posted 31 Jul 2010, 17:12 by Koku Dzordzi A Foli   [ updated 31 Jul 2010, 17:18 ]







Illicit Financial Flows from Africa:

Hidden Resource for Development


In December 2008 Global Financial Integrity released its groundbreaking analysis of Illicit Financial Flows from Developing Countries: 2002 – 2006. We estimated such flows at $859 billion to $1.06 trillion a year.


We are pleased now to release our analysis of Illicit Financial Flows from Africa: Hidden Resource for Development. This study examines the 39-year period from 1970 through 2008. Utilizing accepted economic models, namely the World Bank Residual Method and IMF Direction of Trade Statistics, we estimate that such flows have totalled $854 billion across the period examined. This estimate is regarded as conservative, since it addresses only one form of trade mispricing, does not include the mispricing of services, and does not encompass the proceeds of smuggling. Adjusting the $854 billion estimate to take into account some of the components of illicit flows not covered, it is not unreasonable to estimate total illicit outflows from the continent across the 39 years at some $1.8 trillion.


Much attention has been focused on corruption in recent years, that is, the proceeds of bribery and theft by government officials. In the cross-border flow of illicit money, we find that funds generated by this means are about 3 percent of the global total. Criminal proceeds generated through drug trafficking, racketeering, counterfeiting and more are about 30 to 35 percent of the total. The proceeds of commercial tax evasion, mainly through trade mispricing, are by far the largest component, at some 60 to 65 percent of the global total. While we have not attempted in this study to verify these approximate percentages for Africa, we believe that they are likely to be of roughly the same order of magnitude.


This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and money laundering techniques. The impact of this structure and the funds it shifts out of Africa is staggering. It drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment, and undermines free trade. It has its greatest impact on those at the bottom of income scales in their countries, removing resources that could otherwise be used for poverty alleviation and economic growth.


Addressing this problem requires concerted effort by both African nations and by western countries. The outflow from Africa and the absorption into western economies deserve equal attention. Through greater transparency in the global financial system illicit outflows can be substantially curtailed, thereby enhancing growth in developing countries and at the same time stabilizing the economies of richer countries.


Global Financial Integrity thanks Dev Kar and Devon Cartwright-Smith for their work in producing this analysis.


Raymond W. BakerDirector, Global Financial Integrity



posted 31 Jul 2010, 17:04 by Koku Dzordzi A Foli


A new report shows that Africa may have lost $1 trillion US dollars in illicit flows to western financial institutions over the past four decades. The report – Illicit Financial Flows from Africa: Hidden Resource for Development – goes even further, stating that given the hazy nature of the data available, the true scale of this capital stampede might be as much as $1.8 trillion US dollars.

According to the report by the think tank, Global Financial Integrity, only three percent of this total is due to the corruption of government officials, with a further 30-35% coming from crime. That leaves a staggering 60-65% due to, “the proceeds of commercial tax evasion, mainly through trade mispricing”.

As the report outlines:

This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and money laundering techniques.

The impact on Africa is immense, draining currency reserves, eroding tax collection to fund vital public services and thwarting poverty alleviation efforts.  “Developing countries,” according to research quoted in the report, can “lose at least $10 through illegal flight capital for every $1 they receive in external assistance”.

Siphoning profits off to some Caribbean hideaway must also seriously undermine attempts by local workers to secure decent wages and working conditions from local subsidiaries of multinationals. And if the international system is failing to reign in such financial trickery, what hope does a local union negotiator in Botswana or Bristol have in understanding the financial health of the multinational she’s bargaining with?

G20 finance ministers met at the end of April 2010 to review progress in reigning in the worst effects of financial deregulation, including measures to clamp down on global tax evasion.

The OECD has also just set up a Task Force on Tax and Development to tackle the issue. Both bodies have a daunting to do list in front of them. One important and early victory would be to require companies to fully and accurately report on all of their financial affairs on a country-by-country basis, greatly cutting out transfer mispricing practices – the key culprit driving capital flight.

Such a requirement should be included as part of the upcoming review of the OECD Guidelines on Multinational Enterprises.



posted 31 Jul 2010, 16:46 by Koku Dzordzi A Foli   [ updated 31 Jul 2010, 17:04 ]

In 2008, new research emerged from PERI, the Political Economy Research Institute of the University of Massachusets, Amherst, USA, about the astonishing scale of capital flight from Africa. As the research on 40 African countries estimates:

Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end-2004.

(At the bottom of this blog, we link this to an important but often forgotten piece of world history, using the proposals of two wise men to offer pointers for the future.)

Money that flows out of Africa as capital flight generally stays out. The total external debt of these countries in 2004 amounted to "only" $227 billion, leading to another staggering figure. As the researchers put it:

Their net external assets (accumulated flight capital minus accumulated external debt) amounted to approximately $398 billion over the 35-year period.

The same authors, Léonce Ndikumana and James Boyce, very recently presented a brief summary of their research in the latest edition of Tax Justice Focus; this is the full research document. It also updates earlier research by the authors looking at the period 1970-1996. The new report continues:

Over the past decades, African countries have been forced by external debt burdens to undertake painful economic adjustments while devoting scarce foreign exchange to debt-service payments. On the other hand, African countries have experienced massive outflows of private capital towards Western financial centers. Indeed, these private assets surpass the continent’s foreign liabilities, ironically making sub-Saharan Africa a “net creditor” to the rest of the world.

But there is one absolutely crucial difference between the assets and the liabilities:

The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.

It continues:

Some of the private assets held abroad by Africans may well be legally acquired. But the legitimacy of a significant part of these assets is questionable. This is especially the case for the wealth held by African political and economic élites in international financial centers that provide the coveted secrecy of banking operations. Recently, international pressure on Swiss banks has uncovered large sums of money belonging to former African rulers including Sani Abacha of Nigeria and Mobutu of the Congo. (former Zaïre). These may be only the tip of the iceberg of looted African national resources.

Capital flight is notoriously hard to define, but it generally means an outflow of capital that is not part of normal commercial transactions from a country where capital is relatively scarce (see this for more details). There are several reasons for capital flight, but tax evasion and a desire to grow rich secretly are among the most powerful incentives. This is a massive blight on the continent. Capital flight diverts scarce resources away from domestic investment and other productive activities; and it results in lost taxes for African governments - which are important not only from the point of view of lost revenue, but in terms of the institution-building imperative that we have already remarked upon (the Economist recently noted this point: "the well-off have less incentive to lobby for reforms at home if they are free to store their wealth overseas".) Capital flight accelerates the outflow of human capital too; it has pronounced negative effects on the distribution of wealth within countries; it compounds the debt crises. (By 2000, the report says, debt service amounted to 3.8% of GDP for sub-Saharan Africa as a whole, while they spent just 2.4% of GDP on health in that year.)

The authors rightly conclude that this research underlines the need for greater debt repatriation and forgiveness, but add:

Repatriation of illicit capital and the prevention of future illicit outflows will require a concerted effort by the international political and financial community to increase transparency and accountability in international banking practice.

This report contains many other important things, including country-by-country tables of their estimates; new econometric evidence on the links between external borrowing and capital flight ("out of every dollar of new borrowing, as much as 60 cents left the country in the form of capital flight the same year"); indications that capital flight from Africa constitutes a heavier burden than on other developing regions, even if the absolute volumes are lower; and more.

The authors also contributed to a 2005
book on capital flight which includes some fascinating history:

The neglect of capital flight in current debates is striking given the attention it received at the 1944 Bretton Woods conference, (which) is said to have laid the foundations for today's financial order and many reformers today talk of the need for a 'renewed Bretton Woods vision' The Bretton Woods architects saw the regulation of capital flight as a key pillar of the international financial order they hoped to construct.

The two principal Bretton Woods architects, Harry Dexter White and John Maynard Keynes, were principally worried about large-scale capital flight from war-devastated European countries to the US, destabilising them and turning some of them towards the Soviet bloc. They recognised the difficulties in exerting capital controls, and they addressed these with a further proposal, as the book explains:

They argued that controls on capital would be much more effective if the countries receiving that flight capital assisted in their enforcement. In their initial drafts of the Bretton Woods agreement, both Keynes and White required the governments of receiving countries to share information with the governments of countries using capital controls about foreign holdings of the latter's citizens. White went further in his draft to suggest also that receiving countries should refuse to accept capital flight altogether without the agreement of the sending country's government.

Both of these proposals were strongly opposed by the U.S. financial community which had profited from the handling of flight capital in the 1930s . . . in the face of this opposition, the final IMF Articles of Agreement contained watered-down versions of Keynes' and White's roposals. Co-operation between countries to control capital movements was now merely permitted, rather than required.

The replacement of one word with another has had nothing less than catastrophic consequences for the world's poor. As TJN's John Christensen and David Spencer argued in their recent Financial Times comment piece, referring to the fact that information on tax matters is only exchanged between countries on request:

In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included.

The UN Report by the High-Level Panel on Financing for Development of June 2001 (also known as the Zedillo Report, after Chairman Ernesto Zedillo, former President of Mexico) also called for a mechanism for multilateral sharing of tax information. The report said "developing countries would stand to benefit especially from technical assistance in tax administration and tax information sharing that permits the taxation of flight capital."

This shift alone would likely do more good for Africa than all foreign aid combined. The time has come to resuscitate the proposals of the two grand old men of global finance.



Capital flight out of Africa

Following this astonishing research on the $600-odd billion drained out of Africa as capital flight, we have more data now flowing from the Task Force conference. Richard Murphy (who is attending) notes this:

"Capital flight out of South Africa could be 20% of GDP. . . . This data from economists at the University of Witswaterand, Johannesburg."

It is, as he notes, staggering. And he adds, in another blog:

"Paul Collier of Oxford is speaking at the Task Force – he chairs its economists panel. One third of Africa’s wealth is outside Africa he says. If returned that would increase its capital by 50%.
. . .
Now he’s talking plunder of natural assets: I have had to suffer economists arguing this week that there is no price abuse out of Africa. Paul does not agree at all.
. . .
That failure he says has halved real wealth in Africa in 30 he says. That’s because wealth was stolen from the many by the few and by the few from the future. And it has been taken out of Africa. We need he says a legal counter part of this concept of economic plunder. Then we can create culpability.
. . .
Aid he says is not enough – we need to use codes and laws and instruments to deliver benefit. I call one of those country-by-country reporting. His example is from the FATF – and he says Nigeria was forced by the FATF to tackle corruption – and the pressure was massively effective. Unfortunately of course the head of that process in Nigeria is now in exile.
. . .
He’s right. We can resolve this."

Richard Murphy is quite right with these conclusions (although Collier is quite wrong when he describes the FATF forcing Nigeria into tackling corruption - as forthcoming research from Chatham House in November will show, it was complex internal Nigerian processes that led to this temporary burst of anti-corruption zeal - so Nigeria's president Obasanjo was certainly "massively effective" in creating the zeal, his motives were less clear, and the actual effect on corruption has, sadly, been far less impressive.)

And his
conclusion is very fine.

"Accountants have a major role to play in this." I’ve said before the International Accounting Standards Board could do more good for Africa than Bono and Geldof ever have. So why do they refuse to do so?"




posted 31 Jul 2010, 16:32 by Koku Dzordzi A Foli   [ updated 31 Jul 2010, 16:45 ]

David Spencer, Senior Adviser, Tax Justice Network, Jan 25 2008
The international financial system facilitates trillions of dollars of capital flight from developing and developed countries to onshore and offshore financial centres, with the active participation of banks and other financial institutions. The consequences are massive tax evasion, a resultant erosion of state budgets, and rising disrespect for the law.

The international financial architecture must be redesigned. The UN general assembly at the 2005 world summit resolved to "support efforts to reduce capital flight and measures to curb the illicit transfer of funds". The relevant international organisations that, working together, can achieve such a redesign are the IMF, the Organisation for Economic Cooperation and Development (OECD), and the UN.

$255 billion in lost tax revenues

Research by the Tax Justice Network has revealed that the amount of funds held by individuals in offshore and onshore tax havens, and undeclared in the country of residence, is about $11.5 trillion1 . This estimates capital flight from all countries, and not only from developing countries. Annual worldwide income on such undeclared assets is estimated to be about $860 billion, and the annual worldwide tax revenue lost is approximately $255 billion. That figure is equal to the annual funds needed to reach the UN's Millennium Development Goals.

Onshore tax havens include financial centres which are important members of the IMF, such as Luxembourg, Switzerland, the United Kingdom and the United States. Offshore tax havens include jurisdictions which have been monitored by the IMF in its Offshore Financial Sector Assessment Program. Capital flight exacerbates the problem of emerging market countries being net capital exporters. The IMF itself has expressed concern over this issue "in light of the conventional wisdom suggesting that capital normally flows from capital rich to capital-scarce emerging markets"2.

"... conflicting objectives among the tax authorities in various countries, especially tax-haven countries, ensure that in many cases [information on income earned abroad will not be exchanged between countries]. That leads to losses in total revenues and to changes in the incidence of the tax burden. It also leads to changes in the statutory tax systems when policy-makers attempt to compensate for such losses by increasing the rates for other taxes. Obviously the existence of tax-haven countries facilitates tax evasion. The other countries suffer losses of revenue and decreased control over their tax systems."

Vito Tanzi, former director of the fiscal affairs department of the IMF


UN calls for reform

The United Nations has emphasised the need for developing countries to mobilise domestic resources for development, and has spoken out against capital flight. The 2001 UN report by the high-level panel on financing for development 2001 (also known as the Zedillo report) stated "... globalisation has progressively undermined the territoriality principle on which traditional tax codes are based. Developing countries would stand to benefit especially from technical assistance in tax administration, [and] tax information sharing that permits the taxation of flight capital."

In March 2002, the UN international conference on financing for development in Monterrey called on developing countries to mobilise resources for development, especially domestic resources and the UN's Millennium Development Goals have also focused attention on the resources available to developing countries. About capital flight, the UN general assembly stated in the 2005 World Summit Outcome: "We therefore resolve ... to support efforts to reduce capital flight and measures to curb the illicit transfer of funds".

Previously, many countries relied on exchange controls to try to prevent capital flight and resulting tax evasion. The increasing liberalisation of economies and the resulting relaxation or dismantling of exchange controls have raised the question of how countries can combat capital flight. The liberalisation of economic activity, resulting in the exponential increase in cross-border commercial and financial transactions, has converted the private sector into a world without borders. This has created a major problem for national tax authorities since it has not been accompanied by similar changes in their enforcement powers. The answer is to override bank secrecy in onshore and offshore financial centres, improve tax administration in developing countries, and further implement international exchange of tax information.


The IMF in Argentina: financing capital flight

The June 2004 report of the Independent Evaluation Office (IEO) on the Fund's role in Argentina only mentions capital flight from Argentina in passing - but what it mentions is significant. At a meeting in late August 2001 to consider increasing Fund exposure to Argentina, senior IMF staff concluded that: "The additional few billion dollars would not buy enough time to make a difference, but would be more likely to disappear in capital flight, leaving Argentina more indebted to the IMF".

In their response to the IEO evaluation, Fund staff concluded "that the Fund would have avoided increasing its exposure to Argentina by about $9 billion, which in the event largely financed capital flight."

The report also refers to the technical assistance provided by the IMF's fiscal department to Argentina's tax authorities, without any detailed reference to the problems of tax evasion. Rumours are that Argentine residents held assets offshore exceeding the total amount of the sovereign debt defaulted by their government.

In a joint IMF-OECD-World Bank paper"3 in March 2002 , the three organisations indicated that they would assist developing countries in improving the effectiveness of their tax administrations, with the goal of increasing government revenues: "Developing countries must be able to raise the revenues required to finance the services demanded by their citizens and the infrastructure that will enable them to move out of poverty. Perhaps the greatest challenge facing these countries is to improve the effectiveness of their tax administration. In this context, the increasing globalisation of the economy is relevant both for developed and developing countries. The constraints that it places on countries' ability to set and enforce their own taxes are felt increasingly keenly."

The OECD project on harmful tax practices has tried to limit capital flight from OECD countries into offshore and onshore tax havens. At the same time, the project requires member countries to abolish certain specified "harmful preferential tax regimes". However, the OECD did not apply to itself the requirements for information exchange and overriding bank secrecy rules that it has imposed on designated tax havens. Similarly, the EU directive on the taxation of savings does not apply to interest paid from EU countries to residents of non-EU countries, and therefore does not limit capital flight from these non-EU countries into EU financial centres. Within the OECD and the EU, the opposition of Austria, Belgium, Luxembourg and Switzerland (all OECD members) to exchange of information in both the OECD proposals and the EU directive on the taxation of savings, has framed the debate on this issue.

Overriding bank secrecy

Bank secrecy has two basic forms: de jure and de facto. With de jure bank secrecy, financial institutions are prohibited by law from disclosing the identity of depositors/investors except in cases of money laundering or other criminal activity. De facto bank secrecy results when these institutions are not required to provide their governments with information through automatic reporting about foreign depositors or investors.

In cases of either de jure or de facto bank secrecy, the government of the country where the financial institution is located does not receive the relevant information about the foreign depositor or investor. Therefore, that government cannot effectively exchange information about the foreign investor with the country of residence of the investor. This lack of exchange of information facilitates capital flight and tax evasion.

The solution to the capital flight problem is to override bank secrecy in tax matters and require automatic exchange of tax-relevant information in the international context. For example, if the investment by an Argentine were not protected by bank secrecy in an OECD or other tax haven financial centre, and if that financial centre would automatically provide the Argentine government with tax information about that person's investment, it would substantially diminish capital flight and the resulting tax evasion.

Exchange of information between governments about capital flight was urged by John Maynard Keynes and Harry Dexter White, the principal architects of the IMF, when the Bretton Woods agreement was being drafted in 1944. But this proposal was allegedly opposed by the US financial community which had benefited from capital flight."4

The OECD has made significant steps toward addressing these issues, by emphasising the benefits of automatic reporting by financial institutions of tax-relevant information to their governments, and the benefits of automatic exchange of such information between governments. The OECD has worked on the mechanics of automatic exchange of information. Other OECD efforts to limit bank secrecy in tax matters include amendments to the OECD model income tax treaty, requiring an 'override' of bank secrecy in international tax matters when income tax treaties apply. Further, and extremely important, in a paper to the UN committee of experts in international cooperation in tax matters, the OECD favours similar changes to the UN model taxation convention between developed and developing countries. Thus, the OECD has emphatically stated that bank secrecy should be overridden in tax treaties between OECD countries, and also in tax treaties between developed and developing countries. The override of bank secrecy in tax matters should become an international standard.

The most effective type of exchange of information is automatic exchange of information: the government where the investment is made automatically transmits the relevant information to the government where the investor resides. However, the OECD and UN model income tax treaties only require exchange of information upon request. Only the EU savings directive requires automatic exchange of information, and only in limited cases.

The key role of the IMF

To confront the problem of capital flight and to help developing countries mobilise domestic resources and meet the UN's Millennium Development Goals, the IMF should work with developed and developing countries, in accordance with the March 2002 joint IMF-OECD-World Bank proposal. Firstly, the Fund should - following OECD recommendations - encourage international financial centres, both onshore and offshore, to override bank secrecy (both de jure and de facto) in international tax matters, and to require automatic reporting of income, in order to facilitate automatic exchange of tax information.

Secondly, the Fund should adapt its Reports on the Observance of Standards and Codes (ROSCs) to deter capital flight. Currently, the IMF considers twelve factors in its ROSCs, in three broad areas of financial sector regulation: (1) transparent government operations and policy making (data dissemination, fiscal transparency, monetary and financial policy transparency); (2) financial sector standards (banking supervision, payments systems, securities regulation, insurance supervision, and efforts to combat money laundering and the financing of terrorism); and (3) market integrity standards for the corporate sector (corporate governance, accounting, auditing, insolvency and creditor rights)5. This list of standards and codes does not include whether a country overrides bank secrecy in tax matters, requires the automatic reporting of information, or engages in automatic exchange of information in tax matters. The IMF should include these factors as a fundamental part of worldwide transparency policy.

Finally, the IMF should work with the Tax Justice Network and other interested parties, to further implement exchange of tax information to combat capital flight, and report at least annually, including to the UN's Economic and Social Council (ECOSOC), on the progress made by the IMF to combat capital flight and the resulting tax evasion.

1. The Price of Offshore, prepared by Tax Research Limited for the Tax Justice Network, March 2005.

2. IMF annual report 2005, IMF, p. 11.

3. Developing the International Dialogue on Taxation: A Joint Proposal by the Staffs of the IMF, OECD and World Bank

4. Capital Flight and Capital Controls in Developing Countries, Epstein, Gerald A. ed., 2005, pages 290-291.

5. IMF annual report 2005, pp. 25-6, 31, 72-3, 97, 100-1.



posted 31 Jul 2010, 16:27 by Koku Dzordzi A Foli

The Tax Justice Network for Africa issued this press release today:


May 10, 2008

Lusaka, Zambia

Africa has lost $607 billion (US).

Equitable taxation not aid will end the looting of Africa: Tax Justice Network for Africa

Africa’s revolving door

Capital flight from Africa is devastating development at an alarming rate. It deprives Africa of investment and further exacerbates the gap between the North and South and also between rich and poor people. 35 civil society representatives from 13 southern African and 2 European Countries gathered in Lusaka to discuss strategies to combat revenue leakages in Africa. They met under the banner of the Tax Justice Network for Africa (TJN-A), which was established in 2007 at the World Social Forum in Nairobi.

Addressing the meeting hosted by the Civil Society Trade Network of Zambia (CSTNZ), John Christensen, the Director of the Tax Justice Network International, revealed that $607 billion (US) has been shifted out of Africa over the last three decades. This is depriving Africa of investment and tax revenues that it needs to fund its own development. According to Mr Christensen: “Since the 1970’s, for every dollar in external loans to Africa roughly 60 cents left as capital flight in the same year. For example Zambia has lost 19.8 billion dollars in capital flight representing 272% of the debt stock as at 2004.”

Mr Christensen also cited other examples of Southern African countries experiencing massive capital flight and external debt: Angola has experienced 50 billion dollars of capital flight representing 535% of that country’s external debt. Over the same period, Zimbabwe has lost almost 25 billion dollars, more than 5 times the value of its external debt. The figure for Swaziland stands at 1.3 billion dollars and Lesotho has lost 893 million dollars.

Alvin Mosioma, who coordinates the activities of Tax Justice Network for Africa, said: “Africa is particularly vulnerable to capital flight, tax avoidance and evasion. African leaders must take urgent steps in a concerted political effort to seal the loopholes that are haemorrhaging the outflow of resources from Africa and protect their population from predatory tax practices. They must also join international efforts to close down havens that act as parasites on the global economy.”

As a result of massive tax evasion and avoidance via tax havens, states often attempt to recover lost taxation revenue through increasing regressive taxes that hurt the poor most - such as the Value Added Tax. Governments are placed under pressure to put in place incentives such as tax holidays and other incentives which do not serve a useful purpose. Manipulative accounting policies of multinational corporations, assisted by ac counting firms and banks, are at the heart of the matter. They channel corporate profits to secretive offshore tax havens in order to escape paying taxes in the countries that multinationals operate in.

“The aggressive tax avoidance policies of multinationals are amongst the darker sides of globalization. The problem is not limited to Zambia and Southern Africa. Over half of world trade is channelled through tax havens, despite the fact that these tax havens account for only 3% of the global GDP,” says Francis Weyzig, an expert from the Centre for Research on Multinational Corporations (SOMO) based in the Netherlands. The problem is a worldwide epidemic that threatens the sovereignty of both developing and developed countries. US Senator Barack Obama has even sponsored a bill in the US: the Stop Tax Haven Abuse Act.

So why hasn’t the problem been addressed before?

Savior Mwambwa, of CSTNZ, explains: “The discussions around tax have traditionally taken place in closed circles, in esoteric language purposely designed to confuse the common person. We know there are also acute vested political interests of businesses and elites who would prefer the situation to continue as it does presently.”

The Civil Society Organisations Call upon :

National Government:

- To set up regulatory policies that monitor the transfer of funds

- To reconsider tax policies that place SMEs at a comparative disadvantage and stifle development

- To promote taxation policy that encourages sustainable business environments

- To demand country by country reporting by companies stating clearly what profits are made in each country where they operate

- To encourage a global standard in accounting?

- To call on the UN to adopt a global standard in taxation policy

- To negotiate Information exchange with tax havens

- To end retrogressive tax incentives such as EPZs

- To review mining contracts

- strengthen government institutions that limit corruption


- Respect the sovereign right of countries to setup national tax policy

- The incorporate of taxation policies into sustainability reporting

Civil Society Organizations should:


- Act as a check on business and government with respect to taxation policy

- Target small to medium size business who are less able to take advantage of tax flight.

- Raise awareness among citizens about expanding the definition of corruption to include facilitators and tax havens that enable capital flight.

Matthew Clarke, a commentator on corporate responsibility working in South Africa, concludes: “Civil society is aware of the fact that business will argue that they are in fact the engine of development bringing jobs and important resources to communities. But predatory state taxation policies that encourage MNCs to set up shop without paying taxes place small to medium sized business at a financial disadvantage - stifling development.”

For more information contact:
Alvin Mosioma, Tax Justice Network for Africa

Savior Mwambwa - National Coordinator

Civil Society Trade Network of Zambia- 0977-875404


-What is capital flight- The deliberate and illicit disguise expatriation of money by those resident or taxable within the country of origin.

-What is VAT, Value Added Tax- A form of consumptive tax

-Creative accounting - Accounting practices designed to evade national taxation



posted 31 Jul 2010, 16:16 by Koku Dzordzi A Foli




My television and radio interviews are sometimes preceded with an e-mail pre-interview. Below is a pre-interview with the Voice of America. I was out of the country at the scheduled date and never appeared as a guest for this segment. I am posting my pre-interview notes so that you will understand the inspiration and "the story behind the story" of the things I say on radio and television. The answers were e-mailed to the television producer in March 2000.

PRODUCER: Are you still interested in appearing as a guest on our segment on "The Flight of Money and Intellectual Capital from Africa?"


EMEAGWALI: I noticed that the title was expanded from "Capital Flight" to "Capital and Intellectual Flight." I believe that your new title can be broken down into the flight of (1) money capital; (2) intellectual capital; and (3) intellectuals. The distinction is that the "flight of intellectuals" is brain-drain but the "flight of intellectual capital" is not equivalent to brain drain.

Intellectual flight is the migration of writers, scientists and experts from Africa to the wealthier nations. Intellectual capital flight is about the migration of intellectual materials that can be used to develop Africa, such as information, knowledge, experience and intellectual property. For example, western music companies own the copyrights of most African music. The most productive African musicians now live and work in the New York, London and Paris.
The music of King Sunny Ade, Kanda Bongo Man, Yossou N'dour is created for the taste and consumption of westerners and is losing their African authenticity. The westernization of African music is a flight of intellectual capital. I can give similar examples for writers, artists and scientists (such as myself).
African audiences will find it easier to understand "money capital" because it directly yields tangible products that they can touch, smell or hear. For the latter reason, they intuitively believe that "money capital" is more important than "intellectual capital." .
I disagree.
Without "intellectual capital," it will be impossible to convert "money capital" into products and services. African leaders court foreign investors (financial capital) but do not try to court the expertise (human capital) that will develop and manage the investments and resources with the continent. Therefore, intellectual capital is more important than money capital.
Also, the lack of intellectual capital contributes to the flight of money capital. For example, Nigeria borrowed money from the World Bank to complete its multi-billion dollar steel complex. Some money disappeared. Some was squandered and mismanaged, causing the national debt to increase. When Nigeria repays the World Bank for a nonoperational steel mill that payment will become money capital flight. In other words, it is the flight of money capital caused by the lack of intellectual capital.
You cannot touch, smell or hear knowledge and information and this makes it difficult to discuss the subject of intellectual capital. Since an African can touch a car but cannot touch the technological knowledge that created it, you find that most of them tie up their money in unproductive things like cars, lands and houses. In the new global economy, an African can invest on high yield Internet stock markets.
The economies of the 21st, 20th and 19th centuries are based on information, industry and agriculture, respectively. The beat has changed but Africa is still dancing to the old tune. African leaders are taking lessons on how to walk on land (Industrial Age) while the rest of the world is learning how to swim in water (Information Age). While the wealth of the 20th century is physical, the wealth of the 21st century will be based upon knowledge and information. We are creating a global economy in which English language will be the common language and Internet and telecommunications will be the infrastructure.
Nike is not a shoe manufacturing company, as most people believe. Nike subcontracts its shoe manufacturing to overseas plants that employ 35,000 Vietnamese whose total salary is less than that of Michael Jordan. Nike is a knowledge-based company that designs, markets and distributes shoes. In other words, Nike and Michael Jordan control the intellectual capital while the Vietnamese people control the less lucrative physical capital. Whoever controls the intellectual capital controls the money capital.
Again, natural resources and money are not as important as brain power. It is not the soccer balls, shoes and fields that are important. It is the players' knowledge, training and experience that matter. Similarly, it is the human resources that create wealth. You cannot create constant electrical power without first acquiring the necessary brain power. Africa needs people (intellectual capital) with the brains to build and operate the electrical machinery that supplies constant electricity.
With a population of 800 million, Africa does not need muscle power. It needs brain power!
I just wanted to make the distinction between the "flight of intellectuals" and the "flight of intellectual capital" and their relationships to the "flight of money capital."


PRODUCER: How does capital flight affect the average African?


First, money outside Africa cannot be used to develop Africa. Second, money outside Africa cannot be taxed. Third, it is the poor people in Africa that indirectly pay for the external debts.

Capital flight increases the level of corruption. The flight of capital means that police officers cannot be adequately paid and are forced to extract bribes. Medical doctors, teachers and government clerks extort bribes from citizens.

Capital flight is related to lack of technological development. Because it lacks the technological knowledge, Nigeria exports crude petroleum only to re-import refined petroleum. It exports steel only to re-import cars. It exports one-third of its university-trained graduates only to re-import technological products created by human brains.
Africa is a consumer of technology (and not a producer). Major construction projects are given to foreign companies like Julius Berger (a German construction company). Ten percent of Nigeria's petroleum revenue is paid to the foreign oil companies as royalties and the companies reinvest their profit in Europe. Profits made by foreign companies repatriated abroad and is capital flight which, in turn, increases the level of poverty in Africa. It can only be stemmed when Africa invest in technological development. Nigeria, the world sixth largest producer of crude oil, does not fully possess the technology to refine petroleum. Nigeria imports refined petroleum from countries it exports oil to and this results in capital flight.
Because of the low level of technological development, the African economy is, by default, based largely on the export of raw materials, the import of refined (technological) materials, and the payment of profits to overseas shareholders. Attempting to solve this problem without understanding the relationship between technology and capital flight will be like a wild goose chase for a mirage in the desert.
Africa becomes poorer when it exports raw materials and brains and re-imports finished products.
An increase in capital flight leads to an increase in the level of poverty which leads to an increase in religious and ethnic violence. In Nigeria, for example, we have the religious fundamentalist fighting for Sharia Islamic Laws and the minorities living in the Delta region fighting for a greater share of the diminishing national wealth. A vicious circle is created when the unemployment, social unrest and political instability creates a market for the importation of arms which are often bought on credit and/or by exporting the remaining capital to arms-exporting nations.


PRODUCER: What happens to the money in overseas account?

EMEAGWALI: The Swiss banks retains the money when African leaders dies. When Samuel Doe, the late Liberian President, was asked by his captors to reveal his overseas bank account. He said to them: “I won’t tell you. You are going to kill me anyway.” Doe died without revealing his Swiss bank account and Liberian money became Swiss money.
Sani Abacha and former Nigerian military dictators ran the Central Bank of Nigeria as if it was their own private bank accounts. It is now reported that Sani Abacha has 2.2 billion dollars ($2,200,000,000) in his Swiss bank account. Abacha’s widow is one of the richest women in the world. It is her moral duty to return or re-invest her husband’s money in Nigeria. If Mrs. Abacha re-invests her money in Nigerian bank accounts, it could be loaned and used to develop the nation. The unfortunate part is that the small percentage of capital flight that comes back is classified as foreign direct investment, instead of as repatriated money, which means that the owners can now legitimately take the interest and dividends out of Africa again.
During his five-year rule, $12 to $16 billion was transferred from Nigeria to the private accounts of his family and ministers.

It will be impossible to reduce capital flight without first reducing corruption.


PRODUCER: How is capital diverted overseas?


EMEAGWALI: Sani Abacha sent his money abroad by over-invoicing imports and under-invoicing exports. On the average, imports to Nigeria are over-invoiced by more than 30 per cent. In other words, for every dollar Nigeria spends on importation of goods and services, more than 30 cents leaves the country as capital flight. Four times more capital leaves the continent from falsification of prices than from the ten percent kick-backs extorted from government contractors.

After Sani Abacha died, it was discovered that he collaborated with two of his ministers (Finance --- Anthony Ani, and of Power and Steel --- Bashir Dalhatu) to embezzle $2.5 billion under the pretext that it will be used to refinance a giant steel complex. Instead of financing the steel mill, the $2.5 billion was transferred from the Central Bank of Nigeria to their private bank accounts in London.
For the latter reasons, African nations should establish an independent Central Bank which, in turn, will make it more difficult for corrupt officials to repatriate money to their Swiss bank accounts. It was the extraordinary access to government funds that made it possible for Mobutu and Abacha to become billionaires.


PRODUCER: How can capital flight be stemmed and reversed?


EMEAGWALI: One third of the capital flight cake is enjoyed by Switzerland. For more than sixty years, the Swiss banks have been profiting in capital flight from Africa.

The United Nations should sanction Switzerland for allowing African leaders to maintain secret bank accounts and contributing to the underdevelopment of Africa. Without the cooperation of the Swiss government, it will be impossible to recover the money deposited in the Swiss bank accounts of Mobutu, Sani Abacha and Haile Selassie.
The solution will be for the United Nations to put pressure on the Swiss government to reveal and return the billions of dollars stashed in private accounts of corrupt leaders. Also, the Swiss banks should periodical publish, in their newspapers, the names of their largest account holders, including the amount of money they deposited.


PRODUCER: When did capital and intellectual flight begin?

EMEAGWALI: They began when about forty years ago when most African countries gain independence. And dramatically increases with military dictatorships and civil wars.
There are many factors that contribute to capital flight. Most African political leaders has bank accounts in Europe but no European leader maintains a bank account in Africa. Millions of African Moslems go travel annually to Mecca for holy pilgrimage. The government encourages and subsidizes these pilgrims which, in turn, reduces the nation's foreign exchange reserve. Affluent Africans fly to London to their medical treatments. Many white South African families travel overseas because they can earn and deposit their $6,000 per family allowance in overseas bank accounts.
Capital flight also results in tax evasion since the principal, interests and dividends from these accounts cannot even be taxed by African nations.
Capital flight will be reduced when we make it illegal for leaders to maintain bank accounts in Europe, fly abroad for medical treatments and stop subsidizing holy pilgrimages for government officials.


PRODUCER: How does foreign aid reduce capital and intellectual flight?


EMEAGWALI: A widely held misconception is that the west is giving generous foreign aid to Africa. For each dollar received as foreign aid, Africa turns around and gives back three dollars, in capital flight. This applies to most developing nations. For example, each year, Europe receives at least $50 billion dollars as capital flight from developing nations and the United States receives about the same amount. In effect, the developing nations receive foreign aid from the west and then return the foreign aid as capital flight.

Similarly, Africa receives foreign technical assistance from other nations while one third of its university trained professionals have left Africa.



posted 31 Jul 2010, 16:14 by Koku Dzordzi A Foli


A brain drain or human capital flight is an emigration of trained and talented individuals ("human capital") for other nations or jurisdictions, due to conflict or lack of opportunity or health hazards where they are living. It parallels the term "capital flight" which refers to financial capital which is no longer invested in the country where its owner lives and earned it. Investment in higher education is lost when the trained individual leaves, usually not to return. Also whatever social capital the individual has been a part of is reduced by their departure. Spokesmen for the Royal Society of London first coined the expression “brain drain” to describe the outflow of scientists and technologists to the United States and Canada in the early 1950s.


"Brain drain" is a perception that is hard to measure. In 2000, the US Congress announced it was raising the annual cap on the number of temporary work visas granted to highly skilled professionals under its H1B visa program, from 115,000 to 195,000 per year, effective until 2003. That suggests a ballpark figure for the influx of talent into the United States at that time. In the same year the British government cooperating with the Wolfson Foundation, a research

charity, launched a £20 million, five-year research award scheme that aimed at drawing the return of the UK’s leading expatriate scientists and sparking the migration of top young researchers to the United Kingdom.


Historically, the greatest brain drains have been from rural to urban areas. In the 19th century and 20th century there were great migrations to North America from Europe, and in modern times, from developing nations to developed nations, especially after colonialism. Sometimes such drains occur between developed nations, e.g. from Canada to the United States especially in the finance, software, aerospace, healthcare and entertainment industries due to higher wages and lower taxes.


Iraq is said by some to be presently undergoing a brain drain due to its political instability.

Some scientists say that, with the low amount of engineers percentage-wise produced in the US today, the US is experiencing a type of culture-braindrain.

The former Soviet Union and today's Russia continues to experience a braindrain in science, business, and culture as to many of its Jewish citizens leaving for the United States of America and Israel because of historical Russian anti-Semitism.


New Zealand has also experienced somewhat of a braindrain for a variety of reasons, and many University graduates in that nation are lured to neighboring Australia where wages are generally higher and economic opportunity is more diverse. The generous reciprocal agreements between the two nations make such exchanges very easy, although it is heavily one-sided as mostly Kiwis (New Zealanders) move to Australia while few well-qualified Australians move to New Zealand.


This phenomenon is perhaps most problematic for developing nations, where it is widespread. In these countries, higher education and professional certification are often viewed as the surest path to emigration from a troubled economy or political situation. This has led to situations such as that in many Latin American nations, where enrollment at medical schools is very high, but the nation has a chronic shortage of doctors.



An opposite situation, in which many trained and talented individuals seek entrance into a country, is called a brain gain; this may create a brain drain in the nations that the individuals are leaving. A Canadian symposium in 2000 gave circulation to the new term, at a moment when many highly-skilled Canadians were moving to the United States but, simultaneously, many more qualified immigrants were coming to Canada. This is sometimes referred to as a 'brain exchange'.


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