Keeping an eye on financial transactions in Ethiopia

2021-10-08

Despite efforts to curb the problem, Ethiopia loses billions of dollars a year through illicit financial flows (IFFs). According to Global Financial Integrity, these flows averaged US$2.538 billion between 2004 and 2013. This money has been moving illegally from Ethiopia to other jurisdictions such as the United States, Europe, the Middle East, and the Far East. Global Financial Integrity identifies a range of crime types, yet attributes widespread trade mis-invoicing for about 80% of the losses due to IFFs.

A 2018 study from Transparency International revealed that these flows had resulted in an average annual loss in Ethiopia’s GDP growth of 2.2%. Yet only once it concluded its first National Risk Assessment (NRA) in 2016, with the help of the World Bank, was there a comprehensive understanding of the sources and risks of IFFs in Ethiopia. Since then, the NRA has identified more than 20 criminal activities as major sources of IFFs.

Prior to this, Ethiopia had prioritised efforts to curb IFFs through legislative proclamations. In 2009, Ethiopia enacted a proclamation on the Prevention and Suppression of Money Laundering and Financing of Terrorism, which was revised in 2013. Among others, the proclamation provided for the establishment of a Financial Intelligence Centre (FIC) that would collect, analyse and report information concerning IFFs.

The FIC was accepted into the Egmont group in 2019. The group, comprising 164 Financial Intelligence Units, provides a platform for the secure exchange of expertise and financial intelligence on combating money laundering and terrorist financing. In 2019, the country further enacted a proclamation on the Prevention and Suppression of the Financing of the Proliferation of Weapons of Mass Destruction. This was a result of the 2018 FATF recommendation, which was implemented under the auspices of the Eastern and Southern Africa Anti-Money Laundering Group, of which Ethiopia is a member.

A total of 137 cases of suspicious financial transactions involving billions have been reported to the federal police commission by the FIC since 2015

Another recent measure that Ethiopia put in place is demonetisation. Here most of the country’s currency notes were removed from circulation and replaced by new ones at the end of 2020. The government said the change of currency was meant to curb IFFs. The National Bank of Ethiopia (NBE), an institution that controls the exchange rate, the import and export trade, and the activities of the commercial banks, has also issued several directives intended to limit IFFs.

Mignot Denekew, a Senior Prosecutor of financial crimes in Ethiopia, says NBE directives on cash withdrawal and transfer limits and local and foreign currency holdings have helped reduce suspicious financial transactions from certain towns. These include Togo-Wochale and Moyale, which border Somaliland and Kenya respectively, and are notorious for contraband smuggling and money laundering.

In 2019 and 2020, Ethiopia was removed from both the Financial Action Task Force (FATF) and European Union’s grey lists, which identify jurisdictions under increased monitoring and consequent commitments to resolve deficiencies that enable IFFs. Despite this progress, there are lingering gaps in Ethiopia’s efforts to curb illicit financial flows from both prevention and prosecution perspectives.

Firstly, as Temesgen Lapiso, Director-General of the Organized and Transnational Crimes Prosecution Directorate General, notes, Ethiopia has not developed a comprehensive policy and strategy aimed at regulating syndicate operations that facilitate the flow of a large share of foreign currency through the black market. Mignot concurs. She also points out that exiting efforts are not complemented with capacity-building activities aimed at equipping border control and the police with advanced skills and technologies to intercept and investigate IFFs.

The FIC reports all financial transactions that exceed 300 000 Ethiopian birr as suspicious

Secondly, Ethiopian authorities don’t always follow the money. This is usually the case in relation to enforcing obligations to declare incoming and outgoing foreign currencies. As per a 2017 NBE directive, someone bringing over US$1 000 or equivalent foreign currency into Ethiopia must declare it to customs and convert the same amount to Ethiopian birr. An exception is if they can show that they will leave the country within 30 days of the entry date.

As yet, there is no mechanism to track whether the foreign currency brought into the country is exchanged to Ethiopian birr legally at the bank or illegally on the black market. Furthermore, as the obligation to declare doesn’t require presenting the foreign currency to customs for verification, anyone could, Mignot notes, enter a false declaration intending to take the same amount of money out of the country in 30 days.

Thirdly, the Ethiopian police encounter several challenges in the investigations of suspicious financial transactions reported by the FIC. According to an internal report of the Organized and Transnational Crimes Directorate General of the Attorney General Office, 137 cases of suspicious financial transactions involving billions have been reported to the federal police commission by the FIC since 2015. None of these cases were meaningfully probed by the police due to difficulties in identifying evidence to advance the investigations.

Following this, the Attorney General ordered fresh investigations in July 2021. The results are still to be seen. However, given that the Ethiopian police have limited capacity and expertise to investigate financial crimes and that some of the reported transactions are about six years old, tracing their source and destinations is likely to prove difficult.

The Ethiopian police don’t conduct timely investigations on suspicious financial transactions reported by the FIC

In addition, prompting the police to investigate all reported suspicious transactions thoroughly, the Attorney General’s Office noted that the lack of proper investigation in the past led to large-scale impunity for the perpetrators. This may encourage others to participate in financial crimes, believing they can get away with it.

From the law enforcement perspective, Temesgen cautions against blaming the police for these limitations. The manner in which the FIC reports suspicious financial transactions to the police also requires improvement.

The FIC reports all financial transactions that exceed 300 000 Ethiopian birr as suspicious, even if the transaction involves wages paid by a company. This practice has, Temesgen says, led to an overwhelming number of reports containing limited or no analysis for the police to initiate proper investigations.

In the exercise of their current due diligence, financial institutions could incorporate a more sophisticated categorisation of suspicious financial transactions. This may then also be linked to tracking import and export activities that commonly involve trade mis-invoicing. Thus, the FIC reports that are sent on for further investigation may then contain adequate detail leading to investigations.

Tadesse Simei Metekia, Senior Researcher, ENACT, ISS Addis Ababa

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