Workshop on Illicit Financial Flows, Central Bank of Tanzania

Governor Ndulu, Excellencies, ladies and gentlemen, it is a great pleasure for me to be here for the opening of this important workshop on illicit financial flows.

This is a topic that until recently was dominated internationally by concerns related to money laundering, drug trafficking, corruption, financial regulation and the role played by tax havens in our globalised economy. Of course, these are issues that are also highly relevant outside the G20 and OECD sphere. And there may be other aspects of illicit financial flows that are more acute in a developing country. So I would like to congratulate you on your initiative to examine illicit financial flows in a Tanzanian setting.

We are fortunate to have with us the person who, perhaps earlier and more forcefully than anyone else, pointed out the detrimental effects illicit financial flows have on economic development: Mr Raymond Baker of Global Financial Integrity. As GFI studies have shown, enormous amounts of money flow illegally out of Africa every year – perhaps in the trillions of dollars since the independence years. Others have concluded that the continent is in fact a net creditor to the rest of the world.

The development community has only gradually come to realise that illicit financial flows are fundamentally damaging to economic development. And the financial loss to governments is not the only problem. Illicit financial flows undermine state-building and ultimately democracy, promote corruption, result in non-optimal investments, facilitate crime and terrorism, destabilise the financial system, and more.

Capital flows other than aid, licit or illicit, are important elements of Norwegian development policy, indeed of our foreign policy. Foreign investment, remittances, trade, tax and illicit flows are much larger than aid. In order for these flows to maximise development, changes are needed in individual countries and at the global level.

At the national level, governments have a responsibility to promote good governance, fight corruption and be accountable to their citizens. Aid can assist in building the necessary competence and capacity. This applies to a whole series of government agencies and functions, such as customs, anti-corruption, the police, the auditor general, the judiciary, the ministries and, of course, the central bank.

At the regional level, the AU – through ministers of finance, economy, development and planning – and UNECA in its facilitating role have already taken action by setting up a High Level Panel on Illicit Financial Flows. The Panel held its second meeting over the weekend and will in due course present its recommendations for action.

At the international level we must make sure that rich countries fulfil their part of the deal, which is to stop attracting and hiding illicit money, share information, and create systems, standards and regulation that do not discriminate poorer countries. The challenge is just as morally imperative, urgent, and demanding as promoting good governance in the developing world.

The world is not run according to democratic principles, and the poor have little say in how the financial markets work. It is impossible to disregard the politics of power and money, but there is one thing that will help: TRANSPARENCY.

Transparency is important, both nationally and internationally. At the national level the Tanzanian Extractive Industries Transparency Initiative is a good example of how making tax payments and receipts public can increase accountability, which is so important to the legitimacy of the state. An additional value of the EITI is that it provides a forum for dialogue and good governance through the tripartite cooperation between national authorities, companies and civil society. It is by no means a guarantee against corruption, however, unless there is transparency in the rest of the value chain that covers upstream activities such as licensing and contracts, and downstream elements such as budgetary expenditures.

The EITI-process in Tanzania is encouraging and should increasingly lead to discussions not only about how much is paid, but whether this is the right amount, whether Tanzania is getting a good deal for its resources, and whether the revenues are well used. With more of this debate in the open, not only should tax collection systems and contract negotiations be improved, but it should also narrow the scope for illicit payments. 

There has also been progress at the international level, although it is much too slow. Some improvements have been made in terms of more sharing of tax information internationally, and the pressure on tax havens has increased. But we are far away from the type of oversight needed to reveal illicit transactions. Secrecy is still promoted by multiple jurisdictions globally, and shell companies acting as conduits for criminal and tax evading enterprises can be set up in a matter of hours at a very low cost. We must continue to push the G20 and others to act more forcefully. A loud and clear African voice speaking up against a system that facilitates the annual, illegal transfer of billions out of the continent is essential.

You are of course already aware that Tanzania, too, suffers from illicit outflows, whether in the form of smuggled natural resources or the proceeds from corruption and crime. Globally, the major component of illicit financial flows is tax evasion. It would be interesting to know more about the specific situation in your country. That is a prerequisite for a targeted policy to reduce the outflow.

I understand that Tanzania has through the Central Bank already begun the analytical work that is necessary to underpin future decisions on measures. This is commendable and absolutely the right way to go. Norway will continue to support you in these endeavours. There is of course international expertise that can be drawn upon, as well as regional experience and competence. Here, as in other areas, the potential of South-South cooperation should not be underestimated.

Tanzania and Norway already cooperate in the tax area as part of our Tax for Development Programme. The natural resource sector is a centrepiece in our cooperation, which also includes the Oil for Development Programme. Our common interest and engagement through the EITI can be added to that. Both our countries are economically and socially dependent on minerals, fisheries and forestry.

Building capacity in the tax administration and in other key public institutions is clearly essential to combat illicit financial flows. Domestic resource mobilisation must eventually replace aid and it already far outweighs concessional finance in Africa. There is no doubt, though, that many developing countries miss out on substantial revenue not only through tax evasion, but also by not being able to levy the proper amount of tax. A large multinational company can easily exploit its superior proficiency in financial and legal matters for tax planning purposes. Not to mention the ability to shift profits through a company structure covering numerous jurisdictions, including tax havens. Consequently, many developing countries face a major loss of revenue through licit, as well as illicit means.

Tanzania is a rich country in many respects, but it has a vast untapped potential. I am sure you do not want your wealth to be exported illicitly, and I hope this workshop is the beginning of a successful effort to avoid it. In this, you will have our full support.

I wish you good and productive discussions. Thank you.