Press Release

The report – titled Trapped in Illicit Finance: How abusive tax and trade practices harm human rights ­­– by Christian Aid, Centre for Budget and Governance Accountability and Fundación SES, members of the Financial Transparency Coalition, urges developed nations and the UN to stop tolerating the abusive flows of money that robs developing countries of the necessary revenue. As world leaders gather at the UN General Assembly in New York, the report calls on developed countries to widen their ‘legalistic’ definition of illicit financial flows that goes beyond just illegal flows of money, such as those related to laundering, the drugs trade, tax evasion or corruption. They are now being asked to embrace a broader, human rights-based definition that encompasses immoral and harmful flows of funds.

Lead author of the report Dr. Matti Kohonen, Christian Aid’s Private Sector Principal Adviser, said: “It is a scandal that developing nations are losing out on an astounding $416 billion a year in public revenues. This is money that could help governments deliver much-needed services such as healthcare, education, homes, road and climate adaptation initiatives. It could also go a long way to plugging the funding gap for the sustainable development goals.”

The ‘Trapped in Illicit Finance’ report highlights the impact of this practice on nations in the Global South such as Ghana and Zambia, as well as emerging economies like Argentina, India and Russia. The report also comes in light of the recent investigation of Mauritius Leaks by the International Consortium of Investigative Journalists. One of the authors of the report, Sakshi Rai from Centre for Budget and Governance Accountability (CBGA) points out that “Mauritius’s significant role as a key jurisdiction for routing FDI and ‘round tripping’ Indian funds back to India to mask their origin is well documented. Because of how double tax avoidance agreements are generally negotiated, the residence country (usually a developed country) ends up receiving a larger chunk of taxing profits than the country in which economic value is actually created (usually a developing country). It is common for multinational companies to indulge in treaty shopping to avoid their tax liabilities and this loss of revenue through such channels and arrangements has serious implications especially for developing countries. We are essentially dealing with a broken financial system.”

Dr. Kohonen adds that “despite previous commitments by world leaders to fight illicit financial flows, the abuse of our economic rules has been allowed to go unchallenged for too long. A big reason for this is because many forms of illicit financial flows – such as tax avoidance by multinational corporations and wealthy individuals – are legal.”

Jayati Ghosh, who is Professor of Economics at Jawaharlal Nehru University, New Delhi, has described the report as “extremely topical and hugely important”. She further adds that:

“Across the world, citizens who want their governments to implement policies to reduce inequalities, address climate change and looming ecological disaster, provide better public services and amenities, ensure social protection, generate quality employment and so on, are always confronted with one question: where is the money?... We are made to feel that our governments are effectively helpless in dealing with the multiple crises facing our societies and economies, and all we can do is turn to the private sector and appeal to their generosity and social conscience. But this is not just misleading; it is simply wrong. Governments are constrained in their resources because they tolerate widespread tax evasion and avoidance. Knowingly or unknowingly, they have allowed companies and wealthy individuals to escape from paying their fair share of taxes – sometimes illegally, but very often completely legally – taking advantage of legal loopholes and using tax arbitrage practices that exploit differential tax rates and the existence of tax havens.

This is why it is important to broaden the definition of illicit financial flows (IFFs) to a rights-based definition, as this report does, to include all cross-border flows of money that are either illegal or abusive of laws in their origin, or during their movement or use.

This report should be essential reading not just for policy makers, but for citizens across the world, if we are to create a political climate in which IFFs are no longer tolerated, so that the necessary resources to meet declared social goals can be generated.”

Among other things, the report urges the UN to establish structures to define illicit financial flows based on a rights-based definition. This would require the UN to play a more prominent role in setting the rules and conventions for taxing multinational corporations and to expedite international tax cooperation so developing countries are at an equal footing.

For further information, kindly get in touch with Happy Pant at happy@cbgaindia.org / +91 11 49200411.