The greatest shift in tax sovereignty for a generation?

The new UK government has promised developing countries will receive tax information automatically, and multilaterally. This is a great challenge – in every way.

A new day…

This will be a different government. It is not a coalition government, so we have proper accountability. There’s no trading away of things that are in here. The ability to deliver this, that is one of the most important things we can do to restore trust and faith in politics, when you vote for something you get it, and that is what we are going to do.

With the UK’s new government settling in, and David Cameron stressing the freedom from complications of coalition, those Conservative party manifesto commitments are worth a look.

The international development headline in the document itself is the maintenance of the commitment to spend 0.7% of national income as aid. And this is certainly significant, when such large cuts are planned in ass yet unknown spending areas.

…And a radical commitment

But the most important commitment is perhaps something else entirely:

We will ensure developing countries have full access to global automatic tax information exchange systems

While transparency measures can sometimes deliver little real change – when they imply no actual redistribution of power – there is no question that this would mark a very real redistribution.

As the leaks from HSBC Switzerland showed, scarcely a country around the world has been able to exert their taxing rights over income held undeclared in secrecy jurisdictions. Estimates of the underlying hidden assets range from seven or eight, to twenty or thirty – trillion dollars, that is.

In keeping with David Cameron’s ‘golden thread’ of transparency and accountability, the previous government was instrumental in the development of the Open Government Partnership, which in turn has driven transparency commitments from member states.

The 2013 G8 that Cameron hosted made a similar commitment, but notably weaker:

It is important that all jurisdictions, including developing countries, benefit from this new standard in [automatic] information exchange. We therefore call on the OECD to work to ensure that the relevant systems and processes are as accessible as possible to help enable all countries to implement this new standard.

And since then of course, things have deteriorated substantially.

While a multilateral pilot of the new OECD standard (itself not without criticism) is going ahead, major players are rowing back. The US has U-turned on its own commitments to provide – and not only demand – tax information. Switzerland has set a course for bilateral rather than multilateral information provision, strongly suggesting that only the strong will be able to benefit from the weakening of banking secrecy.

So the Conservatives’ – and now the UK’s – commitment to ensure full access for developing countries is powerful stuff.

What it means and why it will be tough

The commitment could not be clearer: ‘full access’ can only mean equal receipt of information to any other player in the multilateral mechanism – setting the UK against those who would cynically use poorer countries’ initial inability to provide information reciprocally, as a reason to deny them access.

And there is no qualifier on ‘developing countries’ – this is not some select handful of, say, G20 members. This is a universal commitment.

And so the commitment is a fantastic challenge, because if delivered it could be the greatest shift in tax sovereignty for a generation – from jurisdictions with the ability but not the right to tax, back to those with the right but not the ability.

And it’s also a fantastic challenge because it requires the UK to stand against the intransigence of other major economies and financial secrecy jurisdictions, putting a redistribution of taxing rights to lower-income countries above other concerns.

(And yes, it would seem appropriate if the UK were able to play a major, positive role here – given its historic responsibility for the growth of the secrecy jurisdiction model.)

Insert cynicism here

Ah, you say, but this is a government of the elite. Cameron’s own family fortune is based on the old secrecy jurisdiction model. Why would they possibly deliver on this?

Well, you could have said the same in 2013. And many did. But to be fair, whatever you think of the coalition’s domestic inequality agenda, that G8 and the related G20 summit were part of a serious shift. A shift in which the UK did take the lead.

Was it, as one Conservative peer claimed, a counter-strike to block out other tax measures like a haven blacklist? Who knows. The fact remains that what was delivered marks a step change, that has not yet but could very well be of global importance.

What else could go wrong here? Well, it may be that the government had not realised just how big a commitment they were making. After all, the G8 had more or less set the path, the pilot is going ahead – so this may have felt like a commitment just to keep things moving along.

But this is not a new government – the same special advisers, politicians and civil servants who oversaw the 2013 G8 are still in place. This time, for sure, they know what they’ve committed to.

So: park your cynicism. If the government is serious about delivering on this manifesto commitment, then all power to them. Or rather, to the developing countries that would reap the greatest benefit.


The Offshore Game

Football’s a funny old game, or so it’s been said. The people’s game. The beautiful game. The offshore game? £3 billion says so, according to the new TJN project which launched with a splash in The Guardian today.


The Offshore Game

The new project, The Offshore Game, will focus on a range of financial secrecy issues in sport around the world – from match-fixing to administrative corruption, and from tax dodging to the lack of accountability to fans.

In this first major report, we focus on the extent of offshore finance – through both equity ownership and the provision of loans – in the English and Scottish football leagues, using the most recent full accounts plus additional data in the public domain (that is, information that fans could reasonably access in order to see who is in control of their club). [Here’s the methodology.]

A major finding is the total of £3 billion of offshore money, much of it through some of the most financially secretive jurisdictions around the world. The clubs involved range from giants like Manchester United, to minnows such as Dumbarton.

The report highlights the range of risks – not least for fans, tax authorities and sporting integrity – that are exacerbated through greater exposure to financial secrecy.

The Offshore League Table

The league table follows TJN’s Financial Secrecy Index in ranking clubs according to the combination of scale and secrecy: how much offshore money is involved, and how secretive are the particular jurisdictions?

Full details are in the report, including responses from clubs where they provided them, and detailed studies of the top five’s financial secrecy and possible risks.

TOG league table


Thanks and kudos to George Turner for driving the project forward, and writing the report. And to Christian Aid, who provided the space for the fore-running 2010 report, Blowing the Whistle.

Next steps?

Where The Offshore Game goes next will depend, in part, on the opportunities that arise. There are, for example, some very interesting developments in the field of match-fixing analytics that offer the potential of identifying the extreme abnormalities associated with rigged matches in various sports.

We are already receiving tip-offs and suggestions about individual cases of hidden ownership, and associated criminality; while there is clearly scope for financial scrutiny of major international sporting institutions such as the International Olympic Committee and FIFA.

Give us a shout if you have an idea or some info you think we should see (secure options available). It’s all over the world, this stuff…


The failures of international financial regulation: 1974 all over again

[D]espite the dramatic changes which have occurred in the nature of global financial markets over the past forty years, the challenges to the regulatory and supervisory system first identified in the banking scandals of 1974 have persisted.

I remember when reading Nick Shaxson’s ‘Treasure Islands: Tax havens and the men who stole the world’, being particularly struck by the archival research on the ping-pong between the Bank of England and UK Treasury officials over the potential risks of allowing financial ‘wizards’ to set up in UK territories and feed global money into the City of London. I also wondered why there wasn’t more academic research of that sort – there is, for example, on monetary policymaking, so why not on financial regulation? The answer, as so often, is just my ignorance.

Catherine Schenk (professor of economic history at Glasgow) has been doing just this for some time. ‘Summer in the city: Banking failures of 1974 and the development of international banking supervision’, reconstructs the discussions around the creation of the Basel Committee on Banking Supervision and efforts to learn the lessons of crisis – lessons that would be repeated periodically, up to 2008 at least.

The paper tells the story of the UK’s banking liberalisation and subsequent property boom of the early 1970s, followed by a sharp reversal that left many banks over-exposed. At the same time, the rapid internationalisation of banking, and growth of offshore centres since the late 1950s, was revealed to be well ahead of national regulators. Schenk’s story features frauds and fragility from St Helier to Tortola…

Schenk ewsAnd in 1975, the creation of the Basel Committee. An important consideration was the gap between home and host country regulators, as it had been for the Committee’s predecessor the Groupe de Contact – and remained unsolved. The demand for an early warning system went unmet, in the face of different regulatory approaches and a common resistance to cross-border sharing of banks’ information.

The historic parallel with the 2008 crisis (and many in developing countries) doesn’t need much elaboration – primarily the use of less regulated jurisdictions to facilitate massive credit creation, feeding into property and other asset bubbles rather than productive investment. And, sadly, the same underlying argument as in 1975 continues to prevent more effective regulation today: namely, that banks must trust their regulators in order to provide them with the sensitive information necessary for effective regulation, and this is incompatible with regulators sharing that information.

Organisations as diverse as the Economic Commission for Africa and ONE have called for the Bank for International Settlements to publish their data on bilateral banking holdings; but that old argument about regulator trust keeps it private.

Is each crisis an opportunity? We’ve had a lot of similar crises, and missed a lot of opportunities to reduce the probability of repeat. This paper does a great job of exploring one of the big ones.

UNCTAD study on corporate tax in developing countries

UNCTAD, the UN body that tracks trade and investment with the aim of improving development impacts, has published a major new study on corporate tax. [Link broken as at 20 July 2015, thanks Lisa, so see World Investment Report 2015 chapter 5 and annexes instead – this is the updated version.] Much attention will go to the estimate of $100 billion in developing country revenue losses due to MNEs’ tax avoidance, but the study contains much more of value:

  • The first comprehensive overview of MNEs’ revenue contribution in developing countries;
  • A relatively detailed overview of the use of ‘offshore hubs’ as conduits for investment;
  • Regression analysis of the profit-shifting impact of conduit use, and an estimate of the revenue losses; and
  • A discussion of potential policy responses that emphasise the value of investment but also recognise the damage of tax avoidance.

This (long) post will summarise each area in turn, then offer a few thoughts on the importance of the study, and future research directions. [Full disclosure: I’m on the expert group for the upcoming World Investment Report, of which this study is a part; which is to say that I may be biased, but certainly not that I can take any credit.]

MNEs’ revenue contribution

The first major element of the paper consists of creating a baseline for the revenue contribution of (the foreign affiliates of) MNEs, drawing primarily on the ICTD Government Revenue Dataset.

unctad draft fig3The authors break down the pattern of revenues overall (figure 3 – click for full size), and then focus on the contribution of MNEs.

Figure 6 shows the results of the ‘contribution method’, where each component of revenues is decomposed into a corporate and a non-corporate element, and the former again into a domestic and foreign affiliate element (see Annex I for full details). This allows an overall estimate of the contribution of MNEs’ foreign affiliates, of around $725 billion or 10% of total revenues. Around 3% of revenues derives from MNEs’ corporate income tax.

unctad draft fig6

As a cross-check, the authors use balance of payments data to construct the ‘FDI-income method’ which involves estimating the total revenue contribution from both unctad draft fig7corporate income taxation and non-income items. Per figure 7 (click to enlarge), this yields an overall contribution of $730 billion. There is perhaps more uncertainty in this approach, since it rests on the estimated tax rate and on the extrapolated rate of other (non-income tax) revenue contributions. Nonetheless, the full approach (again detailed in Annex I) is plausible, and the cross-check on the contribution approach is valuable.

The investment role of ‘offshore’

The second contribution of the study is to assess the (jurisdiction) sources of investment. 42 jurisdictions are identified as either ‘tax havens’ (“small jurisdictions whose economy is entirely, or almost entirely, dedicated to the provision of offshore financial services”) or ‘SPEs’ (jurisdictions offering SPEs or other entities facilitating transit investment. Larger jurisdictions with substantial real economic activity that act as major global investment hubs for MNEs due to favorable tax and investment conditions”).

This might be considered a rather blunt approach; as I’ve written elsewhere, there are serious issues with any ‘tax haven’ definition, and the intuition of the Financial Secrecy Index is that it makes more sense to think of jurisdictions on a spectrum, rather than being either ‘havens’ or not. Nonetheless, it’s clear that the approach here identifies the major players one way or another.

unctad draft fig13

Figure 13 (click to enlarge) shows the specific picture in the US. The difference in relative tax rates is striking: averages of 3% (‘tax havens’) and 2% (‘SPE countries’) versus 17% elsewhere.

In this light, the growth in use of these conduit jurisdictions for investment in developing countries which figure 17 illustrates is of clear concern.

unctad draft fig17

Estimate of MNE tax avoidance

The logical next step of the paper is to consider the likely effect of using conduit jurisdictions for investment into developing countries on MNEs’ revenue contribution. It seems inevitable that this calculation will draw the most attention.

The estimate is based on (fixed effects OLS) regression analysis of the relationship, at the national level, between the aggregate use of investment conduits and the rate of (taxable) return on the investment stock. On the basis of a variety of specifications, the authors conclude that

“an additional 10% share of inward investment stock originating from offshore investment hubs is associated with a decrease in the rate of return of 1-1.5 percentage point” (p.34).

Extrapolating to all (non-haven) developing countries generates a range of revenue loss estimates from $70 billion to $120 billion. Figure 20 shows the central estimate of $100 billion in revenue losses: towards half of the actual tax paid.

unctad draft fig20

The $100 billion is also around a tenth of the ‘potential value at stake’ – in effect, the total development finance associated with the activities of MNEs’ foreign affiliates. As an earlier draft had noted, the leakage of development resources is not limited to the loss of domestic fiscal revenues but it also affects overall GDP (as the profit component of value added is reduced) and potentially the reinvested earnings component of FDI. As companies shift away profits from the recipient country they may also undermine the development opportunities related to reinvestment of those profits for productive purposes.

Applying an average reinvestment rate of 50%, for example, to the calculated (after-tax) profit shifting of $330 – $450 billion would yield lost reinvested earnings in the range of $165- $225 billion. Summing up the revenue loss component and the reinvested earnings component the total leakage of development financing resources would then be in the order of $250 billion and $300 billion – in other words, between a quarter and third of the potential value at stake.

The pot of gold, however, should not be overstated: although this is likely to be a lower bound, since it does not capture all forms of corporate tax reducing behaviour, we’re talking about something like 1.5 percent of developing country government revenues on average. The absolute amount involved is clearly worth pursuing, and can have a substantial benefit in revenue terms and beyond; but the tax justice agenda cannot be boiled down to this alone. Much broader improvements, with both domestic and international components, are required to achieve a step change in effective taxation for development.

Policy recommendations

The study concludes with a range of policy recommendations, focused on improving the sustainable development impact of investment into developing countries. These are summarised in figure 21.

Multiple measures are set out, each worthy of more detailed discussion. A particular strength is the clarity of intent to ‘Ban tolerance or facilitation of tax avoidance as a means to attract investment’. If such an aim could be made operational and effective, it would imply an end to ‘competition’ among jurisdictions to take the tax base arising from economic activity elsewhere, of the type so clearly exposed in LuxLeaks.

I would have liked to see more emphasis on transparency measures – including, crucially, public country-by-country reporting – that would not only make the analysis here much more of a calculation and less of an estimation, but also provide an ongoing tool for accountability to ensure progress in reducing avoidance.


The UNCTAD study marks a major step forward in our understanding of the scale and nature of multinational tax avoidance in developing countries. Both the baseline for multinationals’ revenue contribution, and the assessment of the losses to avoidance, are likely to become part of the literature and the policy discussion for a good time to come.

No doubt some of the approaches will be challenged, including the regression results (when aren’t they?); and data will evolve over time (for example, the updating of the ICTD dataset in a few months’ time). But the pioneering approaches in the contribution method and the FDI-income method, as well as the model for the avoidance estimate, are likely to endure.

The policy recommendations are likely to have influence, perhaps including in the FfD process, and provide a valuable reminder of the importance of maximising not investment, nor revenues, but the development benefits that result. Better tools to resist avoidance will improve the ability of governments to make any necessary trade-offs.

Poverty – a bad money-laundering risk factor

The UK’s Financial Conduct Authority has revealed the basis on which it ranks jurisdictions as low or high risk for money laundering – and it seems inevitable that it will support debanking of poorer countries.

AML rules under pressure

First a little context. There has been growing pressure lately on anti-money laundering (AML) rules. In recent years, a string of major banks has faced large fines for apparently systematic sanctions-busting. This has been followed by a pattern of withdrawal – ‘debanking’ – from a range of countries where the risks of inadvertently channelling funds of sanctioned and/or terrorism-related entities and individuals have come to be seen as too high.

On the one hand, there are reasons to be rather cynical about this process. First, because supporting generally small-scale remittances to Somalia, for example, is a far cry from accepting and anonymising Iranian funds – and presumably much less profitable. And second, because it feels a little convenient for major banks to be making a case for reduced financial regulation, in which their interests align with those of some of the world’s poorest people.

On the other hand though, there are good reasons to take the issue seriously. (Disclosure – I’m on a CGD working group looking at just this question, so I would say that…) First, even if debanking is motivated by relative profitability of Somalian remittances compared to Iranian sanctions-busting, the potential development impact of remittance channels becoming more expensive is nonetheless substantial. (And we surely don’t expect banks not to respond to profitability.) Financial inclusion also seems to be associated with lower inequality.

And second, we should take the issue seriously because ultimately we want AML rules that work, for everyone, and demonstrably so – which is not the case now.

The question is not whether and how AML rules should be relaxed. It is this:

How can AML rules be designed so that the risks facing banks and other financial institutions are proportionate to the risks of carrying criminal flows, and not inadvertently supporting discriminatory outcomes against poorer countries (and people)?

An inexplicably bad approach

The UK’s Financial Conduct Authority (FCA) is accountable to HM Treasury and the UK parliament for regulating more than 50,000 firms to ensure integrity of financial markets. As Matt Collin points out in a great post, the FCA has just fined the (British branch of the) Bank of Beirut £2 million, and ordered it to sort out its AML procedures.

In the interim, the bank is barred from taking on new business in ‘high risk’ jurisdictions – which the FCA defines as anywhere scoring 60 or less out of 100 on Transparency International’s Corruption Perceptions Index (CPI).

Matt makes two important points about the weaknesses of this approach:

  1. The CPI doesn’t reflect AML risks. Not a single one of the surveys which are aggregated into the CPI involves perceptions of money-laundering.
  2. The threshold is arbitrary – and includes nearly 80% of the 175 countries for which ratings are produced. See Matt’s great figure.

Let’s add a couple of other points:

  1. Even on its own terms, the CPI is a very bad measure of corruption. Sorry and all, and I think many TI chapters do really fantastic work; but the quicker the organisation drops the CPI, the better. Nor should anybody else be using it, as if it were some kind of objective indicator of corruption (never mind money-laundering) – it’s not.
  2. And here’s the real kicker. The CPI is mainly telling you one thing: how poor a country is. Per capita income ‘explains’ more than half of the variation of the CPI (for 2012, which I happened to have to hand). The equivalent for the Basle Anti-Money Laundering Index, which includes the CPI among its components, is a little over a third.

CPI v lngdppc

So: the FCA is basing their AML risk measure on an arbitrary threshold, in a bad measure of corruption, which has nothing to do with money laundering, and mainly reflects income poverty.


An alternative approach

What could the FCA do instead? Well, they could use the Basle index. Or they could follow the lead of researchers at the Italian central bank, or a German rating agency among a good many others – and use TJN’s Financial Secrecy Index (FSI).

The FSI – which is also a component of the Basle index – brings together 48 variables, predominantly from assessments by international organisations, to create 15 indicators of financial secrecy – that is, of the risk factor for money-laundering, tax fraud and other financial crimes. These are then compiled into a single ‘secrecy score’.

For the FSI, this is combined with a measure of each jurisdictions’ global scale in order to produce a final ranking that reflects the relative potential to frustrate other countries’ regulation, taxation and anti-corruption efforts.

For a risk measure, you’d only want to use the secrecy score (or perhaps a subset of indicators that are most tightly relevant to money laundering). Relationships with per capita income are much weaker and of mixed direction, reflecting the basis in objectively assessed secrecy and scale criteria rather than perceptions of corruption.

FSI 2013 and components lngdppcConclusion

To recap: If a financial regulator were to design a simple risk measure that would be most likely to lead to debanking of poor countries, while at the same time having no impact on the most risky jurisdictions, it’s hard to see how they could have done better than the FCA.

The broader lesson for the necessary rethinking of AML rules seems fairly clear. What are needed are context-sensitive measures that encourage responses proportionate to the actual financial crime risks – rather than encouraging the blanket withdrawal of services to poorer countries and/or people.

Offshore ownership in the UK

Transparency International has a new report out on the extent of secretive offshore ownership of London and UK property – and the consistent appearance of more secretive jurisdictions in investigations of corrupt ownership. Back of the envelope calculations suggest the tax implications could be substantial too…

A few top lines:

  • The scale of offshore ownership is large, covering 40,725 London properties. (Or per the Financial Times last year, at least £122 billion across England & Wales; for Scotland, check Andy Wightman’s blog and book.)
  • Secrecy is a common feature. 89% of these properties (36,342) are held through TIUK 2015 POCU incorp locsecrecy jurisdictions, with more than a third due to the highly secretive British Virgin Islands alone.
  • Secrecy jurisdiction structures account for 5-10% of properties in the richest parts of the city including Westminster and Kensington & Chelsea: see map.
  • To the surprise of nobody, secrecy jurisdictions dominate the ownership of property in the Metropolitan Police’s investigations of corruption too.

The report is well worth a look, and details a lot more of the ways in which secrecy jurisdictions are used to make ownership anonymous, and how that facilitates all sorts of corruption.

Just for fun, I took a couple of the stats and checked to see what the potential capital gains tax (CGT) implications might be – because of course if a property is owned through an anonymous company, you can sell the company rather than the property and potentially skip the tax.

A lot of offshore ownership will be entirely unsullied by any intention to launder the proceeds of crime, or to dodge tax. But to get a sense of scale, it’s still informative to think in terms of the potential CGT at risk.

Example 1: the report notes that in 2011 alone, BVI companies bought £3.8 billion of UK property. Assume that property rose in value according to the government’s average house price index (although we know this is mainly high-end property, so this is likely to be conservative), then the rise in value by 2015 would be around 11.8%. Applying CGT at 28% would yield around £125 million of revenues – from the offshore ownership via one jurisdiction and in one year alone.

Example 2: taking the same approach to the FT’s figure of £122 billion owned offshore in England & Wales last year, we have an average rise in value of around 1.9%, with a potential CGT yield for the year of nearly £2.3 billion.

Of course, in neither case do we expect all CGT to have been unpaid; and the liability would only arise were the property sold. Still – the potential scale suggests TI’s final recommendation might well pay for itself, or indeed do rather better:

The Land Registry should publish the ultimate beneficial ownership of these properties freely to the public, on the same basis as Companies House is set to do under current UK legislation. Accordingly, companies registered overseas would be required to update beneficial ownership information on the same basis as UK registered companies.

And so say all of us.

Legal risks and unwritten research

How cautious should advocacy organisations be about legal risks? And how much important work goes undone, or the results unreported, because the threat of legal action could be existential for the organisation?

Earlier at the (virtual) office we were discussing the importance of considering legal risks in relation to some specific pieces of work, and to some upcoming possibilities. Without getting into the detail, all have the potential to involve individuals, multinationals or major accounting firms that might be quite happy to sue over perceived reputational damage.

What does the law say?

One solution, of sorts, is to be right: don’t make mistakes, and you ought to be covered. The Defamation Act identifies a range of defences, including truth but also ‘honest opinion’ (even if untrue), and ‘public interest’.

The recent ‘serious harm’ condition also acts to limit the scope for action:

(1) A statement is not defamatory unless its publication has caused or is likely to cause serious harm to the reputation of the claimant.

(2) For the purposes of this section, harm to the reputation of a body that trades for profit is not “serious harm” unless it has caused or is likely to cause the body serious financial loss.

On balance, at least for me as a non-lawyer, it’s still easy to feel that there’s enough room for you to end up in court for saying reasonable things, with reasonable evidence.

What goes uncounted?

Needless to say, the things that will be left unresearched or unpublished, because of the chilling effect are not going to be random – they will tend to relate to powerful individuals and organisations. (Not entirely unrelatedly, presumably only the biggest advertisers can expect to see the type of rose-tinted coverage that Peter Oborne claims that HSBC enjoyed from the Telegraph.)

I suspect everyone who works in this broad area of work can come up with examples like these:

  • a colleague who has been sued (in one case, who lost for a careless, somewhat important word);
  • a major piece of research that never saw the light of day (I’m thinking of a case involving commodity pricing between a major resource-rich African country, and a small Northern European country, where it was felt the risk of being sued by a particular entity – even although it was not planned to identify it directly – was too high to risk); and
  • any number of pieces of work that were abandoned in the planning stage – so the questions were never asked – because of likely risks of trying to publish any answer obtained.

Not to mention Global Witness and Beny Steinmetz

What’s the answer? (May not contain answers)

So, I complained to twitter….

…and the twitterbrain provided a selection of answers. 

  1. Use (pro bono?) lawyers.
  2. Get sued, but have (really, really) wealthy backers.
  3. Get sued, but crowdfund a defence fund.
  4. Get sued, but have pro bono lawyers on hand.
  5. Get sued, but set up some kind of offshore structure to undertake/publish the research so it doesn’t threaten the main organisation.

I don’t much like any of the ones that start with ‘Get sued’. And lawyers are expensive. So it looks like a case of looking for ways into pro bono assistance where possible, and building in costs where necessary in funding proposals.  And, probably, just not doing some stuff that we might like to. Bah. 

Any further ideas (or offers of help, e.g. 2 above) would be most welcome. 

#SwissLeaks – Tax transparency for accountability

hsbcleakMuch of the #SwissLeaks data has been in the hands of tax authorities for 5 years. Many of the questions raised relate to individuals and to particular regulators and governments – but there’s also a broader question that goes to the type of solutions that will address the broader loss of trust in tax authorities’ effectiveness and independence. Clear policy changes are needed to recover trust and accountability.

Last night the International Consortium of Investigative Journalists (ICIJ), and a host of international media organisations from Le Monde and The Indian Express to the BBC and CBS, broke publicly a leak of documents from HSBC’s Swiss bank, dating to 2005-2007. TJN provides a little historical context here, while Richard Murphy poses some highly pertinent questions. Oh, and TJN’s Jack Blum gave a cracking interview to 60 Minutes.

The broader lesson

If there’s a broader lesson here – and there is! – it’s that providing data privately to tax authorities is insufficient. The leaked data provided privately to (mainly European) governments in or around 2010 simply failed, in different ways, to deliver accountable and effective taxation.

  • Exhibit I: UK. Since receiving details of more than 1,000 cases in 2010, the UK has undertaken 1 (one) prosecution. The coalition government that came to power in 2010 also negotiated a very bad agreement with Switzerland that TJN had shown beforehand would not only protect tax evaders from transparency and prosecution but would also fail to bring in anything like the claimed sum of revenue. In addition, the government appointed as a Lord and trade minister Stephen Green, who had been the chief executive and then chairman of HSBC during the entire period.
  • Exhibit II: Greece. Somewhat further down the road of accountability is Greece, where the then minister of finance is now facing charges of “attempted breach of trust at the expense of the state and improperly interfering with a document”, for alleged actions relating to the loss of the list received from France, and the possible removal of relatives’ names.
  • Exhibit III: India. As of last month, The Indian Express reports that 15 people were facing prosecution out of more than 600 names provided by France in 2011. Today, they have published data from #SwissLeaks relating to 1195 names.
  • Exhibit IV: USA. Here the questions relate, once more, to what action exactly followed from the 2010 receipt of leaked data from France – and whether HSBC should have been allowed to maintain its banking licence. As The Guardian notes, no reference to the case features in the HSBC settlement of nearly $2bn relating to sanctions-busting activities.
  • Exhibits V and VI: Denmark and Norway. With thanks to @FairSkat and @SigridKJacobsen respectively, both of these countries with a relatively strong reputation for fair taxation did the ‘inexplicable’ and chose not to request the data from France. In the wake of the #SwissLeaks story, both now seem likely to.

Without confidence in fair and accountable taxation, governments risk the erosion not only of wider tax compliance, but of state-citizen relations and so of effective democracy (see e.g. recent behavioural and cross-country studies on the important role of tax).

That doesn’t necessarily mean that individual taxpayer data should be in the public domain. While some countries go to this length, many consider it a serious violation of privacy.

What sort of transparency is needed for accountable taxation? 

How can governments (re)build trust that the rich and powerful – not to mention the criminal – will not simply go uncounted behind closed doors?

Here’s a suggestion – comments welcome:

  1. Publish data on the aggregate bank holdings in other jurisdictions of residents, as declared by the banks and through automatic information exchange between jurisdictions (in effect, the national components of the locational banking data collected but not published by the Bank for International Settlements, which was called out by the Mbeki panel and African Union last week);
  2. Publish data on the equivalent, as reported by taxpayers;
  3. Publish regular updates on the status towards resolution of any discrepancy, e.g. “three cases accounting for 27% of last year’s discrepancy are now being prosecuted; investigations continue into 154 cases which account for a further 68%; while further work is underway to determine the nature of the remainder of the discrepancy (5%).” Addendum: @AislingTax points out quite rightly that I need another category here: the ‘gap’ which is not a gap, but rather relates to other features of the tax system such as non-doms in the UK.

A parallel case is that of the watering down of proposals for country-by-country reporting by multinational companies. Publication is necessary so that companies are held to account for abuses, but also so that tax authorities (and governments) are held to account for fair and effective taxation.

Private provision of this data to tax authorities may allow them to tax companies more effectively, but does nothing to demonstrate to citizens if such an opportunity is actually taken. Much of the #Luxleaks data was available to tax authorities, in theory or in practice, but only publication has led to a policy response.

As I twoth last night, the lesson of #SwissLeaks is that accountability demands public transparency.


Mbeki panel showcases new risk-based illicit flows approach

We’ve already blogged at TJN about the Mbeki panel’s historic report on illicit financial flows (IFF) out of Africa. Here I want to pull out a particular aspect, a new approach to IFF which is pioneered in the report.

All IFF approaches to date have focused on estimating the actual scale of flows, in currency terms, on the basis of anomalies in data on cross-borders flows and/or stocks. This raises (at least) two inevitable problems. First, the data are imperfect – and hence anomaly-based estimation may confuse bad data on ‘good’ behaviour with good data showing ‘bad’ behaviour. Second, the behaviour in question is, by definition, likely to be hidden – so it may be unrealistic at some higher level to expect public data to provide a good measure.

Intuition for a risk-based approach

The alternative, or complementary approach, is to pursue a risk-based analysis. Because of the behaviours involved, whether IFF are strictly legal or not, they contain some element of social unacceptability that means the actors involved will prefer to hide the process. For that reason, the risk of IFF will be higher – all else being equal – in transactions and relationships that are more financially opaque.

That will mean, for example, that the chances of uncovering IFF will be higher in anonymous shell companies than in companies with complete transparency of accounts and beneficial owners. Not all anonymous shell companies will be used for IFF, but the risk is higher. Similarly, at a macroeconomic level (at which level much data tends to only be available, unfortunately), trading with a relatively financially secretive jurisdiction such as Switzerland will be characterised by a higher IFF risk than trading with a relatively financially transparent jurisdiction such as Denmark.

Scoring financial secrecy

At present, the most common measure of financial secrecy is the Financial Secrecy Index (FSI), published every two years by the Tax Justice Network, and now used widely—for example, as a component of the Basle Anti-Money Laundering Index and of CGD’s Commitment to Development Index, and as a risk assessment tool recommended in the OECD Bribery and Corruption Awareness Handbook for Tax Examiners and Tax Auditors.

The secrecy score on which the FSI is based reflects 49 measures, grouped to form 15 indicators, which capture a range of aspects of financial secrecy from transparency of beneficial ownership and accounts, through international juridical cooperation. The secrecy score ranges in theory from zero (perfect financial transparency) to 100 per cent (perfect financial secrecy); in practice no jurisdiction has scored less than 30 per cent.

Calculating IFF risk measures

Consider an illustration, involving one country’s exports – say Ghana. For each trading partner, we combine its share of Ghana’s exports with its secrecy score (which ranges from zero to 100). The results can be summed to give an overall level of secrecy for all of Ghana’s exports, and this score reflects Ghana’s vulnerability to IFFs in its exports (the flow-weighted average financial secrecy of all partners). If we multiply this vulnerability score by the ratio of Ghana’s exports to GDP, we obtain a measure of the country’s exposure to IFF risk, which can then be compared across other stocks or flows.

A vulnerability of 50, for exports equal to 10 per cent of GDP, would give an exposure of 5 per cent. This is equivalent to Ghana carrying out 5 per cent of its exports with a pure secrecy jurisdiction (that is, one scoring 100 out of 100), while all other exports go to completely transparent trading partners. The exposure can then be thought of as Ghana’s pure secrecy-equivalent economic activity, as a ratio to its GDP. (Note: Where no secrecy score is available we apply the lowest observed score of 33. This will bias scores downward, though much less so than assuming a zero score.)

IFF risk calculation

This measure of intensity of exposure to IFF risk can then be compared (given data), across time, countries and stock or flow types (with some important caveats). Table AIV.4 from the Mbeki panel report provides an indication of the overall intensity of exposure across African countries (excluding the major conduit jurisdictions).

Further detail can be found in Annex IV of the Mbeki panel report, while Alice Lépissier and I are working on a full paper to follow. Comments on the approach are very welcome indeed.

IFF risk intensity

Show me the Follow the Money!

I had the great pleasure this week of attending three days of meetings of the Follow the Money network, in Berlin, courtesy of T/AI and ONE. A humbling amount of techie knowhow on show, and great goodwill too. Data geeks, criminal investigators, civil society activists, INGO advocates, hackers and all, ranging from corporate transparency to extractive resources, from budget analysis to local service provision, from money-laundering to… tax?

No show moneyIt wasn’t, and still isn’t exactly clear to me where TJN fits in. There’s a certain tendency to focus on (i) domestic issues rather than international aspects, and (ii) pure revenue questions rather than any of the other components of the 4 Rs of tax.

But maybe that doesn’t matter. What is clear is that there are great opportunities in terms of joining up existing work, and developing new collaborations. In that vein, a few speculative thoughts. Comments/offers/engagement on any or all would be most welcome.

  1. Country-by-country

This year sees the first big swathe of public country-by-country reporting, for EU banks. TJN will reach out across the network and try to compile these data as are they filed. The opportunity will then exist to work these into a standard format – not only to allow analysis of the extent to which banks’ activities may raise red flags in terms of tax risk, but also as an input to…

  1. Bank ownership project

There was a lot of interest around banking in partiMaptheBanks screen-shot-2014-12-10-at-12-00-10cular, from explicit criminality (be it Russo-Moldovan money-laundering, Swiss-US tax evasion or global market rigging) to  troubling patterns that may suggest illicitness if not actual illegality (from profit-shifting to avoid taxation, to the very curious patterns of licensing that OpenCorporates have started to turn up at Map the Banks. Hack day ahoy?

  1. The Offshore Game

The Offshore Game, a new TJN project dedicated to uncovering the illicit in sport, will soon have its hard launch with a report on offshore ownership. Other topics of interest include match-fixing and the associated role of gambling, corruption in national and international sports governing bodies, third-party ownership of players, tax affairs of all concerned… In fact, a good part of the FtM agenda comes out to play here.

  1. Show me the Follow the Money!

One of the more exciting ideas discussed, and also one in which there seems to be a clear role for TJNery, is the possibility of putting together (for a single country at first) a complete, integrated set of data on where the money goes (and doesn’t – because the lost revenues to e.g. corporate profit-shifting and individual offshore evasion are equally worth tracking, as the tax paid as it enters the spending process). Of all the possibilities, this feels like it might do most to show what the FtM network can deliver, beyond the sum of its parts.

With thanks to @jedmiller!