Denial no Solution for Effective Firewall against Illicit Outflows

Leaks of confidential information such as the Panama Papers implicating global movers and shakers rarely surface. The 11.5 million documents leaked from the corporate service provider firm – Mossack & Fonseca – to the International Consortium of Investigative Journalists (ICIJ) brought the fire of public discontent on politicians and their acquaintances, in countries as varied as the United Kingdom, Russia, Uzbekistan and Australia.

Revealed in the leaked information is the fact the global rich use offshore accounts and shell companies to avoid taxation. That was no surprise. But by establishing hierarchical shell companies – difficult to trace even for the most empowered regulators – big corporations bypass taxation obligations. And political power seems to play its own role in the scandalous activities as politicians associate with, legitimize or overlook the activities of tax havens. The fact that some politicians, such as Prime Minister David Cameron of the United Kingdom, found to have benefited from an offshore account of his father, fired back to citizens saying they had done nothing wrong in the process is one indicator of how vulnerable political superstructures are.

Regardless, the leaks have made the risks associated with tax avoidance through offshore accounts and shell companies all the more evident. There has never been a time in global history when illicit financial outflows became a key challenge to inclusive global growth more than today.

Little is associated with Ethiopia in the Panama Papers. A search for Ethiopia in the searchable database of the ICIJ would reveal not more than four items: Yimu Perfect Import & Export Co. Ltd, Irrisgienman Ltd, Poly Ethiopia Petroleum Company Ltd, and Girma Agriculture (Ethiopia) Inc. This, however, does not mean that tax evasion and illicit outflows from the country are smaller than from any other African country.

Ethiopia loses about 2.6 billion dollars annually to illicit financial outflows, according to Global Financial Integrity (GFI). The Mbeki Panel (formally known as the High Level Panel on Illicit Financial Flows), established by the African Union Commission to study the intensity of the problem in Africa, came up with a lower figure. Led by former South African President, Thabo Mbeki, the Panel said that Africa loses about 50 billion dollars to illicit outflows annually. And Ethiopia’s share from this chunk of money lost is estimated to be around 1.5 billion dollars per annum.

Despite the estimated difference in the amount of illicit financial outflows (money or capital illegally earned, transferred or utilized), it is certain that Ethiopia is one of the victims of the scourge. For an economy with a gross domestic product (GDP) of 56 billion dollars, 1.5 billion dollars loss per annum is no joking matter. Much as the figure represents an amount close to the annual official development assistance (ODA) receipts of the country, there surely is considerable economic risk associated with it.

On many occasions when the problem is raised for discussion, the approach of the ruling Revolutionary Democrats has been one of either denying the severity of the problem or downplaying it. Head of the Ethiopian Revenues & Customs Authority (ERCA), the ultimate authority to oversee the nation’s taxation system, went on record saying that he does not think the whole rhetoric about illicit financial outflows holds any water.

As the Ethiopian economy is experiencing growth and increasing connectedness with the global economy, the loopholes for trade mispricing, bribery and corruption are definitely on the rise. Hence, downplaying the magnitude and impact of illicit outflows is, by all measures, reductionist.

Even in cases where the ruling elite prefer to admit the existence of the problem, they opt to downplay the impact on the economy. They seem to think that outflows are not as big as contemplated by global financial institutions.

Of course, this view is partly underpinned by disagreements on methodologies of calculating illicit financial outflows. From World Bank’s Residual & Trade Mispricing models to the International Monetary Fund’s (IMF) Direction of Trade Statistics Model, there are various ways to calculate illicit financial outflows. Essentially, the difference lies in the elements to be included as illicit outflows. These differences in methodology, however, do not mean that there is no technical common ground. There is, at least, no confusion on the fact that proceeds from trade mispricing (import over-invoicing and export under-invoicing), bribery and corruption are illicit outflows.

In a practical sense, the Revolutionary Democrats recognise the problem. Showcasing this is some of the measures they have taken over the past two decades. These actions include avoidance of supplier invoices for imports, calculating flower export revenue using stems of flowers (instead of weight of flowers), forcing banks to document and notify regulators on large withdrawals, and establishing the Financial Intelligence Agency (FIA).

Much as these measures could have helped in curbing part of illicit outflows, the nation is yet to have an effective firewall against these outflows. And no doubt denying or downplaying the severity of the problem plays a role in this.

Often, the ruling elite feel uneasy about the subject of illicit financial outflows. They consider reports of illicit outflows unfair, problematic and presumptive judgments by institutions financed by the liberal West. They take them as accusations against political agencies which resist to surrender to the maneouvering of the West. Hence, they tend to sideline them.

But such an approach does injustice to the way the problem of illicit financial outflows is analyzed. Associating everything reported under illicit financial outflow as something related to corrupt political strictures is wrong. Further, even in politically neutral scenarios, it is easy to see that illicit financial outflows is a big problem in today’s world. It needs no specific political affiliation to recognise the magnitude and impact of the problem.

If they have to come to terms with the reality, therefore, the ruling Revolutionary Democrats should avoid their long standing denial of the volume of illicit financial outflows. There is a huge river of national wealth flowing out of the country due largely to trade mispricing and not less to bribery and corruption. Denying the matter cannot not help solve it. Countries, after all, cannot not deny their way out of the scourge of illicit outflows.

Equally important is the need to recognise that much of the illicit outflows occur in the trade sphere of the nation, not the political sphere. This means that having a transparent trade system is vital for the Ethiopian economy. Not only would this reduce loopholes, but it would also help to design a responsive policy framework to control the debilitating phenomenon.

Needless to say, the Ethiopian political-economy remains hugely affected by chronic corruption and opportunism. It, therefore, is a no brainer that part of that corrosion crosses borders. Much as the ruling EPRDFites would not say their system is corruption-free, they should not say that illicit financial outflows is not their problem. Whenever there is corruption, there possibly are illicit financial outflows. Hence, the regulatory actions to be taken to control them should emanate from an honest admission of the linkage.

What the time demands from the ruling elite is for them to build an effective regulatory firewall in the trade, finance and customs systems of the nation. Emphasis has to be on the points where the local economy and the global one meet.

Certainly, the fight against illicit financial outflows cannot succeed without a political elite that is courageous enough to raise the risk flag high, put itself to test, build that regulatory system and punish offenders. It should become clear to them that illicit financial outflows is a subject too big to avoid by outright denial or judgmental downplaying.

Published on May 17,2016 [ Vol 17 ,No 837]



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