Tax Havens and Illicit Financial Flows – Three Problems for Africa Conference on: “Fighting Illicit Flows from Developing Countries: What next for the EU Agenda” EURODAD and Task Force on Financial Integrity and Economic Development Brussels December 7-8, 2010

Africa and Illicit flows: Three problems A Hemorrhage Problem  Large volume of illicit flows A Discovery Problem  The handshake: grabbing hand and receiving hand  “It takes two to tango” A Recovery Problem  The banks: lack of transparency  The governments: responsibilities of African governments & Foreign governments

The Hemorrhage problem Important: distinguish licit capital flows from capital flight or illicit flows Capital flight from Africa: several channels  Outright smuggling of public funds, including borrowed funds (the “revolving door”)  Trade misinvoicing  Other unrecorded capital account transactions Large volumes: for 33 countries  Real capital flight in 2008 dollars: $734.9 billion  Accumulated (stock) of capital flight: $944.2 billion  Africa a “net creditor” : $767 billion (KF stock – debt stock)

The Discovery Problem The origin of illicit flows:  The “grabbing hand”: private actors – national and foreign  Governance and regulation – corruption Destination of illicit flows  The “helping hand”  Banking secrecy practices We simply do not know how much

How capital flight hurts African economies Large losses in foregone investment and growth Deprivation of the African people due to foregone public services:  Education  Health  Infrastructure services Or what African economies could gain from KF repatriation

Top 10 KF Bottom 10 worst performers: tax, PHE, IMR country capital flight ($bn)countryTax/GDP %country pub health exp per capitacountry infant mortality NGA376855SDN7ZAR 2SLE156 AGO79962COG8GIN 2TCD124 CIV66247CAF8SLE 4MOZ117 ZAR48441ETH9 5AGO116 ZAF36431NGA9BDI 6CAF114 ZMB35052GIN10CAF 6RWA109 CMR33256SLE10UGA 6ZAR109 ZWE31338MDG11CIV 8BDI109 COG26903RWA12MDG 9ZMB104 ETH25954ZAR12ZWE 11BFA104 SDN25699GAB12MWI 12NGA99 GAB21854BFA12KEN 12GIN95 Color code: Blue = oil-rich; Red = minerals-rich Capital Flight and Poor Tax Performance –Social Costs

Large potential gains from KF repatriation through investment Note: SSA + 25% = Gross domestic investment achieved following repatriation of 25 percent of the stock of capital flight. Investment/GDP (%), average

The Recovery Problem First, a moral argument: Capital flight was accumulated from resources belonging to the African people; Second, an economic argument: Repatriation of flight capital will support sustainable growth while preserving financial independence and without mortgaging the welfare of future generations. Justification of capital flight repatriation: two arguments

Responsibilities of African governments Improvement of the regulatory framework and the overall investment climate to attract legally acquired private assets. Governance: demonstrate to asset holders that repatriated assets will not be subject to extortion (distortionary taxation), expropriation, etc.

Responsibilities of Western Governments and the EU Enforce transparency in banking systems. Utilize economic and financial intelligence services to track illicit banking transactions and tax fraud by African “politically exposed persons” and private operators. Support, ratify and implement specific international conventions against fraud, corruption, and money laundering. Provide technical assistance in tax administration and governance reforms

Responsibilities of Western banks “Willful blindness”: Banks must report suspected illicit financial transactions. Banks must share information with governments of their clients’ countries (where transactions originate)