The negative impact of illicit financial flows (IFFs) on progress towards development goals increasingly features on international political agendas. There is now a consensus that resolving the problem of IFFs requires responding to underlying development challenges, and tackling all parts of the problem in source, transit and destination countries.

Drawing on collaboration with the African Development Bank (AfDB), the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA), the New Partnership for Africa’s Development (NEPAD) and the World Bank, this report examines the nature of thirteen overlapping, and often times mutually reinforcing, criminal and illicit economies, with a view to identify their underlying development linkages and resulting financial flows.

The report goes beyond traditional efforts to measure illicit financial flows (focusing solely on financial losses) and takes the first step towards building a qualitative understanding of the way in which illicit or criminal activities might interact with the economy, security and development of a region particularly susceptible to IFFs. In taking this approach, this report identifies the networks and drivers that allow these criminal economies to thrive, with a particular emphasis on the actors and incentives behind them.

This report further proposes a framework that offers an opportunity for policy makers (national governments, regional actors and international partners) to prioritise their policy responses, and to address the development conditions and resulting impacts of IFFs.

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West Africa: Regional context and susceptibility to criminal economies*

Economy and trade

Like the rest of the world, West Africa has seen a surge in global trade flows over the last decade, mostly driven by natural-resource extraction. West Africa’s proportional contribution to global imports and exports appears to be falling, while the rest of Africa’ share has remained constant or increased. Illicit activity, criminal economies and the diversion of legitimate trade flows outside of the formal economy could explain West Africa’s relatively poor performance.

The establishment of ECOWAS in 1975 created a free-trade area. This was followed in 1994 by the creation of the West African Economic and Monetary Union (also known as Union Économique et Monétaire Ouest Africaine [UEMOA]). Eight countries within the UEMOA (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) share a common currency (the West African CFA franc), as well as common customs capacity. In terms of economic structure, UEMOA countries are heterogeneous. Although most depend on agriculture, services, and oil and mineral extraction as their primary economic drivers, only a few member countries have developed sizeable manufacturing industries. Mali, Niger and Burkina Faso are landlocked, while all other member countries have access to the sea. Cabo Verde – a small-island economy – has the highest GDP per capita, although Nigeria has by far the largest economy overall. The economies of ECOWAS countries have been growing quickly in the last 50 years. GDP grew from USD 50 billion to nearly USD 300 billion in real terms between 1966 and 2014, while the region as a whole achieved 4-5% growth rates per year over the same period.

Connections to the hydrocarbon-dominant economies of North Africa and the Maghreb have a significant impact on economic realities, as they create economic opportunities for goods, services, income and employment. For centuries, North African ports were global trade gateways to the Sahel countries and countries further south, with trade routes facilitated by nomadic groups spanning the Sahara. This northward pull was reinforced by the discovery of vast hydrocarbon reservoirs in Algeria and Libya; their boom economies and need for labour pushed the migration patterns from all the countries of sub-Saharan Africa northwards.

The major evolution in trade patterns is relatively recent. Since 2009, over 90% of global trade has been moved by sea, 70% of it as container-based cargo. Significant investment in port infrastructure has considerably eased the region’s integration into global trade. Key ports have become strategic points controlling the bulk of trade in the region. This makes it easier and cheaper to extract natural resources from the mineral-rich Mano River and West African coastal regions, which boast plentiful deposits of base metals and precious metals, minerals and phosphates, as well as flora and fauna. In the last decade, this global trend has triggered a rise in the volume of trade through West Africa, largely driven by the growth in demand from Asia.

Most trade for ECOWAS countries takes place outside of the region. The European Union has traditionally been the primary trading partner with West Africa, both for imports and exports. Côte d’Ivoire, Ghana and Nigeria account for 80% of West Africa’s exports – mainly comprising fuel and food products – to the European Union. West Africa’s imports from the European Union consist of fuels, food products, machinery, chemicals and pharmaceutical products. In February 2014, the European Union and ECOWAS signed a new Economic Partnership Agreement that would grant West African states long-term access to the European market without being subjected to tariffs or quotas.

Over the past decade, Chinese exports to ECOWAS countries have expanded more than tenfold. The People’s Republic of China (hereafter China) is now the largest national exporter to ECOWAS. In Ghana, for example, imports from China account for around 20% of total imports.

The bulk of counterfeit and substandard goods brought into West Africa is concealed within legitimate trade flows into the region. Limited state resources, endemic corruption within port authorities and a lack of capacity to physically inspect most containers provide an environment conducive to contraband shipments. Control of imports and product quality in the marketplace is also limited.

From a global perspective, West Africa remains a relatively small market and a relatively complex operating environment. OECD estimates of the prevalence of counterfeit goods based on customs-seizure data suggest a global increase, but no reliable regional figures exist. Anecdotally, the perception is that both substandard and counterfeit goods are highly prevalent in West Africa, and that the problem has grown.

The seizure data indicate that China is the main source country of fake and counterfeit goods (including foodstuffs, pharmaceuticals, and a wide variety of consumer and fake luxury goods) heading to West Africa and the United Arab Emirates. China serve as transit points to West African markets. West African countries have also served as transit points to other countries on the continent.

With their economies so heavily driven by external exports, the ability of regional governments to fund development strategies depends on their capacity to capture a fair share of the export wealth generated by minerals and other resources. In the report Track it! Stop it! Get it! Illicit Financial Flows from Africa, the High Level Panel (HLP) on Illicit Financial Flows from Africa made three key points: African governments are unable or unwilling to successfully negotiate resource-extraction contracts that are fair and favourable in the long term; private companies investing in the region combine legal, illegal and borderline activities to limit taxation; and the international financial system provides loopholes and jurisdictions in which capital resources and revenues can be diverted.

The Africa Progress Panel (2013) has suggested that African governments lack the resources necessary to effectively assess the tax liabilities of overseas organisations. As a result, these organisations may be able to engage in tax evasion or aggressive tax avoidance. When countries have attempted to reform the taxation system against the interests of powerful corporations, these corporations have used their position to rail against such moves. Tax is also evaded through misinvoicing, typically for intangible goods or services (e.g. intergroup loans, intellectual-property taxes, procurement costs, and expert or management fees). Misinvoicing practices have been used in multiple ways, e.g. to pay bribes and reduce profit margins.

Trade within the ECOWAS zone is limited, with 10-15% of total exports going to regional markets. From 2015, ECOWAS adopted common tariffs against the outside world, and established a customs union featuring free trade between the member states and a common trade policy that overrides national law. The common external tariff for consumer goods is set at 20%; the external tariff for specific goods boosting economic development is set at 30%. Individual member states do, however, maintain the option to institute import bans and quotas, and to set taxes. Hence, the customs union is still not fully realised.

All countries in the region have sizeable informal economies. An estimated 40-80% of economic activity takes place outside of the formal banking sector. In 2012, the ECA argued that informal cross-border trade constituted on average 43% of GDP; case studies in West Africa and the Horn of Africa show that informal cross-border trade vastly exceeds reported bilateral trade. The ECA study also noted that in some – albeit unnamed – African countries, informal regional trade flows may constitute up to 90% of official trade movement.

The ECA defines informal cross-border trade as the movement of legitimately produced goods and services that avoid custom controls and/or pass through official channels. They use illegal practices such as under-invoicing (reporting a lower quantity, weight or value of goods to incur lower tariffs) and misclassification (falsifying the description of goods so they appear to be goods attracting a lower tariff). The ECA posited three categories of informal cross-border trade.

Categories of Informal Cross Border Trade

Category A	Category B	Category C
Informal (unregistered) traders or firms operating entirely outside the formal economy	Formal (registered) firms fully evading trade-related regulations and duties (e.g. avoiding official border-crossing posts)	Formal (registered) firms partially evading trade-related regulations and duties by resorting to illegal practices (e.g. under-invoicing)

Source: ECA (2012)

Continually fragmented policies on taxation, quotas, tariffs and currency control have meant that cross-border illicit trade has flourished within the ECOWAS zone. Mbaye (2014) argued that in West Africa, “… documented intra-regional trade is small but smuggling is pervasive, despite regional integration schemes intended to promote official trade.” The assessment further argued that “[c]ross border trade involves a complex interplay of formal and informal operators and practices” and “[e]thnic and religious networks play a large role in organizing the informal sector, resulting in a set of shadow institutions that in some respects are more effective and powerful than official institutions”.

Informal trade of this sort, however, should be distinguished from criminal cross-border trafficking. Faleye (2014) asserts that “there is clear distinction between criminals involved in the trafficking of illegal goods, such as guns, which are a direct threat to national security and informal cross-border traders who buy and sell ‘legal goods’ including contraband commodity goods, such as clothes, which contribute to the wellbeing of the masses of the society.”

In the Sahel and West Africa, active networks of informal cross-border trade have facilitated the growth of more damaging criminal cross-border trafficking. Local border populations – who depend on, protect and sustain smuggling networks – do not distinguish between commodities with varying degrees of illegality. This has implications for those seeking to combat illicit trade. Strengthening lengthy and porous borders requires overcoming the entrenched nature and legitimacy of cross-border informal trade, and accounting for the livelihoods associated with it. Most of the goods available in this region are smuggled commodities; in fact, the communities provide services for traffickers. Successful smugglers and traffickers are seldom stigmatised, and may be lauded by communities where informal trade is the rule, rather than the exception. As seaborne trade has increasingly superseded the need for land-based trade, smuggling and trafficking of increasingly high-value illicit commodities have penetrated the informal economy. Some analysts have argued that the distinction between informal and formal economies is less valid, and that the economy should instead be understood as a series of social networks based around kith and kin.

Most transactions in the informal economy – including those supporting illegal activities – are paid in cash or through informal financing mechanisms. Financial services in the ECOWAS region are available to a small segment of the population: access to finance averages only 20%, ranging from 6% in Sierra Leone to 51% of the adult population in Cabo Verde. Similarly, a large proportion of remittances – which are among the largest contributors to domestic income in most West African economies – travel outside of the formal banking system. For example, surveys in Burkina Faso and Senegal revealed that over 60% of the receiving households used informal channels for cross-border remittances, affecting the capacity of the region’s governments to benefit from taxation. At the same time, senders are paying a disproportionate cost for their transactions, owing to two major challenges: the high rates of informality (particularly within the continent) and a regulatory environment favouring monopolies.

As a result, the costs of transactions between the formal and the informal economy are high, and borne by those who are least able to absorb them. Members of Africa’s diaspora pay a 12% fee to send USD 200; that is almost double the global average, and significantly higher than the pledge made by United Nations (UN) member states in the context of the 2030 Agenda for Sustainable Development to bring the cost down to 3%. In effect, it means that Africans are paying a “super tax” on their remittances. Moreover, despite the principles of free movement of goods and people, and the creation of ECOWAS as a free-trade zone, transactions within West Africa itself incur some of the highest charge structures in the world.

* Extract from Chapter 2. Download the full report on the OECD website.