Financial Transparency Coalition

It’s been four years since the last United Nations Conference on Trade and Development (UNCTAD), and in that time we’ve seen the issue of illicit financial flows (IFF) take on a growing role in how we talk about financing development.

Whether it’s estimates from Global Financial Integrity that put the amount lost by developing countries at more than a trillion dollars each year, or massive leaks like the Panama Papers that outlined the enablers helping to hide the tracks of the rich and powerful, one thing is clear: illicit financial flows are a persistent problem, and they thrive on secrecy.

For this reason, we should be encouraged by the fact that so many governments and international bodies are beginning to look at the best ways to clamp down on the phenomenon. Perhaps most notable are efforts from the Organization for Economic Cooperation and Development, a group of 34 wealthy countries, who have spearheaded two of the biggest tax transparency efforts of late.

But a number of questions remain.

As the OECD only makes up 20 percent of the world’s countries, that means the other 80 percent have been on the outside looking in, as the rules were being written. This is why it’s so important that issues of tax and transparency are also discussed in forums like UNCTAD14; while the aims of the OECD — to cut down on multinational profit shifting and cross-border tax evasion — are laudable, it’s vital that space exists where all countries can discuss the issues on equal footing.

And it’s fitting that these issues are being discussed at UNCTAD14 in Nairobi this week, as the United Nations’ trade and development arm has already been looking into tax, transparency, and financial secrecy for quite some time. Just last year, as part of its World Investment Report, UNCTAD concluded that at least USD$100 billion in revenue was lost each year by developing countries to multinational profit shifting. And just this week, as the conference began, UNCTAD dropped another report, this time examining trade misinvoicing in commodity-dependent developing countries.

From the report:

“Some commodity dependent developing countries are losing as much as 67% of their exports worth billions of dollars to trade misinvoicing, according to a fresh study by UNCTAD, which for the first time analyses this issue for specific commodities and countries. 

Trade misinvoicing is thought to be one of the largest drivers of illicit financial flows from developing countries, so that the countries lose precious foreign exchange earnings, tax, and income that might otherwise be spent on development.”

Whether it’s a multi-billion dollar multinational or a wealthy elite looking to move their fortune undetected, there’s one similarity that’s painfully clear: a lack of transparency is at the heart of the problem. So, as UNCTAD 14 approaches, we’ve offered up some recommendations on what still needs to be addressed, and what role UNCTAD could play (you can find our full submission here):

Strengthen International Institutional Architecture

Strengthening international tax cooperation is paramount to tackling tax abuse, corruption, and money laundering. But to do so equitably, we need equal participation of developing countries, on equal footing. To ensure that all countries have a say in how global standards in tax and transparency are set, UNCTAD should complement and inform the work of the United Nations Economic and Social Council. Governments should reinforce efforts to strengthen cooperation in the current UN Tax Committee, including by endorsing the long-standing proposal from developing countries to upgrade it to an intergovernmental commission in ECOSOC.

Public Country by Country Reporting

After the Anti-Corruption Summit in May 2016 in London, we saw 13 governments express support for a global commitment to public country by country reporting (CBCR) for multinational corporations. Public CBCR could help detect and deter tax abuse by multinationals that shift profits to low- or no-tax jurisdictions where they have little or no real economic activity. But there’s currently no international process to promote such a commitment. This is why we think UNCTAD should be mandated to develop guidelines and build consensus around public CBCR.

Public Beneficial Ownership Registers

May’s Anti-Corruption Summit also saw 8 governments commit to establishing public registers of beneficial ownership information, which would make it much harder to hide behind anonymous companies, often the favorite vehicle for anyone wanting to move dirty money undetected. The Panama Papers laid out in great detail the way anonymous companies are central to illicit financial flows. But there are no international guidelines that could help support countries fulfill this commitment, meaning UNCTAD could play a vital role in developing guidelines and growing consensus for public registers of beneficial ownership information.

Automatic Exchange of Information

The OECD’s Common Reporting Standard aims to make it easier for countries to share information about where their citizens’ money is being held, and whether or not offshore jurisdictions are being used to evade taxes. This is incredibly important for developing countries, as it’s estimated that 33% of all assets in the Middle East and Africa are held offshore, and about 25% for Latin America. This is in stark contrast to the estimate of assets held offshore globally, which is just 6%.

But the OECD standard didn’t accommodate the unique challenges developing countries have, and it risks leaving many of them behind. Perhaps the biggest impediment is the ‘reciprocity rule’, which says that a government has to share information to receive it. While in theory, this mutual exchange is logical, a number of developing countries don’t yet have the capacity to comply with reciprocity from the start. And the reality is that very few citizens of rich nations are sending their money to banks in low-income countries, yet vast sums are flowing the other way.

To help facilitate their inclusion in the system, UNCTAD could help develop global consensus and guidelines on ensuring a limited period where low capacity developing countries could receive information without having to send their own. This temporary period of non-reciprocity will give governments the time necessary to build capacity to meet the reciprocity requirement, while benefitting from the new information.