Posted on May 6, 2016 by Alex de Waal
When UK PM David Cameron opens the Anti-Corruption
Summit on 12 May, we should be aware that the greatest fraud perpetrated on the
majority of the world’s citizens is all perfectly legal.
The
City of London, arguably the heart and headquarters of a international network
of tax havens. Credit: Michael Garnett.
Africa
loses at least $50 billion a year — and probably much, much more than that —
perfectly lawfully. About 60% of this loss is from aggressive tax avoidance by
multinational corporations, which organise their accounts so that they make
their profits in tax havens, where they pay little or no tax. Much of the
remainder is from organised crime with a smaller amount from corruption. This
was the headline finding of the High
Level Panel on Illicit Financial Flows from Africa, headed by former South
African President Thabo Mbeki, a year ago.
This
amount is the same or smaller than international development assistance ($52
billion per year) or remittances ($62 billion). If we take the accumulated
stock of these illicit financial flows since 1970 and factor in the returns on
this capital, Africa has provided the rest of the world with $1.7 trillion, at
a conservative estimate. Africa is a capital exporter.
The
rest of the world didn’t take much notice of the Mbeki Panel’s findings until
the Panama Papers revealed the extent to which this is just part of a global
phenomenon. The rich aren’t being taxed. The rest of us pay for everything.
The
OECD calls the phenomenon ‘base erosion’ (referring to the emasculation of the
tax base of the affected countries) and ‘profit shifting’. The beneficiaries
are a small fraction of the world’s wealthiest 1%, and the secrecy
jurisdictions (aka tax havens) where they sequester their money. These
locations include the City of London, numerous British overseas territories,
Switzerland, and new entrants to the global business of looking after the monies
of the hyper-wealthy and ordinarily wealthy, who would prefer not to pay tax.
Countries including Mauritius, the Seychelles, Botswana and Ghana are seeking
to enter this competition.
And
the vast majority of this is perfectly legal.
Accountants’
alchemy
Two
hundred years ago, the slave trade was legal. One hundred years ago, colonial
occupation and exploitation were legal. This time the legal immiseration is
done by accountants.
This
dimension of unethical financial activity isn’t captured by Transparency
International (TI) and its Corruption
Perceptions Index. That index is, as it says, a measurement of perceptions.
But of what andby whom? As the UN Economic Commission for Africa recently observed,
it relies on asking key power players in a nation’s economy what they think of
the level of corruption. Many of those are foreign investors. Using this
approach a country like Zambia will unsurprisingly tend to rank high on
corruption – 76 worst out of 168. Meanwhile, Switzerland will rank low –
7th.
But
the perfectly legal transfer of the wealth of Africa to Europe isn’t captured
by this index. As TI notes, “Many ‘clean’ countries have dodgy overseas
records”. Consider this: the number one destination for Zambian copper exports
is Switzerland, which in 2014 accounted for 59.5% of the country’s copper
exports. Yet Switzerland’s own imports that year scarcely contained any mention
of copper at all. Had the African country’s main exports just vanished into thin
air? The 2015 figures suggest that in fact much of these exports were destined
for China (31%), though Switzerland remained the number one destination
(34%).
The
answer to where the money goes lies in accountants’ alchemy. International
corporations present their books in such a way that they pay as little tax as
possible in either Zambia or China. And they don’t pay much in Switzerland
either – because the Swiss don’t demand it.
Suddenly
the ranking of Switzerland, 69 places ahead of Zambia in the honesty league,
looks a bit suspect. But of course it’s all perfectly legal.
From
Zambia’s point of view, what counts as corruption is defined by the rich and
powerful. When their country is robbed blind by clever accounting tricks,
against which their government and people have no recourse, it is just the
operation of a free market controlled – as free markets so often are – by
corporations that have enough power to set the rules.
Political
money in a political marketplace
Another
little noticed but significant feature of illicit financial flows from Africa
is that there are occasional reverse flows. The movements back into African
countries aren’t as big as the outflows, but they are important. What is
happening here is “round-tripping”: spiriting funds away to a safe place so
they can be brought back, with their origins unexplained, and no questions
needing to be asked.
The
same multinational corporation that is defrauding an African country can pay
money into the offshore account of one of its political leaders. Or that leader
can whisk funds away by other means. Our main concern here isn’t the money
invested in real estate in France, yachts, fast cars, or foreign business
ventures. These are personal insurance policies in case things go wrong at
home, or tickets to the global elite club. Rather, our concern is the cash kept
liquid, to be brought back home when needed – the money brought back
to fix elections, buy loyalties and, in sundry other ways, secure leaders in
power. These are political budgets par excellence: the funds used for
discretionary political purposes by political business operators.
In
the United States, almost any kind of political funding you can think of can be
done in a perfectly legal manner, given a smart enough accountant and lawyer.
Political Action Committees can spend as much money as they like in support of
a candidate. Campaign finance is essentially without a ceiling.
In
Africa, political finance laws range from lax to non-existent. Spending vast
amounts of money on winning political office – or staying in office – offends
no law. The monetisation of politics is one of the biggest transformations in
African political life of the last 30 years. It is generating vast
inequalities, consolidating a political-commercial elite which has a
near-monopoly on government office, fusing corporate business with state
authority, and making public life subject to the laws of supply and demand.
Political markets are putting state-building into reverse gear, transforming
peace-making into a continual struggle against a tide of mercenarised violence,
and – most perniciously – turning elections into an auction of loyalties.
Political
money is discrediting democracy. Some of the transactions that constitute
Africa’s political markets are blatantly corrupt, but many are simply the
routine functioning of political systems based on the exchange of political
services for material reward.
Yes,
there is corruption in Africa, just as there is corruption in international
trade and finance. But when Prime Minister David Cameron opens the
Anti-Corruption Summit next week on 12 May, we should be aware that the
greatest fraud perpetrated on the majority of the world’s citizens – notably
those living in Africa – is all perfectly legal.
Alex
de Waal is the Director of the World Peace Foundation.
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