Financial Transparency Coalition

At its annual conference last week, the Task Force on Financial Integrity and Economic Development identified concrete measures that could help developing countries to mobilise the resources needed to achieve the Millennium Developing Goals (MDGs) and go even further to help eradicate world poverty and lay the ground for a fairer global financial system.

These measures include:

• taxing the USD 15 to 20 trillion of private wealth sitting in tax havens
• establishing accounting standards that oblige multinational companies to report their profits earned in every country
• or setting rules for the automatic exchange of tax information between countries.

The Task Force is a global coalition of governments and CSOs including Eurodad, working to address inequalities in the financial system that penalise billions of people. This year’s conference focused on the actions needed to achieve greater transparency in the global financial system.

Illicit flows continue to drain resources from poor countries

More than USD 1 trillion in illicit flows leaves developing countries each year- often hidden in tax havens and secrecy jurisdictions with the complicity of 50 of the world’s biggest banks. Two thirds of these illicit flows are due to tax evasion by multinational companies operating in poor countries.

In Africa, the problem is staggering: a study by Global Financial Integrity published earlier this year, Illicit financial flows from Africa: Hidden resource for Development, found that over the past four decades the continent lost as much as US$854 billion, which exceeds all of Africa’s outstanding external debt at the end of 2008. Governor Ndug’u from the Central Bank of Kenya noted in an address to Governors of African central Banks in 2007: “The costs of this financial haemorrhage have been significant for African countries. Massive capital outflows and drainage of national savings have undermined growth. Capital flight has also had adverse welfare and distributional consequences on the overwhelming majority of poor in numerous countries in that it has heightened income inequality and jeopardised employment prospects.”

At a session which discussed how financial integrity could help achieving the Millennium Development Goals, Gail Hurley – from the UNDP – said that USD 353-380 billion of external finance a year are needed to achieve the MDGs by 2015. The shortfall in Official Development Assistance is US$ 180 billion per year. Moreover, at least USD 86 billion will be needed annually to finance climate change adaptation and mitigation.

Therefore, curbing illicit flows from poor countries is crucial to allowing them to mobilise much needed domestic resources to finance poverty eradication and pro-poor development. In Africa, the money lost in illicit flows during the last four decades would not only be enough to wipe out the region’s total outstanding external debt, but leave USD 600 billion for poverty alleviation and economic growth.

What measures must be taken to curb illicit financial flows?

The thrust of the conference in Norway discussed how to address this development black-hole, and what specific measures could be put in place to help developing countries retain much-needed resources to finance equitable development and poverty eradication.

Among them, establishing a binding country by country reporting standard for multinational companies could help governments to know the profits of companies in their country, which would also ease tax collection. Setting up agreements whereby countries automatically exchange tax information would also facilitate the work of tax authorities.

At a discussion about a Task Force initiative to enhance economic transparency, James Henry presented a proposal to tax offshore wealth sitting in first world banks. According to Henry’s estimates, “there is US$ 15 to 20 trillion in private wealth sitting in offshore bank accounts, brokerage accounts and hedge fund portfolios, completely untaxed.” He said that the real tax haven problem is not only one of tiny islands on the periphery of the system, but rather of a global industry of pirate banking like “JPMorgan chase, UBS, Credit Suisse, Citigroup, Morgan Standly, HSBC, Deutsche Bank, Barclays, Bank of America, BNP Paribas, Goldman Sachs and ABN AMRO…based in New York city, London, Amsterdam, Zurich, Geneva, Frankfurt and Paris.” He proposed that the trillions held offshore- most of which are proceeds from past and present tax evasion- be taxed a modest 0.5% annually. He added that “only anonymous wealth should be taxed. If the beneficial owner can show they’re paying taxes on their offshore assets back home, they can claim rebates. Most will just pay up.”

Are governments willing to do what it takes to curb illicit flows?

The governments of Norway, Chile, Denmark, France, Germany, Canada, the Netherlands and Spain are on the partnership panel that cooperates closely with the Task Force. Representatives of most of these governments participated at the conference, showing willingness to deliver.

However, there is often a long way from words to action. Even one of the most active governments in the fight against illicit flows, Norway, which published last year the ground-breaking report Tax havens and development, was criticised by civil society and academics at the launch of Eurodad and members’ report Investments for development: Derailed to tax havens, for not having stricter guidelines regarding the use that the government fund, Norfund, makes of tax havens when investing in the South.

Civil society groups in Europe will continue to pressure European governments, the European Investment Bank and the World Bank Group to set the highest standards to ensure that they do not invest in companies registered in tax havens. There is a long way to go, but swift progress in recent years shows that taxing multinational companies and clamping down on tax havens is a priority for citizens in the North and the South. At the end of the day, as some say, taxes are what we pay for civilised society.