Financial transparency: looking ahead in 2022

January 18th, 2022

As the world is moving towards the third year of the pandemic, we should remind ourselves that the vaccine inequality and unequal economic recovery from Covid-19 are political issues.They can be solved by greater international co-operation from transparency on real owners of companies and trusts, to dealing with debt, and tax abuses by multinationals to enable health and economic recovery.

The world is facing an unprecedented crisis due to the Covid-19 pandemic. The figures are stark: millions of people dead or suffering from the effects of the disease, over 120 million people pushed into extreme poverty and 38 million children still affected by school closures, representing 2.4% of the total school population.  Long-term effects of school closures that at their peak affected 72% of all children will mean rising educational inequality.

Last year female labour income as a share of all labour declined for the first time since the Beijing Declaration of 1995 by declining 4.2% (54 million jobs), compared to male employment declining 3%. This is due to unpaid care work burden and job losses affecting more women than men.  Female incomes stagnated to around 35% of the total labour income in 2019, but as low as 18% in India or 8% in Pakistan, and 4% in Afghanistan.

But there is money available to reverse the trend. As the UN Financial Accountability and Integrity (FACTI) panel revealed earlier last year, money laundering alone costs around $1.6 trillion per year, or 2.7% of global GDP, and $500 billion is lost to governments every year from profit-shifting enterprises.  Taxing the large corporates, rich and wealthy, while improving financial transparency to curb illicit markets should be a top priority in 2022.

Indeed 2022 can be a year of hope, not despair, which will depend on what happens on the following five key priorities:

  1. Covid-19 People’s Recovery

The biggest story in 2022 will be rising global inequality, and persistent poverty. A report released last week showed that the number of billionaires in the Asia-Pacific region, for instance, grew by almost a third from 803 in March 2020 to 1,087 November last year, and their collective wealth increased by three-quarters, with the richest 1% owning more wealth than the poorest 90%. Meanwhile in the UK, the gap between rich and poor has widened to the largest in over a decade fuelled by the pandemic, with the wealthiest 10% of households holding 43% of all the wealth the country.

Amid this crisis, countries have largely failed to act and ensure a fair recovery. Last year we found that 63% of Covid-19 funds in eight of nine surveyed developing countries went to big companies. At the same time, 17 countries cut corporate taxes including Chile, Indonesia and the Gambia, and many others provided further corporate tax incentives, in a global race to the bottom at a time of growing fiscal needs and debt. Meantime, countries have failed to clamp out corruption and mismanagement of Covid-19 contracts.

But not all the news is bad. Argentina and Bolivia have implemented some forms of wealth taxes as a recovery measure to fund social protection programmes. Chile’s incoming administration meantime plans to implement a progressive fiscal reform, raising progressive taxes by 5% of GDP. There are also wealth tax proposals in the Philippines, although they are countered by fears of capital flight by the wealthy using offshore tax havens in the event of greater wealth and capital gains taxes.

Meanwhile South Africa extended the Social Relief of Distress (SRD) grants until March 2022 on the back of a popular uprising, with hopes that the R350 ($22) per month grant may be made a universal income grant.  This is a model for a just Covid-19 recovery, but much like Roosevelt’s New Deal, this measure still lacks financing – as debt for South Africa comes at a high cost even though the cost of no social protection is likely to be higher.

In 2022 we will find out if countries are learning the lessons and raise and provide more funds to the most vulnerable such as women, informal workers and smaller businesses. At the FTC we will analyse how a People’s Recovery in shaping around the world and whether lessons have indeed been learnt, from Chile to Sierra Leone and from South Africa to the Philippines, and covering 20 other countries in the global South.

  1. Global minimum corporate taxes at national and regional levels

2021 was the year when G7/G20/OECD agreed a 15% global minimum corporate tax, a deal that from a global South perspective was grossly insufficient due to the revenue sharing formula being pitted against them and their voice not being represented in the negotiation table.  As a result, Kenya, Nigeria, Pakistan and Sri Lanka refused to join the agreement. However, this agreement may now unravel due to opposition by the US Senate. With US midterm elections coming in November 2022, and the Republicans expected to regain control over Congress, this could mean that there will be no deal in the near future.

This may be positive. Global South countries can go ahead introducing digital taxes which were banned by the new agreement. The Kenya Revenue Authority (KRA) said that only 11 companies that fit this requirement operate in Kenya, yet the country currently has 89 companies paying its new digital services tax (DST) which targets these businesses. Meanwhile Nigeria announced early this year that it plans to tax digital non-resident companies that sell products to local customers 6% of turnover, as part of an effort to boost revenues. Stalling the global minimum agreement may improve tax revenues in the global South and strengthen their negotiation hand if a new round of negotiations on the global minimum tax is initiated.

We will closely follow what the Indian Union Budget in February 2022 says about a domestic minimum corporate tax in addition to maintaining India’s own digital taxes, and the budget season in many global South countries.  They may create their own domestic minimum taxes, while retaining existing digital services taxes. At the same time, the EU and the UK are likely to go ahead in implementing their own regional and domestic corporate minimum taxes.

Will countries move ahead and start implementing fairer minimum corporate taxes? Will the global agreement be ditched in the end, with each country going its own way? The FTC will closely monitor all these developments especially in the global South, focusing on revenue implications and whether middle and low-income countries will finally have voice in the global negotiations as the global minimum tax agreements seems to unravel.

  1. Pandora Papers shows we have to tackle tax havens and their enablers

In October 2021, the Pandora Papers showed once again that the current system is failing to prevent corruption, money laundering and tax abuses, as highlighted during the FTC’s high-level Pandora Papers webinar held last December . In a bid to curb illicit financial flows, Argentina and Canada are moving towards introducing public beneficial ownership (BO) registries. There are some promising signs, together with the United States moving to implement the Corporate Transparency Act (CTA) in a rare bipartisan legislative effort, as Kaisa de Bel from FTC member Global Financial Integrity pointed out in a recent blog.

In 2022 we will follow closely any new developments, particularly what happens to the Financial Action Task Force (FATF), the global standard-setter on anti-money laundering, and its recommendation 24. This requires that competent authorities – such as law enforcement, financial intelligence units and tax agencies – have access to adequate, accurate and up-to-date information on the true owners of companies operating in their country. The key will be to find out whether the review leads to a new standard on centralised beneficial ownership registries instead of the current unworkable system of financial sector self-regulation.

In the EU we will also follow the implementation of the disappointingly weak Anti-Money Laundering Directive (AMLD) and whether the implementation of this directive will create momentum for the introduction of robust, open and verified registries of beneficial owners in all EU member states. We will also watch the new EU-wide Anti-Money Laundering Authority (AMLA) established to coordinate actions of national financial investigation units (FIUs) and directly monitor some of the riskiest actors across the EU. And will monitor the efficiency of beneficial ownership registries in Africa, tracking the effectiveness and use of the newly established registries in Ghana, Nigeria and Kenya.

As FTC, we will continue to support efforts to introduce public beneficial ownership registries in all countries, and investigations and inquiries into the use of offshore shell companies as revealed in Pandora Papers. At the same time, we will renew our core financial transparency demands with a sector wide consultation, also known as the ABC of financial transparency. Adopted in 2009 around the founding of the Financial Transparency Coalition as a policy guide, it focuses on promoting Automatic information exchange of all financial and tax-related data, public beneficial ownership standards, and public Country by Country reporting for larger multinationals.

  1. International co-operation to tackle illicit financial flows

2021 was the year the world most needed multilateral action: from vaccine equity at the World Health Organisation to greater gender equality at the UN Women, Social Protection via the International Labour Organisation, but all of these commitments lack financing and are harmed by financial secrecy that drains and diverts funds.  This is a key gap in global co-operation that the UN along with other multilateral bodies have tried to address via the Financing for Development (FfD) process, and the creation of the UN Convention Against Corruption (UNCAC), and most recently the UN Financial Accountability and Integrity (FACTI) panel with its 14 recommendations.

However, unilateral sanctions regime have failed to effectively tackle corruption and stem illicit financial flows. We need to look at creating momentum for making all assets public, in a global asset registry as an umbrella of all existing and future beneficial ownership registries, and other sources of public ownership, and public financial data to stem out financial crimes and tax abuses

All this was outlined by the FACTI panel last year. Yet key players including the United States and the EU oppose its recommendations, stating that they are overlapping with work done at the OECD and FATF level, among others.  While some areas overlap, countries in the global South are largely excluded from key decision-making mechanisms in these two institutions, leading to less adapted and less relevant rules. Actions taken by a UN-based multilateral framework is critical to ensure that all regions’ needs are treated equally, and to generate political legitimacy.

At the FTC, in 2022 we will be looking at what has happened a year on from the final FACTI panel report, and if any of its 14 recommendations are being implemented. We will link this with the momentum around the relaunch of the AU/UNECA high-level panel on IFFs, also known as the Mbeki Panel, which is relaunching its work this year, along with our colleagues working on the Stop the Bleeding Campaign to propose pan-African solutions to end IFFs.

  1. Financial transparency can shine light on fishery, forestry and human rights abuses

In recent years we have followed investigations in the ways that shell companies contribute towards global environmental degradation, including companies engaged in illegal logging and illegal fishing. In 2022 we will look at how the EU upgraded its timber regulation in 2021, and sanctions against companies violating EU IUU fisheries legislation.

Unfortunately, there is little action on the global scale to tackle illegal logging and fishing due to lack of a multilateral process of monitoring, accountability or sanctions.  Much emphasis is placed on supply chain transparency, and on consumer countries of these products having supplier due diligence, but this is not enough and little is being done to reveal – let alone, act on – the links between these illegal activities and the use of tax havens.

On business and human rights, the main framework is the UN’s voluntary Guiding Principles on Business and Human Rights (UNGPs) which in 2022 will focus on the UNGP 10+ Roadmap, which mentions investor due diligence and tax responsibility. We will follow closely the process to establish mandatory UN Binding Treaty on Business and Human Rights (UNBT), with the 8th session of the working party negotiating the text taking place most likely in October 2022. We also hope to see progress on the 3rd draft that elaborates further on state and business duties, and especially focus on access to remedy those committing and critically enabling human rights violations. Our focus as FTC is financial secrecy and tax abuses that enable these crimes.

We are also seeing now African bodies creating human rights guidance on business duties that can be applied in court. This includes the Africa Commission on People’s and Human Rights publishing guidance on tackling Illicit Financial Flows in 2022, which already in 2019 issued an advisory notice linking IFFs to human rights in the context of the proposed UN Binding Treaty.

These concerns, and other environmental and human rights issues, are core to our vision of a rights-based economy, that puts people and the environment at the heart of the economy rather than as an infinite resource or as an economic externality, a process that the FTC will support through this upcoming exciting year.

Written by Matti Kohonen

Director, Financial Transparency Coalition

Follow @FinTrCo