Track it! Stop it!get

Transcription

1 High Level Panel on Sample 2c ILLICIT Track it! Stop it!get it! Financial Flows from Africa Progress Report of the High Level Panel on Illicit Financial Flows from Africa March 2014

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3 Table of Contents List of Abbreviations v Introduction 1 Work of the High Level Panel 2 Emerging Issues 5 An African Problem with a Global Solution 11 Final Report 12 HLP Members (Biographies) 13 Members of the Technical Committee of the HLP 16 Places Visited by the HLP 16 Secretariat of the HLP 17 Illicit Financial Flows Fact Sheet 18 iii

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5 List of Abbreviations AU CENEAP ECA FAFTF GDP GFI GIABA G8 G20 HLP IFF KARI US MNCs OECD STAR UK UN UNODC US African Union National Center for the Study and Analysis of Population and Development Economic Commission for Africa Financial Action Task Force Gross Domestic Product Global Financial Integrity Intergovernmental Group Against Money Laundering in West Africa The Group of Eight The Group of Twenty High Level Panel Illicit Financial Flows (from Africa) Kleptocracy Asset Recovery Initiative Multinational Companies Organization for Economic Cooperation and Development World Bank Stolen Assets Recovery United Kingdom United Nations UN Office on Drugs and Crime United States (of America) v

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7 Introduction 1. The High Level Panel (HLP) on Illicit Financial Flows from Africa was inaugurated in February 2012 following Resolution L8 of the 4 th Joint Annual Meetings of the AU/ECA Conference of Ministers of Finance, Planning and Economic Development. 2. The HLP was constituted after wide-ranging consultation from within Africa and outside the region with ex officio members drawn from the Economic Commission for Africa and the Kingdom of Norway. Its current composition is as follows: Chair: H.E. Mr. Thabo Mbeki, former President of the Republic of South Africa (South Africa); Vice Chair: Mr. Carlos Lopes, Executive Secretary of the Economic Commission for Africa, (Guinea-Bissau); Mr. Olusegun Apata retired Ambassador and Chairman of Nigerian (Coca-Cola) Bottling Company (Nigeria); Mr. Raymond Baker Director, Global Financial Integrity (USA); Ms. Zeinab El-Bakri former Vice-President, African Development Bank (Sudan); Mr. Abdoulaye Bio-Tchane former Minister of Finance and Economy and former Africa Director of the International Monetary Fund (Benin); Mr. Henrik Harboe Director, Development Policy, Ministry of Foreign Affairs, (Norway); Mr. El Hadi Makboul Secretary General, Ministry of Industrial Development and Investment Promotion(Algeria); Mr. Akere Muna President of the Pan-African Lawyers Union and Vice President, Transparency International (Cameroun); and, Ms. Irene Ovonji-Odida- Board Chair, ActionAid International (Uganda) 3. In its Terms of Reference the HLP was called upon to: determine the nature and patterns of illicit financial outflows from Africa; establish the level of illicit financial outflows from the continent; assess the complex and long-term implications of illicit financial flows on development; 1

8 sensitize African governments, citizens and international development partners on the scale and effect of such financial outflows on development; and, propose policies and mobilize support for practices that would reverse such illicit financial outflows. 4. The Panel expects to finalize its report by July It is however submitting this Progress Report to the Conference of Ministers in order to indicate progress achieved thus far and highlight some of the emerging issues that would require attention. It is also intended to provide a basis for consultations between the HLP and the Conference prior to issuance of the Final Report. This Progress Report outlines the process undertaken by the HLP and underscores some of the issues that have emerged from its on-going work. Work of the High Level Panel 5. The High Level Panel approached its work in accordance with its Terms of Reference. It undertook background research, advocacy, African country studies as well as regional and global consultations. Background Research 6. The HLP tasked its Secretariat to undertake background research on the issue of illicit financial flows from Africa. The purpose was to enable the Panel to gain a concrete African perspective on the issues involved and to provide a technical basis for its Final Report. The background report that was produced has helped to inform the Panel s priority areas of focus and framed its engagement in the consultations with various stakeholders. Advocacy 7. From its inception, the HLP saw advocacy as an essential part of its work. It accordingly framed a communications strategy that included the creation of a website, publication of a brochure on the Panel s work, a fact sheet on Illicit Financial Flows and related slogans. The HLP also adopted the mobilising slogan, Illicit Financial Flows from Africa: Track it. Stop it. Get it to underpin its advocacy efforts. Such has been the success of the advocacy efforts that requests were received by others working on the issue to use the Panel s slogan. The Chair, Panel Members and the Technical Committee 2

9 continue to be invited to make presentations and interact at various forums on the question of illicit financial flows. Country Studies 8. The HLP also commissioned country studies on illicit financial flows from Africa in order to obtain empirical country level evidence of the phenomenon and its manifestation. Given that it could not cover all the countries on the Continent, the HLP concentrated on studies of six countries. The criteria for choosing the six countries included sub-regional coverage, the importance of the extractive sector in their economies, and the process of recovery from conflict. The countries chosen in this regard were Algeria, the Democratic Republic of Congo, Kenya, Liberia, Mozambique, and Nigeria. The Panel also visited Mauritius as a representative of a small island economy. In addition, the Panel plans to visit South Africa to explore how the institutions and processes in that country are geared to address the issue of illicit financial flows. 9. The six countries were all visited and the HLP was well received in every case by Heads of State and Government, Ministers responsible for the economy, parliamentarians, the police and the judicial authorities, and heads of various financial institutions including central banks, customs agencies, internal revenue services, anti-corruption agencies and the like. The Panel also met leading civil society organizations, academic and media practitioners and related non-governmental organizations. At all stages, it explained that the purpose of the country studies was to gain empirical perspectives and insights on the manifestation of illicit financial flows in various jurisdictions and not to point accusing fingers at the individual countries concerned. The HLP received full cooperation in all instances and as was intended the insights from the country visits helped to provide empirical evidence of general application to its work. The Panel would like to extend its heartfelt thanks to all the African Heads of State and Government, the Governments and peoples of Africa all of whom did everything to facilitate its work. Sub-Regional Consultations 10. The HLP also undertook a public consultation in Kenya and broad sub-regional consultations as part of its advocacy efforts. This was also driven by the realisation that stakeholders from all parts of the Continent could make invaluable contribution to its work through insights, information and data that were not otherwise available. Sub-regional consultations for East and Southern Africa took place in Lusaka, Zambia while the one for West and Central Africa was organized in Accra, Ghana. The consultations for North Africa took place in Tunisia. Overall, more than two hundred participants from 3

10 forty eight countries and from a wide cross section of stakeholders participated in the sub-regional consultations. Global Consultations 11. As part of its outreach activities, the HLP has interacted with United States Government agencies, the Secretariat and Member States of the United Nations, the Organization for Economic Cooperation and Development, the World Customs Council, and the European Parliament. Consultations were also held with the World Bank and the International Monetary Fund as well as think tanks and private sector organizations in the United States such as the Brookings Institution and the Corporate Council for Africa. Scale of Illicit Financial Flows 12. As part of its background research, the HLP commissioned a study by the ECA and also took account of existing literature on the scale of illicit financial flows. The results were broadly similar in terms of trends and volumes. The ECA study focused primarily on trade mispricing and the results obtained were broadly comparable to other similar authoritative studies. Studies undertaken under the auspices of GFI indicate that the scale of illicit financial outflows from Africa due to trade mispricing alone is approaching approximately US $50bn a year. On its part, the ECA study which used a different data set and approach estimated that the annual outflow of illicit finance through trade mispricing was closer to $60bn. Also significant was the fact that illicit outflows through trade mispricing from Africa grew at a real rate of 32.5% between 2000 and 2009 which was much more than outflows from other developing country regions. 13. These estimates for illicit financial flows from Africa are at best conservative. It is difficult to get a precise handle on outflows arising from criminal activities and proceeds of bribery and abuse of office because they are by their very nature quite secretive. However, in the course of its consultations the Panel was given examples of how smuggling of cash has become quite rampant, including through the use of private and chartered aircraft. The estimates of illicit financial outflows also do not take account of the increasing importance of services and intangibles such as intellectual property rights in global economic activity. Such activities were estimated to account for about 24% of global trade flows in Equally significant with regard to understanding the full scale of illicit financial flows from Africa is the emergence of aggressive tax avoidance strategies, which relate directly to the illicit outflows. 4

11 Emerging Issues 14. An important number of issues emerged in the course of the research, country studies and consultations undertaken by the Panel. These emerging issues frame and impact upon the entire spectrum of the manifestation, drivers and responses to the problem of illicit financial flows. Complexity and Modalities 15. The issue of illicit financial flows is highly complex with many technicalities relating to origins, destinations, scale, modalities, drivers, actors and regulatory responses amongst other things. The very definition of illicit financial flows and which capital outflows should be considered as illicit have been a constant theme underpinning the on-going work of the Panel. The HLP accordingly decided to adopt the definition provided by Global Financial Integrity (GFI) which is money illegally earned, transferred or used. In other words, relating to its origin, or during movement or use, the flow of money that has broken laws is considered illicit. The HLP accordingly spent time untangling all of these related issues but a constant starting point has been to break down illicit financial flows into three components namely, commercial activities, criminal activities and bribery and abuse of office. 16. The background research undertaken by the Panel has revealed that globally, commercial transactions, tax evasion and laundered commercial transactions accounts for up to 60% of illicit financial flows. By comparison, the criminal element including drug trafficking, racketeering, counterfeiting, contraband and terrorist financing was about 35% of illicit financial flows while the outflows generated through bribery and abuse of office by public officials accounted for about 5%. The Panel felt that while these percentages might be somewhat different in Africa it is fully satisfied that the ranking of the three sources of cross-border illicit financial flows remains the same commercial IFFs are the largest, criminal flows are next, and outright bribery and theft by government officials is the smallest. Regardless of the exact percentage, it is agreed that corruption is a cross-cutting issue affecting all three components of illicit financial flows from Africa. IFF is Political 17. While the entire gamut of illicit financial flows is technical in the manner in which it is effected, the HLP has come to the conclusion that to address the issues involved they must be framed within the context of political considerations. This is mainly due to the nature of the actors involved and the fact that the most obvious solutions require 5

12 strong political commitment and leadership. Illicit financial flows are of concern to governments of developed and developing countries alike because of their implications for resource mobilisation, policy and legislation, and international geopolitics. Among others they impact on fiscal policy and the transparency of financial transactions regarding which States are naturally keen to have as much information as possible. They have also become an important area of focus because of the process of globalisation. At the same time, of course, some States are outrightly desirous of becoming financial secrecy jurisdictions, which thus makes themselves attractive as destinations for illicit financial flows. 18. A set of key actors are multinational corporations (MNCs) which in some cases have annual turnovers that exceed the GDP of several African countries. Intra-group trade of multinational corporations also accounts for up to 30% of international transactions in goods, services, capital and intangibles (intellectual property). This power gives MNCs disproportionate influence over inward investment flows and negotiations of contracts especially for the extraction of natural resources. They also have greater capacity to attract teams of the best lawyers and accountants in their dealings with African countries particularly as concerns transfer pricing. Criminal networks with their shady transactions and increasingly innovative means of money laundering, along with an ability to infiltrate and undermine State structures, also occupy influential spaces in some African countries. 19. Civil society actors including international non-governmental organizations are also actively engaged in the effort to stem the illicit financial flows. These bodies have drawn on their extensive networks, research capabilities and strengths in advocacy to put the issue of illicit financial flows firmly on the global agenda. Civil society efforts have been an invaluable source of support for the campaign against illicit financial flows and they need to be mobilized even further to ensure that pressure is brought to bear on all the other actors to play their part. The objective must be to get both source and destination countries of illicit financial flows to buy into the agenda of stemming the practice in all its manifestations. Uneven or Missing Institutional Architecture 20. The HLP has found that in some African countries the institutional architecture for responding to illicit financial flows was at best uneven or in several key instances non-existent. Lack of transparency, secrecy and difficulty of obtaining information and systematic data remain key challenges across the board. However, there are global frameworks in place for tackling issues of corruption and bribery as well as for gauging criminal activities including money laundering. The same could hardly be said with 6

13 regard to illicit flows arising from commercial activities although it must be emphasised that all the three categories are inter-related. Bribery and Abuse of Office 21. While corruption was found to be a cross-cutting issue across all categories of illicit financial flows, it is clear that this term is often seen to be synonymous with public sector corruption such as bribery and abuse of office often related to public procurement. It is, however, worth noting the key role played by private sector actors, for example through payment of bribes to public officials and by exerting undue influence on public processes via personal connections. 22. In this regard, to combat this practice, there exist inter alia, the AU Anti-Corruption Convention and its related institutions, UN Convention Against Corruption, Inter-Governmental Action Group against Money Laundering in West Africa (GIABA), the OECD Anti-Bribery Convention, the US Foreign Corrupt Practices Act and article 1504 of the Dodd-Frank Act. The requirement here would seem to be strengthening of these instruments and improving international cooperation with regard to their implementation. Notable in this regard are the World Bank Stolen Assets Recovery (StAR) Initiative, the US Kleptocracy Asset Recovery Initiative (KARI) and the Camden Asset Recovery Initiative, all intended to recover and repatriate the inter-related proceeds of abuse of office which are often laundered. An issue of concern to the HLP is the governance of frozen assets in the sense that these resources should not be available to banks that knowingly receive illicit flows. Such monies would need to be held in escrow accounts till due process determines their final destination. Criminal Activities 23. Criminal activities which range from money laundering to drug, people and arms trafficking and smuggling are also a key component of illicit outflows from Africa that have an uneven institutional framework. The Panel found that useful data on these forms of IFF is emerging from UN Office on Drugs and Crime (UNODC). However, even its figures are limited by the shroud of secrecy that surrounds such activities. 24. Money laundering is a key component of the global shadow economy which facilitates illicit financial flows. There has however been some progress in this area especially as a result of the anti-money laundering and counter-terrorist financing regimes that have been put in place principally through the recommendations of the Financial Action Task Force (FATF). The HLP has observed that substantial progress has been made in this area due mainly to the political will to choke financing to terrorist organisations. It has however noted that significant weakness still exists in implementation of the FATF Recommendations as evidence abounds that major banks and financial 7

14 institutions continue to receive, transfer and manage illicit outflows from Africa. Similarly, the UNODC has estimated that while 40% of cocaine and heroin shipments are interdicted, only 1% of the money is traced and/or seized. Commercial Activities 25. As stated earlier, the HLP has found that commercial activities were by far the largest component of illicit financial flows. It is however the area in which the global institutional framework is least developed. Most of the related work in this area is being done by the OECD. This is partly due to the renewed interest of developed countries in illicit financial flows as a result of their own fiscal constraints following the recent global financial and economic crisis. 26. Most commercially induced illicit flows relate to the evasion of tax, aggressive tax avoidance and harmful tax holidays. 1 The key actors in this area are multinational companies operating across borders but dealing with different tax administrations. Resource extraction contracts that are shrouded in secrecy are another commercial source, structured deliberately to deny African countries of legitimate earnings from royalties and taxes. This is particularly important for Africa given that natural resources constitute the bulk of the international tradeable goods originating from our Continent. 27. Integrated companies would quite naturally source some of their inputs and intellectual property from within the group, just as they also supply outputs and services to sister companies. A common practice however has been for the group to resort to declaring the most profit in the jurisdiction with the lowest taxes rather than where the profits were generated. Thus, this phenomenon is not restricted to Africa. Recent examples have shown that some companies operating in countries declare losses for several years and never go bankrupt. Curbing such practices including insisting on greatly strengthened arms length principle provisions for intra-group payments require financial, accounting and legal capacities which are not currently readily available in African tax administrations. 28. A source of the more outright illicit financial flow is the mispricing of imports and exports sometimes to avoid duties but also sometimes to transfer monies, especially foreign exchange out of African countries. Closely related to this is the under declaration of quantities of oil, gas, minerals and natural resources (including timber and fish) that are taken out of African countries. Also of concern in this regard are the never ending system through which multinational firms would benefit from tax holidays and 1 There is some debate about whether aggressive tax avoidance and harmful tax holidays are illicit. Once they are understood in the context of the intent to defraud the state of legitimate tax revenues from activities carried out in its territory then such flows must be considered illicit. 8

15 then sell out just before the expiry period of such concessions only to re-emerge as a new firm starting with a new tax holiday period. The consultations undertaken by the Panel have revealed widespread awareness about such illicit means of taking finances out of the Continent. The general concern and complaint in this regard is about lack of capacity to address these matters. 29. In addition to building relevant capacities in customs and revenue services and in the absence of a universal tax administration it has been suggested that the required solution must focus on increased transparency along the following lines: Curtailment of mispricing in trade imports and exports; Country-by-country account of sales, profits and taxes paid by multinational corporations; Declaration of beneficial ownership in commercial entities, including banking and securities accounts; Automatic cross-border exchange of tax information; and, Harmonization of laws relating to anti-money laundering. 30. These issues have attracted attention in various forums including the Bretton Woods institutions as well as the European Parliament, the OECD, the G8 and G20 and at the level of individual countries or regional groupings. Some of the emerging responses which do not amount to an over-arching institutional framework to tackle illicit financial flows in the commercial sector include: The Global Forum for Transparency and Exchange of Information for Tax purposes (OECD); Multilateral Convention on Mutual Cooperation in Tax Matters (OECD); Extractive Industries Transparency Initiative; Art 1504 of the Dodd-Frank Act (US); Foreign Account Tax Compliance Act (US); G20/OECD work on Base Erosion and Profit Shifting; Automatic Exchange of Information (OECD, G8, G20); Public Registry (UK); and, Open Government Partnership. 31. Apart from the fact that these processes are not universal and are being undertaken by the concerned groups and countries in their own self interest, there is no clear understanding of how they will impact African countries. In some cases complexity and costs of compliance could pose a problem. Similarly, the expected distribution of benefits between African countries and developed countries that are implementing 9

16 these measures are not well known or clearly defined. These are issues that deserve further attention at regional and global levels. Tax Havens and Financial Secrecy Jurisdictions 32. A cross-cutting issue in addressing illicit financial flows relates to the activities and practices of tax havens and financial secrecy jurisdictions. While not strictly the same thing, tax havens and financial secrecy jurisdictions provide a destination for illicit financial flows through tax evasion or money laundering. Indeed providing a location at which funds can be parked with no questions asked, tax havens and secrecy jurisdictions undermine efforts to stem illicit outflows from Africa. Tax havens and financial secrecy jurisdictions often ease registration requirements thus allowing for the use of corporate vehicles and nominal owners (fronts) which mask beneficial owners. The HLP is particularly concerned that some African countries may be tempted to become tax havens and financial secrecy jurisdictions due to perceived benefits. Implications for African Development 33. The background research of the Panel as well as its widespread consultations confirmed the understanding that illicit financial flows have serious consequences for African development. The most obvious effects are the loss of investment capital and revenues that could be used to finance public services including infrastructure, education and health. Conservative estimates have shown that without illicit financial flows from the Continent, the African Gross Domestic Product would have been at least 16% higher. This has an obvious negative impact on economic growth and development and therefore the important issue of job creation. Indeed, tax abuse by international businesses places a disproportionate burden on smaller domestic firms which are typically responsible for most employment in African countries. 34. Illicit financial flows also have a governance dimension in the sense that they undermine state institutions and public confidence in them as well as weakening the rule of law. This is particularly true of state capacity for tax collection and market regulation. Illicit outflows are also damaging in the sense of diverting public money to private uses and through the weakening of the financial sector. They also threaten stability and security by facilitating criminal activities within and across borders, such as the illegal trafficking of people, weapons and drugs. 35. Money laundering affects the reputation of countries and the integrity of their financial systems. Equally pernicious is the temptation that African countries face to become tax havens and secrecy jurisdictions. This is the illicit financial outflow equivalent of the race to the bottom that occurs with regard to tax holidays. 10

17 An African Problem with a Global Solution 36. Illicit financial outflows from the Continent have correctly been characterised as an African problem with a global solution. It is in this sense that while the problem manifests itself in stark relief in Africa, the solutions require international cooperation, including by building relevant capacities on our Continent. International Cooperation 37. We have mentioned some of the initiatives that are emerging at the global level particularly in the OECD, G8 and G20 and economically powerful States. However, there remain gaps in global governance relating to illicit financial flows because the measures that have been taken or that are being contemplated do not have Africa or, indeed, other developing country regions in mind. The HLP will insist that the necessary effort must be exerted to ensure that Africa benefits from such initiatives without having to bear undue costs of compliance. 38. The HLP is undertaking its work at a time in which the international community under the auspices of the United Nations is drawing up a post-2015 Development Agenda. The Panel s discussions with UN Member States, the President of the UN General Assembly and the UN Secretariat indicate that the reduction of illicit financial flows should be an integral part of the post-2015 Development Agenda. While the specific form that such a target would take is yet to be worked out, the Panel is of the view that the global consensus on fighting corruption and criminal activities should be matched by similar support for the fight against the ways and means which comprise the substance of the illicit financial flows. This would make an important contribution to the matter of generating the resources to finance the post-2015 Development Agenda. 39. Also noteworthy in this regard are initiatives such as the Oslo Dialogue on the whole of government approach to fighting tax crimes, as well as the OECD backed Tax Inspectors without Borders which use international cooperation to tackle aspects of illicit financial flows including lack of capacity. 40. Based on the above, a coordinated response involving source, transit and destination countries is imperative. Capacity and Governance Issues 41. It is clear from the work undertaken by the HLP that the prevalence of illicit financial flows in Africa and the inability to check its growing trend is owed in large part 11

18 to capacity constraints. This is clearly the case with regard to the inability to arrest mispricing of the trade in goods, services and intangibles. It is also the case with regard to lack of capacity to negotiate contracts in the extractive sector or indeed to ensure that Africa s views are properly reflected in the emerging global architecture to stem illicit financial flows. The HLP has also observed some institutional deficiencies such that even when problems have been identified and structures established to tackle these, these bodies often do not function as envisaged or intended. 42. The lack of capacity often cuts across sectors and even causes tension between different Departments of State. For instance, an instance of tension between the Prosecuting Authority and the Judiciary was mentioned to the Panel, related to alleged financial crimes. This was fundamentally due to the capacity imbalance between the Prosecuting Authority on one hand and the MNCs on the other, which this Authority was prosecuting, with the MNCs being able to hire the best internationally available legal and accounting expertise, which the African State concerned could not afford. This had resulted in the Prosecutors almost always losing their cases, leading them to suspect prejudice on the part of the judiciary. Final Report 43. The HLP is submitting this Progress Report to appraise the Conference of Ministers of its work, emerging issues and findings thus far. The Progress Report is also intended to guide consultations with the Ministers in the sense that the Panel has not had the opportunity for an exchange of views with the Conference as a corporate body since it was established. 44. The Final Report besides presenting its analyses of the issue will include a range of recommendations directed at different stakeholders in line with their involvement and responsibility for the issue. The Report will also include a results based action plan to facilitate the implementation of the various recommendations. The Final Report of the Panel is nearing completion. We intend to present this Report to the Ministers during the period June/July We hope that the consultations with the Ministers of Finance, Planning and Economic Development will provide additional information and insights further to inform and enrich our Findings and Recommendations. High Level Panel on Illicit Financial Flows February

19 HLP Members (Biographies) H.E. Mr. Thabo Mbeki Mr. Mbeki served two terms as the second post-apartheid President of South Africa from 14 June 1999 to 24 September He was the President of the African National Congress from Mr. Mbeki held the position of Chairperson of the African Union.( ) Mr. Mbeki holds a Masters Degree in Economics from Sussex University. Mr. Carlos Lopes Mr. Carlos Lopes currently serves as the United Nations Under-Secretary-General and Executive Secretary of the Economic Commission for Africa. He assumed this position in September Mr. Lopes previously served as Executive Director of the United Nations Institute for Training and Research (UNITAR) in Geneva and Director of the UN System Staff College in Turin at the level of Assistant Secretary-General from March 2007 to August Ambasador Olusegun Apata H.E. Mr. Olusegun Apata is the Chairman of the Coca-Cola Bottler in Nigeria, Nigerian Bottling Company Plc and has sat on the company s Board of Directors since Ambassador Apata served for three decades in the Nigerian Diplomatic Service.. He attended the University of Lagos for his undergraduate studies while he earned his graduate degrees from the University College, Dublin and Oxford University. Mr. Raymond Baker Mr. Baker is the director of Global Financial Integrity, a think tank in Washington, DC and is a guest scholar at the Brookings Institution and Senior Fellow at the Center for International Policy. In January 2009, Mr. Baker brought together a coalition of research and advocacy organizations and over 50 governments to form the Task Force on Financial Integrity and Economic Development, an organization which advocates for transparency in the global financial system. He is a graduate of Harvard Business School and Georgia Institute of Technology 13

20 Dr. Zeinab Bashir el Bakri Dr. Zeinab Bashir el Bakri is a consultant on human development strategies working for the Government of Kuwait. She is the former vice President Sector Operations of the African Development Bank Group in Tunisia. Mr. Abdoulaye Bio Tchané Abdoulaye Bio Tchané has built a thirty-year career in banking, finance and development across Africa. He has held high positions at the WAEMU Central Bank and is a former Director of the Africa Department at the International Monetary Fund (IMF) as well as the former President of the West African Development Bank (BOAD). Mr Bio Tchané is also widely acknowledged as the finance minister of Benin who spearheaded clear and transparent reforms in budgeting, procurement and taxation and he has actively fought corruption. Mr. Henrik Harboe Henrik Harboe, Director of Development Policy at the Norwegian Ministry of Foreign Affairs since July 2013, was previously Norway s Chief Negotiator in the international climate negotiations. Before that he was head of the Multilateral Bank and Finance Section of the Norwegian Ministry of Foreign Affairs, responsible for Norway s relationship with the World Bank and the Regional Development Banks, for global finance questions and debt relief. He has a Masters degree in Development Economics from the London School of Economics (1987) and his BSc in Economics from the University of Oslo. Prof. El Hadi Makboul Prof. Makboul is Secretary General, Ministry of Industrial Development and Investment Promotion in Algeria. He is the former director of the National Centre for the Study and Analysis of Population and Development (CENEAP), which undertakes studies and analysis in the field of economy, demography and social and cultural development. Mr. Makboul was recently elected as a member of the Committee on Governance and Popular Participation of the UNECA. 14

21 Barrister Akere Muna Barrister Muna is founder and former president of Transparency International (TI) Cameroon. A lawyer by training, he is President of the Pan African Lawyers Union and former president of the Cameroon Bar Association. Akere Muna is President of the African Union s Economic, Social and Cultural Council (ECOSOCC) and a member of several national commissions on legal reform and curbing corruption. Mr. Muna was actively involved in the TI working group that helped to draft the African Union Convention on Preventing and Combating Corruption and has written a guide to the convention published by TI. Ms. Irene Ovonji-Odida The Chairperson of Action Aid Uganda, Ms. Ovonji-Odida is a human rights lawyer and activist with 21 years of experience in development work. She has worked in the public sector in law reform and on public sector ethics for eight years. Irene has been involved with ActionAid in Uganda since 2003, becoming national board Chair in She is the convener of the International Governance & Board Development Committee and was elected as International Board Chair in June

22 Members of the Technical Committee of the HLP Chairperson: Mr. Abdalla Hamdok, Deputy Executive Secretary, ECA Members: Mr. Said Adejumobi, Director, Sub-Regional Office in Southern Africa Mr. Adeyemi Dipeolu, Director, Capacity Development Division, ECA Mr. Adam Elhiraika, Director, Macroeconomics Policy Division, ECA Advocate Mojanku Gumbi, member and advisor Mr. Stephen Karingi, Director, Regional Integration and Trade Division, ECA Mr. René Kouassi, Director, Economic Affairs, African Union Commission Mr Harald Tolan, Senior Advisor, Ministry of Foreign Affairs, Norway Places Visited by the HLP Johannesburg, South Africa: Inaugural Meeting of the HLP, February 2012 Johannesburg, South Africa Second Meeting of the HLP, 4-5 May 2012 Nairobi, Kenya Third Meeting of the HLP, August 2012 (Public Forum on IFF) Tunis, Tunisia Fourth Meeting of the HLP, October 2012 (Regional consultations) Monrovia, Liberia: 29 April 01May 2013 (Country visit) Abuja, Lagos, Nigeria: May 2013 (Country visit) Lusaka, Zambia Fifth Meeting of the HLP, June 2013 (Regional consultations) Algiers, Algeria: July 2013 (Country visit) Kinshasa, Democratic Republic of Congo: August 2013 (Country visit) Mozambique: September 2013 Accra, Ghana Sixth Meeting of the HLP, December 2013 (Regional consultations) Washington, New York: February 2014 (Country visit) Brussels, Paris: February 2014 Mauritius: 6-7 March

23 Secretariat of the HLP Head of the Secretariat Mr. Adeyemi Dipeolu, Director Capacity Building Division Members Ms. Souad Aden-Osman, Senior Program Officer, UNECA Mr. Gamal Ibrahim, Economic Affairs Officer, Macreconomics Policy Division, UNECA Mr. Allan Mukungu, Economic Affairs Officer, Macreconomics Policy Division, UNECA Mr. John Kaninda, Communication Specialist, Macreconomics Policy Division, UNECA Mr. William Davis, Associate Economic Affairs Division, African Trade Policy Centre, UNECA 17

24 Illicit Financial Flows Fact Sheet Illicit Financial Flows: what they are Illicit Financial Flows (IFF) is money illegally earned, transferred or used. At its origin, or during movement or use, the flow of money has broken laws and is thus considered illicit. It is different from capital flight, which is understood as the movement of funds abroad to secure better returns, often in response to an unfavourable business climate in the country of origin. Main components of illicit financial flows Illicit money can be classified into three main categories: Proceeds of theft, bribery and other forms of corruption by government officials; Proceeds of criminal activities, including drug trading, racketeering, counterfeiting, contraband and terrorist financing; and Proceeds of tax evasion and laundered commercial transactions. 5%# Corrup,on#(bribery#and# embezzlement#of#na,onal#wealth)## 60%# 35%# Criminal#ac,vi,es#such#as#the#trade#in# drugs,#weapons,#and#people# Commercial#transac,ons#through# mul,na,onal#companies## 18

25 Illicit financial flows estimates Cumulative estimate of IFFs between stands at $US854bn a $22bn yearly average Trend has increased between 2000 & 2008, with $50bn being lost to financial outflows every year Ndikumana and Boyce (2008) Kar and Cartwright-Smith (2010) Kar and Freitas (2011) Channels of Illicit Financial Flows Illicit financial resources are drained from Africa through various channels, including: Trade misinvoicing takes place either through export under invoicing or import over invoicing Transfer pricing: The organizational structure and nature of MNC operations facilitate IFFs, due mainly to the ease of selling and buying goods and services between sister companies and the head office, typically located in different countries. MNCs protect their profits from taxation by employing complex, country-specific strategies. The most common is transfer pricing: the manipulation of prices of cross-border transactions between related affiliates Investment-related transactions: this happens when multinational invest heavily in the extractive industries in developing countries and structure the deals in a way to benefit from higher commodities prices while preventing those countries from windfall profits Offshore financial and banking centres and tax havens: Offshore banking facilities have multiplied over the last 30years, with some operating in Africa. (Botswana, Liberia, Mauritius, Seychelles) Multinationals also use tax havens as a place to set up shell companies for tax evasion. Through low or no taxes, lax regulation and well-defended secrecy, tax havens collectively control an estimated US$6 trillion, essentially servicing a niche market 19

26 Geographical distribution of IFF Cumulative IFFs in Africa for were unequally distributed. Two-thirds of IFFs were attributed to only two regions: West Africa (38%) and North Africa (28%; figure 2.2). Each of the other three regions (Southern, Eastern and Central Africa) registered about 10% of Africa s total IFFs. 13% 11% 10% 28% North Africa West Africa Central Africa Eastern Africa Southern Africa 38% Illicit financial flows at sector level IFFs from the continent are highest in the extractive industries, including mining. Sectors such as edible fruit and nuts, electrical machinery and equipment, fish and crustaceans, apparel, and cocoa have also been targets for IFFs over , each accounting for 3 4% of the African total Oil (27) Precious metals & minerals (71) Ores (26) Electrical machinery & equip. (85) Fruits & nuts (08) Copper (74) Iron & steel (72) Cocoa (18) Apparel & clothing (62) Fish & crustaceans (03) 20

27 Beneficiaries of IFFs Data shows that the main recipients of IFFs from African countries are developed countries and emerging economies, which are also Africa s major trading partners. Developmental Challenges and Consequences of Illicit Financial Flows from Africa Draining hard currency reserves: Africa lost about US$854 billion in IFFs over and continues to lose US$ billion a year. These losses highlight the adverse impact of IFFs on the continent s medium- and longterm development prospects. Despite recent strong performance, African countries have failed to generate additional resources to finance development projects; Reducing tax collection: Substantial losses due to aggressive tax avoidance schemes increase the financing gap for development. Despite losses in tax revenues, developed countries have enjoyed net benefits from illicit flows from Africa and other developing regions to financial centres in the developed world; Deepening income gaps: IFFs divert domestic savings from real domestic investment, thus contributing to a net loss in financing for investment and development. They also affect income distribution because citizens face higher taxes and austerity measures designed to finance external debt obligations. Depleting investment: Due to huge IFFs from Africa, the continent has lower levels of investment than other developing regions, hampering poverty alleviation and economic transformation. Some estimates show that if Afri- 21

28 ca were to repatriate illicit funds, the capital stock would expand more than 66%. In addition, if the illicit outflow of funds had not taken place, GDP per capita would have been 16% higher Stimulating inflation: Decreased government revenue further depresses investment. In addition, it may lead to greater seigniorage, which could stimulate higher levels of inflation tax while depreciating domestic asset values Weakening governance: Governance is weakened by poor state capacity, a shift in resources from productive to unproductive activities and low private sector development Undermining trade: Global Financial Integrity reports that developing countries lost tax revenues of US$ billion a yearover due to trade mispricing, or about 4.4% of government revenues