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Africa must lead on capital flight

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Africa must lead on capital flight

African governments are not doing enough to challenge illicit financial flows. Those that have been victimised by such flows must raise their voices and work together to push for global action, say Professors Carlos Lopes and Ricardo Soares de Oliveira.

The Pandora Papers, the largest investigative effort yet to shed light on the world of offshore finance, show just how serious the challenge of illicit financial flows is for Africa. The papers reveal that many prominent Africans hold assets in major financial centers abroad with the help of professional enablers who provide them with secrecy, ensure asset protection, and secure tax exemptions.

The investigation also demonstrated that such offshore services are not limited to the best-known tax havens. International standard-setters like the United States and the United Kingdom (directly and through its overseas territories) were shown to be major offshore financial players, illustrating the hypocrisy underlying discussions of reform for the past decade.

And the Pandora Papers include further evidence that Asian financial centres also have become significant offshore players, underscoring the global nature of the problem.

African governments are not doing enough

Some African initiatives demonstrated early leadership in assessing the issue and developing potential solutions. The African Tax Administration Forum, which was created in 2008 and includes 37 African states, has been a noteworthy actor on tax reform issues. The High-Level Panel on Illicit Financial Flows, a joint effort of the African Union and the United Nations Economic Commission for Africa, first convened in 2012 and produced a prominent report on the subject in 2015.

At that time, it seemed offshore finance would be a regular part of African Union discussions. Unfortunately, it is disappearing from the agenda. 

In the past few years, leadership in the fight against tax evasion and avoidance seems to have migrated to international organisations such as the United Nations Conference on Trade and Development and the OECD, which launched its programme on tax transparency in Africa in May 2021.

On the continent itself, independent media are taking a larger role: the Pandora Papers involved 53 African journalists working in 18 countries, often under extremely difficult conditions. Civil-society organisations such as Tax Justice Network Africa also are active in this domain. But African governments and Africa-based international organisations have refrained from major initiatives. 

As a result, there is no multilateral African body leading the way on the problem, and the African organisations that were working on it actively five years ago have assumed what can only be described as a low profile.

Lack of African response allows outsiders to shape the process

It is hard to avoid the sense that many of the continent’s rich and powerful have little incentive to compromise arrangements that have enabled them to move, hide, and protect their assets. Moreover, their lawyers and financial advisers point out that many such practices are not only legal, but common among multinationals active in Africa, especially in the extractive industries.

According to this logic, there is no reason Africans should not avail themselves of strategies that are widespread in the global financial system.

This lack of concern by African states over illicit finance is bolstered by the perception that in most countries, most of the time, tax evasion is not a matter that registers with public opinion. At best, leaders assume that any effect the issue has on public trust can be managed. They are certainly wrong, especially regarding younger voters, but this view shapes their non-committal approach.

The role of external organisations and African civil-society actors in combating offshore tax evasion and avoidance is welcome. But African governments’ lack of initiative on the issue is regrettable. Worryingly, the absence of a robust, collective African response invites outsiders to shape the reform process in ways that will most likely continue to favour leading industrial powers.

This trend already is visible in the way the naming and shaming of tax havens invariably targets microstates and ignores important enablers of illicit financial flows such as the US and the UK.

African states must raise their voices

While some African states never will be at the forefront of reform efforts in this area, those that have been victimised by such flows must raise their voices and work together to push for global action.

Current efforts include the African Parliamentary Network on Illicit Financial Flows and Taxation, which has representatives from 11 countries. Other organisations that played an important role earlier, like the African Union and the UN Economic Commission for Africa, also could reinvigorate their commitment.

Multilateral endeavours such as the African Continental Free-Trade Area, which currently is being shaped with strong inter-governmental support, could be used as vehicles to standardise tax rules and avoid a race-to-the-bottom competition to attract foreign direct investment.

Illicit financial flows rob governments of the resources they need to provide the public goods – education, health care, and trade and communications infrastructure – that are vital for long-term economic growth and prosperity. Africa’s interest in curbing the problem is as obvious as the need for African leadership to get it done. 

Carlos Lopes is Professor, Mandela School of Public Governance, University of Cape Town and former Vice-Chair of the Commission on Illicit Financial Flows from Africa.

Ricardo Soares de Oliveira is Professor of the International Politics of Africa at the Department of Politics and International Relations, University of Oxford.

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