Illicit financial flows (IFFs) – the illegal or unethical flight of capital – from Africa, remains a hotly-disputed issue three years after Thabo Mbeki alerted the world to what he said was a huge problem.

How much is being lost, whether enough is being done to curb the flow and who is most to blame for it, were among the questions fiercely debated at a recent seminar organised by the European Union, the Thabo Mbeki Foundation and the Gordon Institute of Business Science in Johannesburg.

The African Union/UN High Level Panel headed by former president Mbeki delivered its report on IFFs in 2015. It conservatively estimated that Africa was losing at least US$50- billion a year through this drain of money.

The report suggested about five percent of IFFs were proceeds of theft and bribery by corrupt government officials and another 30% from ordinary crime such as arms, drugs and human trafficking and money laundering. By far the largest share, the remaining 65%, was being lost through illegal or murky and unethical dodges by multinational corporations.

These include false invoicing of exports or imports and aggressive tax avoidance measures like registering their companies in offshore tax havens.

Mbeki said the $50-billion a year outflow meant – contrary to the popular perception that the continent was highly indebted to the world because of foreign aid – that in reality “Africa was a net creditor to the rest of the world”.

In other words, more money was flowing out of the continent in IFFs than was flowing into the continent through foreign aid. This was an immense blow to Africa’s development prospects, he said.

Mbeki told the recent seminar on IFFs in Johannesburg that since his report had come out there had been a greater awareness of the need for African countries to mobilise their own financial resources domestically for their development, rather than continuing to rely so heavily on foreign aid.

He noted that in Mozambique, for example, foreign aid had provided nearly half of the state budget in 2008. In Malawi between 1994 and 2004, foreign aid had financed between 33% and 57% of the state budget annually.

“So here we have a number of African countries which can’t even generate resources to finance their own budgets, never mind socio-economic development,” Mbeki said.

Stemming illicit financial flows would greatly help African countries mobilise the necessary domestic finances for that development.

And so, Mbeki noted, staunching IFFs had been included among the September 2015 Sustainable Development Goals.

Mbeki suggested that expensive lawyers employed by multinational enterprises were more to blame for IFFs than corrupt African officials because they were able to exploit loopholes in tax laws and regulations.

He concluded that the evidence was clear about the importance of stopping IFFs and now the critical challenge was implementation. “Everyone knows there is a problem. There is some dispute as to how big it is. The problem is there, what needs to be done is known. And all of the major international institutions have dealt with this issue, the UN, the AU, the World Bank, the IMF, the European Central Bank, the OECD, the European Parliament and everybody. But what we must discuss, surely, is given all of that, are we making progress in dealing with the issue?.”

Yet the seminar showed there wasn’t much agreement on whether much progress had been made. Or who was to blame if there hadn’t been.

There was general agreement, though, that IFFs remain a big problem. Even a representative of the Organisation for Economic Co-operation and Development (OECD), which represents the rich, developed countries that generally take the rap for IFFs, said developing countries were still estimated to be losing hundreds of billions of dollars annually to financial crimes, while tax evasion and avoidance were costing all countries a total estimated to run anywhere between $100-billion and $240-billion a year.

But after that overall agreement, the debate divided largely on South (poor)-North (rich) lines. The Africans mostly insisted that there had been “little or no progress” in stemming IFFs as one tax expert put it. He identified the culprits as mainly the multinational corporations which he said were investing increasing resources in sidelining the IFF debate and continuing to pursue aggressive tax practices to avoid or evade paying due taxes.

These dodges include “transfer pricing” which essentially means that companies earning their money in Africa often sell their produce at below-cost to partner companies registered in tax havens outside Africa which then sell the products on to different companies at real cost but little or no tax.

Other aggressive tax practices by such companies include registering their managements and technical intellectual property in countries where they aren’t doing business and deducting these as expenses to avoid tax in the African countries where they made their profits.

One participant said Zambia, for instance, was losing some 74% of the taxes due to it because a particular copper mining company there was following these aggressive tax practices.

But representatives from the North contended that considerable progress had been made over the last few years in slowing the outflow of capital, mainly through measures taken by the OECD, the G20 and the EU. These measures included international exchanges of information about cross-border financial flows; actions against “Base Erosion and Profit Shifting” (avoiding tax by registering in tax havens); the international Task Force on Tax Crime and Other Crimes; and the Tax Inspectors Without Borders initiative by the UN and OECD which was providing expert help to 20 African countries to counter tax avoidance and evasion by multinational enterprises.

The OECD’s Varsha Singh said The Global Forum on Transparency and Exchange of Information had raised well over $85-billion in revenue globally by sharing information among different governments about international tax dodgers. This included Uganda’s recovery of over $9-billion in taxes in 2015/2016.

The Tax Inspectors Without Borders programme had realised an additional US$328 million in tax revenues to date.

One participant remarked that Africa was increasingly addressing the IFF problem itself so it did not really need the OECD or the EU. The thrust of Africa’s efforts is through the South Africa-based African Tax Administration Forum, (ATAF) which has 38 member countries, of which 26 are participating in its programmes. ATAF has developed its own models and rules for countering transfer pricing, tax deductions and other dodges and is helping African governments to use them.

As a result, just four countries had clawed back over $160- million in taxes in 2016, one expert said. Others praised the South African Revenue Service for eventually recovering R706.7-million due in tax from the entrepreneur Dave King in 2013, after a decade of dogged and skilled legwork.

Several other experts, though, wondered if Sars could pull off a rescue job like that today after then-president Jacob Zuma and his personal appointee, former Tax Commissioner Tom Moyane, had systematically gutted the service of its best investigators.

One NGO head said his organisation had estimated that the Gupta state capture network had shifted at least R6-billion of ill-gotten gains into foreign banks. But he noted that Public Enterprises Minister Pravin Gordhan had since put the figure at about R100- billion and others even higher, at around R200-billion.

Economic Freedom Fighters deputy leader Floyd Shivambu said Sars had recently reported to Parliament about over 400 cases of illegal money flows. But neither the National Prosecuting Authority nor the police had capacity to investigate or prosecute. He said his party would submit a single bill to deal with IFFs.

A representative of South Africa’s Financial Intelligence Centre said the centre is filling some of these gaps by co-ordinating Sars, the police, the NPA, customs and other government agencies in combating IFFs.

Zimbabwean President Emmerson Mnangagwa’s success in recovering $300-million illegally stashed abroad during Robert Mugabe’s tenure, was also noted. Though sceptics noted this was a small fraction of the estimated stolen loot.

Who’s most to blame for IFFs? Mbeki’s report, as we saw, laid an overwhelming 65% of the burden on big business. And at the seminar multinational corporations, especially mining companies in southern Africa, took a pasting.

One academic researcher presented what he called the “alarming” results of his research into alleged misinvoicing of platinum and diamond exports from South Africa, Zimbabwe, Botswana and Namibia. He compared these exports with imports of the same products from the same four countries by purchasing countries and found large discrepancies.

He said for instance that in 2005 South Africa had reported total exports of platinum worth $4-billion while international buyers of South African platinum had reported total imports of $6- billion. The implication was that platinum producers had hidden $2-billion of exports to avoid paying tax on them.

His estimates of IFFs through diamond exports were also large. He said that between 2000 and 2015, the illicit financial flows due to misinvoicing of diamond exports had totalled US$364-million from Botswana, US$1-billion from Namibia, US$5.5-billion from Zimbabwe and an immense US55.5-billion from South Africa.

But a representative of the South African mining industry dismissed these figures, saying they were based on the UN Comtrade database which had already been proved to be very wrong, in earlier reports about alleged IFFs from the South African mining industry.

For example, the mining industry said a 2016 UNCTAD report had accused South African gold producers of “smuggling” some $70- billion in gold from SA between 2000 & 2014.

The Chamber of Mines then commissioned the independent think tank Eunomix to investigate the report. It found that UNCTAD had calculated the $70-billion in “smuggled gold” as the difference between the value of gold exported from SA and the value of gold imported from South Africa by other countries, such as India. UNCTAD had based this figure on UN Comtrade data.

But Eunomix offered very different figures. It said that between 2000 -2011 all South Africa’s gold was exported by the SA Reserve Bank as monetary gold. None of this “monetary gold” had been captured in the UN Comtrade data for South Africa. This explained over $50-billion of the discrepancy.

South Africa’s imports about 100 tons of dore (or alloy) gold from African countries a year. This gold is refined by Rand Refinery and then exported. This gold is picked up in the importing country’s UN Comtrade data as sourced from South Africa but South Africa does not record it as exported from South Africa.

This explained the remaining $20-billion of the gap between SA gold exports and gold imports from other countries in the UN Comtrade data, the Chamber of Mines official said. .

This executive also pointed out that Sars had done tax audits of more than 30 South African multinational corporations and found that overall they had implemented the OECD guidelines on BEPS, on arms-length pricing and mispricing, better than Australian corporations.

Of these 16 were mining companies and Sars had found only R2.5-billion in illicit financial flows from them. He said if the problem was as big as many made it out to be, that figure would have been more like R100-billion.

However another participant dismissed his claim that IFFs from South African mining companies were negligible, insisting that Sars had only discovered R2.5-billion in such flows was because of under-reporting or mis-invoicing by mining companies. She recalled that Mbeki’s report had described a platinum company exporting its produce to Belgium as tin and copper when in fact it was 90% platinum.

These huge discrepancies in statistics are important for assessing the size of the IFF problem not only in specific southern African mining countries but also for IFFs from Africa as a whole. This is because Mbeki’s widely-quoted estimate of around $50-billion in IFFs from Africa every year was also based on now-disputed UN Comtrade statistics.

A report by the World Customs Organisation (WCO) which closely examined trade mis-invoicing should help to clarify the scale of IFFs. WCO executive Liu Ping said 80% of IFFs are lost through over- or under-invoicing of the true value of imports and exports.

He said many factors account for the discrepancy between imports and exports and the report should explain these. It would also provide tools to help customs officials detect false invoicing and plans to co-ordinate various government agencies such as customs, financial intelligence centres and tax authorities in tackling IFFs. This WCO report was commissioned by the G20 at the suggestion of South Africa.

But one participant expressed some doubts that this report, which has been completed but not yet published, would make it back onto the G20 agenda. He said the South African government feared that after the election of Donald Trump as US president, with his business-friendly agenda, the G20 was losing its appetite for tackling IFFs.

He noted that South Africa, as co-chair of the G20’s working group on development, had pushed IFFs on to the G20 agenda because, as an organisation representing both developed and developing countries, it was ideally placed to tackle the problem.

Pretoria believes that IFFs have greatly diminished the investment, economic growth and social development that developing countries should have derived from trade, primarily in commodities.

So it believes the fight against IFFs should be at the forefront of the international agenda. Governments worldwide should join forces to, encourage transparency of multi-national corporations; discourage and detect cross-border tax evasion; and stop trade mispricing, transfer pricing and trade mis-invoicing.

South Africa wants the international community to integrate effective policies which combat IFFs into wider poverty eradication and sustainable development strategies at national, regional and, most importantly, global levels.

Officials have noted that the Mbeki report identified the fragmentation of global efforts to combat IFFs as a major problem, yet the rich-world governments were resisting efforts by South Africa to tackle IFFs through an inclusive, inter-Governmental process guided by a universal United Nations General Assembly Resolution.

The EFF’s Floyd Shivambu said “[there was] one thing to be sure of, the EU and the OECD are not our friends” as Western nations were “looting” Africa. Most IFFs came from multinational enterprises shifting their profits from Africa to offshore tax havens.

He said the NGO War on Want had published a report on the “new colonialism” which described a new “scramble” for African resources by UK mining companies. It said that companies listed on the London Stock Exchange controlled about one trillion dollars worth of Africa’s natural resources.

Most were not paying taxes in Africa, he said.

“I suspect one trillions rand has been stolen from South Africa,” by all companies, he said.

A Western government representative, though, said developed countries were also victims of IFFs which were undermining their economies too. He said it was because of pressure from the EU among others that “countries once famous for their banking security” were now opening up their vaults more for public inspection of murky bank accounts.

The EU was now working to make its corporations more transparent and to do business ethically.

The EU’s ambassador to South Africa, Marcus Cornaro, said the EU was built on a rules-based international order and this order would be entirely inadequate if it did not address IFFs.

“We are Africa’s largest development partner so we realise what huge gains we would make if IFFs were addressed…..as an essential part of African domestic resource mobilisation.”

But if multinational corporations and allegedly foot-dragging Northern/Western governments got a lot of the blame at the seminar, there was also a large consensus that combating IFFs was ultimately the responsibility of African governments.

Mojanku Gumbi of the Thabo Mbeki Foundation, who helped write Mbeki’s groundbreaking IFF report in 2015, said, thieving and corrupt government officials were the enablers of all other perpetrators of IFFs.

Governments often make bad tax deals with multinational enterprises, often out of desperation to attract investment, another tax expert said.

And it was striking how few African governments are tackling IFFs. Only 26 are participating actively in ATAF’s tax recovery initiatives; only 27 in the Global Forum on Transparency and Exchange of Information; only nine in the Africa Initiative to help African countries tackle cross-border tax fraud and evasion; and only 21 in the OECD’s Inclusive Framework on BEPS.

If IFFs are the huge problem which Mbeki and other make them out to be, why aren’t all African governments enthusiastically participating in all these initiatives? Is it perhaps because some governments are complicit in IFFs?

One representative of an NGO said the Zimbabwe and Botswana governments had so thoroughly stonewalled a joint investigation of two NGOs into IFFs from southern African mining operations that eventually they had only published results from SA and Namibia.

Another NGO representative had found that government officials in some southern African mining countries sometimes did not know even what legislation was on their statute books to counter IFFs.

A mining industry representative pointed out that the Southern African Development Community (SADC) had no single dedicated instrument for tackling IFFs, though a SADC representative listed various instruments, some not yet operational, which the organisation had created for tackling different aspects of IFFs.

Another African participant said multinational enterprises should not be regarded necessarily as enemies of African countries as they contributed the majority of countries’ wealth. The problem was the weakness of African tax frameworks and weak tax administrations which allowed the multinational enterprises to avoid paying tax.

Clearly, though, with all the tools available in both the North and the South, what is needed, on both sides, is greater political will, as Singh and others have said. DM