Battle against illicit financial flows gets more bite in Nigeria

No fewer than 114 companies are on the verge of losing choice properties in highbrow areas, including Abuja, Federal Inland Revenue Service (FIRS) Chairman Tunde Fowler says in a renewed battle against illicit financial flow. The real estate is believed to have become a haven to invest funds siphoned from developing countries. Assistant Editor NDUKA CHIEJINA reviews the measures being taking by the Federal Government curb and possibly to eliminate illicit financial flow in Nigeria.

Africa and Nigeria appears spurred to tackle illicit financial flow. Illicit financial flows (IFFs) are illegal movements of funds or capital from one country to another.

Global Financial Integrity (GFI) classifies “this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilised.

Some examples of IFFs include:

• A drug cartel using trade-based money laundering techniques to mix legal money from the sale of used cars with illegal money from drug sales;
• An importer using trade misinvoicing to evade customs duties, Value Added Tax (VAT), or income taxes;
• A corrupt public official using an anonymous shell company to transfer “dirty” money to a bank account in the United States (U.S.);
• An human trafficker carrying a briefcase of cash across the border and depositing it in a foreign bank; or
• A terrorist wiring money from the Middle East to an operative in Europe.

GFI in its report estimates that in 2013, $1.1 trillion left developing countries in IFFs. “This estimate is regarded as highly conservative, as it does not pick up movements of bulk cash, the mispricing of services, or many types of money laundering.”

Effects of IFFs on

developing countries

It is a fact that $1.1 trillion is a huge amount of money to drain out of developing countries.  The 2013 GFI report discovered that “even after accounting for all types of financial flows (both legitimate and illegitimate) — including investment, remittances, debt forgiveness, and natural resource exports —Africa is a net creditor to the world.”

Aside from the damage done to the economies of African countries, “the overall capital outflows, IFFs have a terrible, subversive impact on governments, victims of crime, and society. They facilitate transnational organised crime, foster corruption, undermine governance, and decrease tax revenues” the GFI report said.

What can be done about IFFs?

GFI believes that “the most effective way to limit IFFs flows is to increase financial transparency.”

It believes that developing countries, like Nigeria, should enact policies to among others things, detect and deter cross-border tax evasion; eliminate anonymous shell companies; strengthen anti-money laundering laws and practices; work to curtail trade misinvoicing; and improve transparency of multinational corporations.

Where does the funds end up?

GFI reported that “every dollar that leaves one country must end up in another. Very often, this means that illicit financial outflows from developing countries ultimately end up in banks in developed countries like the U.S. and United Kingdom (UK), as well as in tax havens like Switzerland, the British Virgin Islands, or Singapore. GFI research suggests that about 45 per cent of illicit flows end up in offshore financial centres, and 55 per cent in developed countries.”

This, the report noted, “does not happen by accident. Many countries and their institutions actively facilitate — and reap enormous profits from — the theft of massive amounts of money from developing countries.”

GFI believes that developed countries have a responsibility alongside developing countries to curtail the flow of illicit money.

Global efforts

The United Nations (UN) adopted to fight IFFs in 2015 with a resolve that African countries must have a firm grip on their Domestic Resource Mobilisation (DRM) by strengthening customs, internal revenue agencies and make legislations that curtails IFFs.

As calls for governments to reconsider the tax incentives granted to some individuals and businesses in Nigeria intensified, one of the continent’s tax bodies cited inappropriate use of tax incentives and exemptions as one of the reasons DRM has not been optimised across Africa.

African Tax Administration Forum (ATAF) Executive Secretary Logan Wort made this assertion in Abuja in September 2017 at the third International Conference on Tax in Africa.

Mr. Wort said: “ATAF recognises that some of the key reasons DRM is not optimised across the continent is due to: low savings rate that equals low economic activity; illicit financial flows; inappropriate use of tax incentives and exemptions and weak tax administrative systems and capacities.”

The ATAF, he said, will assist member countries to address these challenges in some broad areas, which he listed as: implementing the basics of any revenue administration such as completing a taxpayer register; functioning audit unit and recovery processes; embedded in legislation that provide certainty; tax base broadening initiatives; improving tax administration capabilities; strengthening tax policy and providing a platform for African countries to voice matters at regional and international level.

Improving tax administration capabilities he noted “means that numerous country programmes and technical assistance missions are aimed at enhancing the capacity of revenue administrations in specialist areas such as detecting and dealing with transfer pricing abuses; exchange of information; development of legislation that closes loopholes that are prone to abuse; the use of compliance risk management practices to ensure optimisation of resources; and to identify areas of revenue leakage and non-compliance.”

The Nigerian onslaught

The DRM is taking a central role in the efforts to tackle IFFs, Vice President Yemi Osinbajo said last year “as donor fatigue is now only too evident.” What he meant was that “free money is drying up and Nigeria now needs to plug all avenues of revenue leakages and boost internally generated revenue.”

Prof Osinbajo noted that VAT, often seen as the tax of the future, needs a review of its processes for effectiveness and efficiency in its administration.

In the area of Corporate Income Tax (CIT), Osinbajo said: “It is in the spotlight as more manufacturing industries take root in the continent, similarly, there is a growing service sector consisting of the financial, telecommunications and real estate sectors.”

As part of efforts to check IFFs out of the country, the Federal Government has hired a leading international asset tracking and investigation agency – Kroll – to trace and track illicit flows and assets from Nigeria to wealthier countries.

Former finance Minister of Mrs. Kemi Adeosun made the disclosure at the Platform for Collaboration on Tax (PCT) Conference at the UN in New York.

Mr. Adeosun said: “The IFFs are driven by the desire to hide illicit wealth, hide the proceeds away from the public eye and law enforcement agencies and also conceal the ways and means by which illicit wealth was created. This makes it difficult to trace the associated money flow.

“As part of open government partnership, Nigeria has included in the national action plan a commitment to establish a public register of beneficial owners. To this end, the Corporate Affairs Commission (CAC), the custodian of Nigeria’s company register, is pursuing relevant amendments to the Companies and Allied Matters Act to comply with global standards.”

Advocating more responsibility on the part of destination countries of IFFs, the minister advised that beneficial ownership registers should be established to allow authorities track money in financial investigations involving suspect accounts or assets held by corporate vehicles.

Besides, she said that Nigeria has signed the Multilateral Competent Authority on Common Reporting Standards, which allows for exchange of financial account information.

According to her, Nigeria is expected to effect the first exchange by 2019 as soon as the domestic legal framework was completed.

Mrs. Adeosun lamented that IFF was a problem that urgently requires global focus and actions towards the realisation of significant developmental progress for Nigeria and other developing countries.

She expressed concern that “developing countries, including Nigeria, collect significantly lower taxes, as a percentage of Gross Domestic Product (GDP), than wealthier states. This is partly because the income and wealth being created, is taken out of the country illegally, without being taxed.”

Quoting the report of former South African President Thabo Mbeki’s High-Level Panel on IFFs, Mrs. Adeosun said Africa loses $80 billion annually to IFFs, with a significant percentage of the loss coming from Nigeria.

As part of measures to tackle IFFs, the minister called for the tightening of Nigeria’s tax codes and tax laws that encourage tax avoidance as well as strengthening of the tax system to make it more efficient.

Why anti-IFF battle must be won

Last week in Abuja, former President Mbeki warned against taking IFF as problem that can be solved exclusively by Africa, stating that the continent needs “the whole world to engage Africa to help her resolve the issues around IFF. Africa needs capacity building and intervention to boost the capacity. Having identified the problem and the nature of the problem Africa now requires the expertise to effectively confront and overcome the menace of IFF.”

Mbeki lamented that “the poor part of the world is subsidising the rich part of the world this has to stop.”

The former South African leader, now serving as United Nations Economic Commission for Africa’s (UNECA’s) High Level Panel on IFFs Chairman, said that Africa loses about $80 billion annually through IFFs.

He said the huge amount came from proceeds of commercial transactions through multinational companies, criminal activities and corruption.

Mbeki said: “Illicit financial flow poses developmental challenges to the continent, in terms of draining hard currency reserve, reduced tax collection, deepening income gap, depleting investment and weakened governance.”

He stressed the need to strengthen institutions like the revenue service agencies, customs services and the legislation to enable them to better tackle incidences of money laundering as well as other forms of IFFs.

Between February 2018 when Adeosun spoke at the UN on IFFs and October of the same year, Federal Inland Revenue Service (FIRS) Executive Chairman Babatunde Fowler shocked the audience when he revealed that Nigeria accounts for 40 per cent of IFF from Africa.

He defined IFF as “a broad term that can be translated into a number of different things but not limited to cross-border laundering of proceeds of crime, funding of terrorism, theft of state assets, private sector bribery and most importantly, the abuse of taxation.”

Mr. Fowler, who serves as ATAF Chairman and United Nations International Tax Experts Committee First Vice Chairman, described the nature of IFFs in Nigeria to include: payments of expatriates staff emolument and remuneration and failure to declare for personal income tax purposes such emoluments to the relevant tax authorities in Nigeria; laundering of funds (often sourced illegally) through real estate transactions to acquire property in choice locations outside Nigeria; Illegal transfer of money out of Nigeria, via unapproved channels; mispricing of goods and services transferred between interrelated locally-based companies and individuals to offshore-based entities and individuals; profit shifting – for instance through excessive interest payments on foreign and locally-sourced loans and mis-invoicing of imports and exports.

FIRS’s strategies of curbing IFFs

Fowler stated that the FIRS had devised strategies to fight IFFs. These strategies, he said, include:  transfer of pricing regulation to address tax revenue losses through transfer mispricing of goods and transfer.

He said that the FIRS has put in place transfer pricing regulations in 2012 and established a functional Transfer Pricing Unit focused on ensuring that taxable persons report sales and profits in Nigeria in adherence with globally acceptable standards of arm’s length principle for tax purposes.

Trend analysis to the rescue

FIRS has developed an in-house capability for trend analysis on banking transactions of taxpayers – to provide early warning on transactions that might be a potential for illicit outflow.

Exchange of Information

There must be the establishment of a functional Exchange of Information (EoI) unit in FIRS to oversee an effective system of exchange of tax information with Nigeria tax treaty partners. EoI units also set up at State Boards of Internal Revenue (BIR) to ensure a nation-wide framework for effective exchange of information on taxpayers.

Base erosion and profit shifting

Nigeria joined the inclusive framework on Base Erosion and Profit Shifting (BEPS) in 2016 and committed to implement the minimum standards, as means to improving tax administrative effort to combat erosion of our tax base.

Automatic exchange of information

Nigeria has signed onto the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of financial account information with other countries. This will ensure that Nigeria shall have international support in identifying and tracing funds illegally taken out tax residents and invested abroad from which they periodically derive passive incomes (interest, dividends, rent, etc.) from sources outside Nigeria.

All these measures aimed at curbing IFFs, Fowler revealed, has led to a boost in revenue generated by the FIRS.

According to him, the total collection of N3, 916.97 trillion from January to September, 2018 is an increase of N1, 019.3 trillion over collection for the same period in 2017.

Benefits of curbing IFFs

Fowler gave a breakdown of the record of debt payments received by the FIRS with the total debt recovered From January 2017 to August 31st 2018 put at N3, 631,949,050. That meant that from November 2016 to December 2017, the total tax collected was N1.9 billion and from January 2018 till date, N1.731 tillion has so far been received.

Other benefits, he said, include: issuance of notification of tax obligation to CIT, non-compliant companies that own properties and identified non-filers for Abuja with 2,672 Demand Notices, 653 those now filing, total payments for Demand Notices for Abuja Properties N2.983 billion.

Interestingly, 114 companies claimed they were unaware of land allocated to them but upon inquiries at the Abuja, Geographic Information System (AGIS), it was discovered that the lands in question were actually allocated to the companies so the matter will be transferred to the Attorney-General to help the FIRS recover these properties since                              AGIS has confirmed the ownership for all the cases referred to them to belong the companies. With this development, 114 companies might lose their lands in Abuja.

In Lagos, the FIRS issued 5,000 demand notices, 1,346 responses were received from companies, 610 companies made filing and the properties reflected in their books, 189 non-compliant companies have paid and N247 million was the total payment received from companies that made filings which did not reflect in the ownership of the property.

In his presentation on IFFs, Presidential Advisory Committee Against Corruption (PACAC) Executive Secretary Prof Bolaji Owasanoye said: “Africa is a recipient of IFFs, there are tax havens in Africa, we need to challenge African countries that take part in IFFs.

“There is the issue of South-South Illicit Flows  –  that is money leaving Nigeria but not leaving Africa. We need to challenge ourselves to know if we are making progress or not. The Mbeki report should be blunt not politically correct.”