Curbing illicit financial flows will free finances for development projects like the provision of safe drinking water. A man collecting water at a government-funded borehole in Southern Zimbabwe. Credit: Busani Bafana/IPS

By Busani Bafana
BULAWAYO, Zimbabwe, Jan 26 2017 (IPS)

Thanks to growing investor interest, increasing respect for democratic reforms, and its vast food production potential, the Africa Rising narrative is only getting better.

But Africa’s development success story will only be complete when the continent plugs the hemorrhaging of its financial resources badly needed for its own development. Africa is losing an estimated 50 billion dollars annually through illicit financial flows (IFFs) — half of all global losses and the equivalent of Morocco’s Gross Domestic Product (GDP)."[Illicit Financial Flows] are only a tip of the iceberg. Within the paradigm of Africa's natural capital losses, part of which is in the form of IFFs, the losses are mind-boggling.” --UNEP's Richard Munang

According to the World Bank, IFFs refer to the deliberate loss of financial resources through under-invoicing, which researchers say is a blot on the ‘Africa Rising’ narrative. Worst, IFFs are depriving Africans of needed resources to access better food, education and health care. Despite a decline in the prevalence of undernourishment in Sub-Saharan Africa, the World Food Programme says the region still has the highest percentage of population going hungry, with one in four persons undernourished.

As cancerous as corruption, illicit financial flows are costing Africa big time. This is despite a continental initiative to curb them at a time Africa is making some progress on good governance, according to the seminal Mo Ibrahim Index of African Governance 2016.

Can the wings of capital flight be clipped?

A 2015 report by the High-level Panel on Illicit Financial Flows from Africa established by the African Union and United Nations Economic Commission for Africa (ECA) puts the average financial losses at between 50 billion and 148 billion dollars a year through trade mispricing. South Africa, the Democratic Republic of Congo, Nigeria, Mozambique and Liberia are some of the countries that have suffered most due to trade mispricing.

“IFFs significantly hamper Africa’s development and progress towards achieving the Sustainable Development Goals (SDGs) considering the astronomical investments the region needs to mobilize and the declining international sources,” climate change expert and the United Nations Environment Programme’s Regional Climate Change Programme Coordinator, Richard Munang, told IPS.

Cumulatively, IFFs range from natural resources plundering and environmental crimes like illegal logging, illegal trade in wildlife, and unaccounted for and unregulated fishing (IUU) to illegal mining practices, food imports, and degraded ecosystems. Munang estimates that Africa loses up to 195 billion dollars annually of its natural capital — an amount exceeding the total annual cost Africa needs to invest in infrastructure, healthcare, education and adapting to climate change under a 2°C warming scenario.

“Reversing IFFs and other natural capital losses is an urgent imperative if the region is going to develop and achieve the SDGs,” said Munang, adding that in terms of climate resilience, for instance, it is projected that to meet adaptation costs by the 2020s, funds disbursed annually to Africa need to grow at an average rate of 10-20 percent annually from 2011 levels.

“So far, this has not been achieved. And no clear pathway exists from international sources,” Munang said. “But IFFs are only a tip of the iceberg. Within the paradigm of Africa’s natural capital losses, part of which is in the form of IFFs, the losses are mind-boggling.”

A recent study called “Financing Africa’s Post-2015 Development Agenda” shows that from 1970 to 2008, Africa lost between 854 billion and 1.8 trillion dollars in illicit financial flows — good money in bad hands.

UNECA says illicit financial flows are unrecorded capital flows derived from the proceeds of theft, bribery and other forms of corruption by government officials and criminal activities, including drug trading, racketeering, counterfeiting, contraband and terrorist financing.

In addition, proceeds of tax evasion and laundered commercial transactions are counted under IFFs. Africa is also losing much-needed money to drug trafficking, tax dodging, wildlife poaching, human trafficking and theft of minerals and oil.

Tax Inspectors without Borders (TIWB), a project launched by the Organisation for Economic Cooperation and Development (OECD) and the United Nations Development Programme (UNDP) in 2015, has helped collect more than 260 million dollars in additional tax revenues in eight pilot countries, indicating the potential of tightening tax audits.

Head of the TIWB Secretariat James Karanja noted that capacity-building can help companies pay their taxes, stop tax dodging and help raise domestic resources to fund government services.

According to the McKinsey Global Institute, GDP growth has averaged five percent in Africa in the last decade, consistently outperforming global economic trends. This growth has been boosted by among other factors, rapid urbanization, expanding regional markets, sound macroeconomic management and improved governance.

The Panel chaired by former South African President Thabo Mbeki also fingered large commercial corporations as culprits in IFFs, which have been fueled by corruption and weak governance. The solution, the panel said was to boost transparency in mining sector transactions and stop money laundering via banks, actions which rested on coordinated action between government, private sector and civil society.

“Illicit financial flows are a challenge to us as Africans, but clearly the solution is global. We couldn’t resolve this thing by just acting on our own as Africans,” Mbeki told the UN’s Africa Renewal magazine in a 2016 interview in New York.

For instance, Zimbabwe is currently in a financial crisis, having lost close to 2 billion dollars to illicit financial flows in 2015, according to the Reserve Bank. The figure is four times the money Zimbabwe attracted in Foreign Direct Investment in 2015 and more than half the 2016 national budget. The Global Financial Integrity Report estimates that over the last 30 years, Zimbabwe has lost a cumulative 12 billion dollars to IFFs.

“It is a grave concern. I looked at the statistics and found out that it’s a cancer that we are brewing,” Central Bank Governor John Mangudya conceded.

Is transparency the tool for slaying development’s demon?

The World Bank says curbing IFFs requires strong international cooperation and concerted action by developed and developing countries in partnership with the private sector and civil society.

IFFs pose a huge challenge to political and economic security around the world, particularly to developing countries. Corruption, organized crime, illegal exploitation of natural resources, fraud in international trade and tax evasion are as harmful as the diversion of money from public priorities, says the World Bank.

Advice on how to make tax policies more transparent — such as requiring all tax holidays to be publicly disclosed, along with names of officials involved in granting the holiday — would likely increase tax revenues collected by governments while reducing the risk of corruption and the potential for firms to abuse tax holiday provisions.

Global initiatives to limit tax evasion and stop proceeds of crime such as the the OECD/Global Forum on Taxation and the UN Conventions against Drugs, Trans-national Organized Crime and Corruption (UNODC) are yielding results. The World Bank’s Stolen Asset Recovery (StAR) programme found that of nearly 1.4 billion dollars in frozen corrupt assets in OECD countries between 2010 and 2012, less than 150 million has been recovered.

Proceeds of illicit financial flows are difficult to recover despite some high-profile cases like that of Teodorin Nguema Obiang, the son of Africa’s longest serving leader, Teodoro Obiang Nguema Mbasogo of Equatorial Guinea. In 2014, a U.S. court ordered Teodorin to sell 30 million dollars’ worth of property believed to have been the proceeds of corruption. In 2013, 700 million in assets stolen and stashed in Switzerland by the Sani Abacha regime was returned to Nigeria.

A 2016 report by the Africa Growth Initiative at the Brookings Institution, “Foresight Africa: Top Priorities for the Continent 2017”, says good governance significantly impacts the mobilization of domestic resources such as tax revenues, as well as external financial flows such as FDI, ODA, remittances, and illicit financial flows.

The report said lowest levels of corruption and highest levels of political stability correlated with the highest tax-to-GDP ratio while “conversely, countries with low political stability scores have a relatively high ODA-to-GDP ratio. In addition, though the differences are subtle, the charts hint that more corrupt countries have higher FDI-to-GDP ratios.”

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. 

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