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3 Aug 2016

Pietro Toigo, in African Development Bank Group

Africa: Economist says hiding beneficial owners of companies hampers efforts to curb illicit financial flows, meet Sustainable Development Goals

"Beneficial ownership of extractive companies: Are we walking the walk?"

Illicit financial flows – flows of financial resources leaving a jurisdiction through illegal or illicit means – are the largest drain on developing countries’ ability to finance the Sustainable Development Goals agenda. Africa is particularly affected: the African Development Bank estimated that the continent lost over a trillion dollars since the 1980s, making it a net creditor to the world...

A significant share of IFFs are generated in the extractive sector, through trade mispricing and targeted use of transfer pricing. For example, the Africa Progress Panel suggests that the Democratic Republic of Congo (DRC) in the period 2010-2012 lost at least US $1.36 billion from just five mining deals hidden behind a structure of complex and secret company ownership structures. Beneficial ownership – that is, the physical person(s) that ultimately owns, benefits economically and controls a company is often unknown to tax authorities in developing countries...

So the road to full disclosure of beneficial ownership is still arduous; the potential fiscal benefit are significant and some progress is being made, though mostly driven by the G20 and by global initiatives. Is there a role for African institutions at the regional and continental level to reinforce these efforts? I would resoundingly argue that this is the case...

The issue of tax transparency is a pressing one for developing countries, and systemic disclosure of beneficial ownership of extractive companies can tip the balance in its favour. But effective implementation requires a critical mass of countries that embrace it as the prevailing business standard. The solution can only be a global one, where industrialised countries agree to make it a minimum requirement, and design the standard in a way that is geared towards increasing tax compliance in Africa and other developing countries. This is an agenda that will require African institutions to influence strongly the global initiatives, to ensure they serve the interest of the continent.