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Tracking the missing billions

African, Asian and Latin American states have won a vote on tax reform at the UN – it could boost revenues and help them catch stolen cash

Ahead of the annual meeting of the UN General Assembly, African states were focusing on the need to claw back the billions of dollars lost in illicit financial flows (IFFs) as their treasuries searched for revenue to fund public services and pay spiralling debt service costs. On 22 November, a coalition of 125 mostly developing countries led by Nigeria won a vote in the UN General Assembly to establish an intergovernmental authority to draw up rules on tax and combating IFFs (AC Vol 64 No 21, Nigeria leads attack on tax).

It is hard to measure the precise scale of these flows, economists agree they are substantial and growing. According to a 2020 report by the UN Conference on Trade and Development, Africa lost an average of US$88.6 billion in illicit capital flight annually from 2013-2015. To compare: in 2015, Africa received $49.5bn in net official development assistance, according to the World Bank. In the same year, UNCTAD estimated foreign direct investment inflows at $54bn.

These commercial IFFs take two forms. The first is deliberate trade misinvoicing, when a company chooses to misinvoice the price of goods to shift tax liabilities from one jurisdiction to another. A company might sell goods to another at a fraction of their real cost, resulting in minimal excise taxes being paid. The company that sold the goods at the low cost then may get a kickback or payment in a third country. This is especially common with commodities – Nigeria, for example, saw a total of $51.9bn in under-invoiced oil exports with its major trading partners from 1999 to 2014, according to a Partnership for African Social and Governance Research (PASGR) study.

Tax trick
The second involves transfer pricing: an accounting technique that involves a company selling goods to itself through its subsidiaries to avoid tax obligations. A mining firm would set up a company, of which it is the beneficial owner, in a tax haven. It would then sell the goods produced by its subsidiary in a developing country to the company based in the tax haven for a fraction of the market value of the product.

This company then sells the goods back to the mining company at market price, resulting in the profits being declared in the tax haven. The result: the company pays little or no tax in the jurisdiction it extracts the goods from – in fact, hardly any tax anywhere. Due to international rules on Arm's Length Standards (ALS), these transactions between related companies are treated as if they did not have a conflict of interest, even when they clearly do.

Glencore's tax avoidance activities in Zambia ended in court. From 2000-2021, it owned Mopani Copper Mines, which was accused of systematically avoiding international tax obligations. A leaked 2011 draft report by accounts Grant Thornton Zambia and Norway's Econ Pöyry, indicates that from 2006-2008, Mopani Copper Mines saw a rise of over $50 million in 'unexplainable costs'. Evidence suggests these increased costs helped shift profits to a company in the British Virgin Islands.

The Zambian Revenue Authority (ZRA) fined Glencore $13m in May 2020 for practices over the period from 2006-2009. UNCTAD also helped the Zambian government set up the Mineral Output Statistical Evaluation System (MOSES) to track copper and mineral exports to raise tax revenues. This has seen some success, raising an additional $1m a year. Yet only a fraction of the taxable revenue lost was recovered.

African officials have been frustrated by the slow progress on the issue, particularly at the Organisation for Economic Co-operation and Development (OECD), which has emerged as the global tax rule-maker.

In 2016, the body set up the Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) in cooperation with the G20 to combat concerns about global tax justice. The initiative attempted to provide the critics of the current structure of global tax norms a platform and voice to change them.

The most significant fruits of the OECD's IF initiative came in 2020, with a commitment to move forward with a 'two-pillar' approach. The first of these 'two pillars' was to redistribute the profits of multinationals to the jurisdictions they operate in while the second is a 'global minimum tax', in an attempt to eliminate the benefits of the most egregious tax havens.

Yet the '[OECD's] Inclusive Framework was not inclusive' according to Adeyemi Dipeolu, former member of the Technical Committee and Head of the Secretariat on the High-Level Panel on Illicit Financial Flows. He pointed out that only 23 of 54 African states had been fully consulted. It 'is not enough to be present as it is still possible to be excluded from genuine participation because of global power dynamics,' said Dipeolu.

The UN African Group has been spearheading recent attempts to challenge the OECD's leading role in setting global tax rules. The result has been a series of significant victories. A year ago the UN General Assembly voted to take responsibility for global tax policy (Dispatches 29/11/22, African nations win latest round on UN tax reform body).

Change has also come in national jurisdictions. Pressure from organisations like Tax Justice Network and Global Financial Integrity has encouraged national reforms to tackle commercial IFFs.

This includes automatic exchanges of tax information, as well as the creation of public registries of beneficial ownership in almost 100 countries as of 2022. These measures offer more transparency on financial transactions – helping governments, sleuths and journalists collect data to investigate suspicious-looking cases.

Not all IFFs involve dodging tax liabilities, and it is these that the UN will struggle to combat directly. Procurement scams, which often involve collusion by government officials with bribery are a particularly damaging IFF that, for now, the UN can do little about.

A major source of IFFs is High-net-worth Individuals who have enriched themselves via grand corruption. One of the most brazen was Nigerian former junta leader, General Sani Abacha, who ruled from 1993 to 1998, stealing an estimated $4bn from the country.

Abacha spread his wealth, keeping large funds in various secret bank accounts, often in jurisdictions and banks that prioritised their clients' secrecy. The result was that recovering the funds proved a long and still incomplete process. In the eight years after Abacha's death, only $1.2bn was recovered. And some of his business partners and family have clung on to most of their stolen wealth, having paid fines in Nigeria foreign jurisdictions. Some are still working in or with the current government.

The current structure of the global financial system facilitates these individuals, accruing and laundering large sums of illicit money. It usually involves several enablers, varying from intermediaries who may complicate tracking funds, to legal experts who might advise where to invest it, to 'secrecy institutions' designed to complicate the tracking and recovering of these funds.

Large sums are difficult to extricate from such 'secrecy institutions', which vary from Swiss banks to the network of British Overseas Territories, Crown Dependencies and banks. The network is so opaque and extensive that Nicholas Shaxson, an author and journalist, has termed the arrangements a 'second British Empire'.

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