Wednesday, July 30, 2008

Conning the Congo: $15 billion in capital flight

Two reports have just emerged highlighting the scale of transfer pricing abuses and capital flight from the Democratic Republic of Congo (DRC), one of Africa's most poverty-stricken and conflicted nations.

One is from Greenpeace International, whose new report Conning the Congo describes how a Switzerland-based logging company, the Danzer Group, has been exporting timber products at below world market price to shift profits out of the Congo to its offshore subsidiary, Interholco:

"Internal Danzer Group documents show in great detail the price fixing arrangements between the Group’s Swiss-based trading arm Interholco AG and the parent firm’s logging subsidiaries in the DRC and the Republic of the Congo. The DRC-based Siforco sells its wood to Interholco at an official price below the true market value of the wood. The shortfall is made up through unofficial payments into offshore bank accounts in Europe, enabling the Danzer Group to evade the payment of a variety of taxes to which it is liable in the DRC."

A second report, neatly complementing the first, comes from Washington-based Global Financial Integrity, which estimates that the DRC lost an estimated $15.5 billion due to capital flight from 1980 to 2006. As the accompanying press release says:

"'pervasive corruption,' and trade mispricing in goods and services led to a per annum loss of nearly $600 million dollars from the DRC economy. Notes the report’s author, lead economist Dev Kar, “With that money, the DRC could have paid off its entire external debt, which is $11.2 billion.”

And it continues:

"If the DRC would have been successful in stemming this capital flight through prudent macroeconomic policies and better governance, not only would the DRC have paid off its entire external debt at end 2006 (US$ 11.2 billion), another US$4.3 billion would have been left to add to the country’s foreign exchange reserves or used to invest in infrastructure and human capital."

This all follows a broader report from the University of Amherst, Massachusets, using different methodology, estimating capital flight of over $600 billion from Africa from 40 African countries from 1970-2004, including imputed interest earnings (and "just $420 billion if interest earnings are not included; still nearly twice these countries' external debt in 2004).

The reports this week from Greenpeace and GFIP coincide with the start of a critical phase of a government-led legal review of forestry concessions in the DRC.

The Greenpeace report, highlighting the extent of tax evasion in the logging sector, calls on the DRC government to cancel non-compliant logging titles and to enforce the May 2002 moratorium on the awarding of new titles and the extension and / or renewal of existing ones.

Speaking at the launch of the Greenpeace report in Zurich, on 30th July, Bruno Gurtner, chair of the international board of Tax Justice Network, described how transfer mispricing practices "prevent governments from collecting a fair and appropriate share of taxes from multinational corporations", noting also that "almost two thirds of the worldwide trade in goods and services do not take place on the free market but in transactions between subsidiaries of the same corporate parent."

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