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Financial Secrecy Index 2018 – IFFs challenge at the doorstep of African Countries (Part 1)

Financial secrecy in Africa presents new challenges in the fight against Illicit Financial Flows 

In an age where we are all too quick to look outward at the challenges that act as stumbling blocks towards sustainable development in developing countries, the launch of the 2018 Financial Secrecy Index (FSI) in January reveals an uncomfortable truth for many growing African economies. In a three part series of blogs, I will be exploring how the emerging issue of financial secrecy in Africa only adds another battleground for citizens, civil society, and advocacy groups in our fight against Illicit Financial Flows (IFFs) from Africa. In part one of this series, I will begin with laying the foundations of financial secrecy and what the FSI is all about. In parts two and three, I will look financial secrecy in the context of Corruption; and how financial secrecy in Africa could potentially undermine development efforts.

 

What is Financial Secrecy and why does it matter?

According to Tax Justice Network, financial secrecy refers to a situation where an entity refuses to share financial information with legitimate authorities such revenue, security, and so on. There are varying degrees of financial secrecy namely: (i) Bank Secrecy; (ii) Corporate Secrecy; and (iii) Non-Cooperation. Each of these forms of financial secrecy are present within borders of the countries and therefore engage in the practice of facilitating financial secrecy. By extension, such countries are often called secrecy jurisdictions. In other words, a secrecy jurisdiction is a country or territory that provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.

Why does this matter?

Financial secrecy and its facilitation by secrecy jurisdictions often engage in activities that tend to be associated with movement of finances that have been obtained in a manner that is not necessarily legal. This matters because:

  1. Several years of research and data collection, reveals that secrecy jurisdictions are complicit in the generation, movement, and harbouring of illicit financial flows, of which a significant amount originates from developing regions including Africa. In Africa, for example, it is estimated that USD 80 billion is lost annually through IFFs up from about USD 50 billion.
  2. When considered in the wider context of development finance, the dollar amount lost to IFFs from Africa outstrips the dollar amount in Official Development Assistance (ODA) and Foreign Direct Investment (FDI).
  3. The facilitation by secrecy jurisdictions erode the moral fibre of society and undermine the governance structures that are created to provide accountability, safety, and security to citizens. It does by extension implicitly impact on the freedoms and rights of citizens in these jurisdictions – something I will be discussing in parts two and three of this blog series.

The above is just a snippet of why financial secrecy is an important issue for the African continent, especially, given its pervasive nature and further, its impact on African economies to generate revenues to finance their development agenda.

“Secrecy jurisdictions are a safe haven for the world’s dirty money- money looted from many poor countries across Africa. These funds would have been used to ensure that more people across the continent have access to basic rights like quality healthcare and education. There is need for more to be done to end financial secrecy. An end to tax havens is the beginning of greater openness and transparency in the corporate world for the benefit of the majority.” (Alvin Mosioma, TJNA’s Executive Director, on FSI 2018)

What is the Financial Secrecy Index?[i]

The Financial Secrecy Index ranks jurisdictions according to their levels of secrecy and the scale of their offshore financial activities. A politically neutral ranking, it is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight. In identifying the most important providers of international financial secrecy, the Financial Secrecy Index reveals that traditional stereotypes of tax havens are misconceived. The world’s most important providers of financial secrecy harbouring looted assets are mostly not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest countries. Rich OECD- member countries and their satellites are the main recipients of, or conduits for these illicit flows.

A global problem at Africa’s doorstep?

Table 1[ii]: Financial Secrecy in Africa – Emerging Challenge?[iii]
Rank Jurisdiction FSI Value6 FSI Share7 Secrecy Score4 Global Scale Weight5
27 Kenya2 378.35 1.19% 80.05 0.04%
38 Liberia2 277.29 0.87% 79.70 0.02%
49 Mauritius2 223.47 0.70% 72.35 0.02%
50 South Africa2 216.44 0.68% 56.10 0.18%
75 Tanzania2 128.92 0.41% 73.40 0.00%
77 Seychelles 125.26 0.40% 75.20 0.00%
95 Ghana2 68.85 0.22% 61.75 0.00%
103 Botswana2 39.45 0.12% 68.73 0.00%
106 Gambia2 34.51 0.11% 76.63 0.00%

The 2018 Financial Secrecy Index presents some worrying signs for the emerging economies in Africa and threaten to potentially undermine the sustainability of their development trajectory. The 2018 FSI, which ranks 112 countries across the world includes 9 African countries. As shown in Table One below, Kenya tops the table as being the most secretive jurisdiction on the continent while The Gambia is the least secretive. This is the first time that both Kenya and The Gambia are being included in the FSI. However, Kenya’s ranking is perhaps not too surprising following the recent passing of legislation creating an international financial centre in its capital city, Nairobi. For some of the other countries featured in the ranking, these are worrying times as the fight against IFFs just got that much more difficult and has come to the doorstep of these very countries.

Table Two illustrates exactly how close to home the challenge of financial secrecy actually is. Comparing the 2018 data with that from 2015, there has been significant improvement the country rankings over the past three or so years. Of the six countries that were in the 2015 index, five have improved their FSI ranking while only one, South Africa, has worsened its FSI ranking. This is positive but the reality on the ground is that while there have been improvements it the FSI ranking, these countries suffer severely from political and socio-economic challenges.

Table 2[iv]: Financial Secrecy in Africa – Progress or Regression?[v]
2018 FSI Ranking 2015 FSI Ranking
Rank Jurisdiction FSI_Value Secrecy score RANK Jurisdiction FSI Value4 Secrecy Score5
27 Kenya 378.34758 80.04
38 Liberia 277.28828 79.69 33 Liberia2 218.2189 82.89
49 Mauritius 223.4719 72.34 23 Mauritius1 297.0404 72.22
50 South Africa 216.43837 56.09 61 South Africa 90.88525 41.57
75 Tanzania 128.92 73.40
77 Seychelles 125.26174 75.19 72 Seychelles 60.84057 71.17
95 Ghana 68.851747 61.75 48 Ghana2 139.184 67.11
103 Botswana 39.457992 68.73 62 Botswana2 90.55827 71.38
106 Gambia 34.520791 76.63

Underpinning the political and socio-economic challenges in these countries is the IFFs. Observing the data in table three below shows that FSI ranking while important, doesn’t seem to be impacting on the IFFs from these countries. The countries that have improved their FSI ranking are still losing millions of dollars through IFFs as shown in table three with South Africa, Botswana, Liberia, Ghana, and Tanzania having lost cumulatively the most between 2005 and 2014.

Table 3[i]: Financial Secrecy and Illicit Financial Flows – Africa’s dual challenge
2018 FSI Rank Jurisdiction

Cumulative IFFs 2005-2014

27 Kenya 837.15
38 Liberia 6,996.74
49 Mauritius 3,108.71
50 South Africa 83,897.99
75 Tanzania 3,491.69
77 Seychelles 241.87
95 Ghana 5,284.30
103 Botswana 8,914.12
106 Gambia 484.51

[i] Source of Data: Authors computation based on the 2018 FSI and From the 2017 GFI IFF dataset

What next?

For the past decade, Tax Justice Network Africa (TJNA) has been on the forefront in the fight against IFFs from Africa and promoting tax justice across the continent. The 2018 FSI findings only add to the TJNA’s body of evidence that while IFFs is a global problem that disproportionately affects Africa, there are policy decisions made by government that are undermining their own development efforts. The Africa Union/Economic Commission for Africa High Level Panel on Illicit Financial flows identified in its report on IFFs that “IFFs are often driven by criminal activities with the purpose of keeping the transactions from the view of law enforcement agencies or revenue authorities. We learned of criminal activities in Africa, ranging from trafficking of people, drugs and arms to smuggling, as well as fraud in the financial sector, such as unauthorized or unsecured loans, money laundering, stock market manipulation and outright forgery.”

The challenge of financial secrecy is not insurmountable. Over the past couple of years crucial exposés have exposed the vulnerability of the global financial system. In particular the Panama Papers in 2016 and the Paradise Papers in 2017 have shown, more than ever before, the truly systemic nature of the secrecy and offshore problem and how they continue to impact Africa’s development agenda. As the battlefront widens in the fight against IFFs, TJNA calls upon African governments to:

  1. Address aggressive tax planning and tax avoidance which potentially causes more harm to African countries beyond tax revenue collection. Tax avoidance undermines laws, institutions, and policies of fragile African economies and further exacerbates inability to effectively collect tax revenue.
  2. Honour their commitments to implement the recommendations from the HLP report. The AU Heads of State meetings of 2015 and 2016 showed unequivocal commitment to implement these recommendations.
  3. Consider their tax policy, legislation, and regimes to being more robust and punitive to those found guilty of aggressive tax planning and tax avoidance. In addition, we call on these ministries to engage actively in pushing for a broader global definition of IFFs that incorporates aggressive tax planning and aggressive tax avoidance

In conclusion, TJNA continues to advocate against IFFs from Africa and will push forward with its call for a broader definition of illicit financial flows that includes actions such aggressive and wilful tax avoidance by individuals and businesses given the pervasive impact it has in Africa.

Author: Jason Rosario Braganza, Deputy Executive Director, TJNA

Photo credit: Nieman Reports

Notes:

[i] This is lifted from Tax Justice Network’s FAQ in the Financial Secrecy Index

[ii] Source of Data: Authors computation based on the 2018 FSI

[iii] Footnote 2: For these jurisdictions, we provide special narrative reports exploring the history and politics of their offshore sectors. You can read and download these reports by clicking on the country name.

Footnote 3: For these jurisdictions, we took the secrecy score for the sub-national jurisdiction alone, but the Global Scale Weight (GSW) for the entire country. This is not ideal: we would prefer to use GSW data for sub-national jurisdictions – but this data is simply not available. As a result, these jurisdictions might be ranked higher in the index than is warranted.

Footnote 4: The Secrecy Scores are calculated based on 20 indicators. For full explanation of the methodology and data sources, please read our FSI-methodology document, here:  www.financialsecrecyindex.com/PDF/FSI-Methodology.pdf

Footnote 5: The Global Scale Weight represent a jurisdiction’s share in global financial services exports. For full explanation of the methodology and data sources, please read our FSI-methodology document, here: www.financialsecrecyindex.com/PDF/FSI-Methodology.pdf

Footnote 6: The FSI Value is calculated by multiplying the cube of the Secrecy Score with the cube root of the Global Scale Weight. The final result is divided through by one hundred for presentational clarity.

Footnote 7: The FSI Share is calculated by summing up all FSI Values, and then dividing each countries FSI Value by the total sum, expressed in percentages.

[iv] Source of Data: Authors computation based on the 2018 FSI

[v] Green = improved FSI ranking; Red = Worsened FSI ranking; No Colour = new country hence no comparable data

[vi] Source of Data: Authors computation based on the 2018 FSI and From the 2017 GFI IFF dataset

13/02/2018

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About TJNA

The Tax Justice Network-Africa (TJN-A) is a Pan-African initiative and a member of the Global Alliance for Tax Justice. Launched in January 2007 during the World Social Forum (WSF) held in Nairobi, TJN-A promotes socially- just, accountable and progressive taxation systems in Africa. It advocates for tax policies with pro-poor outcomes and tax systems that curb public resource leakages and enhance domestic resource mobilisation.

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