Why fighting illicit capital is not a priority?
An interesting report named “Illicit financial flows, human rights and the post-2015 development agenda” has been submitted to the Human Rights Council on 9 March 2015 under the agenda item “Promotion and protection of all human rights, civil, in political, economic, social and cultural rights, including the right to development”.
The report outlines how illicit financial flows undermine the enjoyment of economic, social, cultural, civil and political rights and emphasizes the need for political action.
As many international organizations such as the OECD and civil society groups have been advocating for years, illicit financial flows drain developing countries’ resources, while undermining the scope for progressive taxation.
Developing countries lost US$ 991 billion in illicit financial outflows in 2012 and those flows increased in real terms at a rate of 9.4 per cent per annum over the period 2003–2012.
Tax evasion is considered the main source of illicit financial outflows, followed by criminal activities, such as drug and human trafficking, the illicit arms trade, terrorism and corruption-based illicit financial flows.
Within tax evasion, trade misinvoicing and mispricing by multinational corporations represent around 80% of total illicit financial flows. It takes place when a subsidiary of a company avoids paying taxes in a relatively high-tax country by selling its products at a loss to a subsidiary in a low-tax country, which then sells the product to final customers at market price and yields the profit.
Mispricing activities are allowed to continue unchallenged where tax authorities have scarce capacity and information on such practices. Therefore the effective control of illicit capital flows requires the strengthening of transparency compliance rules by national authorities.
As the representative of Kenya said during a recent UN meeting “Illicit financial flows are not addressed sufficiently. The amount of resources leaving Africa illegally would allow Africa to develop itself and the rest of the world. Fighting illicit financial flows can also reduce or even end aid dependency”.
The report also expresses disappointment for the lack of emphasis on tax evasion and tax heavens by the Open Working Group and for the lack of a dedicated goal on curbing illicit financial flows.
It ends with some specific recommendations on targets and indicators that hopefully can still be incorporated in the current negotiations. Some of the most interesting proposals are:
- Support empirical research on illicit financial flows, improve existing data and estimations, and agree on common methodology for the purpose of tracking progress in curbing illicit financial flows by 2030;
- Ensure that such indicators will include specified percentage targets to reduce trade- and tax-based illicit financial flows by 2030;
- Include in the measurement of progress three transparency targets aimed at reducing to zero:
- The number of legal persons and arrangements for which beneficial ownership information is not publicly available;
- The number of cross-border trade and investment relationships between jurisdictions where there is no automatic exchange of tax information;
- The number of transnational business corporations that do not report publicly on a country-by-country basis.
The importance of this issue and evidence presented in support of it is clear, what is missing is political support. Hopefully, the negotiations for the Financing for Development Conference and for the post 2015 Means of Implementation offer the opportunity to reverse and put an end to illicit financial flows and the threats they pose to sustainable development.
Read full report here.
By Marina Ponti, Social Watch