Bank transaction tax would reduce debt and poverty: report
Financial Times Advisor, February 15, 2010
The Difficulty of Addressing Governance Issues Underlying Illicit Financial Flows
Task Force on Financial Integrity and Economic Development, February 18, 2010
New norms for pricing intangibles soon
The Financial Express (India), February 17, 2010
Businesses concerned over new Transfer Pricing rules
Inside Ireland, February 17 2010
‘Tax havens’ info system a concern’
The Financial Express (India), February 18, 2010
Grenada & Montserrat says they should not be on France’s blacklist
Radio Jamaica, February 16, 2010
Another int’l firm seeks exit from Cayman Islands
The Associated Press, February 17, 2010
Luxembourg summit to discuss future of bank secrecy
Reuters, February 13, 2010
Zurich Prosecutor Won’t Open Probe Involving UBS Employees
Dow Jones Newswire, February 17, 2010
Group to reveal laundering, terror funding blacklist
Reuters, February 17, 2010
Houston firm braces for fines from alleged bribes
Bloomberg News, February 16, 2010
UAE vows to fight corruption
Emirates Business, February 18, 2010
European Voice, February 2, 2010
The Huffington Post, February 17, 2010
A recent study at Global Financial Integrity (GFI) found that illicit financial flows from developing countries (henceforth emerging markets), which grew around 18 percent per annum since 2002 swelled up to US$1 trillion in 2006. While the lack of prudent macroeconomic policies, political instability, and governance issues are major drivers of illicit flows, a subsequent study at GFI found that banking secrecy and lack of regulatory oversight facilitated the absorption of illicit flows in mainly Western financial institutions. Curtailing illicit flows must therefore involve both emerging market as well as developed countries to address the factors responsible for the generation and absorption of illicit funds.
Here we discuss the difficulty of addressing complex governance issues underlying the generation of illicit flows. We start by recognizing that the accurate measurement of complex governance issues through indicators is fraught with difficulties. This came to light in the course of GFI’s study. For instance, we noticed that illicit financial flows from many emerging markets were increasing even though their World Bank governance indicators were actually improving. As we discovered, this was not necessarily an anomaly—the Bank indicators were mainly focused on public sector governance while illicit financial flows are typically generated and driven by the private sector. The preponderance of the private sector in driving illicit flows can be illustrated by the fact that if corrupt government officials stash bribes abroad, they act in their private, and not official, capacity. Hence, public sector governance in some emerging markets could be improving even as their private sector governance deteriorates thereby generating illicit flows through, say, trade mispricing.
Measurement issues aside, international financial institutions have run into serious problems in dealing with governance issues through the use of conditionality in their lending programs. Take, for example, the International Monetary Fund (IMF) which typically attaches two types of conditionality on the use of its financial resources by emerging market countries. Thus, while quantitative performance criteria (e.g., reduction of the budget deficit, accumulation of foreign exchange reserves) attached to the loans are designed to ensure that the loans are repaid in a timely manner, structural conditionality such as improvements in specific governance-related measures seek to complement quantitative benchmarks in reducing the risks of borrower default. The overall objective of conditionality is justified given that the IMF is a monetary institution whose raison d’être is the provision of short-term balance of payments assistance. However, there are a number of problems with the way conditionality has actually worked in practice.
The importance of conditionality in IMF lending began to grow in the 1970s as members’ quotas, the basis for lending, increasingly lagged the significant growth in world trade and capital flows. Both quantitative performance criteria as well as structural conditionality became stiffer as the use of Fund credit increased as a proportion of the member’s quota. By the end of the 1980s, multilateral aid agencies such as the IMF and the World Bank started to consider how governance issues could be considered as part of structural conditionality on the premise that improvements in governance could elicit a supply-side response and improve aid effectiveness. However, relatively little attention was paid to key issues—does the Bank and the Fund have the mandate, the staff resources, and the competence to design and monitor governance-related conditionality which would need to cover a bewildering range of complex issues related to both the public and private sectors?
The IMF decided to “streamline” conditionality following several studies which found that the proliferation of conditionality on borrowers had become burdensome. Several studies found that the burden of conditionality in terms of the cost of monitoring and implementation was quite heavy, particularly for Sub-Saharan Africa and Central Asia where trained staff resources are scarce and institutions are weak. The question arose—how effective was conditionality in the attainment of stated objectives? Internal IMF studies showed that the proliferation of conditionality in Fund programs led to increasing non-compliance. Senior World Bank officials such as Joseph Stiglitz and Paul Collier noted that the penalties imposed lacked moral legitimacy, that the punishment was excessive relative to the crime, and that conditionality often failed to meet its objective due to a lack of “ownership” whereby governments were convinced that compliance was in the national interest rather than merely required by outsiders.
As a result and also due to the sensitivities involved, there have been relatively few Fund programs involving structural conditionality on governance-related issues. In recognition of the complexities of the issues involved, the IMF’s guidelines on conditionality typically allow members to seek waivers on quantitative performance criterion or structural conditionality, if they are able to demonstrate to the Fund’s satisfaction that nonobservance of the conditionality will not jeopardize program implementation. In fact, the IMF has seldom, if ever, withheld disbursement of funds because a structural conditionality on governance-related issues was not met. A large part of the reason is that a structural conditionality involving a narrowly defined governance issue is seldom critical to program implementation in the sense that noncompliance would not allow the authorities to meet the quantitative benchmarks set under the program.
There are other limits to the applicability of conditionality, whether governance-related or not. Obviously, the conditionality leverage can only be used when a member approaches a multilateral lending agency for a loan. But there are many emerging markets with serious governance issues which have no need or, even, qualification for such financing. Hence, governance continues to be a serious issue in many emerging markets in spite of the best efforts of international lending institutions. Given the significant increase in illicit financial flows from emerging markets and the need to ensure greater effectiveness of external aid at a time of unprecedented budgetary pressures in donor countries, the time is ripe for multilateral agencies to adopt a comprehensive approach to improving governance in emerging markets. That, however, is a separate subject matter.
This blog post is the second of a four part series, which highlights country case studies of tax revenue loss from trade mispricing, the topic of a recent paper by Global Financial Integrity, “The Implied Tax Revenue Loss of Trade Mispricing.” To read the first post, please visit Tax Revenue Loss and Public Debt in Costa Rica.
In today’s post, we visit Thailand in Southeast Asia. Thailand is a democracy nestled between Myanmar, a harsh authoritarian regime, Laos, a single-party socialist republic, and Cambodia, a constitutional monarchy. Despite the dramatic military coup which occurred in 2006, Thailand has returned to a democratically elected government. According to the Economists Intelligence Unit, the country also has a well-developed media sector, though in recent years there have been problems relating to censorship and political interference.
Thailand has seen dramatic improvements in infrastructure over the past decade, most notably in terms of mass transit networks in the capital, Bangkok. Despite these improvements, Thailand still faces weaknesses in infrastructure, and budgetary constraints have “meant that the upgrading of national highways has been slow” (EIU). The new GFI report, The Implied Tax Revenue Loss of Trade Mispricing, estimates that between 2002 and 2006, the government of Thailand lost a yearly average of US$1.4 billion to trade mispricing, which is about 4% of its yearly government revenue. This flow represents about half of what the government hopes to spend on new roads and highways each year.
The literacy rate in Thailand is high, but the quality of secondary and higher education does not meet the requirements for an expanding economy to remain internationally competitive. Enrollment in primary school is also high; in 2007 the statistic was about 88% enrollment. The enrollment in colleges, however, remains at a low 22%. While education reform is well-intentioned in Thailand, the country is far behind schedule. The National Education Act of 1999 set a three-year goal for reform of the entire education system, but many of the deadlines were missed. In 2002, the government initiated a guarantee of 12 years of free education to all school-aged children, but the program faces significant problems. Most prominently, there is limited access to schooling for the disadvantaged and the financial resources to guarantee twelve years of education were not available.
The graph below shows the school-age population of Thailand, broken down by enrollment in the education system and the cost to educate those students who are not currently enrolled in the education system. The data for this graph was obtained from a combination of three sources: the Ministry of Education in Thailand, the Economist Intelligence Unit (EIU), and the CIA World Fact Book.
This graph shows that, assuming the prices estimated by the Ministry of Education, the yearly cost to educate the entire school-aged population of Thailand that is not currently enrolled would be just under US$1.27 billion (this number is off to the side). The numbers above each bar is the total cost to educate the non-enrolled students (shown in red).
The recently published GFI report shows that in that same year the Thai government lost US$2.57 billion in tax revenue loss due to trade mispricing. This amount is over twice the cost of educating the entire population of Thai children and adults that are not currently in school, from primary school to higher education. A significant figure indeed.
Lloyds moves to quell fears over executive earnings
The Independent, February 15, 2010
Case Is Said to Link HSBC to U.S. Tax Evasion Inquiry
The New York Times, February 16, 2010
Microsoft, Dell Prepare to Fight Tax Increase in Obama’s Budget
Bloomberg News, February 17, 2010
Tax-Evasion Amnesty So Far Yields EU85.1 Bln, Bank of Italy Says
Bloomberg News, February 17, 2010
U.S. Senate Job Creation Package Would Use Foreign Account Tax Compliance Offsets
Tax Analysts, February 17, 2010
Update: Tagesanzeiger cited the wrong figure for Austrian money, we believe; the version below is corrected.
The Tax Justice Deutschland Blog has picked up on a new report by the Geneva financial research firm Helvea, which estimates that Switzerland has about 500 billion Euros of “black money” (Schwarzgeld, in German) stashed away.
Last September Andreas Missbach of the Berne Declaration in Switzerland also did a calculation, which he wrote up for TJN, estimating that Switzerland hosted 2.5 – 4.0 trillion Swiss Francs in foreign private wealth (later the Swiss Bankers’ association estimated 2.15 trillion) which is not incompatible with the Helvea estimate of 862 billion of total European money (including declared money). Missbach cited estimates for the proportion of the CHF 2.5-4 trillion that is undeclared ranged between 30 and 90 percent – leading to a total estimate between CHF 645 to 3000 billion range of dirty money.
Note that this is an even bigger figure than earlier estimates by TaxAnalysts concluding that at the end of 2006, there were $607.4 billion of assets in Switzerland’s financial sector beneficially owned by non-Swiss individuals who could easily be illegally avoiding tax on those assets in their home jurisdictions; plus $356.1 billion in fiduciary deposits. The new Helvea figure, note, is bigger than the TaxAnalysts figure: it is in higher-valued Euros, for a start, and it refers only to European dirty money.
TJN-Deutschland has outlined the breakdown of the biggest victims of Swiss secrecy:
The study does not seem to be online, so this is culled from newspapers: Switzerland’s Tagesanzeiger (original German version here), and Austria’s Standard (original German version here. Also astonishing is the sheer rate of crime: of over 850 billion Swiss francs stashed in Switzerland, only 16 percent were declared, the newspapers report. And a truly astonishing 99 percent of Italian money in Switzerland is undeclared.
For TJN’s range of estimates for the various forms of dirty money around the world, and country by country, click here.
New Report Finds Developing Country Governments Lose $100 Billion Annually Due to Trade Mispricing
Global Financial Integrity, February 12, 2010
U.S. vs. Swiss Tax Cheats: A Whistleblower Ignored
Time Magazine, February 13, 2010
Offshore centers seek to solve bank secrecy riddle
Reuters, February 14, 2010
Era of banking secrecy may soon come to an end
Financial Times, February 16, 2010
How U.S. Legal Loopholes Are Aiding Money Launderers
Time Magazine, February 15, 2010
Automatic exchange of information “inevitable”
SwissInfo, February 13, 2010
Greek crisis proves Switzerland is still a safe haven
Financial Times, February 15 2010
France has tax havens list
AFP, February 15, 2010
Costa Rica still on blacklist of tax havens
Tico Times (Costa Rica), February 16, 2010
Wealthy Repatriate $500B From Tax Havens
Financial News, February 14, 2010
Mozambique: Government Restates Commitment to Eiti
AllAfrica.com, February 12, 2010
Iraq to join EITI
Zawya.com, February 12, 2010
On Friday Global Financial Integrity published a report called “Tax Revenue Loss due to Trade Mispricing.” Trade mispricing is a practice that is neither widely nor well-understood by most of the development community. Yet according to GFI estimates, the mechanism of trade mispricing moves about $400 billion a year out of developing countries (for a more detailed description, see my blog On Tea and Taxes).
The new paper finds that developing country governments lose about $100 billion a year in tax revenue to the practice of trade mispricing. This figure represents about 4.4% of the entire developing world’s government revenue.
Admittedly, the economics of the paper are simple and the models are not revolutionary, but the conclusions are based on sound assumptions and the dataset is unique. The paper takes Global Financial Integrity’s estimates for the trade mispricing component of the measure of illicit financial flows and applies country-specific corporate tax rates to estimate the approximate tax revenue lost by developing country governments due to this practice. There are empirical limitations to this rather broad approach, but those are enumerated in detail in the report.
In the report, there are tables detailing the amount of tax revenue each developing country loses to trade mispricing, as well as each country’s yearly government revenue and the percent loss those countries experience as a result of that outflow.
In observance of this report, this week I am writing a series of blog posts, which highlight some of the more interesting cases of tax revenue loss. These posts are meant to contextualize our readers’ understanding of the new report.
Today’s post starts our journey in Central America, with Costa Rica, a beautiful tropical country with three major mountain ranges, a central highland plateau, and lowland beaches along both the Pacific and Atlantic coasts. Since 1949 Costa Rica has enjoyed the region’s longest period of unbroken democracy and its current president, Óscar Arias, was the recipient of the 1987 Nobel Peace Prize for his efforts to end civil wars that were raging in Central America. Under the Arias administration, Costa Rica has doubled welfare pensions, increased budget allocations for education by 26% and has substantially improved the country’s road infrastructure. Yet poverty persists. The percentage of households in Costa Rica unable to meet their basic needs increased from 14.2% of all households in 1994 to 14.9% in 2006, before falling to 13.4% in 2007. And despite improvements in health services, public clinics are often poor and there are long waits for medical appointments.
A major structural weakness to Costa Rican development is its domestic public debt, which is defined as the cumulative total of all government borrowings minus repayments. This year, the stock of Costa Rican public debt is estimated to be US$14.69 billion, which is about half of its GDP. The Economist Intelligence Unit notes that this debt represents Costa Rica’s “main policy failure over the last decade.”
According to the new GFI estimates, Costa Rica loses US$968 million a year in government revenue to trade mispricing, which represents about 22% of the entire yearly government revenue. According to World Bank data, this number is 20 times what the government received in official development assistance in 2007 (US$52 million) and about half of the entire country’s yearly expenditure on health care (US$2.2 billion). The GFI study furthermore notes that between 2002 and 2006 the country lost a sum total of US$4.84 billion in tax revenue to trade mispricing. Had this tax evading money stayed in the domestic economy and had it been properly taxed, it could have reduced public debt by a third in just five years.
You can read the entire report, “The Implied Tax Revenue Loss from Trade Mispricing,” online here. To read the next post in this blog series, Tax Revenue Loss and Education in Thailand, please click here.
Washington, DC — Developing country treasuries are losing approximately $100 billion dollars every year due to trade mispricing, according to a new report available today from Global Financial Integrity (GFI).
“Every year crime, corruption, and tax evasion drain $1 trillion out of developing countries,” said GFI director Raymond Baker. “This report more closely examines one particular form of financial outflow and shows how illicit financial practices—in this case trade mispricing—deprive developing country governments of tax revenue.”
Report findings include:
“Trade mispricing moves more illicit money across borders than any other single phenomenon,” noted Mr. Baker. “To curtail these tax losses, developing and developed countries alike must work to curb the global shadow financial system that facilitates illicit financial flows.”
Encouraging governments worldwide to take action, GFI recently launched its G20 Transparency Initiative which seeks to build massive grassroots support from around the world for increased transparency and accountability in the global financial system. “The G20 Transparency Campaign seeks to give people around the world the chance to weigh in on a crucial issue at a critical time,” said Baker.
Germany Tackles Tax Evasion
Wall Street Journal, February 7, 2010
UBS Client Files Complaint, German Prosecutor Says
Bloomberg News, February 10, 2010
Iraq on road to stamping out oil graft
Upstream Online, February 11, 2010
Former anti-graft chief murder case raises corruption woes
CNN, February 12, 2010
Senate Agrees To Relax Some Tax Shelter Penalties
CQ Politics, Feb. 10, 2010
U.S. sends a message by stepping up crackdown on foreign business bribes
Washington Post, February 8, 2010
Is al Qaeda Bankrupt?
Forbes Magazine, February 11, 2010
Global Financial Integrity legislative director Heather Lowe made an appearance on Russia Today TV earlier this week to discuss the major foreign corruption report that was just released by the US Senate’s Permanent Subcommittee on Investigations (PSI) last week.
Part of a two-year-long investigation, the report highlights four cases where high-level foreign officials laundered illicit money in and out of the United States with ease.
The full PSI report, titled “Keeping Foreign Corruption Out of the United States: Four Case Histories,” can be downloaded in its entirety here…
Apologies for the lack of updates over the past week. As many people know, the Washington, DC-area has been hammered by massive snowstorms over the past week, and we’ve been snowed out of the GFI/Task Forces offices since last Friday.
Lovingly referred to as “snowmageddon” here in the DC-area, I wanted to share a couple of pictures of the storm’s aftermath taken from my cell phone over the past week.
Anyway, today we’ve re-opened and are back to business here in the GFI and Task Force offices.
The Senate subcommittee on investigations held their hearing today to highlight the problem of US law and money laundering activities from foreign officials. They also released a report, which can be downloaded here.
I wrote about the hearing yesterday, so I’d like to make a general comment about the report.
Reading through each of the case studies, a theme emerges. At various points in each study, certain public and private individuals and institutions identified the unlawful or suspect nature of the financial transactions taking place in front of them. Often, they acted to close a bank account, notify authorities, freeze assets, or start an investigation. However, the corrupt foreign officials continued to find ways to move their money to where they wanted it to be.
The problem was systematic. No one individual or agency can be blamed for any of these four cases occurring. Instead, they were able to establish a veneer of legitimacy using shell corporations, offshore bank accounts, and lax US financial law to turn an account being shut down by Wachovia or Bank of America or any number of large commercial banks into just a setback, instead of having their flow of money completely shut down.
The recommendations listed by the report reflect this. One suggested reform suggests strengthening PEP (Political Exposed Person) laws, which would do a better job of alerting banks to who they are doing business with. Another set of reforms would close specific loopholes in anti-money laundering laws exposed by these case studies. But more importantly, the report attacks the systemic problem of shell corporations, immigration and visa issues, and ethical standards by professional organizations.
The military would call this an “effects-based” attack on the problem. Instead of simply aiming at the target (which, in this case, would mean closing individual loopholes used by these case studies to move money around, or punishing/firing the people directly involved in the case), the report also suggests focusing on the peripheral enablers and causes of the problem. While this is not exactly a novel concept, Congress’s anti-money laundering efforts have lacked a grand strategy for some time now.
December 5, 2013·
The FACT (Financial Accountability and Corporate Transparency) Coalition today praised Representative Lloyd Doggett (D-TX) and Representative Rosa DeLauro (D-CT) for the introduction ...
December 3, 2013·
Transparency International’s Corruption Perceptions Index 2013 offers a warning that the abuse of power, secret dealings and bribery continue to ravage societies ...
November 25, 2013·
Some of the world’s most infamous secrecy jurisdictions, such as the British Virgin Islands and Jersey are considering becoming more transparent, whereas ...