subject: ILLICIT CAPITAL FLOWS [print this page] ILLICIT CAPITAL FLOWS ILLICIT CAPITAL FLOWS
ILLICIT CAPITAL FLOWS.
Banks and venture capitalists assisting capital flight from Africa for fees and bonuses.
One of the lesser known facts about the commodity upswing since 2000 is the number of billionaires who have flourished in impoverished Africa.
Their source of wealth: privatising (for their own account) vast public mineral resources and foreign development loans.
In some countries, as much as 80% of public loans from world bodies, aimed at alleviating poverty, have left these countries as private assets through capital flight. As Africas last remaining massive ore bodies are slowly moving into bankable feasibility stage, so too is their attractiveness to institutional resource investors.
In an effort to redress this situation, financing through regulated Microfinance Intitutions (MFIs) who distribute loans to small entrepreneurs, is now becoming the preferred choice of foreign foundations and development financiers
Contrary to a decade ago, Africa has now become a continent where vaste swathes of money chase a limited number of bankable projects in order to capture a share of technological, resource and infrastructural expenditure.
Banks, defined as financial institutions licensed by the State or Central Bank, and usually associated with conservative business practices are becoming partners in crime to this unrecorded and untaxed leakage of capital and appear willing to take a piece of the action for the extraordinary fee income.
http://www.cmi.no/file/?972
See detailed Norad report prepared by its anti corruption project ANKOR which highlights its observations but falls short of drawing definitive conclusions. (although the message is clear)
Add to this the secrecy jurisdictions such as Tax Havens, whose actions are complimentary and integral to those initiating the process of capital flight and you have a powerful combination.
In all cases extraordinary fees all the way along the chain drive the process and make the efforts of FICA and FATF and ESAAM (Eastern and Southern African Anti - Money Laundering group) a hard to implement objective.
Although offshore centres have in recent times clambered to become white-listed offering tax transparency there are many jurisdictions which still turn a blind eye to activities which are not proven to be illegal and therefore regarded as legitimate. (read immune from prosecution).
Certain financial activities, such as the externalising of undeclared funds by a resident of a particular country is unlawful in that country of origin but no such law exists in the offshore centres and therefore offshore authorities will not act when alerted to such breaches.
Company Secretaries in the Tax Havens take instructions from the custodians of SPV`s (Special Purpose Vehicles) adding their stamp of legitimacy while the true origin and nature of funds which later gets distributed to beneficiaries out of the SPV remains out of scope.
Auditors, usually working in informal alliances with these Secretaries will then most likely sign off accounts which get submitted to the Registrar of the Offshore centre for filing. Once done, the layer of legitimacy is now complete.
Banks and intermediaries "help" the money movement process through strategic services such as opening accounts and facilitating transfers while corporate specialists market the SPVs to obfiscate audit trails and conceal beneficiary details.
It is most difficult, if not unattainable for an individual from an African country with known political problems and limited democratic principles to open and operate a corporate offshore banking account on their own accord. Thus ready made structures such as shelf companies are sold through intermediaries and this is half way home.
Basic banking procedures such as KYC (know your client) are not always able to be enforced in the country of origin as a result of political pressure and competition from new entrants to the banking system willing to co operate with the capital exporters.
There is also a new and added risk which threatens to keep this system alive.
The rise into the banking ranks of regional African MFIs. These banking newcomers arrived on the scene some years ago as small NGOs and through the continual application of foreign capital injections and technology enhancements, have moved to look after their new owners shareholders rather than their social investor base whom they set out to serve.
Unlike the double bottom line returns inherent in social investments, their commercial shareholders seek only financial return on investments which means maintaining attractive profit margins.
The MFIs eventually obtain full banking licenses and enter the commercial arena. In their quest to move upscale and capture high net worth business such as politically well placed individuals, they have become involved in a global system that on the one hand villifies the practice of public assets and loans being transformed into private assets but permits it to be a fee earner.
In addition, the asset recovery process to repatriate these funds is complex and uncooperative.
Proof of activity to regulators (Government bodies) in the established Offshore jurisdictions is more often than not redirected to local, private legal firms as these Islands have made a business out of enforcement of rights pertaining to missapropriated funds.
Any actions or efforts to start the process of asset recovery requires costly legal fees often between 250 -$400 an hour to investigate such complaints, is time consuming and ends up have to go through the courts in a foreign jurisdiction.
In many ways the perpetrator ends up being protected from accountability, by default, as a result of the inaccesibility of the system and by the recovery units having to carry the burden of proof.
The global resource investing system is also largely at fault because the best ore bodies and most of the remaining strategic metals are in politically unstable continents. The division between mineral rights which belong to the State and those in power has become blurred.
These highly placed individuals now rub shoulders with CEOs and executives of foreign venture capital companies looking for mineral rights to add to their shop window.
Canadian (TSX) and Australian (ASX) venture capital markets where most of these projects end up repackaged as attractive iron ore, copper,gold, diamonds or old fashioned oil and gas proposals are marketed to clients of stockbrockers and investment banks seeking accelerated returns.
The investor appetite remains insatiable. Capital raising fees are easily between 5-8% (and as much as 10% for fundings of up to $5m) which is lucrative enough to overlook all the misery created in the countries where projects are based and the rewards it brings to a few high placed individuals.
And thus there is very limited incentive for anyone to take a first step to reform the process.
Anti corruption and money laundering drives which have now coincided with anti terror measures have been on the rise steadily being embraced by a few countries in Africa. FATF and FICA being at the forefront but face and ongoing and uphill battle.
More on how TSX and ASX venture capital registered brokers have played a role in keeping their investors in the dark as to where they really invest resource classified funds and how poorly these venture exchanges are regulated.
