians to keep stolen money, because of the secrecy that it guarantees their transactions and the difficulties involved in repatriating stolen money from such destinations. From experiences shared from both Panama Papers and more recently, the Paradise Papers, hundreds of top politicians, including Heads of States and Governments, have been exposed for using secret hideaways in tax havens, mainly for money looted from the public, a development that calls for concern.

It shows how deeply ingrained harmful practices and criminality are in the offshore world, and reveals the hypocrisy of some of the leaders who supposedly have ‘zero tolerance for corruption’ in their public posturing. It is important to state at this point that in the real life, these three dimensions of illicit funds transfer are interwoven and as such, could not be compartmentalized. Bribery and corruption feature prominently in the whole chain involving tax evasion, criminal activities and stealing by public officials.

The critical question at this point is, ‘where do we go from here”? What are those measures that we have to take and what are the strategies and tactics to strengthen whistleblowing and tracing property and investments from illicit activities in the west and tax haven?

At this juncture, I want to commend the government of Nigeria for the consistent implementation of its Whistle-blower Policy which has led to the recovery of millions of dollars from corrupt former public officials. I also want to commend the efforts of the National Assembly of Nigeria to strengthen the legal framework on Mutual Legal Assistance and proceeds of crime.

However, what exists currently is like a drop in the ocean. The ambition should be to mobilize majority of Nigerians to become whistle-blowers so that whenever they see something, then they say something. It will also require a dedicated and up-scaled effort by the government to provide resources. It means providing money to strengthen relevant agencies such as revenue authorities, transfer pricing units, customs services, anti-corruption agencies, financial intelligence units and the likes by giving them the necessary autonomy, capacity, and tools with which to carry out their duties.

It further means recruiting and training qualified personnel and making efforts to retain them in the public sector. Regional efforts are also needed, including through forums such as the ECOWAS, African Union, UNODC, the Financial Action Task Force (FATF) and so on, to promote anti-corruption efforts and provide related mutual assistance programs.

Therefore, by way of setting the stage, I wish to call for practical strategies and tactics for the provision of a more conducive and enabling environment for strengthening whistleblowing and tracing of property purchased from proceeds of crime generally.

One way of doing this is through the implementation of extant legal and policy frameworks on transparency of ownership. Beneficial ownership information should be provided when companies are incorporated or trusts registered and Nigeria should push for mandatory project-by-project reporting requirements across all sectors. Secondly, governments at all levels should ensure that public access is granted for the federal, state and local government budget information, including the progress report on expenditure and project implementation. Indeed, Civil Society Organizations should redouble their efforts in demanding transparency in open contracting to reduce illicit financial flows through government procurement processes.

In conclusion, I wish to state that there is no way to eliminate corruption without also tackling the menace of tax havens and their opaque codes. Those who engage in organizing offshore accounts for top government officials and their counterparts in the private sector are in the business of promoting corruption. They provide the leeway for criminal elements looking for escape routes from the law and other relevant financial regulations.