A Global Compact Against Capital Flight and Safe Havens
James K. Boyce and Léonce Ndikumana
This is the final post of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.
Capital flight from Africa is not just a national problem. Nor is it only a continental problem. It is a global problem, and as such it requires a global solution. Institutional reforms at the national level are critically needed to discourage capital flight and tax evasion, but these will not be fully effective unless supported by international efforts to tackle corporate sector corruption, banking secrecy, and other dodgy business practices in the global trading and financial systems.
Strategies at the national level
While African countries have undertaken a number of efforts to combat corruption, money laundering, tax evasion, and illicit financial flows, the scope of these efforts and their degree of effectiveness remain uneven. Even where relevant agencies have been established, they often face serious financial, technical, and human capacity constraints. Moreover, efforts often are spread too thinly across a multitude of agencies, with little systematic coordination and few synergies among them.
The first step, therefore, is to integrate the various existing institutional mechanisms that have relevance for capital flight, money laundering, illicit financial flows, and tax evasion. African governments need to establish a framework of collaboration among anti-corruption agencies, anti-money laundering agencies, financial intelligence units, and specialized offices across other branches of government including the central bank, the police, customs services, immigration services, mining and trade ministries, and company registries. They also need to equip their foreign missions (embassies and official representations at multinational institutions) to operate as centers for collection and dissemination of information on financial crime. This cross-agency coordination needs to be organized along the entire length of the “information value chain,” from the detection of suspicious activity to investigation, all the way to prosecution.
The effectiveness of mechanisms for combating financial crime is contingent on the quality of information and the capacity to generate and manage this information. Such capacity is in short supply in the majority of African countries. Most countries lack an adequate stock of qualified forensic statisticians, investigators, and financial crime prosecutors. They also lack adequate supply of specialized technology and equipment for collecting, processing, and storing specialized information on financial crime. African governments therefore need to invest in capacity building in the investigation and prosecution of financial crime. The donor community can make a substantial impact by providing support to this initiative.
Strategies at the continental level
The effectiveness of national initiatives in combating financial crimes is often hampered by inadequate coordination, harmonization, and cooperation across African countries. National legislations do not always agree on what is considered a prosecutable financial offense, and this opens avenues for agents to evade taxes, move money illegally across borders, and launder it in banking systems. For example, a case study on Botswana, Tanzania, and Zambia found that, while Zambia recognizes abusive transfer pricing as a crime, the other two countries do not (Goredema, 2011, p. 14). Such discrepancies are widespread across the continent. The harmonization of legislations across countries is necessary to close avenues for “criminal arbitrage” across national boundaries.
Continental-level conventions offer a framework to work towards the harmonization and coordination of national initiatives. The most comprehensive existing framework is the African Union Convention on Preventing and Combating Corruption (African Union, 2003). The most recent initiative is the High-Level Panel on Illicit Financial Flows by the United Nations Economic Commission for Africa, established in 2012 following a resolution of the 4th Joint Annual Meetings of the ECA/AU Ministers of Finance, Planning, and Economic Development in Africa in March 2011. The mission of the High-Level Panel is to mobilize political attention in the continent on the issue of illicit financial flows, and to propose strategies that African countries can take individually and collectively to stem these flows and to repatriate stolen assets.
Strategies at the global level
Stemming capital flight, recovering Africa’s stolen assets, and curbing tax evasion must be seen as part of a broader global agenda for establishing a transparent international financial system and a fair tax system across countries. Success on this front can contribute greatly to increasing the overall effectiveness of external development financing, especially by reducing leakages of public debts. The global coalition against capital flight and tax evasion can leverage existing international conventions, legislations, and partnerships, including the United Nations Convention against Corruption, the Stolen Asset Recovery Initiative, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, and the UNCTAD-sponsored Principles on Responsible Lending and Borrowing. To be effective, however, these global initiatives will need to be more than talking shops: they need to be granted adequate enforcement capacity. At the moment, global conventions do not have the legal capacity to hold individual governments accountable for the implementation of relevant dispositions; their rules are not binding at the national level.
To succeed, the global compact against capital flight and tax evasion requires strong and sustained commitment by national leaders in major advanced economies. National legislations in advanced countries that specifically target financial crime, corporate corruption, and tax evasion include the U.S. Foreign Corrupt Practices Act, the US Banking Secrecy Act (especially the Suspicious Activity Report) and the UK Bribery Act, among others. It is also important that individual donor countries emerge as champions of particular causes related to financial transparency. The example of Norway is particularly noteworthy in this regard. By implementing a voluntary audit of its loans to developing countries, Norway has set a powerful precedent for responsible lending practices, one that other lenders and donors should follow if they, too, are committed to financial transparency and anti-corruption. The donor community can also advance the fight against capital flight and tax evasion by allocating more resources to institutional capacity building in Africa, including the establishment and strengthening of financial intelligence units, the provision of specialized technological infrastructure for tracking and monitoring illicit financial transactions and tax evasion, and training in forensic financial investigation and other specialized techniques.
Global networks of civil society organizations dedicated to financial transparency and accountability can play a major role in supporting Africa’s efforts to combat capital flight and tax evasion. To be effective, these networks need to work more closely with local civil society organizations in Africa, create local branches and strengthen those that already exist, and establish more effective mechanisms for systematic and rapid exchange of information. At the moment, actions by these global networks on the ground in Africa remain ad hoc and disparate. Much still needs to be done to coordinate activities and institutionalize collaboration among networks so as to maximize their impact on the campaign against capital flight and tax havens.
Much has been done, but much more remains to be done. The challenges posed by capital flight and tax havens are great, but so are the opportunities for building a more effective and accountable global financial system.
Sources
African Union. (2003). African Union Convention on Preventing and Combatting Corruption. Addis Ababa: African Union.
Goredema, C. (2011). Combating illicit financial flows and related corruption in Africa U4 Issue: CHR. Michelsen Institute, U4 Anti-Corruption Resource Center.
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