Cross posted from Transparency International’s Space for Transparency blog
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.
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.
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.
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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Cross posted from Tax Justice Network Blog.
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):
Crossed post from the International Network for Economics and Conflict, U.S. Institute for Peace
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.
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.”
The 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):
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.
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:
Cross posted from Transparency International’s Space for Transparency blog.
Last week the massive “Offshore Leaks investigation by the International Consortium of Investigative Journalistsreported the uncovering of the beneficial owners of thousands of offshore companies.
Among the owners of offshore shell companies disclosed so far are several senior politicians and their close families in various countries.
‘We especially recommend the Seychelles’
With an internet connection, a credit card, and as little as 690 euros, it can take under 10 minutes to set up a shell company. Let’s take a quick tour of two online providers of offshore services, randomly selected out of the hundreds of companies selling secrecy.
Our first stop is at the website www.offshorecompanyexperts.com, owned by a law firm called Coldwell, based in London. The homepage already makes clear what they are offering:
“Benefit from going offshore. Privacy, limited liability, asset protection, tax exemption”.
ICIJ’s investigation last week into the world of secrecy in tax havens is a voluminous, detailed, entirely worthwhile read. There are literally dozens of unique stories that you can sift through, including this weekend’s fantastic summary in the Washington Post of the investigation. The damage from offshore secrecy comes far and wide, from billionaires like Bernie Madoff using offshore tax havens to facilitate Ponzi schemes to couples trying to unable to locate assets following a divorce.
To help readers digest the deep and complex issues at hand, the Post created this nifty animated video:
Yesterday, the International Consortium of Investigative Journalists (ICIJ) released an article explaining how they explore the hidden world of shell companies. After a three year long investigation, ICIJ’s director, Gerard Ryle, obtained information about offshore companies that included over 2.5 million files. These files contained information surrounding shell companies, nominee directors, and shareholders for over 122,000 shell companies. ICIJ found that most offshore companies were staffed by nominee directors, or people who sell their name to be listed as part of the company. ICIJ also found that the people setting up offshore companies were mostly from China, Hong Kong, and Taiwan, but that the former Soviet republics were also well represented.
To investigate these files, ICIJ had a team of 86 journalists, which faced challenges in analyzing the large amount of information. The projected used sophisticated software such as NUIX and dtSearch to analyze the databases. But, help also came in the form of a British programmer who designed an online search system, Interdata. One of the findings from using these complex systems was that the same person’s information had been used for several companies. Additionally, the databases revealed that many offshore companies had purposely left the field for beneficial owners empty.
This may be the biggest investigation of this kind to ever come out on offshore shell companies and tax havens.
A partial list of stories from the ICIJ website, with more coming:
“The people identified in ICIJ’s analysis of the data are shareholders, directors, secretaries and nominees of companies and trustees, “settlors” or “protectors” of offshore trusts, as well as power-of-attorney holders who direct the actions of third parties. Many of the structures are designed to conceal the true ownership and control of assets placed offshore. Their identified addresses are spread across over more than 170 countries and territories.
ICIJ’s data analysis showed that the people setting up offshore entities lived most often in China, Hong Kong and Taiwan. Another important group of clients comes from Russia and former Soviet republics. This helps explain why the second-largest source of capital investment flowing into China is the tiny offshore tax haven of the British Virgin Islands. Similarly, a large source of investment flowing into Russia is from Cyprus, a country that also features heavily in the data – and whose financial stability was recently undermined by a crisis precipitated by Cypriot-based banks being bloated by Russian money.”
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