Niger River Delta, the source of most of Nigeria's oil wealth; Courtesy of NASA

Tackling corruption with good governance is one of the most important challenges that African countries currently face. Without reforms that dismantle the financial, political, and administrative structures that perpetuate corruption, Africa will be unable to break the cycle of cronyism and bad governance that has constrained its tremendous potential for economic, political, and social development.

The following three topics – perception of corruption, illicit financial flows, and trade misinvoicing – are at the core of Africa’s governance challenge.

Perception of Corruption

Along with economic stagnation and political repression, the perception of government corruption allows extremist groups to appear more attractive and legitimate to citizens craving stability and progress.

The following map, featuring data from Transparency International’s Corruption Perceptions Index 2013, shows the general perception of corruption that exists in each country in Africa. The lower the country’s rating, the darker the shade of red/brown and the higher the perception of corruption in the country. The higher the country’s rating, the lighter the shade of yellow/blue and the lower the perception of corruption in the country.

Perception of Corruption Per Country

Main Takeaways: According to the Corruptions Perceptions Index 2013, the African countries that are perceived to be the most corrupt are generally located near the Sahara Desert, the Sahel, the Horn of Africa, and the Congo. The African countries that are perceived to be the most corrupt are: 1) Somalia, 2) Sudan, 3) South Sudan, 4) Libya, 5) Chad. Generally, the countries that are perceived to be the least corrupt are the continent’s island-states and those that are in and around southern Africa. The African countries that are perceived to be the least corrupt are: 1) Botswana, 2) Cape Verde, 3) Seychelles, 4) Rwanda, and 5) Namibia.

Illicit Financial Flows

Phantom firms and lax financial transparency requirements, especially in countries that are dependent upon resource-exportation, allow individuals to appropriate a country’s wealth and generate massive outflows of capital. The One Campaign estimates that over 70% of major corruption cases in Sub-Saharan Africa involve phantom firms, financial entities that are currently almost impossible to trace or track without improvements in regulatory oversight, resulting in a tax loss of about $52 billion.

Outflows remove capital from the economy and a significant portion of these outflows find their way to the off-source bank accounts of the country’s elite, increasing its personal wealth while decreasing taxable income and depriving the home market of capital for further development. Thus, in many cases, the average wealth and income of the majority of citizens stagnate, and in some situations these measures actually decrease over time, motivating some to call the phenomenon the resource curse.

The following map, featuring data from Global Financial Integrity’s report “Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009” shows whether a country gained or lost capital from 1980-2009 and the amount of capital it either gained or lost. Red represents capital outflows and blue represents capital inflows. The darker the shade of red, the higher the amount of capital outflows. The darker the shade of blue, the higher the amount of capital inflows.

Cumulative Real Net Resource Transfers, 1980-2009 (in millions of 2005 U.S. dollars)

Countries That Experienced The Highest Resource Outflows

Main Takeaways: According to Global Financial Integrity, the countries that experienced the highest net resource outflows were: 1) Nigeria, 2) Libya, 3) South Africa, 4) Algeria, and 5) Angola. The countries that experienced the highest net resource inflows were: 1) Morocco, 2) Kenya, 3) Ghana, 4) Tunisia, and 5) Tanzania. Generally, the regions with economies more heavily dependent upon resource-exportation, which as an industry is incredibly vulnerable to corrupt practices, such as North and West Africa experienced the highest net outflows. The regions with economies that are not as heavily dependent upon resource-exportation such as East Africa experienced moderate net inflows.

These outflows contribute to high levels of inequality, giving rise to continued economic stagnation and civil strife.

In Libya, the country that experienced the second highest amount of outflows, after decades of capital outflows, militias occupied the country’s oil fields and ports demanding a fair distribution of oil exportation profits. The militias did so because they expected the new Libyan government to continue the corrupt practices of the Gaddafi regime.

Nigeria, the country that experienced the largest amount of capital outflows, has experienced difficulties with anti-government and Islamist militias challenging the power of the national government in the face of rampant corruption.

Trade Misinvoicing

Even countries that have experienced higher capital inflows than outflows still suffer from the presence of illicit financial flows in various ways, such as the loss of taxable revenue. The source of illicit financial flows is often trade-misinvoicing, or when individuals purposely commit fraud by mis-stating the quantity, quality, and value of goods.  Global Financial Integrity estimates that of the $542 billion that developing countries lose to illicit financial flows every year, trade misinvoicing accounts for approximately 80%.

The major types of trade-misinvoicing are: 1) export under-invoicing, 2) export over-invoicing, 3) import under-invoicing, and 4) import over-invoicing.

According to Global Financial Integrity, export under-invoicing allows individuals to transfer the difference between the market and stated value into offshore accounts, avoiding taxes in the process. Export under-invoicing allows individuals to obtain extra export credits, and avoid both capital controls and state scrutiny. Import under-invoicing allows individuals to avoid tariffs and VAT taxes. Finally, import over-invoicing allows individuals to disguise the movement of capital out of a country, avoiding capital controls and possibly reducing the number of taxes they must pay to the government.

The following chart, featuring data from Global Financial Integrity’s report “Hiding in Plain Sight: Trade Misinvoicing and the Impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania, and Uganda: 2002-2011” shows the amount of government revenue that a series of African countries lost from 2002-2011 due to trade-misinvoicing.

Loss of Total Government Revenue Due to Trade Misinvoicing, 2002-2011 

Main Takeaways: Global Financial Integrity estimates the total lost tax revenue due to doctored trade invoices from 2002-2011 was: Uganda, 12.7%; Ghana, 11%; Mozambique, 10.4%; Kenya, 8.3%; and Tanzania, 7.4%.

Without this tax revenue, states cannot provide the best services for their people and rally maximal resources to combat opportunistic, extremist groups.

Leaders and policymakers at the US-Africa Leaders Summit must recognize that addressing corruption through financial transparency and regulatory measures is necessary in order to achieve good governance and inclusive, sustainable development.

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