ILLICIT Financial Flows (IFF) are moving to the forefront of the international agenda, as governments worldwide join forces to combat money laundering, tax evasion, and international bribery, which make up the bulk of such flows.
These illicit flows have devastating effects on developing countries. Currently, Africa is estimated to be losing more than $50 billion annually in IFFs.
However, as countries come together to try to minimise the amount of money being lost through illicit outflows, the high pace at which African technological uptake and innovation is happening may be handicapping some of these efforts.
This was highlighted in the UN and African Union’s Illicit Financial Flows report, released in February—popularly called the “Mbeki Report” because former South African president Thabo Mbeki chairs the High Level Panel on IFF.
The report says that “the growth in information and communications technologies has made it possible to transfer huge sums of money at the click of a mouse while also enabling innovative forms of mis-invoicing.”
One African country was estimated to be losing up to $90 million every year from the theft of minutes in the telecommunications sector. This fraud involved masking international calls as local calls, with operators then making fake declarations of incoming international call minutes to reduce tax payable to the government.
Another similar scheme is SIM box fraud where individuals or organisations buy thousands of SIM cards offering free or low-cost calls to mobile numbers. The cards are then used to channel national or international calls away from mobile network operators and deliver them as local calls, costing the operators millions of dollars in revenue.
African governments are taking huge tax hits from this scam following the massive growth of the mobile industry on the continent. The Democratic Republic of Congo (DRC) is estimated to be losing about $90 million in tax revenue a year from the embezzlement of telephone time.
According to the Mbeki report, by diverting these incoming calls using the SIM box in the DRC, pirates pay three times less tax, since international calls are presented as local calls.
The Centre for Technology Innovation at Brookings, Rice University, has published a study which looked at how the digital space is fundamentally altering the landscape of financial transactions.
Because transactions can now be done with purely digital currencies, virtual currencies, and virtual goods, “amounts, sources, and destinations can be intentionally structured to be misleading,” the study noted.
“Transactions can be masked as other activities appearing to have nothing to do with money. The possibilities are limited only by the high levels of imagination and skill of people who dream up new ways to use technology.”
Manipulating scale for example would hide larger movements of money by simply conducting many smaller transactions. For example, the study explains that if the power of a large, distributed online network were used to move money with 100,000 transactions with randomised amounts generally in the $6-$15 range, detection would be much more difficult.
In a World Bank report tracking the illicit financial flows from Somali pirate activities, Somalia money value transfer system (MVTS) providers (the equivalent of Western Union or a network that receives money for the purpose of making the equivalent funds payable to a third party in another geographic location) repeatedly claimed they were unaware of funds from piracy transiting through their services. But according to reformed pirates and officials, they were.
Due to low reliability identification systems and the inability to “know your customer”, there are reports of abuse of MVTS services by criminals.
According to the World Bank, one reformed pirate interviewed explained his experience in moving money to acquire goods abroad. He sent $12,000 via a well-known MTVS provider in Puntland. The money was sent to Dubai where an intermediary bought a car for him. The car was subsequently shipped to Somalia.
He took the cash to the MVTS office in $50 and $100 bills which he justified by saying he got it through “Shahaad”, a traditional charity custom in Muslim societies.
Mobile banking ‘exemption’
In looking at the various ways in which pirates obtained money and goods, the report did say that one way they did not get money was through mobile banking.
While M-Pesa is a popular mobile phone telephone financial service in the region offered by the Kenyan-based company Safaricom, there was “no cross-border movement of money to and from Somalia” and “no reports” indicating that the Kenyan service is being misused by pirates.
This may come as a surprise since the mobile banking sector in Africa has taken off exponentially, allowing an increasing number of people to open accounts, pay bills, and transfer money.
A recent survey of global financial habits by the Gates Foundation, the World Bank, and Gallup World Poll highlighted that the use of mobile money in Africa is much higher than that in other regions with even more developed financial systems. In fact, three-quarters of the countries that use mobile money most frequently are in Africa with some, namely Kenya, Gabon, and Sudan, with half or more of the adult population using mobile money.
In countries such as Madagascar, Tanzania, and Uganda, where mobile network operators are allowed to offer mobile money services, the number of mobile money accounts is already higher than the number of bank accounts
However, a report by the Overseas Development Institute (ODI) explains that while “in principle mobile banking is likely to facilitate capital flight, especially the movement of illegal funds abroad…Data on mobile money in Africa, seem[s] not to confirm this hypothesis since no clear correlation can be identified between capital flight and mobile banking.”
This correlation was explained in a GSMA paper which stated that the low risk of IFF through mobile banking is due to the nature of mobile channels and devices, which track all transactions and localise users, and to the transaction limits that allow customers to transact only relatively small amounts of money.
Mobile transactions are less anonymous than cash because they can be linked to a unique mobile number and transactions are recorded and traceable. The full details including the telephone number of the sender and receiver, the time, and the amount of the transaction are all known to the mobile money provider.
Additionally, the mobile money provider offering the mobile money services is usually regulated and mobile network operators will usually have strict internal controls with regular internal and external auditing.
So whilst the potential is there for IFF through various technological means, creating formidable technical and organisational challenges associated with detecting and monitoring these transactions, solace can be found in Africa’s mobile banking systems.
The question however will remain as to how long. The mobile banking sector is still a relatively new phenomenon and therefore it is too early to assess its impact on illicit financial flows, another factor that may explain this result.
Article part of an E-book on illicit financial flows, a project in partnership with TrustAfrica