International Journal of Innovation and Economic Development

ISSN 1849-7020 (Print)

Volume 3
ISSN 1849-7551 (Online) Issue 4
October, 2017
URL: http://dx.doi.org/10.18775/ijied.1849-7551-7020.2015.34.2002 Pages 19-33
DOI: 10.18775/ijied.1849-7551-7020.2015.34.2002

Impact of Illicit Financial Flow on Economic

Growth and Development: Evidence from
Nigeria
1Amah Kalu Ogbonnaya, 2Okezie Stella Ogechuckwu

1,2
Department of Accounting Michael Okpara University of Agriculture, Umudike

Abstract: This paper assessed the impact of illicit financial flow on economic growth and
development in Nigeria. Data was sourced from the statistical bulletin of the Central bank of
Nigeria and Global Financial Integrity estimates of illicit financial flows. Time series data from
1980-2015 was used. The variables were tested for unit root and co-integration and were
found to have a long run relationship. The results further indicated that illicit financial flows
had a significant impact both on economic growth and development. The study among others
recommends that government of Nigeria and indeed other African countries must lobby
developed nations to adopt control so that individuals who move funds out of Nigeria into
tax havens and secrecy jurisdictions can be exposed. It was also recommended that African
states and indeed Nigeria, in particular, must develop customs capacity in order to fight the
massive outflows of capital through illicit practices.

Keywords: Illicit financial flows, Economic Growth, Globalization, Cross-Border

1. Introduction
Since the debt crisis in the early 1980s, attention has been focused on the outflow of capital
resulting from distortionary domestic policies and political instability mainly in the developing
nations. The rate at which huge sums of money are transferred out of developing countries
illegally has become quite alarming. Consequently, cross-border illicit financial flows (Hereafter
called IFFs) which serve to conceal illegal activities are no new phenomenon. With the growing
globalisation of financial markets, the economic and political significance of these illegal
activities has grown (GFI, 2013).

The issue of illicit financial flows ranks top on the international agenda, affecting both
industrialized and developing countries. Though, the current scale of IFFs originating in
developing countries cannot be measured. Precisely, it is believed that the value has been
worth more than official development assistance from Organization for Economic Cooperation
and Development (OECD) donor countries according to Global financial integrity report. These
practices occur in all countries and are quite damaging both to the social and economic life of
the nations and much more severe to the developing countries whose resources are small.
Consequently, the issue of IFFs occupies a prominent place in development policy discourse of
nations calling for a higher quality of national regulations, proper implementation and
compliance with international best practices.

The concept of illicit financial flows is perceived by some as being vague and imprecise and its
content controversial. As noted by the UNECA, it is “marred by a lack of terminological clarity,
which somewhat limits the emergence of effective policy options”. Illicit financial flows have
been defined in different ways. It is the cross-border movement of money that is illegally

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International Journal of Innovation and Economics Development, vol. 3, issue 4, pp. 19-35, October 2017
 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

obtained, transferred, or used. In an OECD (2010) report, IFFs is explained to mean cross-
border capital transactions that either conceal illegal activities or facilitate them. Illicit financial
flows are essentially generated by methods, practices and/or crimes aiming to transfer
financial capital out of a country in contravention of national or international laws. In practice,
illicit financial flows can be as simple as a transfer from a private account abroad evading taxes
in complex schemes involving criminal networks that hide ownership.

Council for International Development (2014) defined illicit financial flows as the transfer of
illegally earned assets or the hiding of legally earned assets to facilitate illegal tax evasion.
Global Financial Integrity (2013) says IFFs are activities that involve the transfer of money
collected through corruption, bribery, tax evasion, criminal activities and transactions involving
contraband goods. Kar and Freltas (2012) opine that IFFs are funds that are illegally earned,
transferred or utilised, and cover all unrecorded private financial assets by a resident in
contravention of applicable laws and regulatory frameworks. In Baker's (2005) view, illicit
financial flows are termed as ‘dirty money' where dirty money is any money illegally earned,
transferred or utilised. He argues that if it breaks any law in its origin, movement or use, then
it is dirty money. In a seminar contribution to the dirty money literature, Reutter and Truman
(2004) do not define dirty money explicitly instead they say it is the conversion of criminal
income into assets that cannot be traced back to its underlying crime.

1.1 Problem Statement

Existing literature suggests that illicit financial flows involve the following practices: money
laundering, bribery by international companies, tax evasion and trade mispricing. Whichever
the case, illicit financial flows robs developing countries of resources that could be used to
finance essential public services ranging from security and justice to basic social services such
as health and education thus weakening their financial systems and economic potential. "The
impact of this is indeed staggering especially for Africa and Nigeria in particular as it drains
foreign reserves, heightens inflation, reduces tax collection, cancels investment and
undermines free trade", - says Saheed and Ayodeji (2012) quoting GFI, 2010. Besides
removing resources that could otherwise be used for poverty alleviation and economic growth,
it tends to restrict the capacity and ability of affected countries to mobilize domestic resources
and access foreign capital necessary to finance economic growth and development.
Consequently, IFFs contributes to the retardation of economic growth and development of
developing countries (Saheed and Ayodeji, 2012).

1.2 Aim of the Study

The issues raised above makes pertinent this study. Hence, the work seeks to assess the
impact of illicit financial flows on Nigeria's economic growth and development. Specifically, the
paper will assess:
1. The impact of illicit financial flows on economic growth in Nigeria
2. The impact of illicit financial flows on per capita income in Nigeria
To achieve the above objectives, two Research questions are raised
1. To what extent is Nigeria's economic growth affected by Illicit financial flows?
2. How does Illicit financial flow impact per capita income of Nigerians?
In achieving the Objectives of the study and providing answers to the research question, the
following hypotheses will be tested:
1. HO: There is no significant impact of illicit financial flow on economic
growth in Nigeria.
2. HO: There is no significant impact of illicit financial flow on per capita
income of Nigerians.

The paper has five sections. Section I is introduction followed by section II, focusing on
literature review. Section III is the methodology of the study, section IV summarizes the

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

findings and discussions while section V draws some conclusions and offers some policy
recommendations.

2. Literature Review
Illicit financial flows take many forms and circulate through a global maze in which ownership
is obscured while profits, assets, and taxes are lost. In a groundbreaking report which uses
World Bank and IMF data to estimate the quantity and patterns of illicit financial flows coming
out of developing countries, the Global Financial Integrity (GFI,2010) documented Nigeria as
the leading source of illicit financial outflow from sub-Sahara Africa during the years 2000 to
2009. The report showed that developing countries lost USD 903 billion in illicit outflows in
2009. While this marks a significant decrease from the USD 1.55 trillion they lost in 2008, the
global financial crisis accounts for the vast majority of the decrease, rather than improved
governance or economic reforms (www.gfintegrity.org). According to that report, developing
countries lost between USD 723 billion and USD 844 billion per annum on average through
illicit flows over the decade ending 2009. (www.controlcapital.net)

Despite the onset of the global financial crisis in the same period, illicit flows increased in
current dollar terms by 15.19% per annum from USD 386 billion at the start of the decade to
USD 903 billion in 2009 (www.controlcapital.net). Adjusted for inflation, illicit financial flows
still grew by 10.6% making the developing world lose USD 859 billion in illicit outflows in 2010,
an increase of 11% over 2009. The report also revealed that illicit financial flows have
increased in every region of developing countries. The real growth of illicit flows by regions
over the period of study is shown as follows: Africa 23.8 percent, the Middle East and North
Africa (MENA) 26.3 percent, developing Europe 3.6 percent, Asia 7.8 percent, and Western
Hemisphere 2.7 percent. The group also ranked Nigeria as the 7th among the top 10 countries
with the highest measured cumulative illicit financial outflows between 2001 and 2010 with
the list showing China as first with $2.74 trillion followed by Mexico with $476 billion, others
are Malaysia: $285 billion, Saudi Arabia: $210 billion, Russia: $152 billion, Philippines: $138
billion, Nigeria: $129 billion, India: $123 billion, Indonesia: $109 billion, United Arab Emirates:
$107 billion (www.africanoutlookonline.com).

Global Financial Integrity (2013) assert that the drivers and trends of the illicit flows are seen
in Trade mispricing which was found to account for an average of 80 percent of cumulative
illicit flows from developing countries over the period of 2001-2010 and which is also the major
channel for the transfer of illicit capital from China and Mexico. China continued to lead the
world in illicit outflows, losing $420.4 billion in 2010 as bribery, kickbacks, and the proceeds
of corruption continued to be the primary driver of illicit financial flows from the Middle East
and North Africa, while trade mispricing was the primary driver of illicit financial flows in the
other regions (iff.gfintegrity.org). However, it was further reported that Qatar, Kuwait,
Venezuela, and Poland were all displaced from the top-10 illicit financial flow ranking, and were
replaced by the significantly poorer countries like Philippines, India, Indonesia, and Nigeria
(www.africanonline.com).

The vehicle for sustainable development is the mobilization and proper utilization of domestic
resources. In development parlance, 'financing for development' is about increasing resources
while 'good governance' is about deploying them to meet development needs. However, illicit
financial flow phenomenon has marred the growth and development of nations where they
occur, especially the developing countries to which Nigeria belongs. In practice, illicit financial
flows range from something as simple as a private individual transfer of funds into private
accounts abroad without having paid taxes, to highly complex schemes involving criminal
networks that set up multi-layered multi-jurisdictional structures to hide ownership. The
causes of illicit financial flows over the years have been traced to weak financial management
systems, political and macroeconomic instability. GFI (2010) opines that the massive flow of
illicit money out of Africa is facilitated by a global shadow financial system comprising tax

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake

foundations, trade mispricing, and money laundering techniques. The impact of these
structures and the funds it shifts out of Africa is staggering. It drains foreign reserves,
heightens inflation, reduces tax collection, cancels investment, and undermines free trade. It
has its greatest impact on those at the bottom of the income scales in their countries, removing
resources that could otherwise be used for poverty alleviation and economic growth.

Gamuchirai (2014) reviewing the report of United Nations Economic Commission for Africa
(UNECA), an Ethiopian-based UN agency whose mandate is to foster intra-regional integration
and promote Africa's development, classifies illicit financial flows in the following broad
categories:

i. Proceeds of corruption: This is described as misappropriated public fund usually transferred

and invested illegally in foreign banks by senior public officials with little or none of the ill-
gotten wealth invested in local banks in order to avoid detection by the authorities.

ii. Trade mispricing: This is a popular way of transferring illicit funds abroad. It is mostly related
to changes in volumes and value of the trade. This form of illicit financial flows is practised
mainly by multinational corporations due to their size, presence and influence in some
countries. Multinational corporations operating in countries with both high and low tax rates.
Their multi-country presence enables them to carry out inter-subsidiary transfers between
countries, which facilitate illicit transfers of funds abroad. According to UNECA, illicit financial
flows from Africa measured through trade mispricing are highly concentrated in a few sectors,
notably the extractive and mining industries. A report by UNECA highlights that in 2000–2009,
56% of the illicit financial flows from Africa arose from mispricing and smuggling of oil, precious
metals and minerals, ores, copper, iron and steel.

iii. Revenues from illegal resource exploitation: Criminal activities have long been linked to
illicit financial flows through cross-border smuggling and trafficking. This has become of
concern to security agencies across the globe and in Africa. Growth in international commerce
and transport coupled with weak enforcement capacity and corruption has made African
countries a conduit through which illegally-extracted commodities are exported abroad
illegally. An example of the illegal resource exploitation that promotes illicit financial flows in
Africa is the illegal trade in wildlife and wildlife products. The United Nations Office on Drugs
and Crime (UNODC) estimates that in 2011 between 5,600 and 15,400 elephants were killed
in East Africa, translating to between 56 and 154 metric tons of ivory destined for Asian
markets. The illegally-harvested ivory was estimated to have generated US$ 31.5 million worth
of illicit funds.

iv. Tax evasion: Transfer pricing is usually used to evade tax. Most multinational corporations
seek to maximize profits artificially through maximizing expenses in high tax jurisdictions and
maximizing revenue/income in low tax jurisdictions. Thus, because transfer pricing enables
corporations to minimize tax payments illegally and transfer the funds abroad, this constitutes
illicit financial flows. According to Global Financial Integrity (2013), the proceeds of commercial
tax evasion perpetrated through trade mispricing account for an average of 54.7% of
cumulative illicit flows from developing countries.

2.1 Trend Analysis of Illicit Financial Flows from Nigeria

The scale and regional composition of IFFs out of developing countries with particular reference
to Nigeria is a matter of controversy. In Organization for Economic Cooperation and
Development (OECD), there is a consensus that these flows not only surpass official
development assistance but even the sum of those aid flows and foreign direct investment
(OECD, 2013). Worthy of note is the marked growth in IFFs in all developing regions to date,
though at different rates. For the 2002‒2011 period, GFI concludes that the Middle East and

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

North Africa (MENA) region registered the fastest trend rate of growth in illicit outflows (31.5
percent per annum) followed by Africa (19.8 percent), developing Europe (13.6 percent), Asia
(7.5 percent), and the Western Hemisphere (3.1 percent), (Kar and LeBlanc, 2013). Existing
research shows that African countries have experienced massive outflows of illicit capital
mainly to Western financial institutions. In a GFI report, it was shown that over a 39 year
period between 1970 -2008, Africa lost an astonishing US$854 billion in cumulative capital
flight—enough to not only wipe out the region's total external debt outstanding of around
US$250 billion (at end-December, 2008) but potentially leave US$600 billion for poverty
alleviation and economic growth. Instead, cumulative illicit flows from the continent increased
from about US$57 billion in the decade of the 1970s to US$437 billion over the nine years
2000-2008 (www.aefjn.org).
Dev (2015) opines that the magnitude of illicit outflows from Africa with Nigeria at the forefront
strongly suggests that the region can boost the effectiveness of the external aid and other
transfers that it receives by curtailing the leakage of illicit capital. The continent should adopt
a range of policy measures to counter this phenomenon that is sequenced and implemented
in a manner best suited to the nature and sources of each country's illicit flows. Carefully
designed measures to strengthen governance, transparency and regulatory oversight can
significantly reduce the volume of illicit outflows. With the right reforms, Africa and indeed
Nigeria is poised to see an increase in government revenue generation and effectively allowing
additional resources to be devoted to poverty alleviation and improving the business climate
for sustainable economic growth.

2.2 How illicit Financial Flows Hampers Economic Growth and Development
Economic growth and development are key policy objectives of any government. The Nigerian
economy is an open economy with international transactions constituting an important
proportion of her aggregate economic activity. Consequently, the economic prospects and
development of the country, like many developing countries, rest solidly on her international
interdependence. The term economic growth is described as the positive and sustained
increase in aggregate goods and services produced in an economy within a given period. When
measured with the population of a given country, economic growth can be stated in terms of
per capita income such that the aggregate production of goods and services in a given year is
divided by the population of the country in the given period. Economic growth can also be
stated in nominal or in real terms. Hence, when the increase in the aggregate level of goods
and services is deflated by the rate of inflation, we have the real economic growth, otherwise
when measured without deflating; it is called nominal economic growth.

Chisman (1984) sees development as a process of societal advancement, where improvement

in the well-being of people is generated through a strong partnership between all sectors,
corporate bodies and other groups in the society. Development is not only an economic
exercise but also involves both socio-economic and political issues and pervades all aspect of
societal life. Naomi (1995) believes that development is usually taken to involve not only
economic growth but also the notion of equitable distribution, provision of health care,
education, housing and other essential services all with a view to improving the individual and
collective quality of life. Considering these various views, development encompasses social,
economic, cultural and political development.

The direct economic impacts of illicit financial flows on developing countries cannot be precisely
quantified. It may, however, be considered not only as negative but also of grave consequence.
These outflows pose serious concern, as evident by inadequate growth, high levels of poverty,
resource needs and the changing global landscape of official development assistance. There is
broad consensus in the extant literature that IFFs deprive the affected countries of appreciable
amounts of investment funds, which could otherwise spur economic growth and usefully
complement foreign loans and aid payments in funding the public sector. Global Financial
Integrity carried out a joint study with the African Development Bank and found that Africa

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

was a net creditor to the world to the tune of up to $1.4 trillion over the period from 1980
through 2009, with the most conservative estimate of the capital loss being around $600 billion
(Saheed and Ayodeji, 2012). Thus, despite the inflow of international aid into every region of
Sub-Saharan Africa, outflows of illicit capital continue to result in a net loss of resources that
overwhelms any positive economic effects of recorded capital inflows. Recognizing the
particularly damaging effects of illicit financial flows on developing countries, leaders meeting
at the Fourth High-Level Forum on Aid Effectiveness in Busan in 2011 agreed to“ accelerate
individual efforts to combat illicit financial flows by strengthening anti-money laundering
measures, addressing tax evasion, and strengthening national and international policies, legal
frameworks and institutional arrangements for the tracing, freezing and recovery of illegal
assets. This includes ensuring enactment and implementation of laws and practices that
facilitate effective international co-operation” (OECD, 2011a).

Combating illicit financial flows is a shared agenda, requiring action by both developed and
developing countries. Illicit flows are often a symptom of a deeper governance failure and just
one element of a wider set of governance challenges faced by many countries. High levels of
corruption combined with weak institutions – and sometimes illegitimate regimes – are drivers
for such outflows. Ultimately, the fight against illicit flows from the developing world must
focus on building responsive, effective institutions which deliver services to their population.
This will encourage citizens and companies to engage in legal activities, report their earnings
and pay their taxes and dues in accordance with national laws.

2.3 Others’ view on IFFs, Economic Growth and Development

There has not been much study regarding illicit financial flow and its impact in Nigeria. Most
studies carried out have looked at Africa as a whole and came up with the following. Nkurunziza
(2013) investigated illicit Financial Flows as a constraint on poverty reduction in Africa, from
his analysis he concluded that if Africa is to successfully fight against its high level of poverty,
it will need to mobilize more resources to invest in poverty-reducing programs. He was of the
opinion that to fight this ugly trend African leaders need a strong political will to move forward
and having known the amount that has left this continent over the years, it will be important
to find ways of attracting them back.

Quentin and Alessandra (2011) examined corruption and illicit financial flows; they said that
IFF is clouded by lack of terminological clarity, which obstructs the effective policy debate
emerging in response to the financial crises, as the accepted wisdom of the deregulated global
financial market. They assert that illicit financial flow is intimately linked to large-scale
corruption and the acknowledgement of this is important in order to clarify the extent and
ways in which corruption may be tackled via policies thereby stopping illicit flows. Finally,
policy should go beyond anti-money laundering policies and embrace more fully other polices
to tackle illicit funds, but also more decisive effort by rich countries that shelter secrecy havens
or the proceeds of grand corruptions.

AU/ECA Panel 2011 did a work on illicit financial flows from Africa. They examined the nature,
magnitude and developmental challenges of IFFs from Africa, based on disparities in national
income accounts and trade date (trade mispricing). They also explored the extent to which
financial secrecy among Africa countries had heightened the risk of IFFS. They used the World
Bank Residual method, and International Monitory Fund (IMF) Direction of Trade Statistics
(DOTS) based Trade mispricing method. Despite the significant variations, it was concluded
that IFFs from the continent have been increasing over time and oil exporting countries tend
to top the list of African net creditors to the world.
Dev and Devron (2008) conducted an investigation of illicit financial flow from Africa Hidden
resource for development over a period of 39 years. The paper analyzed and used the World
Bank Misinvoicing model to estimate the volume of flows from African countries and found that
illicit flows from Africa grew at an average of 11.9% per annum real terms over the 39 years

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

period, that sub-Saharan Africa registered the highest growth rate in over 30 years, they also
analyzed trends in illicit flows in relation to GDP. The paper finds that the ratio for 2000-2008
takes shape dip because of much faster rate of growth during this period.
(africannetresources.gfintegrity.org)

Similarly, Dev and Freitas (2011) empirically examined the amount of illicit financial flows from
developing countries over the decade ending 2009. The study provided estimates of illicit
financial flows (IFFs) from developing countries over the decade 2000-2009 based on the
balance of payment (BOP), bilateral trade and external debt data reported by member
countries. They used the residual model approach in doing the work. Their findings are that in
2009 IFFs from developing countries led by the top ten exporters of illicit capital, most of which
are in Asia and the Middle East and North Africa region have declined by 41% over the last
year. They also found out that this was due to global economic crises which tended to reduce
the source of funds (New external loans and net foreign direct investments).

Ndikumana (2013) in an effort to establish the extent to which the investment-inhibiting effect
of IFFs impact growth used data from a number of African developing countries to conduct an
econometric simulation. The central question of the study is how much additional growth the
affected countries might have achieved without illicit financial outflows. The findings are of
course plagued by a number of uncertainties, however, the trend is impressive. Ndikumana
concludes that the thirty-nine countries studied over the period from 2000 to 2010 might have
been able to achieve on average 3 percent more economic growth had been a radical stop to
all IFFs. In oil-exporting countries, which are especially prone to illicit financial outflows, that
additional growth might even have been 3.9 percent.

3. Research Methodology
The data for this study were mainly secondary and sourced from the global financial integrity
website and CBN statistical bulletins. In consideration of the specified variables, they were
subjected to some test to ensure that adequate allowance was made for the dynamic
relationship between the variables regarding stationary and cointegration. Unit root test was
carried out to test for the stationary of the time series data using the Augmented Dickey-Fuller
(ADF) test. Johansen Co-integration approach was adopted to test the long run relationship
between the variables.

Model 1:
GDP = f(IFF)
Thus;
GDP = β0 + β1IFF+ µ ---------------------------------------- 1
Where:
GDP= Gross Domestic Product (Economic Growth)
IFF = Illicit Financial Flows
µ = Stochastic error term
Model 2
PCI = ƒ (IFF)
PCI = β0 + β1IFF +µ ---------------------------------------- 2
Where:
PCI = Per Capital Income (Economic Development)
IFF = Illicit Financial Flows
µ = Stochastic error term

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

4. Data Analysis and Interpretation

Table 1: Unit Root Estimates: Augmented Dickey-Fuller (ADF)
Trend and Intercept (Series at 2nd difference)

Series ADF test Cri. Value Value 10% Cri. Value Order Remark
Stat. 1% 5%
GDP_1 -7.130979 -4.273277 -3.557759 -3.212361 2(1) Stationary
GDP_P_C -6.780465 -4.273277 -3.557759 -3.212361 2(1) Stationary
IFF -5.630858 -4.273277 -3.557759 -3.212361 2(1) Stationary

Source: Authors E-views Computation

The Augmented Dickey-Fuller (ADF) was employed to test for the stationarity or the existence
of units roots in the variables. It is common to test the stability of time series data in economic
analysis before the main estimation. Most economic variables are not stationary at level hence
they have to be differenced (Gujarati, 2003). Considering the ADF test statistics at 1%, 5%
and 10% critical values, it is observed that the test statistics are greater than the critical
values. Thus, the series is said to be integrated at the 2nd difference. The implication of this
is that the variables are stationary at that level hence there is no evidence of unit root tested
with the trend and intercept for the time series data employed for this study. The linear
combination of the series integrated at the same order is safely inferred as co-integrated.

(b) Analysis of Co-Integration Test for hypothesis 1

With GDP as the dependent variable

Table 2: Unrestricted Cointegration Rank Test (Trace)

Hypothesize No of Eigen Value Trace Critical Probabili

CE(s) Statistics Value ty
0.05
None * 0.574172 48.13573 15.49471 0.0000
At most 1* 0.453892 19.96298 3.841466 0.0000

Trace test indicates 2 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table 3: Unrestricted Co integration Rank Test (Maximum Eigen value)

Hypothesize No of Eigen Value Trace Critical Probability

CE(s) Statistics Value
0.05
None * 0.574172 28.17275 14.26460 0.0002
At most 1* 0.453892 19.96298 3.841466 0.0000

Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
(b) Analysis of Co-integration Test for hypothesis 2
With GDP per capita as the dependent variable

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

Table 4: Unrestricted Cointegration Rank Test (Trace)

Hypothesize No Eigen Value Trace Critical Probability

of CE(s) Statistics Value
0.05
None * 0.397789 16.89510 15.49471 0.0306
At most 1* 0.004814 0.159260 3.841466 0.6898

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table 5: Unrestricted Cointegration Rank Test (Maximum Eigen value)

Hypothesize No of Eigen Value Trace Critical Probability

CE(s) Statistics Value
0.05
None * 0.397789 16.73584 14.26460 0.0199
At most 1* 0.004814 0.159260 3.841466 0.6898

Max-eigenvalue test indicates 1 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

The unrestricted Johansen Co-integration test results indicate the existence of a stable and
long-run relationship between the variables. From the test, it was found that the variables with
trend and intercept indicated that time series data test are integrated of the same order. The
linear combination of series integrated of the same order is therefore said to be co-integrated.
The level of their integration indicates the number of time the series has to be differenced
before stationary is induced. This implies that the variables have a long-run relationship and
are likely to have the impact on one another. Also, this relationship is further buttressed by
the Adjusted R2 of 56% indicating that to large extent illicit financial flows affects the growth
and development of Nigeria. The remaining 44% are accounted for by the error term or other
variables not captured in this study.

5. Conclusion and Recommendations

The mobilization and proper utilization of domestic resources lie at the heart of the process of
sustainable development and growth. Illicit financial flow undermines both. Suffice to say that
this menace remains one of the major economic problems confronting Nigeria and indeed
Africa as a whole as evidenced by the findings of this study. The resource drain on Nigeria and
countries in the Sub-Saharan Africa over the past thirty years is almost equivalent to Africa's
current GDP. This represents a major drag on African development and dwarfs much of the
effort that donor countries undertake to boost the continent's struggling economies. This poses
a threat not only to Nigeria but Africa as a whole. Based on the above empirical findings we,
therefore, conclude that illicit financial flows have a significant impact on economic growth and
development of Nigeria given this the following recommendations are made:

• The government of Nigeria and indeed other sub-Saharan Africa must partner with
governments of developed nations to monitor the movement of funds out of Nigeria into tax
havens and secrecy jurisdictions and ensure that the culprits are brought to book.
• Nigeria must develop customs capacity in order to fight the massive outflows of capital
through illicit practices. Adequate training and retraining must be given to meet current global
practice.
• Government and regulatory bodies must ensure that banks and tax haven regularly report
to the Bank of the International Settlements (BIS) detailed deposits by sector, maturity, and
country of residence of deposit holders.

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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

• The government should address the problem of shell companies by requiring that all
corporations, foundations, and trusts confirm beneficial ownership information in all banking
and securities accounts.
• The government must address capacity issues and fight corruption domestically within and
outside tax authorities.
• Pursue automatic cross-border exchange of tax information on personal and business
accounts, ideally on a multilateral basis.

References
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 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

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Appendix
Null Hypothesis: D(GDP_1,2) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic - based on SIC, maxlag=2)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -7.130979 0.0000

Test critical values: 1% level -4.273277
5% level -3.557759
10% level -3.212361

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GDP_1,3)
Method: Least Squares
Date: 07/10/17 Time: 04:26
Sample (adjusted): 1984 2015
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(GDP_1(-1),2) -2.228504 0.312510 -7.130979 0.0000

D(GDP_1(-1),3) 0.386460 0.174300 2.217216 0.0349
C -1443.040 3862960. -0.000374 0.9997
@TREND(1980) 66.82071 179044.3 0.000373 0.9997

R-squared 0.832990 Mean dependent var -80.87500

Adjusted R-squared 0.815096 S.D. dependent var 21747482
S.E. of regression 9351528. Akaike info criterion 35.05645
Sum squared resid 2.45E+15 Schwarz criterion 35.23966
Log likelihood -556.9031 Hannan-Quinn criter. 35.11718
F-statistic 46.55141 Durbin-Watson stat 2.234030
Prob(F-statistic) 0.000000

29
 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

Null Hypothesis: D(IFF,2) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic - based on SIC, maxlag=2)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.630858 0.0000
Test critical values: 1% level -4.273277
5% level -3.557759
10% level -3.212361
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(IFF,3)
Method: Least Squares
Date: 07/10/17 Time: 04:35
Sample (adjusted): 1985 2015
Included observations: 31 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(IFF(-1),2) -4.390246 0.503640 -8.717036 0.0000

D(IFF(-1),3) 2.463574 0.410465 6.001904 0.0000
D(IFF(-2),3) 1.200094 0.242996 4.938747 0.0000
C 1969.889 3107.732 0.633867 0.5317
@TREND(1980) -123.0139 143.1514 -0.859327 0.3980
R-squared 0.869508 Mean dependent var -735.2548
Adjusted R-squared 0.849432 S.D. dependent var 18038.67
S.E. of regression 6999.556 Akaike info criterion 20.69177
Sum squared resid 1.27E+09 Schwarz criterion 20.92306
Log likelihood -315.7225 Hannan-Quinn criter. 20.76717
F-statistic 43.31147 Durbin-Watson stat 2.512031
Prob(F-statistic) 0.000000

30
 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

Null Hypothesis: D(GDP_PER_CAPITA,2) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic - based on SIC, maxlag=2)

t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -6.780465 0.0000
Test critical values: 1% level -4.273277
5% level -3.557759
10% level -3.212361
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(GDP_PER_CAPITA,3)
Method: Least Squares
Date: 07/10/17 Time: 04:34
Sample (adjusted): 1984 2015
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(GDP_PER_CAPITA(- -2.267027 0.334347 -6.780465 0.0000
1),2)
D(GDP_PER_CAPITA(- 0.377028 0.183984 2.049243 0.0499
1),3)
C 110.4872 111.6461 0.989620 0.3308
@TREND(1980) -5.471809 5.170889 -1.058195 0.2990

R-squared 0.840591 Mean dependent var -8.382812

Adjusted R-squared 0.823511 S.D. dependent var 641.9727
S.E. of regression 269.6966 Akaike info criterion 14.14894
Sum squared resid 2036615. Schwarz criterion 14.33216
Log likelihood -222.3830 Hannan-Quinn criter. 14.20967
F-statistic 49.21611 Durbin-Watson stat 2.013282
Prob(F-statistic) 0.000000

31
 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

Date: 07/10/17 Time: 04:41

Sample (adjusted): 1983 2015
Included observations: 33 after adjustments
Trend assumption: Linear deterministic trend
Series: GDP_1 IFF
Lags interval (in first differences): 1 to 2

Unrestricted Co integration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.574172 48.13573 15.49471 0.0000

At most 1 * 0.453892 19.96298 3.841466 0.0000

Trace test indicates 2 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.574172 28.17275 14.26460 0.0002

At most 1 * 0.453892 19.96298 3.841466 0.0000

Max-eigenvalue test indicates 2 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

GDP_1 IFF
1.03E-08 0.000254
1.57E-07 -0.000210

Unrestricted Adjustment Coefficients (alpha):

D(GDP_1) -4274067. 1311004.

D(IFF) 1488.104 2535.686

1 Cointegrating Equation(s): Log -869.7215

likelihood

Normalized cointegrating coefficients (standard error in parentheses)

GDP_1 IFF
1.000000 24678.92
(4302.58)

Adjustment coefficients (standard error in parentheses)

D(GDP_1) -0.044033
(0.00825)
D(IFF) 1.53E-05
(7.9E-06)
Date: 07/10/17 Time: 04:51
Sample (adjusted): 1983 2015
Included observations: 33 after adjustments

32
 Amah Kalu Ogbonnaya, Okezie Stella Ogechuckwu
Impact of Illicit Financial Flow on Economic Growth and Development: Evidence from Nigeria

Trend assumption: Linear deterministic trend

Series: GDP_PER_CAPITA IFF
Lags interval (in first differences): 1 to 2

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.397789 16.89510 15.49471 0.0306

At most 1 0.004814 0.159260 3.841466 0.6898

Trace test indicates 1 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.397789 16.73584 14.26460 0.0199

At most 1 0.004814 0.159260 3.841466 0.6898

Max-eigenvalue test indicates 1 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

GDP_PER_CAPIT IFF
A
-0.003408 0.000427
-0.000231 0.000318

Unrestricted Adjustment Coefficients (alpha):

D(GDP_PER_CA 88.12900 11.85045

PITA)
D(IFF) -1919.845 274.1503

1 Cointegrating Equation(s): Log -543.4872

likelihood

Normalized cointegrating coefficients (standard error in parentheses)

GDP_PER_CAPIT IFF
A
1.000000 -0.125274
(0.02005)

Adjustment coefficients (standard error in parentheses)

D(GDP_PER_CA -0.300330
PITA)

33