Landmark OECD Report Finds Rich Countries Failing to Effectively Tackle Illicit Financial Flows

Washington, DC, 18 December 2013, Global Financial Integrity.

This post was originally published on the Global Financial Integrity website.

OECD Member Countries Not Compliant with International Standards for Fighting Money Laundering, Tax Evasion, and Corruption
Report from Intergovernmental Body Published 1 Week after GFI Study Found Developing World Lost Nearly $1 Trillion in Illicit Outflows in 2011

A landmark report published today by the Paris-based Organization for Economic Co-operation and Development (OECD) takes its members—some of the richest countries in the world—to task for failing to implement policies to curtail illicit financial flows in the developing world. The OECD study—which was quietly posted on the multilateral institution’s website this morning—comes just one week after Global Financial Integrity (GFI) released its annual update on illicit financial outflows from the developing world, finding that the world’s poorest countries lost nearly US$946.7 billion in illegal capital flight in 2011, a 13.7 percent rise from the year before.

“Illicit financial flows drained nearly US$1 trillion from the developing world in 2011, and it’s clear that the richest countries in the world bear a lot of responsibility for this,” said GFI President Raymond Baker, a longtime authority on financial crime. “We are thrilled that the OECD is focusing attention on illicit flows. When I launched GFI in 2006, the OECD wouldn’t touch this issue with a ten-foot pole. We’ve made a lot of progress since then.”

“Our latest research finds that illicit financial flows from developing countries increased at an average rate of 10 percent per year over the past decade, spiking nearly 14 percent between 2010 and 2011, the most recent year for which there is reliable data,” continued Mr. Baker. “Illicit financial flows are the most damaging economic problem facing the global poor, and it’s growing at a terrifying pace. While a modicum of momentum has been building internationally over the past year to curtail this problem, the report today from the OECD underscores that more must be done. This study should serve as a wake-up call to world leaders: the time to act is now.”

The OECD study, titled “Measuring OECD Responses to Illicit Financial Flows from Developing Countries,” recognizes that illicit financial flows must be addressed both by policymakers in developing nations and by those in advanced economies, a perspective that Mr. Baker and GFI have continually espoused.

“For a long time, the traditional view in the West was that illegal capital flight was a problem only for the world’s poorest countries, whose purportedly corrupt governments and poor business environments led capital to flee their nations. Certainly, while policymakers in developing countries bear some of the responsibility for this problem, this is a two-way street. The countries absorbing illicit financial flows—that is: offshore secrecy jurisdictions and developed countries like the U.S., UK, and France—likewise bear responsibility. Western nations established an offshore financial system comprised of tax havens, anonymous shell companies, and various trade-based money laundering techniques, and they have not done enough to remedy this system to date.”

Falling Short on Corporate Ownership Transparency

One of the most damning findings of the report is that 27 of the 34 OECD countries are either “non compliant” or only “partially compliant” with the Financial Action Task Force’s (FATF) recommendations on transparency of corporate ownership information—which aims to tackle abuses by anonymous shell companies—and that none of the OECD countries are “fully compliant” with the standards.

“The FATF recommendations on beneficial ownership are only a first step towards eliminating the use of anonymous ‘phantom firms’ and effectively curtailing illicit flows,” said GFI Policy Counsel Joshua Simmons. “Nevertheless, every OECD member fails to comply with even these weak standards on corporate ownership transparency—and most aren’t even close.”

“Still, we have reason to be hopeful that this policy stagnation is finally lifting. The United Kingdom made history in October by announcing that they will create the world’s first public registry of corporate beneficial ownership information,” continued Mr. Simmons. “Public registries of beneficial ownership information are the gold standard in targeting the misuse of corporate entities. We commend British Prime Minister David Cameron for his courage this year and urge the rest of the world to follow suit and make public registries of beneficial ownership information the global norm.”

Advancing Automatic Exchange of Tax Information

More progress has been made on the topic of automatic exchange of tax information between advanced economies, which the OECD report endorses expanding. GFI touts automatic exchange of tax information between countries as an essential tool in detecting and deterring tax evasion. Still, GFI warns that more must be done to make sure that developing countries benefit from such a system.

“This has been a watershed year for automatic exchange of tax information, with the G20 economies agreeing to exchange tax information between themselves by the end of 2015,” noted Mr. Simmons. “However, while the world’s poorest countries stand to gain the most from such a system, they are not members of the G20. It is essential to curbing illicit financial flows that automatic tax information exchange is extended rapidly to developing countries outside the G20, and that these countries’ perspectives are considered in constructing the new global system. We urge the G20 and the OECD to include developing countries in the committee tasked with drafting the automatic exchange implementation convention—ensuring that its terms are both beneficial to and implementable by developing countries.”

Country-by-Country Reporting Absent from Study

Abusive transfer pricing by multinational corporations is another driver of illicit financial outflows, and—while the OECD report touches on the issue—it fails to mention country-by-country reporting of sales, profits, subsidiaries, employees, and taxes paid by multinational corporations as a possible policy remedy. GFI advocates that multinational corporations be required to publicly report this information so as to discourage abusive transfer pricing and profit shifting.

“While we welcome the attention that the OECD gave to tax evasion and avoidance, we’re very disappointed that they failed to recommend the simple step of increasing transparency through public, country-by-country reporting of multinational companies’ accounts and operations,” added Mr. Simmons. “As recent hearings and articles exposing the tax-dodging practices of companies like Apple, Starbucks, Amazon, and Google highlight, international businesses are finding creative ways to artificially shift their profits out of the nations in which they are generated and into unproductive tax havens. Such behavior starves governments of much needed tax revenue at a time when rich and poor nations alike are struggling to make ends meet. Requiring companies to disclose where they operate, where they make their profits, and where they pay taxes—not just to tax authorities, but to the public as well—is a straightforward way to detect and deter corporate tax dodging.”