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Africa/Global: "Stop The Bleeding"

AfricaFocus Bulletin
July 21, 2015 (150721)
(Reposted from sources cited below)

Editor's Note

With the exception of inclusion of a statement promising to address "illicit financial flows," the outcome document of the Financing for Development conference in Addis Ababa (July 13-16) broke little new ground. Significantly, rich countries vetoed action on a greater role for the United Nations in setting international tax standards, preserving that role for the club of the OECD countries dominated by the United States and Europe. But civil society momentum for more significant action is continuing to grow, as was marked by the launch of the "Stop The Bleeding" campaign at a continent-wide gathering in Nairobi in June.

As noted in previous AfricaFocus Bulletins on illicit financial flows and tax justice (http://www.africafocus.org/intro-iff.php), there is strong momentum for African countries to take action to curb the $50 to $60 billion a year outflow of capital due to clearly illegal trade fraud and other financial crime. Campaigners for tax justice point out, however, that even legal economic measures such as ill-advised tax incentives also bleed African economies of resources. Depending on how it is defined, "illicit," it should be noted, can include not only "illegal" flows, but also "illegitimate" flows which are even harder to track and combat.

The "Stop The Bleeding" campaign is intended to build public support and pressure for action on these drains of resources from Africa. It is a joint effort of the Tax Justice Network-Africa, Third World Network-Africa, Africa Forum and Network on Debt and Development (AFRODAD), the African Women’s Development and Communication Network (FEMNET), the African Regional Organisation of the International Trade Union Confederation (ITUC-Africa) and Trust Africa, supported and joined by the Global Alliance for Tax Justice, including international partners such as ActionAid, Oxfam, and Public Services International. For more, see http://stopthebleedingafrica.org/ and, for frequent updates, https://twitter.com/stop_AfricaIFFs

This AfricaFocus Bulletin contains (1) An article on the #StopTheBleeding campaign by Alvin Mosioma, Executive Director of Tax Justice Network-Africa, (2) a reflection by your editor on the different meanings of "illicit financial flows," (3) two reactions by civil society organizations to the failure of the Addis conference to endorse a global tax body with universal membership to set standards to block tax evasion and tax avoidance, and (4) links to specific examples of illicit financial flows from previous issues of AfricaFocus Bulletin.

A few additional links on the Addis conference:

Official conference website
http://www.un.org/esa/ffd/ffd3/

IRIN, "Do #summits solve problems?", July 16, 2015
http://tinyurl.com/qjv4pox

Quartz, "Rich countries rejected an international plan to let the UN help fight tax evasion," July 15, 2015
http://tinyurl.com/qzlpfuq

Global Financial Integrity and Jubilee USA, July 15, 2015
http://tinyurl.com/oobrons

Women's Working Group, July 16, 2015
http://tinyurl.com/nbajbmy

++++++++++++++++++++++end editor's note+++++++++++++++++

#StopTheBleeding?: Kenya, East Africa's economic powerhouse is bleeding

By Alvin Mosioma
Business Daily (Nairobi), June 24, 2015

http://tinyurl.com/o8ulcmc

Alvin Mosioma, is Executive Director of Tax Justice Network-Africa, a Pan-African research and advocacy organization based in Nairobi, Kenya.

Between 2002 and 2011 East Africa's powerhouse lost at least KSh151 billion (US$1.51 billion) to trade misinvoicing, which is where companies deliberately cheat how much they are selling abroad. Companies do this to evade taxes, avoid customs duties, transfer a kickback or launder money. That is three times the country's national health budget. The losses are equivalent to about 8.3 per cent of government's total revenue.

And Kenya is not alone, according to a newly published report from the African Union and the Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa, the continent loses at least KSh 5,000 billion (US$50 billion) each year. This could build 151,000 modern schools in just one year.

Illicit Financial Flows (IFFs) is bigger than just misinvoicing. They are defined as money that is illegally earned, transferred or utilized. These funds originate from three main sources, commercial activities (tax evasion, trade misinvoicing and abusive transfer pricing); criminal activities (including the drug trade, human trafficking, illegal arms dealing, and smuggling of contraband); and corruption by government officials. Of the three types, aggressive tax practices by the commercial sector particularly multinational companies operating in Africa's mining, oil and gas sector constitute the worst offenders.

Kenya is one of six countries which the High Level Panel conducted in-depth case studies for its groundbreaking report. The others were Algeria, DR Congo, Liberia, Mozambique and Nigeria. The Panel also visited Mauritius as a representative of a small island economy and South Africa to gain understanding of how institutions and processes in Africa's second largest economy are geared to addressing illicit financial flows.

In addition to IFFs, Kenya loses over KSh100 billion (US$1.1 billion) each year from legitimate tax incentives and exemptions granted to multinational companies. Of these, trade-related tax incentives were at least KSh12 billion (US$120 million) in 2007 and 2008.

In 2010/11, the Kenyan government spent more than twice the country's health budget in tax incentives. Can we really afford this when 46 per cent of Kenya's 40 million people live in poverty (less than US$1.25 a day)?

Many studies including from the African Department of the International Monetary Fund (IMF), focusing on East Africa, state that "investment incentives – particularly tax incentives – are not an important factor in attracting foreign investment".

Another recent study found that the main reasons for companies investing in Kenya are access to the local and regional markets, political and economic stability and favourable bilateral trade agreements, fiscal concessions offered by EPZs were mentioned by only one (1%) per cent of the businesses sampled. They are an expense Kenya can do without.

The multiplier effects of these losses are much larger. IFFs and other outflows in real terms mean loss of jobs, income, decent education and health facilities and other basic infrastructure critical to structurally transform Kenya's economy and the socioeconomic conditions of the average citizen.

It is against this backdrop that the Interim Working Group of the "Stop The Bleeding" Africa IFF Platform comprising six large PanAfrican organisations namely Tax Justice Network-Africa (TJN-A), Third World Network-Africa (TWN-Af), the African Forum and Network on Debt and Development (AFRODAD), the African Women's Development and Communications Network (FEMNET), the African Regional Organisation of the International Trade Union Confederation (ITUCAfrica) and Trust Africa supported and joined by the Global Alliance for Tax Justice (GATJ) launched a unified African campaign platform on IFFs.

Dubbed "Stop The Bleeding" (Hash tag #StopTheBleeding) campaign, the launch took place on June 25, 2015 at Uhuru Park, in Nairobi. The main goal of the campaign is to stop IFFs from Africa through first the implementation of the recommendations of the HLP report by all African countries through enactment and enforcement of appropriate laws to curtail IFFs from Africa. The aim of the launch is to implement a unified Africa campaign on IFFs that is led and driven by African civil society organisations with support from other partners including international NGOs.

Today there is a consensus of the damaging impact of IFFs on Africa's economies and the continent's future between our governments and civil society. But ultimately ending illicit financial flows is a political problem, not least because of the issues, the nature of actors involved, the international character of the phenomenon and ultimately the corrosive and crippling effects of IFF on the state and society.

We therefore urge our leaders to adopt measures to curb the haemorrhaging of Africa's resources, harness these resources and invest them in the productive sectors of their economies to improve living conditions on the continent.


Defining Illicit Financial Flows

AfricaFocus Bulletin, July 21, 2015

"Illicit financial flows" out of Africa are estimated to exceed $50 billion a year, the most commonly used estimate coming from Global Financial Integrity and the African Union High Level Panel on Illicit Financial Flows from Africa. This is roughly equivalent to the annual total of official development assistance to Africa.

This is a minimum estimate for illicit financial flows, based on indirect calculations from global statistics. It also relies on the most restrictive definition of the term, namely funds transferred across national boundaries that are "illegally earned, transferred, or utilized," that is, "illicit" in the sense of "illegal."

The term "illicit" can actually have two meanings according to most dictionaries:
(1) not allowed by the law or
(2) not approved of by the normal rules of society
(http://www.oxforddictionaries.com/us/definition/learner/illicit).

In practice the lack of transparency makes it difficult to distinguish between the two in many if not most cases. Actions that are clearly illegal, such as fraud in customs declarations to evade taxes (trade misinvoicing), are among the easiest to track and to combat, if national tax authorities are adequately equipped to do so.

But for financial arrangements within a multinational corporation or agreements between such corporations and governments on terms of an investment, information needed to determine whether such transactions are illegal, legal but illegitimate, or legitimate is rarely available for public scrutiny or for adequate government regulation.

So in practice financial flows between countries fall into four categories:
(1) illicit because clearly illegal,
(2) clearly illegitimate because there is enough information is available to show that they would be regarded as such according to "normal rules of society,"
(3) clearly legitimate because there is enough information is available to show that they would be regarded as such according to "normal rules of society," or, finally,
(4) hard to tell or debatable because there is not enough information or there is disagreement on what the law is or what "normal rules of society" should be.

The same difficulties apply within countries, in distinguishing between (1) tax evasion, which is clearly illegal, and (2) tax avoidance, which may be legal but would be regarded as illegitimate if the facts were known. In addition, of course, laws or their interpretations can be changed, often as a result of lobbying by interested parties.

Such distinctions were highlighted by U.S. political cartoonist Tom Toles in 1993. In the cartoon Russian President Yeltsin tells Uncle Sam: "We're having problems switching to capitalism. The trouble is that all our capitalists are criminals, breaking our laws." And Uncle Sam replies: "That's just an early stage of capitalism. Eventually they become powerful enough to rewrite the laws."


Global Alliance for Tax Justice, "Financing for Development outcome rejects a key tax justice measure for ending poverty and inequality," July 16, 2015

http://tinyurl.com/njhew6z

On 15 July 2015, at a summit of world government representatives in Addis Ababa, Ethiopia, the Third International Conference on Financing for Development final outcome text was concluded. A key proposal was rejected to set up an inclusive United Nations intergovernmental global tax body, where every country would have a seat at the table and equal say in reforming global tax policies. This measure had been advocated by many G77 countries and strongly backed by Global Alliance for Tax Justice members and allies. Establishing such a political body on tax within the UN was seen as an effective way to ensure developing countries could increase domestic resource mobilization through fairer international tax policies.

Instead, only a few minor tweaks have been made to the existing UN expert committee. The United States and the United Kingdom were among the developed countries pressuring to ensure that the "the rich countries club" of the OECD remains the only intergovernmental body that sets global tax standards for all.

No specific debt relief initiatives are contained in the FfD outcome document, while privatization and private finance are heavily promoted as 'solutions' to financing for development. The problem of illicit financial flows was strongly debated, but final language around the issue remains weak, with no clear measures for implementation. Member states are simply urged to "redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually eliminate them, including by combatting tax evasion and corruption through strengthened national regulation and increased international cooperation."

Global Alliance for Tax Justice Chair Dereje Alemayehu said: "This came down to a matter of power between rich and poor, developed countries and the rest of the world, and private corporate interests versus the common good. The most powerful countries have ensured the status quo continues in their favour – but only for the moment. Tax justice activists can take heart that our years of advocacy, research and campaigning have ensured that mobilization for real progressive change on these issues will only continue to grow at national, regional and global levels."

During various FfD events, Independent Commission for the Reform of International Corporate Taxation members José Antonio Ocampo, Joseph Stiglitz and Eva Joly, UN Economic Commission for Latin America and the Caribbean Executive Secretary Alicia Bárcena, UN Economic Commission for Africa Executive Secretary Carlos Lopes, former South African president Thabo Mbeki, and even the World Bank's President Jim Yong Kim commended civil society activists for pushing tax justice demands – including the call for an inclusive global tax body, to the top of the agenda in both formal and behind-the-scenes Financing for Development discussions, and urged civil society to continue efforts on this front.


Failure in Addis Ababa: trouble ahead for development

Financial Transparency Coalition
July 15, 2015

http://tinyurl.com/oqbx6p5

Tonight, the Addis Ababa outcome was closed. The final outcome rejects the proposal of establishing an intergovernmental UN body on tax matters, and instead introduces some minor changes to the existing UN expert committee. This means that the OECD will remain the only intergovernmental body that adopts global standards on tax matters.

"This is not only a tragic day for the world's developing countries, who will now have to accept that global tax standards will get decided in a closed room where they are not welcome. It is a tragic day for all of us, because a global tax system where half of the world's countries are excluded from decision-making will never be effective. As long as our governments keep failing to cooperate on tax matters, multinational corporations will be able to dodge taxes. At the end of the day, the Addis Ababa failure will impact us all."

"This came down to power," said Alvin Mosioma. "The powerful simply did not want to cede one ounce of their authority to the rest of the world, and they succeeded in preserving their control."

"Developing countries have fought hard for this body but today's agreement will do nothing but keep them in a patronizing system where a group of 34 countries hold all of the power," said Pooja Rangaprasad of the Financial Transparency Coalition. "Rich countries decided to maintain a system where money goes from south to north, but the rules follow the opposite route."

"This is a dangerous failure of multilateralism and a triumph for a few, said Jorge Coranado," President of the Latin American Network on Debt, Development and Rights. "The agreement will simply continue to allow the powerful to dictate rules for the entire globe."

"Developing countries, including a number from Latin America, made their voice heard on the need for a democratic process," said Jorge Coranado, President of Latin American Network on Debt Development and Rights. "But rich countries and their multinationals decided there would be no room for them."

"It was a painful moment to see the developed countries celebrating the fact that nothing will change and everything will remain the same," added Ryding. "This sets a terrible precedent for the post-2015 and climate negotiations. This was never a negotiation in good faith, and the developed countries have consistently refused to even discuss the issues on the table."


A Few Examples of Illicit Financial Flows cited in AfricaFocus Bulletins, 2013-2015

Note: With the exception of trade misinvoicing, which is by definition illegal, in most of these examples it is not clear, without both more information and detailed expertise on the laws in different laws, what portion of the financial flows are "illegal" and how much are "only illegitimate."

Lonmin in South Africa
June 30, 2015 South Africa: Marikana Perspectives, 2
http://www.africafocus.org/docs15/mar1506b.php

Philia (oil) in Congo (Brazzaville)
March 23, 2015 Africa/Global: Swiss Connections
http://www.africafocus.org/docs15/iff1503.php

Mining companies in Sierra Leone
January 6, 2015 Sierra Leone: Losing Out
http://www.africafocus.org/docs15/sl1501.php

Swiss oil trading companies
September 16, 2014 Africa: Tracing the Oil Money
http://www.africafocus.org/docs14/oil1409.php

Equatorial Guinea
August 11, 2014 Africa: Investment for Whom?
http://www.africafocus.org/docs14/iff1408.php

South African diamonds
June 1, 2014 South Africa: Disappearing Diamond Revenue
http://www.africafocus.org/docs14/dia1406.php

Trade Mis-Invoicing
May 26, 2014 Africa: Fraudulent Trade & Tax Evasion
http://www.africafocus.org/docs14/iff1405.php

Fisheries & Forests
May 12, 2014 Africa: Report Highlights Resource Plunder
http://www.africafocus.org/docs14/app1405.php

Nigeria Oil
March 25, 2014 Nigeria: Corruption & Its International Partners
http://www.africafocus.org/docs14/nig1403.php

Tax Havens
May 31, 2013 Africa/Global: Rich Without Borders
http://www.africafocus.org/docs13/tax1305.php

Tax Havens
Apr 11, 2013 Nigeria: #Offshoreleaks
http://www.africafocus.org/docs13/tax1304.php

Zambia Sugar
Feb 15 2013 Zambia/Global: The Price of Tax Avoidance
http://www.africafocus.org/docs13/tax1302.php


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to subscribe or unsubscribe to the bulletin, or to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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