Roundtable: Illicit Financial Flows and the Widening Poverty Gap

Responsibilities of States, Businesses and Lawyers in Curtailing Illicit Financial Flows to Facilitate Development

On 22 November 2013, as the fourth in its series of “The Hague Roundtables”, The Hague Institute for Global Justice convened a group of twenty experts for a timely discussion on Illicit Financial Flows and the Widening Poverty Gap.

The roundtable was inspired and informed by the report on Tax Abuses, Poverty and Human Rights, written by the International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty and Human Rights and a briefing note written by researchers from The Hague Institute. Illicit financial flows (IFFs) were discussed under its broad definition, including tax abuses, money-laundering and corruption, in the context of the increasing inequality between and within countries.

The Roundtable, which was held under the Chatham House Rule, was fortunate to have the presence of all three target groups of the report, namely policy-makers, business representatives, and lawyers. In addition, the participation of researchers and NGO representatives added to the group diversity to ensure that, thanks to this inclusive dialogue, the responsibilities of states, businesses and lawyers to curb IFFs were made operational in a way that benefits developing countries.

The participants agreed about the momentum to drive more efforts in curtailing IFFs. There has been an awakening in the past few years that transparency is the key to solving many structural problems. Both in developing and developed countries, there have been cases of outrage when multinational corporations or wealthy individuals are avoiding taxes. Governments in the North are also beginning to realize the scale of achievements they could make through efforts in their own backyard. States, both collectively on the international level and by means of multilateral institutions, should moreover bring about institutional reform to ensure good financial governance, as one participant mentioned.

Mr. Sternford Moyo, former President of the Law Society of Zimbabwe and current Vice-Chair of the IBAHRI Task Force, presented the report’s recommendations for what states, businesses, and lawyers could do to counter tax abuses affecting human rights. In addition, Mr. Moyo welcomed the discussion in the context of a widening poverty gap, of which he sees strong evidence in southern Africa.

The second presenter, Ms. Nicole Bollen from the Division for International Financial Institutions, Multilateral Institutions and Human Rights Department at the Netherlands Ministry of Foreign Affairs, agreed with Mr. Moyo’s problem definition and acknowledged the importance of states’ responsibilities in curtailing IFFs and described the Dutch government’s recognition of the incumbency to act immediately and its support of various funds with the International Monetary Fund, such as those in Anti-Money and Combatting of Financing of Terrorism, Tax Policy and Administration, and Managing Natural Resources Wealth.

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More recently, the Dutch government intends to renegotiate tax treaties with low-income countries and low middle-income countries – thereby improving tax transparency – and to update tax treaties by allowing the incorporation of anti-abuse clauses where necessary. The Dutch government also supports efforts of capacity building, in order to increase knowledge and skills of tax authorities in developing countries.

Participants mentioned the difficulty of generating policy recommendations for the unethical yet legal part of tax abuses. While authorities such as the financial intelligence units of countries worldwide have the mandate to stop the illegal practices, their obligations do not extend to the grey areas.

Another much debated topic was on the responsibility of lawyers to advise their clients according to good practices. While some see a lawyer’s role as in solely defending the interest of the client and without the need to balance the client’s interest with the rest of the society, others argue that a distinction should be made between short-term interest (e.g. immediate financial gains accrued to the client) and long-term interest (e.g. sustainable investment returns based on good practices).

Lawyers, they argue, need to bring the limitations of the short-term interests to the client’s attention, acknowledging that some tax abuses might be ruled unconstitutional in foreseeable time. Moreover, where lawyers are the facilitators for businesses, they should advise their clients about their human rights obligations under corporate social responsibility.

Last but not least, many participants mentioned that viewing illicit financial flows in the context of the Post-2015 agenda is an appropriate approach. The Hague Institute is closely following the development of the Post-2015 agenda, and views it as an opportunity to contribute its expertise on peace and justice issues to help shape the development agenda. There can be no meaningful and sustainable development while the risk of conflict looms over a country and is therefore key that conflict risk factors, including illicit financial flows, are dealt with as part of any development agenda.

As a follow-up to this Roundtable, The Hague Institute will publish a policy brief inspired by the discussion, which aims to provide concrete recommendations for policy-makers who act in their domestic jurisdictions and moreover have responsibilities on the international level and at the level of multi-lateral institutions. The recommendations shall also extend to businesses and lawyers.

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