Monday

22nd Jan 2018

EIB loans flow through tax havens, say NGOs

Despite harsh words and threats of tough sanctions against tax dodgers, EU-funded development projects in the third world are run by companies registered in tax havens. This costs developing countries millions in much needed tax revenues and leads to capital flight and lack of transparency, a study by bank-monitoring NGOs says.

The study, "Flying in the face of development- How European Investment Bank loans enable tax havens", released on Wednesday (15 July), says projects and beneficiaries funded by the European Investment Bank (EIB), the EU's house bank, involve tax havens, and multinational companies that use them for tax purposes.

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According to the group "Counter Balance", composed of seven European NGOs that track the EIB's activities, the bank is particularly unconvincing when handing out so-called global loans – loans provided on trust to Europe's biggest banks, the largest users of tax havens.

"The EIB does not have much overview of what they [the banks] then do with the money, and several of the banks have earlier been in the spotlight for conducting business through tax havens," Marta Ruiz, a policy officer from the European Network for Debt and Development (EURODAD) and author of the study, told this website.

The current EIB monitoring system suggests that banks or companies that receive loans report against themselves if they detect any signs of shady business, the report states.

Furthermore, the EIB's sanctions against companies caught evading tax are weak. There is no naming and shaming of companies excluded from finance, and no debarment from tendering for other EIB projects unless sentenced with a criminal conviction.

EU development goals?

The EIB is the world's largest public international financial institution, but also the least known and, according to critics, least transparent of the EU institutions. One of the things it does is implement the EU's development cooperation strategies.

The EIB will, for example, allocate €2 billion to support Africa in the context of the financial crisis over the next three years, mainly for investments in infrastructure, energy projects and the financial sector.

Policy analyst Marta Ruiz explained that often the beneficiary of a project funded by the EIB in Africa is a multinational corporation that sets up a subsidiary in a tax haven like Mauritius.

The company operates in a third country with which Mauritius has a tax agreement, stating that Mauritian companies pay their taxes ‘at home', and not in the country where the project is based.

The companies then pay no taxes but only a nominal fee to Mauritius for the ‘home address', and extract between 20 and 30 percent of return on investment.

"This is like giving development countries money with one hand, and then taking it away with the other," Ms Ruiz said

According to charity War on Want, tax avoidance and capital flight alone cost Africa five times what it receives in aid in each year, money that would have enabled governments to fund vital public services such as health care, education and clean water.

There is however growing international pressure to outlaw tax havens, in order to reform the world's battered financial system. At the G20 meeting this spring, world leaders announced that sanctions would be taken against countries which continued to give haven to tax evaders.

"The writing is on the wall for tax havens wherever they may be," UK prime minister Gordon brown said in a joint press conference with French president Nicolas Sarkozy.

An EU institution, but also a bank

An EIB official said it is not odd that the EU's house bank works with big banks or other intermediaries like private equity funds.

The EIB only gives direct loans to projects involving sums over €25 million. In order to apply smaller loans, such as loans to SME's, the EIB goes through middlemen, such as banks or other funds.

"But these are loans. We naturally want the money back, and therefore we have an interest in asking for full reports from the investors we lend money to," the official stated. But he added that the EIB is currently looking at how to improve back-reporting procedures.

He underlined that those who receive EIB monies for projects have to fulfil with all possible criteria set out in the EU's development goals.

"But people fail to understand that even though the EIB is an EU institution, it is also a bank, and as such, has to act according to secrecy and business rules for banks," he said.

Some political camps, NGOs, faith groups and activists are ideologically opposed to opening up EU development to commercial interests, and to the fact that private banks and companies borrow public money at low interest rates in order to make profits on EU development projects.

But proponents of this path argue that only by taking the industry and business world onboard in the fight against poverty, with their capital, expertise and a sense for multiplying cash and creating growth, can development and aid in poor countries be efficient.

However, if there is suspicion that the actors who carry out EU development policies consider tax evasion a legitimate part of their business, Brussels may have to do some explaining even to those convinced by the public-private partnership model.

EIB president Philippe Maystadt last month announced that the bank would tighten its rules on lending to companies in offshore financial centres, with a revised policy likely to require firms to move out of offshore financial centres if they want an EIB loan.

"The EIB is committed to ensuring that its loans are used for the purposes intended, the promotion of European Union priority objectives", Mr. Maystadt said.

The Luxemburg-based bank is also expected to release new transparency rules later this year.

Investigation

Europe’s tax haven investments in Africa

A combination of lax rules and no-questions-asked policy means that money from the European Investment Bank, the EU's longterm lending institution, is flowing to tax havens. An Egyptian case study shows how this happens.

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