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Africa/Global: Stopping Capital Losses

AfricaFocus Bulletin
February 5, 2015 (150205)
(Reposted from sources cited below)

Editor's Note

"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." - High Level Panel on Illicit Financial Flows from Africa, February 2015

The evidence on Africa's losses from illicit financial flows has been accumulating and gaining greater prominence in recent years, as has the wider realization that rich countries as well are losing billions to evasive tax maneuvers and money laundering by large corporations and the super-rich. See http://www.africafocus.org/intro-iff.php for talking points and a number of earlier reports.

What is new about the latest report is not only that it comes from a panel appointed officially by the African Union and the Economic Commission on Africa, and that it has now been adopted officially by the African Union. It is also that it not only reviews the data, but also proposes specific steps that can be taken by existing African government agencies, as well as reforms such as enactments of new requirements for information disclosure both in Africa and around the world.

Notably, the same technical mechanisms that have been used to track funds of drug traffickers and terrorist networks can now be used, if there is political will, to track monies lost to illicit financial flows and tax evasion.

The report stresses that the largest portion of such flows are based in common commercial mechanisms such as mispricing of imports and exports, which can be checked with improvement of customs and trade monitoring databases. The report called for a crackdown by customs, tax, business and anti-corruption authorities and emphasized that African governments must take the lead, with measures that are practical and can have meaningful effects.

Civil society organizations such as Tax Justice Network Africa, Action Aid, and Oxfam took part in the launch of the report. But they stressed that implementation would be the key issue. With this report having been adopted by African leaders, there are clear guidelines for action.

Rich countries also essential to effective action, which requires such measures as full disclosure of corporate ownership and sharing tax information.

This AfricaFocus Bulletin contains excerpts from the foreword by the Panel chair Thabo Mbeki, and from the first section of recommendations (on the commercial component).

For a good summary of the report, see the Feb. 2 article in The Guardian (http://tinyurl.com/plqj8kv).

The full 126-page report is available at http://allafrica.com/view/group/main/main/id/00035250.html

In a Feb 2 article in the Daily Nation (http://tinyurl.com/ms2sqko), Charles Onyango-Obbo summed up two important implications of the report: (1) Stopping the activities that bleed Africa through illicit flows requires smart states, not muscular police and soldiers. (2) In turn, it means hiring tech-savvy people, and those who know numbers and the way the new global economy works.

A very clear article detailing how trade mispricing works and can be checked, using the case of India, appeared in the Indian Express on Feb. 3 (http://tinyurl.com/ooksj3x).

For previous AfricaFocus Bulletins on illicit financial flows and related issues, visit http://www.africafocus.org/intro-iff.php

++++++++++++++++++++++end editor's note+++++++++++++++++

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.

...

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.

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


Recommendations

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 Post-2015 Development Agenda, the timing of this Report is fortunate. The Post-2015 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 trade- related IFFs (and, indeed, other types of IFFs) from Africa.

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.

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 OECDled 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 pricesensitive 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 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-by- country 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.

[See full report for additional recommendations.]


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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