Diverting flows

Illicit financial flows are a bone of contention in the Federal Administration. The Foreign Affairs Committee of the National Council was not satisfied with the first version of a report and called for a supplementary report.
Political article
Illicit financial flows are conducive to social inequality and undermine sustainable development. Switzerland's centre-right political movements have long ignored this fact. Two new legal studies now reveal the need for comprehensive action.

The Washington-based think tank Global Financial Integrity (GFI) estimates that developing and emerging countries lose one trillion dollars every year through illicit financial flows. Under a broad definition now adopted even by the Swiss Federal Council, this covers not just funds from money laundering and corruption, in other words illicit financial flows, but also legitimate funds from tax evasion by natural persons and tax avoidance by legal entities. This is also very much about depriving countries of funds which they urgently need if they are to adequately finance education, health, social welfare and infrastructure. Funding the Sustainable Development Goals of the UN 2030 Agenda, which among other things has set the goal of eliminating poverty by 2030, would require some US$5000 to US$7000 billion each year. By way of comparison, the sum total of development cooperation funds worldwide amounts roughly to US$160 billion per year.

Switzerland's responsibility

As one of the world's largest financial centres with the highest number of corporate headquarters per capita, Switzerland plays a pre-eminent role in the fight against illicit financial flows, which are harmful to development. According to the Swiss Bankers Association, there were some CHF 3,000 billion in foreign assets under management in Switzerland in 2017. This represents a quarter of all offshore investments worldwide. Twenty-five per cent of the world's commodity trade takes place via Switzerland and, according to balance-of-payments figures from the Swiss National Bank (SNB), in 2016 Swiss companies held a CHF 1,008 billion stake in foreign companies as well as intra-group credits amounting to CHF 547 billion. These figures show that there is a major risk of corporations using their Swiss head offices for profit shifting from South to North and for the associated tax avoidance at the expense of the fiscal authorities in developing countries. International Monetary Fund estimates are that this is costing countries in the South as much as US$200 billion in terms of losses to their potential tax base.

If the world is to realize the goals of the 2030 Agenda over the next 12 years – to which Switzerland too is committed – it will require constructive and proactive cooperation by Switzerland's financial and fiscal policymakers. Over the past ten years Switzerland has indeed opened itself up to several international regulatory systems in this field and is now implementing international minimum standards in these fields, after protracted and staunch resistance. However, both the Federal Council and a parliamentary majority are still to provide most of the answers to the question of how Switzerland plans to exercise its specific responsibility as a global financial centre and an important corporate location in the attainment of the UN Sustainable Development Goals and the associated fight against illicit financial flows.

Postulates, reports, studies

Since 2013 several postulants in Parliament have demanded an examination of the topic of illicit financial flows or tax evasion at the expense of developing countries. The State Secretariat for International Finance (SIF) finally prepared a report on the matter in October 2016. It underscored the importance of combating illicit financial flows, for the benefit of sustainable development in the global South, and the way in which the relevant commitments by Switzerland in the OECD framework and in Switzerland's overall international cooperation work should be fulfilled. But it contained no concrete action recommendations. The Foreign Affairs Committee of the National Council (FAC-N) thereafter called for a supplementary report, which was tabled jointly by the Swiss Agency for Development and Cooperation (SDC) and the State Secretariat for the Economy (Seco) in March 2018. It focused on Switzerland's engagement «on the ground», that is to say in developing countries, which should form part of Seco technical development cooperation. It also focuses strongly on the fight against corruption and money laundering, and zeroes in on the transparency of capital flows in the commodity sector towards target countries. Both reports failed to provide an evaluation of Switzerland's fiscal and financial policy in Switzerland as regards policy coherence for sustainable development, and its negative impacts on countries in the South.

Two legal studies commissioned by SDC and recently published by René Matteotti, the Zürich-based Professor of Swiss, European and international tax law and a lawyer at the Zürich law firm Baker and McKenzie, and Sathi Meyer-Nandi, an expert in international tax law, now provide important elements for a further discussion of the global responsibility of the Swiss financial centre. In his study, Matteotti addresses the «inclusion of developing countries in Swiss policy for implementing AIA [Automatic Information Exchange, Editor's note] and BEPS measures [Base Erosion and Profit-Sharing, Editor's note]» and also explores «Challenges and action areas».[1] Matteotti makes it clear from the very start that «in the view of all international organizations dealing with development policy matters, the SDGs can only be attained if developing countries are better able to harness their tax base. Fiscal policy therefore assumes a key role in the realization of the SDGs». By comparison with the status quo in Swiss fiscal policy, Matteotti's recommendations, especially regarding the implementation of automatic information exchange (AIA) with developing countries, are remarkable. He recommends that Switzerland should launch what are called AIA pilot projects with individual developing countries that have so far not benefited under the AIA system with Switzerland: «For Switzerland, bilateral pilot projects with selected countries represent an interesting way of deepening its developmental engagement with individual States.» So far neither the SDC, Seco nor the State Secretariat for International Finance (SIF) has announced any concrete measures along these lines, even though other OECD countries have been running such projects with the corresponding partner countries for several years now. It is therefore to be hoped that the Zürich professor's recommendations will be well received in Federal Bern.

On the matter of transparency of capital flows, Sathi Meyer-Nandi goes a step further than Matteotti in her study entitled «Swiss Policy Coherence in International Taxation: Global Trends in AEOI [= AIA] and BEPS in Development Assistance and a Swiss Way Forward». She calls on Switzerland to consider public reporting for multinational corporations – what is termed Public Country-By-Country Reporting (pCbCR). With a view to strengthening local civil societies and expanding democratic checks and balances in tax policy, she writes: «Looking at the progressive development with regard to public CbCR in the EU, which will likely also effect Swiss headquartered companies with an EU presence, Switzerland should consider contemplating similar requirements. This would elevate Switzerland to being a progressive first adopter. From a development policy perspective, such a move would be highly appreciated.» A long-standing policy demand of the global Tax Justice Movement has now therefore made its way into the conceptual framework of international tax law. Here too it will be interesting to see how Federal Bern will react to this broadening of horizons in one of the politically most influential research communities.


[1] Integration der Entwicklungsländer in die schweizerische Politik zur Umsetzung des AIA und der BEPS-Massnahmen: Herausforderungen und Handlungsfelder, René Matteotti, Archiv für Schweizerisches Abgaberecht, ASA 86, 2017-2018