How countries ‘secretly’ move money around – including South Africa

The Tax Justice Network (TJN) has published its Financial Secrecy Index for 2020, highlighting the most secretive countries when it comes to their offshore financial activity – either hiding funds overseas, or opening their banking system to offshore financial flows.

The index markets itself as a ‘politically neutral’ ranking, to be used as a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight.

In its 2020 report, the TJN estimates that between $21 trillion to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world.

“Secrecy jurisdictions – a term we often use as an alternative to the more widely used term tax havens – use secrecy to attract illicit and illegitimate or abusive financial flows,” it said, adding that illicit cross-border financial flows have been estimated at $1 trillion to $1.6 trillion per year.

An example of how harmful these practices are can be seen in Africa, it said.

“Since the 1970s, African countries alone have lost over $1 trillion in capital flight, while combined external debts are less than $200 billion.

“So Africa is a major net creditor to the world – but its assets are in the hands of a wealthy elite, protected by offshore secrecy; while its debts are shouldered by broad African populations,” the group said.

The scope of secrecy goes beyond just tax, however.

“In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency.

“The secrecy world creates a criminogenic hothouse for multiple evils including fraud, tax cheating, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more,” it said.

Globally, the Cayman Islands are ranked first on the 2020 Financial Secrecy Index, based on a secrecy score of 76 and a large global scale weight for the size of its offshore financial services sector, which comprise 4.58% of the world total.


South Africa

While South Africa’s overall secrecy score is relatively low (56 – the second lowest among the 15 African nations covered), because of the size of its financial markets, and its global importance, it ranks 58th overall.

“South Africa’s secrecy score of 56 is the second lowest secrecy score of the fifteen African jurisdictions included in the Financial Secrecy Index 2020.

“Yet its global significance is such that it is the greatest of the African countries, reflecting the relative size of South Africa’s economy; and its position in the FSI ranking is 58, being in the seventh position among African countries,” the TJN said.

Inside the country, things can get murky, it said, particularly in light of the state capture saga which saw the entanglement of business and state interests using secrecy jurisdictions.

State Capture

The concept of state capture, the TJN said, dates back to apartheid, where these kinds of networks were used to bust sanctions placed on the national government – but it continued well into democracy, the extent of which was only recently made publicly known.

The Gupta State Capture saga, exposed in 2016/17, revealed the big holes in South Africa’s secrecy networks, where the use of shell companies allowed access to government tenders, where the ultimate beneficiaries were unknown.

Further, using tax agreements with places like the United Arab Emirates – where the Guptas are tax residents – makes it easy for money to be shifted there.

New regulations (like the Financial Intelligence Centre Amendment Act, 2017) set in place laws to counter this kind of activity; but as the TJN pointed out, government has entered into contracts with politically exposed persons despite these changes.

Trade misinvoicing

According to the TJN, trade misinvoicing is another big source of illicit flows – usually out of South Africa.

Trade misinvoicing is a form of money laundering, where the value of commercial transactions are deliberately misreported to more easily shift money across borders.

A United Nations Conference on Trade and Development (UNCTAD) study pinned the value of this practice at over US$100 billion between 2000 and 2014 for South Africa’s gold exports, alone.

While the data has been contested, the UN has stuck to its assertion that there are massive discrepancies in the value of gold recorded leaving the country, versus entering trade partner nations.

Since the UN’s findings, the Department of Trade and Industry has changed its export statistics, making calculating discrepancies more difficult, the UN said, adding to the secretive activities in the TJN’s books.

South Africa is also not only a victim with the practice, TJN said, with a number of multinational companies based in South Africa being complicit with doing the same in other African nations.

“Secrecy in South Africa and secrecy jurisdictions used by the country’s elite and multinational companies hurt the nation. If left unchecked, it will continue to allow a cosy relationship between capital and politics that undermines democracy and the rule of law,” the group said.

The full database of South Africa’s performance, using the TJN’s metrics, is here.


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How countries ‘secretly’ move money around – including South Africa