Overview
Illicit financial flows (IFFs) are transfers of money that are illegally earned, illegally transferred, or illegally used. Kenya loses an estimated USD 1-2 billion annually to illicit financial flows. These flows represent stolen government resources, proceeds of crime, and tax evasion transferred to foreign jurisdictions where they generate wealth for perpetrators while depriving Kenya of resources.
Sources of Illicit Flows
Illicit flows originate from: (1) corruption, where government officials steal and transfer proceeds, (2) organized crime, where trafficking and criminal organizations move proceeds, (3) tax evasion, where businesses transfer profits illegally to evade taxation, (4) trade mispricing, where companies use false valuations to shift profits to low-tax jurisdictions.
Mechanisms of Movement
Illicit flows are moved through: (1) informal money transfer systems (hawala), (2) trade mispricing (importing goods at inflated prices to shift money), (3) foreign bank transfers, (4) cash smuggling, (5) shell companies and offshore structures.
These mechanisms are available to anyone with money to move and create opportunity for massive flow of resources out of Kenya.
Impact on Kenya
The loss of illicit flows deprives Kenya of resources for public investment. Money that could fund schools, hospitals, or roads instead accumulates in foreign accounts. The government loses tax revenue. The overall economy loses capital.
The World Bank estimates that African countries lose approximately USD 50 billion annually to illicit flows, with Kenya accounting for 2-4 percent of that total.
Offshore Financial Centers
Many illicit flows are destined for offshore financial centers (OFCs) where banking secrecy, weak regulation, and favorable tax treatment enable accumulation of ill-gotten wealth. Kenya officials and their associates have assets in OFCs in the Seychelles, Mauritius, Panama, and other jurisdictions.
Recovering assets held in OFCs requires international cooperation that is slow and unreliable.
Trade Mispricing
Trade mispricing is a particularly significant source of illicit flows. An importer brings in goods at USD 100 per unit but pays USD 200 per unit in false invoices. The difference (USD 100 per unit) is transferred to an offshore account by the exporter (typically outside Kenya).
This mechanism shifts wealth out of Kenya disguised as legitimate trade. The foreign exporter receives inflated payment that includes illicit transfer. The Kenyan importer claims higher costs and raises prices to consumers.
Corruption and Illicit Flows
Corruption often initiates illicit flows: an official steals government money and transfers it offshore. Organized crime similarly moves proceeds offshore to jurisdictions where they cannot be traced.
The willingness of foreign jurisdictions to accept and conceal illicit flows from Kenya enables the corruption.
International Efforts
The Financial Action Task Force (FATF) and other international bodies have sought to strengthen anti-money laundering regulations and to increase transparency in financial flows. Kenya has adopted some recommendations but implementation has been weak.
Banks in Kenya are supposed to conduct due diligence on customers and to report suspicious transactions. However, enforcement is inconsistent and some banks appear complicit in moving illicit flows.
See Also
- Goldenberg Scandal
- Kamlesh Pattni and Goldenberg
- Offshore Financial Centers
- Asset Recovery Kenya
- Trade Mispricing and IFFs
- Impunity Culture
- Moi Era Corruption Economy