Ethics and governance in the European Financial centers

€200-250 billion that should reach national budgets is thought to be lost to fiscal fraud. VAT fraud alone accounts for some €40 billion a year – ten per cent of the total receipts. Parliament says it is time for Member States to get serious in tackling this problem and is calling for reform to the VAT system and the Savings Tax Directive.

A report drawn up by Sharon BOWLES (ALDE, UK) and adopted yesterday with 391 votes in favour to 93 against with 178 abstentions says some Member States have shown a “blockading attitude” in the last ten years when it comes to tackling tax fraud.

VAT system based on taxation in country of origin?

It says that in the long run a VAT system based on taxation in the country of origin of goods would be a solution to VAT fraud in cross-border supplies, but this would require a clearing system for sharing revenue. The best solution, say MEPs, would be to impose a 15 per cent tax on intra-community supplies (they are presently exempt with tax charged when they are sold on in the destination country). A decentralised clearing house system for rebalancing payments between Member Sates (because of the differential rates of VAT) could be rapidly developed.

Caution over the reverse charge mechanism

Another much discussed proposal to tackle missing-trader fraud in the VAT system (where the company selling goods or services, which should pay VAT receipts to the tax system, is a sham organisation which vanishes) is to make the customer account for the tax instead of the supplier, except where the customer is a private individual. This “reverse-charge” mechanism would indeed solve this missing-trader problem, MEPs note, but they are concerned it might create new opportunities for fraud elsewhere as well as a heavy administrative burden for businesses and are cautious about introducing it on a wide scale.

The report also calls for more cooperation between Member States’ tax authorities in tacking fraud.

Remove loopholes in Savings Tax Directive; eliminate tax havens

Turning to taxation of savings and other financial income, MEPs want to see action against tax avoidance, a widening of the scope of the Savings Tax Directive and action through the OECD to tackle uncooperative tax havens. The EU should keep the elimination of tax havens at worldwide level on the agenda.

Parliament regrets that Member States are hindering reform of the Savings Tax Directive and says it needs to be updated to remove loopholes and deficiencies. They ask the Commission to investigate some widening of its scope regarding legal entities and sources of financial revenue.


Abstract about tax evasion

Tax evasion

33. Regrets that the Member States are hindering reform of the Directive 2003/48/EC by their continual new objections and delaying tactics and urges the Commission to put forward its proposals as soon as possible in spite of the signs of resistance;

34. Points out that reform of Directive 2003/48/EC must tackle its various loopholes and deficiencies, as they prevent discovery of tax evasion and fiscal fraud operations;

35. Calls on the Commission, in the context of reform of Directive 2003/48/EC, to examine options for reform, including investigating some widening of the scope of the Directive with regard to types of legal entity and sources of financial revenue;

36. Urges the European Union to keep the elimination of tax havens at a worldwide level on the agenda, having regard to their detrimental effects on the tax revenue of individual Member States; invites the Council and the Commission to use the leverage of EU trade power when negotiating trade and cooperation agreements with the governments of tax havens, in order to persuade them to eliminate tax provisions and practices that favour tax evasion and fraud; welcomes, as a first step, the recommendations set out in the Council conclusions following its meeting on 14 May 2008 to include in trade agreements a clause on good governance in tax matters; asks the Commission to put forward such a clause with immediate effect in its negotiations of future trade agreements;


The critical question is what is the credibility of organisations like the OECD or the FATF to actually sanction jurisdiction that have their growth based on clear (to comply and not be registered as uncooperative country) but lax (in Luxembourg one says "pragmatic") regulation to attract people.

Unfortunately or fortunately (it depends on the point of view) despite the culture of confidentiality, the Corporate Registration in Luxembourg is full of "red flags" of dubious situations that may be the marker of fraud:

Example 1 : when same individuals create several companies in the sector of real estate with exactly the same object (wording copied), this does not make sense.
Example 2 : when a statutory auditor ("commissaire" in the law) of a registered company in the sector of real estate comes from a country like the BVI or the Seychelles or other exotic jurisdiction there is a risk all the more than is doe not make sense because of travelling expenses.
Example 3 : many companies in Luxembourg whatever sector are only an address. Where does the business come from as there is no actual office? And no teams anyway? And that are not in the professional phonebook anyway?
And so on.

Should one of these companies be involved in a fraud, the conséquence would be twofold : for the country : "once more Luxembourg" with a damage for the investment fund industry; and for registered professionals (registered auditors or chartered accountants) as nobody makes the difference between "auditors" and these local institutions do not control the statutory auditor that is not committed to the sames requirements and control.


Source : European parliament

Coordinated strategy to improve the fight against fiscal fraud
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Deputy Attorney General Mark R. Filip announced recently that the US Department of Justice is revising its corporate charging guidelines for federal prosecutors throughout the country.
The new guidance revises the Department’s Principles of Federal Prosecution of Business Organizations, which govern how all federal prosecutors investigate, charge, and prosecute corporate crimes. The new guidelines address issues that have been of great interest to prosecutors and corporations alike, particularly in the area of cooperation credit.

The approach is worth reading, especially page 18 of the Guidelines :
In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation's response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated.
Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct. Employee discipline is a difficult task for many corporations because of the human element involved and sometimes because of the seniority of the employees concerned. Although corporations need to be fair to their employees, they must also be committed, at all levels of the corporation, to the highest standards of legal and ethical behavior.
Effective internal discipline can be a powerful deterrent against improper behavior by a corporation's employees. Prosecutors should be satisfied that the corporation's focus is on the integrity and credibility of its remedial and disciplinary measures rather than on the protection of the wrongdoers.

How long can the USA go on relying on jurisdictions that do not share the same approach by notably protecting knowingly wrongdoers whatever level despite official and public evidence?



Press release

Guidelines

In the framework of a speech before French ambassadors, Président Sarkosy underlined the responsability of tax havens in the financial crisis.
"La crise financière a débuté avec le scandale des « subprimes », les fautes graves –mais toujours impunies- des agences de notation et, d’une façon générale, les excès d’un capitalisme financier qui a connu de sérieuses dérives : dissimulation des risques, sophistication incontrôlée des instruments financiers, lacunes de la régulation et persistance de paradis fiscaux captant une partie de l’épargne mondiale qui serait plus justement employée à financer les investissements et la croissance. Le coût de ces errements pour le système bancaire international sera à terme, selon le FMI, de l’ordre de 1.000 milliards de dollars. Mais le coût pour l’économie réelle sera bien plus élevé encore." he said.
For English-speaking readers, this means : "the financial crisis began with the "subprime" scandal, serious -but still unpunished- mistakes by rating agencies and, in a general way, the excesses of financial capitalism which has experienced serious abuses: concealment of risks, uncontrolled sophistication of financial instruments, gaps in regulation and persistence of tax havens capturing a part of global savings that would be more justly employed financing investment and growth. The cost of such misguided ways for the international banking system will be later, according to the IMF, even much higher".

As co prince of the Principality of Andorra, President Sarkozy should act to correct dysfunctions as Andorra does not respect international recs to fight money laundering and the financing of terrorism.