OECD - Bad Trades & Global Trails: Criminal Economies & Illicit Financial Flows from West Africa
Illicit financial flows (IFFs), defined as “money illegally earned, transferred, or used,” are increasingly being recognized as a significant and growing threat to the world economy in general, and to sustainable development and developing countries in particular. To date, most research on IFFs has focused on two of their manifestations: trade mis-invoicing and tax evasion. However, while these are often an important parts of the operation and maintenance of IFFs, they represent neither the source nor the ultimate end of the illicit funds, and do little to capture the impact that IFFs can have on human security. A more nuanced analysis of the challenge would take into account the impact of IFFs on corruption, lost economic growth due to diverted development, the financing of conflict and terrorism, and other phenomena which generate or are fueled by illicit funds.
The OECD has put a strong emphasis on better understanding and addressing IFFs because of their demonstrated impact on development and governance, and recognises that preventing IFFs is a shared responsibility. In order to bring this broader conception of IFFs into mainstream discourse, the OECD’s Development Cooperation Directorate has commissioned the Global Initiative against Transnational Organized Crime to produce an in-depth study titled Bad Trades and Global Trails: Criminal Economies and Illicit Financial Flows in West Africa. This report, which is in its inception stage, examines several different types of illicit trade across the region and their implications for illicit financial flows, as well as broader factors facilitating the growth of IFFs in the area. This follows an earlier study by the OECD, Illicit Financial Flows from Developing Countries: Measuring OECD Responses, which examined the extent of OECD Member Countries’ attempts to fulfill the requirements to counter and prevent IFFs.
The choice of West Africa as the geographical focus for the new report reflects the intention to look beyond conventional conceptions of illicit financial flows. Compared to other regions of the world, West Africa is not the source of high absolute levels of IFFs. A report by UNDP for example, found that the twelve West African countries included in the UN’s list of Least Developed Countries witnessed a total of US$823.6m in illicit outflows in 2008; by contrast, Chad alone was the source of US$1.908 billion in illicit outflows. Even if one scales up to a continent-wide level, illicit financial flows from Africa remain comparatively small, totaling US$518.9 billion out of the global total of US$6.567 trillion from 2003-2012. These low absolute levels of IFFs in West Africa, however, belie the impact that the illicit money has on regional societies and states. IFFs divert labour and resources away from the formal economy and state institutions and government budgets. These ancillary impacts are particularly noteworthy in West Africa because the region receives the highest amounts of official development assistance (ODA), the effectiveness of which is greatly reduced by IFFs.
The OECD study highlights that IFFs can take a variety of different forms. The Global Initiative inception report identified three categories of illicit trade that are linked to IFFs in West Africa. The first category is illegal activities. Overtly criminal activities prevalent in West Africa range from drug trafficking to human trafficking to cybercrime. Drug trafficking in particular has a strong link with illicit financial flows in West Africa. Criminal networks have exploited weak state institutions and gaps in security provision to establish themselves in the region, making it a major link in the trafficking of cocaine and other drugs. In some parts of the region, most notably but not exclusively in Guinea-Bissau, drug profits and associated corruption of government officials has reached the highest levels of the state. Local rates of drug usage, historically low across West Africa, have been climbing as drugs become more readily available in the region. Moreover, much of the profit generated from the drug trade does not stay in West Africa to be spent or re-invested in the community: a 2011 study by the UNODC found that 62% of drug profits in Africa were available for overseas laundering, a higher percentage than on any continent besides South America.
The second category of illicit trade explored in the report is illicit resource extraction, which appears in a number of manifestations across the West Africa region. In Nigeria, oil theft is a significant problem that has been conservatively estimated to represent an annual loss to the Nigerian economy of between $2-3 billion, and has funded complex criminal networks on land and sea. Elsewhere in the region, resources such as diamonds and gold are illegally mined and then smuggled out of the country for sale on more lucrative markets on a considerable scale. For example, in 2011, total exports (licit and illicit) of mining products from Guinea reached US$1.4 billion, or 12 per cent of the country’s GDP, but government mining revenues totaled only US$48 million. The forms of illicit resource extraction are diverse, encompassing natural resources such as poaching of wildlife, illicit logging and fishing, as well as the more commonly noted extractive commodities.
The third and final category is the illicit trade in otherwise legal goods, such as tobacco, medicines or consumer and luxury goods. While these are often given low priority by governments and security organisations, they can realize high profits for the criminal groups involved in their smuggling, as well has having other negative impacts. For example, the production and sale of counterfeit medications, which is estimated to represent as much as 60% of the market in West Africa, generates significant illicit funds, sickens consumers (or at least fails to give them the therapy they need), and also damages public confidence in the health sector. The latter can then create or exacerbate other problems, as was demonstrated in the low confidence in public information provided during the Ebola response. In the Sahel, smuggling of illicit tobacco has been proven to have funded the purchase of arms and the resourcing of groups with a terrorist agenda.
The report features a series of five case studies, each of which provides a political economy analysis of a particular illicit industry and its impact on the countries and citizens in West Africa. The case studies include:
- The international drug trade transitting West Africa, author Mark Shaw
- The migrant smuggling trade from West Africa to Europe, author Tuesday Reitano
- Artisanal and small-scale gold mining in Ghana and Liberia, author Marcena Hunter
- Terrorist financing in the Sahara, author Theodore Christopher Kouts
- The Illicit trade in counterfeit goods in Ghana, author Karl Lallerstedt
When the report is published in February 2016, it will include conclusions and a set of actionable policy recommendations. The goal of the recommendations will be to guide OECD Member Countries’ engagement in this area, providing suggestions on how they can improve their own measures to respond to IFFs, and contribute to attenuating the problem in the region in such a way that recognizes the multi-faceted nature of the challenge, and thus moves beyond involvement only in security sector and law enforcement reform.
 Organization for Economic Cooperation and Development (2014), Illicit Financial Flows from Developing Countries: Measuring OECD Responses, Paris: OECD.
 Benin, Burkina Faso, The Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Niger, São Tomé and Principe, Senegal, Sierra Leone, and Togo
 United Nations Development Program (May 2011), Illicit Financial Flows from the Least Developed Countries: 1990-2008, New York: UNDP.
 West Africa Commission on Drugs (2014), Not Just in Transit: Drugs, the State and Society in West Africa, Geneva: West Africa Commission on Drugs.
 This data refers to Africa as a whole, but there is little evidence to suggest that the proportion should be different for West Africa than for the rest of the continent. See United Nations Office on Drugs and Crime (2011), Estimating Illicit Flows from Drug Trafficking and other forms of Transnational Organized Crime, Vienna: UNODC.
 Christina Katsouris and Aaron Sayne (September 2013), Nigeria’s Criminal Crude: International Options to Combat the Export of Stolen Oil, London: Chatham House.
 Africa Progress Panel (2013), Africa Progress Panel Report 2013: Equality in Extractives, Geneva: Africa Progress Panel.
 European Union (2014), “The EU launches a new project to fight falsified medications in developing countries,” 4 April, accessed on 16 April 2015 from http://europa.eu/rapid/press-release_IP-14-378_en.htm.
 Tuesday Reitano and Mark Shaw (2015), Fixing a fractured state? Breaking the cycles of crime, corruption and conflict in Mali and the Sahel, Geneva: Global Initiative against Transnational Organized Crime.