Sunday, August 31, 2014

You are here

Zambia's Tangled Webs and Flows

Illicit financial outflows are the missing link between the profits of multinationals and the poverty faced by the majority of Zambians.
Share |
Miners in Zambia, where over 60% live under the poverty line. Photograph by bypassedblog.

Zambia is endowed with great copper reserves, yet, despite this wealth, over 60% of its population lives below the poverty line. Much of the money generated in the natural resources sectors does not seem to benefit local people. Instead, the money leaks out of the formal economy – a cause of frustration for many. However, tackling the corruption and money laundering schemes that deprive Zambia of its rightful revenues is not an issue the country has been able to deal with on its own.

Alvin Mosioma, Director of Tax Justice Network Africa, believes that tackling the problem of illicit financial flows in Zambia and across the continent requires international reform, as long as global progress towards greater transparency does not just benefit the rich countries. “What we need is a more multilateral and more inclusive process,” he argues, “where African and other developing countries can sit around the table and be able to discuss how to regulate and reform the existing global financial system.”

Problems with privatisation

A Global Financial Integrity report estimates that Zambia lost approximately $8.8 billion between 2001 and 2010 to illicit financial outflows (IFFs). This figure equates to two times the annual government revenue, which was just $4.3 billion in 2011.

Although Zambia, like many other developing countries, has been struggling with IFFs for decades, the problems intensified with the privatisation of the copper mining industry in 2000.

Since then, Zambia has found it difficult to prevent money escaping from the country. Multinational companies operating in Zambia, especially in copper mining, have moved capital through western banks and tax havens in an effort to protect their profits from taxation.

As Guy Scott, Vice President of Zambia has previously stated, “[The] government was not elected by the people of Zambia to extract 750,000 tonnes of copper a year but to see to it that the minerals are beneficial to the people of Zambia.”

Finding the leak

Sources of illegal capital flight, such as corruption and crime, remain a problem in Zambia. However, as explained by Dev Kar, Chief Economist at Global Financial Integrity, commercial activities are by far the greatest source of IFFs in developing countries.

“Bribery and criminal activity are estimated to account for only about 3-5 per cent and 30 per cent of IFFs, respectively,” states Kar in conversation with Think Africa Press. “The vast majority of IFFs are accounted for by commercial activity, and their use of the illegal practice of misinvoicing trade.”

Trade misinvoicing is a practice companies use to conceal the true value of exports or imports from the authorities, enabling them to avoid taxation in jurisdictions where tax is high and shield their profits in tax havens instead.

A famous case of trade misinvoicing occurred in 2008, when Zambia might have been robbed of the chance to double its annual GDP. Although the trade misinvoicing process is deliberately opaque, what seems to have occurred was that a large amount of Zambian copper was sold off-record at rates far below the market value to a Swiss-registered company. Zambia was left bereft of both export earnings and tax revenue on the sale, whilst this company resold the copper at world prices, reaping huge profits due to its registration in low-tax Switzerland.

Trade misinvoicing is facilitated by a transnational company’s use of an opaque network of subsidiary firms, which helps multinationals conceal their activities and hide profits from taxation. Publish What You Pay Norway estimated in 2011 that the top 10 extractive industry multinationals controlled over 6,000 subsidiaries between them. Many of these subsidiaries were located in tax-havens where the real extent of the multinationals' financial trickery could be kept secret.

Author and journalist Nicholas Shaxson argues that tax havens and multinational banks are central in facilitating illicit financial flows and hiding smuggled wealth.

“Traditionally, the corruption indices, such as from the World Bank and Transparency International always end up pointing the finger at African countries,” he explains. “But, with the recent arrival of measures such as the Financial Secrecy Index, we are beginning to see the finger pointed back at the handlers, the facilitators of illicit financial flows: western banks and tax havens.”

What effects are IFFs having on Zambia?

IFFs are detrimental to small, vulnerable countries like Zambia in three major ways. Firstly, the existence of illicit channels incentivises domestic corruption and undermines good governance, as those tempted have ready-made channels through which to smuggle illegal gains.

Secondly, IFFs harm development. Vital capital that could be used for investment is lost, exacerbating the country's dependence on foreign aid. This loss of government revenue is crippling to Zambia, which has a GDP per capita, PPP adjusted, of $1700. This is despite its natural resource wealth, as it is unable to invest in the services and infrastructure necessary to develop.

Finally, IFFs exacerbate inequality. Alex Cobham, senior fellow at the Center for Global Development, believes that IFFs undermine sensible taxation policies. He explains that in the context of poor bureaucratic organisation, it is difficult to know exactly how much a person or corporation has earned and how much it owes the government in taxes. “You end up being pushed towards VAT-type taxes, because you can track consumption, even though these are regressive.” Thus, the financial system that is complicit in IFFs pushes countries towards regressive taxation as a sort of collective punishment for the wrongdoings of a few, and in doing so it is widening existing inequality.

Stemming the flow

Norwegian assistance to the Zambian Revenue Authority (ZRA) has recently bolstered efforts to challenge the illicit financial flows. However, the tug-of-war between Zambia and the multinationals remains a case of David combating Goliath. Despite having a tax staff ratio that is significantly higher than the African average, it is still insufficient to take on the muscle of natural resource giants. Just one company that operates in Zambia, Glencore Xstrata, turns over more than eight times the country’s total GDP annually. This great mismatch of resources is not helped by the fact that multinationals often poach the best talent from ZRA, offering salaries the state cannot compete with.

Zambian President, Michael Sata, has previously stated that the “fight against corruption and illicit financial flows is a priority”. Yet, despite the Zambian government’s recent progress against IFFs, many believe the Zambian state is too small to stem the tide.

The African continent as a whole lost an estimated $1.4 trillion through illicit financial flows between 1980 and 2009. As illicit financial flows are ultimately an international problem, many believe international solutions are required.

Careful Optimism

Some are optimistic that international progress is already being made on this issue. Cobham, for instance, believes the most recent G8 summit was a step in the right direction. He thinks that, “There has to be a set of global measures taken forward to tackle this issue, and the latest G8 agenda has set a new bar for there to be actual transparency about who the actual owners of companies are. This should start to feed through into the mining sector in Zambia, but also globally. This is an important step.”

However, Mosioma is more sceptical of the rhetoric made by organisations representing the world’s most rich and powerful states, such as the OECD and the G8. Mosioma argues that “On the one hand we have seen the G8 make very positive public statements, but when it comes to actual steps there is basically nothing. We will wait for the next G8 to make similar pronouncements on what we need to do. But in reality nothing is happening on the ground.”

It is believed that in order to facilitate real change and deter future abuses, it is necessary to punish those facilitating the illicit financial flows. “We need to focus on intermediaries, financial institutions, the accountants and lawyers that have been putting this stuff together,” states Shaxson. “These people are causing high levels of criminality and the looting of these countries. We need to talk about serious measures, when these criminals are caught red-handed. We need to see people being slung in jail for this sort of stuff.”

Thus, for many of those campaigning against IFFs, unless the global infrastructure that supports these flows is robustly challenged, Zambia will continue to lose out. In order to enforce change, Mosioma believes that Zambia’s and other developing countries need to make their voices heard in global discussions. He argues that “Representation is needed to ensure the global solutions that are fair and for the benefit of everyone.” For him, without this representation, Zambia’s IFF problem will remain unaddressed.

Correction 6/9/13: The article originally stated that Nicholas Shaxson is an Associate Fellow of Chatham House. He is no longer with Chatham House and this has been removed.

Correction 10/9/13: The article originally failed to provide Alex Cobham's institutional affiliation with the Center for Global Development. This has been updated.

Think Africa Press welcomes inquiries regarding the republication of its articles. If you would like to republish this or any other article for re-print, syndication or educational purposes, please contact: editor@thinkafricapress.com.

For further reading around the subject see:

 

Share |