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Karzai’s Ghost Money from the CIA

Ann Hollingshead

flickr / US Embassy Kabul Afghanistan

The U.S. government is not unfamiliar with short-sighted policies, indeed short-sightedness in political systems often seems often more familiar than not. Yet of all the short-sighted policies the United States has engaged in, and especially of those overseas, the recent reports on ghost money in Afghanistan take the cake.

I wish I could say I was surprised.

According to a report by the New York Times, the Central Intelligence Agency has literally been dropping off “bags of cash” at Afghanistan President Hamid Karzai’s office for decades. Karzai called the amounts “small,” but evidence indicates the amounts are anything but—perhaps totaling tens of millions of dollars.

The presidential palace in Kabul said the money has been used “for different purposes, such as in operations, assisting wounded Afghan soldiers and paying rent.” But the truth is that if the means were so honest CIA wouldn’t have bothered delivering it so secretly— often in suitcases. In reality, the agency was using it to buy the loyalty of Afghans and encourage their support in the war against the Taliban. Karzai, in turn, has used it to buy power, fuelling corruption and empowering warlords.

As it would turn out, according to one American official, “the biggest source of corruption in Afghanistan, was the United States.”

As the understandably puzzled House Representative Jason Chaffetz (R-UT) and a critic of the war effort in Afghanistan put it: “I thought we were trying to clean up waste, fraud and abuse in Afghanistan.”

So did we.

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New GAO Report: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion

EJ Fagan

The Government Accountability Office (GAO) in the United States is one of the primary research arms of the federal government. It publishes reports, often at the request of Congress, to help answer questions related to important policy. Congressed asked the GAO to evaluate the IRS’s effort to clamp down on offshore tax evasion, and the GAO responded with a surprisingly insightful report.

After a whistleblower revealed that billions of dollars in tax evasion were being facilitated by the Swiss Bank UBS in 2009, the IRS launched a voluntary disclosure program to try and recover some of the money. After several extensions, the result has been $5.5 billion recovered by the U.S. treasury. At first glance, this is a lot of money, but the GAO thinks that offshore account holders could be evading tax through “quiet disclosure”:

Since 2003, IRS has carried out four offshore voluntary disclosure programs, collectively referred to in this report as “offshore programs,” that offer incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest, and penalties. Generally, the programs offered somewhat reduced penalties and no risk of criminal prosecution if eligible taxpayers fully disclosed their previously unreported offshore accounts and paid taxes due plus interest. As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues.

Some taxpayers with unreported foreign accounts may have chosen not to participate in one of IRS’s offshore programs, and attempted to circumvent some taxes, interest, and penalties owed. One technique, which IRS calls a “quiet disclosure,” is to file amended tax returns that report offshore income from prior years. Another technique is for taxpayers to declare existing offshore accounts for the first time with their current year’s tax return, but not amend prior year returns. If successful, these techniques result in lost revenue for the Treasury, and undermine the offshore programs’ fairness and effectiveness.

All the more reason to push forward at the G8 this year on automatic exchange of tax information, so the IRS doesn’t have to wait for people to tell them about their Swiss bank accounts before trying see if they paid their taxes. You can read the full report here. (PDF)

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Large-Scale Multilateral Action on Tax Havens is Possible

EJ Fagan

Joshua Keating posted some excellent information over at Foreign Policy today:

Research from Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the Paris School of Economics looks at the result ofinternational agreements taken to prevent tax evasion in the wake of the global financial crisis. The results are not very encouraging for reformers:

First, treaties have had a statistically significant but quite modest impact on bank deposits in tax havens: a treaty between say France and Switzerland causes an approximately 11% decline in the Swiss deposits held by Frenchresidents. Second, and more importantly, the treaties signed by tax havens have not triggered significant repatriations of funds, but rather a relocation of deposits between tax havens. We observe this pattern in the aggregate data: the global value of deposits in havens remains the same two years after the start of the crackdown, but the havens that have signed many treaties have lost deposits at the expense of those that have signedfew. We also observe this pattern in the bilateral panel regressions: after say France and Switzerland sign a treaty, French deposits increase in havens that have no treaty with France.

Johannesen and Zucman suggests their finding lend support to a “big bang” multilateral agreement on tax havens rather than an incremental approach, though it seems like it would be nearly impossible to wrangle an agreement big enough to make a difference.

I think that Keating is underselling a couple of things here. First, we’ve seen very few meaningful treaties signed to combat tax evasion through tax havens in recent years.  The treaty signed between France and Switzerland did not include automatic exchange of tax information or FATCA-like information exchange, so we shouldn’t expect much progress to follow it. The truth is that the aforementioned crackdown has largely been political, rather than substantive, up to this point.

But political change is a real kind of change, and we’re looking closer to substantive policy change every day. When the G20 Finance Ministers start talking about automatic information exchange being the new global standard, they are at least talking about  a “big bang” multilateral agreement. The ten EU nations, led by the UK, who have decided to start a multilateral convention for FATCA-style automatic information exchange are very clearly labeling their efforts a pilot program. We don’t know how far they are planning to extend it, but it certain looks like a potential blueprint for a worldwide system.

The US has demonstrated with FATCA, particularly in Switzerland, that developed countries hold a great deal of leverage over banks in tax havens. Incentives are clearly aligned to use that leverage, as those same developed countries want to be able to fight tax evasion and the erosion of their tax base. A deal can get done here at the G8/G20 levels. Once a multilateral convention becomes the norm for a critical number of large, important economies, compliance with it will become necessary for any large jurisdiction to do business.

Keating’s reference to the whack-a-mole problem of tax havens, where illicit money is caught up in a never-ending race to the bottom and flight to secrecy, is a smart one. We’re not going to make meaningful impacts until we prevent a great deal more secrecy jurisdictions from allowing money to be hidden inside their borders. But this kind of policy change is not impossible, and indeed may be moving substantially as we speak.

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The Green Climate Fund – Bringing the World of Ideas to the Board Room

Alice Harrison

Cross posted from Transparency International’s Space for Transparency blog

Transparency International / Alice Harrison

The World Bank is a leading heavyweight in development investment, presiding over US$30 – $40 billion per year. Inaugurated last summer, the Green Climate Fund could soon dwarf that portfolio. It is estimated that by 2020 it will be channeling US$100 billion a year in climate finance to developing countries – to help arrest the advance of climate change whilst adjusting to its effects.

At the fund’s third meeting, held here in Berlin last month, we watched on as country representatives debated how to reconcile the enormity of their task with the imperative to act fast.

Community consultation on climate change in Papua New Guinea

The 24 men and women at the Green Climate Fund’s helm could emerge as a new brand of world leaders. They are not democratically elected, yet will be managing vast sums of public money, destined for projects that will in some way or other affect all of us. The degree to which they get it right will hinge on three key principles – consultation, transparency and accountability.

Where is funding needed most urgently? Which technologies will best meet the task? Who should be involved? Answering such questions implies a very big conversation, spanning continents and disciplines. It will also require seeking out communities whose homes are being swallowed by rising waters, battered by storms or encroached on by drought. Ensuing decisions on how and where to invest must be open to scrutiny, and backed up with solid justifications.

The fund’s board knows this. “We can’t underestimate the importance of being at the cutting edge of transparency,” the Australian board member asserted. “We need to hear other voices, not just those of state actors,” was the view from Zambia. “We have to be accountable to our taxpayers,” said their counterpart from Japan. And “receptive to the world of ideas,” stressed the representative from India.

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Senator Max Baucus: No Friend to Tax Cheats

Ann Hollingshead

On Tuesday this week, six-term Senator Max Baucus (D-MT) announced he would not seek reelection next year. The decision will end his thirty-six year long and influential career in the Senate; one which included over a decade as the top democrat in the Finance Committee and a co-authorship of the 2010 health care law. In his planned retirement, Senator Baucus will join other senior Democratic senators, including Senator Carl Levin (MI) and Senator Tom Harkin (IO).

In the wake of Senator Baucus’ announcement, the pundits, commentators, and even some Democrats have been calling his legacy “mixed.” Democrats are quick to note all of the times the Senator broke rank, for example over gun restrictions, President Bush’s tax cuts in 2001, and the estate tax. He’s even been quick to speak against the party, just this month saying the implementation of the health care law is headed toward “a train wreck.”

Despite a sometimes controversial career within his party, we should recognize Senator Baucus as one of the pioneers of U.S. legislation aimed at reducing what he has called the “tax gap” – the estimated hundreds of billions in legally owed tax dollars that go unpaid each year. As he puts it: “Offshore tax evasion costs the U.S. jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference. In an era when budgets are tight, it’s critical for the I.R.S. to have the resources it needs to root out tax cheats.”

Senator Baucus has pursued many routes to reducing that shortfall, from improving voluntary compliance, to sponsoring a slew of relevant legislation aimed particularly at offshore centers and tax havens, to working with the Treasury to manage the issue. One of his most notable successes in this arena was his work (and coponsorship) of the Foreign Account Tax Compliance Act (FATCA). Along with House Ways and Means Committee Chairman Charles Rangel and then-senior Senate Finance Committee member John Kerry, Senator Baucus cosponsored FATCA in 2009 and Congress enacted it in 2010. The law targets non-compliance by U.S. taxpayers using foreign accounts by allowing the IRS and Treasury to require U.S. taxpayers holding financial assets on foreign soil to report those assets. FATCA also requires foreign financial institutions to report certain information about U.S. taxpayers directly to the IRS. Originally, Treasury planned to work with financial institutions to implement FATCA, but has since modified its approach.

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Taxcast: Edition 16, April 2013

Taxcast by Tax Justice Network

In April 2013′s Taxcast: ‘offshore leaks’ blows the lid off secrecy for sale, the G20 endorse greater transparency (but let’s not get too excited), Luxembourg agrees to lift its banking secrecy, Austria next? And the Taxcast takes a look at fake foreign direct investment.

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Automatic Information Exchange: Will Germany follow the US in going the extra mile?

Markus Meinzer

Cross posted from Tax Justice Network Blog.

flickr / pittigliani2005

There is a very important project in the new US budget proposal for financial year 2014 supported by the Obama administration. If this proposal is carried through into law (or regulation), the odds for a truly effective global system of automatic information exchange on tax data about the wealthiest citizens would dramatically increase. Alex Cobham has identified the issue (see here) and the original text of the proposal can be found on page 202, of this pdf document.

It is worthwhile quoting at length and unpacking some of the detail:

“Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA).—

In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.

Requiring U.S. financial institutions to report similar information to the IRS with respect to nonresident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents.

The proposal would provide the Secretary of the treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities.”

This legislative proposal is crucial for the effectiveness of any future multilateral system for automatic tax information  exchange for a number of reasons. First, the current regulations for reciprocating data exchange by the US under FATCA are a welcome first step away from the role of the US itself as a major tax haven (see background here), but are very narrow in scope (we have shown this in our analysis of bank account registries, on pages 41-42, in the chapter on the US, here). Most importantly, interest on government and corporate bonds as well as account balances and other crucial tax data is not currently available for reciprocating FATCA. This is the reason why FATCA model 1 agreements which the US has signed with many countries, among them key European allies, contain quite explicit langauge about the need for the US to improve its capacity to reciprocate under FATCA by additional legislation. For instance, article 6.1 of the German draft model 1 agreement states (full pdf here):

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Following the Money Trail to Fight Terrorism, Crime and Corruption

Celina Realuyo

Crossed post from the International Network for Economics and Conflict, U.S. Institute for Peace

flickr / epSos.de

Globalization has provided citizens across the globe with unprecedented access to goods, services, capital and information – better, faster, and cheaper.  Greater efficiency in international financial markets has driven global economic development during the past 30 years.  Despite all the benefits derived from a more interconnected global community, the dark side of globalization simultaneously has empowered terrorism, crime, and corruption around the world.  While the Internet promotes connectivity and anonymity, protecting the identity of illicit actors, traditional investigative tools like “following the money trail” can help us better understand, detect, disrupt and dismantle these illicit networks.  Let us see how examining financial flows can fight terrorism, crime, and corruption, safeguard global financial systems, and promote peace and stability around the world.

Since the tragic attacks of September 11, 2001, the U.S. and other governments have incorporated the financial instrument of national power in their efforts to combat terrorism and crime.  Enhanced anti-money laundering and counterterrorism finance measures have significantly damaged these illicit networks.  During the past decade, Al Qaeda operatives and affiliates from Iraq to Afghanistan complained about increased difficulty in funding terrorist operations and supporting their networks.  Similarly, transnational criminal organizations in the Western Hemisphere realized that greater oversight of international bank transactions and offshore accounts since September 11 complicated their ability to launder profits through the formal banking sector.  Following the money trail and surveillance of facilitators, like the bankers and lawyers moving and sheltering money for terrorist and criminal groups, produced critical financial intelligence that has led to the weakening of illicit actors such as Al Qaeda and the drug cartels.

Once the tighter measures to fight money laundering and terrorist financing were put into practice, they had an unexpected side effect – rooting out corruption.  After the 2002 Bali bombings by Jemaah Islamiyah, Indonesia developed a robust counterterrorism strategy that included efforts to detect terrorist financing.  In December 2004, Indonesia was the country hardest hit by the historic tsunami that killed some 170,000 Indonesians, and millions in international aid flowed to Indonesia to assist with the relief efforts.  As a result of increased scrutiny of international financial flows, Indonesian authorities discovered and acknowledged that some post-tsunami assistance funds were being diverted by graft and corruption.  Indonesian Corruption Watch, an independent non-governmental organization, released a 2006 report alleging irregularities, corruption and collusion in at least five major government managed projects valued at a total of $2.6 million, including the publication of reports, the appointment of staff and the procurement of office equipment. Following the money trail in the case of tsunami relief funds contributed to anti-corruption efforts in Indonesia.

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The Progress on and Future of Automatic Tax Information Exchange

Ann Hollingshead

flickr / afagen

This week the world saw a huge leap forward on automatic tax information exchange and, more broadly, the effort to crack down on tax evasion. As the recent investigation by the International Consortium of Investigative Journalists has shown, governments around the world have a big problem, not only with tax evasion specifically, but also the broader use of offshore vehicles for hiding cash and corruption.

Yet this week, the governments of ten European nations have answered this challenge in stunning fashion. Their efforts have ignited momentum on an effort that could be an integral part of not only reducing tax evasion, but also improving economic development and reducing poverty worldwide. Of course, we’re not there yet, we might even not be past the end of the first quarter. But we could get there.

Here’s where we are: On April 10th, the governments of France, Germany, Italy, Spain, and the United Kingdom announced they will launch the first ever multinational system of automatic tax information exchange. Shortly afterwards, the government of the Czech Republic and Poland, followed by Belgium, the Netherlands, and Romania, also signed up, bringing the number of participating countries to 10.

As Raymond Baker, Director of Global Financial Integrity, noted: “This is a resounding victory for taxpayers and transparency groups; it’s not possible to overstate the significance of this news.”

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India’s Recent Manual on Information Exchange: Implications for Automatic Information Exchange

Pooja Rangaprasad

nullThe Central Board of Direct Taxes (CBDT) in India brought out a manual on exchange of information in January 2013, including automatic exchange of information, one of the Task Force’s five recommendations. Although this Manual was released to provide guidance to Investigating Officers explaining various provisions and for making requests to countries, it is pertinent to note some of the discussion which is of relevance particularly for automatic exchange of tax information.

The Manual notes that exchange of information mechanism is mainly through  double taxation avoidance agreements (DTAAs), tax information exchange agreements (TIEAs) and multilateral agreements for exchanging information. It confirms that global efforts towards information exchange has resulted in many countries/jurisdictions co-operating to exchange information and that most of India’s 84 treaty partners exchange or are willing to exchange information on automatic basis and spontaneously although, ‘it is not mandatory as per the provisions of the DTAAs/TIEAs and is not considered as part of the international standards on transparency and exchange of information for tax purposes’.

Without mentioning any specific countries/jurisdictions, the Manual also states that there are still some treaty partners that have reservations to exchange information automatically and that Government of India is making efforts at bilateral levels and global forums,

To make the exchange of information on automatic basis as part of the global standards’. Noting that TIEAs only cover information exchange on request, it states that ‘Automatic Exchange of Information is one of the most effective ways to improve voluntary tax compliance and decrease the incidence of tax evasion.

The Multilateral Convention on Mutual Administrative Assistance in Tax Matters also finds strong support as an instrument for receiving administrative assistance from foreign jurisdictions having a wider scope than DTAAs and TIEAs as it includes exchange of information on request, automatic exchange of information, spontaneous exchange of information, simultaneous tax examinations, tax examination abroad, assistance in recovery, service of documents etc. The Convention also extends the benefit of information exchange with partners that India does not have a treaty with. The Manual advocates the strengthening of this Convention and ensuring all jurisdictions sign it by citing the following line from the G20 meeting in Los Cabos, Mexico, in 2012 (apparently added on India’s insistence as per the Manual):

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What ICIJ’s Offshore Investigation Can Teach the IRS

Ann Hollingshead

Sarah Petre-Mears controls more than 1,200 companies across the Caribbean, Ireland, New Zealand, and the United Kingdom. Supposedly. Actually Petre-Mears doesn’t know much about the companies for which she passes resolutions and helps set up bank accounts; all she needs to do is sign her name. Because Petre-Mears is actually just a nominee-director, who keep the real owners of her companies secret by selling their names for use on official company documents, whilst giving addresses in obscure places all over the world.

Walk into Madrid’s famed art museum, Thyssen-Bornemiza, and you’ll find the private art collection of Carmen Thyssen-Bornemisza, which includes Monets, Matisses, and Van Goughs. But technically Thyssen-Bornemisza doesn’t own the paintings you see in the museum named for her family. Instead they are owned by secrecy-guarded companies in Liechtenstein, the Cayman Islands, the British Virgin Islands, and the Cook Islands. Not only does this ownership structure give Thyssen-Bornemisza some tax benefits, but it also allows her some flexibility to move the paintings across borders. She’s not the only one; many other of the world’s biggest art collectors use tax havens to buy and sell art.

We wouldn’t know about the antics of Sarah Petre-Mears and Carmen Thyssen-Bornemisza if it weren’t for an investigation by the International Consortium of Investigative Journalists (ICIJ). After a three year investigation into Australia’s Firepower scandal, a case involving offshore abuse and corporate fraud, Gerald Ryle, ICIJ’s Director, obtained a hard drive with a trove of corporate data, personal information, and e-mails on offshore companies and trusts.

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We’re Not Broke Video: How Do Billion-Dollar Corporations Cheat America Out of Tax Revenue?

EJ Fagan

Every year, multinational corporations avoid billions of dollars in taxes globally by using abusive profit shifting to move revenue to tax havens and costs to jurisdictions where they actually do business. This is called transfer pricing, and is the biggest problem that the Task Force’s Country-by-Country Reporting recommendation is designed to fix, by forcing publish exposure of where firms are reporting their figures.

We’re Not Broke, the documentary released last year on corporate tax avoidance and the movement to change it, is now available in segments on Youtube. And unlike our previous post on We’re Not Broke, the segments are viewable by readers outside the United States. Below is the one on abusive profit shifting:

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