As the US-Africa Leaders Summit wrapped up in Washington, D.C., the White House announced the formation of a high-level working group that will focus on the issue of illicit flows out of Africa.
While a global consensus is emerging around the need to curb these flows, however, questions remain as to whether the US has the political will to tackle the issue – despite the initiative announced at the Summit.
“Recognising the losses to the [African] continent and its people from illicit financial flows and corruption, leaders decided to establish a joint high-level working group to develop a plan of action for further work in this area,” the White House announced in an August 6 statement.
According to estimates published by Global Financial Integrity (GFI), an average of $55.6bn per year is funnelled out of the Africa through financial back channels. This number far exceeds the combined totals of aid and foreign direct investment (FDI) flowing in.
At the OECD, where multilateral negotiations on global tax reforms to tackle illicit flows are ongoing, “the US position is generally pretty negative,” Richard Murphy, a chartered accountant and the founder of the Tax Justice Network, claims.
“There is little indication amongst the negotiators that they believe there is any chance that congress will endorse the outcomes” of the talks, he says.
The US-Africa Summit was the first event of its kind, attracting nearly 50 heads of state from across the continent to the US capital to sign deals and discuss the region’s pressing issues. While details on the working group’s structure and mandate have yet to be specified, it appears likely that Senegal will take on a leadership role.
“Senegal has conducted a couple of programmes on illicit financial flows and I think might be a logical government to be deeply involved in this,” Raymond Baker, director of Global Financial Integrity (GFI), tells This Is Africa.
The numbers vary widely, but the countries in Africa worst hit by illicit flows are the region’s largest economies. Nigeria leads by a substantial margin with estimated losses from 2002-2012 totalling $142.27bn, followed by South Africa at $100.73bn. The result is a 5.7 percent loss to sub-Saharan Africa’s GDP, and billions of dollars in revenues that sovereigns are unable to tax in a region constantly strapped for public funds. More worrying still, these flows are growing by an estimated 20 percent per year.
Corruption and criminal activity – such as money laundering – play a part, both facilitated by tax havens and shell companies. However, commercial flows dwarf the other two. In Africa, the common practice of trade misinvoicing accounts for an estimated $35.4bn in illicit flows per year – and has only increased as a consequence of the globalisation of trade over the past 20 or 30 years, according to Mr Baker.
The problem is far from relegated to Africa, or even to the developing world. Nearly $150bn goes missing from the US treasury per year due to illicit flows. Yet the Tax Justice Network’s 2013 Financial Secrecy Index ranked the US as the sixth most secretive financial jurisdiction worldwide – down from number 1 in 2009, ahead of infamously opaque banking countries like Switzerland and Luxembourg.
This level of secrecy is not an accident, but reflects entrenched US corporate culture.
“The US are absolutely paranoid about [commercial] information going to developing countries” through multilateral financial disclosure arrangements because “they believe that it breaches the whole concept of confidentiality – which is incredibly important on the US agenda, more than anybody else’s,” Mr Murphy argues.
“There appears to be a sort of libertarian approach to all of this,” he adds.
And while Africa has been hard hit by illicit flows, without globalised approaches to reform the impact will likely be minimal. Stable, developed economies are most often the destinations for illicit funds shifted out of the continent.
“Nobody in their right mind invests their illicit funds in Angola,” Mr Murphy points out. “People do not invest illicit funds in places where there is a possibility that their funds might be stolen.”
To be sure, the US has taken some leadership roles through legislation such as the Foreign Account Tax Compliance Act of 2010 (FATCA), designed to crack down on tax evasion by US by compelling information sharing from foreign financial institutions.
However, country by country reporting of payments and profits, another measure advocated by tax justice reformers, has met with more resistance in the US than other countries, Mr Baker claims. The oil and gas industry and the American Petroleum Institute have strongly opposed the implementation of the 2010 Dodd Frank Act, a financial reform bill.
“I think [it] is a very misguided step,” he says.
Dodd-Frank includes clauses targeting the opaque financial dealings of US-listed extractives companies through mechanisms such as country by country reporting. The legislation has been subject to legal challenges and lobbying by the sector.
“Having inspired strong laws in Europe” through the passage of Dodd-Frank, “the world is yet to see any disclosure by extractive companies listed on US stock markets due to a questionable legal challenge by the American Petroleum Institute,” says Africa Progress Panel executive director Caroline Kende-Robb.
The result is that while the US has progressive legislation is in place, resistance by entrenched corporate interests have stalled implementation. Still, despite substantial obstacles, change is already afoot.
“I think major companies’ behaviour is now changing because they are so aware of the risk that exists from the exposure” of shady financial practices, Tax Justice Network’s Mr Murphy says. “And they do not want that.”
Published in: This is Africa