Possible contribution of corporate law remedies to curbing illicit outflow of capital from Africa

• Jurisdiction: South Africa
• Date: 16 August 2019
• Published date: 16 August 2019
• Author: Tshepo H Mongalo
• Pages: 1-34

1

POSSIBLE CONTRIBUTION OF

CORPORATE LAW REMEDIES TO

CURBING ILLICIT OUTFLOW OF

CAPITAL FROM AFRICA*

TSHEPO H MONGALO†

Associate Professor of Law at the University of the Witwatersrand,

Johannesburg

Keywords: corporate law remedies, illicit financial flows of capital,

capital flight, non-shareholder corporate constituencies, legal

standing.

ABSTRACT

The long-standing problem of capital flight from Africa as a

result of the deliberately mischievous activities of multinational

corporations is not lessened by the obvious inability of the

conventional Anglo-American corporate law remedies to extend

legal standing to constituencies other than equity investors.

However, the lessons from the recent corporate law developments

in South Africa show that the appropriate extension of legal

standing in corporate law remedies to accommodate other

corporate constituencies and the public interest can go a long

way to contributing to the reduction of the scourge of this

disempowering conduct of multinational corporations. The

extension of legal standing to accommodate non-shareholder

corporate constituencies and the public interest should,

however, be embarked upon within reasonable limitations if

the new corporate legal enforcement framework is to be of any

utility. The South African experience offers lessons as to how

these reasonable limitations can be made a permanent feature

of the new enforcement framework. The paper argues that the

insistence on the conservative, and, largely, individualistic

Anglo-American corporate legal enforcement framework at

* This is the full version of the paper presented at the Global Justice and the Global

South Conference held at Delhi University in India from 25–27 April 2014. The

paper is an adapted version of Chapter 5 of the author’s unpublished Ph.D.

manuscript submitted for examination at the University of Cape Town in 2015.

† B.Proc (summa cum laude), LLB (UKZN), LLM (Commercial Law) (Cambridge),

PhD Candidate (Cape Town).

(2015) 1(1) JCCL&P 1

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2(2015) 1 (1) Journal of Corporate and CommerCial law & praCtiCe

all costs will make it difficult, if not impossible, for modern

corporate law to contribute to the limited arsenal that can be

employed to stem the tide of illicit capital flight from Africa.

I INTRODUCTION

The recent ground-breaking working paper by Global Financial

Integrity (GFI) entitled ‘Illicit Financial Flows from Africa: Hidden

Resource for Development’1 makes it clear that curtailing illicit

financial outflows from Africa can produce the largest source of

new funds for poverty alleviation and economic growth in the

near future. This paper considers how corporate law remedies may

be better employed to contribute to the reduction of this counter-

productive phenomenon, particularly in South Africa, which ranks

in the top five countries with the highest outflow numbers in Africa.

Ever since the publication of this working paper the challenge of

illicit outflows of capital from developing countries has been gaining

momentum. As recently as February 2012, the United Nations’

Economic Commission on Africa (‘ECA’) Conference of Ministers of

Finance, Planning and Economic Development, in association with

the African Union (‘AU’), commissioned a High Level Panel on Illicit

Financial Flows from Africa, which is chaired by the former President

of South Africa, Mr Thabo Mbeki. On 31 January 2015, the High Level

Panel tabled its Final Report at the Twenty-Fourth Ordinary Session

of the Assembly of the African Union in Addis Ababa, Ethiopia.

The findings from the High Level Panel reiterate calls made by civil

society organisations from across the continent to view illicit financial

flows as a serious threat to inclusive development in Africa and to take

urgent practical policy action to stop the scourge. This paper attempts

to propose the proactive development and/or use of proactive policy

measures in stemming the tide on this haemorrhage. Since one of the

most notable findings of the High Level Panel is that Africa is losing

up to $60 billion annually through this phenomenon, it is clear that

stricter transparency measures need to be implemented by affected

countries.

With regard to the need for the introduction of tighter transparency

measures within financial markets, the conduct of related companies

in international trade deserves much scrutiny, as it has recently been

reported that 50 per cent of international trade happens within

1 Dev Kar & Devon Cartwright-Smith Illicit Financial Flows from Africa: Hidden

Resource for Development, a Working Paper of Global Financial Integrity, a

programme of the Center for International Policy (CIP) (2010).

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3

Possible contribution of corPorate law remedies

groups of companies,2 something which, as demonstrated below,

possibly points to collusion within related companies with the

primary aim of hiding assets and underreporting profits by creating

seemingly legitimate but fictitious expenses which are recorded as

being owed by one member of the group to another. On the question

of the need for forging partnerships, this paper concedes that the

impact of the success of these partnerships will, almost completely,

do away with this deleterious phenomenon as the elimination of

tax havens, the wider improvement of transparency measures within

financial markets, and prosecution of those involved in corrupt

activities which fuel the growth of illicit capital flight, will likely be

the outcome of such partnerships.

While the effectiveness, or otherwise, of the partnerships referred

to above will invariably necessitate the development of international

solutions, which may be a long time coming, this paper, by focusing

on the possible role that the corporate legal enforcement frameworks

of affected developing countries may play prior to the realisation of

measures requiring international co-operation, shows that there are

short-term measures which, if implemented, may contribute to the

reduction of this menace of illicit capital flight. By reference to the

recent developments in South Africa in the area of corporate law and

constitutional law, the paper makes proposals for desirable corporate

legal enforcement frameworks in the affected countries.

Having established that a large portion of the illicit financial capital

outflows (something in the region of 60 to 65 per cent of the global

total) emanates from the activities of multinational corporations

through the manipulation of pricing systems, particularly in

facilitating commercial tax evasion through trade mispricing, it

is clear that the corporate laws of affected jurisdictions can, and

should, play a central role in empowering corporate constituencies

and the public, in addition to shareholders, to protect the interests

of both the companies concerned and the corporate constituencies

themselves, as well as the public.

These multinational corporations seem to be able to engage in

these deleterious activities with impunity largely because of the

lack of uniform checks and balances in financial reporting and

compliance. One of the common ways in which these corporations

are able to swindle large sums of money out of affected countries

is by overpricing imports and underpricing exports, with the result

2 Professor Thomas Pogge of Yale Law School, who was part of the team that

prepared the working paper of the Global Financial Integrity, pointed this out at

the session on ‘Illicit Financial Outflows of Capital and Corruption’ at the Global

Justice and the Global South Conference held at the University of Delhi in India

on 27 April 2014.

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