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South Africa is failing to tackle illicit financial flows (IFFs) and losing billions in potential tax revenue in the process, said Yunus Carrim, chair of the standing committee on finance in Parliament.
Carrim in an emailed response said that different bodies need to work together to come up with a collective strategy and programme with timelines to tackle IFFs.
“There needs to be far greater cooperation between the South African Revenue Service (SARS), the Financial Intelligence Centre (FIC), the Hawks and the National Prosecuting Authority (NPA) to tackle the problem,” he said.
IFFs must be taken seriously for the country to move forward and the committee will hold the relevant agencies to account. The Hawks are "the weakest link in the chain", he said.
IFFs drain the fiscus of tax revenue that could be directed towards improving development.
According to the most recent figures, a 2017 report from Global Financial Integrity (GFI), a leading research institution on IFFs, South Africa lost R1.5trn from illicit financial outflows from 2003 to 2012. That figure represents an estimated 14% of total trade.
South African laws are adequate to combat IFFs, said Carrim. "We have some of the most sophisticated legislation globally. The challenge is implementation."
According to Carrim, the relevant agencies “do not have the capacity, staff and other resources and maybe not even the will to act decisively on IFFs”.
The government is looking at appointing an interministerial committee to be coordinated by the minister of finance and which would include the ministers of police, justice and trade and industry to ensure greater cohesion within government to tackle IFFs.
IFFs are by their very nature complex and the only way to combat illicit trade and IFFs is with efficient cooperation between multiple local and international agencies, said Carrim.
South Africa has a desperate need for economic growth, job creation and additional revenue to meet the country’s developmental needs. “We simply cannot afford to lose these large amounts of money.”
The recent increase in value-added tax from 14% to 15% has had a negative effect on the poor and the disadvantaged. “If we could stem IFFs, we could avoid raising taxes.”
Most illicit financial flows happen when there is transfer pricing, essentially when companies lie to tax authorities about the value of goods being imported or exported to avoid tax. Other companies resort to creative accounting by inflating their expenses to reduce reported profit and avoid tax, according to the Organisation for Economic Co-operation and Development (OECD).
Although new tax regulations, enforced in 2017, allow for country-by-country transfer pricing reporting to help SARS keep track of large multinational companies shifting profits between subsidiaries in different countries to avoid taxes, it would be difficult to measure how effective they are because many countries did not sign or have not yet signed the Multilateral Competent Authority Agreement (MCAA).
The MCAA is a framework agreement to provide automatic standardised and efficient exchange of tax information and was drawn up by the OECD.
The implementation of the General Data Protection Regulations (GDPR) in the European Union in March and a similar law, the Protection of Personal Information Act (POPI) of 2013 that will come into effect later this year in South Africa, will do nothing to stem the tide of IFFs between the countries, said Era Gunning, director Banking and Finance of ENSAfrica.
Even though they are both aimed at improving accountability, lawfulness and transparency of private and personal data use, they both allow transferring data to a third party with the consent of the data owner.
This story was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation.
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