By José Antonio Ocampo, Professor at Columbia University, and former UN Under-Secretary-General for Economic and Social Affairs and Finance Minister of Colombia

The world must curb financial flows associated with tax evasion and avoidance, as well as those obtained through corrupt activities and money laundering. The magnitude of the funds involved is immense; trillions of dollars in bank accounts and other assets, and not just in tax havens. The concealed money drains resources from the hands of governments, generates increasing inequality –because the beneficiaries are generally rich people— and causes significant deterioration in public sector governance worldwide. Increased transparency and accountability to curb these flows would improve governance and enhance fairness at the national and international levels.

The problems are systemic and therefore require systemic solutions. This is the basic message of the Financial Integrity for Sustainable Development Report launched by a High Level United Nations Panel on February 25^th. It represents a landmark in the fight against illicit financial flows in the global economy. Former prime minister of Niger Ibrahim Assane Mayaki and former president of Lithuania Dalia Grybauskaitė co-chaired the Panel, which included 15 independent members from around the world. The Panel’s recommendations aim at strengthening national governance, as well as enhancing international co-operation on specific controls on tax abuse, money laundering or corruption, but also to build a coherent ecosystem of institutions to curb these illicit practices.

First, the new ecosystem must give a fair role to developing countries and strongly support capacity building at all levels to curb these practices. This may involve a redesign of national and international institutions in each area or even the creation of new institutions. Moreover, it would require the launch of an inclusive and legitimate global coordination mechanism at the United Nations Economic and Social Council (ECOSOC) to address financial integrity at a systemic level.

“The concealed money drains resources from the hands of governments, generates increasing inequality –because the beneficiaries are generally rich people— and causes significant deterioration in public sector governance.” #DevMatters

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Second, a specific institution must be created to curb all forms of illicit financial flows: a global registry based on beneficial ownership of specific assets and built upon strong national registries.

A third component of the ecosystem should be global standards for financial, legal and accounting professionals, and the adoption of a clear principle that not only are the persons directly involved in the illicit transaction legally responsible, but also the lawyers and accountants who supported them in carrying it out –the “enablers”. Moreover, these global standards must protect anti-corruption advocates, journalists and whistle-blowers, who have played and should play an increasingly important role in curbing these practices.

A fourth element must be an appropriate system to guarantee rapid asset recovery for countries that have been negatively affected by these illicit activities. This must include an adequate place to store these funds over the course of legal disputes.

A fifth dimension should be the creation of fair and effective dispute settlement systems. The views of the Panel were generally negative on existing mediation mechanisms and showed a preference for mediation and arbitration systems managed by intergovernmental organs. 

Finally, several basic agreements were reached in the area of international co-operation on tax evasion and avoidance, which I coordinated in the Panel’s work.

The first is that there should be a United Nations Tax Convention to set global standards and create an inclusive intergovernmental body on tax matters under the United Nations (UN). The Panel supported the hopefully successful conclusion of the current negotiations on international tax co-operation that are taking place within the OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting), but considered that future negotiations should take place at the UN. Other institutions currently working on these issues should also support the UN in this endeavour. This includes the Global Forum on exchange of information for tax purposes, also managed by the OECD, that should work closely with the new intergovernmental body, guaranteeing in particular an automatic exchange of information among tax authorities, including those from developing countries.

“The new ecosystem must give a fair role to developing countries and strongly support capacity building at all levels to curb these practices.” #DevMatters

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The Panel also recommended the creation of a new dispute settlement mechanism on taxes, which should be linked to the new intergovernmental body, as well as a better system for collecting international information on tax matters, which could again be under the UN, or –in my personal view—the International Monetary Fund.

In terms of substance, the Panel supported the current negotiations under the OECD Inclusive Framework, underscoring that taxes on multinational profits, including those associated with digital transactions, should be based on a formula that allocates multinationals’ global profits to the countries where the economic activity takes place. Taxes should also take into account the total profits of these firms, and not just a “residual” share – i.e. profits above a fictional “routine return”— as proposed by the OECD.

The Panel also proposed that, under current negotiations, the minimum corporate tax rate that should be adopted to limit tax competition among countries must be relatively high, in the 20-30% range. And beyond current negotiations, the Panel emphasised the need to strengthen international co-operation to guarantee adequate taxation of capital gains, an area where there is massive tax avoidance and possibly evasion today.

The agenda is an ambitious one, reflecting the dramatic repercussions of the problems analysed by the Panel. The world should move forward in adopting the Global Pact on Financial Integrity for Sustainable Development that it recommended.