EVAL By / July 18, 2016

The inclusion of financial services in EU free trade and association agreements: Effects on money laundering, tax evasion and avoidance

Written by Isabelle Ioannides, The EU has increasingly opened up market opportunities for European business by negotiating trade and association…


Written by Isabelle Ioannides,

A briefcase with money

The EU has increasingly opened up market opportunities for European business by negotiating trade and association agreements, as well as investment agreements, with key countries. Services, which account for approximately 70% of EU GDP, are an increasingly important part of international trade, especially with the growing role of technology and the mobility of employment. Notwithstanding, concerns are often raised in connection with financial services and regulatory transparency, which have contributed to a number of trade negotiations becoming deadlocked in the past.

Experts have shown that service trade with tax havens is approximately six times larger than with comparable countries whereas no such difference exists in goods trade. Moreover, the consequences of tax evasion are considerable for the EU market: an estimated €1 trillion is lost every year to tax evasion and avoidance. Tax evasion and avoidance by multinational companies, such as that exposed by the ‘Panama Papers’, also constitute a great loss for the developing world. African countries face up to 60% of lost revenue, which has massive implications for development aid and government budgets, and ultimately costs lives.

Against this background, this Ex-Post Impact Assessment examines the implementation and effects of the inclusion of financial services in existing EU free trade and association agreements (FTAs) and, in particular, their impact on money laundering, tax evasion and avoidance. In doing so, the study seeks to support the European Parliament Members’ scrutiny of ongoing trade negotiations with third partners. It also follows the revelations of the ‘Panama Papers’ affair, which disclosed the extent of the use of offshore shell companies to hide or launder wealth. This new leaked information has put added pressure on, and offered an opportunity to, policy-makers to (re-)act.

The opening analysis, prepared in-house by the Ex-Post Impact Assessment Unit of the European Parliamentary Research Service, outlines the geopolitical and trade context, as well as the EU policy framework to combat money laundering, tax evasion and avoidance and the loopholes in the implementation of this framework. The analysis also examines the offshore ties of EU Member States and their relation to the ‘Panama Papers’ leaks. The ‛Panama Papers’ database has shown that every single EU Member State was implicated in the ‛Panama Papers’ affair, but with great discrepancies between the first (the United Kingdom) and the last (Slovakia) on the list. The opening analysis also assesses the consequences of tax evasion and money laundering and their link to trade in Africa. Moreover, it examines EU-Panama trade relations and evaluates the implementation of the EU-Central America Association Agreement, whose trade pillar has been provisionally applied for Panama since August 2013. Finally, it provides a synthesis of the key findings and recommendations presented in the annexed study.

The annexed expertise was drafted by a team of researchers from the Asser Institute and the University of Groningen, in the Netherlands. The analysis of illicit financial flows is at the centre of the researchers’ evaluation of the implementation and effects of the financial services provisions in selected EU FTAs with third countries, and their propensity to curb money laundering, on the one hand, or to be misused for tax evasion and avoidance reasons, on the other. The team of researchers draw conclusions from their study of the FTAs that the EU has signed with Mexico, South Africa, Serbia, the Republic of Korea and Colombia/Peru on the transposition and implementation of relevant provisions in the national legal and institutional systems of these countries. They also evaluate the actual and potential impact of the liberalisation of trade in financial services between the EU and the above-mentioned third countries on money laundering (insofar as it is linked to the use of the international financial system to conceal proceeds of crime) and tax evasion (insofar as this constitutes an aspect of money laundering).

The annexed expertise concludes that the liberalisation of trade in goods and services with developing countries increases the threat of money laundering, and that it is therefore likely to contribute to an increase in illicit financial flows from developing countries to the EU. It does not find conclusive statistical data to support a causal link between the EU FTAs that are in force and an increase in illicit financial flows. It deduces nonetheless that the far-reaching commitments made by the EU and developing countries in the selected EU FTAs on access to the markets for goods and services, including in the financial services sector, translate into such agreements significantly increasing trade openness, and hence also the threat of money laundering facing developing countries. To remedy these threats, the annexed study provides policy recommendations on the scope, content and wording of financial services in EU FTAs, on strengthening the effectiveness of provisions on tax cooperation and anti-money laundering, and on bolstering the effectiveness of existing compliance monitoring mechanisms in EU FTAs.

Read the complete study on ‘The inclusion of financial services in EU free trade and association agreements’.

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