Glossary Financial Transparency

Arm’s length principle: The OECD guideline is the governing principle underpinning international corporate taxation. The principle determines the price one subsidiary of a multinational corporation should charge for a product or service when trading with another subsidiary of the same company or the parent company. The guideline states that companies should use the same price internally as they would if selling to an external company (i.e., at arm’s length). The arm’s length principle calls for multinationals to determine prices as if the subsidiaries were separate businesses rather than part of a single global entity. The principle has come under increasing criticism from outside experts, however. One disadvantage of the arm’s length principle is that it may not be useful when the object of a transaction is difficult to compare to others, such as services, intellectual property or unique goods. This weakness may help facilitate abusive transfer pricing.

Automatic exchange of tax information: The sharing of tax information between countries in which individuals and corporations hold accounts. This exchange of information should be automatic and not require a request from tax or law enforcement officials in one jurisdiction to those in the jurisdiction where the account is held. Also referred to as “routine exchange,” automatic exchange of tax information is one of the FTC’s five recommendations.

Beneficial owner: The real person or group of people who controls and benefits from a corporation, trust or account. The FTC advocates that beneficial ownership information be collected and made publicly accessible. One of the five FTC recommendations.

Black money: Money acquired, transferred or used illegally or through an unregulated or untaxed market.

Country-by-country reporting: A proposed form of financial reporting in which multinational corporations report certain financial data—such as sales, profits, losses, number of employees, taxes paid and tax obligations—for each country in which they operate. Currently, consolidated financial statements are the norm. One of the five FTC recommendations.

The Cut Unjustified Tax (CUT) Loopholes Act (S. 268): A bill most recently introduced by Senator Carl Levin (D-MI) and Sheldon Whitehouse (D-RI) in February 2013. The bill targets offshore tax havens and abusive transfer pricing, mandates country-by-country reporting, and would recapture an estimated $189 billion in tax revenues. This Senate bill is similar to a House companion bill, The Stop Tax Haven Abuse Act (H.R. 1554).

Domestic Financing for Development (DF4D): An initiative created by former U.S. Secretary of State Hillary Rodham Clinton focused on helping developing countries combat tax evasion and mobilize domestic resources to fund their health, education and infrastructure needs.

Dodd–Frank Wall Street Reform and Consumer Protection Act: A broad financial reform bill enacted into law by the United States in July 2010.

§  Dodd-Frank Section 1502: Requires companies selling or manufacturing products made with minerals originating from designated conflict countries to disclose to a public database where the minerals came from and what steps the company took to ensure that purchase or processing of the minerals have not financially benefited armed militia groups in those countries.

§  Dodd-Frank Section 1504: Requires oil, gas, and mining companies to publicly disclose all payments to governments in each jurisdiction in which they operate.

Double Tax Avoidance Agreements (DTAA) / Double Taxation Treaties (DTT): Agreements between states (usually in the form of bilateral treaties) that are designed to prevent an individual from being taxed on the same income (or other forms of wealth, e.g., an estate, a gift) by two different countries. The OECD suggests that countries often suffer from “double non-taxation” as a result of abuse of these treaties.

Facilitation payments: A bribe designed to quicken the pace at which an official performs a routine, nondiscretionary action, sometimes referred to as a “grease payment.” Facilitation payments are legal under the Foreign Corrupt Practices Act but not under the OECD Anti-Bribery Convention or the vast majority of anti-bribery statutes around the world.

Financial Action Task Force (FATF): An intergovernmental body housed at the OECD whose purpose is the development and promotion of international standards to combat money laundering, terrorist financing and the proliferation of weapons of mass destruction. FATF has published 40 recommendations plus nine special recommendations on terrorist financing and related guidance documentation in order to meet this objective.

Foreign Corrupt Practices Act (FCPA): A U.S. law passed in 1977 that makes it illegal for U.S. citizens, U.S. corporations and certain non-U.S. corporations to bribe foreign officials.

Front corporation: A corporation that has conducted or is currently conducting some legitimate business in order to hide illicit activity. For example, a gas station where the owner also acts as a launderer for a drug cartel, moving drug money through the gas station’s legitimate accounts.

Generally Accepted Accounting Principles (GAAP): A corporate accounting standard used for financial reporting in the United States and some other countries, established and overseen by the Financial Accounting Standards Board. GAAP is in the process of being merged with the International Financial Reporting Standard. Changes could be made to GAAP/IFRS that require the adoption of country-by-country reporting.

Hawala transactions: An informal system of money transfer between entities in different countries. Brokers use handshake deals and/or agreements with counterparts in other countries to move money without physically transferring funds (especially across borders) or using bank transfers. Often extremely difficult to monitor, hawala is used primarily in the Middle East, East Africa and South Asia.

International Accounting Standards Board (IASB): Nongovernmental rule-making body responsible for oversight of the International Financial Reporting Standards. The corporate accounting standard used throughout the majority of the world but notably not in the United States (see Generally Accepted Accounting Principles).

International Financial Reporting Standard (IFRS): A corporate accounting standard used for financial reporting in the majority of countries around the world, established and overseen by the International Accounting Standards Board. Changes could be made to IFRS to require the adoption of country-by-country reporting.

Illicit financial flows (IFFs): The cross-border movement of funds that are illegally acquired, transferred or used. The sources of the funds of these cross-border transfers come in three forms: bribery and theft by government officials; criminal activities, including drug trading, human trafficking, illegal arms, contraband and more; and commercial tax evasion, trade mispricing and abusive transfer pricing.

Incorporation Transparency and Law Enforcement Assistance Act – A bipartisan U.S. bill requiring that most corporations and other legal entities created in the United States declare their beneficial ownership upon formation. Originally proposed in 2008 and introduced in every session of Congress thereafter, the bill is likely to be re-introduced in the current session soon. The bill is sponsored in the U.S. Senate by Sens. Carl. Levin (D-MI), Charles Grassley (R-IA), and Dianne Feinstein (D-CA), and in the House of Representatives by Rep. Carolyn Maloney (D-NY).

International Asset Recovery: Efforts to return the proceeds of corruption back to the home country.

Money laundering: The process of disguising the source of money (or “cleaning it”) from illicit activities to give it the appearance of originating from a legitimate source.

OECD Transfer Pricing Guidelines: Guidance first created by the OECD in 1995 to define rules for multinational corporations’ use of transfer pricing, including the “arm’s length principle.”

Organization for Economic Cooperation and Development (OECD): An international organization comprised of 34 democratic countries with large free-market economies. Its international secretariat is mandated to stimulate economic progress and world trade. Based in Paris, it is one of the world’s most important tax-policy institutions. It is also highly influential in international attempts to counter corruption.

Politically Exposed Person (PEP): A person entrusted with a public function, such as a politician or employee of a government agency. The term is sometimes inclusive of their relatives and close associates. Banks are supposed to treat PEP clients as high-risk clients, applying enhanced due diligence at both the inception of the relationship and on an ongoing basis to ensure that the money in their bank account is not proceeds of corruption.

Predicate offense: An underlying crime, such as drug trafficking, which generates the illicit money to be laundered and is a necessary element of building a criminal money-laundering charge. The FTC argues that tax evasion should be classified as a predicate offense for money laundering, which is now one of the FATF 40 recommendations as well.

Secrecy jurisdictions: Secrecy jurisdictions are cities, states or countries where laws allow banking or financial information to be kept private under all or all but a few circumstances. The Cayman Islands, Singapore and Delaware are all examples of secrecy jurisdictions. Also see tax havens.

Shell banks: A bank without a physical presence or employees in the jurisdiction in which it was incorporated.

Stolen Asset Recovery Initiative (StAR): A partnership between the World Bank and the U.N. Office on Drugs and Crime that supports international efforts to end safe havens for corrupt funds. In the fall of 2011StAR released  the landmark report, “The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It” which focused on the adverse impact of legal structures.

 Stop Tax Haven Abuse Act – Proposed U.S. legislation targeting loopholes in the U.S. tax code enabling offshore tax haven abuse and enacting a country-by-country reporting requirement for large U.S. corporations. Originally proposed in 2007 and introduced in every session of Congress thereafter, the has been re-introduced in the current session of the House of Representatives by Rep. Lloyd Doggett (D-TX) and will be re-introduced in the Senate soon by Sen. Carl Levin (D-MI).

Tax avoidance: The legal practice of seeking to minimize a tax bill by taking advantage of a loophole or exception to the rules, or adopting an unintended interpretation of the tax code. Usually refers to the practice of seeking to avoid paying tax by adhering to the letter of the law but contradicting the spirit of the law.

Tax evasion: The illegal nonpayment or underpayment of taxes, usually by making a false declaration or no declaration to tax authorities. It entails criminal or civil penalties.

Tax havens: Any country or territory whose laws may be used to avoid or evade taxes that may be due in another country under that country’s laws. Tax havens usually have a low or zero tax rate on accounts held or transactions by foreign persons or corporations. Over 50 countries may be considered tax havens. Also see secrecy jurisdictions.

Tax information exchange agreements (TIEAs): Bilateral agreements under which two territories agree to cooperate in tax matters through exchange of information. The current international standard for exchange of information under TIEAs is exchange upon request. This standard requires governments to already have information about suspected tax evasion before seeking further information from another jurisdiction. Also see automatic exchange of tax information. .

Tax planning: Designing and implementing strategies, usually by accountants or attorneys, in order to assist a client in reducing, delaying or avoiding taxation. The practice is not always illegal.

Tax strategy patents: A patent on a method of reducing, delaying or avoiding taxation. Tax strategy patents have been banned in the United States.

Trade mispricing: The act of misrepresenting the price or quantity of imports or exports in order to hide or accumulate money in other jurisdictions. The motive could be to evade taxes, avoid customs duties, transfer a kickback, launder money or some other purpose.

§  Abusive transfer pricing: A transfer-pricing scheme in which trade mispricing has occurred. Used by multinational corporations to shift profits from high-tax jurisdictions to low-tax jurisdictions.

§  Trade-based money laundering: A technique where trade mispricing is used to hide or disguise income generated from illegal activity.

Transfer pricing: A trade transaction at a non-market price that occurs between two or more business entities that are owned or controlled directly or indirectly by the same party, usually between different subsidiaries of a multinational corporation. A transfer-pricing transaction that either falls well outside global norms or misrepresents the price or the specification of goods being sold is known as “abusive transfer pricing.”

UK Bribery Act: A law passed in the United Kingdom in 2010 that makes it illegal for UK citizens and corporations to commit bribery in foreign countries, including bribery of a foreign official and all other forms of commercial bribery.

The United Nations Convention against Corruption (UNCAC): The most comprehensive global convention combating corruption. It is a binding agreement ratified by 160 countries on standards and requirements for preventing, detecting, investigating and applying sanctions on corruption.

The UNCAC Coalition: Formed in 2006, it is composed of more than 300 civil society organizations in more than 100 countries with the goal of promoting ratification, implementation and monitoring of the U.N. Convention against Corruption.
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