An examination of illicit capital movement – the cases of China-Africa Trade and the Africa-United Arab Emirates Gold Trade
“Billions of US dollars are leaving the continent as we speak. Existing evidence indicates that for each dollar of external debt, an estimated 60c is embezzled and lost in capital flight. It’s a major constraint on development in Africa,” said Arcade Ndoricimpa of the Faculty of Economics and Management at the University of Burundi. “Sustainable development is increasingly undermined by illicit financial flows. It’s estimated that we need $574 per annum until 2030 just to meet the Sustainable Development Goals.”
Ndoricimpa pointed out that in 2018 Africa’s stock of external debt was estimated at $720 billion. The stock of capital flight from just 30 countries from 1970 to 2018 totalled at least $2.4 trillion. “A small portion of that lost to capital flight would pay off the external debt,” he said.
“It also represents a loss in potential investments,” he added. “Fofack and Ndikumana showed in 2010 that if a quarter of what we lose in capital flight was repatriated and invested, investment rate would increase from 19 to 35%.”
He explained that capital flight is about outflows of financial resources not recorded in official statistics and studies have shown that trade misinvoicing – a technique to move resources across borders by falsifying the value or volume of exports and imports – is an important mechanism.
“Trade misinvoicing undermines domestic resource mobilisation as it robs governments of customs duties and corporate tax revenues,” he added. “This hampers social-service delivery and poverty-reduction efforts.”
His project aims to generate evidence to understand trade misinvoicing and identify ways to tackle it. Using data from the United Nation’s COMTRADE, and the International Monetary Fund’s Direction of Trade Statistics (DOTS) databases, the study is calculating the magnitude, trend and patterns of capital flight through trade misinvoicing in Africa. The work thus far has found extensive under- and over-invoicing examples from across the continent.
“Trade invoicing is the major channel for capital outflows. It’s a method for moving money illicitly across borders – not in one but both directions,” he said. “Also if some countries are playing by the rules and others not, then they don’t make the same gains from trade.”
In his seminar Ndoricimpa focused on the magnitude and patterns of illicit capital movement in China-Africa trade, as well as in the Africa-United Arab Emirates gold trade. He also unpacked some of the drivers of the phenomenon and suggested some policy implications.
China-Africa trade
Ndoricimpa explained that China is Africa’s biggest trading partner with an estimated $200 billion exchanging hands in two-way trade in 2019. Exports from China increased from $5 billion in 2000 to $113 billion in 2019.
“China imports mainly natural resources from African countries. The biggest exporters to China include Angola, South Africa and the Democratic Republic of Congo while the biggest importers from China are South Africa, Egypt and Nigeria.”
“There are 608 Chinese firms working just in South Africa,” he added.
“There is a huge illicit capital movement between China and Africa,” he said. “My results show that in exports 70% and in imports 62% of the countries under-invoice. The main driver is tax avoidance.”
“Corruption control and political stability are important factors in reducing trade misinvoicing,” said Ndoricimpa. “Corruption control is found to reduce export under-invoicing. Political stability reduces the extent of both export over-invoicing and import over-invoicing.”
Africa-UAE Gold Trade
Turning to the gold trade between the United Arab Emirates (UAE) and Africa, Ndoricimpa described this as the “ugly side of Africa-UAE gold trade”.
“The old gold-trade hubs include the USA, Switzerland, China, Hong Kong and the UK,” he explained. “The UAE is a new player – its gold import increased from $37 million in 2000 to $48 billion in 2021.”
But, as he explained, when it comes to gold, origin matters. In Africa there is industrial or large-scale gold mining as well as artisanal, small-scale or mining. “The small-scale is often characterised by low-level technology, limited mechanisation, lack of safety measures and informal employment often with human right’s violations (including against women and children), and an absence of government oversight,” he said. “The big stakeholders are organised crime, corrupt officials and illegal armed groups in conflict zones.”
“The old gold hubs won’t import gold from these sources but for the UAE this doesn’t seem to matter,” he added. “They are happy to import gold from small-scale sources linked to armed groups and human rights abuses. They don’t play by the rules.”
He explained that gold from conflict zones is often smuggled into neighbouring countries then onwards by air – often hand carried by couriers. This requires bribery of airport staff as well as customs and other officials. “There’s a chain of people with different interests but all have something to gain.”
He pointed to a 2021 case where officials at OR Tambo airport in Johannesburg arrested three people from Madagascar en route to Dubai carrying nearly 75 kg of gold in their hand luggage.
“For some countries, as much as 90% of gold is smuggled out,” said Ndoricimpa.
But that’s not all – there is also evidence of underreporting. Ndoricimpa pointed to numerous cases where mirroring export and import data show huge discrepancies.
“The main motivation is the increasing gold price as well as tax fraud,” he said. He highlighted the need for transparency to understand the mechanisms and to strengthen governance institutions and reduce corruption. “The key issue in all of this is secrecy – we need to reduce it.” – something that Ndoricimpa hopes his work can help to address.
“Africa needs to renegotiate the benefits from our own natural resources,” he continued. “There is also a need for a new moral political economy – as described by Carugati and Levi in their 2021 book.”
“International organisations like the United Nations, African Union, the International Monetary Fund and World Bank need to step in,” he said.
Michelle Galloway: Part-time media officer at STIAS
Photograph: Noloyiso Mtembu