iff STOP IT! Illicit Financial Flows Report of the High Level Panel

iff STOP IT! Illicit Financial Flows Report of the High Level Panel
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Illicit Financial Flows
Report of the High Level Panel
on Illicit Financial Flows from Africa
Commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development
Illicit Financial Flow
Report of the High Level Panel
on Illicit Financial Flows from Africa
Commissioned by the AU/ECA Conference of Ministers of
Finance, Planning and Economic Development
Foreword
The 4th Joint African Union Commission/United Nations Economic Commission
for Africa (AUC/ECA) Conference of African Ministers of Finance, Planning and
Economic Development was held in 2011. This Conference mandated ECA to
establish the High Level Panel on Illicit Financial Flows from Africa. Underlying
this decision was the determination to ensure Africa’s accelerated and sustained
development, relying as much as possible on its own resources.
The decision was immediately informed by concern that many of our countries
would fail to meet the Millennium Development Goals during the target period
ending in 2015. There was also concern that our continent had to take all possible
measures to ensure respect for the development priorities it had set itself, as
reflected for instance in the New Partnership for Africa’s Development. Progress
on this agenda could not be guaranteed if Africa remained overdependent on
resources supplied by development partners.
In the light of this analysis, it became clear that Africa was a net creditor to
the rest of the world, even though, despite the inflow of official development
assistance, the continent had suffered and was continuing to suffer from a
crisis of insufficient resources for development.
Very correctly, these considerations led to the decision to focus on the matter
of illicit financial outflows from Africa, and specifically on the steps that must
be taken to radically reduce these outflows to ensure that these development
resources remain within the continent. The importance of this decision is
emphasized by the fact that our continent is annually losing more than $50
billion through illicit financial outflows.
This Report reflects the work that the High Level Panel on Illicit Financial Flows
has carried out since it was established in February 2012, particularly to:
> Develop a realistic and accurate assessment of the volumes and
sources of these outflows;
> Gain concrete understanding of how these outflows occur in Africa,
based on case studies of a sample of African countries and;
> Ensure that we make specific recommendations of practical, realistic,
short- to medium-term actions that should be taken both by Africa and
by the rest of the world to effectively confront what is in fact a global
challenge.
It would not have been possible for our Panel to do its work without the
enthusiastic support of all our interlocutors as we worked to discharge our
mandate. I would like to take this opportunity to convey our sincere and warm
thanks to all those for everything they did to contribute to the success of the
work of our Panel. Here I am referring to:
> The heads of state and government and the governments of all the
African countries we visited, as well as the president and government
of the United States;
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> Leaders of the legislatures in many of these countries;
> The leadership and staff of the international organizations with which
we interacted, these being:
–
The United Nations, at its New York Headquarters, as well as
the United Nations Member States;
–
The World Bank and the International Monetary Fund at their
headquarters in Washington, DC;
–
The World Customs Organization at its headquarters in
Brussels, Belgium;
–
The Organisation for Economic Co-operation and Development
at its headquarters in Paris, France;
> The European Parliament in Brussels, Belgium;
> Civil society, including the business community, in the African
countries we visited, as well as in the United States; and,
> Members of the media in many of these countries
We also extend our sincere thanks to the leadership and staff of ECA for
their excellent contribution in providing our Panel with absolutely vital expert
intellectual and logistical support.
I am also privileged to convey my heartfelt gratitude to my fellow panellists,
drawn from all regions of Africa, as well as the committed and principled
friends of Africa from the United States and Norway, who formed the
outstanding collective responsible for this Report.
All these eminent persons, members of the Panel, have worked with great
dedication, honesty and determination to serve the people of Africa.
Objectively, it is practically impossible to acquire complete information about
illicit financial flows, precisely because of their illicit nature, which means that
those responsible take deliberate and systematic steps to hide them. This
also means that ECA and everyone concerned should continue to carry out
research on this matter, including making generally available all new relevant
information that will inevitably emerge.
Despite the challenges of information gathering about illicit activities, the
information available to us has convinced our Panel that large commercial
corporations are by far the biggest culprits of illicit outflows, followed by
organized crime. We are also convinced that corrupt practices in Africa are
facilitating these outflows, apart from and in addition to the related problem
of weak governance capacity.
All this should be understood within the context of large corporations having
the means to retain the best available professional legal, accountancy, banking
and other expertise to help them perpetuate their aggressive and illegal
activities. Similarly, organized criminal organizations, especially international
drug dealers, have the funds to corrupt many players, including and especially
in governments, and even to “capture” weak states.
All these factors underline that the critical ingredient in the struggle to end
illicit financial flows is the political will of governments, not only technical
capacity.
3
Further, illicit financial outflows whose source is Africa end up somewhere
in the rest of the world. Countries that are destinations for these outflows
also have a role in preventing them and in helping Africa to repatriate illicit
funds and prosecute perpetrators. Thus, even though these financial outflows
present themselves to us Africans as our problem, united global action is
necessary to end them. Such united global action requires that agreement
be reached on the steps to be taken to expedite the repatriation of the illicitly
exported capital. This must include ensuring that the financial institutions
that receive this capital do not benefit by being allowed to continue to house it
during periods when it might be frozen, pending the completion of the agreed
due processes prior to repatriation.
It also means that concrete steps should be taken to give general universal
application to such best practices as might have developed anywhere in the
world. This includes the relevant actions and initiatives that have been taken
by such institutions as the OECD, the G8 and G20, the European Parliament
and the African Tax Administration Forum.
Correctly, the United Nations is leading the process to engage the international
community to design the Post-2015 Development Agenda, the successor
programme to the Millennium Development Goals. As was foreseen in
the Millennium Development Goals, giving credibility to the Post-2015
Development Agenda will require realistic expectations about the availability
of resources to finance this agenda—a new and real commitment to the
objective of financing for development.
Our Panel is convinced that Africa’s retention of the capital that is generated
on the continent and should legitimately be retained in Africa must be an
important part of the resources to finance the Post-2015 Development Agenda.
We do not say this to support the entirely false and self-serving argument
against capital transfers from the rich to the poor regions of the world,
including Africa—a historically proven driver of equitable global development.
Rather, we are arguing that there exists a very significant and eminently
practical possibility to change the balance between the volumes of domestic
and foreign capital required for meaningful and sustained African development.
The radical reduction of illicit capital outflows from Africa, short of ending
them, is precisely the outcome Africa and the rest of the world must achieve
to produce this strategically critical new balance.
As a Panel we are convinced that the goals of ending poverty in the world,
reducing inequality within and among nations, and giving practical effect to
the fundamental objective of the right of all to development remain vital pillars
in the historic process to build a humane, peaceful and prosperous universal
human society.
We commend this humble Report to our immediate Principals, the African
Finance, Planning and Economic Development Ministers, all the other African
authorities and the people of Africa, as well as to the rest of the world, as
a contribution to what must be an honest, serious, concerted and sustained
African and global effort to build a better world for all.
Thabo Mbeki
Chairperson
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Acknowledgements
The Panel would like to thank the governments, civil societies, business
communities and members of the media in all of the African countries
visited. The government of the United States. The leadership and staff
of the United Nations (UN), The World Bank, the International Monetary
Fund, The World Customs Organization, The Organisation for Economic
Co-operation and Development, and the European Parliament. It also
wishes to acknowledge the contributions and work of Former members
of the Panel, Abdoulie Janneh, former Executive Secretary of the ECA;
Ingrid Fiskaa, State Secretary for International Development, Norwegian
Ministry of Foreign Affairs, 2012; and Arvinn Gadgil, State Secretary for
International Development, Norwegian Ministry of Foreign Affairs, 20122013.
The panel would also like to thank the Technical Committee of the High
Level report beginning with its Chairperson, Abdalla Hamdok, Deputy
Executive Secretary of the Economic Commission for Africa (ECA). Said
Adejumobi; Adeyemi Dipeolu; Adam Elhiraika; Advocate Mojanku Gumbi;
Stephen Karingi; René Kouassi; and Harald Tollan.
The panel acknowledges the work of the Secretariat of the HLP headed
by Adeyemi Dipeolu, which worked on the report. Its members included
Adeyinka Adeyemi; Gamal Ibrahim; Souad Aden-Osman; Allan Mukungu;
Simon Mevel; William Davis; John Kaninda and Oladipo Johnson. Other
ECA staff who also contributed to the work of the Panel included Gedion
Gamora; Lia Yeshitla; Rebecca Benyam; Selamawit Hailu; Aster Zewde;
and Loule Balcha.
We would also like to acknowledge the work of other former ECA staff
members who contributed to the Panel’s report but have since moved
on to new assignments. These include Professor Emmanuel Nnadozie;
Siope ‘Ofa; Samson Kwalingana and Ariam Abraham. The panel expresses
thanks to all consultants who undertook country and technical studies
during the development of the report; Prof. Olu Ajakaiye; Prof. Geegbae
Geegbae; Francis Mwenga; Maria Mitadenga, and Floribert NtungilaNkama. Finally, the panel would like to thank other consultants who
contributed to the Panel’s work. These include Alex Cobham and Alice
Lépissier of the Center for Global Development, Alex De Waal; Bruce
Ross-Larson; Carolina Rodriguez; Giacomo Frigerio; Valentina Frigerio;
Pauline Stockins; Saba Kassu; Tsitsi Mtetwa as well as the entire team of
the Publications Section of ECA.
5
Contents
2
5
8
Foreword
Acknowledgements
Glossary
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22
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Chapter 1
Chapter 2
Chapter 3
Tackling illicit financial flows
from Africa
Understanding the
phenomenon of illicit
financial flows from Africa
The governance and
development impact of illicit
financial flows
62
78
87
Chapter 4
Chapter 5
Annex I
Findings and policy
implications
Recommendations
Resolution establishing the
High Level Panel on Illicit
Financial Flows
88
90
106
Typology of commercially
driven illicit financial flows
and their immediate impacts
ECA analysis on quantifying
illicit financial flows:
Methodology and data
Vulnerabilities and exposure
to financial secrecy
118
121
Annex II
Annex V
Panel members and
secretariat
Annex III
References
Annex IV
Glossary
Arm’s-length principle. The arm’s-length principle is an international
standard that compares the transfer prices charged between related
entities with the price in similar transactions carried out between
independent entities at arm’s length.
Automatic exchange of tax information. The sharing of tax information
between countries in which individuals and corporations hold accounts.
This exchange of information should be automatic and not require a
request from tax or law enforcement officials in one jurisdiction to those
in the jurisdiction where the account is held. Also referred to as “routine
exchange,” automatic exchange of tax information is one of the five
recommendations of the Financial Transparency Coalition (FTC).
Beneficial owner. The real person or group of people who control(s)
and benefit(s) from a corporation, trust, or account. The FTC advocates
that beneficial ownership information be collected and made publicly
accessible. Transparency of beneficial ownership is one of the five FTC
recommendations.
Base erosion and profit shifting. According to the OECD (2013), base erosion
and profit shifting refers to “tax planning strategies that exploit gaps and
mismatches in tax rules to make profits ‘disappear’ for tax purposes or
to shift profits to locations where there is little or no real activity but the
taxes are low resulting in little or no overall corporate tax being paid.”
The base erosion and profit shifting project coordinated by the OECD,
which also involves the G20 countries, seeks to reform international tax
standards that have become open to exploitation by multinational firms.
Country-by-country reporting. A proposed form of financial reporting in
which multinational corporations report certain financial data—such as
sales, profits, losses, number of employees, taxes paid and tax obligations—
for each country in which they operate. Currently, consolidated financial
statements are the norm. This is also one of the FTC recommendations.
Dodd-Frank Wall Street Reform and Consumer Protection Act. A broad
financial reform bill enacted into law by the United States in July 2010.
> Dodd-Frank Section 1502. Requires companies selling or
manufacturing products made with minerals originating from
designated conflict countries to disclose to a public database
where the minerals came from and what steps the company has
taken to ensure that purchase or processing of the minerals has
not financially benefited armed militia groups in those countries.
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> Dodd-Frank Section 1504. Requires oil, gas and mining
companies to publicly disclose all payments to governments in
each jurisdiction in which they operate.
Double taxation. Where a company or individual incurs a tax liability in
more than one country, the two countries’ claims on the taxing rights
can overlap, resulting in double taxation of the same declared income.
Some tax avoidance strategies exploit international tax instruments in
ways that were not intended, for example by ensuring that the right to tax
a transaction is allocated to a country that levies no or low taxation on it.
Double tax avoidance agreement (DTAA)/Double taxation treaty (DTT).
Agreements between states (usually in the form of bilateral treaties)
that are designed to prevent an individual from being taxed on the same
income (or other forms of wealth, e. g., an estate or a gift) by two different
countries. The OECD suggests that countries often suffer from “double
non-taxation” as a result of abuse of these treaties.
False invoicing. The practice of falsely declaring the value of goods
imported or exported to evade customs duties and taxes, circumvent
quotas or launder money. The value of goods exported is often understated,
or the value of goods imported is often overstated, and the proceeds are
shifted illicitly overseas. Most estimates of trade-based illicit financial
flows focus on this mechanism.
Financial Action Task Force (FATF). An intergovernmental body housed
at the OECD whose purpose is the development and promotion of
international standards to combat money laundering, terrorist financing
and the proliferation of weapons of mass destruction. FATF has published
40 recommendations on terrorist financing and related guidance
documentation in order to meet this objective.
Foreign Corrupt Practices Act (FCPA). A US law passed in 1977 that makes
it illegal for US citizens, US corporations and certain non-US corporations
to bribe foreign officials.
Hawala transactions. Hawala is an informal system of money transfer
between entities in different countries. Brokers use handshake deals
and/or agreements with counterparts in other countries to move money
without physically transferring funds (especially across borders) or using
bank transfers. Often extremely difficult to monitor, hawala transactions
are used primarily in the Middle East, East Africa and South Asia.
Illicit financial flows (IFFs). Money that is illegally earned, transferred or
utilized1. These funds typically originate from three sources: commercial
tax evasion, trade misinvoicing and abusive transfer pricing; criminal
activities, including the drug trade, human trafficking, illegal arms
dealing, and smuggling of contraband; and bribery and theft by corrupt
government officials.
Secrecy jurisdiction. Secrecy jurisdictions are cities, states or countries
whose laws allow banking or financial information to be kept private
under all or all but few circumstances. Such jurisdictions may create a
legal structure specifically for the use of non-residents. The originators
of illicit financial flows may need to prevent the authorities in the country
1
www.gfintegrity.org/wp-content/uploads/2014/09/GFI-Analytics.pdf.
9
of origin from identifying them (e. g. if the money is the proceeds of tax
evasion), in which case the flow will be directed to a secrecy jurisdiction.
Because those directing IFFs seek out low taxes and secrecy, many tax
havens are also secrecy jurisdictions, but the concepts are not identical.
Shell bank. A bank without a physical presence or employees in the
jurisdiction in which it is incorporated.
Stolen Asset Recovery Initiative (StAR). A partnership between the World
Bank and the United Nations Office on Drugs and Crime that supports
international efforts to end safe havens for corrupt funds. In the fall of
2011 StAR released the landmark report, “The Puppet Masters: How the
Corrupt Use Legal Structures to Hide Stolen Assets and What to Do about
It,” which focused on the adverse impact of legal structures that enable
IFFs.
Tax avoidance. The legal practice of seeking to minimize a tax bill by taking
advantage of a loophole or exception to tax regulations or adopting an
unintended interpretation of the tax code. Such practices can be prevented
through statutory anti-avoidance rules; where such rules do not exist or
are not effective, tax avoidance can be a major component of IFFs.
Tax evasion. Actions by a taxpayer to escape a tax liability by concealing
from the revenue authority the income on which the tax liability has arisen.
Tax evasion can be a major component of IFFs and entails criminal or civil
penalties.
Tax havens. Jurisdictions whose legal regime is exploited by non-residents
to avoid or evade taxes. A tax haven usually has low or zero tax rates
on accounts held or transactions by foreign persons or corporations.
This is in combination with one or more other factors, including the lack
of effective exchange of tax information with other countries, lack of
transparency in the tax system and no requirement to have substantial
activities in the jurisdiction to qualify for tax residence. Tax havens are
the main channel for laundering the proceeds of tax evasion and routing
funds to avoid taxes. Also see Secrecy jurisdictions.
Tax treaties. Formally known as tax conventions on income and capital,
bilateral tax treaties between countries were originally referred to
as double taxation treaties. By concluding them, countries reach a
negotiated settlement that restricts their source and residence taxation
rights in a compatible manner, alleviating double taxation and allocating
taxing rights between the parties. Treaties also harmonize the definitions
in countries’ tax codes, provide mutual agreement procedures that can be
invoked if there are outstanding instances of double taxation and establish
a framework for mutual assistance in enforcement. A treaty between a
developing country and a country from which it receives investment
will shift the balance of taxing rights away from the developing country.
Such treaty provisions create opportunities for treaty shopping by foreign
investors.
Trade misinvoicing. The act of misrepresenting the price or quantity
of imports or exports in order to hide or accumulate money in other
jurisdictions. The motive could, for example, be to evade taxes, avoid
customs duties, transfer a kickback or launder money.
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> Abusive transfer pricing. A transfer price may be manipulated
to shift profits from one jurisdiction to another, usually from a
higher-tax to a lower-tax jurisdiction. This is a well-known source
of IFFs, although not all forms of transfer pricing abuse that result
in IFFs rely on manipulating the price of the transaction.
> Trade-based money laundering. A technique where trade
mispricing is used to hide or disguise income generated from
illegal activity.
Transfer pricing. The price of transactions occurring between related
companies, in particular companies within the same multinational
group. Governments set rules to determine how transfer pricing should
be undertaken for tax purposes (since, for example, the level of transfer
pricing affects the taxable profits of the different branches or subsidiaries
of the firm), predominantly based on the arm’s-length principle (this is
also explained in the glossary; see above). Much of the debate on taxmotivated IFFs revolves around the formulation and enforcement of
transfer pricing regulations, their shortcomings and the way in which they
are abused for tax evasion and tax avoidance purposes.
All amounts of money are expressed in US dollars.
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4
Chapter
Tackling illicit financial
flows from Africa
12
1
1.1 Background
1.1.1 Illicit financial flows as a development challenge for
Africa
Over the last 50 years, Africa is estimated to have lost in excess of $1
trillion in illicit financial flows (IFFs) (Kar and Cartwright-Smith 2010;
Kar and Leblanc 2013). This sum is roughly equivalent to all of the official
development assistance received by Africa during the same timeframe.2
Currently, Africa is estimated to be losing more than $50 billion annually
in IFFs. But these estimates may well fall short of reality because accurate
data do not exist for all African countries, and these estimates often exclude
some forms of IFFs that by nature are secret and cannot be properly
estimated, such as proceeds of bribery and trafficking of drugs, people and
firearms. The amount lost annually by Africa through IFFs is therefore likely
to exceed $50 billion by a significant amount.
These outflows are of serious concern, given inadequate growth, high levels
of poverty, resource needs and the changing global landscape of official
development assistance. Although African economies have been growing
at an average of about 5 per cent a year since the turn of the century, this
rate is considered encouraging but inadequate. It is, for example, below
the double-digit growth that has propelled transformation in parts of Asia.
Further, the benefits of this growth have mostly been confined to those at
the top of the income distribution and it has not been accompanied by an
increase in jobs. Aside from the equity issues that this raises, it also means
that this growth may not be sustainable due to possible social unrest. The
global commodity super-cycle that has contributed to Africa’s growth is
coming to an end, while macroeconomic factors such as debt reduction
might be a once-off effect.
Poverty remains of serious concern in Africa in absolute and relative terms.
The number of people living on less than $1.25 a day in Africa is estimated
to have increased from 290 million in 1990 to 414 million in 2010 (United
Nations, 2013). This is because population growth outweighs the number
of people rising out of poverty. Moreover, GDP per African was around
$2,000 in 2013, which is around one-fifth of the level worldwide (IMF, 2014).
Poverty in Africa is also multidimensional, in the sense of limited access to
education, healthcare, housing, potable water and sanitation. This situation
puts the loss of more than $50 billion a year in IFFs in better perspective.
The resource needs of African countries for social services, infrastructure
and investment also underscore the importance of stemming IFFs from
the continent. At current population trends, Africa is set to have the largest
youth population in the world. By 2050 the median age for Africa will be
25 years, while the average for the world as whole will be about 36 years
(United Nations Population Division, 2012). Infrastructure constraints also
act as a brake on growth, just as do the low savings and investment rates
of the continent. In 2012 gross capital formation rates in Nigeria and South
2
Some $1.07 trillion of official development assistance was received by Africa between 1970 and 2008 (OECD 2012a).
13
1
2
3
4
Africa were 13 per cent and 19 per cent, respectively, as compared to a rate
of 49 per cent in China and 35 per cent in India (United Nations Statistics
Division, 2014; World Bank, 2014). Yet Africa is estimated to need an
additional $30–$50 billion annually to fund infrastructure projects (Foster
and Briceño-Garmendia, 2010; African Development Bank, 2014).
The Panel considered that when these needs are coupled with the changing
landscape of official development assistance, Africa cannot afford to
remain sanguine about the problem posed by IFFs. Current developments
in the global arena in fact make the challenge posed by IFFs more acute.
The resources that Africa receives from external partners in the form of
official development assistance are stagnating due to the domestic fiscal
challenges of partners, who in response are seeking to reduce such
expenditures. Africa will therefore need to look within the continent to
fund its development agenda and reduce reliance on official development
assistance.
IFFs are also of concern because of their impact on governance. Successfully
taking out these resources usually involves suborning of state officials and
can contribute to undermining state structures, since concerned actors
may have the resources to prevent the proper functioning of regulatory
institutions
1.1.2 Context
Cognisant of the detrimental effects of IFFs on Africa, the 4th Joint Annual
Meeting of the AU/ECA Conference of Ministers of Finance, Planning
and Economic Development adopted Resolution 886 mandating the
establishment of a High Level Panel on Illicit Financial Flows from Africa.
The Panel is chaired by H. E. Thabo Mbeki, former President of the Republic
of South Africa, and comprised nine other members both from within and
outside the continent.
1.1.3 Mandate
The Panel’s Terms of Reference called for it to:
1. Determine the nature and patterns of illicit financial outflows from
Africa;
2. Establish the level of illicit financial outflows from the continent;
3. Assess the complex and long-term implications of IFFs for development;
4. Raise awareness among African governments, citizens and international
development partners of the scale and effect of such financial outflows
on development; and
5. Propose policies and mobilize support for practices that would reverse
such illicit financial outflows.
The Panel’s work has been dedicated to achieving these goals.
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1.2 Definition of illicit
financial flows
To determine its scope of work and come to grips with the subject
matter, the Panel spent a considerable amount of time gaining a proper
understanding of the phenomenon of IFFs. We observed that IFFs have
often been linked to capital flight in discussion of the problem, with both
terms often used interchangeably.
We felt that it was important to distinguish IFFs from capital flight
because capital flight, which is sometimes driven by macroeconomic and
governance factors, could be entirely licit. For the purposes of our work,
we agreed on a definition of IFFs as money illegally earned, transferred or
used. This definition avoids complicated explanations of what qualifies as
IFFs and debates about whether investors should be allowed to respond
rationally to economic and political risk. Moreover, we believe that our
preferred definition addresses the issue of IFFs across the entire breadth
of financial transactions.
1.3 The Panel’s approach
and methodology
Since there was already extensive academic work on IFFs, the Panel
decided that its work would add value only by taking a different approach
in accordance with its Terms of Reference. We accordingly placed our
emphasis on matching original research with advocacy and inclusive
consultations while exploring the policy dimensions of IFFs.
1.3.1 Research
To place its work on a firm footing, the Panel commissioned a background
paper, “Scale and Development Challenges of Illicit Financial Flows from
Africa”. The paper examined the nature, magnitude and development
challenges of IFFs from Africa, based on disparities in national income
accounts and trade data (trade mispricing). (Details of the empirical study
are contained in annex III of this Report.)
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1
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3
4
We also explored the extent to which financial secrecy among Africa’s
trading partners exposes African countries to the risk of IFFs through
trade mispricing or misinvoicing. This analysis is included in annex IV.
The HLP also commissioned country studies on IFFs from Africa to
obtain empirical country-level evidence of the phenomenon and its
manifestations. Given that it could not cover all the countries on the
continent, the HLP concentrated on studies of six countries. The criteria
for choosing the six countries included subregional coverage, the
importance of the extractive sector in their economies, and the situation
in post-conflict countries. The countries chosen using these criteria were
Algeria, the Democratic Republic of Congo, Kenya, Liberia, Mozambique
and Nigeria. The Panel also visited Mauritius as a representative of a
small island economy and South Africa to gain an understanding of
how its institutions and processes are geared to mitigate illicit financial
outflows (box 1).
Box 1.1 Information on Countries Selected as Case Studies
> ALGERIA
With the second-largest oil reserves in Africa and the ninth-largest reserves of natural gas in the
world, Algeria is one of the main exporters of petroleum and natural gas products from Northern
Africa and is also headquarters for the largest oil company in Africa. The country’s current GDP is
estimated at $273.59 billion, its GDP per capita is estimated at $6,978, and its annual GDP growth
averages 3.0 per cent. Algeria is projected to have lost approximately $25.7 billion of its national
revenue through IFFs between 1970 and 2008. This substantial figure reflects the fact that countries
highly dependent on natural resources are among the most severely affected by the problem of IFFs.
(http://www.Africaneconomicoutlook.Org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf; http://www.u4.no/publications/extractive-sectors-and-illicit-financialflows-what-role-for-revenue-governance-initiatives/)
> DEMOCRATIC REPUBLIC OF CONGO.
In terms of annual carats produced, the Democratic Republic of Congo is the second-largest
diamond-producing nation in the world as well as the largest exporter of cobalt ore. A combination
of such highly sought resources and recent political struggles have made the Central African nation
one of the most affected by the illegal exploitation of its resources. Several Congolese commissions
and UN panels of experts have documented illegal mineral exploitation and exports, some of which
finance armed groups in the Democratic Republic of Congo. ECA currently estimates the country’s
GDP at just more than $57 billion, with GDP per capita of $854 and annual GDP growth averaging 6.4
per cent. Moreover, conflicts within the Democratic Republic of Congo have reduced national output
and government revenue and even in its post-conflict status, years of unchecked and ongoing IFFs
out of the Democratic Republic of Congo still affect the country’s national revenue to this day. The
Democratic Republic of Congo is an especially relevant case in the fight against IFFs because its
mining sector is regarded as the economic foundation for the country’s post-conflict reconstruction.
(http://www.Africaneconomicoutlook.Org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf)
16
> KENYA
Coupled with its recent development of an extractive industry, this East African nation has in recent
years maintained steady economic growth with a current GDP of $79.66 billion, GDP per capita of
$1,796, and an average GDP growth rate of 4.8 per cent a year. Kenya is believed to have lost as much
as $1.51 billion between 2002 and 2011 to trade misinvoicing. The role of IFFs and their adverse
effect on the country’s GDP cannot be ignored. A recent study funded by the Danish government on
five of its priority countries (Ghana, Kenya, Mozambique, Tanzania and Uganda) shows that Kenya’s
tax loss from trade misinvoicing by multinational corporations and other parties could be as high
as 8.3 per cent of government revenue, hampering economic growth and resulting in billions in
lost tax revenue.
(http://www.Africaneconomicoutlook.Org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf; http://iff.gfintegrity.org/hiding/Hiding_In_Plain_Sight_Report-Final.
pdf)
> LIBERIA
Currently, the West African nation of Liberia is rebuilding its infrastructure, especially in and
around its capital, Monrovia, since the end of the civil war of 1989–1996. Richly endowed with
water, mineral resources and forests, and with a climate favourable to agriculture, Liberia has
been an attractive market for multinationals and similar foreign stakeholders. Timber and rubber
are currently the country’s main exports. However, foreign investment is still relied on to increase
its GDP, estimated at $3.3 billion in 2012. GDP per capita is approximately $767, and Liberia’s GDP
growth rate averages 7.8 per cent. As with most post conflict nations, the focus on redevelopment
leaves much room for foreign investors to try to take advantage of the country’s situation. This can
lead to issues of tax dodging as well as the use of the country as a hub for offshore banking and
as a tax haven.
(http://www.Africaneconomicoutlook.org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf; http://allafrica.com/stories/201306210889.html)
> MOZAMBIQUE
While there is still room for progress, the economy of Mozambique has developed in the last
decade since the end of its civil war. The Southern African country has also seen dramatic
improvements in its growth rate, with its GDP growing to $29.975 billion in 2012. Its GDP per capita
grew approximately to $1,160, and its growth rate averages 7.3 per cent. Although agriculture is
central to the country’s workforce, investment projects in titanium extraction are expected to help
strengthen the economy. Similar to its Kenyan counterpart, however, Mozambique also faces the
challenges of trade and tax related malpractices.
(http://www.Africaneconomicoutlook.Org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf;
http://www.gfintegrity.org/report/report-trade-misinvoicing-inghana-kenya-mozambique-tanzania-and-uganda/)
> NIGERIA
The most populous country in Africa has seen rapid economic growth recently. Its GDP has almost
tripled to $490.857 billion. Its GDP per capita is $2,827, and its GDP growth averages 6.7 per cent.
Oil exports remain a major contributor to Nigeria’s economy, but the telecoms industry accounts for
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more than a quarter of its 2014 GDP growth. Other drivers include manufacturing and film-making,
which account for an estimated 7 per cent and 1.5 per cent, respectively. Agriculture is also a rapidly
growing sector in the country. Having such a large economy inevitably increases the risks of IFFs, and
the nation’s reliance on its petroleum industry for exports and government revenue further increases
this risk.
(http://www.Africaneconomicoutlook.Org/fileadmin/uploads/aeo/2014/PDF/E-Book_African_
Economic_Outlook_2014.pdf; http://www.economist.com/news/finance-and-economics/21600734revised-figures-show-nigeria-africas-largest-economy-step-change)
Note: GDP and GDP per capita estimates are based on purchasing power parity in US dollars; annual GDP growth rates are averages for
2005–2013.
Figure 1.1
Promotional banner
used for IFF regional
consultation
1.3.2 Advocacy
From its inception, the Panel saw advocacy as an essential part of its
work. We accordingly framed a communications strategy that included
the creation of a website, publication of a brochure on the Panel’s work,
and development of a fact sheet on IFFs as well as related slogans
and promotional banners (see figure 1.1). The Panel also adopted the
mobilizing slogan “Illicit Financial Flows from Africa: Track it. Stop it. Get
it” to underpin its advocacy efforts. The Chair, Panel members and the
Technical Committee continue to be invited to make presentations and
interact at various forums on the question of IFFs.
1.3.3 Inclusive consultations
From the outset, the Panel was committed to obtaining insights and
inputs from governments, the private sector, civil society organizations
and regional and international organizations with interest in the subject.
We held wide-ranging consultations with a variety of stakeholders with
the purpose of sensitization, gaining first-hand knowledge and placing
the matter firmly on the regional and global agenda.
The Panel visited the six countries for which case studies were
commissioned and held meetings with Heads of State and Government,
ministers responsible for the economy, parliamentarians, the police
and the judicial authorities, and heads of various financial institutions,
including central banks, customs agencies, internal revenue services and
18
anti-corruption agencies. We also met leading civil society organizations,
academics and members of the media and related non-governmental
organizations. At all stages, we explained that the purpose of the
country studies was to gain empirical perspectives and insights on the
manifestation of IFFs in various jurisdictions.
Subregional consultations for East and Southern Africa were held in
Lusaka, Zambia, while consultations in West and Central Africa took
place in Accra, Ghana. The consultations for North Africa took place in
Tunisia. The need for subregional consultations was informed by the
realization that stakeholders from all parts of the continent could make
invaluable contributions to the work of the Panel by providing information
and sharing knowledge that would not otherwise be available. More than
200 people from 48 African countries drawn from a wide cross-section of
stakeholders participated in the subregional consultations.
The Panel also reached out to the rest of the world in the course of its
assignment. We met with US government agencies, the Secretariat and
Member States of the United Nations and the Organisation for Economic
Cooperation and Development. Useful meetings were held with the
World Customs Council, the European Parliament, the World Bank and
the International Monetary Fund. In the United States, policy seminars
also took place in the Brookings Institution and the Corporate Council for
Africa.
1.3.4 Policy dimensions
The Panel’s work is ultimately focused on helping governments formulate
appropriate policies to combat IFFs. The present Report accordingly
focuses on identifying the key actors involved in IFFs, characterizing
the nature of such flows and their drivers and enablers, and proposing
possible policy responses nationally, regionally and internationally.
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1.4 Progress Report to the
Conference of Ministers of Finance,
Planning and Economic Development
The Panel presented a Progress Report to the Seventh Joint Annual
Meetings of the ECA Conference of African Ministers of Finance, Planning
and Economic Development and African Union Conference of Ministers
of Economy and Finance in March 2014 in Abuja, Nigeria. The Report
provided an update of the Panel’s work and its emerging findings.
The Ministerial Statement issued after this meeting reported as follows:
“20. We deplore the unfortunate situation whereby Africa loses $50 billion
a year in illicit financial flows. These flows relate principally to commercial
transactions, tax evasion, criminal activities (money laundering, and drug,
arms and human trafficking), bribery, corruption and abuse of office.
Countries that are rich in natural resources and countries with inadequate
or non-existent institutional architecture are the most at risk of falling
victim to illicit financial flows. These illicit flows have a negative impact on
Africa’s development efforts: the most serious consequences are the loss
of investment capital and revenue that could have been used to finance
development programmes, the undermining of State institutions and a
weakening of the rule of law.
“21. We pledge to take the necessary coordinated action nationally,
regionally and continentally to strengthen our economic governance
institutions and machinery, focusing especially on tax administration,
contract negotiations, and trade-related financial leakages. In addition,
we will engage with the international community, in the context of the
ongoing discussions on the reform of global economic governance, in
order to highlight our concerns regarding illicit transfers, including the
question of tax havens.”
1.5 Structure of the Report
The rest of this report is structured as follows. Chapter 2 outlines the
framework for analysing IFFs from Africa, including estimates, actors,
drivers, enablers and means by which IFFs take place. Chapter 3 highlights
the development dimension of IFFs, while Chapter 4 contains the findings
of the Panel. The Panel’s recommendations are contained in Chapter 5.
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1.6 Main messages of the Report
IFFs are not only an African problem but are indeed a matter of global
governance that calls for a wide range of actions, including at the level of
the global financial architecture. IFFs are a potential source of domestic
resource mobilization for the continent, which if tapped will have
positive impacts for the 2015 development agenda of Africa and beyond,
especially in the context of global economic developments that mean that
dependence on development assistance is no longer a sustainable option
(figure 1.2).
The Report also maintains that successfully combating IFFs will generate
positive impacts for the governance landscape of Africa, resulting in
sustainable improvements and enhancements for the local business and
private sector development environment.
Figure 1.2
Heat map of illicit financial flows by country as a percentage of GDP
›16
14-16
12-14 16
10-12 10
7-10
5-7
3-5
1-3
‹1
No data
Source: Green, 2013.
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4
Chapter
Understanding the
phenomenon of illicit
financial flows from
Africa
22
2
As a starting point and to gain a full understanding of the various
dimensions of illicit financial flows (IFFs) and their impact on Africa, the
Panel reviewed existing literature, commissioned research, used case
studies and undertook wide-ranging consultations. We felt that it was
necessary to have a clear definition of IFFs and to understand how they
take place in Africa. We also estimated the extent of IFFs from the continent
and examined the roles of different actors, considering that solutions
stemming from such outflows would depend on their cooperation or
compliance. Some drivers and enablers of IFFs were studied for the same
reasons. The Panel also sought to examine policies and steps that had
been taken in Africa and elsewhere to tackle IFFs.
2.1 Defining illicit financial flows
We defined IFFs as “money illegally earned, transferred or used” to
enable us come to grips with our assignment, in line with the work of
other organizations on this subject (see, for example, Reuter 2012, Baker
2005, and Kar 2011). In other words, these flows of money are in violation
of laws in their origin, or during their movement or use, and are therefore
considered illicit. We placed emphasis on illegality across any stages
of such outflows to show that a legal act in one geographical location
does not nullify the intent and purpose of such outflows, which is to hide
money even if legitimately earned. We also felt that the term “illicit” is a
fair description of activities that, while not strictly illegal in all cases, go
against established rules and norms, including avoiding legal obligations
to pay tax. Our purpose in doing so was to establish the nature of such
outflows, given the harm that they cause to African economies. Figure 2.1
maps a range of transactions against their origin as capital.
ILLEGAL
Figure 2.1
Origins of illicit financial flows
Laundering proceeds of crime
Abuse of power
Nature of transaction
ILLICIT
Capital origin
Market/regulatory abuse
Tax abuse
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2.2 How illicit financial
flows take place
We determined that the convention of breaking IFFs into the three
components of commercial activities, criminal activities and corruption
was substantially correct in the case of Africa. We took note of existing
estimates, which assess commercial activities as accounting for 65 per
cent of IFFs, criminal activities for 30 per cent and corruption for around
5 per cent, but we decided to take a more nuanced view based on the
information available to us in the African context (Kar and CartwrightSmith, 2010).
2.2.1 Commercial activities
The commercial component of IFFs arises from business-related
activities. These are complex to determine in terms of the dividing line
between the fair use of policy incentives and their abuse and the range and
scope of economic activities from which such outflows can emanate (see
annex II). The interpretation of such outflows has important implications
for a sector that is expected to invest in productive activities, create jobs
and impart managerial and technological skills. The business sector also
has relative strengths in interpreting laws and rules and being able to
avoid compliance with them because of the legal, accounting and finance
assistance that it can draw upon (figure 2.2).
IFFs originating from commercial activities have several purposes,
including hiding wealth, evading or aggressively avoiding tax, and dodging
customs duties and domestic levies. Some of these activities, especially
those linked to taxation, are described from a more technical perspective
as “base erosion and profit shifting” especially within the ambit of the
OECD. The various means by which IFFs take place in Africa include
abusive transfer pricing, trade mispricing, misinvoicing of services and
intangibles and using unequal contracts, all for purposes of tax evasion,
aggressive tax avoidance and illegal export of foreign exchange.
Figure 2.3, from the New York Times, shows how companies shift profits
among jurisdictions to evade or avoid paying due taxes.
24
Figure 2.2
Overview of illicit financial flows and security linkages
Financial
opacity gices
rise to IFF
Laudering
criminal
proceeds
Corruption
>> Drug trafficking
>> Bribery of
officials
>> Human
trafficking
>> Theft of state
assets
‘Illegal capital’
IFF
Tax
abuse
Market
abuse
>> Corporate
>> Conflicts of
interest
>> Individual
>> Regulatory
abuse
‘Legal capital’
IFF
Most urgent threats:
Most urgent threats:
>> conflict
>> state illegitimacy
>> rent-seeking
>> basic service
provision
>> inequality
>> effective political
representation
>> rent-seeking
Risk to
negative
security
Risk to
positive
security
Source: Tax Justice Network, 2014.
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Figure 2.3
The “Double Irish” system of tax evasion
‘DOUBLE IRISH WITH A DUTCH SANDWICH’
Numerous companies take advantage of loopholes in international laws to move profits around the world, avoiding taxes.
Many of these techniques rely on transferring profits on patent royalties to places like Ireland. Here is one technique typical
of what Apple and others pioneered.
START HERE
U. S. consumer
Overseas consumer
When the same product
is sold overseas, money
from the sale is sent to a
second irish subsidiary
PRODUCT
If the profits from the sale of a product
stay in the United States, they would be
subject to a federal tax of 35 percent.
But if money is paid to an irish subsidiary
as royalties on patents the company
owns, it can ultimately be taxed at far
lower rates.
PRODUCT
Second irish
subsidiary
Irish subsidiary
Manufacturing subsidiary
Because of a quirk in irrish law.
If the Irish subsidiary is
controlled by managers elsewhere,
like the Carribbean, then the
profits can skip across the
world tax-free.
At one time, a company would
actualy manufacture products
in Ireland. But today, it’s more
likely to use factories in China,
Brazil or India that ship directly
to consumers.
Caribbean or other
tax haven
The profits can land in an
overseas tax haven where
they are stored, invisible to
authorities, for years
0%
Netherlands
And because of irish treaties
that make some interEuropean transfers tax-free,
the company can avoid taxes by
routing the profits through the
Netherlands....
Source: New York Times, 2012.
26
NO-TAX COUNTRY
... and then back
to the first irich
subsidiary, which
sends the profits
to the overseas
tax haven
Abusive transfer pricing occurs when a multinational corporation takes
advantage of its multiple structures to shift profit across different
jurisdictions. While it is not wrong for trade to take place between
companies that are part of a single group, they would have to comply
with the “arm’s-length principle” for them not to be considered to be
engaging in base erosion and profit shifting. We found evidence that
abusive transfer pricing was occurring on a substantial scale in Africa.
In a particularly telling example, an African President informed the Panel
that a multinational corporation in his country had never paid taxes over
a 20-year period because it consistently reported making losses. He
was certain that this could only have been due to profit shifting, since no
business entity could remain in operation if it were making losses for such
a long time.
Another example of abusive transfer pricing was reported by the South
African Revenue Service (box 2.1). Research undertaken by Action Aid
International and other civil society organizations showing that abusive
transfer pricing was going on in several African countries was also
brought to the Panel’s attention.
We were particularly concerned that only three African countries
had transfer pricing units in their internal revenue services. Given the
widespread nature of such activities even in developed countries involving
well-known companies, we noted that African countries lacking any
official monitoring capacity must be very vulnerable to IFFs stemming
from transfer mispricing.
Box 2.1 Aggressive tax avoidance by multinational corporations being curtailed
in South Africa
The South African authorities informed the Panel about a case in which a multinational corporation
was found to have avoided $2 billion in taxes by claiming that a large part of its business was
conducted in the United Kingdom and Switzerland, which at that time had lower tax rates for their
business, and moving the legal site of their business to these jurisdictions. When the South African
authorities investigated the case, they found that the UK and Swiss subsidiaries/branches had only
a handful of low-paid personnel with relatively junior responsibilities, and that these offices did not
handle any of the commodities in which the company dealt (nor were they legally able to take title to
those commodities). The company’s customers were often in South Africa, but for each transaction,
a paper trail was created that would route the transaction through the Swiss or UK offices to give the
impression that these offices were critical to the business. The South African authorities were able to
reclaim the tax that was avoided because it was clear that the substance of the company’s activities
was conducted in South Africa.
Trade mispricing is the falsification of the price, quality and quantity values
of traded goods for a variety of purposes. These could range from the
desire to evade customs duties and domestic levies to the intent to export
foreign exchange abroad. The overinvoicing of imports has been practiced
by a variety of importers for a number of years, which is why several
African countries have introduced pre-shipment inspection to detect such
practices. We established that underinvoicing of exports was quite common
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in Africa, and particularly in the natural resource sector. The intention of
such practices is to reduce the amount of money to be remitted to the
exporting country from such sales.
The Panel was told in Mozambique that exported shrimp were often declared
to be of a lower quality than was actually the case. Reports of underdeclaration of quantities exported were present in all countries studied
or visited; for example, the Panel heard such reports in relation to crude
oil in Nigeria, minerals from the Democratic Republic of Congo and South
Africa, and timber from Mozambique, the Democratic Republic of Congo
and Liberia. According to a report by Chatham House, Nigeria’s oil is being
looted on an industrial scale, with the quantities lost estimated to be about
100,000 barrels a day (Katsouris and Sayne, 2013). Mozambican records for
2012 showed a total export of 260,385 cubic metres of logs and sawn timber
to the world, while records from China alone showed that 450,000 cubic
metres of the same products were imported from Mozambique.
Similar concerns caused Liberia to introduce the tagging of timber exports.
This measure was found to be quite effective, as a result of which the Panel
brokered contact between Liberia and the Democratic Republic of Congo,
which was facing challenges in the same area. The Panel was informed
by US authorities that they had apprehended a company guilty of fishing
illegally in South African waters, seized the funds and returned them to the
South African authorities.
We were particularly concerned that most African countries lacked the
means to verify the quantities of natural resources produced, relying
instead on exporter declarations. Self-regulation is the rule, and African
countries resort to a variety of incentives to encourage accurate reporting.
In one case, a partial refund of tax expenses was used as an incentive to
encourage filing of accurate returns.
Another widespread means to effect IFFs from Africa is the misinvoicing
of services and intangibles such as intra-group loans and intellectual
property and management fees. Such practices are making an increasing
contribution to IFFs. This is partly due to the increasing share of services
in global trade. Other contributing factors are changing technology and
a lack of comparative price information. The growth in information and
communications technologies has made it possible to transfer huge sums
of money at the click of a mouse while also enabling innovative forms of
misinvoicing. It is easier to use the arm’s-length principle to determine
the proper price of merchandise than it is for intellectual property such
as use of a brand name. It is similarly quite difficult to limit the advisory
services that related companies can render to one another or to determine
the maximum amount that they can lend one another.
We learned of instances in which intragroup loans were so large that they
would substantially reduce the tax payments of the companies involved. In
a case researched by a leading civil society organization that came to our
attention, the intragroup loan level to capital of an African subsidiary was
higher than a banker would countenance. A particularly intriguing example
of the increasing use of services for IFFs was that of the telecommunications
sector in numerous African countries (box 2.2). One country was estimated
to be losing up to $90 million every year from the theft of minutes in the
telecommunications sector. This fraud involved diverting international
calls and transforming them into local calls, with operators then making
fake declarations of incoming international call minutes to reduce the tax
payable to the government. Other examples of services being overinvoiced
were payments for overseas education, medical tours and foreign insurance.
28
Box 2.2 SIM box fraud and its effects on the African mobile sector
If you have ever received an international call while in Africa with significantly poor quality and the
number calling you appears as a local number rather than an international one, chances are that you
have been a victim of SIM box fraud. It is common belief that poor quality during mobile phone calls
stems from a defective wireless network. However, it could also be the mobile operator’s poor business
strategy. In SIM box fraud, individuals or organizations buy thousands of SIM cards offering free or
low-cost calls to mobile numbers. The SIM cards are then used to channel national or international
calls away from mobile network operators and deliver them as local calls, costing the operators
revenue (see illustration on next page). Formerly an issue that was only prevalent in Europe and
other parts of the world, African governments are now also suffering losses of potential tax revenue
from this scam with the massive growth of the mobile industry on the continent. In Kenya alone, the
approximately $440,000 per month worth of taxable revenue is lost to SIM box fraud. Recently the
government of Ghana also reported that SIM box fraud has cost $5.8 million in stolen taxes alone.
The Democratic Republic of Congo is also estimated to lose about $90 million in tax revenue a year
from the embezzlement of telephone time. The government of the Democratic Republic of Congo
levies a tax on each international call minute, and the fraud involves diverting international calls to a
SIM box and transforming them into local calls. By diverting these incoming calls using the SIM box,
pirates pay three times less tax, since international calls are presented as local calls.
Illegal SIM box fraud has been identified in many other African countries, including Côte d’Ivoire,
Madagascar, Sierra Leone, Somalia, Sudan, Tanzania and Uganda. In some cases, SIM cards were
generating up to 10 cents a minute for more than 20 days a month, costing an operator up to $3,000
per SIM card a month in lost revenue.
Steps are now being taken to curtail this problem though with the use of SIM box fraud tracking
services, and Airtel Ghana has recently announced the introduction of short code, 919, which
customers can use to report SIM card fraud. Such measures indicate how widespread SIM box fraud
has become.
Source: HumanIPO, 2012; Communications Africa, 2011.
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TRAFFIC SCENARIO
International SIM Box Fraud
Operator suffers a loss of $0.17 per minute being the difference between international termination
charge of $0.30 and local call of $0.13 per minute
INTERNATIONAL CARRIERS /
INTERNATIONAL VOICE MARKETS
NETWORK OPERATOR
Person initiating the call
Person receiving the call
Simbox
Authorized Point of interconnect International
gateway Switch
Volp calls forewarded using standard SIM cards from
operator $0.13/minute
Authorized “Legal” routing of call through agreed
points of interconnect and protocols $0.30/minute.
Fraudulent routing usually using Volp and terminating
on a computer bypassing the authotized point of
interconnect.
Source: “iServ SIM Box Detection,” http://www.idservers.net/App_Simbox.Aspx.
30
While there is increasing awareness of the use of services and intangibles
for IFFs, existing tools do not seem to provide the required solutions. African
governments are not entirely helpless in responding to this challenge; they
sometimes require registration of management fees or put caps on them as
a percentage of turnover. Governments are, however, hampered by lack of
information, the difficulty of establishing comparables for intellectual property
and the lack of remuneration for first-rate lawyers, accountants and financial
experts. We feel that this is an area requiring closer attention and formulation
of effective policy responses.
Unequal contracts are another commercial means used to facilitate IFFs.
Concern was expressed to the Panel about resource extraction contracts that
are shrouded in secrecy and fuelled by bribes in order to circumvent existing
legal provisions for the payment of royalties and taxes. Also of concern in this
regard is the asymmetry of information between African countries and the
multinationals, which often have more information about the quantity and quality
of the mineral deposits for which such contracts are being signed. Several
examples of unequal contracts were found during the Panel’s consultations and
in its case studies and existing literature.
The case of iron ore mining concessions in Guinea illustrates the problem of
unequal contracts. While the ore from one of the mines is estimated to be able to
generate revenues of up to $140 billion over the next twenty years, a concession
was granted in 2008 by the government at the time to a multinational for only
$165 million. A new government terminated this concession for reasons which
included allegations of corruption, after it was discovered that half of the rights
to the concession had been sold to another multinational for $2.5 billion. Since
then, the Guinean government has re-awarded the concessions for $20 billion to
another three mining firms. The disparity in the values illustrates the potential
losses of financial flows from unequal contracts in the extractive sector.
In another case, a company in a post-conflict country was as a result of the
provisions of a secret contract paying a corporate tax of only 1.43 per cent—in
effect, $10 million in tax on revenues of more than $700 million. In another
instance, a hidden contract set the royalty rate for the extraction of a major
mineral at 20 per cent of the rate established by law. This is an important factor
in a continent where natural resources are the main source of government
revenues and foreign exchange earnings.
A new practice in developed countries, and one that bears watching in African
countries, is tax inversion. This practice involves a large company undertaking
a cross-border merger with a smaller one in a more “tax friendly” jurisdiction.
The motive is clearly to reduce the tax burden on the large company. Up to 15
such transactions are said to have taken place in the United States in the last
two years (Economist, 21 June 2014).
2.2.2 Criminal activities
IFFs are often driven by criminal activities with the purpose of keeping
the transactions from the view of law enforcement agencies or revenue
authorities. We learned of criminal activities in Africa, ranging from
trafficking of people, drugs and arms to smuggling, as well as fraud in
the financial sector, such as unauthorized or unsecured loans, money
laundering, stock market manipulation and outright forgery.
Money laundering has received the most global attention as a result of antimoney laundering and counter-terrorist financing regimes put in place,
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principally through the recommendations of the Financial Action Task Force.
We felt that this was probably due to the political interest in the matter arising
from the desire to choke off financing to terrorist organizations. The case
studies and country consultations showed that while progress has been made,
significant weaknesses still exist with regard to stemming money laundering
in African countries. Most of the countries studied or visited had established
financial intelligence units or were in the process of doing so. Some, such
as Mozambique, had just put the institutional infrastructure in place, while
others, such as the Democratic Republic of Congo, had yet to act for a variety of
reasons relating to capacity constraints or distractions due to ongoing conflict.
We learned from United States authorities about a case of money laundering
totalling $480 million involving Lebanese banks in which sales of second-hand
cars were used to launder drug money, with a paper trail going across Benin
and Togo to European countries and Lebanon. The banks involved in facilitating
these transactions paid fines of up to $102 million. Evidence was also presented
of large-scale cash smuggling across land borders and through airports,
notably on private and chartered aircraft. The case of a former governor of a
state in Nigeria who used different shell companies, multiple bank accounts
and the movement of money through several jurisdictions to launder ill-gotten
wealth was a notorious example that came up in the course of the Panel’s
work. This particular case spoke to issues of governance as well as the role of
the banks in facilitating such suspicious transactions (Rayner, 2012).
Although we were not able to delve deeper into the shadowy world of organized
crime in Africa, the Panel was alarmed at the extent of the problem, which
became evident from information obtained from a variety of sources. In addition
to trafficking of drugs, arms and people, the evidence pointed to large-scale
smuggling networks trading in counterfeit goods or trading with the intent to
avoid paying duties and domestic levies. The main purpose of such criminal
activity might not be to generate IFFs, but criminality contributes substantially
to such outflows because of the desire to hide the proceeds.
2.2.3 Corruption and the Abuse of Entrusted Authorities
Corruption was one area greatly debated by the Panel. While there was
agreement that it facilitated all other aspects of IFFs, there was some debate
about the extent of its importance. While research indicated that money
acquired through bribery and abuse of office by public officials accounted for
around 5 percent of IFFs globally, some believe that this may not necessarily
be the case for Africa (Kar and Cartwright Smith, 2010). The situation was
further compounded by the outcome of questionnaires administered in the
course of the case studies in which most respondents felt that corruption
was the greatest source of illicit financial outflows from their countries.
The fact is that most people conflate any untoward act in the public sphere
with corruption. It is also pertinent to note that corruption cases are a staple
of daily news and are therefore in the consciousness of most citizens. This is
partly due to the work of anti-corruption advocates in civil society and state
anti-corruption agencies, but it can also be attributed to increased global
attention to the problem arising from the adoption of global and regional
instruments such as the United Nations Convention against Corruption and
the African Convention on Preventing and Combating Corruption.
We also noted that corruption was not limited to the public sphere, since
we learned of cases of corruption emanating from the private sector. We
noted that there are both demand and supply sides to bribery, which is why
the legislation in some developed countries against the giving of bribes by
32
companies makes an important contribution to stemming corrupt practices
in Africa. We agreed that corruption was better understood as the abuse of
entrusted power as defined in various anti-corruption instruments, which
makes a cross-cutting contribution to IFFs without the officials concerned
necessarily exporting their illegally acquired wealth.
2.3 Estimating illicit financial
flows from Africa
We emphasized that it was important to estimate the extent of IFFs from Africa
in a credible and evidence-driven manner. We noted, however, that arriving at
such an estimate was not a simple matter due to the difficulties inherent in
calculating such flows, the various approaches that have been used in previous
research, and the purposes for which the calculations are made.
The difficulties in estimation arise from the very nature of IFFs, which by
definition are mostly hidden and therefore difficult to track. As a result, data
are not usually available nor can the accuracy of existing data be easily verified
due to additional and well-known difficulties of generating good statistics
on the continent. We nonetheless felt that there was enough scope to track
IFFs based on existing work and on discrepancies in economic transactions
recorded between Africa and the rest of the world.
Existing work on IFFs has mainly examined discrepancies in recorded
capital flows or discrepancies in recorded trade flows. In taking one of these
approaches, researchers have worked on the basis of gross figures or netted
out illicit inflows into Africa. The motives of the researchers determined which
approach was taken. Those intent on showing the direct economic effect of
IFFs preferred to use the net approach. Others preferred to work on gross
outflows because, as one researcher famously said, “there is no such thing as
‘net crime’” (Kar and Freitas, 2012).
Taking these factors into account as well as results from other research, we
commissioned the Economic Commission for Africa of the United Nations (ECA)
to provide us with an estimate. The study undertaken by ECA looked at gross
outflows focusing on trade mispricing. This was informed mainly by reasons of
availability of data and the fact that United Nations Comtrade data enable the
use of detailed trade data and accordingly for a more nuanced approach. The
results of the study undertaken by ECA (see annex III ) show that in 2001–2010
African countries lost up to $407 billion from trade mispricing alone.
We compared the results of our study with other existing research, particularly
the work of Kar and Cartwright-Smith under the auspices of Global Financial
Integrity and that of Ndikumana and Boyce. Figure 2.4 shows that the trend
of IFFs has been high and rising since 2000, with a remarkable similarity in
the trend lines between the studies of Kar and Cartwright-Smith and of ECA.
The cumulative amount differed substantially, with the GFI approach showing
illicit outflows of $242 billion from trade mispricing alone in the period studied
by ECA. The difference was undoubtedly due to the use of different datasets.
Ndikumana and Boyce using a different approach, but similarly estimated
high IFFs from Africa from 33 African countries amounting to $353.5 billion
between 2000 and 2010.
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Figure 2.4
Evolution of IFFs from Africa, 2000–2008 (US$ Billion)
100
80
60
40
20
0
2000
UNECA’s
methodology trade mispricing
2001
2002
2003
Kar and
Cartwright-Smith
(2010) - all IFFs
2004
2005
2006
2007
2008
Kar and
Cartwright-Smith
(2010) - trade
mispricing only
Source: Based on Ndikumana and Boyce (2008), Kar and Cartwright-Smith (2010), Kar and Freitas (2011) and ECA’s calculations.
The implications of all these studies are that IFFs from Africa range from
at least $30 billion to $60 billion a year. These lower-end figures indicated
to us that in reality Africa is a net creditor to the world rather than a net
debtor, as is often assumed (see also African Development Bank, 2013). We
also observed that the increasing trend of illicit financial outflows coincided
with a period of relative high economic growth in Africa, and that IFFs are
therefore negating the expected positive impact of increased growth on the
continent.
We believe that these estimates of illicit financial outflows tell only part
of the story, in the sense that it takes a combination of actors and set of
conditions to enable them to happen. We proceeded to examine the roles of
different actors in IFFs and their drivers and enablers.
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2.4 The mosaic of actors
It is obvious that there are different sets of actors in the policy sphere of
IFFs. These actors have different stakes, with some of them implicated
as perpetrators while others are actively engaged in combating the
scourge. They also have different capacities with regard to responding to
the policy and regulatory requirements of IFFs and have different levels of
information at their disposal. It is important to get a better understanding
of the respective roles, motives and incentives of these actors, as well as
of the complex interrelationships between them.
Some of the actors involved from opposite ends of the IFFs from Africa
are governments within and outside the continent, the private sector,
civil society organizations, criminal networks and global actors, including
international financial institutions.
African governments have a political interest in IFFs because these flows
impact their national development aspirations and encroach on state
structures. They therefore have law enforcement and regulatory agencies
whose duties include preventing IFFs. Among these are the police,
financial intelligence units and anti-corruption agencies. Governments
also have customs and revenue services and other agencies whose
purposes are thwarted or hindered by IFFs.
We believe that most African governments have a strong interest in
stemming IFFs, including through obtaining the cooperation, compliance
and commitment of other actors. They seek to stop IFFs in order to
maximize tax revenues, keep investible resources within their countries,
prevent state capture and impede criminal and corrupting activities.
This much was evident from the level and range of government officials
with whom we interacted during our country visits and subregional
consultations.
We found, however, that there was a relative lack of knowledge about
the true nature of IFFs in government circles except for a few pockets
of specialized agencies dealing with such matters. African governments
also lack various requisite capacities in law and finance to tackle IFFs
effectively, with unbalanced institutional capabilities in some countries.
For instance, several African countries had set up or were moving to
establish anti-corruption agencies, but very few of them had transfer
pricing units in their internal revenue services.
In some African countries we found that the institutional architecture for
responding to IFFs was at best uneven or, as in several key instances,
non-existent. Lack of transparency, secrecy and the difficulty of obtaining
information and systematic data remain key challenges across the board.
Even where the institutional set-up is elaborate and extensive, as is the
case with Nigeria (box 2.3), we remain concerned about the effectiveness
of the relevant institutions, including the lack of cooperation and coherent
operations among the various agencies. We also learned of concerns about
retaining skilled people in public service in Africa due to the large gap in
remuneration between the public and private sectors. We heard reports
that large corporations had attempted to recruit skilled accountants and
lawyers who had worked for government on cases related to IFFs.
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Box 2.3 Financial institutions in Nigeria and their challenges in combating illicit
financial flows
In many African countries, regulatory agencies and institutions have been established with
responsibilities that cut across various dimensions of IFFs. In Nigeria, for example, some of the
related institutions include:
> Nigerian Ministry of Finance
> Central Bank of Nigeria
> Economic and Financial Crime Commission
> Independent Corrupt Practices and other related Commission
> Federal Inland Revenue Service
> Nigeria Custom Service
> Nigeria Drug Law Enforcement Agency
> Nigeria Extractive Industry Transparency Initiative
> Nigeria’s Code of Conduct Bureau
> Special Control Unit against Money Laundering
> Nigerian Financial Intelligence Unit
> Nigeria Police Service
Despite the various institutions and their efforts aimed at curbing IFFs and related problems, the
magnitude of the challenges experienced by these institutions overwhelms their implementation
capacities. Most of these institutions face problems such as inadequate capacity (including equipment,
adequate and relevant skills); shortages of funding (requiring them to rely on unpredictable foreign
assistance); and in some cases, inadequate support from the judicial system.
In addition to these constraints, the situation is further complicated by a lack of coherence between
the institutions, the duplication of responsibilities among the different agencies, ineffective
coordination between them, and insufficient expertise to deal decisively with the IFF phenomenon. In
some instances, therefore, tax authorities may not report tax crimes to law enforcement authorities
even after they have reclaimed stolen tax funds from the perpetrator.
The private sector in Africa consists of large companies, small and
medium-scale enterprises and the informal sector. The large companies
are engaged in all economic sectors, including agriculture, mining,
manufacturing and services. This category includes multinational
corporations and international banks, as well as international legal and
accounting firms that operate in several African countries and some of
which are of African origin.
36
In terms of the financial flows involved, it is the large companies that
engage in IFFs through abusive transfer pricing, trade misinvoicing,
misinvoicing of services and intangibles and use of unequal contracts.
They exploit the lack of information and capacity limitations of government
agencies to engage in base erosion and profit-shifting activities. Given
their scale, IFFs will at some point pass through banks and the financial
system. The international banks sometimes facilitate IFFs even when
they know that the money is tainted, as became evident in several asset
recovery cases. Even where banks have an obligation to file suspicious
transactions reports, this requirement is often overlooked in some
countries in transactions emanating from small, rural branches. Indeed,
banks sometimes knowingly establish infrastructure to facilitate IFFs
moving to financial secrecy jurisdictions.
In spite of the active involvement of large companies in IFFs, their role
is not well known by the general public in Africa. It is the difficulties
that some of them have had with tax and revenue authorities in G8
countries that have made more people aware of such activities. We
noted that large companies are vulnerable to reputational risk and to
pressure from the governments of developed countries. Although large
companies wish to continue exploiting the thin dividing line between tax
evasion and aggressive tax avoidance, they are also concerned about
their brand names and the dangers of falling afoul of the law. When
negotiating settlements with tax and revenue authorities they therefore
often seek clauses that preserve their anonymity.
Customs authorities reported that small and medium-scale enterprises
also engage in illicit financial outflows, mostly through the misinvoicing
of imports and exports. They sometimes underinvoice imports in order
to reduce customs duties while overinvoicing exports to benefit from
export incentives. We believe, however, that small and medium-scale
enterprises and the informal sector are, in the main, victims of tax
evasion and aggressive tax avoidance by large corporations because
they tend to bear the brunt of the tax burden.
Another set of actors that have become noticeable in the fight against
IFFs are civil society organizations (CSOs). They have campaigned against
IFFs from Africa (and other parts of the world) from the perspective of
social justice and also because of their effects on development and
governance. CSOs have used various means to draw attention to the
negative consequences of IFFs, ranging from advocacy campaigns
and naming and shaming perpetrators to undertaking research and
proposing policy solutions.
The Panel benefited from an exchange of views with CSOs at various
stages of its work. CSOs were active participants in consultations and
country visits, and their research was invaluable in providing insights on
the phenomenon of IFFs. Notable in this regard is the work of Action Aid
International, Christian Aid, Chr. Michelsen Institute, Global Financial
Integrity, Oxfam, Pan African Lawyers Union, Tax Justice Network and
Transparency International (box 2.4).
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Box 2.4 Civil Society Organizations (CSOs) that lend their voices to the fight
against illicit financial flows and related practices
Several non-profit organizations actively increase awareness and ultimately help shine a spotlight
on financial malpractices globally.
Action Aid was created to fight poverty and injustice globally. Among its many objectives are to
eradicate poverty and hunger, achieve education for all and strengthen gender equality. With its
focus on accountability in governance, Action Aid is also actively involved in the struggle against
IFF practices such as tax dodging, trade misinvoicing and bribery. Taking a more direct approach
than most, the organization occasionally develops reports and media campaigns that probe the
IFF practices of specific multinational corporations or governments. In 2010, the organization
led a campaign (which included a detailed report) against a large multinational in Africa.
Source: https://www.Actionaid.org.uk/sites/default/files/doc_lib/calling_time_on_tax_avoidance.pdf.
Christian Aid is the official relief and development agency of 41 British and Irish churches and
works to support sustainable development, end poverty, support civil society and provide disaster
relief in South America, the Caribbean, the Middle East, Africa and Asia. The organization works
globally to encourage profound changes that are in many ways related directly to accountability
in government and financial probity in international trade. However, it makes its argument from
the standpoint of those affected by IFFs—as, for example, in a Christian Aid report that argues
that the lives of at least 1,000 children are being lost daily to disease and poverty in poor countries
because of illegal trade-related tax evasion.
Source: http://www.Christianaid. Org.uk/images/deathandtaxes.pdf.
Chr. Michelsen Institute (CMI), founded in 1930 is an independent, non-profit research foundation
for policy-oriented and applied development research. CMI generates and communicates
research-based knowledge relevant for fighting poverty, advancing human rights, reducing
conflict and promoting sustainable social development. Its research focuses on local and global
challenges and opportunities facing low- and middle-income countries and their citizens. In
relation to fighting IFFs, the institute hosts the Anti-Corruption Resource Centre, also referred
to as U4. The Centre aims to create a full understanding of corruption and its impact on
development, and particularly on the lack of information on the problem and how to address it.
Source: http://www.u4.no/publications/tax-motivated-illicit-financial-flows-a-guide-for-development-practitioners/.
Global Financial Integrity (GFI) is a non-profit research and advocacy organization that conducts
research on national and multilateral policies towards enhancing global development and
security. The organization produces analyses of IFFs and promotes pragmatic transparency
measures in the international financial system. For instance, GFI asserts that roughly $1 trillion
flows illegally out of developing countries annually due to crime, corruption and tax evasion—
close to ten times the amount of foreign aid flowing into these same economies. In a recent
report, GFI emphasized the blight of trade misinvoicing within Ghana, Kenya, Mozambique,
Tanzania and Uganda and its negative impact on the national revenue of these nations.
Source: http://iff.gfintegrity.org/hiding/Hiding_In_Plain_Sight_Report-Final.pdf.
38
Oxfam is an international confederation comprising 17 organizations working in approximately
94 countries to find solutions to poverty and what Oxfam considers as injustice around the world.
It works with thousands of local partner organizations to find practical and innovative ways for
people to lift themselves out of poverty and prosper. Oxfam is also frequently involved in anti-IFF
activities as well as the fight against inequality. The organization has been vocal on the issue of
multinationals taking advantage of tax loopholes in Africa as well as the necessity for adequate
laws that can help the continent recover its losses from IFFs.
Source: http://www.oxfam.org/en/eu/content/taxing-problem-eu-africa-and-illicit-finance.
Pan African Lawyers Union (PALU) is a continental membership forum and umbrella association
for African lawyers and lawyers’ associations, which reflects the aspirations and concerns of
the African people and promotes their shared interests. As an non-governmental organization
focused on upholding legal standards, it works towards the development of the law and the legal
profession, the rule of law, human rights and the socioeconomic development of the African
continent. This includes ensuring the preservation of financial legality in all sectors. This focus
was evident at the PALU General Assembly held in June 2014, whose theme was opposition
to IFFs and repatriation of frozen assets. The General Assembly issued a Communiqué on
Combating Illicit Financial Flows with recommendations for African Governments, the African
Union and relevant international financial institutions.
Source: http://lawyersofafrica.org/archives/2471.
Tax Justice Network (TJN) is an independent international advocacy group dedicated to research,
analysis and advocacy in the areas of tax and aspects of financial regulation internationally. TJN
plays an instructional role in analysing and explaining the harmful impacts of tax evasion, tax
avoidance, tax competition and tax havens. The African Charter of TJN particularly concentrates
on several thematic areas related to IFF and tax competition within the continent. An example
of the work that highlights the institution’s research is a manual that provides a summary of
why African states and citizens should engage in the campaign for tax justice. The manual gives
an overview of the sources of tax injustices in Africa, the key actors in framing the tax policy
landscape on the continent, the agencies influencing tax policy in Africa and finally a way forward
for more tax justice on the continent.
Source: http://www.taxjustice.net/cms/upload/pdf/tuiyc_africa_final.pdf.
Transparency International (TI) monitors and publicizes corporate and political corruption in
international development. Consisting of locally established chapters that address corruption in
their respective countries, TI seeks to end corruption while promoting accountability and integrity
at all levels of society. In line with its mandate, the organization has worked with like-minded
organizations, including the United Nations as well as governments, in seeking to curb IFFs as
part of its fight against corruption. TI has in the past launched campaigns to this effect, such as
one launched early in 2014 on how shedding light on those who benefit illicitly from companies
is a key tactic in stopping corruption.
Source: http://files.Transparency.org/content/download/1326/10289/file/2014_PolicyBrief2_BeneficialOwnership_EN.pdf.
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We wish to stress the invaluable role that CSOs play in the fight
against IFFs. However, CSOs often face political pressures and need
to be provided with the space and support that would enable them to
continue their campaigns.
Criminal networks also engage actively in laundering money from
Africa, with the motive of hiding their activities, facilitating payment
across their illegal supply chains and concealing the resulting illicit
wealth. Even so, criminal networks by their very nature minimize
contact with law enforcement and tax, customs and regulatory
authorities. These networks do not comprise just the “field soldiers”
of maritime piracy and narcotics, arms and human trafficking, but
include as well sophisticated people who run the operations and related
financial transactions out of the public eye. Although the activities of
criminal networks are not publicly visible, we noted with concern the
use of illicit financial resources to sponsor terrorist activities on the
continent and their use as part of insidious moves to capture state
structures.
Obviously, there are also global actors in IFFs in the African context.
Indeed, the more we learned about IFFs from the continent, the
stronger became our view that the trend is an African problem with a
global solution. We identified two types of beneficial global partners
in this regard, namely, non-African governments and international
organizations.
Non-African governments have a crucial role to play in stemming IFFs
from the continent by ensuring that their jurisdictions are not used as
conduits or destinations for IFFs. We found that while some developed
countries were taking a firm stance against some aspects of illicit
financial outflows, others had put in place institutional mechanisms
that encouraged such flows and that could qualify them as financial
secrecy jurisdictions. Apart from helping to establish a global norm
against IFFs, non-African governments have a key role to play in
assisting African countries acquire the capacities to fight the scourge
of IFFs.
International organizations have a similar role to play in norm setting.
They have established global norms against corruption and criminal
activities and should continue to act in concert against these nefarious
activities. However, they play a more differentiated role in tackling
IFFs from commercial activities. Entities such as the World Customs
Organization, United Nations Tax Experts Committee, United Nations
Office of Drugs and Crime, Financial Action Task Force and OECD are
working on different aspects of IFFs and from different perspectives.
We felt that the very important research, policy advice and direct
technical support activities of these various bodies is of great help,
though better coordination is required to achieve coherence and to
support Africa’s limited capacities to cope with IFFs.
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2.5 Drivers and enablers
of illicit financial flows
IFFs are driven by a number of “push” and “pull” factors. The most
obvious push factor driving IFFs is the desire to hide illicit wealth. In other
words, irrespective of the means by which illicit financial transfers take
place, the ultimate objective of the actors involved is to hide the proceeds
away from the public eye and law enforcement agencies. Related to this
is the imperative to conceal the ways and means by which illicit wealth is
created and that make it difficult to trace the associated money flow.
Poor governance enables IFFs. A poor business environment may
encourage IFFs when people find it easier to make money through illicit
activities than through legitimate business. Moreover, apart from being
one of the sources of IFFs, generalized corruption would also propel
such activities by weakening institutions and regulations. Strong legal
frameworks and enforcement agencies make it difficult for individuals
and companies to move illicit resources. This point is evident from the
relative success of developed countries in tackling IFFs compared with
the African experience.
Weak regulatory structures may also be an important factor in postconflict countries. This was certainly the case in the Democratic Republic
of Congo, which has not been able to establish such institutions as a
financial intelligence unit or indeed an anti-corruption agency, owing
partly to the distractions of violent conflict. It was also clear that illicit
financial outflows are facilitated in areas that are not under the complete
control of African governments as a result of conflict and insurgency.
Recognition of this problem led to the introduction of the Kimberly Process
to stop the trade in “blood diamonds”.
Double taxation agreements (DTAs) can also enable IFFs. We acknowledge
that DTAs have a positive role in a number of respects. Since double
taxation can stifle economic activity and deter foreign direct investment,
and agreements between countries to avoid such consequences have
a place in necessary policy interventions. However, the benefit of such
agreements depends on their provisions. A well-negotiated and balanced
DTA will not deter foreign direct investment, and it should not contain
provisions that encourage IFFs. Troublesome examples of such provisions
came to the Panel’s attention, such as those that seek to remove or
lower withholding taxes on management fees and remove limitations on
intracompany loans.
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The content of DTAs reflects the relative bargaining strength of the
partners, and given their weak capacities African countries start out at
a disadvantage in negotiating such agreements. We therefore lend our
support to the model treaty proposed by the African Tax Administration
Forum. We also note that the OECD version does not allow for withholding
taxes on royalties and management fees, while the version produced by
the United Nations Tax Committee gives stronger rights to taxation at
source. The case of DTAs underlines the need for Africa to build capacity
to negotiate economic contracts effectively.
Tax incentives are another set of instruments with positive intentions
that sometimes enable IFFs. Ordinarily, tax incentives are granted to
encourage inward investment or the expansion of economic activity in
general or in specific sectors. However, they can have a pernicious effect
when abused. In this regard, African countries need to establish regional
and subregional standards for tax incentives to end the existing “race to
the bottom”. At the same time measures should be taken to combat the
abuse of incentives such as tax holidays that enable IFFs, notably through
the exploitation of rules relating to change of ownership as well as directly
through base erosion.
A major enabler or pull factor for IFFs from Africa is the existence of
financial secrecy jurisdictions and/or tax havens. Strictly speaking, these
two things are not the same. Financial secrecy jurisdictions put in place
an elaborate framework to attract financial resources irrespective of
their provenance, whereas tax havens mainly aim to exploit differences
in tax rates across different jurisdictions. Nonetheless, we feel that the
distinction is not a vital one for the purposes of our work, especially as
the enabling effect of both financial regimes on IFFs is the same in terms
of lack of transparency.
We learned of the difficulties that the more powerful developed economies
face in curbing the activities of financial secrecy jurisdictions, or even in
describing countries as such. We faced similar sensitivities both from
within and outside Africa during the course of our work. Since addressing
the push factors of IFFs alone would be ineffective, the Panel is of the
strong view that it remains vital to ensure that there is nowhere to send
or hide illicit financial outflows. We found that several African countries
desired to become financial services centres, and, though we understand
the reasoning, we feel strongly that African countries should not in the
process become financial secrecy jurisdictions sucking resources from
the rest of the continent. A situation in which global businesses pay lower
taxes than domestic companies, in countries where they have substantial
operations, does not inspire confidence in the intentions and outcomes of
the financial arrangements put in place to achieve this result.
commissioned research on financial secrecy jurisdictions to
help African countries identify places where their trade is purportedly
going but that could be a disguise for IFFs. The study (see annex IV)
analyses the risk to African countries of IFFs arising from the extent of
financial secrecy of the partner jurisdiction. As an example, the intragroup
transactions of a multinational company with subsidiaries in Bermuda
may contain greater risk of IFFs than those with a subsidiary in Brazil.
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2.6 Ongoing efforts to curb illicit
financial flows
To complement our exploration of issues around IFFs, we also studied the
efforts and interventions going on regionally and globally. We recognized
that the very fact of the establishment of our Panel was a sign that
African countries are seriously concerned about IFFs. Our work has also
confirmed the clear imperative to take global action to end the scourge
of IFFs.
2.6.1 National and regional efforts
Some of the prominent problems at national and regional levels are
> The lack of adequate regulatory frameworks;
> Lack of information and telecommunication
transportation and other relevant infrastructure;
facilities,
> Lack of adequate funding and reliance on unpredictable foreign
assistance;
> Shortage of technical and human capacity to deal with crime
perpetuated by sophisticated companies and individuals;
> The involvement in corruption of top government officials
operating at different levels of governance; and
> The perception of citizens of resource-rich countries that resource
rents are free for all to harvest if given the opportunity.
A particular case that concerned inadequate capacities that resonated
with the Panel was one that led to tension between the prosecuting
authority and judiciary. The capacity imbalance between the prosecuting
authority and the multinational corporation it was prosecuting was such
that the latter was able to hire the best internationally available legal and
accounting expertise, which the State could not afford. This resulted in the
prosecutors almost always losing their cases and leading them to suspect
prejudice on the part of the judiciary. Other telling examples were the
poaching of staff of government agencies by multinationals, sometimes
during ongoing investigations into their tax affairs.
There are also challenges of duplication, overlapping of functions and
lack of coordination among different agencies. These problems are more
pronounced in countries where there are numerous anti-IFF institutions.
Equally, countries also complained about the lack of cooperation from
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destinations where IFF money is held, especially in the context of asset
recovery. There is a strong view throughout African civil society that the
required institutions are weak and that they face the additional challenges
of obstructive political interference, ineffective legal frameworks and
processes and the lack of political will to deal decisively with IFFs. These
are among the areas where much has to be done to enhance Africa’s
success in fighting against IFFs.
The whole of government approach promoted by the Oslo Dialogue of the
OECD also attracted the attention of the Panel due to its coverage of a
wide range of issues and related institutions pertaining to IFFs, including
tax, customs, law enforcement, anti-corruption, financial regulation and
prosecuting authorities. We believe that African countries can benefit
from the example of improving cooperation between these agencies at
the national level and between countries. Key in this regard would be
the re-examination of policies which restrict the use of tax information
solely for that purpose without the ability to share the information with
law enforcement agencies.
The Panel has also noted policy and institutional frameworks established
on the African continent with regard to combating corruption through
adoption of an Africa-wide instrument (the African Union Convention on
Preventing and Combating Corruption) as well as national anti-corruption
legislation and institutions.
We have also taken particular note of the progress that has been made with
regard to combating money laundering. The regional commitment to the
fight against money laundering is evident from membership of the InterGovernmental Action Group against Money Laundering in West Africa,
the Financial Action Task Force, the Global Counterterrorism Forum, the
UN Counter-Terrorism Implementation Task Force, the Financial Crimes
Enforcement Network, and the Egmont Group of Financial Intelligence
Units.
This institutional response is largely the result of the anti-money laundering
and counter-terrorist financing regimes that have been put in place,
principally through the recommendations of the Financial Action Task
Force. The substantial progress made in this area is owing to the political
will to choke financing to terrorist organizations. However, significant
weaknesses remain in the implementation of the FATF recommendations,
with evidence still abounds that major banks and financial institutions
continue to receive, transfer and manage illicit outflows from Africa. In
this regard, see the important report “Measuring OECD Responses to
Illicit Financial Flows from Developing Countries” (OECD, 2014).
The record on efforts to combat commercial sources of IFFs was more
mixed. The African Tax Administration Forum, which was established to
promote cooperation and collaboration among African revenue services,
has made an important contribution on some tax-related aspects of IFFs.
It has developed model treaties for double taxation agreements and for
the exchange of information that are more suited to the needs of African
countries. Our interaction with the African Tax Administration Forum
reinforced our view that a major constraint on combating IFFs in Africa is
the problem of capacity.
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2.6.2 Global efforts
At the global level, the Panel looked into existing or emerging practices,
principles and frameworks for managing different aspects of IFFs
as well as related efforts at institutional cooperation. Some of the key
items relate to transparency, which encompasses issues like availability
of information relating to compliance with the arm’s-length principle,
country-by-country reporting, beneficial ownership, automatic exchange
of information and asset recovery. We believe that transparency is key to
all efforts to arrest IFFs, given that the primary aim of perpetrators is to
hide wealth. We agree with the admonition by the late US Justice Louis
Brandeis that “sunlight is the best disinfectant”.
Observance of the arm’s-length principle is fairly well established in
developed countries as the means by which a company can show that
it is not engaged in abusive transfer pricing. By showing that it is using
the comparative price of similar goods in conducting intragroup trade, a
company can avoid accusations of tax evasion or aggressive tax avoidance.
Our observation, however, is that checking on the use of the arm’s-length
principle is not a simple matter for African countries where transfer
pricing units are barely functioning, if they exist at all. We agree with the
view of the United Nations Tax Committee that it is difficult and complex
to ensure compliance with the arm’s-length principle, since doing so
requires a huge and expensive database and a high level of expertise. In
the case of the rapidly rising trade in services and intangibles, the arm’slength principle does not offer remedies in terms of establishing the
quantum of exchange or the appropriateness of the prices used.
We were encouraged by the emergence of discussions on country-bycountry reporting of employees, profits, sales and taxes as a means of
ensuring transparency in cross-border transactions. Country-by-country
reporting, publically available, will help to show where substantial activity
is taking place and the relative profits generated and taxes paid. In the
absence of a universal tax administration, country-by-country reporting
will enable tax and law enforcement agencies to gain a full picture of a
company’s activities and encourage companies to be transparent in their
dealings with African countries.
We consider Section 1504 of the US Dodd-Frank Act, which requires
companies in the extractive sector to disclose publicly all their payments
to government in the separate jurisdictions in which they operate, to be a
good start to country-by-country reporting. Also notable in this regard is
the European Union’s Accounting and Transparency Directives. We also
view the Extractive Industries Transparency Initiative in the same light as
improving transparency. At the same time we note its voluntary nature
and the fact that reporting payments made to governments tends more
to curb corruption than to tackle IFFs from commercial activities. This is
because reporting payments to governments alone may not show the full
extent of IFFs if there is no profit base with which they can be compared.
Moreover, its provisions do not cover undeclared quantities, which are a
key source of IFF.
45
1
2
3
4
A key principle that is emerging with regard to tackling IFFs is the exchange
of tax information among countries. This can either be on request or involve
the automatic exchange of information, which is finding increasing favour
with developed countries in their various forums, including the OECD. We
acknowledged that complying with this emerging “gold standard” could
be problematic for African countries because of their inadequate human
and financial resources and regulatory frameworks. Nevertheless, we
believe that it is important for Africa to strive to be part of emerging global
frameworks to tackle IFFs. The application of the principle of “common but
differentiated responsibilities” would also be appropriate in this regard.
Another key transparency issue relates to the declaration of beneficial
ownership in companies. The operation of shell companies and allowing
the identity of owners to remain secret enable those who wish to hide
illicit wealth or launder money to do so without hindrance. To combat
these problems, the Panel feels strongly that public registry of beneficial
ownership is important. It welcomes the passage by the European
Parliament of a resolution calling for beneficial owners of companies,
foundations and trusts to be listed in public registers and looks forward
to the final EU legislation to serve as a model for other jurisdictions. The
Panel is of the view that political action is particularly important in this
area. We note the virtual disappearance of shell banks once US financial
institutions were prohibited from dealing with such non-US entities.
An area of particular concern during the subregional consultations was
that of asset recovery. This Panel wishes to stress the importance of
asset recovery as a means of providing resources for the development of
African countries while also serving as a deterrent for those who stash
illicit gains abroad. Global schemes for repatriating capital that has been
corruptly transferred abroad are well developed, and these also cover
Africa. Notable arrangements include incentives for bringing assets held
abroad back to their countries of origin, such as amnesties, unilateral
domestic legislation in developed countries and multilateral agreements
with the same purpose. In this regard, we recognize the importance of the
Kleptocracy Asset Recovery Initiative of the United States and the Stolen
Assets Recovery Initiative of the World Bank and the United Nations Office
on Drugs and Crime.
The Panel is particularly encouraged by the action taken by the US
government under its Kleptocracy Initiative in early 2014 to freeze and
return to Nigeria assets of not less than $458 million stolen by the late
Nigerian dictator Sani Abacha, with another estimated $100 million also
restrained (box 2.5). We feel that such action underscores the imperative
for political action by developed countries to fight IFFs. Similarly, we
recognize the contribution of the StAR Initiative, even as we acknowledge
the fact that thus far its accomplishments have been limited. We believe
that necessary actions be taken to improve the effectiveness of this
important instrument.
46
Box 2.5 US Department of Justice freezes millions stolen by Sani Abacha
In March 2014, the US Department of Justice announced that it had summarily frozen more
than $458 million in corruption proceeds stashed in various accounts in the United States and
around the world by the late Nigerian dictator Sani Abacha and his conspirators. The seizure was
described as the proceeds stashed in or moved through various accounts in the United States.
This recovery was made possible through the department to Kleptocracy Asset Recovery Initiative,
which is aimed at seizing/recovering the assets of foreign leaders who steal funds that properly
belong to the citizens they are supposed to serve and, where appropriate, return that money to
benefit the people harmed by these acts of corruption and abuse of office.
Although it is purported that these illicit funds were laundered through the purchase of bonds
using US financial institutions, the department insists that it will not let the US banking system
be a tool for dictators to hide their criminal proceeds. The department said it was pursuing
additional holdings in the United Kingdom with an expected value of at least $100 million, but
that the exact amount would be determined later.
In an effort to ensure continued transparency and increased information sharing, the Department
of Justice also reported in comprehensive detail how the money was stolen from the Central Bank
of Nigeria and the role of several Nigerian banks in transferring the stolen funds to accounts
operated by General Abacha across the world.
The frozen funds, amounting to more than $458 million, and the additional assets named in the
complaint represent the proceeds of corruption during and after the military regime of General
Abacha.
Source: US Department of Justice.
It is our view that existing asset recovery initiatives are hindered by
delays, lags and capacity constraints. Countries that have been the most
successful in tracing, freezing and repatriating stolen assets have legal
frameworks that allow asset forfeiture and civil prosecutions without
requiring criminal prosecution of the offender. Also pertinent in this
regard are laws that prohibit the giving of bribes and gratuities such as
the OECD Foreign Bribery Convention and the Foreign Corrupt Practices
Act of the United States.
A matter of particular concern relates to the administration of frozen
assets. We believe that frozen assets should not be kept in banks that
are complicit in receiving these assets. Rather, they should be kept in
an escrow account in regional development banks, which in the case of
Africa is the African Development Bank. In addition, countries where illicit
financial outflows have been secreted should not have the prerogative of
stipulating the conditions for their return. Even at the most mundane level
of justice, law enforcement agencies do not ask a person who has been
robbed to give guarantees of how the returned resources will be used. Of
course, this does not amount to an endorsement of mismanagement of
returned/repatriated funds.
47
1
2
3
4
While recognizing the global dimension of IFFs, we believe in cases of
corruption, African countries and other related actors have to live up to
their responsibilities in this area. Corruption has both a demand and
supply side, even within the continent. Thus, while public sector agents
play an important part in corruption, private sector actors often initiate and
benefit from such acts. We therefore wish to underscore the importance
of promoting transparency in interactions between Government and
business in Africa and suggest the introduction of lifestyle audits as a
routine legal requirement when there is evidence of unexplained wealth.
We acknowledge the various efforts to tackle IFFs at the global level
and through a number of forums and initiatives (box 2.6). While there is
emerging convergence of principles and practices, such as exist among
the G8, G20 and OECD states, much more needs to be done to promote
and achieve this convergence. Because membership in the forums
dealing with IFFs is often limited to developed and emerging economies,
the related processes are not universal and reflect the interests of the
concerned countries and groupings. The lack of participation of African
countries means that their interests are not necessarily being taken into
account. Indeed, the complexity of the issues involved and the financial
costs of compliance could pose a problem for Africa. We feel that these
issues deserve further attention at regional and global levels.
Box 2.6 Initiatives and forums to tackle illicit financial flows
> The Global Forum for Transparency and Exchange of Information for Tax Purposes (OECD)
> The Multilateral Convention on Mutual Cooperation in Tax Matters (OECD)
> The Extractive Industries Transparency Initiative (EITI)
> Base Erosion and Profit Shifting Project (OECD + G20)
> Sections 1502 and 1504 of the Dodd Frank Act (US)
> The Foreign Account Tax Compliance Act (US)
> Automatic Exchange of Information (OECD, G20, G8)
> Anti-Bribery Convention (OECD)
> Public Registry (UK)
> United Nations Convention Against Corruption (UNCAC)
> The Recommendations of the Financial Action Task Force
> Open Government Partnership
> United Nations Tax Committee
48
49
1
2
3
4
Chapter
The governance and
development impact
of illicit financial flows
50
3
The Terms of Reference of the Panel require it to explore the governance
and development impact of illicit financial flows (IFFs), which we discuss
in the chapter.
3.1 Weakening governance
The occurrence of IFFs is first and foremost a governance problem, since
good citizenship is the foundation of good government. Inasmuch as IFFs
are driven by the desire to hide wealth and to evade taxes, perpetrators
clearly do not respect the obligations of citizenship. It is well established
in the literature that there is greater government accountability when the
bulk of public sector resources derive from taxpayers, who almost always
demand to know how their tax monies are being used.
The widespread occurrence of IFFs in Africa also points to a governance
problem in the sense of weak institutions and inadequate regulatory
environments. IFFs accordingly contribute to undermining state capacity.
To achieve their purposes, the people and corporations behind IFFs
often compromise state officials and institutions. Left unchecked, these
activities lead to entrenched impunity and the institutionalization of
corruption.
Corruption is both a source and enabler of IFFs. The transfer of the
proceeds of bribery and abuse of power are one thing, but the role of
corruption in enabling IFFs across the board is another. The negative
impact of corruption on development is well known, including the
debasement of values needed in the development process, misdirection of
energies on “rent-seeking” activities and the misalignment of incentives
such that private gain no matter how acquired becomes the leitmotif of
all economic activity.
Several examples of the role of corruption to fuel IFFs came up at every
stage of the Panel’s work. These included bribes paid to customs officers;
inducements to tax inspectors, including job offers; and payments to
security officers, bankers and judges. Earlier we mentioned that political
power is often used to prevent state officials from carrying out their duties.
This includes forbidding officials to vet mineral exports or search private
planes to prevent smuggling of cash and the cutting of political deals to
frustrate prosecution of crimes relating to IFFs.
IFFs can contribute to political discontent, partly due to the reduced
ability of governments to provide social services but also as a result of the
resentment of corruption arising from IFFs. These factors were evident
during the Afro-Arab Spring. Participants in the Panel’s consultations in
North Africa were particularly vocal in expressing their anger at the extent
of their resources illicitly taken abroad and the cumbersome, lengthy and
costly process of repatriation of such funds.
A closely related consideration is the symbiotic relationship between
increasing criminal activities and IFFs, especially, but not only, in West
and Central Africa.
51
1
2
3
4
Given the well-known dependence of several African countries on
significant amounts of official development assistance, the loss of
resources through IFFs can only serve to deepen reliance on donors. Such
dependence is apparent not only in terms of funds to support the social
sector and state institutions, but also in terms of development ideas. It
is an established fact that despite assertions of ownership, development
policy very often reflects the perspectives of creditors or donors. Thus,
when strapped for resources, African countries can often find themselves
at the receiving end of externally imposed ideas that might not really be in
their own perceived interests.
Another governance dimension of IFFs relates to the unequal burden
of citizenship imposed on other sectors of society, both in terms of
tax fairness and “free-riding”. When large companies, particularly
multinational corporations, engage in base erosion and profit-shifting
activities, the bulk of the tax burden as a result falls on small and mediumscale enterprises and individual taxpayers. This runs counter to the idea
of progressive taxation, in which those who earn more income contribute
a larger percentage of tax revenues. Just as pernicious to governance is
the “free-riding” that results when entities evade or avoid taxes where
they undertake substantial economic activities and yet benefit from the
physical and social infrastructure, most of which is still provided by the
public sector in Africa.
We would like to draw attention to the fact that in the context of the
governance impact of IFFs, the African Peer Review Mechanism (APRM)
does not provide for monitoring the processes and impacts arising from
IFFs. This should be corrected, as the APRM is a good instrument for the
continuous monitoring of IFFs from Africa. We therefore feel that steps
should be taken to include IFFs in areas covered by the APRM.
3.2 Development consequences
The development consequences of IFFs are quite severe. When monies are
illicitly transferred out of African countries, their economies do not benefit
from the multiplier effects of the domestic use of such resources, whether
for consumption or investment. Such lost opportunities impact negatively
on growth and ultimately on job creation in Africa. Similarly, when profits
are illicitly transferred out of African countries, reinvestment and the
concomitant expansion by companies are not taking place in Africa.
In this regard we have taken due note of various calculations of the impact of
IFFs. Some have estimated that Africa’s capital stock would have expanded
by more than 60 per cent if funds leaving Africa illicitly had remained on the
continent, while GDP per capita would be up to 15 per cent more (Boyce
and Ndikumana, 2012). Just as telling is the estimate in the 2012 African
Economic Outlook that Africa’s ratio of domestic investment to GDP would
increase from 19 per cent to 30 per cent if the stock of capital taken out
were available for investment within the continent.
52
One of the outcomes of the recent global economic and financial crisis has
been a slowing in official development assistance. African countries have
accordingly had to place more emphasis on domestic resource mobilization
to generate the savings and investment required to finance continental
development. We took note of the NPCA/ECA study on mobilizing domestic
resources for the implementation of national and regional infrastructure
projects in Africa and the subsequent Dakar Financing Summit, which
identified practical actions that should be taken for this purpose. These
efforts are undoubtedly being greatly undermined by illicit financial
outflows. Moreover, infrastructure is not the only area in which African
governments can “crowd in” investment. By taking equity stakes in key
sectors, partly to pioneer investment in strategic sectors and also as an
investment guarantee, governments have been able to attract substantial
private investment. It is therefore important that they have access to the full
extent of tax revenue that can be raised from the economic activity taking
place within their countries.
Deficiencies in African countries’ tax revenue are also partly responsible
for the vulnerability of African economies to recurring fiscal deficits. While
not necessarily problematic in the short run, continuing fiscal deficits will
eventually cause resort to reductions in spending and attendant austerity.
Indeed, IFFs can contribute to austerity in other ways. Balance of payments
statistics influence fiscal and monetary policy, yet IFFs mask the real
export performance of African countries. The well-known effects of
austerity manifest themselves in various ways. These include a squeeze
on growth, slowdown of investment, and factories operating at far less
than full capacity—all of which are accompanied by retrenchment and job
losses. Given their role in managing economic shocks and adjustment in
African countries, and their assigned role in generating financial statistics,
the IMF, World Bank and Bank for International Settlements should play a
more active role in refining data that will assist in tracking IFFs.
Beyond the consequences of fiscal deficits, reduced tax earnings resulting
from hiding taxable funds has a direct effect on the provision of public
services such as schools, clinics, sanitation, security, water and social
protection. Finance Ministers were quite clear in their discussions with our
Panel that their governments face continuing pressures for social spending
on education, health and poverty eradication programmes. We were made
aware of a study (O’Hare and others 2013) that explored the potential impact
of IFFs on under-five child and infant mortality. Figure 3.1 shows the ways
in which IFFs exacerbate indicators from Millennium Development Goal
(MDG) 4 on child mortality.
The study looked at the potential reduction in years required for 34
African countries to reach MDG 4 if IFFs were eliminated, as compared
with current rates of progress in meeting those goals. As table 3.1 shows,
the impact would be quite dramatic. Without IFFs, the Central African
Republic would be able to reach the MDG indicators in 45 years compared
with 218 years at current rates of progress. Other striking examples are
Mauritania, 19 years rather than 198 years; Swaziland, 27 years rather
than 155 years; and the Republic of Congo, 10 years rather than 120
years. Perhaps most striking is the finding that if IFFs had been arrested
by the turn of the century, Africa would reach MDG 4 by 2016.
53
1
2
3
4
Figure 3.1
Illicit financial flows and their impact on child mortality rates
IFF (1-15% OF GDP)
COUNTRY
RESOURCES (GDP
PC PPP) AND ITS
DISTRIBUTION
Government revenue
Governance/control of corruption
Government efficiency
Household resources: access
to food shelter/education/
sanitation/healthcare (including
vaccinations) (indicator 4.3) /
water/information Resource
allocation in home
Child mortality
including
under-five mortality
rate (indicator 4.1) and
infant mortality rate
(indicator 4.2)
54
Table 3.1
Illicit financial flows and their impact on Millennium Development Goal 4
Country
Under-5
mortality
rates in
2000 (per
1000)
MDG 4
target
(under-5
mortality
rates,
2000-2011)
Actual
annual
Reduction
in under-5
mortality
rates
(2000-2011)
Illicit
financial
flows
(per-cent
of GDP)
Potential
annual
reduction
in under-5
mortality
absent
IFFs
Number
of years
from 2000
to reach
MDG 4 at
current
rate of
decline
Number of
years from
2000 to
reach MDG
4 if IFFs
curtailed
Angola
200
87
20.0
7
4.66
41
17
Botswana
96
17
10.4
10
14.20
16
11
Burkina Faso
191
67
2.0
3
3.14
52
33
Burundi
164
63
1.5
6
3.78
63
25
Cameroon
148
50
0.8
6
3.08
135
35
Central African
Republic
176
59
0.5
5
2.40
218
45
Chad
190
67
1.0
20
8.60
104
12
Congo, Democratic
Republic
181
66
0.7
3
1.84
144
54
Congo, Republic of
104
35
0.9
25
10.40
120
10
Côte d’Ivoire
148
51
1.7
6
3.98
62
26
Ethiopia
141
70
5.3
6
7.58
13
9
Gabon
88
31
2.1
11
6.28
49
16
Gambia
128
55
2.6
14
7.92
32
10
Ghana
99
39
2.2
2
2.96
42
31
Guinea
175
76
2.8
9
6.22
29
13
Guinea-Bissau
177
80
1.3
7
3.96
61
20
Kenya
111
35
4.0
1
4.38
28
26
Lesotho
127
34
2.8
15
8.50
46
15
Madagascar
102
56
4.8
6
7.08
12
8
Malawi
167
75
6.2
10
10.00
13
8
Mali
213
83
1.8
3
2.94
52
32
Mauritania
116
43
0.5
12
5.06
198
19
Mozambique
177
83
4.7
5
6.60
16
11
Niger
218
102
5.0
3
6.14
15
12
Nigeria
186
77
3.8
12
8.36
23
10
Rwanda
177
58
11.1
5
13.00
9
8
Senegal
119
50
6.4
1
6.78
13
12
South Africa
78
19
4.2
4
5.72
33
24
Sudan
114
41
1.7
3
2.84
60
35
Swaziland
114
28
0.9
11
5.08
155
27
Tanzania
130
52
5.7
2
6.46
16
14
Togo
124
50
1.4
6
3.68
64
24
Uganda
144
62
4.1
3
7.52
20
16
Zambia
157
57
5.6
9
5.60
18
11
Total
143
56
3.3
3.31
29
16
55
1
2
3
4
The social consequences of IFFs extend beyond the implementation of the
MDGs to the worsening inequality in Africa. Our earlier observation that
IFFs contribute to a regressive tax system and impose an unfair tax burden
on poorer sections of society is pertinent in this regard. IFFs contribute to
worsening inequality in Africa in other ways as well. The provision of social
services and social protection schemes are means of reducing inequality.
African governments find it increasingly harder to provide these forms of
support in increasingly constrained economic circumstances. Hidden wealth
moreover increases inequality between recipient countries and African
countries. The African Tax Administration Forum estimates that up to onethird of Africa’s wealth is being held abroad. This wealth and its associated
income are beyond the reach of African tax authorities, thus depriving
countries of resources that could be used to mitigate inequality.
Instead, IFFs contribute to shifting resources from productive to less
productive activities. Available evidence shows that many large companies,
including multinational ones, devote considerable effort to activities that seek
to increase their profitability through tax evasion and avoidance rather than
through making their operations more efficient. IFFs reduce the efficiency
of resource allocation through the focus on activities with the highest pretax returns to those with best after-tax returns. This focus tends to reduce
value creation, which is very important as Africa seeks to shift its production
structures from primary to secondary activities.
3.3 Discouraging transformation
and transparency
By discouraging value creation, IFFs impact negatively on African aspirations
for structural transformation. Indeed, the structure of African economies also
makes them vulnerable to IFFs. Africa has on average been doing well in
terms of economic growth since the turn of the century, with growth rates of
about 5 per cent a year. However, the economic structure of African countries
has remained unchanged since the era of early independence, with continued
reliance on agriculture, extraction of natural resources and traditional and
basic services (ECA and African Union Commission, 2014).
Case studies and other related literature indicated to our Panel that the
natural resource sector is especially prone to IFFs. The research showed
that countries such as Nigeria and the Democratic Republic of Congo, which
have huge oil/gas and mineral sectors, are quite vulnerable to this scourge. In
Nigeria, the share of oil in total government revenue is more than 70 per cent,
while in the Democratic Republic of Congo the mining sector accounts for up
to 30 per cent of gross domestic product and 90 per cent of export revenue.
Reliance on extractive industries for revenue and export earnings in Africa
usually means that the sector has a high degree of discretionary power and
political influence. This is the source of the secret and unequal contracts that
African countries sometimes enter into with multinational mining companies.
These contracts in turn undermine efforts to promote transparency and
accountability in the extractives industry. (See figure 3.2 illustrating Nigeria’s
efforts to increase transparency in its extractive sector).
56
Figure 3.2
The Central Bank of Nigeria now delivers monthly reports on national oil revenue
CBN REPORT ON OIL REVENUE
for the month of february 2014
According to the economic report for the
month of February 2014 provided by the
CBN, available data showed that estimated
federally collected gross revenue for that
month was N847.81 billion.
estimated federally
collected gross revenue
This figure according to the report is 10.3%
below the provisional monthly budget
estimated.
CRUDE OIL &
GAS SALES
N224.0 billion
DOMESTIC
CRUDE OIL & GAS
N128.2 billion
PPT/ROYALTIES
N262.2 billion
Oil revenue for the month was N630.14 billion gross which
constitutes 74.3% of the total revenue.
The figure is lower than the provisional monthly budget
estimate. The month’s decrease in oil revenue was caused by
the shortfall in receipts from crude oil and gas export due to
pipeline vandalism resulting in a drop in production.
OTHERS
N15.7 billion
Source: Premium Times, 2014.
57
1
2
3
4
By the same token, the inability of African countries to establish the precise
quantities of their natural resources that are exported only serves to
aggravate poor record keeping and data collection which is a well-known
bane of development planning on the continent.
The high correlation between reliance on extractive industries and
IFFs also impacts on development and inequality. Indeed, there is an
established positive correlation between the level of resources that African
countries export and their levels of inequality. Similarly, the 2013 Resource
Governance Index, which measures transparency in oil, gas and mining
in the 58 countries that collectively produce 85 per cent of the world’s
petroleum, 50 per cent of its diamonds and 80 per cent of its copper reveals
that 80 per cent of these countries “fail to achieve good governance in their
extractive sectors”.
Of particular concern to our Panel is the lack of transparency in national
budgets that are dependent on earnings from the extractive sector. We
have taken note of the Publish What You Pay initiative, which in addition
to requiring companies in the extractive sector to report their payments to
governments, also requires governments to disclose how much revenue
they receive. This is the backbone of the Extractive Industries Transparency
Initiative (EITI). However, we are concerned that schemes like EITI and
the related parts of the Dodd-Frank Act will not succeed in eliminating
unrecorded transactions, including provisions in secret contracts or
undeclared quantities.
The main consequences of undeclared quantities are loss of revenue,
but there are also the associated results of undermining the ability to
quantify environmental damage and the negative impact on sustainable
development. This is also the case for losses arising from secret contracts.
The intertemporal loss or reduction in the welfare of future generations
due to overextraction permitted by secret contracts is a key concern of our
Panel. In many instances, lack of contract transparency is the result of
failure to learn from the experience of others in negotiating contracts and
the inability of different stakeholders to coordinate their efforts effectively in
the management of such contracts.
3.4 Straining Africa’s capacities
In addition to other governance and development consequences, IFFs strain
the capacities of African governments in various ways. While we established
that a good deal of IFFs take place because of weak regulatory and law
enforcement capacities, the effort to stem such outflows strains these
already weak capacities. Drawing on the example of global negotiations in
development, trade, and climate change for instance, we noted that the
ability of African countries to negotiate and obtain fair outcomes is always
a matter of concern. This is also the case with regard to the negotiation of
agreements and contracts that sometimes enable IFFs. We are particularly
concerned about the risk that African countries face in making unbalanced
58
concessions with regards to double taxation agreements, concession
contracts for the extraction of natural resources and indeed participation in
ongoing global processes and negotiations aimed at curbing IFFs.
In addition to digging deep to find the resources to undertake negotiations
that would help stem IFFs, African countries also have to reallocate
resources to tackle this growing scourge. The point has been made
elsewhere that for African countries to have the same ratio of tax officials
to their populations as the OECD countries they would need up to 650,000
new tax officials.
Given concerns about ineffective and corruption-prone public tendering
processes, some African countries have had to establish special
procurement units for this purpose. Anti-corruption agencies, financial
intelligence units and transfer pricing units are examples of the creation of
additional cost centres to combat IFFs.
We are aware of studies that show that the additional cost of building
capacity, especially for revenue authorities, often pays off through increased
tax collection. The key thing is that the resources have to be found first in a
context of competing priorities, while the results will take time in coming.
Closely related to this problem is the expense of coping with emerging
global standards for fighting tax evasion, including automatic exchange of
information and building the capacity to use mutual assistance programmes.
While African countries cannot afford to remain outside emerging global
frameworks, there is the reality that given their capacity constraints, many
cannot cope with the often onerous requirements of such agreements.
We re-iterate the view that in addition to technical assistance to tackle IFFs,
African countries should benefit from the principle established in other
global negotiations of “common but differentiated responsibilities” or, in
other words, an asymmetry in obligations. After all, the flow of illicit finance
is mostly one way, and developed countries are unlikely to demand from
African countries taxes deriving from the activities of their multinational
companies.
3.5 Undermining international
development cooperation
IFFs undermine development cooperation in various ways. It is clear that
such outflows do not help reach the goals of international agreements
like the Monterrey Consensus and its successor the Doha Declaration on
Financing for Development, which emphasize the important role of domestic
resource mobilization. In a similar vein, IFFs undercut global efforts to
promote partnerships for aid effectiveness and development effectiveness.
59
1
2
3
4
Policy coherence is another victim of IFFs. It is somewhat contradictory
for developed countries to continue to provide technical assistance and
development aid (though at lower levels) to Africa while at the same time
maintaining tax rules that enable the bleeding of the continent’s resources
through illicit financial outflows. It might indeed be useful to undertake an
analysis of the impact of the tax systems of developed countries on African
countries. A closely related concern is the revelation by the Norwegian
Commission on Tax Havens that some development agencies actually
make investments in financial secrecy jurisdictions. This practice should
be stopped and necessary divestments should be made.
There is as yet insufficient international cooperation on IFFs. It is well
known that the MDGs had nothing to say about IFFs, yet the trend of such
outflows from Africa was increasing at the very time that efforts were being
intensified to achieve the MDGs by the target date of 2015. While illicit
financial outflows cannot be blamed solely for failure to achieve the MDGs,
they certainly contributed to the fiscal constraints that hampered meeting
these noble objectives. We takes heart from various proposals to include
IFFs in a post-2015 development agenda and wish to stress the importance
of setting clear, achievable targets in this regard.
IFFs, ranging from profit shifting to lack of transparency, financial secrecy
jurisdictions, lack of clarity about beneficial ownership, and inadequate
reporting of payments in the extractive sector, have attracted the attention
of G8 and G20 countries. Certainly, if such countries are negatively affected
by these activities, as they indeed are, there can be no doubt that African
countries face an even tougher challenge given the governance gap, which
can only be widened by the illicit outflows.
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Chapter
Findings and policy
implications
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4
The previous three chapters of this Report outlined the approach employed
by the Panel, the framework it used to analyse illicit financial flows (IFFs)
from Africa and some of the development consequences of such outflows.
Chapter 4 contains the findings of the Panel and their related policy
implications. It is informed by the analyses in the previous chapters and
the Panel’s extensive work, including case studies of selected countries,
and its wide-ranging consultations with relevant actors both within and
outside Africa. The findings and policy implications in Box 4.1 inform the
recommendations contained in the final chapter.
Findings of the HLP Report on IFFs
>
Finding 1:
>
Finding 2:
>
Finding 3:
>
Finding 4:
>
Finding 5:
>
Finding 6:
>
Finding 7:
>
Finding 8:
>
Finding 9:
>
Finding 10:
>
Finding 11:
>
Finding 12:
>
Finding 13:
>
Finding 14:
Development partners have an important role in curbing illicit financial flows from Africa
>
Finding 15:
Illicit financial flows from Africa are large and increasing
Ending illicit financial flows is a political issue
Transparency is key across all aspects of illicit financial flows
Commercial routes of illicit financial flows need closer monitoring
The dependence of African countries on natural resources extraction makes them vulnerable to illicit financial flows
New and innovative means of generating illicit financial flows are emerging
Tax incentives are not usually guided by cost-benefit analyses
Corruption and abuse of entrusted power remains a continuing concern
More effort needed in asset recovery and repatriation
Money laundering continues to require attention
Weak national and regional capacities impede efforts to curb illicit financial flows
Incomplete global architecture for tackling illicit financial flows
Financial secrecy jurisdictions must come under closer scrutiny
Illicit financial flow issues should be incorporated and better coordinated across United Nations processes and frameworks
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In communicating these findings and recommendations, the Panel wishes
to emphasize from the outset that African countries must adopt a systemic
approach and take the lead in tackling IFFs from their countries, among
other things by mainstreaming transparency requirements and adopting
standards through legislation and regulation.
Finding 1: Illicit financial flows from
Africa are large and increasing
It is established that IFFs from Africa are large and increasing. This finding
is valid irrespective of the source of data and is evident across the three
main categories of IFFs: commercial, criminal, and corrupt activities.
Our own empirical research, focusing mainly on the merchandise trade
sector, found that illicit financial outflows from Africa had increased from
about $20 billion in 2001 to $60 billion in 2010. The same conclusions
were reached from a review of other related work undertaken by Global
Financial Integrity, the African Development Bank, the United Nations
Development Programme and several civil society organizations. Using a
different methodology, Global Financial Integrity puts the trend growth of
IFFs from Africa over 2002–2011 at 20.2 percent a year. Even those who
question the methodologies used to estimate the outflows tend to agree
that the problem of IFFs is serious and demands urgent action.
Policy implication: High and increasing IFFs from Africa impact on
development through losses in tax revenue and the opportunity cost of lost
savings and investment in various sectors of African economies. These
impacts are of particular policy significance now due to the increased
importance of domestic resource mobilization at a time when the role
of official development assistance is declining. Whether IFFs are three
times the amount of official development assistance, as attributed to the
Secretary-General of the OECD, or are 10 times the amount of aid received,
as claimed by the Tax Justice Network, the implications are clear. These
considerations compel urgent and coordinated action to curb these illicit
outflows.
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Finding 2: Ending illicit financial
flows is a political issue
The range of issues related to IFFs makes this a technically complex subject.
However, we are convinced that success in addressing IFFs is ultimately a
political issue. Issues involving abusive transfer pricing, trade misinvoicing,
tax evasion, aggressive tax avoidance, double taxation, tax incentives, unfair
contracts, financial secrecy, money laundering, smuggling, trafficking
and abuse of entrusted power and their interrelationships confer a very
technical character to the study of IFFs. However, the nature of actors,
the cross-border character of the phenomenon and the effect of IFFs on
state and society attest to the political importance of the topic. Similarly,
the solutions to IFFs that are the subject of ongoing work in various global
forums attest to this political significance.
Policy implication: The technical aspects of IFFs are responsible for
divergences in understanding, measurement and emphasis with regard to
IFFs. A global consensus in tackling the problem is required. This means
that the required concerted response depends on the necessary decisions
being taken at the political level. This requirement is obvious from the work
on disparate components of illicit financial outflows undertaken regionally
by the African Union and regional economic communities and at the global
level by the G20, OECD, the World Bank, the IMF and the United Nations.
Such work needs to be coordinated to ensure consistency and success in
tackling the illicit outflows.
Finding 3: Transparency is key across
all aspects of illicit financial flows
Transparency is key to achieving success in the fight against IFFs. The
admonition of the late Justice Louis D. Brandeis of the United States
mentioned earlier that “sunlight is the best disinfectant” is especially
pertinent in this regard. The importance of transparency is evident in
ongoing approaches to tackle IFFs, whether through the automatic
exchange of information, country-by-country reporting, project-by-project
reporting, disclosure of beneficial ownership, public information about
commercial contracts that African governments enter or implementation
of the recommendations of the Financial Action Task Force. While voluntary
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approaches to the exchange of information such as the Extractive Industries
Transparency Initiative are making steady progress for extractive industries,
the push for transparency should encompass all commercial sectors,
moving to mandatory requirements such as those contained in Section 1504
of the US Dodd-Frank Act and the European Union Transparency Directive.
Policy implication: The policy implication of increased transparency is that
it should ensure access to such information and the right to obtain it. While
various countries and regions are developing mechanisms for information
sharing, there is a need to move to a common global mechanism. African
countries in turn need to show commitment to the various voluntary
and mandatory initiatives by joining them and mainstreaming their
requirements nationally and regionally, including through legislation and
adoption of common standards. They also need to develop the capacity to
request, process and use the information that they obtain.
Finding 4: Commercial routes of illicit
financial flows need closer monitoring
The commercial sector is the major source of in Africa, but it is the least
understood. This is due to the range of methods by which IFFs take place
in the commercial sector as well as the technicality of issues such as
transfer pricing, tax evasion, aggressive tax avoidance, trade misinvoicing,
tax incentives, double-taxation agreements and the like. Although the
OECD is working to address issues of base erosion and profit shifting,
this work is not principally geared to developing country concerns. African
governments are concerned about the negative impact of these illicit
financial outflows on their tax revenues and investment capital, but most of
them lack legislation and guidelines on transfer pricing or effective units to
address the problem. When countries prosecute corporate tax evasion and
aggressive tax avoidance they find themselves in a long and costly process
that often results in a mutually agreed settlement that is not necessarily
beneficial to the countries concerned.
Policy implication: African countries need to pay closer attention to
illicit flows from the commercial sector. This means developing the
required capacities, establishing or strengthening necessary institutions
including transfer pricing units, and providing resources for the effective
functioning of these institutions. It would also mean holding multinationals
accountable for fraudulent practices by setting up requirements for their
transfer of funds and business practices. Furthermore, it is essential that
the private sector, especially large corporations, such as the headquarters
of international banks and other multinational corporations play a stronger
role in ensuring that they are not accomplices to IFF practices. This will
also mean tracking and participating where possible in global processes
to improve commercial transparency and the international tax regime.
Similarly, global actors have to take Africa’s interests and concerns into
account in their ongoing processes.
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Finding 5: The dependence
of African countries on natural resources
extraction makes them vulnerable
to illicit financial flows
African countries depend to a large extent on the extraction of natural
resources for their exports and tax revenues. However, this sector is
very prone to the generation of illicit financial outflows by such means
as transfer mispricing, secret and poorly negotiated contracts, overly
generous tax incentives and underinvoicing. The lack of transparency in the
extractive sector informs various initiatives to redress the situation, such
as the Extractive Industries Transparency Initiative, relevant sections of the
US Dodd-Frank Act and the Publish What You Pay initiative driven by civil
society organizations.
We established from the case studies and our consultations that indeed
there is a clear relationship between countries that are highly dependent on
extractive industries and the incidence of IFFs. We found there is extensive
underreporting of the quantity and sometimes quality of natural resources
extracted for export be it crude oil, diamonds, coltan, gold, shrimp or timber,
yet none of the countries we studied and visited had its own independent
means of verifying the precise amount of natural resources extracted and
exported. Instead, they depend on reports filed by the operators, who have
an incentive to underreport, especially since requirements in legislation
such as the Dodd-Frank Act cannot cover undeclared quantities. In the
case of timber, Liberia’s government now tags logs for export to respond to
the problem. Accordingly, the Panel put the Democratic Republic of Congo,
which faces a similar challenge, in contact with the Liberian authorities.
Policy implication: It is vitally important to pay attention to activities in
the extractive sector in efforts to curb IFFs from Africa. African countries
need the capacities and technology to monitor extraction of their natural
resources better and to negotiate contracts more effectively. They also need
to make greater use of the information and support provided by voluntary
existing mechanisms promoting transparency in the natural resource sector
while calling for the adoption of mandatory global reporting requirements.
Ultimately, African countries need to diversify their economies away from
dependence on natural resources into higher value activities.
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Finding 6: New and innovative
means of generating illicit financial
flows are emerging
In addition to the difficulties that exist in measuring the contribution to
IFFs of traditional services, the digital economy and intangibles, these now
contribute to the problem in novel and abstruse ways. This finding reflects
the increased share of the service sector in global economic activity as
well as the technological changes underpinning service transactions. The
digital revolution has enabled speedier transfers of money, often at the
click of a button, while e-commerce and online gambling make it harder
to “follow the money”. While consultancy fees, payment of royalties and
charges for the use of intellectual property are not in themselves new, there
is increased resort to such activities because of the opportunity they afford
for increased opacity.
Policy implication: There is need for a better appreciation of the increasing
contribution of services to IFFs. This requires further research and the
improved generation of data on service-related transactions, particularly
by the international organizations charged with maintaining statistics on
international trade and financial flows. As the Democratic Republic of
Congo has done for telecommunications, it is important for countries to
share with others their experience of discrepancies in services trade with
others.
Finding 7: Tax incentives are not usually
guided by cost-benefit analyses
African countries grant a host of tax incentives such as tax holidays,
investment allowances, tax rate reductions and use administrative
discretion in order to attract foreign direct investment. However, in many
instances these policy decisions are not guided by proper cost-benefit
analyses but rather by the intention of outdoing competitors for foreign direct
investment, leading to harmful tax competition and a “race to the bottom”.
At the same time, there is general consensus that investment decisions of
foreign investors are informed by a broader set of considerations beyond
tax incentives. In many countries, the picture is further complicated by the
lack of coordination among agencies responsible for granting tax incentives
and those concerned with raising revenue, compounded by the additional
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burden of managing such incentives. We were informed about the abuse
of tax holidays through the sale of assets and transfer of ownership just
before the expiration of the exemption period in order to perpetuate the tax
holidays.
Policy implication: There is a clear need to undertake cost-benefit analysis
in granting tax incentives, especially tax holidays intended to attract foreign
direct investment. Moreover, there should be coordination of such incentives
among regional economic communities to develop common standards and
prevent a “race to the bottom”. For tax holidays, rules should be drawn up
to prevent the same entity/beneficial owner from continuing to benefit after
there is an apparently substantial change in ownership.
Finding 8: Corruption and abuse
of entrusted power remains
a continuing concern
Corruption remains a matter a major concern despite the global and
regional attention that resulted in adoption of the United Nations
Convention against Corruption (UNCAC) and the African Union Convention
on Preventing and Combating Corruption (AUCPCC). Corruption is a crosscutting and integral part of IFFs because of its facilitating role. Indeed, the
general perception expressed during our consultations and also emanating
from the questionnaires used in the case studies was that corruption is
one of the main drivers of IFFs. This is not surprising, since corruption is
a main area of policy attention and intervention by civil society, while also
being a driver of IFFs that the general public can relate to without having
specialist knowledge. Corruption in the form of abuse of entrusted power
for private benefit in both the public and private sectors thus remains an
issue of continuing concern.
Policy implication: African countries need to domesticate the provisions of
the UNCAC and AUCPCC at the national level. Such existing instruments
and frameworks, particularly the AUCPCC, in turn need to be updated to
reflect the importance of tackling IFFs. The global effort to fight corruption
needs to continue unabated in terms of establishing national anti-corruption
agencies, bringing them together for regional cooperation and providing
them with autonomy, resources and capacities to prevent and prosecute
corruption cases.
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Finding 9: Stimulating and
expediting the process of asset
recovery and repatriation
There are initiatives and increased efforts to trace, recover and return IFFs,
especially where corruption is involved. The UNCAC is notable as a global
instrument that seeks to provide a legal framework for asset recovery. The
AUCPCC contains similar provisions. There are also bilateral efforts between
originating and destination countries. Another significant development is the
Stolen Assets Recovery Initiative, which is a partnership of the World Bank
and the United Nations Office on Drugs and Crime (UNODC). These sorts of
initiatives—some of which exist at the sub-regional level in Africa, such as the
Arab Forum on Asset Recovery and the Asset Recovery Inter-Agency Network
of Southern Africa—are important to show that determined efforts to find and
repatriate illicitly acquired monies can be and are being undertaken.
One of the initiatives to be encouraged and strengthened is the African
Legal Support Facility, hosted by the African Development Bank, which
has been supporting African governments in the negotiation of complex
commercial transactions since 2010. The Facility was established to address
the asymmetric negotiating capacity of African governments when dealing
with deep-pocketed international investors. The Facility was established in
response to a call by African Ministers of Finance for assistance in three key
areas: commercial creditor litigation, negotiation of complex commercial
transactions, and capacity building.
Action should be taken to overcome obstacles to the proper functioning of
asset recovery initiatives in Africa, including providing legal and financial
expertise and aligning domestic policy and institutional frameworks with
global instruments. It was observed that the frameworks for asset recovery
are mostly limited to the return of proceeds of corruption and illicit enrichment
while efforts to repatriate proceeds of tax evasion usually depend on the
efforts and abilities of individual countries. An exemption that came to our
attention was illegal fishing in South African waters, which led US authorities
to apprehend and prosecute the offender and return to South Africa the
illicitly derived gains, which had been deposited in US banks.
One matter of concern in the context of asset recovery efforts is the treatment
of frozen funds. Our view is that not only should accepting tainted funds be
rendered highly unattractive to banks but also that banks that are determined
to have been complicit in the receipt of illicit funds should not be allowed to
keep these funds while they are frozen. A clear framework for the handling
of frozen assets is needed. Creating an institutional escrow system in which
regional development banks are designated as escrow agents seems to be
one rational path to follow in this regard.
Policy implication: Regulations and mechanisms are needed to ensure
that financial establishments and banks identify and refuse to accept IFFs
rather than relying on self-regulation by banks. Global frameworks on asset
recovery should be reconfigured to require that frozen assets be placed in
escrow accounts in regional development banks rather than allowing banks
that are culpable in accepting such deposits to continue to benefit from them.
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Finding 10: Money laundering
continues to require attention
There has been notable success in tackling money laundering, especially
due to the desire to choke off financial resources going to terrorist
organizations. Many countries have put an emphasis on implementing the
recommendations of the Financial Action Task Force. This has included
establishing financial intelligence units, adopting anti-money laundering
and counter-terrorist financing legislation, improving banking supervision
and raising awareness about such activities among banks and nonfinancial institutions. Indeed, banks try to work in accordance with antimoney laundering/counter-terrorist financing requirements because of the
reputational risks of non-compliance.
However, new and more obscure ways of money laundering have emerged,
including cash smuggling and triangulated transactions routed through
Africa. There are sometimes lags or delays in the implementation of antimoney laundering/counter-terrorist financing in some African countries
due to political instability and institutional and resource constraints. The
fight against money laundering may also be constrained by laws restricting
the use of tax information solely for tax purposes. This is an example of the
dichotomy of interests among government bodies, with the revenue body
being solely interested in raising revenue without regard to the interests of
the law enforcement agencies.
Policy implication: The international community needs to continue to pay
close attention to money laundering, with increased focus on the new and
obscure ways of laundering money. It is also important to address the
dichotomy between revenue and law enforcement agencies on the sharing
of information about money laundering discovered in the process of tax
audits.
Finding 11: Weak national and regional
capacities impede efforts to curb illicit
financial flows
The ability of African countries to combat IFFs is seriously impeded by
deficiencies in their capacities to track, stop and repatriate illicit financial
outflows. This lack of capacity is reflected at various levels, such as the lack
of accurate data and up-to-date information, inadequate understanding
of the various mechanisms used, and absent or ineffective legislative,
regulatory and institutional frameworks. For example, very few African
countries have transfer pricing units in their government structures, and
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the few that do have them suffer from staff shortages. In some countries,
an extensive institutional framework had been established to combat
various dimensions of IFFs, but the outcome has not been encouraging
either due to political interference, poor coordination among agencies and
lack of resources.
Most African countries do not have enough highly trained lawyers,
accountants and tax experts to carry out the oversight functions to prevent
or punish perpetrators of illicit financial outflows. The few that exist are
often overworked and unable to prepare sufficiently to take on top-class
professionals representing large corporations. We were told of several
instances of attempts by such perpetrators to suborn or recruit state officials
working on their cases. A similar trend observed in several countries was
that state prosecutors tend to lose key cases against powerful interests
engaged in IFFs to the extent that they sometimes feel that the judiciary is
not supporting their efforts.
Policy implication: Illicit financial outflows from Africa can be reduced and
stemmed only by enhancing and improving relevant capacities across the
board. This requires a dedicated and up-scaled effort to provide resources.
It means providing money to create relevant agencies, such as revenue
authorities, transfer pricing units, customs services, anti-corruption
agencies, financial intelligence units and the like where these do not
exist. It also means strengthening existing institutions by giving them the
necessary autonomy and tools with which to carry out their duties. It further
means recruiting and training top-flight personnel and making efforts to
retain them in the public sector. Regional efforts are also needed, including
through forums such as the African Tax Administration Forum and related
mutual assistance programmes. The support of the global community is
also essential to make up for current capacity deficiencies. The idea of Tax
Inspectors Without Borders is a good example of how such support could
be rendered (box 4.1).
Box 4.1 Tax Inspectors Without Borders
The OECD’s Tax Inspectors Without Borders is a very good example of how developed countries
can help African countries overcome capacity constraints. The way it operates is that tax audit
experts are made available to work directly with officials in developing countries to undertake tax
audits or learn general audit practices. An anonymized case study of one country provided by the
OECD shows a 76 per cent increase in tax revenues in one year (from $3.3 million to $5.8 million)
following transfer pricing audit assistance provided at a programme cost of $15,000.
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Finding 12: Incomplete global architecture
for tackling illicit financial flows
There is as yet no global architecture for tackling IFFs. There are a number of
commendable initiatives and instruments to deal with the commercial, criminal
and corrupt activities of IFFs, but they are often disparate and handled in
separate processes and forums. There are also different levels of commitment
to combating IFFs among countries, regions and groupings, and the use of
the existing architecture is challenging even for developed countries. Some
notable initiatives and instruments are emerging under the auspices of the
United Nations, African Union, G20, OECD, G8, World Bank, IMF and individual
countries. However, even taken together these initiatives and instruments do
not amount to a coherent and overarching institutional framework to tackle
IFFs. These initiatives include:
> The Global Forum for Transparency and Exchange of Information for
Tax Purposes (OECD)
> The Multilateral Convention on Mutual Cooperation in Tax Matters
(OECD)
> The Extractive Industries Transparency Initiative (EITI)
> Base Erosion and Profit Shifting Project (OECD + G20)
> Sections 1502 and 1504 of the Dodd Frank Act (US)
> The Foreign Account Tax Compliance Act (US)
> Automatic Exchange of Information (OECD, G20, G8)
> Anti-Bribery Convention (OECD)
> Public Registry (UK)
> United Nations Convention Against Corruption (UNCAC)
> The Recommendations of the Financial Action Task Force
> Open Government Partnership
> United Nations Tax Committee
There are fledging attempts in Africa to introduce similar initiatives and
instruments. Notable among them is the African Tax Administration Forum,
which is working on an Agreement on Mutual Assistance in Tax Matters and a
Model Double Taxation Agreement. Also noteworthy is the AUCPCC.
Policy implication: The above referenced processes are not universal and at
times are undertaken by various countries and groups in their own interest
with no obvious interface between them, links between these processes need
to be made to optimize their effectiveness in helping stem IFFs from Africa. In
some cases, the complexity and cost of complying could pose a problem for
African countries. It might also be important to consider how best all these
elements could fit into an overarching global framework, perhaps under the
auspices of the United Nations.
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Finding 13: Financial secrecy
jurisdictions must come under
closer scrutiny
Although financial secrecy jurisdictions and tax havens are not strictly
the same thing, there are commonalities between them with regard to
their allowing harmful tax practices and high levels of opacity in financial
transactions, as well as laws enabling banking secrecy and the registration
of shell companies. While we found increased political disapproval of these
destinations for IFFs across the board, the involvement of overseas territories
and subnational jurisdictions of some major economies has watered down
the criteria used for including well-known destinations in these categories.
The number of countries and jurisdictions in such categories, as determined
by the OECD, has fallen over time, but, as pointed out earlier, the volume
of IFFs from Africa continues to increase. A related finding is that some
developing countries (including some in Africa) continue to be attracted by
the perceived benefits of allowing financial secrecy.
Policy implication: The main policy implication is that efforts must continue
to be made to put political pressure on jurisdictions that enable a high level
of financial opacity or that have laws enabling banking secrecy and the
registration of shell companies. Countries that desire to be financial services
centres would need assistance to ensure that they do not use the tools of tax
havens and financial secrecy jurisdictions to facilitate the receipt of IFFs.
Finding 14: Development partners
have an important role in curbing
illicit financial flows from Africa
We acknowledge that actions taken by some countries to stem some
aspects of IFFs have proved to be very effective. Their political support
will continue to be invaluable in curbing such illicit outflows from Africa.
This has been demonstrated in several instances. With the passage of the
Patriot Act in the United States, shell banks disappeared from the financial
landscape. Similarly, the Foreign Account Taxpayer Compliance Act has
elicited cooperation with US authorities by tax havens and financial secrecy
jurisdictions. The recent case in which the United States was able to freeze
assets linked to the late Sani Abacha, former military ruler of Nigeria,
across several jurisdictions also speaks to the importance of the role of
key players in addressing their responsibilities to stem IFFs. The essential
contribution of development partners is also evident from the ongoing work
in this area at the global level, particularly under the auspices of the G8,
G20 and the OECD (box 4.2).
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Box 4.2 The important contribution of development partners
One illustration of the impact of political action can be found in the implementation of the US Patriot
Act of 2001 which, among others, seeks to improve surveillance of terrorist activities, ease information
sharing and combat money laundering. As part of the effects of its implementation, for the first time,
United States banks and securities firms were barred from opening accounts for non-US shell banks
that had no physical presence anywhere and no affiliation with another bank. The Patriot Act has
been instrumental in considerably reducing, if not totally eliminating the activity of shell banks— one
important conduit for tax evasion.
Policy implication: Development partners need to ensure that Africa’s
interests are taken into account in ongoing regional and global processes
for commercial transparency, including exchange of information and
transfer pricing regimes. They should also continue to provide financial
and technical assistance for national and regional efforts to tackle criminal
activities, especially money laundering and trafficking of people, drugs and
arms. Similar support is needed with IFF-related asset recovery.
Finding 15: Illicit financial flow issues
should be incorporated and better
coordinated across United Nations
processes and frameworks
The Panel is concerned that the issue of IFFs in its entirety is not firmly on
the policy agenda of the United Nations system. There are United Nations
agencies and bodies working on various dimensions of IFFs, such as the
UNODC on corruption, drugs and crime, the United Nations Development
Programme on IFFs and fragile states, the United Nations Department of
Economic and Social Affairs through its practical guide on transfer pricing,
and the United Nations Committee of Experts on International Cooperation
on Tax Matters. The United Nations Conference on Trade and Development
continues to maintain a scaled-down programme on transnational
corporations, while intergovernmental organizations like the World
Customs Organization also work on related issues. Various instruments,
including the United Nations Convention against Corruption, set the pace
for global action in the key area of IFFs.
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The Panel is encouraged that ongoing work to frame the Post-2015
Development Agenda is poised to take account of IFFs, which were not
mentioned in the Millennium Development Goals. We feel that this positive
development should be complemented by a more rigorous effort in support
of a unified global architecture on the issue of IFFs. The starting point of
this effort should be a clear United Nations Declaration on the issue of
IFFs.
Policy implication: Africa needs to act in concert with its partners to ensure
that the United Nations plays a more coherent and visible role in tackling
IFFs. This involves ensuring that efforts to combat IFFs are included in the
Post-2015 Development Agenda. Similarly, Africa needs to initiate steps for
the United Nations to adopt a unified policy instrument on IFFs in order to
place the matter squarely on the agenda of the world organization.
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Chapter
Recommendations
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5
The recommendations set out here serve as our humble contribution to
addressing the complex issue of the illicit outflows of capital from Africa. As
we noted in the Foreword, despite the challenges of gathering information
about illicit activities, available information shows that our continent is
losing in excess of $50 billion to $60 billion a year through illicit financial
outflows.
Commercial activities are by far the largest contributor to illicit financial
flows (IFFs), followed by organized crime, then public sector activities.
Corrupt practices play a key role in facilitating these outflows.
The sources of IFFs are from within our continent, and the fundamental
responsibility for eliminating the sources rests with the governments of
African States. Therefore, the Panel calls for the African Union to take
leadership in ensuring that Africa takes the necessary measures to curtail
and indeed eliminate all avenues for IFFs.
Although the sources of IFFs are within our Continent, the mechanisms
for moving IFFs often involve non-African private and public actors and are
sometimes the result of policies and laws adopted by intergovernmental
bodies and governments outside our Continent. It is therefore necessary
for African governments to engage with these non-African actors to ensure
that their practices do not facilitate the illicit outflow of funds from Africa.
The ultimate goal of these recommendations is to eliminate IFFs from
Africa. Given that the international community will shortly launch the Post2015 Development Agenda, the timing of this Report is fortunate. The Post2015 Development Agenda should reflect the recommendations contained
in this Report. Indeed, the Common African Position on the Post-2015
Development Agenda already calls for action against IFFs.
The biggest cross-cutting challenge found through our country case
studies is the lack of appropriate capacity to ensure that illicit outflows are
curtailed. In many cases, this does not entail acquiring additional resources
but better using existing capacities. Take Nigeria, where capacity exists
within the Customs Agency, but the authority to monitor some exports has
been transferred to another agency.
Given that most measurable IFFs are trade based, actions set forth in
the recommendations below for improving capacity and accountability to
curtail trade-related IFFs should be given primacy. African States should
take primary responsibility for mobilizing resources for tackling traderelated IFFs (and, indeed, other types of IFFs) from Africa.
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A. The commercial component
of illicit flows
1. Trade mispricing
African countries should ensure that they have clear and concise laws and
regulations that make it illegal to intentionally incorrectly or inaccurately
state the price, quantity, quality or other aspect of trade in goods and services
in order to move capital or profits to another jurisdiction or to manipulate,
evade or avoid any form of taxation, including customs and excise duties.
The first step in revenue collection is to ensure that all corporations, big and
small, are registered for tax purposes. In addition to existing registration
requirements, countries may consider a provision in the respective acts
regulating the registration of companies or small businesses to the effect
that no registration shall take place without proof of tax registration. In
some countries, one cannot open a business bank account without proof
of registration for tax. To avoid unnecessary delays in the registration of
companies, the relevant agencies must have adequate capacity to process
such registrations. We recommend further that the databases of the
companies’ registration office and the tax authority be linked.
African States’ customs authorities should use available databases of
information about comparable pricing of world trade in goods to analyse
imports and exports and identify transactions that require additional
scrutiny. States should also begin collecting trade transaction data and
creating databases from that information, which can then be searched and
shared with other States so that a more robust dataset of local and regional
comparables is available.
2. Transfer pricing
The “arm’s-length principle” is currently accepted as the international
standard to combat transfer pricing, but its effective implementation depends
on the availability of comparable pricing data on goods and services. The
Panel calls on national and multilateral agencies to make fully and freely
available, and in a timely manner, data on pricing of goods and services in
international transactions, according to accepted coding categories.
African countries should establish transfer pricing units as a matter of
extreme urgency. These units should be appropriately situated in revenue
authorities and should be well equipped in accordance with global best
practices. Establishing transfer pricing units may entail the training of a
selection of existing revenue officers in this specialized area. We have been
informed that those African countries that have established transfer pricing
units have been and are willing to continue training other countries’ officials.
In this case, a small investment in training can have a major positive impact
on revenue collection.
80
African States should require multinational corporations operating in their
countries to provide the transfer pricing units with a comprehensive report
showing their disaggregated financial reporting on a country-by-country or
subsidiary-by-subsidiary basis. African governments could also consider
developing a format for this reporting that would be acceptable to multiple
African revenue authorities.
3. Base erosion and profit shifting
The practice by which multinational corporations shift profits to subsidiaries
in low-tax or secrecy jurisdictions is one of the biggest single sources of illicit
outflows. In many cases, those subsidiaries exist on paper only, mostly with
one or two employees, while the bulk of the activities of the company occur
in another country. While we recommend that African countries support the
OECD-led response to this problem, which focuses on improving access
to the information of these multinational corporations, we know that the
challenge is a bit more complex for African countries.
We also recommend that there should be an automatic exchange of tax
information among African countries. Africa must strongly call for an
automatic exchange of tax information globally, subject to national capacity
and to maintaining the confidentiality of price-sensitive business information.
4. Related recommendations
Transparency of ownership and control of companies, partnerships, trusts
and other legal entities that can hold assets and open bank accounts is critical
to the ability to determine where illicit funds are moving and who is moving
them. African countries should require that beneficial ownership information
is provided when companies are incorporated or trusts registered; such
information is updated regularly; and such information is placed on the
public record. Beneficial ownership declarations should also be required of
all parties entering into government contracts. False declarations should
result in robust penalties.
Double taxation agreements can contain provisions that are harmful to
domestic resource mobilization and can be used to facilitate illicit financial
outflows. We recommend that African countries review their current
and prospective double taxation conventions, particularly those in place
with jurisdictions that are significant destinations of IFFs, to ensure that
they do not provide opportunities for abuse. The use of the Model Double
Taxation Agreement developed by the African Tax Administration Forum is
recommended for consideration.
Regional integration arrangements should be used to introduce accepted
standards for tax incentives to prevent harmful competition in the effort to
attract foreign direct investment.
African countries are encouraged to join the African Tax Administration
Forum and to provide it with the necessary support, including giving it political
81
standing in African regional processes such as the AU/ECA Conference of
Ministers of Finance.
The extractive sector is a primary source of IFFs in Africa, but it is not the
only source of IFFs. African countries and companies operating in extractive
industries in Africa should join voluntary initiatives like the Extractive Industries
Transparency Initiative. Africa should also push for mandatory country-bycountry and project-by-project reporting requirements immediately in the
extractive sectors and in the near term across all sectors.
5. Institutional support for these measures
African States should establish or strengthen the independent institutions
and agencies of government responsible for preventing IFFs. These include
(but are not limited to) financial intelligence units, anti-fraud agencies,
customs and border agencies, revenue agencies, anti-corruption agencies
and financial crime agencies. All such agencies should render regular
reports on their activities and findings to national legislatures.
African States should create methods and mechanisms for information
sharing and coordination among the various institutions and agencies of
government responsible for preventing IFFs, with such coordination being
led by the country’s financial intelligence unit.
Banks and financial institutions have a major role in preventing and
eliminating IFFs. Robust regimes should be put in place for the supervision
of banks and nonbank financial institutions by central banks and financial
supervision agencies. Such regimes must require mandatory reporting of
transactions that may be tainted with illicit activity.
82
B. The criminal component
of illicit flows
Poaching; drugs, arms and human trafficking; oil and mineral theft; and
other forms of crime that generate money contribute to IFFs, sometimes
employing the same commercial mechanisms used to evade taxes and
customs duties to move the proceeds of these crimes out of African
countries. African governments should ensure that those investigators
responsible for identifying the criminals engaged in these activities are also
required, trained and empowered to investigate the financial aspects of these
cases, prosecuting those who facilitate the movement and laundering of the
proceeds of these crimes as well.
Each African country’s financial intelligence unit should share information
with other African financial intelligence units about cases of people and
companies being prosecuted for facilitating the movement and laundering
of the proceeds of these crimes so that cross-border illicit activities and
patterns can be identified.
We recognize the excellent reports that the United Nations Office on Drugs
and Crime (UNODC) has produced on transnational organized crime in
Eastern and Western Africa. We request that the UNODC extend this work to
cover the whole of Africa. The work should include estimates of the financial
magnitude of various types of criminal activity affecting the continent.
C. The corrupt component
of illicit flows
IFFs should be integrated as a specific component in the African Union
Convention on Preventing and Combating Corruption. This will immediately
bring IFFs into the Strategy of the Advisory Board of the Convention. The
association of civil society and media, as required of governments under
Article 12 of the Convention, will become accepted standard practice.
To eliminate the opportunity for IFFs from national and local government
treasuries, African States should ensure that the public can access national
and subnational budget information, and that processes and procedures for
budget development and auditing are open and transparent to the public.
Non-transparent government procurement and supply chains can provide
opportunities for corruption-related IFFs. African governments should
adopt best practices in open contracting to reduce IFFs through government
procurement processes.
83
Global standards in anti-corruption and anti–money laundering require
financial institutions to subject accounts held by certain persons to greater
scrutiny and monitoring, including senior government officials, leaders
of political parties, executives at state-owned enterprises and others with
access to large amounts of state assets and the power to direct them (often
called politically exposed persons, or PEPs). African governments can greatly
help financial institutions in this task by publishing lists of PEPs, as well
as any asset declarations filed by PEPs and information about whether the
country’s laws prohibit or restrict the ability of their PEPs to hold financial
accounts abroad.
African governments can require foreign financial institutions to provide
details of accounts held by their listed PEPs, preferably as part of the new
system of automatic exchange of financial information being created under
the auspices of the OECD.
D. Additional strategic measures
by African States
African countries should adopt a normative instrument in the form of a
declaration to commit to combatting IFFs and urging similar actions at the
global level.
Given the vital and positive role of civil society organizations (media, nongovernmental organizations, academia and think tanks) in efforts to curb
IFFs, it is essential that they should be given the operating space and legal
freedoms required for advocacy, activism and research in this area. The Panel
also recognizes the importance of African governments continuing to engage
such global campaigns against IFFs.
Article 22 of the African Union Convention on Preventing and Combating
Corruption regarding the functions of the AU Advisory Board on corruption
should be extended along the following lines: “Develop methodologies for
analysing the nature and extent of illicit financial flows from Africa, and
disseminate information and sensitize the public on the negative effects of
illicit financial flows from Africa.”
The African Peer Review Mechanism, which is a unique governance
instrument, should incorporate issues of IFFs in its questionnaires for the
country review process.
A study should be undertaken of potential methodologies and reforms
available globally and regionally and to individual African countries to facilitate
taxation of multinational corporations in accordance with where their
economic activities occur, bearing in mind current international standards
and pragmatic opportunities for the improvement of these standards.
The ECA should be mandated to undertake research on the cost-benefit
analysis of tax incentives to help guide African countries in drawing up such
frameworks intended to attract foreign direct investment.
84
The ECA should also produce a produce a practical document available to
all African countries on operational measures to adopt policies against IFFs
as well as support advocacy actions detailing the dangers to the economic,
social and political lives of African countries. This document would also serve
as an educational tool in addition to serving other measures.
African countries must become involved with the work of the OECD on base
erosion and profit shifting to ensure that global rules being discussed and
agreed on do not result in increased IFFs from Africa. African countries
should consider coordinating efforts and presenting regional or larger
unified positions in response to OECD consultations and meetings. Where
measures are adopted by the OECD that African countries determine will
hurt their countries or the continent as a whole, African governments should
recommend and publish measures that all African countries can take to
counter profit-shifting practices detrimental to African countries.
Initiatives to improve financial transparency, while welcome, may involve
complicated requirements or have the potential for adverse economic
consequences. The ECA should accordingly be mandated to assess the impact
of such initiatives on African economies. In this regard, it should assess the
impact of the relevant provisions in the Dodd-Frank Act and comparable
legislation elsewhere on Africa and make appropriate recommendations.
E. Further responsibilities
of Africa’s partners
The Panel recommends that the Bank for International Settlements publish
the data it holds on international banking assets by country of origin and
destination in a matrix format, along the lines of the data published by the
IMF for bilateral trade; foreign direct investment and portfolio investment, so
that it can inform the analysis of IFFs from Africa.
The Panel asks that the global community in all of its institutions, including
parliaments, take all necessary steps to eliminate secrecy jurisdictions,
introduce transparency in financial transfers and crack down on money
laundering. The AU, G20, IMF and OECD should provide required leadership
in these efforts.
The Panel calls for stronger collaboration and consistent engagement
between Africa and global players such as the US, EU, G8 and G20 to help
ensure greater transparency in the international banking system, with banks
being required to ascertain the identity, source of wealth and country of origin
of their depositors and their deposits.
The Panel calls for partner countries to require publicly available
disaggregated, country-by-country reporting of financial information for
multinational companies incorporated, organized or regulated in their
jurisdictions.
85
Transparency of ownership and control of companies, partnerships, trusts
and other legal entities that can hold assets and open bank accounts is
critical to determining where illicit funds are moving and who is moving
them. All countries should require beneficial ownership information to
be provided when they incorporate companies, for that information to be
updated regularly, and for that information to be available on the public
record. Beneficial ownership declarations should also be required for all
government contracts with third parties. False declarations should result in
robust financial penalties.
The African Union should engage with partner institutions to elaborate a
global governance framework that will determine the conditions under which
assets are frozen, managed and repatriated. The framework should include
the creation of escrow accounts managed by regional development banks
that will serve as custodians of the assets determined to be of illicit origin.
Existing laws which have proven successful in combatting IFFs should be
replicated as global best practices and standards. The use of The Lacey Act
in the United States which was used to repatriate illegal fishing proceeds to
the Republic of South Africa (RSA) is one such example. Similarly, the South
African tax laws that enabled the country to reclaim $2 billion of unpaid taxes
is another case in point.
The IMF, United Nations and World Bank should play a more coherent and
visible role in tackling IFFs. African countries should accordingly initiate
steps for adopting a unified policy instrument to curb IFFs in order to place
the matter squarely on the global agenda and bring coherence to all ongoing
efforts in this regard.
If Africa is to effectively curtail IFFs, the measures outlined above must be put
into effect on the ground. National, regional and global actors need to actively
engage with the process of stemming IFFs.
We are absolutely certain that with the necessary institutions, many of which
are in place; and which are staffed by officials with the requisite skills (which
some African countries are prepared to help transfer); and with transparent
systems across the board, Africa can reverse illicit financial outflows. At the
very least, as a result of our collective action, approximately $50 billion a year
will become available to finance Africa’s identified developmental needs.
We recommend this report to you, our African leaders, the people of Africa,
and to the peoples of the rest of the world.
86
Annex I:
Resolution establishing the High Level Panel
on Illicit Financial Flows
Resolution 896 (XLIV)
Illicit Financial Flows from Africa
The Conference of Ministers,
Recalling resolution 886 (XLIV) on illicit financial flows adopted at the Fourth
Joint Annual Meetings of the African Union Conference of Ministers of
Economy and Finance and the Economic Commission for Africa Conference
of Ministers of Finance, Planning and Economic Development, providing for
action to be taken to address the problem of such flows,
1. Commends the establishment and inauguration of a High-Level Panel
on Illicit Financial Flows from Africa headed by Mr Thabo Mbeki, former
President of South Africa, assisted by nine other members;
2. Reiterates that illicit financial flows constitute a major development
challenge for Africa, draining the continent of needed financial
resources, causing economic distortions and perpetuating poverty;
3. Calls on the Economic Commission for Africa to provide the necessary
technical backstopping for the Panel;
4. Invites the Panel to work actively in addressing the problem and report
to the next Conference of Ministers; and
5. Urges the different stakeholders including governments, civil society
organizations, the private sector and regional and international
organizations to fully support the work of the Panel.
87
Annex II:
Typology of commercially driven illicit financial flows
and their immediate impacts
Flow
Manipulation
Illicit Motivation
IFF Type
Exports
Overpricing
• Exploit subsidy
regime
• (Re)patriate
undeclared capital
• Tax abuse
• Market/regulatory
abuse
Under-pricing
• Shift undeclared (licit)
income/profit
• Shift criminal
proceeds out
• Evade capital controls
(including on profit
repatriation)
• Tax abuse
• Laundering
proceeds of crime
• Market/regulatory
abuse
Overpricing
• Shift undeclared (licit)
income/profit
• Shift criminal
proceeds out
• Evade capital controls
(including on profit
repatriation)
• Tax abuse
• Laundering
proceeds of crime
• Market/regulatory
abuse
Under-pricing
• Evade tariffs
• (Re)patriate
undeclared capital
• Tax abuse
• Market/regulatory
abuse
Overpricing
• (Re)patriate
undeclared capital
• Market/regulatory
abuse
Under-pricing
• Shift undeclared (licit)
income/profit
• Shift criminal
proceeds out
• Evade capital controls
(including on profit
repatriation)
• Tax abuse
• Laundering
proceeds of crime
• Market/regulatory
abuse
Anonymity
• Hide market
dominance
• Hide political
involvement
• Market/regulatory
abuse
• Abuse of power
Imports
Inward
Investment
88
Flow
Manipulation
Illicit Motivation
IFF Type
Outward
Investment
Overpricing
• Shift undeclared (licit)
income/profit
• Shift criminal
proceeds out
• Tax abuse
• Laundering
proceeds of crime
Under-pricing
• Evade capital controls
(including on profit
repatriation)
• Market/regulatory
abuse
Anonymity
• Hide political
involvement
• Abuse of power
Public Lending
(If no expectation of repayment,
or if under-priced)
• Public asset
theft (illegitimate
allocation of state
funds)
• Abuse of power
Public
Borrowing
(If state illegitimate, or if
overpriced)
• Public asset theft
(illegitimate creation
of state liabilities)
• Abuse of power
Related Party
Lending
Under-priced
• Shift undeclared (licit)
income/profit
• Tax abuse
Related Party
Borrowing
Overpriced
• Shift undeclared (licit)
income/profit
• Tax abuse
Under-pricing
• Public asset theft
• Abuse of power
Anonymity
• Hide market
dominance
• Market/regulatory
abuse
Anonymity
• Hide political
involvement
• Abuse of power
Overpricing
• Public asset theft
• Abuse of power
Under-pricing
• Hide market
dominance
• Market/regulatory
abuse
Anonymity
• Hide political
involvement
• Abuse of power
Anonymity
• Corrupt payments
• Abuse of power
Public Asset
Sales
Public
Contracts
Offshore
Ownership
Transfer
Source: Developed by Alex Cobham and Alice Lépissier, Center for Global Development.
89
Annex III:
ECA analysis on quantifying illicit financial flows:
Methodology and data
Several attempts have been made to quantify the illicit financial flows (IFFs)
that leave African countries and others. These include Kar and CartwrightSmith (2008, 2010); Kar and Freitas (2011) and Ndikumana and Boyce
(2011). However, no analysis has been conducted that disaggregates IFFs
from Africa by subsector and by destination country. UNECA has therefore
conducted such an analysis, and the results are reviewed in the discussion
below.
Overview of the main methods of estimating illicit financial
flows
In terms of the methodologies used to estimate IFFs, several empirical
models have been used to estimate both the magnitude of IFFs and
their economic implications for developing countries, including those in
Africa. These models and the analytic methods underlying them deserve
further scrutiny. In particular, four methods have dominated the empirical
literature: the Hot Money Method, the Dooley Method, the World Bank
Residual Method and the International Monetary Fund (IMF) Direction of
Trade Statistics (DOTS)–based Trade Mispricing Method. The latter two
remain the most widely used.
The Hot Money Method records IFFs through net errors and omissions in
payment balances. The Dooley Method relies on the privately held foreign
assets reported in the balance of payments that do not generate investment
income. The World Bank Residual Method estimates IFFs as the difference
between the source of funds (external debt and foreign direct investment)
and the use of funds (current account deficit and reserves). The Trade
Mispricing Model assesses IFFs by looking for disparities arising from
overinvoicing of imports and underinvoicing of exports after adjusting for
ordinary price differences. In this model, imports are generally recorded
after adjusting for the cost of insurance and freight, while exports are
usually valued free-on-board (Kar and Cartwright-Smith, 2008).
To provide the most thorough estimates of IFFs, Global Financial Integrity
has combined the World Bank Residual Method and the Trade Mispricing
Model in its computations (Kar and Cartwright-Smith, 2008, 2010; Kar and
Freitas, 2011). Ndikumana and Boyce (2008, 2011) have adopted a similar
methodology.
90
In terms of the final estimates of IFF globally, the latest estimates indicate
an average annual loss of more than $1 trillion for 2007–2009, with Africa’s
share being nearly 6 per cent (Kar and Freitas, 2011). Note, however, that
these estimates are conservative given the inadequacy of the data and the
diverse channels through which illicit capital flows.
Estimates of IFFs can differ considerably because of the use of different
methods, assumptions and data, even when using the same basic
methodology. For example, the latest report by Global Financial Integrity
on IFFs from developing countries estimates that IFFs at the regional and
national levels could differ from those published in its 2010 report due to
revisions of the underlying data supplied by member countries (Kar and
Freitas, 2011). In 2006, annual losses from developing countries were
estimated to be between $443.4 billion (World Bank Residual Method) and
$1.1 trillion (Dooley Method; Kar and Cartwright-Smith, 2008).
Despite these significant variations, noteworthy convergences exist for
Africa:
> IIFFs are high;
> 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.
Ndikumana and Boyce (2008, 2011), Kar and Cartwright-Smith (2010) and
Kar and Freitas (2011) confirm these findings. Although these studies
adopt similar approaches for combining residual (accounting for balance
of payments and external debt) and trade mispricing methods, they differ in
their data sources and assumptions.
According to Kar and Cartwright-Smith (2010), Africa lost about $854 billion
in IFFs over 1970–2008, a yearly average of about $22 billion (figure AIII.1).
This cumulative amount is considerable compared with both the external
debt of the continent and the official development assistance received over
the same period. Indeed, it is equivalent to nearly all the official development
assistance received by Africa during that time frame (OECD, 2012). From a
different perspective, a sum equal to only a third of the loss associated with
IFFs would have been enough to fully cover the continent’s external debt,
which reached $279 billion in 2008 (UNECA, 2009).
91
Figure AIII.1
Illicit financial flows from Africa, 1970–2009 (billions of dollars)
120
100
80
60
40
20
0
2008
Ndikumana and
Boyce
2010
Kar and
Cartwright-Smith
2010
2000
1990
1980
1970
-20
2011
Kar and Freitas
Source: Based on Ndikumana and Boyce (2008), Kar and Cartwright-Smith (2010) and Kar and Freitas (2011).
The trend has been increasing over time and especially in the last decade,
with average annual IFFs of $50 billion over 2000–2008 compared with only
$9 billion for 1970–1999 (Kar and Cartwright-Smith, 2010). The decline in
2009 is a likely result of the recent economic and financial crises, which
have depressed overall global trade (Kar and Freitas, 2011).
Cumulative IFFs in Africa for 1970–2008 were unequally distributed. Twothirds of IFFs were attributed to only two regions: West Africa (38 per cent)
and North Africa (28 per cent; figure AIII.2). Each of the other three regions
(Southern, Eastern and Central Africa) registered about 10 per cent of
Africa’s total IFFs. But the particularly low shares of IFFs from the latter
three regions could also be attributed to the lack of data or their poor quality.
92
Figure AIII.2
Cumulative illicit financial flows from Africa by region, 1970–2008
28%
38%
11%
13%
North Africa
Eastern Africa
West Africa
10%
Central Africa
Southern Africa
Source: Authors’ calculations based on Kar and Cartwright-Smith (2010).
In addition, the data show the great significance of IFFs from oil-exporting
countries dominated by the North African and West African regions. Nigeria
accounts for the largest share of IFFs for West Africa (79 per cent of the
West African total), whereas Egypt and Algeria account for 66 per cent of
the IFFs from North Africa. Non-oil-exporting countries such as South
Africa, Morocco, Côte d’Ivoire and Ethiopia also register significant levels of
IFFs for 1970–2008. Interestingly, IFFs are extremely concentrated in a few
countries: the top 10 for 1970–2008 accounted for 79 per cent of total IFFs
from Africa (table AIII.1).
Table A3.1
Top 10 African countries by cumulative illicit financial flows, 1970–2008
Country
Cumulative IFFs
(1970–2008) US$ Billion
Share in Africa’s Total IFFs
Nigeria
217.7
30.5%
Egypt
105.2
14.7%
South Africa
81.8
11.4%
Morocco
33.9
4.7%
Angola
29.5
4.1%
Algeria
26.1
3.7%
Côte d’Ivoire
21.6
3.0%
Sudan
16.6
2.3%
Ethiopia
16.5
2.3%
Congo, Republic of
16.2
2.3%
Source: Based on Kar and Cartwright-Smith (2010).
93
The literature emphasizes that IFFs considerably limit the resources
available for development of the African economies, impeding poverty
reduction. But even if the observations at the country level tend to indicate
higher IFFs for oil-exporting countries, a thorough analysis at the sector
level that incorporates the destination of IFFs from Africa is critical to help
identify specific niches. No such disaggregated analysis has been conducted,
so UNECA has developed a methodology based on trade mispricing. This
approach is critical to inform policymakers about the urgent need to tackle
IFFs.
ECA Methodology
This section briefly overviews the ECA methodology for assessing IFFs at
the country and sector levels through trade mispricing using misinvoicing.
Assessing IFFs at the sector level by considering their bilateral dimension
requires a significant amount of data. For this reason, the analysis focuses
only on the trade mispricing aspect of commercial transactions by
multinational corporations. According to Raymond Baker, “trade mispricing
accounts for up to 55% of total illicit capital outflows from developing
countries.” In other words, the bulk of illicit flows from developing countries
are due to trade mispricing by multinational corporations (see figure AIII.2).
The methodology here is similar to that in the Trade Mispricing Model in
that estimates are made using data for misinvoicing. Similar to the Trade
Mispricing Model, the ECA methodology uses bilateral data for the same
trade flow, comparing country I’s exports of product a to country J, with
country J’s imports of product a from country I. This two-way information is
usually mismatched for several reasons:
> Exports are generally expressed free-on-board (FOB), while imports
are normally reported as including the cost of insurance and freight
(CIF);
> Each country does not necessarily use the same nomenclature for
a given product;
> Mistakes in reporting the value of the flows are possible;
> Delays often occur in the export/import process; and
> IFFs can be a source of discrepancies.
The ECA analysis takes the discrepancy between the data reported on the
imports and on the exports of the same flow and subtracts the differences
between CIF and FOB values and the ad valorem equivalent of the delays
in the export/import process. The remainder is used as the estimate of the
IFFs associated with that trade flow. This remainder could also, in part,
be due to mistakes in reporting or discrepancies in nomenclature used
by importing and exporting countries. However, assuming that these
errors are evenly distributed on either side (that is, they artificially reduce
discrepancies just as often and just as much as artificially adding to them),
the errors on either side should roughly cancel each other out in the overall
estimates of IFF and the overall estimates should be accurate.
94
In addition, the ECA approach “nets off” the IFF estimates—that is, its
IFF estimates are the difference between the trade mispricing IFF flows
in the two directions for a given pair of countries for a given product. The
net method is not universally favoured because it may improperly capture
reversals in countries subject to political and economic instabilities. But
there are reasons for supporting its use. We do not observe any significant
illicit financial inflows for African countries based on the ECA model’s
computations. Moreover, at the global or national level, differences between
estimates using either a net or a gross approach are generally limited. In
addition, when it comes to finer-grained analysis of IFFs, the gross method
is likely to create inconsistencies with analysis at the global level. If a gross
approach is used, then “negative IFFs” for a particular country will be set
to zero, which will create inconsistencies with global totals when IFFs are
aggregated up.
Further details of the methodology are as follows. To calculate the cost
of insurance and freight, the ECA model uses the BACI database, which
provides reconciled bilateral trade flows using Comtrade data at the
HS6 level of product disaggregation. An econometric model estimating
transport costs is used to assess CIF values and mirror flows at FOB prices.
The econometric analysis allows for offsetting other discrepancies, such
as potential data mistakes and nomenclature differences. See Gaulier and
Zignago (2010) for more details. This contrasts with the Trade Mispricing
Model, which uses a fixed CIF/FOB ratio of 1.1 for assessing the value of
CIF.
To estimate the ad valorem equivalent of time lags in the export/import
process, the present paper accounts for ad valorem equivalents of the time
to trade across borders. This contrasts with the Trade Mispricing Model,
which does not correct for such factors for identifying misinvoicing.
The ECA uses data from UN Comtrade. This allows for analysis at the
product level, with data available for several nomenclatures, including the
Harmonized System at the six-digit level (HS6), which provides bilateral
trade data for more than 5,000 products (the Trade Mispricing Model instead
uses data from IMF Trade Statistics, which does not allow this).
It is worth noting that this methodology has limitations in addition to those
associated with the assumptions listed above. Although some argue for
assessing IFFs through trade mispricing as determined by misinvoicing
because they see international trade as a predictable channel for IFFs,
others argue that misinvoicing is mainly a response to high trade taxes.
In addition, many trade transactions are not recorded, especially in Africa,
and so they cannot be captured through misinvoicing. Also note that the
methodology only captures IFFs in goods, not in services, because such
detailed data are not available for African countries. At the country level,
Kar and Cartwright-Smith (2010) attempt to include services in their
estimates of IFFs by using a proxy for services-related IFFs derived from the
ratio of world trade in services to world trade in goods, but this is a highly
questionable approach. Furthermore, and despite meaningful outcomes
from very detailed levels of aggregation for countries and products, a
downside is that data inconsistencies negatively affect country results more
than global results. This drawback is relatively controlled in our estimates
due to use of the BACI database. Even if trade mispricing accounts for more
than half of IFFs, it cannot explain all the IFF pathways. Other pathways are
hard to quantify, and as a consequence it is difficult to precisely determine
the magnitude of IFFs.
95
Results
The ECA estimates are in the same range as the Trade Mispricing Model’s
for the ratio of trade mispricing to total IFFs, which represent up to 55 per
cent of total IFFs from developing countries (Baker, 2005). Figure AIII.3
also shows estimates from Kar and Cartwright-Smith (2010) for total IFFs
over 2000–2008. It is possible to use the analysis in Kar and CartwrightSmith (2010) as a comparator for the ECA results, since they isolate trade
mispricing from the rest of IFFs in their estimates. Even if not strictly
comparable, the trends are relatively similar. For 2000–2008, Kar and
Cartwright-Smith (2010) estimate cumulative IFFs from Africa due to trade
mispricing at $162 billion, whereas comparable estimates from ECA are
higher, at $242 billion. Kar and Cartwright-Smith assess total cumulative
IFFs in Africa at $448.4 billion. The ECA estimates for cumulative IFFs
through trade mispricing represent 54.1 per cent of this total, while Kar and
Cartwright-Smith’s computations for trade mispricing would correspond
to 36.2 per cent. Finally, even though Baker’s approximation of the share
of IFFs through trade mispricing in total IFFs is for developing countries
in general and not specifically Africa, Global Financial Integrity states that
“illicit outflows through trade mispricing from Africa grew faster, with a
real growth rate of 32.5% between 2000 and 2009, clearly outpacing such
outflows from developing Europe (9.7%), Asia (7.7%), and other regions”
(Kar and Freitas, 2011: 10).
Table AIII.1
Evolution of illicit financial flows from Africa, 2000–2008 (billions of dollars)
100
80
60
40
20
0
2000
2010
2001
Kar and CartwrightSmith - all IFFs
2002
2010
2003
2004
Kar and Cartwright-Smith
- trade mispricing only
2005
2006
2007
ECA’s methodology
- trade mispricing only
Source: Based on Ndikumana and Boyce (2008), Kar and Cartwright-Smith (2010), Kar and Freitas (2011) and the ECA methodology.
96
2008
Figure AIII.4 provides the 10 sectors used in the sector-level analysis,
defined for the Harmonized System at the two-digit level (HS2), for which
cumulative IFFs from Africa have been the highest for 2000–2010. IFFs from
the continent are highest in the extractive industries, including mining.
More than half (56.2 per cent) of the IFFs from the African continent over the
period come from oil, precious metals and minerals, ores, iron and steel,
and copper. Moreover, these are highly concentrated in very few countries.
Nearly three-fourths of the total IFFs in oil from Africa during 2000–2010
are from Nigeria (34.5 per cent), Algeria (20.1 per cent) and Sudan (12.0
per cent; ECA 2012). In precious metals and minerals, iron and steel, and
ores, the greatest shares in total IFFs from Africa are from the Southern
African Customs Union (SACU), with 97.6 per cent, 59.7 per cent and 51.8
per cent, respectively. Zambia accounts for 65 per cent of the continent’s
IFFs in copper.
Table AIII.4
Top 10 sectors by cumulative illicit financial flows for Africa, 2000–2010 (billions of
dollars, trade mispricing only)
90
80
70
60
50
40
30
20
10
0
Oil
(27)
Precious
metals &
minerals
(71)
Ores
(26)
Electrical
Fruits &
machinery nuts (08)
& equip. (85)
Copper
(74)
Iron & steel
(72)
Cocoa
(18)
Apparel &
Fish &
clothing crustaceans
(62)
(03)
Note: Top 10 sectors are by HS2 classification. See annex IV for full details about HS2 codes and definitions.
Source: ECA calculations.
The trend of IFFs in the extractive industries, including mining, has been
growing exponentially, peaking in 2008, especially for oil, when world prices
were highest (figure AIII.5). But 2009 was marked by a reduction in illicit
flows compared with 2008, mainly due to the financial and economic crisis.
Demand for these products declined, as did world prices. IFFs gradually
picked up again in 2010, with notable increases in the oil, precious metals
and minerals, copper and cocoa sectors.
97
Table AII.5
Evolution of illicit financial flows from Africa in some extractive sectors, 2000–2010
(billions of dollars, trade mispricing only)
18
16
14
12
10
8
6
4
2
0
2000
2001
Ores (26)
2002
Oil (27)
2003
2004
Precious metals &
minerals (71)
2005
2006
2007
Iron & steel (72)
2008
2009
2010
Copper (74)
Note: Sectors are listed by HS2 classification.
Source: ECA calculations.
Sectors such as edible fruit and nuts, electrical machinery and equipment,
fish and crustaceans, apparel and cocoa have also been targets for IFFs
over 2000–2010, each accounting for 3–4 per cent of the African total. IFFs
between 2000 and 2010 are also concentrated in a few countries. In the
cocoa sector, 86.8 per cent of total IFFs are from Côte d’Ivoire (38.1 per
cent), Ghana (26.4 per cent) and Nigeria (22.3 per cent). In the electrical
machinery and equipment sector, 82.7 per cent of total IFFs are from
Morocco (51.8 per cent), Tunisia (19.1 per cent) and the SACU countries
(11.8 per cent). The same is true of the edible fruit and nuts sector, with IFFs
coming mainly from the SACU countries (46.4 per cent), Cameroon (14.3
per cent) and Côte d’Ivoire (13.9 per cent). In the apparel sector, Tunisia
(33.4 per cent) and Morocco (31.4 per cent) register the largest shares of
IFFs. IFFs in the fish and crustaceans sector are distributed more evenly
across African countries.
As in the extractive and mining sectors, IFFs in edible fruit and nuts,
electrical machinery and equipment, fish and crustaceans, apparel and
cocoa have greatly increased in the past few years (figure AIII.6).
98
Table AIII.6
Evolution of cumulative illicit financial flows from Africa in selected non-extractive
sectors, 2000–2010 (billions of dollars, trade mispricing only)
2.5
2
1.5
1
0.5
0
2000
2001
2002
Fish & crustaceans (03)
2003
2004
Fruit &nuts (08)
2005
2006
Cocoa (18)
2007
2008
2009
2010
Apparel & clothing (62)
Electrical machinery & equipment (85)
Note: Sectors are by HS2 classification.
Source: ECA calculations.
Further, IFFs tend to be confined to a few sectors within each country,
reflecting the volumes of the internationally tradable goods exported by
these countries. Of African countries where cumulative IFFs are the highest
over 2000–2010, 93.2 per cent of total IFFs occur in the oil sector in Sudan,
92.9 per cent in Nigeria, 74.1 per cent in Algeria and 40.6 per cent in Egypt;
80 per cent of Zambian IFFs are from copper. IFFs in the SACU countries are
mainly from precious metals and minerals (51 per cent); cocoa generates
most of Côte d’Ivoire IFFs (49.7 per cent).
In Morocco, the concentration is less pronounced, with 29.9 per cent of total
IFFs in electrical machinery and equipment, 14.2 per cent in apparel and
10.7 per cent in edible vegetables. However, Moroccan exports are among
the most diversified in Africa. Therefore, if African countries’ exports were
more varied, IFFs would be more distributed across sectors and perhaps of
lesser magnitude for the continent as a whole.
Concentration is also high in the destination countries. In 2008, 76.4
per cent of the IFFs in oil from Nigeria benefited only the United States,
Spain, France, Japan and Germany (table AIII.2). More generally, the
main recipients of IFFs from African countries are developed countries
(especially the United States, various European countries, Canada, Japan
and the Republic of Korea) and emerging economies (such as China and
India), which are also Africa’s major trading partners.
99
Table AIII.2
Top five destinations by share of total illicit financial flows for selected African countries
and sectors where these flows are particularly large, 2008 (per cent, trade mispricing
only)
Nigeria - Oil
(HS2 code 27)
Algeria - Oil
(HS2 code 27)
SACU - Precious
Cote d’Ivoire metals and minerals Cocoa (HS2 code 18)
(HS2 code 71)
United
States
29.0% Germany
16.1% India
Spain
22.5% Turkey
14.6%
France
8.7%
Canada
11.7% Italy
Japan
8.5%
Tunisia
10.2%
Germany
7.7%
United
States
6.8%
Top 5 Total
76.4% Top 5 Total
23.2% Germany
United Arab
22.7% Canada
Emirates
Zambia - Copper
(HS2 code 74)
23.6% Saudi Arabia 23.4%
9.4%
Korea, Rep
15.7%
United
States
9.2%
China
10.4%
United
States
10.8% Mexico
8.5%
Thailand
5.7%
Turkey
7.2%
7.4%
Pakistan
2.6%
59.4% Top 5 Total
14.2%
France
78.2% Top 5 Total
58.1% Top 5 Total
57.9%
Note: Sectors are by HS2 classification.
Source: ECA calculations.
Conclusion
IFFs from Africa measured through trade mispricing show high
concentrations in a few countries and a few sectors. African economies
specializing in exporting extractive industry products (such as Algeria,
Egypt, Nigeria, the SACU, Sudan and Zambia) generally register the highest
IFFs. But IFFs from Africa also occur in sectors such as edible fruit and nuts,
electrical machinery and equipment, iron and steel, fish and crustaceans,
apparel, and cocoa. Within each country, IFFs are derived mainly from one
sector. Moreover, IFFs from Africa are high, and the total of IFFs over 1970–
2008 is also about three times larger than the continent’s current external
debt, according to some estimates.
100
Table AIII.3
Ad valorem equivalents of the time to trade across borders (per cent)
Exports
Imports
Algeria
0,9
8,6
Angola
0,5
20,8
Benin
11,1
20,8
Burkina Faso
20
27,7
Burundi
32,8
20,8
Cameroon
4,9
12
Cape Verde
6,2
20,8
Central African Republic
3,9
29,7
Chad
9,3
53,3
Comoros
6,2
20,8
Congo Dem. Rep.
11,1
20,8
Congo Rep.
1,9
16,6
Côte d'Ivoire
3,6
10,3
Djibouti
31,9
20,8
Egypt, Arab Rep.
13
4,5
Equatorial Guinea
0,6
28,6
Eritrea
20,6
15,6
Ethiopia
21,3
27,1
Gabon
0,4
13,9
Gambia, The
6,4
20,8
Ghana
27,2
23,9
Guinea
19,3
20,8
Guinea-Bissau
0,5
11,4
Kenya
10,6
19,2
Liberia
11,1
20,8
Libya
11,1
20,8
Madagascar
10
7,1
Malawi
3,7
30,5
Mali
14,1
32
Mauritania
2,6
12,3
101
Exports
Imports
Mauritius
3,5
3,8
Morocco
6,8
15,3
Mozambique
0,9
7
Niger
11,1
39,4
Nigeria
0,2
22,8
Rwanda
6,1
52
Sao Tome and Principe
1,4
20,8
Senegal
6,7
11,3
Seychelles
6,8
10
Sierra Leone
14,1
20,8
Somalia
11,1
20,8
SACU
17,6
13,4
Sudan
32,2
36,9
Tanzania
24
11
Togo
4,4
12
Tunisia
4,8
8,2
Uganda
33,6
50,5
Zambia
14,1
26,2
Zimbabwe
26,4
23,4
Source: Based on Hummels and others (2007).
102
Year HS2
code
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Cumulative
total
Yearly
average
Table AIII.4
Illicit financial flows from Africa by sector, 2000–2010 (billions of dollars, trade
mispricing only)
01
0
0
0
0
-0,1
-0,1
-0,1
-0,1
-0,1
0
-0,1
-0,6
-0,1
02
0
0
0
0
0
0
-0,1
-0,1
-0,1
0
-0,2
-0,4
0
03
0,7
0,7
0,9
0,8
0,8
1,1
0,8
0,9
1,1
1
0,4
9,3
0,8
04
0
0
0
0
0
0
0
0
0,1
0
0
0,2
0
05
0
0
0
0
0
0
0
0
0
0
0
0,1
0
06
0,1
0,1
0,1
0,1
0,1
0,1
-0,3
0,1
0
0,1
0,2
0,7
0,1
07
0,1
0,1
0,2
0,2
0,3
0,4
0,2
0,7
0,7
0,5
0,5
3,8
0,3
08
0,5
0,8
0,8
1,2
1,1
1,1
1,1
1,4
1,6
1,4
1,3
12,2
1,1
09
0,2
0,2
0,2
0,2
0,3
0,4
0,3
0,2
0,3
0,2
0,3
2,7
0,2
10
0
0
0
0
0
-0,1
0,1
0,1
-0,1
0,1
0
0,4
0
11
0
0
0
0
0
-0,1
0
0
0
0
0,1
0,1
0
12
0
0,1
0,1
0,1
0,1
0,1
0,2
0
0,2
0,1
-0,2
0,9
0,1
13
0
0
0
0
0
0
-0,1
0
0
0
-0,2
-0,2
0
14
0
0
0
0
0
0
0
0
0
0
0
0
0
15
0
0
0,1
0,1
0,1
0
0,2
0,1
0,2
0,1
0,1
1
0,1
16
0
0,1
0,1
0,1
0,2
0,1
0,2
0,2
0,4
0,3
0,2
1,9
0,2
17
0
0,1
0,1
-0,1
0
0
0
0,1
0,4
0,3
0,3
1,2
0,1
18
0,1
0,5
0,3
1,3
0,4
0,6
0,8
1,1
1,5
1,7
2,2
10,4
0,9
19
0
0
-0,1
0
0
0
0
0
0
0
0
0
0
20
0
0
0
0
0
0
0,1
0,1
0,1
0,1
0
0,6
0,1
21
0
0
0,1
0,1
0,1
0,1
0
0,1
0,2
0,2
0,1
0,8
0,1
22
0
0
0,1
0
0
0
0
0
0
0,1
-0,1
0,2
0
23
0
0
0
0
0
0
0
0,1
0,1
0
0,1
0,6
0,1
24
0,2
0,2
0,5
0,2
0,2
0,5
0,2
0,5
0,2
0,3
0,5
3,4
0,3
25
0,2
0,3
0,3
0,4
0,2
0,6
0,6
0,7
1,1
0,4
0,7
5,4
0,5
26
0,7
0,8
0,7
0,9
1,2
1,8
1,4
2,2
4,6
0,5
0,4
15,2
1,4
27
-0,8
4,2
2,5
5,8
5,6
4,9
2,5
16,6
17
11,5
13,7
83,4
7,6
28
0,3
0,3
0,3
0,3
0,4
0,6
0,6
0,5
0,5
0,7
1
5,5
0,5
29
0,1
0,1
0,1
0,1
0,1
0,1
0,2
0,2
0,5
0,2
0,3
2,1
0,2
30
0
0
0,1
0
0
0,1
0
0,1
0,1
0,1
0,1
0,8
0,1
31
0,1
0,1
0,1
0,1
0,1
0,1
0,1
0,1
1,2
0,2
0,4
2,6
0,2
32
0
0
0
0
0
0
0
0
0,1
0,1
0,1
0,4
0
33
0
0
0
0
-0,4
-0,3
-0,3
-0,2
0,1
0,1
0,1
-0,9
-0,1
103
Year HS2
code
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Cumulative
total
Yearly
average
34
0
0
0
0
0
0
0
0
0
0
0
-0,1
0
35
0
0
0
0
0
0
0
0
0
0
0
0
0
36
0
0
0
0
0
0
0
0
0
0
0
0
0
37
0
0
0
0
0
0
0
0
0
0
0
0
0
38
0,1
0,1
0,1
0,1
0
0
-0,1
-0,2
0,1
0,1
0,1
0,3
0
39
0
0
0,1
0,1
0
0
0,1
0
-0,4
-0,1
-0,4
-0,6
-0,1
40
0
0,1
0,1
0,1
0,1
0,2
0,3
0,2
0,2
0,2
0,1
1,6
0,1
41
0,2
0,3
0,3
0,3
0,1
0,1
0,2
0,2
-0,1
0
-1,3
0,4
0
42
0
0
0
0
0
0
0
0
0
0
0
0,2
0
43
0
0
0
0
0
0
0
0
0
0
0
0
0
44
0,5
0,6
0,5
0,8
0,7
0,8
0,5
1,1
1,2
0,6
0,8
8,2
0,7
45
0
0
0
0
0
0
0
0
0
0
0
0,1
0
46
0
0
0
0
0
0
0
0
0
0
0
0
0
47
0
0
0
0
0
0
0
0,1
0,1
0,1
0
0,3
0
48
0
0
0,1
0,1
0
0,1
0,1
0
0,2
0
0,2
0,8
0,1
49
-0,1
-0,1
-0,1
-0,2
-0,1
-0,2
-0,2
-0,6
-0,8
0,1
0
-2,3
-0,2
50
0
0
0
0
0
0
0
0
0
0
0
0
0
51
0
0
0
0
0
0
0
0
0,1
0
0
0,3
0
52
0,4
0,3
0,2
0,3
0,4
0,5
0,3
0,3
1
0,1
0,5
4,2
0,4
53
0
0
0
0
0
0
0
0
0
0
0
0,2
0
54
0
0
0
0
0
0
0
0
0,1
0,1
0,1
0,3
0
55
0
0
0,1
0
0
0
0
0
-0,1
0
0
0,3
0
56
0
0
0
0
0
0
0
0
0
0
0
0,1
0
57
0
0
0
0
0
0
0
0
0,2
0,1
0,1
0,4
0
58
0
0
0
0
0
0
0
0
0
-0,1
0
0
0
59
0
0
0
0
0
0
0
0,3
-0,1
0
0
0,2
0
60
0
0
0
0
0
0
0
0
0
0
0
0,1
0
61
0,3
0,4
0,6
0,6
0,9
0,9
0,9
0,9
1,3
0,8
1,1
8,9
0,8
62
0,5
0,5
0,8
0,8
0,8
0,9
0,7
1
1,5
1
1,2
9,7
0,9
63
0
0
0
0
0
0
0
0
0
0
0
0,2
0
64
0
0
0,1
0,1
0,1
0,1
0,1
0
0,1
0,1
0,2
0,8
0,1
65
0
0
0
0
0
0
0
0
0
0
0
0
0
66
0
0
0
0
0
0
0
0
0
0
0
0
0
104
Year HS2
code
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Cumulative
total
Yearly
average
67
0
0
0
0
0
0
0
0
0
0
0
0
0
68
0
0
0
0
0
0
0
0
0,1
0,1
0
0,1
0
69
0
0
0
0
0
0
0,1
0
0,1
0,1
0,2
0,5
0
70
0
0
0
0
0
0
0
0
0,2
0,2
0,2
0,6
0,1
71
6,6
2,7
7,2
2
3,3
4,8
5,1
6,7
9,3
4
5,4
57,2
5,2
72
0,6
0,5
0,4
0,5
0,9
1,3
1
1,5
2,4
0,9
0,9
10,9
1
73
0
0
0
0
0,1
0,1
0,1
0,1
0,1
0,1
0
0,7
0,1
74
0
0,3
0,2
0,3
0,4
1
1,3
1,7
2,5
1,7
2,9
12,2
1,1
75
0,2
0,1
0,1
0,2
0,3
0,4
0,7
0,3
0,4
0,2
0,8
3,6
0,3
76
0,1
0,5
0,5
0,1
1,1
0,3
0,5
0,4
1,5
1
1,7
7,8
0,7
78
0
0
0
0
0
0
0
0,1
0,1
0
0
0,3
0
79
0
0
0
0
0,1
0
0,1
-0,1
0,1
0,2
0
0,5
0
80
0
0
0
0
0
0
0
0
0
0
0
0
0
81
0,1
0,1
0,1
0
0,2
0,3
0,1
0,2
0,4
0,1
0,2
1,6
0,1
82
0
0
0
0
0
0
0
0
0
0
0
0
0
83
0
0
0
0
0
0
0
0
0,1
0
0,1
0,3
0
84
0,2
0,3
0,4
0,4
0,5
0,5
0,6
0,5
0,9
1,3
0,5
6
0,5
85
0,3
0,4
0,6
0,8
1,2
1,3
1,4
1,9
1,3
1,6
1,6
12,3
1,1
86
0
0
0
0
0
0
-0,1
-0,1
-0,1
0
0
-0,4
0
87
-0,1
0,1
0,3
0
0
-0,1
0,2
-0,1
0,6
0,9
0,9
2,7
0,2
88
0
0
0
0,1
0,1
0,2
0
0,1
0,5
-0,1
0,1
1,1
0,1
89
0,1
0
0
0
0
0,4
0,2
-0,5
-0,9
0,1
-1
-1,6
-0,1
90
0,1
0,1
0
0
0,1
0,1
0,1
0,1
0,1
0,1
0,1
1
0,1
91
0
0
0
0
0
0
0
0
0
0
0
0,2
0
92
0
0
0
0
0
0
0
0
0
0
0
0
0
93
0
0
0
0
0
0
0
0,1
0,1
0
0
0,4
0
94
0
0
0
0,1
0,1
0,1
0
0,1
0,2
0,1
0
0,8
0,1
95
0
0
0
0
0
0
0
0
0,1
0
0
0,3
0
96
0
0
0
0
0
0
0
0
0
0
0
0,1
0
97
0
0
0
0
0
0
0
0
0
0
0,1
0,2
0
TOTAL
13
16,3
20,6
20,6
23
26,6
23,2
42,2
56,8
35,7
40,2
318,4
28,9
Note: For details of the HS classifications, please see /www.wcoomd.org/en/topics/nomenclature/instrument-and-tools/hs-online.aspx.
Source: Authors’ calculations.
105
Annex IV:
Vulnerabilities and exposure to financial secrecy
The phenomenon of illicit financial flows (IFFs) with which this Panel is
concerned is one of hidden flows, deliberately obscuring either the illicit
origin of capital and/or the illicit nature of transactions undertaken. By
design, hidden flows do not lend themselves to measurement. However, it
is possible to analyse more precisely the risks that any given flow of funds
contains a hidden component.
Using bilateral data on economic and financial flows, it is possible to assess
the risk that a given country faces, according to the extent of financial
secrecy of the partner jurisdiction. For example, the IFF risks inherent in a
commodity trade with Switzerland will be substantially higher than in the
equivalent transaction with Sweden; and similarly, intragroup transactions
of a multinational corporation with its subsidiary in Bermuda contain
greater risk than those with its subsidiary in Brazil.
This does not of course imply that all trade with Switzerland is illicit, nor that
all multinationals with Bermudan subsidiaries are committing tax evasion.
However, the greater the transparency of the partner jurisdiction in a given
bilateral transaction, the lower will be the risk of something being hidden,
all other things being equal. Not all transactions of a less transparent
nature will be illicit, but the likelihood of illicit transactions within a less
transparent flow will be higher. The greater the degree of secrecy, in other
words, the higher the risk of IFFs.
The most common measure of financial secrecy is the Financial Secrecy
Index, published every two years by the Tax Justice Network, and now used
widely—for example, as a component of the Basle Anti-Money Laundering
Index, and as a risk assessment tool recommended in the OECD Bribery and
Corruption Awareness Handbook for Tax Examiners and Tax Auditors. The
Index is based on a “secrecy score”, which is constructed from 48 indicators
of transparency in areas from corporate reporting to banking and beneficial
ownership, largely based on the assessment of relevant international and
multilateral organizations. The full set of indicators can be seen in table
AIV.1. This secrecy score provides the basis for assessing countries’ trading
and financial partner jurisdictions.
This approach also does not imply a narrow focus on “tax havens”. A central
result of the Financial Secrecy Index approach is that it does not make sense
to divide jurisdictions into “good” and “bad”. Rather, there is a spectrum of
secrecy on which all jurisdictions sit (and where all jurisdictions can make
progress). Little progress could be made by “shutting down” some of the
smaller jurisdictions most commonly thought of as tax havens, when the
great majority of potentially risky flows go through some of the biggest
economies.
106
The secrecy score ranges in theory from zero (perfect financial transparency)
to 100 per cent (perfect financial secrecy); in practice no jurisdiction has
scored less than 30 per cent. It is informative to compare the relationship
across countries between secrecy scores and per capita incomes, and that
of a commonly used corruption measure (the Transparency International
Corruption Perceptions Index). As figure AIV.1 shows, the secrecy score
exhibits a much weaker relationship with (log) per capita income than
does the Corruption Perceptions Index —more than half of which can
be “explained” by income, implying that it is primarily telling a story of
corruption as a problem of poverty. The secrecy score, in contrast—and
the Financial Secrecy Index as a whole—reflects the reality that corruption
necessarily involves multiple actors, and that the financial secrecy provided
by some of the highest income jurisdictions is often central.
Table AIV.1
Financial Secrecy Index secrecy score and the Corruption Perceptions Index, relationship
with log GDP per capita
FSI Secrecy Score
Corruption Perceptions Index
100
100
80
80
60
60
y = -6.5268x + 126.37
R2 = 0.1989
40
y = 9.47x + 36.917
R2 = 0.5691
40
20
20
0
0
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
The relationship between financial transparency and IFF risk allows the
analysis of individual flows, making possible a detailed identification of IFF
vulnerabilities facing each country or region. Recognizing that the current
state of knowledge does not allow specific claims to be made about the
relative importance of particular types of IFF for particular countries, we
explore instead what is known: the extent to which any given country is
exposed to financial “secrecy jurisdictions” (a term preferred for its focus
and verifiable criteria to “tax havens”, as set out in Cobham (2012) in each
of its economic and financial relationships.
107
To illustrate the approach, consider a particular flow: exports from Zambia.
For each trading partner, we allocate to its share of Zambia’s exports the
partner’s secrecy score (which ranges from zero to 100). The results can be
summed to give an overall level of secrecy for all of Zambia’s exports, and
this score reflects Zambia’s vulnerability to IFFs in its exports. If we multiply
this vulnerability score by the share of exports in Zambia’s GDP, we obtain
a measure of Zambia’s vulnerability to IFFs, which can then be compared
across other stocks or flows. A vulnerability of 50, for exports equal to 10
per cent of GDP, would give an exposure of 5 per cent. This is equivalent to
Zambia carrying out 5 per cent of its exports with a pure secrecy jurisdiction
(that is, one scoring 100 out of 100), and all other exports with completely
transparent trading partners. The exposure can then be thought of as
Zambia’s pure secrecy-equivalent economic activity, as a ratio to its GDP.
(Note: Where no secrecy score is available we apply the lowest observed
score of 33. This will bias scores downward, though much less so than
assuming a zero score.)
In this exercise, we have used data on trade and on direct and portfolio
investment. Should the necessary data be made available, equivalent
analysis can and should be carried out for other types of financial flows—
for example, banking flows and the distribution of corporate profits. We use
data for the three most recent years available, 2009–2011, for three types of
economic activity: commodity trade (from UN Comtrade), direct investment
(IMF Coordinated Direct Investment Survey) and portfolio investment
(IMF Coordinated Portfolio Investment Survey). Note that because we are
constrained to use stock data on investment (flow data from United Nations
Conference on Trade and Development being unavailable), exposure
should not be compared directly with that in trade flows, to assess relative
importance. Nonetheless, the pattern when African countries are compared
with one another, or with their peers elsewhere, will still indicate relative
importance.
Figure AIV.2 shows the vulnerability for African countries, stacked for
visibility: so the individual score for each type of economic activity for each
country reflects the weighted average secrecy score for all partners in that
activity. One important issue is revealed: the absence of self-reported trade
data for several African countries, confirming the importance of statistics
in this area. This will bias the aggregate results downward, and render
comparison with this group less revealing.
Figures AIV.3 and AIV.4 show the intensity of each activity—that is, the share
of each flow or stock in GDP—again by country for African countries. Figure
AIV.4 excludes the three conduit jurisdictions, Mauritius, Seychelles and
Liberia, to show the remaining results more clearly. Note that investment
dominates for the conduits, while trade is the main component for all other
jurisdictions.
108
Table AIV.2
Stacked vulnerability by country and activity
Mauritius
Ghana
Ethiopia (excludes Eritrea)
Ethiopia
Nigeria
Uganda
Kenya
South Africa
Tanzania
Niger
Zambia
Namibia
Egypt, arab Rep.
Egypt
Togo
Gambia, The
Tunisia
Algeria
Malawi
Zimbabwe
Madagascar
Sudan
Mali
Rwanda
Mayotte
Mauritania
Sao Tome and Principe
Brurundi
Central African Republic
Côte d’Ivoire
Senegal
Cape Verde
Burkina Faso
Mazambique
Djibouti
Libya
Liberia
Botswana
Morocco
Equatorial Guinea
Swaziland
Seychelles
Eritrea
Congo, Republic of
Comoros
Guinea
Benin
Guinea-Bissau
Somalia
Gabon
Sierra Leone
Cameroon
Angola
Congo, Democratic Reoublic of
Reunion
Lesotho
Saint Helena
Chad
Western Sahara
0
50
100
150
200
250
Mean (unweighted) vulnerability score
Inward Direct
Investment
Outward Direct
Investment
Portfolio
Investment
Assets
Portfolio
Investment
Liabilities
Imports
Exports
109
Table AIV.3
Intensity by activity and country
Mauritius
Liberia
Seychelles
Tunisia
Senegal
Zimbabwe
Namibia
South Africa
Zambia
Côte d’Ivoire
Nigeria
Malawi
Algeria
Ghana
Togo
Cape Verde
Tanzania
Egypt, Arab Rep.
Egypt
Niger
Madagascar
Sao Tome and Principe
Mauritania
Uganda
Mali
Kenya
Sudan
Burkina Faso
Ethiopia (excludes Eritrea)
Ethiopia
Gambia, The
Mozambique
Rwanda
Congo, Republic of
Angola
Swaìziland
Central African Republic
Botswana
Gabon
Morocco
Equatorial Guinea
Burundi
Lesotho
Libya
Congo, Democratic Republic of
Sierra Leone
Guinea-Bissau
Cameroon
Eritrea
Benin
Guinea
Comoros
Chad
Western Sahara
Somalia
Saint Helena
Reunion
Mayotte
Djibouti
0
50
100
150
Mean (unweighted) GDP intensity
Inward Direct
Investment
110
Outward Direct
Investment
Portfolio
Investment
Assets
Portfolio
Investment
Liabilities
Imports
Exports
Table AIV.4
Intensity by activity and country, excluding conduits
Tunisia
Senegal
Zimbabwe
Namibia
South Africa
Zambia
Côte d’Ivoire
Nigeria
Malawi
Algeria
Ghana
Togo
Cape Verde
Tanzania
Egypt, Arab Rep.
Egypt
Niger
Madagascar
Sao Tome and Principe
Mauritania
Uganda
Mali
Kenya
Sudan
Burkina Faso
Ethiopia (excludes Eritrea)
Ethiopia
Gambia, The
Mozambique
Rwanda
Congo, Republic of
Angola
Swaziland
Central African Republic
Botswana
Gabon
Morocco
Equatorial Guinea
Burundi
Lesotho
Libya
Congo, Democratic Republic of
Sierra Leone
Guinea-Bissau
Cameroon
Eritrea
Benin
Guinea
Comoros
Chad
Western Sahara
Somalia
Saint Helena
Mayotte
Djibouti
0
5
10
15
Mean (unweighted) GDP intensity
Inward Direct
Investment
Outward Direct
Investment
Portfolio
Investment
Assets
Portfolio
Investment
Liabilities
Imports
Exports
111
We can also draw some broader conclusions about the potential to extend this
exercise, and what it can tell individual countries—as well as the implications
for regional policy. It is informative to consider the extent of data available
to extend this exercise, in order to cover all important areas of economic
activity and to generate a full picture of vulnerability to financial secrecy and
therefore to IFFs. While we have not been able to access it here, equivalent
data on bilateral cross-border banking liabilities is collected by the Bank for
International Settlements and if made available could also be used. Some
service trade data, similar to Comtrade, could also be considered. In addition,
the United Nations Conference on Trade and Development collects foreign
direct investment data with broader coverage, and including flow data, though
we have been unable to access it for this particular study.
Finally, the major absence in relation to the IFF typology set out in the
report relates to data on the profit location of multinational groups of
companies. Research under the auspices of the International Centre for Tax
and Development aims to assess the scale of distortion of the international
corporate tax base, compared with counterfactuals in which profit is allocated
in proportion to economic activity—though existing sources of data suffer
various limitations.
Without a full set of bilateral data, it is impossible to draw final conclusions
about the relative importance of different elements of the IFF typology set
out in chapter 2. Overall, it would clearly be of value for African countries to
become more consistent in their reporting (as well as their use of data) on
bilateral economic relationships.
In terms of the data that we have been able to use, and the IFF estimates
discussed above, it is possible to relate back the findings to the typology
presented in table AIV.1. One driver of overall exposure in relation to IFFs
is the high exposure of individual African countries, most notably Mauritius.
Its operation as a relatively financially secretive conduit results both in high
exposure for itself, but also for other countries across the region. In terms
of actors, the role of investment professionals and companies that promote
the use of relatively secretive jurisdictions for investment into Africa may be
worthy of greater attention. Similarly, although less extreme, are the positions
of the Seychelles and Liberia.
At the level of individual countries, however, we see trade as more exposed in
most cases. In some cases, especially at lower income levels, this exposure is
related to imports; for others, especially commodity producers, the exposure
lies in exports. There are clear implications here for countries that wish to
reduce their exposure to IFFs, relating to the secrecy of their trading partners
and the extent of transparency and vigilance in regard to their trade pricing.
The importance of the commodity supercycle of the 2000s in driving IFFs
from Africa is also confirmed.
In terms of the actors involved, emphasis has tended to fall on IFFs relating
to criminal proceeds and the abuse of power. The major single channel of
IFFs, however, appears to be trade mispricing—whether within Raymond
Baker’s original (2005) comparative analysis, or if we combine the ECA
analysis of more detailed trade data with the Global Financial Integrity
estimates of hidden flows through the capital account. Since trade mispricing
is incompatible with IFFs driven by abuse of power, this points strongly to
the role of corporate abuses (of either tax or market regulation). Rather than
direct attention primarily towards movements of illegal capital, it may be that
the most relevant actors are those in the private sector whose activities give
rise to IFFs of legitimate capital through abusive transactions. This would also
imply that the tax component of Africa’s IFFs may be a particular concern.
112
Table AIV.1
Key financial secrecy indicators: Qualitative index components of the Financial Secrecy
Index
KSFI
Description
Result
Component Weighting
Does it have a statutory basis?
YN
20%
To what extent are banks
subject to stringent customer
due diligence regulations
(FATFrecommendation 5)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
To what extent are banks
required to maintain data records
of customers and transactions
sufficient for law enforcement
(FATFrecommendation 10)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
Are banks and/or other covered
entities required to report large
transactions in currency or
other monetary instruments to
designated authorities?
YN
10%
Are banks required to keep
records, especially of large or
unusual transactions, for a
specified period of time, e.g. five
years?
YN
10%
Sufficient powers to obtain and
provide banking information on
request?
1: Yes without
qualifications; 2: Yes,
but some problems;
3: Yes, but major
problems; 4=No, access
is not possible, or only
exceptionally
10% (only if answer
is 1)
No undue notification and appeal
rights against bank information
exchange on request?
1: Yes without
qualifications; 2: Yes,
but some problems; 3:
Yes, but major problems;
4=No, access and
exchange hindered
10% (only if answer
is 1)
Trusts available?
0: Foreign law trusts
cannot be administered
and no domestic trust
law; 1: Foreign law trusts
can be administered, but
no domestic trust law; 2:
Domestic trust law and
administration of foreign
law trusts
Complex
Assessment;see KFSI
2 for details; trusts
maximum of 50% in
KFSI 2
KNOWLEDGE OF BENEFICIAL OWNERSHIP
Bank Secrecy
Trust and
Foundations
Register
113
KSFI
114
Description
Result
Convention of 1 July 1985 on the
Law Applicable to Trusts and on
Their Recognition
YN
Trusts: Is any formal registration
required at all?
0: Foreign law trusts
(and domestic law trusts
if applicable) must
be registered; 1: No
registration requirement
of foreign law trusts, but
registration of domestic
law trusts mandatory;
2: No registration
requirement of domestic
law trusts, but of foreign
law trusts; 3: Neither
foreign law trusts nor
domestic law trusts
(if applicable) require
registration
Trusts: Is registration data
publicly available (“on public
record”)?
0: No, neither for foreign
law trusts nor domestic
law trusts (if applicable);
1: Only for domestic law
trusts, but not for foreign
law trusts (if applicable);
Yes, for both domestic
and foreign law trusts (if
applicable)
Foundations available (private)?
YN
Foundations: Is any formal
registration required at all?
YN
Is the settlor named?
YN
Are the members of the
foundation council named?
YN
Are the beneficiaries named?
YN
Must the constitution/
foundation documents be
submitted, including changes
and all bylaws/
letters of wishes?
YN
Foundations: Is registration data
publicly available (“on public
record”)?
YN
Component Weighting
Complex
Assessment;see
KFSI 2 for details;
foundations maximum
of 50% in KFSI 2
KSFI
Recorded
Company
Ownership
Description
Result
Foundations: Is registration data
publicly available (“on public
record”)?
0: No online disclosure
for all private
foundations; 1: Partial
online disclosure for all
private foundations; 2:
Yes, full online disclosure
of all private foundations
Companies: Registration
comprises owner’s identity
information?
0: no; 1: only legal; 2: BO
always recorded
Is update of information on the
identity of owners mandatory?
YN
Component Weighting
BO=100%; condition
that update is not "no"
KEY ASPECTS OF CORPORATE TRANSPARENCY REGULATION
Public
Company
Ownership
Public
Company
Accounts
Companies: Registration
comprises owner’s identity
information?
0: no; 1: only legal; 2: BO
always recorded
Is the update of information
on the identity of owners
mandatory?
YN
CompaniesOnline Availability of
Information: On public record (up
to 10 €/US$): Owners’ identities?
0: no; 1: only legal; 2: BO
always recorded
Accounting data required?
YN
Accounts submitted to public
authority?
YN
Online Availability of Information:
On public record (up to 10 €/
US$): Accounts?
YN
LO=20%; BO=100%;
condition that update
is not "no"
Only if all answered
Yes = 100%
EFFICIENCY OF TAX AND FINANCIAL REGULATION
Fit for
Information
Exchange
Are all payers required to
automatically report to the tax
administration information on
payments to all non-residents?
0: No, none; 1: Yes,
dividends, no interest;
2: No dividends, yes
interest; 3: yes, both
100% (dividends and
interest each 50%)
Efficiency Tax
Administration
Does the tax authority make
use of taxpayer identifiers
for information reporting and
matching for information
reported by financial institutions
on interest payments and
by companies on dividend
payments?
0: No, none; 1: Yes
interest, no dividends;
2: No interest, yes
dividends; 3: Yes, both
80% (dividends and
interest each 40%)
Does the tax authority have
a dedicated unit for large
taxpayers?
YN
20%
115
KSFI
Description
Result
Component Weighting
Avoids
Promoting Tax
Evasion
Absent a bilateral treaty, does
the jurisdiction apply a tax credit
system for receiving interest
income payments?
3: Yes, all three types
of resident recipients
[i) legal person –
independent party; ii)
legal person – related
party; iii) natural person];
2: for 2; 1: for 1; 0 for
none
0: 0%; 1: 10%; 2: 20%;
3: 50%
Absent a bilateral treaty, does
the jurisdiction apply a tax credit
system for receiving dividend
income payments?
3: Yes, all three types of
recipients; 2: for 2; 1: for
1; 0 for none
0: 0%; 1: 10%; 2: 20%;
3: 50%
Companies – Available Types:
Cell Companies?
YN
50%
Trusts – Are trusts with flee
clauses prohibited?
YN
50%
Harmful Legal
Vehicles
INTERNATIONAL STANDARDS AND COOPERATION
Anti-Money
Laundering
Money Laundering: Overall
compliance score of
FATFstandards in percent (100%
= all indicators rated compliant,
0%=all indicators rated noncompliant)
49 criteria (each given
an equal weight); each
criterion: 1: compliant;
2: largely compliant; 3:
partially compliant; 4:
non-compliant
Scaled up to 100%
Automatic
Information
Exchange
EUSTD participant (or
equivalent)?
YN
100%
Bilateral
Treaties
Number of double tax
agreements
Number
Sum % of 46; or
Number of tax information
exchange agreements (TIEA)
Number
1988 CoE/OECD Convention /
Amending Protocol
YN
Yes, then 100%
1988 CoE/OECD Convention /
Amending Protocol
YN
20%
UN Convention against
Corruption
YN
20%
UN Drug Convention 1988
YN
20%
UN International Convention for
the Suppression of the Financing
of Terrorism
YN
20%
UN Convention against
Transnational Organized Crime
YN
20%
International
Transparency
Commitments
116
KSFI
Description
Result
Component Weighting
International
Judicial
Cooperation
Will mutual legal assistance
be given for investigations,
prosecutions and proceedings
(FATFrecommendation 36)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
Is mutual legal assistance
given without the requirement
of dual criminality (FATF
recommendation 37)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
Is mutual legal assistance
given concerning identification,
freezing, seizure and
confiscation of property (FATF
recommendation 38)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
Is money laundering considered
to be an extraditable offense
(FATF recommendation 39)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
Is the widest possible range
of international cooperation
granted to foreign counterparts
beyond formal legal assistance
on anti-money laundering
and predicate crimes (FATF
recommendation 40)?
1: compliant; 2: largely
compliant; 3: partially
compliant; 4: noncompliant
20%
117
Annex V:
Panel members and secretariat
H. E. Mr. Thabo Mbeki
Mr. Mbeki served two terms as the second post-apartheid President of South
Africa from 14 June 1999 to 24 September 2008. He was the President of the
African National Congress from 1997–2007. Mr. Mbeki held the position of
Chairperson of the African Union (2002–2003). Mr. Mbeki holds a Master’s
Degree in Economics from Sussex University.
Mr. Carlos Lopes
Mr. Carlos Lopes currently serves as the United Nations Under-SecretaryGeneral and Executive Secretary of the Economic Commission for Africa. He
assumed this position in September 2012. Mr. Lopes previously served as
Executive Director of the United Nations Institute for Training and Research
in Geneva and Director of the UN System Staff College in Turin at the level
of Assistant Secretary-General from March 2007 to August 2012.
Ambassador Olusegun Apata
H. E. Mr. Olusegun Apata is the Chairman of the Coca-Cola Bottler in
Nigeria, Nigerian Bottling Company Plc, and has sat on the company’s
Board of Directors since 2006. Ambassador Apata served for three decades
in the Nigerian Diplomatic Service. He attended the University of Lagos for
his undergraduate studies, while he earned his graduate degrees from the
University College Dublin and Oxford University.
Mr. Raymond Baker
Mr. Baker is the director of Global Financial Integrity, a think tank and
advocacy organization in Washington, DC, and was formerly a guest scholar
at the Brookings Institution and Senior Fellow at the Center for International
Policy. In January 2009, Mr. Baker brought together a coalition of research
and advocacy organizations and more than 50 governments to form the Task
Force on Financial Integrity and Economic Development, an organization
that advocates for transparency in the global financial system. He is a
graduate of Harvard Business School and Georgia Institute of Technology.
Dr. Zeinab Bashir el Bakri
Ms. ElBakri is a member of the World Bank Inspection Panel. She is the
former Vice President Sector Operations of the African Development Bank
(AfDB) Group in Tunisia. After leaving AfDB she was appointed Director of
the Delivery Unit in the Office of His Highness the Prime Minister of Kuwait
responsible for delivering key reform initiatives in improving the business
environment, education and procurement. She was also member of the
HLP to Review the Global Fund for Aids, TB and Malaria, and served as
Peer Reviewer of the UN Joint Inspection Unit.
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Mr. Abdoulaye Bio Tchané
Abdoulaye Bio Tchané has built a 30-year career in banking, finance and
development across Africa. He has held high positions at the WAEMU
Central Bank and is a former Director of the Africa Department at the
International Monetary Fund as well as the former President of the West
African Development Bank. Mr. Bio Tchané is also widely acknowledged
as the finance minister of Benin who spearheaded clear and transparent
reforms in budgeting, procurement and taxation, and he has actively fought
corruption.
Mr. Henrik Harboe
Henrik Harboe, Director of Development Policy at the Norwegian Ministry
of Foreign Affairs since July 2013, was previously Norway’s Chief Negotiator
in the international climate negotiations. Before that he was head of the
Multilateral Bank and Finance Section of the Norwegian Ministry of Foreign
Affairs, responsible for Norway’s relationship with the World Bank and
regional development banks for global finance questions and debt relief. He
has a Master’s Degree in Development Economics from the London School
of Economics (1987) and a BSc in Economics from the University of Oslo.
Prof. El Hadi Makboul
Prof. Makboul is Secretary General, Ministry of Industrial Development and
Investment Promotion, in Algeria. He is the former director of the National
Centre for the Study and Analysis of Population and Development, which
undertakes studies and analysis in the field of economy, demography and
social and cultural development. Mr. Makboul was recently elected as a
member of ECA’s Committee on Governance and Popular Participation.
Barrister Akere Muna
Barrister Muna is founder and former president of Transparency
International Cameroon. A lawyer by training, he is President of the
Pan African Lawyers Union and former president of the Cameroon Bar
Association. Akere Muna is President of the African Union’s Economic,
Social and Cultural Council and a member of several national commissions
on legal reform and curbing corruption. Mr. Muna was actively involved in
the Transparency International working group that helped draft the African
Union Convention on Preventing and Combating Corruption and has written
a guide to the convention published by Transparency International.
Ms. Irene Ovonji-Odida
The Chairperson of Action Aid Uganda, Ms. Ovonji-Odida is a human rights
lawyer and activist with 21 years of experience in development work. She
has worked in the public sector in law reform and on public sector ethics
for eight years. She has been involved with ActionAid in Uganda since
2003, becoming National Board Chair in 2005. She is the convener of
the International Governance & Board Development Committee and was
elected as International Board Chair in June 2009.
119
Members of the Technical Committee of the HLP
Chairperson:
Mr. Abdalla Hamdok, Deputy Executive Secretary, ECA
Members:
Mr. Said Adejumobi, Director, Sub-Regional Office in Southern Africa
Mr. Adeyemi Dipeolu, Director, Capacity Development Division, ECA
Mr. Adam Elhiraika, Director, Macroeconomics Policy Division, ECA
Advocate Mojanku Gumbi, member and advisor
Mr. Stephen Karingi, Director, Regional Integration and Trade Division,
ECA
Mr. René Kouassi, Director, Economic Affairs, African Union Commission
Mr Harald Tolan, Senior Advisor, Ministry of Foreign Affairs, Norway
Secretariat of the HLP
Head of the Secretariat
Mr. Adeyemi Dipeolu, Director, Capacity Development Division, ECA
Members
Mr. Gamal Ibrahim, Chief, Finance and Private Sector Section,
Macreconomic Policy Division, ECA
Ms. Souad Aden-Osman, Senior Programme Officer, Office of the Deputy
Executive Secretary, ECA
Mr. Allan Mukungu, Economic Affairs Officer, Macroeconomic Policy
Division, ECA
Mr. Simon Mevel, Economic Affairs Officer, African Trade Policy Centre,
ECA
Mr. William Davis, Associate Economic Affairs Officer, African Trade Policy
Centre, ECA
Mr. John Kaninda, Communication Specialist, Public Information and
Knowledge Management Division, ECA
Mr. Oladipo Johnson, Communications Specialist, Capacity Development
Division, ECA
120
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