Generally, capital flight is considered unrecorded and rapid outflow of assets and money from a country, or economic region as a result of intended, or unintended economic consequences. Capital flight in many situations occurs in a context of illicit activity, such as embezzlement, bribes, and tax evasion. Politics and economic conditions can also lead to capital flight. This means that political turmoil can negatively affect investor confidence vis a vis economic futures, which leads to the withdrawal of investment funds. Furthermore, aggressive tax policies, currency devaluation, or falling interest rates can trigger capital flight and it should be noted that investor choices i.e. safe or risky investments contribute the issue of capital flight.
The international mainstream media leads many to believe that the African continent is entirely dependent of foreign ‘aid’ and functional private investment. The general image depicted is that of advanced economies providing money to poor and developing African countries. To the contrary, research and data proves that the Africa is a ‘net-creditor’ to the rest of the world. According to a 2018 Political Economy Research Institute (PERI) report, with a sample of 30 African countries over a 46 year period (1970-2015), the group of countries lost a combined total of $1.8 trillion to capital flight including interest earnings. Additionally, the report goes on to indicate that the stock of debt owed by the countries as at 2015 amounted to $496.9 billion. The evidence proves that countries on the African continent lose more value through capital flight than is received in foreign aid, or investment.
The founding president of Global Financial Integrity (GFI) Raymond Baker, is quoted as saying, “The traditional thinking has been that the West is pouring money into Africa through foreign aid and other private-sector flows, without receiving much in return. Actually, that logic is upside down – Africa has been a net creditor to the rest of the world for decades.”
The GFI and the African Development Bank released a report in 2013, estimating that the most common strategy for transferring capital from developing countries to advanced economies was trade mis-invoicing. The GFI further reports that sustained conditions of capital flight undermines revenue sources and stifles the ability of affected countries to build a domestic tax base.
The FinCEN leaks are only a symptom
In similar fanfare that was afforded to the 2016 Panama Papers Leaks, the FinCEN Files which details over 200,000 suspicious financial transactions, were leaked, and globally publicized on the 20th of September 2020. The investigation was carried out by the International Consortium of Investigative Journalists (ICIJ) and the files were leaked from the Financial Crimes Enforcement Network (FinCEN). It is claimed within original reports that global banks are entirely complicit in or willfully ignorant of the outright stripping of economic value from majority of the world’s population, in favor of multinational elite/criminal interests. The FinCEN files show proof that global banks such as JPMorgan Chase, Deutsche Bank, HSBC, Standard Chartered Bank and Bank of New York Mellon continued moving cash for illicit networks, even after they had been fined by U.S authorities for failing to stem illicit fund transfers, according to key findings by the ICIJ. Furthermore, the ICIJ also reports that in about half of the FinCEN Files, banks did not have information on one or more entities behind transactions and also, after years of concern, banks carried on providing services to criminal interests, allegedly leading to cases of actual harm.
According to UN estimates, Africa lost over $830billion within the first 15 years of the 21st century (2000~2015). Majority of that amount was linked to high-value extractive commodities like gold, diamonds, and platinum. This contributed to the inability of African governments to provide basic services like healthcare, education, or infrastructure. The U.N. Conference on Trade and Development (UNCTAD) reported that, between 2013 and 2015, illicit capital outflow was about $89billion/year on average. Within that period, capital outflows from Nigeria, Egypt and South Africa accounted for more than four-fifths of the total ($267billion approx.) while Nigeria made up almost half of that value.
What do next steps look like
In considering the debilitating actions of many global industries, which are backed by direct or indirect funding, with transactions facilitated through unaccountable financial institutions, it is observed that ‘shadow’ economies are allegedly propped up at the expense of global population groups. For context, one must consider funding operations that enable illegal mining in the global south, or human trafficking operations in Europe as well as the Americas. As far as full disclosure is concerned, a Forbes article reported that, in the $150billion/year human trafficking industry, approximately 25 million people are trafficked worldwide and banks are used here for purposes of cash transfers and remittances.
In addressing problems of capital flight and the run-off issues therein, financial watchdog organizations, and socio-political institutions, must develop working plans focused on the accountability of entities overtly exposed (a la FinCEN Files and Panama Papers) in dark and illicit financial actions. Examples of policies in Africa produced with the intent of combating illicit capital flows include, the Voluntary Assets and Income Declaration Scheme (VAIDS) in Nigeria and the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) in Kenya. Although adherence to such policies may be neglected or sparsely enforced, larger governing bodies such as the East African Community (EAC) or the African Union itself can set in motion programs to encourage the creation, adoption, and adherence to such policies.
Concise coverage and education of the capital flight problem can serve to build a firm base of political will, for committing to actions that benefit concerned economies and populations.