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Part 2: Illicit Inflows: Are They the Remedy for Illicit Outflows?

Devon Cartwright-Smith

Global Financial Integrity Economist Devon Cartwright-Smith analyzes the relationship between illicit financial outflows and illicit financial inflows in developing economies in this two-part series.

Photograph by Ulrik De Wachter

Yesterday I posed the question of whether it is wise to subtract evidence of illicit inflows from illicit outflows (which are known to hinder developing country economies), as if one would cancel the other out.  If billions of dollars are leaving a developing country through illicit channels and billions of dollars are being brought in through illicit channels, can we say with utter certainty that the country has no problems with illicit money?  I think not.  In fact, I can only think of two enterprises in developing countries that would require the inflow of large sums of cash, and neither offsets the problems created by outflows nor helps the developing country’s economy stabilize and grow.

The first use of the money brought into a developing country under the government radar, through illicit channels, is to finance activity in the underground economy.  Do you need to buy a fancy car but do not want to leave a paper trail and pay a small fortune in sales tax?  Easy: get it from the black market and pay cash.  Like copious quantities of drugs?  Better have lots of cash on hand.  (They don’t take plastic…I’m told.)  Are you a drug lord in need of a massive hacienda to impress your friends and wow your enemies?  I bet you can find some contractors to build it, and they probably would have no problem being directly compensated with fat stacks of tax-free cash.  A study by Global Financial Integrity finds, tucked away in the appendix at the back, an average of US$30 billion was secreted into Russia from 2002-2006 through trade misinvoicing.  Since I cannot personally measure the shadow economy in Russia, I can only point to the numerous suggestions I’ve found that Russia’s black market has flourished.  Money makes the black market move all over the world.  The entire drug trade is financed and run by cash transactions.  Money opens doors and persuades good but poor people to turn a blind eye when they know they shouldn’t.  Excessive flows of money (bribes) encourage systems of corruption that undermine a struggling country’s ability to stabilize itself and grow.  Underground flows of cash finance terrorism and war.  Illicit funds brought into developed countries through hidden channels and fed into the underground economy are not used for the good of the people, and they do not offset the problem of illicit outflows.

The second use involves the hawala money transfer system.  The hawala system is run by a network of hawala brokers, or hawaladars, in separate countries all over the world.  Transferring money between countries is as simple as giving an amount of money to a hawaladar, A, in country A, Mr. A calling his counterpart in country B and telling Mr. B that this amount of money (converted into local currency) is owed to you, or to whoever is arranged to receive the transfer in country B (such as a family member or henchman).  The hawaladars in both countries settle up the debt at a later time.  This system is entirely based on trust between the hawaladars, which is why it’s common for hawaladars to use family members in foreign countries as their counterparts.

Consider the following illustration.  Suppose there’s a man in the U.S. named Raj who wants to send $100 home to his family in India.  He can use the local bank to transfer the money, for a fee of $20, and the money will arrive in the Indian bank in a week or so, ready to be picked up.  Or he can go to a nearby U.S.-based hawala broker and for a transaction fee of, say, $5, have an Indian hawaladar provide his family the $100 (in rupees, of course) the next day.  Some hawaladars in developing countries will even deliver the funds to the family, a door-to-door courtesy that no bank offers.

Here’s where the illicit inflows comes in.  Suppose Raj wanted to transfer $50,000 between countries.  If his local hawaladar calls his Indian counterpart to arrange to have $50,000 worth of cash available in Indian rupees, that Indian hawaladar better have the rupees available or he is going to lose his business.  If he doesn’t have the cash handy the U.S. hawaladar will find someone else and may never call again.  Hawaladars must have large amounts of cash readily available at all times.  Since the whole system is based on the belief that debts can be settled later and that transactions with the counterparts will be completed quickly and without fuss, and since this whole system operates under the radar, hawaladars rely on illicit inflows to keep their business afloat.

There is some evidence that hawaladars do most of their transactions through the mispricing of trade.  Hawala brokers are often businessmen with a legitimate business.  Their foreign-country contact may also be a businessman or may be a member of a tiered network of hawaladars, many of whom may also run a business.  To settle debts, to provide sources of cash, and to keep up notions of trust between parties, hawala partners who engage in international trade in their normal business routine can misprice trade invoices to conceal money transfers.  The same study by Global Financial Integrity also finds that an average of US$17 billion was funneled into the UAE through trade misinvoicing, from 2002-2006—an estimate consistent with the claim (page 3): “The United Arab Emirates, especially Dubai, are believed to handle the largest volume of [hawala] transactions…”  Hawaladars in Dubai need to provide for billions of USD worth of transactions and the evidence is clear that the manipulation of trade misinvoices is a preferred avenue for providing adequate cash flows into the UAE.

Since the money floating around in the hawala system exists outside of the official system, the government cannot generate revenue by subjecting these transactions to taxes.  Money brought into a developing country to finance the hawala system undermines the formal financial system and reduces government income.  Thus, even if the illicit flows models identify net inflows, rather than outflows, it is foolish to let evidence of illicit inflows wash out the estimates of illicit outflows.   To more accurately gauge the problem developing countries face from illicit flows, it may be better to add the two estimates together.  Then we may see a more realistic estimate of how much illicit money is enabling illegal activities and undermining development efforts.

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Thursday’s Daily News Digest

Scott Fahey

Swiss Panel Backs UBS-U.S. Deal but Urges Referendum
Reuters, June 2, 2010

Gov’t to expedite efforts to get black money info
PTI, June 2, 2010

Taxing the Poor
IPS, June 2, 2010

The Taxman Cometh
Foreign Policy, June 2, 2010

Christian Aid calls on giants to open their books
Accountancy Age, June 3, 2010

Corruption can be good – Museveni
The Observer (Uganda), June 2, 2010

Ex-Florida GOP chief Jim Greer charged with siphoning cash
Miami Herald, June 2, 2010

Haiti Telecom exec sentenced to 4 years
Miami Herald, June 3, 2010

Growing corruption
Dawn, June 3, 2010

Jamaica has chance to rid country of corruption
The Guardian, June 2, 2010

Study: Mexico drug cartels avoid bank deposits
AP, June 3, 2010

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Country-by-Country Reporting Requirements: The United States should follow Hong Kong’s lead

Collin Swan

Collin Swan analyzes the groundbreaking, new reporting requirements at the Hong Kong Stock Exchange and examines the implications they will have on the proposed Energy Security Through Transparency (ESTT) Act in the United States.

Photograph by Brian Jeffery Beggerly

Today, the Hong Kong Stock Exchange (HKEX) is enacting a clear and comprehensive set of listing requirements for mineral companies that are in line with international standards and encourages greater disclosure and transparency.  Under the new Chapter 18 of the HKEX Listing Rules, mineral companies applying for a listing on HKEX will be required to disclose important information about their exploration and extraction activities, including payments made to host governments.  Revenue Watch has heralded these new rules as a “significant step forward in the global campaign to establish greater transparency and accountability in the extractive industries.”   While these new rules are far from perfect and do not require country-by-country reporting on an annual basis, they are still a step in the right direction.  After today, the HKEX will become the first stock exchange in the world to require any kind of country-by-country reporting by companies operating in extractive industries.

The new Chapter 18 will apply to any “new applicant whose Major Activity (whether directly or through its subsidiaries) is the exploration for and/or extraction of Natural Resources [including both minerals and/or Petroleum].”   Therefore, a company that has more than 25 percent of its total assets in natural resources will have to comply with Chapter 18 when applying for a listing.  To accommodate the increasing interest of foreign mineral companies to list in HKEX, the exchange is ultimately trying to establish itself as a creditable place for mineral companies to raise capital while providing investors with enough information to feel secure in their investments.  And for that, HKEX should be applauded.

As part of its listing application, a mineral company will be required to disclose any “relevant and material” information concerning a number of different categories, including environmental, social, health and safety issues and the company’s historical experience with host country laws and practices.  These progressive rules require new mineral companies to disclose in their listing application all “payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis.”

However, Chapter 18 does have its limitations, and the HKEX ultimately fails to take this country-by-country reporting requirement far enough.  The new rules only apply to mineral companies applying for a listing on HKEX, and do not dramatically affect the obligations of companies already listed.    Listed companies would be required to make similar disclosures only if they were to conduct a major acquisition or disposal of mineral or petroleum assets (i.e. the acquired or disposed assets were at least 25 percent of the company’s total assets).  Perhaps most significantly, mineral companies subject to Chapter 18 are only required to disclose their country-by-country payments during the listing application process and would not be required to update this data annually.

This is where the United States can take the reins and make country-by-country reporting a meaningful disclosure.  The U.S. Senate is currently considering the Energy Security Through Transparency Act (ESTT), which would require all mineral companies registered with the Securities and Exchange Commission (SEC) to disclose payments made to governments on a country-by-country basis in their annual reports.  A similar bill is expected to be introduced in the House of Representatives soon.

The steps Hong Kong has taken reaffirms that country-by-country reporting standards are not only positive but essential for investor security and risk analysis.  They provide investors with a deeper look into a mineral company’s allocation of resources on a global basis and enable them to make more accurate risk assessments.

Now is the time for Congress to step up to the plate.  Hong Kong’s new rules already demonstrate the formal recognition of a growing international standard in support of country-by-country reporting.  Transparency is good for both investors and companies, and it helps to ensure that mineral-rich countries actually obtain the profits they deserve from their resources.

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Part 1: Illicit Inflows: Are They the Remedy for Illicit Outflows?

Devon Cartwright-Smith
Global Financial Integrity Economist Devon Cartwright-Smith analyzes the relationship between illicit financial outflows and illicit financial inflows in developing economies in this two-part series.

When determining the amount of money that flows out of developing countries, a question naturally arises once the calculations are complete: “Why do some of these countries have huge negative outflows?”  If outflows are measured as positive figures, negatives must indicate inflows.  So are developing countries really recipients of huge swaths of cash, brought in through illicit channels?  If these inflows were legitimate and intended to help alleviate the damage done by illicit outflows, developing countries shouldn’t need quite so much foreign aid from the wealthier countries of the world.  Plus, they should be able to pay off all that odious outstanding external debt.  Unless, of course, this evidence of inflows is just some data error.  Perhaps these countries don’t have their books in order and the numbers they report, or fail to report, don’t jive with reality?  This is possible, but unlikely when the evidence of inflows is in the range of billions of US dollars.  Data discrepancies aside, suppose the data are good and these recorded illicit inflows are legitimate.  Does it make sense to let the amount of illicit inflows be subtracted from the illicit outflows for a net estimate of illicit money moving into or out of a country?

It’s easy to come up with an explanation for why someone in a developing country might want to send money abroad.  Political instability, poor economic performance, and inefficient capital markets in the home country all discourage domestic saving or investment.  Macroeconomic instability might foreshadow a decreasing value of the country’s currency, so residents would want to keep their assets in a foreign, more stable currency, such as the Euro or US dollar.  Investment in foreign assets is an option for developed country residents who want to diversify their portfolio (as if to take advantage of better interest rates than domestic offerings or to minimize risk across their portfolio), but is generally not an option for residents of developing countries due to restrictions on foreign investment.  Moreover, some developing country governments offer large incentives in order to entice foreign investment into their countries for future development, even offering guarantees on the foreign debt, while there are few incentives and few guarantees for domestic investors.  For residents with shady morals, tax evasion is an obvious and well known reason to stash their cash abroad.  Similarly, if a country has capital controls, such as limits on how much money may be exchanged for foreign currency or transferred abroad?as is the case in most developing countries, illicit channels are the only ways to fully skirt these controls.

With these driving motivations for developing country residents to send money out, coupled with incentives to bring money in from abroad through official channels as foreign direct investment, what possible reason could someone in a developing country have to bring money in through illicit channels, under the government radar?  Additionally, once the money is successfully sneaked in, it’s unlikely that the illicit inflows will be declared as income and given over to the government in income taxes.  Nor is it likely that those who bring the money in through illicit channels will be putting the money toward efforts to help develop and stabilize the economy.  Only two uses come to mind.  Neither of them is good for the official economy.  Neither would offset the detrimental effects of the illicit outflows.  Neither suggests that it would be reasonable to let this evidence of inflows wash out any evidence of outflows (as if one flow is good and the other flow is bad).  In fact, both uses encourage me to think that to properly capture the damage done to developing countries by illicit flows one would need to add the two flows together, not let them wash each other out…

Coming soon (tomorrow), the exciting conclusion where everything is revealed!  Stay tuned.

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Wednesday’s Daily News Digest

Scott Fahey

Offshore Corporate Tax Havens: Why Are They Still Allowed?
The Huffington Post, June 1, 2010

Tax haven crackdown coming to close
MoneyManagement.com (Australia), June 2, 2010

Uncle Sam to keep a closer eye on offshore trusts and accounts
The Royal Gazette, June 1, 2010

SEC Is Boosting Scrutiny of Offshore Accounting, Fagel Says
Bloomberg, June 2, 2010

Ghana lost $36 million of gold revenue
GhanaWeb.com, June 2, 2010

Cancun mayor arrested on drug charges
Associated Press, June 1, 2010

Nigeria: Democracy, Their Democracy, And Citizen Kuti
Daily Champion (Nigeria), June 1, 2010

Corruption thrived in country this year: TI report
Daily Times (Pakistan), June 2, 2010

Georgian mafiaso fined for money laundering in Spain
Reuters, June 1, 2010

U.S. Treasury Designates Mozambique Firms in Narcotics Network
Bloomberg, June 1, 2010

Liberian President’s Son Wore Wire for DEA In Massive Drug Sting
MainJustice.com, June 1, 2010

UK jury: Nigerian leader’s sister laundered money
Associated Press, June 1, 2010

Vatican bank under scrutiny
AFP, June 1, 2010

Koda graft trail leads to Dubai
India Today, June 2, 2010

Ecuador Won’t Work With Sanctioned Iranian Banks – Correa
Dow Jones, June 2, 2010

U.S. Attorney General Says More Individuals to Face Bribery and Corruption Charges
Business-Ethics.com, June 1, 2010

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Tuesday’s Daily News Digest

Clark Gascoigne

Key Swiss report raps government over UBS crisis
Reuters, May 31, 2010

Tax collectors expand probe of Canadians hiding money in Liechtenstein
The Globe and Mail, May 31, 2010

Swiss banks to focus on ‘taxed assets’ from foreign clients
Press Trust of India, May 30, 2010

Tax-haven poker websites hit jackpot
Sydney Morning Herald, May 30, 2010

Op-Ed: Demystifying tax-haven hypocrisy
The Economic Times, June 1, 2010

Fin Min: Greece Short On Revenue Targets, Vows Tax-Evasion Crackdown
Dow Jones, May 31, 2010

Yacht seizure made my breast milk dry up, says Flavio Briatore’s wife
Times (of London), May 30, 2010

Editorial : The Road to Ruin
Barron’s, May 30, 2010

Uruguay Legislates On Bank Secrecy
Tax-News.com, June 1, 2010

OECD And Council Of Europe Strengthen Tax Cooperation
Tax-News.com, June 1, 2010

Opinion: We will all benefit from further business tax reforms
The Globe and Mail, May 31, 2010

Opinion: Dispute resolution panel needs change for effectiveness
The Economic Times, May 31, 2010

Mulroney-Schreiber relationship ‘inappropriate,’ probe finds
The Globe and Mail, May 31, 2010

Israel fraud squad quiz Olmert over property scandal
AFP, May 30, 2010

Kremlin bribery whistleblower flees to UK
Times (of London), May 30, 2010

OECD concern over Irish international bribery laws
The Sunday Business Post (Ireland), May 30, 2010

S.Africa ruling alliance faces split over corruption
AFP, June 1, 2010

Bangladeshi PM ‘cleared of corruption cases’
AFP, May 31, 2010

Anti-bribery act could weigh on corp ratings: Fitch
Reuters, June 1, 2010

UPDATE 1-Indonesia to scrap permits to save forests-official
Reuters, May 31, 2010

Kenneth Starr – the rise and fall of a Ponzi star
International Business Times, May 31, 2010

Country-by-country look at Europe’s debt crisis
Associated Press, May 31, 2010

France to Host 25th Annual Africa-France Summit
Voice of America, May 29, 2010

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New briefing – the benefits of country-by-country reporting

Richard Murphy PDF

When in Norway earlier this week I was asked what the benefits of country-by-country reporting are.

It was a good question. It deserved a full answer.

As a result a new briefing sheet on his issue has been published today. It’s available here. Comments are welcome.

The benefits are summarised in this table:

Data to be disclosed under country-by-country reporting
Information need met
1. The name of each country or jurisdiction in which a multinational corporation operates;
  • Discloses geographic spread of the multinational corporation
  • Advises host communities of the presence of the multinational corporation in their jurisdiction
  • Indicates presence in locations likely to be subject to geo-political risk
  • Indicates exposure to local regulatory and tax regimes.
2. The names of all its companies trading in each country or jurisdiction in which it operates;
  • Identifies completely and accurately the full groups structure of a multinational corporation, a feat rarely possible at present
  • Lets a multinational corporation be properly identified in the host communities that facilitate its activities
  • Allows those engaging with a multinational corporation locally to identify ultimate responsibility for the entity with which they are trading
  • Ends the corporate culture of secrecy about activities in many jurisdictions, whether they are secrecy jurisdictions or not
  • Means a multinational corporation is accountable for all its actions – a pre-condition of corporate social responsibility.
3. Sales, both third party and with other group companies. Sales information will also require additional analysis. If sales to any state are more than 10% different from the figure from any state then data should be declared on both bases so that there is clear understanding of both the source and destination of the sales a multinational group makes
  • The extent and direction of sales flows by multinational corporations will be documented
  • The full extent of intra-group sales will be understood for the first time
  • The use of tax havens / secrecy jurisdictions as locations for the routing of intra-group transactions will be properly understood
  • The splitting of sales from the location in which a service is received from the jurisdictions from which they are billed will be capable of identification, an issue of particular significance in services where limited data on sales flows is currently available
  • The relocation of sales for tax purposes will be identifiable
  • The risk inherent in internal supply chains will become apparent
4. Purchases, split between third parties and intra-group transactions
  • This data is requested to complement that on sales: when the sales of a multinational corporation from a jurisdiction are largely matched by intra-group purchases it is likely the jurisdiction is being used for re-invoicing purposes and transfer mispricing may be taking place: a cause of concern to almost all tax authorities
  • The extent of outsourcing in source jurisdictions likely to be at the start of supply chains can be identified, especially when compared to labour data (see below)
  • The vulnerability of supply chains can be identified
  • By comparing intra-group purchases and intra-group sales likely intra-group supply chains can be established
  • Sourcing from locations with high geo-political risk should be identifiable
5. Labour costs and employee numbers
  • The organisation of labour by jurisdiction within multinational corporations can be identified
  • Unusual incidence of value added in proportion to labour cost can be identified
  • The likelihood of outsourcing can be identified
  • Average reward per employee by jurisdiction can be calculated
  • Trends in labour relationships over time can be monitored
6. Financing costs split between those paid to third parties and to other group members
  • Financial flows indicate where financial assets and liabilities are located within and beyond multinational corporations: disclosure of income and payments, especially on an intra-group basis will indicate the extent to which profits are relocated through the use of debt that creates internal and external financial risk within the multinational corporation
7. Pre-tax profit;
  • Pre-tax profit is, without exception, the principle starting point for determining:
    • The location of retained reserves
    • The ability to finance activity without recourse to third parties
    • The likelihood of ongoing financial stability of the entity
    • The potential for making payment of taxation liability on income arising
  • Pre-tax profits located in many countries where there is considerable corporate secrecy are currently wholly unascertainable
  • The presence of significant profit in locations where most purchases and / or sales are intra-group might indicate artificial relocation of profits
  • The absence of profits in locations where it would be expected there should be considerable value added e.g. in source locations for extractive industry supply chains, might indicate transfer pricing issues
  • Persistent losses in a jurisdiction might indicate the misallocation of resources by a multinational corporation, as might strongly differing profit rates between jurisdictions
  • Significant profits arising in politically sensitive jurisdictions might indicate vulnerable future earnings
  • Significant earnings in tax havens / secrecy jurisdictions might indicate high tax risk or unsustainably low tax charges indicating a likely change in future after tax earnings ratios
  • Significant profits arising outside a parent company location where corporate taxation is assessed on a remittance basis might indicate limited access to funds for dividend distribution purposes
8. The tax charge for the year split between current and deferred tax;
  • The extent to which a tax charge is expected to arise when compared to headline tax rates indicates the effectiveness of a tax regime in capturing income for tax assessment purposes
  • The degree to which corporate tax liabilities can be deferred indicates the existence of incentive allowances out of alignment with economic costs incurred, and indicates future potential reversal and erratic cash flows
  • The ratio of tax paid to profitability across jurisdictions is at present unknown: country-by-country reporting would provide it and indicate the extent and nature of cross border tax planning and international tax arbitrage
  • If a declared tax rate appears aberrant it may indicate unsustainability
9. The actual tax payments made to the government of the country or jurisdiction in the period;
  • It is not accruals made for tax that allow governments to meet their obligations – it is cash in its bank accounts that allows it to do that: cash paid is the ultimate proof of tax settled. This data is currently entirely unavailable and as such the contribution of multinational corporations to individual national economies is very hard to assess
  • It is cash that is the subject to corruption: it is cash for which governments have to be held to account. This data is vital for that purpose
  • Cash settlements of less than liabilities declared in earlier years suggest the presence of undetected tax planning or corruption. In either case the effectiveness of the tax regime of the jurisdiction is in question.
10. The liabilities (and assets, if relevant) owing for tax and equivalent charges at the beginning and end of each accounting period
  • This data is required to undertake an overall tax reconciliation for a jurisdiction: tax due at the beginning of the period plus the current tax charge for the period less tax paid should equal the closing liability. If it does not there is indication of irregularity in accounting or in the statement of taxes due, in either case worthy of investigation
  • The failure of a jurisdiction to collect tax owing to it is indicated by this data: if tax outstanding relates to more than one year prime facie there is a tax collection problem within the jurisdiction or the entity is declaring liabilities in its accounts that are inconsistent with those declared to tax. In either case problems are indicated
11. Deferred taxation liabilities for the country or jurisdiction at the start and close of each accounting period.
  • Deferred taxation indicates any of these things:
    • Excessive allowances offered by he jurisdiction
    • The existence of significant tax avoidance
    • A non-alignment of taxation with underlying economic reality
  • In each case there is cause for concern
12. Details of the cost and net book value of its physical fixed assets located in each country or jurisdiction and

13. Details of its gross and net assets in total for each country or jurisdiction in which operates.

  • Without indication of the capital dedicated by a multinational corporation to a jurisdiction it is not possible to calculate:
    • Rate of return on capital employed in the jurisdiction and to compare these
    • To determine whether capital invested justifies the level of profit reported
    • To determine whether capital assets are being appropriately allocated to support labour productivity, or not
    • To determine where assets and liabilities are likely to be within a group and whether they are as a consequence available a) to shareholders and b) to creditors
14. A full breakdown of all those benefits paid to the government of each country in which a multinational corporation operates broken down between the categories of reporting required in the Extractive Industries Transparency Initiative if the multinational corporation is engaged in extractive industry activities
  • Required for all the reasons noted by the Extractive Industries Transparency Initiative

As noted: these benefits from the data noted are indicative and should not be considered complete.

In combination it is suggested that this data would contribute to the benefits users of the financial statements of multinational corporations would secure from the transparency created by country-by-country reporting.

In summary, country-by-country reporting would:

  • Provide a stakeholder view of accounting;
  • Create reporting of results by country, without exception, which has previously been unknown;
  • Provide a new view of corporate structures;
  • Impart a new understanding of what the business of a corporation is, and where it is;
  • Opens up a new perspective on world trade because intra-group transactions would be reported for the first time in multinational company accounts;
  • Give a new view of world labour markets;
  • Create an entirely new tool for geo-political risk profiling of companies;
  • Permit better appraisal of corporate contributions to the governments that host their activities and in the process contribute to constraining corruption on the part of some recipient governments;
  • Provide better awareness of the true extent of tax haven activity;
  • Allow measurement of tax lost through tax planning by corporations through the relocation of profit;
  • Provide a better understanding of the physical resource allocation of the corporate world.

It is for these reasons that the data it can supply is requested by those campaigning for its introduction.

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New briefing sheet – financial transparency

Richard Murphy PDF

There’s another new briefing sheet out, published today, on financial transparency. It’s available for download here and says:


Transparency is at the core of the demand for tax justice. But what is it? What do campaigners mean when they say they want increased transparency? This paper seeks to provide a concise answer to that question, but each dimension of transparency, noted below, will be the subject of an additional briefing sheet to provide greater detail on just what it might mean in practice.

The 11 steps to financial transparency

Tax justice cannot happen by chance. To achieve it information is needed. That means all potentially taxable people, whether they are human beings or legal entities created under law, must be transparent about what they do, are and have done.

Financial transparency exists when the following information is readily available to all who might need it to appraise transactions they or others might undertake or have undertaken with another natural or legal person:

1. Who that other person is;

2. Where the person is;

3. What right the person has to enter into a transaction;

4. What capacity the person has to enter into a transaction;

And with regard to entities that are not natural persons:

5. What the nature of the entity is;

6. On whose behalf the entity is managed;

7. Who manages the entity;

8. What transactions the entity has entered into;

9. Where it has entered into those transactions;

10. Who has actually benefited from the transactions;

11. Whether all obligations arising from the transactions have been properly fulfilled.


Only when these questions can be answered on timely basis and at low or no cost by anyone who wishes to make enquiry does financial transparency exist.

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Thursday’s News Digest

Clark Gascoigne

Ribadu Advocates International Corruption Court
This Day, May 27, 2010

Uruguay faces uproar over new taxation law
UPI, May 27, 2010

87% lured by tax dodgers’ discount
The Press Association, May 27, 2010

Germany hands over to India names of 50 tax evaders
DNA (India), May 27, 2010

Maintain raiders on radar
Herald Sun (Australia), May 27, 2010

Nigeria: Corruption – Time for General Amnesty?
Daily Independent (Lagos), May 26, 2010

Administration wants drug aid to Mexico refocused on corruption, not military hardware
Associated Press, May 26, 2010

Bank Indonesia officials grilled over alleged money printing bribery
Jakarta Post, May 27, 2010

CIA to help Bulgaria fight crime, corruption
AFP, May 27, 2010

Afghan president’s half-brother denies corruption
BBC News, May 27, 2010

Former Zambian finance minister jailed for corruption
BBC News, May 26, 2010

Arrest warrants issued to bust an alleged int’l money-laundering ring
Montreal Gazette, May 26, 2010

Mayor of Cancun, Mexico, charged with drug trafficking, money laundering
Washington Post, May 27, 2010

Experts try to untangle money-laundering web
Irish Independent, May 27, 2010

The secret trial of Arcadi Gaydamak
Haaretz, May 27, 2010

Court adjourns money laundering trial
Next (Nigeria), May 27, 2010

Jamaica violence ‘linked to US drug market’
BBC News, May 27, 2010

Treasury Official Acknowledges Chilling Effect on Giving of Counterterrorism Policies
The Chronicle of Philanthropy, May 26, 2010

Tax deal with Cayman Islands OK’d
Kyodo News, May 27, 2010

Supreme Court rejects tax office’s appeal against KPC
The Jakarta Post, May 27, 2010

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Jersey and the Isle of Man tax regimes to be reviewed by Europe in September – so what will the Tories do?

Richard Murphy

News reaches me of a meeting of the EU’s Tax Code of Conduct Group, held last week.

This Group was established to monitor compliance with the EU Code of Conduct on Business Taxation – established in 1997.

Aficionados of this blog will know that in the wake of publication of this Code – with which the UK’s Crown Dependencies are obliged to comply since they are part of the UK for these purposes – The Isle of Man, Jersey and Guernsey (in that order) announced plans to create what were described as zero/ten corporate tax systems.

Suffice to say, I was one of the leading critics of this move and when an adviser to a committee of the States of Jersey in 2005 exposed Jersey’s plans as hopelessly non-compliant with the Code. It followed that the Isle of Man’s and Guernsey’s were too. The reason was simple: the proposed arrangements kept in place the ring fence that the EU Code was meant to abolish: it just claimed to move it from company tax law to personal tax law. So, as a result local companies remained taxable and those owned by all other people – even if trading in Jersey, Guernsey or the Isle of Man were not. This was blatantly abusive under the EU Code and last year the UK told the Crown Dependencies this was the case (at long last, and after a lot of publicity on the issue from the likes of me).

Each island has now to come up with new tax laws.

Guernsey has said it will do a 10% flat tax rate, irrespective of ownership.

Jersey and the Isle of Man have not announced plans yet.

So, last week the EU’s Tax Code of Conduct Group met and considered their responses.

Guernsey they decided is off the hook for now: a 10% across the board tax will keep the EU happy.

As for Jersey and the Isle of Man: no news to the EU was not good news for them. Their tax arrangements are to assessed formally in September. I gather Spain and the UK  are gunning for Jersey and the Isle of Man and are putting on tons of pressure for rejection of the current arrangement.

Expect a lot of lobbying of Tory and Lib Dem politicians from the Crown Dependencies before September then.

This one is vital: when imposing cuts on everyone else will the Con Dems stand up to the tax havens or not?

There’s one to watch out for – and the fireworks will surely fly if they let the Crown Dependencies off the hook.?

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Wednesday’s Top News Stories Digest

Clark Gascoigne

Shadow system erodes Africa’s growth
Business Report, May 26, 2010

$how Me the Money
Harvard Business School Alumni Bulletin, June 2010

Did more African aid deliver fewer coups?
BBC News, May 25, 2010

Editorial: A timely reminder on Africa
Financial Times, May 26, 2010

Greek ministry cracks down on tax evasion by staff
Reuters, May 25, 2010

Switzerland wins backing for ‘foreign’ tax proposal
AFP, May 26, 2010

ANALYSIS-Global rich want trusts, Swiss banks stay wary
Reuters, May 26, 2010

Italian tax police probe $6.9bn in HSBC list
Financial Times, May 26, 2010

Italy announces austerity measures
CNN, May 26, 2010

Government plans taxing overseas assets of residents in Uruguay
MercoPress, May 26, 2010

Opinion: Black money finds tax haven abroad
The Financial Express (Bangladesh), May 26, 2010

Mexico to Issue New Dollar Deposit Rules Next Week (Update2)
Bloomberg, May 26, 2010

Quebec police make money-laundering arrests
CBC News, May 26, 2010

Latvia shuts bank where U.S. saw money laundering-UPDATE 1
Reuters, May 26, 2010

Jamaican police intensify search for drugs suspect
Financial Times, May 26, 2010

Mexico arrest Cancun mayor on drug charges
Associated Press, May 26, 2010

FCPA Debarment Bill Introduced in House
Main Justice, May 25, 2010

Citibank, Swiss official have admitted Zardari had dollar accounts
The News International (Pakistan), May 26, 2010

OPINION: The world’s biggest threat is corruption, not nuclear weapons
Washington Post, May 26, 2010

Russia May Begin Seizing Corrupt Officials’ Ill-Gotten Assets
Bloomberg, May 26, 2010

European banks settle Madoff cases, Swiss hold out
Reuters, May 25, 2010

Christian Aid wants FTSE 100 to endorse transparency drive
Accountancy Age, May 26, 2010

OPINION: Transfer Pricing — What Will Tomorrow Bring?
The Moscow Times, May 26, 2010

OPINION: Exchange of information on tax matters
Business Mirror, May 27, 2010

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New briefing sheet – who are the users of accounts?

Richard Murphy

A new briefing sheet on who might be considered the users of accounts has been published by Tax Research LLP today. It’s available here.

The briefing is, of course, produced in response to the International Accounting Standards Board claim that only capital providers can be considered proper uses of financial statements – all other users having to make do with the information capital providers need, as decided upon by the IASB.

The paper argues that the IASB is wrong – and goes on to show that their claim is in conflict with their own constitution and long held views by accounting standards setters.

There’s no doubt the IASB is going to have change its position on his issue or its whole project will come to an end as legislators realise that the IASB is refusing to act in the public interest. In which case the time for change is soon.

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