Vulnerabilities and risks at departmental level – key learnings from country engagements in Africa
Vulnerabilities and risks at departmental level – key learnings from country engagements in AfricaJune 24, 2020 •
Illicit financial flows (IFFs) represent some of the worst crimes and are a major contributor to corruption and development challenges across the developing world – particularly in Africa, where IFFs coincide with an absence of substantive economic inclusion.
They have been estimated to be as large as USD80 billion annually in Africa alone (UNECA, 2017) and 18% of total trade in 2015 (GFI, 2019). Based on similar definitions from GFI (2019) and others, Cenfri defines IFFs as:
Capital, financial and resource flows that are earned, transferred, intermediated and/or used illegally
Although a lot is currently being done at the national, regional and intergovernmental levels to better understand the scale of the IFFs and to address the problem, it is also important to undertake studies at the local level to gain a first-hand comprehension of the vulnerabilities, threats and risks at the country and institutional level. This will allow for targeted, context-specific strategies that countries can employ when they approach the problem of IFFs. Based on Cenfri’s in-country work across Africa, this blog highlights the key vulnerabilities at the institutional level that regulators and stakeholders need to address to minimise exploitation by key threats – and hence IFFs risks.
Financial intelligence centre
A financial intelligence centre (FIC) is generally the primary body within government responsible for investigating financial crime cases, related to all forms of IFFs, particularly money laundering and terror financing. A FIC’s main sources of information are the data and reports from banks and financial services providers (FSPs), as well as information from other government bodies. In this role, they face a number of key vulnerabilities.
- Limited mandate and capacity of FICs
Firstly, several FICs lack the necessary mandate to demand data and information in a timely manner from other institutions. This means they are often waiting on important information that may make or break a case because they don’t have the mandate to sanction institutions that do not comply with their information requests or to compel them to act quickly. This is a vulnerability because it weakens the ability of FICs to properly investigate cases.
- Limited capacity to collect and process data on IFFs and suspicious transactions
Databases within African FICs are mostly elementary and not well structured, and they’re able to handle only very simple retrospective requests. The processing of information that is received from other institutions is often manual rather than automated, making it particularly difficult to analyse suspicious transactions reports from FSPs. In one country surveyed by Cenfri, the FIC had to load information from flash drives and was unable to access servers remotely. Limited automation in data analysis and poorly structured, non-integral databases are serious vulnerabilities, as they hamstring the ability of FICs to process, compare or link large amounts of data and make any headway in uncovering even rudimentary criminal networks.
- Underfunded and under-supported
These capacity issues are largely a result of the limited support and funding that these institutions receive from Parliament. Without adequate capacity and resources, FICs cannot make the necessary technological upgrades to keep pace with the complex nature of IFFs. Lack of funding also results in some African FICs being cut off from regional and global learning platforms like the Egmont group. They are therefore neither exposed to, nor provided opportunities to implement, best practices in AML-CFT for their region.
In addition to FICs, some countries have units/departments that specialise in corruption cases. While on the surface, the existence of anti-corruption commissions suggests that significant efforts to combat corruption are in place, these commissions are facing serious challenges. Like FICs, they are typically underfunded and lack sufficient mandate to undertake meaningful investigations.
During Cenfri country visits, we found the people working for these commissions to be competent and passionate individuals, driven to make a difference; but they simply did not have the tools or official standing to undertake their tasks effectively. One FIC director confided to the Cenfri team that they did not even have a budget to buy pens and stationery.
Law enforcement and investigative authorities
On the other side of the fence are the police authorities and prosecutors who are most often responsible for conducting the detailed investigation and prosecution of IFF cases. A lack of directed funding and specific mandates also results in capacity and mandate vulnerabilities within these institutions in respect of very sophisticated IFF crimes – hence their difficulty in successfully investigating or prosecuting.
- Limited availability of IFF specialists
A key vulnerability noticed in enforcement institutions is the lack of specialised units or centres of excellence that focus on financial crime matters, particularly IFFs. Across the Cenfri country studies, this lack of concentrated expertise or centres that promoted the replication of these skills coincided with very few actual prosecutions related to money laundering. In some countries there had never been a prosecution. This is because investigating and prosecuting money laundering and related IFFs require niche skills and knowledge, as well as IT, financial and data resources. Perpetrators themselves may even have access to disproportionately stronger legal support, which makes prosecution all the more difficult.
- Underdeveloped legal and regulatory frameworks
Legal framework issues contribute to the problem, as most often key elements of IFFs are not adequately covered in legislation, which makes it difficult or impossible to prosecute offenders. For example, in one country, the corruption commission uncovered a trade-based money laundering case of mispricing of timber by stacking very high-value, rare wood on a boat instead of the much lower-value wood that was reported in the export documentation. Due to an inappropriate legal framework for prosecuting this type of crime, the corruption commission had to try to prosecute the originating activity under illegal timber extraction, which was difficult to prove. This is a key vulnerability, as it effectively negates an ability to prosecute IFFs.
The auditor-general plays a vital role in the prevention of IFFs, particularly where corruption and bribery of officials are involved.
- Pervasive silos
A key vulnerability in these institutions in some African countries is their relative isolation from other departments. In our research and engagements, we discovered that, although the auditor-general’s office performs its audits effectively, there are weak links between the auditor-general, Parliament, the FIC and the public prosecutor. Although the auditor-general often finds information that could be relevant to a case that, for example, the FIC is working on, there is no requirement or mandate that compels the auditor-general to actively share such information. This inhibits the ability to collate various types of data and develop a proper picture of IFFs.
An illustrative example was the declaration of assets and interests required for all civil servants in one of our study countries as part of a commendable good governance initiative. It came to light that no audit checks had been done on the veracity of those declarations, nor had any cross-referencing been done in relation to government procurement. This was because the auditor-general did not have any mandate across government units and the government departments did not have any mandate of their own to investigate or check the veracity of declarations. As such, they merely kept them in a drawer and ticked them off on a compliance list.
- Underdeveloped and weak accountability frameworks
In some countries, there is no mandate and accountability framework in these institutions to ensure that the information generated and reported by the auditor-general is acted upon. Where the auditor detects anomalies and flags them, there is often no assessment or feedback on such anomalies.
A holistic, integrated approach to combatting IFFs is essential
Combatting IFFs requires a coordinated approach from all of these, and other, institutions to be effective. Without a solid understanding of the vulnerabilities at institutional level, threats in the economy (such as politically exposed persons, products with multiple jurisdictional presence, and terrorists) may be able to abuse the financial systems for IFFs. This will inform and be greatly complemented by other measures at country, regional and global levels. Addressing these vulnerabilities and threats will also strengthen IFF reduction efforts under initiatives such as automatic exchange of information, country-by-country reporting, subsidiary-by-subsidiary reporting and project-by-project reporting, among others.
Why is it important? At stake is a flow of capital so large that it has the potential to turn a vibrant and growing GDP on paper into a severe recession in reality.
This work forms part of the Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri.