Africa Leaders Summit: America’s dirty little secret

This week’s U.S.-Africa Leaders Summit is designed to showcase Africa in a new light, focusing on its economic potential as a trading partner and investment opportunity. With 10 of the world’s 12 fastest-growing economies in Africa, both U.S. and African officials are keen to convince U.S. corporations that Africa is a wise place to do business.

What’s being left unsaid, or conveniently glossed over, is that international trade rules are part of what keeps Africans poor. It’s not just because these rules tend to benefit wealthy countries, which have teams of experienced lawyers and negotiators to ensure that their own interests and demands are met. It’s also because the system makes it easy to steal public resources and conceal the ill-gotten gains abroad. As a result, more money is leaving Africa than is going in.

{mosads}According to a May 2013 report, far more money flowed out of Africa — as much as $1.4 trillion over the last three decades — than came in, making the African continent a long-term net creditor to the rest of the world. In fact, research shows that Africa loses more each year through illicit outflows than it receives in external aid and foreign direct investment combined.

Although this problem is not unique to Africa — the developing world as a whole lost nearly $1 trillion in illicit outflows in 2011 alone — sub-Saharan Africa’s loss is the largest in relative terms, accounting for some 5.7 percent of GDP annually.

What are these illicit outflows? Certainly, some is due to corrupt officials siphoning off government funds and stashing the money abroad, but that’s only a small part of it. The biggest factor is thought to be corporate malfeasance through fraudulent invoicing of trade. Companies intentionally misstate the value of imports and exports in order to avoid taxes and duties and to facilitate the payment of bribes and kickbacks.

You might think that these illicit outflows are simply a result of inadequate legal structures and poor enforcement on the part of African countries themselves. But you would be wrong. The movement of money couldn’t occur without a vibrant, and largely legal, global marketplace for dirty money. U.S. rules and policies make it lawful, even easy, to hide stolen assets and erase the trail.

First, U.S. corporate registration procedures give legal protection to anonymous companies, allowing firms to shield their owners from personal responsibility for business debts. Incorporation is handled at the state level, and there are few rules about who can open a company, or even requirements to collect and publish the names of the true owners.

Second, U.S. tax laws help corporations hide shady overseas deals and avoid paying taxes to any country. Without having to declare production, sales, profits and taxes on a country-by-country basis, companies are able to make it appear that all the profits occur in low- or no-tax jurisdictions. Given OECD estimates that 70 percent of global trade takes place inside multinational corporations — that is, among their own subsidiaries — the financial impact of such profit shifting is enormous.

If we really want to help Africa, we ought to start by doing no harm. Changing U.S. laws and policies that enable unscrupulous companies and individuals to pillage Africa’s vast economic wealth would be an important step in the right direction.

Ohlbaum is a senior associate with the Center for Strategic and International Studies’ Project on Prosperity and Development and a principal of Turner4D, a strategic communications firm.