Harness regional integration to fight illicit financial flows out of Africa

Saturday March 22 2014

Corrupt African governments keep cash in secret tax havens. Photo/FILE

The African Development Bank (AfDB) estimates that illicit financial flows have drained in excess of a trillion dollars from Africa since 1980. These flows undermine the tax base, damage political institutions and exacerbate inequality.

With major momentum behind global countermeasures, there are clear opportunities for progress at the regional level — including through stronger information exchange and co-operation, tax base harmonisation and innovative uses of trade data.

Illicit flows involve the hidden movement of profits, hidden transfers of ownership, or hidden income streams. The main motivations are tax evasion, laundering the proceeds of crime and corruption.

These will often rely on the manipulation of trade prices and the use of anonymous companies in secretive “tax haven” jurisdictions. Because illicit flows rely on being hidden, the main counter-measures are improvements in specific elements of financial transparency.

Growing civil society demands for “tax justice” in many countries, coupled with the sharp rise in fiscal pressures on politicians in many of the Organisation for Economic Co-operation and Development (OECD) economies since the financial crisis that began in 2008, culminated last year in a series of substantive steps in the fight against illicit financial flows.

The G8 countries took a lead on the importance of knowing the owners of companies recognising that this is important to well-functioning markets and combating corruption, and that their own lack of transparency has global ramifications.


There was agreement at the G8 and G20 meetings on the need for automatic, multilateral exchange of tax-relevant information between jurisdictions, and the OECD was mandated to produce a standard.

This includes information about ownership of assets and income streams, and beneficial ownership information is necessary to make it function and to tackle not only tax abuse, but also other areas of illicit flows.

Last year also saw a spate of high-profile reports, including those from the AfDB and the African Progress Panel, on the scale of illicit financial flows out of Africa.

The UN Economic Commission for Africa’s High Level Panel, chaired by Thabo Mbeki will publish a major report later this year.

Drawing on two years of technical analysis, case studies and multiple country visits to engage with governments and civil society, the Mbeki report’s recommendations are likely to prove influential both within Africa and in providing clear African leadership in the ongoing global processes.

There is no question then that the African policy makers are focused on the issues. They now face three major questions:

  1. What national or regional countermeasures are likely to yield benefits by reducing illicit financial flows?
  2. What national or regional countermeasures are needed to meet international responsibilities?
  3. What scope is there for greater benefits from the ongoing international processes?

The answers to all three are linked, because the opportunity to benefit from international processes will depend on regional and national actions.

Consider first the opportunity of engaging in automatic, multilateral exchange of tax information.

To meet international responsibilities national policy makers should ensure the collation of, and publishing, registers of the beneficial ownership of their own companies. Failure to do so means that countries risk providing the secrecy that can promote illicit financial flows elsewhere.

This same step is also necessary to provide reciprocity in information exchange, which the new OECD standard makes a general requirement — so if Ghana, for example, wishes to receive information about Ghanaians’ assets in Jersey, Ghana would need to be in a position to reciprocate.

This means Accra would need systems in place to identify domestically all overseas beneficial owners and the specific residence jurisdictions thereof.

Overall then, establishing effective systems to identify beneficial ownership in the financial system and of companies will have direct domestic benefits; will ensure countries meet their international responsibilities; and will provide the basis to participate in the new standard of automatic exchange of tax information, when reciprocity is required.

The area of automatic exchange of tax information also provides a powerful example of the benefits of regional co-operation.

While unilateral US demands for information under the Foreign Account Tax Compliance Act have forced new openness from some of the most secretive jurisdictions such as Switzerland, the principle of multilateral exchange was pioneered, and the precedent set, by the European Union through its Savings Tax Directive.

This regional initiative has also led to the strengthening of member systems domestically in order to facilitate co-operation, and has managed to include those member states that are most opposed to transparency.

The equivalent within, for example, the East African Community, could yield similar benefits. In addition, it would also provide a powerful antidote to some sceptical OECD members and others, who have claimed that lower-income countries would not be able to establish the required systems, nor deal effectively or confidentially with the resulting information.

One further area in which regional groupings could take a lead in co-operating is in the use of customs data. First, by sharing trade price data, countries automatically expand the dataset against which they can judge and identify abnormal pricing.

In the Open Government Guide, I propose working with major trading partners to identify abusive pricing happening at each end of the same transactions. Starting such a process on a regional basis could be powerful and also provide a demonstration to other trade partners of the value of cooperation.

Greater regional integration to curtail illicit financial flows has the potential to support a clearer and more credible African position in the international processes which otherwise risk responding to OECD and G20 member priorities, rather than reflecting the diversity of African countries’ situations.

Alex Cobham is a research fellow at the Center for Global Development in Europe.