UN FACTI Panel envisages major global reforms

The UN high-level panel on Financial Accountability, Transparency and Integrity (FACTI) is moving fast. Following its launch earlier this year, the Panel has consulted widely with member states, civil society and experts from all areas of its broad mandate, the global architecture within which illicit financial flows take place.

Now FACTI has published a series of background papers laying out the key conclusions from expert assessment in each area. Below, colleagues from across the Tax Justice Network have summarised the main technical findings of each paper. We draw out the potential outline of the FACTI Panel’s final report, were they to follow the logic of this body of work.

As I said in invited remarks to the FACTI Panel’s ‘virtual global town hall‘ meeting, the problems the panel are addressing may be technically complex, but they are fundamentally political in nature:

Thank you co-chair, and panel, for the opportunity to speak. Your work is crucial, and most timely.

The Tax Justice Network was formed nearly two decades ago, and put forward then what remain the key elements to fix the global architecture for tax and financial integrity – motivated by the recognition that tax injustice does systematic damage to human rights, especially women’s rights and across a whole range of intersectional inequalities. The technical fixes include a shift to unitary taxation for multinational companies, and the universal introduction of the ABC of tax transparency: A for automatic exchange of information on financial accounts; B for beneficial ownership transparency, through public registers joined up into a Global Asset Registry; and C for public country by country reporting from multinational companies.

But while detailed, technical solutions are required, the question of whether the world chooses to implement these is fundamentally not a technical one but a political one.

For decades, the former imperial powers that dominate the OECD have set the rules for international tax and the architecture for financial transparency. The position in which we now find ourselves is the position that these rich countries have created. And that position is one in which tax abuse by multinational companies, and other forms of corruption, are not marginal activities, but are central to the global economy. All serious estimates, whether from researchers at the Tax Justice Network, UNCTAD or the International Monetary Fund, show that the costs of tax abuse are disproportionately high for lower-income countries – the very ones that are denied an effective voice at the OECD, and the right to participate fully in both rule-setting and information exchange.

And so the FACTI panel has one clear challenge: to outline the truly global governance alternative at the United Nations which can oversee effective responses to tax abuse and illicit financial flows, in the form of a new UN tax convention and rule-setting forum. Genuinely multilateral information exchange and rule setting has the potential to eliminate the grave inequalities in taxing rights between countries, to curb gross inequalities within societies, including those rooted in gender and racial injustice, and to empower the type of revenue raising for public spending that the pandemic has highlighted is crucial for all of our health.

As the review of the background papers confirms, the expert authors have identified exactly the political dynamics at play, and recommend a set of important and powerful reforms.

Summary of technical papers

The first of these, ‘Tax information production, sharing, use and publication’ underscores the importance of recent key steps towards transnational tax information cooperation. However, it criticises the established legal framework as not being universal, since it overlooks the needs of developing countries. For that reason, the paper emphasises the need to revise the existing legal frameworks and calls for public availability of certain tax information as a key policy tool.

The analysis by Professor Leyla Ates considers a number of proposals for improving existing legal frameworks of taxation. First of all, the existing international institutional framework should be improved through the creation of a global body with responsibility for collating and analysing tax data (including gender-disaggregated data) under the umbrella of the UN. Data should cover, inter alia, automatically exchanged financial account information and country by country reporting by multinational companies.

Moreover, countries should enjoy the full benefit of automatically exchanged financial accounts and public country by country reporting. To achieve this, Prof Ates argues, all jurisdictions must commit to fully inclusive and multilateral information exchange, to publish aggregate and detailed data, and to make detailed data available for analysis. To underwrite these processes, an international tax convention, led by the United Nations, is required.

In their paper on ‘The appropriateness of international tax norms to developing country contexts’, Martin Hearson, Joy Ndubai and Tovony Randriamanalina examine the extent to which six sets of international tax norms (including tax treaties, transfer pricing rules and mutual assistance agreements between states) hinder or help developing countries in enforcing their tax laws and preventing tax avoidance by multinational enterprises. The authors argue there is an institutional deficit in international tax norm setting and point out the need for an international body which can reconcile competing interests between lower-income and more powerful states.

In an attempt to address the disadvantages that developing countries currently face in global tax negotiations, the paper recommends the FACTI Panel employ a combination of short, medium and long term interventions. Among the short-term measures are that the Panel should urge governments to promote local filing legislation for country by country reporting, and adopt unilateral measures for taxing the digital economy that are better-suited to resource-constrained contexts. Medium term interventions include that the Panel should reexamine the purpose of tax treaties as a tool to maximise the gains for developing countries and explore a more radical approach; strengthen developing countries’ participation in international tax cooperation and capacity building, inter alia through investigating potential changes to the institutional design of the UN Tax Committee and the OECD’s Inclusive Framework.

Most importantly, the authors urge the Panel to pursue longer-term reforms by evaluating the replacement of the arm’s length principle with unitary taxation with formulary apportionment; investigating alternative instruments to current blacklists, peer review mechanisms and trade investigations, that better meet developing counties’ needs and available resources; and considering the call for a global tax body.

In the next paper in the series, ‘Transparency of asset and beneficial ownership information’, the Tax Justice Network’s Andres Knobel describes how financial secrecy is achieved in order to engage in illicit financial flows. To address and reveal these tax and financial crimes and abuses, beneficial ownership transparency entails identifying the natural persons who ultimately own, control or benefit from legal vehicles such as companies and trusts. This transparency provides a way to prevent abuses and to “anchor” legal vehicles to the limits and responsibilities of a natural person so that no one stays above the law. While the Financial Action Task Force (FATF) and the Global Forum on Exchange of Information for Tax Purposes allow countries to implement three different approaches to ensure availability and access to beneficial ownership information, the paper identifies the many gaps left in place, and recommends that all countries establish a centralised register of beneficial ownership for all legal vehicles.

Setting up registers does not guarantee that information will be accurate and up to date. Countries should also close the many loopholes in the legal framework (eg narrow scope of legal vehicles subject to registration, high thresholds in the beneficial ownership definition, lack of effective sanctions) and properly equip the beneficial ownership register. The paper weighs the privacy risks and economic costs, and concludes that giving online public access to beneficial ownership information will have significant benefits, by ensuring that all relevant users are able to access, use and verify the data. While most of the recommendations involve legal changes (which are economically ‘free’), the digitalisation, online disclosure and automated cross-checks or interconnection of registries may involve economic costs. Countries should see these improvements in beneficial ownership transparency for assets and legal vehicles as a strategic investment. High-income countries (especially major financial centres where most offshore legal vehicles are incorporated and where most of the cross-border wealth is located) should assist lower-income countries, because global beneficial ownership transparency is an important public good from which all stand to gain.

In their paper, ‘Anticorruption measures’, Michael Findley, Dan Nielson and Jason Sharman emphasise the need to increase efforts in law enforcement, as well as assessing risks and effectiveness of anti-corruption policies. The paper sheds light on the role of corporate service providers in international corruption and exposes the problem of misidentification of haven countries: the symbiotic relationship in which high-income havens, often OECD members, receive illicit flows from lower-income countries. The authors further note – as our Financial Secrecy Index has long demonstrated – that corruption perception rankings may capture some risks in source countries, but systematically ignore the havens that shelter the proceeds.

The authors recommend refocusing the fight on haven countries, and changing both the metrics and the policy responses in order to spotlight them. And while the authors are less convinced of the value of beneficial ownership registries, arguing for a focus on regulating, licensing and auditing corporate service providers, they concur with Andres Knobel on the crucial role of verification of beneficial ownership.

Abiola Makinwa’s paper, ‘Foreign bribery investigations and prosecutions’,shows that illicit financial flows and foreign bribery rely on difficulties in effective prosecution because of the obscure transacting environment where it takes place, which is delocalised and has no central nexus of governance. Furthermore, the monopoly of the state to initiate criminal law enforcement often translates into a reluctance to prosecute domestic companies or persons, and, paradoxically, the criminal justice system may in such circumstances provide a layer of protection to wrongdoing corporations. State actors are often among the primary beneficiaries of contracts facilitated by foreign bribery; while the primary enforcer of anti-foreign bribery laws is the state itself. Finally, information asymmetries represent a great challenge since few countries have the critical capacity to uncover and discharge the traditional burden of proof with respect to foreign bribery activities that are shrouded in secrecy and concealed with the best expertise money can buy.

The author argues that the FACTI Panel should promote non-trial resolutions (NTR), whose growth and spread has focused on crime prevention ex ante, and which outperforms traditional (ex post) criminal prosecution. Dr Makinwa proposes structurally integrating victims’ compensation into NTR regimes, while in the long-term she advocates for linking supply-side NTRs to demand-side foreign bribery prosecution, in order to develop a prosecutorial framework that leverages voluntary disclosures from supply-side NTRs to support the development of a demand-side NTR process.

Fatima Kanji and Richard Messick in their paper ‘Accelerating the return of assets’ criticise approaches to stolen state assets that have been largely centered on the malfeasance of government officials from lower-income countries, while ignoring richer countries’ centra role in hiding the proceeds. The authors note that Sustainable Development Goal target 16.4 calls for more effective recovery and return of stolen assets, whereas the United Nations Convention Against Corruption requires states to assist in locating and returning stolen resources but all too often through processes that are painstakingly slow and prohibitively expensive.

In order to streamline asset recovery procedures, Kanji and Messick argue that barriers to the exchange of information should be addressed urgently and that states themselves should be required to disclose how long they take to respond to relevant requests. They also propose a crackdown on professionals who facilitate the hiding of assets, through the deployment of anti-money laundering laws and the strengthening of penalties. Such legislation should also be used to confiscate stolen assets and ensure their prompt return to victim states.

In the final paper, ‘Peer review in financial integrity matters’, Valentina Carraro and Hortense Jongen examine the role of peer review mechanisms – the most prevalent form of monitoring in the field of international financial integrity, but characterised by serious gaps and vulnerabilities. The authors evaluate six international review mechanisms: on tax, those mandated to monitor the OECD’s Inclusive Framework on Base Erosion and Profit Shifting, and the Global Forum on Transparency and Exchange of Information for Tax Purposes; in the area of corruption, the oversight mechanisms of the UN Convention Against Corruption, the OAS Inter-American Convention Against Corruption, and the OECD’s Working Group on Bribery; and  in the field of money laundering, the monitoring of the Financial Action Task Force.

The authors identify five key institutional weaknesses that are currently limiting the effectiveness of these mechanisms: (1) the frequency with which they are conducted; (2) the lack of systematic follow-up monitoring; (3) exclusion or lack of participation by civil society and other key stakeholders; (4) power imbalances and political bias; and (5) problems arising from the existence of partially overlapping monitoring systems. They also emphasise that, at the domestic level, implementation of standards promoted through peer review mechanisms is often hindered by lack of political will and lack of technical expertise and resources.

Potential recommendations from the UN FACTI Panel report

The FACTI Panel has an important opportunity to lay out the path forward, identifying the changes in global rules and rule-making that will give the world at least a chance of curbing illicit financial flows, including the great scourge of corporate tax abuse. The central recommendations from the Panel’s background papers offer a clear roadmap, should the Panel choose to take it.

Running through all the papers is the core point that current structures are flawed politically: that power imbalances result in bad policies, with OECD members preventing effective scrutiny and accountability of their own actions (and often those of their dependent territories), thereby blocking globally effective action. The focus of current instruments and policy fora is consistently put on actions to be taken by lower-income countries and small jurisdictions, when it is high-income countries and major financial centres, along with their multinational companies and professional enablers, which are the consistent actors in all illicit financial flows.

The papers make a clear case for a UN convention, on which negotiations could begin immediately. This could address each of the three key thematic areas of the Panel’s work, providing the fully supportive context for additional, national actions and for a globally inclusive and effective response to the grave threat posed by illicit financial flows.

• Corporate tax

In 2013, the G20 countries established a consensus – since joined by many more countries at all income levels and from all regions – that the single goal of corporate tax reforms should be to reduce (or indeed eliminate) the misalignment between the location of multinationals’ real economic activity, and where their profits are declared. In successive processes (2013-15, and now 2019-ongoing), the OECD appears to have failed to make significant progress. A convention can create the basis for, and the expertise in a secretariat to support, genuinely inclusive negotiations to deliver the necessary reforms. As noted in the background papers, this is likely to include a shift to unitary approach with formulary apportionment.

• Financial transparency

The key elements identified in the Panel’s discussions and confirmed in their background papers are the ABC of tax transparency. The convention could include a comprehensive set of commitments to ensure comprehensive, multilateral, automatic exchange of financial information, including the publication of aggregate data; set the standard for beneficial ownership registers for all major asset classes, with a technical basis in open data allowing their combination into a global asset register; and the full publication of country by country reporting by multinational companies.

• Institutional effectiveness

The convention should set standards for issues of cooperation and process raised in the background papers – notably, with regard to the speed and power relations in asset recovery processes; and to non-trial resolutions in foreign bribery and other illicit flow cases. In addition, and importantly, the convention would address the key failure of current arrangements in respect of peer review of compliance with international instruments – and specifically, would establish a comprehensive and inclusive mechanism of peer review for the convention itself.

Conclusion

There is no guarantee that the FACTI Panel will follow the advice of the chosen experts – and there has already been fierce resistance to the entire process from a number of OECD member states, and of course the corporate lobby – eg the International Chamber of Commerce arguing that the “Confidentiality [of multinationals’ country by country reporting data] is critically important”.  

At the same time, many in civil society have expressed scepticism about the Panel’s willingness to take their own logic to its necessary conclusion, and to make the case for the full reforms that their analysis confirms to be urgently needed.  With the publication of this important set of background papers, the world now awaits the FACTI Panel’s findings.