Financing for Whose Development? How Official Development Finance Institutions support Tax Havens

This is an extract from an article by Eurodad’s Mathieu Vervynckt, in which he discusses the Third UN Conference on Financing for Development (FfD), set to take place in Addis Ababa next year as a crucial opportunity to discuss both the use of scarce public resources to leverage private sector finance, and the fight against international tax avoidance and evasion.

The Third UN Conference on Financing for Development (FfD), set to take place in Addis Ababa next year, will be a crucial opportunity to discuss two of the hottest topics in development finance today: the use of scarce public resources to leverage private sector finance, and the fight against international tax avoidance and evasion. Both topics come together in Eurodad’s new report, Going Offshore, published today, though probably not in the way you might expect.

Previous Eurodad research has shown that despite the lack of public information about how they work and their impact on development, Development Finance Institutions (DFIs) – government-controlled institutions that support private sector projects in developing countries – have come to dominate the development finance landscape to such an extent that by 2015 the money they channel into the private sector is expected to exceed US$100 billion. They are, in short, the embodiment of an agenda (pushed by, among others, the European Commission) to use more public resources to leverage private finance.

More and more DFI support is also being channelled through financial intermediaries such as investment funds, which lend, in turn, to private companies in developing countries. And here comes the trick: at a time when the political momentum on tax justice is building, Going Offshore finds that many of the funds backed by DFIs are registered in the world’s most secretive jurisdictions – the same jurisdictions that play a systemically important role in helping private companies avoid and evade taxes in developing countries.

This creates an absurd and counterproductive situation. As public institutions aiming to reduce poverty, DFIs are reinforcing an offshore industry that is a major part of the reason why many developing countries can’t collect enough taxes to provide the infrastructure and public services that they so desperately need both to reduce poverty and to provide the platform for private sector investment.

Going Offshore also shows that the use of secrecy jurisdictions by DFIs is an endemic problem. For the purpose of this report we looked only at the top 20 jurisdictions in the Tax Justice Network’s Financial Secrecy Index (FSI), which ranks 82 jurisdictions according to their degree of secrecy and their importance in global finance.

The figures speak for themselves: at the end of 2013, 118 out of 157 fund investments made by the UK’s DFI, CDC Group plc, went through jurisdictions in the top 20 of Tax Justice Network’s Financial Secrecy Index. In 2013 alone, these offshore funds received a total of US$553 million. Meanwhile, at the end of 2012, four of the 14 direct and indirect investments held by DEG (the German DFI) were structured through the Cayman Islands, St Kitts and Nevis or even the British Virgin Islands – a country of not more than 25,000 inhabitants.

Read the full article here.