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Curbing illicit financial flows in Africa is imperative

A recent report detailing how Africa lost $US1-trillion in the last 50 years through illicit financial flows of money has raised questions about it’s abilities to curb fraud evasion and other means of corporate profit hiding. It has also sparked interest in holding multinational corporates, which are mainly responsible for the capital outflow, accountable for their actions.

Last week, a panel led by Thabo Mbeki presented the report to the African Union summit.

The report called for lobbying at the United Nations by African countries for a declaration on illicit financial flows. 

Research shows how these flows rob developing countries of income taxes that rightfully belong to the host countries where companies operate, particularly in the extractives sector.

Africa has lost more in illicit outflows in 50 years than it has gained in development aid, according to the report. In sub-Saharan Africa, up to 5.5% of gross domestic product is lost this way every year.

Questions have also been raised about whether the African Union (AU) has the necessary clout internationally to lobby for the necessary reforms. These would have to involve more corporate transparency, as well as tax reforms in offshore tax havens where illicit outflows inevitably end up.

The European Commission announced on Tuesday that it was investigating a number of corporate tax evasion schemes, including a Belgian system that allows companies to reduce their tax bills.

The commission is also looking into possible tax schemes involving Amazon, Italian car-maker Fiat in Luxembourg, Apple in Ireland and Starbucks in the Netherlands – all tax havens.

David Lewis, director of Corruption Watch in South Africa, says there are a range of measures that can be put in place by the private and public sectors to stop illicit flows.

There are also a number of voluntary initiatives that corporates can endorse that would not require further legislation, according to Lewis. 

One example is the Extractives Industry Transparency Initiative (Eiti) that aims to promote transparency in companies involved in resource extraction, such as oil or mining.

South Africa is not a signatory to the Eiti and companies can take the lead by introducing country-by-country reporting.

“Most private sector reports of listed companies are aggregated so it’s not possible to tell the flows out of each country,” Lewis says.

Transparency International runs a campaign called Unmask the Corrupt, and Corruption Watch is a partner.

One of the demands of the campaign is that there should be a public register of the beneficial ownership of companies, for example, information on who really owns nominal shares.

Lewis says companies who do not disclose beneficial ownership publicly should not be admitted to public tender.

He believes the South African government could do a lot more to curb illicit flows by implementing mechanisms already in place. For example, vendors of luxury goods like real estate, jewellery or luxury vehicles, are required to report suspicious transactions.

“This should be enforced more rigorously,” he says.

The Mbeki report also pointed a finger at the banking sector, which is also required to report suspicious transactions but in some instances has helped its clients to move large amounts of money across borders, without the authorities’ knowledge.

The benefits of voluntary disclosure
Phil Bloomer, executive director of the Business & Human Rights Resource Centre, says schemes to avoid paying corporate tax deprive developing countries of the resources necessary to deliver basic human rights to their citizens.

“Some companies have shown leadership in this area by voluntarily disclosing total tax and royalty payments, and pushing government to close loopholes and eliminate tax havens.

“However, much more needs to be done as many companies still use sophisticated methods to avoid paying taxes. This is documented by numerous civil society groups. Companies must recognise that these short-term profit gains are far out-weighed by the benefits of operating with educated, healthy and happy communities and workforces,” Bloomer said.

Peter Vale, professor of humanities at the University of Johannesburg, says it is unlikely that the AU would have the necessary clout to force real change at the UN. But it is also unlikely that the matter would ever reach the UN Security Council.

False promises and the Greek question
The only way the practice could potentially be curbed is if it reaches the attention of the World Bank or the International Monetary Fund, he says.

Vale says the exploitation of Africa in this way often takes place within the context of promises of job creation and foreign investment, which are often false.

More broadly, the growing resistance to illicit financial flows is part of a growing backlash against the neoliberal economic system.

“Greece shows you the extent of the disarray that the financial system is in,” says Vale. 

“For example, much of the conversation at the World Economic Forum in Davos was around whether Greece was going to be squeezed out of the European Union. It was really about the establishment trying to reassert itself.”

“The Greek question is another example of the way international finance rallies against dissonant voices. Greece is also an interesting test – all of these examples are like buoys bobbing in a very turbulent sea and each of them sends out a red flag that the system itself is in crisis.” he said. 

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Sarah Evans
Sarah Evans

Sarah Evans interned at the Diamond Fields Advertiser in Kimberley for three years before completing an internship at the Mail & Guardian Centre for Investigative Journalism (amaBhungane). She went on to work as a Mail & Guardian news reporter with areas of interest including crime, law, governance and the nexus between business and politics. 

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