Kenya must escape the temptation of financial opacity

In Angola, she is known as ‘the Princess’, a smart and innovative businesswoman which makes her the richest woman on the continent. However, recently, Isabel dos Santos has become the symbol of corruption among African elites. She is accused of systematically looting public assets.

The eldest daughter of ex-president Jose Eduardo dos Santos has, together with her husband, allegedly received billions of dollars from her father’s government through a business empire spanning more than 400 companies in 41 countries.

As a result, according to the Luanda Leaks, she was able to avoid scrutiny and access many public works contracts, State assets and loans at the expense of Angolans.

It’s no coincidence that the 2020 edition of the Financial Secrecy Index (FSI), published by Tax Justice Network classifies Angola as the most secretive of all 17 African countries included in its index. For five of the past 10 years, Angola was listed as having ‘strategic deficiencies’ by the Financial Action Task Force (FATF), an international standard setter of anti-money laundering policy.

In reality, no nation in Africa is spared. Kenya, for example, has seen its contribution to global financial secrecy worsened, taking its ranking up from 27th on the 2018 index to 24th in 2020. It has the third highest secrecy score in Africa.

After the Panama Papers that showed in 2016 that several Kenyans were hiding their wealth in offshore jurisdictions, in 2019, the Mauritius leaks revealed that DAC Aviation International, a UN contractor, had been engaging in tax avoidance. Despite this and efforts by Tax Justice Network Africa to have the Kenya-Mauritius double taxation agreement suspended, the Government opted to sign another agreement.

Of course, we must remember the biggest contributors to global secrecy are not African countries. Members of the Organisation for Economic Cooperation and Development (OECD that brings together the richest countries in the world are responsible for 49 per cent of all financial secrecy in the world as measured by FSI in 2020.

But it is in Africa that the situation is most tragic. Capital flight by African elites and foreigners alike has been undermining the continent’s development for decades. In a recent report examining capital flight from 30 African countries between 1970 and 2015, James Boyce and I demonstrated that they lost approximately US $1.4 trillion over the period in question (US $1.8 trillion if earned interest income is taken into account).

This is much more than the total of the stock of debt owed by these countries as of 2015 (US $496.9 billion) and the cumulative amount of foreign aid received over this period (US $991.8 billion). In short, Africa is a “net creditor” to the rest of the world and not a continent dependent on foreign aid and private investment as typically portrayed.

The consequences are brutal. The capital outflows deprive governments of resources to invest in public services such as education, healthcare and childcare services. The financial haemorrhage exacerbates gender inequality as women are over-represented among the poor. Furthermore, capital flight and tax evasion erode the tax base, forcing countries to resort to regressive taxes on consumption such as value-added tax, thereby shifting the tax burden to the middle class and the poorest segments of the population.

Scandals such as the Mauritius and Luanda Leaks have generated public outrage across the world. It is hoped the revelations will eventually force governments to start tackling the financial secrecy industry that allows cross-border corruption networks to prosper.

We, the Independent Commission for the Reform of International Corporate Taxation, believe it is time for Africa to start addressing the question of transparency. In this context, Kenya’s ambition to be a financial centre modelled after the City of London that thrives on secrecy is a cause for concern. Despite the progress in transparency and exchange of information, there is concern that the establishment of the Nairobi International Financial Centre may undermine progress in transparency, with the risk, as demonstrated recently, of promoting more profit shifting and hence less tax revenue.

Financial transparency is also a political emergency. Wealth inequality is extreme in Kenya. According to Oxfam, less than 0.1 per cent of the population own more wealth than the bottom 99.9 per cent. By continuing to turn a blind eye to corruption and tax evasion and by persisting in responding to the lack of fiscal resources through austerity programmes, governments jeopardise their legitimacy in the eyes of the population, opening the door to extremist movements to advance their destructive interests.

Ndikumana is a distinguished professor of economics and director of the African Development Policy Programme, University of Massachusetts. He is also a commissioner on the ICRICT.