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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 A Discovery Problem Large volume of illicit flows 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 1970-2008 Real capital flight in 2008 dollars: $734.9 billion Accumulated (stock) of capital flight: $944.2 billion Africa a “net creditor” : $767 billion (KF stock – debt stock) The Discovery Problem The origin of illicit flows: Destination of illicit flows The “grabbing hand”: private actors – national and foreign Governance and regulation – corruption The “helping hand” Banking secrecy practices We simply do not know how much How capital flight hurts African economies Or what African economies could gain from KF repatriation Large losses in foregone investment and growth Deprivation of the African people due to foregone public services: Education Health Infrastructure services Capital Flight and Poor Tax Performance –Social Costs Top 10 KF country Bottom 10 worst performers: tax, PHE, IMR capital flight ($bn) country Tax/GDP % country pub health exp per capita country infant mortality NGA 376855 SDN 7 ZAR 2 SLE 156 AGO 79962 COG 8 GIN 2 TCD 124 CIV 66247 CAF 8 SLE 4 MOZ 117 ZAR 48441 ETH 9 ETH 5 AGO 116 ZAF 36431 NGA 9 BDI 6 CAF 114 ZMB 35052 GIN 10 CAF 6 RWA 109 CMR 33256 SLE 10 UGA 6 ZAR 109 ZWE 31338 MDG 11 CIV 8 BDI 109 COG 26903 RWA 12 MDG 9 ZMB 104 ETH 25954 ZAR 12 ZWE 11 BFA 104 SDN 25699 GAB 12 MWI 12 NGA 99 GAB 21854 BFA 12 KEN 12 GIN 95 Color code: Blue = oil-rich; Red = minerals-rich Large potential gains from KF repatriation through investment Investment/GDP (%), average 2000-2004 30 20 10 0 GDI/GDP SSA SSA+ 25% Low Inc. EA&P 18.9 29.6 21.1 24.2 LAC MENA 23 19.4 S. Asia 27.4 Note: SSA + 25% = Gross domestic investment achieved following repatriation of 25 percent of the stock of capital flight. 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 independence and without mortgaging the welfare of future generations. 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)