Symposium on systems of financial secrecy summary report

  • Publication date: 06 March 2024
  • Author: Open Ownership

Session four

Taxation, corruption, and public funds

In this session, international experts presented on how financial secrecy enables the misappropriation of public funds through tax evasion, money-laundering, and corruption, and outlining the ways in which international standard setters are attempting to tackle these issues. This session’s presenters spoke on the interlinks between corruption and tax crimes; beneficial ownership and public procurement and contracting; and trusts and tax evasion/avoidance.

  • Diane Ring, Professor of Law and Dr. Thomas F. Carney Distinguished Scholar, Boston College Law School

Diane opened this session with her keynote presentation Beyond bribery: The interconnections between corruption and tax crime, presenting joint research with Costantino Grasso.

In her research, Diane was struck by the degree to which corruption and tax crime are often connected and intertwined, yet for regulatory purposes they are often considered separately. She believes that corruption and tax crimes are both too narrowly defined to capture their full breadth and, as such, they are underestimated.

Both corruption and tax abuse are forms of economic crime and involve those with power: they both regularly involve businesses, government officials, and professionals (e.g. bankers, lawyers). Diane encourages broader definitions of both, to more effectively capture and respond to deeply problematic conduct.

As examples of the range of conduct, Diane shared several cases.

  • The first, a bribery case related to Walmart’s Mexican subsidiary, included abuse of the entity’s accounting and tax reporting to hide underlying corrupt conduct.
  • The second was the famous SwissLeaks case in which a bank employee obtained data revealing that the bank was helping conceal client account information from tax authorities. The underlying data on taxpayers was eventually shared with the relevant taxing jurisdictions, including Greece. Once in the hands of the Greece finance minister, the list disappeared, and then reappeared minus the names of three of the Finance Minister’s relatives.
  • The third case revealed the shifting US government position on Apple’s ongoing tax issues with its Irish subsidiary. In 2012, Apple was brought before the US Senate’s permanent subcommittee on investigations regarding the shifting of profits away from Apple US to Apple Ireland, but four years later, in 2016, US government leaders defended Apple and its same tax conduct against EU state aid inquiries.

To conclude, Diane said that “how you frame behaviour really matters”, and sees this as a reason to push for a broader framing of both corrupt conduct and tax abuse. She said that it is harmful to fail to acknowledge the power dynamics in these cases.

Research available here and case studies here.

  • Costantino Grasso, Associate Professor in Business and Law, Manchester Law School

Costantino presented Exploring potential conflict of interest in anti-tax abuse policymaking. To stimulate reflection on the effectiveness of anti-tax abuse, Costantino presented two complex cases: the implementation of Italy’s Legislative Decree 231 (2001), and the UK’s Bribery Act.

In Italy, the legal gap meant that criminal liability was personal in law, and personal was interpreted as “natural persons” not “legal persons”. The Legislative Decree 231 introduced a means to hold corporations liable for specific predicate offences, though tax evasion was excluded from the otherwise extensive list. Only in 2020, after the European Union compelled all member states to extend the liability regime to corporations for tax crimes, such offences were eventually included in the list, but limited to those relating to the financial interests of the Union. Costantino emphasised how this reflects the hesitance within Italy's legal system to prosecute corporations for tax crimes. Like Italy, Chile and Georgia also exclude tax crimes from similar legislation.

In the UK, prior to the Bribery Act, corporate liability only arose when offence was committed by a natural person “directing mind or will of the organisation”, meaning that unless a top official was involved, it was not possible to prosecute a corporate entity for bribery. The Bribery Act was shown to be effective in enabling prosecution of corporate entities for bribery, through a ‘failure to prevent’ offence. Similar failure to prevent legislation was introduced for tax evasion in 2017, however the use of (legal) loopholes and aggressive tax avoidance means that things have remained largely unchanged.

Though countries may aim to enforce strict measures against corporate tax abuse, Costantino said that some are “too big to jail”, highlighting the power dynamics at play.

  • Dr. Mihály Fazekas, Associate Professor, Central European University and Irene Tello Arista, PhD Researcher, Central European University

Irene and Mihály presented Using beneficial ownership data for large-scale risk assessment in public procurement.

While running an NGO in Mexico for five years, Irene uncovered many cases of corruption with companies that had no listed beneficial owners. She decided to do her PhD to understand the policies in place to prevent procurement corruption in Europe, with the view to also improve things in Mexico.

Mihály and Irene are now conducting research in Denmark, Latvia, Slovakia, Ukraine, and the UK, with the aim to test common indicators used to measure money-laundering risks and generate hypotheses about the impact of BO registers on financial crime. Their research suggests that higher risk indicators lead to higher instances of a company’s involvement in wrongdoing in public procurement. Their underlying hypothesis is that BO registers on their own carry little information on corruption risk, but mistakes in the data, as well as the presence of certain risk indicators such as the company being very new, or a BO being a citizen of an offshore jurisdiction, indicate increased risk of corruption.

They also discussed the challenges faced when working with BO and procurement data, with missing identifiers making it difficult to link data, and BO information missing in many cases. “To our surprise, BO and procurement datasets, despite being very noisy, are high enough quality for systemic, large-scale risk-flagging.” – Dr. Mihály Fazekas

Their research has generated other interesting hypotheses, including: BO registers make offshore linked firms cleaner; BO registers induce a move from offshore to strawman evasion techniques and other ways to conceal beneficial ownership; BO registers have no impact in countries with low anti-corruption enforcement capacity, as knowing the illegitimate owners does not lead to sanctioning.

  • Andrej Leontiev, Managing Partner, Taylor Wessing

Andrej presented The Slovak experience: a special BO register as the main know-your-customer tool for public contracting.

Andrej discussed the case of BOT reform in Slovakia, focusing on its Register of Public Sector Partners, the law for which he co-authored. As a post-socialist society, Slovakia has had problems with conflicts of interest, especially between businesses and politicians. In 2016, Slovakia created the unprecedented Anti-Shell Companies Law with the objective of eliminating shell companies from public contracts and stopping them from doing business with public funds and public assets.

Since then, Slovakia has also excelled in hitting FATF Recommendation 24 revisions with this tool. The three pillars of its register are: broad scope of relations covered by the law, including all types of public contracts, transferal of assets, etc.; verification of BO data by gatekeepers, with a requirement for registration of foreign and domestic companies doing business with a public hand; and a shifted burden of proof where there is suspicion that BO information is not accurate.

Since the register went live seven years ago, 90% of the most economically significant Slovak companies are covered by the register and its very solid verification, and the Legal Certainty Index called it the “third most positive legal measure in 2018”.

  • Andres Knobel, Lead Researcher on Beneficial Ownership, Tax Justice Network

Andres presented The abuse of trusts for tax evasion and avoidance. Andres explained that trusts have two basic strategies: secrecy, and asset protection (e.g. from creditors), and he explained that because trusts are so sophisticated, they need at least as much transparency as companies.

There is no data on how many trusts exist, who benefits or controls them, nor the value of assets they hold. Because there is no requirement to register trusts, it is easier for people to back-date or falsify trust documents. Andres also explained that modern trusts can have very complex structures with many more parties than classical trusts, making it harder to identify all relevant beneficial owners. Modern trusts’ parties could include: legal and economic settlors, protectors, corporate trustees (controlled by whoever holds shares in them), discretionary and indirect beneficiaries, purposes, etc. .

Because many countries do not have laws to create domestic trusts or do not cover trusts under their BO registration laws, they are not able to properly deal with trusts involved in company ownership chains. Andres highlighted the shortcomings of merely applying rules to determine the BO of companies to trusts, as using thresholds for company ownership and applying these to trusts can result in ownership being obscured. He also described the asset protection features of trusts (especially the discretionary trust), enabling the “ownerless limbo” where trust assets do not belong to anyone’s personal wealth (the settlor claims the assets were transferred into the trust, the beneficiary claims they haven’t received any distribution yet, and the trustee claims to be a mere legal owner of the assets). This asset protection feature can be used to facilitate tax avoidance and defraud creditors.

Andres ended with policy recommendations, including: requiring registration of trusts and their beneficial owners as a precondition for legal validity or distribution of assets held in a trust; not applying BO thresholds where a party to the trust is an entity; prohibiting discretionary trusts, or treating such trusts as wills; and considering the settlor as the remaining owner of the trust assets until distribution to beneficiaries, in order to prevent the “ownerless limbo”.

“I’ve been researching trusts for seven years and the more I learn about them, the more outraged I become about what is allowed to happen.” – Andres Knobel

  • Michael Vaughan, Research Fellow, LSE III

Michael then closed the session with thoughts as a discussant. Focusing on the common themes across the session, he noted that:

  • Panel presentations centred the role of the state and government in the nexus of state-corporate power relations.
  • There is a difference between legal concepts and political/economic realities: the de facto operation of legal regimes does not reflect their legal design.
  • These differences foreground the importance of norms and ideas – how different norms prevail among political elites, professional services.

Michael also noted certain tensions in the various papers discussed during the day, raising the following questions:

  • If we take seriously the call from Diane Ring to expand the definition of corruption and tax crimes, do we need a common definition?
  • When we centre the “systems” that underpin secrecy, do we mean the political and economic systems or the policy systems? This varied between the papers.
  • As we get a large dataset, for example on BO data, do we run the risk of focussing too much on data analysis, and by doing so insulating powerful actors from scrutiny?
  • Finally, he prompted us to think further about the utility in cross-national comparison, and how it contributes to tackling transnational secrecy.

The discussion highlighted the political nature of labels such as “offshore jurisdiction”, and that there is much technical work to be done in order to effectively tackle financial secrecy.

Next page: Conclusion