Illicit financial flows severely impact developing countries, not least South Africa

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19cash2Illicit financial flows are a massive problem impacting developing countries in general and in particular South Africa, and require urgent attention. This became clear during a roundtable meeting convened by three well-known international civil society organisations (CSOs) - African Monitor, Economic Justice Network and Oxfam - in South Africa during May. In a statement released Friday last week, the organisations noted that illicit financial flows also impacted developed countries and was such a huge and complex field that it would be best solved by a wide range of organisations working together to address the challenges caused by such flows.

In the case of South Africa, a Working Group was established during the roundtable to work with South African CSOs, the government and the private sector. The Working Group will ensure that there is purposeful cooperation to address the issue among South African CSOs. The group will liaise with other like-minded groups and task forces involved in addressing the issue.

Such flows involve money that is illegally earned, transferred or utilised. Illicit financial flows range from trade in drugs, trade mis-invoicing, corporate malpractices, use of tax havens and aggressive transfer pricing, among others.According to estimates from Global Financial Integrity (GFI), South Africa is heavily affected by such illicit financial outflows, having lost R1,007-Billion to illicit outflows in the decade 2002 to 2011. Of this amount, over 80% was lost through transfer pricing, pointing to the role of the private sector in perpetuating this illicit practice.

The statement said that the roundtable had heard a presentation by Dev Kar of Global Financial Integrity, who said that since the publication of the illicit financial flows report and figures in 2013, the GFI had been commended by national governments as well as international bodies such as the IMF, World Bank, OECD, African Development Bank, the UN Economic Commission for Africa and the United Nations itself, among others.Kar noted that such illicit flows are not just a problem for developing countries but also for developed countries as illustrated by the Eurozone crisis. Numerous attempts have been made to resolve this problem, such as the President Thabo Mbeki-led High Level Panel on Illicit Financial Flows from Africa, due to deliver its final report at the July AU Summit and the G20/OECD Base Erosion and Profit Shifting (BEPS) Project.In spite of this, there is still serious resistance from governments and the private sector with vested interests and who are benefitting from illicit financial flows.

To illustrate how entrenched these vested interests are, the meeting cited the dominance of business voices at the recent OECD Annual Meetings in Paris and a subsequent G20 tax symposium held in Japan during May 8 & 9 hosted by the Australian Presidency. At this meeting, Mr Kojo Parris (with a strong private sector background), reiterated the importance for CSOs to closely engage private sector and government on this issue and not treat them as enemies. Hassan Lorgat of the Bench Marks Foundation emphasised the importance of understanding that illicit financial flows is part of a bigger struggle of capital versus workers. Therefore, the need to connect the struggles through engaging grassroots groups is of paramount importance.It was accepted that while there was already a good basic understanding of the problem as well as estimates of how much was involved, there needed to be an understanding of the nature and types of underlying mechanisms used to generate the outflows as an important step in addressing illicit financial flows in South Africa.

Tendai Murisa of Trust Africa, urged civil society organisations to also focus on investment treaties the government has entered and is entering into as an important step in addressing illicit financial flows.The meeting also highlighted the inadequacy of the South African regulatory system in terms of its excessive focus on anti-money laundering at the expense of other dominant forms of illicit financial flows such as trade mispricing.As a way of curbing dominant forms of illicit financial flows in South Africa, the roundtable identified the urgent need to bring together all stakeholders and economic agents participating in and monitoring developments in the production value chain.

It was further noted that transparency and an improved reporting standards would be central in ensuring that the agencies are able to monitor developments, calling on government to:

immediately adopt legislative changes to put in place comprehensive country by country reporting;

implement automatic exchange of tax information between competent authorities; 

implement public beneficial ownership registers;

address harmful tax competition; and

for South Africa to use its position in the G20 to advocate for an inclusive Base erosion and Profit Shifting (BEPS) process that fully integrates developing countries in rewriting the rules on global corporate taxation.Media was also noted as an important player in highlighting the issue.

The roundtable also said that there is a need to look into intra-Africa illicit financial flows, with particular attention to the role played by South African companies in Africa. During the meeting, participating CSOs and partners shared the work they are doing in the following areas:

tax justice covering issues of tax evasion and other tax loopholes;• corporate income tax disparities;

input and advocacy around the Davis Tax Commission;

information provision and availability;

voluntary disclosure and mandatory reporting;

grassroots engagement in terms of poor public service delivery and provision;

research and understanding of South Africa’s regulatory framework that perpetuates illicit financial flows;

Base Erosion and Profit Shifting (BEPs);

accessing policy makers on illicit financial flows issues;

Transnational Corporations and tax impunity especially within mining and the extractives sector; and

value chain analysis and how the shadow economy impacts on illicit financial flows.

For more information contact Masiiwa Rusare, Advocacy Lead for African Monitor on 021 713 2802,

Advocate Johnlyn van Reenen, Programme Officer: Tax Justice and Extractives for Economic Justice Network on 021 424 9563

or Thembinkosi Dlamini, Governance Manager for Oxfam on 011 223 2454.


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