A new study, published in February 2020, alleges that Kenyan elites siphoned $328 billion of World Bank Aid over the span of two decades, focusing on the period between 1990 and 2010. The news accompanies preparations by the European Union to sanction the tax haven Mauritius over money laundering and terrorism financing.
The study titled “Elite Capture of Foreign Aid: Evidence from Offshore Bank Accounts” details how Kenyan ruling elite funnel foreign aid money into foreign offshore accounts in order to enrich themselves. The study was conducted by Bob Rijkers of the World Bank, Jorgen Juel Andersen of BI Norwegian Business School, and Niels Johannesen of the University of Copenhagen.
The purpose of the report is to investigate if elites capture foreign aid. The report suggests that aid corresponding to 1 percent of the GDP reflected an increase in deposit havens by 3.4 percent.
By comparing data on aid disbursement from the World Bank with foreign deposits from the Bank of International Settlements (BIS), the study successfully identified 22 aid-dependent countries that had allegedly siphoned part of their aid into offshore accounts. Jordan topped the list with $350 billion carted away, followed by Kenya, and Côte d’Ivoire.
Popular Hiding Spots for Siphoned Money
According to the report, tax havens like Switzerland, Luxembourg, the Cayman Islands, and Singapore were popular tax havens for the siphoned money because their legal frameworks emphasize secrecy and asset protection. Additional hiding locations for the stolen funds were Germany, France, and Sweden, which are all non-tax havens.
Before the release of the report, Kenyan authorities had already taken certain measures to retrieve money laundered to these havens. In 2018, Kenyan President Uhuru Kenyatta and then-President of Switzerland Alain Berset signed an agreement to help recover the funds that were stashed in Swiss bank accounts. Since then, Kenya has been fighting to recover some of the stolen money that was stashed in tax havens.
The study documents a correlation between the aid disbursed to the most aid-dependent countries and increases in deposits channeled to offshore foreign financial centers that have reputable histories of bank secrecy and private wealth management. It reads, “Our estimates suggest a leakage rate of around 7.5 percent for the average highly aid-dependent country. Aid capture by ruling politicians, bureaucrats and their cronies is consistent with the totality of observed patterns.”
The study says, “This mechanism cannot explain why the money only flows to havens. It seems less likely that the results reflect profit shifting by multinational firms, the effect of aid on income through aggregate demand and portfolio adjustments by commercial and central banks.”
The report has stirred controversy and raised objections from the World Bank, which is the biggest aid provider to Kenya. The head of the World Bank released a statement Wednesday questioning the report’s credibility. He said, “I had raised some issues with the methodology of the report.”
The European Commission announced in May 2020 that it plans to add Mauritius, Panama, and nine other countries that “pose significant threats to the financial system of the [European] Union” to a blacklist of states that pose a financial risk to the bloc, because of their shortfalls regarding anti-money laundering and terrorism financing. Banks and other financial and tax firms are obligated to scrutinize more closely their clients who have dealings with countries on the list.
The European Commission announced in a statement on its website that the revised list will be submitted to the European Parliament for approval and that the country status of the new listing will begin on October 1, 2020.
The study suggests Mauritius has become a favorite location for Kenyan officials to hide their wealth from tax collectors like the Kenyan Revenue Authority. Some of Kenya’s elite have registered their companies through subsidiaries in Port Louis, Mauritius, due to its favorable tax regime. As a result, Mauritius may become the subject of heightened scrutiny from the international community and aid providers in the coming years.