Africa is rich in resources – but tax havens are keeping its people poor

The Panama Papers are not just about famous people who use offshore accounts to avoid paying tax. They have also lifted the veil on a secret world in which tax havens are used to shift billions out of the world’s poorest countries in Africa.

Look at the Democratic Republic of Congo. DRC has enormous mineral wealth – especially cobalt, copper and diamonds. Yet it has some of the world’s worst malnutrition and child mortality, and millions of children who are not at school.

But mining concessions are being sold for much less than their market value, to middle people who resell them at vast profits.

The money is hidden by being routed through complex networks of offshore companies, many in the British Virgin Islands – the tax haven that is home to half of the offshore accounts named in the Panama Papers.

In 2013, the Africa Progress Panel, chaired by Kofi Annan, and Global Witness examined five major sales of mining rights in DRC. Each deal involved firms registered in the British Virgin Islands. We estimated the gap between the market value of the concessions and the price paid was at least $1.36 billion – almost double what the DRC spends each year on health and education combined.

Accounting and banking complexity and secrecy in the British Virgin Islands makes it impossible to work out who are beneficiaries of the companies. Our exercise captured what is likely to be a small share of the overall losses caused by underpricing. We covered only a small subset of deals for the period 2010-2012. Moreover, the pattern of selling mining assets to offshore shell companies has been a consistent theme in the privatization of state assets over more than a decade.

We did not infer from our analysis any illegality on the part of political leaders, public officials or the companies involved in purchasing and selling the concessions. But the size of the losses means the transactions should be investigated to determine whether or not the mining assets sold were knowingly undervalued. Further investigation into the 11.5 million documents leaked from Panama law firm Mossack Fonseca may shed light on these deals.

In the case of the DRC deals we investigated, the complex structures of interlocking offshore companies, commercial secrecy on the part of major mining companies and limited reporting by state companies and government agencies to the DRC’s legislators, creates what amounts to a secret world – a world in which vast fortunes appear to be accumulated at the expense of the DRC’s people.

While the opaque practices of some foreign companies and the extensive use of offshore companies facilitate the diversion of public wealth into private bank accounts, weak national governance is also to blame.

Poorly managed state-owned mining companies are part of the problem. All too often their operations are hidden behind opaque financial management systems, with limited legislative oversight, restricted auditing procedures and, in the worst cases, a comprehensive disregard for transparency and accountability. With this lack of transparency comes another concern: the potential for political leaders and public officials to benefit from secret deals made with foreign investors.

Not all offshore activity is harmful to Africa’s interests. But the absence of transparency in some jurisdictions makes it difficult to work out what is legitimate and what is criminal. For African revenue authorities, tracking accounts that pass through jurisdictions such as the British Virgin Islands is almost impossible.

Effective taxation lies at the heart of the social contract between citizens and the state. It is a powerful instrument to reduce inequality, stimulate growth and enhance human development – for all countries. Tax evasion at any level destroys trust in public institutions. And aggressive tax avoidance does so too – even though it is not illegal.

For citizens everywhere, in Africa, in G20 countries and across the globe, current tax practices raise questions about fairness, social justice and citizenship. Such practices affect the grandma in Manchester as well as the mother in Mali – but they affect Africa more. What is emerging is a shared agenda, in which different parties have overlapping interests and similar goals.

But more needs to be done. This month UK Prime Minister David Cameron hosted an anti-corruption summit in London with other world leaders. The summit might be over, but now is the time to focus on making it count. Three areas are especially important.

First, country by country reporting is crucial to show where profits are shifted by spotting where there is a mismatch between where firms do business and where they are taxed.

Second, UK overseas territories and crown dependencies should follow what the UK has put in place, with a public registers of beneficial owners. This should be extended to trusts and foundations. Ultimately, there is no good reason not to know with whom you are doing business. This secrecy undermines both trust and the efficiency of markets.

Third, the IMF is making progress in supporting African countries to strengthen tax policy and administration, and enhancing tax information sharing among governments. The IMF could lead on agreeing on how to define, measure and better track illicit flows.

The release of the Panama Papers is just the start. It is time for multinational companies to pay fair taxes to African governments; for African governments to be involved in discussions to reform the global tax system; and for the gap between what is legal and what is fair to be narrowed.

Ultimately, we need global solutions, otherwise the issue is simply relocated rather than solved. Governments worldwide should commit to halt the practices that are effectively undermining progress and trapping millions in poverty.