Mexico 2012: A G20 for Financial Integrity? - Financial Transparency Coalition

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OK, it seems a bit premature to be thinking about Mexico’s G20 before we’re anywhere near November 2011 and Paris. But there are good reasons to start thinking about 2012 – and good reasons to think that it could be the first G20 that puts financial integrity and the combating of illicit flows right up front and centre.

There are important measures that can be pursued in 2011, and pressure must be maintained on President Sarkozy to deliver concrete actions to back his administration’s strong words on the damage done by secrecy in tax havens. With luck, however, the French G20 will be the last whose agenda is largely driven by the global financial crisis – and this creates the opportunity for Mexico to run the first G20 with a clear focus on long term development, and the necessary structural and systemic changes.

What could a Mexican G20 agenda look like? Well, we can get some ideas if we consider a range of evidence on the problems that face the country itself, on policy directions it has pursued and on its approach to G20 summits thus far.

Last month, Global Financial Integrity published new estimates showing the scale of illicit flows that Mexico faces – specifically, that the country lost around $460 billion between 2000 and 2008. This number is made all the more dramatic when you think that it does not take into account illegal, cash-only transactions or smuggling-related activities.

In response, and recognising that an enormous amount of these illicit flows end up in US bank accounts, Mexico has pursued a deal with the United States to automatically exchange information on interest paid to residents of the other country. Such a deal has long existed between Canada and the US, and between Canada and Mexico.

In early 2009, in fact precisely two years ago to the day, perhaps taken by a mood of optimism that was prevalent at that time, the Mexican finance secretary Agustin Carstens put the request formally in a letter to his US counterpart Timothy Geithner. As far as is publicly known, the letter has yet to receive a response.

The key point is the Mexican emphasis on automatic information exchange. Increasingly, it has become clear that automatic information exchange is the relevant standard for effective cooperation between jurisdictions (rather than the largely ineffective ‘on request’ exchange of information embodied in the OECD’s bilateral Tax Information Exchange Agreements).

Most obviously, the European Union member states exchange information on the savings income of each others’ residents under the Savings Tax Directive. In the UK, which has not always championed the directive, the tax authority has recently announced that “there will be increased penalties in place for under-declared income and gains from territories which do not automatically share tax information with the UK.”. To be clear: there will be higher penalties in place with regard to territories which only exchange information on request.

Perhaps the most exciting development came at the end of 2010, with the EU committing that member states would exchange automatically information on no less than five categories of income by 2015.

In the US, meanwhile, the Treasury Department has proposed regulations that would require banks to report to Treasury all interest payments to non-resident aliens – providing the basis for the US to engage in broader automatic information exchange, and indeed to respond positively to the Carstens letter.

Apart from its own desire for automatic information exchange, where does Mexico stand in relation to the broader G20 agenda? At the Seoul summit in 2010, Mexico took an active role, stressing a commitment to poverty eradication with a broad application. Ambassador Martha Ortiz de Rosas Gomez told the Korea Times: “We would like to see more elements aimed at helping not just the countries with the lowest incomes, but also emerging economies that have large poor populations… Within the G20 there are still deprived regions and vulnerable populations that need to overcome considerable challenges. The G20 should be one of the mechanisms to overcome them.”

In effect, Ortiz de Rosas Gomez stressed the role of inequality. Since three quarters of those living in extreme income poverty—living on less than a dollar a day—are now in middle-income rather than low-income countries, the G20 must respond to this challenge and see beyond poverty in the latter.

Addressing inequality, rather than absolute low incomes, requires a functioning state, which is representative of its citizens and concerned with justice. Corporate tax abuse that strips government of the revenues needed to support the poorest is antithetical to that aim. Illicit flows of all sorts, including the proceeds of corruption, undermine effective (and progressive) taxation and clean government.

The opportunity for Mexico is this: that by putting financial integrity for development at the heart of the 2012 G20, they can make progress toward a multilateral agreement on the automatic exchange of tax information, which would mark a fundamental step toward changing the structures and systems that promote inequality and undermine governance. And who knows? Maybe they’ll even get a reply to that letter.