Tag Archives: illicit financial flows

The European Parliament secures bank transparency

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Members of the European Parliament (MEPs) secured a big step towards the financial transparency needed to combat tax dodging last week when they made EU Finance Ministers agree on country-by-country reporting for EU banks from 2014. This represents a major victory after years of campaigning by Eurodad members and allies. The deal under the EU’s Capital Requirement Directive is timely and it can – and should – influence the final agreement on the Accounting Directive, where country-by-country reporting is still on the table.

MEPs requested urgent action on this issue in an open letter to EU Finance Ministers, and their persistence paid off. “The European Parliament is on a roll, enjoying its most influential week since the Lisbon Treaty gave it ‘co-decision’ authority over EU laws,” wrote the Financial Times.

Under the Capital Requirement Directive (CRD IV), the EU will require banks to disclose profits made, taxes paid and subsidies received, as well as turnover and number of employees for each country where they operate. This information will be included in the banks’ audited annual reports. From 2014, the information will be disclosed to the European Commission (EC). From 2015, the data will be made public, unless the EC finds significant economic disadvantages when carrying out an impact assessment, in which case they can propose a delay.

Last week’s agreement is referred to as a ‘political agreement’ that has to be approved by EU Member States and by the whole European Parliament, where a vote is expected in mid April.

Towards full country-by-country reporting

Thanks to strong pressure from civil society organisations, including Eurodad and our members, EU lawmakers have discussed country-by-country reporting extensively over the last year in negotiations over the Accounting Directive.

Importantly, the deal made under the CRD IV goes further than the provisional agreements of the Accounting Directive in requiring disclosure of financial data. Whereas the Accounting Directive will require disclosure of tax payments to governments, the CRD IV will require disclosure of profits made, taxes paid and subsidies received on a country-by-country basis, as well as turnover and number of employees. This is crucial. Knowing how much tax a company pays to the government in each country is good, but it does not reveal where real activity takes place and hence where value is made. This is basic information required to determine whether a company is paying its fair share of taxes. Country level disclosure of financial data is key to revealing tax dodging practices, which cost developing countries hundreds of billions of dollars every year.

In addition, the CRD IV requires data to be published in the banks’ annual reports. This means the data will be audited, which is not the case under the Accounting Directive.

Spill-over ensuring coherence?

Coherence in EU law will require the CRD IV agreement to spill over into the final negotiations of the Accounting Directive. At a very minimum, the new agreement should convince EU Member States that the review clause of the Accounting Directive must include country-by-country reporting

  • beyond logging and extractive industries, and
  • beyond payments to governments.

This would mean that the questions will be up for new discussions in the legislative review.

Investment figures demonstrate why extending the requirement beyond extractive and logging industries is important. In 2010, green field investments (start-ups) in the five sectors proposed by the European Parliament for inclusion in the Accounting Directive were worth $235bn: the biggest sector was extractive and logging industries with $76bn; followed by communications ($72bn); the financial and banking industries ($46bn); and construction ($41bn). On average, 63% of these flows targeted developing countries.

When voting on the Accounting Directive, MEPs suggested that payments to governments should be disclosed at country level in the banking, construction and telecommunication sectors, in addition to extractive and logging sectors. Member States have been dragging their feet, and the final agreement may not reflect the MEPs’ sensible suggestions.

MEPs deserve congratulations for securing fast action on bank transparency. Now Member States are under pressure to act coherently and extend these transparency requirements to other sectors when finalising the details of the Accounting Directive.

European Parliament: procurement policies and illicit flows vital to policy coherence for development

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On 25 October the European Parliament voted through a resolution calling for better alignment of all EU policites to development objectives. The resolution, led by MEP Birgit Schnieber-Jastram (EPP, DE) was passed with the overwhelming support of 561 votes in favour and only 47 against and 51 abstentions. The European Parliament explicitly supports key demands of Eurodad and our members on tax and sustainable procurement, building pressure on EU institutions and governments to improve EU development cooperation and to increase developing countries’ policy space to promote nationally owned development policies.

In a blow to the Commissions controversial Agenda for change policy paper, the parliament explicitly states that “the European Consensus on Development … remains the doctrinal framework for the EU’s development policy, and that any attempt to revise or replace it in the context of the ‘Agenda for Change’ should involve the institutions that permitted its creation.” It adds that the whole concept “is not merely a technical issue, but primarily a political responsibility, and that Parliament …. has a key responsibility for translating the commitment into concrete policies.” 

Sustainable procurement

As public procurement accounts for 19% of world GDP, the resolution recognises the huge potential that public procurement has “to be a tool of implementing sustainable government policies both in the EU and in its ODA recipient countries.”

Procurement ranks highly thoughout the document, which includes some of the key asks of Eurodad and allies, including fair trade groups, regarding the revision of the public procurement directive. According to the resolution, “public procurement should be effectively used to achieve the overall EU objectives of sustainable development and, therefore, that the future of public procurement directives should enable sustainability criteria to be integrated throughout the process.”

Also in line with Eurodad demands, the resolution calls for giving “contracting authorities the policy space to make informed pro-development procurement choices.” This reference is timely, given the current discussion surrounding the reciprocity regulation put forward by the European Commission that promotes the liberalisation of  procurement markets in developing countries.

Tax and development

The resolution explicitly mentions the negative impact of illicit financial flows in mobilising domestic resources in developing countries and consequently in promoting sustainable development policies. At the same time, the resolution supports Eurodad’s call for greater financial transparency, arguing that “it is essential for supporting revenue mobilisation and combating tax evasion.”

The resolution also demands that “the current reform of the EU Accounting and Transparency Directives should include a requirement for extractive and timber companies to disclose payments made governments on a project-by-project basis, with reporting thresholds that reflect the size of the payments from the perspective of poorer communities.” Although this not as ambitious as hoped for, and does not include the crucial need for the framework to be expanded to country by country reporting, it is important that the parliament explicitly recognises the relevance of fighting against capital flight in the light of policy coherence for development. 

Mexico: illicit financial flows, macroeconomic imbalances, and the underground economy

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Eurodad partner Global Financial Integrity have released a very interesting report in English and Spanish about illicit financial flows, macroeconomic imbalances, and underground economy in Mexico

The report finds that Mexico lost a total of $872 billion in illicit financial flows (or illegal capital flight) over a 41-year period from 1970 to 2010. These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.

Illicit Financial Flows Breakdowns:

  • Total capital flight represents approximately 5.2 percent of Mexico‘s GDP over the 41-year period ending in 2010; IIlicit flows peaked in 1995 at 12.7 percent of GDP.
  • Average outflows increased sharply in each successive decade; They were $3 billion in the 1970s, $US10.4 billion in the 1980s, $US17.4 billion in the 1990s, and $49.6 billion in the decade ending 2009.

IFF Drivers: The growth of the underground economy and trade mispricing are found to be significant drivers of Mexico‘s illicit financial flows. In fact, illicit flows and the underground economy are found to drive each other, creating a feedback loop.

Analysis

There is a stable relationship between the volume of illicit outflows and the onset and aftermath of Mexico‘s macroeconomic crises during the 41-year period. With reference to the six crises studied, illicit outflows increased in the crisis year compared to the two years preceding the crisis.
Furthermore, illicit flows through trade mispricing rose sharply after NAFTA came into being. The following chart shows this acceleration
The cross-border holdings of bank deposits reported to the Bank for International Settlements (BIS) show that the United States, offshore financial centers or tax havens in the Caribbean, and tax havens in Europe, are the three top destinations for Mexican private sector deposits. These deposits consist of both licit and illicit funds. However, due to a lack of data on withdrawals and incomplete reporting by financial institutions it is not possible to determine the destinations of illicit financial flows only.

Recommendations

It is clear that almost three-quarters of total illicit flows over the period 1970-2010 were generated through trade mispricing (Appendix Table 6). Moreover, model simulations indicate that increasing trade openness since 1994 when NAFTA was implemented led to more trade mispricing. This would strongly suggest that policy should be focused on curtailing trade mispricing. The report recommends three policy measures to reduce trade mispricing:

  • require risk-based price profiling;
  • require a legally binding declaration of traders between exporters and importers; and
  • undertake additional measures to curb abusive tranfer pricing.

In addition to policy action to curtail trade mispricing, the report recommends four additional policy actions to reduce illicit capital flight from Mexico:

  • expand double tax avoidance agreements;
  • require automatic cross-border exchange of tax information on personal and business accounts;
  • pursue macreconomic stability;
  • improve overall governance in order to reduce the propensity to pay bribes and kickbacks; and
  • take steps to reign in the role of offshore financial centers (OFCs) and banks;