1. THE SHAPE OF BATTLE TO COME: ILLICIT FINANCIAL FLOWS (IFFs) FROM AFRICA (Breakout session, ITJ Academy, Nairobi, 10-15 August 2015)

2. Summary Discussion of the three fallacies regarding IFFs from Africa and suggestions on possible responses (to the fallacies and IFFs from Africa)

3. Three IFF fallacies 1.They are not significant (confined only to resource rich countries like Sudan, Angola and Nigeria). 2.There is no universal agreement on key concepts (such as IFF, invoicing, transfer pricing, etc) 3.FDI comes with some IFFs

4. Three IFF fallacies Over the last few months, senior officials of IMF have made these assertions at international forums. Over the last few months, senior officials of IMF have made these assertions at international forums. They are wrong. They are wrong.

5. 1. IFFs are significant Africa is estimated to be losing more than $50bn annually in IFFs. Africa is estimated to be losing more than $50bn annually in IFFs. IFFs are a huge drain on Africa’s resources and of serious concern given; IFFs are a huge drain on Africa’s resources and of serious concern given;  Inadequate growth – average growth of 5% annually is encouraging at best.  High levels of poverty – number of people living on less than $1.25/day increased from 290million 1990 to 414 million in 2010  Africa’s resource needs – set to have largest youth population.  Changing global landscape of Official Development Assistance – ODA resources are stagnating due to domestic fiscal challenges of partners.

6. IFFs are not the problems of three countries

7. IFFs are not the problems of three countries… #Country Cumulative IFF (1970-2008) US$ billion Share in total Africa’s IFF 1Nigeria217.730.5% 2Egypt105.214.7% 3South Africa81.811.7 4Morocco33.94.7% 5Angola29.54.1% 6Algeria26.13.7% 7Cote d’Ivoire21.63.0% 8Sudan16.62.3% 9Ethiopia16.52.3% 10Congo, Republic of16.22.3%

8. Estimates of IFFs from Africa tell only part of the story… Estimates of IFFs from Africa tell only part of the story…

9. IFFs are an African problem with Global solutions… IFFs are an African problem with Global solutions…

10. Impact of IFFs Development Consequences – Loss of multiplier effect for growth & job creation Loss of multiplier effect for growth & job creation Africa’s capital stock would have expanded by 60% & GDP per capita of 15% Africa’s capital stock would have expanded by 60% & GDP per capita of 15% Rate of domestic investment to GDP would have risen from 19% to 30% Rate of domestic investment to GDP would have risen from 19% to 30% Leveraging effect of state intervention Leveraging effect of state intervention  Infrastructure Fiscal effects & austerity Fiscal effects & austerity

11. Impact of IFFs Discouraging Transformation and Transparency - by discouraging value creation, IFFs impact negatively on African aspirations for structural transformation. Straining Africa’s capacities – there is great concern over the risk African countries face in making unbalanced tax concessions. Straining Africa’s capacities – there is great concern over the risk African countries face in making unbalanced tax concessions. Undermining International Development Cooperation - global efforts to promote partnerships for aid effectiveness and development effectiveness are undercut by illicit financial flows. Undermining International Development Cooperation - global efforts to promote partnerships for aid effectiveness and development effectiveness are undercut by illicit financial flows.

12. 2. There is broad agreement on concepts In a world where there is agreement on good governance, drug trafficking and pornography…why is there confusion on what constitutes illicit financial flows?

13. Understanding IFFs Illicit financial flows can be defined as “money illegally earned, transferred or used”. Illicit financial flows can be defined as “money illegally earned, transferred or used”.

14. Abusive transfer pricing Shifting profits from one jurisdiction to another; usually from a higher tax to a lower tax jurisdiction Shifting profits from one jurisdiction to another; usually from a higher tax to a lower tax jurisdiction (Businesses usually argue that this is a logical business decision. But it is IFF if the action entails manipulating the price of transaction).

15. False invoicing Falsely declaring the value of imports or exportys to evade taxes, customs duties, circumvent quotas or launder money (Exports are usually understated and imports are overstated. Proceeds are shifted overseas illicitly) Falsely declaring the value of imports or exportys to evade taxes, customs duties, circumvent quotas or launder money (Exports are usually understated and imports are overstated. Proceeds are shifted overseas illicitly)

16. Base erosion and profit shifting Tax planning strategies which 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 (OECD) Tax planning strategies which 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 (OECD)

17. What should be done Unpack /clarify the fallacies Unpack /clarify the fallacies Pay attention to Paragraph 23 (FfD Addis outcome): Pay attention to Paragraph 23 (FfD Addis outcome): “We will redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them, including by combating tax evasion and corruption through strengthened national regulation and increased international cooperation”. (Another $1 trillion gone in IFF by 2030) “We will also reduce opportunities for tax avoidance, and consider inserting anti-abuse clauses in all tax treaties”. “We will make sure that all companies including multinationals, pay taxes to the Governments of countries where economic activities occur and value is created, in accordance with national and international laws and policies”. (How? CSOs should help)

18. A.The commercial component of IFFs 1)Trade Mispricing: African countries should ensure they have clear and concise laws against mis-stating the price, quantity, quality or other aspect of trade in goods and services in order to move capital to another jurisdiction or avoid taxation. 2)Transfer Pricing: African countries should establish or strengthen transfer pricing units of their countries of operation. 3)Base Erosion and Profit Shifting: African countries should establish arrangements for exchange of tax information between them as well as with global partners. 4)Regional integration arrangements should be used to introduce accepted standards for tax incentives. 5)Institutional support for these measures: African States should establish or strengthen the independent institutions and agencies responsible for preventing IFFs. What should be done 18

19. B.The criminal component of IFFs 1)Training and empowerment of investigators responsible for identifying the criminals engaged in illicit (criminal) activities by African governments is critical. 2)Each African country’s financial intelligence unit should share information with other African financial intelligence units. 3)Request that the United Nations Office on Drugs and Crime (UNODC) extend its work on transnational organized crime in West and Central Africa to the rest of the continent What should be done 19

20. C.The corrupt component of IFFs 1)IFFs should be integrated as a specific component in the African Union Convention on Preventing and Combating Corruption 2)African states should ensure that the public can access national and subnational budget information. 3)African countries should adopt best practices in open contracting to reduce IFFs through government procurement processes. 4)African governments can regularly publish lists of Politically Exposed Persons (PEPs) as well as any asset declarations filed by PEPs and information about whether the country’s laws prohibit or restrict the ability of their PEPs to hold financial accounts abroad. What should be done 20

21. Thank You Download HLP Report on IFFs here: http://www.uneca.org/publications/illicit- financial-flow Download HLP Report on IFFs here: http://www.uneca.org/publications/illicit- financial-flow http://www.uneca.org/publications/illicit- financial-flow http://www.uneca.org/publications/illicit- financial-flow Follow us on Twitter: @IFF_Africa Follow us on Twitter: @IFF_Africa