By Sipho Mthathi
JOHANNESBURG, Jun 12 2015 (IPS)

Africa is known as the ‘paradox of plenty’. How can a continent so rich in natural resources be so poor?

Economic growth is predicted to increase by 4.5 percent across the continent this year, despite falling oil prices and the Ebola crisis. South Africa’s economy, the second biggest in Africa is expected to continue to grow by 3.5 percent this year; Nigeria will grow by an enviable 5.5 percent.

Sipho Mthathi, Executive Director of Oxfam South Africa

However, millions across Africa are struggling.  Economic inequality is on the rise, and public coffers are insufficient due to an increasing demand for public services like health, education and housing.

Recently, Thomas Pogge and other distinguished academics have written about the cost of progress. Surprisingly, history provides us with examples of countries where, if there is a balance between economic growth and public spending, it is possible to address inequality.

There is no time to waste in looking for ways to address this widening gap across Africa.

It is urgent that, collectively, African nations look at the billions of dollars flowing out of the continent every year, most of which can be attributed to corporate tax dodging.

In January, the report of the High Level Panel on Illicit Financial Flows (IFFs) from Africa, chaired by former South African President Thabo Mbeki, contended that IFFs from Africa increased from about 20 billion dollars in 2001 to 60 billion in 2010 in the merchandise sector alone.

According to Global Financial Integrity’s 2014 report on IFFs from developing countries, South Africa alone may have lost more than 122 billion dollars between 2003 and 2012 in IFFs.

This is a lost opportunity for money that could have been reinvested in advancing Africa’s development and increased access to public goods for her Africa’s people.“It is urgent that, collectively, African nations look at the billions of dollars flowing out of the continent every year, most of which can be attributed to corporate tax dodging”

But this is only the half of the story. Multinational companies are gaining at the expense of African people through other ‘legal’ forms of corporate tax dodging, and through negotiated tax breaks. This is happening because of a lack of fair global tax rules, and behind-closed-door deals between corporations and governments, rushing to seal deals under pressure.

Africa’s astounding growth is affecting human development. And these losses in tax revenue come at a time when the role of official development assistance to Africa is declining.

Fair and progressive tax systems should be providing financing for well-functioning government programmes to enable governments to uphold citizens’ rights to basic services (such as healthcare and education), and cement trust between citizens and governments.

Establishing an effective tax system is critical if Africa is going to mobilise the resources it needs to tackle poverty and inequality.  Africa is home to six out of ten of the world’s most unequal countries – South Africa, Lesotho, Namibia, Botswana, Zambia, and Central Africa Republic.  Some estimates on Africa’s financing needs include 40-$60 billion dollars per year to finance the post-2015 development agenda.

This is not just Africa’s problem. Around the world, many lower-income countries have been subject to harmful tax practices, including transfer pricing, whereby a transfer price may be manipulated to shift profits from one jurisdiction to another, usually from a higher-tax to a lower-tax jurisdiction.

After revelations of how multinational enterprises (MNEs) such as Starbucks, Google and Apple deliberately structured themselves to minimise their tax bills, the Organisation for Economic Cooperation and Development (OECD) launched an effort to reform this base erosion and profit shifting (BEPS) practice. This reform is expected to wind up by the end of 2015.

However, since the launch of the BEPS Action Plan, developed countries have not had a real voice or influence in the process.  Just four African countries, including South Africa as a G20 member country, have been invited to participate as observers.  These countries are bringing attention to the many mining corporations which are offered lucrative tax incentives which must be addressed in the BEPS plan.

The African Tax Administration Forum (ATAF) is a regional tax body that has been invited by the OECD/G20 to participate in the BEPS reform process.  This should provide further scope to influence the BEPS process with an African perspective.

At the same time, the South Africa Revenue Services (SARS) is going after billions lost through wasteful incentives and trade mispricing. SARS has recovered 5.8 billion rand (460 million dollars) over the three-year period 2011-2014, 55 percent (3.4 billion rand or 274 million dollars) of which is attributed to the mining industry.

South Africa’s membership in the G20 (and its role as co-Chair of the G20 Development Working Group) provides an enormous opportunity to insist on broad inclusion of all nations in the BEPS reform process.

At a recent conference convened by ATAF, South African Finance Minister Nhlanhla Nene called for “Africa to protect its own tax base, and advance domestic resource mobilisation through a common voice, a common concern and a common action plan.”

It is time that all African finance ministers wake up to the possibility that tax revenues for financing essential services for their citizens, or investment in small-holder agriculture or infrastructure, could come from the recovery of billions of dollars lost from corporate tax dodging and unfair tax competition.

Tax breaks provided to six large foreign mining companies in Sierra Leone, for example, are equivalent to 59 percent of the total budget of the country – or eight times the country’s health budget.

It is time for a global inter-governmental body on international tax cooperation to allow for a more inclusive and coordinated approach to ongoing tax reform, beyond BEPS.

All countries should be able to participate in tax negotiations on an equal footing, which guarantees one country, one vote, and where representatives will have the political mandate to speak on behalf of their governments.  Simply relying on the BEPS process to re-write tax rules will not be enough to end international tax dodging.

Through the BEPS reform process and this new tax body, there would be real potential for an African taxation renaissance.

Edited by Phil Harris

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

Excerpt:

Street vendors in Africa reflect the income inequality that pervades the continent, much of it due to corruption. Credit: Jeffrey Moyo/IPS

By Jeffrey Moyo
HARARE, Feb 21 2015 (IPS)

Reports this year of illicit moneys from African countries stashed in a Swiss bank – indicating that corruption lies behind much of the income inequality that affects the continent – have grabbed international news headlines.

Secret bank accounts in the HSBC’s Swiss private banking arm unearthed this year by the International Consortium of Investigative Journalists (ICIJ) were said to hold over 100 billion dollars, some of which came from Africa, including some of the poorest nations on the continent.

When these funds leave the region, they deny the very nations that need them most.

For example, at least 57 clients of the Swiss HSBC bank associated with Uganda were reported to be worth at least 159 million dollars. The World Bank has estimated that Uganda loses more than 174.5 million dollars in corruption annually.“Income inequality begins with our political leaders and corrupt wealthy business people who, more often than not, illicitly own the resources of the [African] continent” – Claris Madhuku, Platform for Youth Development, Zimbabwe

It is not a crime for Africans to have a Swiss bank account. But questions are now being raised by local tax offices as to whether the proper taxes were paid on the stashed amounts.

In South Africa, the head of the Revenue Service, Vlok Symington, said his office was analysing the information. “Early indications are that some of these account holders may have utilised their HSBC accounts to evade local and/or international tax obligations,” Symington was reported as saying by the South Africa Sunday Times.

“Income inequality begins with our political leaders and corrupt wealthy business people who, more often than not, illicitly own the resources of the continent,” Claris Madhuku, director of the Platform for Youth Development, a democracy lobby group in Zimbabwe, told IPS.

Diamonds, for example, which have made many traders wealthy, are often mined by the poorest of the poor, treated almost as slaves in war-torn African countries, despite the Kimberley Process Certification Scheme, which was established in 2003 to prevent the flow of these diamonds.

“It’s a case of greed and corruption,” thundered Zimbabwean independent political analyst, Ernst Mudzengi. “Africa has parasitic politicians who are primarily concerned with self-centred political power and economic gain as ordinary Africans remain at the periphery in poverty,” Mudzengi told IPS.

Development experts here attribute income inequalities to the continent’s lax anti-corruptions laws.

“African countries do not have sound anti-corruption laws and politicians and the rich amass too much power exceeding even the powers of the police here, leaving them with the liberty to accumulate wealth overnight by whatever means without being questioned,” Nadege Kabuga, an independent development expert in Kigali, Rwanda’s capital, told IPS

“It’s shocking how huge banks such as HSBC have created a system for enormously profiteering at the expense of impoverished ordinary people, worse by assisting numerous millionaires from Africa in particular to evade tax payment, disadvantaging the already poor,” Zenzele Manzini, an independent economist based in Mbabane, the capital of Swaziland, told IPS .

“Very often, government directors, ministers and their secretaries are the ones globetrotting on government businesses, awarding themselves huge allowances and the lower government workers remain stuck at the periphery with no extra benefits besides the meagre salaries they get monthly,” a top Zimbabwean government official in the Ministry of Labour, told IPS on the condition of anonymity, afraid of victimisation.

Writing for Financial Transparency Coalition, a global alliance of civil society organisations and governments working to address inequalities in the financial system, Koen Roovers, the coalition’s European Union (EU) Lead Advocate, asked the deeper question: “How do we prevent this in the first place?”

To catch fraud sooner rather than later, capacity in developing countries must be increased, Roovers said. “The scale of the challenge is significant: the UK-based charity Christian Aid has estimated that sub-Saharan Africa would need around 650,000 more tax officials to reach the world average.”

Rich states have promised help to poor countries to build the capacity they need, but these commitments have yet to be honoured.

Researchers at the U.S.-based Global Financial Integrity, a non-profit organisation working to curtail illicit financial flows, said developing nations have lost almost one trillion dollars through illicit channels.

Without clearly defined measures to curb income inequalities, economists say the African continent may be headed for the worst levels of poverty set to hit even harder at the already poor.

“Africa may keep facing perpetual poverty amid rising income inequalities because governments here have no institutions and expertise to identify and halt money laundering by corrupt wealthy individuals and politicians evading tax,” Zimbabwean independent economist, Kingston Nyakurukwa, told IPS.

According to Roovers, “criminals and their enablers are creative, so the only way to prevent future scandals is to shed light on what criminals and tax dodgers are trying to hide. This is why online registers of assets for all legal persons and arrangements are necessary and should be publicly available.

“If we turn a blind eye to these loopholes,” he added, “economic development for all will continue to be undermined by illicit actors looking to exploit them.”

Edited by Lisa Vives/Phil Harris    

While a major global campaign to cut down on tax evasion is picking up momentum, anti-poverty advocates say the initiative overlooks the world’s poorest countries.

Last week, 51 countries from four continents agreed to systematically exchange tax information by 2017, with the aim of allowing authorities to quickly register any disparities. Several dozen additional countries – 89 in total – said they would follow suit by the following year, according to the Organisation for Economic Cooperation and Development (OECD), a grouping of wealthy countries that is spearheading the project."Do we really think that there are many Brits or Americans with money in, say, Nigeria? Probably not. But is there likely a lot of Nigerians with money in the U.S. or U.K.? Yes.” -- Heather Lowe, senior counsel with Global Financial Integrity

Global tax evasion has risen to the top of the global agenda in the aftermath of the 2007-08 financial crisis and the resulting financial constrictions felt by governments around the world. Though last week’s pledges will still need to be underpinned by separate bilateral agreements, the new accord is being lauded as a major step forward on the issue.

“This great success in the fight against international tax evasion would have been unthinkable only a few years ago,” Wolfgang Schauble, Germany’s finance minister, wrote Monday for a newspaper here. “We need to make sure that creative tax planning in the form of profit-shifting and artificial profit reduction is no longer a lucrative business model.”

The new pledges were made at the annual meeting of an OECD-organised grouping known as the Global Forum on Transparency and Exchange of Information for Tax Purposes. At the meeting, in Berlin, the forum’s 123 members also formally endorsed a new OECD blueprint, known as the Common Reporting Standard, detailing what information will be collected, by whom, and how it will be exchanged.

Yet the list of those asked to participate in the new pledging includes almost solely developed countries or known tax havens, which rich governments have been particularly keen to address. This is cause for concern for some, given that the impact of illegal financial dealings is felt particularly by weaker economies.

“The new OECD standard on automatic information exchange is a big first step towards tackling illicit financial flows,” Andres Knobel, an analyst with the Tax Justice Network, a British advocacy group, said in a statement.

“However, serious obstacles to the inclusion of developing countries and a number of unresolved loopholes will prevent its effectiveness, allowing rich individuals with plenty of options to avoid reporting.”

Select invitations

While the Global Forum on Transparency includes 123 members, just 95 of these were asked to take part in the new automatic exchanges. And just one of those, the Pacific island nation of Vanuatu – widely known as a tax haven – is considered by the United Nations to be a least developed country.

OECD officials say that many developing countries weren’t invited to take part in this initial round of pledging due to concerns over institutional capacity.

“The developing countries which do not have financial centres have indicated their difficulties on account of low capacity to implement [the automatic exchange of tax information] on such an ambitious timeline,” Monica Bhatia, the head of the Global Forum secretariat, told IPS.

“These countries were nevertheless encouraged to participate with a more flexible timeline and support was offered to facilitate their participation … by way of pilot projects. Already six developing countries have requested pilot projects and the Global Forum is committed to helping other developing countries who come forward as well.”

Yet others suggest that, capacity notwithstanding, all countries should be able to receive tax information about whether their own citizens have undeclared overseas bank accounts.

“Under the current agreement, tax-haven countries that don’t have an income tax for their own people don’t have to reciprocate this information,” Heather Lowe, senior counsel with Global Financial Integrity (GFI), a Washington-based watchdog group, told IPS.

“That makes some logical sense, but the organisers won’t even consider a similar phase-in period for the least developed countries. Do we really think that there are many Brits or Americans with money in, say, Nigeria? Probably not. But is there likely a lot of Nigerians with money in the U.S. or U.K.? Yes.”

GFI has published pioneering data estimating that developing countries could be losing a trillion dollars a year from a variety of shady financial dealings. While all such activities contribute to crippling public-sector coffers, the new plan covers only tax evasion.

“While a portion of illicit financial flows is driven by tax evasion, much of it is also propelled by other crimes such as drug trafficking, sex slavery, corruption and fraud,” Lowe says. “The current framework risks either missing these other major forms of crime, or keeping that information locked up by tax authorities and away from government investigators and prosecutors.”

Starting with Africa

The Global Forum says it wants to bring as many developing countries as possible into the new exchange system, and maintains that multiple initiatives are currently underway to do so. Last week, the grouping announced the most significant of these, a project aimed at strengthening outreach and capacity on the issue in Africa.

The African Initiative, overseen by the Global Forum, the World Bank Group and others, will initially focus on 17 countries, around a third of the continent. Yet an OECD factsheet says this number could be “significantly increased” through the three-year programme.

As yet, there is no parallel initiative in Asia or Latin America, though the Global Forum says such projects could still be created.

“The impetus for the Africa Initiative came from our African member countries … in the wake of increased focus on the problem of illicit financial flows from African countries of which tax evasion forms a significant component,” Kathryn Dovey, a tax policy analyst with the Global Forum, told IPS in an e-mail.

“The Global Forum is committed to working with all developing countries and would be happy to seed and support similar initiatives in other regions. If countries and organisations from the region and relevant international organisations come forward to collaborate, the Africa Initiative could be replicated in other key geographies over time.”

Still, GFI’s Lowe says that capacity-building could be a secondary goal after bringing in poorer countries on a non-reciprocal basis.

“Africa is a strong place to start, because investment in Africa has been growing significantly over the past few years and there are many governments in the continent that are really starting to engage on this issue,” she says.

“But I don’t see why we can’t start with non-reciprocal information for least-developed countries and then work on these capacity-building programmes to allow for reciprocation to happen later. Let’s start with the practical.”

Edited by Kitty Stapp

The writer can be reached at cbiron@ips.org

New analysis suggests that developing countries are losing a trillion dollars or more each year to tax evasion and corruption facilitated by lax laws in Western countries, raising pressure on global leaders to agree to broad new reforms at an international summit later this year.

These massive losses could be leading to as many as 3.6 million deaths a year, according to the ONE Campaign, an advocacy group that focuses on poverty alleviation in Africa. Recovering just part of this money in Sub-Saharan Africa, the organisation says, could allow for the education of 10 million more children“Whenever corruption is allowed to thrive, it inhibits private investment, reduces economic growth, increases the cost of doing business, and can lead to political instability. But in developing countries, corruption is a killer” – ONE Campaign
 a year, or provide some 165 million additional vaccines.

“Whenever corruption is allowed to thrive, it inhibits private investment, reduces economic growth, increases the cost of doing business, and can lead to political instability. But in developing countries, corruption is a killer,” a report on the findings, released Wednesday, states.

“When governments are deprived of their own resources to invest in health care, food security or essential infrastructure, it costs lives, and the biggest toll is on children.”

The new analysis focuses on a spectrum of money laundering, bribery and tax evasion by criminals as well as government officials. The lost money is not development aid but rather undeclared or siphoned-off business earnings – immense tax avoidance resulting in a decreased base from which governments can fund essential services.

International trade offers a key point of manipulation, the report says, with the extractive industries particularly vulnerable. In Africa alone, exports of natural resources grew by a factor of five in the decade leading up to 2012, offering clear prospects for growth alongside lucrative opportunities for corruption on a mass scale.

“Between 2002 and 2011 we saw an exponential increase in illicit financial flows across the globe,” Joseph Kraus, a transparency expert at the ONE Campaign, told IPS.

“Yet while we’re all familiar with corruption in developing countries, it takes two to tango – that money often ends up in the financial centres of the Global North. Those banks, lawyers and accountants are all essentially facilitators of that corruption, so in order to get at the root of this issue we need to go after the problems there.”

Real opportunity

Advocates including the ONE Campaign are currently stepping up pressure on industrialised countries to institute a series of across-the-board transparency measures. Some are aimed at corruption in developing countries, such as strengthening disclosure laws impacting on the extractives industry and bolstering “open data” standards to allow citizens increased oversight over their governments’ dealings.

Several other reforms would need to be carried out by developed countries, particularly those housing major financial centres such as the United States and United Kingdom. These would include new standards requiring governments to automatically exchange tax information, to mandate the publication of full information on corporate ownership, and to force multinational corporations to report on their earnings on a country-by-country basis.

In certain circles, such demands have been percolating for years. But current circumstances could offer unusual opportunity for such changes.

“In the last two years we’ve seen an acceleration of this agenda,” Kraus says. “Eighteen months ago, no one was talking about phantom firms or anonymous shell companies. But these issues have gained a lot of momentum in a short period of time, and there is real opportunity coming up.”

This new energy has been motivated particularly by concerns in advanced economies over shrinking government budgets in the aftermath of the global economic downturn. Yet developing countries arguably stand to benefit the most from substantive reforms, provided they’re structured accordingly.

Advocates of such changes are now looking ahead to a summit, on Nov 15 and 16 in Australia, of the members of the Group of 20 (G20) world’s largest advanced and emerging economies as well as two major meetings of finance ministers in the run-up to that event.

The G20 represent about two-thirds of the world’s population, 85 percent of global gross domestic product and over 75 percent of global trade.

The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.

The G20 has taken on a primary role in issues of global financial stability and, more recently, in pushing the automatic exchange of tax information between governments. A new global standard on such exchange could be approved by the G20 ministers in November, among other actions.

“For too long, G20 countries have turned a blind eye to massive financial outflows from developing countries which are channelled through offshore bank accounts and secret companies,” according to John Githongo, an anti-corruption campaigner in Kenya.

“Introducing smart policies could help end this trillion dollar scandal and reap massive benefits for our people at virtually no cost. The G20 should make those changes now.”

Coordinated response

In fact, many G20 countries have instituted some of these reforms on their own. The U.K. government, for instance, has taken unilateral action on publicising information on corporate ownership, while the United States was the first to pass strong transparency requirements for multinational extractives companies.

While such piecemeal national legislation can spur other countries to action, many feel only a comprehensive approach would have a chance at having a substantial impact. Further, many governments have pledged to act on these issues, but have yet to actually follow through.

“Illicit financial flows are a perfect example of a transnational problem, in that you have two legal regimes in which loopholes are being exploited,” Josh Simmons, a policy counsel at Global Financial Integrity, a Washington watchdog group that supplied data for the new ONE Campaign report, told IPS.

“So when an international cooperative body is able to identify these loopholes, they can get member countries to move in sync to address the situation. But if only one country tries to do so, businesses would probably just move elsewhere.”

Others are looking even more broadly than the G20. A paper released last month by researchers with the Center for Global Development, a think tank here, calls for the inclusion of anti-tax-evasion aims in the new global development goals currently being negotiated under the United Nations.

Indeed, even while there could be real movement at the G20 on several of these issues this year, the work on the other end of this equation – in developing countries – remains onerous.

“We need to get developing countries’ tax systems up to speed, strengthen their financial intelligence units and get their anti-laundering laws up to code. And that is proceeding, but much more under the radar given its complexity,” Simmons says.

“Still, that’s where people are actually bearing the brunt of this problem. Tax avoidance in the United States contributes to the national debt, but in developing countries it’s literally causing people to go hungry.”

Edited by Ronald Joshua

Misinvoiced trade in five African countries cost their governments billions of dollars in tax revenue and facilitated at least 60.8 billion dollars in illicit financial flows from 2002 to 2011, says a new report by Global Financial Integrity (GFI), a research advocacy organisation here.

Using data on bilateral trade flows from 2002-2011 from the U.N.’s Commodity Trade database, the study calculated that the potential average annual tax loss from trade misinvoicing amounted over the same decade to roughly 12.7 percent of Uganda’s total government revenue, followed by Ghana (11 percent), Mozambique (10.4 percent), Kenya (8.3 percent), and Tanzania (7.4 percent), according to the 52-page report, “Hiding in Plain Sight.”“A lack of domestic enforcement of regulations against deliberate trade misinvoicing, as well as unclear international regulations, exacerbates the illicit money flows.” -- Brian LeBlanc

The report, sponsored by the Danish foreign ministry, represents the first comprehensive study on the magnitude of the loss of tax revenue for these countries.

Trade misinvoicing is the intentional misstating of the value, quantity, or composition of goods on customs declaration forms and invoices, usually for tax evasion or money-laundering purposes.

“Fraudulent trade transactions rob the people of these countries of funds that could otherwise have been used for investments in infrastructure, schools, hospitals, and other much-needed public services,” said Mogens Jensen, Denmark’s minister for Trade and Development Cooperation.

Further, misinvoiced trade is a significant source of illicit capital flight.

Tanzania tops the list, with the greatest annual average gross illicit flows of 1.87 billion dollars. Kenya is second with 1.51 billion in average gross flows. They are followed by Ghana (1.44 billion); Uganda (884 million), and Mozambique (585 million).

These losses create “one of the most damaging conditions undermining economic growth and development, governance, and human rights in Africa and around the world,” according to the report which, noted that misinvoicing thrives in a global shadow system that features financial secrecy and tax havens for the rich.

Over the decade, gross illicit outflows in Kenya were twice what the country received in official development assistance (ODA); in Ghana these flows roughly equaled its ODA, followed by Tanzania (77.6 percent), Uganda (58.9 percent), and Mozambique (32.6 percent).

The numbers are huge, but experts caution that these might be too modest.

“The estimates provided by our methodology are likely to be extremely conservative as they do not include trade misinvoicing in services or intangibles, same-invoice trade misinvoicing, hawala transactions, and dealings conducted in bulk cash,” GFI President Raymond Baker noted.

Ghana, Kenya, Mozambique, Tanzania, and Uganda have all experienced significant economic growth in recent years. But the wealth remains concentrated in the hands of a very few and has not trickled down to the average citizen and the very poor, who often lack basic services.

The revenues that the governments lost due to misinvoiced trade and illicit money flows could  help fill these gaps.

“The problem lies in a lack of transparency and poor data reporting. And publishing data is important,” Brian LeBlanc, who co-authored the report, told IPS.

He also noted statistics presented at last week’s launch of the latest report by the African Progress Panel, a think tank chaired by former U.N. secretary-general Kofi Annan. It estimated that illegal fishing and logging – most of which benefits foreign interests – cost sub-Saharan Africa an average of over 20 billion dollars each year.

GFI experts highlighted the importance of governments both domestically and internationally in cracking down against trade misinvoicing. Thus, the two main objectives of the report are focused on helping governments improve transparency in domestic and international financial transactions and enhancing cooperation between developed and developing country governments to shut down the channels through which illicit money flows.

“A country with weak laws or lax enforcement of money laundering statutes could encourage trade misinvoicing by making it easier to transfer and use the money gained from the illegal transaction,” the report says.

According to LeBlanc, particular attention needs to be paid to providing customs officials with “real-time access to pricing data” in order to identify the mispriced and mistraded goods. More pressure should also be placed on auditing firms to inform governments of misinvoiced trade.

Customs authorities often lack the means, or, in some cases, the will to collect the data they need to understand the magnitude of illicit flows of capital due to trade misinvoicing or the tax revenue and investment capital that are lost as a result.

Governments need to track the direction of trade flows, detect if the invoices are altered in different jurisdictions, and understand how the values of items included in invoices compare to the world market for the products involved.

“Many countries don’t have access to world market prices for different commodities, this information asymmetry makes it difficult to make progress in curtailing misinvoicing trade and illicit financial flows,” Clark Gascoigne, communications director at GFI, told IPS.

Not only does the information asymmetry deprive governments of tax revenues, it also hinders their efforts at halting illicit flows.

“A lack of domestic enforcement of regulations against deliberate trade misinvoicing, as well as unclear international regulations, exacerbates the illicit money flows,” LeBlanc said.

The five countries are nonetheless making some progress. The establishment of electronic customs systems and, in some cases, the creation of financial intelligence units (FIUs) hold some promise.

The World Trade Organisation (WTO) could also be used as an important enforcement mechanism, according to LeBlanc, who also cited a model that has been used with considerable success in the Philippines.

“A final step to curtailing illicit trade transactions and financial flows is a whistle-blowing mechanism, where employees as well as competitors can blow the whistle anonymously if their employers or rivals are engaging in misinovocing trade,” LeBlanc told IPS.

He added that it is in the interests of both employees and competitors. And while it is obvious why competitors would benefit from blowing the whistle on their rivals, LeBlanc further elaborates on why it is in the interest of employees of the company.

“There is a misconception that misinvoicing trade results in a better company performance in terms of revenue. It in fact hurts the company,” LeBlanc says, and “the extra profits from over- or under-invoicing imports and exports end up being transferred to off-shore accounts of the company owners and are not distributed to the employees.”

A major grouping of rich countries has unveiled a new model for the automatic exchange of certain individual financial information between countries, aimed at significantly cutting down on offshore tax evasion.

Advocates of stronger financial transparency measures are lauding the move, announced Thursday by the Organisation for Economic Cooperation and Development (OECD). But anti-poverty campaigners are warning that developing economies were not included in discussions around the new common reporting standard.“Just five years ago you couldn’t get anyone to talk about this issue – most people called it a pipedream.” -- Heather Lowe

Indeed, the new standard has yet to offer clarity on how it would include poor countries, despite the fact that developing economies are among the hardest-hit by global tax evasion.

“This is a real game changer. Globalisation of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence,” OECD Secretary-General Angel Gurria said Thursday.

“This new standard on automatic exchange of information will ramp up international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”

The new proposal comes in the context of rising public frustration around the world, particularly in the aftermath of the global financial crisis, with reports of rich companies and individuals stashing as much as 20 trillion dollars overseas in order to escape national taxation. That public sentiment coincides with increasingly strapped government coffers, new enforcement of painful austerity measures, and officials looking for ways to strengthen national revenue streams.

The OECD developed the new standard after being requested to do so last fall by the Group of 20 (G20) of developed and emerging economies. It will now be formally presented to a G20 ministerial meeting in Australia later this month, and potentially adopted at a G20 summit in September.

If adopted, the changes would mark a sea change in global financial transparency, and one that advocates say came about with astounding speed.

“Just five years ago you couldn’t get anyone to talk about this issue – most people called it a pipedream,” Heather Lowe, director of government affairs for Global Financial Integrity (GFI), a Washington watchdog group, told IPS.

“So it’s fantastic and amazing that we’ve gotten to the point where everybody recognises that the automatic exchange of tax information is necessary in order to fill those holes in the international financial system that allow illicit money to hide out.”

Truly global

The OECD common reporting standard would see participating countries automatically share information on foreign bank accounts, capital gains and other interest earned. Previously, such information would have needed to be formally requested by governments, an often cumbersome process that could be easily stonewalled.

Significant parts of the new standard reflect landmark U.S. legislation, known as the Foreign Account Tax Compliance Act (FATCA), which the OECD says played a “catalytic role” in the creation of the new model. Since its enactment in 2010, FATCA has been roiling international discussions by requiring overseas financial institutions to turn over information about U.S. customers.

“Today’s announcement underscores that promoting tax transparency is a global priority and we are proud to lead the charge on this pressing issue by implementing FATCA and collaborating closely with our G20 partners,” the U.S. Treasury told IPS in a statement.

“We expect the G20’s endorsement of the common reporting standard to add further momentum to our network of intergovernmental agreements, as countries see the extent to which our model agreements reflect this new international standard.”

Already, the OECD says more than 40 countries have agreed to adopt the new standard. Yet poor countries have thus far been largely left outside of the process, despite a high-level summit last year declaring that a prime motivation for any strengthened exchange of tax information would be to assist developing countries collect the taxes due to them.

“This model is being billed as a global standard, but it won’t be global unless all countries can sign up to it, and that includes developing countries,” GFI’s Lowe says. “Otherwise, we could easily create a system in which rich countries get richer and poor countries get poorer, because their wealthy officials and businesspeople continue putting money abroad where tax authorities can’t reach it.”

Other groups are decrying the fact that developing countries were excluded from the negotiating process surrounding the new OECD model.

“Up to nine trillion dollars is thought to be hidden offshore from the tax authorities in developing countries. Those governments need information just as much as [developed countries], but they are being told they will have to wait,” Joseph Stead, a senior economic justice adviser for Christian Aid, a British charity, said Thursday.

“We want to see the U.K., OECD and G20 commit to a process which enables developing countries to be part of the new system and to start benefiting from it before they are burdened with costs.”

Reciprocity and reluctance

The OECD plan outlines two G20-directed processes mandated to figure out how to bring developing countries in under the tax information-sharing umbrella. The first of these blueprints are to be released in September, and will show “how developing countries can overcome obstacles to participation in the automatic exchange standard and to assist them in meeting the standard”.

While necessary, there will likely be at least two obstacles in the attempt to begin regular exchange of tax information with developing countries.

First and foremost, while the OECD model calls for information-sharing “reciprocity”, many developing countries currently lack the basic technical capacity to make such information available. While programmes to offer both financial and training assistance are already going forward, GFI and other groups are calling on multilateral institutions and G20 donors to prioritise such work as the model goes forward.

A second obstacle could be reluctance on the part of certain governments or individual officials in developing countries to open their systems up to greater scrutiny, over concerns of past or future corruption.

“This is clearly a very tricky issue, but in certain cases it won’t be a question of what a government wants but, rather, what’s right for the people in developing countries,” GFI’s Lowe says.

“Fortunately, I think there’s a growing movement among populations around the world about illicit money and tracing it and returning it to developing countries. So as that continues to grow, the pressure will be on developing country governments to take part, and it will be up to others to support those grassroots movements.”

Developing countries are likely losing more than a trillion dollars a year in “illicit financial flows” stemming from crime and corruption, according to new estimates. This fast-rising figure is already 10 times the total amount of foreign aid these countries are receiving.

Between 2002 and 2011, governments in the developing world are thought to have lost a total of almost six trillion dollars, largely due to poor governance and lax regulation, according to Global Financial Integrity (GFI), a Washington-based watchdog. Included in its estimates are ill-gotten wealth from purposefully incorrect trade invoices, the use of shell companies and tax havens, and other accounting gimmicks.

“This gives further evidence to the notion that illicit financial flows are the most devastating economic issue impacting the global South,” Raymond W. Baker, GFI’s president, stated in the introduction to a report released Wednesday, calling the numbers a “wake-up call to world leaders on the urgency with which illicit financial flows must be addressed.”

Particularly worrying is the fact that the rate at which these outward flows have been growing appears to be increasing substantially."Illicit financial flows are the most devastating economic issue impacting the global South."
-- Raymond W. Baker

In 2002, for instance, the earliest year that GFI’s researchers have examined, illicit financial flows are thought to have been around 270.3 billion dollars. By 2011, the latest year for which estimates are available, that figure had grown to 946.7 billion dollars, and has likely increased since then.

When adjusted for inflation, this translates into an average growth of more than 10 percent a year, while the 2011 number constituted a 13.7 percent increase over 2010.

“Outflows have certainly been increasing,” Dev Kar, GFI’s chief economist and a co-author of the new report, told IPS. “During the economic crisis both imports and exports declined, but as economic activity has recovered so too have these outflows.”

Kar also cautions that the GFI estimates are likely conservative. They include neither unofficial (“hawala”) financial flows nor large-scale cash transactions, and as such are unable to offer a glimpse of broader underworld economies, including drug or human trafficking.

Asia is seen as having the most significant problems, accounting for around 40 percent of all illicit outflows from developing countries. While Africa’s share was only around seven percent in 2011, the continent did have the highest ratio of average illicit flows to gross domestic product, at around 5.7 percent.

With Africa also the world’s most aid-dependent region, an increasing concern for many is how to staunch the flow of some of this illicit capital so it can be ploughed back into public sector spending such as on health, education and public infrastructure.

Shadow systems

Major development institutions have started paying attention to such discrepancies. The humanitarian group Oxfam estimates that some 32 trillion dollars are currently sitting in tax havens around the world, for instance, and suggests that taxes on this sum could raise nearly 190 billion dollars a year.

“Governments should agree to end global hunger by 2025 and an end to tax havens, which could help pay for this and much more,” Stephen Hale, advocacy head for Oxfam, said in a statement. “Tax-dodging effectively takes food from hungry mouths.”

The past year has actually seen notable moves by the international community to close down certain avenues used to hide or shield unreported wealth from prying states. Major multilateral groupings including the Group of Eight (G8) rich countries and the Group of 20 (G20) industrialised countries, for instance, have put tax abuse at the top of their list of priorities.

This summer, a high-level United Nations panel negotiating the next phase of the Millennium Development Goals (MDGs), for which the deadline is 2015, stated that one of its highest priorities would be tackling the abuse of offshore tax havens and illicit financial flows.

The following month, nearly a dozen EU members agreed to the world’s first multilateral system of tax information exchange, based on similar bilateral U.S. requirements passed three years ago.

“The fact that illicit financial flows are being mentioned in the G20 and other international organisations – that didn’t exist before,” Brian LeBlanc, a junior economist with GFI and a co-author of the new report, told IPS. “Earlier, these issues were seen solely as a developing country problem but now we’re seeing developed countries taking action. So we’re making some progress.”

Yet transparency advocates urge that far more needs to be done, and GFI’s Kar says that he expects the moves that have been taken so far will have little impact on illicit financial flows in the near term.

“The G20 has basically not tackled the shadow financial system, which remains largely intact – there have been no moves to improve transparency, not much has been done on tax havens or blind trusts,” he says.

“Importantly, much of the conversation currently focuses on developed rather than developing countries. We believe that governance factors are the main engines of illicit flows, and in the major countries governance is simply not improving – in fact, it’s deteriorating in many countries.”

GFI has now put out research on illicit financial flows for several years in a row. Yet Kar says the startling estimates presented appear to have made little impact on government officials in many developing countries, even as state coffers in those countries continue to struggle in the aftermath of the global financial crisis.

“In most countries it’s had almost zero impact, with government officials refusing even to acknowledge that this is a problem. Malaysia, for example, will only say that our estimates are overstated,” Kar says, noting that Malaysia ranked fourth on GFI’s list of the largest exporters of illicit capital.

“There remains a powerful, corrupt nexus between politicians and business, covering the financing of elections, non-transparency of business conduct, kickbacks in government contracting,” Kar added.

“These are huge issues, and we expect a long process before countries come to accept the fact that illicit flows are a problem – and then to move to implement policies to deal with the situation.”

India's parallel economy has widened disparities. Credit: Ranjit Devraj/IPS

By Ranjit Devraj
NEW DELHI, Oct 4 2013 (IPS)

As India grapples with rising prices and a rapidly sinking rupee, attention has turned to the country’s massive parallel economy that siphons wealth away from development programmes and into the pockets of a corrupt ruling elite.

On Monday, a special court declared Lalu Prasad Yadav, one of India’s leading politicians, guilty of diverting millions of dollars meant for the purchase of animal fodder while he was chief minister of the eastern state of Bihar in the 1990s.

He has been sentenced to five years in prison. Because he was given more than two years, he will lose the seat he currently holds in Parliament and will be barred from contesting elections, according to a Supreme Court ruling handed down in July, which the government has sought to overturn through an ordinance.

Last week, however, Rahul Gandhi, a scion of the Nehru-Gandhi political dynasty who is tipped to be prime minister if the ruling Congress party is returned to power in elections due next year, announced personal opposition to the ordinance, sealing Yadav’s political fate and that of other legislators convicted for corruption.

“If you want to fight corruption in the country, whether it is the Congress or the [main opposition] Bharatiya Janata Party, we cannot continue making these small compromises. Because if we make these small compromises, we compromise everything,” said Gandhi.

Analysts see Gandhi’s opposition to his own party’s policy as a response to rising public anger against corruption. His father Rajiv Gandhi, who served as prime minister from 1984 to 1989, had also been critical of “power brokers” in the Congress party who siphon off development funds.

Ashwini Sharma, who teaches global political economy at Delhi University and is a fellow of global governance at the University of London and visiting professor at the University of Warsaw, says that black or unaccounted-for money is impossible to eradicate because it is the lifeblood of political parties in India.

“Asking political parties to fight corruption is like asking the fox to guard the chicken coop,” Sharma tells IPS.

With black money now an entrenched feature of life in India, Sharma says it has become important to assess the real costs it imposes on the body politic. “We already know that a large parallel economy makes it impossible for economists to make accurate analyses and make policies and programmes that have a chance of working.”

Worse, Sharma said, black money is regularly transferred out of the country through clandestine ‘hawala’ channels, and even if it returns to the country it only goes into lavish lifestyles for a privileged few rather than development activity or projects that can alleviate poverty.

Sharma said the fact that the value of the rupee has slid down by 20 percent over the last four months and is now close to 70 to the dollar is partly the result of increased capital flight via hawala channels, typical in months leading up to an Indian election.

The parallel economy works through an extra-governmental system backed by a phalanx of musclemen, brokers and touts acting in collusion with chartered accountants, policemen and bureaucrats who get a share, said Sharma. “Corruption feeds on itself through the constant generation of black money.”

Having a disposable income in India is determined by whether a significant portion of it is in the form of black money gained through opportunities to participate in the parallel economy.

R. Vaidyanathan, professor of finance and control at the prestigious Indian Institute of Management in the southern city of Bangalore, released a three-year study in 2012 that found Indians paying as much as 70 billion dollars annually in bribes for ordinary governmental services.

Vaidyanathan tells IPS that such bribes work as a form of parallel tax that does not reach government coffers. “This system of ‘bribe tax’ is so well developed that the actual collection is outsourced to private agents.”

According to Vaidyanathan, successive governments have balked at widening the income-tax base beyond three percent of the population because of the existence of the bribe tax system. “Obviously, you cannot ask people to pay two sets of taxes – one for the formal system and the other that feeds the black economy.”

Records released by the finance ministry show that in fiscal year 2011-2012 only 30 million people in this country of 1.2 billion people paid annual income tax, with 90 percent of that number paying less than 7,000 dollars each.

A political manifestation of people’s resistance to corruption is the emergence of the Aam Aadmi Party (AAP) or Ordinary People’s Party led by Arvind Kejriwal, a former income tax official who has vowed to clean up the system and is fighting the next elections with the broom as a polling symbol.

Kejriwal is best known for his efforts to bring transparency into governance that resulted in the passage of the Right to Information Act of 2005. But political parties have been fighting to have the Act amended to ensure that they do not come under its purview.

“It is a travesty that political parties are resisting accountability when they should have been supporting it,” said Sharma. “This shows how entrenched the main political parties have become in the parallel economy.”

According to Joginder Singh, a former director of the Central Bureau of Investigation, an arm of the police department, the poor are the worst victims of corruption since they must pay bribes out of their pockets each time they deal with government departments.

“Corruption is what keeps a majority of Indians in poverty despite the fact that they live in a country that is well-endowed with natural and human resources,” says Singh, who identifies himself with anti-corruption initiatives. “It is an open secret that most public projects have a built-in scope for corruption.”

In 2010, the Washington-based Global Financial Integrity estimated money lost to India through illicit outward flows to be around 462 billion dollars with 68 percent of it happening after 1991 when the country embarked on economic reforms.

Sharma says it is vital to assess the current size of the parallel economy in India. “The last study conducted by the National Institute of Public Finance and Policy was in 1984 when black money was estimated to be around 20 percent of GDP, but most experts agree that it has now grown to around 50 percent of GDP.”

Oil rigs and pumps. Credit: Bigstock

By Carey L. Biron
WASHINGTON, Jul 2 2013 (IPS)

A federal judge here on Tuesday struck down a key new regulatory provision that would require large U.S.-listed extractives companies to disclose payments made to foreign governments, a rule that rights groups had long pushed as a way to cut down on corruption in developing countries.

The judgement is being seen as technical, however, and could allow government regulators to tweak and re-issue the rule.

The ruling is seen as a major victory for the American Petroleum Institute (API), a lobby group that sued the U.S. government following the rule’s adoption, last August, on several grounds, including that it would force businesses to divulge proprietary secrets, impose significant costs and infringe on their Constitutionally mandated right to free speech.

“The court has vacated the SEC’s requirement that U.S. companies report competitive information that can be used against them by global competitors,” Harry Ng, API vice president and general counsel, said in a statement.

“U.S. companies are leading the way to increase transparency, but the rule would have jeopardised transparency efforts already underway by making American firms less competitive against state-owned oil companies.”

Ng points out that several major companies under the API umbrella are engaged in the Extractives Industry Transparency Initiative (EITI), a set of standards currently being implemented in around three-dozen countries. Yet the U.S. Congress had felt that the EITI standards were not strong enough (they have since been tightened), and thus mandated the SEC to come up with the extractives payment rule.

The rule is known as Section 1504, part of financial industry overhaul legislation known as the Dodd-Frank Act, signed into law in 2010. As finally adopted in August, Section 1504 requires that all oil, gas and mining companies listed on U.S. stock exchanges engage in annual, public reporting of any payments over 100,000 dollars made to foreign governments.

The rule would apply to around 1,100 companies, and disclosures would have been required starting next year.

Passage of Section 1504 was seen as an important victory by pro-transparency activists and development groups, who suggest that such transparency can crack down on rampant corruption and help to lift the “resource curse” in some resource-rich, governance-poor developing countries, particularly in Africa.

“Needless to say we are incredibly disappointed with this decision, particularly given that the United States has been a leader on this issue through the passage of Section 1504,” Jana Morgan, a Washington campaigner with Global Witness, an advocacy group, told IPS.

“We are now seeing similar initiatives in the European Union and Canada, with transparency in resource payments becoming the new paradigm and the new standard for best business practices.”

Senator Ben Cardin, who co-authored Section 1504, similarly expressed concerns over the potential broader effects of Tuesday’s court decision.

“The U.S. has been at the forefront of the transparency fight, and this decision will delay implementation of vital transparency rules,” Cardin said in a statement.

“Congress was clear in the letter and the spirit of the law that this information should be in the public domain. It’s unfortunate that the court believes that company disclosures to the SEC should remain hidden.”

‘Substantial errors’

The court’s decision revolves around the SEC’s interpretations of the law originally handed down by Congress. In this context, the judge ruled that the SEC had overreached the Congressional mandate in two important ways.

First, the commission’s rule required that company reports on this issue be made public, rather than publishing only, say, summaries of the reports. API-aligned companies had stated in court that changing this element would have cleared up most of their concerns over Section 1504.

Second, the rule did not offer any exemption for companies operating in countries where national laws disallow any such disclosure – Angola, Cameroon, China and Qatar are the four at issue in this case, though this is disputed by transparency advocates.

“The record of comments to the SEC shows clearly that no one has yet correctly identified a single country where Section 1504 disclosures would come into conflict with local laws,” Heather Lowe, director of government affairs with Global Financial Integrity (GFI), a Washington watchdog group, said in a statement on Tuesday. GFI has estimated that illicit financial flows cost developing countries a trillion dollars a year.

Yet companies say Section 1504’s lack of an exemption for national rules would force them to pull out of certain countries, resulting in massive economic costs.

U.S. District Court Judge John D. Bates noted these two points constituted “substantial errors … the commission misread the statute to mandate public disclosure of the reports, and its decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious.”

Because Bates had already struck down the rule based on these two points, he did not offer a decision on the remaining arguments, including the issue of constitutionality. The decision now sends the issue back to the SEC to refashion a new rule, unless the commission moves to appeal the judgement to a higher court.

Contacted by IPS, John Nestor, an SEC spokesperson, said only that the agency is reviewing the decision.

Towards re-enactment?

While rights groups here and internationally are expressing disappointment over the decision, they are noting that the judgement leaves intact significant components at the heart of Section 1504.

“We strongly disagree with the court findings, but that said, the court hasn’t precluded the possibility that the rules will be re-enacted in the same form but with a stronger justification,” Gavin Hayman, the London-based director of campaigns for Global Witness, told IPS.

“Further, we note that nothing in the decision blocks the SEC from requiring public reporting or allows for exemptions from reporting. The oil industry has never been able to clearly show the existence of host country prohibitions against payment disclosure.”

Similar points were made Tuesday by the Washington office of Oxfam America, a humanitarian group that filed a court brief in support of the SEC in this case.

“Nothing in the decision says that the SEC may not require public reporting or deny exemptions – it just says that the SEC needs to use its discretion and provide a fuller analysis,” Ian Gary, Oxfam’s senior policy manager, said in a statement to IPS.

“We disagree with the court’s analysis of the SEC’s justification for not providing reporting exemptions. Despite the court’s conclusions, the SEC balanced the potential costs and benefits of granting exemptions.”

Gary also noted the court’s refusal to rule on the API’s free speech-related argument, but suggested that the judge “did recognise that the Supreme Court has upheld public disclosure requirements as an appropriate approach to regulation.”

The United States is being singled out for criticism after the Group of Eight (G8) rich countries failed to adopt a plan pushed by British Prime Minister David Cameron to require the creation of public country-level registries with detailed information on corporate ownership and activity.

Although the United States did unveil important new pledges Tuesday to crack down on anonymous “shell” corporations, used by money launderers and tax evaders, critics point out that Washington has not outlined how it will implement these commitments. They also warn that the commitments will not put corporate ownership information into the public domain, a criticism also levelled at the G8 declaration overall.

The G8 met Monday and Tuesday at a summit in Northern Ireland, during which tax evasion and corporate transparency were given top billing. While Cameron had hoped other countries would back his call for the creation of public registries, none did so.

Even as the G8 countries decided on a more incremental approach to financial transparency than some had hoped, however, they did arrive at a host of important agreements, including for countries to begin sharing tax information."We would like to see even greater moves for corporate transparency."
-- Eric LeCompte

“The G8’s declaration is absolutely historic,” Eric LeCompte, executive director of Jubilee USA Network, a religious antipoverty group, said Tuesday. “We would like to see even greater moves for corporate transparency, but the foundation the G8 built will take us into a more accountable corporate world then we’ve seen before.”

Christine Lagarde, managing director of the International Monetary Fund, the Washington-based multilateral lender, similarly issued congratulations, noting, “International tax avoidance and evasion have emerged as major risks to government revenue and as threats to the credibility of tax systems in the eyes of citizens – in both advanced and developing countries.”

Others are offering more tempered reactions, however, particularly over the failure of the G8 to explicitly call for the creation of public registries detailing the “beneficial” (or final) ownership of all companies, including shell corporations.

While the United States has now said it will be creating these registries on its own, these will apparently be available only to law enforcement and tax authorities. Critics urge these databases to be made open to the public from the beginning.

“It is important that the United States has committed to creating registries of beneficial information, because this does go beyond the G8 declaration,” Stefanie Ostfeld, a senior policy advisor with Global Witness, an advocacy group and member of the Financial Transparency Coalition, told IPS.

“But it’s not putting that information in the public domain, as the United Kingdom is saying it will do. Without such a commitment, these moves will not live up to their potential impact.”

Shell companies

“We’re very pleased to see the G8 as a whole recognise that anonymous shell companies around the world are a massive problem,” Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity (GFI), a Washington watchdog group, told IPS.

“But then it comes down to the individual national action plans to achieve meaningful progress. In this, the United States is particularly significant in part because of the very high number of companies created here in the first place.”

In recent years, the United States has increasingly spoken out on international tax evasion and money laundering, with a domestic political debate progressing on related reforms to the tax code. At the same time, the United States is widely thought to shelter a huge number of these shell corporations, used to launder corrupt earnings or hide income of foreign citizens.

“It’s very hard to tell how many of these shell companies are incorporated here, as the U.S. doesn’t require information on the ultimate beneficial controller of each company,” Lowe said.

“However, we do know that the potential for a large number of anonymous corporations existing under U.S. law is very high. We also know that those who want to create such a company know this is a good place to do it.”

U.S. shell companies are estimated to have facilitated some 18 billion dollars in illicit transactions in 2005 alone, according to the Treasury Department. Advocates say this legal laxity is directly affecting developing economies, allowing corrupt officials or cronies in resource-rich countries to siphon billions of dollars out of their countries.

According to a recent report by GFI, such abuse could be resulting in losses for developing countries as high as a trillion dollars a year – 10 times the amount those countries receive annually in foreign aid.

For this reason, activists had increased pressure substantially in recent months on President Obama, calling on him to back Cameron’s plan to create a public registry on corporate ownership.

Yet the final pledge fell short of this goal. In a fact sheet released Tuesday, the White House said simply that “The Treasury Department, along with other federal agencies, will continue to advocate for comprehensive legislation on beneficial ownership.”

Recommitment

Simply pushing for such legislation is in line with a commitment the Obama administration made nearly two years ago. According to Lowe, little progress has been made since then.

“While this is a step forward, it’s certainly not a change in U.S. government policy,” she said.

“This [G8 announcement] is really just a recommitment to the issue. That’s fine, but what we really wanted to see was a plan for how the government would advocate for new legislation, which we haven’t been able to obtain.”

In the past, U.S. legislation to require the collection of “beneficial ownership” information has been difficult to advance. One proposal has been introduced (and rejected) in the Senate at least three times over the past decade, at one point being co-sponsored by then-Senator Obama.

On Tuesday, Senator Carl Levin, a primary sponsor of a bill that would require such disclosure, lauded the new G8 commitments: “I said before the summit that the G8 nations were poised to strike a hammer blow against offshore corporate tax avoidance. The G8 commitments made today, if carried out, can bring that hammer down.”

Levin’s legislation, as well as a similar bill in the House of Representatives, is expected to be reintroduced in the coming weeks. Meanwhile, it is currently unclear whether regulatory or executive action on this issue could allow the administration to work around Congress, but advocates suggest they see some opportunities for doing so.

Artisanal diamond miners at work in the alluvial diamond mines around the eastern town of Koidu, Sierra Leone. In resource-rich countries, the natural resource sector is usually the main source of illicit financial flows. Credit: Tommy Trenchard/IPS

By Carey L. Biron
WASHINGTON, May 28 2013 (IPS)

Over the past three decades, Africa has functioned as a “net creditor” to the rest of the world, the result of a cumulative outflow of nearly a trillion and a half dollars from the continent.

The new data, to be formally released Wednesday by the African Development Bank (AfDB) and Global Financial Integrity, a Washington-based watchdog group, stands in stark contrast to widely held images of Africa receiving massive amounts of foreign aid."While these figures are amazing, we have to recognise that they’re being directly facilitated by Western banks and tax havens." -- GFI's Clark Gascoigne

Foreign assistance levels are indeed high for Africa – following on a 2005 pledge among the Group of Eight (G8) rich countries, the continent receives more than 50 billion dollars a year, making it the world’s most aid-dependent region. Yet according to the new joint report, the interplay of corruption, tax evasion, criminal activities and other factors resulted in a net outflow of some 1.4 billion dollars between 1980 and 2009.

“In development circles we talk a lot about how much aid is going to Africa, and there’s this feeling among some in the West that after we’ve been giving this money for decades, it’s Africa’s fault if the continent’s countries still haven’t developed,” Clark Gascoigne, communications director at Global Financial Integrity (GFI), told IPS.

“In fact, our research shows that while the West has been giving money to Africa, far more is flowing out illicitly. Further, you can assume that illicit outflows from other regions would likely lead to high net resource transfers from other developing regions, as well.”

In Africa, this trend appears to have particularly strengthened over the past decade, during which time some 30.4 billion dollars every year are thought to have illegally leaked from the continent. Of that, around 83 percent is thought to have come from North African countries alone.

Over the full three decades, perhaps counter-intuitively, dark-money outflows appear to have originated particularly in resource-rich countries, those most prominently engaged in oil, gas and other natural resource extraction. Some of the most notable include Nigeria, Libya, South Africa and Angola.

Such findings are bolstered by a new index, released last week by the Revenue Watch Institute (RWI), another watchdog group, that for the first time systematically correlated governments’ economic dependency on natural resources and low human development indicators.

The RWI index looked at 58 countries responsible for the vast majority of the world’s petroleum, copper and diamond extraction, and reported that the profits of their extractive sectors added up to more than 2.6 trillion dollars in 2010, far outweighing Western aid flows. Yet more than 80 percent of those countries had also failed to put in place satisfactory standards for openness in these sectors – and half hadn’t even taken basic steps in this regard.

“In resource-rich countries, the natural resource sector is usually the main source of illicit financial flows,” the AfDB-GFI study states, noting a finding by the International Monetary Fund (IMF) that Angola’s oil sector in 2002 failed to report around four billion dollars.

“These countries generally lack the good governance structures that would enable citizens to monitor the amount and use of revenues from the natural resource sector. Often, rents and royalties derived from resource management are not used to support the social and economic development of resource-rich countries but instead are embezzled or expended in unproductive ways through corruption and cronyism.”

The impacts of this mass leakage on both African public coffers and foreign development-focused aid are clear.

“The resource drain from Africa over the last 30 years – almost equivalent to Africa’s current gross domestic product – is holding back Africa’s lift-off,” Mthuli Ncube, chief economist and vice-president of the African Development Bank, said Tuesday.

“[But] the African continent is resource-rich. With good resource husbandry, Africa could be in a position to finance much of its own development.”

Halting “absorption”

The new report, which is being released Wednesday at the African Development Bank annual meetings in Morocco, does not look into country-specific drivers of these outflows.

Yet while it is clear that differing levels of strengthening of country-level regulatory mechanisms will be required to ensure that natural resource development in Africa benefits public sector aims, it is impossible to ignore the role of Western countries in this ongoing situation.

“While these figures are amazing, we have to recognise that they’re being directly facilitated by Western banks and tax havens that allow for the creation of anonymous shell companies, by Western governments that don’t share tax information and continue to lack adequate money-laundering enforcement,” GFI’s Gascoigne says.

“While the onus for change is on both national and international players alike, the Western countries can control the international component of this dynamic – the international financial structure.”

The AfDB and GFI analysts are encouraging strengthened alignment of financial policies between African countries and those countries that are “absorbing” these illicit flows. The United States, for instance, continues to be the largest incorporator of shell companies in the world, while Gascoigne says there is also far more that Washington and other Western capitals can do on swapping tax information and refusing to tolerate bank and tax haven secrecy.

In this regard, many observers are eagerly awaiting the G8 summit slated to be held in the United Kingdom in mid-June. The first part of this year has seen unique international momentum build around issues of tax evasion and tax havens, energised particularly by depleted government coffers in the aftermath of the global economic crisis.

British Prime Minister David Cameron, who is hosting the upcoming summit, has taken on the issue of tax evasion as a key priority for his government’s G8 presidency this coming year. He has been widely praised for his recent leadership on the issue, particularly for pushing a new global standard under which governments would automatically share tax information.

European Union countries have now largely aligned themselves with the U.K. stance. But key to watch at the June summit will be whether the United States, Canada, Japan and Russia agree to sign on to a robust new initiative – or choose instead to stand in the way of greater reform.

“Curtailing these outflows should be paramount to policymakers in Africa and in the West because they drive and are, in turn, driven by a poor business climate and poor overall governance, both of which hamper economic growth,” GFI chief economist Dev Kar, formerly with the IMF, said Tuesday.

“The slower growth rate results in more aid dependency, with foreign taxpayer funds filling the shortfall in domestic revenue – to the extent that tax evasion is a part of illicit flows.”

China and India are expected to be the largest investors by 2030, accounting for 38 percent of all global investment. Credit: Bigstock

By Carey L. Biron
WASHINGTON, May 17 2013 (IPS)

Over the next decade and a half, a major global shift will result in the developing world controlling roughly half of the world’s capital, up from less than a third today.

According to new scenarios released Thursday by the World Bank, developing countries could control some 158 trillion dollars (at 2010 rates) by 2030, particularly in East Asia and Latin America. By that time, the developing world could account for 87 to 93 percent of global growth.“It’s one thing for the pie to be increasing, but how equitably is it being distributed?” -- Economist Dev Kar

Under certain scenarios, “financial markets in economies like Brazil, India, and those of the Middle East will develop considerably, with these countries attaining, by 2030, a level of financial development comparable to the United States in the early 1980s,” a new report from the Washington-based development lender states. “Similarly, the quality of institutions in developing countries will tend to improve significantly.”

This analysis suggests that developing countries will soon gain the resources necessary to bankroll the major investments that the bank says will be necessary, particularly in infrastructure and services. This would mark a stark contrast with the past.

Further, World Bank analysts foresee a massive escalation of global investment from these countries. Whereas in 2000 international investment from developing economies constituted just a fifth of the global total, this could now triple over the next decade and a half.

“We found that developing economies will come to dominate investment,” Maurizio Bussolo, a World Bank lead economist and author of the new Global Development Horizons report, told reporters Thursday.

“By 2030, for every dollar invested around the world, 66 cents will be in developing countries. That’s a dramatic change, as for almost four decades such investments made up just 20 cents on the dollar.”

In fact, Bussolo suggests that developing countries will overtake the developed world in this regard much sooner, perhaps by the end of this decade.

Fast-strengthened systems

China and India are expected to be the largest investors by 2030, accounting for 38 percent of all global investment, almost as much as all high-income countries combined. In fact, China alone could be responsible for nearly a third of global investment by that time, the bank says, while Brazil, India and Russia will together constitute a larger investment bloc than the United States, at around 13 percent.

This means that total investments in the developing world could be half again as large as among developed countries, at 15 versus 10 trillion dollars.

Such changes will require the exponential development and strengthening of financial sectors in developing countries, as emerging economies inevitably move to quickly integrate with the international financial system in a way never before seen.

“Developing countries are currently almost absent from international financial markets, so you can see that we have a very long way to go in a historically short time period – 15 or 20 years for developing financial markets is not long,” Hans Timmer, director of the Development Prospects Group at the World Bank, told reporters.

“But we have seen in high-income countries that if you deregulate too rapidly you have a very dangerous situation. So we have a dilemma: the role of developing countries is increasing very rapidly, but we must deepen these financial markets only very gradually.”

Already, weak financial systems across the developing world are allowing for illicit outflows of capital that are at times far greater than the countries’ external debt, inexorably impacting on those countries’ ability to finance their public sector.

One report last year estimated that North African countries alone lost nearly a half-trillion dollars over the past four decades, almost the equivalent of their combined gross domestic product for 2010.

“It’s important to note that the World Bank is only talking about recorded capital here, but there’s so much illicit capital currently sloshing around that the multilateral institutions haven’t yet gotten their heads around,” Dev Kar, formerly with the International Monetary Fund (IMF) and currently the chief economist with Global Financial Integrity, a Washington advocacy group, told IPS.

“Our studies suggest that the unrecorded capital coming from developing countries is absolutely huge – the losers are losing far more than the gainers are gaining. As a result of these developments, you can understand why the North African countries blew up, as that kind of massive outflow of resources must have some kind of social impact.”

A level field

Of potentially considerable concern in the bank’s projections is where this new wealth will end up being concentrated.

“It’s one thing for the pie to be increasing, but how equitably is it being distributed?” Kar asks.

“Equity is a huge problem, as the rich seem to be getting richer and the poor getting poorer. Further, it seems the nouveau riche in the developing countries are a bit more callous than the established rich in developed countries.”

Kar notes that income inequality is generally not being helped through current redistribution mechanisms aimed at ensuring broader equal opportunity. Meanwhile, the poor, being unable to take advantage of globalisation, are being left behind across the globe.

According to the World Bank and numerous other analysts, wealth in developing countries is today largely locked up among the elite.

“For most of these countries, the first quarter of the population provides almost no savings. The bulk of savings comes from the richest quarter – there is lots of concentration,” the World Bank’s Bussolo told IPS.

In a separate statement, he noted: “Even if wealth will be more evenly distributed across countries, this does not mean that, within countries, everyone will equally benefit. Policymakers in developing countries have a central role to play in boosting private saving through policies that raise human capital, especially for the poor.”

In particular, the new report places significant focus on increasing government funding for education. It points to analysis from Mexico suggesting that changes in education could result in a five percent greater household saving rate by 2050.

“If the distribution of education among workers of future generations were to remain as unequal as it is today, this would perpetuate inequality of earning capacity, saving, and wealth in the future,” the report states.

“Leveling the playing field in terms of educational opportunities could thus be supported not just in terms of fairness but also – given the positive effect on private saving – in terms of efficiency.”