Business

What UN blunder on illicit financial flows tells us

2016-08-07 15:00

Recent misinvoicing statistics blunder by Unctad sounds the alarm bell on how much we just don’t know

Activists and policymakers working in, and on behalf of, Africa need to take stock of the recent blunder by the UN Conference on Trade and Development (Unctad) regarding illicit financial flows.

This concerns a report, commissioned by the UN agency and produced by economics professor Léonce Ndikumana of the University of Massachusetts at Amherst in the US.

It is the latest contribution to the fast-growing pool of research on trade misinvoicing – a factor that many believe to be the major mechanism for keeping countries in an impoverished state.

Companies understate the value of their exports to feign poverty and dodge taxes.

Widely accepted estimates have put the damage suffered by Africa from this practice at hundreds of billions of dollars over the past decade.

Initially, the new research seemed to uncover a horrifying crime committed against South Africa by the gold industry: the “smuggling” or complete non-invoicing of virtually all gold exports since 2000 – more than $110 billion (R1.5 trillion) worth.

However, this was subsequently found to be erroneous.

The mistake was attributed to Unctad’s failure to spot a historical anomaly in the way that South Africa officially reports its gold exports.

Responding to City Press’ criticism of its report, Unctad this week said that South Africa should fix its gold export accounts in the interest of transparency – but was quick to add that its methods were still sound.

The flaws in the Unctad report make it likely that the numbers in another UN high-level panel report – chaired by former president Thabo Mbeki last year – are also wrong.

South Africa’s exports of “invisible” gold make up a large chunk of the Mbeki report’s estimates of illicit flows from Africa – second only to Nigerian oil.

Questions about these findings now put an international campaign centred on these figures in a tricky position, given that the Mbeki estimate of roughly $50 billion “lost” by Africa every year has often been cited by representatives of nongovernmental organisations, governments and international bodies such as the UN.

The new, incorrect report by Unctad has spread like wildfire in progressive circles.

However, this report’s findings are not all misleading, as evidence abounds of other suspicious trade mismatches.

The report is also an improvement on previous reports of this kind – including the Mbeki one – which rely on more aggregated numbers that are harder to interrogate in the first place.

As this type of research becomes more sophisticated, it is speculated that earlier findings will be disproved.

Global advocacy bodies have worked hard to bring these issues to the fore.

If the uneven global distribution of the creation and destruction caused by capitalism is going to change, we need to know exactly what is going on.

The Tax Justice Network, a not-for-profit organisation promoting fairer tax systems, this week called the data debate a “vicious cycle”.

“There is not much high-quality data available, so we cannot be certain of the extent of the problem.

But without hard numbers ... policymakers have been reluctant to push for better numbers,” said the group.

Although there is undeniably a problem, it is possible that all the attention being devoted to the misinvoicing of commodities is leading everyone astray.

We often get a glimpse of what multinational corporations do to avoid taxes.

Take the case of Evraz Highveld Steel and Vanadium, now broke and being sold in parts.

In the giddy days of the commodities boom it was channelling billions of rands through a fake “manufacturing” subsidiary in Austria, where tax allowances cut its tax bill by more than 75%.

It is currently in efforts to settle a R689 million claim with the SA Revenue Service (Sars) out of court.

So is Anglo American subsidiary Kumba Iron Ore.

Earlier this year, Sars lodged a spectacular claim for R5.5 billion in taxes and penalties related to the “overseas sales and marketing” conducted by the company from 2006 to 2010.

Last year, City Press reported on a peculiar case in Swaziland, where an investor reopened an old iron ore operation in the kingdom.

It then used a tax haven-based company to charge its Swazi subsidiary amounts almost exactly equal to its revenues – for transport services.

This meant no profit in Swaziland and no tax either. A case of bad luck, or unsubtle transfer pricing abuse?

Journalists have probed the tax planning of companies such as MTN and De Beers, while local economist Dick Forslund found what appeared to be a tax-dodging arrangement in platinum producer Lonmin’s books: a marketing arm in Bermuda that charged suspiciously high prices for its services.

Lonmin, MTN and the rest deny wrongdoing, but the point is this: Even if it were true, these arrangements would not show up in the statistical exercises undertaken by Unctad and others.

They are possibly not even illegal, since they use methods legislators have not thought to ban yet – or intentionally leave open because that is what they believe it takes to obtain investment.

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