Photograph — USA Today

Kenya and Uganda have become the main hubs for illicit financial flows (IFFs) in East Africa, a new report by the Institute of Economic Affairs (IEA) in Nairobi shows. Failure to stop the flow of illicit money through their economies has seen both countries receive billions of dollars in stolen funds, particularly from South Sudan.

The loot reportedly comes from top South Sudanese military and government officials, who continue to invest in both Uganda and Kenya without restriction. On the part of Nairobi and Kampala, the report said that well-connected businessmen in the countries aid money laundering by Juba’s officials.

Also, South Sudan’s top officials engage in currency speculation. This is encouraged by the huge disparity between the exchange rates of the official Bank of South Sudan and those on the black market. The East African reports that the dollar is exchanged at a rate of almost 400 percent more on the black market than official exchange rates. 

The IEA further explained that the looted money, mostly in U.S. dollars, is regularly supplied to the black market and the proceeds from manipulation are ultimately reinvested in Kenya and Uganda.

Factors responsible

The think-tank cited Uganda’s geographic proximity to South Sudan, official closeness with the Juba’s elite and the huge gaps in the country’s Anti-Money Laundering Act 2013 and Financial Institutions Act, as reasons for its role as a channel of illicit financial flows. 

While the more advanced financial markets in Kenya create multiple access points for money launders and increase the country’s vulnerability to illicit flow of funds.

More so, the fact that South Sudan’s military officers and political leadership have large stakes in the country’s main banking institutions gives them control of and provides the necessary channels for illicit financial flows to occur.

Costs and implications

For Kenya and Uganda, becoming East Africa’s capitals for illicit financial flows puts both countries at risk of blacklisting by global financial regulators. According to the IEA, the inability to stop the flow of illicit finance through their economies means they are “at the risk of entering the watch list of risky money-laundering jurisdictions.”

A listing by the Financial Action Task Force (FATF) for instance could prove to be disastrous for both economies as it would be impossible for local banks to deal with global counterparts, slowing down investment inflows.

Meanwhile, South Sudan has seen $6.8 billion lost in illicit financial flows over the past seven years due to regulatory failure, weak state institutions and impunity by high ranking officers.

Illicit financial flows have also destabilised the nation’s economy by triggering inflation and increasing public debt and taxes. They also serve as sources of financing for the civil war, deepening Juba’s political and humanitarian crises, IEA said in its report.

Furthermore, the U.S. Department of State money laundering assessment (International Narcotics Control Strategy Report) has put the country on the watch list of dangerous jurisdictions with respect to huge illicit financial flows.

As part of recommendations to curb the problem, the IEA stated that “national institutions must be strengthened in order to provide the necessary checks and balances to deter illicit financial flow.”

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