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Illicit finance was once understood by few and ignored by many. No longer. Tax evasion is seen as unseemly, especially when illicit funds may well feed the world.
Illicit finance once was a shadowy term, understood by few and ignored by many. No longer. The idea that depositing money on a tropical island in a secret bank account to avoid taxes is an acceptable gambit for the globally mobile rich and powerful has changed rapidly over the past few years.
The latest evidence is in a report to the United Nations. Listed among the recommendations to the UN made by 27 eminent persons on ways to eradicate extreme poverty by 2030, is the following: “A swift reduction in corruption, illicit financial flows, money-laundering, tax evasion, and hidden ownership.”
Before the global financial crisis of 2008-2009, such calls were rare and largely dismissed as the whines of the disenfranchised. Today tax fairness has moved to the centre of the global agenda.
Witness Apple, usually held up as an icon of corporate excellence, but last week it was called before a U.S. Senate panel. Apple might have abided by all the tax laws of the United States, but there was something unseemly about chief executive Tim Cook justifying how the global company saved $9 billion by funneling earnings through Irish subsidiaries. Microsoft and Hewlett-Packard have done much the same.
TO EVADE OR FIGHT EVASION?
Prominent politicians have fared little better. Socialist French President Francoise Hollande has seen his approval ratings plummet on revelations that his budget minister and campaign manager held money in tax havens in Switzerland and the Cayman Islands respectively. U.S. presidential candidate Mitt Romney had to fend off criticism last year over his tax shelters. And this week, Michael Froman - a top aide to U.S. President Barack Obama and the man who led G8 talks on international tax issues - revealed he, too, has money in the Cayman Islands.
This calling to account is a marked change, part of a broader realization that in a globalised economy, money knows no borders, and that national policies alone are insufficient to deliver fair and equitable growth. World leaders first addressed the issue in April 2009. Facing global recession after a banking collapse, heads of G20 major industrialized and developing countries in London pledged to rein in tax havens and declared, “The era of banking secrecy is over.”
Since then, governments have steadily expanded international agreements to share tax information and "encouraged" an end to shell companies. UK Prime Minister David Cameron has put financial transparency and improving tax sharing at the top of his agenda for the G8 meeting of world leaders in Northern Ireland on June 17-18, linking it to prosperity and jobs.
“We must fight the scourge of tax evasion by promoting a new global standard for automatic information exchange between tax authorities,” Cameron wrote in a May 13 opinion piece in the Wall Street Journal.
Some critics in the U.S. administration say his intentions may be less about transparency and more about deflecting attention from his contractionary budgetary policies at home. Cameron also may prove less than willing to embrace strong rules, given the prominent role of the City of London in aiding tax evasion, they say.
Expediency aside, Cameron has clearly aligned himself with change. He is one of the three co-chairs of the UN report - along with Liberian President Ellen Johnson Sirleaf and Indonesian President Suilo Bambang Yudhoyono - which makes a strong case for a radical rethinking of global growth and development models.
ENOUGH TO FEED THE WORLD
Development aid and national policies alone cannot lift the next one billion out of poverty, the report says. In a globalised economy, it will require developed countries to embrace structural changes, including addressing corruption and financial transparency. “They can also co-operate more effectively to stem aggressive tax avoidance and evasion, and illicit capital flows. Governments can work with business to create a more coherent, transparent and equitable system for collecting corporate tax in a globalized world. They can tighten the enforcement of rules that prohibit companies from bribing foreign officials,” it said.
The numbers are compelling. Global Financial Integrity estimates that developing countries in 2010 lost $859 billion in illicit financial outflows - that is 10 times more than the amounts they received from official development aid. ONE, the anti-poverty group, is more conservative, estimating $20 to 40 billion is illegally and corruptly appropriated from some of the world’s poorest countries each year.
Whatever the sum, keeping a small portion of that money would be more than enough to feed the estimated 3.5 billion people worldwide who struggle to survive on less than $2 a day.
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