Illicit Financial Flows are a major obstacle to economic development and the
achievement of the MDGs in Africa. These papers look at tax evasion, commercial
transparency, money laundering and asset recovery. The issues here form part of
the UK G8 Presidency priorities in 2013, and the work of the G20 Development
Working Group, as well as the High Level Panel on Illicit Financial Flows established
by African Finance Ministers.
The papers have been prepared for a meeting of the Africa Partnership Forum in
Cotonou in December 2012. The Forum is composed of senior officials from Africa
and its main development partners. More detail on the work of the Forum is
contained at www.africapartnershipforum.org
The papers are Combating Tax Evasion, Increasing Commercial Transparency,
Tackling Money Laundering; Asset Recovery
19th APF, 3 December 2012, Cotonou, Benin
SESSION II: INCREASING COMMERCIAL TRANSPARENCY
CONTEXT
There has been an increased focus on how to improve the transparency of multinational enterprises operating
in developing countries, particularly in the extractives sector. This includes transparency of payments to
governments, and transparency of supply chain more broadly. Increased transparency in both areas will help
not only to improve overall economic governance but also to reduce illicit financial flows:
- by making transfer mispricing more difficult to hide;
- by reducing the scope for corruption; and
- by helping to curb a significant source of illicit flows - the illegal exploitation of natural resources.
Recent developments include voluntary initiatives, the introduction of mandatory country-by-country
reporting requirements by OECD countries, plus African regional initiatives and national legislation.
SUGGESTED ISSUES FOR DISCUSSION:
(i) What are the main voluntary initiatives?
The voluntary initiatives in this area include the Extractive Industries Transparency Initiative (EITI). This
monitors company payments and government revenues. It has wide support and is now strongly established in
Africa, with 20 countries (out of a global total of 36) implementing the standard either in full or in part.
Other transparency-related initiatives in the extractives sector include the Natural Resources Charter (NRC),
and OECD-IGCRL-UN Due Diligence Guidance aimed at promoting responsible supply chain management of
minerals from conflict-affected and high-risk areas through the observance of due diligence requirements.
(ii) What progress is being made in introducing mandatory reporting requirements in OECD countries?
There is increasing interest in the use of mandatory reporting requirements. Recent US legislation introduces
mandatory requirements for oil, gas, and mining companies to disclose key financial data relating to their
overseas operations on a country-by-country and project-by-project basis. The proposed amendments to the
EU Transparency Directive will require the extractive and logging industries to report on a country-by-country
basis, and apply to large unlisted companies as well as listed extractive companies.
The aim of the US and proposed EU regulations is to increase transparency in the extractive sectors and
thereby reduce tax evasion and corruption, as well as helping to reduce conflict. Developments are being
monitored, as part of the broader issue of how to improve the transparency and accountability of Multinational
Enterprises, in the Informal Task Force on Tax and Development hosted at the OECD.
(iii) What progress is being made under African regional and national initiatives?
Alongside voluntary initiatives and mandatory requirements in other jurisdictions, it is important for host
governments themselves to mainstream the requirement for transparency in their national legislation and
systems, by imposing standards on all companies operating within their jurisdictions.
There are some recent examples of both regional initiatives and national legislation requiring transparency in
the extractives sector and more broadly, including legislation related to the award of licences or contracts, and
the collection, allocation and management of revenue, particularly in the petroleum and mining sectors.
(iv) How can progress be accelerated?
Strong political will is required by all parties.
a) Africa’s international partners can support increased transparency through:
- support for existing voluntary initiatives, including through the G8 and G20 processes;
- implementation of mandatory reporting requirements;
- increased financial and technical support for African initiatives in this area.
b) African governments can accelerate progress by:
- mainstreaming transparency requirements in national legislation and systems:
- the promotion of regional and continental initiatives: transparency requirements in national legislation;
- the continued implementation of voluntary initiatives, reinforced by economic incentives.
c) Enhanced international co-ordination and co-operation can reinforce this:
- through the strengthening of existing voluntary initiatives;
- by harmonising reporting standards.
1
APF/COTONOU-2012/5
What are the main voluntary initiatives?
The Extractive Industries Transparency Initiative (EITI)
1.
The EITI is built on the idea that operating companies in the extractive industries disclose the
tax, dividend and royalty payments they make to host governments, and that governments disclose
what they receive. It has developed a methodology for monitoring and reconciling company payments and
government revenues. The process is implemented by governments, for whom the potential benefits include
improvements in the tax collection process, a demonstration of commitment to reform and anti-corruption, and
a boost to investment. It is endorsed by the UN General Assembly, the G20, the G8, the AU, the EU, and all
the major regional development banks, and supported by companies, investors and civil society.
2.
The EITI is now strongly established in Africa, with 20 countries (out of a global total of 36)
implementing the standard either in full or in part. By October 2012, 8 countries in Africa (and 15
globally) were EITI compliant, and 12 countries in Africa (21 globally) were candidates – implementing EITI
but not yet meeting all requirements.
3.
This reflects a significant commitment to improving transparency. To become an EITI candidate,
a country must meet 5 sign-up requirements. It then has 1.5 years to publish an ‘EITI report’ that reconciles
what companies say that they pay in taxes, royalties and signature bonuses, with what governments say they
have received. To achieve EITI Compliant status, a country must complete an EITI Validation. It provides an
independent assessment of the progress achieved and what measures are needed to strengthen the EITI
process.
4.
The EITI has wide support and a growing momentum, and its next Global Conference in 2013 is
expected to launch a revised EITI standard. 68 of the world’s largest oil, gas and mining companies
support the EITI, along with more than 80 global investment institutions representing that collectively
manage over US$16 trillion in assets. 31 countries have disclosed their payments and revenues in an EITI
report, covering revenues generated by the extractive industry, initially focusing on oil and gas but now
covering a wide range of commodities including other minerals, diamonds, forestry and rubber.
Natural Resources Charter
5.
The Natural Resources Charter is a set of economic principles for governments and society on
how best to manage the opportunities created by extractive resources for development. It has 12
‘precepts’ one of which is promoting transparency and accountability including for awarding contracts, for
taxing, collecting and managing revenues, and for taking spending decisions. The Charter has been adopted by
NEPAD as a flagship programme, and endorsed by the African Development Bank.
OECD Guidelines on Multinational Enterprises
6.
The OECD Guidelines for Multinational Enterprises, updated in 2011, are recommendations
addressed by governments to multinational enterprises operating in or from adhering countries. They
provide non-binding principles and standards for responsible business conduct consistent with applicable laws
and internationally recognised standards, including in relation to disclosure. Further work may be undertaken
on the issue of public disclosure of taxes, royalties and other payments made to host governments, to take into
account developments since 2011 on mandatory reporting requirements (such as the Dodd/Frank Act and the
EU Transparency Directive – see the next section).
OECD/ICGLR/UN Due Diligence Guidance for Responsible Supply Chains of Minerals from ConflictAffected and High-Risk Areas
7.
This is the first example of a collaborative government-backed multi-stakeholder initiative on
responsible supply chain management of minerals specifically from conflict-affected areas. Its objective
is to help companies respect human rights and avoid contributing to conflict through their mineral sourcing
practices, and to cultivate transparent supply chains and sustainable corporate engagement in the mineral
sector. It builds on the principles and standards in the OECD Guidelines on Multinational Enterprises, and has
been endorsed by the International Conference on the Great Lakes Region (ICGLR). Over 100 companies and
trade associations are using the Guidance in Central Africa. In August 2012, the US Securities and Exchange
Commission issued regulations regarding Section 1502 of the Dodd-Frank Act pointing to the Guidance as the
internationally recognised standard regarding responsible supply chains of minerals.
APF/COTONOU-2012/5
2
19th APF, 3 December 2012, Cotonou, Benin
Civil society: the Publish What You Pay (PWYP) Coalition
8.
PWYP is a global network of civil society organisations campaigning for transparency in the
extractive sector. Its objective is for companies to “publish what you pay” and for governments to “publish
what you earn” as a step towards a more accountable system for the management of natural resource wealth.
Its agenda covers topics such as the future of the EITI, stock market listing regulations, and accounting
standards regulations. It collaborates with local and international organisations on capacity building, including
the Revenue Watch Institute, a non-profit advocacy policy institute and funding organization that promotes
the effective, transparent and accountable management of oil, gas and mineral resources.
What progress is being made in introducing mandatory reporting requirements in OECD countries?
9.
There have been recent calls to build on the voluntary approach above by developing
regulatory instruments making transparency a mandatory requirement for companies operating in the
extractive industries sector. Such instruments would reinforce the EITI and similar initiatives by
- providing a flow of reliable, timely and detailed information on company payments to governments to
complement and help catalyse more consistent and timely EITI reporting;
- ensuring that revenue payments are disclosed in countries which are not implementing the EITI.
10.
Whilst no such instruments currently exist at international level, there have been recent
regulatory innovations in OECD member countries. Two examples are given below. The aim in both cases
is to increase transparency in the extractive sector thereby helping to combat both tax evasion and corruption.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
11.
Section 1504 (the Cardin-Lugar amendment) of the Dodd-Frank Act, introduces mandatory
requirements for all US listed oil, gas, and mining companies to disclose key financial data – taxes, royalties,
fees, production entitlements and bonuses – relating to their overseas operations on a country-by-country and
project-by project basis. It should thereby decrease the ability for multinationals to engage in profit shifting.
The provision covers 90% of the major internationally operating oil and gas companies, including both US
and non-US companies. The Securities and Exchange Commission (SEC) issued its rules for compliance with
Section 1504 in August 2012.
12.
Section 1502 relates to transparency in supply chain management. It requires companies to determine
whether their products contain conflict materials and to report this to the SEC. It is a disclosure requirement
only and places no ban or penalty on the use of conflict materials.
The proposed amendment to the EU Transparency and International Accounting Standards Directive
13.
The proposed amendments to the EU Transparency Directive will similarly require the extractive
industry to report on a country-by-country basis and will include the logging industry as well as oil, gas, and
mining companies and apply to large unlisted companies as well as all EU-listed extractive companies.
14.
The proposals were published in 2011, and approved by the European Parliament in September
2012. They have still to be approved by the European Council. At this stage it is not clear whether EU
governments will agree to project-by-project reporting and what the threshold for payment disclosure will be.
The EU is taking a voluntary rather than compulsory approach to transparency in supply chain management.
Related work on transparency in the Informal Task Force on Tax and Development
15.
The issue of reporting of financial information and how to improve the transparency and
accountability of Multinational Enterprises and governments has also been considered by the Informal Task
Force on Tax and Development, a multi-stakeholder body consisting of representatives from OECD member
and non-member countries, business and civil society, hosted at the OECD. There are 4 areas of work relating
to transparency:
(i) The Task Force is monitoring developments on mandatory government transparency initiatives, in
particular the rules for implementing Section 1504 of the Dodd-Frank Act and proposals for revising the EU
Transparency Directive. It will host the debate on the harmonisation of the US and European initiatives once
the detailed rules have been set out and approved;
3
APF/COTONOU-2012/5
(ii) It has discussed NGO proposals for ‘country-by-country’ reporting but with no consensus on the way
forward, and polarized positions taken by business and civil society (NGOs demand that each MNE should
publicly report profits and taxes it declares in every country in which it operates);
(iii) There is however agreement that requiring companies to provide detailed information in their tax returns
on cross-border transactions with other members of the multinational enterprise, may help tax administrations
in transfer pricing risk assessment. A draft tool for reporting requirements in such cases is being used in the
Tax and Development transfer pricing capacity building programme in several developing countries;
(iv) Agreement has also been reached on exploring the potential value of the public registration of local
statutory accounts of unlisted companies in developing countries as a tool to promote transparency. A report
on this topic will be made available to all developing countries to use as they consider appropriate.
What progress is being made under African regional and national initiatives?
16.
Whilst voluntary initiatives and mandatory requirements in other jurisdictions are both important, they
will be most effective if host governments themselves mainstream the requirement for transparency in their
national legislation and systems, by imposing standards on all companies operating within their jurisdictions.
Governments should enact and implement legislation in this area, supported by effective institutions and
reinforced by economic incentives. Such action is likely to be more effective if undertaken at regional level.
Comprehensive information on regional and national initiatives is, at the time of drafting, less readily
17.
available. The following is therefore likely to be an incomplete picture which will be enriched in discusion. At
continental level although there are important sectoral initiatives such as the AU Mining Vision 2050, there is
no overarching AU instrument on transparency. There are however, recent examples of both regional
initiatives and national legislation.
Regional initiatives
18.
The International Conference on the Great Lakes Region (ICGLR) Initiative builds on the OECDICGLR-UN standards on due diligence for responsible supply chains of minerals and comprises a six-pronged
approach to tackling the illegal exploitation of natural resources: (1) Regional Certification Mechanism; (2)
Harmonization of National Legislation; (3) Regional Database on Mineral Flows (4) Formalization of the
Artisanal Mining Sector; 5) Promotion of the EITI and (6) Whistle Blowing Mechanism.
19.
In 2009, ECOWAS Ministers of Mines and Industries adopted the ECOWAS Mining Directive, which
aims at improving transparency in mineral policy formulation and providing a legal framework to engage
States and Companies for accountability, respect of human rights, and preservation of the environment.
Provisions have been made for compliance and contentious issues to be addressed by the ECOWAS
Commission and the ECOWAS Court of Justice. SADC is also involved into a process of harmonization of
mining policies, standards and regulations through its protocol on mining, with the aim to favour
accountability and transparency in extractive industries.
National legislation
20.
A number of African governments have also recently introduced national legislation requiring
transparency in the extractives sector and more broadly, including:
(i)
reforms aimed at promoting greater transparency in the award of contracts or licences, particularly in the
petroleum and mining sectors;
(ii) reforms aimed at introducing greater transparency in relation to the collection, allocation and
management of revenue, again particularly in the petroleum and mining sectors;
(iii) broader Freedom of Information legislation to provide citizens with access to information kept by the
government and public institutions, including on the spending of public funds.
APF/COTONOU-2012/5
4
19th APF, 3 December 2012, Cotonou, Benin
How can progress be accelerated?
21.
The problem of international tax evasion thus needs to be tackled at 3 levels:
(i) by Africa’s international partners;
(ii) by African governments acting at both national and regional levels;
(iii) by enhanced international coordination and co-operation.
Africa’s international partners
22.
Africa’s international partners can support increased transparency through:
(i) support for existing voluntary initiatives, including through the G8 and G20 processes:
Continued political support, as in the Cannes G20 Summit Final Declaration of November 2011, can help
maintain the momentum behind voluntary initiatives;
(ii) implementation of mandatory reporting requirements:
The implementation of mandatory reporting requirements will reinforce voluntary initiatives by providing a
flow of reliable, timely and detailed information on company payments to governments;
(iii) increased financial and technical support for African initiatives in this area:
Development agencies should scale up their support, in particular to African authorities facing sudden surge in
natural resource revenues, and help Regional Economic Communities and continental institutions to foster
transparent business practices in extractive industries at the regional and continental level.
African governments
23.
African governments can accelerate progress by:
(i) mainstreaming transparency requirements in national legislation and systems:
Governments should enact and implement legislation imposing transparency requirements on all companies
operating within their jurisdictions, sensitising companies to the benefits of transparency, and considering
whether this could be strengthened by economic incentives;
(ii) promotion of regional and continental initiatives:
Regional initiatives have a key role to play and can help ensure a level playing field with neighbouring
countries. Another option could be to consider whether there would be valus in drawing these together within
the framework of an umbrella African Convention on Transparency;
(iii) continued implementation of voluntary initiatives
Countries which are already EITI candidates should continue their efforts to achieve full compliance with its
requirements, Other countries should consider joining such voluntary initiatives.
Enhanced international co-ordination and co-operation
24.
Enhanced international co-ordination and co-operation can reinforce this:
(i) Strengthening existing voluntary initiatives:
There is significant scope for strengthening existing voluntary initiatives, by strengthening current standards,
and extending the remit of such initiatives beyond the extractives to other sectors. This is important in the
context of the increased interest and rapid growth in other sectors such as agriculture;
The next EITI Global Conference in 2013 will consider the strengthening of the EITI standard, including:
extending the standard to verify that payments and revenue are what they should be;
(ii) Harmonising reporting standards:
The proliferation of standards creates potential for confusion. The establishment of an International Financial
Reporting Standard for extractive activities – for instance requiring extractive companies to report how much
they pay governments on a disaggregated (country-by-country) basis - would help to bring some uniformity to
reporting requirements. Such a proposal has been debated within the Accounting Standards Board (IASB)
which published a discussion paper on the extractive industries in April 2010.
5
APF/COTONOU-2012/5
References
AUC, AfDB, UNECA, 2011, Building a sustainable future for Africa’s extractive industry: From vision to
action, Action Plan for Implementing the AMV
AUC, UNECA, 2011, Minerals and Africa’s Development - The International Study Group Report on
Africa’s Mineral Regimes
EITI, 2012, Extracting Data - Overview of the EITI Reports published 2005-2011
IASB, 2010, Discussion Paper DP/2010/1, Extractive Activities
OECD, 2011, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from ConflictAffected and High-Risk Areas
Oxford University, Center for Business Taxation, 2011, Transparency in reporting financial data by
multinational corporations
Revenue Watch Institute, 2012, from the ground up
APF/COTONOU-2012/5
6