adminmore than US$1,8 trillion between 1970 and 2008 in illicit financial outflows involving multinational corporations (MNCs) through tax evasion, mis-invoicing, import over-invoicing and under-pricing of exports. The combination of a heavy debt burden and sustained illicit outflows of capital make Africa the world’s largest net creditor.
Various researchers have also concluded that illicit financial outflows are not restricted to Africa, as the entire developing world is the West’s unwitting largest provider of money. African governments struggle with mounting external debts and fail to finance national budgets largely because they are afraid of upsetting the applecart by levying more solid taxes on MNCs.
Governments pamper MNCs with massive tax incentives. Researchers say the companies abuse this by siphoning proceeds offshore through evasion of the few taxes they must pay. This is a slap in the face for governments that offer tax incentives in anticipation of returns such as personal income tax, foreign exchange earnings and job creation.
Washington-based Global Financial Integrity (GFI) concludes the West is the ultimate beneficiary of laundered money from Africa and Asia. GFI says that during the decade to 2009, developing countries lost between US$723 billion and US$844billion annually.
Illicit outflows rose from US$353bn in 2000 to US$1,3trillion in 2008. These fell to US$775bn in 2009, largely due to the global financial crisis whose impact did not spare developing economies. Illicit outflows through trade mis-pricing from Africa are growing rapidly, outpacing outflows from Europe, Asia and other regions, GFI says.
Africa registered 32,5 percent growth in illicit financial outflows between 2000 and 2009 through trade mispricing. “The faster pace of illicit outflows from Africa through trade mis-pricing can perhaps be attributed to weaker customs monitoring and enforcement regimes.
“Given that customs revenues are an important source of government tax revenues in Africa, the faster pace of trade mis-pricing calls for strengthening the role of customs in African countries to curtail the mis-pricing of trade,” GFI’s Dev Kar and
Sarah Freitas say in a report titled “Illicit Financial Flows from Developing Countries over the Decade Ending 2009”.
The GFI report shows that the rise in illicit financial flows is partly attributable to kickbacks and bribery.
However, trade mispricing is the major conduit through which capital is laundered offshore, depriving the continent of much-needed revenue. Capital leaves the continent through MNCs’ external accounts.
By over-pricing imports and under-pricing exports on customs documents, money is illegally transferred offshore. Through accounting systems, mis-invoicing can be estimated by comparing a particular country’s exports to what other countries say they have imported from that particular country, after adjustments for insurance and freight.
Conversely, a country’s imports are compared to what sellers declare to have exported to it. Discrepancies between the figures of the importer and exporter indicate mis-invoicing. Africa’s largest copper producer, Zambia, is working on a new export mechanism for producers. This, after a nasty experience with Switzerland, which is internationally lauded for its financial integrity. The Zambian government has established that copper exports destined for Switzerland are not accounted for in
Swiss customs data. So where is the copper going and how much is being paid for it? Zambia’s scenario mirrors that of many resource-rich African countries. The Zambian government says the country failed to cash in on the commodities price boom between 2004 and 2008.
“In 2008, much of Zambia’s exported copper, almost half of which was earmarked for Switzerland, never arrived at its destination disappearing into thin air.
“Moreover, the pricing structure for Swiss copper remarkably similar to Zambia’s exported copper was six times higher than the funds Zambia received, facilitating a potential loss of some US$11,4 billion.
“This is especially interesting when taking into account that Zambia’s entire GDP for 2008 was US$14,3 billion,” Al Jazeera reported in June 2011.
GFI says falsified pricing is facilitated by tax havens and secrecy jurisdictions in offshore financial centres that have created space for billions of dollars in unseen and unrecorded proceeds to be moved across borders.
The bulk of MNCs have corporate headquarters offshore and through “tax planning” devise ways to reduce or even totally avoid corporate taxes. In 2009, GFI estimated that through the combination of low or no taxes, lax regulation, well-defended secrecy, tax havens had grown to a point where they controlled an estimated US$6 trillion.
The Isle of Jersey has amongst its clientele Bank of America and Morgan Stanley, while Panama has AIG and American Express. Mauritius is the channel for investments into India while Russian money launderers prefer Cyprus. The British Virgin
Islands offer China’s preferred destination to move illicit capital.
Banks in Switzerland, London and New York, among them Credit Suisse, Barclays and Citigroup serve rich clients by directing transactions through more than 20 Caribbean tax havens, GFI says.
The UK hosts more than half of the world’s tax havens such as those that come under the British Crown Dependencies (Jersey), British Overseas Territories (Cayman Islands, BVI, Bermuda) and members of the Commonwealth. Most of the MNCs
operating in Zambia are incorporated either in the British Virgin Islands or Bermuda.
Other studies say the Organisation for Economic Development and Co-operation (OECD), which has some of the world’s most powerful nations and leading donors, benefits from Africa’s impoverishment.
Africa has grappled with the problem of illicit capital outflows since the 1960s. This is according to a UN paper titled “Tackling Illicit Capital Flows for Economic Transformation”, which was presented to the African Union in May 2011.
“The growing international reach of corporations propelled the development of a whole system of offshore finance that was designed to avoid taxes and regulation. In the process, the system also obscures the origin and destination of the increasingly large sums of money passing through it,” the report says.
It reveals the top five African countries with the highest illicit outflows as Nigeria (US$89,5bn), Egypt (US$70,5bn), Algeria (US$25,7bn), Morocco (US$25bn) and South Africa (US$24,9bn).
“Illicit financial outflows from the entire region (Africa) outpace official development assistance coming into the region at a ratio of at least 2:1,” the report says. A 2008 study by academics Ndikumana and Boyce noted that between 1970 and 2004, total capital flight from Africa amounted to US$444bn, equivalent to 104 percent of the continent’s exports and 124 percent of imports (2007 values). The study also estimated annual average capital flight at around US$49bn between 2000 and 2008,
an amount which researchers say could finance 54 percent of Africa’s infrastructure bill.
GFI estimates Africa’s annual outflows at US$30 billion but the AU’s estimates are around US$148 billion, nearly four times the foreign aid received.
While Africa’s leaders are still to wake up to the impact of the illicit financial outflows, the figures beg for action. UNCTAD in 2009 estimated the continent’s accumulated stock of capital flight between 1970 and 2004 at around US$607bn, almost three times the continent’s external debt over that period.
UNCTAD’s report cited the example of Sierra Leone where capital flight was 425 percent of the country’s GDP in 2004. In the DRC and Zimbabwe, capital flight was 344 percent of GDP and 312 percent in Burundi (2004). GFI makes its calculations using a method called Gross Excluding Reversals (GER), to determine illicit outflows that are defined as export under-invoicing and import over-invoicing.
The December GFI study reveals, for example, that Ethiopia (with a per capita GDP of US$365), lost US$11,7bn to illicit financial outflows between 2000 and 2009. In 2009 alone, illicit money that left Ethiopia was estimated at around US$3,26bn – a significant rise on previous years. Between 2000 and 2009, GFI estimates that South Africa lost US$5,9bn, Angola lost US$1,7bn, the DRC lost US$1,4bn.
Namibia lost US$750m between 2000 and 2009, while Botswana’s losses were US$703m. Add to these Zambia’s losses of US$395m and Zimbabwe’s US$390m and it becomes clear that the continent is losing revenues that can fund real development.
The Tax Justice Network for Africa, in a January 2011 report titled “Tax Us If You Can”, recommends the establishment of an international co-operation mechanism on taxation to tackle tax evasion, information exchanges on lax regulation as well as best practices on taxation.
“Co-operation could be placed within the United Nations system to regulate all multilateral and bilateral tax treaties, and take measures to erase harmful tax practices in one country that impact on the tax sovereignty of other countries.”
African countries must also start establishing their own watertight regulatory frameworks. Greater enforcement of regulations and prosecution of local and foreign actors involved in paying of kickbacks and bribes will help stamp out corruption – Southern Times
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