Financial crime in developing countries, particularly Africa, is on the rise, undermining gains in economic growth and negatively affecting development. This is particularly worrying on a continent whose countries are among the most resource-rich worldwide, but whose people are among the poorest.
Quantifying the cost of financial crime in Africa is difficult, and there's a lack of consensus on what should be included in the list of offences. For example, in the area of corruption alone, the African Union (AU) estimates that 25% of the gross domestic product (GDP) of African states - some US$148 billion - is lost to corruption every year.
PricewaterhouseCoopers reported that money laundering in 2016 cost between 2% and 5% of global GDP, roughly US$1 trillion to US$2 trillion, with Africa the worst affected. The Organisation for Economic Co-operation and Development in February 2018 reported that the continent loses on average about US$50 billion a year through illicit flows. The Wall Street Journal says as much as US$60 billion is being siphoned off. These figures are probably modest, as most financial crimes are not detected or reported.
There are significant disparities among African states in defining financial crime
Financial crime involves some of the world's most dangerous groups and transnational syndicates. In his book The Looting Machine, Tom Burgis looks for explanations not only among Africa's political elites, but also the rapacious multinational companies whose deals are clad in corruption, secrecy and a lack of accountability.
Technological advancements in the financial industry have fuelled the growth of this type of crime. The trend can be traced back across a series of key moments in history: the shift from the gold standard to fiat currency in the 1930s, the introduction of the first credit card in 1950, and the advent of the internet from the 1980s.
The digital era is one of global interconnectivity, electronic banking, and crypto currencies. This drive towards what is often referred to as the digital cashless economy has increased the tendency for fraud, corruption and illicit financial flows.
These changes have brought about what financial crime expert Marius-Cristian Frunza calls a revolution of new financial crimes. Contemporary financial crimes tend to be complex and sophisticated. They are highly organised and rapidly adapt to changes in technology and the global financial system.
Africa risks becoming a safe haven for those who have committed financial crimes elsewhere
While financial crime is growing in Africa, it is little understood. In the course of working with senior detectives and financial investigators from Southern, West and Central Africa, the ENACT project found disparities among Africa's states and regions in defining financial crime. States responded differently to this type of illegal activity too, highlighting gaps in the knowledge and capacity of law enforcement agencies to effectively investigate and prosecute these crimes.
Africa's various legal systems also define trends differently - divided among anglophone, francophone and lusophone fault lines. As a result, there is little cooperation among African countries on the investigation and prosecution of financial crimes.
Many of these crimes therefore go underreported and unaccounted for, which sustains impunity and undermines the effectiveness of Africa's criminal justice system. The continent risks becoming a safe haven or a hub for criminals evading justice elsewhere.
To address the problem in Africa, there needs to be a clear understanding of what constitutes financial crimes. Without a universally accepted definition, these offences are often described in broad terms, encompassing fraud, illicit financial flows, money laundering, counterfeiting, market abuse, bribery, corruption and tax evasion - to name a few. The International Monetary Fund's definition includes the sale of fictitious financial instruments or insurance policies, embezzlement of non-financial institutions and stock manipulation.
According to Frunza, most financial crime occurs at three main levels: within organisations, through financial instruments, and through the misuse of technology - the central pillars of economic growth and development.
The existing capacity of African law enforcement agencies is insufficient to deal with financial crimes
While 92% of firms in Africa see money laundering as a high risk, only 31% conduct fraud risk assessments annually, and only 34% of these have trained staff on financial crime awareness. In South Africa alone, where the impact of this type of crime is widespread, the Global Economic Crime Survey 2016 reports that 69% of firms reportedly experienced financial crimes.
Financial crimes engender poverty as funds are misdirected, and the corrupt get richer while the vulnerable grow poorer. The lack of strategic and effective cooperation among African states indicates that financial crimes will continue to pose a growing threat in Africa.
Current responses - which emphasise stringent legislation and regulation, but not their enforcement - are inadequate. The existing capacity of law enforcement agencies is also insufficient to deal with the problem. For Africa to reverse these trends, a continent-wide convention or protocol is needed, along with a rule-of-law-based approach and better international cooperation.
States should invest more in preventing, detecting and disrupting financial crimes. This will require capacity building, effective monitoring and compliance regimes and above all, the political will to drive it.
Martin Ewi, Technical and Southern Africa Coordinator, ENACT project, ISS
A version of this article was first published by the ENACT project. ENACT is funded by the European Union (EU). The contents of this article are the sole responsibility of the author and can under no circumstances be regarded as reflecting the position of the EU.