REPUBLIC OF KENYA

PARLIAMENT OF KENYA---------------------------------------

THE 45th CPA AFRICAN REGION CONFERENCE Arusha, Tanzania16th –27th July 2014

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THEME: UTILISING COMMONWEALTH PARLIAMENTS TO COMBAT THE CHALLENGES TO SOCIO-ECONOMIC DEVELOPMENT IN AFRICA

THE ROLE OF PARLIAMENTS IN CURBING ILLICIT FLOWS OF FINANCIAL AND NATURAL RESOURCES IN AFRICA

1.0 INTRODUCTION

1. Understanding Illicit Flows of Financial and Natural Resources in Africa

The illicit flows is defined as unrecorded private financial outflows involving capital that is illegally earned, transferred, or utilized, generally used by residents to accumulate foreign assets in contravention of applicable capital controls and regulatory frameworks. Thus, it says, even if the funds earned are legitimate, such as the profits of a legitimate business, their transfer abroad in violation of exchange control regulations or corporate tax laws would render the capital illicit.

A report published in December 2013 by Global Financial Integrity, a non-profit, research and advocacy organization located in Washington, D.C., revealed that close to USD 500 billion illicitly flowed out of Africa over a 10-year period running from 2002 through to 2011. The report states that adjusted for inflation, illicit financial flows out of developing countries increased by an average of more than 10 percent per year over the decade and that some USD 946.7 billion in illicit outflows left the developing world in 2011, up from USD 832.4 billion in 2010.

Illicit financial flow is not a recent phenomenon. It reached an alarming level in South American countries in the wake of the financial crisis they found themselves in following the end of the Second World War. Now it is the turn of African countries to suffer the same fate that their Latin American countries did decades ago. Illicit financial flow has assumed astounding proportions over the past decade owing to the failure to take a concerted action to address the problem decisively. Africa in particular has faced the brunt of the problem.

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Aside from denting the capacity of poor nations to become financially self-reliant and thereby perpetuate their dependence on foreign, illicit flow worsens poverty as well as harm the national and public interests by draining foreign exchange, diminishing the revenue for government coffers and dampening the appetite for foreign investment. Moreover, it can lead to political fallout as it is one of the leading causes behind an inequitable resource allocation between citizens, a fact which is liable to disenfranchise the vast majority of the public.

Many developing countries natural resource extraction accounts for a significant proportion of GDP and often for the bulk of foreign exchange earnings and foreign investment. In this context, Africa has some of the world’s largest mineral reserves which should be used to eradicate poverty. Paradoxically, countries with rich natural resources often fare worse than other countries (the ‘resource curse’ phenomenon) and the control, exploitation, trade and taxation of minerals in some cases contribute to armed conflicts (the ’conflict minerals’ problem).

Mining and Sustainable Development: Non-sustainable mining can have huge negative environmental and social impacts, especially in Africa. It stressed that extractive industries should contribute to development through linkages to the local economy and participation in efforts to develop local industries that use processed or non-processed materials as inputs or can benefit from the presence of the extractive companies in other ways. The resolution urged the need to adopt regional and international approaches to curbing the illegal exploitation of natural resources.

2.0 THE ROLE PARLIAMENTS

Parliaments, in the Commonwealth and elsewhere therefore ought to play a frontline role to curb illicit flows of financial and natural resources by:-

Support further institutional development and capacity building within host governments;

Prioritise assistance for the development of legislation and taxation policy so as to maximise the local and national benefits of extractive industries development, resulting in the creation of local employment, living wages for employees and their families;

Strengthen the principle of ownership so that local communities should participate in the planning and development of natural resources projects;

Recognise and secure the traditional rights and cultures of indigenous people in extractive industry development;

Ensure that victims of breaches of social or environmental legislation by multinational companies have effective access to justice;

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Implement fundamental labour standards as set out in ilo conventions to ensure decent and safe work for all mine workers;

Combat child labour in mining; Ban mineral exploration and exploitation in national parks and world heritage

sites; Seek agreements on climate financing, technology transfer and capacity building

and to upgrade its assistance to developing countries for CO2 emission reduction; Strengthen the need for strong European legislation on disclosure of non-financial

information by certain large companies, including the obligation for companies to conduct risk-based due diligence, taking into account their whole supply chain.

Illicit capital flows from Africa are linked to the secrecy around mining contracts and tax regimes. Therefore, the fight against tax evasion and tax havens should remain a top priority.

Parliament should consider ways of concessions that can be granted to mining companies and the problems this can cause, including expropriation, deprivation of people’s livelihoods and problems concerning user rights and land rights.

Therefore there is need to break the Link between Armed Conflict and Mineral Exploitation: Parliament should note that the exploitation of high-value natural resources, including oil, gas, minerals and timber, is a major source of conflicts around the world. It embraced the Africa Mining Vision according to which an environmentally and socially responsible, transparent and inclusive mining sector is essential for addressing the adverse impacts of the mining sector and avoiding conflicts induced by mineral exploitation.

2. Parliaments should consider legislations that: Create a legally binding obligation for all upstream companies operating in the

EU that use and trade natural resources sourced from conflict-affected and high-risk areas and all downstream companies that act as the first placer on the European market to undertake supply chain due diligence to identify and mitigate the risk of conflict financing and human rights abuse;

Are based on the relevant international instruments; Apply to all segments of the supply chain and to all natural resources, without

exception, produced in any conflict-affected or high-risk area; Are founded on a risk-based approach, requiring companies to assess actual and

potential adverse impacts arising from their operations, and to mitigate the identified risks;

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Define requirements for company risk assessments and for a management framework;

Include a sanctions mechanism for cases of noncompliance with the risk-based supply chain due diligence obligation.

3. The Role of Parliament in Addressing the Illicit Financial Flows and Natural Resources in Kenya

a) The passage of the Constitution with its numerous provisions on integrity and accountabilityThe Constitution outlaws public servants from holding bank accounts abroad. This has been further strengthened by the enactment of the Leadership and integrity Act, 2012 which is to effect the Chapter six of the Constitution on leadership and integrity. Since this can be circumvented, Parliament needs to pass the requisite legislation to provide for strengthened beneficial ownership requirements and other critical strengthening regulations

b) Reform measures that the Government can take ranging from tax reforms, trade reforms, customs reforms and procurement etc. Some of the reforms are ongoing in the Country to stream line tax administration with measures being placed to streamline institutions and seal loopholes likely to encourage such illicit flows.For example the creation of a national authority for the regulation and management of Public Procurement, The Public Procurement Oversight Authority (PPOA) through the Public Procurement and Disposal Act, 2005 - policy measure to address bribes and kickbacks in Government contracts to ensure transparency and accountability in the contracting process.

c) Passing of laws to curb mechanisms of illicit money flows; Kenya has taken significant steps toward improving its Anti-Money Laundering regime including enactment of the Proceeds of Crime and Anti-Money Laundering (Amendment) Act as an amendment to the Act of 2009. The Act addresses deficiencies in the criminalization of money laundering and freezing of assets and the issuance of revised AML guidelines by the Central Bank.

d) The County however needs to make significant progress in implementing its action plan particularly as relates to supervisory programmes for financial sector, operationalise the Financial Intelligent Unit among others.

e) Build capacity through budgetary allocation: Law enforcement authorities (e.g., the economic crime enforcement unit within the CID, the Ethics Anti-Corruption

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Commission (EACC) etc) need to be empowered through the Budget appropriation so as to have capacity to investigate and prosecute economic crimes like tax evasion, money laundering and corruption. Capacity will also ensure that technical support to audit multinational companies in Transfer Pricing is sufficient. Parliament should advocate for increased allocations to make capacity for such enforcement agencies a reality.

f) Political goodwill and commitment is required to combat economic and financial crimes in Kenya. Political goodwill will ensure the implementation of the requisite pieces of legislation put in place.

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