The US is the second easiest country to open a money laundering firm in. And despite tax reforms, the government is perilously behind in the movement for corporate transparency
In March 2010, facing high unemployment in the wake of the largest financial crisis since the 1930s, the US Congress passed the Hiring Incentives to Restore Employment Act (Hire), hoping to stimulate the American job market. While the Hire act dominated news headlines at the time, a lesser-known provision of the legislation, known as the Foreign Account Tax Compliance Act (Fatca), was included in the bill as a means of paying for the stimulus measure. Few people remember the Hire act; Fatca was a real game changer.
One of the biggest advancements in curtailing illicit financial flows to date is the US Foreign Account Tax Compliance Act (Fatca) signed into law in March 2010. The law required foreign financial institutions to report to the US government information on all of their US clients. Almost immediately, foreign governments demanded the same from the United States, leading to a flurry of intergovernmental agreements between the US and foreign nations — many of them developing countries — establishing a system of automatic exchange of tax information.
In order for the law to work effectively, and in order for developing nations to benefit from it, each of these intergovernmental agreements needs to be negotiated and signed both by US treasury department officials and by their foreign counterparts. Unfortunately, with the US government shutdown for more than two weeks, those treasury department officials are unable to do their jobs.
Tom Cardamone
Six years ago, when the effort to promote greater transparency in the global financial system began to gain traction, it was well understood that at some point private sector support would be a key factor in achieving progress. Last week at the International Bar Association’s (IBA) annual meeting in Boston, an IBA task force released a report that takes a major step in that direction. The study examined the issue of tax evasion from the “perspective of international human right law” and found that there is a linkage between human rights and the use of secrecy jurisdictions and other measures used to avoid or evade taxation.
Tom Cardamone
Christine Clough, PMP
Five years after the financial crisis hit, the G8 finally seems to be serious about addressing the issue of financial opacity and illicit outflows. During a speech at the World Economic Forum in Davos earlier this year, UK Prime Minister and current G8 Chair David Cameron outlined his agenda for the Lough Eurne Summit to focus on a special blend of ‘T’: trade, tax, and transparency. He has called for “a more serious debate” on tax compliance and fairness, including the topics of automatic exchange of tax information and abusive tax avoidance. His transparency plan weaves strands of beneficial ownership disclosure and country-by-country reporting to his “golden thread” for development. The trade outline has a similar focus on openness, but it needs some direction.
Tom Cardamone
The French, it has oft been said, have a wonderful way with language. What sounds rather bland in English, rolls off the French tongue with a touch of elegance and élan. And so it is with the rather clumsy term the English-speaking world uses when referring to where many people hide their wealth from prying eyes: tax haven. The French have a far more pleasant term for these places: they call it a paradis fiscal, a fiscal paradise.
Fiscal paradise, doesn’t that sound much better? No references to unseemly topics like taxes, or worse, worrying about whether to pay them. By using the French term, all the tawdry dealings of the rich and powerful get a makeover that would make any Caribbean hotel spa proud. All that might be sinister or criminal about what is hiding behind the veil of a nominee trust or an anonymous shell company seems somehow rather innocuous when it happens in ‘paradise.’
Christine Clough, PMP
When the G8 Foreign Ministers met in London last month, they reaffirmed their commitment to supporting economic and political reforms in Egypt, Tunisia, Morocco, Jordan, Libya and Yemen under the Deauville Partnership with Arab Countries in Transition. The Deauville Finance Ministers and international financial institutions made a similar declaration at their meeting in Washington a week later. A key part of this effort has focused on corruption and asset recovery. The six Arab countries are supposed to improve rule of law and reform their economies and political systems to fight corruption and be more transparent. The G8 governments have agreed to help with these domestic reforms, including building greater institutional capacity and championing recovery of assets stolen under the previous regimes in Egypt, Tunisia and Libya. But their statements seem to reveal a flawed premise: that corruption and capital flight are the fault of those countries over there, and the only role for Western governments to play is helping them to clean up the mess. The money that Mubarak, Ben Ali and Gaddafi allegedly stole went to banks in the UK, the U.S., France, and a number of other countries. If the G8 sincerely wants Deauville to be an “effective and pragmatic partnership,” member countries should work to make their own financial sectors more open and law-abiding.
Tom Cardamone
As the saying goes—when things seem too good to be true, they often are. And so it is with tax haven secrecy.
For decades, government officials in Washington, London, and other Western nations were in agreement: Tax havens and anonymous shell companies were beneficial, or so the logic went. Regulators at the US Federal Reserve and the Bank of London saw trillions of “foreign” dollars flowing into American and British markets from offshore tax havens. Surely, that was a good thing. If a bunch of anonymous shell companies and disguised bank accounts want to funnel enormous wealth into the American and British economies, why ask questions? What’s the worst that could happen?
Illicit financial flows are a key issue impacting economic justice and human rights. They stifle domestic resource mobilisation, undermine government accountability and stability, and fuel economic inequality. For many decades, the human rights movement focused its programs and campaigns on civil and political rights. Experts and policymakers are now working to include issues of economic justice. This is the lens through which we in the development community should view the issue of illicit flows. While 1.2 billion people struggle to survive on $1.25 per day, we estimate that $859 billion drained illicitly out of developing countries in 2010.
