Reintroducing large commercial banks into the oil and gas commodity trade could be a way to reduce the volume of illicit financial flows (IFFs) out of resource-rich developing countries according to a new report published by the Organisation for Economic Co-operation and Development (OECD).
The scale of IFFs out of such countries is immense. The report concedes that measurements of IFFs are “inherently rubbery and definitions vary” but argues that the problem is clearly signed by record levels of capital outflows.
The report provides evidence linking increasing IFFs with the shift in financing oil and gas commodity trades from finance provided directly by banks to indirect financing by banks of international commodity traders that are subject to fewer regulatory requirements.
Capital outflows from a selected number of developing and emerging economies (including Angola, Ghana, Kenya, Nigeria, South Africa and Zambia) reached the record level of US$100 billion in the early months of the COVID-19 pandemic, according to the report.
It estimates that illicit capital flight from the African continent amounts to some US$88.6 billion per year, or the equivalent of 3.7 per cent of the continent’s total gross domestic product.
Impact of banks
The withdrawal of large commercial banks from the oil and gas commodity trade as part of their de-risking strategies appears to have led to more unregulated activities in the physical trade and first trade (the original transaction between the national oil company and an oil trader). This is because trading firms themselves are not subject to direct regulation according to the report.
It says one question that would be worthy of further enquiry is whether – and if, so how – reintroducing large commercial banks into the oil and gas commodity trade would help improve the coverage and effectiveness of regulation, both through corporate governance practices and by external public authorities.
The intention would be to, among other things, reduce the prevalence of oil-backed lending via unregulated entities and improve the standards of performance in local and regional finance and trading companies.
The OECD report, Illicit Financial Flows in Oil and Gas Commodity Trade: Experience, Lessons and Proposals, can be found here.
Categories: Trade Based Financial crimes News