Former UN Secretary-General Calls for Public Disclosure of Corporate Ownership Information

2013 Africa Progress Report Features GFI Research, Highlights Devastating Impact of Tax Haven Secrecy, Phantom Firms on Development

Forthcoming Joint Report from AfDB and GFI Released May 29th to Examine Economic Toll of IFFs on Africa

May 18, 2013, WASHINGTON, DC (Global Financial Integrity) – Global Financial Integrity (GFI) lauded former UN Secretary-General Kofi Annan and the Africa Progress Panel (APP), which he chairs, for highlighting the devastating impact that illicit financial outflows have on economic development and poverty alleviation across the continent in the 2013 Africa Progress Report published today.  The APP report cites GFI’s research on illicit financial flows and calls upon the G8 to require full, public disclosure of the beneficial ownership information of all corporate entities within the next year.

“Illicit financial flows—facilitated by tax haven secrecy and anonymous shell companies—are the most damaging economic problem facing the African continent,” said GFI President Raymond Baker, a longtime authority on financial crime. “GFI’s research shows that illicit financial outflows cost Sub-Saharan Africa $385 billion between 2001-2010.  That’s nearly $400 billion that could have been used to invest in healthcare, education, and infrastructure—that could have been used to pull people out of poverty and save lives.  Mr. Annan and the Africa Progress Panel have done a major service to the people of Africa in highlighting this menace.”

Utilizing Africa’s immense resources to lift millions of people out of poverty “will require strengthened governance backed by international cooperation to stem the hemorrhage of revenues associated with tax evasion, secret deals and illicit financial transfers,” Mr. Annan wrote in an op-ed for the International Herald Tribune on Friday.

“It is time to draw back the veil of secrecy behind which too many companies operate,” continued Mr. Annan. “Every tax jurisdiction should be required to publicly disclose the full beneficial ownership structure of registered companies. Switzerland, Britain and the United States — all major conduits for offshore finance — should signal intent to clamp down on illicit financial flows. And the G-8 and the G-20 should work together to expand the scope and reach of the Dodd-Frank” extractives transparency legislation.

Mr. Annan continues to write: “It is also critical that the G-8 helps to empower African governments. The region’s revenue authorities are hopelessly ill-equipped to tackle problems such as transfer pricing or to counter illicit transfers. That is why the Africa Progress Panel has called on the G-8 to provide the technical, financial and administrative support to build capacity.”

Building on British Momentum against Phantom Firms

Late last month, UK Prime Minister David Cameron called for the G8 to endorse public registries of beneficial ownership information—effectively banning anonymous shell companies—when world leaders meet in Northern Ireland this summer.  Kofi Annan’s endorsement raises the pressure on the United States, Canada, Japan, Russia and other G8 members to follow suit with full public registries.

“Anonymous shell companies are the most-widely used method for laundering the proceeds of crime, corruption, and tax evasion,” said Mr. Baker of GFI. “These phantom firms facilitate sex slavery, terrorism, and tax evasion. Central public registries of meaningful corporate ownership information are essential to curtailing these pernicious crimes. We’re heartened to note Mr. Annan’s endorsement of this position.  It’s now time for the United States, Canada, Russia and Japan to jump on the bandwagon.”

Upcoming AfDB and GFI Study

The APP report compares the amount of money flowing illicitly out of Africa, citing GFI’s research, to the amount of foreign aid and foreign direct investment flowing into the continent—noting that the illicit outflows exceed foreign aid and FDI.   Global Financial Integrity (GFI) and the African Development Bank (AfDB) explore this concept of net resource transfers from Africa more fully in a report scheduled for publication May 29, 2013 alongside the 48^th annual AfDB meetings in Marrakech, Morocco.  Titled “Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009,”the findings of the report will be discussed by GFI and AfDB experts on a panel at the annual meetings in Marrakech Wednesday, May 29^th.

–Global Financial Integrity

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Ethiopia lost $11.7 billion in outflows of illegal funds and corruption in the past decade

The Administration of Prime Minister Hailemariam Desalegn made the full might of its power known last Friday, after ordering the arrest of 10 high and medium ranking officials of the Ethiopian Revenues & Customs Authority (ERCA), along with six businessmen, some of whom are well known.

The Federal Ethics & Anti Corruption Commission (FEACC) announced launching a probe against the suspects, but remained quiet about the wrongs they are being accused of.

“Following leads from the public, the Commission, in cooperation with the national security and information services, has been investigating the suspects,” said the Commission headed by Ali Sulieman on Friday night. “Compiling sufficient material evidence and people to testify, the Commission finds it necessary to take them into custody until their case is presented to a court of law.”

Prominent, among those arrested on Friday late afternoon, is Melaku Fenta, director general, of ERCA. He was in his office located off Equatorial Guinea St., (near Megenagna roundabout), when investigators arrested him at 5:00pm, according to eyewitnesses. At about the same time, his deputies Gebrewahed W. Giorgis, in charge of ERCA’s most feared intelligence unit, was arrested by members of the Federal Police Commission outside of ERCA, while Eshetu Woldesemayat, head of the prosecutors’ Directorate, was escorted by police officers from ERCA headquarters.

It is believed that they were heading to the Federal Forensic Department of the Federal Police Commission, a.k.a Maekelawi, on Dejazmach Belay Zeleke Road.

Asemelash W. Mariam, head of Kality Customs; Amegnie Tagel, head of Nazareth Customs; and Tiruneh Berta, team leader of confiscated goods inspection, were also taken into custody on the same day.

The list of people arrested late last week hardly stopped with those inside the government. Prominent businessmen were also arrested in connection with Melaku and his colleagues, including Nega G. Egziyabher of Nesta Trading Plc; Ketema Kebede of K. K. Plc; and Simachew Kebede of InterContinental Addis. Two lesser known businessmen, Zerihun Zewdie and Marishet Tesfu, both of whom run transit companies, were apprehended by police.

Mihereteab Abraha, a businessman who is the brother of Seeye Abraha, was arrested at around 2:00pm, when he went to his children’s school, according to a family member.

“There must be some kind of mistake,” a close family member told Fortune. “He fought ERCA all the way to the Supreme Court where he won his case.”

This is the second time Mihereteab has been arrested and probed by the Anti-Corruption Commission in ten years. Back in the early 2000s, he was arrested and spent close to five years fighting charges of corruption before he was released in the mid-2000s.

“I wonder how he could be implicated with the others,” said this family member.

But none of the officials from the Federal Police and Anti-Corruption Commission have disclosed to the public on what grounds the suspects were put under custody.

“The list is a tall-order,” said an administration official.

Searches were carried out by investigators on Friday night and Saturday morning in the homes and offices of the suspects, Fortune learnt.

However, the investigation directed at some of ERCA’s officials has been going on for close to six months, according to sources in the government. A taskforce from the Commission, the Information Network Security Agency and the Forensic Department of the Federal Police Commission was collecting material evidence, although “very few people were privy to the investigation,” according to a mid-level official from the Anti-Corruption Commission.

“I was aware that they were investigating Gebrewahid,” this official told Fortune. “But, Melaku’s was not something that was revealed to us. It must have come much later.”

The case involves alleged improprieties at customs processing, especially involving imports of steel, according to sources.

The arrests were, however, made after the information allegedly implicating the suspects was presented to Prime Minister Hailemariam Desalegn a week prior to the wave of arrests was carried out, according to a senior aide of the Prime Minister.

“He feels very strongly about this,” this aide told Fortune, but asked anonymity due to the sensitivity of the case. “I believe he started to make good on his promises that he will fight corruption provided that the public supports him by providing valuable leads and information.”

It is the first time since the early 2000s the government has conducted a wave of arrests against officials and businesspeople, including a member of the powerful executive committee of the ruling EPRDF.

Back in the 2000s, Seeye Abraha, former strongman of the TPLF, was arrested, along several businessmen and bank executives, and subsequently charged with corruption. They all had spent close to five years in jail before they were released. Prior to that, Tamrat Layne, former prime minister during the transitional government, was arrested in the mid-1990s, together with businesspeople, all accused of corruption.

Melaku, an economics graduate from Addis Abeba University, oversaw several tax reforms including widening the tax base, by requiring businesses to install cash registration machines and to become registered for Value Added Tax (VAT). He was appointed by former Prime Minister Meles Zenawi, to be director general of the newly organized ERCA, in June of 2008.

Under him, the amount of revenues the federal government mobilized has reached 71 billion Br in 2011/12, a dramatic increase from the 19 billion Br collected before he took the position. ERCA has also consistently managed to meet the revenue targets set for it by the government, though it fell short of the in-house goals it set for itself.

But reforms were not easy to implement and were not necessarily popular. Businesses have long complained of ill-treatment by lower level officials of ERCA, lack of uniform information, bureaucratic bottlenecks, and regulatory unpredictability, marred by inefficiency and unfair taxation.

Front and centre fielding such complaints from the business community at consultation meetings along with Melaku was his deputy Gebrewahed who headed the most feared law enforcement directorate within ERCA.

Most recently, officials from the ERCA have come to loggerheads with businesses, after demanding businesses pay undistributed dividends. During ERCA’s performance assessment meeting, higher level officials were accused of turning a blind eye towards some big businesses for which only lower level officials were bearing the brunt, sources disclosed to Fortune.

Last week’s wave of arrests on people known to be well connected within the political establishment no doubt has put many people off guard.

“Hailemariam wants to prove that there are no holy-cows,” said a senior official in the administration.

Source: FORTUNE

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Stop the Plunder of Africa

By KOFI ANNAN

With Africa’s economies riding the crest of the global commodities wave, there is an unprecedented opportunity to convert the region’s vast resource wealth into investments that could lift millions out of poverty, create jobs, and bring hope to future generations.

Seizing that opportunity will require strengthened governance backed by international cooperation to stem the hemorrhage of revenues associated with tax evasion, secret deals and illicit financial transfers.

Natural resource exports have propelled Africa into the world’s high-growth league. Around one-third of the region’s economies grew by more than 6 percent in 2012. Strong demand in emerging markets is set to drive another decade of high prices for Africa’s natural resources, and foreign investment is on the rise. Mozambique and Tanzania are poised to emerge as major exporters of natural gas. Guinea and Sierra Leone stand to reap windfall gains from iron ore exports. Demand for Zambia’s copper and the Democratic Republic of the Congo’s cobalt is booming.

Unfortunately, the rising tide of wealth is not lifting all boats. Poverty has been falling far too slowly, and in some countries — including Zambia and Nigeria — it has increased. Few governments have used the increased revenues generated by resource exports to counteract rising inequality, build better health care and education systems or strengthen smallholder agriculture. Moreover, corruption remains endemic.

African governments themselves must step up to the plate and address these issues. They need to recognize the urgency of converting their country’s resource wealth into the human capital and investments in infrastructure on which sustained and inclusive growth depend. And they should follow the example of countries like Liberia and Guinea that are combating corruption by posting all mining contracts online for public scrutiny.

In other areas, action by African governments alone will not succeed. As we highlight in this year’s Africa Progress Report, no region has suffered more from tax evasion, aggressive tax planning and plunder of national wealth through offshore-registered companies. These are global problems that demand multilateral solutions.

The scale of the losses sustained by Africa is not widely recognized. Transfer pricing — the practice of shifting profits to lower tax jurisdictions — costs the continent $34 billion annually — more than the region receives in bilateral aid. Put differently, you could double aid by cutting this version of tax evasion. The extensive use made by foreign investors of offshore-registered companies operating from jurisdictions with minimal reporting requirements actively facilitates tax evasion. It is all but impossible for Africa’s understaffed and poorly resourced revenue authorities to track real profits through the maze of shell companies, holding companies and offshore entities used by investors.

There have been some encouraging recent developments in the multilateral response to these challenges. Under the Dodd-Frank Act in the United States and comparable measures in Europe, extractive companies are now required to meet higher standards of disclosure. (In what is surely an act of strategic folly, many of these companies are swimming against the tide of reform by mounting a legal challenge to the Dodd-Frank Act.) Meanwhile, the British government has taken the lead in putting international cooperation on taxation at the center of the agenda for next month’s Group of 8 summit.

This is an area in which the G-8 can make a real difference. The summit should serve as a launch-pad for the development of a rules-based global system on transparency and taxation.

It is time to draw back the veil of secrecy behind which too many companies operate. Every tax jurisdiction should be required to publicly disclose the full beneficial ownership structure of registered companies. Switzerland, Britain and the United States — all major conduits for offshore finance — should signal intent to clamp down on illicit financial flows. And the G-8 and the G-20 should work together to expand the scope and reach of the Dodd-Frank legislation.

It is also critical that the G-8 helps to empower African governments. The region’s revenue authorities are hopelessly ill-equipped to tackle problems such as transfer pricing or to counter illicit transfers. That is why the Africa Progress Panel has called on the G-8 to provide the technical, financial and administrative support to build capacity.

More than 50 years ago, as African states emerged into independence, Kwame Nkrumah, Ghana’s first president, commented: “Never before have a people had within their grasp so great an opportunity for developing a continent endowed with so much wealth.”

With political leadership at home and strengthened international cooperation we can seize the opportunity that Kwame Nkrumah identified.

Kofi Annan, former secretary general of the United Nations, is chairman of the Africa Progress Panel.

–New York Times