July 14, 2017
July 5, 2017
Raymond W. Baker
President, Global Financial Integrity
Thank you, Ms. Gigi Reid-Miles.
Your Excellencies, Honorable Ministers, distinguished officials, members of the Bar, and guests.
I am delighted to have the opportunity to participate in PALU’s annual conference, this year focusing on the eradication of corruption and illicit financial flows and the role of lawyers and lawyers associations. These issues have moved into the forefront of Africa’s agenda in recent years and will continue to shape thinking about maximizing domestic resources for development in the coming years.
Let me relate to you briefly where I, an American, but one long involved in Africa, am coming from. I arrived in Africa in 1961 and soon took on the management of a company owned by the then Foreign Minister, Jaja Wachuku. (Story).
Fast forward – 15 years in Nigeria building a group of companies, then retaining business interests in Nigeria I spent another 20 years doing business all over the rest of developing world. Segued into the tank-tank community at the Brookings Institution in Washington, wrote a book, and formed Global Financial Integrity in 2006.
Immediately after forming GFI, I and my colleague Tom Cardamone had a lengthy discussion about what do we call this phenomenon we are going to address. My book had been subtitled “Dirty Money,” but we knew we could not call it this, since to do so would make people cringe and shrink from the subject matter. So we reviewed the standard terminology – flight capital, illegal flight capital, tax evasion, tax avoidance, corruption, money laundering, and so on, but none of these exactly fit what we were trying to convey. Finally we settled on the phrase “illicit financial flows.” Each of these words was chosen carefully. “Illicit” is a little bit weaker word than “illegal” and therefore somewhat more encompassing. “Financial” makes it clear that we are talking about the money, not the drugs, or humans or ivory tusks that move. And the final word “flows” is perhaps the most important because it establishes that we are addressing money that starts in one place, perhaps goes through another place, and finally ends up in another place. So “illicit financial flows” is what we decided to call this phenomenon. It took the media about five years to begin using this terminology, but today it is the accepted phrase, repeated by the World Bank, IMF, UN, national governments, so often that it is frequently referred to simply as IFFs.
Our work came to the notice of the United Nations Economic Commission for Africa in 2010. Dr. Abdalla Hamdok and his team of economists at UNECA, decided to take on aggressively the issue of illicit financial flows from Africa and asked the former President of South Africa Thabo Mbeki to head a High Level Panel on Illicit Financial Flows from Africa. Moving across African capitols and western capitols for several years, the issue was secured onto Africa’s agenda, with the reported recommendations adopted by the African Union at its Summit meeting of January 2015. The work of Thabo Mbeki and Abdalla Hamdok was absolutely brilliant in accomplishing this outcome in a few short years. Ladies and gentlemen may I ask that, acknowledging this outstanding achievement, we give a round of applause to these two individuals. Africa is leading the world in this important effort.
We are no longer dealing with recommendations. This issue is now in the implementation phase. So let me devote the rest of my remarks to some of the steps that can be taken by Governments and by lawyers to curtail corruption and illicit financial flows. I will draw upon the report of the High Level Panel, “Track It, Stop It, Get It,” and on the extensive work done by the Pan African Lawyers Union, the African Tax Administration Forum, Trust Africa, Tax Justice Network – Africa, CRADEC in Cameroon, CISLAC in Nigeria and many others. It is you, the legal community, that has the key role in these efforts.
First, a measure that is absolutely key is beneficial ownership information on companies, such information to be publically available if possible. There is no argument in favor of not knowing with whom you are doing business, yet this is the reality in many countries, more so in the United States than probably any other country. Now if beneficial ownership takes some time to establish, there is available to virtually every Government a short cut. In almost all countries the Governor of the Central Bank or the Supervisor of Banking can order that no bank can have an account where it does not know who are the ultimate human beings owning the accounts. Banks can be given 6 months to request and obtain this beneficial ownership information for each account, and in the absence of information close the account. If at a later date the bank discovers that it has been given false information, it should also be required to close the account. In other words, if it takes a while to establish beneficial ownership registries, you can shortcut that process by requiring banks to obtain beneficial ownership information on all their accounts, placing the responsibility for this upon the account holders themselves.
Second, adopt legislation that clearly outlaws trade misinvoicing. From our work, we find that abusive transfer pricing by related parties and trade misinvoicing by unrelated parties shifts more resources out of Africa than any other mechanism. Yet, very few African countries have clear cut laws against such misinvoicing. We put forward to Governments a suggested text, to be adapted to each country’s legal language and framework, that says, “In connection with the importation or exportation of goods or services, it is illegal to manipulate the price, quantity, volume, grade, or other material aspect of an invoice for the purpose of manipulating VAT taxes, customs duties, income taxes, excise taxes, or any other form of Government revenue.” It is illegal. This can be backed up with some additional steps. Corporations and companies can be required to sign on their annual accounts or tax returns that they have complied with this statute. Customs departments can take advantage of trade databases that provide up-to-date information on world market pricing of all 80,000 Harmonized System code categories of goods. GFI offers such a system to Customs departments. And Customs and Revenue departments should have specialized units examining transfer pricing to identify and prevent abuse. ATAF does an excellent job on this issue.
Third, publish all extractive industry contracts, including the annexes where price formulas and terms of sale are frequently set. Many of these contracts have secrecy clauses in them. I know that I am standing before lawyers advocating the violation of these secrecy clauses. The reason is straightforward. Contracts entered into in the name of the people need to be known to the people. A contract that does not do this is, in my judgement, unconscionable at the most basic level. And you know better than I that contracts that are unconscionable can be challenged and violated. I am a hawk on publishing contracts. Do you know how many extractive industries will pull out of Africa after their contracts have been made public? None. You have the resources. Extractive industries have to come to you. Add full transparency to the extractive process.
Fourth, establish Government monitoring mechanisms on resource exports. We on the High Level Panel were stunned to find that very few African countries have in place mechanisms for independently monitoring the exports of oil, minerals, timber, fish, logs, etc., across their borders. Instead, most countries are wholly dependent on what the exporters themselves say they are exporting. Count the rail cars taking mineral exports to the docks. Put Customs officials on the loading platforms of oil and gas exporting facilities. Use satellite imagery to monitor illegal logging and fishing and gold mining. This is no longer expensive technology. We’ve done some of this work, providing satellite imagery to several countries. Resource exports are so important to Africa. Establish independent export monitoring mechanisms.
Fifth, require country-by-country reporting by multinational corporations. Most corporations provide only their global data, and developing countries cannot break down that data to see what is going on in their own countries. You do not have to wait for Europe to pass country-by-country reporting standards. You can require that now. Tell us what are the revenues and expenses, what are the stated profits and taxes payable, what is the investment, how many people are employed, give us full disclosure. You don’t have to wait; African nations can do this now. Country-by-country reporting will go far toward curtailing tax evasion and tax avoidance.
Sixth, there is the big issue of asset recovery, recovery of assets that have been stolen. Let’s be clear what this is all about. It’s not about recovering commercial tax evading and tax avoiding money. I’m not aware of any country that has laws facilitating the return of commercially generated money that was tax evading or avoiding. What this agenda is about is returning money stolen from Government coffers. Unfortunately, the western countries have created a very complicated and time consuming process that developing countries have to go through to get this kind of money back. It’s called the MLAT process, the Mutual Legal Assistance Treaty process. Our suggestion is that African countries can force the pace of this process by elevating it to the diplomatic level. If you have a claim on money that is lodged in another country, call in the ambassador from that country and insist on expedited handling of your claim. Not to be stretched out over a period of years; instead to be handled in a matter of a brief few months. Make asset recovery a diplomatic matter as well as a justice and finance matter. As part of this effort, consider having the African Union establish an asset recovery unit, to provide support and political clout to this effort. (Tunisia example).
Now, a final word about steps that can be taken to fight corruption, curtail IFFs, and recover stolen assets. Everything that I have mentioned has political content. One of the things we do in GFI is suggest how each of these measures can be phased into existence. Each one does not have to be entrenched all at once. Each one can be brought into force in a phased manner, avoiding some of the political problems that can surround abrupt changes. For example, a law against trade misinvoicing. Such a law could be passed, giving the Finance Minister the power to apply the law to sectors of the economy in a phased manner. Perhaps such a law could be applied to extractive industries, or construction industries, or companies with turnover above $100 million a year, or such other categorizations as appropriate. My point is that everything doesn’t have to be done all at once. Sensitive to political realities, measures can be phased into existence.
None of what I have talked about is technically complicated. All of what I have talked about is a matter of political will. You, the legal community, are the repositories of political will. You are the community from which the political will has to grow and mature. Extend your influence in each of your countries and regions, and you can bring about the change needed to drive Africa forward. Let us know how we can work with you. My thanks to the leadership of PALU and my very best wishes to you for a most successful conference.