2015 Holt Distinguished Lecture Series

The University of Pennsylvania Law School

September 30, 2015

  1. Distinguished ladies and gentlemen, it is indeed an honour to be back here at UPENN to deliver this year’s Holt Lecture at the Law School which has since the 19th century distinguished itself as the bedrock of the American legal profession. First, I’ll like to thank Leon and June Holt for their vision. This lecture series has hosted great minds like Larry Summers and Jane Harman and is indeed a worthy legacy for this wonderful couple to bequeath so generously to the education of the younger generation of lawyers here at Penn Law School.
  1. Let me also extend my gratitude to the Dean of the Law School, Professor Theodore Ruger for extending the invitation to me to give this lecture, to my good friend and sister, Rangita da Silva, for insisting that I come and to his entire faculty and staff for the warm reception I’ve enjoyed since arriving here. I’m also grateful to you Penn Law students and students from other faculties– I’m a lover of youth and I’m always delighted to be in the company of the younger generation. I’m pleased that you’ve found time to turn out in such great numbers.
  1. My talk today is titled – Licit and Illicit financial flows from developing countries: are lawyers heroes or villains? Let me begin by setting some context here. Many of you may be aware of the Millennium Development Goals (or the MDGs as they are better known globally). Well for the benefit of those who are not familiar with this term, the MDGs are a set of 8 transformational goals identified as far back as year 2000 by the international development community (including the UN, governments of several countries, the business community, and the international civil society) as the key areas of focus for improving the quality of life in developing countries like my home country Nigeria. The MDGs were focused on reducing poverty, maternal and child mortality, and improving primary education and sanitation, amongst others.
  1. The MDGs which had a 15-year mandate will expire this year 2015 and while significant progress has been made towards the targets set in 2000, a lot still needs to be done. Hundreds of millions of people still live in extreme poverty and hunger, maternal health mortality is still high, 60 million children are out of school globally, global CO2 emissions have increased and so on. To this end, a new set of goals – to be known as the Sustainable Development Goals (SDGs) have just been adopted by the United Nations and become applicable in January 2016. With 17 proposed goals and 169 targets, the SDGs this time are universal. They apply to all countries not just developing countries and will serve as the focal point for governments to hinge their policies to end poverty and hunger, ensure access to affordable and sustainable energy for all, build resilient infrastructure, combat climate change and its impact, and promote the rule of law and equal access to justice for all, amongst others.
  1. But the question now is how will countries finance the SDGs? Unlike the MDGs which were largely funded through Official Development Assistance (ODA) from developed countries, reaching about US$135.2 billion annually by 2014, the much broader and more ambitious SDGs require a lot more resources to achieve its set targets by the year 2030. According to the Report of the Global Commission on the Economy and Climate (GCEC), infrastructure investments – which account for about 80 percent of the total financing of the SDGs globally – will require over US$6 trillion per year, totaling US$90 trillion over the next 15 years till 2030. What this essentially means is that the global economy must spend the equivalent of about 5 years of the total Gross Domestic Product of the USA, to meet infrastructure targets of the SDGs.
  1. However, current global spending on infrastructure is about US$1.7 trillion a year, so we are talking about a huge funding gap that is almost 3 times the current spending. Much of this funding gap will have to be borne by developing countries since they account for about 60 percent of the global infrastructure needs, and current levels of ODA are too meager to bridge the gap. It is expected that between 50 and 80 percent of infrastructure financing under the SDGs will come from developing countries’ own resources, according to the World Bank 2013 Report on financing for Development Post-2015. So this is going to be a monumental financing challenge for developing countries who must now look inwards to mobilize resources domestically and see how they can leverage external resources.
  1. But it is not an impossible task. In 2012, developing countries mobilized resources of about US$7.7 trillion domestically and there is scope for even more. Studies by Multilateral Development Banks and global consulting firms like McKinsey have shown that significant resources can be mobilized by developing countries through: plugging leakages and gaps in tax collection, improving the efficiency of public spending, and curbing all forms of illicit financial flows and corruption. With such resources, they can finance the SDGs by using their domestic resources to leverage private capital. An estimated $110 trillion is in the hands of private institutional investors who hold only $4 to $5 trillion in infrastructure assets. If domestic resources could be adequately mobilized, they could be used to leverage this vast pool of private resources through PPPs, guarantees, and other vehicles. The question then becomes how can developing countries improve their domestic resources? What are the possible pools of resources? This brings me to my talk today on licit and illicit financial flows and what they can contribute.
  1. So what are licit and illicit financial flows? As the definition suggests, licit financial flows are monies that are legally earned, transferred, and utilized. Within the context of a global financial system, they could include trade flows, Foreign Direct Investment (FDI), and remittances from workers abroad, which together are a great thing for the recipient economy and need to be encouraged. Illicit flows on the other hand are the exact opposite. They are monies that are illegally or corruptly earned, transferred or utilized. They typically originate from four sources:
  2. Commercial Tax Evasion, Trade Misinvoicing and Abusive Transfer Pricing, which in this context occurs mainly through the circumvention of capital controls and taxes by global companies. As far as tax evasion is concerned, please note that I am not talking about legal tax deductions allowed by law in various countries including here in the USA. We may not like them but several countries tax systems do contain loopholes that allow certain legal deductions which may also be lodged abroad. I am talking of illegal activities by large corporates and high net-worth individuals to escape a tax liability by concealing revenues from tax authorities. If you recall, such concealment came to light during the recent 2008/2009 financial crisis when countries were severely cash strapped and started searching for funds. Germany unearthed $5 billion of tax invasion in Switzerland and Luxembourg.
  3. We have trade misinvoicing which is the act of misrepresenting the price or quantity of imports or exports in order to hide or accumulate monies in other jurisdictions. The motive here could be to evade taxes including customs duties, or even launder money. A transfer price may be manipulated to shift profits from one jurisdiction to another, usually from a high tax jurisdiction to a lower one.
  4. Several large companies, particularly multinationals are guilty of these practices, and in fact,  they are by far the  single biggest form of illicit money flows from developing nations to developed ones, representing between 60 and 65 percent of total flows, according to the Washington-based think tank Global Financial Integrity (GFI);
  5. There is the theft of natural resources, which occurs when a country’s mineral and oil wealth, is brazenly stolen and illegally sold for gain in international markets, and this has been rampant in Sub-Sahara Africa. I’m sure you all know about the blood diamonds from Sierra Leone, which has cost the country significant amount of resources. In Nigeria also, we have been experiencing significant revenue shortfalls as a result of oil theft and pipeline vandalism. At one point we were losing about 100,000 barrels of oil per day to theft from onshore and swamp operations alone. When the pipelines are vandalized and the oil stolen, it leads to complete shutdown of entire pipelines carrying up to 400,000 barrels per day. Now, let’s do the math and think of the billions of dollars we lose annually;
  6. We have Bribery and Theft, which occurs when public servants demand payment under the table for rendering a service, and when a country or a State’s budgetary resources are illegally diverted through inflated contracts that are siphoned off abroad or at home by policy makers, politicians and civil servants – paraphrased in Nigeria as “evil servants”. According to the OECD, more than USD 1 trillion is paid each year in bribes to public officials in both developing and advanced countries in exchange for advantages in international business; these are large numbers indeed.
  7. And lastly, we have the proceeds of criminal activities like drugs and narcotics trade, counterfeiting, racketeering, contraband, and other forms of crime.
  8. All-in-all, the cross-border flow of the global proceeds from criminal activities, corruption, and tax evasion is estimated at between $1 trillion to $1.6 trillion annually, according to Global Financial Integrity (GFI), a Washington DC based anti-corruption think tank. GFI also conservatively estimates that about $991.2 billion left developing countries in illicit financial flows in 2012 alone representing roughly eight times the amount of official development assistance flowing in from advanced countries to support these economies, according to OECD estimates. In Africa, the High Level Panel on Illicit Flows chaired by former President Thabo Mbeki of South Africa estimates that illicit flows from Africa can be as much as US$50 billion per annum, which is nearly twice the amount of ODA the continent receives.
  9. So distinguished ladies and gentlemen, let me put things into context. With a population of about a billion people, it means that Illicit financial flows are costing the African continent roughly US$ 50 per capita or per person each year. This is a continent where about 415 million people (or roughly 47 percent of the population) are extremely poor, that is they live on less than US$1.25 per day, according to the latest poverty statistics of the World Bank. So imagine we develop a social safety net program that targets Africa’s poor and invest this US$50 billion into it. Based on simple calculations, we will be able to channel an extra $125 dollars to each of these poor people yearly, pulling many of them out of poverty. With this, I’m most certain that we will come close to meeting the number one Sustainable Development Goal of ending extreme poverty as defined on the African continent. I’m also sure we can make similar arguments using data from other parts of the developing world.
  10. So typically, one could argue that illicit flows are curtailing financial resources available for infrastructure investment; are preventing the establishment of schools and hospitals; are causing fewer jobs, and ultimately preventing poverty eradication. Under these circumstances, illicit financial flows are a great injustice to developing countries, many of which may not even have a sophisticated justice system to deal with the problem.
  11. So the question now is how do we address these illicit financial flows which are hampering the economic and social progress of several developing countries? This is where I want to bring in the main part of my talk today: Are Lawyers Heroes or Villains? Without a doubt, lawyers play a key role in the world of illicit financial flows. Now I do not mean to be disrespectful of the legal profession, but several studies (including some recent by the OECD) have shown the widespread use of the legal profession to carry out transactions that quite often lead to illicit financial flows. This role is even more prominent in commercial tax evasion and trade mis-pricing by foreign companies operating within developing countries and bribery and theft by government officials, which accounts for the bulk of illicit flows as I mentioned earlier. Given their expertise, lawyers help their clients to identify tax havens, create or exploit illegal loopholes in tax regimes, and hide the identities of beneficial owners of companies – a rampant practice in money laundering, amongst other activities.
  12. So this is a moral question: As a lawyer should you be helping your clients find legal ways to do the illegal, especially as these illegal activities are retarding the development of countries? I know many of you may argue that even established criminals need lawyers. For instance, the law allows cold-blooded murderers to be defended by lawyers in the court of law. Some may also view this as a moral dilemma. But in my own opinion, such instances arise “after-the-fact”, that is the crime is already committed, and the involvement of a defense lawyer becomes merely circumstantial and as such may not necessarily question the lawyer’s morality.
  13. But in the case of illicit financial flows, more often than not it is lawyers that provide the apparatus for their clients to do the illegal, or better put, to serve the injustice to developing nations. Yet, a lawyer’s dealings should always be just and fair, in the words of English Poet William Cowper. Furthermore, according to Martin Luther King Jnr “Law and order exist for the purpose of establishing justice and when they fail in this purpose they become dangerously structured dams that block the flow of social progress”,. This is what we are experiencing now as far as illicit flows are concerned.
  14. I can also give you more examples relating to bribery and corruption, some of which you may already know of and which I have written about in my book “Reforming the Unreformable: Lessons from Nigeria”. Some of you must have heard of the seizure and freeze by the US government of $458 million in Abacha corrupt assets. Over the five years of General Abacha’s rule of Nigeria from 1993 to 1998, an estimated $3 – $5 billion of Nigeria’s public assets were looted and sent abroad by Abacha and his associates. To put things in perspective, these sums of monies can provide anti-retroviral therapy for 2–3 million people infected with HIV/AIDS over a ten-year period, or supply insecticide treated bed nets for over 200 million pregnant women and children, using unit cost estimates provided by the World Bank. Knowing fully well that these monies were corruptly stolen from Nigeria, lawyers have been working with the Abacha family to prevent the seizure and repatriation of these monies back to Nigeria.
  15. We also had the case of the former Governor of Delta State in Nigeria, James Ibori, whose London-based lawyer Mr. Gohil formed several shell companies and helped launder millions of pounds sterling stolen from the state government’s coffers to the United Kingdom.
  16. With regards to the exploitation of natural resources developing countries often find themselves at a disadvantage in crafting agreements that define the way and manner in which these resources are to be exploited and the share of resources going to each side. Multinational companies have the best lawyers in the world to help them craft agreements that are exploitative of these developing countries. There is a complete asymmetry of knowledge and capacity on the part of developing countries locking them into years of lost revenue.
  17. So distinguished ladies and gentlemen, for years as I have looked at these matters from my financial vantage point, I have often wondered, in this business of illicit financial flows, are the lawyers that craft these agreements heroes or villains? Are they just doing their professional job or has something gone awry? Is there a moral dilemma here or is this just the worries of ignorant economists and financial analysts and civil society placing an undue moral burden on the legal profession? I do not have the answer ladies and gentlemen but I could not pass up the opportunity of addressing lawyers in training and getting their view on these question and perhaps, just perhaps, influence the thinking of a generation of lawyers on these issues. Clients involved in this business will probably see their lawyers as heroes and you may argue that finding legal ways to do the illegal is an important part of the legal profession. In the words of Anglo-Irish Statesman Edmund Burke, “morality is more important than laws, because law depends on morality”. But this again depends on our values.
  18. First can lawyers stand for agreements equitable and fair to both sides in these natural resource exploitation contracts? Can lawyers refuse to draw up contracts that underpin or support trade mispricing- under or over invoicing? Can lawyers refuse to file cases that assist those clearly known to have stolen government money? Let me make haste here to say not those falsely accused of doing these things but those actually indicted and sentenced for corruption, theft and money laundering but are still trying to block access to illegally acquired funds? Will there be a day when an association of lawyers- such as lawyers without borders, an admirable organization- will come together and say enough is enough. Instead of supporting the leakages of these funds we shall actually fight to help Least Developed Countries bring the monies back!! Ladies and gentlemen, remember a lot is at stake. We are talking about monies that can finance education, health for the vulnerable and render services to help eradicate poverty.
  19. What I am trying to say here in conclusion is that the legal profession has an interesting legal, economic and financial role to play in helping Least Developed Countries achieve the Sustainable Development Goals. My question is how do you assess this role and will the legal profession rise up to the challenge in the decade to come?
  20. Let me conclude with these thoughts from Abraham Lincoln: “Let no young man choosing the law for a calling for a moment yield to popular belief: resolve to be honest at all events; and if in your own judgement you cannot be an honest lawyer, resolve to be honest without being a lawyer”. Thank you for listening.