Finance ministers: “hammer blow against tax evasion” – or a feather-swipe?

Updated: April 18th

The Finance Ministers of Germany, France, Britain, Italy and Spain have announced a new plan to share information about the beneficial ownership of companies, trusts, foundations and other structures, complementing existing efforts by the OECD (the Common Reporting Standard) to create a global system for sharing banking information. UK Chancellor [Finance Minister] George Osborne said:

“Today we deal another hammer blow against those who hide their illegal tax evasion in the dark corners of the financial system. Britain will work with our major European partners to find out who really owns the secretive shell companies and trusts that have been used as conduits for evading tax, laundering money and benefiting from corruption.”

The statement, as we’ll show, contains some positive elements but lacks in ambition. And this raises a big question: in terms of the particular details, while parts of this statement might look like a step forwards, a cynic might read it instead as an attempt to deflect attention away from where it is really needed: the need for publication of beneficial ownership information about shell companies, trusts and so on. In which case it would be a step backwards.

Not only that, but there are some slightly odd things about this statement.

So far, there aren’t many precise details, just the joint statement itself.  The most relevant (but not the only relevant) section reads:

“On beneficial ownership, it is essential that all jurisdictions apply enhanced standards of transparency. in this spirit, we commit to establishing as soon as possible registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administrations and law enforcement authorities. We call on other jurisdictions to so so.

In addition, as a first step we are launching a pilot initiative for automatic exchange of such information on beneficial ownership. This will give our tax and othre relevant authorities full knowledge on vast amounts of information and help them track the complex offshore trails used by criminals.”

Reading between the lines, there is a fair bit to welcome, but plenty that smells less good. This may be simply the result of hurried drafting by committee amid all the Panama pandemonium . . . but let’s see.

On the plus side, as we’ve noted before, it’s essential to complement transparency of “banking” information (through the OECD’s CRS process) with the issue of the transparency of shell companies (and trusts and foundations). And it is certainly good to see trusts and foundations in the cross hairs. This is something that has not yet been seriously addressed by any international initiatives, bar perhaps the CRS. it doesn’t look good from where we’re sitting. In fact, it looks so iffy that a cynic might be tempted to say that this statement is designed to deflect pressure and attention away from the need for deep-seated reform.

What is more, the call on other nations to follow suit, and for “the development of a system of interlinked registries containing “full benefit (sic) ownership information and mandate the OECD, in cooperation with FATF, to develop common international standards for these registries and their interlinking.”

That spelling mistake we flagged there is surely a sign of just how hurriedly this statement was drafted. They’ll presumably correct that soon, so we’ll paste it here for posterity (and a bit of fun, if you like that sort of thing.)

In general terms, though, this is a good idea: let’s see how the details emerge.

Also, there is a whiff of a vague promise of something good at the bottom of the statement:

“We are willing to ensure the effective implementation of the exchange of information standards and to deal with non-cooperative jurisdictions.”

The strongest measure by far would be the summoning of courage to implement our withholding tax proposals, as we outlined it recently in the Financial Times, and in more detail here. This would really set the cat among the pigeons.  But as noted, the statement by the five finance ministers doesn’t follow through on that: it is important to put pressure on them to do so now.

And now, the negatives

On the negative side, the statement makes no reference to “public” registries of beneficial ownership information. This is absolutely crucial – and it seems to mark a step back by countries such as the UK which in 2013 promised an open public register. Why no shared commitment to public registers? The Panama papers reveal the tremendous power of public access to the world’s media and others. Closed registries risk putting the fox in charge of the chickenhouse.

Not only that, but this plan does not call for “central registers” but for “registers or other mechanisms” – which is again a step back from previous positions- and an echo of language that the Financial Action Task Force (FATF) was using a couple of decades ago, to little effect. What are those ‘other mechanisms?’

Third, even within the context of non-public registers, it is important to separate out two key aspects: first, the issue of countries sharing information with each other; and second, what they call “robust identification of beneficial ownership”. It is this latter part that has tended to be the Achilles’ Heel of anti-money laundering programmes for decades: through trusts and other subterfuges it is possible to play with the very concept of what ‘ownership’ means and skirt around such procedures. It is hard for public officials to sift through this stuff and really tease out what is going on: publication is far stronger medicine, and once again we call for that.

Fourth, there isn’t any apparent concern here for the participation of developing countries: we think it’s important to bring them in at an early stage.

Update: Others seem to be coming out with similar opinions. Richard Murphy finds much to criticise in his UK-focused piece. And this just in, via email from Christian Aid:

“Toby Quantrill, Christian Aid’s Principal Adviser on Economic Justice, said: “Despite George Osborne’s claim that this will deal a ‘hammer blow’ to those who evade tax, this is a series of half-measures designed to convince the public that ‘something is being done’. It will not help developing countries, who stand to lose the most from financial secrecy, and is not the response that the Panama Papers demands.

“Politicians are desperate respond to the public outrage with some action, but rather than seizing a moment of public support to drive through real change, they are spinning baby steps as great strides.””

Update 2: a comment emailed to us by Elise Bean, an experienced U.S. expert in this field, who is looking at this in a longer historical context:

“The criticisms in the Tax Justice Network are valid, but for me, they still don’t take away from the fact that governments are now talking about sharing ownership information in a way that a few years ago would have seemed revolutionary.  

When governments talk about sharing beneficial ownership information, it changes the whole context for offshore jurisdictions and secret corporate ownership.  By indicating ownership information should be more widely available, it makes the concept of public registries more feasible and offers another tool to fight tax evasion.  If the United States is, in fact, opposing the proposal, I wonder if the announcement was hastily issued so that it got out before any of the five caved to U.S. pressure.  

So despite ambiguous provisions, possible loopholes, and weaknesses, I still see the proposal as a very useful step forward.”

And finally . . . 

Alongside the spelling mistake, we’ve noted another oddity about the statement. The UK government bills it like this:

Strangely, though, Wikipedia describes the “G5” as including Brazil, Mexico, India, China and South Africa.  And there’s another “G5” which seems to be France, Germany, Japan, the United Kingdom, and the United States.

As we noted, it’s all a bit odd.

Photo credit: Chatham House, CC BY 2.0, via Wikimedia Commons