The U.S. Africa’s Leaders Summit and Illicit Financial Flows

August 14th, 2014

Last week the White House wrapped up the three-day U.S.-Africa Leaders Summit, which President Obama convened to strengthen and enhance relations between the United States and African nations. One of the stated missions of the Summit was to advance America’s “commitment to Africa’s security, its democratic development, and its people.”

As such, a core promise of the Summit was more American investment in the African continent. Specifically, the Summit set the stage for more than $33 billion in new commitments to support economic growth across Africa. President Obama pledged $7 billion in new financing; U.S. companies announced $14 billion in deals in a variety of sectors, including energy and construction; and alongside the World Bank and Sweden, the United States also promised an additional $12 billion in investments for the President’s Power Africa initiative.

Foreign investment can play an important role in economic development. One study, for example, found that foreign direct investment (FDI) promotes economic growth in developing countries by increasing the transfer of advanced technology and creating higher productivity in those nations. Other studies suggest that recipient nations of FDI can also benefit from increases human capital as their residents receive employee training through the investing company. Finally, and perhaps most importantly, several studies note that host nations benefit from FDI to the extent that it contributes to increased corporate tax revenue.  

This is an important point. A critical means by which developing nations can benefit from FDI is, in fact, tax revenue. And, yet, while the Summit was heavy on promises about business and investment, it was light on ideas for improving business practices and gaining fair tax revenues from multinational corporations operating in Africa.

Here’s an example. Say a company decides to invest in a nation in Africa to build a new clean energy project. In a few years from now, the enterprise is successful and the company ends up making a sizeable profit on that investment. Under the current status quo, there is very little that can prevent that successful company from evading the corporate tax that it owes on those profits. There is very little to stop the company from misinvoicing its next shipment of wind turbines, shift its profits to an island nation in the Caribbean, and avoid taxes on most or all of the profit that was meant to benefit that African nation.

Take another similar example, this time from Sierra Leone’s Foreign Minister Samura Kamara. In a recent interview, Kamara noted that sometimes “multinationals will form subsidiaries in joint partnership with governments and then load the subsidiary with debt, reducing any dividends the government had expected to receive.” Again, the effect is that companies may look good for creating private-public partnerships or increasing investment in developing countries, but the real effect of those promises are less clear.

One important caveat to all this is that the Summit did address illicit financial flows, at least in words if not in concrete options. The Summit served as a platform for the creation of the U.S.-Africa Partnership to Combat Illicit Finance and through this announcement these leaders did take one step toward tackling illicit financial flows. This is an important symbolic moment, but in truth, it’s still light on the details.

Investment is important, but it must be paired with financial transparency and oversight. Domestically and internationally, we must watch both new and old business ventures for profit shifting, tax evasion, and trade misinvoicing. Again, as Kamara points out: “The tax structures used by multinationals must be addressed” and nations should achieve “greater transparency, particularly in the extractive industries.”

And so, we should be optimistic. We should be optimistic about the pledge of investment in Africa and the creation of the Partnership on Illicit Finance. Yet we should also be cautious. We should understand that profits from these investments are still susceptible to the same kinds of trade and financial manipulations that are today responsible more than $35 billion in illicit finance leaving the nation each year. Our work here is not done.

Written by Ann Hollingshead

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