Finance Minister Pravin Gordhan said yesterday that illicit financial flows, tax evasion and transfer pricing were major contributors to South Africa’s and Africa’s tax gap.

Gordhan told delegates from more than 30 countries at the high level two-day conference on Illicit Financial Flows: Inter-Agency Co-operation and Good Tax Governance in Africa, held at the University of Pretoria, that illicit flows were a threat to the continent’s development agenda.

“Tax evasion, illicit financial flows and transfer pricing are contributors to the tax gap in any country and the extent to which they are uncontrolled undermines the fiscal capacity of the various countries,” he said. Last year former president Thabo Mbeki told the Pan African parliament that the illicit flows cost Africa $1 trillion (R14trln) over 50 years.

Prime suspects

Mbeki, who first investigated the illicit financial flows for the AU in 2012, said multinational corporations were the prime suspects in the trade and that illegal drug trafficking accounted for almost 30 percent of the money.

In his Budget speech delivered in February, Gordhan said with effect from next year international agreements on information sharing would enable tax authorities to act more effectively against illicit flows and abusive practices by multinational corporations and wealthy individuals.

Capital flight not only drains domestic wealth, but it also exacerbates inequality and facilitates crime and corruption. In 2014, French bank BNP Paribas was fined $8.9 billion after being found guilty in 2014 for transferring billions of dollars on behalf of Sudan and other countries blacklisted by the US in one of the biggest financial illicit cases to date.

A research by the Global Financial Integrity, which used Ghana, Kenya, Mozambique, Tanzania and Uganda as case studies, found that trade misinvoicing was a significant source of illicit outflows and inflows of capital in each country. The International Monetary Fund said governments should significantly boost customs enforcement by providing appropriate training and equipment to better detect the intentional misinvoicing of trade transactions.

Gordhan said Africa lost about $50bn annually to illicit financial flows and this compromised the continent’s ability to provide economic and human development.

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High Level Conference on Illicit Financial Flows: Inter-Agency Cooperation and Good Tax Governance in Africa

Extracts from the Address by Minister of Finance, Mr Pravin Gordhan

Ladies and Gentlemen, welcome to all of you who have travelled from all corners of our continent and thank you for the invitation to address this High Level Conference on Illicit Financial Flows and Good Tax Governance.

Tax crimes, money laundering and illicit flows are part of a complex phenomenon which is undermining good governance, ethical politics, government and civil society programs intended to promote inclusive growth, reduce inequality and improve the standard of living of the poor and lower middle classes on this continent and elsewhere in the world.

I am pleased that you are looking at this matter from an African continental perspective, because our continent is one where illicit flows from and between African countries pose a significant threat to the developmental agendas of our countries. Indeed, in recognition of the matter, the African Union prioritised the need to identify, stop and eliminate these flows out of Africa, giving effect to the sterling work done by the Mbeki High Level Panel on Illicit Financial Flows from Africa.

This project recognises the link between tax crimes and the proceeds gained from all manner of criminal activities – organised crime, money laundering and corruption being amongst them. Good tax governance and strong cooperation between law enforcement agencies and tax authorities are essential elements in effectively countering corruption, bribery, and illicit flows.

But this requires society to nurture and sustain strong, capable and independent institutions led and operated by public officials who are ethical, public-service oriented and allowed to act without fear or favour against these crimes and those committing these crimes.

The program that you are initiating must ensure that, both in Africa and outside of Africa, in the public but also in the private sector, there is an unimpeachable effort to build ethical, resilient institutions and officials whose integrity is beyond question. A task, I admit, easier to articulate and talk about but difficult to implement.

Nonetheless, we can never relent in our efforts, we must all ensure that the right things are done whatever the evil and extractive forces in the private and public domain might be doing in order to sabotage genuine people-oriented democracies and just and fair development across the world.

Background

The danger of illicit flows and money laundering is not new to South Africa. It was in fact identified as a priority integral to a tranche of laws which were passed by Parliament almost immediately after the birth of our democracy and was seen as critical.

These laws were to enable our integration into the world economy and to ensure that the integrity of the South African financial system was protected from being abused for criminal objectives.

The first administration of President Mandela and the first Minister of Justice of the democratic South Africa, the late Dullah Omar, recognised that illicit flows and money laundering pose a “danger that should be taken very seriously by all countries” and failure by countries “to take action against it face not only massive potential financial losses, but a terrible threat to the entire fabric of society.”