Global Policy Forum

No Qualms Funding Tax Haven-Tainted Banks


David Cronin

December 11, 2009


Although the links between tax evasion and global poverty are officially recognised, the European Investment Bank, the lending arm of the European Union (EU), has no qualms financing banks known to stash away money in tax havens.


Throughout 2009 statements issued by the EU's most powerful bodies acknowledged a scourge estimated to reduce by 160 billion dollars a year the amount of revenue which poor countries can collect.

While these statements suggest that the EU is doing everything it can to crackdown on the scourge, the EIB has, since 2004, provided loans worth more than 5.6 billion euros (8.2 billion US dollars) to the largest users of tax havens from Britain, France and the Netherlands, according to research conducted by the European Network on Debt and Development (Eurodad), an alliance of anti-poverty groups.

Recipients of EIB loans include BNP Paribas and ING, the French and Dutch banks with the highest number of branches and affiliates in tax havens, and Barclays, which hatched a plan in 2007 to generate profits by availing of tax evasion schemes in the Cayman Islands and Luxembourg.

Furthermore, the EIB has been heavily criticised for directing much of the loans it gives in Africa to so-called alternative investment funds which take advantage of moves towards greater trade liberalisation on the continent.

Most of the EIB's assistance to Africa's financial sector over the past five years has gone to just one firm, European Financing Partners (EFP), which received 196 million euros (288.8 million dollars) from the Luxembourg bank over that period.

EFP regularly works with investors like Britain's Commonwealth Development Corporation which concentrate their African activities in Mauritius - widely considered to be the continent's principal tax haven.

Nuria Molina, the Eurodad director, has suggested that EIB's loans contradict the EU's stated commitment to ensure that its development aid activities are not undermined by work undertaken in pursuit of other policies. In 2005, the EU undertook to ensure that there is "coherence" between its different policy activities so that they contribute to poverty reduction.

But Molina told a Brussels conference on Dec. 9 that progress towards realising this objective has been "piecemeal".

An EIB source, speaking on condition of anonymity, said that the loans it had given to French, British and Dutch banks were part of an initiative to support small and medium-sized enterprises (SMEs) in Europe. "We have checked where this money went and it definitely went to SMEs within the EU," the source added.

During 2010, the EU's governments are set to discuss a number of proposals relating to tax evasion and the secretive culture in the financial services sector that has allowed it to flourish.

Among the urgent steps required, said Molina, is modifications in the accounting standards used in Europe so that it becomes obligatory for multinational companies to state precisely how much profit they make and how much tax they pay in every country where they operate.

Molina also noted that 25 out of the world's 70 or so tax havens are located in Europe or its dependent territories. These include the City of London, the Cayman Islands, Luxembourg, Guernsey and Jersey.

Rebecca Dottey from the Ghanaian office of Christian Aid highlighted the problem of trade mispricing, under which firms deliberately underreport their profits so that they can pay as little tax as possible. Her organisation estimates that Ghana's loss in taxes due to mispricing for trade with the EU alone rose from 13 million euros in 2005 to 43 million euros (63.3 million dollars) in 2007.

This is just one way in which the west African state has been taking in far less tax than it ought to.

Firms operating in Ghana's so-called export processing zones enjoy a tax "holiday" of ten years, under which they are exempt from both direct and indirect taxes including income tax and valued-added tax. The total revenue loss resulting from such exemptions comes to 75 million dollars annually, or three times the amount spent on a programme for giving meals to children during school hours.

Eva Joly, a French member of the European Parliament, described trade mispricing as "criminal" and said that ending this practice should be a top priority for anti-poverty campaigners.

Odd-Helge Fjeldstad, a professor with the Christian Michelsen Institute in Norway, argues that tax is inseparable from human rights. "Citizens have not only an obligation to pay tax but have a right to pay tax," he said. "The right to pay tax gives them the right to hold their government accountable. Some aid-dependent countries are more accountable to foreign governments than to their own citizens."

John Lungu, a professor at the Copperbelt University in Zambia, said that his country's copper mines had been nationalised in the 1970s but were privatised between 1996 and 2000 under pressure from the World Bank and the International Monetary Fund.

Once privatisation occurred foreign mining companies negotiated secret agreements with the Zambian authorities, under which they were granted exemptions from many taxes and were not required to provide the same social services for their workers that had previously been in place.

"The mines argued they were not in the business of providing social services, they were in the business of making profits," Lungu added. "So the government provides social services and gets next to nothing from copper."

Meanwhile, the outgoing European commissioner for development aid Karel de Gucht has recognised that a strategy is needed to ensure that poor countries can finance themselves through raising sufficient taxation resources, rather than relying indefinitely on aid.

De Gucht lamented how in many parts of Africa aid makes up a higher proportion of national income than taxation.

Citing the example of Mozambique, where tax comprises 12 percent of gross domestic product compared to 15 percent for foreign aid, he said: "One may wonder how long this situation is sustainable. It will be a challenge to public opinion in Europe if we can't point to a time - however remote - when this aid may be stopped."



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