Financial Transparency Coalition » Blog http://www.financialtransparency.org Fri, 27 Feb 2015 10:28:07 +0000 en-US hourly 1 http://wordpress.org/?v=3.7.5 Settling accounts: what happens after SwissLeaks? http://www.financialtransparency.org/2015/02/18/settling-accounts-what-happens-after-swissleaks/ http://www.financialtransparency.org/2015/02/18/settling-accounts-what-happens-after-swissleaks/#comments Wed, 18 Feb 2015 14:38:26 +0000 http://www.financialtransparency.org/?p=25886 cash withdrawals worth millions of dollars to setting up sham legal entities to obscure the ownership of the funds. The ‘Lagarde list’, as the files have come to be known, has been around for a couple of years and so many have been asking: ‘Why do we only see government action once a group of reporters put the spotlight on this?’ Another frequent question has been whether the bank has really (as it claims) cleaned up its act. Relatively few commentators have asked: how do we prevent this in the first place?]]> This article first appeared on openDemocracy, you can view the original article here.

A major leak of incriminating HSBC records last week resulted in print and television news coverage around the globe, trended on Twitter for several days and prompted several governments to start long-anticipated investigations. Through its Swiss entity, the British banking juggernaut helped customers from around the world to hide their money for tax evasion or other nefarious purposes without any questions asked. In fact, in several of the ‘scripts’ which accompany the accounts, banking personnel are seen to be very willing to accommodate dubious requests—from allowing cash withdrawals worth millions of dollars to setting up sham legal entities to obscure the ownership of the funds.

The ‘Lagarde list’, as the files have come to be known, has been around for a couple of years and so many have been asking: ‘Why do we only see government action once a group of reporters put the spotlight on this?’ Another frequent question has been whether the bank has really (as it claims) cleaned up its act.

Relatively few commentators have asked: how do we prevent this in the first place?

Information exchange

Last year, the Organisation for Economic Co-operation and Development (OECD)—a rich nations’ think tank—proclaimed the death of banking secrecywhen it launched its new ‘Common Reporting Standard’, a global system intended to enable automatic information exchange (AEoI) between governments on the deposits of residents, for tax purposes. The Financial Transparency Coalition (FTC) has been following this closely and questions whether the plan, in its current shape, will prevent the next global tax-evasion scandal.  The poorest countries suffer most from tax evasion and other illicit financial flows, and they may be left out of the plan.

The idea behind AEoI is simple: financial institutions everywhere will determine which of their clients are foreign tax residents. Each institution will provide information about them to its ‘home government’, which will forward this ‘automatically’ at set intervals to the government whose citizens it concerns. Essentially, instead of governments relying on their own tax residents to disclose their foreign accounts, a tax resident’s foreign bank will let its government know about them.

A good idea in principle, but the way it is intended to be put into practice is controversial. OECD members have made participation dependent on confidentiality standards yet to be defined. And some states—including Switzerland—have added further reservations, wanting to exchange only with countries with which they have political and economic ties.

To illustrate why such a requirement would be disingenuous, look at offshore holding around the world. Residents of Africa and Latin America are estimated to hold over a quarter of their assets offshore, whereas the volume of offshore assets from other countries held in the poorest countries is negligible. Nigeria, with one of the most developed financial sectors in Africa, holds less than 1% of its bank assets in the UK, for example. In other words, wealthier states generally have little to gain economically from exchanging information with poorer countries, whereas the latter have a great deal to gain. If the criteria for exchange include whether wealthier countries obtain a substantial economic benefit, the intended global development benefits of the plan will be lost before the first bytes of data are exchanged.

It is in everyone’s interest that automatic information exchange becomes a global standard, with all jurisdictions participating as soon as possible. But it is widely accepted that developing countries will face challenges in joining the AEoI system and fully benefiting. Both for OECD members and developing countries the stakes are high, as potential loopholes in the global system could be devastating. Creating a system where developing countries are effectively excluded risks the creation of new tax havens outside of the exchange, as well as depriving developing countries of the necessary information for them to enforce their tax systems effectively.

Significant challenge

Capacity in developing countries will need to be increased, so that any technical barriers to taking part in the global system can be overcome sooner rather than later. The scale of the challenge is significant: the UK-based charity Christian Aid has estimated that sub-Saharan Africa would need around 650,000 more tax officials to reach the world average. Inadequate information technology represents another barrier.

A good idea in principle, but the way it is intended to be put into practice is controversial.

Through the G8, the G20 and the Global Forum—a platform hosted by the OECD with 125 participating governments—rich states have promised help to poor countries to build the capacity they need, but these commitments have yet to be honoured. Investing in AEoI is one of many pressing issues facing developing countries, so if and when they make a commitment to it they should be ensured that support will be there.

Such technical assistance should engage developing-country tax authorities and investigative and prosecutorial personnel, to demonstrate how AEoI information can be mined for specific data or used to identify trends. For this to happen, developing countries need to be receiving data. The FTC strongly recommends a phased approach for the poorest countries (those with gross national income per capita of less than $4,125), to prepare them for full co-operation in a global system of information exchange.

Identifying assets

Meanwhile, potential benefits for developing countries can also be assessed by identifying the assets of their residents held overseas, for example using data collected by the Bank of International Settlements. As sufficiently disaggregated data are not available publicly, only government-led research is currently possible here. Governments are encouraged to publish the volume of data being exchanged, the number of individuals involved and the extent of the assets concerned.

These statistics would give citizens, journalists, politicians and organisations an idea about the potential impact of AEoI. Research on the deterrent effect—which may be the main impact—would very likely prompt countries to prioritise participation. And what, other than such a deterrent of tax evasion, would prevent the next big scandal?

But even if all the loopholes in global information exchange are fixed, this is a solution to today’s problems, not tomorrow’s. Criminals and their enablers are creative, so the only way to prevent future scandals is to shed light on what criminals and tax dodgers are trying to hide. This is why online registers of assets for all legal persons and arrangements are necessary and should be publicly available. And law-enforcement bodies around the world should have access to information about other stores of wealth, such as gold and art held in freeports.

If we turn a blind eye to these loopholes, economic development for all will continue to be undermined by illicit actors looking to exploit them.

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HSBC findings don’t surprise us. What will it take for things to change? http://www.financialtransparency.org/2015/02/13/hsbc-findings-dont-surprise-us-what-will-it-take-for-things-to-change/ http://www.financialtransparency.org/2015/02/13/hsbc-findings-dont-surprise-us-what-will-it-take-for-things-to-change/#comments Fri, 13 Feb 2015 20:05:04 +0000 http://www.financialtransparency.org/?p=25878 7241603398_414983169d_z (1) Fresh revelations from the Guardian today, paint an even bleaker picture of HSBC Geneva’s client list. According to the paper, the bank’s customers included those who faced allegations of drug-running, corruption, doping and money laundering. Over twenty years, Global Witness has campaigned to stop a lot of things, from blood diamonds to corrupt dictators, to the money flows that fuel conflict. It appears that HSBC has been playing its part in enabling the money flows that support such activities. In some cases, the Guardian claims to have evidence that HSBC bankers were aware of some of the allegations against their clients.]]> This post originally appeared on the blog of Global Witness.

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Fresh revelations from the Guardian today, paint an even bleaker picture of HSBC Geneva’s client list. According to the paper, the bank’s customers included those who faced allegations of drug-running, corruption, doping and money laundering.

Over twenty years, Global Witness has campaigned to stop a lot of things, from blood diamonds to corrupt dictators, to the money flows that fuel conflict. It appears that HSBC has been playing its part in enabling the money flows that support such activities. In some cases, the Guardian claims to have evidence that HSBC bankers were aware of some of the allegations against their clients.

Sadly, news of HSBC behaving badly isn’t news to us. HSBC has featured repeatedly in our investigations:

  • In 2007 we revealed how the bank was raising money for global forest destruction. HSBC appeared to violate its own environmental guidelines by arranging the stock exchange listing for Malaysian timber giant Samling, a company notorious for destroying tropical forests and the abuse of local communities.
  • In 2009, our Undue Diligence report highlighted how HSBC hid behind bank secrecy laws in Luxembourg to frustrate US efforts to find out if Equatorial Guinea’s oil revenues had been looted and laundered.
  • In 2010, we exposed how HSBC was one of a number of banks that had taken millions of pounds from corrupt Nigerian politicians. A UK High Court Judge found that some of the payments made through an account at HSBC were bribes, raising serious questions about the checks that the bank carried out on these transactions.
  • In 2011, Global Witness published leaked documents detailing where the Libyan sovereign wealth fund had invested $64 billion around the world. It turned out that HSBC held $1.4 billion of this money. Given the corruption allegations that have swirled around the Libyan fund, Global Witness wanted to know what the bank had done to prevent the misuse of state funds.
  • In 2012, we teamed up with Bill Oddie to highlight how HSBC had bankrolled logging companies causing widespread environmental destruction and human rights abuses in Sarawak, Malaysia, violating its sustainability policies and earning around US$130 million in the process.

On top of this, the bank was fined $1.9 billion in 2012 by the U.S. authorities after admitting allowing money laundering by drugs cartels and dealing with pariah states, in violation of US law. Over 35,000 people were killed at that hands of Mexican drug gangs during the time HSBC was providng banking services for one of the biggest and most vicious of them.

And yet despite of all of this, we’ve seen almost no action against the senior management who presided over these events. The HSBC case is just one symptom of a broader problem in the banking industry. At the moment the risk, reward is skewed in such a way that bankers are not incentivised to do their upmost to turn away dirty money.  This is in contrast to the penalties that members of the public around the world might face for wrongdoing, such as the three strikes and out approach in the US in which more minor offences can lead to long custodial sentences.

As my colleague Stuart McWilliam said on Tuesday, “If we want to clean up the system, we need much tougher penalties for those making decisions at big banks when things go this badly wrong – that’s how lessons get learned.”

Now surely it must be time for politicians and prosecutors to act.


Image used under Creative Commons Licensing / Flickr User Elliot Brown

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Leaked HSBC Records Shed Light on Culture of Corruption in the International Banking System http://www.financialtransparency.org/2015/02/09/leaked-hsbc-records-shed-light-on-culture-of-corruption-in-the-international-banking-system/ http://www.financialtransparency.org/2015/02/09/leaked-hsbc-records-shed-light-on-culture-of-corruption-in-the-international-banking-system/#comments Mon, 09 Feb 2015 21:12:24 +0000 http://www.financialtransparency.org/?p=25865 WASHINGTON, DC – Leaked HSBC documents revealed today by the International Consortium of Investigative Journalists (ICIJ) highlight a culture of corruption in the international banking system that goes far beyond the world’s second biggest bank, noted Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. Featured Sunday evening on CBS News’ 60 Minutes program, the files allegedly highlight how the Swiss branch of the bank meticulously catered to some of the world’s biggest dictators and criminals, and they are but the latest example of a global bank gone rogue.]]> Swiss Leaks Findings Emblematic of Opaque System Illegally Draining US$1 Trillion Annually from Developing Economies

GFI: Bankers and Bank Executives Must be Held Accountable for their Behavior

WASHINGTON, DC – Leaked HSBC documents revealed today by the International Consortium of Investigative Journalists (ICIJ) highlight a culture of corruption in the international banking system that goes far beyond the world’s second biggest bank, noted Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. Featured Sunday evening on CBS News’ 60 Minutes program, the files allegedly highlight how the Swiss branch of the bank meticulously catered to some of the world’s biggest dictators and criminals, and they are but the latest example of a global bank gone rogue.

“While the leaks do really expose a culture of corruption at HSBC, it seems almost unfair at this point to single them out,” said GFI Policy Counsel Joshua Simmons. “From Credit Suisse to UBS and BNP Paribas to Standard Chartered, it feels like nearly every major bank is either under investigation or subject to settlements for engaging in serious financial crimes. Even HSBC acknowledged in 2012 that it let US$200 trillion—roughly 3 times global GDP—flow through its New York office over a three-year period without applying the legally required anti-money laundering controls. Nevertheless, not a single bank employee or executive has been prosecuted in any of these cases. Until the U.S. Department of Justice—and financial regulators worldwide—begin holding individuals accountable for their actions, we’re going to continue living in a financial Wild West.”

GFI research estimates that opacity in the global financial system, consisting of tax haven secrecy, anonymous companies, trade-based money laundering, and lax financial crime enforcement, drains roughly US$1 trillion per year out of developing and emerging economies—more than these countries receive in foreign direct investment or foreign aid combined. Beyond bleeding the world’s poorest economies, this propels crime, corruption, and tax evasion globally.

“Illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies,” added Mr. Simmons. “But tax haven secrecy and lax enforcement also take a toll on developed countries like the United States, where offshore tax haven abuses cost American taxpayers roughly US$150 billion in revenue each year. Enough is enough: Now is the time for regulators and legislators to act.”

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Notes to Editors:

  • Click here to read an HTML version of this press release on our website.
  • Click here to read more on the Swiss Leaks files from the ICIJ.
  • Click here to watch Sunday evening’s 60 Minutes segment on the files.
  • Click here to read GFI’s latest annual global report on illicit financial flows, “Illicit Financial Flows from Developing Countries: 2003-2012,” published in December 2014.

Journalist Contacts:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 x222 (Office)
+1 202 815 4029 (Mobile)

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How long does it take for an era to end? http://www.financialtransparency.org/2015/02/06/how-long-does-it-take-for-an-era-to-end/ http://www.financialtransparency.org/2015/02/06/how-long-does-it-take-for-an-era-to-end/#comments Fri, 06 Feb 2015 18:18:07 +0000 http://www.financialtransparency.org/?p=25845 As the G20 finance ministers assemble in Istanbul this weekend, there’s a good chance at least one of them will repeat the phrase ‘the era of bank secrecy is over’, heard several times since the 2009 G20 Summit. But before anyone thinks of repeating it again, they should instead look at the plans (or lack thereof) for including developing countries. As our new report, Information for the Nations, explains, while new reforms on financial transparency are welcome, the proposals could end up leaving a number of developing countries behind. At the heart of all this is the fact that vast amounts of money are held offshore (by some estimates up to $21 trillion); at best, only 20% of this is thought to be declared for tax. With little ability for tax authorities to find out who has cash stashed offshore, up until now little could be done to stop these tax evaders. That’s now set to change (for rich countries at least), as 52 of the biggest economies and the biggest tax havens have agreed to automatically share details of offshore accounts to tax authorities in other countries.]]>

As the G20 finance ministers assemble in Istanbul this weekend, there’s a good chance at least one of them will repeat the phrase ‘the era of bank secrecy is over’, heard several times since the 2009 G20 Summit. But before anyone thinks of repeating it again, they should instead look at the plans (or lack thereof) for including developing countries. As our new report, Information for the Nations, explains, while new reforms on financial transparency are welcome, the proposals could end up leaving a number of developing countries behind.

At the heart of all this is the fact that vast amounts of money are held offshore (by some estimates up to $21 trillion); at best, only 20% of this is thought to be declared for tax. With little ability for tax authorities to find out who has cash stashed offshore, up until now little could be done to stop these tax evaders. That’s now set to change (for rich countries at least), as 52 of the biggest economies and the biggest tax havens have agreed to automatically share details of offshore accounts to tax authorities in other countries.

The impact of this is huge. The OECD estimates that even before this system has come into operation an extra $37billion of tax has already been collected, as those that know they have something to hide have come clean before they were found out.

While this is great for countries that will be getting the information (mostly developed countries), for the rest, nothing is changing. So, why aren’t all countries involved? Well, there are a few hurdles in the road, and unfortunately, the hurdles look higher for poorer countries.

First, there is a requirement that if you want to receive information from other countries, you also have to provide information on the offshore cash in banks in your own country. In principle, this is fair and necessary in the long term. But in the short term, it can act as a barrier, and seems excessive for poor countries. Setting up the laws, regulations and processes to be able to ensure that all the banks and officials in your country are able to provide the necessary information is a lot of work, especially in countries that are already short of resources.

And it’s not clear how necessary it is to have developing countries provide this information. Lots of cash from developing countries is held offshore, mostly in tax havens and developed countries. It’s estimated that 33% of African and Middle Eastern owned assets and 25% of Latin American owned assets are held offshore (compared to a worldwide average of 6%). But since lots of cash from developed countries is not held in developing countries, there would appear to be no urgent need to deny developing countries the benefits of receiving information on their own citizens before they have the ability to send data out as well.

There are other hurdles too. Rather than having every country that signs up agree to share information with every other country that has signed up (a multilateral deal), a clause has been inserted that means there has to be an additional agreement signed by each country individually on which other countries they will share information with. Countries such as Switzerland and the Bahamas have indicated that they will use this clause to only share information with countries they have a political and/or economic need to (i.e. those that can make them), and, sadly, few developing countries will make that list.

Another hurdle looks likely to be prejudice. Every time I have a discussion about automatic exchange of information and developing countries, the issue of confidentiality is raised. In some respects this is fair, because this information is confidential and should be treated as such; but there seems to be a perception that developing country revenue authorities can’t be trusted. I say perception because if we look at peer reviews of countries on confidentiality standards, many developing countries have the best ratings, while some who are at the heart of building the new system have less desirable scores. Oddly, no one seems to be raising apprehensions about those jurisdictions. These perceptions are more than just scores on a piece of paper too; every country is allowed to refuse to share information with another country, if they deem there to be a confidentiality risk.

All of these hurdles have to be jumped before developing countries face the biggest one, but the one that will make the most difference: actually using the information received to increase government revenues need to tackle poverty.

If things stay as they are, we risk a two-tiered world where bank secrecy is over for some, yet it lives on elsewhere. The result will be the inability to improve the very public services that sow the seeds of economic growth and development. The G20 must now set a new course; a course that involves fewer hurdles and more support to help others over the ones that remain. When the hurdles come down, then it may be time to talk about the end of the secrecy era.


Image used under Creative Commons Licensing / Flickr User TheTaxHaven

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Era of Bank Secrecy Still Far From Over For Developing Countries http://www.financialtransparency.org/2015/02/06/era-of-bank-secrecy-still-far-from-over-for-developing-countries-christian-aid/ http://www.financialtransparency.org/2015/02/06/era-of-bank-secrecy-still-far-from-over-for-developing-countries-christian-aid/#comments Fri, 06 Feb 2015 18:12:22 +0000 http://www.financialtransparency.org/?p=25839 G20 Finance Ministers meeting in Istanbul this weekend still have much to do if the claim ‘the era of bank secrecy is over’ is to mean anything in developing counties.

In a new report from Christian Aid, endorsed by 18 other civil society organisations, the flaws in the current approach of the G20 towards automatic exchange of tax information are laid bare.

Joseph Stead, Christian Aid’s senior economic justice advisers said today: “There remain loopholes in the standards that will limit the impact in all countries, but for developing countries there are some specific challenges that remain, despite the promises of the G20 to take action.

“It’s estimated that 33 per cent of African and Middle East-owned assets are held offshore compared to 6 per cent of European-owned assets. This suggests tax evasion on a significant scale.

“If the tax authorities in African countries had access to information about the true ownership of those off shore assets, they could raise revenue to fight poverty, but sadly automatic information exchange looks some way off.

“The G20 and the 122 member jurisdictions of the OECD-dominated Global Forum on Transparency and Exchange of Information for Tax Purposes, to which the EU is also signed up,  continue to insist that developing countries put in place all the systems and processes to send information on assets held in their financial institutions before they can receive anything in return.

“Not only is this difficult for countries with limited resources, it is likely to be of little benefit to developed countries, very few people are believed to be hiding their cash in developing countries.”

The new report, Information for the Nations, recommends that Low and Lower-Middle Income Countries be given a limited period where they can receive information, before the requirement to reciprocate is enforced.

This idea appeared to be endorsed last week by the African Union report on Illicit Financial Flows, which called for common but differentiated responsibilities in Automatic Exchange of Information.

Information for the Nations also highlights the fact that although automatic exchange of information is supposed to be a multilateral process, there is a loophole that some tax havens have made it clear that they will use to demand a separate agreement with every country with which they are prepared to share information.

“Countries such as Switzerland and the Bahamas have shown no qualms at indicating they will only agree to information exchange with countries that have the political and economic power to make them,” said Mr Stead. “Very few developing countries will be on that list.

“Events are moving incredibly quickly in the world of Automatic Exchange of Information, faster than almost anyone believed, but developing countries should not be left behind. The key test will be ensuring all countries, not just the rich ones, benefit.”

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If you would like further information please contact Andrew Hogg on 0207 523 2057 or 24 hour press duty phone – 07850 242950  

Notes to Editors:

1. Christian Aid works in some of the world’s poorest communities in around 50 countries at any one time. We act where there is great need, regardless of religion, helping people to live a full life, free from poverty. We provide urgent, practical and effective assistance in tackling the root causes of poverty as well as its effects.

2. Christian Aid’s core belief is that the world can and must be changed so that poverty is ended: this is what we stand for. Everything we do is about ending poverty and injustice: swiftly, effectively, sustainably. Our strategy document Partnership for Change www.christianaid.org.uk/images/partnership-for-change-summary.pdf explains how we set about this task.

3. Christian Aid is a member of the ACT Alliance, a global coalition of more than 130 churches and church-related organisations that work together in humanitarian assistance, advocacy and development. Further details athttp://actalliance.org

4. Follow Christian Aid’s newswire on Twitter: http://twitter.com/caid_newswire

5. For more information about the work of Christian Aid, visit http://www.christianaid.org.uk

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Five take-aways for Europe from the African Union’s High-Level report on illicit financial flows http://www.financialtransparency.org/2015/02/04/five-take-aways-for-europe-from-the-african-unions-high-level-report-on-illicit-financial-flows/ http://www.financialtransparency.org/2015/02/04/five-take-aways-for-europe-from-the-african-unions-high-level-report-on-illicit-financial-flows/#comments Wed, 04 Feb 2015 16:54:21 +0000 http://www.financialtransparency.org/?p=25831 6171626086_24fafd82fa_zLast Saturday a landmark decision was taken when the African Union, made up of 54 African Heads of State, adopted the report of the High Level Panel on Illicit Financial Flows (IFF). This report documents the scale and impact of IFF from the continent and gives a range of policy recommendations. Our friends at the Tax Justice Network says the report is“probably the most important report yet produced on this issue” and for good reasons. The new report is not only a strong testament to the importance that African leaders are placing on the issue of IFF, but its publication ahead of July’s Financing for Development (FfD) conference is an indication that the issue is likely to figure prominently among items raised by developing countries during the negotiations.]]> This post originally appeared on the blog of Eurodad, a coordinating committee member of the FTC.

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Last Saturday a landmark decision was taken when the African Union, made up of 54 African Heads of State, adopted the report of the High Level Panel on Illicit Financial Flows (IFF). This report documents the scale and impact of IFF from the continent and gives a range of policy recommendations. Our friends at the Tax Justice Network says the report is“probably the most important report yet produced on this issue” and for good reasons.

The new report is not only a strong testament to the importance that African leaders are placing on the issue of IFF, but its publication ahead of July’s Financing for Development (FfD) conference is an indication that the issue is likely to figure prominently among items raised by developing countries during the negotiations.

While the report has its regional focus on Africa the implications of its findings and recommendations are intrinsically linked to the European continent. Here, we identify the top five take away points for Europe:

1. Tax dodging by transnational companies is the main driver of illicit financial flows in Africa…

The report clearly identifies transnational corporations as “by far the biggest culprits of illicit outflows” (p3). By massaging their accounts and structuring their operations in tax havens, transnationals illicitly draw money out of the African continent, with no tax paid on these funds.

The report highlights many examples of the tricks used by companies, including how transnational companies in Mozambique under-declare the value of the shrimps they export; how 100,000 barrels of oils goes missing each day in Nigeria; or how an investor in South Africa set up subsidiaries with a handful of staff in Switzerland and in the UK to avoid paying $2 billion in taxes (p27-28).

The report tackles corruption and money laundering, but it also makes it clear that we cannot tackle IFF without tackling the issue of tax dodging transnational companies. European officials and governments who want to believe that IFFs are only about corruption and that all transnational corporations are beneficial to developing countries should listen and learn.

2. …And European countries are a centre for these flows

The report notes that “illicit financial outflows whose source is Africa end up somewhere in the rest of the world.” (p4). One of the innovations of the Panel’s report is that they are able to narrow down where some of the illicit flows end up, and it turns out that a lot of it comes to Europe. For example, 22.5% of the illicit flows emanating from Nigeria’s oil sector end up in Spain, while 11.7% of IFF from Algerian oil ends up in Italy and 23.6% of IFF from Cote d’Ivore’s cocoa sector ends up in Germany (p100). At the same time, the report notes that the proceeds from corruption have a tendency to end up in bank accounts in developed countries (p46).

“Countries that are destinations for these outflows also have a role in preventing them and in helping Africa to repatriate illicit funds and prosecute perpetrators” notes the report.

There are three obvious solutions which European leaders can introduce. Automatic exchange of information for tax purposes, public country by country reporting and public registries of beneficial owners of companies, trust and similar legal structures. However, while the European and G20 governments have taken steps to implement these tools in ways that create more transparency for themselves, there are not yet any solid transparency initiatives which will create transparency from an African perspective.

3. Capacity building will not solve the problem…

The report states that capacity building of tax administrations in Africa would be a good idea, and that African countries would need an additional 650,000 new tax officials to have the same ratio of tax officials to their population as OECD countries (p59). This is an area supported by several European aid agencies.

However, the report does state the limits of this approach: “It is somewhat contradictory for developed countries to continue to provide technical assistance and development aid (though at lower levels) to Africa while at the same time maintaining tax rules that enable the bleeding of the continent’s resources through illicit financial outflows” (p60).

As long as the international financial system is rigged against Africa more tax inspectors alone will not fix the situation. The report notes that “the critical ingredient in the struggle to end illicit financial flows is the political will of governments, not only technical capacity” (p.3).

4. …Instead the solution is political with massive implications for European leaders

The report gives many recommendations for African leaders, but for our purpose it is interesting to note that many of the recommendations speak directly to developed countries. There are at least five recommendations that should be on the radar for European decision makers.

• Firstly, the report calls for fully public registers of beneficial owners of companies and trusts (p86). The EU had a chance to deliver this when a deal was reached on the revision of the EU’s Anti-Money Laundering Directive in December 2014. While government’s failed to agree that registries should be public, it is still perfectly possible for individual member states to decide this, and France, the UK (on companies only), and Denmark have already announced plans to make their registers public. Unless the registries are public, the developing country governments and citizens will have great difficulties accessing the information, and other member states therefore need to follow suit and make their registries public.

• Secondly, the report calls for comprehensive and publicly available Country by Country reporting (p85). The EU has adopted such standards for its banking industry through the Capital Requirements Directive, but it is yet to take the logical step to extend it to all sectors.

• Thirdly, there is a strong focus on the need for more balanced Tax Treaties between developed and developing countries, noting that “we are particularly concerned about the risk that African countries face in making unbalanced concessions with regards to double taxation agreements” (p58-59). Research conducted by Eurodad supports this concern, showing that European tax treaties with developing countries significantly reduce withholding tax rates and allow for abusive treaty shopping. Such treaties obviously need to be renegotiated or removed all together.

• Fourth, in relation the EU system of Automatic Exchange of Information for tax purposes through the Directive on Administrative Cooperation (DAC) it is significant that the report calls for “common but differentiated responsibilities” for developing countries (p46). This would entail allowing developing countries a transitional period toward reciprocal Automatic Exchange of Information, during which they receive information automatically even though they are not able to send any information back.

• Lastly, the report notes that developed countries could “undertake an analysis of the impact of the tax systems of developed countries on African countries” (p60). Such spill-over analysis has already been conducted by some European countries, including the Netherlands and Switzerland. It would no doubt be useful for these exercises to be extended to all European countries as well as the EU as a whole. It is also vital that these studies are followed up with political action to remove the negative impacts on developing countries.

In short, Europe plays a key role in the illicit flow of financial resources from Africa, and we must also play a key role in solving the problem.

5. African leaders will not be sidelined anymore in international negotiations

So why have the changes that are necessary for Africa’s development not happened before? While the report does not try to answer this question directly it does provide some explanation when it states “although the OECD is working to address issues of base erosion and profit shifting (BEPS), this work is not principally geared to developing country concerns.” (p66). The solutions so far proposed by the BEPS initiative does not follow the recommendations contained in the report. For example, BEPS does not call for Country by Country reporting to made publicly available, and does not include provisions for Automatic Exchange of Information with developing countries following the principle of “common but differentiated responsibilities”.

But then again, the developing countries are not represented in the OECD. As a result, the report recommends that “Africa needs to act in concert with its partners to ensure that the United Nations plays a more coherent and visible role in tackling IFFs”. This demand links closely to the ongoing negotiations on financing for development, where African governments, together with a broad group of other developing countries, have demanded an intergovernmental UN body on tax matters, to allow them a seat at the table when decisions on international tax reform are taken. European governments must support this call and engage in global cooperation between developed and developing countries to close the bleeding wound, which illicit financial flows constitute for our economies.


Image used under Creative Commons licensing / Courtesy of Flickr User Civmilcoe

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Tax Justice Network’s Illicit Finance Journalism Programme Now Accepting Applications http://www.financialtransparency.org/2015/01/28/tax-justice-networks-illicit-finance-journalism-programme-now-accepting-applications/ http://www.financialtransparency.org/2015/01/28/tax-justice-networks-illicit-finance-journalism-programme-now-accepting-applications/#comments Wed, 28 Jan 2015 16:13:48 +0000 http://www.financialtransparency.org/?p=25813 8704603297_92b41d11c1_k

We are delighted to issue a call to journalists and campaigners to attend the fifth Illicit Finance Journalism Programme. TJN’s financial investigative journalism training course takes place in London between Tuesday 12 May – Friday 15 May 2015 at City University London, Northampton Square, EC1V 0HB. This course is aimed at practicing journalists who have an interest in investigating business and the flow of money. Experience in financial reporting is an advantage but not a prerequisite. Class instructions will take place in English. There are bursaries for journalists from the developing world to cover visa fees, travel, accommodation and per diems for food and travel in London. Due to the limited number of bursaries, applicants will be selected based on their track record in investigative journalism, but you do not need to have a financial background to apply.]]>
8704603297_92b41d11c1_k

We are delighted to issue a call to journalists and campaigners to attend the fifth Illicit Finance Journalism Programme. TJN’s financial investigative journalism training course takes place in London between Tuesday 12 May – Friday 15 May 2015 at City University London, Northampton Square, EC1V 0HB.

Over four days, our course covers:

a) The history size and scale of the offshore world

b) Tax incentives

c) Beneficial Ownership

d) Accounts and balance sheet interpretation (a whole day)

e) A live Investigative Dashboard session

f) Freedom of Information

g) How to investigate Transfer Pricing

h) How to investigate Money

i) Extractives

j) Personal and IT security

This course is aimed at practicing journalists who have an interest in investigating business and the flow of money. Experience in financial reporting is an advantage but not a prerequisite. Class instructions will take place in English. There are bursaries for journalists from the developing world to cover visa fees, travel, accommodation and per diems for food and travel in London. Due to the limited number of bursaries, applicants will be selected based on their track record in investigative journalism, but you do not need to have a financial background to apply.

The course fee for journalists and campaigners from UK, Europe and North America is £650. Course fees go towards subsidizing travel and accommodation costs for other participants.

To apply or for more course information, please click here where you will see a link to apply.

The deadline for applications is Wednesday 18 February 2015. Applicants will be informed if they have a place the following week.


Image used under Creative Commons license / Flickr User Ronnie MacDonald

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Loophole USA: the vortex-shaped hole in global financial transparency http://www.financialtransparency.org/2015/01/26/loophole-usa-the-vortex-shaped-hole-in-global-financial-transparency/ http://www.financialtransparency.org/2015/01/26/loophole-usa-the-vortex-shaped-hole-in-global-financial-transparency/#comments Mon, 26 Jan 2015 16:36:36 +0000 http://www.financialtransparency.org/?p=25807 For years we at the Tax Justice Network were ridiculed for advocating AIE: pie in the sky, many people said. The OECD, the club of rich countries that dominates international rule-making on tax and tax-related information sharing, was for years pushing its so-called Internationally Accepted Standard which was, well, the internationally accepted standard for cross-border information exchange, despite being only slightly better than useless. The message was that we should just accept this, and move on.]]> This article originally appeared on the blog of the Tax Justice Network, a member organization of the FTC. 

If people stash their wealth or earn income overseas, that is fine with us — just as long as their tax authorities get the information they need to tax that wealth or income according to the law, and as long as money laundering and financial crimes can be effectively tracked, and so on. Where there are cross-border barriers to the instruments of democratic societies, then there is an offshore problem.

The only credible way to provide the necessary information is through so-called automatic information exchange (AIE), where governments make sure the necessary information is available across borders, as a matter of routine.

For years we at the Tax Justice Network were ridiculed for advocating AIE: pie in the sky, many people said. The OECD, the club of rich countries that dominates international rule-making on tax and tax-related information sharing, was for years pushing its so-called Internationally Accepted Standard which was, well, the internationally accepted standard for cross-border information exchange, despite being only slightly better than useless. The message was that we should just accept this, and move on.

How the world has turned since a couple of years agoThe OECD is now in the middle of putting in place a system – known as the Common Reporting Standards (CRS) – to implement automatic information exchange (AIE).  The CRS is the first ever potentially global system of AIE, and although it has major shortcomings and loopholes, as we’ve explained on several occasions, it’s potentially a giant step forwards from a largely transparency-free past.

Meanwhile the European Union had been moving ahead with plans to beef up its own, older plans for AIE, notably through amendments to tighten up its loophole-ridden Savings Tax Directive and other initiatives (for an overview of that, see here.) The United States, for its part, has been rumbling forwards with its Foreign Account Tax Compliance Act (FATCA), which is, at least technically speaking from a self-interested U.S. perspective, fairly strong. In fact, the OECD’s CRS is modeled on FATCA.

But – and here comes a big ‘but’ – how do these different initiatives mesh together? Might anything fall between the cracks?

The European Union, for its part, seems to be working hard and in fairly straightforward fashion to get its ducks in line with the CRS, the OECD’s emerging global standard. It will be incorporating a lot of the OECD technical standards into EU law, in cut-and-paste fashion, and will add categories to include in the mix: such as covering the all-important insurance sector more comprehensively than the CRS does, and covering other categories of income and capital including income from employment, directors’ fees, pensions, and ownership of and income from immovable property.

But the United States’ position on meshing FATCA with the global standards? Well, now there’s a story.

President Obama recently gave his State of the Union address, with an eye to his legacy. Here’s something that may seriously tarnish it, for a failure to take this seriously will make wealthy people wealthier and poorer people poorer, and will undermine crime-fighting, all around the world.

USA: we’ll pretend to join in

The U.S. position has basically been to say ‘we are doing our home-grown FATCA project, and it’s technically similar to the OECD’s CRS, so we don’t need to join the CRS.’ Which, at first glance, looks like a position that could be defensible, depending on the detail.

A crucial part of the detail, however – and this is where the vortex starts to come in – hangs on the all-important question of reciprocity. The United States is extremely keen for other countries to pony up information about U.S. taxpayers hiding their cash offshore and overseas – as it should. But when it comes to reciprocity, or providing information in the other direction, things change.

The U.S. (again, on the surface) has said that is committed to sharing FATCA-related information under so-called Intergovernmental Agreements (IGAs,) which are bilateral deals that stipulate how and in what circumstances the relevant information may be handed over to foreign governments. (There are three basic models: 1A, 1B and 2: only the Model 1A agreements are reciprocal; the Treasury’s U.S. public list of IGAs is here, with the gory details explaining the different modelshere.)

In May last year the Center for Global Development’s Alex Cobham (now TJN’s Director of Research) wrote a useful blog entitled Joining the Club: The United States Signs Up for Reciprocal Tax Cooperation, welcoming the U.S. commitment to reciprocal information exchange, as far as the announcement went. By November, though, as the details came through, he began to raise the alarm. In a post entitled Has the United States U-Turned on Tax Information Exchange? he wrote:

“A full commitment to reciprocal and automatic, multilateral information exchange, backed by legislation to ensure beneficial ownership information is available, has been replaced by an indication that the United States will seek to provide information in the few bilateral Foreign Account Tax Compliance Act (FATCA) agreements that require it, for which the United States accordingly commits to ‘advocate’ for domestic legal changes that would create the necessary beneficial ownership transparency.

After the midterm elections, the success of such advocacy seems unlikely. But it would be a sad irony if the legacy of an administration that began with such strong rhetoric on shutting down tax havens was to leave the United States as the biggest remaining centre of anonymous company ownership.”

Thus pre-empting today’s blog by quite some time, of course.

What we have now is updated information, source material, and details. Drill down to look at the precise details of what the U.S. is offering, and it the substance seems paper-thin.

The gory details

If you’re not a connoisseur of the details of cross-border financial transparency, this next bit is where we get into the weeds a bit.

The United States is already a tax haven for foreigners, as outlined in detail in Treasure Islandsand, more recently, here. To achieve effective reciprocity with other countries it would need to tighten up its rules considerably, and in various ways.

The U.S. Treasury’s Financial Crimes Enforcement Network (FINCEN) seems to be taking a lead on some of the internal stuff to prepare the ground for international co-operation, with new rules entitled “Customer Due Diligence Requirements for Financial Institutions.” 

How good are these rules? Well, for starters, on page 45152 Fincen says it

is proposing rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for: Banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities.”

Our emphasis added. The first thing to notice is that these are just proposals. To get approved, they’re going to have to get this lot past Senator Rand Paul, the combined lobbying power of the Big Four accounting firms and Wall Street banks, and a host of other vested interests.

Then there are the loopholes larded through this document.

For instance, the players identified in the Fincen paragraph above are just a subset of actors in the financial menagerie that is out there. The document continues:

“In addition to input from covered financial institutions, FinCEN sought and received comments on the ANPRM [Advance Notice of Proposed Rule Making] from financial institutions not subject to CIP [Customer Identification Program] requirements, such as money services businesses, casinos, insurance companies, and other entities subject to FinCEN regulations.”

There are no plans to cover these chaps as yet. And this is a problem: in many countries insurance policies, for example, are classic tax evasion and secrecy vehicles — and they’re already carved out.

Then there is the enormously important issue of trusts, where no useful beneficial ownership information seems to be required. There is this, mostly on p45160:

“There are many types of trusts. While a small proportion may fall within the scope of the proposed definition of legal entity customer (e.g., statutory trusts), most will not. . . .  identifying a ‘‘beneficial owner’’ among the parties to such an arrangement for AML purposes, based on the proposed definition of beneficial owner, would not be practical. At this point, FinCEN is choosing not to impose this requirement. “

Our emphasis, again, added.

There are even more egregious exemptions. Take a look at this corker:

“Financial institutions noted that a requirement to ‘‘look back’’ to obtain beneficial ownership information from existing customers would be a substantial burden. FinCEN proposes that the beneficial ownership requirement will apply only with respect to legal entity customers that open new accounts going forward from the date of implementation. Thus, the definition of ‘‘legal entity customer’’ is limited to legal entities that open a new account after the implementation date.”

Translation: we’ll accept a complete whitewash of everything in the past, because it will be a “burden” on those poor financial institutions. And even stuff that’s still going on won’t be covered if the account was opened before

Oh, and there is no “implementation date”, at least for now.

Wouldn’t it have been nice if it at least could come up with something strong, then expect it to be watered down at a later stage of law making? But no: they seem to be hobbling themselves from the outset. Is Fincen even trying?

And even then – if Fincen were to close all these loopholes and obtain all this customer information, it doesn’t seem clear to us that it would be authorised to pass it on to the U.S. Internal Revenue Service (IRS), which would be the body that would be mandated to hand over the necessary information to foreign governments that need it to tax or police their wealthy citizens and criminals.

A Europe-based expert we spoke to went as far as to call the U.S.’ adherence to the emerging global transparency standards, just based on what this Fincen document says, ‘farting in the wind.’ This document shows that the US is currently unable under its domestic law to reciprocate with information exchange, because its banks are not required to collect the necessary beneficial ownership information.

So much for the requirements for financial institutions in the U.S. to fish the information out of its customers. Now look at how the (non-)information they do obtain are to be shared out with the U.S.’ foreign partners. Article 6 from one of the U.S. Model IGAs (Intergovernmental Agreements) says:

“ReciprocityThe Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner].”

The U.S. government acknowledges the need to be reciprocal.  That’s nice. But will it be?

Turn to Article 2, and you get a picture of what the U.S. may obtain from other countries, versus what other countries may obtain from the U.S. Here’s a summary of some of the differences, from  TJN’s Andres Knobel. Just look at how thin the US banks’ reporting obligations are about Germans, compared to German banks’ reporting obligations about US persons.

German vs US Fatca IGA

You get the picture. A comparison with more details is available here.

Reciprocity, anyone?

Oh, and then there is the problem that only some countries, but not others, have signed or committed to sign these IGAs.

And then there’s the problem that the U.S. legislation required to tackle this stuff is all over the place, in different legislative nooks and crannies. Jack Blum, a Tax Justice Network Senior Adviser, gave a good overview of an earlier version of this mess to the U.S. Senate Finance Committee in 2008, and he added, in an email to us last week:

“after the current round of IRS budget cuts there is no way the United States could implement Information Exchange. Without the people nothing the law says really matters. Things here are in a real mess.”

Loophole USA: the big one. Will the OECD and its member states – not to mention developing countries – wake up to these issues? And will the United States itself realise that if it doesn’t play ball, others won’t want to play either?

If not, the world’s wealth will flood more upwards and out of sight rather more rapidly than it would have done. That’ll be quite a legacy.

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TaxCast January 2015: How Offshore Havens are Infiltrating Football and More http://www.financialtransparency.org/2015/01/26/taxcast-january-2015-how-offshore-havens-are-infiltrating-football-and-more/ http://www.financialtransparency.org/2015/01/26/taxcast-january-2015-how-offshore-havens-are-infiltrating-football-and-more/#comments Mon, 26 Jan 2015 16:14:39 +0000 http://www.financialtransparency.org/?p=25802 In the January 2015 Taxcast: how offshore is ruining the ‘Beautiful Game’: the Taxcast scrutinises football’s own goal. Also: how banks with criminal convictions are being allowed to continue to handle our money, how people may be allowed to apply for anonymity in the UK’s new register of beneficial owners of companies to be introduced in 2016, and the meeting of the world’s most powerful in that bastion of transparency, Davos, Switzerland. Plus more scandal and unique analysis.

The TaxCast is produced by Naomi Fowler for the Tax Justice Network.

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Closing Tax Loopholes is Great, But Tackling Anonymous Companies is Just as Important http://www.financialtransparency.org/2015/01/21/closing-tax-loopholes-is-great-but-tackling-anonymous-companies-is-just-as-important/ http://www.financialtransparency.org/2015/01/21/closing-tax-loopholes-is-great-but-tackling-anonymous-companies-is-just-as-important/#comments Wed, 21 Jan 2015 16:30:20 +0000 http://www.financialtransparency.org/?p=25781 President Obama wants to stop the billions of dollars that are moving offshore from U.S. companies.

Or he at least said so much during his State of the Union address last night:
As Americans, we don't mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight. This year, we have an opportunity to change that. Let's close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America.
The topic of moving money to low tax jurisdictions has become a hotly debated issue over the last few months, following the LuxLeaks scandal that brought light to hundreds of secret tax arrangements between multinational corporations and Luxembourg.]]>
President Obama wants to end the loopholes that allow companies to shift billions of dollars in profits offshore.

Or he at least said so much during his State of the Union address last night:

As Americans, we don’t mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight.

This year, we have an opportunity to change that. Let’s close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America.

The topic of moving money to low tax jurisdictions has become a hotly debated issue over the last few months, following the LuxLeaks scandal that brought light to hundreds of secret tax arrangements between multinational corporations and Luxembourg. By artificially moving profits to an offshore jurisdiction, corporations can avoid paying higher tax rates. Many of the tax deals highlighted in the LuxLeaks scandal meant that corporations were paying as little as 1% on a substantial portion of their profits.

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President Obama also mentioned those behind the financial system that proliferate the movement of money, and pointed out (correctly) the unfortunate truth that the more accountants you can buy will simply expand the number of places where you can move your money and often lower the amount you pay in taxes.

From the speech:

Let’s simplify the system and let a small business owner file based on her actual bank statement, instead of the number of accountants she can afford.

This last statement is quite important. President Obama hints at one of the most obvious, yet undiscussed, parts of the financial system: the enablers of tax evasion and avoidance. While he may be talking about them in the context of tax loopholes, the same willing set of bankers, accountants, and lawyers help fuel illicit financial flows. But alongside these enablers is perhaps the United States’ biggest secrecy export: anonymous companies.

From Nevada to Wyoming, and perennial powerhouses like Delaware, the U.S. is one of the easiest places in the world to set up an anonymous shell company. Whether you’re an arms dealer, tax evader, or kleptocrat, shell companies that don’t track the real owner behind them serve as a perfect curtain to hide behind. A World Bank report revealed that more than 70% of large scale corruption cases of the last 30 years involved anonymous companies.

Anonymous companies started in the U.S. aren’t just a problem for American citizens, either; they are a global problem for the simple fact that they can be used by anyone. So, while it was promising that President Obama mentioned tax loopholes in his address last night, it’s vital that we also address the the corporate secrecy that is alive and well within the borders of the U.S.


Image used courtesy of Whitehouse.gov and the federal government copyright policy

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