Time to stop the $1 trillion capital stampede
As if our financial Sheriffs of Nottingham didn’t have enough bad press, a new report shows that Africa may have lost $1 trillion US dollars in illicit flows to western financial institutions over the past four decades. The report – Illicit Financial Flows from Africa: Hidden Resource for Development – goes even further, stating that given the hazy nature of the data available, the true scale of this capital stampede might be as much as $1.8 trillion US dollars.
Is this just corrupt leaders buying Premier League football clubs and leaving their people destitute? According to the report by the think tank, Global Financial Integrity, only three percent of this total is due to the corruption of government officials, with a further 30-35% coming from crime. That leaves a staggering 60-65% due to, “the proceeds of commercial tax evasion, mainly through trade mispricing”.
As the report outlines:
This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and money laundering techniques.
The impact on Africa is immense, draining currency reserves, eroding tax collection to fund vital public services and thwarting poverty alleviation efforts. “Developing countries,” according to research quoted in the report, can “lose at least $10 through illegal flight capital for every $1 they receive in external assistance”.
Siphoning profits off to some Carribbean hideaway must also seriously undermine attempts by local workers to secure decent wages and working conditions from local subsidiaries of multinationals. And if the international system is failing to reign in such financial trickery, what hope does a local union negotiator in Botswana or Bristol have in understanding the financial health of the multinational she’s bargaining with?
G20 finance ministers meet at the end of this month to review progress in reigning in the worst effects of financial deregulation, including measures to clamp down on global tax evasion. The OECD has also just set up a Task Force on Tax and Development to tackle the issue. Both bodies have a daunting to do list in front of them. One important and early victory would be to require companies to fully and accurately report on all of their financial affairs on a country-by-country basis, greatly cutting out transfer mispricing practices – the key culprit driving capital flight. Such a requirement should be included as part of the upcoming review of the OECD Guidelines on Multinational Enterprises.