Tax havens: why urgent action is needed

European multilateral banks need to go bigger and better on transparency of ultimate owners and country-by-country reporting to reach their development and transition goals.

A report recently released by NGO Eurodad, Going Offshore, reveals that European development finance institutions provide billions of euros to private companies and funds registered in offshore financial centers to undertake projects in developing countries.

The European Investment Bank (EIB) – the EU house bank - and the European Bank for Reconstruction and Development (EBRD) are implicated in siphoning funds despite being backed politically by G8 donor countries which potentially gives them the ability to set rigorous standards on tax compliance.

Nevertheless, as the report shows, both the EIB and EBRD have made little effort to reach beyond the limited set of international standards enacted by the OECD Global Forum that has for years determined their decisions on investing in companies and funds registered in secretive jurisdictions.

It is the reliance on the OECD judgment that proved wrong in case of the EIB’s €450 million equity to Qalaa private fund for reinvestment in the Egyptian Refining Company (ERC). A recent investigation published in EUobserver uncovered that ERC, which operates an oil refinery outside of Cairo, is controlled by an entity registered in the British Virgin Islands.

The EIB countered that the country did not feature on the OECD black list of secretive jurisdictions when it closed the contract on the project in 2012. This shows how needed it is for the EU bank to move forward and not rely on the questionable effectiveness of the OECD ranking.

Another striking element of the investigation is that Qalaa is suspected of paying abysmally low levels of corporate tax in contrast to its stunning profits. The due diligence procedures in place at the EIB should have demonstrated this problematic situation via checking the company’s financial statements from each country of operation.

In this case, had the EIB incorporated the system of country-by-country reporting promoted by tax justice NGOs, it would have dropped the idea of such an investment.

Introducing country-by-country reporting requirements would mean that beneficiaries of EIB and EBRD financing would have to disclose in their audited annual reports country level information about their sales, assets, employees, profits and tax payments in each country in which they operate.

The EBRD has also provided taxpayer-backed finance to investment funds registered in tax havens or countries with reduced taxation levels.

Taking a close look at the financing of six private equity funds under consideration or signed by the EBRD after the Bank had reviewed its policy on tax havens in December 2013 is an enlightening experience.

One is incorporated in Delaware; one in Russia, one got registered in Estonia only a year before being awarded the EBRD contract; one is domiciled in England but managed by a Dutch fund affiliated with Dubai-headquartered Abraaj Holdings; one is registered in the Netherlands and managed by a Dutch fund; one client’s domicile is unspecified.

In addition, the recently approved financing for the company Serinus Energy for oil and gas fields exploration in Tunisia has brought the EBRD under fire from tax justice campaigners because of the opacity of its ownership structure and unclear links with offshore subsidiaries.

For the time being, the EBRD and EIB still allow their clients to register in a different country from where they are economically active to avoid tax burden and optimise taxes.

Routing of financing through third jurisdictions deprives developing countries of scarce budget resources and leaves them openhanded when seeking accountability.

The EIB and EBRD should not leave the onus on the borrowing countries but advance the tax justice in their yards by reviewing their policies and standing firm and transparent on their implementation.

It is not enough that the EIB and the EBRD rely on weak standards set by the OECD. European public investment banks should become proactive and take concrete steps to address the structural weaknesses of their tax havens policies.

A report published last week by the European Commission shows that country-by-country disclosure requirements are not expected to have significant negative economic impact, in particular on competitiveness, investment, credit availability or the stability of the financial system, but rather some positive ones.

In addition the banks must ensure that all companies and financial institutions involved in their transactions disclose information regarding the beneficial ownership of any legal structure directly or indirectly related to the company, including trusts, foundations and bank accounts.

This means identifying and publicising the hidden ownership of companies and other legal structures which may facilitate tax evasion, corruption and related crimes.

It is the responsibility of public banks to revise their policies and to lead by example.

Klara Sikorova is a Bankwatch researcher. Xavier Sol is director of Counter Balance.