Finance: Cash, oil and blood

In the middle of Ghana, in a clearing surrounded by thick fronds through which crested porcupines and plump grasscutters scuttle, there is a pond.

One day in late 2009, Kofi Gyakah arrived at the pond to find the fish on which he and his neighbours depended for sustenance and income floating belly up.

Either you are in the government and you have access to power, to wealth. If you are excluded, you have no access

When I visited a few weeks later, Gyakah was still mourning his two hunting dogs that had perished after chomping on the dead fish.

Gyakah and his neighbours blamed the recent cyanide spill from a nearby gold mine run by Newmont, the largest US-based gold mining corporation.

“Living here is not comfortable at all,” Gyakah told me, his young daughter peeking out from behind his leg. “We are powerless.”

Newmont would later pay $4.9m in fines and compensation even though it maintained that a government inquiry “found no evidence of adverse consequences to human life or property” from the spill.

There is, though, another reason why Gyakah and his compatriots in one of the world’s great gold-producing countries feel a sense of powerlessness.

The unpublished stabilisation agreements that Newmont and other mining companies have secured to keep their tax payments low may not kill any fish, but they represent one of the tools that ensure that the vast majority of the benefits rom Africa’s natural wealth depart the continent along with cargoes of minerals.

The ways in which money pours out of Africa have come into sharper focus in recent months.

The Swiss banking unit of HSBC has, we learned in February, provided convenient repositories for the ill-gotten wealth of African politicians and plunderers.

Accountants have concocted financial ruses allowing businesses to book profits not in the African countries where they were made but in Luxembourg, thus dodging tax.

An inquiry led by South Africa’s former President Thabo Mbeki reported its results on 1 February and concluded that illicit financial flows – defined as “money illegally earned, transferred or used” – worth at least $50bn leave the continent each year via corruption and money laundering, but mainly through accounting fiddles by multinational companies.

Such illicit flows heading out of Africa are estimated to be anything from three to 10 times larger than the amount of aid governments receive.

Africa’s curse

The Mbeki inquiry calculated – or rather, estimated, as illicit flows are by their nature hard to gauge precisely – trade mispricing by sector.

This typically involves multinational companies exaggerating or under-reporting the value and quality of goods they are shifting between their subsidiaries in different countries so as to divert profits from an African state to somewhere else where they will be taxed at lower rates, if at all.

Of the 10 largest sectors ranked by the scale of illicit flows, the top three – oil, precious metals and minerals, and ores – together account for more than double the next seven combined.

That sort of money, economic rents generated by stuff you dig out of the ground, is Africa’s curse.

It comes in as payments from companies in exchange for the rights to exploit a patch of territory for the riches beneath.

That is a very different form of income from direct taxation of the population. The former requires issuing a piece of paper; the latter requires securing broad social consent to rule.

Perhaps the greatest pageant of the Alice-in-Wonderland politics that rule-by-rent begot is the presidential primary of Nigeria’s ruling People’s Democratic Party (PDP).

I was there for the one in late 2010, when Goodluck Jonathan, recently catapulted into the top job by the death in office of Umaru Yar’Adua, sought the party’s backing to run for a full mandate in upcoming elections.

Acrobats cartwheeled around Eagle Square in Abuja as 3,400 delegates converged on the parade ground.

A son of the Niger Delta was, for the first time, the occupant of the presidential palace and the chief font of the patronage system was at stake.

“We have never had the presidency before,” Rotimi Amaechi, governor of the Niger Delta state of Rivers told me. “So we want to have a bite.”

Nigeria, Africa’s biggest oil producer, is the source of a third of all the continent’s illicit financial flows, according to the Mbeki report.

Perhaps, though, it is the oil money that stays behind that does more damage.

Income from oil and gas accounts for two-thirds of government revenue. The figure is still higher in Angola and Equatorial Guinea.

It is no coincidence that these countries are run with a mixture of oppression and the abdication of responsibility for providing public goods.

Why seek popular consent, beyond staging elections deemed by observers to be deeply flawed, when you can guzzle oil rents?

Pot of gold in the palace

A political economy based on a big central pot of wealth – rather than industries that provide mass employment and a wide base of taxpayers – makes countries prone to coups.

Said Djinnit, until last year the top UN official in West Africa, spent much of his time trying to keep putschists from running wild, from the bloodthirsty junta of Moussa Dadis Camara in bauxite-and iron-rich Guinea to the posse of soldiers who in 2010 took power in Niger.

“Definitely, the centrality of the economy in the hands of those in power makes our struggle tougher,” Djinnit says.

“Either you are in the government and you have access to power, to wealth. If you are excluded, you have no access. You are excluded from wealth. In that sense, it’s a struggle for survival at the highest level.”

Perhaps it is better then to be rid of such corrosive cash. Nobody likes being fleeced, and a far healthier solution lies in the Mbeki report’s conclusion that, “ultimately, African countries need to diversify their economies away from dependence on natural resources into higher-value activities.”

But if resource rents beget misrule and violence, might not it be a blessing to have them siphoned off by the accounting departments of multinationals and the private wealth managers of Swiss banks?

The problem with that idea is its failure to take into account two linked and ruinous effects of the silent looting of Africa through the global financial system: the emaciation of the institutions of state and the blossoming of transnational networks that have harnessed Africa’s great natural wealth to the interests of kleptocrats.

Revenue from oil and mining may be toxic but, if you are trying to run an education ministry or a vaccination programme, it is better than nothing at all.

And nothing is close to what the treasuries of some of the African countries richest in natural wealth have received.

That is due in part to taxation tricks such as those detailed in leaked PwC documents in Luxembourg, which, like the revelations about HSBC in Switzerland, were unearthed by the International Consortium of Investigative Journalists.

The Luxembourg leaks shine a light on the structures created by advisers to multinationals seeking to pay tax in the Grand Duchy at a lower rate than in the African states where they actually produced their palm oil or sold their beer.

Multinationals often have no need to look abroad to avoid paying tax, thanks to a trend that began in the 1980s for African governments to try to outdo one another in offering ever sweeter tax deals to attract foreign investment.

In a 2003 internal assessment of its support for Ghanaian gold mining, the World Bank concluded that, in part because of low taxes levied on foreign mining houses, “it is unclear what [the mining sector’s] true net benefits are to Ghana”.

Nonetheless, the Bank’s private sector arm, the International Finance Corporation, went on to support Newmont’s vast new gold mine, complete with the stabilisation agreement to keep its taxes low.

A senior banker in Accra says: “People are asking: how did the country earn nothing from a hundred years of mining?”

Those in Africa’s other great sources of mineral wealth ask the same question. In 2011, just 2.4% of the $10bn generated by copper mining in Zambia accrued to the government, which has since encountered stiff opposition from the industry by trying to secure a more equitable share.

As the state withers, the shadow state grows fat.

Commercial secrecy of the sort pioneered in Switzerland is an essential lubricant in the systems through which the regimes that govern what should be some of Africa’s richest states ensure that the wealth mainly accrues to themselves and their corporate allies.

Growth of the parallel state

According to calculations by Kofi Annan’s Africa Progress Panel, offshore vehicles linked to Israeli tycoon Dan Gertler acquired cut-price Congolese mining assets in transactions that cost the state $1.4bn between 2010 and 2012 – either side of the 2011 election, widely denounced as fraudulent, in which Gertler’s close friend Joseph Kabila won another term as president.

Kabila and Gertler had for years formed part of a powerful triumvirate with Augustin Katumba Mwanke, the influential operator who died in a 2012 plane crash.

At the heart of their power lay access to offshore finance and control of the DRC’s bounty of minerals.

“He was hugely intelligent,” Olivier Kamitatu, an opposition politician who served for five years as planning minister in Kabila’s government, recalls.

“He knew how to run the political networks and the business networks. The state today is the property of certain individuals. Katumba’s work was to create a parallel state.”

For Kamitatu, that shadow state is the root of his country’s failure to escape poverty: “You can’t develop the country through parallel institutions. Every infrastructure project you undertake is not done through a strategic vision but with a view to the personal financial results.”

Meanwhile, winning a presidential election costs tens of millions of dollars, and the only people with that kind of money are the foreign mining houses.

“I am extremely worried about a political system where the voters are starving and the politicians buy votes with money from natural resource companies,” Kamitatu says. “Is that democracy?”

There are supposed to be checks on business acquisitions that involve cuts for corrupt officials and on banks opening accounts for kleptocrats.

But in many cases, the due diligence process appears instead to be an exercise in what one former senior banker calls “manufacturing deniability”.

An international campaign for transparency in payments by oil and mining companies to governments has won significant victories, convincing legislators in Europe and the US to make disclosures mandatory.

However, even the proponents of greater transparency are acknowledging its limits, in part because while it allows more scrutiny of formal payments, it does nothing to ex- pose bribes.

“Good information creates a potential for action but cannot be expected to influence problems that lie outside the scope of disclosure,” writes Diarmid O’Sullivan, formerly of the anti-corruption campaign group Global Witness.

In the end, the Mbeki report’s conclusion about illicit financial flows goes equally for secretive banking and cross-border tax manipulation: “Left unchecked, these activities lead to entrenched impunity and the institutionalisation of corruption.”

And the money that sloshes through Africa’s resource states can even help to turn freedom fighters into predators.

One night over whiskies in a quiet corner of a Port Harcourt bar, a veteran of the Niger Delta’s struggle against despoliation and exploitation fumed with the anger of the betrayed as he spoke of the warlords who claimed to be warriors in the Delta’s cause.

“The majority of the militants, especially the leadership, initially they were flagging up environmental things,” the activist told me. He asked me not to name him for fear of reprisals.

“Then the money came and the amnesty came. None of these fuckers ever talk about it any more.” ●

*Partly adapted from The Looting Machine: Warlords, tycoons, smugglers and the systematic theft of Africa’s wealth by Tom Burgis, published by William Collins (and forthcoming in the US from Public Affairs). Burgis is a Financial Times Investigations correspondent. He joins other authors for an Oxford Literary Festival discussion on “The Future of Africa” on 29 March.