Europe, Issue, World — March 4, 2011 at 3:26 am

Dude, Where’s my capital?

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Early this January, international man of mystery Julian Assange held an extravagant press conference in Geneva.  With cameras flanking him on all sides, the WikiLeaks founder was handed two discs of secret banking data from a disgruntled former employee of Julius Baer, a prominent Swiss financial institution. After the release of hundreds of thousands of diplomatic cables, Mr. Assange and his source were now planning to expose the details of international tax evasion.  The source himself voiced his desire to “let society know how [the offshore banking] system works.”

Of course, the practice of massive international tax evasion by major multinational corporations is already more or less an open secret.  It should come as a surprise to no one that many wealthy people and corporations keep their money in Switzerland or in one of the many lesser-known countries that qualify as tax havens (countries with nominal or no taxes levied, in a fairly deliberate attempt to leverage the international market for tax evasion). What is surprising, though, is that the international community has for so long lacked a strong, unified voice against tax evasion in the developed world.

The good-governance and anti-corruption movement—spearheaded by Transparency International, by most accounts the most influential international monitor of corrupt practices —have developed a double standard on an issue that deprives states, developing and advanced alike, of much-needed and deserved tax revenue. The movement has been vocal when free capital flows and lax accounting standards enable autocrats (like Tunisia’s recently deposed president Zine El Abidine Ben Ali) to abscond criminally with millions of their countries’ public funds.  But when those same mechanisms allow functioning First World corporations and individuals to avoid tax regulations in their countries of operation, the response has been underwhelming. Tax evasion and long-term capital flight —as practiced by many of the world’s largest corporations, headquartered overwhelmingly in the developed world— are often quasi- or completely legal, and seemingly out of bounds for much of the anti-corruption movement.

Defining corruption in the international community has always been a slippery business. Transparency International attempts to define corruption as “the abuse of entrusted power for private gain.”  Unfortunately, this concise appraisal is not watertight. Paying a bureaucrat to grant a favor is clearly corrupt, even if the bribe only succeeds in coaxing the official to do his job in the first place.

When a building inspector in Indonesia takes a bribe to overlook the shoddy materials being used to build a public school and the savings go into the contractor’s pocket, the actions are illegal and corrupt. When a billionaire rock star, a corporate heiress or even an entire corporation moves its legally acquired assets to the Cayman Islands, thereby cheating the home government out of tax revenue that might have built a public school, the theft is clearly on a much larger scale. But TI often limits itself to studying corruption that is strictly illegal.

Attempts to calculate the extent of tax evasion yield staggering figures. Switzerland and the Cayman Islands each hold about $1.5 trillion in assets. The Isle of Man holds another trillion, and Liechtenstein, Monaco and the Virgin Islands hold an additional trillion dollars between them. According to a 2008 Christian Aid report, somewhere between five and seven trillion dollars are currently sitting “offshore.” As a point of comparison, this total is more than twice the gross domestic product of the United Kingdom.  The amount of money in Liechtenstein’s banks comes to 30 times its national GDP. There is no way to know exactly what percentage of this money is ultimately being hidden from another authority, but there are few other compelling reasons to do one’s banking on a small Caribbean island.

Transparency International has devoted some investigative power to the issue of tax evasion, estimating that close to $1 trillion disappear from developing countries every year. Anybody looking to make foreign aid more effective would do well to plug the leakage. The other $750 trillion dollars that are estimated to move through tax havens every year come from countries in the developed world. Recouping the losses nations suffer to tax evasion would make any austerity budget a great deal less austere. In fact, the grassroots movement UK Uncut is arguing just that in organizing sit-ins and protests of major multinational retailers engaged in these schemes.

Considering the obvious benefits of a unified push against tax evasion, the relative lack of attention paid to the issue by Transparency International— not to mention national political groups —is puzzling. But this is not to say that the international community as a whole has been silent on the issue. Smaller advocacy groups such as Global Financial Integrity are devoted solely to the study of, and advocacy against, damaging trans-national capital flows. “That’s for the most part a good thing,” said Nathaniel Heller, managing director at Global Integrity (no relation to GFI), another prominent anti-corruption watchdog. According to Heller, smaller groups with a focus on specific issues and countries can report more comprehensively and with a deep understanding of regional practices and institutions. GFI, for example, focuses heavily on money that disappears from developing economies and their associated aid budgets while also recognizing that even legal business transactions can be siphoned through the same system.  Groups like GFI, however, usually lack the capacity to present their case to a larger audience.

Advocacy of major rule-making organizations and broad public awareness campaigns are exactly where larger groups such as TI have a comparative advantage, but their devotion to the issues has been less than commensurate to their importance.  Despite the piles of wealth sitting in Liechtenstein, Transparency International has yet to assign a rating to the country’s governance practices.  Of course, the tax haven countries tend to be tiny, both in terms of territory and population and one could argue that TI and other major advocacy groups lack the time to cover every base. But  with  countries like Liechtenstein, which according to its own commercial registry has about twice as many businesses as people, failing to pay attention to disproportionate economic footprints in a world of free capital flow would be an enormous omission in anti-corruption monitoring.

This is where the potential value of closer coordination between TI and smaller, more focused advocacy organizations becomes clear. Smaller groups have done much of the legwork in identifying specific problems in particular places. Tax Justice Network, for example, recently condemned Google for using a complicated scheme to report its international ad sales in Bermuda, thereby cheating the U.S. government out of more than one billion dollars a year in revenue —this from a company whose creed is “Don’t be evil.”  Groups with the clout to publicize larger issues, TI chief among them, should now be able to connect the dots and ultimately make sure that the G20 and the Organization for Economic Co-operation and Development see the larger picture of massive and pervasive revenue losses for governments around the world. Why has this not happened yet?

One possible answer may lie in TI’s list of donors. non-governmental organizations are inherently reliant on private donors for funding, which that contributors can often have at least indirect influence over the issues that make it onto their recipient organizations’ agenda. The concern is that organizations can be compelled, benignly or otherwise, to follow the priorities and whims of their donors. The validity of this concern was brought to light in March 2010, thanks to the investigative work of The Nation journalist Johann Hari.

Hari uncovered the chilling financial ties between major environmental advocacy groups and environmentally unfriendly corporations, focusing particularly on the bonds between BP and the Nature Conservancy and the limits those bonds placed upon the NGO’s ability to criticize the destructive practices of its donor.  A look at TI’s list of donors illustrates why this concern might be equally valid in the issue of tax evasion. Among the firms on the TI steering committee are BP, Shell, HSB, and Price Waterhouse Coopers (PwC).  BP, Shell and HSBC were recently singled out in a Financial Mail investigation as each having 40 to 80 subsidiaries listed offshore, outside of the jurisdiction of U.K. tax authorities. PwC is one of the world’s foremost accounting firms, with enormous business presence in certain small island principalities.

TI, in response to public perceptions of the sticky ethical situation which its donor list seems to create, has been ardent in defending its donor policies to the public.  The group insists that they do not pull any punches or make special considerations when donors have behaved in suspect ways.

From TI’s website: “TI works within the private sector in an attempt to reduce supply-side bribery and it is not TI’s aim to condemn companies with a questionable past. The stronger their commitment to a no-bribes future, the better for everyone.”

But, the truth is, TI currently receives funding not just from companies with a questionable past. Its list of donors includes those who have continued their corrupt practices into the present, such as BP, which still funnels much of its profitsinto offshore tax havens. From TI’s statement, it is clear that the group continues to conflate bribery alone with the whole practice of corruption while missing the larger implications of legal corruption.  The fact is, despite stating otherwise, TI has been silent on issues it should care deeply about—seemingly because those issues involve some of their donors.

There is no need to jump to overblown conspiratorial conclusions, as it is all but impossible to discern the types of subtle internal pressures that determine a group’s priorities in relation to its donors.  But the fact remains that there is a grave and possibly crippling conflict of interest when advocacy groups rely on funding from donors who are known to engage in practices that contradict the group’s purpose. And it is for this, critical reason that smaller advocacy groups merit greater public attention.  Groups such as Global Integrity, an advocacy organization far smaller than TI, refuse to accept funding from groups that would put them in this position and attempt to refrain from accepting donations large enough to allow donors to dictate policy. This adherence to principles, though, comes with a cost: a dearth of funding.   The best-funded organizations, like TI, tend to be those with the loudest voices and the widest reach.  Meanwhile, the groups that have largely rejected relationships with the corporate world have remained small relative to TI, their activities garnering a far smaller share of public interest.

Conflicts of interest can arise out of the best of intentions, and this could have very feasibly occurred in the good governance movement. Heller makes sure to point out that the movement is internally “well aware” of possible donor conflicts—not surprising since groups are typically transparent about their funding. While this is good to hear, the movement ultimately exists to spread its message beyond an NGO echo chamber.  It is now up to TI to remove its blinders and call attention to very real, but legal, forms of corruption.

Smaller groups, such as Global Financial Integrity, and even the independently funded and operated national chapters of TI itself have done an excellent job of spotting local misbehavior. Transparency International and other groups of similar size and clout should be responsible for magnifying the voice of these smaller groups, so that these issues ultimately end up on the official agenda at the G20 or OECD: groups with the cooperative power that the task of addressing legal corruption requires. In a promising development that took place   this last March, TI raised its voice on the “stolen assets” of recently deposed Middle Eastern leaders. Crucially, TI called on the G20 to establish financial transparency and cooperation within the world’s financial centers.  Even though legal tax evasion was again left off the table, at least TI is now aiming in the right direction.

Dissuading tax evaders by relying on the detective work and finger-wagging of a small but dedicated community is bound to be futile. It would be much more effective to pressure the supply side of tax evasion around the globe. For the anti-corruption movement, this means pushing for greater transparency in the financial system, quite possibly by pressuring the countries and corporations that create effective hiding places for assets. An alternative might be to forge international measures against tax evasion in a forum like the United Nations or OECD, which would resolve the issue in one fell swoop. The point is not to hunt individual perpetrators of tax evasion but to expose the larger lack of oversight that allows them to do so. None of these tasks, however, would be possible without the ardent strategizing and advocacy of major groups like TI.

Expanding TI’s current anti-corruption advocacy to include issues of tax evasion by major corporations would go a long way in revising the current perception of corruption as synonymous with greased palms in the developing world.    A more accurate perspective would recognize the corruption that hides behind the laws, regulations and practices of the very nations and companies currently dictate the gospel of good governance to the rest of the world.

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