The recent Panama revelations have highlighted some problems associated with illicit financial flows, as well as tax evasion and avoidance, including the role of enabling governments, legislation, legal and accounting firms as well as shell companies.
PANAMA PAPERS
The Panama Papers offer an opportunity to understand how shell companies and trusts operate. The documents originate from the law firm Mossack Fonseca, involving 210,000 legal entities.
The Panama-based law firm has also worked with some of the world’s biggest banks — including HSBC, Société Générale, Credit Suisse, UBS and Commerzbank — to circumvent tax and law enforcement authorities worldwide.
Many other such firms in different locations provide similar services. High net-worth individuals and corporations have a far greater ability to evade taxes by paying tax advisers, lawyers and accountants, and opening undeclared companies and financial accounts in low-tax jurisdictions.
Not surprisingly, Mossack Fonseca claims it has never been accused or charged in connection with criminal wrongdoing, but this only underscores that Panama’s authorities have been part of the system. Similarly, many clients of such firms claim that they have not violated national and international regulations.
TAX HAVENS
Total global wealth was estimated at US$231 trillion (RM901 trillion) in mid-2011 by a 2012 Tax Justice Network (TJN) USA report. It conservatively estimated that US$21 trillion to US$32 trillion of hidden and stolen wealth has been stashed secretly, “virtually tax-free”, through more than 80 secret jurisdictions. According to Oxfam, about two-thirds are hidden in the European Union, and a third in United Kingdom-linked sites.
This costs poor countries more than US$100 billion in lost tax revenues every year. Oxfam also found that tax dodging by transnational corporations alone costs the developing world between US$100 billion to US$160 billion yearly. If “profit shifting” is taken into account, about US$250 billion to $300 billion is lost.
Following the Panama Papers leak, Oxfam revealed that the top 50 United States companies have stashed US$1.38 trillion offshore to minimise US tax exposure. The 50 companies are estimated to have earned some US$4 trillion in profits across the world between 2008 and 2014, but have only paid 26.5 per cent of that in US tax.
PANAMA, UNITED STATES EXCEPTIONS
To qualify for the Organisation for Economic Cooperation and Development’s “white list” of approved jurisdictions, almost 100 countries and other jurisdictions have agreed since 2014 to impose new modest disclosure requirements on international customers. Hence, the Swiss government has now relaxed confidentiality and secrecy provisions, allowing sharing of information with other countries about illegal or unauthorised deposits, subject to certain restrictive conditions. Consequently, the world of illegal and unaccounted cash has moved to new destinations.
Only a handful of nations have declined to sign on. The most prominent is the US, the world’s single greatest tax haven. The US does not accept a lot of international law, regulations and standards, and gets away with it because of its economic and political clout. Another hold-out is Panama. Hence, a large number of accounts has been moving to Panama from other signatory tax havens.
In his April 5 speech, following the US Treasury’s crackdown on corporate tax “inversions”, US President Barack Obama criticised “poorly designed” laws for allowing illicit money transfers worldwide.
“Tax avoidance is a big, global problem… a lot of it is legal, but that’s exactly the problem.”
ILLICIT FINANCIAL FLOWS
International capital flows are now more than 60 times the value of trade flows. The Bank of International Settlements (BIS) acknowledges that large international financial transactions do not facilitate trade, and that excessive financial “elasticity” was the cause of recent financial crises. Illicit financial flows involve financial movements from one country to another, especially when funds are illegally earned, transferred, and/or utilised.
Some examples include:
A cartel using trade-based money laundering techniques to mix legal money with illegal money;
AN importer using trade mis-invoicing to evade customs duties, value-added tax or income taxes;
A corrupt public official or family members using an anonymous shell company to transfer dirty money to bank accounts elsewhere;
AN illegal trafficker carrying cash across the border and depositing it in foreign banks; or,
A terrorist financier wiring money to an operative abroad.
Global Financial Integrity (GFI) estimates that in 2013, US$1.1 trillion left developing countries as illicit financial outflows. As GFI’s methodology is quite conservative, it does not pick up movements of bulk cash, mispricing of services, or most money laundering.
Beyond the direct economic impact of such massive haemorrhage, illicit financial flows hurt government revenues and society. They also facilitate transnational organised crime, foster corruption and undermine governance.
WHAT CAN BE DONE?
Does it really matter that tax avoidance schemes are legal? Just because they are not illegal does not mean they are not a form of abuse, cheating and corruption.
To tackle the corruption at the heart of the global financial system, tax havens need to be shut down, not reformed. “On-shoring” such funds, without prohibiting legitimate investments abroad, will ensure that future investment income will be subject to tax, as in the US and Canada.
If not compromised by influential interests benefiting from such flows, responsible governments should, therefore, seek to enact policies to:
DETECT and deter cross-border tax evasion;
IMPROVE transparency of transnational corporations;
CURTAIL trade mis-invoicing;
STRENGTHEN anti-money laundering laws and enforcement; and,
ELIMINATE anonymous shell companies.
Jomo Kwame Sundaram was United Nations assistant secretary-general for economic
development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007