Tuesday, December 7, 2021

Botswana opens back door to international financial criminals

Botswana has opened a back door for shady companies and wealthy foreigners trying to get away with money laundering, tax avoidance and evasion in their home countries ÔÇô an international tax watchdog has revealed.

Tax Injustice Network has red flagged Botswana as a financial secrecy risk jurisdiction and warned that the Botswana International Financial services Centre may be used for “illicit and criminal practice.”

This is not surprising, because the Botswana government strategy was shaped in 1995 by advisers from Luxembourg, Bermuda and the Isle of Man ÔÇô notorious secrecy jurisdictions.

Botswana’s secret relationship with De Beers also offers an insight into how Botswana is entangled with notorious international tax havens.

Tax Injustice Network report makes reference to another report : Botswana’s Diamond Deception which reveals how the structure of mining contracts and the exact value of extracted diamonds as well as Botswana’s 15% shareholding in De beers remain a closely guarded secret. The corporate structure of the Debswana system which is co owned by the Botswana government and De beers also operates through secrecy jurisdictions, such as Luxemburg and the British Virgin islands.

“These are secrecy jurisdictions which allow shareholdings and associated companies connected to the entities to withhold details of who ultimately benefits and what the purpose and power within the overall company is in these entities. Unknown beneficiaries or ultimate owners of shares are potential vehicles for lifestyle accounts of political ligitimisation of the Botswana Democratic party as a political vehicle/party potentially through dividends.”

For a long time De beers financed the ruling BDP though these secrecy jurisdictions.

The report which was released by the Tax Injustice Network states that while Botswana is ranked 103 and has an insignificant market for offshore financial services, the country has a relatively high secrecy score of 68. 

A total of 112 of “secrecy jurisdictions” were sampled- a measure that the UK-based research group says encourages crimes such as money laundering and tax evasion.

The researchers said while they were unable to establish how Botswana Government’s financial secrecy has negatively affected the economy, arrangements and incentives offered to companies such as ‘investor friendly’ business environment,  exempting companies from capital gains and withholding tax, are likely to come at a cost to the country’s coffers because of limited foreign exchange controls.

According to the report, information sharing on the part of Botswana authorities remains limited, enabling companies and wealthy foreigners to get away with tax avoidance and evasion by avoiding detection in their home countries or where business activity actually takes place.

Citing a report by International Monetary Fund which warned Botswana against tax incentives offered to foreign companies, the Financial Secrecy Index report states thatfoot-loose enterprises or not, Botswana does not appear to be heeding this advice (by IMF)as it continues to seek to create a so-called ‘investor-friendly’ business environment.

The report says Botswana is in the process of setting up eight special economic zones for activities ‘with perceived comparative advantage, including mineral beneficiation, leather, beef, financial services and agricultural processing’.

Yet the arrangements and incentives offered to companies are likely to come at a cost to the country’s coffers, the report says.

“For example, the arrangement the government has with De Beers for the country’s famous diamonds is shrouded in secrecy: contracts are not public, the valuation formula of diamonds produced is unknown, increasing the risk of trade mis-pricing, and the corporate ties between the ruling party and the company are not transparent,” the researchers at Tax Injustice Network said.

Citing a recent study into De Beers and Botswana’s diamonds, the report says it found that “Botswana’s paper success does not translate to the kinds of gains the country should be receiving. Disclosure of key information and removal of De Beers’ monopoly would liberate the economy and its democracy.”

Botswana has faced international scrutiny, the report says. Controversially, at the G20 Summit in 2012, former French president Nicholas Sarkozy called for the exclusion of Botswana, along with 11 other countries, from the international business community since the country was without a ‘suitable legal framework for the exchange of tax information’.14

In 2017, France again blacklisted Botswana, despite Botswana president Ian Khama’s protestations that they have taken steps to align with international standards since 2010, including amendments to the Income Tax Act to allow for the exchange of information.

The report further says there may be limited information on the way Botswana’s IFSC is used for illicit and criminal practice, however, according to the 2017 evaluation carried out by Eastern and Southern Africa Anti-Money Laundering Group, without a developed anti-money laundering and counter-terrorist financing regime, the country is vulnerable and at risk of being used as a conduit.

Researchers at Tax Injustice Network 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 ├®lite, protected by offshore secrecy; while the debts are shouldered by broad African populations,” the report says.

The problems go far beyond tax. In providing secrecy, the report says, 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 says.

It further notes that the secrecy world “provides multiple ways for insiders to extract wealth at the expense of societies, creating political impunity and undermining the healthy ‘no taxation without representation’ bargain that has underpinned the growth of accountable modern nation states. Many poorer countries, deprived of tax and haemorrhaging capital into secrecy jurisdictions, rely on foreign aid handouts.”

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