Nigeria is losing money to Illicit Financial Flows

Feb 05, 2018|Toluwanimi Segun

In the wake of the current lull in the oil market, our fiscal outlook is suffering. The Nigerian government has turned to the recovery of looted funds, increasing tax collection and taking on more debt to meet its revenue requirements.

The situation need not be this dire. An answer may lie in revelations of a 2013 High-Level Panel Report commissioned by the United Nations Economic Commission for Africa (UNECA) on Illicit Financial Flows (IFFs). IFFs – what Nigeria’s would call looted funds or dirty money – are unlawful funds which cross national borders, made unlawful via their source, how they are transferred across the border, or their ultimate use. The size of these flows is colossal; they are not only more than double Africa’s aid, they make our continent a net creditor to the world! To make the implication clear: if Nigerian policymakers were to plug these holes today, fiscal dependence on oil would be old news.

So why does the Nigerian government not just get it done? As with many things in life, it’s not that simple. IFFs come in many forms; a significant amount of them are legal but immoral, hence the term “illicit”, not “illegal”. It might seem like splitting hairs, but the distinction is essential. It means even if regulators were aware of a good chunk of these practices, they wouldn’t have a basis to stop them. Tax avoidance is made different from tax evasion in this way. The former is immoral, the latter illegal. Other components are trade misinvoicing (over or under-invoicing imports/exports to conceal funds) and transfer mispricing (distorting intra-firm transaction prices to shift profits).



A Truly Global Issue

Many times, the distinction between “developed” and “developing” countries is that the former have long since dealt with issues the latter struggle with. However, many countries actively facilitating these outflows are developed. By implication, the industrialised world is not much further along in dealing with some IFFs than countries like Nigeria. Rich countries, however, do not need the funds from IFFs with as much urgency as developing countries do, so their issues tend to manifest politically instead.                                        


Much Rhetoric, Muted Response

Unfortunately, we have not taken advantage of our common ground. Most solutions are generated at the OECD, which Nigeria is not a member of. To their benefit, the OECD has responded to calls to expand involvement; the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) is a result of this.

Nigeria is a member of the Global Forum. We have duly signed relevant multilateral instruments available to combat tax evasion/avoidance, but implementation remains slow. Nigeria has also taken the lead in producing anti-IFF resolutions at the UN. However, what the resolutions call for are likely to be drawn out, for example, creating a central supranational body to deal with IFFs. Most of the push for more practical steps is coming from NGOs such as the Nigeria Extractive Industries Transparency Initiative. There also isn’t an explicit government anti-IFF campaign. What’s wrong?

For starters, many African countries simply lack the capacity to participate more meaningfully. For example, tax avoidance schemes can be very convoluted, and even the most competent tax administrators have trouble detecting them. In times of plenty, the Nigerian government neglected its tax administration because oil money made it easy to grow without much taxation. This means that in our current financial famine, the country’s legislative framework and quality of tax administration have become hindrances, hence the exclusively rhetorical progress. Furthermore, Nigerian administrators are unable to tackle the issue in a way that matches our reality. Trade misinvoicing is the largest component of IFFs, but most progress has been made in dealing with tax avoidance/evasion, as the latter is most relevant to developed countries. Of course, there’s also political apathy; our leaders may just not care.


The Way Forward 

In the short term, an optimal solution lies in the Nigerian Customs Service (NCS). NCS is in charge of trade and is, therefore, the primary actor in tackling trade misinvoicing which disproportionately affects developing countries. The strategy should be to improve its efficiency, i.e. the NCS needs to be the opposite of the mismanaged, shady place it is today.

A more sustainable strategy would be improving the efficacy of the Federal Inland Revenue Service (FIRS). In this area at least, the administration is making gentle strides. Babatunde Fowler oversaw the growth of internally generated revenues through the Lagos Inland Revenue Service, and he would do well to replicate that success at the federal level.  

Finally, the change undergirding these reforms has to be a shift in political will. IFFs are not easy to deal with, so the administration has to really care about illicit financial flows. 


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