The Panama Papers shed crucial light on how illicit financial flows work. It’s essential for Africa’s development, but any hope of change is still distant.

When African Union (AU) Commission Chairwoman Nkosozana Dlamini-Zuma was asked about the Panama Papers, which detail how the wealthy exploit offshore tax regimes, she was unequivocal: big corporates that are guilty of corruption and tax evasion must be targeted and return their ill-gotten gains to Africa.

It sounded great. “Why aren’t you talking to the people who are holding the illicit flows to repatriate them back to our continent?” she asked at the Conference of Ministers, a joint AU and United Nations Economic Commission for Africa (Uneca) meeting held in Addis Ababa on Tuesday. “Everyone talks about corruption but when we say let those corrupt resources that were brought to your continent illegally be sent back to our continent we don’t see any movement there and I think that’s where now the debate must be taken.”

And that’s where the conversation must go. Action, however, will be harder to achieve.

According to Global Financial Integrity, Sub-Saharan Africa suffers the highest loss of illicit capital compared to GDP, losing an average of US$81.7-billion a year between 2004 and 2014 to illicit financial flows. The Panama Papers, which feature 11.5-million documents, or 2.6 terabytes of leaked information from Mossack Fonseca, a law firm that assists in creating accounts in offshore jurisdictions, could be key in our understanding of illicit financial flows, and future development.

“Illicit financial flows are the most damaging economic problem facing the developing world,” said Global Financial Integrity Managing Director Tom Cardamone this week. As Daily Maverick's Simon Allison pointed out after the documents were released, “The value of the Panama Papers is that they illustrate exactly how this system works: with numbers, names and time lines.”

To put it simply, African states need cash for development, but their tax revenues are lower, by the billions, than they should be because of illicit financial flows. The largest component of illicit financial flows is trade misinvoicing, says Global Financial Integrity, a key institution on the issue. Companies use offshore accounts to manipulate the price, quantity or quality of goods to funnel through funds and pay lower taxes when they avoid paying taxes where they operate.

Africa has already been pushing for reforms, but the Panama Papers could offer the next step. Former President Thabo Mbeki led an AU panel on the issue, which was often cited during this week’s AU-Uneca conference, offering the continent’s leaders a revenue target to boost funds for their often sputtering development.

“The best part of increasing revenue is to block these illicit outflows because what is outflowing Africa illicitly is equal to or more than our official earnings,” said AU Commissioner for Economic Affairs Dr Anthony Maruping at this week’s conference. “So if we can block these leakages, there will be a lot of resources at our disposal for development.”

“Banks and law firms routinely conspire to hide their clients’ money and fail to follow through on required customer due diligence checks. The governments of the US and other major financial centres particularly need to make corporate ownership information public through corporate registries. The Panama Papers investigation must be the nail in the coffin of anonymous companies,” explained Global Financial Integrity lawyer Liz Confalone.

The Sustainable Development Goals (SDGs), the successor to the Millennium Development Goals, make targeting illicit financial flows a priority. “The inclusion of a specific target to reduce illicit financial flows under the Sustainable Development Goals makes clear that curbing such flows is also essential for creating an enabling environment for sustainable development,” said UN independent expert on the effects of foreign debt and other related international financial obligations of states Juan Pablo Bohoslavsky recently. The Millennium Development Goals didn’t. “This can be considered a remarkable progress.”

Like many others, he cited the Addis Ababa Agreement on financing for development, which calls for measures to combat illicit financial flows. Uneca this week called for “strengthening international co-operation on tax matters to stem the tide of illicit financial outflows”.

But international tax dodging requires international solutions as many illicit financial flows exploit legal rather than illegal tax loopholes. The Organisation for Economic Co-operation and Development (OECD) is pushing its Base Erosion and Profit Shifting (BEPS) reforms aimed at preventing multinational companies registered in tax havens from tax avoidance. US President Barack Obama has called it a massive global issue and South African Finance Minister Pravin Gordhan has called on those with off shore assets to make full disclosures.

But as the Addis Ababa agreement on financing development showed, the powers that be offer questionable solutions. The OECD represents the world’s wealthiest countries and despite efforts from African states, support for the status quo from the United Kingdom and United States mean it will continue to regulate international tax regimes rather than pass the responsibility to an international, democratic, body.

And developing countries are partly to blame. This week, Democratic Republic of Congo Minister of Planning Georges Wembi Lwambo denied his country is a haven for IFFs even though Uneca has said, “The Democratic Republic of Congo is an especially relevant case in the fight against illicit financial flows because its mining sector is regarded as the economic foundation for the country’s post-conflict reconstruction.”

It is hoped the Panama Papers can blow the lid on such denials and efforts by wealthy countries to maintain their ill-gotten gains. But Dlamini-Zuma’s hopes to repatriate those funds are still a long way away.

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Panama Papers: High Level Panel’s Warnings are Not Just another Recommendation

Statement by Thabo Mbeki, Chair of the High Level Panel on Illicit Financial Flows from Africa

Over the past few days, there has been a furore in the global community regarding reports on “the Panama Papers”, an enormous leak of more than 11 million documents which are said to date back up to four decades and are allegedly connected to a Panama law firm. According to the International Consortium of Investigative Journalists (ICIJ), this firm has, in all that time and possibly longer, helped establish secret shell companies and offshore accounts for the rich and the powerful globally. On an even graver note, data from these documents show that that the firm worked with more than 14,000 banks, law firms, company incorporators and other middlemen to set up companies, foundations and trusts for customers. In a time such as this when the issue of curbing Illicit Financial Flows, brought on by practices such as tax evasion and the use of Tax Havens, is one of Africa’s priorities, the release of these Panama Papers is most welcome.

The Panama Papers elaborately bring to light issues that the African Union (AU)/United Nations Economic Commission for Africa (ECA) High Level Panel (HLP) on Illicit Financial Flows (IFF) from Africa vigorously underscored in the Findings in its Report released and endorsed by African Heads of State and Government in January 2015. Not least significant in these Findings were matters relating to Tax Havens and/or Financial Secrecy Jurisdictions and the lack of transparency with regard to the Beneficial Ownership of firms. The information released in the Panama Papers thus far strongly confirm the Findings in the HLP Report. More so, they confirm the existence of a network of offshore accounts and complex investment vehicles that drive tax avoidance and evasion. Until now warnings against such vehicles have been taken lightly. The staggering amount of illicit practices and the large number of global actors exposed by the Panama Papers demonstrate that Governments of Africa and the rest of the world cannot avoid firm action against the Tax Havens/Financial Secrecy Jurisdictions.

The undeniable fact is that the Illicit Financial Flows which derive from tax evasion deserve our full attention both continentally and globally. As revealed within the Panama Papers, the fourth most used Tax Haven by this firm is an African country. Worse still, the reports show that this firm only knew the identities of the real owners of just 204 of 14,086 companies it had incorporated in this very country. Indeed, we must not rest under the illusion that the issue of Tax Havens does not directly affect Africa and the world at large.

Several countries in the world including South Africa, Britain and France have vowed that any of their citizens mentioned in the Panama Papers will be investigated by the relevant agencies to ensure they comply with the laws regarding tax evasion. It is a decent start to the efforts required. Now all countries within and outside Africa must follow suit and begin their own investigations. These investigations should not only be limited to the findings in the Panama Papers but should go further to uncover other possible destinations of the proceeds from tax evasion. The exposures contained in the Panama Papers is a massive blow to financial secrecy, which must be encouraged.

Specific efforts must continue to put political pressure on the countries that enable a high level of financial opacity or that have laws enabling banking secrecy and the registration of shell companies. This is extremely important to all countries. Otherwise harmful tax practices and high levels of opacity in financial transactions as exposed by the Panama Papers will continue to be a scourge that we find ourselves discovering only when there are people bold enough to expose them.

As stressed in the AU/ECA HLP Report on IFFs, the global community in all of its institutions, including parliaments must take all necessary steps to eliminate secrecy jurisdictions, introduce transparency in financial transfers and crack down on money laundering. Until all countries begin to work together to combat IFFs in all its forms, including by closing down Tax Havens and combating the lack of transparency of ownership and control of companies that can hold assets and open bank accounts, there will always be a cavernous opportunity for the exploitation of tax laws at all levels and in all countries for negative purposes.

The Panama firm in question, which all would hope to see receive the deserved justice if found guilty, has responded to the exposures by stating that nothing in the documents released suggests that it has been involved in any illegal practices. Sadly, this may very well be the case legally given the current incomplete global architecture for tackling IFFs, which should include binding international Treaties.

We should not misconstrue the release of the Panama Papers as a time for celebration or an end in itself. To the contrary, it is rather a time for deep reflection and regret that we have allowed the practice to persist which is made possible among others by the existence of Tax Havens/Financial Secrecy Jurisdictions.

Now is the time for the global community to act in a firm and comprehensive manner to end the Illicit Financial Flows and close down the Tax Havens/Financial Secrecy Jurisdictions which serve as the domicile of these Illicit Financial Flows.