Understanding offshore activities and illicit financial flaws

In order to best combat offshore activities and illicit financial flaws, we must fully understand these offences and the operations behind them. Added to that, it is also crucial to comprehend the existing legal instruments that we have at our disposal to tackle them.

In 2012, the Parliamentary Assembly of the Council of Europe stated that its member states “lose billions every year due to tax avoidance, tax evasion and tax fraud that are facilitated by the offshore financial system including tax havens and secrecy jurisdictions. This massive tax cheating by wealthy individuals and enterprises not only penalises ordinary tax payers, public finances and social spending, but also threatens good governance, macroeconomic stability and social cohesion.” Indeed, it is widely agreed that tax havens play a very negative role by facilitating activities which are either illegal (such as tax evasion or money laundering) or formally legal (tax avoidance, aggressive tax planning), but economically and socially harmful.

VAT fraud is used by criminal organisations that take advantage of existing legislative gaps across the EU Member States and their competent supervisory authorities. VAT fraud also leads to funds leaving the EU in tax havens, thus creating a distorted fiscal environment that is particularly damaging to small and medium-sized enterprises.

Their impact is manifold and consists in:

· Facilitating hiding information from regulators, rating agencies, shareholders and the general public and thus escaping regulation and public scrutiny. The opacity and the secrecy they guarantee have enabled financial institutions to take risks that they would not be able to take otherwise;

· Making it possible for multinationals and wealthy individuals to avoid paying taxes, which leads to transferring the burden of taxation to smaller enterprises and the rest of society;

· Turning transfer pricing into “transfer mispricing” with the use of shell companies registered offshore;

· Capital leakage from onshore jurisdictions which may result in the latter lowering their own tax rates, which may be to the detriment of the societies concerned;

· Facilitating criminal activities, such as tax evasion and money laundering.

Due to some of the above elements, tax havens are widely perceived to have contributed to the financial crisis which started in 2007, as well as having a continuously negative impact on the EU budget by reducing the gross national income of the Member States.

The problem of tax havens cannot be dealt with in isolation from issues such as tax evasion, money laundering, fraud and grand corruption. These phenomena are inter-related, as illustrated by cases of corrupt foreign officials using complex corporate vehicles in tax havens to hide their identity and then successfully launder illicit gains by investing in the EU.

Offshore activities, illicit financial flows, VAT fraud and tax avoidance in the EU must be immediately and efficiently tackled. Here are some recommendations on how to best prevent and combat them.

1. Existing legislative gaps across the EU must be addressed. All Member States have criminalised money laundering, but there are differences between Member States both on the definition of money laundering and on the sanctions applied to such a crime. These differences create obstacles that hinder cross-border judicial and police cooperation on effectively tackling money laundering. Therefore, the Commission’s Proposal for a Directive on countering money laundering by criminal law is of great importance and it aims to remove the above — mentioned obstacles by setting up a common definition of money laundering across the EU.

2. Member States should improve the cross-border cooperation (with a potential focus on neighbouring countries) and the exchange of information, as well as should better coordinate their national strategies in order to efficiently close any gaps in tackling VAT fraud, tax avoidance and illicit financial flows. Additional steps are also needed in order to align national strategies with those of European agencies and bodies such as Europol, Eurojust and OLAF. In order to facilitate this collaboration, legal obstacles preventing information exchange should be removed by setting up national risk analysis tools might help improve the efficiency of such exchanges of information and the use of joint investigation teams where necessary in order to follow the money and value.

3. At the moment 98.9% of estimated criminal profits are not confiscated and remain at the disposal of criminals therefore confiscating assets generated by criminal activities is a very efficient tool to fight crime and terrorism, as it deprives criminals from the proceeds of their illegal activities and terrorists from organising an attack.

4. Regulation on the mutual recognition of freezing and confiscation orders will facilitate cross-border recovery of criminal assets and will lead to more efficient freezing and confiscation of funds from illicit origin in the EU without cumbersome formalities. It also provides additional funds to invest back into law enforcement activities or other crime prevention initiatives or it can be used for other public interest or social purposes.

5. The establishment of a single, strong and independent European Public Prosecutor’s Office (EEPO) that is able to investigate, prosecute and bring to court the perpetrators of criminal offences affecting the Union’s financial interests, should be swiftly tackled. A clear division of competencies between the EPPO and Member States investigating authorities must be duly implemented, in order to avoid a wrongful approach in tackling offences that might fall outside the competencies of any of these authorities.

If you have any views or questions, you can find me on Twitter @PavelEmilian or simply send me an email at emilian.pavel@europarl.europa.eu.