Tax Havens and Illicit Financial Flows – Three Problems for Africa

1. 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

2. 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

3. The Hemorrhage problem • Important: distinguish licitcapital flows from capital flight or illicitflows • 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 1970-2008 • 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)

4. 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

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

6. Capital Flight and Poor Tax Performance –Social Costs Bottom 10 worst performers: tax, PHE, IMR Top 10 KF Color code: Blue = oil-rich; Red = minerals-rich

7. Large potential gains from KF repatriation through investment Investment/GDP (%), average 2000-2004 Note: SSA + 25% = Gross domestic investment achieved following repatriation of 25 percent of the stock of capital flight.

8. The Recovery Problem Justification of capital flight repatriation: two arguments • 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 independenceand without mortgaging the welfare of future generations.

9. 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.

10. 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

11. 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)