Why we must step-up the fight against illicit financial flows

In Summary

• The sad truth is that most jurisdictions lack adequate technological and human capacity to outpace criminals who operate within the cyber space.

Kenyan currency.
Kenyan currency.
Image: ENOS TECHE
Kenyan currency.
Kenyan currency.
Image: ENOS TECHE

The story of Illicit Financial Flows (IFFs) in developing countries, especially in the African region is a sad one. International Financial crimes, which include money laundering, external payouts of proceeds of corruption and fraud, external payouts linked to drug trafficking and illegal ‘tax planning’ that leads to repatriation of exaggerated profits by multinationals and illicit trade based on mis-invoicing and document misrepresentation are steadily eroding the tax base, draining the much needed capital pool out of Africa and in essence sinking the continent deeper into debt and poverty.

The United Nations Conference on Trade and Development (UNCTAD), the United Nations Economic Commission for Africa (UNECA) and the United Nations Office on Drugs and Crime (UNODC) estimated that Africa lost over $50billion in illicit outflows in 2015. Although actual figures are difficult to quantify, various experts estimate that capital flight from Africa through IFFs has since gone past the $100billion per year.

The report of the High Level Panel on Illicit Financial Flows, also commonly referred to as the Mbeki report, identified a causal relationship between IFFs and weak governance systems. Weak governance systems are characterized by several factors including inadequate policies and systems for combatting IFFs, weak cross-border information sharing systems, inadequate technological support for enforcement processes and engineered lethargy among state officers who in many cases are accomplices of these crimes.  But of key importance is the technological weakness that bedevils most of Africa’s efforts to fight IFFs.

It is noteworthy that in this time and age most payments that facilitate illegal capital flight are mainly made either through complex layered and encrypted online payment systems or through emerging technological stores of value like crypto currencies. These payment processes are not only difficult to track and trace but they are also made across jurisdictions, some of which remain unwilling to cooperate with investigators hence making it very difficult to hold the culprits to account. But perhaps the weakest link in the fight against IFFs is the apparent misalignment between these highly tech payment systems and the technologies at the disposal of investigators.

The sad truth is that most jurisdictions lack adequate technological and human capacity to outpace criminals who operate within the cyber space. Whereas it might be easier to apprehend retail drug peddlers it is difficult to piece together all activities within the drug trafficking value chain, especially those that are conducted in the cyber space. Take the case of a drug lord who uses bitcoin to pay for narcotics worth millions of dollars which are then shipped from drug havens to East Africa via the Indian Ocean and then offloaded in the high seas onto waiting speed boats in the dead of the night and later distributed to retail traders in either Mombasa or Zanzibar. In most cases, even if arrested, the retail trader would have no idea how the drugs were paid for and he may not even be able to identify the main players in the narcotics value chain.

However if government investigators were in full view of bitcoin transactions from the point at which cash changes to crypto and the stages through which such crypto changes hands through various wallets to the eventual drug lord then it would be easier to track such payments and bring drug lords to book. Investigators must therefore understand this technology-based chain and arm themselves with technology that can mine transactions at the levels of the crypto clearing houses and crypto wallet holders.

Nonetheless technology must be properly supported. This is because even if local government investigators engaged international investigators who have the requisite technological capacity to track such payment systems, the process would still result to naught because many African Countries lack the necessary legal and regulatory frameworks through which to manage these types of crimes. The point is, to succeed in the fight against IFFs huge investments in technology and policy must be made.

There is no doubt that we are in the midst of a whirlwind of technological change. Artificial intelligence, machine learning, robotics, cloud capabilities and blockchain technologies are all rapidly advancing. As they advance they are also fusing and in the process creating new complementary capabilities. In the next decade we will certainly start witnessing a fusion between infotech and biotech. The resultant opportunities especially for investigators of IFFs and tax crimes will be amazing.

For instance, using algorithms it will be possible to identify and link individuals to transactions after which the investigator will biometrically connect the ‘owners’ of these transactions with real people. Algorithms will also be able to dig up and link transactional information of tax payers and create tax scenarios from these transactions, then profile tax evaders in different categories. These algorithms may in future even be able to tell if or not the event of tax evasion was deliberate or accidental, in which case relevant authorities can make decisions on whether to prefer criminal charges on evaders or not. Needless to say, criminals are also rapidly advancing, especially in their use of modern technology.

The future of the war on IFFs must therefore align to this new future. Tax administrations and IFF investigators across Africa will particularly need to transit into algorithmic systems with high predictive capacities. They will need to engage chat-bots and other intelligent crime reporting systems that will have capacity to ascertain truths at the same time protecting whistleblowers. They will also need to lay claim to full view and unfettered access to internet gateways and online payment platforms in order to fully tap necessary information on all transactions.

Tax Administrations and IFF investigators will need to embrace technologies with immutable data storage and sharing capabilities such as blockchain. They will need to be facilitated with policies that designate them as convergence points for all transactional data in a country and policies that provide them with unfettered access to all forms of transactional data. They will need to invest in high level intelligence gathering systems including systems that can dig into digital platforms and identify incongruences that might point to illegal transactions such as tax evasion or aggressive tax planning with the intention of eroding national tax bases and shifting profits. To support these efforts governments must fast-track digitization oftransacting systems in a harmonized manner andallow tax administrations and other strategic agencies access to high quality overarching data. Of course as these rights are granted there will also need to be enacted laws to ensure that these provisions are managed professionally. Conversations around issues like data privacy and in view of the need to enforce full compliance with national laws will need to be canvassed and the right balances struck.

At the Kenya Revenue Authority (KRA) we are well aware of our role in the fight against illicit financial flows, especially as it relates to protection of public revenue. Illicit financials flows not only erode public revenue but they also dilute the integrity of our markets. One of our mandates is to protect the market. To this end KRA has signed several international instruments that make Kenya a member of a wider community of Nations that is actively tracking and tracing hidden wealth for purposes of identifying and repatriating hidden taxes.

Through the Kenya School of Revenue Administration (KESRA), KRA is also currently hosting the OECD Academy for Africa on Tax and Financial Crimes Investigations. KESRA and OECD have therefore partnered to impart requisite skills to investigators and tax and customs officials in this area across the continent. KRA is also an active participant within a wider national multi-agency arrangement whose role, among others, is to curb illicit flows. The Authority continues to scale up technological capacity to support these and other efforts.

Finally, at the continental level key agencies that have the mandate to fight IFFs shall need to be facilitated with technology driven intelligence and data sharing systems and facilitative laws to boot. For example, immigration and customs departments across boundaries need to be able to share seizures and related cases across the continent in real time. Of course there are many other non-technology interventions that will need to be implemented.

It is my belief that structured and well thought out investment in technology will go a long way to ensure that IFFs are stemmed. This will reverse the dire situation of illegal capital flight that Africa finds herself in thereby reducing the Continents over-reliance on debt. As new capital is created we shall be able to develop the much needed infrastructure, create new exports, create more jobs and reclaim our freedoms and dignity at the international arena.

Dr. Mugambi is a Commissioner at the Kenya Revenue Authority (KRA) and the Head of the Kenya School of Revenue Administration (KESRA)