How Illicit Financial Flows Drained Nigeria’s Economy By N3.8trn

A Report of the High Level Panel on Illicit Financial Flows by a former President of South Africa, Mr. Thabo Mbeki categorized Tax Crimes and Illicit Financial Flow into three major components.

The first is Commercial Activities which makes up 65 per cent of tax crimes and illicit financial flow. These activities are illegal flows from business activities that lead to hiding wealth, evading or aggressively avoiding tax, and dodging customs duties and domestic levies.

The second component is criminal activities which constitutes 30 per cent of IFFs and are often driven by criminal intentions with the purpose of keeping the transactions from the view of law enforcement agencies or revenue authorities.

Finally, there is the issue of Corruption which is estimated by the Mbeki Report to constitute five per cent of IFFs. These are usually money acquired through bribery and abuse of office by public officials and they are enormous.

There is no doubt that Illicit Financial Flows through cross border laundering, proceeds of crime, financing of terrorism, the theft of state assets, private sector bribery, and most importantly the abuse of taxation has had so much damage on the economy of Nigeria.

Just recently, this website had exclusively reported how the Federal Ministry of Works and Housing circumvented the Public Procurement Act of 2007 to award various contracts worth N9.32bn.

The discovery was made by the Office of the Auditor-General of the Federation in its Audit Report for the Ministry of Works include the award of a N343.83m contract for the purchase of project monitoring vehicles without due process; failure by the Ministry to comply with Treasury circular TRY/A2&B2/2009OAGF/CAD/26/V in the award of a N139.9bn contract for services and direct purchase of vehicles spare parts, Computer Accessories, Photocopying Machines parts and for designing of Nigerian Roads and Bridges; and irregularities in the production and airing of special video documentary for N210.68m.

The Ministry, according to the Audit Report, also violated the Public Procurement Act, 2007 where it used members of staff as contractors for in-house engineering design without due approval of the Bureau of Public Procurement Act 2007. Also, the sum of N1.2bn was paid to contractors without proper revalidation, while the Ministry used staff as contractor for in-house design without approval of the Bureau of Public Enterprises

Findings by this website showed that already, the Federal Government through the Federal Inland Revenue Service had identified the nature of tax fraud, illicit financial flows activities and tax crimes in Nigeria.

According to the FIRS, Illicit Financial Flows are perpetrated through payments of expatriates staff emoluments and remuneration; failure to declare for personal income tax purposes such emoluments to the relevant tax authorities in Nigeria; laundering of funds often sourced illegally through Real Estates transactions to acquire property in choice locations outside Nigeria, and illegal transfer of money out of Nigeria, through unapproved channels such as Virtual Currencies.

Other channels for conducting IFFs are mispricing of goods and services transferred between interrelated Nigeria based companies and individuals to offshore based entities and individuals; profit-shifting through excessive interest payments on foreign and locally sourced loans; and mis-invoicing of imports and exports.

Speaking on the illegal flow of funds, the ICPC Chairman, Prof. Bolaji Owasanoye, (SAN), revealed that Nigeria accounts for 20 per cent (about $10bn) of the estimated $50bn that Africa was losing to Illicit Financial Flows.

Based on the Central Bank of Nigeria official exchange rate of N379 to a dollar, the $10bn translates to about N3.79trn.

According to the ICPC Chairman, “The African Union Illicit Financial Flow Report estimated that Africa is losing nearly $50bn through profit shifting by multinational corporations and about 20 per cent of this figure is from Nigeria alone.”

The ICPC boss explained that taxes play a “very strategic role in the nation’s political economy.”

The ICPC Boss said the instrumentality of taxation could be used to curb IFFs through “risk-based approach to monitoring and audit; due process in tax collection; structured tax amnesty framework especially that which is skewed in public interest; data privacy; timely resolution of audits and payment of tax refunds; and intelligence sharing among revenue generating; regulatory; and law enforcement agencies.”

He also stated that for the contemporary tax man to remain relevant, he must build his capacity in areas of technology management, solution architects and an astute relationship manager.

Also, the Executive Chairman of Federal Inland Revenue Service, Mr. Muhammad Nani, expressed concerns that IFFs pose a serious threat to the Nigerian economy as the act robs the nation of resources that are needed for development.

Nani declared that tackling IFFs would expand the tax base of the Nigerian nation and improve revenue generation which was required for development.

He consequently pushed for policy reforms that would make it difficult for “capital flights” from occurring so that the country would be placed on the path of growth.

Nami said that the FIRS has carried out reforms to reposition the agency to be able to cope with the dynamic nature of IFFs.

Some of these reforms include sealing a pact with the Financial Intelligence Unit and designated Authorized Officers for the FIUs; setting up the first of its kind in Africa, a beneficial ownership register for tax purpose with ICPC which has led to so many forfeiture of asset under a presidential directive.

He said, “To address tax revenue losses through transfer mispricing of goods and transfer, the FIRS has put in place Transfer Pricing regulations in 2012 and established a functional Transfer Pricing Unit focused on ensuring that taxable persons report sales and profits in Nigeria in adherence with globally acceptable standards of arm’s length principle for tax purposes.

“FIRS has developed an in-house capability for trend analysis on banking transactions of taxpayers to provide early warning on transactions that might be a potential for Money Laundering and Terrorism Financing /illicit outflow.”

The FIRS Boss said that unwholesome practices of Multinational Enterprises, Financial Institutions, and Oil and Gas companies remain the biggest component of IFF in Nigeria.

He added, “Corruption and abuse of office by both political appointees and civil servants thereby enabling illicit financial flows activities offices remain a factor of money laundering /terrorism financing /tax crimes in Nigeria, and FIRS has ensured collective effort to end this menace.

“We are striving to reduce the Money Laundering/ terrorism financing/ illicit flow of money from Nigeria and effects of beneficial ownership as it is causing economic downturn which has an unprecedented effect on the economy and lives of Nigerians.”

Nami stated further that stiffer laws and regulation would be enacted to deter future illicit financial flows actions by people determined to engage in such acts, most especially in the new trend of virtual currencies which is a new typology on illicit financial flows.

Also speaking, Mr. Sanya Gbonjubola of the FIRS identified contractual clauses that promote IFF in Nigeria to include: tax exemption clauses in contracts, contract-splitting clauses, contracts awarded to conduit companies, mobilisation clauses, clauses in government debt instruments, poorly worded, negotiated or implemented clauses in DTAs, poorly worded clauses in domestic tax laws and bilateral investment treaties, and un-implementable clauses in contracts.

To address the menace, he called for the development and updating of standard rules that curb IFFs, the building of systems, programmes and global network to prevent IFFs, and capacity building of relevant stakeholders.

The Sustainable Development Goals had specifically said that the global community must significantly reduce Illicit Financial Flows by the year 2030.