Corruption inverted

Tuesday, 3 May 2016
Richard Dowden

When Prime Minister David Cameron called a conference on global corruption earlier this year my first reaction was: you must be joking. From Pergau dam in the 1990s where Britain’s development agency built a useless dam in Malaysia as a sweetener for a massive arms deal, to selling Tanzania an unnecessary air-traffic control system in 2010, the UK government has used its weight to secure dodgy deals for British companies. Have these practices come to an end?

Most corruption in the world has fewer zeros attached than arms deals. But for poor people “petty” corruption can rob a day’s earnings. Earlier this year I was at Nairobi airport and my taxi stopped with its front wheels just touching a yellow line. The police immediately demanded money from the driver. Then they saw me – a foreigner - and were too embarrassed to take a bribe in front of a foreigner. So they insisted we went to pay the fine in an office in the main building. But that meant I could miss my plane. I left some money with the driver and left. Once I was out of the way the police accepted the cash. I was complicit in petty corruption.   

In the early 1990s in Kinshasa I was having dinner with the local representative of a very large and – I thought - respectable British global company. He admitted that Zaire – as the Democratic Republic of Congo was called then – was extremely corrupt but that was why President Mobutu needed one good company he could trust to be clean – and that was the one he was proud to represent in Kinshasa.

A few days later I ran into his son who was working for another company and I asked him why he wasn’t working for this father’s company. He was quiet for a moment and then said; “Because I could not stand seeing my father take a briefcase of dollars to President Mobutu every Monday morning”. That was corruption on a grand scale.

As I visited more and more African countries, I heard the same refrain: that is how you do business in Africa. This perception is annually reinforced by Transparency International’s Corruption Perception Index. It is based on a survey of the views of (mainly Western) business people and Western experts. This has framed our view of Africa as the continent of corruption. That is why – some say – Africa is poor.

Estimates vary but many organisations tracking corruption accept a rough global figure of $1 trillion for global corruption. That is more than three times all foreign aid. Of that, perhaps a half occurs in poorer countries with less will or ability to control corruption. I saw the demand side for corruption in Africa as an unfortunate imposition on Western companies by corrupt African leaders.

But looking at the figures suggests that grand corruption is in fact a secondary cause of the impoverishment of Africa. The primary cause is tax avoidance by global companies. Using small states like Panama, Luxembourg and several territories which fly the Union Jack, such as the Bahamas and Cayman Island, companies avoid paying tax.

One technical term for this is transfer pricing. But a more accurate description would be theft. Nicholas Shaxon explained how this works at a RAS meeting last week, giving the example of a fictional corporation that grows bananas in Ecuador. A corporation picks and packs a container-load of bananas in Ecuador, and it costs the company $1,000. It sells them to a French supermarket for $3,000. Which country gets to tax the $2,000 profit – France, Ecuador? The answer is: Where the multinational’s accountants decide.

He explained how the multinational sets up three companies, all of which it owns. Let's call them: EcuadorCo, HavenCo (in a zero-tax haven) and FranceCo. EcuadorCo sells the container to HavenCo for $1,000, and HavenCo sells it on to FranceCo for $3,000. That’s basically it. (The bananas themselves don’t go anywhere near the tax haven: this is all just paper-shuffling in New York or London.)

If you blinked, you may have missed what happened here. It cost EcuadorCo $1,000 to pick and pack the container, and they sold it on for $1,000. So EcuadorCo records zero profits, meaning no taxes. Likewise, FranceCo buys it for $3,000 and sells it to the supermarket for $3,000. Again, no profits, and no taxes. HavenCo is the key to the puzzle. It bought the container for $1,000 and sold it for $3,000 – a $2,000 profit. But it is based in a haven, so it pays no tax. In short, all the profits have been stripped out of France and Ecuador, and shoveled into the haven.  

It is now clear that grand tax avoidance far exceeds the grand corruption. But it is not illegal. It should be. As President Obama said, it's the fact that these practices are legal that's the problem. 

Shaxon also points out that almost nowhere in reports by the four global accounting firms is there any mention of tax havens and tax avoidance. They are the fixers of this global pillage. As he says when you arrive at Geneva or Findel, the beneficiary locations in Switzerland and Luxembourg, no one will ask you for a bribe.

So the TI’s Corruption Perception Index is just that – the perception of Western business. For years we have seen countries like the Democratic Republic of Congo, Sudan and Nigeria as the most corrupt countries but the countries that actually handle, hide and benefit from global corruption in Europe are Switzerland, Luxembourg and, of course, the City of London.  I look forward to David Cameron’s analysis and comments on this when he gives the opening speech at the global corruption conference on May 12th