Shady Deals: Illicit financial flows in a EU-Mercosur free trade agreement

GUE/NGL in the European Parliament has published the latest in its series of studies examining EU taxation, and specifically, the potential for tax dodging and other illicit financial flows within a future EU-Mercosur free trade agreement. The study,  Shady Deals: How the EU-Mercosur Free Trade Agreement would encourage illicit financial flows, was written by Magdalena Rua, Martin Burgos and Verónica Grondona.

The key findings include:

  • the leaked draft Mercosur-EU Free Trade Agreement (MEFTA) favours loose fiscal, financial and exchange regulations;
  • in essence, the proposed MEFTA will be very similar to the EU-Andean Community FTA on goods, services, financial services and the movement of capital;
  • the negotiators’ objectives are to liberalise and deregulate control mechanisms – conveniently overlooking many aspects in the negotiating articles that would make tax-dodging and money-laundering possible;
  • capital controls would be restricted and speculative financial services would be liberalised. At the same time, it could limit possibilities for countries in the agreement to identify the states with high levels of tax avoidance opportunities and financial secrecy, as well as other measures to prevent illicit financial flows, tax evasion and money laundering;
  • with the Mercosur’s four developing countries’ stock of offshore financial wealth in 2017 exceeding US$ 853.7 billion, whilst between 2008-2017 the average annual outflows from these countries was around $56.4 billion, that’s a lot money that leaves the bloc, depriving the countries of tax which cannot then be re-invested;
  • likewise, stock of offshore wealth for some EU member states run into trillions (Luxembourg: $12.6 trillion, which represents 20185% of GDP; the Netherlands’s at  $10.1 trillion, 1228% of GDP), the risk of financial instability is high when huge amount of in and outflows remains untaxed. MEFTA could therefore exacerbate the problem for both sides;
  • the study also examines the different components of illicit financial flows and presents an estimation of the problem of the possible increased flows of capital, services and goods that would take place within MEFTA;
  • the existing and highly flexible tax systems and liberalised financial and exchange regimes could facilitate these flows, as well EU and Mercosur countries which are renowned tax havens and/or financial secrecy jurisdictions.

The study also includes policy recommendations on closing the loopholes to combat tax dodging, illicit financial flows and money laundering.

A prior GUE/NGL study had already identified that illicit financial flows normally increased in trade agreements – for example,  “EU-Colombia Free Trade Agreement, deregulation, illicit financial flows and money laundering” from 2012 written by SOMO’s Myriam Vander Stichele; and other studies  reached similar conclusions, such as “The ‘Global Agreement’ that profits the few” from 2017 relating to the Free Trade Agreement between Mexico and the EU; and “The inclusion of financial services in EU trade and association agreements” a study requested by the European Parliament Research Services (EPRS), commissioned per request of GUE/NGL MEP Helmut Scholz (DIE LINKE) in the INTA Committee in 2016. What this new GUE/NGL study exposes compared to previous analysis, are original estimations of IFF (both from a bloc by bloc and country-by-country perspective), as well as an analysis of the different chapters of a possible MEFTA.

The study also provides an analysis of the EU and the Mercosur tax havens. In this regard, it is useful to note that the recent declaration by the G20 leaders after Buenos Aires’ summit, includes a paragraph on international taxation in which the need to consider defensive measures with listed jurisdictions is highlighted. However, EU tax havens are not listed in the EU list of non-cooperative jurisdictions for tax purposes, as it is not possible to apply differentiated measures between one EU Member State and the other within the EU; and it is not evident that such discrimination will be possible in the context of a MEFTA.

GUE/NGL MEPs commissioning this study are those which are part of the European Parliament’s Special Committee on financial crimes, tax evasion and tax avoidance (TAX3): Martin Schirdewan (DIE LINKE), Miguel Urban Crespo (Podemos), Matt Carthy (Sinn Féin); Paloma López Bermejo (Izquierda Unida), Marisa Matias (Bloco de Esquerda), Miguel Viegas (PCP) and Emmanuel Maurel (La France Insoumise); in addition to those participating in GUE/NGL’s TAX3 Working Group: Takis Hadjigeorgiu (AKEL), Patrick Le Hyaric (Front de Gauche), Stelios Kouloglou (Syriza) and Marie-Pierre Vieu (Front de Gauche); and Helmut Scholz (DIE LINKE) who is GUE/NGL’s shadow rapporteur on the EU-Mercosur FTA in the European Parliament.

Read more about the study here, and the study itself here.