Curtailing Illicit Financial Flows as a Goal in the Post-2015 Agenda

On 1 November, UN Deputy Secretary-General Jan Eliasson said the rule of law is of central importance to fair and sustainable development, and that justice and human rights should have a place in the post-2015 development agenda. The post-2015 agenda, which synthesizes the sustainable development goals with the successors of the millennium development goals, offers a unique opportunity: institutional reform can happen! The combat of illicit financial flows can assist to fund those goals, while simultaneously prompting a fair global taxation regime.

Illicit financial flows entail the cross-border movement of money that is illegally earned, transferred or utilized, a trend which often has negative consequences for development. Generally involved are the transfer of money earned through illegal activities such as corruption, transactions involving contraband goods, criminal activities, and efforts to shelter wealth from a country’s tax authorities.

Although the exact size of the problem is hard to estimate, it is clear that the challenge is an enormous one. Global Financial Integrity (GFI) has calculated that illicit money flows out of developing countries were approximately $1.06 trillion in 2006. Data on revenues lost to developing countries from tax evasion, avoidance and the use of havens is unreliable but most estimates exceed the total level of aid received by developing countries – around $100bn a year, according to the US Senate. GFI estimates the ratio of illicit financial flows coming out of developing countries compared to ODA (Official Development Assistance) at 10-1, meaning that for every $1 in economic development assistance which goes into a developing country, $10 is lost via these illicit outflows. In effect, the amount spent on ODA is dwarfed by illicit outflows from developing countries. In developed and developing countries alike, losses in revenues translate into fewer resources for infrastructure and detrimentally affect standards of living.

GFI also estimates that for developing countries only 10 to 20% of these illicit money streams are losses in revenues, while the other sums of money fall in the other categories of corruption and money laundering, for example. Consequently, a fair global taxation regime might only be an important part of the solution. An effective answer to the problem of illicit financial flows also has to include technical assistance to developing countries on financial investigations and asset recovery. A holistic approach to tackle illicit financial flows thus ought to include efforts to foster a rule of law culture in developing countries. Therefore, developing countries should not only be assisted to improve the effectiveness of their tax authorities, but also by means of help with criminal investigative measures aimed at “following the money.” Fostering of a rule of law culture in developing countries also assists in combatting the rising inequality between and within states. More often, the plea is framed in this way: the successors of the millennium development goals should include building “(…) responsive and legitimate institutions [that] encourage the rule of law, property rights, freedom of speech and the media, open political choice and access to justice.”

Vital reforms can only happen through concerted leadership. We therefore welcomes the efforts of the Dutch government, which is advancing the multilateral initiatives of theG8, G20 and the OECD, by renegotiating loophole-ridden tax treaties with nearly two dozen developing countries. The offer by the Netherlands to revise tax treaties with countries such as Zambia, where the existing 36-year-old treaty has no anti-abuse clauses, might prove important in combating tax practices that are contrary to the letter or spirit of international and domestic tax laws and policies in developing countries. When pursued hand-in-hand with effective strategies to combat corruption and money-laundering, the Dutch government can live up to its responsibility, as laid down by the Task Force of the International Bar Association Human Rights Institute, which will have its European launch at The Hague Institute on 21 November. Based on extensive consultation over an 18-month period, the Report onTax Abuses, Poverty and Human Rights of the Task Force urges:

  • States to implement international standards of transparency and information exchange in tax matters effectively;
  • Businesses to undertake due diligence measures and impact assessment of all operations, including with respect to tax planning strategies; and
  • Lawyers to balance their obligations to defend clients’ interest with the responsibilities to uphold human rights in their practice, including with respect to tax planning strategies.

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