Treasure islands: Mapping the geography of corruption

Published on Pambazuka News, by Khadija Sharife, July 29, 2010.

Neither the Organisation for Economic Co-operation and Development nor the country’s government agree that Mauritius is a tax haven, but Khadija Sharife’s investigations suggest otherwise … //

… The narrow geography of ‘corruption’ has been limited to behavioural ‘demand-side’ activities i.e.: Corruption on the part of state officials for public gain. This definition was launched by corruption watchdog Transparency International, and ratified by resource-seeking and financial multinationals, and developed governments – systemic providers of supply-side corruption such as the Louvre Group. 

And because Africa’s often ineffective tax and revenue administrations have been structured to serve as recipient vessels of Large Taxpaying Units (LTU), multinationals – Africa’s primary ‘renters’ conducting 60 per cent of global trade, within rather than between corporations – are easily able to exploit vacuums. This includes using self-regulated ‘arms length transfer’ pricing principles, designed by the International Accounting Standards Board (IASB) as a mechanism motivating for market price. But there is no external body to hold them to account because corporate Country-by-Country reporting (CbC), which is a tool that helps reveal economic activities in resource-rich regions, is not mandatory.

Examples of transfer (mis)pricing that occurs within corporations between subsidiaries to decrease costs or increase profits, includes rocket launchers exported for US$52 each and plastic buckets imported for a nominal value of US$972 each. ‘Self-regulation by the IASB, funded in large part by the ‘big four’ accounting firms, are in the interests of its funders, not society,’ said accountant Richard Murphy, founder of CbC and head of Tax Research LLP.

In 2006, the IASB rejected CbC, a version of which already functions smoothly in the US, monitoring corporate activities such as taxes and other revenues remitted to the state, imported materials, labour, and the basis for determining profits, pricing goods and allowable costs, amongst other details. ‘A member stated, “This looks like it deals with transfer pricing, and we don’t want to go there”’, revealed Murphy. High-level research by the TJN reveals that 99 per cent of the 97 largest quoted companies in France, the Netherlands and the UK use secrecy jurisdictions while a further 80 per cent of 476 companies surveyed in another study declared transfer pricing crucial to corporate strategy. Paradoxically, ‘first world’ secrecy jurisdictions feature at the top of TI’s ‘clean lists,’ while African nations in particular, almost uniformly occupy the bottom ranks.

The paradox of ‘donor countries’ actively incentivising the flow of illicit flight was interrogated in depth by Washington-based Global Financial Integrity’s director Raymond Baker who stated in testimony before the US House of Representatives (2009): ‘For every dollar Western governments have been handing out across the top of the table, crooked Western banks, businesses and middlemen of various descriptions have been taking back up to $10 dollars of illicit proceeds under the table.’

Illicit flows from the continent are a very serious drain on African economies. During the recently held World Economic Forum in Tanzania, the Tanzania Daily News (7 May 2010) reported: ‘The African continent, which many international investors describe as too risky to invest in, loses between US$200 billion and US$400 billion annually in capital flight by firms which make super profits through evading or cheating the taxman.’ Such siphoning occurs through corporate mispricing (60 per cent), political corruption (five per cent), and criminal in-fighting (30-35 per cent). As James Boyce and Leonce Ndikumana (African Development Bank), note: ‘Adding to the irony of sub-Saharan Africa’s position as net creditor is the fact that a substantial fraction of the money that flowed out of the country as capital flight appears to have come to the subcontinent via external borrowing.’

According to the UN Commission of Experts on the Financial and Monetary System, the G20’s policies via the OECD to curb ‘harmful tax practices’ was geared toward ‘discriminatory targeting of small international financial centres in developing countries while a blind eye is turned to lax rules in developed economies.’ They went on further to state that the chief sources of evasion are situated ‘in developed countries’ on-shore banking systems,’ including the City of London and the US’s Delaware.

In the case of Delaware, foreign clients ‘investing’ onshore in this area are deemed tax-exempt, save for annual ‘franchise’ taxes, as corporate income tax applies only to those unfortunate enough to conduct economic activity in Delaware. With an opacity score of 92 per cent and over 1,104,700 lawyers active in the state, Delaware peddles legal and financial secrecy vehicles such as banking secrecy policies and lack of disclosure related to trusts, beneficial owners of companies and company accounts as well as allowing company redomiciliation and protected cell companies.

Meanwhile, though the onshore City of London has an opacity score of 42 per cent (blocking company redomiciliation, protected cell companies and banking secrecy), according to an official from the Serious Fraud Office (as revealed to TJN Director John Christensen), these ‘tax havens are little more than booking centres. I’ve seen transactions where all the decisions are made in London, but booked in havens.’ These include one quarter of all secrecy jurisdictions globally, including Guernsey (opacity score 79 per cent; FS 55 per cent/GDP), Jersey (opacity score 87 per cent; FS 60 per cent/GDP), and the British Virgin Islands (opacity score 92 per cent; FS 45 per cent/GDP).

Examples of remote-controlled use administered from different jurisdictions are prevalent throughout onshore and offshore entities. One such institution is the Louvre Group, marketing Guernsey Protected Cell Companies (PCC), a cellular corporate structure that allows assets to be held within individual cells. The assets of any one particular cell are only available to the shareholders and creditors of that cell while creditors of another cell have no recourse against them. The ‘core’ company (established and managed by a Guernsey financial services provider such as Louvre) is able to create cells, thereby isolating wealthy individuals from risks, disclosure and taxation.

The use of ‘tax minimisation’ strategies via tax planners retained and trained by the ‘big four’ auditing and accounting firms – PricewaterhouseCoopers, Deloitte & Touche Tohmatsu, KPMG and Ernst & Young – extends all the way back to the heyday of the British Empire, via the Duke of Westminster ruling decided at the House of Lords of the United Kingdom in 1936. The ruling, still the cornerstone of the Britain’s unofficial ‘supply-side corruption’ empire, stipulates that ‘the ‘taxpayer has the right to order affairs as he (sic) sees fit to minimise his tax payable.’

With combined revenue of more than US$100 billion, these hyper-mobile economies exploit the weak political capital of ‘offshore’ treasure island economies, renting out secrecy spaces as befits foreign clients.

The ‘big four,’ of course, are present and active in Mauritius, Guernsey, Jersey and most other secrecy jurisdictions. Through vehicles such as KPMG’s Tax Innovation Centre, the ‘tax avoidance’ industry has undermined Africa’s fiscal independence, by draining the continent of revenue – 80-90 per cent of which remains permanently offshore. South Africa, which has the largest number of millionaires on the African continent, loses an estimated 9.2 per cent of GDP when adjusted for illicit flight.

Like Ghana, Botswana, Seychelles, Liberia and Djibouti, Mauritius – marketing itself through the slogan, ‘How Best Can We Serve You’ – serves as a crucial conduit for tax avoidance, rendering Africa subject to captured states lending to expanding informal sectors, aid dependence and enclave maldeveloped economies structured around unearned resource revenues.

Speaking in the UK parliament in November 2009, South African finance minister Pravin Gordhan noted that: ‘We have allowed the word avoidance to gain too much respectability. It is just a smarter form of evasion.’ Damn right. (full long text).

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