This document provides an overview of a seminar on corruption, illicit financial flows, and governance ethics in Africa. It discusses definitions of corruption, its causes such as political, legal, bureaucratic, economic, and transnational factors. The consequences of corruption are outlined as political, economic, and social. While corruption is generally seen as harmful, some argue it can have short-term benefits by substituting for weak rule of law and inefficient bureaucracy. The document also examines illicit financial flows from Africa, including their origins, means such as trade mispricing and cash smuggling, channels, and methods for estimating flows.

1. A Trillion $ Question! Seminar On
Corruption,
Illicit Financial Flows and
Governance Ethics in Africa
June 1, 2011
PhD in Public Management and Policy
School of Graduate Studies, Department of Public Management and Policy,
College of Management, Information and Economic Sciences
Addis Ababa University
Instructor:
BT Costantinos, PhD

2. An Overview Of Corruption
• Corruption may be defined as the abuse of public
position for personal gain or for the benefit of an
individual or group to whom one owes allegiance.
• Corruption is a two-way process, involving members
of both the public and private sector, who are engaged
in illegal, illegitimate and unethical actions
• Corruption is a symptom of weakness in
political, social, legal and economic systems.
• Corruption manifests itself in various forms:
– Personal, Political, Institutional,
Administrative, Grand and Petty Corruption
– Bribery, nepotism, cronyism, patronage, fraud,
and embezzlement
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3. Causes of Corruption
• Political Factors - Corruption levels are linked to the strength
of civil liberties, particularly
• the level of press freedom,
• the level of structured, active political competition
• the strength of civil society and independence of the media.
• Citizens must have the ability to learn about their
government’s activities and take action accordingly.
• Legal Factors -
• the quality of a country’s legal system
• effective anti-corruption laws,
• Finally, effective laws depend on the credibility and ability of
the police and judiciary to act against corrupt practices.
• In situations where these conditions are not met, corruption
is liable to spread rapidly.
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4. • Bureaucratic Factors
– higher regulatory and state bureaucratic interventions in the
economy, where government imposes huge regulations,
there is greater opportunity for officials to subvert them.
– where public officials are unaccountable over the provision
of a public service or the application of regulations and fees.
• Economic Factors –
– Where governments create monopolistic economic settings.
– State power creates opportunities for public officials to
promote their own interests, if economic policies are
developed, implemented and monitored in a manner that is
not participatory, transparent and accountable.
• Transnational Factors
– Corruption has strong transnational dimensions.
– Some countries that are “hopelessly corrupt” had
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systemic corruption introduced during colonial periods.

5. Consequences Of Corruption
• Political Consequences
– Corruption is insidious, attacking governance and national stability
– Corruption is a form of extortion that marginalizes citizens.
– Fosters contempt for public service and political cynicism
– Corruption distorts decision-making, resulting in the wrong
projects & shifts services away from those who need them.
• Economic Consequences
– One of the most visible consequences of corruption is its
impact on a country’s economic development
– Corruption compromises the achievement of sustainable
development objectives.
– Bribing and rent-seeking result in additional business costs,
a burden to small entrepreneurs, and the misallocation of
human capital and talent. 5

6. – The continuous attention demanded of business by
corrupt officials also threatens economic productivity.
– Competition becomes focused on the highest
bribe, thereby denying the public the advantages of a
competitive marketplace.
– The poor bear the heaviest burden in such
situations, reinforcing extreme gaps between rich and
poor.
• Social Consequences
– All of the political and economic consequences
discussed above have significant social impacts. The
“culture of corruption” results in the demoralization of a
country’s population,
– Leading to a lack of confidence in the state and its
institutions, and,
– In extreme situations, the collapse of the state itself.
Corruption violates the public trust and erodes social 6

7. Positive Side of Corruption
Praising the Curse
• Corruption is bad but new school of thoughts are
emerging regarding the good sides;
• The impacts of corruption depend on the strength or
weaknesses of institutions and governance
• For nations that have failed to establish and
consistently enforce rule of law and efficient
bureaucracy, corruption may do a better job
• Corruption may be considered a useful substitute for
a weak rule of law and virtually inefficient
bureaucracy
• When the value of behaving corruptly (Productive
transactions) is substantially greater than the cost of
corruption, in the short run, it provides an efficient
solution. 7

8. • True, when Corruption results in permanent rent-
seeking behavior, it is economically restrictive, but it
can also expand economic activities in some cases.
– For example, by private citizens bribing officials to evade bad
laws, economic efficiency may increase.
– All laws may not necessarily lead to efficiency and fair use of
resources and authorities are not necessarily legitimate
– Corruption may break such systems and authorities.
– The moral and ethical element of corruption is destructive
but seemingly positive side is also short run.
• There are evidences that many corrupt activities substitute the
missing or misguided laws, and inefficient bureaucratic
systems.
• Direct attacks on corruption can be costly battles that will be
resisted when corruption plays an expansionary role in a
nation.
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9. Illicit Financial Flows
(IFF) from Africa
• Introduction
– Illicit Finance/Illicit Money is illegally earned and
intentionally taken out of a country of origin, with the
purpose of hiding its source
• An Overview of IFF from Developing Countries
– Massive outflows of illicit money from developing countries
– IFF is $859 billion to $1.06 Trillion a year - 2002-2006
• Sources of IFF are estimated as follows:
– 3% is from bribery and theft by govt. officials
– 30-35% is from criminal activities such as drug
trafficking, human trafficking etc
– 60-65% is from tax evasions through trade mispricing 9

10. Origin and Means of Illicit
Financial Flows (IFF) from Africa
• Since the 1960’s, former colonizers and new
neo-colonizers motivated local rulers because of
uncertainty of remaining in power to stash
money out of Africa
• The following were common means of IFF : Trade
mispricing, Bulk cash movement, Hawala ,
Smuggling and growth of MNCs
– Shifting profit from one country to another through fake
intra-company transactions between branches a MNC,
– International tax heavens,
– Secrecy jurisdictions in which many corporations are
disguised
– Fake charitable organizations, 10

11. Channels for IFF and
Methods of Estimation
• Capital flight takes two forms:
– Legal: it is recorded on official records
– Illegal: unrecorded as it violates existing rules and
regulations (tax laws, banking regulations…)
• GFI’s focused on two channels for the IFF:
– External Accounts
– Mispricing of Trade Transactions
• Two methods for estimating IFF
– The World Bank Residual Method: compares
sources of external funds with usage of these
funds
– The Trade Mispricing Model: Measures IFF through
trade mispricing data
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12. • The World Bank Residual Method
– uses external accounts of the country to measure IFF
– compares sources of external funds with usage of these
funds
– The difference being IFF
– Sources of funds include: Countries inflow of capital,
which consists:
• The net public sector external debt (source: WB’s data base)
• Net inflow of the FDI
– Use of Funds include:
• Funds used to finance the current account deficit and
• Addition to the central bank reserve
• Thus, excess of inflows/sources over recorded
uses of funds, represents illicit capital outflow
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13. 2. The Trade Mispricing Model
– Measures IFF through trade mispricing data
– It compares developing countries export data with
what the world imported from them; and their import
data with what the world exported to them
– Mispricing:
• discrepancies between trade data of importing & exporting
parties after insurance and freight adjustment s
• Could also result in negative figure suggesting illicit inflows
• Limitations of the models:
– Both the World Bank Residual Method and the Trade
Mispricing models could not fully capture illicit
outflows mainly due to reasons such as: smuggling
which bypasses records, complications and collusions
between parties, in the case of mispriced invoices and
so on. Thus the methods result in understated figures of
outflows 13

14. GFI’s Report on IFF from Africa
• GFI’s report showed there was massive illicit financial
outflows from Africa to western financial institutions
• From 1970-2008, illicit financial outflows from Africa
totaled $854 billion - $1.8 trillion
• Regional analysis was conducted for the 53 African
states, on decennial basis (1970s, 1980s, 1990s, and 2000-
2008)
• Regional Groupings were as follows:
– North Africa (5 countries)
– Sub Saharan Africa (SSA): (48 countries)
• Horn of Africa (5 countries)
• Great Lakes, (6 countries)
• Southern Africa, (14 countries)
• West and Central Africa (23 countries)
• Fuel Exporters (8 countries) (Nigeria, Sudan,…)
• Non Fuel Primary Commodity Exporters (13 countries) 14

15. Conclusion:
– The bulk of IFF: West and Central Africa - Oil
exporters are the top in the list in SSA
– Arica lost around $29 billion per year over the
period of 1970-2008;
– The ratio of IFF to ODA is estimated to be 2:1 -
Africa’s position to the rest of the world should be a
creditor’s rather than a debtor
– Ethiopia ranks 6th with a cumulative out flow for
the period from 1970-2004.
– Impacts of Illicit Financial Outflows
• Drain hard currency reserves and heighten inflation
• Undermine trade and investment, reduce tax collection
• Widen income-gaps and worsen poverty …
– Hence, economic growth without global good governance
results in increased IFF which destroys development efforts
and worsen poverty.
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16. Combating corruption:
Tailoring the Fight against Corruption to
Country Governance circumstance
• Cognizant of the disastrous impact of corruption, not
surprisingly, there has been a growing global movement to
condemn corrupt practices, that has resulted in the removal of
some national leaders.
• In addition, governments and agencies have devoted
substantial resources to fighting corruption in recent years.
• Despite these efforts, however, it is not clear that the incidence
of corruption has declined perceptibly, especially in highly
corrupt countries. Why?
• This section of the seminar paper is basically intended to raise
discussion towards addressing of such question of why (despite
such efforts, the incidence of corruption remains significantly
unchanged)

17. Anti corruption model
propounded by Anwar Shah
• The governance level of the country is considered as
a vital determinant of the anti corruption strategies
to be adopted
– Putting differently, the model try to explain the governance-
corruption nexus and asserted that the success of various anti
corruption strategies heavily depend on the governance
environment of the country in which they adopted
– The rational of the model to focus on governance-corruption
nexus is that corruption itself is the symptom of failed governance.
Hence, the solution should consider such underlying root cause of
corruption
– The model was developed based on deep investigation and
analysis of causes and cures of corruption from both conceptual
and empirical perspectives
– The author tries to delineate causes and cures of corruption from
various theoretical perspectives particularly that of public
choice theory, principal- agent model, neo institutional
economics and new public management.
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18. The 2004 World Bank study
(the case of Guatemala, Philippines, Latvia, Pakistan, Kenya and Tanzania)
• As per the WB study, the root causes of rampant
corruption in the countries under study were:
– Clintelism: the legitimacy of the state as a guardian of
public interest is contested,
– rule of law is weakly embedded,
– accountability are ineffective: electoral process, bill
of right, citizen charter, auditor general, media and
judiciary independency etc are weak or non existence
– lack of commitments on part of national leaders
– data from both conceptual and empirical perspective
attested that the root cause of corruption is that of the
disease of dysfunctional governance.
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19. Strategies in States with week
Governance Institutions
• The model shows that such strategies to combat
corruption in developing nations (where
governance is weak and corruption is rampant)
are either irrelevant or have low impact.
• Hence, the model argued that the pecking order
of anti corruption policies or strategies in
developing nations where governance is weak
and corruption is rampant should be:
– Establish rule of law,
– Strengthen institutions of participation and
accountability,
– Establish citizens’ charter,
– Limit government intervention,
– Implement economic policy reforms
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20. Raising public awareness via
media and seminar(not relevant)
Justifications:
- In countries with weak governance, corrupt practices
and agents are generally well known.
- Neither the general public nor honest public officials
feel empowered to take a stand against corruptors and
even fear being victimized.(clintelism is the norm)
- Public officials may be aware of corruption but
unwilling or unable to take action because of incentive
problems in countries with weak governance.
(absences of rule of law, accountability and
transparency are incentives)
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21. Anti Corruption and Watch Dog
Agencies (not relevant)
Justifications:
• Nations with weak governance and with endemic corruption,
anticorruption agencies may extort rents. (Kenya and Pakistan)
• Neither the general public nor honest public officials feel
empowered to take a stand against corruptors and even fear
being victimized.(bribe and kickback)
• Their detection and prosecution tends to focus on lower level
functionaries (rule of law not applied to higher officials and
even in some countries like Pakistan they don’t have a mandate
to detect higher level officials and military)
• Evidences suggest that they misused as a tool of political
victimization( ex. In Kenya Malawi, sera lion, Nigeria, Tanzania
and Uganda researches attested such problem and the
ineffectiveness of these institutions) 21

22. Increasing public sector wage (negligible)
Justifications:
• may have a positive impact on petty corruption but
generally where governance is weak, wage-based
strategies are not likely to have a significant impact
on civil service corruption.
• Income from corrupt acts is dominant in amount
even in case of petty corruption;
• No or little impact in grand corruption
• In corrupt societies public positions are often
purchased by borrowing money from family and
friends.
• Raising public sector wages simply raises the
purchase price and subsequent corruption efforts
to repay loans.
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23. Decentralization
(low with medium relevance)
Justification:
• There is evidence that decentralization can be an
effective antidote to corruption, because it
increases the accountability of public authorities to
citizens.
• But decentralization creates hundreds of new
public authorities, each having powers to
tax, spend, and regulate that are liable to abuse in
environments where governance is weak.
• As the World Bank’s analysis of the Philippines in
the 1990s shows, decentralization may multiply
rather than limit opportunities for corruption if it
is implemented under the wrong circumstances.
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24. The Model’s Conclusion
• Anticorruption strategies are unlikely to succeed
unless they recognize the pecking order of
reforms.
– The first order of priorities should be establishing the
rule of law, strengthening institutions of participation and
accountability, and establishing a citizens’ charter of basic
legal rights, including access to public services standards and
limiting government interventions and implementing
economic policy reforms should be part of this package.
– The second order of priority should be clarifying the
roles and responsibilities of various orders of government
and introducing performance-based accountability to hold
government to account for service delivery performance.
– The third order of priority should be implementing
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policies dealing with detection and punishment of corruption

25. Thank you
1. Abeba Beyene PhD GSR/6318/03;
2. Alazar Amare, PhD GSR;
3. Ayenachew Aseffa PhD GSR/6319/03;
4. Berhanu Temesgen PhD GSR/6316/03;
5. Bikila Hurissa PhD GSR/6314/03;
6. Girmaw Assemie PhD GSR/6320/03;
7. Nega Wubie PhD GSR/6312/03;
8. Sewagegne Delele PhD GSR/6321/03;
9. Tamrat Getachew PhD GSR/6317/03;
10. Yetnayet Ayele PhD GSR/6315/03
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