Illicit Financial Flows: a thorough definition







Tax Justice Network (TJN) senior advisor Sol Picciotto just published this blog contribution on TJN’s website titled “Illicit financial flows (IFFs) and the tax haven and offshore secrecy system”.

Sol Picciotto is also coordinator of the BEPS Monitoring Group, Emeritus Professor of Law at Lancaster University and Senior Fellow of the International Centre for Tax and Development on defining illicit financial flows.

As GATJ’s chair of Coordination Committee Dereje Alemayehu notes, “this is a highly valuable contribution as it extends our mainly moral arguments against tax avoidance into legal ones”.

“The importance of reducing and eventually eliminating IFFs, PIcciotto introduces, has now been recognised in the Addis Ababa Action Agenda of the United Nations, as key to ensuring good governance, as well as contributing to the domestic resource mobilisation necessary for achieving the Sustainable Development Goals, adopted in 2015. However, there is now some debate about what is covered by this term.

There are several components of illicit financial flows, but all of them make use of the same facilities provided by the tax haven and offshore secrecy system. They include:

  • the concealment of the proceeds of crime or corruption;
  • tax evasion;
  • tax avoidance and tax planning;
  • hiding wealth from public agencies, business associates, or family members.

Offshore is a murky world which facilitates a range of criminal, illegal, illegitimate and undesirable practices, all covered by the broad term illicit. This murkiness feeds from several elements:

  • opacity due to secrecy rules and weak arrangements for international sharing of information;
  • complexity of the structures involving chains of entities in different jurisdictions;
  • difficulties and divergences in interpreting abstract legal concepts;
  • the imbalance of resources between avoiders and enforcers of the rules;
  • weak political support for vigorous enforcement against the wealthy and powerful.

The activities taking advantage of these features certainly cover a very wide spectrum. They range from facilitating serious crime to behaviour which is unethical or undesirable, such as concealing assets from family members or business associates. It is sometimes said that many of these activities are ‘perfectly legal’, and hence legitimate.

However, if they are legal, there is no need to carry them out offshore. Offshore devices or structures all involve using the laws or facilities of another country to obtain an advantage not possible under the law that should apply. Private persons’ bank accounts, financial information and other aspects of their personal affairs are generally protected in all countries by laws on confidentiality and privacy, which can only be overridden in specified circumstances, when there is a public interest. There is a network of tax treaties aimed at preventing double taxation, and in any case countries wishing to attract investments generally provide inducements, not excess taxation. Resorting to an offshore arrangement always involves trying to get around an inconvenient law – dodging the law”.

The 5-pager then divides into 4 sections :

  • Evasion, avoidance and illicit practices
  • The grey areas of international tax
  • Contested Concepts
  • Concerted counter-measures

You can read the whole publication here and also listen to Sol Picciotto’s Interview on Tax Justice Network’s website.

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