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Recharacterizing Corruption to Encompass Illicit Financial Flows

  • James Thuo Gathii (a1)

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Anticorruption treaties generally define corruption as the abuse of entrusted power for private gain. As such, global anticorruption efforts primarily target transactions involving the bribery of governmental officials. The definition excludes transactions in which multinational corporations deprive developing states of revenue by failing to pay taxes and other monies due. Yet such transactions are equally injurious to the development agenda of poor states. This essay argues that corruption should be redefined to encompass illicit financial flows, a term used by a growing network of tax and economic justice groups to refer to money that is “illegally earned, transferred or used.” Transactions such as trade misinvoicing, base-erosion, and abusive transfer pricing to illegally earn additional income undermine the ability of poor states to raise revenue for development. Expanding the definition of corruption would create a more realistic picture of the role of corporate actors and their involvement in corrupt and illicit dealings. It would also bring equivalency to the treatment of corporate actors and public officials. By focusing on illicit dealings involving corporate actors, this essay challenges the partial definition of corruption adopted in the heyday of the Washington Consensus, when skepticism about the role of the state, rather than of private actors, prevailed.

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Copyright

This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.

References

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1 Sol Picciotto, Illicit Financial Flows and the Tax Haven and Offshore Secrecy System, Tax Just. Network (Feb. 8, 2018). For a contrasting view on the converging definitions of illicit financial flows, see Maya Forstater, Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different?, Ctr. for Global Dev. (Mar. 2018).

2 African Union/Economic Commission on Africa Conference of Ministers of Finance, Planning and Economic Development, Track it! Stop it! Get it! Report of the High Level Panel on Illicit Financial Flows from Africa (Addis Ababa, Jan. 2015) [hereinafter Illicit Financial Flows Report]. This definition and close variations of it have been adopted by various institutions in discussing illicit flows of finances and their effects. For purposes of my argument, I am not concerned with proceeds of crime and hiding wealth from tax agencies, acts that are often included in the definition of illicit financial flows.

3 UN Convention Against Corruption art. 1(c), opened for signature Dec. 9, 2003, 2349 UNTS 41 (entered into force Dec. 14, 2005) [hereinafter UNCAC].

4 On the inadequacy of corruption treaties to address internal accounting controls, auditing, and follow-up in the private sector, see Peter Schroth, Fostering Informed and Responsible Management: The Failure of the Corruption Treaties' Provisions on Accounting and Controls, 17 Res. Int'l Bus. & Fin. 313 (2003).

5 See, e.g., Jed S. Rakoff, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, N.Y. Rev. of Books, Jan. 9, 2014. See also Peter Schroth, The United Nations Convention Against Doing Anything Serious About Corruption, 12 J. Legal Stud. Bus. 1 (2005).

7 The World Bank released in 2018 its first annual report on suspension and disbarment of firms involved in corruption and fraud in the projects it finances. See World Bank Group, World Bank Group Sanctions System Annual Report (2018).

8 From this premise, the World Bank argued that “a crisis of governance underlies the litany of Africa's development problems.” World Bank Group, Sub-Saharan Africa-From Crisis to Sustainable Growth: A Long-Term Perspective Study 60 (Nov. 1989). See also Int'l Monetary Fund, Good Governance: The IMF's Role (Aug. 1997).

9 Among these reforms were deregulation, privatization, and liberalization of the economy with a view to facilitating the competitive allocation of resources in the marketplace, rather than relying on an “open ended” exercise of official discretion. See James Gathii, Empowering the Weak while Protecting the Powerful: A Critique of Good Governance Proposals (1999) (unpublished S.J.D. thesis, Harvard Law School) (on file with author).

11 Illicit Financial Flows Report, supra note 2; Allison Christians, Tax Activists and the Global Movement for Development Through Transparency, in Tax, Law and Development 288 (Yariv Brauner & Miranda Stewart eds., 2013). Among the individuals and groups involved are Bono, Global Witness, George Soros, Mo Ibrahim, Oxfam, and Transparency International. Id. at 290–91.

14 Joseph E. Stiglitz, Globalization and Its Discontents (2003).

15 With regard to tax matters, OECD Model Tax Treaties contain structural disadvantages to developing countries because they favor the collection of taxes in the country of a tax-payer's residence rather than in the country in which the company earns the income that is subject to taxation.

16 The Panama Papers: Exposing the Rogue Offshore Finance Industry, Int'l Consortium Investigative Journalists (2016).

17 Christians, supra note 11, at 293.

19 Christians, supra note 11, at 289.

20 Id. at 306.

21 United Nations, Sustainable Development Goal 16.4 (2016) (providing that one goal is to “by 2030 significantly reduce illicit financial and arms flows, strengthen recovery and return of stolen assets, and combat all forms of organized crime”).

23 Christians, supra note 11, at 312–13.

24 Marshall J. Langer, Harmful Tax Competition: Who Are the Real Tax Havens?, 21 Tax Notes Int'l 2831, 2831 (2000).

25 See, e.g., Illicit Financial Flows Report, supra note 2 (noting that Africa loses more than US$50 billion in such flows annually).

26 Omar Mohammed et al., Tanzanian Government Accuses Acacia of Mining Gold Illegally, Guardian (June 12, 2017).

28 For an example of how one developing country has adjusted, see Attiya Waris, How Kenya Has Implemented and Adjusted to the Changes in International Transfer Pricing Regulations: 1920–2016 (Int'l Ctr. for Tax & Dev. Working Paper No. 69, 2017).

29 Masimba Tafirenyika, Illicit Financial Flows from Africa: Track It, Stop It, Get It, Afr. Renewal (Dec. 2013). According to a joint report by the African Development Bank and Global Finance Integrity entitled Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980–2009, “cumulative illicit outflows from the continent over the 30-year period (1980–2009) range from US$1.2 trillion to US$1.4 trillion.” Dev Kar, Ilicit Financial Flows from Africa: Causes, Consequences, and Curtailment, Geo. J. Int'l Affairs (Dec. 14, 2015).

30 Forstater, supra note 1.

32 Miranda Stewart, Global Tax Information Networks: Legitimacy in a Global Administrative State, in Tax, Law and Development, supra note 11.

33 A multinational corporation in a country with a tax-sparing treaty could use its foreign corporate subsidiary to achieve this outcome.

34 See Deborarh Toaze, Tax Sparing: Good Intentions, Unintended Results, 49 Can. Tax J. 908 (2001).

Recharacterizing Corruption to Encompass Illicit Financial Flows

  • James Thuo Gathii (a1)

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