Financial secrecy: How is it hurting the African continent?

Sierra Leonean journalist, Mohamed Konneh, gives his reflections on how financial secrecy hurts his country and the rest of the African continent. Mr. Konneh was one of many delegates from developing countries who attended the _Financial secrecy, society and vested interests conference_ in Bergen 20.-22. November.

Article by Mohamed Konneh

 The term "secrecy jurisdiction" is described as a place that is popularly called a "tax haven". The places in question would prefer that they were called "offshore financial centres" or "international financial centres". The difficulty with the terms "tax haven", "offshore financial centre" and "international financial centre" is that no one has ever been able to define what they mean by these terms.

Secrecy jurisdictions According to economist Guttorm Schjelderup, speaker at "a recent conference":conference in Norway on financial secrecy, an alternative and more accurate description is "secrecy jurisdictions". This definition suggests three parts that reflect the complexity of what they do:  

Firstly, secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. This is important. To be a secrecy jurisdiction, a place must deliberately create law that can be used by people who are not resident in its own territory. Or, to put it another way, it must deliberately create laws that wholly or mainly relates to activities that take place ‘elsewhere’ as far as it is concerned. Secondly, secrecy jurisdictions deliberately design the regulation they create for use by people who do not live in their territories so that it undermines the legislation or regulation of another jurisdiction. Again, this is important. It is one thing to create laws that help people who are not resident in your country. As a matter of fact, many countries will do that, to encourage tourism for example. The difference this part of the definition suggests is that this legislation has what we would consider malicious intent: it is designed to undermine the rule of law in another country.

That is a serious allegation to make. Thirdly, it has been argued that to assist those from other places who want to make use of the laws that a secrecy jurisdiction provides, those secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. This last point is no minor issue: by suggesting this we are saying that secrecy jurisdictions knowingly assist people from outside their domains to break the law in the places where they live and make it as hard as possible for that law breaking to be discovered. As such it has been suggested that those secrecy jurisdictions are complicit in the law breaking process. It must be stressed that to be a secrecy jurisdiction all three of these characteristics must be present but that of the three, the most important is the last. But why is this happening?

Laws are made to be respected, irrespective of who or where the crime is expected. h4. Harmful for developing countries The financial secrecy that today entails the extractive industries is most harmful for developing countries that loose out on revenue, which could have the potential to bring millions of people out of poverty. It was therefore crucial that participants from resource rich developing countries attended the conference on financial secrecy, society and vested interest. The conference was an eye opener for participants in the developing countries, and Sierra Leone was represented by both myself, Mohamed Konneh, a practicing journalist in Sierra Leone and member of the Association of Journalists on Mining and Extractive and Daniel Kojo-Lansana, a civil society activist and executive director of Open Eye Development Organization.

 Interestingly, during the conference series of cases including tax evasion were brought forward with the Jahre case showing the magnitude of how prominent people continue to evade taxes, hiding their assets in tax havens. Anders Jahre lived his entire life Norway. He formed and managed several companies, the most important being Kosmos AS. Investigation by tax authorities had been initiated before Anders Jahre’s death in 1962 and this led to a tax claim against his estate in 1983 in an amount exceeding NOK 235 million. In my mind, the Jahre case is still a case in point for the Norwegian authority, a country fighting hard in the area of transparency and accountability. Most African countries, including Sierra Leone, are poor today because such people like Jahre are still parading as business individuals in the continent, catering away the much-needed revenue to areas referred to as “tax havens”. Most African money are hidden in these tax havens, some of which are forgotten money left behind by African leaders or business entities. The extractive sector in Africa is one that is shrouded in secrecy. In Sierra Leone the vast majority of the populace knows little or nothing about the mining agreements the government has signed on to.

Tax havens provide the structures Though Sierra Leone is very much rich in natural resources, with a lot of mining activities, yet revenues accrued from the sector accounts only for about 1,4 % of GDP, according to a report by the Danish NGO, Ibis, earlier in 2012. Major mining companies use complex tax haven-structures, and indications of tax dodging through tax havens makes tax cooperation a joke. From Europe 5.2 bn USD annually in tax avoidance profits are moved to Ireland, Netherlands and to the Bermuda. Accounts for companies should include, sales and purchases within the MNC and to third parties, what companies pay in tax, royalties, VAT and other payments, financial costs (loans, interests, etc), number of employees and salary costs.

Tax havens provide the structures which facilitate capital flight, and that makes multinational companies seem like criminals together with a lot of corrupt elites. Tax havens undermine transparency and international cooperation in the international economy. Tax havens are characterised by special legislation for foreign companies and bank accounts, and zero or minimal tax on foreign companies, holdings, trusts. There are no forms of transparency, no reporting, no disclosure of ownership, no accounts. Over the years the governments from Ghana, Sierra Leone and Mozambique continue to strike bad tax agreements with mining companies. As a result of corruption, incompetence, bad advice from donors and World Bank/IMF, it is believed they have to provide incentives for foreign investors. Civil society needs to hold government to account, and this was very clear from the _Financial secrecy, society and vested interest-conference_ organized by Publish What You Pay Norway. The key role of civil society is to demand transparency and accountability, tracking revenues.

Parliament also has a role to play in that they should hold the extractive companies to account, track funding nationally and locally. The extractives sector is the most corrupt sector, and this is where the fight against corruption is most needed. h4. Need for transparent data and new contracts Consider natural resources as a one-off asset, and therefore investment into it should be sustainable and promoting pro-poor growth. Diamonds were important – now increasingly iron ore and bauxite are the most important, and oil is upcoming. This is all the more resaon why civil society should endeavour to work assiduously in the sector with a more focused attention.

What are the development outcomes for Sierra Leone from the mining industry? There is need for transparent, available data, in the form of what has been proposed as extended country-by-country reporting. These data could be used to spot tax evasion, and for advocacy and awareness raising, and can be linked to the EITI process, and strengthen civil society engagement with the EITI process. There is need for the revision of existing mining contracts, and civil society needs to develop an advocacy strategy in getting the contracts renegotiated.

This strategy should target; Government; electoral campaigns; Donors; the public through awareness raising. It is sad that the mining sector arrangement does not favor the country, the policies, regulations; the fiscal regimes are all skewed towards investors with a number of concessions and tax holidays given to mining companies. Damages caused by mining activities are unimaginable and mining companies are not taken to book on this aspect. 1.4 percent is the total contribution from mining revenues towards Sierra Leone’s GDP, and this is horrible.

This is not helpful to the country considering the damage caused to the environment as a result of mining activities. With the state of affairs, civil society activists want a moratorium on mining activities so as to regulate the sector before the country can continue with such activities. Mining, according to civil society activist Abu Brima of the Network Movement For Justice and Development (NMJD), has been done recklessly in the country, and therefore a long-term plan is needed in the sector.