SEC Reorganizes to Enhance Performance; GFI Applauds, Offers Suggestions

Global Financial Integrity applauds Mr. Khuzami’s plan to reorganize the enforcement arm of the SEC and maximize the agencies powers in an effort to enforce laws already on the books that require corporations to be accountable for their illegal actions on the national and international level. The SEC has not provided additional detail on the five specialized investigative groups, but we hope that trade mispricing is included in the scope of the investigative group responsible for market abuses by big traders.

Approximately 60% of global trade is now conducted within subsidiaries of the same multi-national corporation – as opposed to between different corporations. The OECD has stated that since intra-group transactions are not subject to the same market forces as transactions between unrelated parties operating on the free market, there is a huge potential for profit shifting via under or over pricing of intra-group transactions. This profit shifting deprives developing countries host to subsidiaries of US companies from the benefits of such investment by preventing them from appropriately taxing those profits and increasing the local tax revenues that should be used as capital for local infrastructure, health programs, etc.

The SEC has an opportunity to enforce US laws, prevent profits of multinationals from languishing in tax havens, and support the developing world by including transfer pricing within the remit of the investigative group responsible for market abuse by big traders. We hope they seize this opportunity.

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Has Travers Endorsed Automatic Exchange of Tax Information?

Our friend Anthony Travers, chairman of the Cayman Islands Financial Services Association, wrote an opinion piece for the conservative Washington Times yesterday in which he claims that “it is unfair to mischaracterize Cayman as a ‘tax haven’ – a phrase that implies secrecy and wrongdoing – as President Obama and others have done recently.” Now language like this is to be expected from Mr. Travers – he has been making similar statements for months. However the surprising part of the article is what follows:

To avoid any further confusion on this issue, we agree the United States should take the opportunity to make its agreement with Cayman even more transparent by making it proactive. What would that mean? Reporting to the U.S. government the opening of a bank account in Cayman the day it is opened – without waiting to be asked by the U.S. authorities. Proactive reporting would assist U.S. policymakers in understanding that no additional U.S. tax revenue is to be derived from the Cayman Islands, because it is not, in fact, a locale used by U.S. citizens to evade tax.

Mr. Travers is correct in that as a zero tax state they provide a mechanism for tax avoidance which is perfectly legal, although that does not mean that proceeds of illegal acts and corruption are not parked in zero tax jurisdictions where it is much more difficult or impossible to identify them. He appropriately identifies the fact that it is up to the US to change its domestic laws to minimize tax avoidance, but does not address the more nefarious uses of Cayman accounts.

Mr. Travers has stated, however, that the tax avoidance schemes put in place by companies have benefitted the US financial institutions and markets to the tune of trillions of dollars. The issue, however, is to what degree that benefits the US as a country and whether these schemes in fact still prevent the US treasury/taxpayer from benefitting from the profits these companies are making instead of just benefiting the people who are employed by the financial institutions that he refers to. There needs to be a balance between the effects of such arrangements on the financial markets and the responsibility of US companies to contribute to the general welfare of the country through taxation. This is a domestic issue around which dialogue has now begun under the Obama administration.

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