Renewed crusade against illicit financial outflows from Nigeria

EFCC Chairman, Ibrahim Larmode

President Muhammadu Buhari must have envisaged the debilitating consequence of corruption when he came up with the famous statement: “If you don’t kill corruption, corruption will kill you.”

How else would he have described the revelation that between 1960 and 2011, Nigeria experienced cumulative illicit financial outflows totaling $83.3billion.

For a developing nation, the figure is mind-boggling, but doubly daunting is how to stem the tide and rein in perpetrators who had mastered the art and science of kleptomania over time.

In a bid to assist government and the private sector in the crusade against this phenomenon, the Centre for Democracy and Development (CDD) in conjunction with stakeholders in the financial sector held a one day seminar aimed at averting illicit financial outflows from the country.

At the event graced by the Dore who is there were mind boggling revelations that underlined the need for the President Muhammadu Buhari to arrest the trends of illicit monetary transactions out of the country.

Speaking on the theme “Domestic Resource Mobilisation for Nigeria’s Development: Need for National Compact Against Illicit Financial Flows”, the Country Director African Development Bank Nigeria (AFDB), Dr. Ousmane Dore asserted that an area that particularly requires urgent attention is the large scale illicit financial flows out of the country.

The AFDB chief said going by global financial Integrity ranking, Nigeria is ranked 7th among the top ten highest illicit capital outflows in the developing world and first in Africa on the cumulative illicit capital outflows during 2001 to 2010.

He remarked that some of the push factors in illicit capital flows include, corruption perception indicators, the size of the underground economy, and weak regulatory institutions.

He said the bank recently commissioned a study entitled “Nigeria: Illicit Financial Flows due to Trade Mis-invoicing, 1960-2012”adding that it focuses on trade mis-invoicing which is the only illicit financial flows that can be captured. Others are illegal activities such as bribery, drug trafficking and similar illegal activities.

“Nigeria has for many decades experienced a very serious problem with trade mis-invoicing, in the form of over-invoicing of imports and under-invoicing of exports for the purpose of shifting money out of the country. Trade mis-invoicing is a reality impacting virtually all countries. Indeed, the High Level Panel on Illicit Financial Flows from Africa, formed by the UN Economic Commission for Africa and chaired by former President of South Africa, Thabo Mbeki, identifies trade mis-invoicing as the most frequently used mechanism for transferring resources from Africa in a hidden manner. Between 1960 and 2011, Nigeria experienced cumulative illicit financial outflows totaling USD83.3 billion or 5.6% of total goods trade through trade mis-invoicing only.

“Export under-invoicing takes the larger share of USD44 billion while the balance of USD39.3 billion was due to import over-invoicing. In the literature, exchange controls has been identified as a basic driver of trade mis-invoicing in developing countries, especially Nigeria, because they tend to create black markets in foreign exchange where foreign currencies can be bought and sold at a premium over official rates. “

Stating that active and sustained Domestic Resource Mobilization (DRM) and utilization is a sine qua non for driving sustainable broad-based economic growth, development and transformation, in addition to providing a more stable, reliable and less volatile means for development finance, he said reliance on domestic resources help create a social contract between government and citizens, thereby strengthening citizens’ oversight and supervision of the use of financial resources.

On the problem associated with DRM in Nigeria, he said that there was the need to take a second look at it since “ the economy exhibits narrow tax base, with oil and gas sector accounting for 75%-80% of total tax receipts. Second, Nigerian DRM environment exhibits poor financial market instruments. For example, Nigeria sits on large financial resources such as the Pension Fund currently worth about N4.7 trillion, but financial instruments for deploying the fund to the needed sectors in the economy are very limited. Third, the ability of tax administrators to efficiently collect tax in Nigeria is constrained by both weak human and physical capacity.
“These, together with the high cost of tax collection give rise to low tax payment compliance with high evasion and avoidance. While the government of Nigeria has embarked on milestone reforms aimed at improving DRM in the country, the benefits of these reforms have been limited. “

On the strategies for Improving DRM in Nigeria, he noted: “ There is need for a multi-stakeholder and multi-agency approach to DRM mobilization in Nigeria, especially developing a National Compact against illicit financial flows. However, given the limited time for this presentation, I will focus on the role of government as enabler, facilitator and regulator of activities that promote DRM.

Government needs to undertake critical tax reforms with focus on regulatory, institutional and legal issues.

“These include reducing complications in tax assessment, computation and collection; broadening the tax base to include the hard-to-tax informal sectors and activities; deepening the move away from incessant and indiscriminate use of tax exemptions, concessions and holidays; and financial sector reform. Government should ensure proper sequencing of the reform efforts to increase success and unleash the high potentials of pension and insurance funds for efficient and innovative use.

“Reforms should ensure a broader tax base and better tax conditions that are capable of harnessing untapped tax potentials, especially through formalization of informal sector activities and a move away from the current focus on large tax payers.

“They should also focus on improving tax administration and capacity. The introduction of the Tax Identification Number (TIN) is a very important step by the FIRS to improve tax administration. To further facilitate assessment and collection, it is important that the implementation of this strategy be further intensified for all taxpayers, individual and corporate. The reform would remain largely incomplete if attention is not given to existing tax legislation and regulations. The whole reform process can be effectively driven through the use of technology and other innovative techniques.

“Experiences in Nigeria and elsewhere have shown that, at best, time-bound tax holidays only succeed in attracting short-term investment. Once the tax holiday is over, investors tend to shift production to new areas where similar incentives are available. Generally, tax holidays encourage tax fraud and tax avoidance through use of transfer pricing as taxable businesses shift their profits to those enjoying tax holidays thereby avoid payment of taxes.

“Overall, these further fuel illicit financial outflows. Required reforms in this respect will be those that eliminate such exemptions, concessions and holidays and consider replacing them with more transparent incentives.

“Much still need to be done on financial sector reform with particular focus on achieving effective mobilization of savings and allocating them efficiently across the wider spectrum of economic agents. The recently developed Financial Inclusion Policy of the CBN is a move in this direction. The target of reducing the financially excluded Nigerians to 20% by 2020 is also a laudable goal.

“ There is also need for institutional capacity and infrastructure building for improved tax collection and management. This is particularly true for revenue collection agencies like FIRS and Customs.  There is need for significant improvement in the business environment so as to attract private investment and engagements in economic activities that are taxable. Governments at all levels (Federal, State and Local) need to work together to address the complaints from the private sector about multiple taxation. However, this should be preceded by comprehensive assessment of the status quo with respect to tax structure and respective jurisdiction of different tiers of government.”

In a welcome address, CDD’s Executive Director, Ms Idayat Hassan, remarked that iIllicit Financial Flows (IFFs) out of Nigeria has a direct bearing to the underdevelopment in the country.

Referring to the recently released Thabo Mbeki Panel report on illicit financial flow out of Africa, she disclosed that Africa is currently estimated to be losing more than $50 billion yearly in IFFs.

She further stated that over the last 50 years, the African continent is estimated to have lost over $1trillion in IFFs, an amount equivalent to the total amount of development assistance rendered Africa over the same period.

Lamenting the development, she said it behooves well meaning citizens of the country to close ranks and support the President Muhammadu Buhari led administration to block leakages of monies required to ensure growth and development of the country.

Continuing, she noted: “Its widespread occurrence in Africa, and specifically in Nigeria, points to governance challenges in the sense of weak institutions and inadequate regulatory environment and lack of transparency and accountability, which has for many years strained capacities of our governments in various ways and discourages creation of wealth to implement development policies.