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Africa: Capital Losses, What Can Be Done?
AfricaFocus Bulletin
Nov 20, 2012 (121120)
(Reposted from sources cited below)
Editor's Note
"Both rich countries and Africa suffer from a global system
of financial secrecy, in which rich individuals and large
companies hide income and assets from public scrutiny and
from taxation by transferring them across borders. ...
despite many differences ...the same structural realities
and the same institutions are implicated in the "fiscal
crises" of Europe and North America and in the failure of
African states to capture and channel sufficient resources
to development." - Introduction to special issue of ACAS
Bulletin on "Africa's Capital Losses: What Can Be Done?"
Today's two AfricaFocus Bulletins contain selected articles
from the newly released issue of the Bulletin of the
Association of Concerned Africa Scholars, on "Africa's
Capital Losses: What Can Be Done?" The full bulletin is
available at http://concernedafricascholars.org/bulletin/issue87/
This Bulletin contains the editors' introduction and an
overview article by Raymond Baker of Global Financial
Integrity, "Plundering a Continent." The other Bulletin sent
out today (available at
http://www.africafocus.org/docs12/cap1211b.php) contains an article on "Debt Audits and the
Repudiation of Odious Debts," by James Boyce and Léonce
Ndikumana.
For previous issues of AfricaFocus Bulletin on illicit
financial flows and related issues, visit
http://www.africafocus.org/debtexp.php
See particularly
http://www.africafocus.org/docs11/cap1112.php, with excerpts
from the book "Africa's Odious Debts,"
http://www.africafocus.org/docs11/iff1112.php, on "Capital
Flight Updates," and http://www.africafocus.org/docs12/bank1208.php, "Global
Pirates vs. Tax Justice."
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Books Issue Coming Up - Send in Your Suggestions
In early December, AfricaFocus will be doing one of its
periodic books issues, listing new and notable books that
may be of interest to readers, including new books by
AfricaFocus subscribers. Please send in your suggestions to
africafocus@igc.org.
One book sure to be included, which I can strongly recommend
to anyone interested in Mozambique or in the complexities of
"post-independence" in any country which has won freedom
after a prolonged struggle, is "S is for Samora: A Lexical
Biography of Samora Machel and the Mozambican Dream" by
Sarah LeFanu
(http://www.africafocus.org/books/isbn.php?0231703368)
The book is beautifully written, insightful, and innovative
in its format, which consists of multiple short
entries/essays in alphabetical order.
++++++++++++++++++++++end editor's note+++++++++++++++++
Africa's Capital Losses: What Can Be Done?
Association of Concerned Africa Scholars Bulletin
No. 87, Fall 2012
Editors' Introduction
William Minter and Tim Scarnecchia
William Minter is editor of AfricaFocus Bulletin and a
member of the ACAS Advisory Council. Tim Scarnecchia is
associate professor of history at Kent State University and
co-editor of the ACAS Bulletin.
When presidential candidate Mitt Romney released his 2011
tax return in September 2012, Huffington Post journalist
Zach Carter calculated that 267 of the 379 pages of the
return were devoted to investments in foreign companies and
partnerships. Of the 34 offshore companies involved, 30 were
located in countries considered to be offshore tax havens by
the U.S. Government Accountability Office.
But Romney is far from an exception among the rich in the
United States and around the world. According to a Tax
Justice Network report released in July, the global superrich
hold at least $21 trillion in offshore accounts
protected by secrecy, both in well-known tax havens such as
the Cayman Islands and in a shadow financial system
involving the world's largest banks and related financial
industry institutions. That minimum estimate is equivalent
to the size of the U.S. and Japanese economies combined.
In their 2011 pathbreaking book, Africa's Odious Debts: How
Foreign Loans and Capital Flight Bled a Continent, Léonce
Ndikumana and James Boyce demonstrate the systematic
draining from Africa of resources by this global system, in
which rich individuals and large companies hide income and
assets from public scrutiny and from taxation by
transferring them across borders. Africa's situation is
aggravated by its vulnerability in the world economy, by the
weaknesses of African states, and by the misguided
assumption that this pattern stems only from the personal
corruption of African leaders. In fact, despite the many
differences between the rich countries of the West and
developing countries in Africa, the same structural
realities and the same institutions are implicated in the
"fiscal crises" of Europe and North America and in the
failure of African states to capture and channel sufficient
resources to development.
We asked Ndikumana and Boyce to put together this special
issue of ACAS Bulletin, titled "Africa's Capital Losses:
What Can Be Done?" The goal of this Bulletin is to provide a
better understanding of the ways capital is lost and the
measures that can be taken in Africa and in rich countries
to stem this hemorrhaging of resources.
The issue of illicit financial flows is moving higher on the
agenda of Western countries and the international community
more generally. Notably, mechanisms that have been developed
for tracking flows associated with drug smuggling or support
for terrorism turn out to be precisely the same mechanisms
needed to track resources sent across national borders to
evade the tax authorities of both rich and poor countries.
This is creating new opportunities to address illicit
financial flows of all kinds.
The contributors to this issue are among the leading
authorities in the field. They have been asked to cover
specific aspects of the topic in accessible language and to
suggest further resources for those seeking to explore the
topics in more depth. We are delighted with the result, and
we hope this issue will be widely used to draw greater
attention to the topic of illicit financial flows, which is
of fundamental importance for Africa and for countries
around the world. The capacity of the 1% to evade their
responsibilities and undermine the public good depends on a
deeply entrenched network of financial secrecy that spans
national boundaries. Exposing this web of institutions to
public view and recapturing public resources for public
goods requires joint action by scholars, policymakers, and
activists that also crosses national and institutional
boundaries.
Plundering a Continent
Raymond W. Baker, Director, Global Financial Integrity
Raymond Baker is the Director of Global Financial Integrity
and a Senior Fellow at the Center for International Policy
in Washington, D.C., researching and writing on the linkages
between corruption, money laundering, and poverty. He is the
author of Capitalism's Achilles Heel: Dirty Money and How to
Renew the Free-Market System. In 2011 he was named to the
High Level Panel on Illicit Financial Flows from Africa,
chaired by former President of South Africa, Thabo Mbeki.
In 1961 I arrived in Lagos, Nigeria, to take over the
management of a company. One of the early conversations I
had was with an "old coaster," a British gentleman who was
managing director of a UK-based trading company that had
been active along the west coast of Africa since the late
1800s. I asked him, "How do you do business in Africa?" He
looked me skeptically up one side and down the other and
wasn't very forthcoming. I got the distinct impression that
he did not like Americans showing up in his former British
colony so soon after independence. But I pressed on as is my
American manner and asked further, "Well, okay, tell me, how
do you price your imported cars and textiles and building
materials to sell in the Nigerian market?" He answered,
"Price? Price is not a problem. I'm not trying to make a
profit."
Imagine my surprise. I had just finished Harvard Business
School learning all about how to make a profit and here in
Africa one of the first persons I encounter tells me he's
not trying to make a profit. What could be going on here?
It took me awhile to realize that what he was talking about
was transfer pricing. Everything he imported was priced at
such a high level that, indeed, the Nigerian subsidiary was
not supposed to make a profit. It was only supposed to pay
the bills for its imports, with all potential profits
shifted back to the UK within the invoices of what was being
purchased for resale locally. It took me some time longer to
realize that most foreign companies were doing similarly and
a bit longer still to figure out that many Nigerians
involved in foreign trade were doing the same thingoverpricing
imports and underpricing exports in order to
shift money out of the continent and into foreign bank
accounts. Thus began my education in unrecorded, hidden,
usually illegal financial flows and the harm they do to
developing countries.
The 1960s marked the takeoff point in developing the
structure that facilitates such cross-border illicit
financial flows. There are two reasons that account for
this. First, the 1960s was the decade of independence.
Between the late 1950s and the end of the 1960s, 48
countries gained their independence from colonial powers (1
http://www.un.org/en/members/growth.shtml). Some of the
political and economic elites in these countries wanted to
take their money out by any means possible, and western
financial institutions and even governments serviced this
desire creatively and effectively.
The 1960s also marked the decade when multinational
corporations accelerated their expansion across the world.
There were already a handful of international oil and
trading companies with operations in perhaps a dozen
countries, but the thrust to expand globally took off
simultaneously with the decade of independence and has
continued since. Many multinational corporations utilized a
practice continuing today-aggressive transfer pricing and
money laundering schemes to shift profits from countries
where they are in business into locations where they are
often not in business.
How is this possible? How do you lose money or operate at
little or no profit in countries where you are heavily
invested and make money in countries and enclaves where you
are not invested? Quite simply, you use the global shadow
financial system to shift your revenues and profits across
borders at will.
This system comprises a number of elements. Tax havens,
rising from four or five in the 1950s, now number upwards of
60 situated all around the globe. Most of these tax havens
operate as secrecy jurisdictions, meaning that you can
establish entities behind nominees and trustees such that no
one can find out who are the real owners and managers of
these entities. The most popular form-disguised
corporations-now number in the millions around the world,
more in the United States than in any other country.
Anonymous trust accounts are part of this structure. Fake
foundations are available, enabling you to donate money to
your own foundation and then designate yourself the
beneficiary of the distributions. Trade mispricing is the
most commonly used device in the global shadow financial
system, accounting for more than half of illicit crossborder
financial flows. And then there are many specialized
forms of money laundering available, so that capital
movements can be facilitated through interest payments,
derivatives, swap contracts, entirely fake transactions,
barter, and more. This global shadow financial system was
built by those who live in the countries into which the
money arrives, not by those who live in the countries out of
which the money comes.
At Global Financial Integrity, we estimate that the shift of
laundered money out of Africa over the last 30 years is very
roughly on the order to US$1 trillion (Kar and CartwrightSmith
2010). It could be half that and it could easily be
twice that, depending on what cannot be seen in our
analyses. Whatever the proper figure, we are dealing with an
order of magnitude resulting in a devastating impact on the
poorest continent and its one billion-plus people.
For many well meaning observers, including the authors of
the Washington Consensus promoting unfettered international
trade, the only concern here is the loss of tax revenues.
Important as this is, the larger impact is the loss of
capital to the economies of the continent. Retaining
resources in countries has a multiplier effect on domestic
activity. Losing resources drains bank accounts, curtails
investment, worsens poverty and inequality, and contributes
to political instability.
For a half century the western media has focused attention
on corruption in Africa. Much of this attention is well
deserved. I lived 15 years in Nigeria and retained business
interests there until three years ago, so I am not
unfamiliar with the reality. But in our analysis of global
cross-border illicit financial flows, we think that the
corrupt component, stemming from bribery and theft by
government officials, is only about three percent of the
total. The criminal component arising from drugs, human
trafficking, counterfeiting, illegal arms trading, and more
is about 30 to 35 percent of the global total. Trade
mispricing, in which multinational corporations are heavily
involved, is about 60 to 65 percent of the global total. We
have not made a separate analysis of these percentages for
Africa. The corrupt component may well be higher, and then
again the trade mispricing component may also be
considerably higher. But the ranking of the three is no
doubt correct.
What is missed by most development experts and economic and
political analysts is the systemic nature of this problem.
Drug trading is approached as a problem to be fought largely
through eradication and interdiction. Human trafficking is
basically conceived of as a problem of immigration and
border control. Corruption is fought from the bottom up more
often than from the top down. Money laundering is a matter
of know your customer and suspicious activities reports.
What we do not want to admit to ourselves is that all three
forms of cross-border illicit financial flows utilize the
same shadow financial system to shift their revenues and
profits. The key fallacy in global anti-money laundering
efforts is the idea that commercial interests can hold on to
their use of the shadow financial system to move
commercially tax-evading money and at the same time make
others give up their use of the shadow financial system to
move corrupt and criminal money. This is not possible. It is
the facilitating system itself that must be changed.
How? Two guidelines are important. Recognize, first of all,
that the goal is to curtail illicit financial flows rather
the impossible one of stopping them. And second, encompass
both rich and poor countries in accomplishing the necessary
reforms.
Broadly speaking, the answer is to replace the shadows with
transparency. This means a number of steps.
First, banks and other financial intermediaries should be
required to know the natural persons owning and managing all
financial accounts. This proposal elicited a response from a
Wall Street banker who asked, "Do you have any idea how much
it would cost us to know the beneficial owners of all our
accounts?" The answer is it costs nothing. You put the shoe
on the other foot. You the banker sends a letter to each of
your non-personalized account holders requesting within six
months the name(s) of the natural person(s) owning the
account. You advise of the penalties of making a false
declaration to a bank. And you advise that if you
subsequently find that the information given is incorrect
you will have no choice but to block the account pending
disposition according to law. Immediately you the banker
will get correct information on probably upwards of 99
percent of your accounts. Hopefully the holders that do not
want to respond are the accounts that you would prefer not
to have anyway. To put it simply, there is no argument in
favor of not knowing with whom you are doing business. This
is an issue of huge significance in the fight against
corruption, crime, terrorism, and tax evasion, and it is the
element of the shadow financial system that is the easiest
to curtail.
Second, adopt consistent anti-money laundering (AML)
policies across the globe. AML has been important on the
world scene for two decades. And for two decades money
laundering has been growing. How can this be? Very simply,
our efforts are more geared to looking for the money after
it has passed from one party to another instead of
curtailing the flow before it begins. The shadow financial
system defeats AML efforts. The Arab Spring is informative.
The Mubaraks, the Ben Alis, and the Kaddafis were found to
have large deposits abroad, as yet untallied. But with
revelations pouring out of these countries, banks were quick
to freeze these accounts, pending further determination of
their disposition. Of course, the question is, "Why did you
take the money in the first place?" And the reason is
because vast gaps are left in global AML efforts, with a
decided bias toward easily accepting the money and asking
questions only later, if at all. The United States and
Europe are replete with laundered money scandals and will
continue to be so until AML regulations are tightened and
sanctions against sheltering ill-gotten gains are stronger.
Third, automatic exchange of tax information needs to be
implemented globally. The argument that African nations and
other developing countries cannot deal with the volume of
data that would be produced through automatic exchange does
not stand up to scrutiny. Any nation can deal with the 10
names or 100 names on their tax rolls with the largest
incomes. Automatic exchange has been a reality in the
European Union for years. It has existed between the United
States and Canada for decades, yet remains to be implemented
between the United States and Mexico. Prime Minister
Manmoham Singh of India called for automatic exchange at the
Cannes G-20 summit in 2011. India is certainly an example of
an emerging market country with billions spirited abroad,
billions on which tax information should be provided.
In relation to this point, note that all the available
measures of global inequality are decidedly underestimates,
because they do not include earnings on capital deposited by
citizens outside their countries. Those incomes from
interest, dividends, and rents pile up abroad and largely
slip through the global accounting net, meaning that the
rich in many developing countries are far richer than they
appear to be. The global gap is wider than income statistics
show and getting wider every year. Poverty appears to be
declining, but inequality is rising and that poses the
greater problem in the long run to reconciling democracy and
capitalism. Automatic exchange of tax information is a key
toward fighting money laundering and its impact on income
inequality.
Fourth, trade mispricing, moving more illicit money across
borders than all other methods combined, has to be
curtailed. And this is the toughest to accomplish.
Fortunately, there is a growing set of data on world market
pricing that can be accessed online. Customs officers could
compare prices on an invoice to world market data to quickly
and fairly check for discrepancies. Customs declaration
forms that had a statistically significant deviation from
market prices would then be pulled out for further review.
Use can be made also of pricing declarations backed up by
the signatures of importers and exporters. Both can be asked
to sign a statement saying that "The transaction herein is
priced at world market norms with no element of mispricing
for the purpose of manipulating VAT taxes, customs duties,
or income taxes, and the transaction conforms to all
exchange control regulations, banking statutes, anti-money
laundering laws, and terrorist financing prohibitions in the
countries of origin and destination." Certainly, some
exporters and importers will readily violate such a clause.
But there are not many multinational corporations that will
run such transactions through their tax planning departments
for the prohibited tax manipulations and then ask their
people to sign a statement saying they did no such thing.
Remember, what we are trying to accomplish here is to
curtail-not eliminate but curtail-illicit cross-border
financial flows. This issue of trade mispricing needs to be
addressed now and cannot wait for a perfect world decades
down the road.
Finally, country-by-country reporting is an important step
leading toward greater integrity in the global financial
system. Discussed in another paper in this bulletin, efforts
are underway to require extractive industries to report on
their payments to governments, vitally important to Africa.
But this merely begins what needs to be accomplished, which
is full financial reporting in each country, so that
corporations cannot continue this process of losing money
where they are in business and making money where they are
not in business.
Africa has taken a major step on the road toward curtailing
cross-border illicit flows. The United Nations Economic
Commission for Africa has named a High Level Panel to
research how this phenomenon affects the peoples of the
continent and what can be done to surmount the problem. Led
by former President of South Africa Thabo Mbeki, the panel
constitutes the first effort by a continent-wide
organization to come to grips with the reality of massive
flows shifting money from poor to rich countries.
Above all else, this is a problem requiring concerted effort
by both sides of the equation-those in the countries out of
which the money comes and those in the countries into which
the money arrives. The solutions are not technically
difficult. The issue is a matter of political will.
References
Kar, Deve, and Devon Cartwright-Smith. 2010. Illicit
Financial Flows from Africa: Hidden Resource for
Development. Washington, DC: Global Financial Integrity.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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