The CFA Franc as a vivid symbol of colonial continuities in Francophone Africa

In the first article of our Black Lives Shattered edition of Tax Justice Focus, Dr N.S. Sylla explains how monetary policy in Africa has been dominated by a consensus formed in Europe and the United States. In France’s former colonies in West and Central Africa this has helped preserve the substance of empire long after its formal end.

Dr. Ndongo Samba Sylla *

The history of money and finance in the former French colonies south of the Sahara presents remarkable continuities, despite the political and institutional changes that occurred with the decolonisation process in the 1960s. The most obvious symbol of these continuities is no doubt the CFA franc. The acronym of this currency created in 1945 by the French provisional government originally stood for franc of the French colonies in Africa. It still circulates in eight countries in West Africa and six countries in Central Africa without its founding principles having been altered.

To have a proper sense of the history of French monetary imperialism in Africa, one has to go back at least to the mid-19th century. With the abolition of slavery in France in 1848, the French state had to compensate French slave owners for the loss of their “movable” property. Part of the financial compensation had been used to set up colonial banks under the authority of the Bank of France. This was the case of the Bank of Senegal, created in 1853 by a decree of Louis Napoleon. Unlike the other colonial banks whose headquarters were located in metropolitan France, the Bank of Senegal was based in Saint-Louis, in the north of Senegal. It started in 1855 as a loan and discount bank. Being under the financial control of the Bordeaux trading houses, its role was to promote their export and import activities to the detriment of their local rivals who suffered discrimination in accessing credit.  Following its dissolution in 1901, the Bank of Senegal was succeeded by the Bank of West Africa, a private bank that had a monopoly on the issuance of francs in the French colonial empire south of the Sahara.

African people had for a long time resisted the imposition of the French currency. For their trade, but also for religious purposes, they used currencies like the cowries, a shell from the Indian Ocean, and the manilla (a bracelet). They were aware that the acceptance of the colonial currency would disrupt their trade and more importantly would make them economically subordinated to the diktats of their colonial masters. If you no longer have control over your currency as a nation, you no longer have control over what you produce, consume and exchange. As the ban on the import of cowries and the obligation to pay taxes in the colonial currency were not always effective, colonial administrators were often obliged to use legal sanctions and physical force. Their sense of masculinity often suffered from the defiant attitude of African women who did not want to use the franc in their daily trade.  Only the creation of the CFA franc would end decades of resistance from ordinary people against the French imperial monetary order.

The Bank of West Africa was replaced in 1955 by two public issuing institutions that four years later became the Central Bank of West African States and the Central Bank of Equatorial African States and Cameroon, renamed the Bank of Central African States. These two central banks each separately issue a currency whose acronym is the CFA franc: the franc of the African financial community in the first case; the franc of financial cooperation in Central Africa in the second. In the mid-1970s their headquarters were moved to Dakar (Senegal) and Yaounde (Cameroon) respectively. Their staff was ‘Africanised’ in the same process.

The ‘Africanization’ of the management of the Central Bank of West African States and the Bank of Central African States did not put an end to the colonial character of the monetary system. The CFA franc still functions according to the same principles and purpose established during the colonial period. Its rigid peg to the French currency (franc then euro, from 1999) and the freedom of transfers between France and countries using the CFA franc were not abolished after independence. Similarly, the French government’s direct control over monetary and exchange rate policy is still exercised through its representation in the organs of the two central banks with a veto power that has become implicit over time, and the obligation for the latter to deposit part of their foreign exchange reserves with the French Treasury (50 percent since the mid-2000s).

The purpose of this ‘monetary arrangement’ from its origin to the present day is to maintain satellite economies that are ‘complementary’ to the French economy. That is, economies that serve as cheap sources of raw material supplies and captive outlets.

The fixed parity reduces transaction costs and protects French companies (and now all foreign companies operating in euros) from exchange rate risk. The structural overvaluation of the CFA franc, the artificially high level of its value against the reference currencies, tends to favour imports, including luxury goods, to the detriment of exports.

The fixed parity thus constitutes a kind of trade preference granted to the euro zone, since African countries cannot use their exchange rate as an instrument to boost at times the price competitiveness of their exports. Finally, it deprives the Central Bank of West African States and the Bank of Central African States of the possibility of using the exchange rate to absorb shocks. Thus, in the event of a crisis, the need to defend the peg implies a reduction in public expenditure and credits to the economy, as well as an increased dependence on external financing flows.

As for the freedom of transfer, it allows for the free investment and disinvestment of French capital as well as the repatriation of profits, dividends, etc. In resource-rich CFA countries, this freedom is often associated with significant financial bleeding. For example, over the period 1970-2008, illicit financial flows from Côte d’Ivoire and Cameroon are respectively estimated in 2008 US dollars at 66.2 billion and 33 billion, which was 6 times and 13 times higher than their respective stock of external debt.

In addition to the handicaps resulting from an overvalued exchange rate and the outward transfer of local economic surpluses, the behaviour of the banking sector retains its colonial character.

In CFA countries, credits to the economy remain low, with short maturities and prohibitive interest rates. Loans are mainly oriented towards the trade sector to the detriment of invesmtnet in agriculture and manufacturing. Bank loans are primarily targeted at large companies and governments to the detriment of SMEs in general. The decline in the market share of French banks in CFA countries has not changed this general observation. The banking landscape has become less oligopolistic but is still largely dominated by foreign banking groups. In Senegal, for example, the latter control more than 90 percent of banking assets.

Thus, domestic production in CFA countries is penalised on the one hand by the low level and inadequacy of the credits to the economy and on the other by the overvaluation of the exchange rate. This pattern is aggravated by trade liberalisation policies and those dictated by the ideology of fiscal austerity.

The persistence of neo-colonial monetary and financial relationships has favoured neither structural transformation nor regional integration, and has done even less for the economic development of the CFA countries, 9 out of 14 of which are among the Least Developed Countries. In terms of health and education achievements, CFA franc using countries occupy the lowest ranks worldwide. Among a total of 189 countries, Niger, Central African Republic and Chad had the lowest score on the 2020 Human Development Index. Looking from a long term perspective, average real incomes have stagnated or declined in five of the biggest CFA franc using economies: Cote d’Ivoire, Cameroun, Gabon, Senegal and Congo Republic.

If this monetary bond did not prevent the commercial and financial decline of France in its sphere of influence, it has nonetheless contributed to the institution of centralised political regimes that are more responsive to the priorities of the French government, French companies and foreign investors than to the interests of their citizens. For example, in oil-exporting CFA countries such as Chad, Gabon, the Republic of Congo and Equatorial Guinea, the ‘president for life’ model remains the norm, notwithstanding the frequent organisation of formal elections with a foregone conclusion.

In other words, the CFA franc existence favours a particular type of political leadership. Those who can aspire to lead CFA countries are those who will not question its limitations. It is these leaders that have enjoyed the active solidarity and support of the French government over the last six decades.

In the face of growing protests against this colonial relic led by pan-Africanist social movements and intellectuals, France, in alliance with Côte d’Ivoire, decided in December 2019 to soften its stance on the West African CFA franc. As with previous CFA franc reforms, the current one is very limited in scope. Its motivation is to tackle the embarrassing symbols – the name of the currency, French representation within the Central Bank of West African States and the control of the French Treasury over the latter’s foreign exchange reserves – while ignoring the points that African economists criticise: the existence of a formal link of monetary subordination between France and the CFA countries, the fixed parity with the euro, the freedom of transfers, and also the existence of two monetary unions that have no other foundation than colonial history.

While the abolition of the CFA franc does not in itself guarantee that its member countries will develop more equitably and rapidly, extending its life expectancy cannot but hinder any prospect of political and economic emancipation of African peoples.

You can access the entire Black Lives Shattered edition of Tax Justice Focus here

** Dr. Ndongo Samba Sylla is a Senegalese development economist and researcher at the West Africa Office of the Rosa Luxemburg Foundation. He is the co-author with Fanny Pigeaud of Africa’s Last Colonial Currency: The CFA Franc Story (London: Pluto Press, 2021).

#BlackLivesShattered – colonialism, tax havens, and African development

In 2020, as Black Lives Matter activists challenged unequal power relations across the world, Dara Latinwo – a One Young World ambassador* – contacted Tax Justice Network to discuss how tax havens and illicit financial flows have thwarted African development in the decades since many states won their independence from European empires. We suggested that Dara guest edit a special edition of Tax Justice Focus, our flagship publication, and invite four eminent scholars to contribute their views on the subject. Here is that special edition, and in the following blog we publish Dara’s guest editorial in full.

************

Editorial by Dara Latinwo

In a year plagued by pandemic-driven loss and lockdowns, the death of George Floyd did the seemingly impossible and pierced sharply into the global consciousness of 2020, sparking fervour that fuelled worldwide protests against racial injustice and police brutality.

Keen to keep up with those marching in the streets, corporations and celebrities were quick to claim solidarity on social media, showcasing their support for ‘The struggle’ and displaying their donations on blacked out Instagram accounts. However, wading through this deluge of diversity-themed tweets and posts left me uneasy. After all, many of those hurrying to hashtag their ‘allyship’ with one hand, are also hiding their wealth in tax havens with the other.

These secretive repositories starve governments of vital resources that could be used to improve the lives and prospects of millions of people like George Floyd. (Whether those governments would use the resources in this way is a question for another editorial.) Moreover, by harnessing havens for their own benefit, individuals and organisations prop up structures that serve as the final destination for funds stolen from public coffers across Africa – the region with the most black lives.

As long as Africa remains economically hobbled by these exploitative global financial flows and systems, it will not just be capital that flees from the continent but, increasingly, its desperate population too, hungry for basic opportunities to develop and dignify itself. However, more often than not, these economic evacuees find only a frosty reception on reaching foreign shores: described and dismissed as ‘migrants’, they end up at the bottom of yet another pile. With this being the case, it is no surprise – but no excuse either – that the black diaspora finds itself particularly vulnerable to the sort of prejudices that led the store owner to call the police on Floyd last summer and Chinese authorities to hound African expats out of their homes last spring.

For this reason, any debate or discussion that is serious about tearing down racial injustice, rather than just statues, must include Africa. As the competition between actual and aspiring superpower states intensifies, it is imperative that African countries enhance their economic and geopolitical heft on the world stage, especially as other governments have few, if any, scruples about strengthening themselves at Africa’s expense.

Hence, the decision to commission this special edition of Tax Justice Focus which spotlights Africa and explores the international dimension to racial inequity buried in the continent’s past, playing out in its present, and looming over its future.

In the first article Dr Ndongo Samba Sylla, a former technical adviser at the Senegalese Presidency and current research & programme manager at the Rosa Luxemburg Foundation, explores the colonial past and neo-colonial present of West and Central Africa’s monetary system.  Tracing the origins of the region’s economic entanglement with France, Dr Ndongo illustrates how technocratic control over monetary policy has helped Paris keep its former possessions in a state of underdevelopment long after the end of formal empire.

Pulling the reader into the present with the second article is Léonce Ndikumana, a director at the Political Economy Research Institute (PERI) and a UN Development Committee member. His piece follows the trail of devastationleft by illicit financial flows, all the way to the poisoned paradises of modern-day tax havens – the temporary homes for ill-gotten gains siphoned from the continent. Casting a glance back at some of the financially hollowed-out African nations, Léonce’s contribution highlights the human cost of havens and the systemic corruption they contaminate countries with.

Gyude Moore, a former Minister of Public Works in Liberia and current senior policy fellow at the Center for Global Development, uses the third article to peer more closely at Africa’s relationship with China in order to present a more nuanced picture of this oft-discussed commercial and political ‘partnership’. Looking ahead to an uncertain post-pandemic future, Gyude offers practical policy recommendations on how Africa can strategically navigate its way along this second incarnation of the ‘Silk Road’.

The final feature article in this edition, written by Fadhel Kaboub, Associate Professor of economics at Denison and President of the Global Institute for Sustainable Prosperity, seeks to grapple with the question of what a sovereign and sustainability-focussed African continent could look like and convincingly maps out the journey there. In so doing, Fadhel persuasively lays out for readers what it would take for Africa to wake up as a real-life Wakanda.

The issue concludes with a review of Tom Bergin’s Free Lunch Thinking, a reminder that underdevelopment in Africa is in part the culmination of a steady process of intellectual decay in Europe and North America.

Although the heady ‘Africa rising’ narratives, which have waxed and waned over the years, strive to create compelling visions of a strong, self-determining Africa that exists beyond a Marvel film fantasy, these narratives often miss a central truth: that Africa did rise. Indeed, its proud pre-colonial past is a testament to this rarely revealed reality.

Thanks to curious history hunters, such as broadcaster Zeinab Badawi with her BBC History of Africa series and the musician Akala with his lectures on ancient and medieval Africa, new light is being shed on the array of technological advances made by sophisticated African civilisations before transatlantic slavery and colonialism shattered the continent’s sense of self and confidence.

Social media support, mingled with sympathy, for black communities across the world ultimately rings hollow without an accompanying readiness to rethink and remove the economic and financial strangleholds that have enfeebled the African continent. This edition of Tax Justice Focus represents an attempt to loosen some of these so that Africa can, one day soon, rise again.

Download the entire edition here.

About the Guest Editor: Dara Latinwo is a One Young World (OYW) ambassador who was selected by the ICAEW to attend the 2017 OYW annual summit, held in Bogotá, Colombia.

Having lived and worked across four different continents, she is
passionate about rethinking and redesigning the paradigm within which organisations operate, such that sustainability – economic, environmental and societal – sits at the heart of solutions and strategies proposed for the future.

A new anti-monopoly initiative opens today

In November 2019 we published a long article entitled If tax havens scare you, monopolies should too. And vice versa.

The article described how a small group of ideologues in Chicago from the 1970s popularised a harmful new story about monopolies and competition, which was so influential that it effectively de-fanged government protections and allowed a wave of corporate mergers and rising corporate power, first in the United States, then in Europe and beyond. We described the emergence in the past few years of a powerful new antimonopoly movement in the United States, wielding a vibrant new story that is now starting to overthrow the Chicago-school ideology of antitrust.

Unfortunately, this new story had not – and still has not – spread very far beyond the United States. Hopefully, this will soon start to change. This week, a new newsletter was launched, The Counterbalance, which notes:

“We first came together in late 2020 when Barry Lynn [a leading light of the new US antitrust movement] sent Michelle [Meagher, a competition lawyer} an article by Nick [Shaxson of TJN,] entitled “If tax havens scare you, monopolies should too. And vice versa,” calling for a new antimonopoly movement outside the United States. We recognised our shared interests, and began working together almost immediately.”

The Counterbalance is only a newsletter at this stage. The participants are setting up an organisation – The Balanced Economy Project – to tackle these enormous issues. It will have a global focus.

Now please read on – and if you like what you see, please subscribe.

The Tax Justice Network March 2021 Spanish language podcast, Justicia ImPositiva: Los países que más facilitan el abuso tributario corporativo #57

Welcome to our Spanish language podcast and radio programme with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita.

En este programa:

Invitados: 

Los países que más facilitan el abuso tributario corporativo #57

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Tax Justice Network Arabic podcast, edition 39: الجباية ببساطة #٣٩- العدالة الضريبية وتحقيق أهداف التنمية المستدامة

Welcome to the 39th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. It’s produced and presented by Walid Ben Rhouma and is available for listeners to download. Any radio station is welcome to broadcast it for free and websites are also welcome to share it. You can join the programme on Facebook and on Twitter.

مرحبا بكم في العدد التاسع والثلاثين من الجباية ببساطة.


في هذه الحلقة سلطنا الضوء على الأزمة الإقتصادية الخانقة التي تعيشها السودان ما دفع بالبنك المركزي السوداني إلي خفض قيمة العملة بصورة حادة. دائما في اخبارنا المتفرقة، عودة على أهم ما جاء في رسالة مديرة صندوق النقد الدولي لإجتماع مجموعة السبعة وتوصياتها للإسراع في استعادة نسق نمو يعود بالنفع على كل البلدان.
في الجزء الثاني من الحلقة، حاور وليد بن رحومة السيد كريم داهر، أحد أعضاء الفريق رفيع المستوى المعيّن من الأمم المتحدة والمعني بالمساءلة المالية الدولية والشفافية والنزاهة من أجل تحقيق أجندة 2030، للحديث عن أهم مخرجات التقرير الصادر مؤخرا وما جاء فيه من توصيات لمحاربة التدفقات المالية غير المشروعة والتهرب الضريبي وتبييض الاموال.

تابعونا على صفحتنا على الفايسبوك وتويتر https://www.facebook.com/ TaxesSimplyTweets by taxes_simply

The Tax Justice Network’s French podcast: L’idée d’un système fiscal international désormais acquise au niveau des Nations Unies #25

Pour la 25ème édition de votre podcast en français Impôts et Justice Sociale sur la justice fiscale et sociale en Afrique et dans le monde proposée par Tax Justice Network avec Idriss Linge:

Nous parlerons du rapport final du Panel FACTI, qui valide plusieurs thèses défendues depuis de longues années par l’ONG Tax Justice Nework, notamment : Le besoin d’un système fiscal international avec un niveau minimum de taxation, l’élargissement de la reconnaissance des actes susceptibles d’être qualifiés de Flux Financiers Illicites, et la lutte contre les paradis fiscaux et le secret offshore.

Seront écoutés à ce sujet dans ce programme :

Nous parlons aussi du message de la France à propos de la dette africaine, avec une déclaration du Président Emmanuel Macron, et en posture d’invité, nous avons Alain Symphorien Ndzana Biloa, expert de la fiscalité basée au Cameroun, et auteur d’un livre sur le besoin d’un système fiscal international

Un système fiscal international désormais acquise au niveau des Nations Unies #25

Vous pouvez suivre le Podcast sur:

Beneficial ownership verification: exploring Belgium’s sophisticated system

Belgium’s automated IT system, which comprises cross-checks, validations and structured data on ownership chains, sets an example for other countries to follow. However, it should improve its public access.

Despite many jurisdictions approving laws to establish beneficial ownership registers (we reported more than 80 countries back in April 2020, and the US became the latest to do so in January of 2021), verification of beneficial ownership remains a challenge. Countries offering beneficial ownership information online and for free have enabled the public (for example journalists and civil society organisations) to assess the extent of the problems in accuracy of beneficial ownership information. Examples of this third-party verification include Global Witness’ analysis of the UK beneficial ownership register, Transparency International’s use of the Slovak beneficial ownership register to detect abuses by the Czech Prime Minister, or the recent OpenLux investigation into Luxembourg’s beneficial ownership register.

We have been writing about beneficial ownership verification since our first proposals in 2017, which we updated in 2019. We have also set up a multi-stakeholder group with other allied organisations to promote pilots to verify beneficial ownership information. During the group’s calls we have heard presentations on how different stakeholders are going about verifying this information, and a curated collection of our work on the issue is available here.

Cutting-edge verification

In 2019 the Financial Action Task Force (FATF) published a paper on best practices of beneficial ownership for legal persons, describing the sophisticated verification systems of some countries, with one of the examples being Denmark. Representatives from the Danish Business Register made a presentation to our multi-stakeholders group and also wrote a guest blog post describing the impressive Danish system.

A few months later we got in touch with Alexandre Taymans and Sébastien Guillaume from Belgium’s Ministry of Finance. They were kind enough to present the very sophisticated IT system used by the Belgian beneficial ownership register at the VI edition of the Buenos Aires beneficial ownership event that we co-organised with Latindadd and Fundación SES as members of the Financial Transparency Coalition.

Now, Belgium’s Ministry of Finance has also prepared an illustrative and detailed report on how the Belgian IT system works. The report shows how the system detects inconsistencies, for example if the user declares a national tax identification number or other personal information that doesn’t match the records of the register of natural persons.

The report also elucidates the requirements to disclose the ownership chain and how the system presents this as structured data, creating graphic representations as well.

Overall, the Belgian IT system for beneficial ownership verification sets an example for other countries to follow. The detailed report gives precise descriptions of what the checks look like and it proposes some future improvements. It is a must-read for any country planning to set up a beneficial ownership IT system. However, Belgium could also learn from countries such as the UK and Denmark that make beneficial ownership information available in open data format. Belgium should improve its public access to the beneficial ownership register; this would also enable, among other benefits, verification by third parties. As detailed in TJN’s, Financial Secrecy Index, access to beneficial ownership information is currently restricted to those with a Belgian electronic Id or those who are physically in Belgium.  The index also identified loopholes in relation to legal ownership registration that should be fixed.

Tax Justice Network Portuguese podcast #22: América Latina perde US$ 43 bi por ano; valor dá pra vacinar toda região

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business). All our podcasts are unique productions in five different languages – English, Spanish, Arabic, French, Portuguese. They’re all available here.

#22 América Latina perde US$ 43 bi por ano; valor dá pra vacinar toda região

Mais de US$ 40 bilhões em recursos que poderiam ser investidos no desenvolvimento da região, em educação, saúde, na compra de 2 bilhões de doses de vacina contra a covid-19 estão vazando da América Latina e Caribe em forma de fluxos financeiros ilícitos. Esse dinheiro sai de nossos países de maneira ilegal e sustenta o tráfico de pessoas, drogas, armas, a lavagem de dinheiro e também muitos abusos fiscais.

Esses vazamentos criminosos são destaques da edição #22 do É da sua conta, que traz as informações do recém lançado estudo “Vulnerabilidades e exposição a riscos de fluxos financeiros ilícitos na América Latina”, da Tax Justice Network. De acordo com o material, os principais  buracos que  permitem essas perdas bilionárias estão no comércio internacional, nos investimentos estrangeiros nos países latinoamericanos e movimentações bancárias suspeitas.

Além de colocar a lanterna e mostrar onde está o problema, o podcast também traz as ferramentas para vedar os canais de fluxos financeiros ilícitos apresentados no estudo da TJN. Acabar com estes fluxos financeiros ilícitos é possível. Ouça o podcast e descubra como.

Participantes desta edição:

Transcrição do podcast

Mais informações:

#22 América Latina perde US$ 43 bi por ano; valor dá pra vacinar toda região

Conecte-se com a gente!

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Download do podcast em MP3

É da sua conta é o podcast mensal em português da Tax Justice Network. Produção de Daniela Stefano, Grazielle David e Luciano Máximo. Coordenação: Naomi Fowler.

Download gratuito. Reprodução livre para rádios.

Casino Capitalism and a just transition: the Tax Justice Network podcast, February 2021

Welcome to the latest episode of the Tax Justice Network’s monthly podcast, the Taxcast. You can subscribe either by emailing naomi [at] taxjustice.net or find us on your favourite podcast app.

In this month’s episode:

The transcript is available here (some is automated and there may be small inaccuracies)

Featuring:

The Taxcast: Casino Capitalism and a just transition #109

We can do this, you know, there are solutions. The next 20 years could be one in which we rebuild a more just global economic system.”

~ Ben Tippet of the Transnational Institute

In the same way that Bitcoin has surged in price, the Gamestop bubble has no rooting in any kind of economic reality. The term ‘investment’ is very widely used and abused by politicians and by journalists. We need to see huge investment directed towards a new energy efficient, non-fossil fuel market. There’s a huge transition facing humanity and at the moment, I don’t think markets are in any way geared to making that kind of transition.”

~ John Christensen of the Tax Justice Network

Further reading:

Want more Taxcasts? The full playlist is here. Or here.

Want to subscribe? Subscribe via email by contacting the Taxcast producer on naomi [at] taxjustice.net OR subscribe to the Taxcast RSS feed here OR subscribe to our youtube channel, Tax Justice TV OR find us on Acast, Spotify, iTunes or Stitcher etc. Please leave us feedback and encourage others to listen!

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A tide-turning moment in the global struggle for tax justice

It’s not often that you can celebrate an outright, global triumph for the advocacy efforts of a movement. Today, for tax justice, is one of those days. The high level UN panel report launched today, by a group of heads of state and ministers from around the world, may come to be seen as a pivotal moment in the world’s fight against illicit finance and tax abuse. If their envisaged changes follow, the $427 billion that we conservatively estimate to be lost in tax revenue each year may finally be curbed.↪NOTEOur State of Tax Justice 2020 report revealed in November 2020 that countries around the world are losing over $427 billion in tax each year to international corporate tax abuse and private tax evasion, costing countries altogether the equivalent of nearly 34 million nurses’ annual salaries every year – or one nurse’s annual salary every second.

The UN High-Level Panel on International Financial Accountability, Transparency and Integrity (the FACTI panel) was launched in March 2020 to study the impact of tax abuse, money laundering and illicit financial flows on the ability of states to meet the UN’s Sustainable Development Goals by 2030.

The FACTI panel’s final report represents a year’s worth of detailed analysis and engagement with UN member states in every global region. From the perspective of two decades of struggle by the tax justice movement, the recommendations are nothing short of remarkable.

The report calls for powerful, specific policies to be implemented, in respect of both tax transparency and international tax rules. It also envisages sweeping reforms to the global architecture. In each area, a raft of tax justice proposals are adopted.

Consider first the “ABC’s of tax transparency”. This is the suite of policy measures that the Tax Justice Network proposed shortly after our formal establishment in 2003, each of which was first dismissed as utopian and unrealistic by policymakers and OECD officials.

A is for the automatic exchange of information, delivered through a multilateral instrument to ensure that tax authorities are aware of their tax residents’ offshore financial accounts. This was adopted by the OECD in the Common Reporting Standard, which now covers all major financial centres except the United States, but excludes most lower-income countries from effective access to information.

B is for beneficial ownership transparency, and specifically the creation of public registers of the ultimate warm-blooded human beings who own companies, trusts and foundations. Around 80 countries now have registers for companies at least.

C is for country by country reporting by multinational companies, to show the extent and nature of profit shifting. The G20 directed the OECD to develop a standard in 2013, which was finalised in 2015 and follows closely the original proposals of the tax justice movement – but under heavy lobbying introduced various technical weaknesses and an extreme turnover threshold, and critically did not allow for the data to be made public.

The FACTI panel identifies each of the ABC as crucial policy tools for the fight against tax abuse and illicit finance. In each, the recommendation is close to the full demand of the movement: to end the exclusion of lower-income countries from automatic information exchange; to establish central registers of beneficial ownership for all legal entities, and ‘encourage’ at least that these be made public; and to require all multinationals to publish country by country reporting.

Turning to international corporate tax rules, the tax justice movement has long called for two measures to end profit shifting ↪NOTEProfit shifting is a technique used by multinational corporations to pay less tax than they should that involves a multinational corporation moving the profit it makes in the country where it sells good and services into to a tax haven. By shifting profit into a tax haven, the multinational corporation underreports the value of its profit in the countries where it sells goods and services and so pays less or no tax in that country. The profit shifted into a tax haven then gets taxed at a very low rate or not at all depending on whether the tax haven has a very low corporate tax rate or no corporate tax rate. Learn more here. and the race to the bottom on tax rates. The first of these is unitary taxation: the taxation of multinationals on the basis of their global group profits, apportioned as tax base between the countries where their real economic activity (sales and employment) takes place. This is the antidote to the current, failing system which relies on the economically illogical “arm’s length principle” to ensure that entities within the same multinational group each end up with an appropriate amount of taxable profit – despite the obvious incentives to shift profits to where tax will be low or zero.

The second measure is the introduction of a global minimum tax rate – to end the provision of precisely those low and zero effective tax rates which provide the incentive for profit shifting.

The latest OECD reform process has finally embraced both of these ideas in theory. In practice, however, the process has stalled entirely with the secretariat’s proposals seen as highly complex and unlikely to deliver any significant revenue increase. Most profits would still be allocated under the arm’s length principle, and the proposed minimum tax approach would do little for the lower-income countries that host most multinational activity. Indeed, lower-income countries are projected to continue to suffer disproportionately higher losses as a share of current revenues – but even OECD member countries would gain little.

Here, the FACTI panel has embraced in full the tax justice proposals, and call for multinationals to be taxed on a unitary basis and subject to a global minimum corporate tax.↪NOTEFor an interactive summary of our key tax justice proposals and how they tackle inequality, see our “What we’re fighting for” page.

And this is the context for the third major element of the FACTI panel’s recommendations, and where the turf battle begins in earnest. The report calls for a set of reforms to the global architecture, and they have one thing in common: they take power away from the OECD and related institutions, and seat it instead at globally inclusive institutions.

The central element is the creation of a UN tax convention, to be negotiated on an inclusive basis and to set rigorous standards for the global exchange of information and for tax cooperation. Second is the establishment of an intergovernmental body under UN auspices, to oversee the setting of international tax rules. And while these have long been advocated by the tax justice movement, the third is a relatively new proposal: a Centre for Monitoring Tax Rights, first proposed in 2019 (in my book The Uncounted), to collate, analyse and publish data on the extent of international tax abuse affecting (and facilitated by) each individual country and jurisdiction.

The report recommendations here are blunt, and based on the detailed analysis of their interim report in September 2020. These reforms, they see, are necessary to address the fundamental failures of the existing architecture – which is to say, the fundamental failures of the OECD and related institutions to provide fair, effective and globally inclusive progress against tax abuse.

The outstanding question now is that of political will. Are UN policymakers willing to take this turf battle on, while OECD officials are increasingly open in their hostility? Are heads of state and finance ministers ready to push the measures through, to deliver the powerful changes needed – and to reap the revenues that will follow from strengthening key elements of transparency and accountability?

These questions, ultimately, come back to the tax justice movement. Political will is not a question of politicians’ will, but the political context in which they operate. Policymakers do not see the light, they say; but they do feel the heat. If ever there was a rallying cry for the global tax justice movement to stand up as one and call for public pressure for national and international policymakers to do the right thing, this report from the FACTI panel is it. Let us rise!

Making a killing from care

Foreign investors who own UK care homes are charging exorbitant fees while shifting millions of pounds into tax havens. That is the finding of a new report by the Center for International Corporate Tax Accountability and Research (CICTAR) which shows the Canadian government pension fund PSP Investments, which controls more than 60 UK care homes, is shifting profits offshore and declaring losses in the UK while demanding £200 a day in fees from thousands of residents.

Darkness at Sunrise: UK Care Homes Shifting Profits Offshore focuses on two companies controlled by the PSP; Gracewell Healthcare and Signature Senior Lifestyle, both of which are run by management company Sunrise Senior Living. The report presents a concrete example of what is likely to be a much broader pattern of predatory corporate behavior in a sector that is dominated by private equity firms with a track record of aggressive tax planning.

The study comes at a timely and troubling moment, as the Coronavirus pandemic has thrown decades of underfunding of the sector into stark relief. Financialisation of the UK care industry has enabled private equity firms to extract many millions of pounds from the economy while prejudicing the wellbeing of residents and undermining the labour rights of workers.

For example, US real estate company Welltower – which is a minority partner in the homes examined – made an estimated £64 million from them in 2019. What’s more, the firm owns some 120 UK care homes in total. As explained by the report’s author Jason Ward: “Profits reported to shareholders reveal what is usually kept hidden – complex corporate structures using tax havens artificially create losses to avoid UK tax.”

In Canada, meanwhile, PSP Investments owns the second largest care home operator, Revera, which is now facing scrutiny over Covid-19 deaths and growing calls for public ownership.

The pernicious impacts of financialisation, and in particular of private equity firms, in the UK care sector has also been examined in episode 96 of the Taxcast, and Nick Shaxon’s book The Finance Curse.

Submission to New York State Assembly: the case for Financial Transactions Taxes

Update, March 7: In new Zogby poll, majority of New Yorkers support the change. See TJN release here

A version of this document is being submitted today to the New York State Assembly, in support of its Stock Transfer Tax.

The time for financial transactions taxes has returned

By James S. Henry, John Christensen, David Hillman and Nicholas Shaxson

New battles with global finance are brewing, as a range of countries, states and coalitions now push to enact new financial transactions taxes (FTTs,) an old, honourable, effective and progressive kind of tax that is fast regaining popularity around the world as governments scramble to pay for the costs of the Covid pandemic.  Powerful new initiatives in the United States and the European Union show rising momentum for new FTTs.

An FTT does what it says on the tin. States apply a tiny tax rate (for example, 0.1 percent) on the value of financial transactions such as the sale of shares or derivatives. Well designed FTTs have three main benefits: first, they raise significant tax revenue, delivering a welcome transfer of wealth from rich to poor; second, perhaps more importantly, they curb excessive and harmful high frequency financial speculation (which makes up around half of all US stock market trading now) while leaving normal trading and investment intact; third, they boost transparency, giving tax authorities better oversight of financial activities.

A push in New York, and the United States

In New York state, Assemblyman Rep. Phil Steck has sponsored a disarmingly simple three-page bill that would raise some $10-20 billion a year from Wall Street and plough the money into the pandemic response and the local economy, creating jobs with a fair, efficient and progressive tax. 

The form of FTT in play is the Stock Transfer Tax, a tax on share dealing that has been on the books in New York state since a Republican governor introduced it in 1905 – and still is.  The tax was progressive and highly effective, raising around $80 billion (in 2020 dollars) until 1979 when the New York Mayor and state governor caved into Wall Street pressure and phased in a 100 percent annual “rebate”, which unfortunately also remains in effect. So the tax is in effect levied – then kicked straight back to Wall Street.  According to detailed calculations by co-author James Henry, who is helping Steck organise the fight, New York state has lost $344.2 billion in lost STT revenues since 1979 when they started phasing in the rebate (figure is in 2020 dollars: original data sources are here and here.)

“The whole public sector has been starved,” said Steck.

His bill is clear and simple: it removes the rebate. If enacted, it would levy a tax of five cents on every share trade valued over $20 – so for the median Nasdaq share traded, worth $48, this would amount to an insignificant 0.1 percent tax. It behaves like a progressive sales tax,  vastly lower than the eight percent tax New York residents pay on retail items.

The STT would be painless and easy to implement – and, of course, would prove immensely popular. Steck’s bill currently has 54 sponsors in the New York assembly – and it only needs 60-65 to get accepted. (Senator James B. Sanders, Chair of the New York State Banking Committee, is sponsoring the same bill in the state Senate.) It has widespread support, ranging from the biggest trade unions, to conservatives worried about budget deficits.  We are close to a nifty victory that can be replicated all over the planet. This has got legs. 

A similar Wall Street Tax Act, a new federal FTT proposal, is supported by a good majority of voters, though its chances at a federal level are currently slim, and even lower if this doesn’t pass in New York. Various other FTT proposals have been introduced recently in the US alone.  

The Wall Street pushback

Predictably, Wall Street is shrieking, and wielding the same kinds of spurious arguments and empty threats they always make when faced with taxes and regulations.  For instance, the Securities Industry & Financial Markets Association (SIFMA,) in partnership with the Institute of International Bankers and several others, just organised a letter to Governor Cuomo opposing the STT, and the president of the New York Stock exchange followed this up by a thundering opinion article in the Wall Street Journal. These lobbyists wheeled out the usual arguments: that the tax threatens jobs; that it is a ‘tax on working families’; and of course the old “competitiveness” shibboleth: that all the banks will run away if they have to pay the tax. They cited various horror stories of countries like Sweden that had imposed an FTT, and apparently ended up regretting it.

They coo that the state should instead fill its current $15 billion pandemic-year’s fiscal deficit with other, complex mostly pro-Wall Street proposals that gouge the poor – such as budget cuts, raising fees on auto registration, or legalising casino gambling or marijuana. None have the clout and simplicity of simply repealing the costly rebate.

These tired old arguments remain as invalid as they have always been – as we will demonstrate below. Parts of our counterargument may shock some people.

A new push in the European Union

In the European Union, a new FTT push has just begun under the leadership of Portugal, which holds the rotating presidency. Although negotiations have been long and hard, Portugal has provided invaluable technical expertise on the FTT file over the years, putting it in a good position – with sufficient determination and strong civil society support – to deliver a historic FTT agreement in the coming months.

An EU document leaked to the Agence Europe highlights the FTT’s potential, and urges European countries to build on “an FTT that has already been successfully introduced and secured with minimal distortions to the financial markets” in France and Italy, and to “start testing at the European level, as early as possible, the approaches developed and already tested” – possibly including not just shares but equity derivatives. And, once introduced, it urges exploring “the options of developing this tax in the future”.

This gradual, phased approach may feel slow for those demanding a far more ambitious FTT, encompassing bonds and derivatives, but may be pitched correctly for now, so as to get the FTT over the line at a time when European leaders know their populations, angry and hurting, demand measures like this.

In many countries, financial transactions taxes have been enormously successful, as explained below. In no country has the tax inflicted any significant damage on the economy: the opposite, in fact. And they are immensely popular. In Britain, for instance, over a million people signed the “Robin Hood Tax” petition for a far broader FTT covering derivatives and other instruments.

The scope for such a tax to curb risky finance is immense. Globally the volume of outstanding derivatives contracts alone is now estimated to be equivalent to $640 trillion dollars – nearly 10 years of annual world economic output – and the sheer excess volume of financial transactions is a threat to global, national and local financial stability. This has to be reined in – and economists from John Maynard Keynes to James Tobin to Joseph Stiglitz have advocated the FTT as a great way to do it, “throwing sand in the wheels” of excessive and risky speculative global finance.

Busting the Wall Street myths

The threats and arguments from Wall Street and the European banking sector are versions of the same threats and spurious arguments we have seen, time and again, around the world, whenever anyone wants to tax financial capital. They are as wrong now as they always are – and it is worth taking the threats apart, point by point.

Claim 1: that this is a ‘tax on working families’ The idea here is that financial institutions will simply pass the cost of the tax onto end investors – such as pension funds.

The exact opposite is true, for several reasons. First, we must distinguish between investors holding shares for the long-term – like pension funds – and high-frequency traders. The former has legitimate needs, while the latter provides no useful service to the economy: their business is to use super-fast computers to flip shares milliseconds ahead of their competitors, to gain a trading edge over their counterparties, which include pension funds. This is pure wealth extraction from others. The 0.1 percent average STT hardly touches the ‘good’ investors, because it is levied only once per trade – while it would hammer the HFT predators (which are effectively levying a private tax on all share owners every time they use their supercomputers to trade against them.)

Second, our further calculations suggest that the cost of the FTT to the $103bn New York State Teachers retirement pension fund, for example, would be just over $20m a year. That may seem like a lot, but compare it to the shocking $330 million in annual management, advisory and legal fees the fund paid to Wall Street (see p94 here), just on the $54 billion of their assets that are externally managed. Add internal administrative costs for the internally managed assets, much of which also flow ultimately to Wall Street, and the total rises to $401 million. Put another way, the STT would cost the fund 1.8 basis points, while the fees cost it 60 basis points.  Adding in the New York State and Local Retirement System pension fund, including police and civil service, we calculate a total of $1.33 billion in overall fees and administrative expenses.

These fees are splashed out to 37 different investment advisers (p96 here), and the assets are fire-hosed out into 414 different Wall Street funds (pp 97-100), many of which extract hidden fees not recorded above. That is a lobbyists’ gravy train – and a vastly bigger tax on working families than any STT could ever be. It is also an example of “pension fund capture” – which may help explain why it has been so hard to get many employee pension funds on board with such an employee-friendly tax.

What is more, a STT encourages pension funds to invest as they should: for the long term, rather than speculating with pensioners’ money.  Meanwhile, those clever Wall Street investment managers have overseen a $2.5bn decline in those pension fund assets since 2018, while stock markets have soared.

This general principle also applies to any taxes that effectively target the owners of capital (as opposed to targeting workers or employees, say). Such taxes disproportionately strike capital-intensive, low-employment (and often predatory) activities, while hardly touching the patient productive investors employing locals. That is largely because taxes that apply to firms employing large numbers of people are usually a tiny proportion of overall outgoings (whereas things that those taxes help pay for, such as infrastructure or an educated workforce, loom far larger.) Meanwhile, taxes on capital loom far larger in capital-intensive industries employing few people, such as hedge funds. What is more, it is easy to design safeguards to minimise impacts on healthy investing.

Also, over 80 percent of quoted U.S. shares are ultimately owned by the wealthiest 10 percent of Americans, so any residual direct costs on share owners (like pension funds) are shouldered overwhelmingly by richer folk in any case. When the racial or gender dimensions are considered, the picture is even starker. And for the FTT, the wealth impact is even more concentrated than this, because the main beneficiaries of strategies by hedge funds that engage in HFT – the ones targeted by the STT – are billionaires and other high net worth individuals.

Claim 2: Other countries that imposed an FTT regretted it. Sweden is routinely cited here, when an FTT imposed in 1984 led to a reduction in Swedish trading volumes.

The exact opposite is true. Sweden did lose some trading volumes after the FTT was implemented – but this was because of its design flaws. As the IMF reported in 2011, the FTT was only imposed on trades via Swedish brokers, so “it was easily avoided by using non-Swedish brokers.”

By contrast, Britain’s Stamp Duty on securities, a narrow FTT on share transfers is extremely hard to avoid.[1] It raised around £3.5 billion (US$ 4.9 billion) in 2020, equivalent to the salaries of 110,000 nurses, for instance, or seven times the operating budget of Oxford University.  This tax, which was introduced in 1694 (that is not a misprint) has not prevented London from being one of the world’s two biggest financial centres, alongside New York.  If extended to cover other forms of financial trading, the UK’s FTT could raise multiples of these sums.

The latest EU document notes that in Italy’s and France’s case “the introduction of an FTT did not have a significant impact on market liquidity . . . nor did it have a significant effect on financial volatility” and added that it has “not led to a significant shift towards non-taxable investment vehicles as a strategy for tax avoidance.” And in all these countries, the revenues, added transparency and reduced risky speculation delivered large benefits.

Claim 3: That the financial sector is the goose that lays golden eggs, the “engine” of the economy, thatitshowers tax revenues and jobs on the rest, so we should nurture and protect it.

Another complete myth. A financial sector provides some ‘utility’ benefits to any economy, but parts of it also impose severe costs. Two images illustrate this.

The blue section in the image on the left is the ‘utility’ part of finance, providing useful services to the economy: lending to small businesses, providing ATM machines, etc. The red part is the harmful stuff: the hedge fund predation, the high-frequency trading / extraction, and so on. The image on the right, from the IMF, shows there is an optimal size for a financial sector: expansion beyond this tends to harm economic growth in the state that hosts it. The U.S. and U.K. passed this point some time in the 1980s, and both suffer a heavy “finance curse”. Oversized finance is not a golden goose, but a cuckoo in the nest, crowding out and harming other parts of the economy. The conclusion is, “shrink finance, for our prosperity.” Shrink the red part, and keep the blue part.  How can we do this? One good way is via an FTT, which kills harmful high frequency trading, but leaves the utility functions unscathed.

Claim 4: that the tax imposes a ‘burden’ on the country or state. 

This claim resonates quite widely in the United States, where anti-tax and anti-government ideologies run deep, but it is nonsense. A tax is not a cost to an economy but a transfer within it. An FTT transfers wealth downwards, from wealthy shareholders and owners, many of which are from overseas or out of state, to the local public purse, which deploys resources to fund economy-growing initiatives such as local public infrastructure, courts, or health and education. Studies have suggested that FTTs boost economic growth and net job creation, and reduce the likelihood of financial crises.

An FTT provides additional public benefits, like a tax on tobacco or on gambling, by reducing harmful financial trading and financial risks, as discussed above.

Claim 5: that “all the money will run away” – that our country or state will become “uncompetitive” and the bankers will de-camp or do their trades elsewhere.

They always say that. (Why woudn’t they? Talk is cheap.) When New York’s STT was enacted in 1905, the New York Times thundered that all the money would flee to other stock exchanges like Philadelphia’s or Chicago’s, and New York would be like those “medieval cities, which fell out of the course of modern commerce.”  Three months later, the NYT retracted the opinion, admitting it had been a great success.  And now consider that immense gravy train of Wall Street fees extracted from New York’s pension funds described above: why on earth would Wall Street run away from that? In fact, of the many US pension fund assets invested overseas, the top destination is the United Kingdom – which has the highest FTT of any major country. 

In fact, FTTs of different kinds are happily in place in Belgium, China, Colombia, Cyprus, Egypt, Finland, France, Hong Kong, India, Ireland, Italy, Kenya, Malaysia, Malta, Pakistan, Peru, Philippines, Singapore, South Africa, South Korea, Spain, Switzerland, Taiwan, Tanzania, Thailand, Trinidad & Tobago, Turkey, United Kingdom and Venezuela – and those are just the ones we know about. Denmark and Poland are considering them.

As a detailed IMF study put it, FTTs “do not automatically drive out financial activity to an unacceptable extent,” they are “certainly feasible” even unilaterally, and “would likely be quite progressive.”

Many of of those FTTs were brought in since the last global financial crisis – and precisely none of the FTTs trashed their local financial centres. It is also almost certain, though we haven’t checked every case (here’s some Kenyan FTT lobbying, for instance), that financial interests threatened armageddon ahead of the introduction of every one of them, often brandishing Sweden as if it supported their arguments.

Don’t believe the hype. These ‘competitiveness’ stories are a hoax.

In short, since the first FTT was pioneered in the Netherlands in the 1630s, such measures have always been passed in response to fiscal crises. Pretty much every country and state across the globe faces a fiscal crisis now. The time to get these taxes into the books is today.

Further reading

James S. Henry is an investigative economist and lawyer, Global Justice Fellow at Yale, Board member of Amnesty Internatinoal US, and Senior Advisor to the Tax Justice Network.

John Christensen is an economist and former head of the government economic services of the British Channel Island of Jersey. He chairs the Board of the global Tax Justice Network.

David Hillman campaigned to Ban Landmines and Drop the Debt before helping found the Robin Hood Tax (RHT) campaign to tax the finance sector better, sparking RHT campaigns across Europe and in the US.

Nicholas Shaxson is a financial journalist and author of Treasure Islands, a book about tax havens, and The Finance Curse, about the perils of oversized financial sectors. He also writes for the Tax Justice Network.

[1] As the IMF explains: “the U.K. stamp duty is a tax on the registration of shares in U.K. registered companies. Investors purchasing shares in U.K. companies anywhere in the world must pay stamp duty in order to ensure their legal claim on the shares.” Austrian economist Stephan Schulmeister has produced a more detailed analysis of the Swedish experience, which he contrasts with a much more effectively designed transaction tax in the United Kingdom: the full report can be accessed here.

Call for papers: Human rights and the 4 “Rs” of tax justice – Tax Justice Network annual conference

Each year, over $427 billion in tax is lost to the most egregious forms of international corporate and individual tax abuse. This costs countries around the world the equivalent of nearly 34 million nurses’ annual salaries every year – or one nurse’s annual salary every second. But while the expansion of research into credible measurement of these tax losses has helped to drive forward international policy responses, these responses are often disconnected from the human costs that result. This reflects a failure to properly consider “the 4 Rs of taxation”.

Without tax justice, states cannot raise the revenues to meet their obligations to provide the maximum available resources to promote human rights. Without effective taxation, states cannot deliver the level of redistribution necessary to combat gross inequalities. Without a functioning tax system, states cannot achieve the repricing of public “bads” such as carbon emissions, to ensure sustainable development. And last but far from least, without fair and transparent taxation, we do not see the development of effective political representation necessary to ensure accountable governments based on a healthy social contract.

In 2021, the UN’s High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) has thrown down the gauntlet. The Panel’s final report calls for a fundamental overhaul of the global architecture around tax and financial transparency, in order to address global inequalities in taxing rights between countries. Such an overhaul is crucial to ensuring that all states can deliver the 4 Rs.

The tax justice movement has in recent years worked ever more closely with human rights organisations to confront tax injustices and the resulting human rights failures, including the critical failures of women’s rights. Existing international legal instruments such as the Convention on the Elimination of Discrimination Against Women and the International Covenant on Economic, Social and Cultural Rights have been utilised to enforce accountability, while domestic mass mobilisation campaigns have sought to raise public awareness and demands for action.

Co-organised by the Association for Accountancy & Business Affairs (AABA),  City University of London (CityPERC), the Tax Justice Network and the Tax and Gender Working group of the Global Alliance for Tax Justice (GATJ),this virtual conference is the latest in an annual series dating back to 2003. The events bring together researchers, academics, journalists, civil society organisations, consultants and professionals, along with elected politicians and their researchers, and officials from national governments and international organisations. The purpose is to facilitate research, open-minded debate and discussion, and to generate ideas and proposals to inform and shape political initiatives and mobilisation.

Call for papers, and proposals for panels

The organisers wish to invite original, high quality papers for presentation, in the broad field of human rights and the 4 Rs of tax justice. We particularly welcome papers that focus on the following themes:

In addition, we welcome proposals for interactive panels, conversations or other sessions of a non-standard format, addressing an alternative particular theme. Please note that we will not consider men-only sessions, and that we are committed to broader diversity including with respect to race and class.

Please submit abstracts and/or panel proposals of up to 500 words, along with details of the authors and proposed speakers by 12 March 2021. The review panel will communicate decisions by 26 March 2021, and final papers will be required by 28 May 2021. Proposals should be submitted via the form below. For any queries, please contact Helena Rose at [email protected] or Liz Nelson at [email protected].

Financial support may be available for speakers where remote connectivity would otherwise present obstacles to participation. Please indicate with your submission if you would require support to be able to attend.

Registration

Registration will open when the preliminary programme is published, in April 2021. For more information contact: [email protected].

The Tax Justice Network February 2021 Spanish language podcast, Justicia ImPositiva: Nueva ley, nueva constitución, nuevo mundo #56

Welcome to our Spanish language podcast and radio programme with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. We hope you like it! ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita.

En este programa:

Invitados:

Nueva ley, nueva constitución, nuevo mundo #56

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Some things never change: the use of Swiss banks by crooks

While many aspects of our lives and economies have faced uncertainty and instability during the Covid-19 pandemic, some areas seem to have resisted turmoil or even thrived from it. Unfortunately, Swiss banking secrecy and its abuse by corrupt officials and dictators is one of those areas, and it appears to be alive and kicking harder than ever.

As reported by Swissinfo:

Swiss officials have discovered CHF9 billion ($10billion) in embezzled Venezuelan public funds spread across hundreds of bank accounts. One in eight Swiss banks is caught up in this latest scandal, which some experts say shows up the failure of the anti-money-laundering mechanism put in place by Switzerland.

Not an isolated case

This absolutely doesn’t surprise us. The new revelations about embezzled Venezuelan public funds are far from being the only cases of corrupt officials with money in Swiss banks. Another Swissinfo article entitled “Switzerland has ‘impressive results’ for return of dictator funds” listed a recount of Switzerland’s other crook clients. This does make us wonder if it is so “impressive” to have that many dictators hide their ill-gotten money in Switzerland to begin with:

CHF4.5 million placed in a Geneva bank by a former cabinet minister of deposed Haitian dictator Jean-Claude “Baby Doc” Duvalier… CHF321 million siphoned off by the family of Nigeria’s former dictator Sani Abacha… 570 million in the case of Egypt [Mubarak], $60 million in the case of Tunisia [Ben Ali] and about $70 million regarding Ukraine.

Yet another Swiss publication entitled “No dirty money. The Swiss Experience in Returning Illicit Assets” included other cases of government officials’ money held in Switzerland (part of which was then returned), including US$5.5 million from Mobutu (Democratic Republic of Congo), CHF 3.9 million held by Mali’s Moussa Traoré, US$93 million from Peru’s Vladimiro Montesinos, US$684 million from the Philippines’ Ferdinand Marcos, CFH 120 million held by Syria’s Bashar Al-Assad, and US$64 million related to Angolan officials and embezzlement from the sale of Angolan oil.

What neither of these articles mentions is of course, Switzerland’s role in profiting from Nazi gold (which according to the Eizenstat Report by the US Special Envoy of the Department of State, included gold taken from victims of concentration camps). The Swiss Bergier Commission and news articles, eg on Estelle Sapir, described the reluctance of Swiss banks to return the money to Holocaust survivors, until they were forced to do it by external pressure.

Is Switzerland considered a tax haven by everyone?

Based on these cases, and the prevalence of secrecy until today, it’s no wonder that Switzerland has been ranked among the top worst offenders for years on the Tax Justice Network’s Financial Secrecy Index, a global ranking of countries most complicit in helping wealthy individuals hide money from the rule of law, and the Corporate Tax Haven Index, a global ranking of countries most complicit in helping multinational corporations abuse corporate tax.

Switzerland
  • Corporate Tax Haven Index Ranking: 5
  • Financial Secrecy Index Ranking: 2
  • Tax Loss Each Year To Tax Havens: $ 4,669,696,002
  • Tax Loss Inflicted On Other Countries: $ 17,621,174,737
See country profile ↘

Nonetheless, some folks appear to prefer turning a blind eye. Just last year, the OECD’s Global Forum rated Switzerland as “largely compliant” on issues relating to availability, access and exchange of ownership information on entities and bank accounts, among others. If this sounds at odds with the current news story of Venezuelan money laundering in Swiss banks, hold your breath because there’s more. Switzerland held onto its old “largely compliant” rating, even though the 2020 criteria was expanded to also cover availability and access to beneficial ownership information↪NOTEA beneficial owner is the real person, made of flesh and blood, who ultimately owns, controls or receives profits from a company or legal vehicle, even when the company legally belongs, on paper, to another person or entity, like an accountant or a shell company. Identifying and registering beneficial owners is vital to making sure the wealthiest are held to the same level of transparency and accountability as everybody else. Learn more here., something that even Global Forum acknowledged not to be guaranteed in Switzerland:

It cannot be ascertained that beneficial ownership information will be available in all cases… In addition, the AML [Anti-Money Laundering] legal framework contains some deficiencies with respect to the identification, verification or updating of the beneficial owners of legal entities and arrangements that may result in the AML obliged professionals not always maintaining beneficial ownership information in line with the standard. Similarly, the obligations for companies and their shareholders to identify some beneficial owners do not allow the full identification of all beneficial owners according to the standard.

In contrast, more than 80 jurisdictions already had a law by April 2020 requiring the disclosure of beneficial ownership data to government authorities. Even the United States approved a law requiring beneficial ownership registration in January this year (although some the law has some loopholes that should be fixed).

Switzerland secrecy problems don’t stop there. One of the biggest obstacles to transparency are bearer shares, a type of certificate that gives ownership of shares whoever physically holds the certificate. Most countries have prohibited bearer shares or have at least immobilised them. According to the Global Forum report, based on recent laws, Switzerland will allow non-compliant holders of bearer shares (who fail to convert the bearer shares on time) to reinstate their rights up to October 2024 (more than three years from now). In addition, non-compliant holders of bearer shares will have until 2034 (almost 13 years!) to claim economic compensation for the loss of their bearer shares.

As for banking secrecy, although Switzerland is now engaging in the OECD’s Common Reporting Standard (CRS) for “automatic” exchange of banking information, it originally showed strong resistance, and then managed to include obstacles to prevent others from obtaining information. First, as described here (see box 4), Switzerland tried to prevent automatic exchanges altogether, offering instead their alternative, known as Rubik agreements. Under these agreements, Switzerland would collect the owed taxes and give it to each corresponding country, instead of disclosing the identity of those with secret accounts in Switzerland. Those countries that signed the Rubik agreements, such as the UK, failed miserably to obtain the expected tax revenues.

When automatic exchange of information↪NOTEAutomatic exchange of information is a data sharing practice that prevents corporations and individuals from abusing bank accounts they hold abroad to hide the true value of their wealth and pay less tax than they should at home. Under automatic exchange of information, a country takes the information it has on the financial activity of individuals and businesses who are operating within its borders but are resident in, aka permanently living in or headquartered in, another country and shares that information with that country. Learn more here.  was finally endorsed, Switzerland managed to get its hands on the design of the OECD standard to protect Swiss financial interests. As described here and here, the Swiss requests for full reciprocity from developing countries and the initial allowance for Switzerland and other tax havens to cherry-pick countries to exchange information with, resulted in many countries being excluded from the system, or failing to receive information from Switzerland until later in the future (giving enough time for tax abusers to rearrange their affairs).

By 2020, there were also concerns with Switzerland’s compliance with the old (but surviving) standard of exchanges of information “on request” (when a foreign authority makes a specific request for detailed banking information). The Global Forum report wrote that, despite some recent changes, it appears that Switzerland will not respond to a foreign request of banking information if it’s based on “stolen data” (eg a leak) and if the requesting authority “actively sought out” the information outside of an administrative assistance procedure.

There are also concerns with the delays to respond to information requests (sometimes more than two years) and with the excessive information that Switzerland shares with the investigated person about the foreign authority’s request for information about the person’s financial affairs

The 2016 Report noted that the persons entitled to notification have a right to see the EOI [exchange of information] file, including the request letter, subject to exceptions. The legal framework has not changed and the recommendation to ensure that it does not exceed the confidentiality requirements as provided for under the international standard remains… In addition, the publication of the notification in the federal gazette specifically relates to administrative assistance, and in the case of group requests, provides information about the requesting authority, the date of the letter and the legal basis. Switzerland is recommended to ensure that it only discloses the minimum information necessary for the notification.

Conclusion

Unfortunately, corruption and money laundering cases keep popping up be it the Moldova Laundromat, Danske Bank or now the Venezuelan case. Embarrassingly, these cases keep using the same secrecy strategies, the same enablers (banks, lawyers, accountants, etc) and the same tax havens. Yet these tax havens continue to earn “largely complaint” ratings from the body supposedly best placed to tackle tax havens. We keep assessing countries in our indexes, proposing how to verify beneficial ownership information and how to use SWIFT data to detect money laundering. What else is needed to get governments to react?

Tax Justice Luxembourg responds to #OpenLux

Our good friends at the Collectif Tax Justice Lëtzebuerg (Luxembourg), which launched in 2016, have responded to the #OpenLux revelations. Here is their English translation of the original French press release, #OpenLux : Lumière sur la face cachée du Luxembourg.

Press release from the Collectif Tax Justice Lëtzebuerg (CTJL)

#OpenLux: Casting Light on Luxembourg’s Dark Side

The Collectif Tax Justice Lëtzebuerg (CTJL) has taken note of the #OpenLux investigation, published on this day by many national and international media outlets. These revelations are the result of a collaborative investigation carried out by Le Monde, with the participation of many journalists and investigative media, including WOXX, over the past year.

Despite some real and concrete advances in terms of transparency and openness in Luxembourg in recent years, such as the establishment of a Registry of Beneficial Ownership (RBE), which also made this investigation possible in the first place, these efforts remain insufficient. We regret that the country and its leaders have not managed to break with its past as a secrecy jurisdiction (or “tax haven”, even if this term is not precise enough), despite the assurances offered by the Prime Minister during his last address on the State of the Nation. The continued existence of many companies without any real economic substance bolsters fears that the financialisation of the Luxembourg economy will continue, at the risk of the country’s productive and creative economies.

The global COVID-19 pandemic underlines in several ways how interdependent humanity is and how much collective solutions are needed to overcome not only the disease but also the deep socio-economic injustices and inequalities that have facilitated the spread of COVID-19 in the first place. The adverse ecological impact of Luxembourg’s financial centre because of investments into polluting industry by investment funds is also worrying, as highlighted in a recent report by Greenpeace Luxembourg.

The Luxembourg government, which reacted quickly to the survey by setting up an information page (www.openlux.lu), needs to show real political will to combat tax evasion by multinationals and high net-worth individuals. It is not enough to hide behind excuses such as the application of the – alas insufficient – standards of the OECD or the European Union (as highlighted in particular by the adoption of the European Parliament Resolution of 21 January 2021 on the reform of the European Union’s list of tax havens). Advertising campaigns such as “Luxembourg – Let’s Make It Happen” cannot replace building a real culture of openness and good governance in the public interest.

In order to seize the opportunity offered by these latest publications, the CTJL believes that the Luxembourg authorities should:

Press release by the Collectif Tax Justice Lëtzebuerg (CTJL), 8 February 2021

Tax Justice Network Arabic podcast, edition 38: الجباية ببساطة #٣٨ – عندما يتقاضى المعلم دون الأجر الأدنى في الأردن

Welcome to the 38th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. It’s produced and presented by Walid Ben Rhouma and is available for listeners to download. Any radio station is welcome to broadcast it for free and websites are also welcome to share it. You can join the programme on Facebook and on Twitter.

الجباية ببساطة #٣٨ – عندما يتقاضى المعلم دون الأجر الأدنى في الأردن
مرحبا بكم في هذا العدد الجديد من الجباية ببساطة. في هذه الحلقة نعود على أهم الأحداث الإقتصادية والضريبية في المنطقة العربية و العالم في سنة لم تكن كباقي السنوات. من طلاق بريطانيا والإتحاد الأوروبي إلي سقوط عملات السودان وسوريا وتركيا مرورا بالإنكماش الإقتصادي غير المسبوق في كل أنحاء العالم جرّاء قرارات الإغلاق، زيادة على إنخفاض أسعار النفط لضعف الطلب.
في الجزء الثاني من البرنامج نحاور مدير مركز الفينيق للدراسات الإقتصادية بعَمان، أحمد عوض، حول الوضع الإقتصادي في الأردن في ظل جائحة كورونا وتداعياته الاجتماعية، مع عودة على إحتجاجات المعلمين وأسبابها.

تابعونا على صفحتنا على الفايسبوك وتويتر https://www.facebook.com/ TaxesSimplyTweets by taxes_simply

The Tax Justice Network’s Francophone podcast: Malgré la Covid-19, les injustices sociales et fiscales ont persisté, #24

Pour la 24ème édition de votre podcast en français Impôts et Justice Sociale sur la justice fiscale et sociale en Afrique et dans le monde proposée par Tax Justice Network avec Idriss Linge, le premier de l’année 2021, nous revenons sur un fait marquant de l’année 2020, celui de la persistance des injustices fiscales et sociales. Au nom de la Covid-19, les pays du monde ont engagé 14 000 milliards $. Mais selon des données du Fonds Monétaire International (FMI) seulement 5,2% de ces ressources ont été affectés à la lutte contre la pandémie. Le reste est allé gonfler la richesse des personnes les plus riches.

Au Cameroun, la loi organise la redistribution par l’Etat des revenus collectés dans le secteur des mines et des carrières. Mais une étude publiée par la branche camerounaise de Publish What You Pays révèle que le processus connait des problèmes et prive de millions de populations de ressources nécessaires pour leur développement.

Sont intervenants dans ce podcast :

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Tax Justice Network partnership with Federal Inland Revenue Service of Nigeria explores new audit tool

The Tax Justice Network is engaged in a pioneering joint research and data analysis project to support Nigeria’s Federal Inland Revenue Service (FIRS) audit of Multinational Companies.

Like most countries, Nigeria has a plethora of international companies doing business there, and an under-resourced tax authority, so it only gets to audit a fraction of the international economic activity passing through. A tool to help prioritise audits could therefore be invaluable.

Under an agreement with the FIRS, signed in December 2019, the Tax Justice Network has developed a detailed risk assessment tool based on international data that can help Nigeria’s tax authority (and, hopefully, others in future) prioritise and target their audits of multinational companies. On January 11-13 we partnered with FIRS in a joint three day event, entitled “Workshop on effective audit of multinational corporations for domestic revenue mobilisation in Nigeria.” The workshop was attended by about 50 staff from different areas of the FIRS, including the International Tax Department in charge of transfer pricing audit, the Treaties Unit and the Exchange of Information Unit. Beyond the specific audit project, another aim of the workshop was to create and enhance synergies between these units.

Speaking at the workshop, FIRS‘ Executive Chairman Muhammad Nami said that “many rich Multinational Corporations do not pay the right taxes due from them, let alone pay their taxes voluntarily.” Nigeria is now paying greater attention to tax audits, he said, adding that “we have created more than 35 additional Tax Audit Units and deployed experienced and capable staff to take charge of these offices.”

Tax havens, of course, constitute a major risk factor for the Nigerian tax authorities, and international data provided by official bodies in this area is hardly better than worthless. A slide we showed at the workshop illustrates this.

Nobody believes that American Samoa or Vanuatu, or Guatemala for that matter, are the top jurisdictions of concern for Nigeria, or for any other country. The world’s top tax havens are nearly all European or at least OECD countries, and these powerful groupings naturally exclude their own from blacklists. They are political. By contrast our rankings – the Financial Secrecy Index and the Corporate Tax Haven Index – are based on careful analysis of hard data, rather than on political considerations.

Essentially, both of our indexes involves combining two metrics for each jurisdiction: a “haven/secrecy score”, each based on 20 specific indicators, which tells us how risky the country’s legislation is in terms of enabling abuses; and a ‘scale weight’ telling us the size of financial flows through these jurisdictions. These scores are then mathematically combined to produce the final ranking.

However, our models have gone a step further, from the global, macro level analyses, to the bilateral macro level analyses: in our Illicit Financial Flows Tracker tool, we provide risk profiles of individual country’s economic cross-border activity based on their illicit financial flows risks in foreign direct investment, in their banking deposits abroad, etc. These risk profiles provide important pointers where to focus audit activity, and where to prioritise resourcing and how to target policies for information exchange better.

Yet, the next level is to take this analysis to the “micro” level. So instead of merely saying “Cayman‘s investment in my country provides risks”, the tax authority can scrutinize its taxpayers for related transactions and specific flows via Cayman, based on declarations and disclosure. Through our model, the tax authority can systematically calculate the risks for illicit activity of individual taxpayers based on each taxpayer’s entire cross-border transactions with all secrecy jurisdictions (not only with Cayman) to flag and rank those taxpayers incurring most geographic risks. The result is a ranking of taxpayers causing most of a country’s vulnerability in their cross-border economic transactions – and thus allowing the country prioritise its audits.  

The analysis rests significantly on a core formula: Exposure = Vulnerability x Intensity. This slide illustrates the top-level view of this.

Data will be mined from certain components of transfer pricing documentation submitted as part of annual tax returns, with appropriate confidentiality and anonymisation safeguards in place. The key risk dimension driving the model is geographical risk, looking at where the connected companies and individuals (eg shareholders, intra-group trade with related companies, directors) are incorporated and/or tax resident; and at the related volume of costs or income from high secrecy jurisdictions.

In this way, tax authorities will be able to examine the risks of different corporate structures in a speedy manner and to process large volumes of corporate tax data fast, teasing out those corporate groups whose finances are most exposed to geographic risks. The model thus allows them to understand the flows better, and prioritise their audits accordingly. Similar kinds of exercises can be carried out looking at wealthy individuals, instead of corporate structures, using the data categories from our Financial Secrecy Index.

This model now needs to be subjected to the hard knocks of the real world, and refined accordingly. We will be delighted to receive feedback and are expecting that once road-tested in Nigeria, it can be useful to a range of other countries in Africa and beyond. 

We’re proud to partner with Nigeria in countering illicit financial flows by sharing knowledge, capacity building and pioneering new methods and tools.

Tax Justice Network Portuguese podcast #21: Taxar super-ricos JÁ!

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business). All our podcasts are unique productions in five different languages – English, Spanish, Arabic, French, Portuguese. They’re all available here.

Estima-se que pelo menos 26 bilhões de dólares anuais podem ser arrecadados na América Latina com impostos sobre grandes riquezas, o que é urgente para superar as maiores crises já enfrentadas pela nossa geração. Além de contribuir com o financiamento de ações contra essas crises, o imposto sobre riqueza é essencial para auxiliar a reduzir desigualdades. O É da sua conta #21 te convida a conhecer e participar das campanhas pela tributação de grandes riquezas.

E começa mostrando que é possível: mais de cem super-ricos defendem a tributação sobre suas grandes riquezas e participam da campanha global Milionários pela Humanidade. Especialistas latinoamericanos explicam como funcionam os impostos sobre riqueza que já existem na Colômbia e na Argentina.Também contam  a experiência dos países que ativaram esse tributo para enfrentar a pandemia: Bolívia, de forma permanente e Argentina, de forma extraordinária.

E você ainda ouve as iniciativas de países que seguem tentando aprovar leis de imposto sobre riqueza na região, como Chile e Brasil. 

No que depender dos ouvintes do É da sua conta taxar grandes fortunas é urgente e necessário. Destacamos a opinão de alguns deles ao longo do episódio.

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Download do podcast em MP3

É da sua conta é o podcast mensal em português da Tax Justice Network. Produção de Daniela Stefano, Grazielle David e Luciano Máximo. Coordenação: Naomi Fowler.

Download gratuito. Reprodução livre para rádios.

New study and tool for assessing risks of illicit financial flows in Latin America

This blog is an expanded version of a blog published originally on CIATblog, with kind permission.

Today, the Tax Justice Network publishes its new study on “Vulnerability and exposure to illicit financial flows risk in Latin America.” It is the most comprehensive and systematic analysis of illicit financial flows risks in Latin America to date, and provides the basis for granular policy decisions. Illicit financial flows (IFFs) are transfers of money from one country to another that are forbidden by law, rules or custom. They encompass flows from both illegal origin capital (classic money laundering, arms, drugs, human trafficking, corruption) and legal origin capital (tax evasion and avoidance).

Illicit financial flows affect the economies, societies, public finances and governance of Latin American countries – as they do in all other countries. Latin American and Caribbean countries account for a significant share of trade-based illicit financial flows, and are estimated to lose US $43bn annually to global cross-border tax abuse. The urgent need to tackle illicit financial flows is clear. Despite global agreement in target 16.4 of the UN Sustainable Development Goals, however, the international architecture remains entirely insufficient to support progress  – although the UN FACTI panel’s final report, due in February, will identify key gaps and make recommendations for immediate action.

At the national level, a particular challenge in countering illicit financial flows lies in prioritising among the many channels; and within each channel, identifying the economic partner jurisdictions responsible for the vulnerability. We address this research gap by elaborating on an approach pioneered in the report published by the High-Level Panel on Illicit Financial Flows from Africa (“Mbeki Panel”), which can be used to generate proxies for illicit financial flows risk by combining bilateral data on trade, investment, and banking stocks and flows, with measures of financial secrecy in partner jurisdictions. This approach rests on the observation that illicit financial flows are hidden; thus, the likelihood of an illicit component increases with the level of secrecy of any given transaction. Trade with companies in Cayman Islands will be more risky than trade with companies in Ecuador. The analysis also points to geopolitical implications, and below we explore questions of OECD responsibility for threats faced in the region.

Chart 1 below illustrates the vulnerability in the eight economic channels for the 19 countries in Latin America under review, where zero represents no vulnerability or secrecy in the economic channel, and 100 implies highest vulnerability, or economic flows with an entirely secretive counterparty. The dotted lines represent the global average of vulnerability, so it can be seen that Chile, for example, faces roughly the average risk in most channels, while Mexico is more vulnerable in most.

Chart 1: Latin American jurisdictions’ vulnerability to illicit financial flows in different channels, 2018. Dotted lines represents the global average.

Risks associated with Foreign Direct Investment

The study discusses how the data-driven vulnerability profiles for individual Latin American countries relate to, and can be used to help identify, real cases of tax avoidance, evasion, money laundering and corruption. For instance, the risks stemming from inward FDI for tax avoidance by multinational companies can be illustrated with the case of Coca-Cola in Brazil. According to a media investigation published in 2018, Coca-Cola Brazil was involved in a tax avoidance scheme. At the core of the allegations is an investment from two companies registered in the U.S. state of Delaware, a corporate tax haven and secrecy jurisdiction, into a subsidiary in Brazil. Chart 2 shows the vulnerability of Brazil’s inward foreign direct investment 2018.

Chart 2: Vulnerability of Brazil’s inward foreign direct investment stock in 2018. Source: IFF vulnerability tracker.

The Netherlands is responsible for 31 per cent of all Brazilian vulnerability in inward foreign direct investment (Chart 2). Brazil and the Netherlands have a tax treaty which can be exploited by multinational corporations. Due to its position as a corporate tax haven and a secretive jurisdiction, Brazilian authorities should pay special attention to Dutch inward investment and analyse the costs, risks, and benefits of the tax treaty between the two countries to consider cancellation of the treaty. Brazil also receives high inward direct investment from other corporate tax havens: are Luxembourg (#6 on Corporate Tax Haven Index 2019), Switzerland (#5), and the British Virgin Islands (#1), and the US (#25), as illustrated in the case of the Brazilian Coca-Cola subsidiary.

In outward direct investment, there is also the risk that domestic companies and individuals make false statements about the relationship, owners, and accounts of their foreign businesses or activities in tax returns. This may be done for round-tripping purposes. That is, to nominally invest abroad with the ultimate destination being the domestic economy, to exploit tax treaties or other provisions only available to foreign investors, or to pay kickbacks for securing contracts abroad. For instance, in 2019, Joaquín Guzmán Loera (a.k.a. “El Chapo”) was found guilty by a District Court in Brooklyn, United States, of drug trafficking and money laundering. According to the United States Drug Enforcement Administration (DEA), one of the methods used by El Chapo for laundering billions of U.S. dollars of drug proceeds consisted of using U.S. based insurance companies and controlling numerous shell companies. These shell companies and U.S. based insurance companies, into which El Chapo invested, would be recorded as (derived) outward FDI from Mexico.

Chile offers a striking example of highly concentrated illicit financial flows risks in derived outward foreign direct investment positions in Latin America. Panama dominates (over 17 per cent) all Chile’s vulnerability in outward FDI with over US$15bn of investment. While some of these investments may consist of genuine, tangible real investment interests of Chilean based companies, the magnitudes involved and the secrecy levels found in Panama suggest a significant risk that some of it is there for opacity’s sake. The British Virgin Islands (71) and Cayman Islands (76) are other high secrecy jurisdictions in Chile’s vulnerability in outward foreign direct investment.

Chart 3: Vulnerability of Chile’s outward direct investment (derived) stock in 2018

RankJurisdictionSecrecy scoreVulnerability scoreDirect Investment Outward (derived) (billions) (USD)Share of Direct Investment Outward (derived)
1Panama7217.16%15.114.62%
2United States6312.47%12.512.14%
3Brazil5210.64%13.012.61%
4Peru5710.5%11.611.28%
5British Virgin Islands719.93%8.88.53%
6Argentina557.65%8.88.52%
7Colombia565.59%6.26.06%
8Cayman Islands764.74%3.93.81%
9Luxembourg553.42%3.93.78%
10Uruguay572.98%3.33.20%

Overall vulnerability of investment outward (derived): 61

While this macro-level analysis signals red flags for the Chilean tax administration, which might consider investigating the outward foreign direct investment stock into some of the highly secretive and more notorious corporate tax havens itself, the next level would consist in applying the same analysis to micro-level outward foreign direct investment and intra-group trade transactions. By applying this vulnerability analysis to transaction level data, administrations can sift through large volumes of data and implement a high level advanced analytics risk mining of their datasets. This model could be applied for example to controlled transactions in transfer pricing returns filed by multinational companies, to customs declaration forms, to suspicious transaction reports, or to SWIFT money transfers, etc. By focusing limited audit capacity on transactions with the highest composite secrecy risks and with the greatest financial values cloaked in secrecy, both the revenue yield and the compliance impact of audits could be greatly enhanced. The Tax Justice Network currently partners with tax administrations to pioneer and evaluate the effects of this approach, and is working towards expanding this approach.

Geopolitical Implications

Another important finding of the study concerns the responsibility of OECD member states and their dependencies in the vulnerability (not only) of foreign direct investment in Latin America (see chart 4). In 2018, 91 per cent of Latin America’s vulnerability risk in direct (inward) foreign investment stemmed from OECD countries and their dependencies.  The implied political economy of international tax governance points to the need for vigilance in the current “BEPS 2.0” process negotiations around reform of the taxation of multinational companies under the inclusive framework of the OECD. More ambitious proposals for comprehensive reforms, such as those made by the Intergovernmental Group of Twenty-Four (G24) and by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), have been sidelined, as has become evident in the blueprints published in October 2020 by the OECD. Latin American countries should carefully evaluate their political representation at the OECD and the inclusive framework, and assess the potential for an enhanced role through a UN tax body and convention, not least through the FACTI panel.

Chart 4: Vulnerability in direct investment (inward and outward (derived)) 2018 – Top suppliers of secrecy risks faced by Latin America, by OECD membership and dependencies

Offshore tax evasion and automatic exchange of information

An even higher concentration of risks in OECD member states can be found in the outward banking deposits of Latin America. The case of Colombia – one of the Latin American countries which is most actively engaged in the automatic exchange of information system – illustrates the importance of risks stemming from banking relationships. As chart 5 illustrates (last column), the United States remains by far the biggest obstacle to a level playing field for countering banking secrecy by not participating in the Common Reporting Standard (CRS).

Chart 5: Vulnerability of Colombia’s banking claims (derived) in 2018, and AEOI: Automatic Exchange of Information (Y = indicating activated relationship under the Common Reporting Standard; N = absence thereof)

RankJurisdictionSecrecy scoreVulnerability scoreValue of Banking Claims (derived) (billions) (USDShare of Banking Claims (derived)Activated AEOI Relationship?
1United States6358.68%9.559.39%N
2Panama7228.81%4.125.52%Y
3Switzerland743.22%0.42.77%Y
4United Kingdom462.76%0.63.80%Y
5Spain442.21%0.53.20%Y
6France501.35%0.31.72%Y
7Australia500.94%0.21.20%Y
8Germany520.59%0.10.73%Y
9Luxembourg550.33%0.060.38%Y
10Austria560.28%0.050.32%Y

Overall vulnerability of derived banking claims: 61

Latin American countries already participating in the exchange system (i.e. Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Uruguay) might consider working towards a joint position for tweaking the parameters of the system to their needs. For example, requiring public statistics could be an effective means to increase compliance of reporting obligations in major OECD controlled financial centres. In addition, the artificial legal constraints the OECD places on the use of data for criminal corruption and money laundering investigations could be revisited. The Punta del Este declaration, “a call to strengthen action against tax evasion and corruption”, signed by participating ministers from Latin America in 2018, could provide a useful starting point for international political coordination towards more efficient and ambitious data usage. Furthermore, options to achieve fully reciprocal information exchanges, including with the United States, should be explored, including a continent-wide withholding tax on non-participating financial institutions.

All data underlying the report is available freely in the Tax Justice Network’s Illicit Financial Flows Vulnerability Tracker. In February 2021 the website will be updated, providing increased granularity (e.g. vulnerability through agricultural exports) and a user-friendly data explorer.

Policy recommendations

The report offers three broad policy recommendations to counter IFFs more effectively. In each of the chapters, more granular policy recommendations are provided.

1. Enhance data availability

Broadening the availability of statistical data on bilateral economic relationships is a first step for enabling both in depth and comprehensive analyses and meaningful regulation of economic actors engaged in cross-border transactions. In the process of collecting statistical data according to IMF standards, governments would need to build registration and monitoring capacity that likely helps improve overall economic governance.

2. Consider Latin American coordination on countering illicit financial flows risks

The bulk of illicit financial flows risks at the moment is imported into Latin America from outside the region. This finding could help foster joint negotiation positions among Latin American countries when engaging in multilateral negotiations around trade, investment or tax matters. Despite the lack of political organisation at the regional level, which makes coordination and joint action more difficult to achieve, Latin American countries might consider crafting alternative minimum standards for trade, investment, and financial services in order to safeguard against illicit financial flows emanating from secrecy jurisdictions and corporate tax havens controlled by European and OECD countries. Furthermore, Latin American countries should carefully evaluate their political representation at the OECD and the associated Inclusive Framework, and assess the potential for an enhanced role through a UN tax body and convention.

3. Embed illicit financial flows risk analyses across administrative departments

A holistic approach to countering illicit financial flows requires capacity to identify and target the areas of the highest risks for illicit financial flows. Illicit financial flows risk profiles can assist governments to prioritise the allocation of resources across administration departments and arms of government, including tax authorities and customs, the central bank, audit institutions, financial supervisors, anti-corruption offices, financial intelligence units and the judiciary. Within these departments, the illicit financial flows risk profiles would support the targeting of audits and investigations at an operational level as well as the negotiation of bilateral and multilateral treaties on information exchange at a policymaking level. Whether on tax, data, trade or corruption related matters, capacity building strategies at a continental level should include illicit financial flows risk analysis.

Read report

How we win: the Tax Justice Network podcast, January 2021

New year, new logo: our monthly podcast the Taxcast is entering its tenth year on the air and to celebrate we’ve got a new logo!

In this episode of the Tax Justice Network’s monthly podcast, the Taxcast:

Featuring:

Download this link to listen on your mobile device

If we on our side have every fact and every policy and the other side has all of the stories, the passion, the emotion, the excitement, then we’ll lose”

~Ben Phillips, author of How To Fight Inequality and why that fight needs you.

From where I’m sitting, this is the end of the line for Thatcherism and for shareholder capitalism, it’s made a tiny number of people, bankers and private equity people and mergers and acquisition specialists spectacularly rich in the past 40 years, but overall the development strategy has failed the vast majority of people in the United States and in Britain and in other countries that went down this route.”

~ John Christensen, Tax Justice Network

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