Big talk but little action on illicit financial flows

This opinion piece appeared in the Business Day on 19 August, 2019. The original can be viewed here.

Late last week the IMF’s senior representative in SA, Montfort Mlachila, observed that the country has the highest level of debt in its history, said this was “quite concerning” and concluded that the country’s debt trajectory is “not favourable and becoming uncomfortable”.

As SA struggles with how to navigate these uncharted waters, weighed down by an stagnant economy and faced with increasingly jittery ratings agencies and lenders, the issue of illicit financial flows (IFFs) from SA, and Africa more generally, has once again come into the spotlight. At the end of last week, during the 39th ordinary summit of the heads of state and government of the Southern African Development Community (Sadc) in Dar es Salaam, yet another research report came out detailing the hundreds of billions of rand being lost to the Treasury every year due to illegal transfer pricing.

According to the report, the Sadc region loses R321bn a year in debt payments.

This new report, from Action for Southern Africa (Actsa), focuses on trade-related IFFs and estimates that in 2015 alone R90bn of revenue was lost to SA due to trade misinvoicing. In simple terms trade misinvoicing occurs when transnational companies deliberately lie about the value of their imports or exports, or both, to avoid duties and taxation. The illicit funds from these activities are then diverted into tax havens with secrecy laws that allow the ill-gotten gains to be hidden from the laws of other jurisdictions — in this case the SA Revenue Service.

Actsa’s report follows on from one completed by Global Financial Integrity in 2017, which estimated that between 2010 and 2014 about R565bn, an average of R113bn per year, of revenue was lost to the SA state due to trade misinvoicing.

This report, in turn, followed on from the 2015 report of the AU high-level panel on illicit financial flows from Africa, which estimated that the continent as a whole lost over R760bn a year from IFFs (over 55% of which comes from  the extractive sector alone). According to Actsa, the Sadc region, which is home to some of the world’s poorest countries, loses in excess of R135bn a year to IFFs. The report’s author, Sunit Bagree, notes that this is a conservative estimate because there are no figures from the Democratic Republic of Congo, trade only with the “global north” was considered, and the calculations excluded misinvoicing for services.

The Alternative Information and Development Centre pointed out in a research report in 2018 that it is not only the SA Treasury that loses out. This is because IFFs also result in wage evasion as companies report lower profits, thus reducing pressure on wage claims by workers.

While acknowledging the technical complexity of the issue, it is clear that IFFs can be halted through the implementation of comprehensive tax reforms. But as the AU report frankly noted, “ending illicit financial flows is a political issue”. While the IMF, World Bank, EU, Organisation for Economic Co-operation and Development (OECD), UN and Group of 20 groups have expended a lot of time and effort “talking” about the issue, very little concrete progress has been made to date.

Even a recent OECD report on IFFs from developing countries reported that 27 out of 34 OECD countries failed to implement “transparency of ownership” requirements, making them potential safe havens for funds from IFFs. The UN Economic Commission for Africa has noted that IFFs from Africa have increased since 2000, rather than decreased. A UN concept note from May noted that “the underlying problems of financial secrecy, without which IFFs would be on a much lower scale, are global and systemic”. Alarmingly, the concept note reports that there needs to be “more debate” before any “meaningful progress in combating IFFs” can be achieved.

The Actsa report also states that the losses caused by IFFs should be situated within the wider context of financial flows leaving Africa in the form of external government debt repayments. According to the report, the Sadc region loses R321bn a year in debt payments, some of which are payments being made against so-called odious debt, such as SA’s previous apartheid debt. The report states that “virtually nothing has been achieved to ensure debt justice”.

While Bagree called on Sadc leaders in Tanzania to do more domestically to combat the problem of IFFs, such as strengthening domestic tax systems, he says it is a “broken international economic system” that is at the centre of these problems. He urged Sadc leaders to “call out powerful international countries for failing to live up to their responsibilities and turning their collective backs on vulnerable people in Southern Africa”.

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