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Wednesday, August 5, 2009

Africa's missing billions:Tax havens are at the heart of the corruption that is sucking the continent dry.

By Khadija Sharife

When we hear the words "rogue state," we tend to think of the Burmas and Guineas of the world - countries ruled by despotic leaders who oppress their people through militarized rule. We don't tend to imagine bucolic mountain pastures populated by cud-chewing cattle, or pristine lakefront cities teeming with international businessmen in smartly pressed, charcoal-gray suits.

Maybe the comparison is a little over the top. But one could nonetheless make a strong case that Switzerland - or, for that matter, Britain, home to more than a quarter of the world's tax havens -- belongs in the category of countries whose unwillingness to follow international norms has harmful spillover effects around the world.

Take Africa, whose poverty is often portrayed as the inevitable product of history and geography. Africa has immense natural riches; they've just been sucked dry by wealthy individuals and multinationals who rely on countries with lax tax regulations and excessive traditions of secrecy to disguise the full extent of their earnings. In other words, Jersey, the Cayman Islands, and other tax havens and offshore financial centers are at the heart of Africa's resource curse.

The numbers are staggering. Each year, more than $1 trillion exits developing countries, and more than $140 billion of comes from Africa. That's almost four times as much as the continent gets in official development aid. Sub-Saharan Africa may be the world's poorest region, but it's also its leading net creditor.

The key players in this shadow economy are corporations. Globally, more than 60 percent of capital flight comes from multinationals operating in resource-rich regions. Here's how it works: Instead of declaring profits where they earn them, companies use a mechanism called transfer pricing, wherein internal corporate revenues are "moved" from one part of a company to another. Each year, African countries lose billions in tax revenue to home countries or tax havens as a result. Meanwhile, instruments such as "tax competition" designed in theory to attract foreign direct investment, are primarily utilized in practice by corporations seeking to exploit finite natural resources.

African officials, of course, are often complicit in this organized theft. Equatorial Guinea stores $2 billion worth of oil revenue offshore, according to the IMF, some of which was likely used to buy the $35 million Malibu mansion purchased by the country's president in 2006. Still, compared with the scale of capital flight, the infamous corruption of African officials is pennies, amounting to just 3 to 5 percent of the billions exiting Africa.

Watchdog groups like Transparency International (TI), self-described as the ‘leading global organization devoted to combating corruption,' have yet to hold tax havens account for the pernicious impact they have on the developing world. Switzerland, the recipient of one third of global capital flight, ranks fifth-best in the world on TI's latest Corruption Perception Index.

Nor are wealthy countries adequately focused on the problem. The G-20's London summit, which saw British Prime Minister Gordon Brown boldly declare, "The era of banking secrecy is over," was a good start. But G-20 leaders, focused on tax evasion in their countries, failed to notice that the developing world loses an estimated $385 billion to tax abuse annually. They failed to call for country-by-country reporting or mandatory automatic exchanges of information about where corporate profits are going. Nor were there any calls to recover and return the estimated $11.5 trillion currently stashed in tax havens dotting the globe. Instead, the G-20 countries proposed bilateral tax arrangements related to "suspected" tax evasion, and this, on "request" only. Good luck getting complicit African governments to turn on their multinational partners.

For Africa, the era of banking secrecy is far from over.

Khadija Sharife is an investigative journalist, researcher with the Tax Justice Network and a visiting scholar at the Center for Civil Society in South Africa.

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