Developing world corruption isn't the biggest source of global dirty money

In the last installment we tried to explain the web of players that are involved in facilitating bribery, concealing the identities of the beneficiaries of bribery and corruption and the shifting of their ill-gotten wealth into havens of secrecy abroad, protected from the public view and from tax authorities.

We suggested that ultimately the buck stops with the politicians and public servants who use their delegated power not to provide services to their people but to enrich themselves. Leadership without integrity opens the door for the use of power to manipulate the law for personal gain and for self-protection. My good old friend Papi Silvio once told the legendary Italian journalists Indro Motanelli and Enzo Biagi that "I am forced to enter politics, otherwise they will put me in prison" (www.vanityfair.com). If that's what motivates people to seek political representation what can stop them from abusing all rules of decency for their own interest and protection?

But politicians hardly act on their own when it comes to diverting public resources to themselves. It takes crooked, rent-seeking business people, banks and companies – local and foreign- supported by equally unethical accountants and lawyers to arrange the bribes, to front shady companies and to channel the loot. In the Okemo and Gichuru case we recounted the alleged roles of well-known business entities like the Sameer Group of Companies, Alcatel and Vivendi to negotiate, pay and conceal the alleged briberies.

It took accountancy firms and lawyers to draw up the papers to conceal the wealth, to create "empty" companies, disguised corporations, fake foundations etc, register them in secrecy jurisdictions with "flee clauses" permitting them to exit easily, in order to conceal the beneficiaries of the loot and to dodge taxes. It took banks, including well known ones like Deutche bank and HSBC as well as less known banks to channel the proceeds of bribery abroad, by for example permitting the opening of anonymous trust accounts and such vehicles. Above all, it takes the existence of secrecy jurisdictions and a secrecy industry permitted by some of the most powerful countries for concealment to be possible. Finally it takes the collective complacency or complicity of the media and civil society to create a veil over the network of illegality surrounding dirty money flows by often concentrating narrowly, if at all, on a selective list of local politicians and public servants to the exclusion of more powerful players who move and shake the world of dirty money.

In these narratives, our focus was on bribery and corruption and the complex web of players involved in hiding and moving this type of dirty money. We hinted in the title of the article that there is more to dirty money flows than cross-border bribery and corruption. You might be surprised to know that cross-border bribery of public officials (including politicians) and outright theft of public resources by politicians moved abroad is the smallest of the three mechanisms by which dirty money flows around the world.

Nature and Scale of dirty money flows

Dirty (or illicit) money takes 3 main forms: bribery and corruption of public officials, criminal (drugs, counterfeit, theft of minerals, terrorism financing, other forms of organized criminal activities etc.) and commercial. Raymond Baker of the Global Financial Integrity Project (GFIP), www.gfip.org estimated, in his seminal book, "Capitalism's Achilles Hill", that the proportion of global dirty money flows that can be attributed to bribery and corruption is a mere 3%. The second largest component, criminal activities constitute between 30-35%. The rest (60%+) are the result of commercial activities – largely international/multinational companies using different means to evade and avoid tax by concealing and moving profits abroad, mainly into tax haven, low tax countries and financial secrecy jurisdictions. We have dealt with the 3% of which the likes of Okemo, Gichuru and Papi Silvio are accused of involvement. The criminal component is being actively addressed by the various anti-money laundering laws pushed heavily on all governments by the United States following the 9/11 terrorist attacks on the United States and others, including Kenya and Tanzania. This leaves the largest component, which also tends to hurt Africa the most, as the subject of this part of the article.

Scale

Before we explain how illicit capital moves through seemingly benign commercial activities, let us first take a peek at how big the problem is. Estimates of the scale of illicit capital flows vary depending on methodology. The latest and perhaps most comprehensive estimates of the scale of capital that has illegally left Africa is the Global financial Integrity's 2010 publication, "Illicit Financial Flows from Africa: A Hidden Resource for Development" www.gfip.org. In this report, GFI estimates that between 1970-2008, as much as $1.8 trillion may have left Africa illegally largely from commercial means – trade mis-invoicing. The period of the greatest illegal capital flight is the period 2000-2008. North Africa constitutes the source of the largest exit if capital and the Great Lakes region is the least. Nigeria tops the list of countries of illicit capital outflows having lost over $100bn. Kenya lost over $6bn in capital flight. The scary bit is that the rate of capital exit has accelerated since 2004 especially in Kenya. These estimates do not include criminal activities such as smuggling, narcotics trade, sex trade, mineral thefts and other criminal activities. In the next installment we shall explain briefly how these figures were arrived at.

How capital leaks illegally through commercial activities.

Dirty money is generated through commercial activities in several ways.

1. Commercial fraud using secrecy jurisdictions to conceal corporate identities. Take a live case currently battled in Ghana between the Ghana Investment Bank (GIB, a Government Bank) and Dominion Corporate Trustees (DCT), a Jersey company. DCT brought a case to the Ghanaian courts against NIB for a claim of USD 60 Million based on promissory notes that were issued by a client of the bank. The issuing company is called Eland International (Ghana) Ltd and is affiliated to Eland International (a shady company with Indian, Singaporean and Malaysian connections). There is also another company involved called International Caps Trading which actually took delivery of the promissory notes and discounted them on the money markets for 45 million US dollars. The notes were guaranteed by NIB but Eland defaulted when a call was made to pay the face value of the notes upon maturity and so the current holders of the notes are demanding that NIB pays the 60 million US dollars with interest.

The transaction was put together by a company called Iroko Securities which is allegedly associated with a one Francois Ekam-Dick who was allegedly involved in the Meridian BIAO bank collapse scandal in England in the 1990s. The GIB legal team have argued that the transaction was illegal in the first place because the guarantee was given by the Managing Director of the Bank without Board approval. The sum of the promissory note ($60mn) exceeded the Bank's subscribed capital. The case is riddled with secrecy and bolstered by secrecy as the entities involved are registered in secrecy jurisdictions and involve "shell" companies which are in turn owned by "shell companies" much similar to the Okemo case. The Ghanaian legal team are struggling to get decent information about the backgrounds of the entities they are dealing with.

2. Inflated management service fees and royalties for brand names registered abroad. In a study entitled "Calling Time: Why Sabmiller should stop dodging taxes in Africa", Action Aid, a British NGO describes how the Sabmiller Group, one of the largest brewers in the world manages to avoid paying taxes in Africa and the developing world in particular. Sabmiller owns the South African flagship beer brand Castle, and many others across the African continent. It is by far the largest brewers on the continent. The study describes 4 main strategies. Strategy 1 involves registering most of the brands in The Netherlands where SM has negotiated a very plum tax deal. Its subsidiaries file their accounts to the Netherlands thereby avoiding paying tax in the places where the beer id brewed and drank. In addition, each subsidiary plays inflated prices for management service fees and as royalties for the use of the brands. This way, profits are concealed and moved to the Netherlands or other tax havens such as Switzerland and Mauritius.

3. Thinning on the top. This describes ways by which the capital of a subsidiary in a high tax paying jurisdiction is "thinned down" by indebtedness to another subsidiary in a low tax jurisdiction. For example, Accra Breweries which is required to pay corporate tax of 25% is made to borrow up to seven times its capital from the Mauritian subsidiary Mubex where corporate tax is 3%. This way Accra Breweries continually transfer capital into Mauritius through inflated interest rates thereby reducing profitability and pay little or no tax in Ghana.

4. Mis-pricing: This is by far the most widespread means by which companies transfer capital abroad illegally. This is the basis by which the estimates of illicit capital mentioned above is based. It involves the illegal use of transfer pricing, mis-invoicing of imports and exports and the deliberate mis-recording of trade pricing. Learn how these mechanisms work and the role of tax havens, banks and accountants in the next part.