Michael Marchant

Like many South Africans, I hear a lot about the growing “lawlessness” in SA. The strongest proponents are often people who have emigrated. It is mentioned in many contexts, but it is increasingly used at home and abroad to criticise corruption in government. Isn’t it sad, the story generally goes, that resources are lost and squandered by elected officials and that the poor suffer as a result?

I am not suggesting this is not a problem. We must continue to strive to eliminate corruption and hold corrupt officials accountable. However, viewing this problem as the scourge on SA’s (and, more broadly, Africa’s) resources is misleading.

To understand the scope of the problem when it comes to the looting of Africa’s wealth, we need to understand two things: the fundamental role played by the private sector, and the role of “lawlessness” in the global north that facilitates such looting.

Global Financial Integrity (GFI), a US-based nonprofit organisation, research and advocacy organisation, estimates $1-trillion left developing countries illicitly in 2012, and that illicit financial flows are rising nearly 10% a year.

Sub-Saharan Africa is particularly hard hit when comparing these flows as a proportion of gross domestic product (GDP), where the “gross sum of illicit financial flows from 2003-12 from 48 sub-Saharan African countries (constituted) 35.7% of their combined 2012 GDP”.

SA is a primary source for these illicit outflows, second only to Nigeria on the continent in terms of annual outflows.

It is crucial to note that up to 90% of these flows are explained not by corruption but by trade misinvoicing, profit shifting and corporate tax evasion. Although issues such as manipulation of prices on a trade invoice are traditionally thought to require corrupt government officials, this is no longer the case. In fact, the majority of trade misinvoicing by multinational corporations is now facilitated by setting up shell companies in tax havens, circumventing any need to include corrupt officials.

GFI economist Brian le Blanc provides a concise account of how this happens, giving the hypothetical example of a Zambian copper producer that will sell its copper to its own shell company in Switzerland at almost half price before that shell company sells it on to the buyer for the full price.

The copper will, of course, never pass through Switzerland and the lower price is reported to the Zambian government for tax purposes. The differential in the price remains untaxed in a Swiss account.

Companies rely on two factors in this kind of case. One is the presence of a tax haven, where profits will remain untaxed. These havens, including London, New York and small island countries and protectorates, do this deliberately as a way of attracting money to their shores.

The second, and arguably more important, factor is the ability to set up shell companies that obscure beneficial ownership. This means when governments in Africa try to uncover whether a company has been using these methods to move money illicitly, it is often impossible to uncover whether the shell companies are indeed linked to the original firm.

So, in effect, a very deliberate “lawlessness” is created and maintained in secrecy jurisdictions by wealthy governments in the global north that facilitates what amounts to the looting of wealth from the poorest countries in the world.

This looting of wealth has a catastrophic effect on the resources available to poor and developing countries to spend on essential services and other investment and, in simple terms, we need to be angrier about it.

We are rightly angered that the Nkandla upgrades diverted more than R200m away from more essential expenditure. Yet, when $29bn left the country illegally in 2012, we did not have the same visceral response.

Some will argue that this is because governments would simply waste this money if it stayed in African countries. For one, this is a generalisation that no longer holds, with many African governments improving their investment in infrastructure and social spending. Second, it seems strange to argue that because corruption is a problem, we should allow companies to steal money and hide it in foreign jurisdictions.

Surely the struggle to combat government mismanagement of funds can and should go together with a struggle to ensure that profits gained from African resources should remain in Africa.

Regardless of how governments spend money, the movement of money offshore by companies also allows them to deliberately mislead their workers and the public and falsely justify not paying local workers a living wage.

We should eagerly await the report of the Farlam commission on the Marikana massacre. It is essential to remember that this is inherently linked to the issue of base erosion and profit shifting by Lonmin, which paid more than R2bn to subsidiaries in Bermuda before claiming it could not afford wage hikes for mine workers.

A recently released Alternative Information Development Centre report confirms that, by eliminating the shifting of more than R500m to Bermuda and reducing the millions more in “management fees” transferred to Lonmin in the UK, the Lonmin subsidiaries in SA could have met the rock-drill operators’ demand for a basic wage of R12,500.

Finally, it is important to note that the complete separation of government and the private sector is not accurate.

Corporate looting is also often done hand in hand with powerful officials, so both benefit at the expense of the population. Therefore, the problem is one of elite capture rather than simply a problem of government or private sector greed.

Regardless, our tendency to focus on the pathologies of the government leads us to obscure this relationship and the centrality of corporate interests in the looting of resources. In addition, while lamenting the quality of political leadership in Africa, we ignore the governments in tax havens that construct jurisdictions deliberately to facilitate the removal of trillions of dollars from African economies.

As a result of this global financial system, by last year, 85 individuals owned the equivalent of the poorest half of the world’s population. How relieved they must be that our anger appears to be reserved for government corruption.

This piece was first published in the Business Day on June 15th 2015. See online here.

 

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Photo: David Parry / Enough Food IF via Flickr (CC BY-NC-ND)

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