The impact of trade-based money laundering on economic growth & development

Author: Nasubila Ng’ambi
LLB (cum laude) Nelson Mandela University

Introduction

The African Continental Free Trade Area (AfCFTA) is the African Union’s flagship regional economic integration project.[1] The AfCFTA aspires to lift 30 million people  out of extreme poverty and to increase Africa’s income by $450 billion by 2035.[2] These goals are set to give effect to both Agenda 2063 and the UN’s sustainable development goals (SDGS).[3] However, these audacious goals are not without challenge as there are numerous risks associated with free trade areas (FTA) such as trade based money laundering (TBML). This article seeks to explore the implications of TBML on economic growth and development. Further, the article will highlight the need for an effective framework to ensure that TBML is mitigated.

The right to economic development

Article 22 of the African Charter on Human and People’s Rights (ACHPR) provides for the right of ‘all peoples… to economic, social and cultural development’.[4] Further, it mandates that states parties provide an environment suitable for the exercise of the right to development.[5] In XYZ v Benin, the African Court of Human and People’s Rights (African Court) stated that “the right to development is an inalienable human right”.[6] A state’s obligation to facilitate economic development was expounded on in the pivotal SERAC v Nigeria case.[7] This matter highlighted the need for states parties to enact legislation and provide effective remedies for the protection of human rights, more so as they relate to economic development and environmental preservation.[8] The ACHPR has been ratified by the majority of African countries,[9] therefore there is an imperative to ensure that measures are implemented to give effect to economic development.

Article 6(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) provides for the right to work. Further Article 6(2) obliges states parties to create frameworks for the realisation of the right to work, inclusive of safeguarding the economic conditions in which the right will be exercised.[10]

AfCFTA presents a novel opportunity in economic development as it aspires to create a liberalised market for goods and services, while contributing  to the movement of capital and people.[11] The AfCFTA further aspires to develop extensive regional value chains and promote industrialisation through diversification.[12] However, exceedingly high levels of illicit financial flows (IFFs), and TBML threaten the noble aspirations of the AfCFTA.

TBML & IFFs                                                  

IFFs refer to the movement of funds that are illegally derived, transferred, or used across borders.[13] It is estimated that illicit financial flows from Africa range between $50 billion and $80 billion a year.[14] These funds deprive many countries of funds that could have been channelled towards economic development.[15] A significant amount of IFFs are generated from financial crimes.[16]

Trade based money laundering (TBML is defined as the transfer of illicit funds through trade transactions.[17] TBML is a widespread, sophisticated money laundering (ML) technique facilitated by the trade of voluminous quantities of goods.[18] Various methods such as over/under invoicing and multiple invoicing enable TBMLs. These tactics are employed to over/under state the value of goods or services, thereby allowing for the transfer of illicit funds or the avoidance of government levies.[19]

The need for a TBML risk framework

Evidence suggests that TBML is more likely to occur in transactions with trade partners outside Africa. Global Financial Integrity reported that there was a value gap of $25.2 billion in Sub-Saharan Africa (SSA) between 2009 and 2018 in trade with 36 advanced economies.[20] However, Babatunde and Folabi found that interregional trade allowed for increased trade mis-invoicing as parties would falsify trade transactions with increasing trade volume.[21] Therefore, stakeholders should be cognisant of this form of money laundering as it could potentially offset the gains offered by the AfCFTA and hinder economic growth. Consequently, there is a need for relevant government stakeholders to create country-specific responses to TBML risks and for the AfCFTA secretariat to create a robust anti-TBML framework.

[1] https://au-afcfta.org/

[2] https://au-afcfta.org/about/

[3] https://au.int/en/agenda2063/sdgs

[4] African Charter, 1981.

[5] Ibid.

[6] [2020] ACHPR par 125.

[7] Communication 155/96 (1996)

[8] SERAC v Nigeria par [46]

[9]https://achpr.au.int/en/states#:~:text=The%20African%20Charter%20on%20Human,Union%20(AU)%20Member%20States.

[10] ICESCR, 1996.

[11] Article 3(B) & (C), Agreement Establishing the AfCFTA, 2018

[12] Article 3(G), Agreement Establishing the AfCFTA, 2018

[13] https://www.transparency.org/en/corruptionary/illicit-financial-flows

[14]https://www.afdb.org/en/news-and-events/press-releases/african-countries-making-headway-tackling-tax-evasion-and-money-laundering-2020-tax-transparency-report-says-36559.

[15] https://gfintegrity.org/issue/illicit-financial-flows/

[16] https://www.imf.org/en/About/Factsheets/Sheets/2023/Fight-against-illicit-financial-flows

[17] https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-basedmoneylaundering.html

[18] Hataley “Trade Based Money Laundering: organized crime, learning and international trade” 2020 23 Journal of Money Laundering Control 651-661 at 651 & Iyanda “The Threat of Trade Based Money Laundering to The African Continental Free Trade Area” 2018 2 Journal of Anti-Corruption Law 141-162 at 155.

[19] https://financialcrimeacademy.org/trade-based-money-laundering-methods/#mcetoc_1fg56kpm40

[20] https://gfintegrity.org/report/trade-related-illicit-financial-flows-in-134-developing-countries-2009-2018/

[21] Babatunde & Afolabi “Growth effect of trade misinvoicing in Sub-Saharan Africa: the role of governance” International Journal of Development Issues 2023 22 241-254 at 242.

About the Author:

Nasubila Ng’ambi recently obtained her LLB cum laude from Nelson Mandela University, Gqeberha, South Africa. Her LLB treatise explored the money laundering vulnerabilities of the AfCFTA. She is an international trade enthusiast who enjoys legal research and writing.