Why the new EIB tax haven policy will not be effective

Since the outbreak of the financial crisis in autumn 2008, the fight against tax havens has been a hot issue, and growing direct street level protests against major corporations and their deft use of these secrecy jurisdictions suggests that things are only getting hotter. Because in spite of commitments taken by different world leaders and the G-20 countries regarding tax havens, the policies put in place have proved to be ineffective. This looks likely to be the case for the recently reviewed tax haven policy of the European Investment Bank (EIB). Although the EIB’s policy goes further than those of other international financial institutions (IFIs), it will still do little to prevent European public money reaching tax havens.

The OECD club of rich countries has a dominant position in setting economic rules, on international tax in particular, and the widely hailed ‘moves’ that we have seen against tax havens since 2008 have come with an OECD stamp attached. But effectively, the OECD’s policy on tax havens reflects the interests of its members, many of which are tax havens in their own right. In April 2009 there was a G-20 statement that the ‘era of bank secrecy is over’, and this mandated the OECD to start cracking down on it, accompanied by a lot of media fanfare.

Yet, as Nicholas Shaxson of the Tax Justice Network, and author of the recently published bestseller “Treasure Islands: Tax havens and the men who stole the world”, points out: “If you actually look at the specifics of what the OECD has done since then it looks like a whitewash. There is no other word for it. There has not been the change that is required.”

It is within this context that the EIB has recently reviewed its policy on non-cooperative jurisdictions, more commonly known as tax havens or secrecy jurisdictions. Although the EIB is one of the few IFIs to have at least adopted a comprehensive public policy on tax havens, will this allow it to curb illicit flows and the abuse of tax havens by European corporations that benefit from EIB public loan support?

Betraying a highly ideological approach, and loaded as always in favour of corporate rights over public and taxpayer interest, the EIB has left several loopholes in its new policy. Apart from the reference to the toothless international lists of countries regarded as tax havens (that OECD problem noted above), the main problem lies in the wide number of exemptions granted to European business operating via tax havens. In particular the bank would still accept the usual argumentation of corporations around the need to operate via tax havens because of the inadequate legal framework and investment climate in many developing countries where projects are implemented, and consequently about the need to avoid burdensome double taxation.

This is clearly an approach biased in favour of investors’ rights which fails to consider that some provisions less friendly to investors could be highly suitable for local governments and populations, and their development strategies. However the EIB policy goes beyond these arguments usually used by corporations and accepted by public financiers. The EIB will permit corporations operating in a specific country to register in a different country which is a tax haven or secrecy jurisdiction just because there might be “other tax burdens that make the structure uneconomical”. Rather than a comprehensive tax policy this in fact reads like a bad joke!

Of even more concern is that the EIB policy does not exclude the possibility to support a financial intermediary incorporated in a tax haven or secrecy jurisdiction even if this bank or private financial institution , such as a private equity vehicle, operates in sectors related to the local economy of that country. Yet how can the EIB ever assess what is what if money is fungible and the same intermediary can engage in proprietary trading or shift the money elsewhere in a highly liberalised global capital and financial market?

The widespread use by the EIB of financial intermediaries and private equity funds poses a major threat to accountability at the bank, particularly in its lending outside of the EU where these entities are the destination for up to almost 40 per cent of its entire portfolio outside of the EU. As documented by recent Counter Balance research, all 12 private equity funds in which the EIB invested in Sub Saharan Africa between 2007 and 2009 were registered in well-known tax havens. Two of these indeed were in Luxembourg where the EIB itelf is based. As Nicholas Shaxson notes: “Luxembourg is a great dark horse of the offshore world – it is absolutely massive.”

The development implications of tax havens, of course, are hugely troubling. At the beginning of this year the Washington-based organisation Global Financial Integrity produced some startling new research. They asked a former IMF senior economist to crunch the numbers on illicit financial flows out of developing countries, and their latest analysis is that in 2008 USD 1.2 trillion – trillion, not billion – leaked as illicit flows out of developing countries. If we compare the USD 100+ billion of foreign aid going to developing countries, then this translates to one dollar going in as aid and ten dollars going out under the table. This is the bigger picture that the likes of the EIB and other IFIs are, unfortunately, only adding to with their lax policies.

What the EIB should be doing instead is simply limiting its partners to entities – whether private banks or equity funds – that are incorporated in the same countries as the ultimate beneficiaries, and then imposing fully transparent and stringent standards on them for the projects they support. While this principle should make perfect sense after the financial crisis, it is not being reflected in today’s practices between the EIB and the “trusted and experienced” financial partners it chooses. Moreover, information about the final beneficiaries is still so badly lacking that it makes it impossible to assess the environmental and development impacts of these projects, never mind the potential for tax abuse.

Since the European Parliament has recently called for significant improvements in the new EIB policy on non-cooperative jurisdictons through votes on both the 2009 EIB Annual Report and, more importantly, the new external lending mandate of the bank, MEPs have still an important, direct role in preventing public money ending up in tax havens by convincing EU member states to agree to these requests.

It’s time to ensure that European public money becomes tax haven free by insisting that the EIB adopts stronger policies. The only way to do this is by obliging the EIB to disclose information about its financial partners and by ensuring that it uses local intermediaries with a verifiable development mission. These intermediaries should of course operate in a transparent manner, implementing the highest environmental, social and human rights standards. Hopefully this will soon be reflected in the final revised external lending mandate of the EU’s bank.