Podcast Summary: The CGD Podcast

Episode: Illicit Financial Flows and the Three Ts of the G8 Agenda – Alex Cobham
Date: April 16, 2013
Host: Lawrence MacDonald
Guest: Alex Cobham, Research Fellow, Center for Global Development

Overview

This episode explores the rising political and development significance of illicit financial flows, tax, and transparency—the "Three Ts" of the G8 agenda. The discussion focuses on how tax avoidance, opaque global trade practices, and lack of corporate transparency impact both developing and developed countries. Alex Cobham shares insights from his research, offers concrete examples (notably Zambia), and evaluates the evolving international policy landscape, while highlighting challenges and possible avenues for reform.

Key Discussion Points & Insights

The Global Importance of the "Three Ts"

• Context: David Cameron announces the G8 will focus on tax, trade, and transparency (00:32).
  • These areas are finally entering mainstream political discussion in OECD countries, not just in the development community.
  • “This is coming, right? … This is an agenda that’s been growing in development. … It’s never been more live than it is now.” – Cobham (01:10)

Zambia’s Copper Example: Explaining Illicit Financial Flows

• Case Study: Zambia’s copper exports and lost revenue (01:31–04:19).
  • Zambia exported copper at half the price declared by Switzerland for the same copper, a discrepancy with major economic implications.
  • “If in 2008 Zambia had received the price for its copper that Switzerland declared on exporting exactly the same copper… Zambia’s GDP would have nearly doubled.” – Cobham (01:46)
  • Most Zambian copper doesn't actually go to Switzerland. It's rerouted “on paper,” making tracing profits and accountability nearly impossible (02:29).
  • Despite reforms requiring realistic customs prices, only two mining companies declared profits at the peak of copper prices—clear signs of manipulation and revenue loss (03:19).

The Structure of the Problem: Profit Allocation & Secrecy

• Two Fundamental Issues:
  1. Multinationals can allocate profits as they wish, minimizing tax obligations.
  2. Less reputable companies exploit a lack of transparency and anonymous ownership to enable corrupt or abusive practices (04:36).
  • “There’s, you know, two issues here… multinational companies are able to more or less choose where they’re going to allocate their profits… [and] use a lack of transparency, particularly anonymity of company ownership, to do even more abusive things.” – Cobham (04:36)

Widespread and Growing Relevance

• Not Just a Developing Country Problem:
  • Issues like tax haven secrecy and anonymous company ownership now exacerbate fiscal pressures in rich countries, drawing more global attention (05:20).
  • “It’s not just a development issue, it’s an issue for all of us.” – Cobham (05:41)

The Scale of Illicit Financial Flows

• Quantifying the Problem:
  • Estimates suggest for every $1 of aid, $8–$10 leaves developing countries illicitly (07:17).
  • “For developing countries, the illicit hidden outflows are something in the range of 8 to $10 for every $1 of aid money that’s received.” – Cobham (07:23)
  • Most of these flows are channeled through tax havens linked to the major economies, amplifying the contradiction between development aid and facilitation of financial outflows (07:57-08:33).

Complicity and Unintended Consequences in Developed Countries

• Tax Havens and Historical Policy Decisions:
  • The UK, US, India, and China all leverage offshore centers like the British Virgin Islands and Mauritius for capital flows, creating dependency and reluctance to enforce transparency (09:05–09:48).
  • “The City of London… is quite dependent now on those flows.” – Cobham (09:05)

The Political Economy: Can Global Powers Reform Finance?

• Alignment of Interests:
  • Despite the power of the financial sector, current fiscal pressures may finally align the interests of rich and developing countries for reform (10:29–11:18).
  • “For the first time, actually makes it possible that we’ll see real progress.” – Cobham (10:33)
  • Two perennial arguments against action—loss of competitive advantage and difficulty of cooperation—may be weakening.

US Actions: Cautious Optimism

• FATCA and Its Ripple Effect:
  • The US’s unilateral Foreign Accounts Tax Compliance Act (FATCA) is a “game-changer,” requiring automatic exchange of tax information, not just on request (12:33–14:36).
  • “It’s the automatic nature of the exchange that really makes a difference.” – Cobham (13:31)
  • FATCA pressures even major secrecy jurisdictions to comply, sparking similar multilateral efforts in Europe and potentially beyond.

The Evolution of Corporate Taxation

• Unitary Taxation: The Next Frontier?
  • As multinationals’ profits are allocated to low-tax jurisdictions (e.g., Google, Amazon, Starbucks), there’s growing interest in a system that divides global profits according to where economic activity actually happens (15:23–16:34).
  • “For US based multinational companies, nearly half of their total profit ends up being declared in five jurisdictions only, including Bermuda and Switzerland.” – Cobham (16:11)

Nationalism and Multinational Tax Avoidance

• Perceptions and Policy:
  • There’s tension between pride in national corporate champions and concern over their tax practices (16:34–17:47).
  • “If this isn’t in fact rather unpatriotic of these companies to be acting in this way at a time when the country clearly needs revenue.” – Cobham (17:33)

Alex Cobham’s Forward Agenda

• Research Priorities:
  • Critically assess and refine current estimates of illicit financial flows.
  • Investigate whether foreign direct investment (FDI) routed through transparent vs. secret jurisdictions affects growth differently in developing countries (18:09–19:41).
  • Explore how “big data” and financial transparency initiatives could create new research and policy tools (19:41–20:43).
  • “Trying to get those interests together to have some kind of initiative to get to a completely different level of transparency about exactly that sort of information.” – Cobham (20:28)

Notable Quotes & Memorable Moments

• On the core problem:
  “If those companies aren’t making a profit now, there is simply no reason for them to exist, to be in Zambia at all. So something is still not right here. We’re still seeing manipulations that are costing Zambia revenue.” — Alex Cobham (03:58)

• On the scale of illicit flows:
  “For developing countries, the illicit hidden outflows are something in the range of 8 to $10 for every $1 of aid money that’s received.” — Alex Cobham (07:23)

• On the global dimension:
  “The City of London, in some ways, is quite dependent now on those flows. So for the UK to start pushing for greater transparency… is potentially a little bit worrying for the UK.” — Alex Cobham (09:05)

• On prospects for reform:
  “You’re seeing a combination of interest there that actually does, for the first time, have the potential to overcome all of the interest on the other side of this.” — Alex Cobham (10:57)

• On US policy impact:
  “It’s the automatic nature of the exchange that really makes a difference.” — Alex Cobham (13:31)

Important Timestamps

• 01:31: Case study: Zambia’s copper and price manipulation
• 04:36: The two core structural issues behind illicit flows
• 07:17: Quantifying illicit flows—scale relative to aid
• 09:05: UK’s reliance on flows from tax havens
• 10:33: Alignment of interests offers hope for real progress
• 12:33: US unilateral reform: FATCA
• 15:23: The move toward unitary taxation of multinational profits
• 18:09: Cobham’s research priorities
• 19:54: Big data and the future of financial transparency

Conclusion

This episode provides a rich exploration of how global financial opacity undermines both development and domestic fiscal health. As G8 leaders and policymakers pay closer attention to the Three Ts—tax, trade, transparency—there is genuine, albeit cautious, optimism that reform is possible, especially with innovative US and European initiatives making headway. Alex Cobham’s research aims to clarify the scope of the problem and develop policy-ready insights, leveraging new data sources and a shifting international landscape.