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29/08/2016

‘Swiss Leaks’ catastrophic for African economies

Development Policy

‘Swiss Leaks’ catastrophic for African economies

African economies are among the hardest hit by the tax evasion carried out by HSBC.

[IMTFI_Flickr]

Developing countries in Africa have been hit by the full force of the recent Swiss Leaks scandal. The Swiss branch of HSBC bank cost Tanzania, Senegal and the Ivory Coast over 30% of their national health budgets. EurActiv France reports

The “Swiss Leaks” scandal, revealed by Le Monde and a group of around 60 other international media organisations, shed light on the large-scale tax evasion systems put in place by the Swiss arm of British bank HSBC. Between 2006 and 2007, 100,000 clients and 20,000 offshore companies secretly channeled over €180 billion through HSBC accounts.

This extensive fraud, actively encouraged by the bank, had a devastating effect on the budgets of developing countries, particularly in Africa.

The HSBC tax evasion scam boasted high numbers of clients from 19 African countries, including 1787 from South Africa and 1068 from Morocco. Clients from other, poorer countries were also involved, such as Mali (68 clients) and Zambia (69 clients).

Loss of capital

While the sums in question are less substantial than for some developed countries like Switzerland or the United States, many African countries have lost significant amounts of capital through the Swiss Leaks affair. According to information collected by the NGO One, the losses incurred by Ivory Coast correspond to 0.58% of the country’s gross national product (GNP), or €169 million. This loss of capital is equivalent to 39% of the national health budget, or 14% of the education budget.

The situation is similar in other developing countries, like Senegal. Here, the Swiss Leaks documents revealed a loss of 0.90% of GNP, equal to 38% of the health budget or 18% of the education budget. Tanzania’s loss of 0.48% of GNP would cover 17% of health, and 10% of education spending.

But this problem is nothing new. A source from One France told EurActiv that “the Swiss Leaks are only the tip of the iceberg”.

Illicit financial flows

In 2011, the United Nations Economic Commission for Africa established a high-level panel to write a report on illicit financial flows (IFFs) in Africa and to come up with ways to combat them.

The panel, presided by the former South African head of state Thabo Mbeki, presented its damning report earlier this month, in which they estimate the cost of IFFs to the continent at $50 billion each year.

>> Read: Developing countries lose $2 for every $1 they earn

The report states that “some have estimated that Africa’s capital stock would have expanded by more than 60 per cent if funds leaving Africa illicitly had remained on the continent, while GDP per capita would be up to 15 per cent more”.

Worse still, this sum is even greater than the total official development assistance received by African countries, which was $46.1 billion in 2012.

“Given the well-known dependence of several African countries on significant amounts of official development assistance, the loss of resources through IFFs can only serve to deepen reliance on donors,” according to the report.

The figures given by the high-level panel are almost certainly under-estimated, because they exclude certain incalculable financial fluxes that come from “money laundering and drug, arms and human trafficking”.

Today, some countries, like Chad, lose 20% of their GDP to illicit financial flows. This figure climbs to 25% for the Republic of the Congo.

Illicit financial flows in Africa

To combat IFFs, the developed countries of the OECD and the G20 have advanced discussions on the automatic exchange of tax information. This tool, judged the most efficient way to fight tax evasion and aggressive tax planning, should enter into force in January 2017 in certain countries, before being progressively enlarged.

But African countries may find themselves left on the side-lines if they cannot find the human, financial or regulatory resources to bring their agencies up to standard.

Global Financial Integrity estimates the total revenue lost by developing countries to illicit financial flows in 2012 at 1,000 billion dollars.

The phenomenon appears to be growing. From 2003 to 2012, IFFs grew by an annual average of 9.4%, twice as fast as the average GDP growth in the developing world.

Sub-Saharan Africa is worst-affected by this loss of capital, which costs the region’s economies an average of 5.7% of their GDP each year. 

Background

According to the European Commission, tax evasion and fraud cost the EU around €1000 billion every year. For France, the figure is between 60 and 80 billion euros, while for developing countries it is around €100 billion per year.

The international authorities decided to address the issue in 2008. The automatic exchange of information between the tax administrations of different countries, adopted at the Saint Petersburg G20 summit in 2013, will allow each country to know whenever any of their citizens opens a bank account, transfers money or creates a company abroad. 

Further Reading

United Nations

NGOs

Press articles