Global Financial Integrity


Offshore Interests Not Aligned with Africa’s Development Agenda

Tom Cardamone

Offshore Financial Centres Can Help Curb Illicit Flows by Exchanging Tax Information and Providing Transparent Beneficial Ownership Information

This article was originally published by This is Africa.

In its recent op-ed, Jersey Finance provides a defence of the offshore financial centre’s legal code and regulatory framework against charges by “pressure groups” of alleged financial improprieties. The author also promotes Jersey’s financial services to current and potential clients that intend to invest in Africa.

However the article’s logic is flawed. It suggests that since Jersey is an international finance centre with allegedly tough anti-money laundering laws to help prevent wrongdoing, other IFCs are also proper places to facilitate investments in the developing world. One need only search “Swiss leaks” or “Lux leaks” to understand more clearly how taxes are dodged, money laundered, and financial secrets kept around the globe. Secret bank accounts, anonymous corporations, fraudulent foundations, nominee trust accounts and other opaque structures are the calling cards of many IFCs and are utilised by any firm or person who wants to move, hide or launder money.

However debating the extent to which Jersey’s laws and regulations contribute to the flow of investment capital into Africa misses the larger point. The key issue for future development in sub-Saharan Africa is to create legal frameworks and improve the technical capacity of customs departments in order to reduce the massive amount of capital lost through trade misinvoicing. Without these key improvements, the region will struggle to meet the Sustainable Development Goals, which will be implemented in January 2016.

Trade misinvoicing, or trade fraud, occurs when the quantity, quality, or value of goods being shipped is purposefully misrepresented on an invoice in order to evade taxes or duties, increase government rebates, or launder funds. In sub-Saharan Africa, as in the rest of the world, this equates to huge amounts of money. In 2012 alone, the region lost an estimated $69bn to trade misinvoicing according to our analysis of IMF trade data..

If even half of this illicit capital outflow could be stopped before it left countries and was taxed appropriately, it would create a transformative flow of financing with which to build Africa’s future. For example, from 2008 to 2012 three sub-Saharan countries – Chad, Côte d’Ivoire and Zambia – had more capital siphoned out of their economies due to misinvoicing than the totals of FDI and ODA flowing in. We base these figures on trade data the countries themselves provide to the IMF and compare the losses to OECD figures for aid and investment inflows. Our numbers are estimates, but the data sets point to outflows of an order of magnitude that cannot be ignored.

Governments in Africa can address this problem by focusing on establishing adequate legal protections and developing efficient, well-trained and well-equipped customs departments.

Several policy measures could go a long way to curbing misinvoicing. First, laws must be passed that make knowingly misrepresenting the value of goods on an invoice a crime. Second, owners of companies should be required to sign a statement that is attached to each shipment assuring that the value listed on the invoice represents the true price and that it has not been modified to evade taxes or duties. Third, commercially available trade pricing software should be used in customs departments to enable officials to cross-reference prices to determine if goods have been misinvoiced.

In the current draft of the Financing for Development Conference document that will be used as a guide for global development until 2030, use of the phrase ‘domestic resources’ is scattered throughout. This is a reference to sources of potential tax revenue and investment capital – such as that lost through trade misinvoicing – that must be captured and mobilised by developing country governments if there is any hope of eliminating extreme poverty.

The financial services Jersey offers its clients are meant to benefit those clients, not nations in Africa. The steps needed to address trade misinvoicing are not technically complicated. The ultimate challenge for developing countries in Africa, and elsewhere, is whether they are able to muster the political will to get the job done. Jersey can help by exchanging tax information and providing transparent beneficial ownership information, and by encouraging other IFCs to do the same.

Tom Cardamone is managing director of Global Financial Integrity, a Washington, DC-based research organisation focused on flows of illicit capital and global development.

This article was originally published by This is Africa.