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African countries should emulate China’s measures at tackling IFF

Popularity 3Viewed 3789 times 2016-4-19 08:04 |Personal category:Politics|System category:News

By definition Illicit Financial Flows (IFF) or outflows refers to money that is illegally earned, transferred or utilized. Typicallythese funds originate from three sources: commercial tax evasion and tax avoidance, trade misinvoicing and abusive transfer pricing/mispricing; criminal activities, including the drug trade, human trafficking, illegal arms dealing, smuggling of contraband, bribery and theft by corrupt government officials.

By contrast China leads the developing world in Illicit Financial Flows (IFFs) leaving the shores of developing countries. A 2015 report by Washington based research and advocacy group Global Financial Integrity (GFI) revealed in a study between 2004 and 2013 that $7.8 trillion worth of illicit money was siphoned from developing countries averaging an annual rate of 6.5 percent with China accounting for almost one fifth of the losses, a staggering $1.2 trillion within the ten year period.

That amount, according to reports was equivalent to 15 percent of the country’s GDP in 2012. Key contributing factors to the high rate of illicit outflows from China were tax evasion through trade misinvoicing by transnational corporations and corruption led by top ranking officials. These two alone accounted for a whopping 77 percent of IFFs that left China within the period under study. The implication for China as well as other developing countries is the widening income inequality which inevitably has ripple effect on average household consumption.

To tackle this worsening situation, China, among other policies implemented the now infamous operation “Fox Hunt’ campaign led by the country’s top anti-graft body, the International Cooperation Bureau of the Central Commission for Discipline Inspection. Another campaign, Operation Skynet on the other hand is a campaign committed to taking action against illegal private banks and offshore companies that illegally transfer money overseas. In January this year, the Ministry of Public Security set up a new agency to consolidate the efforts of these two campaigns. The Department of Overseas Fugitive Affairs is to help China bring fugitives hiding overseas to justice and to retrieve stolen funds. The country has so far extradited over 1000 fugitives who were on the run. Among them, 360 fugitives willingly turned themselves in to the police as part of the 2015 Fox Hunt campaign.

This is what African countries should emulate- stepping up on counter measures to mitigate this problem which regardless of capital inflows from foreign development assistance cripples countries on the continent in all areas of development. The outflows within the past 50 years (excess of $1 trillion) as reported by the Joint African Union Commission/United Nations Economic Commission for Africa (AUC/ECA) is roughly the equivalent of inflows of official development assistance. However, some analyst totally dispute that and believe the outflows far outweighs the inflows, hence the need for radical measures that would hinder the major culprits from continual involvement in this malpractice. In a joint report by the AUC/ECA, the continent loses between $50 billion and $148 billion annually through illicit financial outflows. This canker cannot be solved by civil society organizations and neither can it be solved by the global financial institutions under whose oversight these criminal activities are perpetuated, but by the consolidated efforts of all countries on the continent.

The foremost culprits according to the report are the same multi-nationals corporations who have vowed vested interest to assist in the development of the continent. Following the multinationals is organized crime which understandably can only operate through illicit financial outflows. Apart from weak governance capacity in most countries, the report noted that corrupt practices in Africa facilitate these outflows. And so begs the question, who should take the blame? Is it the leaders that the populace in Africa have entrusted the resources of the continent for development who have failed and continue to disappoint the people.

Many would wonder how the multi-nationals are able to siphon these resources without notice. According to the Chairperson of the High Level Panel (AUC/ECA), former President of South Africa Thabo Mbeki, the plot here is, these large commercial corporations have the means to retain the best available professionals in legal, accountancy, banking and other expertise to assist them in perpetuating their aggressive and illegal activities on the continent. “Similarly, organized criminal organizations, especially international drug dealers, have the funds to corrupt many players, including and especially governments, and even to “capture” weak states”.

The undeniable truth is these illicit outflows are part of major contributing factors why African countries fell short of achieving the set target for the erstwhile Millennium Development Goals (MDG’s). The UN has set new targets, the Sustainable Development Goals (SDG’s) dubbed the 2030 Agenda. If African countries are going to make progress towards achieving targets outlined in the SDG’s, particularly in areas including reducing inequality within and among countries then they have to radically tackle challenges including but not limited to the following strategies these multinationals use in perpetuating IFFs.

Base erosion and profit shifting.

This refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.

False invoicing

The practice of falsely declaring the value of goods imported or exported to evade customs duties and taxes, circumvent quotas or launder money. The value of goods exported is often understated, or the value of goods imported is often overstated, and the proceeds are shifted illicitly overseas. Most estimates of trade-based illicit financial flows focus on this mechanism.

Hawala transactions

Hawala is an informal system of money transfer between entities in different countries. Brokers use handshake deals and/or agreements with counterparts in other countries to move money without physically transferring funds (especially across borders) or using bank transfers. Often extremely difficult to monitor, hawala transactions are used primarily in the Middle East, East Africa and South Asia.

Secrecy jurisdiction

Secrecy jurisdictions are cities, states or countries whose laws allow banking or financial information to be kept private under all or all but few circumstances. Such jurisdictions may create a legal structure specifically for the use of non-residents. The originators of illicit financial flows may need to prevent the authorities in the country of origin from identifying them (e. g. if the money is the proceeds of tax evasion), in which case the flow will be directed to a secrecy jurisdiction. Because those directing IFFs seek out low taxes and secrecy, many tax havens are also secrecy jurisdictions, but the concepts are not identical.

Shell banks

A shell bank is a bank without a physical presence or employees in the jurisdiction in which it is incorporated.

Tax avoidance

This is the legal practice of seeking to minimize a tax bill by taking advantage of a loophole or exception to tax regulations or adopting an unintended interpretation of the tax code. Such practices can be prevented through statutory anti-avoidance rules; where such rules do not exist or are not effective.

Tax evasion

Actions by a taxpayer to escape a tax liability by concealing from the revenue authority the income on which the tax liability has arisen. Tax evasion can be a major component of IFFs and entails criminal or civil penalties.

Tax havens

These are jurisdictions whose legal regime is exploited by non-residents to avoid or evade taxes. A tax haven usually has low or zero tax rates on accounts held or transactions by foreign persons or corporations. This is in combination with one or more other factors, including the lack of effective exchange of tax information with other countries, lack of transparency in the tax system and no requirement to have substantial activities in the jurisdiction to qualify for tax residence. Tax havens are the main channel for laundering the proceeds of tax evasion and routing funds to avoid taxes.

Trade misinvoicing

These are acts of misrepresenting the price or quantity of imports or exports in order to hide or accumulate money in other jurisdictions. The motive could, for example, be to evade taxes, avoid customs duties, transfer a kickback or launder money.

Multinationals for example rely on the expertise of highly trained legal professionals who resort to a combination of all these mechanisms- making it very difficult for most governments with inadequate capacity to tract these outflows. This is not to say that regulatory bodies on the continent are not aware of these mechanisms used by perpetrators of IFFs but their lackadaisical attitude to closing these loopholes is what is making countries on the continent go around begging for alms when they could efficiently secure illicit funds leaving the continent. 

China, for example is incessantly incorporating counter-measures at tackling illicit outflows. It is promoting its fight against corruption on all fronts- swatting flies and tigers in their numbers. This is what is missing in Africa. Some may call witch hunting but I think it is about time African governments and politicians stood up for the people, protect the resources in their various jurisdictions and eliminate the perception of a beggar continent that has clouded the minds of people around the world. Africa is not poor, Africa is rich. It is Africans who are poverty stricken due to misrule, mismanagement and lack of oversight that have stagnated the continent in an ever increasing competitive world. More importantly, we cannot continue to use our colonial past as an excuse to remain in poverty.

Irrespectively, the problem of illicit flows according to the GFI report cannot be solely solved by simply focusing on domestic policies of developing countries like what China is doing but by cooperation and support from the world’s shadow financial system which facilitates the absorption of illicit outflows from the continent. The group recommends that the global financial system “must also be subject to greater regulatory oversight so that the system is held to higher standards of transparency and accountability regarding transactions and operations. It advocates that a whole host of policy measures is necessary to make the absorption of illicit assets more difficult ranging from greater transparency with regard to reporting of data and information to the requirement that financial institutions collect on beneficial ownership of corporation, foundations and trusts, the requirement of country- by-country reporting by multinationals on their transactions and operations, and the automatic exchange of tax information between sovereign nations and tax havens.


(Opinions of the writer in this blog don't represent those of China Daily.)




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Reply Report voice_cd 2016-4-19 13:14
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Reply Report eddieturkson 2016-4-19 19:03
voice_cd: Thank you very much!!! we have highlighted your blog.

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