This joint post with Alex Cobham first appeared on Views from the Center.

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”  Winston Churchill, November 1942

The agenda for action to tackle illicit financial flows has passed an important threshold. While the G-8 meeting which concluded today did not agree everything that had been hoped, there was tangible progress in two out of the three main areas.

  1. Corporate tax avoidance. Multinational companies will provide more detailed financial reports about their global activities, which will make it more difficult for them to declare profits wherever they choose (that is, where they will pay least tax): “We call on the OECD to develop a common template for country-by-country reporting to tax authorities by major multinational enterprises.”
  2. Beneficial ownership. Countries are committed to developing and implementing action plans to establish who really owns companies, and benefits from trusts, registered in their jurisdiction. In truth, these are a mixed bag, with no G-8 member committing to the full transparency of a public registry.
  3. Tax information exchange. The G-8 has given impetus to a new multilateral agreement on sharing tax information between them, with the baton passing to the OECD to work out the details: “It is important that all jurisdictions, including developing countries, benefit from this new standard in [automatic] information exchange. We therefore call on the OECD to work to ensure that the relevant systems and processes are as accessible as possible to help enable all countries to implement this new standard.”
  4. Development emphasis. In addition, and importantly, the communique is full of references to ensuring that these systems are designed to work not only for G-8 countries but for developing countries too; and that necessary capacity support is provided.

The move to country-by-country reporting is very significant, even though it may be that the information is initially kept private for tax authorities, rather than allowing for public accountability of both companies and tax authorities.

380528The step towards a global deal for automatic tax information exchange is also important, reflecting the established consensus and seeking to accelerate progress towards its enactment in a way that benefits developing countries and not only the richest.

It is disappointing that the G-8 did not agree to compile registries of beneficial ownership of companies and trusts, let alone to make them public.  If individuals can own companies anonymously, it is too easy for them to set up shell companies and shelter their income from tax within them. We are confident it will eventually dawn on everyone that the only workable solution is registries of beneficial ownership, and that there is no reason that these should not be public.

It is especially welcome that the G-8 emphasizes throughout that the solutions to these problems must be designed with the interests of developing countries in mind, and not only the interests of the wealthy nations.

It isn’t surprising that the UK did not get everything it pressed for. This agenda has burst into the public consciousness over the last six months at startling speed. Across G-8 countries, too few civil society organisations, business groups or think tanks have even begun to engage with it.  There is little understanding among policy-makers of why this is important or what the options are.

Researchers and activists such as Richard Murphy, John Christensen, Charles Abugre, Raymond Baker, David McNair and Jim Henry should be very proud. They have produced evidence and analysis over the years which has forced these issues onto the agenda of some of the world’s most powerful leaders.  Coincidentally, the Mbeki panel on illicit flows in Africa met in Lusaka at the same time as the G8, as the evidence and political commitment to change continues to build in the region.

The experts will be frustrated that agreement was not reached over the last two days on all their recommendations. But it would have been astonishing #IF the G-8 had swallowed the whole agenda at the first attempt.

This G-8 has kicked off a process which will take two or three years to complete. The challenge ahead is to maintain the momentum; to keep producing the evidence and analysis; to ensure that the interests of developing countries remain front and centre; and to build consensus about what should be done.

It would have been easy for David Cameron to rest on the government’s laurels – after all, the UK is the only G-8 country to have met the target of spending 0.7% of GNI on aid.  The G-8 could have made the usual bouquet of announcements about how their aid budgets will be spent – $50m on smallholder agriculture and $20m on microfinance.  But – remarkably – David Cameron took on a much more challenging agenda. He asked the G-8 to “get its own house in order”: that is, to identify and fix the systemic problems which help create and sustain poverty around the world. He has not succeeded yet in getting agreement to all the changes that are needed. But he has focused the world’s attention on these key issues, and he has set in train processes which are explicitly aimed not only at protecting tax revenues for rich countries but of ensuring that the system works for developing countries too. For that he deserves much credit.

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One Response to How did the G-8 do on financial secrecy and tax?

  • Well said Owen Barder and Alex Cobham. It was interesting to see, post G8 (it even started about a week beforehand), pundits do a nice Cameron-bashing job. His presumed crime: not having achieved enough and not being able to do as much as he wanted to. I’d answer that in fact, he’s actually shown amazing vision by leading a transparency agenda that is leaps ahead of what one would expect from a “classic” G8 presidency.
     
    Granted, not everybody is 100% on board. It’s easy to see that France is a willing partner but that there is more reluctance from others (US and Canada in particular) to fully climb aboard the beneficial ownership transparency train.
     
    Don’t get me wrong though: The US, is a true pioneer in government data transparency. But when it comes to beneficial ownership, they’re still unsure of what the road ahead looks like. Especially because the UK proposal would translate into somewhat heavier regulations for businesses, like forcing companies to divulge their intricate ownership structures and shareholdings patterns.
     
    This is something economies which are favoring market self-regulations are worried about. And I would say, rightfully so: forcing companies into something they don’t want to do is yet another fight with businesses, at the very same time when economies damaged by the financial crisis need to rebound.
     
    Now that things are finally getting better, (at least in the US) it might not be the best time to start imposing a large regulatory fight on business investments. One wants investments to flow in, not out – which is exactly why Cameron declared that if others would not move on beneficial ownership, UK won’t move either for the moment, so as not to put British companies at a disadvantage vis-à-vis others.
     
    Cameron, again, is right: If I had to invest in one of two markets, one of which is more stringent on disclosure than the other, I might be inclined to exercise my right to good sense and go invest my money in the less regulated market. Which is why beneficial ownership regulations would only work if adopted by all major economies at once.
     
    The UK cannot afford play the lone ranger on this, and Cameron knows it well. That’s exactly why the G8 only ended up with a commitment from every country to prepare an “action plan” on beneficial ownership. This will give G8 member states some visibility on their neighbor’s direction and timetable. If countries can see each other’s cards clearly, fellow players at the G8 poker table will be able to make their move together, incrementally, in a much less risky fashion. So I agree that this process will take a few years. Although, and that’s where I start to differ from the UK strategy, I do not see a single way to get there.
     
    I don’t believe regulating businesses on beneficial ownership will actually do the trick. Sure, regulations could be enacted that would require businesses to self-disclose their relationships with other corporate entities. But in a world of ever-complicated corporate networks and shareholding patterns and ever-creative CFOs(who sometime create companies for the purpose of single transactions_ no regulator will be able to sift out the true from the false, or the reported from the hidden. Would you ask a burglar for his burglary map and expect it to be a representation of the truth? I know I wouldn’t.
     
    So then why do regulators believe that their call for information about corporations’ true beneficial owners will be met with accuracy? And if some information is missing, what would the penalty be? How would it be enforceable? Will a KPMG be called do to a full audit? It won’t work in practice.
     
    That’s why I suggest a different way: The Open Data way. Today, every corporation in the world is registered in national, or local, corporate registries. So imagine a world where all this data is freely available and out there for anybody to access, for free.  Imagine that the ID card for any given company includes Directors, Shareholders, and even Filings.
     
     Now imagine that all that data, from all jurisdictions around the world, is aggregated in a single gigantic database. You could just plug in the name of a company and the system, through relational analysis, would produce a picture of the full network in which that company belongs. A real dream for journalists, civil society activists, regulators, and even the private sector (companies want to know about the other companies they are dealing with).
     
    If you think this is fiction, think again. To incentivize governments to increase transparency of their corporate registries, and promote efforts related to corporate accountability, the World Bank Institute recently supported the launch of the Open Company Data Index at http://registries.opencorporates.com
     
    This new data index looks at the state of play of how countries enable transparency of information about registered corporations. It then goes further, by aggregating open registry information. This tool generates open-source, transnational datasets that can help curb corruption, check beneficial ownership, and deepen competitiveness analysis, so that the private sector can also benefit from transparency.
     
     For instance, if you search for a particular company on this website, you can not only see corporate registration information for that company, but also(and this is revolutionary) generate a visual representation of the corporate network to which that company belongs, as well as the registry information of all the companies in the network.
     
    The potential benefits for governments, media, citizens, and the private sector to be able to map the connections between companies, are enormous. I explain more in this blog: http://blogs.worldbank.org/voices/solving-g8-transparency-equation-businesses-bottom-line-development-impact-open-and-collaborative. There are many roads to beneficial ownership for the G8 leaders. I tend to prefer this one, as it is based on open data and crowd-sourcing of an application on top of such data. Much more efficient in my view, than hard to broker, and hardly enforceable, business regulations. 

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