Nigeria loses nearly half of its annual budget to illicit financial flows (IFFs), mainly due to weak company laws and regulations that allow them to happen. Deputy News Editor JOSEPH JIBUEZE highlights some of the legal loopholes that must be urgently blocked to stem the flow.
In a remote village of Ikwuano in Abia State, a group of ten-year-olds are learning the multiplication table in a classroom without desks.
But they do not seem to care, singing and cheering as their teacher tells them they performed well in a test they just did, even though they have to sit on the floor while learning.
Due to the government’s reduced allocation to the education sector, coupled with corruption, thousands more are in the same position in public primary schools across the country.
Every year, due to weak banking and tax regulations, the country loses half of its $29 billion-budget to illicit financial flows (IFFs), revenue that could have increased education funding.
It was seven years before these kids were born that the Banks and Other Financial Institutions Act, which regulates banking operations, was last amended.
The law that regulates company operations, the Companies and Allied Matters Act (CAMA) 2004, was amended by the last Senate but is yet to be signed into law.
Tax law experts say IFFs occur due to Nigeria’s weak regulations and lack of political will to enforce and administer existing laws.
“Every transfer of an amount exceeding $10,000 is automatically reported by the remitting bank to the Economic and Financial Crimes Commission (EFCC).
“It is then up to the EFCC to decide whether a transfer should be investigated or not”, said Theophilus Emuwa, founding partner at AELEX Legal, who heads the firm’s taxation and corporate practice groups.
“I would say that the problem is more to do with weak enforcement rather than weak laws. The solution would, therefore, lie in strengthening our prosecutors and strengthening our judiciary.”
When the Global Financial Integrity, the Washington, DC-based think tank that produces IFFs analyses, said in 2018 that Nigeria loses about $15.7 billion annually to IFFs, the Central Bank of Nigeria (CBN) said it was “concerned” about the report, which stated that Nigeria is one of the 10 largest countries for IFFs in the world.
The financial sector regulator said: “The CBN will increase its vigilance to ensure that Nigerian banks are not used as conduits for illicit fund flows, especially in foreign currencies.”
Nigeria’s prominence in world IFFs is further underscored by the High-Level Panel on IFFs report titled Track-It! Stop It! Get It!, chaired by a former South Africa President Thabo Mbeki.
The 2015 report says Africa loses $50 billion yearly to IFFs, with Nigeria contributing 30 per cent of the flows.
Tackling IFFs
No doubt, blocking the loopholes that allow IFFs will boost revenue that could go towards realising the sustainable development goals (SDGs), in which Nigeria is lagging.
According to UNICEF, one of five of the world’s out-of-school children, or 10.5 million children, lives in Nigeria, and most of those in public schools lack basic facilities.
Nigeria is also the country where nearly 20 per cent of all global maternal deaths happen, according to the World Health Organisation.
In July 2019, the World Bank said poverty remains significant at 33.1 per cent in Africa’s biggest economy, and a report by The World Poverty Clock shows Nigeria has overtaken India as the country with the most extremely poor people.
Commercial law expert, Chukwudi Enebeli, a partner at Nigeria’s top law firm Pinheiro LP, believes money cannot leave the country without the active connivance of commercial banks.
“To curtail the participation of commercial banks in IFFs, regulators must go beyond issuing fines against them. I am of the view that the CBN should issue appropriate regulations,” he said.
To him, the law guiding banking operations, the Bank and Other Financial Institutions (BOFIA) Act, must be amended.
He suggested that the amendment should make bank directors personally culpable for their participation in the illicit transfer of funds outside Nigeria.
“Directors of banks cannot continue to hide behind the corporate veil,” he said.
“Section 48 of the BOFIA which provides for the disqualification of certain individuals from the management should be amended to include persons who were previously directors of any bank at the time such illicit transfer occurred.
“The implication of this is that the board of every bank will live up to expectation and serve as a check on the management.”
Besides, Enebeli said the regulatory requirement of monthly returns of banks to the CBN should go beyond assets and liabilities and should include funds repatriated for that period and on whose behalf they were repatriated.
“The CBN must begin to scrutinise the books of banks to curtail illicit fund repatriation.”
Enebeli added that Nigeria’s tax laws should be amended to make company directors individually liable for IFFs through tax evasion.
“This should also be extended to the parent company the same way the Bribery Act of the UK applies to corporate organisations with business presence in the UK, whether incorporated in the UK or not.
“It is only then that Nigeria would be seen as a country eager to bring an end to illicit financial flows,” Enebeli added.
Need for beneficial
ownership register
Lawyer Janet Gbam, a Research Scholar at the Center for Human Rights at the University of Pretoria in South Africa, said Nigeria needs a register of beneficial ownership.
She noted that Nigeria signed on to the Open Government Partnership in 2016, with a commitment to establish a Central Register of Beneficial Owners of Corporate Entities.
The commitment meant an amendment of Nigeria’s company law, CAMA.
Under the amendment Bill, all companies will be required to disclose in their annual returns a register of members, with the details of all persons with significant control of over five per cent.
This includes beneficial owners, disclosure of substantial shareholders and filing requirement for public companies.
The Senate passed the bill on May 15, 2018, in which Section 6 contains the critical provision of a statutory requirement on the issue of a register of beneficial ownership.
However, President Muhammadu Buhari is yet to sign the bill into law. The Senate will have to re-issue it as the 30 days period within which the President was supposed to sign has long-since passed.
Regulatory analyst, Eze Onyekpere, believes the government must back words with action and urged the President to reconsider signing the amended CAMA Bill.
Prof. Emmanuel Nnadozie, Executive Secretary of the African Capacity Building Foundation (ACBF), which works for institutional capacity for good governance and economic development, identified limited awareness of the impact of IFFs, weak political leadership, corruption and the inability to design, implement, monitor and evaluate policies and regulations to curb IFFs as some factors that allow IFFs to occur.
Others, he said, are a weak implementation of appropriate legal, regulatory and/or prudential frameworks to curb IFFs, lack of transfer pricing units and poor contract negotiation skills.
Nnadozie said Nigeria needs enhanced coordination, capacity development, regulatory and legislative support and effective information sharing to tackle IFFs.
International tax officer at the African Tax Administration Forum, Thulani Shongwe, said penalty regimes must be increased while laws must be devoid of ambiguities that give room for tax avoidance.
He suggested stronger oversight and better coordination of tax incentives, adding that contracts should be better drafted after a thorough evaluation of incentive proposals.
“We are moving slowly to update legislation and regulations. This gives taxpayers the time to plan on how to continuously avoid and evade taxes. This is the recipe for aggressive tax planning,” Shongwe said, adding that laws with weak low penalty regimes must be amended.
“The world has changed and so should our laws. Unfortunately, our laws have not moved with the nature of the business, which has changed,” he said.
“The penalties do not scare off taxpayers and therefore there is a risk of increased non-compliance culture. Defaulters who make multiple profits will prefer to pay $1000 fine than comply with the laws.”
Shongwe added that African states, including Nigeria, should create methods and mechanisms for information sharing and coordination among the various institutions and agencies of government responsible for preventing IFFs.
Such coordination, he recommended, should be led by the country’s financial intelligence unit.
To underscore the point, he said India made 10 times as many Exchange of Information (EOI) requests as the whole of Africa in 2017.
“Only five African countries are committed to automatic exchange of financial accounts information (AEOI) while illicit financial flows continue to ravage the continent,” Shongwe said.
On the way forward, he called for increased collaboration between tax policy and administrators in fighting IFFs, as well as the need to build capacity to negotiate economic contracts effectively.
- This story was produced by The Nation. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in collaboration with the Institute for the Advancement of Journalism. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.
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