African Development Bank, AfDB shines a new light on capital flight
New research from the African Development Bank (AfDB), in conjunction with the US think tank Global Financial Integrity and supported by the Norwegian government, revealed in May that in the three decades from 1980 to 2009, African countries lost up to $1.4trn in illicit financial flows, known as capital flight.
could be leaving Africa each year in illicit flows – almost half what is needed to resolve infrastructure deficiencies
“It’s a staggering figure,” says AfDB chief economist Mthuli Ncube. “Around $30-40bn is leaving the continent each year.”
As a point of comparison, the AfDB estimates that African countries need to spend $90bn a year until 2020 to meet pressing infrastructure needs.
There are many routes through which these illicit flows occur – corruption, tax evasion and other criminal activities. Unsurprisingly, resource-rich countries like Nigeria, Algeria and South Africa are the worst hit.
One common form is transfer-pricing and mis-pricing. For example, a multinational par- ent company overcharges its subsidiary for services or goods.
The subsidiary can then show its books to local tax inspectors and argue that it made no profits locally.
The report suggests several ways to tackle the problem.
The first is to improve transparency in the financial system.
Offshore banks and financial centres should be required to report to the Bank for International Settlements about deposits, citing sector, maturity and country of residence of the deposit holders, the AfDB argues.
This may have seemed implausible a decade ago, but there is now a conversation at the international level about the noxious effects of tax havens and creative accounting on the health of crisis-striken countries across the West.
For example the tough questions Apple is facing in the US for its tax arrangements in Ireland, the government’s harrying of Starbucks in the United Kingdom or the German government’s pressure on Luxembourg and other European tax havens.
The second is to encourage country-by-country reporting by large multinational resource companies.
The European Union and the United States have pushed through new laws that may mark a new chapter in transparency.
Perhaps to get ahead of claims surroundings its tax dealings in Uganda, or simply to be first in class, oil company Tullow announced in May that it is moving to a country-by-country reporting methodology, which will allow campaigners and tax officials to better understand what is going on in a particular place.
The final strategy to fight capital flight is to improve the capacity of African countries’ tax administrations.
This is being boosted by the African Tax Administration Forum, an organisation supported by the very effective South African Revenue Service.
This can be accelerated and training broadened to civil society in order to help a wider segment of the population and government to understand the sophisticated frauds involved in capital flight. ●