Underground assets and illicit financial practices brought under the spotlight in Pretoria

Underground assets and illicit financial practices brought under the spotlight in Pretoria

The mining of the world’s assets below the ground has fallen prey to illicit financial flows (IFFs), robbing countries of valuable revenue that could be used for the benefit of citizens. This was the subject of the second annual meeting of the Steering Committee of the International Organisation of Supreme Audit Institutions (INTOSAI) Working Group on the audit of Extractive Industries (WGEI) held in Pretoria from 25 to 27 September 2018.

With representatives of SAIs from nine countries that make up the steering committee of the WGEI in attendance, the objective of discussing IFF was to understand the practice and its impact. In his welcome address, Mr. Jan van Schalkwyk (SAI SA) indicated that countries with large extractive sectors such as Russia, Mexico, Malaysia, Nigeria, Brazil, South Africa and Indonesia are all listed among the top 10 sources of IFF.

Guest speakers from the South African Revenue Service (SARS), the Financial Intelligence Centre of South Africa (FIC) and the Department of Mineral Resources of South Africa (DMR) provided great insight on the types of IFFs, their respective efforts to track and stop it and its impact on extractive industries in particular. 

The term ‘illicit financial flows’ first appeared in the 1990s to describe a number of cross border activities. The term was initially strongly associated with capital flight. It now generally refers to cross-border movement of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred or used, that crosses borders. This falls into three main areas:

  1. The acts themselves are illegal (e.g., corruption, tax evasion); or
  2. The funds are the results of illegal acts (e.g., smuggling and trafficking in minerals, wildlife, drugs, and people); or
  3. The funds are used for illegal purposes (e.g., financing of organised crime).

In-depth studies have found that the different types of IFFs are often linked in exchanges and relationships that involve corruption, organised crime, and international commercial fraud.

The role of the WGEI in dealing with IFFs is spurred on by the report of the United Nations Economic Commission for Africa that says ‘track it – stop it – get it’. Mr. Schalkwyk further contextualised its role by saying: ‘The WGEI alone will not be able to stop this practice, but your efforts in promoting good governance in the extractive industries, where accountability and transparency is assessed at each stage of the extractive industry value chain, will be the fundamental shift in the tide.’

Mr. Pieter Alberts from the FIC provided valuable insights through case studies on how IFFs are committed. He also highlighted that the FIC works closely with SARS, the Pubic Protector, the Hawks and other international agencies to address IFFs and stressed that a cooperation agreement should be established with auditors-general to further promote transparency.

From the perspective of SARS, Ms. Keamo Kuypers explained transfer pricing in the context of IFFs and described how big corporate companies evade taxes by setting up their headquarters in tax havens. She also described how SARS detects potential illicit transaction and what typical risk factors they consider in this regard.

Supporting these sentiments and really crystallising the impact of IFFs for the members of the WGEI, was Ms. Irene Singo, the CFO from the Department of Mineral Resources. Speaking in the South African context, Irene explained that Base Erosion and Profit Sharing shifting (BEPS) is recognised as a risk to realising true value from South Africa’s mineral resources. This, she explained, undermines the national economic sovereignty and erodes the social and economic development impact.

Mr. Sybrand Struwig, the representative of SAI-SA to the WGEI said: ‘It was clear from the presentations made by our guest speakers that IFFs is a complex and multi-facet process which one role player can’t effectively detect, stop and recover alone. In this regard the engagements with FIC, SARS and DMR re-emphasised the need for all tasked to assess, regulate and audit to work together to build public confidence. I therefore believe that we as working group representatives were able to extract all that was worth from our peers and expert guest speakers, exploit all that was valuable from our deliberations and produced all that matters in our collaboration on the topic of auditing in the extractive industries.’

While the main theme of the annual meeting was illicit financial flows, the WGEI also addressed other priorities impacting it. Their discussions covered the design of a funding plan for the WGEI, establishment of Terms of Reference for each activity, the rollout of the Extractive Industries training framework, the development and utilisation of an auditor’s toolkit, INTOSAI regional participation in the WGEI and collaborative audits.

Members of the working group also took some time out to enjoy a bit of the ‘wild side’ of Pretoria when they were treated to a game drive and had dinner among the lion enclosures where they were joined by Mr. Kimi Makwetu – Auditor General of South Africa.

The chairperson of the WGEI, Mr. John Muwanga, Auditor-General of Uganda, expressed his gratitude to SAI-SA for hosting the WGEI meeting and said it was very engaging with fruitful discussions on the progress of the implementation activities of the WGEI. In his words, ‘The arrangement to bring in external subject matter experts to address the committee members on the important topic of illicit financial flows brought in the required external influence to WGEI. We achieved a lot during the meeting and charted a new course.’

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