From EU money to Egypt, via tax havens
Offshore banking and tax havens, courtesy of Shutterstock. - Courtesy: Shutterstock

The honor of delivering the keynote address at the high-level EU-Africa Business Forum earlier this year fell to Ahmed Heikal.

In front of European Commissioners, leading politicians, chief executives of huge multinationals, senior bank bosses and billionaires, the Egyptian investment tycoon was asked to set the tone of the forum. This three-day lobbying event funded by the European Union represents an opportunity for the business community to influence European policy towards Africa.

Heikal is founder and chairman of Qalaa Holdings, an African investment fund with US$9.5 billion on its books. The European Commission says he represents a company that has become an “African success story.”

But although it is undoubtedly successful, Qalaa’s business model raises a series of questions about whether it represents the sustainable and inclusive growth that the EU says it wants to encourage in Africa.

An investigation by the Illicit Finance Journalism Programme (IFJP) shows Qalaa has paid extremely low levels of corporation tax since it was founded over 10 years ago, and relies heavily on some of the most secretive financial jurisdictions in the world.

It has also received hundreds of millions of euros in loans from the European Investment Bank (EIB), the EU’s long term lending institution. EIB money has flowed to companies linked to the British Virgin Islands (a known tax haven), contravening the bank’s current policies on the matter — a revelation which the EU parliament is set to investigate.

 Qalaa Holdings

Qalaa Holdings, renamed from Citadel Capital, started as a private equity fund to buy companies, restructure them and then sell them at a profit. This year it rebranded as an investment holding company.

It has made exceptional returns for its investors, who include Heikal and the company management. In the first six years of the company until 2010, the firm delivered a stunning US$2.2 billion of returns to investors and shareholders.

These substantial returns were made on the back of businesses largely in the energy, mining, agrifood, cement and transport sectors based in Egypt, Sudan, South Sudan, Kenya and Ethiopia.

To finance the company’s acquisitions, Heikal told the EU-Africa Business forum that the company has received money from three sources: Gulf-based sovereign wealth funds, international export credit agencies and development financial institutions (DFIs).

The last are organizations like the EU-funded EIB, whose director general was in the Brussels audience to listen to Heikal.

According to Heikal, cash from these top-quality, tax payer-funded institutions “dictates a certain way of doing business.”

Qalaa has no choice but to be mindful of human rights issues and even “the way we pay taxes,” said Heikal. “A whole slew of certain basic principles we have to adhere [to] because if we don’t no one will give us money.”

But despite these lofty statements, a Qalaa investor presentation reveals in a statement published on the company’s website that the company pays very little tax on their profits.

Although there is no suggestion that Qalaa has done anything illegal, the document clearly shows that while the company has made LE1,316,750,000 in post-tax profits since it was founded over 10 years ago, it paid just over LE2,720,000 in corporation taxes. This suggests an effective corporation tax rate of 0.2 percent.

A spokesperson for Qalaa says that focusing solely on corporation tax is not a fair reflection of its tax contribution, and that the company has paid over US$300 million in taxes since it was founded.

“The company pays a great deal in other taxes. In fact, it is one of Egypt’s largest taxpayers,” she asserts.

But when asked to explain fully its tax contribution, the firm declined to do so. It also did not respond when asked whether its claimed US$300 million tax contribution included taxes paid by employees.

Qalaa is also a heavy user of tax havens.

Its latest annual accounts show that out of 130 subsidiaries, almost a third are in tax havens. The company has 38 incorporated in the British Virgin Islands (BVI), five in Mauritius and one in Luxembourg.

Qalaa emphatically denies that its tax haven-registered subsidiaries are driven by tax minimization. 

The company spokesperson explained that its use of BVI was for legal reasons. BVI companies allow for more flexible corporate structures that accommodate the different needs of investors, she said, which include development finance institutions.

Europe’s investment in Qalaa

European development finance institutions have invested heavily in Qalaa’s offshore controlled projects.  

Qalaa’s most significant deal to date is a US$3.7 billion oil refinery project outside Cairo. The finance package for the deal was completed in 2012, when Egypt was in the midst of revolution, in large part thanks to a US$450 million loan from the EIB. The money from the bank’s loans and the investments of a number of other state backed development finance institutions is controlled by a company in BVI.

The Qalaa investor’s presentation reveals that the operating company for the refinery, the Egyptian Refining Company (ERC), is 76.2 percent-owned by “ARC,” which in turn is 63.3 percent-owned by “Orient.”

“ARC” is the Egypt-registered Arab Refining Company, and “Orient” is Orient Investment Properties Limited, based in the BVI. Orient has investors from a number of development finance institutions, including the International Finance Corporation of the World Bank and the German Investment Corporation. Qalaa has a minority stake, but controls the company as it has the right to appoint the majority of the board of directors.

Other European institutions invest in Qalaa too. The Inframed Fund, to which the EIB also contributes along with European state institutions like France’s Caisse des Dépôts, is another investor in the ERC project. Inframed has invested US$100 million through Orient Investment Properties.

Another key asset controlled by Qalaa via the BVI is Rift Valley Railways. This is the company which runs the key rail link between the Kenyan port of Mombasa and the capital of landlocked Uganda, Kampala.

Rift Valley is owned by KU Railway Holdings in Mauritius, which in turn is controlled by Ambience Ventures of the BVI, which is controlled by Qalaa.

Rift Valley has received loans from The African Development Bank (US$40 million), the Belgian Investment Company for Developing Countries (US$10 million), FMO, the Dutch Development Bank (US$20 million), The International Finance Corporation (US$22 million), The ICF Debt Pool (US$20 million) and KfW, a German development bank (US$32 million).

But it is not just financial support that Heikal and Qalaa receive from European institutions.

It also benefits from access and influence. The Africa-EU Business Forum, where Heikal was the keynote speaker, is supported by the EU which spent 700,000 euros on the event.

It was held just before the Africa-EU summit, which brought together political leaders from the two continents. 

This influence from Heikal and others in the business world no doubt helps to keep funds flowing in their direction. European leaders practically said as much at the summit.

The Business Forum got a special mention in the summit statement, which also said that the EU needs to pay “particular attention” to improving the business climate in order to make it favorable to investors and working with the private sector.

In practice, private sector means big finance.

A recent report by Eurodad, the European Network on Debt and Development, noted that over the last decade more than 50 percent of funds allocated to the private sector by development finance institutions go to the finance industry — companies like Qalaa.

Private equity, where Qalaa started out, is an important destination of these development funds. A 2011 study by the World Bank showed that in sub-Saharan Africa, nearly half of all private equity funds have had development finance institutions as clients.

Private financial institutions will typically use the funds provided by development institutions to lend on to local business, or in the case of private equity, buy local businesses and sell them on for a profit. The middlemen, people like Heikal, stand to make huge profits from this cheap source of government-backed finance.

Campaigners are very critical of these kinds of deals. 

“Fighting poverty through private equity investments is like handing out welfare checks in the city of London — it’s perverse and it’s ineffective. The primary objective of those funds is maximizing profits for their investors. Development expertise is not a requirement,” says Antonio Tricarico, a researcher with Counter Balance.

Nick Dearden, from the World Development Movement, says that by presenting Heikal as a role model at events like the EU-Africa Business Forum, the EU is promoting a deeply unequal model of development. 

“We have been told a lot about ‘Rising Africa,’ but what is happening in Africa is the corporate takeover of food, land and other resources by big business,” says Dearden.

“Hedge funds and other financial intermediaries are providing a lot of lubrication to ensure those resources slip as easily as possible out of the hands of ordinary Africans.”

The EIB between policy and practice of offshore financial centers

Qalaa is keen to stress that its close relationship with development institutions means that it upholds the highest ethical and environmental standards, despite its offshore links.

But the involvement of the EIB in financing Qalaa’s projects poses major questions about the effectiveness of the bank’s investment policies.

The EIB introduced a policy on the use of offshore financial centers in 2005. At the time, this was seen as a pioneering move.

The policy was subsequently strengthened and is supposed to cover all jurisdictions that are non–compliant with norms on transparency and taxation. 

A core principle of EIB policy is preventing tax avoidance, money laundering and other damaging activities.  

The EIB policy includes a general prohibition on investments linked to non-compliant jurisdictions (NCJs), except in limited circumstances. “Linked to” means not only companies located in a non-compliant jurisdiction, but also companies controlled by NCJ-located companies.

As the policy exists today, this would include the EIB’s investment in the Egyptian Refining Company, as the BVIs are considered a NCJ.

As set out in the policy, the exceptions to this rule should be limited. They essentially allow the bank to help tax haven countries with their domestic development programs.

Asked why the EIB had approved the Egyptian Refining Company investment even though it was controlled by a BVI company, a spokesperson said that in 2010, when the investment was approved, the BVIs were not considered a non-compliant jurisdiction.

According to the EIB, when it approved the deal in 2010, the bank went by the Organization for Economic Cooperation and Development (OECD)’s lists of how countries adhered to information exchange rules.

Countries on the black list had not committed to financial transparency; the grey list contained countries committed to transparency, but who had not yet implemented the required measures; and the white-list countries were in the clear. 

However, in April 2009, five months before the EIB launched their enhanced policies designed to address the problems caused by “tax havens,” the OECD removed all countries off its black list.

The grey list contained a further 30 jurisdictions, but that, too, quickly started to empty. To be put on the white list, the country only had to sign up to 12 — in practice rather loose — information exchange agreements. 

The agreements could be with any jurisdiction, including the Faroe Islands, Greenland and other minnows of the financial world. The only condition was that there were 12 of them. 

So, shortly after the release of the grey list in 2009, the BVIs signed agreements with Greenland, the Faroe Islands and Iceland, as well as France, the UK and New Zealand to bring their tally up to 12 treaties. This got the BVI on the white list by the end of 2009. Indeed, in 2011, Greenland, Iceland and the Faroe Islands accounted for 20 percent of all tax information exchange agreements in existence. 

Many other countries followed suit. By 2012, the only countries left on the OECD grey list were the tiny Pacific island nations of Nauru and Nieu.

At this point, there were effectively no restrictions on where the EIB could invest. The EIB’s celebrated policy was effectively worthless.

In 2013, OECD compiled a new list of NCJs. This list included the BVIs and some other well-known weakly regulated and secretive jurisdictions such as Panama and Switzerland. However, despite the BVI now being subject to the NCJ policy, the EIB has confirmed that the policy is not retroactive. Furthermore, the EIB has not revisited investments like the ERC, which it made previously but are still active today.

There are also a number of other jurisdictions that are absent from the OECD list. The Cayman Islands, the Bahamas, Bermuda, Guernsey, the Isle of Man, Jersey, Macau and Mauritius have been given the all-clear by the OECD.

This opens up hundreds of billions of taxpayer-funded euros being lent to companies and investment funds based in weakly regulated, low-tax jurisdictions.

Nick Hildyard of Corner House, a UK-based research and campaign group, says the Egyptian Refining Company investment shows that the EIB’s policy on tax havens is meaningless, and that the bank is unwilling to impose its values on the financial sector.

“One does wonder what was the point of having a policy on offshore financial centers if a jurisdiction like the British Virgin Islands was deemed acceptable. For many years, it has been one of the most secretive offshore financial centers in the world, and a destination of choice for money launderers, corrupt officials, tax evaders and tax avoiders.

“Instead of the EIB driving up standards in the financial sector, it would seem that the financial sector is dictating terms to the EIB,” says Hildyard.

Public pressure

European Union leaders from across the continent frequently talk about the need to deal with the problems caused by offshore tax havens.

The European Commission has undertaken a series of investigations into the tax structures of prominent international firms like Apple, Google and Fiat.

But the role of development finance institutions like the EIB in financing offshore structures has so far received less attention.

But this is changing. The European Parliament’s International Development Committee recently decided to prepare a report on tax avoidance and evasion.

Linda McAvan, a British Labour MEP who chairs the committee, says she would pass the results of the IFJP investigation to her colleagues working on the report to look into the matter further.   

“We will not be able to meet our global development goals and tackle poverty unless companies pay their fair share of tax in an open and transparent manner,” says McAvan.

Campaigners have a number of ideas about how institutions like the EIB should improve their policies on tax havens, such as improving the list of tax havens covered.

They say that it should have been obvious from the start that the OECD list of tax havens was inappropriate for development finance, as developing countries are not members of the OECD. Instead, the EIB and other institutions should produce their own criteria for defining non-compliant jurisdictions.

Another suggestion is for the EIB to be much more transparent on how their publically financed investments are used.

“At the very least, the bank should be much more explicit about why the use of an offshore financial centers was deemed necessary, and what prevented them from investing directly. But even more importantly, it needs to ensure citizens that its policy is properly implemented, by publicly disclosing beneficial ownership and country-by-country data on all its investee companies,” says Mathieu Vervynckt, policy and research analyst at Eurodad.

In Qalaa’s case, this would show how much profit from a project like the Egyptian Refining Company is generated in Egypt, and how much in the BVIs.

Whether the EIB will change its policies remains to be seen, but mounting public pressure could yet force it to do so.

George Turner works for the Illicit Finance Journalism Programme (IFJP), a project funded by the Tax Justice Network. The aim of the program is to increase the quality and quantity of investigative journalism. about offshore finance and illicit financial flows in developing countries.

George Turner 

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