Argument
An expert's point of view on a current event.

A Small Victory in the War on Corruption

This week's G8 Summit brought some small but crucial successes in the effort to cut down on illicit financial flows.

Matt Cardy/Getty Images
Matt Cardy/Getty Images
Matt Cardy/Getty Images

The civil war in Syria overshadowed coverage of this week's G8 Summit in Northern Ireland. Yet that wasn't the only item on the world leaders' to-do list. Little noticed by reporters, the summit ended up producing some small but important advances in the global fight against corruption. British Prime Minister David Cameron pushed hard to convince his colleagues of the virtues of his transparency agenda, which he believes will foster global prosperity by curtailing tax evasion by multinational companies and the use of so-called "offshore centers" by businesses, corrupt officials, and organized crime. Although both the G8 and the G20 have toyed with an anti-corruption agenda for the last three years, the measures proposed by Cameron add up to a much more specific attack on the financial and legal mechanisms that facilitate corruption and tax evasion. Cameron received modest support from some countries, such as the United States and France, and somewhat more muted backing from Germany, Japan, and Italy. Russia resisted some of the measures -- which is important, since it's taking over the G8 Chair in July and is installed as Chair of the G20 for all of this year. But the outcome was sufficient to create a credible base for future action. 

The civil war in Syria overshadowed coverage of this week’s G8 Summit in Northern Ireland. Yet that wasn’t the only item on the world leaders’ to-do list. Little noticed by reporters, the summit ended up producing some small but important advances in the global fight against corruption. British Prime Minister David Cameron pushed hard to convince his colleagues of the virtues of his transparency agenda, which he believes will foster global prosperity by curtailing tax evasion by multinational companies and the use of so-called "offshore centers" by businesses, corrupt officials, and organized crime. Although both the G8 and the G20 have toyed with an anti-corruption agenda for the last three years, the measures proposed by Cameron add up to a much more specific attack on the financial and legal mechanisms that facilitate corruption and tax evasion. Cameron received modest support from some countries, such as the United States and France, and somewhat more muted backing from Germany, Japan, and Italy. Russia resisted some of the measures — which is important, since it’s taking over the G8 Chair in July and is installed as Chair of the G20 for all of this year. But the outcome was sufficient to create a credible base for future action. 

Cameron’s program concentrates on four measures: an end to secrecy surrounding the true ownership of companies; the introduction of a register that includes all relevant data on corporate ownership; automatic access across frontiers to all taxes paid in a specific jurisdiction; and a tax regime that would see all companies trading internationally pay their taxes wherever profits are generated.

This package is intended to help countries recover much of the rightful tax revenue that they’re currently losing, and which goes instead to the offshore centers  integral to tax avoidance and evasion schemes. Part of the problem is that the current definition of an offshore center is broad, and actually has as much to do with legal structures as with location. (Indeed, the City of London is frequently referred to as "offshore" in current analyses.)

Why now? Transparency International, Global Financial Integrity, the Tax Justice Network, and Global Witness have been calling for curbs on offshore centers for some years now. Mounting losses from tax evasion have recently given the issue a big boost in some G8 states, notably France, Britain, and the United States. In the United States, the fact that profits earned on an international basis can be "parked" in the Cayman Islands, where corporate tax is negligible, has cost the U.S. Treasury at least $500 billion. British and French companies have avoided paying comparable amounts. Anti-corruption measures have had a hard time making headway against offshore tax havens, which now enable the fruits of corruption to be held in multiple layers of shell companies and trusts that have proved very difficult for investigators to penetrate.

Thanks in part to intensive lobbying by NGOs such as ONE and analytical work by Professor Paul Collier of Oxford University, Cameron had recently become convinced that he should make the corruption issue central to Britain’s chairmanship of the G8. Despite the potential for resistance from the corporate sector, he is now arguing that measures aimed at solving these problems will be good for business and its reputation. Risking a confrontation with the quasi-independent chief ministers of the Crown dependencies of the Channel Islands and the Overseas Territories of the Caribbean, Cameron forced them to acquiesce to an agreement on the swapping of tax-related information at a meeting in Downing Street two days before the summit.

What do these measures really mean? First, beneficial ownership. Secrecy surrounding corporate ownership holds in many jurisdictions. In several U.S. states there is no requirement to identify shareholders in company registers. One measure proposed by this G8 meeting would end such secrecy, whatever its legal form, and reveal the real and beneficial owners of the share capital in question. This would be invaluable — both to countries defrauded by corruption and to tax authorities that may find themselves searching through what may be more than a hundred subsidiaries. At this summit Britain offered to reform its Companies Act to reflect this, but failed to persuade the others to make a binding commitment. Obama, apparently, merely promised to press Congress to consider the issue.

Second, the corporate register. In the version proposed by the British government, from now on registers will have to record all information relevant to corporate ownership, including the beneficial ownership data produced as a result of the reform mentioned above. The British position was that this register should ultimately be international and open to the public. Others, notably Russia and Canada, did not support this position. 

Third, reporting on global taxes paid. The reform proposed by Cameron calls for a regime under which corporate taxes by mining companies — in Tanzania, let’s say — would be accessible to the tax authorities in both offshore centers and the company’s home country. (Some pilot projects based on just such a mechanism are already running in four G8 countries. Canada, Japan, Russia, and the U.S. have yet to participate). Under the proposals, companies would also have to publish accounts of the taxes they’ve paid in all countries in which they have sales.

This mirrors the requirement under the U.S. Dodd-Frank Act for "project-by-project" reporting, a stipulation that was also adopted by the European Parliament earlier this month and which member states are all supposed to adopt within a two-year time frame. This innovation — pushed for heavily by civil society — would enable the public to track information from each investment made by extractive industries as opposed to recording the total value at national level. (The European Union has recently proposed that this requirement should now extend to multinationals outside the extractives sector.) Given that few businesses like the idea, and considering that Dodd-Frank is under fire from many quarters in the United States, the requirement is likely to remain contentious. The question of whether project-level reporting should be available to the public, and not only to revenue authorities, is even more so. The OECD is working on this issue, and is scheduled to launch its proposals to the G20, under the Russian chairmanship, in July. 

Missing from this G8 package is a clearer focus on what Raymond Baker of Global Financial Integrity (GFI) has christened "mispri
cing": transactions in which exports or imports are made at prices that facilitate the transfer of unjustified profits to offshore centers. GFI has shown that such transactions are responsible for more than $1.3 trillion escaping from Africa between 1980 and 2009. It’s imperative that this issue is addressed along with the others, and the G20 has a nominal commitment to doing so.

As I’ve noted before, 2013 always stood a good chance of being the year in which the international framework on corporate and banking secrecy, project-by-project reporting, and the status of offshore centers became recognized as critical to building a fairer world. By mid-year the members of the G8 have taken important, though unequal, steps to that end. The question now is whether President Vladimir Putin as Chair of both the G20 and the G8 will go the further miles that are so badly needed.

Laurence Cockcroft is a co-founder of Transparency International and author of "Global Corruption."

More from Foreign Policy

The USS Nimitz and Japan Maritime Self-Defense Force and South Korean Navy warships sail in formation during a joint naval exercise off the South Korean coast.
The USS Nimitz and Japan Maritime Self-Defense Force and South Korean Navy warships sail in formation during a joint naval exercise off the South Korean coast.

America Is a Heartbeat Away From a War It Could Lose

Global war is neither a theoretical contingency nor the fever dream of hawks and militarists.

A protester waves a Palestinian flag in front of the U.S. Capitol in Washington, during a demonstration calling for a ceasefire in Gaza. People sit and walk on the grass lawn in front of the protester and barricades.
A protester waves a Palestinian flag in front of the U.S. Capitol in Washington, during a demonstration calling for a ceasefire in Gaza. People sit and walk on the grass lawn in front of the protester and barricades.

The West’s Incoherent Critique of Israel’s Gaza Strategy

The reality of fighting Hamas in Gaza makes this war terrible one way or another.

Biden dressed in a dark blue suit walks with his head down past a row of alternating U.S. and Israeli flags.
Biden dressed in a dark blue suit walks with his head down past a row of alternating U.S. and Israeli flags.

Biden Owns the Israel-Palestine Conflict Now

In tying Washington to Israel’s war in Gaza, the U.S. president now shares responsibility for the broader conflict’s fate.

U.S. President Joe Biden is seen in profile as he greets Chinese President Xi Jinping with a handshake. Xi, a 70-year-old man in a dark blue suit, smiles as he takes the hand of Biden, an 80-year-old man who also wears a dark blue suit.
U.S. President Joe Biden is seen in profile as he greets Chinese President Xi Jinping with a handshake. Xi, a 70-year-old man in a dark blue suit, smiles as he takes the hand of Biden, an 80-year-old man who also wears a dark blue suit.

Taiwan’s Room to Maneuver Shrinks as Biden and Xi Meet

As the latest crisis in the straits wraps up, Taipei is on the back foot.