ILLICIT FINANCIAL FLOWS
The report of the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda or FACTI Panel underscores the urgent need to address the systemic problem of illicit financial flows (IFF) which, if left unabated, will continue to widen inequalities.
Below are quotes lifted from the FACTI Report released in February 2021. * The FACTI Panel was convened by the 74th President of the United Nations General Assembly and the 75th President of the Economic and Social Council on 2 March 2020. It was co-chaired by Dalia Grybauskaitė, former President of Lithuania, and Ibrahim Miyaki, former Prime Minister of Niger, with panelists composed of former world leaders and central bank governors, business and civil society heads and academics.**
· The (pandemic) crisis has sharpened pre-existing divides within and between countries. The impassioned declarations made at the start of the pandemic – that “we’re all in this together”– rapidly started to subside. It soon became clear that less developed countries with low tax-to-GDP ratios were worse equipped to tide their societies over the disaster. All countries were in the same storm, but they were not on the same boat. Developing countries could ill afford social safety nets, medical equipment, and vaccines, compared to developed countries.
· Inequality has risen sharply, with reports suggesting the pandemic has led to an 7% increase in extreme povertywhile boosting billionaires’ wealth by 27.5% at the peak of the crisis, between April and July 2020. Even if this result cannot be traced solely to illegal corruption and fraud, it is an alarming testament to the way the international financial system is presently skewed in favour of the wealthy, even during a pandemic.
· The UNODC (United Nations Office of Drugs and Crime) warned (in April 2020) that dramatic measures taken by Member States to stave off economic collapse, including relaxed safeguards, could present “significant opportunities for corruption to thrive”.
· The UNODC again (in December 2020) drew attention to the risk of corruption, related to emergency funding for the vaccine, including recently approved financing of US$12 billion from the World Bank, to help developing countries finance, purchase and distribute COVID-19 vaccines, tests and treatments. It warned that public procurement posed a particular risk, given the volumes of funding involved.
· The FACTI Panel notes the estimates that the global loss to governments from profit-shifting by multinational enterprises may be $500 to $600 billion a year. This tax loss from profit shifting estimate is based on a calculation of the deviations in declared corporate profits from indicators of real economic activity, and is a rough estimation, indicative of how much revenue corporations are denying governments.
· llicit financial flows — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development. They worsen inequalities, fuel instability, undermine governance, and damage public trust. Ultimately, they contribute to States not being able to fulfil their human rights obligations.
· Concerns about illicit financial flows have been raised before. But these discussions have tended to rapidly run aground, with some vociferously focusing only on illegal activities such as bribery and money laundering, to the exclusion of tax avoidance.This fault line explains in part why there is still no intergovernmentally agreed universal definition of IFFs.
· From a legal perspective, tax avoidance utilises loopholes in tax laws, exploiting them, albeit within the bounds of legality. In contrast, tax evasion is defined as non-compliance with tax laws. However, taxpayers do engage in “aggressive tax planning”, a term which describes artificial arrangements designed to manipulate tax laws in order to achieve results that conflict with the intention of legislatures.It blurs the line between tax avoidance and tax evasion. Both aggressive tax planning and tax evasion foster inequalities, deprive countries of resources that could be used for financing public goods, and undermine trust in governance and the social contract.
· An estimated $7 trillion of the world’s private wealth is funnelled through secrecy jurisdictions and haven countries.Taking into account just one sub-type of illicit financial flows – corporate profit-shifting, or the shopping around for tax-free jurisdictions by multinational corporations – such practices cost countries where these profits are actually made on the order of $500 to $650 billion a year, according to some estimates. Turning to the illegal flows, as much as 2.7 per cent of the global GDP is laundered by criminals.And bribery of all types across the world amounts to an estimated $1.5 to $2 trillion dollars every year.While these opaque transactions occur in all countries, they have a much heavier impact on developing countries.
· Illicit financial flows represent a double theft: an expropriation of funds that also robs billions of a better future. Taking action to recover hidden outflows could reduce inequalities everywhere,improving peoples’ well-being, as well as socioeconomic and health outcomes.Turning to the illegal flows, as much as 2.7 per cent of the global GDP is laundered by criminals.And bribery of all types across the world amounts to an estimated $1.5 to $2 trillion dollars every year.While these opaque transactions occur in all countries, they have a much heavier impact on developing countries.
Echoing a proposal that developing countries have been calling for for years, the FACTI Panel recommends that an intergovernmental tax body should be established under the auspices of the United Nations. Furthermore, the FACTI Panel called for the development of a UN Tax Convention – a proposal that has previously been put forward by the Africa Group at the UN.
It is high time for governments to act on these recommendations. It is not only a question of ensuring the fairness and effectiveness of our tax systems; it is also a question of governments being able to mobilize the public resources needed to recover from the Covid-19 crisis.
*The full report of the FACTI Panel is available here https://www.factipanel.org/reports
**The members of the FACTI Panel can be found here https://www.factipanel.org/panelists
Please refer to the following video for more information on IFF: https://www.apmdd.org/programs/development-finance/iff/trade-misinvoicing-iffs-and-tax-justice-advocacy
Corporate tax abuse and other illicit financial flows (IFF) are taking a toll on people’s health and depriving millions of essential services. The urgent need to address IFF as a systemic problem was underscored recently in the report of the FACTI Panel or the United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda.
“Illicit financial flows represent a double theft: an expropriation of funds that also robs billions of a better future. Taking action to recover hidden outflows could reduce inequalities everywhere, improving peoples’ well-being, as well as socioeconomic and health outcomes. It could give developing countries the ability to provide their citizens basic social services, such as adequate water, sanitation, electricity, healthcare, and housing,” says the FACTI Report, Financial Integrity for Sustainable Development published in February 2021.
The FACTI Report notes that “IFFs — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development. They worsen inequalities, fuel instability, undermine governance, and damage public trust. Ultimately, they contribute to States not being able to fulfil their human rights obligations."
It is estimated that the global loss to governments from profit-shifting by multinational enterprises may come to (US)$650 billion a year. “As much as 10 per cent of the world’s GDP might be held in offshore financial assets. An estimated $7 trillion of the world’s private wealth is funneled through secrecy jurisdictions and haven countries. Taking into account just one sub-type of illicit financial flows – corporate profit-shifting, or the shopping around for tax-free jurisdictions by multinational corporations – such practices cost countries where these profits are actually made on the order of $500 to $650 billion a year, according to some estimates.”
The FACTI Report estimates that recovering the annual estimated loss to tax evasion would allow Bangladesh to expand its social safety net for the elderly, from 4 million people of those above the age of 60 to 13 million elderly, while increasing the size of the cash transfer to $58 a month (from the current $6).
In India, recovering tax avoidance losses could cover the hospital treatments for 55 million low-income patients annually.
In Thailand, the $1.1 billion estimate lost to corporate profit shifting annually would have been able to augment its social welfare program, providing its 12 million recipients an additional $100 a year.
“Illicit financial flows are a systemic problem that requires a systemic solution,” states the FACTI Report. The FACTI Panel was convened in March 2020 by the 74th President of the United Nations General Assembly and the 75th President of the Economic and Social Council.
“There must be greater fairness, especially in tax cooperation and in the recovery of stolen assets of States. All taxpayers should pay their fair share, including a minimum global corporate income tax rate on profits. Fair and impartial mechanisms should be ensured to adjudicate disputes. A multilateral mediation mechanism can help resolve difficulties in asset recovery and return. The global financial system must be reformed, redesigned and revitalized so that it conforms to four values – accountability, legitimacy, transparency, and fairness,” recommends the FACTI Report.
In the course of formulating its findings and recommendations the FACTI conducted a series of consultations across the world which drew participation from policymakers and government officials, representatives of international agencies, academics, the private sector and civil society.
Earlier, the report The State of Tax Justice 2020, released by the civil society group Tax Justice Network, analyzed data on how much tax revenues are lost to international corporate tax abuse and private tax evasion. “The world is losing over US$427 billion in tax a year to international tax abuse. Of the $427 billion, nearly $245 billion is lost to multinational corporations shifting profit into tax havens in order to underreport how much profit they actually made in the countries where they do business and consequently pay less tax than they should. The remaining $182 billion is lost to wealthy individuals hiding undeclared assets and incomes offshore, beyond the reach of the law,” according the State of Tax Justice 2020. (https://www.taxjustice.net/reports/the-state-of-tax-justice-2020/)
A finding that stood out, with the world grappling with the Covid19 pandemic, was the proportion of moneys lost to tax havens vis a vis health spending. Globally the equivalent of nearly 34 million nurses’ annual salaries is lost to tax havens each year. On average, the losses come to nearly 8.4 per cent and nearly 52.4 per cent of the health budgets of higher income countries and lower income countries, respectively. Asia was found to have lost over $73.3 to multinational tax abuse and private tax evasion every year. The tax lost is equivalent to 6.48 percent of the region’s combined health spending or paying the yearly salaries of 11,371,221 nurses.
The Asian Peoples’ Movement on Debt and Development joins civil society calls for systemic reforms in the international financial architecture. APMDD, through its membership in the Financial Transparency Coalition, organized the 2019 Asian Conference on Illicit Financial Flows. The conference communiqué, “Stopping Robbers and Pirates”, states in part that “the abusive tax practices of corporations and the generous tax incentives they enjoy greatly drains our economies of foregone revenues which could and should have been used to finance development. “
(Full Communiquéavailable on https://www.apmdd.org/programs/development-finance/iff/communique-of-the-asian-conference-on-illicit-financial-flows)
Among the ways forward identified in the Asian Conference was to advocate and work for reforms in the international financial architecture, particularly setting up an inclusive UN inter-governmental tax commission and an international tax convention, which together ensures effective international tax cooperation and transparency.
Rick Rowden, Senior Economist at the Global Financial Integrity discusses trade misinvoicing and how it facilitates illicit financial flows (IFFs) and the magnitude and scale of the phenomenon.
The FTC welcomes the Interim Report by the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda.
"Stopping Robbers and Pirates"
Quezon City, Philippines
20-22 November 2019
1. We, participants of this Conference, have come together from 11 Asian countries1 to call for an end to illicit financial flows (IFFs), recognizing these as a massive loss of public money when needs are as urgent as ever for essential social services, decent jobs, long-lasting resilience for climate change and the full realization of human rights for all.
