The need to prevent the damaging drainage from developing country economies represented by illicit financial flows has been gaining international attention. In a recent report (“the Report”) the UN Independent Expert on Foreign Debt and Human Rights, Mr. Juan Pablo Bohoslavsky (“the Expert”), added his voice by developing the implications human rights law and principles have for action on this front.
In a broader sense, illicit financial flows encompass not just those emerging from obviously illicit activities (e.g. human or illegal arms trade). All kinds of artificial arrangements that have been put in place for the essential purpose of circumventing the law or its spirit, including certain legal “tax-optimization” schemes, making use of legal loopholes that allow for example transnational corporations to shift around profits to zero or low corporate tax jurisdictions, without undertaking any real economic activities in those jurisdictions, fall under this category. Thus, this definition encompasses activities that, like many tax avoidance schemes, are designed to comply with existing laws and regulations or at least, go unchallenged in situations where tax authorities have scarce capacity and information.
The Expert acknowledged the difficulties in estimating the amount of illicit financial flows. However, available estimates exist and the report referred to them. For instance, an estimate by Global Financial Integrity found that developing countries lost USD 991.2 billion in illicit financial outflows in 2012, a further increase of 1.8 per cent compared to 2011. “There is consensus that they exceed aid flows and investment in volume and that the scale of the problem warrants international policy attention,“ he argued.
Assessing illicit financial flows from a human rights perspective, the report focused on the diversion of resources they represent and how they reduce the “maximum available resources” that countries of origin could devote to meeting economic, social and cultural rights obligations.
The impacts are not restricted to economic, social and cultural rights, though. “Illicit financial outflows and their non-repatriation undermine civil and political rights and the rule of law in countries of origin and destination,” the report argued. This is because of the role illicit unregulated money can play in funding of political parties or election campaigns in contravention of domestic regulations, risking State capture and the subversion of the right to participation in public affairs.
Avoiding illicit financial flows is also a responsibility of business enterprises. In this regard, the UN Guiding Principle on Business and Human Rights are relevant. According to the Report, “Business enterprises that contribute through transfer mispricing, tax evasion or corruption to significant illicit financial outflows cause adverse human rights impacts by undermining the abilities of States to progressively achieve the full realization of economic, social and cultural rights.” Publishing their sales, profits and taxes country-by-country – rather than in the aggregate –is among the things that companies could do to demonstrate responsible behavior. Banks also play a facilitating role in illicit financial flows, by not exercising due diligence with their customers, and have a responsibility to avoid them.
A human rights aspect the Report addresses is that of the reprisals or human rights violations that journalists or whistle-blowers and anti-corruption activists can suffer in connection with illicit financial flows. The document cited reports by the Review Group of the United Nations Convention against Corruption, Transparency International and the Council of Europe to justify the assertion that measures for the protection of these crucial actors are highly uneven and insufficient by international standards.
Finally, the Report drew attention to the use of the funds that are successfully repatriated, noting that “lack of transparency and participation in the allocation decisions can end up in the use of the recovered assets to ends different from those sought by human rights principles.”
The Report then named a series of ongoing actions to address this problem in fora such as the Group of 8, the Organization for Economic Cooperation and Development and the African Union. It also made recommendations for how to take action in the context of the post-2015 development agenda. Among these, outstanding for its ambition is the call to include in the measurement of progress three transparency targets aimed at reducing to zero: (i) The number of legal persons and arrangements for which beneficial ownership information is not publicly available; (ii) The number of cross-border trade and investment relationships between jurisdictions where there is no automatic exchange of tax information; and (iii) The number of transnational business corporations that do not report publicly on a country-by-country basis.
An important debate is taking place on the indicators to measure progress on the 169 targets that, together with the Sustainable Development Goals, UN Member States are expected to endorse in September. The Expert’s recommendations on indicators to adequately track progress on the targets that refer to illicit financial flows are undoubtedly a valuable input Member States should listen to if they are interested in aligning the emerging set of goals with the international human rights framework.