Thursday, February 28, 2013

More cries for help from UK's Jersey tax haven

From the Treasure Islands blog:
What the hell is the UK doing in its tax haven of Jersey?
This is one in an occasional series on the widespread corruption, impunity and criminality in the Septic Isle, otherwise known as the part-British tax haven of Jersey. (Try here, here or here for some earlier juice, just for example.) This isn't completely a tax haven issue, though it's an issue of political capture which is a feature of tax havenry that I've encountered in jurisdiction after jurisdiction.
Jersey Deputies Trevor and Shona Pitman have issued a press release entitled "Jersey Corruption:UK government fails constitutional obligations on 'good governance.' The preamble introducing it says:
"Our island's 'justice' system has become a tool of oppression rather than arbiter of fairness and protection for all ordinary citizens.  Complaints alleging corruption being brought to a number of politicians can now simply no longer be ignored. The reported abuses are as diverse as the members of the public bringing them to us."
Then, from the press release itself:
"Our Law Office has become the tool of choice for the clique at the apex of power to try to silence and, if necessary, drive from office or ruin those who dare challenge the established order."
I remember on my first visit to Jersey coming away telling friends that it was a cross between the English seaside town of Bournemouth and the corrupt, highly repressive west African state of Equatorial Guinea (which I visited several times in my earlier career.) I wasn't really joking.

The press release describes the illegal suspension of former Police Chief Graham Power; the former health minister Stuart Syvret "currently being silenced by a blatant misuse of the Data Protection Law within ‘top secret’ Royal Court hearings," and much, much more. Read the whole thing: it's not that long.

This corruption in Jersey is out of control, and has been for many years. And there's something else, that I've known about for a long time. The islands' only newspaper, the Jersey Evening Post, is captured by the establishment, and will not publish articles that seriously challenge the establishment fix or the tax haven industry. I should know: I've spoken to journalists on the paper who confirm this to me, but they were too afraid for their career to let me quote them, even indirectly, in any detail.

The whole of the Pitmans' shortish press release needs to be read in full: this is yet another cry for help from what is essentially an oppressed people hidden in plain sight in a pretty little English tourist destination.

Among many other things, I just don't understand why human rights organisations aren't able to take a proper look into what's going on in Jersey. It may be that they can't believe such stuff could happen somewhere so British. But it's not just human rights organisations: there something more fundamental here, as the Pitmans explain in the first paragraph of their press release:
"Two Members of Jersey’s Parliament have today called for the UK government – which has overall responsibility to ensure ‘good governance’ in the Channel Islands - to urgently investigate what they describe as the ‘spiralling evidence of the wide-spread breakdown of law within the island’s justice system.’"
And they are quite right to point to London. The UK's Ministry of Justice notes:
"The Queen is the Head of State of each Island and the Lieutenant-Governor on each Island is Her Majesty’s personal representative. The Crown is ultimately responsible for their good government, the UK for their defence and international relations."
That's clear, (as also explained in Treasure Islands.) The UK has the powers to intervene, yet it chooses not to.

What the hell is the UK doing with this vicious and corrupt little tax haven?


Mongolia kills tax treaty with Netherlands. Good.

Update via Somo in the Netherlands: see the update in the text.

We've just received an interesting email from colleagues in the Netherlands:
"Mongolia has cancelled its DTA with Netherlands due to treaty shopping and resulting loss of revenue, a new development in the whole tax treaty debate and developing country negotiation strategies. The IMF has played a positive role here, it urged Mongolia to renegotiate or introduce anti-treaty provisions. It did not however advise to cancel the treaty.

This is great timing in the Netherlands, where I assume after BEPS, with more pressure from journalists and NGOs and the EU Action Plan threatening to tackle harmful tax regimes in the EU, we will see our ministry of finance finally having to publicly admit NL is a common tax avoidance route."
The original article, in the NRC in Dutch, is here.

This is fascinating, and a welcome development, we think. And an update via Somo, noting that
this is not the only tax DTA Mongolia seems to have cancelled. The Mongolian Parliament also approved the cancellations of tax treaties with Luxembourg, Kuwait and United Arab Emirates in November last year, it seems.  See, for instance, this, from PWC, and this, from Deloitte. Argentina did a similar cancellation with Switzerland, and for similar reasons, with analysis here.

A while ago we wrote an article entitled India: don't sign with Liechtenstein which, while the cases and the countries are in each case very different, outlines some of the principles that are at play when you sign a tax treaty (as opposed to merely an information-exchange treaty) with a tax haven such as the Netherlands.

See also Mark Herkenrath's broader analysis of Switzerlands' Double Tax Agreements (DTAs) with developing countries here. A few swallows don't make a summer, but are we seeing the start of something here?

From a web translation of the new NRC article:
Mongolia at the end of last year canceled the tax treaty with the Netherlands because it claims to be the victim of multinationals that the Dutch tax laws used to evade taxes in Mongolia. It is exceptional that a country with a tax unilaterally terminates Netherlands.
. . .
The Mongolian action comes at a painful time for the Netherlands [TJN: serve those particular Dutch tax abusers right]. International is tax avoidance under the magnifying glass. The G20 (nineteen industrialized countries and the EU) announced recently with measures. Because of the favorable tax legislation for companies to lucrative flows through the Netherlands and thus provide little or no elsewhere to pay taxes.
. . .
According Parliament Speaker Zandaakhuu Enkhbold, the tax treaty that actually intended to avoid double taxation "loses the Mongolian government revenue". "The Netherlands is used as a hub for companies that evade taxes," he said in November.
. . .
In an advisory qualified IMF the tax last year as "problematic" and advised the Mongolian government to take "immediate action." 
Other countries, developing and developed, take note of Mongolia: an example that may well be -- though we admittedly aren't familiar with the full details of this case -- worth emulating.


Many UK councils expect majority to pay no council tax

First, a story from Detroit.
"Nearly half of the owners of Detroit's 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.

The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city's taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found.
And now, a story from the UK's Guardian, headlined Up to 84% on low incomes will not pay council tax, local authorities believe:
"Local authorities have conceded that up to 84% of people on low incomes will refuse to pay council tax after being caught in the net by benefit changes this April, and admit there is little they can do about it.

Ministers have cut the support for means-tested council tax benefit by £500m, and told local authorities to decide where the axe should fall."
The text of the article doesn't support that 84% as a blanket figure, but it still makes horrifying reading.

We don't look kindly on non-taxpaying by anyone, but we do fight as hard as we can for a tax system that doesn't (as the U.S. and British tax systems increasingly do) unfairly shift the burden of taxation away from those most easily able to pay -- those whose tax bills (if any) will result in their buying a slightly less grandiose yacht -- onto those least able: those whose tax payments mean fewer slices of bread and butter in their childrens' stomachs.

It's truly appalling what is happening in these two countries, as in many others. Britain's leaders are at least now talking the language of tax justice, though talking with rather bifurcated tongues

We have seen words from the politicians. We now want to see action. As a sign of the government's sincerity, it should this monstrosity, for example, into the rubbish bin. Until we see such monsters being demolished, we'll keep making comments about forked tongues.

The politicians are being led by pressure from the streets - which is just how this should work in a democracy. Keep the pressure building.

Today's blogger is currently reading this book, The Great Tax Robbery by Richard Brooks. A relentlessly brilliant skewering of the entire tax philosophy underlying the tax policies of this UK government and the last. Anyone interested in tax justice in the UK has to read it.

(We will shortly be reading Over Here and Under-taxed, by TJN's own Richard Murphy, which is bound to be excellent too.)


Country by Country reporting, a big step forward

A qualified cheer for this news from the Financial Times (via Markus Meinzer):
"As well as a prized bonus cap, which would go into effect in January 2014, parliament also prevailed in requiring banks to reveal their taxes and profits on a country-by-country basis from 2015, as long as the extra transparency is not judged by the European Commission as an impediment to inward investment."
We are not happy with that qualifier at the end of that sentence - what on earth does that mean? - but still, that part in bold reflects progress, real progress.  We are delighted to report that the Avaaz petition that we blogged on Tuesday, easily beat its target of 150,000 signatures, and currently stands at 210,000-odd, and counting. Fantastic work.

 TJN's Senior Adviser Richard Murphy, the pioneer and prime prizefighter on behalf of the Country by Country (cbc) transparency concept (and see our dedicated webpage here,) speaks eloquently about it on his blog this morning. We will quote at length:
"If you did [sign the petition], thank you. Sharon Bowles MEP and Philip Lambert MEP have to be thanked for what they did on this issue. All NGO colleagues who have worked on it receive my grateful thanks. And of course I know it is not quite in the bag yet, but as the FT also note:
"Ireland will on Thursday present the draft deal to EU ambassadors, who may decide to ask ministers to approve the final terms. Michel Barnier, the EU commissioner responsible for the reforms, said it was “difficult to imagine now that we would scrap this compromise”.
A gauntlet has been thrown down. It will be very hard indeed for an EU wide measure to be deemed anti-competitive. That would be absurd. I am cautiously optimistic, not least because the momentum for change has been created.

There was opposition though:
"George Osborne, the UK chancellor who led frantic diplomatic efforts to blunt the curbs, must now decide whether to force a debate or a formal vote at a meeting of finance ministers next week."
Wasn’t it ever so? This is the man who sings the praises of country-by-country reporting for Africa and does not want it here. That is pure hypocrisy. We need it very badly in this country, in banking, and in due course for all business in whatever sector it is in.

I find it hard to believe we have made this progress. It seems a long way from here, where this journey began in 2003, but sooner now than I might have expected I think country-by-country reporting will be a reality for global business. And that is appropriate, because it is all about holding global capital to account locally, which is precisely what it does not want to be.


TJN on Fox News: What to Do with $20 trillion in Offshore Tax Havens

Update: after taking the segment down, Fox News has reinstated it.
James Henry, TJN Senior Adviser, on Fox Business. Gentlemanly fisticuffs, with a clear winner.



Wednesday, February 27, 2013

Links Feb 27

Debt ‘vultures’ told to keep claws off Argentina Jubilee Debt Campaign
On protests in London and New York today. See also Jubilee Debt Campaign’s media briefing on Argentina’s default and vulture funds.

Corporate tax, revenues and avoidance Institute for Fiscal Studies
Hat tip: Sol Picciotto, noting that the Common Consolidated Corporate Tax Base (CCCTB) should be applied with the requirement of a worldwide Combined Report, so that it would be a weapon against tax havens and not just intra-EU transfer pricing.

Experts on Tax Information Exchange visit Costa Rica Inter-American Center of Tax Administrations

Where should tax fit into the post-2015 development settlement? Martin Hearson's blog

#inequalities2015 report launch (updated) Uncounted

The Number’s Up For European Tax Evasion iexpats

Hungary: Amnesty For Offshore Wealth Is Over - Is There Any Efficient Way To Tax It? mondaq
Some seemingly positive developments, however, possibly following the loophole-riddled Swiss Rubik deals with the UK and Germany as models.

Argentina: The state accepts companies created by dead people La Nacion (In Spanish)

How Will India Confront its Corruption Crisis? Huffington Post

Spain’s Corruption Scandals: The Crisis of the Royal Family Time

U.S.: Happy Birthday, Dear Income Tax - Five lessons for progressives from our first century of income taxes The American Prospect

How the 100-Year Old Income Tax Unleashed the Modern U.S. Economy The Atlantic
Hat tip: TaxProf. See also: How the Income Tax Created the Modern Fiscal State Bloomberg

U.S.: Jack Lew's Grotesque Citi Employment Deal and the Institutionalization of Corruption naked capitalism

Russia giant Rusal raided in tax probe BBC

Offshore law meets global challenge The Lawyer
See also: Maples regains offshore crown from Appleby The Lawyer
"Offshore managing partners are predicting further challenges ahead for the sector as well as more consolidation as firms continue to look for opportunities in new jurisdictions." The reports note a focus of new office launches in Africa and Asia.


Tuesday, February 26, 2013

Petition to end the bankers’ tax dodge -- 24 hours left!

From Avaaz, an important petition on country by country reporting:

Right now big banks are free to hide billions in international tax havens. But tomorrow the European Parliament could push through a reform that makes them pay their fair share. Germany and the UK are blocking the proposal, and Parliament needs our huge public backing to stand strong and win this landmark reform. We only have 24 hours left -- sign the petition.
Dear friends across Europe,

Big banks are hiding billions in tax havens around the world. In just 24 hours, the European Parliament can push through a reform to make them pay their fair share of tax on their already oversized profits -- but to win they need our support.

Bankers are using complex accounting tricks to avoid paying tax like the rest of us, and they're not even required to tell us where their money is. But now the European Parliament wants to shine a light onto their tax avoidance. It's a no-brainer reform that expert economists widely support -- but key governments including the UK and Germany are siding with rich bankers to kill the proposal.

Negotiations end in just 24 hours time, and allies in Parliament say that with massive public support, we can win this landmark reform to end banks' tax dodging. Sign the petition and tell everyone -- if we urgently raise 150,000 signatures from across Europe, MEPs will deliver our message right into tomorrow's crucial meeting:

It's crazy that when governments across Europe are strapped for cash, banks are free to squirrel away their money around the world without telling anyone where it is. Using accounting tricks that serve no one but themselves, they can set up their accounts so almost all of their profits are declared in tax havens where they don't have to pay their fair share -- even when those billions are earned here in Europe.

Experts say the European Parliament's proposal is a key step in the struggle to hold tax avoiders to account -- as it would require the banks to tell us where their money is and how much tax they pay, and make tax evasion more difficult. It's called "Country by Country Reporting", and means they have to break down their accounts by each country they operate in, rather than just provide one meaningless, global number.

But despite talking tough on tax avoiders, the British and German governments are leading resistance to the Parliament's proposal. Let's deliver 150,000 signatures in the next 24 hours and empower key MEPs to end this banker outrage -- sign and spread the word:

We know that this can work. Last year, hundreds of thousands of us successfully pushed the EU to agree measures to put criminal bankers behind bars -- with the EU Finance Commissioner crediting Avaaz with helping turn the tide. Now, let's make sure we stop banks' tax avoidance.

With hope,

Luis, Emma, Paul, Emily, Alex, Wen-Hua and the rest of the Avaaz team


European banks face tough disclosure rules (New Statesman)

Country-by-country reporting is making progress despite the UK (Tax Research UK)

Barclays secret tax avoidance factory that made £1bn a year profit disbanded (Guardian)


Links Feb 26

Taxation, Bank Leverage, and Financial Crises IMF
Greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis
Talking Ten years of Tax Justice in Brussels. Tax Research

50% Increase in Zambia's Mining Revenues EITI

The evils of tax havens Business World - Philippines
The Philippines has probably suffered more than most. See Chapter 2 in Jim Henry's The Blood Bankers.

Tax evasion, bribery and price-fixing: How Samsung became the giant that ate Korea The Independent

Fighting evasion: Commission launches consultations on EU Taxpayer's Code and EU Tax Identification Number Europa

EU probe into so-called revolving door practice The Parliament
Hat tip: Offshore Watch

Romanian Police dismantle EUR 2.5 million tax evasion, money laundry ring Romanian Insider

Scottish Labour to hit out at tax-dodging companies Daily Record
Let's hope the Labour party, UK-wide, can rediscover its tax mojo following the Blair era 

Diego Maradona returns to Italy for tax evasion case Daily Record

Celebrity Tax Woes The Washington Post

New moves to tax corporate offshore havens People's World

Why we must cap banker bonuses Re-Define


Monday, February 25, 2013

Links Feb 25

The uncompetitive culture of auditing's big four remains undented The Guardian
Prem Sikka comments on a report published by the UK's Competition Commission on the lack of competition in the auditing market, arguing that the problems are deep rooted and require major surgery.

Yes, taxation can be a good thing for developing countries devex
Article by TJN-Africa's Alvin Mosioma

In Europe's tax race, it's the base, not the rate, that counts Reuters
On the vote in the European Parliament for the EU to adopt the Common Consolidated Corporate Tax Base (CCCTB), and how Ireland, the Netherlands and the UK have either opposed the CCCTB or withheld support.

LinkedIn paid no federal income tax over past three years New York Post

Tax expert urges Channel Islands not to follow Isle of Man on compliance deal Jersey Evening Post

The final assault on tax havens, the OECD tries a pincer movement La Repubblica (In Italian)

Tax, Law And Development Edward Elgar Publishing
New book just released, edited by Yariv Brauner, Professor of Law, University of Florida Levin College of Law, US and Miranda Stewart, Professor of Law, University of Melbourne Law School, Australia.

Kenya: State now slaps 20 per cent tax on mining sector deals Business Daily Africa

Bermuda Relaxes Beneficial Owner Reporting Rules

Gérard Depardieu registered as Russian resident amid tax row with France The Guardian

A Revolving Door in Washington With Spin, but Less Visibility Dealb%k

UK rating downgraded while Cayman Islands retains AAA
Cayman News Service

Tax evasion is threatening social morality NyTid (In Swedish)

Laundry ... pagina12 (In Spanish)


U.S. income inequality: another stunning graph

From the United States, via David Cay Johnston of Tax Notes, an article entitled Income Inequality: 1 Inch to 5 Miles.

This graph shows that, among other things, the adjusted gross income (AGI) of the bottom 90 percent of the U.S. population rose by just $59 in 2011 dollars in the 45 years between 1966 and 2011, while the AGI of the top 1 percent of the top 1 percent (ie the top 0.01 percent) rose by $18.4 million.

As they say Statesside: go figure. Johnston concludes:
"For each extra dollar of annual income going to each household in the vast majority, an extra $311,233 went to households in the top 1 percent of the top 1 percent. One inch to almost five miles.

What do you think will happen to our tax system, and to the United States, as tax policy helps extend that line to 10 miles?"
More horrifying stats in the main article.


Friday, February 22, 2013

Links Feb 22

Summary of Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries - Spanish version Eurodad

Future of private bankers under the microscope
The number of traditional, family-run private bankers in Switzerland is shrinking from a Second World War rate of around 60 to just nine.

See also:
History bites back at Swiss private banking swissinfo

Political Corruption and Media Retribution in Spain and Greece The Nation

Disappearing Diamonds 100 reporters
Great report highlighting the role of shell companies in conflict diamonds.

EU banks face strict transparency rules Financial Times (Subscription required)
European banks are facing the threat of having to reveal their taxes and profits on a country-by-country basis in the latest twist to the EU negotiations over rules to make banks safer.

Why Should Taxpayers Give Big Banks $83 Billion a Year? Bloomberg

Big Companies Fear Offshore Tax Fallout

Seniors and Veterans to Crash ‘Fix the Debt’ Party Hosted by Honeywell CEO
The Nation

Big four accountants 'insufficiently independent and sceptical' of City The Guardian

UK new scourge of tax havens, favourite tax location for big business

Cayman Seeks To Quash Fund Investment Taboo Tax-News

Serbia has plans to prevent tax evasion SE Times

Technology whizz kid tackles Greek tax evasion Reuters

India: Private universities being probed for alleged tax evasion The Hindu Business Line

Tax avoidance: Legality vs morality Al Jazeera

Israeli Banks Said to Be Implicated in U.S. Tax Evasion

Tackling tax havens; a fight to continue Les Echos (In French)

Christians urged to fast from tax-dodging companies during Lent Ekklesia
"Christians are being encouraged to do no business with tax-dodging corporations such as Amazon and Starbucks for the duration of Lent, as a public witness against the sins of corporate tax avoidance."


TJN's February Taxcast

In February 2013′s Taxcast:

Transparency for French banks;
Taxing the digital economy aka how to worry Google and Amazon;
G8 leaders talk up reform of the global tax system – but will they walk the talk?
And…it is a bird? Is it a plane? No! It’s the OECD. The Taxcast takes a closer look.

Download it here

Update: For latest and previous Taxcasts, see here.


Thursday, February 21, 2013

LInks Feb 21

City Of London Seeks Stronger Partnership With Dubai Tax-News

The Myths of the British Tax Isles A Third Opinion

For the record, the Isle of Man is still a tax haven Tax Research UK

Silvio Berlusconi promises tax refund in mailshot The Guardian
The former prime minister's initiative, which drew accusations of foul play and even criminal wrongdoing from adversaries, appeared to be a final attempt to win over undecided voters before Italy's general election.

Tax havens let billions vanish into thin air
The Sacramento Bee
Op-ed by David Cay Johnston

Who Pays the Corporate Income Tax
The New York Times

Facebook Status Update: A $429 Million Tax Rebate, Compliments of U.S. Taxpayers Citizens for Tax Justice

See also:
Facebook’s K Street friends deliver windfall Salon
Zuckerberg's lobbyists help reduce the already-low corporate tax rate, while preserving huge loopholes.

Eyes Turn to Corporate Tax Abuse as US Senator Tackles Tax Haven Crackdown The International

Who’s Afraid of Inversion? U.S. PIRG
New Analysis: Stopping Corporations from Shifting Profits to Tax Havens Won’t Drive Companies Overseas

Amazon's tax avoidance reaches Germany TJN Germany blog

Quelle Surprise! The Administration Wants You to Believe it is Serious About Prosecuting Banks naked capitalism

Ukraine And EBRD Discuss Tax Corruption Tax-News

Governor wins legal review in Tempura secrets battle Cayman News Network
Update on the story of Operation Tempura in Cayman, a corruption case highlighting alleged misgovernance between Britain and its offshore financial centres.

Mapping G20 Decisions Implementation: How G20 is delivering on the decisions made Heinrich Boell Stiftung


Wednesday, February 20, 2013

Links Feb 20

India cracks down on taxation of transfers within foreign firms Reuters

Britain and the U.S. are amongst the biggest tax havens tportal (In Croatian)

Help combat tax avoidance across the world, Christian Aid urges UK Government
Christian Aid press release

Paulson Leads Funds to Bermuda Tax Dodge Aiding Billionaires Bloomberg

Tax deal targets offshore evaders in Isle of Man BBC

Country-by-Country reporting requirements are making progress despite Germany
TJN Germany Blog
Commenting on a report in the Financial Times.

Facebook getting a $429m tax refund even though it owes $559m America Blog

Malawi to lose more revenue due to illicit financial flows nyasa times

The cost of maintaining the benefits of a state like Norway actibva (In Spanish)

Tax havens: Revenue Québec collects crumbs canoe (In French)

In sports, finances and life, impulse to cheat is strong Baltimore Sun


Stop Amazon's tax dodge now - petition from independent booksellers

We bring you this petition from

We pay our taxes and so should Amazon!

We run the Kenilworth and Warwick bookshops,  independent shops which have been a proud part of our local high streets for many years. We are proud of the personal service we provide to all those who visit our store.

But times are tough and getting tougher.

We face unrelenting pressure from huge online retailers undercutting prices, in particular Amazon and it's pushing businesses like ours to the brink.

But what’s even worse is that Amazon, despite making sales of £2.9 BILLION in the UK last year, does not pay any UK corporation tax on the profits from those sales. In my book, that is not a level playing field and leaves independent retailers like us struggling to compete just because we do the right thing.

All Amazon UK book and toy sales are routed through its Luxembourg subsidiary. So when the British public buy goods from Amazon, they are in fact paying a Luxembourg company. This means Amazon can avoid paying British corporation tax on the profits it makes. Experts say if Amazon's total UK sales profits were not funnelled to Luxembourg, it could be paying as much as £100m a year in British corporation tax.

As Independent booksellers, we are happy with competition in the market but it must be on level terms and by dodging corporation tax in this way, Amazon start with an unfair advantage.

As they grow bigger it’s inevitable that shops like ours will be under even more pressure. That’s bad for customers, bad for the high street and bad for the UK.

Amazon may be obeying the letter of the law - but they’re certainly not being fair. Last year Starbucks announced that they had caved to public pressure and would look at their tax affairs in the UK. It’s time that Amazon did the same.

We pay our taxes and so should they -- please take a stand with us and tell Amazon to pay their fair share.

Until they do, please consider purchasing from local, independent shops instead.

Sign the petition here.


Making a Killing: Oil Companies, Tax Avoidance and Subsidies

Our friends at Platform have just released an excellent report on how UK oil company profits are boosted by unnecessary subsidies and tax avoidance.  You can read the report here. 


Tuesday, February 19, 2013

How far will governments go with committing to tackling tax avoidance?

UK Prime Minister David Cameron and his Chancellor George Osborne have gone to extraordinary lengths in recent weeks to condemn tax avoidance and committing themselves, through G8 and G20 respectively, to tackling this systemic cancer.  These commitments are to be welcomed and are the strongest signal to date that TJN's core message is getting through to decision-makers at the highest level.  Now the real work of translating these commitments into solid measures must get underway, and as Salman Shaheen argues in the New Statesman, the challenge facing both G8 and G20 leaders lies with avoiding half-measures and going for comprehensive reforms fit for the 21st century.

Shaheen identifies several areas of reform that will be familiar to readers of this blog.  Since 2002 we have been promoting a country-by-country reporting standard as a crucial tool for ensuring an effective level of accounting transparency.  CBCR has already gained support within the political and business communities, and now needs to be extended beyond the extractive industries to other sectors.  As Shaheen explains:

"This is a vital first step. But if Osborne is serious about tax transparency, he must now make the case for a much more robust form of country-by-country reporting whereby every large multinational corporation in every sector would be required to publish in their annual audited financial statements a country consolidated profit and loss account, limited balance sheet and cash flow data on tax paid for every jurisdiction where they have a permanent establishment for tax."
Problems with transfer pricing have become endemic.  Some will be tempted to tweak the OECD's arm's length method and leave it at that.  TJN sees the need for a more comprehensive reform and has called for an opening up of research into how a unitary approach with combined reporting would allow taxable profits to be apportioned to the countries where genuine economic activity occurs.  Last December TJN's Sol Picciotto laid out a route map towards attaining this goal, available here, and Shaheen picks up on this theme in his article:

"Osborne should be pushing for serious examination of a system of unitary taxation, under which companies would submit a global consolidated account in each country in which they are present, then apportion the global profits among these countries by a formula reflecting the genuine economic activity of the company in each jurisdiction."
And then there is the vexing issue of how to turn round the culture of the global tax avoidance industry.  We recognise that systemic flaws have corrupted the integrity of tax professionals in most countries.  We feel the solution lies with a General Anti-Avoidance Principle which would reverse a widespread tendency to over indulge tax avoiders.  George Osborne has gone partially down this route with his proposed General Anti-Avoidance Rule, but we feel this measure is a half-way house.  As Michael Meacher MP has previously commented:

"The real purpose of the GAAR is not to counter tax avoidance, but to narrow its definition, making everything else ethically and technically acceptable because it is outside that narrow remit."
In their recent letter to the Financial Times (16 February 2013) George Osborne and his counterparts in France and Germany - Pierre Moscovici and Wolfgang Schauble respectively - spelt out the gravity of the problem facing the world:
 "...the practices some multinational enterprises use to reduce their tax liability have become more aggressive over the past decade.  Some multinationals are exploiting the transfer pricing or treaty rules to shift profits to places with no or low taxation, allowing them to pay as little as 5 per cent in corporate taxes while smaller businesses are paying up to 30 per cent.  This distorts competition, giving larger companies an advantage over smaller, more domestic companies."
This gets to the heart of the problem, and underlines the urgency of the need for new rules.  Tax justice is gaining momentum with a strong following wind, but we must be alert to the risk that political leaders will settle for half-way measures rather than the systemic reforms the situation requires.  As Shaheen comments in his concluding remark, we sincerely hope that world leaders will neither falter nor miss this historic opportunity.


Saturday, February 16, 2013

An invitation to Bill Dodwell of Deloittes

Bill Dodwell, who heads tax policy at Deloittes, has come out fighting, demanding some kind of regulation of civil society organisations which engage on international tax matters.  He specifies our partners at Action Aid and Christian Aid, and our research director, Richard Murphy, himself a chartered accountant with very considerable experience and knowledge of international tax matters.

Richard has blogged a response to Mr Dodwell here.  For our part we would simply invite Mr Dodwell to submit his proposal for how civil society should be regulated.  TJN is totally transparent in the way it operates and our research work is rigorously scrutinised by internal and external experts.  We are intrigued by the thought of what specific proposals Mr Dodwell has in mind.  We will, of course, blog whatever he submits.


Friday, February 15, 2013

Big UK tax avoiders will easily get around new government policy

An article by TJN Adviser Prem Sikka in The Guardian, responding to an announcement by the government of a new policy, apparently, to blackball tax avoiding companies from government contracts. We already blogged this, but Sikka adds:
The proposed policy only applies to bidders for central government contracts. Thus tax avoiders can continue to make profits from local government, government agencies and other government-funded organisations – including universities, hospitals, schools and public bodies. Banks, railway companies, gas, electricity, water, steel, biotechnology, motor vehicle and arms companies receive taxpayer-funded loans, guarantees and subsidies, but their addiction to tax avoidance will not be touched by the proposed policy.
And there's much more in there, well worth reading.

In case you missed it, you can still see the recent grilling of the partners of the Big Four accountancy firms for crafting tax avoidance schemes. The 2.5 hour public grilling is by the UK House of Common Public Accounts Committee. The recording is available here.

Also read "The Pin Stripe Mafia: How Accountancy Firms Destroy Societies"

Please consider attending and submitting papers for the following conferences

2013 TJN/AABA conference to be held in London on 4-5 July 2013

Critical Accounting stream at the Critical Management Studies to be held at Manchester (UK) on 10-12 July 2013


Links - Feb 15

What Goes Around Comes Around: Why the US is Responsible for Capital Flight (and What it Can Do about It) Social Science Research Network
Paper by Reuven S. Avi-Yonah, University of Michigan Law School

Gangster Bankers: Too Big to Jail Rolling Stone/Taibblog

Australian Reforms To Tackle Tax Base Erosion Tax-News

UK: Government to blackball tax avoidance firms from major contracts
The Guardian

Why We Hope Obama's Nominee for Treasury Secretary Is a Quick Learner Citizens for Tax Justice

Facebook Status Update: A $429 Million Tax Rebate, Compliments of U.S. Taxpayers Citizens for Tax Justice

Cyprus, ‘A Money Laundering Machine For Russian criminals’ – Amounts, Flows, and Mechanics Wolf Richter - Testosterone Pit

Lord Lucas on the threat from Amazon Treasure Islands

Special Report on Tax Havens - The Economist
Storm survivors
Enduring charms
The OFCs’ economic role: The good, the bad and the Ugland
Onshore financial centres: Not a palm tree in sight
Tax transparency: Automatic response
Company taxation: The price isn’t right
The merry enablers
Switzerland and its rivals: Rise of the midshores
Who’s the criminal?
Prospects: Sunshine and shadows


This might be the best letter ever written about bankers' bonuses

From the Treasure Islands blog, via here. We linked to this letter yesterday, but it bears repeating in a stand-alone blog.
"Read the letter here. I cannot recommend it highly enough.

It's a comment on bankers bonuses, but it could also be taken as a commentary on taxpayer-funded public services.
(And after you've read it, you might read this.)"


UK govt to blackball tax avoidance firms from major contracts. Or will it?

That's the headline in The Guardian.
The Treasury has unveiled proposals to blackball suppliers from bidding for lucrative public sector contracts if they have crossed swords with Revenue & Customs over certain aggressive tax structures in the past 10 years.
That looks pretty meaty, doesn't it? (Reuters has more.) It's a no-brainer, and truly amazing that it hasn't been done before.

But. (Of course, there was going to be a 'But.')
"From April, would-be government contractors must declare in their bid paperwork if they have used a tax structure that HMRC objected to and was either defeated at tribunal or led to an out-of-court settlement in the last decade. Civil servants can then bar contractors from Whitehall contracts if they are not satisfied the firms have reformed their approach to tax paying." 
Our emphasis added. Two things here. First, what if a contractor 'forgets' to declare this in its bid paperwork? Why no HMRC blacklist? Why ever not? The second part in bold opens the door to pretty much everyone being let off the hook. (We can just picture the long, liquid crustacean lunches; we can already hear the cries of 'You abused our democracy for years, but you've promised to stop. OK, that's fine.'

And then:
Nor will the rules penalise some of the most controversial multinational corporations – including Apple, Google, Amazon, Starbucks and others – who have been criticised in recent years for exploiting differences in international tax regimes to lower their overall tax bill.
Not good enough. Not nearly good enough.

And now here's another 'but:' an even bigger one.
Margaret Hodge, chair of parliament's public accounts committee, attacked contract awards to big accountancy firms which, she said, were among the most active in inventing schemes to minimise tax bills for companies doing business in the UK. "I think it is questionable whether you should get public contracts," she told top tax experts from Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG. Her committee heard how these four firms make almost £490m annually from public sector work in Britain.

However, large accountancy firms will not face blackballing on account of advice offered to clients under the rules proposed.
Whaaat?  They are the very heart of the system. And they will be exempt?

If ever there were a case of tinkering at the edges in pursuit of favourable media coverage, this appears to be it.

It's very simple indeed: if they don't bring the Big Four accountants into the frame for the widespread abuses they have perpetrated over the years, then this is not a serious initiative.


Switzerland: a response to the critics

TJN has written in great depth about Switzerland and its role in financial secrecy. Now we have a guest blog written from Switzerland:
Switzerland is indeed one of the major providers of international financial secrecy. Unfortunately, the same is true for most of the so-called 'advanced' economies among the G-20 members.

The United States rank fifth on TJN's Financial Secrecy Index 2011, which also includes Japan (rank 8), Germany (rank 9), the UK (rank 13) and Canada (rank 24) among its 'top 25'.

Drawing on the detailed expertise and insights of local member organisations all over the world, TJN has always sought to expose financial secrecy mechanisms wherever they occur, including in the case of G-20 members.

The above press release takes a more one-sided approach. Were the G-20 to expel all major providers of financial secrecy, it would not only become more legitimate, but also significantly smaller (a G-15?). It is important to note that the authors of the above press release have not had the
opportunity to consult with Swiss TJN members. The responsibility for any
possible factual errors remains theirs.

We welcome the downsize of the original press release of TJN to a guest blog.

Bruno Gurtner, Chair Global Board TJN, Switzerland
Mark Herkenrath, AllianceSud, Switzerland
Olivier Longchamp, Berne Declaration, Switzerland


Loophole4all: weird, subversive art installation

This new electronic art installation, called Loophole4all, is weird, subversive and interesting. Among other things, the offshore search engine appears to work well. We're just getting our heads around it.


Thursday, February 14, 2013

Updated: New tax haven top story in The Economist: The missing $20 trillion

It's here. And well worth reading.

On this evidence, the Economist has come a very, very long way from its previous stance broadly in favour of tax havens as promoters of 'efficient' finance.  (They are anything but.)
 From the next article, Storm survivors:
Pressure on OFCs has since eased a little because they have all accepted, to differing degrees, that they need to exchange more information with their clients’ home countries. But they remain beleaguered as an increasingly confident band of “tax justice” campaigners pushes for more concerted action on tax evasion and avoidance, money-laundering and the proceeds of corruption. Tax avoidance, the grey area between compliance and evasion, has shot up the political agenda. 
A recent cover of Private Eye, a British satirical magazine, caught the national mood, showing Santa Claus being booed for living offshore. Governments have been rushing out action plans. Britain has put tax compliance and corporate transparency at the top of its list of priorities for its presidency of the G8 this year. America’s media often suggest that Congress yank money back from tax havens to alleviate the nation’s fiscal woes.
Here's another important section in the same article:
"The amount of money booked in those havens is unknowable, and so is the proportion that is illicit." 
That's quite right. Take just the many tens of thousands of British residential properties owned via offshore companies, typically registered in the British Virgin Islands. Given that those are likely the most expensive residential properties, many of those valued in the tens of millions of dollars, we are talking tens of billions of dollars just for that sector in that particular country.
"The data gaps are “daunting”, says Gian Maria Milesi-Ferretti of the IMF. The Boston Consulting Group reckons that on paper roughly $8 trillion of private financial wealth out of a global total of $123 trillion sits offshore, but this excludes property, yachts and other fixed assets. James Henry, a former chief economist with McKinsey who advises the Tax Justice Network, a pressure group, believes the amount invested virtually tax-free offshore tops $21 trillion. His methodology is reasonably sophisticated but he admits his calculation is still “an exercise in night vision”.
The remainder are here.
Enduring charms
The OFCs’ economic role: The good, the bad and the Ugland
Onshore financial centres: Not a palm tree in sight
Tax transparency: Automatic response
Company taxation: The price isn’t right
The merry enablers
Switzerland and its rivals: Rise of the midshores
Who’s the criminal?
Prospects: Sunshine and shadows

(Midshores. This TJN blogger hasn't heard that one before. Interesting.)


Links Feb 14

Switzerland - FATCA Tax compliance deal signed with US swissinfo

The 39th Globalization Lecture - Can we make Tax Justice fun? Tegenlicht (In Dutch)
Event on 21 March, on the Netherlands as a tax haven. Presenters to include Alvin Mosioma of TJN-Africa.

Hong Kong Gazettes Trust Law Reform Tax-News
"The bill, if passed, will bolster the competitiveness of Hong Kong's trust services industry and attract settlors to set up trusts in Hong Kong"

Germany: Merkel Seeks End to Corporate Tax Havens in Election Fight Bloomberg

Germany Benefits From Switzerland's Group Request Concession

Australia mining tax working, despite teeth-gnashing Reuters

UK: A cautious welcome for the government’s tax and procurement scheme: if it says tax avoidance does not pay it will work
Tax Research UK

UK: Right and left united over tax avoidance BBC

U.S.: The Convergence of George Will and Sherrod Brown The New York Times
More on the uniting of left and right, here for breaking up the country's largest banks.

U.S.: Yes, Virginia, the Rich Continue to Get Richer: the Top 1% Got 121% of Income Gains Since 2009
Naked Capitalism
On a new paper, Striking it Richer:The Evolution of Top Incomes in the United States(Updated with 2011 estimates), by Emmanuel Saez

Bank of New York Mellon Corp. Barred From $199 Million of Foreign Tax Credit

Silicon Valley firms shelter assets overseas, slash U.S. tax bill The Bay Citizen

Tech company rorts 'threaten global tax take'

The OECD intends to tackle tax avoidance by big business KEPA (In Finnish)
See also recent blog OECD unveils major (and welcome) report on corporate taxation

A banker's millions won't save a life Letter to The Guardian
As Nick Shaxson says, This might be the best letter ever written about bankers’ bonuses.


Canada's parliament, Yale University, look into tax justice

One, by Dennis Howett of Canadians for Tax Fairness, includes this:
"Tax havens play a key role in facilitating organized crime, the illegal arms trade, bribery and corruption and the financing of terrorism. It is the secrecy of tax havens, not just the low tax regime, that is the main problem in terms of crime. Banking secrecy rules in many of the tax haven countries allow criminals to set up accounts without having to declare the beneficial owner and move huge sums of cash in and out without any scrutiny. This is a perfect system for money laundering.

And we have learned that many of the large banks are complicit in this criminal enterprise. If the government is serious about its tough on crime agenda it needs to take much stronger action to curb the use of tax havens. Jailing the street-level drug dealer for more years will do nothing to curb the drug trade if tax havens are free to help ensure that crime pays (at least for the king pins).

Tax havens are also impoverishing developing countries. It is estimated that tax havens have facilitated illegal capital flight from developing country elites totaling $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010. The same source countries had aggregate gross external debt of $4.08 trillion in 2010 but if wealth hidden abroad by their elites is taken into account they would be creditor, not debtor countries

The size of the tax havens problem is much bigger than you might think and it is growing. We are recommending that the federal government publish an official estimate of the size of the tax evasion and avoidance problem because we feel that if policy makers and political leaders realize how grave the situation is, it will spur them to take more decisive action."
Another, by TJN Senior Adviser Richard Murphy, includes this:
"Secrecy takes many forms. It includes not having to record the real ownership or management of a company with regulatory authorities. It comes from no accounts being required to be placed on public record, or even be made available to authorities because a no tax regime does not require tax returns.

It comes from tier upon tier of structuring in one secrecy jurisdiction after another to create impermeable opacity often combining trusts, companies and foundations.

It can come from Swiss style banking secrecy.

It can come from non-cooperation, whether that be refusal to information exchange or by ensuring that, as the French have found, when information exchange requests are made the data supplied is of limited or no value.

All these things happen, and it is not by chance. It is by design. The intention of tax havens is straightforward: with the aim of luring cash to their banks to support a local financial services sector that appears to create prosperity secrecy jurisdictions sell their right to legislate for the benefit of those who do not live there and who wish not to pay their taxes where they are due including in places like Canada.

The cost is enormous: the Tax Justice Network estimates there is a minimum of US$21 trillion in assets held offshore at present that is not declared for tax purposes. "
In addition to these Canadian developments, TJN will be speaking at this conference at Yale University, looking at similar problems. In country after country, tax justice is going mainstream.


Further reports supporting combined reporting, unitary

We have written a lot recently about the topic of Unitary Taxation, and its core components Combined Reporting and Profit Apportionment. We have noted that we are far from alone in pushing for this, and that a majority of U.S. states already use this system with great success (see this recent example, for instance.)  What this system means, in essence, is that multinational corporations are no longer taxed as if they were a collection of separate entities but as a single global entity, with profits apportioned out to different jurisdictions according to the genuine economic substance of what they do

We'd like now to draw attention to a couple of other reports that we haven't yet pointed to, advocating this approach. One, published last month, comes from the U.S. Congressional Research Service (CRS), and is authored by tax expert Jane Gravelle, which looks at profit apportionment as one of several possible recipes for change:
"Another approach to addressing income shifting is through formula apportionment, which would be a major change in the international tax system.

With formula apportionment, income would be allocated to different jurisdictions based on their shares of some combination of sales, assets, and employment. This approach is used by many states in the United States and by the Canadian provinces to allocate income.

Studies have estimated a significant increase in taxes from adopting formula apportionment. Slemrod and Shackleford estimate a 38% revenue increase from an equally weighted three-factor system. A sales-based formula has been proposed by Avi- Yonah and Clausing that they estimate would raise about 35% of additional corporate revenue, or $50 billion annually over the 2001-2004 period."
The report notes (as have we) that the system is no panacea and not without its problems. Tax writer David Cay Johnston, writing in Tax Analysts, discusses this:
"The Gravelle report recommends single company accounting for multinational corporations: ‘‘Treating the parent and subsidiary companies of a multinational corporation as one corporation for the purpose of calculating taxes . . . would eliminate the tax benefits of shifting profits to tax havens such as Bermuda or Ireland.’’

Single company accounting would be a significant reform, which is why multinational companies his- torically have fought it. But the best thing about single company accounting is that it can be ex- plained easily, and that means ordinary voters can grasp a simple way to imbue state-level tax systems with integrity and fairness."
Single company accounting is, we are sure, Johnston's term for combined reporting. Finally, here is another report written for the U.N. Economic Commission for Africa (UNECA), entitled "A proposal for unitary taxes on the profits of transnational corporations."
"This paper presents empirical evidence and a proposal for applying a unitary tax system on the profits of TNCs. Such a system would eliminate one of the most powerful mecha- nisms at the disposal of TNCs for illegally avoiding tax payments— transfer pricing."
These will be added to the TJN transfer pricing page, which contains various other reports looking at unitary taxation.


Wednesday, February 13, 2013

Links Feb 13

IFC investments "rarely touch the poor" Bretton Woods Project

Europe economic crisis: the rich avoid paying tax Mehrnews

Cayman: No sign of techy park Cayman News Service
Status on a development reported here in Cayman Islands to create a new fantasy nowhere land

Nokia protests against Indian tax probe Reuters

Associate British Food’s misleading statements Martin Hearson's Blog
On the response by ABF to ActionAid's report blogged in British sugar company in African tax scandal.

Navigating Between Tax Avoidance and Evasion NY Times

Developments In Israel And Its Trusts Laws WealthBriefing
See also: Israel an Emerging Trust Administration and Financial Center Finance Publications Offshore

Sweden: 140,000 billion kronor gone with the wind in various tax havens
 Arbetarbladet (In Swedish)
Reporting on TJN's James Henry, author of The Price of Offshore Revisited, speaking on tax havens at the Swedish Parliament.

Cyprus: Eurogroup pushes for independent money laundering audit Europolitics


Report: Russia Hemorrhages $211.5 bn+ in illicit outflows 1994-2011 via Cyprus "Laundry Machine"

There is a lot of kerfuffle right now about the British-linked tax haven of Cyprus, which is facing a financial crisis and calls for a huge bailout, despite widespread anger that its economy is substantially based on serving as a haven for dirty Russian money. Now, from Global Financial Integrity in Washington, D.C., a new report:
February 13, 2013

Russia Hemorrhages at Least US$211.5 Billion in Illicit Financial Outflows from 1994-2011, Finds New GFI Study
Cyprus a “Laundry Machine for Dirty Russian Money”

  • Illegal Inflows of Capital Estimated at US$552.9 Billion; Driving Underground Economy, Crime, Tax Evasion
  • US$764.3 Billion in Total Illicit Flows (Inflows + Outflows) Measured
Russia’s Underground Economy Averages 46% of GDP, 35% in 2011; Weak Governance and Endemic Tax Evasion Lead to Increasing Outflows

WASHINGTON, DC – The Russian economy hemorrhaged US$211.5 billion in illicit financial outflows from 1994—the earliest year for which data is available following the dissolution of the Soviet Union—through 2011, according to a new report released Wednesday by Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization.  The study, titled “Russia: Illicit Financial Flows and the Role of the Underground Economy,” [PDF] also measures massive illicit inflows to the Russian economy of $552.9 billion over the 18-year time-span, raising serious questions about the economic and political stability of the nation currently chairing the G20.

“Russia has a severe problem with illegal flows of money,” said GFI Director Raymond Baker.  “Hundreds of billions of dollars have been lost that could have been used to invest in Russian healthcare, education, and infrastructure.  At the same time, more than a half trillion dollars has illegally flowed into the Russian underground economy, fueling crime and corruption.”

Underground Economy

GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, the authors of the study, estimate the size of Russia’s underground economy at a massive 46% of GDP per year over the time period.  Moreover, illicit outflows and inflows were found to drive the domestic underground economy, which includes—among other things—drug smuggling, arms trafficking and human trafficking. Thus, illegal capital flight was determined to contribute to a deterioration in governance.  Growth in the underground economy likewise was shown to drive illicit flows, creating “a snowballing effect, whereby both the underground economy and illicit flows continue to grow at an increasing rate unless policy measures and institutions intervene,” according to Dr. Kar, the principle author of the report, who worked as a senior economist at the International Monetary Fund before joining GFI.

A 1% increase in the size of the underground economy was found to increase the cross-border flow of illicit money by 7%.

The report reveals that, according to World Bank staff, Russia’s underground economy is 3.5 times larger than corresponding G-7 economies like the U.S., France, and Canada, and Russia lags far behind every G-7 country in all six dimensions of governance measured by the World Bank.

Further, illicit flows and the underground economy both grew significantly over the 18-year period studied, driven in large part by an overall deterioration in governance and widespread tax evasion.

The study highlights that in 3 out of the 6 key governance factors measured by the World Bank—voice and accountability, control of corruption, and regulatory quality—Russia’s standings have deteriorated since the fall of the Soviet Union, while remaining poor in the other categories—rule of law, government effectiveness, and political stability.

“So long as the Russian authorities fail to shrink the underground economy, Russia will continue to hemorrhage scare capital, both illicit and licit, to the detriment of economic and political stability and undermining the nation-state,” write Dr. Kar and Ms. Freitas in the 68-page report.

Unrecorded Wire Transfers

Unrecorded wire transfers detected by GFI’s Hot Money Narrow (HMN) model were the primary method for moving money illicitly out of Russia.  HMN, which accounted for $135 billion or 63.8% of illicit outflows over the period studied, is one of two models used by GFI to estimate illicit financial flows—the other being the Gross Excluding Reversals (GER) model, which tracks trade-based money laundering through the fraudulent misinvoicing of customs declarations.  Still, trade misinvoicing accounted for the remaining 36.2%, or $76.5 billion, of illicit outflows, and it is growing in significance.

The prevalence of unrecorded money transfers through banks is not surprising when considering the state of the Russian banking system.  Citing research by the Financial Action Task Force, Dr. Kar and Ms. Freitas note serious weaknesses in Russian banks including that:

Some banks are still believed to be owned and controlled by criminals and their front men;
There is no requirement to investigate the background and purpose of suspicious transactions or to record and maintain such information for follow-up by regulatory agencies;
While credit institutions are prohibited from opening anonymous accounts, there is no specific provision that prohibits banks from maintaining existing accounts under fictitious names;
Gaps in monitoring wire transfers remain;
Sanctioning powers and the sanctions themselves are in general completely inadequate;
A key weakness is the lack of effectiveness of financial sector supervision regarding AML/CFT compliance; and
The existing AML/CFT regime and its implementation do not effectively deal with the illegal alternative remittance systems operating in Russia.
“There will continue to be massive illegal outflows of money through unrecorded wire transfers as Russia neglects to address these shortcomings in the banking system,” adds Dr. Kar.

Illicit Inflows

While HMN (e.g. unrecorded wire transfers) was the predominant technique for transferring money illicitly out of Russia, trade-based money laundering through the misinvoicing of customs invoices (GER) was the primary method for moving money illicitly into Russia, accounting for $542.9 billion or 98.2% of all illicit inflows into the country from 1994-2011.

These illegal inflows, which—combined with HMN inflows—totaled $552.9 billion, funneled into the underground economy, fueling crime, corruption, and tax evasion and further deteriorated governance in the country.

These massive illicit inflows—combined with the $211.5 billion in strictly illicit outflows—mean that a total of $764.3 billion in illegal money flowed into and out of Russia over the past 18 years.

$782.5 Billion Lost through “Broad Capital Flight”

In addition to presenting their findings on illicit financial flows that were strictly illicit, Dr. Kar and Ms. Freitas also present estimates of broader capital flight (CED+GER), which measures illicit outflows but may include some licit outflows as well.  The broader capital flight methodology determined the Russian economy suffered an outflow of US$782.5 billion between 1994 and 2011, a massive figure that is nevertheless in-line with previous estimates of capital flight from Russia.

"Conservative Estimates"

Referring to both the broader CED+GER methodology and the strictly illicit HMN+GER methodology, Dr. Kar commented “The estimates provided by either methodology are still likely to be extremely conservative as they do not include trade mispricing in services, same-invoice trade mispricing, hawala transactions, and dealings conducted in bulk cash.  This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates.”

Indeed, same invoice faking—one of the methods that we cannot capture in our economic models—has been aggressively utilized by Russian companies for years.  "Beginning in the 1990s, many Russian corporations established subsidiaries in Europe to function as buying offices. In addition, hundreds of corporations established their own “pocket” banks to handle their trade documentation and financial transfers. By selling exports to their foreign subsidiaries and by buying imports from their foreign subsidiaries and by utilizing their own pocket banks to handle the transactions, Russian corporations have been able to transfer hundreds of billions of dollars out of their country. None of this shows up in our data or in other analyses of flight capital from the country," writes GFI Director Raymond Baker in his forward to the report.

"When you control the exporting party, the importing party, and the bank conducting the transaction, you can pretty much get away with anything," commented Mr. Baker, who worked as an international businessman for decades importing and exporting shipments to and from the developing world before founding GFI.

Oil Prices

A notable finding of the report is that higher oil prices were found to drive licit capital flight as well as the broader definition (CED+GER) of capital flight from the country.

“With oil exports accounting for more than half of Russia’s total exports in 2011, such a significant link cannot be ignored,” said Ms. Freitas, the GFI Economist.  “Our study shows that Russia’s dependence on oil, combined with its lack of fundamental reform and its endemic corruption, explain massive outflows of both licit and illicit capital.”


As European and Russian officials currently weigh the merits of bailing out the Cypriot economy, GFI’s study raises serious concerns about the legitimacy of Cyprus’ financial sector.

The report notes that Cyprus, a tiny island nation with a GDP of just $23 billion, is the largest source and destination of Russian foreign direct investment (FDI) from 2009-2011.  According to the IMF, Cyprus sent $128.8 billion in FDI into Russia in 2011, more than 5 times the size of Cyprus’ GDP.  “The recorded FDI positions merely reflect the round-tripping of prior illicit deposits from Russia into Cyprus,” write Dr. Kar and Ms. Freitas in the report.

“Cyprus is a laundry machine for dirty Russian money,” added Dr. Kar.

Possible Solutions

In addition to the banking reforms mentioned above, there exist a number of steps the Russian government can take to ameliorate the problem of illicit flows of money into and out of the country.  According to the report:

The Russian government should significantly boost its customs enforcement, by training its officers in better detecting the intentional misinvoicing of trade transactions. There exists software that can be used to assist governments in detecting invoices that fall outside the normal range of prices for a particular good. Russia could make use of this software to catch individuals deliberately misinvoicing their trade transactions to launder money;
Transactions involving tax haven jurisdictions like Cyprus and Switzerland should be treated with the highest level of scrutiny by customs, tax, and law enforcement officials; and
The Russian Government should require that all banks in Russia know the true, human, "beneficial" owner of any account opened in their financial institution. Often banks do not know who owns or controls the accounts in their institution – they might have the name of an anonymous shell company, but they don't know the person controlling that shell company. Hence, the banks cannot monitor the accounts for money laundering. Requiring knowledge of the beneficial owner is a simple step that would significantly help curtail the problem.
Global Financial Integrity recommends that Russia use its influence in global fora such as the G20, G8, and United Nations to increase the transparency in the international financial system and curtail the illicit flow of money into and out of Russia.  Policies advocated by GFI include:
  • Addressing the problems posed by anonymous shell companies, foundations, and trusts by requiring confirmation of beneficial ownership in all banking and securities accounts, and demanding that information on the true, human owner of all corporations, trusts, and foundations be disclosed upon formation and be available to law enforcement;
  • Requiring the country-by-country reporting of sales, profits and taxes paid by multinational corporations;
  • Requiring the automatic cross-border exchange of tax information on personal and business accounts;
  • Harmonizing predicate offenses under anti-money laundering laws across all Financial Action Task Force cooperating countries; and
  • Ensuring that the anti-money laundering regulations already on the books are strongly enforced.
  • In addition to curtailing outflows from Russia, such policies would curtail the illicit flow of money world-wide, which is estimated by GFI to cost developing countries nearly $1 trillion per year.
A December 2012 report from Global Financial Integrity, titled “Illicit Financial Flows from Developing Countries: 2001-2010,” ranked Russia as the 5th-largest exporter of illicit capital over the past decade, behind China, Mexico, Malaysia and Saudi Arabia, respectively."
TJN: other estimates, based on overlapping but substantially different methodologies, available from TJN's Price of Offshore Revisited.