Proactive Strategies for Addressing Illicit Outflows in Uganda

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An article the other week in the Ugandan Daily Monitor quotes an official from the Uganda Revenue Authority (URA), Mr. Patrick Mukiibi, on the value and implications of illicit flows from that country. According to the article, Uganda loses UGX 2 trillion (approx. USD 866 million) annually through “tax crime”, also termed “economic and tax fraud”. The Ugandan Ministry of Finance says that the current fiscal year (2010/2011) government budget is UGX 7.5 trillion (approx. USD 3.2 billion), and it will need loans and other development assistance to cover 26 percent of this. In other words, the article says, development aid into Uganda roughly equals the tax revenue it loses from illicit flows. “If we were able to collect all the money we are supposed to get, we would be able to fund our entire budget without any external support,” says Mr. Mukiibi. It is on this idea that we want to focus.

First, however, we need to talk a bit more about the figures Mr. Mukiibi uses. The Daily Monitor article does not discuss the data or methodology behind the UGX 2 trillion IFF figure, so we do not want to rely on it (although we applaud the government for even being willing to come up with and publicly discuss a figure for its illicit flows and associated tax loss). Instead, let’s take the figures from the latest report from Task Force member Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2000-2009. GFI’s economics team estimates that Uganda lost an average of USD 509 million in illicit outflows per year between 2000 and 2008 (the most recent year for which the IMF’s macroeconomic data are available). This means that, on average, Uganda loses five percent of its GDP in illicit outflows each year. If we apply this average to the FY 10-11 government budget from the Daily Monitor article, illicit outflows would represent approximately 16 percent of the total budget. The majority of these outflows resulted from trade mispricing (unrecorded transfers flows in the IMF’s Direction of Trade Statistics). Trade mispricing means that the value of a good or service being exchanged has been deliberately altered, usually to avoid paying taxes.

Differences in figures aside, the key point is that Uganda is losing a significant amount of (potential) government revenue each year. Development aid is filling this gap now, but it can never be as effective (nor as sustainable) as organic revenue that the state generates itself. The best strategy for the Uganda Revenue Authority to pursue is one that’s proactive: enact policy changes to limit future illicit outflows. Given that GFI’s figures show a disproportionate loss through trade mispricing, this is where the government should start.

First, customs officials in Uganda should be provided with data on typical prices paid for the commodities it exports. We recognize that the price of coffee from Uganda will not be the same as it is in another country, but the pricing data will at least create a range of reasonable prices that can help curtail the mispricing of goods. Second, Uganda should amend its import/export policies to include a requirement that the buyer and seller (whether they are from the same MNC or not) of any cross-border transaction both sign a declaration that the goods (or services) being exchanged have not been mispriced for the purpose of avoiding taxes. Such a policy would create personal responsibility for any wrongdoing, which provides a strong incentive against such a practice. Again, this is just going to curtail the illicit flows, it will not stop them completely. Curtailment still has a significant impact on illicit flows, and in the long term it helps chip away at the culture of pervasive tax evasion, which can then have a positive ripple effect on other issues (and in other countries).

Trade mispricing is not the only concern, however. Uganda looks set to go from a net importing country to a net exporting country within this decade, thanks to major oil discoveries. So far, at least 800 million barrels of reserves have been confirmed in the Lake Albert basin, with a potential two billion barrels in total. According to the World Bank oil has the potential to double government revenue within six-ten years and to constitute 10-15 percent of GDP at its peak. Uganda faces the prospect of being able to free itself from development aid. The risk, though, is that it goes the way of other oil-rich countries, with the revenues seeping away and not benefiting the Ugandan people. Uganda has been lauded for its development in the last twenty years, but the governance trends have been heading downhill for a while, with a series of unresolved high-level corruption scandals.

A recent report by Global Witness identified a series of warning signals in the Ugandan oil sector, such as a lack of transparency and accountability throughout the awarding of concessions, contracts and signature bonuses, which have been a key element in descent into the ‘resource curse’ in other countries. To avoid this fate, the central government should commit to full transparency in the management of oil by passing a new comprehensive Oil Governance Law in the new Parliament, after the February 18^th elections. There are also steps Uganda’s donors can take, assuming they want to see value for their money (which has been providing up to a third of the national budget in recent years), such as working with the Ugandan government to get transparent natural resource management in place and building the capacity of local accountability groups. But there are also improvements to the international financial architecture that would help.

A key tool for avoiding illicit outflows from oil revenue is country by country reporting. As part of the Dodd-Frank Wall Street Reform Act, the US has recently passed legislation that requires US- listed (i.e. publicly traded) companies engaged in the commercial development of oil, natural gas or minerals anywhere in the world to publicly disclose what they pay to US and foreign governments.

The European Commission, inspired by the US example, is currently considering introducing its own legally binding country by country reporting requirements for all companies listed on European stock exchanges. One route to do this would be via an accounting standard, the other would be via securities regulators as the US has done. Such a standard, if extended to the EU, would cover the international oil companies operating in Uganda, the main one of which – Tullow Oil – is listed on the London stock exchange and therefore not covered by Dodd-Frank.

The transparency country by country reporting creates would allow the URA, civil society groups, parliament and press to monitor incoming revenues to make sure that a) the money makes it through to the national budget and b) companies are paying their fair share of taxes. For example, something fishy would be going on if Oil Company X claimed to have earned USD 500 million in a secrecy jurisdiction, where it is not extracting any oil, while at the same time claiming a net loss of USD 100 million in Uganda, and thus not paying the URA any revenue taxes. Similarly it will become easy to compare how much Uganda receives per barrel of oil with other countries, shedding light on the fairness of the production sharing agreements. Companies already collect this information for internal purposes, so producing it for oversight authorities would be simple – the only losers would be those planning to steal the revenue.

Such changes to the international regulatory standard could have a powerful effect in helping countries to generate – and keep – their own revenue so they can achieve economic independence.

Anthea Lawson is a senior investigator for Global Witness where she heads the organization’s anti-corruption campaign. Based in London, Ms. Lawson is an expert on the relationship between the international finance system, corruption and poverty.

Christine Clough is the coordinator of the Task Force on Financial Integrity & Economic Development.

The authors wish to thank Karly Curcio at Global Financial Integrity and Joe Powell at ONE for their assistance with this blog.