A new report by Alvin Mosioma titled Panama Papers and the Looting of Africa provides insights into how complex corporate structures are used deliberately to hide away massive amounts of capital in tax havens. His findings depart from the popular discourse and approach to illicit financial flows, which has generally focused on how developing countries are poorly governed (the so-called anti-corruption consensus), rather than on systemic failure in the global financial architecture.
Other than the fact that the “good governance” understanding of corruption is overly simplistic and that its associated reforms are therefore likely to be ineffective (see Luca Uberti’s recent paper or this one by Matt Andrews, for example) the focus on corruption also does not address the root cause of illicit financial outflows. In fact, Mosioma finds that while corruption is to blame for 5% of total outflows, the main avenue of resource outflow (65%) is actually tax dodging resulting from manipulation of commercial transactions of multinational corporations. Meanwhile, criminal activities such as money laundering account for 30%.
So What Did The Panama Papers Reveal About Africa?
The companies exposed in the Panama Papers were operating in 44 out 54 African countries. The papers revealed information about concealed company structures and veiled ownership of multinational companies that are extracting oil and diamonds on the African continent. They also show the advanced accounting, finance, and legal systems that exist globally, that provide the infrastructure for illicit financial flows to be easily moved to offshore territories and high secrecy jurisdictions.
Estimates by Ibi Ajayi and Leonce Ndikumana put the outflows in perspective: They find that the net outflows from the African continent outweigh the inflows by a ratio of four to one. In line with this, a recent study by UNCTAD shows that commodity dependent countries (of which there are many in Africa) lose up to 67% of their export earnings due to trade misinvoicing.
Some of the African scandals revealed in the Panama papers were the tax avoidance by Heritage Oil in Uganda, the under-pricing of diamonds in Sierra Leone, and the massive agricultural development project in Mozambique using tax havens and shell companies to avoid paying taxes.
Not (Just) An African Problem
As Mosioma concludes, perhaps the most important revelation of the Panama papers is the fault lines of the global system that allows for these kinds of outflows in the first place. In fact, the Panama Papers show that illicit financial flows are not a problem particular to Africa at all, but rather a natural consequence of the current international financial system that provides the infrastructure for the illicit outflows.
While African countries have undertaken domestic reforms in order to increase their tax base (from 13% to 18% from 1990 to today), these findings show that tax avoidance is a global systemic problem that cannot solely be tackled at the national level. Although the issues have been exposed, it remains to be seen whether this leak will actually lead to rethinking and reform at the global level.