IMPACT OF ILLICIT FINANCIAL FLOW ON ECONOMIC GROWTH IN NIGERIA

IMPACT OF ILLICIT FINANCIAL FLOW ON ECONOMIC GROWTH IN NIGERIA

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Background to the study

Since the debt crisis in the early 1980s, attention has been focused on the outflow of capital resulting from distortionary domestic policies and political instability mainly in the developing nations. The rate at which huge sums of money are transferred out of developing countries illegally has become quite alarming. Consequently, cross-border illicit financial flows (Hereafter called IFFs) which serve to conceal illegal activities are no new phenomenon. With the growing globalisation of financial markets, the economic and political significance of these illegal activities has grown (Okezie, 2017).  

The issue of illicit financial flows ranks top on the international agenda, affecting both industrialized and developing countries. Though, the current scale of IFFs originating in developing countries cannot be measured.  Precisely, it is believed that the value has been worth more than official development assistance from Organization for Economic Cooperation and Development (OECD) donor according to Global financial integrity report. These practices occur in all countries and are quite damaging both to the social and economic life of the nations and much more severe to the developing countries whose resources are small. Consequently, the issue of IFFs occupies a prominent place in development policy discourse of nations calling for a higher quality of national regulations, proper implementation and compliance with international best practices.  

The concept of illicit financial flows is perceived by some as being vague and imprecise and its content controversial. As noted by the UNECA, it is “marred by a lack of terminological clarity, which somewhat limits the emergence of effective policy options”. Illicit financial flows have been defined in different ways.  It is the cross-border movement of money that is illegally obtained, transferred, or used.  In an OECD (2010) report, IFFs is explained to mean cross-border capital transactions that either conceal illegal activities or facilitate them. Illicit financial flows are essentially generated by methods, practices and/or crimes aiming to transfer financial capital out of a country in contravention of national or international laws. In practice, illicit financial flows can be as simple as a transfer from a private account abroad evading taxes in complex schemes involving criminal networks that hide ownership.  

Council for International Development (2014) defined illicit financial flows as the transfer of illegally earned assets or the hiding of legally earned assets to facilitate illegal tax evasion. Global Financial Integrity (2013) says IFFs are activities that involve the transfer of money collected through corruption, bribery, tax evasion, criminal activities and transactions involving contraband goods. Kar and Freltas (2012) opine that IFFs are funds that are illegally earned, transferred or utilised, and over all unrecorded private financial assets by a resident in contravention of applicable laws and regulatory frameworks. In Okezie's (2017) view, illicit financial flows are termed as ‘dirty money' where dirty money is any money illegally earned, transferred or utilised. He argues that if it breaks any law in its origin, movement or use, then it is dirty money. In a seminar contribution to the dirty money literature, Reutter and Truman (2004) do not define dirty money explicitly instead they say it is the conversion of criminal income into assets that cannot be traced back to its underlying crime.

Corruption, fraud and other related crimes are responsible for mismanagement and misappropriation of the huge fund generated as has been widely reported by organizations and researchers. Existing research suggests that members of the Nigerian armed forces have enabled and benefitted from the illegal trade in a number of ways. Often this benefit comes from providing “protection” – both ensuring military officials turn a blind eye to illegal activity and protecting oil thieves‟ access to extraction points from rivals – in exchange for financial bribes‟.  It can be observed that the Nigerian army officials are corrupt and therefore compromise their core mandate.

However, there is another mysterious means through which Nigeria loses huge resources financially and otherwise that appears not popular among average Nigerians. It is through what is referred to as capital flight perpetrated by developed countries through their Multinational Corporations (MNCs). The impact of this is enormous. Capital flight is aided and abated by Nigeria corruption politician and foreigners who have the monopoly of the technology to tap these natural resources. The MNCs carry out these acts via tax evasion, tax avoidance, transfer pricing and involvement in banking secrecy.  It appears that corruption and fraud among the political class have distracted attention from capital flight to the extent that majority of Nigerians, even among the scholars report less on the dangers it portends to the nation.

1.2 Statement of The Problem

Literature suggests that illicit financial flows involve the following practices:  money laundering, bribery by international companies, tax evasion and trade mispricing. Whichever the case, illicit financial flows robs developing countries of resources that could be used to finance essential public services ranging from security and justice to basic social services such as health and education thus weakening their financial systems and economic potential. "The impact of this is indeed staggering especially for Africa and Nigeria in particular as it drains foreign reserves, heightens inflation, reduces tax collection, cancels investment and undermines free trade" - says Okezie (2017) quoting GFI, 2010.  Besides removing resources that could otherwise be used for poverty alleviation and economic growth, it tends to restrict the capacity and ability of affected countries to mobilize domestic resources and access foreign capital necessary to finance economic growth and development. Consequently, IFFs contributes to the retardation of economic growth and development of developing countries (Okezie, 2017).  

1.3 Objectives of the Study

The main purpose of this study is to know the impact of illicit financial flow on economic growth in Nigeria.

Specifically, this study is set out to:

1.  To ascertain the relationship between illicit financial flows via illegal commercial activities and economic growth in Nigeria.
2.  To find the relationship between illicit financial flows caused by Corruption and economic growth in Nigeria.
3. To determine the relationship between illicit financial flows caused by international crime and economic growth in Nigeria.  

1.4 Research Questions

In order to achieve the objectives of this study, the following research questions became necessary:

1. Is there relationship between illicit financial flows via illegal commercial activities and economic growth in Nigeria?

2. What is the relationship between illicit financial flows caused by corruption and economic growth in Nigeria?

3. How to determine the relationship between illicit financial flows caused by international crime and economic growth in Nigeria?

1.5 Research Hypotheses

The following research hypotheses were formulated to guide the study:

 i. Ho1: There is no significant relationship between illicit financial flows via illegal commercial activities and economic growth in Nigeria.

ii. Ho2: There is no significant relationship between illicit financial flows caused by Corruption and economic growth in Nigeria.

iii. Ho3: There is no significant relationship between illicit financial flows caused by international crime and economic growth in Nigeria.

1.6 Significance of the Study

The research will be useful in several ways to the following bodies:

Firstly, the government will benefit immensely from the findings and recommendations. This study will highlight the problems associated with illicit financial flows on economic growth in Nigeria. It will therefore help government on how they will effect control measure in their establishments in other to ensure accountability of government funds and ridding out corrupt practices of unscrupulous officials.

Secondly, it will help policy makers in adopting appropriate policy and sanctions against illicit financial flows in Nigeria. Indeed, a discovery of knowledge of the protracted problems of the subject matter and policy recommendations of this nature would enable management, employees, customers, investors, financial institution and the general public to make adjustments where necessary.

Finally, it will be a guide to scholars, researchers, or writers who will like to carry out further study on this subject matter in the future.

1.7 Scope And Limitations of the Study

The study focuses on the impact of illicit financial flow on economic growth in Nigeria.

Within this research work, the study considers different measure and policy established to control illicit financial flows on economic growth in Nigeria.

1.8 Definitions of Terms

Illicit: Trade or activities that is illegal or socially disapproved of. Activities or trade not allowed by law.

Illicit financial flows: illicit wealth that is earned, transferred or used in contravention of a country’s laws. It can be referred to as wealth whose origin is connected with illegal activity, such as corruption, the illicit manufacture of goods, other varying forms of crime; it includes concealing a company’s wealth from a country’s tax authorities.

Economy: the state of a country or region in terms of the production and consumption of goods and services and the supply of money. careful management of available resources.

Growth: The process of increasing in size.

Economic growth: Economic growth is an increase in the production of economic goods and services, compared from one period of time to another.

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