THE SHAPE OF BATTLE TO COME: THE SHAPE OF BATTLE TO COME:

ILLICIT FINANCIAL FLOWS (IFFs) ILLICIT FINANCIAL FLOWS (IFFs)

FROM AFRICAFROM AFRICA

(Breakout session, ITJ Academy, (Breakout session, ITJ Academy,

Nairobi, 10-15 August 2015)Nairobi, 10-15 August 2015)

SummarySummary

Discussion of the three fallacies regarding IFFs Discussion of the three fallacies regarding IFFs from Africa and suggestions on possible from Africa and suggestions on possible

responses (to the fallacies and IFFs from Africa)responses (to the fallacies and IFFs from Africa)

Three IFF fallaciesThree IFF fallacies

1.1.They are not significant They are not significant (confined only to resource rich (confined only to resource rich countries like Sudan, Angola countries like Sudan, Angola and Nigeria).and Nigeria).

2.2.There is no universal agreement There is no universal agreement on key concepts (such as IFF, on key concepts (such as IFF, invoicing, transfer pricing, etc)invoicing, transfer pricing, etc)

3.3.FDI comes with some IFFsFDI comes with some IFFs

Three IFF fallaciesThree IFF fallacies

Over the last few Over the last few months, senior officials of months, senior officials of IMF have made these IMF have made these assertions at assertions at international forums.international forums.

They are wrong.They are wrong.

1. IFFs are significant1. IFFs are significant Africa is estimated to be losing more than $50bn Africa is estimated to be losing more than $50bn

annually in IFFs.annually in IFFs.

IFFs are a huge drain on Africa’s resources and of IFFs are a huge drain on Africa’s resources and of serious concern given; serious concern given;

Inadequate growth – average growth of 5% Inadequate growth – average growth of 5% annually is encouraging at best.annually is encouraging at best.

High levels of poverty – number of people living High levels of poverty – number of people living on less than $1.25/day increased from 290million on less than $1.25/day increased from 290million 1990 to 414 million in 2010 1990 to 414 million in 2010

Africa’s resource needs – set to have largest Africa’s resource needs – set to have largest youth population.youth population.

Changing global landscape of Official Changing global landscape of Official Development Assistance – ODA resources are Development Assistance – ODA resources are stagnating due to domestic fiscal challenges of stagnating due to domestic fiscal challenges of partners. partners.

IFFs are not the problems of three countries

IFFs are not the problems of three countries…# Country Cumulative IFF (1970-2008)

US$ billion Share in total Africa’s IFF

1 Nigeria 217.7 30.5%

2 Egypt 105.2 14.7%

3 South Africa 81.8 11.7

4 Morocco 33.9 4.7%

5 Angola 29.5 4.1%

6 Algeria 26.1 3.7%

7 Cote d’Ivoire 21.6 3.0%

8 Sudan 16.6 2.3%

9 Ethiopia 16.5 2.3%

10 Congo, Republic of 16.2 2.3%

Estimates of IFFs from Africa tell only part of the story… Estimates of IFFs from Africa tell only part of the story…

IFFs are an African problem with Global solutions…IFFs are an African problem with Global solutions…

Impact of IFFs Impact of IFFs

Development Consequences – Development Consequences –

Loss of multiplier effect for growth & job creationLoss of multiplier effect for growth & job creation

Africa’s capital stock would have expanded by 60% Africa’s capital stock would have expanded by 60% & GDP per capita of 15%& GDP per capita of 15%

Rate of domestic investment to GDP would have Rate of domestic investment to GDP would have risen from 19% to 30%risen from 19% to 30%

Leveraging effect of state interventionLeveraging effect of state intervention InfrastructureInfrastructure

Fiscal effects & austerityFiscal effects & austerity

Impact of IFFs Impact of IFFs

Discouraging Transformation and Transparency - by Discouraging Transformation and Transparency - by discouraging value creation, IFFs impact negatively discouraging value creation, IFFs impact negatively on African aspirations for structural transformation.on African aspirations for structural transformation.

Straining Africa’s capacities – there is great concern Straining Africa’s capacities – there is great concern over the risk African countries face in making over the risk African countries face in making unbalanced tax concessions. unbalanced tax concessions.

Undermining International Development Undermining International Development Cooperation - global efforts to promote partnerships Cooperation - global efforts to promote partnerships for aid effectiveness and development effectiveness for aid effectiveness and development effectiveness are undercut by illicit financial flows.are undercut by illicit financial flows.

2. There is broad 2. There is broad agreement on agreement on

conceptsconceptsIn a world where there is

agreement on good governance, drug trafficking and pornography…why is there confusion on what constitutes illicit financial flows?

Understanding IFFsUnderstanding IFFs

Illicit financial flows can be defined as “money Illicit financial flows can be defined as “money illegally earned, transferred or used”. illegally earned, transferred or used”.

Abusive transfer pricingAbusive transfer pricing

False invoicingFalse invoicing Falsely declaring the value of imports or Falsely declaring the value of imports or

exportys to evade taxes, customs duties, exportys to evade taxes, customs duties, circumvent quotas or launder money (Exports circumvent quotas or launder money (Exports are usually understated and imports are are usually understated and imports are overstated. Proceeds are shifted overseas overstated. Proceeds are shifted overseas illicitly)illicitly)

Base erosion and profit Base erosion and profit shiftingshifting

Tax planning strategies which exploit gaps and Tax planning strategies which exploit gaps and mismatches in tax rules to make profits “disappear” mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being resulting in little or no overall corporate tax being paid (OECD)paid (OECD)

What should be doneWhat should be done Unpack /clarify the fallaciesUnpack /clarify the fallacies

Pay attention to Paragraph 23 (FfD Addis outcome):Pay attention to Paragraph 23 (FfD Addis outcome):

““We will redouble efforts to substantially reduce illicit We will redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually financial flows by 2030, with a view to eventually eliminating them, including by combating tax evasion and eliminating them, including by combating tax evasion and corruption through strengthened national regulation and corruption through strengthened national regulation and increased international cooperation”. increased international cooperation”. (Another $1 trillion (Another $1 trillion gone in IFF by 2030)gone in IFF by 2030)

““We will also reduce opportunities for tax avoidance, and We will also reduce opportunities for tax avoidance, and considerconsider inserting anti-abuse clauses in all tax treaties”. inserting anti-abuse clauses in all tax treaties”.

““We will make sure that all companies including We will make sure that all companies including multinationals, pay taxes to the Governments of countries multinationals, pay taxes to the Governments of countries where economic activities occur and value is created, in where economic activities occur and value is created, in accordance with national and international laws and accordance with national and international laws and policies”. policies”. (How? CSOs should help)(How? CSOs should help)

A.A. The commercial component of IFFsThe commercial component of IFFs1)1) Trade Mispricing: African countries should ensure they have Trade Mispricing: African countries should ensure they have

clear and concise laws against mis-stating the price, quantity, clear and concise laws against mis-stating the price, quantity, quality or other aspect of trade in goods and services in order quality or other aspect of trade in goods and services in order to move capital to another jurisdiction or avoid taxation. to move capital to another jurisdiction or avoid taxation.

2)2) Transfer Pricing: African countries should establish or Transfer Pricing: African countries should establish or strengthen transfer pricing units of their countries of operation.strengthen transfer pricing units of their countries of operation.

3)3) Base Erosion and Profit Shifting: African countries should Base Erosion and Profit Shifting: African countries should establish arrangements for exchange of tax information establish arrangements for exchange of tax information between them as well as with global partners.between them as well as with global partners.

4)4) Regional integration arrangements should be used to introduce Regional integration arrangements should be used to introduce accepted standards for tax incentives.accepted standards for tax incentives.

5)5) Institutional support for these measures: African States should Institutional support for these measures: African States should establish or strengthen the independent institutions and establish or strengthen the independent institutions and agencies responsible for preventing IFFs.agencies responsible for preventing IFFs.

What should be doneWhat should be done

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B.B. The criminal component of IFFsThe criminal component of IFFs

1)1) Training and empowerment of investigators responsible for Training and empowerment of investigators responsible for identifying the criminals engaged in illicit (criminal) activities identifying the criminals engaged in illicit (criminal) activities by African governments is critical.by African governments is critical.

2)2) Each African country’s financial intelligence unit should share Each African country’s financial intelligence unit should share information with other African financial intelligence units. information with other African financial intelligence units.

3)3) Request that the United Nations Office on Drugs and Crime Request that the United Nations Office on Drugs and Crime (UNODC) extend its work on transnational organized crime in (UNODC) extend its work on transnational organized crime in West and Central Africa to the rest of the continentWest and Central Africa to the rest of the continent

What should be doneWhat should be done

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C.C. The corrupt component of IFFsThe corrupt component of IFFs1)1) IFFs should be integrated as a specific component in the IFFs should be integrated as a specific component in the

African Union Convention on Preventing and Combating African Union Convention on Preventing and Combating CorruptionCorruption

2)2) African states should ensure that the public can access national African states should ensure that the public can access national and subnational budget information. and subnational budget information.

3)3) African countries should adopt best practices in open African countries should adopt best practices in open contracting to reduce IFFs through government procurement contracting to reduce IFFs through government procurement processes. processes.

4)4) African governments can regularly publish lists of Politically African governments can regularly publish lists of Politically Exposed Persons (PEPs) as well as any asset declarations filed Exposed Persons (PEPs) as well as any asset declarations filed by PEPs and information about whether the country’s laws by PEPs and information about whether the country’s laws prohibit or restrict the ability of their PEPs to hold financial prohibit or restrict the ability of their PEPs to hold financial accounts abroad. accounts abroad.

What should be doneWhat should be done

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Thank YouThank You

Download HLP Report on IFFs here: Download HLP Report on IFFs here: http://www.uneca.org/publications/illicit-financial-flow

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