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Home , Biens mal acquis, Mobutu Sese Seko, Tax Justice Network

THE FRENCH EDITION 2007 VOLUME 3, NUMBER 3

TAX JUSTICE FOCUS Europe leads against havens 1 Christian Chavagneux and Editorial Objective Doha 3 The quarterly newsletter of the tax justice network Jean Merckaert Features : the shadow world of oil 4 Xavier Harel Tax havens and ill-gotten wealth 6 Antoine Dulin and Jean Merckaert Economic and financial crime needs 9 a coordinated response EUROPE LEADS THE FIGHT Chantal Cutajar Harmful Tax Practices: 10 Next steps for Europe Vincent Drezet AGAINST TAX HAVENS news and research Expert meeting in Rome considers Europe contains a number of tax havens, but is becoming less tolerant of them: in European states, for their part, have been tax agenda for Doha 2008 12 making progress on three fronts. David Spencer fact, the European Union has increasingly taken the lead in the global fight against Letter from Africa 13 tax havens and offshore financial centres. Christian Chavagneux and Ronen Palan First, on the taxation of the savings of non- Alvin Mosioma residents. Since July 2005, an EU directive outline how the EU is leading the way. Reviews applying to all member states requires Paradis Fiscaux 14 information to be exchanged on non-resident he European Community’s Court of when the court condemned what it called Capitalisme Clandestin 14 deposits with the relevant national authorities. Justice (the highest court in the EC) “wholly artificial” subsidiaries in tax havens. In Jacques Terray Austria, and secured has signalled how attitudes are shifting another important judgement delivered on 13 Afrique pillage à huis clos 15 T the right to retain their banking secrecy, but in Europe. As recently as 2005, the Court March 2007 (the so-called ‘thin-cap’ affair), the Court ruled that states could restrict freedom are required to impose a withholding tax on Calendar 15 tended to side with individuals and corporations earnings from deposits starting at a rate of 15 and not with states seeking to protect their of establishment of wholly artificial structures Guest editor: Jean Merckaert devoid of economic reality and having tax per cent from 2005 to 2007, rising to 20 per Editor: revenues. But then, in a landmark judgement in avoidance as their principal objective. cent from 2008 to 2010, and to 35 per cent Contributing editor: John Christensen April 2005 (the Halifax case), the Court ruled thereafter. This depended on applying equivalent Design and layout: www.tabd.co.uk Email: [email protected] that European law forbids transactions having Three swallows do not, of course, make a measures to the principal non-EU member Published by the Tax Justice Network International the sole purpose of creating a . summer: we must carefully monitor future state competitors (Andorra, Liechtenstein, Secretariat Limited This interpretation was reaffirmed in a case rulings. But the change in attitude signals that , Saint Moreno, ) plus all © Tax Justice Network 2007 involving Cadbury Schweppes in May 2006, something important is happening. the dependencies and associated territories For free circulation, ISSN 1746-7691 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS of member states (the , Isle “The code of conduct introduced an important innovation Luxembourg to abandon its tax regime for of Man, and Caribbean islands). And, despite that overturns a traditional objection of tax havens: that holding companies. Similarly, the adoption of pessimism about being able to do this, this new tax regimes by , Guernsey and the was achieved. European financial diplomacy under the principle of sovereign equality large and powerful Isle of Man from 2008 onwards (notably the has continued: in early 2006, the Cayman states cannot dictate to smaller states what laws or rules they 0% on business profits) may be taken Islands and Montserrat agreed to information to task for not respecting the Code. exchange in principle, and the British Virgin can or cannot impose in their own territories. “ Islands and Turks and Caicos opted for the The struggle against tax havens has a long and principle of a withholding tax. process would mean that group profits are in the EU, including: lack of transparency; difficult road ahead. But we should recognise taxed just once in the EU, and the resulting tax rates significantly lower than in other that the European Union has already taken The European Commission admits that some revenues are then distributed between the countries; tax advantages specifically targeted several positive steps, and seems to want to of Europe’s offshore capital has simply fled different countries according to agreed at non-residents (i.e. ring fenced from the go still further. to Asia as a result. But this has prompted criteria (e.g. amount of capital invested, sales local economy) or targeted at economic the EU to widen the geographical scope of turnover) as is already done between states in or financial activities not connected to real Christian Chavagneux and Ronen Palan its initiative, and now it is seeking to open the U.S., and in Canada. There is a long way to domestic economic activity; or ways of taxing co-authored Les paradis fiscauxpublished by La negotiations with Hong Kong, , go before a consensus is reached, but Germany profits that fall outside international norms. Macau and Japan, as well as with Canada, and support the proposal. The United Découverte, , new edition 2007 Bahrain, Dubai and the Bahamas. Since last Kingdom and Ireland, predictably, oppose it, The code of conduct introduced an March, there are clear indications that the because they fear that harmonisation of the important innovation that overturns a Commission has targeted several loopholes tax base will be followed by harmonisation traditional objection of tax havens: that under in the directive, and is working with financial of tax rates. The proposal is also opposed the principle of sovereign equality large and intermediaries to try and identify how best by the Baltic states and Slovakia, which fear powerful states cannot dictate to smaller to close them. After that, the EU will have to that a harmonised tax base will be narrower, states what laws or rules they can or cannot convince the tax havens to follow suit, as it and will allow more exemptions, than their impose in their own territories. To avoid the has already done with the original directive. existing regimes. The Commission has given charge of ‘’, the code does not According to tax expert Richard Murphy “if itself until 2008 to come up with a directive try to elaborate a principle of “just taxation” UPDATE that happens, most of the existing loopholes for company taxation. and then impose this on recalcitrant states. Europe is playing hardball on this: Reuters in the directive will disappear”. Instead, taking a line of reasoning adopted Finally, for several years a code of good by the OECD, the code accepts the principle reported on October 2 that Singapore’s Second, the EU is also pushing for the conduct on business taxation has been of , allowing states freedom refusal to soften its strict bank secrecy harmonisation of company taxation applied within the European Union. The code of choice in this matter. But then, crucially, it laws could scupper talks with Europe across the community. Multinational does not have the status of a legal instrument, insists that the tax regime’s rules are applied about a agreement. “Clearly people engaged in money laundering are looking companies with subsidiaries in more than one but provides an informal approach to regulation equally on all businesses in the jurisdiction. for places like Singapore with low levels of European country pay in the countries which has nonetheless proved effective. In This confronts and challenges jurisdictions transparency to actually engage in money they operate in, but they tend to shift profits adopting this code, member states have that have created a niche in the global laundering,” said Glyn Ford, a Member to the lowest-tax country through complex been working towards eliminating a number economy precisely by making a distinction of the European Parliament. “Is this a systems of . A European-wide of harmful tax competition practices and in their tax treatment between resident and dealbreaker? Potentially yes.” tax base would reduce the incentives for doing avoiding new ones. The code sets out explicit non-resident companies. Citing the code, for so: applying a “formulary apportionment” criteria for identifying harmful tax practices example, in 2006 the Commission forced

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OBJECTIVE DOHA: editorial TACKLING THE HAVENS Jean Merckaert

n December 2008, six years after the “the G-8 countries, which have the means but not the will to stamp out this phenomenon, Monterrey Conference in Mexico, Doha tolerate this secrecy because of pressures from the principal beneficiaries of : banks, I will be hosting the United Nations’ follow up conference on Financing for multinational companies and super-rich people.” Development. This choice of location calls for a moment’s reflection, since the name of up by G-8 to combat money laundering. And well as this, the G-8 countries, which have has also announced that it is preparing to the capital of Qatar – an emirate bordered yet organised crime continues to prosper. the means but not the will to stamp out this launch a study of from by the offshore financial centres of Bahrain The Financial Stability Forum (FSF) has also phenomenon, tolerate this secrecy because South to North, whilst also engaging with the and Dubai – is often associated with the dropped its own list of offshore financial of pressures from beneficiaries of tax evasion: United Nations in strengthening procedures resounding stalemate of the WTO’s so-called centres not cooperating with the rules banks, multinational companies, super-rich for repatriating ill-gotten loot. The revision ‘development round’ of trade negotiations. for financial surveillance. The rapid growth people and even political parties with secret of the IMF’s mandate could also provide an of poorly regulated financial instruments, finances. By doing so, even when they don’t opportunity to clarify that institution’s role But the chips are down. Sixty years after including offshore hedge funds, remains a operate as havens in the way that London in tackling the tax and legal havens. As David the universal declaration of cause for concern. According to the OECD, and the American state of do, they Spencer’s article suggests, the United Nations (December 1948) and seven years before which is tasked with tackling tax evasion, become complicit in economic and financial Tax Committee could see its role reinforced the day of reckoning for achievement only three jurisdictions remain on its non- crime and the looting of the countries of the as an outcome of Doha. The European Union, of the Millennium Development Goals cooperating list (Andorra, Liechtenstein, and South. Furthermore, it is a mistake to treat which has made some progress in tackling (MDGs), Doha provides an opportunity for Monaco). Which begs the question: why do tax evasion as a lesser evil than handling the the havens, as Christian Chavagneux outlines the international community to tackle the tax authorities still feel so powerless in the proceeds of other crimes: evasion undermines in his article, could and should play a leading number one obstacle to the financing for face of this phenomenon? The steps taken by the legitimacy of states and deprives them of role at Doha. development agenda: tax and legal havens. the IMF and the United Nations to tackle money the means to take vital actions. Secret repositories for the proceeds of crime, laundering and promote tax cooperation This is another occasion for France, which and tax evasion, and generators respectively, are equally unconvincing. It will take a multiplicity of actors to put this holds the presidency of the EU during the of financial instability, these havens cost the subject at the heart of the Doha agenda. second half of 2008, to act with credibility. poorer countries of the South between Crucially, these initiatives are organised Fortunately, organisations are But while Monaco and Andorra, which are $500-800 billion annually – five times the in compartmentalised ways, making them not alone in taking on this issue. Under a closely linked to France, fight it out to see UN’s estimated cost of financing the MDGs. almost totally ineffective. Trying to tackle Norwegian initiative, a task force is now which will be the last to stay on the OECD’s dirty money flows without also tackling being formed to tackle capital flight and tax blacklist, it is hard to see this happening. International attempts to tackle the havens tax evasion, as the IMF has attempted, is havens, with Chile, France and also have patently failed. Since 2006 not a single pure delusion, because the secrecy space participating, in the context of the work Jean Merckaert heads the Financing for country remains on the blacklist created by provided by the havens protects tax evaders of the Leading Group on Solidarity Levies Development programme of the Comité Catholique the Financial Action Task Force (FATF) set as much as it enables illicit capital flight. As to Finance Development. The World Bank Contre la Faim et Pour le Développement (CCFD)

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feature AFRICA: THE SHADOW WORLD OF OIL Xavier Harel

The oil industry provides unbridled scope for corruption, writes Xavier Harel. In Congo-, the regime of Denis Congolese oil on behalf of the national Sassou Nguesso embezzles hundreds of millions of dollars annually from oil revenues, with the help of BNP Paribas, the treasury – made a habit of selling oil shipments at way below market price to Bermuda- French oil company Total, and the opaque legal systems of various tax havens. registered Sphynx Bermuda, a company belonging to… Denis Gokana, president of SNPC. He resold the shipments at market he shenanigans and opulent lifestyles Congolese national oil company – Société acting for Kensington – an American fund price and pocketed hundreds of millions of of the offspring of some African Nationale des Pétroles du Congo (SNPC), holding debt instruments valued at over dollars, at the expense of the Congolese T presidents make regular headlines. which is responsible for marketing the $100 million – to track Congolese assets, people. Dozens of tanker cargoes were sold Leader of the pack is the oldest son of country’s oil. we would still know nothing about who this way, via shell companies, for the sole Teodoro Obiang Nguema, ’s was hiding behind Long Beach Limited. The purpose of embezzling oil rents. Both BNP While 70 per cent of the Congolese dictator, who was given a $35 million villa in company was managed by nominees to avoid Paribas, a major French bank, and commodity population lives below the poverty line, trader Trafigura, helped along the way. Malibu, California, complete with swimming disclosure of the owner’s identity: a handy pool and tennis court. Another is Gabonese the hundreds of millions of dollars he has way to keep dodgy commissions out of sight president ’s son, Ali, likewise the squandered between Paris and Marbella The British Virgin Islands and Jersey lie at the from prying eyes. Kensington seized $12 happy owner of a sumptuous pad in Malibu, didn’t come from hard work on the part heart of a scandalous structure apparently million from the accounts of Long Beach this one valued at $25 million. of Denis Christel. In fact they consisted of created for the sole purpose of disguising commissions on oil shipments paid into Limited and Elenga Investment Limited, ownership of Congolese oil reserves. Until very recently the affairs of Denis accounts held at the Bank of East Asia on another Anguilla registered company Christel Sassou Nguesso, son of the behalf of Long Beach Limited, a company established for the benefit of Blaise Elenga, But first, we must backtrack slightly. When president of oil-rich Congo Republic (not domiciled in Anguilla, with Denis Christel number two at Cotrade. seized power in 1997 to be confused with the larger Democratic Sassou as sole beneficiary. For example, on after a bloody coup d’état, he discovered that Republic of Congo-), were handled 19 March 2005, Long Beach Limited’s account Oil companies are particularly attracted his predecessor, Pascal Lissouba, had handed more discreetly. But publication of bank was credited with $320,000: a commission to the discreet ways of tax havens. SNPC control of a number of Congolese oil assets statements dating from 2004 and 2006 by arising from a shipment on the tanker Tanabe. – a public company responsible for marketing at way below their real value to the oil major British NGO Global Witness shows that he The company’s account was also topped up enjoys the same taste for high living as his with commissions paid by Sphynx Bermuda peers: palaces, smart restaurants, top brand and African Oil and Gas, shell companies “The British Virgin Islands and Jersey lie at clothes and shoes, fine leather goods… used by President Sassou to embezzle oil Denis has spent up to $48,000 monthly rents for his own benefit. the heart of a scandalous structure apparently on luxury goods, revealing a particular fancy for Louis Vuitton. Nothing prevents These embezzlements would never have been created solely for the purpose of disguising Denis from enjoying the high life: the young revealed had it not been for an American playboy directs Cotrade, a subsidiary of the vulture fund. Without the efforts of lawyers ownership of Congolese oil reserves”

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Jersey implicated in Elf, which was omnipotent in Congo. The Xavier Harel is a journalist with Le Tribune and incoming ruler asked for compensation. In author of Afrique: Pillage à huis clos other African scandals 2003, following a long period of negotiations, The UK’s Serious Fraud Office Elf, which was taken over by Total in 2000, ceded to the Congo – for a token payment has begun a new investigation into – an old oil field (Likouala) which still held British links with one of the biggest reserves of tens of millions of barrels. But corruption inquiries in Africa. UK instead of handing management of the field firms won huge contracts from the to SNPC, the government immediately sold it Kenyan governments of presidents to a Congolese company with no experience and Mwai Kibaki, in the oil industry, Likouala S.A. The IMF but anti-corruption investigators quickly suspected this was a device to fill the coffers of Sassou or one of his cronies. The have discovered that many were Congolese argued that the transaction only fictitious and amounted to state- involved Total, Congo and SNPC. Be that as sponsored looting. The SFO inquiry it may, the proceeds from Likouala cannot be is concentrating on the movement traced. And for good reason: Likouala S.A. is of millions of pounds into accounts controlled by a trust created in the British in Guernsey and Jersey controlled Virgin Islands, which in turn is owned by a foundation based in Jersey. This is an obvious by Andrew MacGill, a 64-year-old way to hide the real owners of the oilfield. arms dealer from Fife. Documents As a result, several hundreds of millions of seen by show that dollars have disappeared into thin air, to the HSBC’s office in the Channel Islands financing for some of the 18 benefit of a mysterious foundation in Jersey. suspicious security equipment contracts at the heart of the investigation was administered through a The oil industry feeds unbridled corruption. The Elf Affair revealed how a cut from each company called Investec Trust, which handled LBA’s business from 2001 barrel of that company’s output was paid through accounts with the banks HSBC in Guernsey and Standard Chartered into the Swiss bank accounts of the rulers in Jersey. of Congo-Brazzaville, Congo and Cameroon. Elf’s former chairman, Loïk Le Floch-Prigent Internal audits showed that no questions were asked by Investec managers about was well aware that on top of official payments LBA’s receipt of funds from Kenya or Mr MacGill’s arms dealing. It was only after made for oil licences, unofficial payments the publication in March 2004 of a report by the former anti-corruption chief, John were also paid to those leaders’ Swiss bank Githongo, that the company’s lawyers recommended the firm make a suspicious accounts. activity report to Guernsey’s financial intelligence service. The secrecy of tax havens provides perfect opportunities for the oil industry to corrupt The Guardian (UK), Oct 1, 2007 dishonest leaders with relative ease.

 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS TAX HAVENS AND feature ILL-GOTTEN WEALTH Antoine Dulin & Jean Merckaert

A study published in March 2007 estimated the value of wealth embezzled by prominent dictators at $100–180 billion. Antoine Dulin and Jean Merckaert, who authored the study, take western governments to task for complicity in this looting.

epatriation of dictators’ loot has become a major issue on Rthe international agenda. This is demonstrated by the powerful pressures that built up around the repatriation of Duvalier’s funds held in Switzerland, and the likely repatriation to the Democratic Republic of Congo of around US$7 million accumulated by former dictator which have been frozen in various Swiss bank accounts since 1997. However, the amount With thanks to Private Eye of funds repatriated to date is a drop in the ocean compared to the wealth that has been by the Paris-based CCFD (Comité Catholique estimates that the value of wealth embezzled Product. And these estimates do not even looted from countries in the South. This contre le Faim et pour le Développement, just by the most prominent dictators over include wealth embezzled by the dictators’ much is clear from the evidence produced in www.ccfd.asso.fr) recent decades amounts to $100–180 billion: relatives or cronies. In practice, the looting the report . . profitent between one to two times the annual value of assets has undermined the democratic trop souvent: la fortune des dictateurs et les In this study, which details the different of governmental . In some aspirations of Southern countries, destroyed complaisances occidentales (Looted Wealth… is procedures for repatriating funds and the countries, the value of looted wealth is their economies, and drained the reserves of Profitable Too Often) published in March 2007 barriers put up to impede repatriation, CCFD equivalent to their annual Gross Domestic their central banks.

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“How credible is the preaching on good governance secure the cross border restitution of to hide or disguise the real ownership of stolen wealth, but in practice these have assets. They also enable the laundering of from Tony Blair and Gordon Brown’s Commission for proved to be minefields. Haitian NGOs dirty money into the mainstream financial have been battling for more than 20 markets and allow illicit funds to be shifted Africa, when so many major tax havens, not least the years to secure the repatriation of the very rapidly through the money markets to assets looted by “Baby Doc” Duvalier. avoid detection. City of London, fly the British flag?” At the start of June this year, the Swiss federal council was on the verge of In practice the freezing and repatriation of returning $5 million frozen on account stolen wealth runs up against weaknesses Despite the virtuous rhetoric of the been repatriated, and $2.7 billion has been for several years to Duvalier’s family, but in the system for international legal agencies leading the global fight against frozen. Switzerland, anxious to restore its delayed its decision on the grounds of legal cooperation. France has refused support corruption, it is less often remarked upon tarnished image, has led the way in making technicalities. Thanks to NGO activism, to because it submitted its request that this plundering of wealth happens with repatriations: Marcos ($658 million), Abacha supported by representations to the in English; Britain has refused to cooperate the connivance of western governments. ($594 millions), Montesinos ($80.7 millions). Swiss courts by two victims of Duvalier’s with requests for assistance unless there is During the , the governments of Jersey – a British – has repatriated regime, the freeze on the accounts has been proof that the funds are actually being held the , the and some of the Abacha loot; the United States prolonged for a few more months. But there within its territory; Switzerland does not France actively supported despotic regimes has returned some of Pinochet’s ill gotten is no certainty of victory in this case. investigate the real beneficiaries of accounts or encouraged corruption to further their wealth to Chile. France, for her part, has held under false names; Liechtenstein has economic and geo-political interests. Even returned nothing. The international measures taken against around fifteen administrative and legal bases today, France continues to gives financial and tax and legal havens have not stopped for delaying investigations and repatriation diplomatic support to the regimes in Congo- Nonetheless, for several years the them from thriving, nor from continuing for as long as possible; countries such as Brazzaville and , notwithstanding the international community has been working to be amongst the principal barriers to don’t bother to reply to requests massive pilfering going on in both countries. on procedures for facilitating the repatriation repatriation of assets. They make it very for legal mutual assistance. The pace of The Elf Affair revealed the extent of this of stolen wealth. The Organisation of difficult to accurately trace stolen funds international justice simply can’t keep up complicity and its connections into the heart American States, the Council of Europe, because banking secrecy and the use of with the speed of international finance. As of the French Establishment. In the United the African Union and the European Union webs of legal entities (offshore companies, a result, former Malian dictator Moussa Kingdom, it has recently been revealed that have promoted conventions and protocols trusts, foundations, etc) makes it so easy Traoré took advantage of procedural delays weapons manufacturer BAE Systems has relating to the fight against corruption. been paying enormous kickbacks to Prince The United Nations’ Convention Against Bandar of Saudi Arabia: the fact that these Corruption (UNCAC), signed at Mérida in “And what about the hypocrisy of , payments were routed via the Bank of December 2003, which came into force in England makes it clear that they were December 2005, addresses repatriation of speaking on 26 July, when he invited Africans to authorised at the highest levels within the stolen assets in its Chapter V, making it a government. fundamental principle of international law. invest their wealth rather than divert it – and then To date 95 countries have ratified UNCAC, These examples help explain why western but there are no measures to monitor its gave red carpet treatment the very next day to Omar governments have been less than eager to effective application. seize and subsequently restore the wealth Bongo, the kingpin of in Gabon for the embezzled by these dictators. Of the huge Since the end of the 1980s several past 40 years and a central actor in the Elf Affair?” sums involved, a mere $4 billion has actually procedures have been put into place to

 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS in bilateral exchanges between his country Table : Dictators and their loot and Switzerland to withdraw most of the funds in his accounts in 1991. In the case Country / DICTATOR / period Estimated looted Amount repatriated of Mobutu, Swiss authorities were only able assets ($) from abroad ($) to freeze $7 million of the $5 to $6 billion / MARCOS / 1965-86 5 to 10 billion (bn) 658 millions (mn) dollars embezzled. (Switzerland-2003)

Until northern countries take a lead in / TRAORE / 1968-91 1 to 2 bn 2.4 mn (Switzerland / 1997) cracking down on the looting of countries in Nigeria / ABACHA / 1993-98 2 to 6 bn 160 mn (Jersey / 2004) the South by tackling the predatory regimes 594 mn (Switzerland / 2002-05) and the tax and legal havens which support / DOS SANTOS / 1979- several bn 21 mn (Switzerland / 2005) them, the looters will continue to benefit from this legal impunity. How credible is the / FUJIMORI / 1990-2000 0.6 to 1.5 bn 80.7 mn (Switzerland / 2002-04) preaching on good governance from Tony 20 mn (USA / 2006) Blair and Gordon Brown’s Commission for / DUVALIER / 1971-86 0.5 to 2 bn Africa, when so many major tax havens, not least the City of London, fly the British flag? RDC - / MOBUTU / 1965- 5 to 6 bn And what about the hypocrisy of Nicolas 1997 Sarkozy, speaking on 26 July, when he invited Kazakhstan / NAZARBAEV / 1991- 1 bn Africans to invest their wealth rather than divert it – then gave red carpet treatment Kenya / MOI / 1978-2002 3 bn the very next day to Omar Bongo, the Indonesia / SUHARTO / 1967-98 15 to 35 bn kingpin of kleptocracy in Gabon for the past 40 years and a central actor in the Elf Iran / M.PAHLAVI / 1941-79 35 bn Affair? Source : CCFD, Biens mal acquis… profitent trop souvent. La Fortune des dictateurs et les complaisances occidentales, April 2007. Meantime, the World Bank and United Nations have jointly launched their StAR initiative to assist countries from the Sherpa, and the Federation of Congolese South with tracking and repatriating looted Diaspora (FDC), originating from the wealth, and we can hope that civil society’s report by CCFD. If other NGOs around the growing interest in these issues will increase world get inspired by this initiative, perhaps pressure for action. On 18th June 2007, the one day the countries of the North will be public prosecutor’s office in Paris opened forced to stop handling wealth stolen from a preliminary investigation into the real the countries of the South. estate holdings in France of a number of African dictators. This procedure follows Antoine Dulin is the main author of Biens mal on from a complaint about diversion of acquis under the direction of Jean Merckaert. state funds raised by French NGOs Survie,

 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS ECONOMIC AND FINANICAL CRIME feature NEEDS A COORDINATED RESPONSE Chantal Cutajar

Despite an increasingly sophisticated arsenal of national and international legal measures, economic and financial crime continues launderers to choose whichever jurisdiction to flourish.Chantal Cutajar makes the case for harmonising countermeasures and strengthening cross-border enforcement. (A longer provides the lowest level of regulation. version of this paper (French only) is available for download from: http://www.taxjustice.net/cms/front_content.php?idcat=6) Despite frictions arising from different legal traditions, a common approach is gradually he cross-border nature of many made: the networks of mutual assistance this cumulation of charges is possible, where emerging. Italy, Netherlands, Portugal, the UK, economic and financial crimes are expanding, although there are questions there is no overlap in the material elements Germany and Spain have put in place special T requires international cooperation about how effective they are. of the primary crime and the subsequent arrangements for fighting economic and between governments. But principles of money laundering. financial crime, showing several clear trends, national sovereignty require that states retain Measures to harmonise procedural issues such as: responsibility for actions at national level. This and legal definitions used by different legal Although it is not standard practice in all P limited specialisation during the sets up barriers to legal cooperation. systems would improve the effectiveness jurisdictions, combining investigation of of cross-border criminal investigation and both the money laundering offence and the investigation stage, with the police playing The international dimension of economic enforcement. Such harmonisation will be predicate crime would strengthen crime the predominant role; and financial crime is a structural issue: arduous, since it needs comparative law to be enforcement, particularly with respect to P the special arrangements are restricted to differences between national legal and fiscal studied in depth. confiscating the proceeds of crime. This a limited range of economic and financial regimes frequently create opportunities cumulative approach should become the crimes, applying rules based on the for arbitrage. Obstacles to international Take money laundering for example. Money international norm. legal qualification of the crime, and the juridical cooperation include barriers to laundering is a secondary crime, involving importance of the case; communication caused by differences between people disguising or hiding the origins of In addition, different countries have different proceeds from a primary (predicate) crime standards of evidence concerning the origins national systems, and technical problems P resistance to over-riding the authority (e.g. theft, fraud, tax evasion, misusing public of illicit funds passed from one person because of the way international cooperation and prerogatives of judges handling the funds, etc.) But this raises problems in French to another. French law requires proof of is actually organised. When economic and cases: financial crime happens, these difficulties jurisprudence: for a long time French courts a primary crime, which can be especially become amplified: there are also political disagreed over whether a suspect can be hard to provide when the crime takes place Fighting cross-border financial and economic obstacles, such as when investigations involve simultaneously investigated for money abroad. Belgian courts, on the other hand, are crime requires a unified trans-national high ranking people, not to mention technical laundering as well as for the predicate crime. satisfied with proof that the money launderer approach involving specialists capable of difficulties such as inadequate disclosure and Two cases heard at the Cour de Cassation was aware of the predicate crime or of the working in multidisciplinary environments. legal blockages. Even so, progress is being in June 2003 and January 2004 decided that assets’ illicit origins. But the potential for taking this further is restricted by financial constraints. At The need for legal harmonisation at EU this stage, the scope for cooperating “Lack of harmonisation creates competitive distortions within the level is becoming increasingly indispensable. along multidisciplinary lines remains fairly EU, allowing money launderers to choose whichever jurisdiction Lack of harmonisation creates competitive embryonic. provides the lowest level of regulation.” distortions within the EU, allowing money

 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS HARMFUL TAX PRACTICES: feature NEXT STEPS FOR EUROPE Vincent Drezet

y now it’s well established that tax tax loopholes, and strengthening anti-avoidance International cooperation provides the most effective way to tackle tax competition competition and tax havens are mechanisms. The outlines of such a general and tax evasion. Vincent Drezet makes the case for harmonization of European B systemic issues, providing the basis framework for promoting tax justice would be for numerous financial, legal and tax dodges. based on an analysis of tax competition and a Union rules, including company law, and for strengthening procedures for mutual Even the term “tax haven” is too narrow, since variety of ground-breaking proposals. assistance and information exchange. the facilities provided by these territories are legal as well as fiscal. But it is far easier It has become clear that tax competition to talk about measures to prevent fiscal is damaging in a number of ways. It lowers one solution might involve the creation of P A minimum effective tax rate on the erosion and tackle the havens than it is to put the tax burden on mobile factors while a mechanism to gradually bring the different earnings of individuals these measures into practice: which is why increasing the tax burden on fixed factors; it regimes into a broadly based framework which P Harmonisation of rules and procedures we propose a common European approach, impoverishes public budgets, it promotes a could be progressively harmonised over time. for combating tax evasion and avoidance since the introduction of common rules , and it generally weakens The thinking behind the European exchange throughout the European Union (EU) would tax systems. The only way to reverse these rate mechanism (nicknamed “the snake”), P Taxation of companies and individuals improve our opportunities for tackling these tendencies is to institute common rules which was used to restrict fluctuations within on all corporate and private investments problems effectively. across the EU. But this won’t happen with a a progressively narrowing band, could equally and shareholdings located in another single wave of a magic wand. be applied to the creation of a European ‘tax EU member state but according to the What we need are measures to limit snake’. tax regime of the investors’ country of variations in tax regimes across the different For starters, the most important ingredient Such an instrument could be based on a residence. EU member states. We need to work towards – political will – is noticeably lacking. But it number of measures: further harmonisation, making substantial should be possible for the European Council, P Commitment to automatic exchange modifications to the European budget, the Parliament and the Commission to take P An upper rate limit on value added tax of tax information on all capital placed overturning banking secrecy, creating a steps towards harmonisation or towards offshore – which would extend to framework for better disclosure of legal enhanced cooperation. Modifying tax regimes P A minimum lower tax rate on corporate individuals, companies, trusts, etc. information, putting an end to a wide range of on a concerted basis would take time: so profits

P A European P Re-evaluation of the EU budget to finance a European solidarity fund “The thinking behind the European exchange rate mechanism P Common rules for determining the (nicknamed “the snake”), which was used to restrict tax base (for both VAT and corporate It will be essential to tackle tax evasion taxation) and for taxing companies and avoidance in order to make such an fluctuations within a progressively narrowing band, could operating through subsidiaries in different instrument viable. This will require a legal equally be applied to the creation of a European ‘tax snake’” European countries system that allows fast access to information,

10 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS with appropriate checks and balances. Such “It should be made a requirement that the names of the the concept of territoriality as well as the a framework would, of course, need to be group taxation of companies should urgently backed by sanctions and could be supported ultimate beneficiaries (i.e. individual persons) who own a be reviewed. European legal standards by a Europe-wide data bank modelled on company or benefit from a trust should be disclosed, at the relating to the location of registered offices, Europe’s VAT information exchange system suppression of fictional or shell companies, V.I.E.S. which, though far from perfect, time of their inception, to the public authorities, without common requirements throughout the EU demonstrates that this project is technically exception. This information would then be available for relating to the creation or modification of feasible. companies, cooperation on information exchange with the public authorities of other Member States.” exchange, it is clear that company law cannot Information sharing, mutual assistance, and be disregarded in the struggle against tax other forms of cooperation need to be havens and harmful tax practices. extended to monitor and collect all types backed by appropriate technical and human registered in their territories. This requires of taxes, both direct and indirect. For this, Here, in short, is a proposal for how to inject resources. Interestingly, the Commission a sufficient level of supervision to ensure it will be necessary to revise the scope of a bit more social justice into the European noted back in 2004, that with only 30,000 the strict integrity of a system for obtaining, the Council of Europe / OECD Convention economy. inspectors covering the different Member managing and transmitting this information. on Mutual Administrative Assistance in States, it would take 40 years to inspect each It should also be possible for public Tax Matters to ensure that all taxes are Vincent Drezet is a member of the Syndicat and every of the 24 million entities registered authorities involved in the monitoring and included without exemption or derogation. National Unifiés des Impôts (SNUI) under the VAT regime. implementation of the laws – during the The revisions should apply to all EU and course of their investigations – to exchange OECD member states that have signed the One of the key characteristics of tax havens information about beneficial ownership Convention. At the same time the EU should is the way they allow rapid and very low of companies registered in other Member strengthen its commitment to international cost creation of shell companies which States of the EU. It should therefore be made cooperation on tax administration. The enable cross border financial flows and a requirement that the names of the ultimate figures speak for themselves: one and a half financial management to occur under a veil beneficiaries (i.e. individual persons) who own million companies operate in more than one of anonymity. Typically tax havens provide a a company or benefit from a trust should be EU country, but the number of multilateral regime of opacity relating to company law; disclosed, at the time of their inception, to controls enabling a coordinated system for so it is possible to set up shell companies the public authorities, without exception. operating the community-wide VAT regime which hide or disguise the real identity of This information would then be available for fell from 15 in 2000 to 3 in 2003. owners and beneficiaries. These types of exchange with the public authorities of other entities (including trusts and foundations) are Member States, and sanctions could apply On the other hand, the system for mutual tailor-made for illicit financial transactions if it is not made available. Such a measure administrative assistance only involved 2 and money laundering. There is obviously a would make it possible to tax a resident of per cent of these businesses in 2003. A ‘right need to tackle this opacity and increase the a Member State, even when that resident has to proceed’ could be established to allow transparency of all such structures. transferred part of his or her wealth to an investigators to pursue enquiries in another offshore trust, for example. EU Member State where the company The ultimate goal should be that the public operates or has established a subsidiary. authorities of all Member States collect In the longer term it will be necessary to Considerable political will would be required and make available information relating consider the case for harmonising company to turn this into concrete legal measures to beneficial ownership of legal entities law throughout the EU. Within this context,

11 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS news and research

Expert Meeting in Rome Considers Tax Agenda for Doha 2008 by David Spencer

The UN’s Financing For Development Committee, primarily related to At the Rome meeting, Dr. Noureddine TIMELINE Office sponsored a meeting in capital flight and the resulting tax Bensouda of , the Chairman Rome on September 4-5, entitled evasion and loss of government of the UN Tax Committee, made March 2002 – The International Conference on Financing for “Tax Aspects of Domestic Resource revenue. three recommendations. Development (FFD) called on developing countries to mobilize domestic Mobilization—A Discussion of resources for development (Monterrey, Mexico) Enduring and Emerging Issues”. The Papers were also presented on First, the juridical statute [of the Meeting was attended by fifteen common tax issues confronted UN Tax Committee] should be December 2003 – UN General Assembly elevates Ad hoc group of experts worldwide, including David by developing countries, and the reconsidered to give it more powers experts on international cooperation in tax matters to Committee status, accountable to ECOSOC Spencer, a Senior Adviser to the Tax need for greater South-South and permanence in the international Justice Network (TJN). cooperation and coordination on tax scene; this could be achieved December 2004 – UN Tax Committee holds first session in Geneva. tax issues: the sharing by developing through making a permanent TJN represents civil society. The Rome Meeting focused on countries of experience in the intergovernmental structure within tax as a means of development, taxation of resources (including the UN, composed of permanent April 2005 – High level meeting of UN ECOSOC, Bretton Woods especially in developing countries mining, petroleum, forestry, fishing technical experts who would work Institutions, and UNCTAD confirms commitment to FFD and tackling and transition economies, and was and land); environmental taxes; tax for the Committee and represent it capital flight and tax evasion intended to provide suggestions aspects of trade (including the loss at international events. Second, the to the UN Tax Committee about of as a result of trade UN Model Convention should be September 2005 – UN World Summit resolved to support efforts to helping developing countries and liberalization) and of investment more than a simple guide. Instead, reduce capital flight (New York) countries with economies in (including the issue of the possibly it should be endorsed by the UN transition to mobilise domestic harmful impact of tax incentives); as UN official document bearing June 2006 – TJN proposes Code of Good Conduct on Information resources, as emphasized by the transfer pricing issues (and the all the positions, observations Exchange to ECOSOC Substantive Session (Geneva) 2002 Monterrey Consensus and the capacity of developing countries to and reservations of the UN September 2007 – TJN proposes 18 recommendations for tackling 2005 United Nations World Summit. confront ); the members. Third, funding is crucial. capital flight and tax evasion UN expert meeting (Rome) The World Summit had stated impact of capital flight; and technical Member countries should raise the explicitly that the UN resolved “to cooperation in tax matters. (Issues necessary funds, either by directly September 2007 – Norwegian government announces creation of a support efforts to reduce capital of South –South cooperaton are also contributing to the trust fund, or Leading Group task force on tax havens and capital flight, including Chile, flight and [to support] measures within the jurisdiction of the Special by financing particular Committee’s France and Spain (Oslo) to curb the illicit transfer of funds.” Unit for South-South Cooperation activities (such as by funding training At the meeting TJN presented 18 of the United Nations Development workshops.) December 2008 – Second Global Conference on Financing for recommendations for the UN Tax Programme.) (Cont’d) Development (Doha, Qatar)

12 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS news and research

Expert Meeting in Rome Letter from Africa (cont’d from p12) by Alvin Mosioma

The UN’s Financing for Development Authority (KRA), business people, the development component Alvin Mosioma coordinates the Office confirmed that the journalists and representatives of the budget) continues to be Secretariat of TJN 4 Africa recommendations from the Rome from local and international financed from external sources Meeting will be reported to the 3rd NGOs. and Kenya remains reliant on session of the UN Tax Committee in external aid. Geneva, on October 29 —November Guest speakers Jack Ranguma 2 (2007), and will also serve as (former commissioner of Second, only 7 per cent of the an input for preparations for the domestic tax at the KRA) and population actually pays direct Follow-up International Conference Kwame Owino (programme taxes. on Financing for Development to coordinator at Kenya’s Instititute Review the Implementation of the of Economic Affairs) were asked Third, government efforts to Monterrey Consensus, to be held to address three questions: increase revenue collection are in Doha, Qatar in the second half of targeting mainly the so called 2008. P Who is carrying the tax informal sector. burden resulting from The Rome meeting was attended Do you feel poor and fleeced was increased revenue collection? Finally, tax evasion by rich people by 15 experts worldwide: the title of an article in Kenya’s and large businesses has not makers, administrators, and other Daily Nation about TJN 4 Africa’s P How has the Increase impacted received as much attention from experts (including six members first Tax Forum, organised with on poorer households? government as tax evasion by and observers of the UN Tax the support of the Heinrich Boell “the little people”. Committee); the Chairman of the Foundation. The title referred P How adequately does the OECD’s Committee on Fiscal Affairs to Christian Aid’s report ‘The tax system address issues of During discussion it was (Paolo Ciocca of Italy); and three Shirts Off Their Backs’ which was equity and distribution? suggested that tax collection in senior Italian tax officials. distributed at the event. Kenya is arbitrary and provides In summary the speakers made tax officers with opportunities TJN’s 18 recommendations can be Billed under the theme Kenya the following points: for corruption. In conclusion, downloaded from the homepage of Tax Revenue Growth – Who it was agreed that tax payers First, despite having been the TJN website. is paying? the event attracted need to know more about the successful in raising more over 150 participants, including importance of tax and the Tax revenues, a large percentage of David Spencer is senior adviser to the tax experts, lawyers, academics, Forum should continue with its expenditure (mainly relating to Tax Justice Network. He is based in officers from the Kenya Revenue work. New York.

13 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS reviews

Les Paradis fiscaux Clandestine which applies to the formation and operation the book remains a useful tool because of the (Tax Havens) Capitalism: The of companies and other legal entities created way it structures the many issues arising from Illusion of Offshore for non-residents seeking shelter from the “offshore” problem. Ed. La Découverte Regulation investigation -- or simply greater flexibility. Collection Repères Jacques Terray Thierry Godefroy and This book starts with a rigorous analysis of Paris 2006, 122 pages Pierre Lascoumes the advantages “offshore” provides, illustrated Ed. La Découverte, Paris, by concrete examples and factual case studies 2004, 262 p. (both legal and fraudulent). The second part outlines the comprehensive history of This wide ranging book examines tax havens The globalisation of financial markets has efforts by the international community to from an historic, economic and political turned offshore financial (OFCs) centres counter the main abuses, notably unfair tax perspective. French journalist Christian into indispensable features of the onshore competition or refusal to cooperate. On the Chavagneux and British academic Ronen capital markets. Trying to stigmatise them by issue of tax competition, since George Bush’s Palan use simple and rigorous language to concentrating on media friendly issues like election the United States has joined the side analyse the phenomenon. Notably they mafia and terrorist money, misses the point of the tax havens by blocking dialogue. On the explain how tax havens, which emerged as a and is ineffective, because the main users of issues of administrative and legal cooperation, result of several converging factors in the mid these offshore centres are – either directly the authors show how the major offshore 20th century, have become an unavoidable or through intermediaries – high level players centres (Cayman, Barbados) have effectively feature of global trade, finance and in the industrial and financial markets and blocked progress through the simple ruse of investment flows. A sense of powerlessness even nation states themselves. placing wonderful new laws onto their statute can overwhelm readers confronted with books without really changing the way they the multiplicity of powerful actors involved What are the attractions of OFCs? There are operate in practice. in offshore finance. But despite their clear several, first and foremost being their low analysis of the weakness of political reactions or non-existent tax rates. There is also the The strengths of this book lie in the way it to this problem, the authors conclude on an secrecy space arising from how tax havens provides a methodical analysis of the subject, optimistic note by drawing attention to the can use their sovereignty (which may be total backed by factual information, while also increased mobilization of civil society. or partial) to provide account holders with pointing out themes around which political guaranteed anonymity, backed by a refusal strategies could realistically be organised An updated and larger edition, this time in to cooperate in information exchange with (subject to there being political will in the English and involving TJN’s Richard Murphy, is foreign authorities. Lastly, the huge laxity first place.) Although it was published in 2004, in the pipeline.

14 THIRD Quarter 2007 Volume 3 Issue 3 TAX JUSTICE FOCUS reviews Calendar

Oct 22–25 Tax justice lecture tour of French universities: Rennes, Nantes, St. Malo, and Africa: looting behind whose notorious secrecy provides cover for Laval. John Christensen will be talking about the political economy of tax closed doors. How criminals from around the world. havens a handful of players siphon African oil And Harel’s conclusion: only through mass Oct 29 civil society mobilization will the voices of Xavier Harel Tax justice briefing to South Centre members in advance of the Third citizens prevail over those of a “handful of Session of the UN Tax Committee. Bruno Gurtner and John Christensen Ed. Fayard players”. will be representing TJN. Paris 2006, 288 pages Oct 29 In Africa, oil stands for misery, war and UNCTAD meeting on Financial Reporting and Transparency in the Extractive . But Le Tribune journalist Xavier Industries, Geneva. Richard Murphy will be representing TJN in discussions Harel doesn’t stop at this shocking conclusion. In this thoroughly researched work, he exposes on the impact of International Financial Reporting Standards on both the the hypocrisy behind western concerns about Extractive Industries and developing countries. poverty and corruption. Black gold would not Oct 29–Nov 2 be such a curse for continental Africa were it not for the complicity of France, the United Third Session of the Committee of Experts in International Cooperation in States, the United Kingdom and . Tax Matters, Geneva. Bruno Gurtner and John Christensen to attend.

In Congo-Brazzaville, Sassou Nguesso knows Nov 7–9 he can count on unconditional support Annual meeting of TJN European Steering Committee in Paris (contact from the Elysée palace, from Total, and from Michel Roy: [email protected] ) BNP Paribas to assist with his wholesale embezzlement of oil revenues. Even as it Nov 29 attacks the ‘enemies of democracy’, the White John Christensen to speak in Rome at meeting of CIDSE (Coopération House greets the tyrant Teodoro Obiang Internationale pour le Développement et la Solidarité) Nguema with open arms: oil from Equatorial Guinea is flogged off to American oil majors Sept 18–21 2008 at bargain prices. European Social Forum, Malmö, Sweden This book uncovers the links between oil, December 2008 corruption and tax havens, highlighting Second Global Conference on Financing for Development (the follow up to the pernicious role of the City of London, Monterrey (2002), Doha, Qatar

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