On the 14th floor of a modern high-rise complex in central Cairo, there is a maze of offices, buzzing with the activities of the International Financial Corporation (IFC), the arm of the World Bank that lends to and invests in private sector projects.
The glittering, gold-capped towers planted on the bank of the Nile are home to some of the largest multinational corporations in Egypt and overlook a deprived area called Ramlet Bulaq.
In the summer of 2012, this building, the Nile City Towers, came to be emblematic of economic inequality in Egypt.
Violent clashes erupted between inhabitants of Ramlet Bulaq and Nile City security guards (backed by the police). Media outlets rushed to cover the incident, calling attention to the stark difference between the two worlds symbolized by the low-income neighborhood and the high-rise complex located on its fringe.
Orascom Construction Industries (OCI), the company that built the towers, has been allegedly accused by non-governmental organizations working on developing the area of being involved in a government plan to evict the 3,000 people living there.
At the time, OCI was one of the largest Egyptian transnational companies. In 2015, the corporation split into two entities, Orascom Construction Limited (OC Ltd.) and OCI NV, which were relocated to other countries.
The majority shareholders in OC Ltd., members of the Sawiris family, own Nile City Towers. We could not establish whether the towers belong to OC or a sister company that belongs to another Sawiris son, Naguib.
According to its website, the IFC is a shareholder in the company that built the towers in which it is currently housed. However, further information on OCI and many other companies financed by the corporation is concealed.
An in-depth look at the Egyptian projects supported by the World Bank’s private-sector lending arm reveals that it is currently financing private companies that conceal the identities of shareholders, some of whom have political connections. Many also appear to be aggressively employing tax avoidance techniques, particularly through the use of secrecy jurisdictions.
This investigation looked through investment summary documents available on the IFC website for the 93 projects, which were funded through equity or loans (including risk management facilities) between 1995 and August 2017, and those of three other projects pending approval.
Here is a link to our compilation of the investment summary documents.
The lack of information about ownership of the projects receiving IFC financing strikes an alarming note.
Presently, the most basic question usually asked in a company disclosure, namely who the owners are, remains unanswered for 40.4 percent of the companies studied.
Changes to the IFC’s access to information policy in 2012, however, for the 33 projects financed after its implementation, eight (one in four) are described in ambiguous terms. The current disclosure policy still leaves a great deal to be desired.
For instance, while it stipulates that the IFC website should publish “information about the shareholders of the project or investee company,” it does not specify exactly what this should be.
The IFC office in Egypt declined our request to access the documents that fully outline shareholder structures.
Phrases like “other investors” are used to obscure the identities of shareholders in investee companies.
This can be seen in the case of the Alexandria National Iron and Steel Company (ANSDK), a company in which Ahmed Ezz, who formerly held a top position in the National Democratic Party (NDP) and was known to be close to Gamal Mubarak, had a stake. The IFC describes the shareholders in ANSDK as “72 percent Egyptian investors,” but makes no mention of Ezz.
Similarly oblique phrasing is used in the investment summary of the Dar Al Fouad private hospital. The summary reads, “Strategic investors include,” followed by a list of people and companies that omits the name of partner Hatem al-Gabaly, a pre-revolution health minister and senior member of the NDP.
The IFC has also lent money to projects owned by former ministers Mohamed Mansour and Ahmed al-Maghrabi, and more than one project linked to the Mubarak family.
This lack of transparency suggests a set of practices that are increasingly condemned in literature on good corporate governance. Two such practices are particularly noteworthy in the case of Egypt, namely tax avoidance and state capture by politically connected investors, which grants them exclusive benefits such as free or subsidized land, energy subsidies and subsidized borrowing from state banks.
The following graphs and case studies trace the trends of these two activities in the IFC portfolio.
In 2014, the IFC published an offshore financial centers policy (OFC policy), which sets the mission as: “First, the World Bank Group wishes to help those member countries that want to improve their overall tax transparency through an offer of technical assistance. Second, the World Bank Group wishes to ensure that its Private Sector Operations are not used for tax evasion.”
In order to do so, the policy states that the IFC will “continue to apply heightened transactional due diligence to all investment transactions involving an Intermediate Jurisdiction.” It adds that the institution will undertake an investment only when it has satisfied itself that the transaction will not be used for tax evasion, tax abuse or other purposes.
The mission has not been realized in Egypt.
“I don’t think [the policy] is a dramatic change from the way we did business before,” says Walid Labadi, the IFC’s country manager for Egypt, Libya and Yemen. He believes that the OFC policy has had some success in encouraging companies to take steps toward transparency, adding that it has had a notable impact on transparency in offshore tax havens in particular.
According to Labadi, before the policy was introduced, the developmental institution already had a consistent approach to managing this issue. “What the IFC does, for the most part, is invest in a particular project company and monitor very closely how they use and distribute their money. We already had a lot of restrictions in place on what these companies can do,” he adds.
It seems, however, that the number of IFC-financed projects with subsidiaries in tax havens increased after the adoption of the 2014 policy.
Of the total number of projects financed by the IFC since it began operations in Egypt in 1995 (Figure 1), approximately half have subsidiaries in one or more tax havens. This increases to 81.5 percent if only the projects financed after the policy was implemented are considered (Figure 2).
Since 2015, months after the publication of the policy, 27 new projects have been approved, with loans and equities totaling US$966.3 million. Twenty-two of these projects have a network of shareholders with subsidiaries in jurisdictions with few to no disclosure regulations and a tax rate of between zero and 12 percent. These jurisdictions can be considered tax havens.
Labadi says that the IFC has never declined to invest in any project in Egypt on the basis of offshore subsidiaries, adding that what constitutes a tax haven comes down to definitions. When assessing an investment, the IFC uses the list of countries that the Organization of Economic Cooperation and Development (OECD) has deemed to be tax havens.
Figure 1 shows that 11.8 percent of the companies have no offshore investments. In almost 38 percent of the cases, there is a lack of information from the IFC in this regard.
In 29 percent of cases (Figure 3), a project requesting IFC investment have shareholders with companies registered in tax havens, which could be another form of tax avoidance.
The United Arab Emirates-based Alcazar Energy, which has projects in Egypt, Jordan and Turkey, is a prime example of the OFC policy’s shortcomings.
The company owns three solar power plants in Egypt, a 75 percent stake in another project company and has received IFC loans worth $70 million.
The IFC identifies Alcazar Energy as an offshore entity, specifically calling it “an asset holding entity.” In an email correspondence, the Egypt office of the World Bank’s private-sector arm says that “The UAE-based entity is actually an asset holding entity with operations in Dubai. Nonetheless, we treated [Dubai] as an intermediate jurisdiction that is subject to our OFC policy.”
Intermediate jurisdiction refers to a country or part of a country that is not the host country of the proposed investment, where investors base their companies to benefit from low corporate tax rates or loose disclosure regulations.
However, the submission and approval of the company’s solar power projects before the IFC’s board suggests that the policy is being liberally implemented.
In 2016, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes listed Dubai as a “partially-compliant intermediate jurisdiction.”
As such, the IFC should not fund any project based in this jurisdiction or owned by an Emirati citizen, nor should it rollout any projects in the UAE.
In an emailed response to questions about companies it finances based in Dubai, the IFC asserts: “Dubai was assigned in 2017 a provisional rating of ‘largely compliant’ by the OECD, which reflects the progress made in implementing the Global Forum’s requirements on tax transparency. As such, the proposed investments were found to be acceptable under the IFC’s policy on the use of intermediate jurisdictions. That rating of ‘largely compliant’ remains in place today.”
The choice of Dubai for Alcazar Energy’s headquarters has raised questions, particularly given that the company has no projects there. Rather, the majority are based in Egypt. It is worth noting that the UAE ranked two places below Egypt in the World Bank’s 2016 Doing Business report, which ranks 190 economies on how easy it is to conduct business there.
A professional corporate lawyer, who spoke to the authors on condition of anonymity, says that as the company is based within the Dubai International Financial Centre free zone, it is likely being treated as a UAE tax resident. If so, Alcazar Energy will be reaping the benefits of the double taxation treaty (DTT) between the UAE and Egypt, which allows the company to operate without paying any tax on capital gains or dividends generated from activities in Egypt.
Commenting on IFC investments in companies with links to no- or low-tax jurisdictions, Labadi says, “I am certain that, if there is a rule, it has been followed.”
Despite his assurances, out of the 13 solar power companies financed by the institution in the Benban Solar Park in Aswan, 11 are either domiciled in or have subsidiaries in tax havens, according to the International Consortium for International Journalism database. It is the IFC’s narrow definition of what constitutes a tax haven that enables this leniency.
Companies registered in offshore financial centers are not the only point of concern. It is important to address the existence of onshore, or domestic tax havens.
Data shows that 25 percent of IFC investee companies are registered in free economic zones in Egypt that offer tax incentives on par with those provided by offshore financial centers.
A confidential report issued in December 2017 by the International Monetary Fund (IMF) on Egypt, which the Egyptian Initiative for Personal Rights (EIPR) obtained a copy of, states that: “[Free zone] companies operate outside the scope of the Egyptian Tax Authority [ETA] and do not submit income statements. [Free zones] can thus effectively be used as domestic tax havens, enabling tax avoidance and jeopardizing domestic revenue mobilization.” The report also is concerned that the ETA “has no information about the scope and operations in free zones, making it impossible to assess its revenue costs (likely substantial).”
There are a number of reasons why a company may choose to use a network of subsidiaries spread out across multiple jurisdictions.
Labadi argues that this is not an unusual approach. “When you look at a company that has multiple investors … it is fairly normal to choose an offshore jurisdiction to base it in,” he says. He believes the issue is not inherently with offshore financial centers, but rather with jurisdictions that lack sufficient disclosure regulations.
Maggie Murphy, the senior global advocacy manager at anti-corruption coalition Transparency International (TI), also says that this approach is fairly standard. “Most large companies are now interconnected across tax havens. Many claim that doing so affords them a degree of stability in otherwise potentially unstable contexts where their assets could be removed if a coup took place, or if the economy tanked,” she says. However, she is skeptical about this reasoning. “You could argue that there’s no reason why that stable independent country couldn’t be Denmark or other such politically neutral, economically stable countries.”
It is not illegal to base companies in jurisdictions with zero tax rates, and in an attempt to achieve higher rates of tax efficiency, holding companies may be located in secrecy jurisdictions where they pay significantly less in tax.
Studies have emerged highlighting the negative impact of this practice in the aftermath of the 2008 global financial crisis, as ballooning budget deficits and the amassing of public debts increasingly necessitate the collection of more taxes.
Moreover, tax avoidance by using tax havens is becoming a reason for rising inequality in developed (and even more so for developing) countries. Because the wealthiest people and corporations use tax havens, more than others, as shown in a newly published paper, “Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality.”
In a globalized market, tax avoidance is becoming easier for multinational corporations and wealthy individuals. “Governments are now engaged [with corporate entities] in tax battles,” according to one corporate lawyer, who spoke to the authors on condition of anonymity.
These tax battles can take shape in a number of ways. An OECD directory on tax avoidance has documented 400 aggressive tax planning schemes used by companies around the world to avoid paying their fair share of taxes.
Base Erosion and Profit Shifting (BEPS) is the term widely used to refer to tax planning strategies that exploit gaps and inconsistencies in tax regulations to artificially shift profits to low- or no-tax locations and where there is little to no economic activity. Some of these schemes are illegal, but most are not.
According to the OECD website, BEPS “undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.” It adds that when multinational corporations are able to legally avoid paying income tax, they undermine voluntary compliance by all taxpayers.
The corporate lawyer believes that Egypt is currently facing what he describes as “second-generation tax avoidance.”
After the 2011 revolution, the ETA closed a number of the loopholes that previously enabled profit shifting. This made it more difficult and more costly to create offshore shell companies to evade taxes in Egypt, says former Deputy Finance Minister Amr al-Monayer, who resigned shortly after the interview for this report.
Now, the battle is playing out between two opponents. On one side, there is a pool of bureaucrats under the guidance of officials like Monayer, who has previous experience as an executive in the tax division of PricewaterhouseCoopers, a multinational accounting corporation. On the other is a team of well-paid lawyers, accountants and auditors.
“The level of sophistication is the same as the tax battles we see happening in France, Germany and the United Kingdom,” the corporate lawyer says. “These are battles of law and logic, not fraud.”
Several examples from the IFC portfolio reflect the two phases of tax battles in Egypt. In the mid-2000s, the first generation of tax avoidance had reached its peak. Offshore jurisdictions like the Cayman Islands and British Virgin Islands (BVI) became hubs for investment banks or private equity (PE) companies seeking to base shell companies in tax havens, which would function as a parent company. They would then restructure and sell Egyptian subsidiaries and shift profits to the offshore parent company, sidestepping the payment of taxes in Egypt completely.
“This is what happened with a number of privatized companies,” says the lawyer. The financial intermediary or private equity company selling to the third party was able to amass enormous capital gains, and do so without having to pay a cent in taxes in Egypt — although Egypt was the source of their revenues.
A 2008 annual report published by Egyptian investment bank EFG Hermes noted that the effective tax rate decreased from 13.1 percent in 2007 to 10 percent in 2008, “as revenues from outside of Egypt and non-taxable entities increased.”
Private equity firm Qalaa Holdings, which is the parent company of the most recently approved IFC project, managed to pay an effective tax rate of 0.2 percent in the first six years of the company’s operations through 2010, according to an investigative report published by Mada Masr in 2014. At the time, the firm owned 38 companies registered in the BVI, five in Mauritius and one in Luxembourg, comprising, in total, almost one third of Qalaa Holdings’ subsidiaries.
A company spokesperson denied that the offshore activities were related to tax avoidance schemes, telling the authors that these jurisdictions merely offered more flexible corporate structures.
An example of a more sophisticated tax avoidance scheme is evident in the case of OCI NV, one of the companies that resulted from the 2015 Orascom demerger, which is now based and listed in the Netherlands.
In this instance, the Netherlands is a country with which Egypt has signed a treaty of non-double taxation. These countries are often larger than the smaller, touristic islands, like Mauritius or the Cayman Islands, and, unlike Egypt, they often have either no taxes on capital gains or none on dividends, sometimes both. This is a convenient setup for holding companies.
When a holding company like OCI NV relocated to the Netherlands, it does so on the condition that the majority of the board members are Dutch, and that it will hire Dutch directors and auditors. While OCI NV is now registered there, the other holding company that resulted from the demerger, OC Ltd., is based in Dubai.
When asked about the IFC’s share in the two firms, the institution’s Cairo office said, in an emailed response, “The current share is quite small. The IFC has a 0.48 percent stake in OC Ltd. and a 0.55 percent stake in OCI NV.”
Interestingly, resorting to DTTs allows for a form of tax avoidance that does not exclude the use of the old style, that of using offshore jurisdictions.
A 2016 annual report published by OCI NV made no effort to disguise the fact that the holding company uses a multitude of offshore jurisdictions to help to reduce the income taxes its pays. “The statutory income tax rates vary from 0.0 percent to 42.8 percent, which results in a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of 25.0 percent,” reads the report.
According to the report, against the 25 percent tax rate in the Netherlands, OCI NV paid an effective rate of only 21.8 percent.
This multitude of jurisdictions alone helps reducing taxes paid by $43.3 million, according to the OCI NV annual report.
The practice of profit shifting is widespread. In the United States — one of the largest current democracies — the effective corporate tax rate has declined from 30 to 20 percent, Gabriel Zucman writes in The Hidden Wealth of Nations: The Scourge of Tax Havens (2015).
He attributes two thirds of this drop to companies profit shifting to subsidiaries or to sister firms of holding companies located in low- or no-tax jurisdictions. While these shell companies are effectively inactive, they are, on paper, where most of the profit occurs.
The losses incurred by tax avoidance are more keenly felt in developing countries, where the laws are often weaker due to harmful tax competition and the need to attract investments.
The IMF has calculated that in developing countries, the cost of profit shifting and tax avoidance is 30 percent higher than in OECD countries, according to a report by Oxfam.
It cites Global Financial Integrity as estimating that about 5.7 percent of Africa’s gross domestic product, or as much as 30 percent of the total financial wealth in Africa, is believed to be held in tax havens.
It seems that here, again, the IFC may have turned a blind eye to this offshore wealth.
Of the 68 companies that the World Bank’s private-sector arm lent money to in 2015 in order to finance investments in sub-Saharan Africa, 51 use tax havens, according to an Oxfam analysis. “Together these companies, whose use of tax havens has no apparent link to their core business, received 84 percent of the IFC’s investments in the region that year,” the paper reads.
The IFC’s portfolio in Egypt shows a similar trend, and its seeming reluctance to fight tax avoidance is at odds with the state’s recent efforts — which Monayer pointed toward in the private interview with the authors — in a bid to refill its empty coffers.
An analysis of the IFC’s portfolio reveals that at least one third of all the companies it finances or has financed in Egypt are politically connected (Figure 4).
Investors are considered politically connected if they held positions in the government, Parliament or the ruling party before 2011, as per the definition included in the World Bank’s 2015 study “Jobs or Privileges.” The term also applies to investors whom, after 2011, the government allowed to invest in public projects or create joint ventures with public companies, as well as the investors who were granted plots of land or made donations to the state philanthropic fund Tahya Masr (Long Live Egypt).
The proportion of IFC investments in politically connected firms may be higher than the estimated one third due to the fact that the names of the beneficial owners of 39.8 percent of the 93 projects financed are concealed in their investment summaries.
In these cases, the shareholder structure includes company names but not the identities of partners in the company. This information is not readily available on the companies’ websites, and an online search turns up no results.
According to Labadi, the IFC inquires about the political connections of partners and owners while conducting due diligence on a company, but the results are not publicly available.
While Murphy says that publishing the due diligence could put the IFC in a legally vulnerable situation, she adds there is no reason that beneficial ownership information should not be published.
The TI senior advocacy manager believes that any company has a right to know who they are investing in, contracting or entering into a joint partnership with. “If beneficial ownership is concealed, then you increase your own risk. There are many opportunities for conflicts of interest to be hidden by beneficial ownership secrecy, and that it [public disclosure] should be a prerequisite for any investment.”
The prevalence of politically connected firms has a negative impact on growth, competition and job creation in Egypt, according to the World Bank’s “Jobs or Privileges” study.
Another study titled “Private Banking and Crony Capitalism in Egypt,” published in 2016, similarly shows that firms with political connections receive the majority of the banking sector’s lending. This poses the question as to why the IFC would choose to finance companies that are already well-established and in a favorable position?
This appears to stand in contrast to the corporation’s raison d’être, which is listed on its website as encouraging innovative business models and creative entrepreneurs by “creating markets and mobilizing private capital.”
Labadi says that the IFC conducts an integrity due diligence. “If we find there is a politically connected person in a company,” he says, “we look at their level of involvement, and then make an assessment based on this, and the person’s reputation.”
However, despite his affirmations, shareholders or owners of 15 IFC companies are currently being tried on corruption charges, and a confirmed 22.8 percent of IFC investee companies have a private equity investor that has been involved in a corruption case inside or outside of the country (Figure 5).
EFG Hermes is archetypal of the golden age of politically connected, IFC-financed firms in Egypt. Through a complex network of offshore companies in the BVI, the Cayman Islands and Cyprus, connections can be traced from the investment bank, which is the largest in Egypt, to Gamal and Alaa Mubarak, sons of deposed President Hosni Mubarak.
The IFC was closely connected to EFG Hermes through a series of loan and equity deals, worth approximately $200 million, between the years 2000 and 2009. According to the IFC website, $20 million in equity is still active.
The connecting link between the investment bank and the Mubaraks is a firm called Pan World Investments. The former president’s sons were named as the owners of the company by the EIPR and subsequently by the Panama Papers in 2015.
The company established its private equity connections and indirect ownership in Egyptian companies through an extensive network of offshore companies established in Cyprus, the BVI and the Cayman Islands. From August 1996 to January 2008, Pan World Investments owned 50 percent of Bullion, registered in Cyprus, which in turn owned 35 percent of EFG-Hermes Private Equity.
Until the 2011 revolution brought court proceedings against Mubarak’s sons, their business connection with the the investment bank was a well-kept secret.
An investigation published by Mada Masr in October 2016 includes a copy of a 2002 contract signed between holding company EFG Hermes and its BVI-based subsidiary, EFG-Hermes Private Equity, which was represented by Gamal Mubarak, and shows how profits were shifted through the offshore company. The investigation also analyzed official court documents, and Mada Masr calculated that Mubarak’s sons had, at the time, made at least $21 million from their secret connection to EFG Hermes without having to lay down any serious investments.
A judicial committee’s report on this insider trading case, in which the Mubaraks are still on trial, found that at least LE497 million in profits were shifted to the offshore EFG-Hermes Private Equity, in which Mubarak’s sons owned at least a 17.5 percent indirect stake between July 2003 and December 2009. According to the judicial committee report, there is no indication that the equity firm paid any taxes on these profits.
Speaking about investors in the IFC portfolio who were alleged to be involved in corrupt dealings, Labadi says, “We made an assessment at the time, and we made good investments in terms of reputation.” The IFC’s country manager for Egypt, Libya and Yemen adds that if they were to evaluate now, “We have to look at each individual case.”
Even after 2011, the IFC continued to invest in companies with the same, fishy dual characteristics: strong ties to the government and extensive use of tax avoidance schemes.
In 2012, as the IFC announced a new loan to OC Ltd., the ETA accused the Sawiris family conglomerate of operating a tax avoidance scheme through a web of shell companies.
The incident dates back to 2007, the state-owned Al-Ahram website reported Mamdouh Omar, the head of the ETA at the time, as saying. OCI reported to the ETA that a deal to sell shares to French industrial company Lafarge was worth LE22.8 billion, instead of the LE68.6 billion outlined in the documents presented to the Egyptian Financial Supervisory Authority (EFSA).
A quick search on OpenCorporates, a website that shares data on corporate entities, reveals that, before demerging into two entities, OCI had established a web of 10 companies all registered at the same address in Cyprus. According to OCI’s website, it has no operations based there. The two brothers of Nassef Sawiris, who is the CEO of OCI NV, also have two other companies listed at the Cyprus address. At the time of publishing, the company had not responded to multiple attempts to reach it for comment.
The Sawiris family is widely known to have been close to the inner circle of the National Democratic Party, a relationship that is referred to in The Moment of Change (2013), edited by Rabab al-Mahdi and Philip Marfleet.
The relationship with the government took new forms after the revolution. In 2011, Nassef Sawiris, the CEO of Orascom Construction, established an alliance with Arab Contractors, the largest construction and contracting firm in the public sector, which secured the contract for the digging of six tunnels under the Suez Canal in 2014, when Arab Contractors CEO Ibrahim Mehleb became prime minister.
The Sawiris son announced he also made the most significant contributions to the Tahya Masr Fund, established in 2014 by President Abdel Fattah al-Sisi, who is also its head.
The billionaire has made sure to emphasize in comments to the media how he donated LE2.5 billion in recouped tax payments to the fund after winning a tax evasion case in 2014.
Murphy suggests that instead of deferring to the OECD’s list of tax havens, the World Bank’s private-sector arm should “take the Financial Secrecy Index elaborated (and updated) by the Tax Justice Network (TJN) as a reference point.” For instance, while the United Kingdom and its affiliated islands; Switzerland; and the Netherlands (where IFC investee OCI NV is based) are not on the OECD list, and thus the IFC blacklist, they rank highly on the TJN list of prominent tax havens.
The IFC’s portfolio is, at present, dominated by large, politically connected firms. While this may be less risky and more profitable for the institution, it hinders development, employment and inclusive growth as small and medium sized enterprises are generally more labor intensive. These investment choices also work to crowd out smaller firms—the real backbone and largest employer in any economy—depriving them of much needed technical and financial support, which the IFC is in a position to provide.
Residents of Ramlet Bulaq were not completely off the mark when they described their attempted eviction in 2012 as a confrontation with the owners of the Nile City Towers.
Ideally, had Orascom paid its fair share in taxes to the government, particularly on a local level, these revenues could have been used to develop the area in a way that preserved citizens’ rights.
This report relies on the findings of a study published by EIPR titled: “Veils of Secrecy: Evaluating the role of the IFC in enhancing tax and ownership transparency in development projects.”