Service on Finance and Development (Mar16/03)
16 March 2016
Third World Network
illicit flows to progress on human rights, says UN expert
Published in SUNS #8199 dated 11 March 2016
Geneva, 10 Mar (Kanaga Raja) - Curbing tax-related illicit financial
flows has the potential to make the largest fiscal impact and would
enlarge domestic resources available for the realization of human
rights, including social, economic and cultural rights, a UN human
rights expert has said.
In his final study on illicit financial flows, human rights and the
2030 Agenda for Sustainable Development, Mr Juan Pablo Bohoslavsky,
the Independent Expert on the effects of foreign debt and other related
international financial obligations of States, said that combating
tax abuse, and illicit financial flows more broadly, is essential
to make better progress in realizing international human rights obligations.
"The inclusion of a specific target to reduce illicit financial
flows under the Sustainable Development Goals makes clear that curbing
such flows is also essential for creating an enabling environment
for sustainable development," he added.
The study by the Independent Expert was presented at the Human Rights
Council, which is currently holding its thirty-first session here
from 29 February to 24 March.
(The study can be found here: http://ap.ohchr.org/documents/dpage_e.aspx?si=3DA/HRC/31/61)
In his study, the rights expert welcomed the adoption of the outcome
document of the third International Conference on Financing for Development,
the Addis Ababa Action Agenda, and the Agenda 2030 for Sustainable
"It is the first time that two key international documents recognize
explicitly the detrimental effects of illicit financial flows on sustainable
development," he said.
"While the Millennium Development Goals had remained silent on
the issue, States have now pledged to significantly reduce by 2030
illicit financial flows and strengthen the recovery and return of
stolen assets (target 16.4) in the Agenda 2030. This can be considered
a remarkable progress."
According to the study, it has been estimated that the majority of
all illicit financial flows are related to cross- border tax-related
Jurisdictions with high levels of financial secrecy can attract all
kinds of illicit funds. Combined with low tax rates, they become ideal
locations for tax-evading funds.
Many important secrecy jurisdictions are home to a large private banking
industry that facilitates tax evasion by high net-worth individuals
in a systematic manner.
Through the use of "shell" companies and other corporate
vehicles, accounts can be rendered anonymous and funds can reside
untaxed or minimally taxed with no means of identifying to whom they
The Independent Expert noted that many of the world's most important
secrecy jurisdictions are developed countries, which have historically
been overlooked in their role in facilitating tax evasion.
One report estimates that $7.6 trillion (8 per cent of global financial
household wealth) was held in tax havens at the end of 2013 - with
an estimated 80 per cent of it unrecorded.
Another, estimates the value of global private wealth held offshore
in 2013 to be $8.9 trillion, while yet another estimates that, at
the end of 2010, unrecorded private wealth invested offshore was as
much as $21 trillion to $32 trillion (10-15 per cent of global financial
A more recent estimate is even higher: $24 trillion to $36 trillion
as of 2015.
There is also consensus that the amount of private wealth held offshore
is growing. It has been estimated that global offshore wealth increased
by 28 per cent from end-2008 to end-2013, and that unrecorded offshore
private wealth grew at an average rate of 16 per cent a year from
2004 to 2014.
This trend is especially strong in developing countries.
Mr Bohoslavsky said developed and developing countries suffer as a
result, but developing countries are particularly hard hit.
It has been estimated that the relative amount of wealth from developing
countries held abroad is much greater than for developed countries,
ranging from 20-30 per cent in many African and Latin American countries.
Another study provides similar figures: 26 per cent for Latin America
and 33 per cent for the Middle East and Africa.
The United Nations Conference on Trade and Development (UNCTAD) has
calculated that the tax gap for developing countries is $66 billion
to $84 billion per year - about two thirds of total official development
"These revenues become lost from the erosion of the tax base,
thus preventing Governments, particularly in developing countries,
from establishing progressive tax systems," said the rights expert.
Another crucial fact to note is the greatly unequal ownership of offshore
It has been estimated that 85 to 90 per cent of wealth belongs to
fewer than 10 million people - just 0.014 per cent of the world's
population - and at least a third of it belongs to the world's top
100,000 families, each with a net worth of at least $30 million.
The rights expert said a common commercial tax-evading practice is
trade misinvoicing. This involves falsifying trade documents, such
as customs forms.
By under-invoicing exports and over-invoicing imports, tax evaders
can move assets out of countries and into secret bank accounts and
shell companies in tax havens.
According to Global Financial Integrity, trade misinvoicing is the
most common way of illicitly moving funds out of developing countries.
The organization has estimated that trade misinvoicing accounted for
more than 80 per cent of all illicit outflows between 2004 and 2013
- an average $655 billion per year - and that it roughly doubled in
magnitude over this time period.
An analysis by the organization shows that in 7 out of the past 10
years, the global volume of illicit financial outflows from developing
countries - of which trade misinvoicing constitutes the vast majority
- was greater than the combined value of all ODA and foreign direct
investment (FDI) flowing into poor nations.
Importantly, these estimates are thought to be conservative since
they account for only one type of trade mis-invoicing, known as "re-invoicing,"
which occurs when goods are exported under one invoice, the invoice
is then sent to another jurisdiction, such as a tax haven, where the
price is altered, and finally, the revised invoice is sent to the
importing country for clearing and payment.
They do not account for misinvoicing on trade of services and intangibles
- approximately 20 per cent of world trade - nor does it capture "same
invoice faking," where misinvoicing occurs within the same invoice
as agreed between exporters and importers.
A study by Global Financial Integrity has found that tax revenue losses
to developing countries due to re-invoicing alone amounted to $98
billion to $106 billion per year between 2002 and 2006.
"While tax evasion, which breaks national tax laws, is openly
illegal, a number of corporate tax avoidance schemes use very complex
methods to make it very difficult for tax authorities to provide sufficient
proof that they are in contravention of national laws and regulations,"
said the study.
The overall effect of those practices is to reduce the corporate tax
base of many countries in a way not intended by domestic policy.
In addition, tax avoidance by transnational corporations harms society
by avoiding a "fair share" of the tax burden.
The rights expert said that a common method of corporate tax avoidance
is "profit-shifting", where transnational corporations take
advantage of tax rate differentials across jurisdictions and shift
taxable income and assets away from source countries, where economic
activity takes place, and into associated companies in tax havens,
sometimes with no real staff or business activities.
UNCTAD has estimated tax revenue losses to developing countries of
$100 billion annually, which represents about one third of corporate
income taxes that would be due in the absence of profit-shifting.
Total development resource leakages, including lost earnings from
missed reinvestment opportunities in addition to tax revenue losses,
are an estimated $250 billion to $300 billion per year.
A recent study by the International Monetary Fund (IMF) estimates
long-run annual revenue losses to developing countries of $200 billion
per year (1.7 per cent of gross domestic product - GDP) and to countries
of the Organization for Economic Cooperation and Development (OECD)
of $500 billion per year (0.6 per cent of GDP).
Looking specifically at the United States of America, one report estimates
losses due to profit-shifting by United States firms to be $100 billion
per year, while another calculates a decline in the effective tax
rate on United States firms from 30 to 20 per cent over the past 15
years, two thirds of which is attributable to profit-shifting.
The Independent Expert stressed that tax abuse deprives Governments
of resources required to progressively realize human rights, including
economic, social and cultural rights, such as health, education, social
protection, water, sanitation, as well as civil and political rights,
including access to justice, free and fair elections, freedom of expression
and personal security.
"Tax abuse can also undermine the rule of law, for example, when
large-scale tax evasion is allowed to occur with impunity."
Tax abuse by corporations and high net-worth individuals forces Governments
to raise revenue from other sources, including through regressive
taxes, the burden of which falls hardest on the poor.
This has important human rights implications because regressive tax
structures limit the redistributive impact of social programmes since
they effectively end up being funded by the very people they are supposed
The need to make up revenue shortfalls through regressive taxes thus
further undermines the realization of economic and social rights for
the most vulnerable, said the study.
In addition, tax abuse perpetuates and exacerbates extreme economic
inequality, benefiting the rich at the expense of the poor.
Global inequality currently stands at extremely high levels. The United
Nations Development Programme (UNDP) reports that the richest 8 per
cent of the world's population earn half of its total income, leaving
the other half for the remaining 92 per cent.
Oxfam has shown that, in 2014, the richest 1 per cent of people in
the world owned 48 per cent of global wealth - up from 44 per cent
in 2010 - leaving 52 per cent of global wealth to the remaining 99
per cent of the world's population.
Oxfam predicts that, by 2016, half of global wealth will be concentrated
among the top 80 individuals.
Over the past two decades, income inequality has increased by 9 per
cent in developed countries and 11 per cent in developing countries.
"Extreme economic inequality threatens to undermine human rights.
For example, income inequality prevents millions of individuals from
enjoying social and economic rights on a non-discriminatory basis,
such as access to adequate housing, food, health care and sanitation,"
said the Independent Expert.
"This is particularly true if such inequality is not addressed
by policies ensuring access to these rights, for example, through
social welfare and protection."
Curbing tax abuse and illicit financial flows is not only essential
for realizing human rights, but also for achieving sustainable development.
Making progress on target 16.4 of the Sustainable Development Goals
on reducing illicit financial flows will make an important contribution
not only to achieve various other goals included in the Agenda 2030
for Sustainable Development, but also to the enjoyment of human rights,
Global Financial Integrity estimates that 31 developing countries
had illicit financial outflows greater than their public spending
on health during the period 2008-2012 and, in 35 developing nations,
illicit financial outflows outnumbered public spending on education
during the same period.
In 12 countries, illicit outflows were estimated to surpass total
tax revenues. Finally, for 20 developing nations, illicit outflows
outnumbered the combined financial inflow in the form of ODA and FDI
during that period.
"Such figures suggest that achieving the Sustainable Development
Goals will be an immense uphill battle in the face of illicit financial
flows," the rights expert underlined.
"By reducing government revenue, tax abuse critically undermines
the ability of many countries, especially the world's poorest countries,
to fulfil economic, social and cultural rights."
According to a UNDP report, in 2009 the least developed countries
received approximately 24.1 per cent of total ODA, yet at the same
time it has been estimated that as a group they lost 60 cents off
every dollar of ODA to illicit financial flows.
For some of these countries, illicit outflows were several times greater
than the amount of ODA received.
The report also found that illicit outflows averaged 4.8 per cent
of the GDP of least developed countries, a large proportion of already
A recent study by Global Financial Integrity also confirms that illicit
financial flows have an outsize impact on the worst-off developing
countries, including least developed countries and heavily indebted
The organization found that, of 82 developing countries studied, 20
per cent have illicit outflows greater than their ODA and FDI combined;
for close to 25 per cent of countries, the ratio of illicit outflows
to GDP is 10 per cent or greater; and, for 40 per cent of countries,
the ratio of illicit outflows to total trade value was 10 per cent
The Independent Expert said that when it comes to tax evasion, financial
institutions, including some of the world's largest and best-known
banks, are also key actors.
For the period 1998-2014, one author identified 845 cases in which
individual financial institutions received specific declared penalties
and assessments for a host of infractions, the most widespread of
which was helping wealthy clients and corporations engage in tax fraud.
Moreover, it was found that a small handful of banks were responsible
for a majority of those infractions: looking at the top 14 kinds of
infractions, the top 22 banks were penalized a combined 655 times
and the top 10 offenders account for more than half of these.
The study calculated that the banks had paid a combined $11 billion
in fines for facilitating tax evasion.
However, those penalties, and those for other financial crimes, were
only a modest share of their total assets.
Moreover, of the cases reviewed, in only one - a tax evasion case
- did a major bank ever plead guilty to a corporate felony.
Even so, the bank in question did not have its license revoked; indeed,
the plea deal was arranged so that this would not happen.
"There is furthermore a sense of impunity in relation to the
conduct of senior bankers with respect to the financial crimes of
The rights expert emphasised that financial institutions that facilitate
tax evasion and transnational corporations that employ aggressive
tax planning strategies must recognize that their actions may have
negative human rights impacts.
"They can demonstrate respect for human rights through appropriate
policies and due diligence procedures, through country-by-country
reporting, including publishing information about the taxes they pay
to each country in which they operate."
In the view of the Independent Expert, implementing the Sustainable
Development Goals target on illicit financial flows will be a challenge.
First, it is only one of 169 targets included in the Agenda 2030 for
Second, there are many actors with different and sometimes conflicting
interests who need to work together in order to make progress on this
The more actors there are, the greater the risk of diffusion of responsibility
for implementation, if it is not clearly spelled out who should do
what and when.
"This raises the question of accountability for implementing
the Sustainable Development Goals and monitoring their implementation.
So far, it is largely left to States to honour their commitments."
But commitments are not likely to be honoured if one cannot point
at responsibility for specific action and if there is no public pressure
to take action, said the Independent Expert, pointing to the need
for a rigorous and independent monitoring mechanism.
In this context, it will also be essential to track progress on reducing
illicit financial flows through appropriate indicators.
To maintain accountability, it will be necessary to track and measure
not only illicit financial flows themselves, in terms of volume, but
also policy efforts to reduce them, both in countries of origin and
countries of destination.
"Finally, it will be necessary to have robust and independent
mechanisms to ensure that the commitments made in Addis Ababa and
in New York are closely watched, not only by States and bodies of
the United Nations, but also by academic experts and civil society,"