Compliance: an asset or a hindrance to development in West Africa.

Reducing Africa’s annual capital flight by $88.6 billion would enable the continent to meet half of its sustainable development financing gap, according to the UNCTAD (United Nations Conference on Trade and Development) 2020 report.¹⁾https://unctad.org/fr/system/files/official-document/aldcafrica2020_fr.pdf

The results of this report are very worrying in view of the situation in Africa – considered as a continent rich in natural and human resources, but struggling to take off economically. The continent’s notorious and worrying backwardness can be explained by the presence of a number of scourges that are eating away at its economy, slowing down its take-off and compromising people’s living standards. Among these ills is the pandemic presence of illicit financial flows. The latter are financial flows (FFI) whose origin, transfer or use are illicit, which embody an exchange of value (rather than a simple monetary transaction) and which cross national borders.. They take the form of offences – corruption, money laundering, tax fraud and counter-terrorism – whose illegality stems from the mode of acquisition.

These FFIs erode the tax base, jeopardize public revenues and consequently reduce public spending on education, health and infrastructure. With this in mind, the present study focuses more specifically on the impact of these FFIs on West African development. In other words, how would the implementation of an efficient compliance program be a vector for development in this part of the world?

In the broadest sense, compliance means respecting the regulations in force for a given sector of activity, country or group of countries. The term conformity is used here to refer to the advanced countries of West Africa.²⁾Benin, Burkina Faso, Côte d’Ivoire, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo. in the fight against corruption, money laundering, tax fraud and the financing of terrorism.

In view of these observations, it is and will remain a priority to examine the impact of compliance and vice versa, and indirectly of these financial flows, on the economic and social situation of all the countries making up the western zone of the African continent.

In order to grasp the relevance of the subject and therefore the direct link between compliance and economic development, it seems necessary to study the impact of each of these offences – taking the form of FFI – on the various sectors of the West African economy.

According to the African Development Bank, corruption costs the African continent $148 billion a year³⁾https://tambour.agoraafricaine.info/2019/09/04/la-corruption-fait-perdre-a-lafrique-148-milliards-de-dollars-par-an/. These major losses, which have a direct impact on African public revenues, are mainly due to corruption at the highest levels of government. More specifically and by way of illustration, consider the case of the laundering of rackets/extortion proceeds by a criminal law enforcement officer, using the real estate sector⁴⁾https://www.giaba.org/media/f/1102_FRANCAIS-ML%20-%20TF%20IN%20EXTRACTIVE.pdf: case n°16 in chapter 4 concerning typologies and case studies.. If we look at the facts of this case, we can legitimately assert that it is the people who are supposed to be enforcing the regulations who are the first offenders. These practices represent a real loss of revenue for the State, and conversely, an illicit enrichment of public officials to the detriment of the population.

Apart from cases directly involving public officials, corruption can also be the direct result of the actions of more senior government officials. The most recent case is the biggest corruption scandal in the oil sector, Malabu Oïl, involving multinational oil companies (Shell and Eni) and senior government officials (including ministers) in Nigeria. This scam, which stripped́ the Nigerian oil sector of more than US$1 billion, relied on the anonymity of corporate ownershiṕ shell companies, offshore tax havens and other systems designed to mask grand corruption, international bribery, tax evasion and money laundering, in multiple jurisdictions⁵⁾(For details of the scam, see Prime times article “Malabu 1.1 billion scandal: like Nigeria, Italy set to prosecute individuals and companies involved in scandals” December 24, 2016.).

Added to this are the assets stolen from public accounts by people occupying positions in the State’s highest institutions. The most famous case is that of the BONGO family, whose fortune was estimated at 68 million euros acquired in France between 1960 and 2008, including three mansions in Paris and seven villas in Nice, maintained at great expense, and thirty-three properties in the capital and on the Côte d’Azur.⁶⁾https://www.leparisien.fr/faits-divers/biens-mal-acquis-les-secrets-du-tresor-des-bongo-05-09-2017-7235712.php. The investigation shows the major role played by a French company, Atelier 74, specializing in interior decoration, and its directors, the complacency of a notary and the BNP Paribas bank, which “did not bother to ask its client about the origin of the funds or the size of the cash volumes”.

The case of the BONGO family is just one of many examples of illicit financial flows – linked to the misappropriation of public funds – committed by high-ranking State authorities, which support ” global analyses showing that in many countries In Africa, between 20% and 30% of private wealth is invested in tax havens. This proportion is higher than the global average of 8%.⁷⁾https://senegal7.com/corruption-et-comptes-offshore-lafrique-perd-148-milliards-de-dollars-chaque-annee/

With regard to terrorism and its financing, the publication of the Panama Papers has highlighted serious shortcomings, through the leak of commercial data disclosed by Mossack Fonseca, a law firm, and dubious transactions linked to the extractive industry in the mining sector of certain West African countries.

Analysts and counter-terrorism specialists point to the fact that the terrorist groups Al-Qaeda and Hezbollah have used rough diamonds from West Africa to finance their activities. To support the above assertion, it will suffice to refer to a report by the US Office of Foreign Assets Control (OFAC) establishing a link between certain West African residents and Middle Eastern descendants living in Gambia, Ghana and Sierra Leone who provide support to terrorist organizations such as Al-Qaeda and Hezbollah. These nationals have constituted́ large communities and are effectively key players in the economy.

In addition several raids by Nigerian security forceś in the camps as well as fleeing Boko Haram elements have revealed large stocks of refined petroleum, used either to fuel vehicles and other machinery, or to generate operating and maintenance income for the terrorist organization.

Yet the link between resource exploitation and terrorism in the region has not beeń established in the literature of the governing authorities. The recent joint typology study carried out by the FATF, GIABA and GABAC⁸⁾Action Group against Money Laundering in Central Africa referred to oil smuggling and detour, but admitted failing to confirm a direct correlation with terrorist groups in the region.⁹⁾https://www.giaba.org/media/f/1102_FRANCAIS-ML%20-%20TF%20IN%20EXTRACTIVE.pdf, chapter 2 on literature review.

The International Criminal Police Organization estimates that Illicit Financial Flows (IFF) contribute to the financing of terrorism, to the tune of at least 40 billion dollars.

One-sixth (1/6) of public revenue in Africa comes from corporate income tax, yet the cost of tax evasion represents 1/10 of this amount. Tax evasion and aggressive tax avoidance are undoubtedly among the sources of IFF that contribute most to increasing inequality in West Africa. The available data highlight a complex web of links between taxatioń and inequality. Aggressive tax optimization strategies are mainly pursued by the wealthiest groups and large corporations. 10 of the world’s 19 most unequal countries are in West Africa, according to the United Nations Development Programme (UNDP), 2017.

On average, losses due to tax evasion are higher in Central, North and East Africa (2.7% of GDP) than in Southern Africa (around 2% of GDP) and West Africa (2.3% of GDP). The median rate of capital flight, expressed as a percentage of GDP, ranges from 2.7% in North Africa to 10.3% in West Africa.

In its 2018 report the World Bank estimates that at this rate the extreme povertý rate will remain above 10% in sub-Saharan Africa in 2030. To overcome this, we need an unprecedented rate of growth and to ensure that growth is inclusive.

Money laundering, as in the rest of the world, is an offence directly linked to the others. As the UNCTAD report shows, there is a symbiotic relationship between the various offences. One example is the link between bribery of public officials in the institutions responsible for implementing the regulations in force and money laundering, since bribery facilitates money laundering and the latter makes the former profitable.

Faced with these various shortfalls, which are eroding public revenues and thereby compromising the socio-economic situation of the population, measures have been put in place to stem the tide. Firstly, the creation of the Intergovernmental Action Group against Money Laundering in West Africa (GIABA)¹⁰⁾https://www.giaba.org/member-states/index_654.html in December 2000, whose mission is to assist member states in ensuring that their economies and financial systems are not used to launder the proceeds of crime and finance terrorism.

In order to comply with Recommendation 29 of the Financial Action Task Force (FATF), WAEMU member states have set up the Cellules Nationales de Traitements des Informations Financières (CENTIF). “Countries should institute a Financial Intelligence Unit (FIU) serving as a national center…”¹¹⁾https://www.centif.ci/presentation.php

Thanks to its strategic position, CENTIF-CI acts as an interface between regulated professionals, the supervisory authorities (preventive aspect) – through declarations of cash transactions of an amount equal to or greater than a threshold set by a BCEAO instruction, whether a single operation or several operations that appear to be linked – and the prosecuting authorities, i.e. the judicial police and the courts (repressive aspect).

As part of its commitment to combating AML/CFT, CENTIF has set up 4 obligations for member states. These obligations include vigilance, reporting suspicions, document retention and the implementation of a compliance program, in accordance with article 13 of law no. 2005-554 of December 2, 2005¹²⁾https://www.centif.ci/documents/decret_2006.pdf.

Thanks to the efforts made, many countries have made progress in mitigating the impact of these FFIs on their economies. As an example, see the first conviction for money laundering in Niger¹³⁾https://www.unodc.org/documents/westandcentralafrica/Programme_Sahel_-_Rapport_dactivite_Janvier_2016.pdf intimating the adoption of an approach focused on asset recovery and profit-generating crimé in order to align with international anti-money laundering standards followed the establishment of the Asset Recovery Inter-Agency Network for West Africa (ARIN-WA), the establishment of which was facilitated by UNODC¹⁴⁾United Nations Office on Drugs and Crime. In the same vein, Senegal has established a system for declaring the assets of civil servants and public officials in accordance with article 8 of the UNCAC, following advice from the UNODC.¹⁵⁾United Nations Convention Against Corruption

In the same vein, the Extractive Industries Transparency Initiative (EITI) has been set up by GIABA to combat money laundering in the extractive sector. This intergovernmental institution aims to make the mining sector a driving force behind the continent’s transformation, and encourages countries to strengthen their cooperation in the area of mining taxation.

More recently, as part of the collaboration between the African Development Bank (AfDB) and the OECD, a virtual meeting on the theme of “Corporate anti-corruption compliance in Africa: practices, challenges and prospects”. was held on April 14, 2021. According to Patrick Moulette, Head of the OECD’s Anti-Bribery Division, the very high attendance at the round table “testifies to the interest in this subject”.

Despite these efforts and the support of numerous international institutions, we are still lagging behind in implementing our AML/CFT obligations.

Despite the digital boom and the footprint of Foreign Direct Investment (FDI), Africa is the least banked continent. Many people do not have a bank account. To overcome these shortcomings, alternative solutions have been adopted. This is particularly true of decentralized financial systems (SFD), which take the form of institutions whose main purpose is to offer financial services to people who generally have no access to the operations of banks and financial establishments. Although they offer the same services as a traditional bank, their use does not require the same AML/CFT vigilance.

In addition to these establishments, there are cases of indulgence on the part of financial institutions in implementing customer identification and knowledge obligations in the name of financial inclusion. Thus, domestic financial operators (even those belonging to international groups) are obliged to adapt to domestic social realities by accepting customers who do not have an identity card – provided that their transactions are limited in frequency and amount, and that the person in question provides additional information including address, occupation and sources of income – and people whose identity cards have expired less than a year ago. This is undoubtedly a high risk in terms of AML/CFT, and in countries with advanced legislation would justify a ban on entering into a relationship or, where applicable, a refusal to maintain it.

Frequent changes in the IP address or location of account holders are considered as clues for identifying suspicious transactions that may give rise to a suspicious transaction report.

In addition to these many shortcomings, which directly cripple the effectiveness of a compliance program, there are the following “the theory of rational choice justifying that an agent will take the risk of resorting to tax evasion if the utility of non-payment of tax, i.e. the expected gain in terms of income, outweighs the cost of the penalty incurred in the event of being caught”. – which are based on the lack of decision-making powers on the part of the supervisory authorities, the lack of cooperation on the part of Member States, which more often than not lack the resources, and the complicity of public officials in the commission of these offences (see case no. 16 concerning the case of laundering of proceeds from rackets/extortion by a criminal enforcement officer, using the real estate sector in Mali).

For example, the case of Africa, and more particularly its western zone, which is rich in resources but classified as a developing country, and some of whose countries are on the FATF’s f-grise list¹⁶⁾https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-february-2021.html, highlights the symbiotic relationship between compliance and a country’s socio-economic development.

There is a pandemic of Illicit Financial Flows which erode the tax base, compromise public revenues and consequently reduce public spending on education, health and infrastructure. Tackling them can help to achieve higher levels of productivity and more efficient use of resources.

Recovering the illegally diverted money would, as we said, help finance the physical economy. Following the revelations of the “Panama Papers, France recovered 372 million euros in tax and fine payments, a sum which, according to estimates, would enable the construction of 24 elementary school with 20 pupils per class or two large public hospitals, at the cost of a major French metropolis (France, National Assembly, 2019). So if Africa could raise just 40 billion a year, it could build 2,400 elementary school with 20 pupils per class, or 200 large hospitals!

[1] https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-february-2021.html