The problem with illicit financial flows is not just that they are illicit, but that their effect spreads far beyond their immediate area of occurrence. Millions of people are affected, economies are weakened, and development is halted, while a shady few accumulate wealth and influence.
A high level conference, held on 14 July at Pretoria University, addressed the problem from a taxation and good governance perspective, with the ultimate aim of developing a framework of national and international co-operation to curb tax evasion, money laundering, corruption and other types of illicit financial flows (IFFs).
The conference was held under the theme of Inter-Agency Co-operation and Good Tax Governance in Africa, and was organised with the co-operation of the UN Office on Drugs and Crime. Other partners included the African Tax Institute, the Tax and Good Governance project at the Vienna University of Economics and Business, and the Institute for Austrian and International Tax Law. Delegates representing governments, international organisations, tax administrations, law enforcement agencies, business and academia flew in from all over Africa, Europe and North and South America.
Addressing the gathering, finance minister Pravin Gordhan expressed his pleasure that the entities involved were looking at the problem from a continental perspective, because IFFs from and between African countries pose a significant threat to the developmental agenda of each country individually, and the continent as a whole.
However, countries will only achieve success against the threat if they work together, he cautioned, and strive to establish strong institutions.
“Good tax governance and strong co-operation between law enforcement agencies and tax authorities are essential elements of effectively countering corruption, bribery and illicit flows,” Gordhan said. “Each country must nurture and sustain strong, capable, independent institutions led and operated by public officials who are ethical, public service orientated, and allowed to act without fear or favour against these crimes and those committing them.”
Countries must ensure, on the one hand, that institutions that are necessary to serve the public interest are viable, sustainable, and not interfered with in any way, and on the other hand, that those who seek to undermine these institutions must be controlled, he added.
Natural resources are not always a blessing
Africa is particularly susceptible to looting, mainly because of its abundant natural resources coupled with a poor governance track record. Released last year, the report of the High Level Panel on Illicit Financial Flows from Africa, chaired by former president Thabo Mbeki, found that “our continent is annually losing more than $50-billion through illicit financial outflows.”
This equates to $1-trillion over the last 50 years, a total which, according to Sean Gossel of Cape Town University’s graduate school of business, is the equivalent of “all of the official development assistance received by Africa over the same time frame and is enough to wipe out the region’s total external debt of around $250-billion and still leave $600-billion for poverty alleviation and economic growth.”
This annual $50-billion loss comes about as a result of, among other factors, tax evasion and the mispricing of trade services by multinational companies, said Gordhan, although the scope of IFFs is in reality much wider.
“Illicit money leaving the continent reduces the amount of resources available to Africa to invest in jobs and provide critical social services to citizens and economy.”
The main culprits are big multinational companies
The Mbeki report also fingered the main culprits as large commercial corporations, followed by organised crime. They are ably assisted by corrupt people and practices in Africa, an issue that is exacerbated by the related problem of weak governance capacity.
The International Monetary Fund noted in March 2016, said Gordhan, that money laundering, the financing of terrorism, and related crimes, can significantly undermine the stability and integrity of financial institutions and systems, discourage foreign investment, and distort international capital flows. “The recent leakage of the Panama Papers once again demonstrated how wealthy individuals are able to conceal their personal wealth.”
This should all be understood within the context of large corporations having the means to retain the best available professional legal, accountancy, banking and other expertise to help them perpetuate their aggressive and illegal activities, the report noted. Similarly, organised criminal organisations, especially international drug dealers, have the funds to corrupt many players, including and especially in governments, and even to capture weak states.
A concerted effort can curb tax evasion
Gordhan, the former commissioner of the South African Revenue Service, outlined some of the challenges faced by the public and private sectors on the continent and beyond, and offered a number of solutions that authorities can put in place to curb tax evasion.
- Governments are expected to put in place relevant laws to deal with corruption, the proceeds of crime, and money laundering. They must spend effectively, efficiently and transparently, taking care to build confidence in their economies and among their people and to improve tax morality within their respective countries.
- No matter how well drafted and intended our laws, they are “utterly useless” if there is no capacity or will to enforce them. More importantly, the public must be educated to understand the laws and how they apply, because the impact of IFFs is felt by all people living on the continent. It is citizens who must understand about money laundering and illicit flows, because it is the citizens who will ultimately defend the public interest, together with the institutions. Addressing citizen education would ideally be one of the outcomes of the conference, Gordhan said.
- Legislation that does not meet recommended standards must be subject to punitive action, including massive fines.
- Enforcement systems must have dedicated personnel who are focused on achieving higher conviction rates for complex tax crimes. If there are no serious attempts at prosecuting people engaging in criminal activities, then they will not take authorities seriously, because their actions will carry no consequences or deterrents.
- Coordination is key, and enforcement agencies must coordinate and communicate domestically and internationally on financial crimes and abuses.
- Domestic and enforcement agencies must take care to not fall into the trap of silo approaches and territorial battles.
- Multinational companies must work on improving their business culture and commit to a code of good tax practice. They should take active steps to stop aggressive tax structuring practices, and pay their fair share of taxes in countries where they generate their profits and add value. This is the fundamental change in culture and habit and practice that we require, Gordhan said.
- The Organisation for Economic Co-operation and Development’s common reporting standards, for example, facilitate global transparency and information exchange for tax purposes. Enforcement agencies that work well together and present a united front against crime make it difficult for individuals to hide their illegal activities.
- For international standards to be effective, all countries – irrespective of power, size or influence – must adhere to those standards. “We can’t have double standards, where rules are imposed by one part of the world, but that same part of the world chooses to exempt itself from those rules. Uniformity in the application of the law is crucial.”
- Developed countries must show more resolve to dismantle all tax havens, and not allow their “little islands” and territories to engage in such practices. This is part of the double standards mentioned earlier. Advanced economies must ensure that their companies, governments and citizens do not abuse their influence and resources when dealing with smaller countries.
