The honour of delivering the keynote address at the high-level EU-Africa Business Forum earlier this year fell to Dr 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, a three-day lobbying event funded by the EU.

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Driving up standards in the financial sector - or is the financial sector dictating terms? (Photo: EIB)

Dr Heikal is founder and chairman of Qalaa, an African investment fund with $9.5bn 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 longterm lending institution – a revelation which the EU parliament is set to investigate.

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.

Qalaa holdings

Qalaa started as a private equity fund, buying companies, restructuring them and then selling them at a profit. This year it rebranded itself as an investment holding company.

It has made exceptional returns for its investors, which include Dr Heikal and the company management. In the first six years of the company until 2010, the firm delivered a stunning $2.2bn 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 organisations like the EU-funded European Investment Bank, whose Director General was in the Brussels audience listening to Dr Heikal.

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

Qalaa, said Heikal, has no choice but to be mindful of human rights issues and even “the way we pay taxes”.

A company built on tax havens

But despite these lofty statements, a Qalaa investor presentation reveals 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 €142m in post-tax profits since it was founded over 10 years ago, it paid just over €298,000 in corporation taxes. This suggests an effective corporation tax rate of 0.2 percent.

A spokeswoman for Qalaa said that focusing solely on corporation tax is not a fair reflection of its tax contribution and that the company has paid over $300m 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 said.

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 $300m 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 minimisation.

The company spokeswoman noted that the British Virgin Islands (BVI) allow for more flexible corporate structures accommodating the different needs of investors, which include development finance institutions.

Europe’s investment in Qalaa

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

Qalaa’s most significant deal to date is a $3.7bn 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 $450m loan from the European Investment Bank. 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 the British Virgin Islands.

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 Arab Refining Company, a company registered in Egypt, and ‘Orient’ is Orient Investment Properties Limited based in the British Virgin Islands. 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.

More than just money

It is not just financial support that Dr Heikal and Qalaa receives from European institutions.

It also benefits from access and influence. The Africa-EU Business Forum, where Dr Heikal was the keynote speaker, is supported by the European Union which spent €700,000 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 their summit.

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

In practice, private sector means big finance.

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 Dr Heikal, stand to make huge profits from this cheap source of government-backed finance.

The role of the European Investment bank

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 European Investment Bank (EIB) in financing Qalaa’s projects poses big questions about the effectiveness of the bank’s investment policies.

The EIB introduced a policy on the use of offshore financial centres 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 British Virgin Islands 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 programmes.

The EIB’s policy – from pioneering to worthless

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 British Virgin Islands were not considered a non-compliant jurisdiction.

According to the EIB, when it approved the deal in 2010, the bank went by the 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 started to empty quickly. 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 British Virgin Islands signed agreements with Greenland, the Faroe Islands, 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. It has also not revisited investments like the Egyptian Refining Company, still active today.

The Cayman Islands, The Bahamas, Bermuda, Guernsey, The Isle of Man, Jersey, Macau and Mauritius, have also 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.

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

EU leaders frequently talk about the need to deal with the problems caused by offshore tax havens, with prominent international firms like Apple and Google on their radar.

A change?

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

But this may change. 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, said 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,” said McAvan.

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

They say the EIB and other institutions should produce their own criteria for defining non-compliant jurisdictions rather than relying on the OECD.

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

“At the very least, the bank should be much more explicit about why the use of an offshore financial centre was deemed necessary, and what prevented them from investing directly,” said Mathieu Vervynckt, a policy and research analyst at Eurodad.

“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,” he added.

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 British Virgin Islands.

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 programme is to increase the quality and quantity of investigative journalism about offshore finance and illicit financial flows in developing countries.