Zim loses US$12bn in illicit financial flows

via Zim loses US$12bn in illicit financial flows by Darlington Musarurwa for SundayMail

Resource-rich countries have been losing money through multiple channels. However, it is believed that there are various reforms that can be implemented to plug these loopholes. Many countries, Zimbabwe included, are now actively fighting leakages in their financial systems

Zimbabwe has lost a cumulative US$12 billion in the last three decades through illegal financial outflows ranging from secret financial deals, tax avoidance and illegal commercial activities, a new report jointly produced by the African Development Bank (AfDB) and Washington-based US think tank Global Financial Integrity has shown.

The haemorrhage is part of an estimated US$1,4 trillion that was lost by the African continent in the three decades from 1980 to 2009.

Significant losses in the region were, however, recorded in neighbouring countries such as South Africa, Botswana and Mozambique where outflows were measured at US$184 billion, US$31 billion and US$25 billion respectively.

It is believed that between US$30 billion and US$40 billion is leaving Africa each year.

Policymakers are concerned that although the outflows continue to increase, the inflows to the continent remain worryingly low.

According to the report, which is titled Illicit Financial Flow and the Problem of Net Resource Transfers from Africa: 1980-2009, African countries received resources amounting to 2,3 percent of gross domestic product (GDP) in the 1980s and just under 1 percent in the 1990s.

It also concludes that Africa has generally become the net lender of resources.

Resource-rich countries were the most affected.

While the majority of African countries continue to rely on external development assistance, “with good resource husbandry” it is believed they could be in a position to finance the bulk of their development needs from their own resources.

The report notes that within Sub-Saharan Africa, the per capita loss of illicit capital is mainly driven by Southern Africa, which lost nearly US$2 000 per person, while countries in West Africa and Central Africa lost about US$1 293 per capita.

Estimates at a country-level indicate that losses in Southern Africa were mainly driven by South Africa, Angola and Zimbabwe.

“The report finds that during the 30 years covered by the study, Africa provided net resources to the world of up to US$1,4 trillion on a cumulative basis, far exceeding inflows over the same period. The illicit haemorrhage of resources from Africa is therefore about four times Africa’s current external debt and almost equivalent to Africa’s current GDP.

“The resources lost to Africa from illicit financial outflows are large. If harnessed, they could plug the financing deficit that afflicts the continent, enable countries to extend their socio-economic infrastructure, create employment for their youthful populations, and safeguard their natural resource revenues. We should therefore accord efforts to address the proliferation of illicit financial flows from Africa as much importance as we are putting on domestic resource mobilisation and the attraction of foreign direct investment,” said the report.

But there are indications that there were brief periods in the early1980s and the 1990s when Africa received small net resource transfers from the rest of the world.

Crucially, it was observed that the main driving force behind the net drain of resources from Africa were illicit financial flows – largely unrecorded – which grew at a much faster pace than the net recorded transfers.

Opinion leaders and policymakers on the continent are presently making efforts to try and sensitive African states about the negative effects of the outflows and the implications on development.

In June this year a 10-member panel established by the Economic Commission for Africa (ECA) and the African Union (AU) and chaired by Mr Thabo Mbeki, the former president of South Africa, held a two-day consultative meeting in Lusaka, Zambia.

More than 60 delegates comprising key stakeholders from East and Southern Africa attended the meeting.The new report, however, recommends that governments need to play a much more active role in promoting transparency in the financial system by ensuring that banks and offshore financial centres (OFCs) report regularly to the Swiss-based Bank of International Settlements (BIS) detailed deposit data by sector, maturity and country of residence of deposit holders.

Some quarters are pushing for the BIS to be permitted to publicly disseminate the cross-border banking data for specific source and destination countries, while it is also felt that the obscurity of information on the beneficial ownership of companies, trusts, and other legal entities must be addressed.

Governments are also being urged to strengthen domestic laws governing financial institutions to make it illegal to open accounts without knowledge of natural person(s) owning the accounts.

Since tax evasion is considered as a “significant component of illicit financial flows”, there are proposals to make it difficult for individuals and entities to shift income between countries.

Adds the report: “Tax evasion is at the heart of the world’s shadow financial system and constitutes a significant component of illicit financial flows. One way to address the problem of tax evasion is for African countries to enter into automatic exchange of information (AEI) agreements with the destination countries where the proceeds of tax evasion are lodged.

AEI agreements should be accompanied by double tax avoidance agreements, which set clear rules for countries’ ability to assess taxes and monitor compliance according to international norms, making it more difficult for individuals and entities to shift income between countries.”

In addition, it is believed that multinational companies operating in African countries should be required to publish annual financial reports that explicitly include their activities in Africa.

Other reforms that are considered workable include tax reforms that eliminate “built-in incentives” for evasion, a process that is already under way in Zimbabwe, creation of a national authority for the regulation and management of public procurement to ensure greater transparency and accountability in the contracting process.

Reforming customs service procedures to curtail trade mis-pricing by removing ad hoc exemptions from customs duties, streamlining clearance and document control procedures, and efficient computerisation of payment and collection procedures in order to make procedures less cumbersome and more efficient is also regarded as crucial by the report.

Of late there has been numerous allegations of rampant transfer-pricing or mis-pricing in the region, Zimbabwe included, especially from subsidiaries of being corporations that have offshore bases.

There are instances where parent companies overcharge their local subsidiaries for services and goods as a creative way to avoid tax obligations. Zimbabwe has to a large extent made headway in dealing with most of these corporate vices. Also there has long been awareness by Harare of the need to plug loopholes through which the country was being exploited, particularly by foreign firms.

In particular, the Indigenisation and Empowerment Act that was legislated in 2008 makes a deliberate attempt to place the economy into the hands of the locals.

The latest report is similar to the Africa Progress Report which asserted that Africa is losing billions of dollars annually from the extractive industries as a result of defective contracts signed with foreign companies.