When ICIJ launched their landmark investigation into more than 100,000 leaked HSBC Switzerland client accounts, most of the media speculation that followed centered on the absolute values of money connected to individual countries, and the potential crimes of tax evasion and money laundering. We heard about the $21 billion associated with the United Kingdom, or the $12 billion connected to France. Little was said, however, about the money moving out of some of the most impoverished countries in the world. When you use the same data, but look at the hidden bank accounts as a percentage of a country's GDP, the problem really begins to take shape.
While the undetected movement of money and assets to offshore banks is a problem for many governments, countries that already have little to begin with stand to lose much more. So viewing the SwissLeaks money as a percentage of GDP actually matters a great deal more than viewing the data in absolute dollar amounts. The problem of illicit financial flows is one that affects developing countries at an alarmingly disproportionate rate. It's estimated that almost $1 trillion leaves developing countries illicitly every single year. This deprives developing countries of capital for investment, and of taxes on that capital for government investment. But with increased domestic revenue streams, developing country governments could invest in the drivers of development, like roads, schools, and health care.
It's difficult to quantify just how much increased revenue a particular country could see based on their citizens' money stashed abroad. But some countries, like Spain, have begun to provide information on how much in taxes and fees they've already started to recoup from the leaked HSBC Swiss accounts. Spain has said that it's recovered roughly $340 million from its citizens' accounts, roughly 15% of the total amount linked to the country in the leaks. If we apply Spain's rate of return to the money connected to Sierra Leone, for example, the potential revenue could be about $4.95 million. Though $5 million may sound paltry at the onset, the fact that the potential tax revenue from just one bank in just one secrecy jurisdiction could equate to roughly 19% of the country's health budget is simply shocking.
When you look at the amount of money connected to a particular country as a percentage of GDP, the disproportionate damage to developing countries becomes clear. If the money tied to a place like the United States is important, the money connected to the Central African Republic is even more significant—it's 11 times higher as a % of GDP.
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When the SwissLeaks story broke, many rich country politicians reacted to the news by citing a new cross-border exchange system that's in the works, and claimed that it would all but cement the death of banking secrecy. This 'cure', developed by the G20 and OECD, would enable participating countries to trade financial information with each other at designated intervals. We heard numerous times that "tax secrecy is over" because of the new system, known as the Common Reporting Standard (CRS). Even Switzerland was given praise for being unusually cooperative in the process.
But there is one glaring caveat that wasn't discussed much at all: due to a number of requirements in the CRS, many low income countries won't be able to participate when the system launches, and it doesn't seem like they'll be added to the mix anytime soon.
When the OECD and G20 began designing the system, they did so with little meaningful consultation of low income countries. The result was a system designed by wealthy nations, with wealthy nations in mind, making many of the prerequisites impossible for countries that don't have sizable tax administration budgets or advanced technical capacity.
Viewing the SwissLeaks money as a percentage of GDP shows just how much more low and middle income countries have at stake compared with their high income counterparts, making their inclusion in any system absolutely imperative. The US, UK, and France are rightfully concerned about money leaving their borders undetected for secrecy jurisdictions, but the money leaving countries like Pakistan, Mali, and Sierra Leone should be viewed with even more immediacy.
Perhaps one of the biggest deterrents to including low income countries is the "reciprocity rule", which that says you must share information to receive it. In other words, to get information on your citizens that are stashing money abroad, a country must be able to share similar information about its own financial system at the same time. Say, for example, the government of Mali wants to know about money its citizens are potentially hiding in UK banks to evade taxes. They would also have to compile information on UK citizens that are doing the same in Malian banks. In theory, this mutual exchange is logical, but a number of developing countries simply don't have the capacity or technical systems to comply with their side of the requirement from the start.
This is why we think it's only sensible for developing countries that can't meet the requirement to be given a temporary period of non-reciprocity where they can receive information without having to send their own. This will give governments the time necessary to build capacity to share their own information.
If there was evidence that citizens of rich countries were stashing cash in banks in low income countries, requiring immediate reciprocity would make a lot of sense. But the reality is that very few citizens of rich nations are sending their money to banks in low income countries, yet vast sums are flowing the other way. When you take a closer look at who controls the bulk of the offshore financial market, trying to come up with an answer as to why rich countries would oppose a temporary period of non-reciprocity for developing countries gets that much harder.
There simply isn't much offshore money stashed in developing countries in the first place.
We've seen countless examples of politicians using bank accounts in secrecy jurisdictions to hide stolen assets. Former Nigerian leader Sani Abacha chose the UK, Jersey, and France, while Ukraine's Victor Yanukovych seemed to prefer Switzerland and Austria. The new automatic exchange system would compile lots of information that could seriously advance investigations of corruption and state embezzlement, and help stop the looting before it's too late. Picking up the pieces from large-scale state embezzlement is a process that takes years and it's greatly hindered by a lack of access to information.
But there's one problem concerning this new glut of information: corruption will be off limits.
Instead of letting governments use the information to track and investigate corruption, the financial information exchanged will only be available for tax-related matters and shared between each country's "competent authorities". The restriction on using this information for corruption is puzzling and has to be revisited.
Pointing out the shortcomings of a new system is only half of the equation. It's just as important to point out the solutions, too. If you'd like to read more about the G20/OECD automatic exchange system, and what can be done to improve it, check out Christian Aid's report Information for the Nations. You can also view this infographic on why a temporary period of non-reciprocity is vital to ensure developing countries are included in the system.
Reworking the current framework is key, but it makes more sense for global standards to actually be set in global forums, which is why we think the UN should upgrade the United Nations Committee of Experts on International Cooperation in Tax Matters to a universal intergovernmental body. This would give it the political and financial backing necessary to lend itself to the global standard setting process. We advocated for its creation in July at the 3rd Financing for Development Conference. Though the tax body wasn't part of the final outcome, the issue of ensuring that all countries have a seat at the table isn't going anywhere. You can learn more about financial transparency, illicit financial flows, and the secrecy that helps keep the system running here.
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