Criminals and corrupt politicians steal $1trn a year from the world's poorest countries

Money stolen through shell companies and tax evasion

At least $1trn a year is being “stolen” from the world’s poorest countries by criminals and corrupt officials who siphon cash through money laundering, tax evasion and embezzlement.

The staggering cost of corruption is revealed in a study published today by ONE, the anti-poverty group co-founded by the rock star Bono. It calls on the G20 group of rich nations, including Britain, to expose the anonymous shell companies which are used to “rip off” poor countries. According to ONE, the millions diverted from poverty-stricken nations is channelled through banks and secret companies in places including London, Delaware and Hong Kong.

If the money was retained by the developing nations, it could help avert 3.6m deaths a year between 2015 and 2025, the study concludes. It would also mean that these countries would no longer need to rely on overseas aid from rich nations.

The report found that $3.2trn of the world’s $20trn of undeclared assets originated in developing countries. If the missing millions were taxed, it could bring in revenues of $19.5bn a year. In sub-Saharan Africa alone, curbing corruption could educate an extra 10m children a year; provide antiretroviral drugs for more than 1m people with HIV/Aids and pay more almost 16.5m vaccines.

David Cameron and George Osborne secured the backing of the eight leading economies to crack down on shell companies and tax havens at last year’s G8 summit in Loch Erne, Northern Ireland. But ONE fears that progress around the world is stalling and is warning that the drive must be extended to the top 20 economies, including China and India, at a G20 summit Australia in November.

A four-point plan proposed by ONE urged G20 leaders to:

  • expose the “phantom firms” involved in money laundering by making information about them publicly available
  • bring in strong “payment disclosure laws” on oil, gas and mining to stop natural resources being “stolen” from poor countries
  • crack down on tax evasion through automatic exchange of information so that poor nations can collect taxes they are due
  • ensure all governments publish data so the public can “follow the money” and hold their leaders to account.

Dr David McNair, ONE’s transparency and accountability policy director, said: “In developing countries, corruption is a killer. Up to 3.6m lives could be saved if we end the web of secrecy that helps the criminal and corrupt. When governments are deprived of their own resources to invest in the essentials - like nurses and teachers - the human cost is devastating.”

John Githongo, an anti-corruption campaigner and chief executive of the Inuka Kenya Fund, said: “For too long, G20 countries have turned a blind eye to massive financial outflows from developing countries which are channelled through offshore bank accounts and secret companies. Introducing smart policies could help end this trillion dollar scandal and reap massive benefits for our people at virtually no cost. The G20 should make those changes now.”

The ONE report, The Trillion Dollar Scandal, says: “Corruption is perhaps the greatest threat to economic growth in developing countries and the uncomfortable truth is that, all too often, money diverted from their own budgets ends up in G20 countries and their related jurisdictions.”

It adds: “Illegal manipulation of cross-border trade is the biggest source of losses to poor countries. The secrecy that allows that activity to thrive may also help to conceal financial flows related to criminal bribery and theft by government officials, human trafficking and/or the illegal sale of arms and contraband, depending on the circumstances.”

Some 70 per cent of the 213 biggest corruption cases between 1980 and 2010 involved anonymous shell companies, according to ONE.

“These phantom firms are essential tools of the trade for money launderers. They may hide the identities of individuals who profit from illegal activities, including the trafficking of arms, drugs and people, the theft of public funds and/or illegal tax evasion.

“In dozens of jurisdictions around the world, a phantom firm can be created with less information than is needed to obtain a driving licence or open a bank account. Currently completely legal, they exist solely on paper, and allow the people who own or control them (the ‘beneficial owners’) to keep their identities hidden.”

The report says that  governments, law enforcement agencies and ordinary citizens face “an impossible task” when they try to reclaim the “stolen assets.” It adds: “They are thwarted by the ease with which criminals can create complex, multi-layered financial structures in which an anonymous shell company can be owned by another shell company or a trust, resulting in a nearly impenetrable web of secrecy that can block even the best law enforcement efforts.”

A spokesman for the Department for International Development said: “The UK has made strong progress on trade, tax and transparency following last year’s G8 in Loch Erne, benefiting countries across the world including the poorest nations. Britain will maintain momentum to improve tax collection, break down trade barriers and promote transparency in developing countries.”

How poor countries are robbed

In Zambia, a leaked audit report suggested that Mopani Copper Mines had failed to pay tens of millions of dollars due in local tax. Glencore, which owned 73 per cent of Mopani, denied the allegations.

Five African countries – Ghana, Kenya, Mozambique, Tanzania and Uganda – lost an estimated $15bn in tax revenues between 2002 and 2011 due mainly to “trade mispricing” of imports or exports, allowing firms to shift capital to other countries to evade taxes or launder money.

In 2011, subsidiaries of oil and gas firms Shell and Eni paid $1.1bn to the Nigerian government for an offshore block containing estimated oil reserves of nine billion barrels. The government then transferred precisely the same amount to an account in the name of Malabu Oil & Gas, a phantom firm whose hidden owner was the country’s former petroleum minister Dan Etete.

In 2008, the Zimbabwean army took control of the Marange diamond fields. Since then, government diamond mining concessions have been allocated to several companies in questionable circumstances – including Mbada Diamonds, which is partly controlled through companies registered in the British Virgin Islands and Mauritius.

Source: ONE