Rethinking FinanceAlternative voices for a new financial architecture

In April 2009, in the wake of the economic downturn and under pressure to ease the global credit crunch, the G20 leaders pledged $100 billion additional support for Multilateral Development Banks (MDBs) to mitigate negative impacts of the crisis on developing countries. At this point in time it is still unclear to what extent the money will be genuinely additional – that is, additional to MDBs budgets- but also additional to aid commitments pledged before the onset of the global crisis. 

At the next G20 Summit in September 2009 in Pittsburgh, leaders called upon MDBs to focus their poverty eradication intervention on four main areas, among including “support for private-sector led growth and infrastructure to enhance opportunities for the poorest, social and economic inclusion, and economic growth”. 

In the specific case of the World Bank Group, the International Finance Corporation increased its investments by 200 per cent in the five past years. In the fiscal year 2009, new investments totalled $14.5 billion against just $5.6 billion in FY2004. World Bank President Robert Zoellick confirmed that private sector lending would be of highest priority during his presidency. In recent years World Bank development strategies and the international community at large have promoted private sector lending and investment liberalisation as a way to mobilise international resources for growth and development in low income countries.

Tax havens and financial regulation also featured prominently in the agenda of the London G20 Leaders Summit. The leaders of the world’s major economies agreed to take unprecedented action against tax havens which fail to comply with the OECD’s standards governing transparency and exchange of information. Ahead of the G20 Summit in London, the Council of the European Union agreed to “ fight with determination tax evasion, financial crime, money laundering and terrorist financing; ” and made commitments to “protect the financial system from non-transparent, non-cooperative and loosely regulated jurisdictions, including off-shore centres”.

Does the IFC ensure that the projects it supports do not evade taxes or use tax havens?

Increasing private sector lending by MDBs, in particular the IFC, may contradict actions taken against tax avoidance. The IFC provides financial support to companies and banks using tax havens. All too often multinational companies operating in developing countries make use of secrecy jurisdictions to avoid paying taxes on profits made in the South, thus undermining domestic resources mobilisation in the world’s poorest countries. The World Bank Group’s anti-corruption policy also fails to include tax avoidance related concerns.

Civil society organizations raised these concerns with European members at the Executive Board of the IFC during the Annual General Meetings of the World Bank and the International Monetary Fund (IMF) held in Istanbul in October 2009. From this exchange of views it emerged that in February 2009, at the Board’s request, the staff presented an "Update of IFC Operations in Offshore Financial Centres." In the past, the IFC reportedly used the existing risk-based Integrity Due Diligence (IDD) procedure to mitigate potential risks of abusing OFCs in IFC transactions. In light of growing international concern regarding the role of OFCs in global financial markets, the above-mentioned paper presented in February at the Executive Board reviewed past IFC practice and provided information on steps to enhance past practices. Since then, a new approach is being implemented which requires that the project document for each transaction includes the rationale for using OFC in any investment. Moreover, the IFC has committed to reporting regularly to the Board, including regarding any changes in their approach as a result of ongoing international discussion on these issues in relevant multilateral fora.

While some national and international public banks have already undertaken significant first steps to address the problem of secrecy jurisdictions, the IFC has not yet taken leadership in stepping up concerted efforts of MDBs in this regard. More importantly, the IFC has so far not addressed concerns raised by civil society about specific IFC backed operations involving private actors that use secrecy laws and tax havens.

Why focus on tax havens from a development and global justice perspective?

Each year the global South is estimated to lose $1 trillion through illicit flows. This trend has been growing at a yearly rate of about 18 percent this decade. This massive outflow represents up to ten times the amount of Overseas Development Assistance (ODA) that Southern countries receive each year. It is a massive draining of resources from the South to the North. Sixty-five per cent of these illicit capital flows originate from tax evasion and aggressive tax avoidance schemes driven by commercial actors that operate through tax havens or secrecy jurisdictions.

 “to fight poverty with passion and professionalism for lasting results” and “to help people help themselves and their environment”. As part of the Wold Bank Group, the IFC should wholeheartedly embrace international development commitments, including the Monterrey commitment to help developing countries to mobilise domestic resources for development. The IFC should have exemplary high standards of responsible lending thus encouraging best practice in other MDBs and private institutions.

Recommendations

Following significant policy improvements at the EIB, the EU house bank, European governments should take bold action at the IFC to ensure that the institution adopts the highest standards of responsible lending, including those outlined by the Eurodad Charter on responsible lending.

The IFC should set an example of best practice in establishing responsible finance performance standards, in consultation with all relevant stakeholders, including civil society. This policy should contain, at the very least, the following components:

- The IFC should ensure that developing countries in which it invests are able to hold on to a reasonable amount of taxation.

- The IFC should ensure that its supported projects are not based in secrecy jurisdictions. In order to ensure appropriate implementation, all beneficiaries should sign a legally binding agreement that prevents them from using secrecy jurisdictions whilst benefiting from IFC support.

- In cases where support is granted to financial intermediaries, the IFC should also ensure that all supported banks and other financial intermediaries have stringent safeguards in place against the use of secrecy jurisdictions. This should include the disclosure of beneficial ownership of financial assets.

- At the very minimum, the list of secrecy jurisdictions must include both prohibited and monitored jurisdictions according to criteria defined by international institutions such as the OECD. However, the IFC should go beyond the existing level playing field of OECD lists and take account of all jurisdictions that might allow tax avoidance or evasion. For this purpose, it should adopt the Financial Secrecy Index promoted by the Tax Justice Network.

- IFC supported companies and financial intermediaries should present their annual accounts on a country by country basis, in order to identify where they make profits and therefore where taxes should be paid.