Last week, while showcasing draft EU laws on tax transparency, commissioner Algirdas Semeta told media in Brussels he is building “the most comprehensive information exchange system in the world.” He added: “The EU system will become even broader than the US system.”
It is an astonishing claim.
The wide-reaching impact of the new US regime – the Foreign Account Tax Compliance Act (FATCA), which came into force on 1 January – has been demonstrated by a storm of angry reactions in worldwide financial centres. Some of Semeta’s proposals, notably his amendments to the EU Savings Tax Directive (EUSTD), do broaden the scope of information to be shared inside Europe and do go beyond FATCA. But other elements of the US law are missing from the EU package.
Meanwhile, even if the European Commission now has the legal instruments to create a FATCA-plus system, there is no guarantee they will ever be used.
Semeta’s laws must first be unanimously agreed by EU countries. So long as Austria and Luxembourg, two EU financial centres, are allowed to delay and frustrate the EUSTD amendments, the entire project will remain what it has been for the past five years: a lovely idea on paper, nothing more.
Despite reports to the contrary, the last meeting of EU finance ministers in May did not mark a change of heart in this respect. Austria and Luxembourg did not abandon their old tactic of saying “we will happily join if and when Switzerland joins as well.”
Instead, EU countries agreed to make progress by the end of the year, a deadline which falls after elections in Austria and Germany. Judging from the two countries’ track record on tax transparency, it does not bode well.
After years of talking, EU leaders seem willing to take action at last on requiring transparency that will shed light on tax dodgers. There are at least two opportunities for concrete legislation that the EU cannot afford to miss this year, although Member States still seem to be dragging their feet.
After a year of negotiations with Member States and the European Commission, and strong involvement by Eurodad and our partners, the European Parliament this week voted in favour of new accounting rules for extractive and logging sectors. The Accounting Directive will require companies in these two sectors to disclose their payments to governments in every country where they operate.
While this is a vital step towards combating corruption, the question now is whether action will be taken to produce the transparency needed to fight tax evasion and avoidance. Knowing a company’s tax payments is not enough to assess whether those payments are fair, as it does not reveal where the real economic activity takes place. Forthcoming research from Eurodad and CIP into a European mining company in Mozambique provides a concrete example of how this lack of detailed reporting prevents citizens and tax authorities from detecting harmful tax practices. Assessing whether a company pays its fair share of taxes requires country-by-country reporting –including country-level disclosure of profits, sales, tax payments, assets and the number of employees.
Movements towards legislation
WASHINGTON DC - The release of massive amounts of new information about hidden off-shore wealth by the International Consortium of Investigative Journalists (ICIJ), confirms beyond reasonable doubt that the world’s financial system legitimises industrial-scale tax avoidance, aids criminals and drug cartels and facilitates corruption up to the highest levels of our society.
Since the 1960s, President John F. Kennedy, the OECD, and European leaders of the G8 have all committed to tackling tax havens, with a mixed record of successful reform. However, leading up to this week’s meeting of the G8, David Cameron is calling for the organization’s leaders to commit to addressing the global shadow financial system that has allowed illicit financial flows to stream into tax havens.
In this week’s issue of the Economist, Paul Collier of Oxford University, an adviser to Cameron, argues that transparency reforms are a positive step forward for global development, “Instead of preaching to poor countries or promising to double aid, which we never did anyway, the idea now is for the G8 to put its own house in order, in ways that are good for us and also good for Africa.”
The summit between leaders of the world’s wealthiest economies will get underway next week in Northern Ireland. British Prime Minister David Cameron, leading the summit, has put three things at the top of his agenda: trade, tax, and transparency. There are a lot of issues directly relevant to the Financial Transparency Coalition in there, and I don’t have time to address them all, but one of the most promising, and interesting, is Cameron’s commitment to improving information on beneficial ownership of companies via public registries.
Anonymity is prevalent under the world’s status quo. It is exceptionally easy (and relatively cheap) to set up a company, trust, or foundation anonymously. By that I mean that the process obscures the “beneficial owner” of the entity, that is, the flesh and blood person who has control over or benefits from the corporation. Companies, trusts, and foundations accomplish this by incorporating subsidiaries in a secrecy jurisdiction or by using nominees in place of the true directors.
The injustices that result from secrecy are numerous. Given that other people and organizations have outlined some of these injustices in beautiful detail, I won’t name them all (see, for example, this excellent report by Global Witness). Anonymous companies facilitate corruption and bribery by allowing government officials to transfer money undetected; they ease crime by allowing criminals to launder the proceeds of criminal activity and avoid detection by law enforcement; they facilitate tax evasion, costing American taxpayers alone an estimated $150 billion annually; and they facilitate global illicit financial flows that bleed developing countries of billions of dollars every year.
The swashbuckling pirates of olde amassed private fortunes by raiding ships and stealing them. Once they captured a ship, they would replace its flag — which represented one of the world’s sovereign nations — with the Jolly Roger. By flying the skull and crossbones, pirates proclaimed that they were out for their own benefit and theirs alone.
Many American corporations are following this pirate tradition. Their crews aren’t sword-wielding ruffians, but high-priced lobbyists and accountants. They fight for, win, and then exploit loopholes in the tax code that allow multinational corporations to take profits earned in the United States and legally shift them to tax havens like the Cayman Islands, Ireland, and Luxembourg.
This accounting hocus-pocus allows U.S. corporations to deny the Treasury about $100 billion a year. The money, which could go a long way toward plugging the holes in our federal budget, is tantamount to private booty stashed in a modern-day tax haven cove.
Instead of the Jolly Roger, one of these contemporary pirate gangs flies the so-called Fix the Debt flag. This lobby group has more than 100 corporate ships in its flotilla. Together they’re fighting to cut Social Security and Medicare and to scrap U.S. taxes on their offshore booty, which collectively totals $544 billion.
That’s according to “Corporate Pirates of the Caribbean,” a new Institute for Policy Studies report I co-authored. If Captain Dave Cote of the Honeywell ship, Jolly Jeff Immelt, who commands GE’s vessel, and their pals prevail, together they’ll split a $173 billion tax windfall.
For the first half of American history, taxes on business activity, like trading, paid most of the government’s bills. As recently as World War II, U.S. corporations stood by our country as corporate taxes accounted for nearly 40 percent of federal revenue. No corporate leaders back then called for tax cuts or complained that high taxes made them uncompetitive. They proudly flew Old Glory outside their businesses and paid to keep the nation strong.
Canadians have about twice as much money squirreled away in tax havens as they did a decade ago, writes Tom Cardamone in the Canadian edition of The Huffington Post. With the G8 summit looming, will Canada’s government support David Cameron’s transparency reforms, including public registries of the true owners of companies?
Cross posted from Transparency International’s Space for Transparency blog.
The UK Government has announced that transparency and anti-corruption will be key elements at the G8 summit this year. Much needed action on money laundering provides an opportunity to live up to that promise.
Corrupt money flows through the UK – in particular through our financial services industry. Nobody knows how much, but it is almost certainly many billions of pounds each year.
Some, perhaps a great deal, of those funds are then hidden in the UK’s Crown Dependencies and Overseas Territories.
Why don’t we know how much money is laundered, or who owns it? There are three reasons. First, those who hope to benefit from the proceeds of corruption try very hard to hide their money. Secondly, some financial institutions and their host governments welcome rich customers, and don’t try very hard to find out where the money comes from. Thirdly, the system is shrouded in secrecy.
Developing countries lost $5.86 trillion in illicit financial flows in the decade spanning 2001-2010. That’s almost $6 trillion which could have been ploughed into healthcare, education, and water sanitation. We know from the cases that have come to light that some of it ended up funding the mansions and fast cars of the people who stole it. The UK and its fellow G8 members are not unsullied by this tragic statistic.
To slow down the flow of corrupt funds, host governments and financial institutions at least need to be able to know who owns the money sloshing through the system. They need to be able to run sufficient checks on its legitimacy. That relies in part on being able to find accurate information on who the customers really are. However, the current system can make it almost impossible for a bank to find accurate information on who ultimately runs, owns, and profits from the company – the ‘beneficial owner’. If banks and governments do not know, then it is highly unlikely that ordinary citizens will.
Transparency International signed a letter with prominent prosecutors and corruption hunters addressing G8 leaders on the urgency to curb money laundering.
Dear G8 leaders,
As a group of individuals who have worked to expose and fight corruption, we have witnessed firsthand the detrimental effects of state looting by unscrupulous politicians and officials. It hinders development in some of the poorest countries in the world by depriving governments of revenues desperately needed to combat poverty.
Grand corruption would not be possible without the help of the global financial system – in particular, banks that accept corrupt assets and secrecy rules that allow money launderers to disguise their activity.
We welcome the strong statements from Prime Minister Cameron that at the upcoming summit in Northern Ireland, G8 leaders will discuss how they can tackle this problem.
We believe that two things are necessary.
Firstly, G8 countries must commit to take action to prevent anonymous companies from being used to hide criminal activity. Corrupt politicians, tax evaders, and organised criminals all use complex webs of shell companies to hide and launder stolen money. We believe that part of the solution is for governments to require existing company registers to collect information on the ultimate owners of all companies. To have the most impact, this information should be in the public domain.
The Obama Administration was an early backer of beneficial ownership legislation, which would collect information on the true owners of companies, and make that information available to law enforcement. However, since then, UK Prime Minister David Cameron has begun advocating for more thorough disclosure at the G8 level, including both law enforcement and the public at large.
Today, the New York Times quotes Global Witness’s Stefanie Ostfeld, who is among those anti-corruption advocates urging President Obama to back public registries. She says, “Corrupt politicians, tax evaders, and organized criminals all use complex webs of shell companies to hide and launder stolen money, governments to require existing company registers to collect information on the ultimate owners of all companies.”
Originally published at Trust Law.
A shell game is a well-known parlor game in which players try to follow the movement of a ball placed under one of three quickly shuffled shells or cups and then try to correctly guess the shell that covers the ball once they are brought to rest.
When the operator of the game is especially skilled, correctly tracking the ball can prove quite difficult. If a skilled and dishonest operator uses sleight of hand to covertly move the ball to one of the shells not identified by a player, the game becomes impossible to win, a veritable “confidence trick used to perpetrate fraud.”
The use of anonymous shell companies, or “phantom firms”, can be similar to a parlor shell game. Both rely on operators adept at creating misdirection and keeping observers uninformed. Both can be used for legitimate purposes, but in the wrong hands can be used for nefarious purposes.
Phantom firms make it easy for corrupt government officials, drug traffickers, fraudsters, terrorists, and others to secretly and illicitly move money around the globe with virtually no oversight or repercussions.
In much of the world, the actual owners of anonymous shell companies are not legally required to disclose their identities. Instead, they can remain anonymous by listing the name of a stand-in (or “nominee”) director – or even another (often anonymous!) company – as the owner. This enables individuals and companies to shift money around the globe secretly and anonymously, making it nearly impossible for law enforcement and ordinary citizens to follow the money.
Phantom firms have become the world’s most complicated – and common – shell game, one that is played on a global scale with significant gains and losses. Phantom firms played a role in the loss of $859 billion from developing countries in 2010 in the form of illicit financial flows.
The US Conference of Catholic Bishops submitted a letter to the G8 Heads of State on Tuesday, urging them to fight poverty by addressing tax evasion and financial transparency. It reads, “The G8’s emphasis on transparency is critical. Human dignity demands truth, and democracy requires transparency. With more and better information, civil societies, including faith-based organizations, can hold their governments accountable and help insure that resources reduce poverty and improve the health of the whole society.”
September 25, 2014·
Owners of anonymous companies registered in U.S. states are ripping off innocent people and businesses across America, says a new report by ...
September 21, 2014·
WASHINGTON, D.C.—The G20’s recent focus on financial transparency is a welcome development, but instituting bare minimum requirements, or plans that allow for ...
September 16, 2014·
WASHINGTON, D.C. — The Organization for Economic Cooperation and Development’s (OECD) new recommendations to fight multinational corporate tax avoidance look robust from ...