Illicit Financial Flows Costing Ghana US$340m Annually

A new study has revealed that, Ghana loses US$340 million annually, due to Illicit Financial Flows (IFFs).

According to the Integrated Social Development Centre (ISODEC), “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.”

According to the Global Financial Integrity, illicit flows include when the funds are illegally earned, transferred, and/or utilized.

In Ghana’s case, the inability of revenue collection agencies to judiciously mobilize funds, has resulted in both local and foreign companies evading taxes.

In an interview with Dr. Steve Manteaw, Coordinator of ISODEC, at a forum to discuss illicit financing and its effects on countries, lamented that the nation is losing a lot due to this act.

“ISODEC has advocated for strict monitoring of the revenue collection agencies as well as the country’s legislations, in order to apprehend the perpetrators. There is exploitation of leakages in our revenue generation agencies, and these leakages must be blocked. Our policies and laws must be reinforced to close the gaps, that way, we can make a lot”, he added.

The forum was dubbed combating illicit financial flows to foster sustainable development goals-taking stoke and strengthening responses.

A recent clear Ghana case is the, the National Petroleum Authority (NPA) disclosing that Ghana loses about GHC850 million annually in taxes, due to the increased activities of fuel smugglers in and out of the country.

The illegal act is said to involve operators who ply their business at the ports by fueling tanks with fuel products brought into the country through unapproved routes.

The second category of the illicit trade is carried out by businesses who apply under the pretext of exporting petroleum products but end up selling them within Ghana, thereby evading some taxes.

The Chief Executive of the NPA, Hassan Tampuli confirmed the worrying development to journalists during a visit to the Tema port led by Deputy Finance Minister, Kweku Kwarteng last week.

“We estimate that about 250,000 metric tonnes of losses in terms of petroleum products get to this country and that is estimated to cost the country GHC850,000,000,” he said.

Illicit financial flows (IFFs) are illegal movements of money or capital from one country to another. GFI classifies this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilized.

Some examples of illicit financial flows might include: a drug cartel using trade-based money laundering techniques to mix legal money from the sale of used cars with illegal money from drug sales; an importer using trade misinvoicing to evade customs duties, VAT, or income taxes; and a corrupt public official using an anonymous shell company to transfer dirty money to a bank account in the United States;

Also include: a human trafficker carrying a briefcase of cash across the border and depositing it in a foreign bank; or a terrorist wiring money from the Middle East to an operative in Europe.

GFI estimates that in 2013, US$1.1 trillion left developing countries in illicit financial outflows. This estimate is regarded as highly conservative, as it does not pick up movements of bulk cash, the mispricing of services, or many types of money laundering.

A lot can be said on the impact of illicit financial flows on developing countries. US$1.1 trillion is a tremendous amount of money to be drained out of developing countries. A 2013 GFI report found that even after the account for all types of financial flows (both legitimate and illegitimate)—including investment, remittances, debt forgiveness, and natural resource exports—Africa is a net creditor to the world: GFI is therefore currently in the process of applying this analysis of “Net Resource Transfers” to the rest of the developing world.

Beyond the damaging economic impact of the overall capital outflows, illicit financial flows have a terrible, subversive impact on governments, victims of crime, and society. They facilitate transnational organized crime, foster corruption, undermine governance, and decrease tax revenues.

It is very critical trace where those illicit monies end up to help in the tracking efforts.

It is a bare fact that, every dollar that leaves one country must end up in another country. Very often, this means that illicit financial outflows from developing countries ultimately end up in banks in developed countries like the United States and United Kingdom, as well as in tax havens like Switzerland, the British Virgin Islands, or Singapore.

GFI research suggests that about 45% of illicit flows end up in offshore financial centers, and 55% in developed countries.

This does not happen by accident. Many countries and their institutions actively facilitate—and reap enormous profits from—the theft of massive amounts of money from developing countries. GFI, therefore, believes that developed countries have a responsibility alongside developing countries to curtail the flow of illicit money.

ISODEC has also identify the main conduits for these losses as; trade mis-invoicing, corruption, and profit shifting in projects and trade deals where companies move profits from their subsidiaries in higher tax countries where the real economic activity takes place to other subsidiaries in tax havens.

GFI believes that the most effective way to limit illicit financial flows is to increase financial transparency and also enact policies to: detect and deter cross-border tax evasion; eliminate anonymous shell companies; strengthen anti-money laundering laws and practices; work to curtail trade misinvoicing; and improve transparency of multinational corporations.

Presenting highlights of a study undertaken by ISODEC on the issue of trade mis-pricing in Ghana, Dr Manteaw said, the study found that Ghana’s export to the European Union (EU) was undervalued by an estimated €2.7 billion during the 13-year period between 2000 and 2012; being 14 per cent of the total value of export to the EU.

The analysis, which used data from EUROSTAT for trade with the EU, also found that Ghana’s import from the EU within the period was overvalued at €2.8 billion; 14 per cent of the total import from the EU.

An analysis of United States (US) merchandise trade database for US-Ghana trade also found that Ghana’s exports to the US within the period was undervalued at an estimated $633 million, which represents 21 per cent of total value of export to the US, while Ghana’s imports from the US were overvalued by an estimated $573 million; eight percent of total imports from the US.

Dr Manteaw noted that an experiment conducted by ISODEC by importing and clearing some items (video cameras, microphone/speakers, and projectors) also revealed that the items were undervalued, costing the nation a total of US$101, 781.20 in unpaid taxes.

He called for greater coordination among the various divisions, departments and units of the Ghana Revenue Authority (GRA) in order to improve efficiency and information sharing.

“It will be necessary to consider the introduction of IT-mediated solution such as a kind of intranet that links up the various divisions, departments and units, and help them to monitor in real time the transactions that take place in a day,” he said.

Although, much effort have been done in terms of modernizing, integrating and upgrading the services efficiencies of the three divisions of GRA, it seems there is still more to be done to be able to stem the tax evasion by these well-coordinated criminal activities by tax evaders.

Attempts to reach the GRA for their comments on the allege ISODEC deliberate act to test the efficiency of the tax administration system in the country, where it was proofed inefficient resulting in a loss of US$101,781 in unpaid taxes by ISODEC when it imported some items, proved futile.

ISODEC has therefore recommended that, the planned enactment of the Fiscal Responsibility Act or any future amendment of the fiscal responsibility provisions in the Public Financial Management Act contain severe sanctions for the violation of constitutional provisions in respect of tax waivers.

He called on Ghana to design, implement, monitor and evaluate a real-time model for tracking and eliminating trade mis-pricing in commodities.

OECD has estimated, every year, US$1 trillion is spirited out of developing countries through corruption, smuggling, money laundering, and corporate tax evasion.

These illicit financial flows out of developing countries dwarf the flow of development assistance going in. Illicit financial flows removed US$10 for every dollar spent on overall development aid, and US$80 for every dollar spent on basic social services.

By taking advantage of weak rules governing financial transactions, corporations, racketeers, and corrupt officials don’t merely enrich themselves. They greatly aggravate poverty and oppression by weakening the institutions that are intended to sustain the rights and livelihoods of the poor.

This deprivation constitutes a massive violation of human rights; one-third of all deaths globally are the result of poverty and poverty-related conditions.

The issue of illicit financial flows (IFFs) is at the forefront of the international agenda. The G8 and G20 are urging countries to take action on several fronts: strengthening their anti-money laundering regimes, enforcing greater transparency of company ownership, and supporting efforts to trace, freeze and recover stolen assets. They are also committed to automatic exchange of information to tackle tax evasion. And given the interconnectedness of our economies, global compliance is required to tackle many of today’s challenges.

The most immediate impact of illicit financial flows (IFFs) is a reduction in domestic expenditure and investment, both public and private. This means fewer hospitals and schools, fewer police officers on the street, fewer roads and bridges. It also means fewer jobs. Furthermore, many of the activities which generate the illicit funds are criminal; and while financial crimes like money laundering, corruption and tax evasion are damaging to all countries, the effects on developing countries are particularly corrosive. For example, corruption diverts public money from public use to private consumption.

It is a known fact that, general private consumption has much lower positive multiplier effects than public spending on social services like health and education. Proceeds of corruption or criminal activities will generally be spent on consumption of items such as luxury vehicles, or invested in real estate, art, or precious metals (World Bank, 2006).

The social impact of a Euro spent on buying a yacht or importing champagne will be very different from that of a Euro spent on primary education. On another front, money laundering is harmful to the financial sector: a functioning financial sector depends on a general reputation of integrity, which money laundering undermines. In this way, money laundering can impair long-term economic growth, harming the welfare of entire economies.