IMF Concludes Article IV Conclude Article IV Consultation with Myanmar and the First Review of Staff-Monitored Program

Note: New Rules for Global Finance is following closely the increasing engagement and activities of IMF and Myanmar, especially the participation of civil society, which wasn't mentioned in this press release.

Please see the Press Release No. 13/187 from IMF, May 22, 2013

http://www.imf.org/external/np/sec/pr/2013/pr13187.htm

Offshore Profit Shifting and the U.S. Tax Code

Senate Permanent Subcommittee on Investigations

May 21, 2013

             The Senate Permanent Subcommittee on Investigations held the hearing “Offshore profit shifting and the U.S. tax code – Part 2 (Apple Inc.)” at the Dirksen Senate Office Building on Tuesday, May 21. Three panels, including law experts, representatives for Apple Inc, and US government officials from the Internal Revenue Service and Department of Treasury, provided testimony and answered the Subcommittee’s questions.

            The main argument from the Subcommittee, led by Chairman Levin, is the fact that Apple Inc. has shifted taxable income generated by its intellectual property rights (IPR) – 95% of which is produced in the U.S.  – offshore for the purpose of tax avoidance. While fully enjoying the legal protection of its IPR by the U.S. government, Apple signed agreements with its three subsidiaries in Ireland in 2008 and 2009 authorizing the transfer of the economic rights to its intellectual property (i.e. profits)  to its Irish subsidiaries that are subject to little to no income tax. As a result, Apple pays less tax and the tax burdens are distributed on to other tax payers, including small companies that are not able to operate overseas and hard-working individuals. During the hearing, representatives from Apple, including its CEO Tim Cook, reaffirmed that its behavior is legal under the current international tax law. In addition, it points out the problem of the relatively high tax rate in the U.S., its negative effect on the competitiveness of U.S. companies, and the need to reform the tax code. Tim Cook stated that he has no intent to bring the offshore profit back to the US under the current tax code. The legal experts from the first panel made suggestions to reform the tax code, including reducing the tax rate to below 15%, increasing the transparency on multi-national corporations, especially in terms of where they record income, and the amount of tax they pay, and imposing a minimum amount of tax for transfer-pricing. It is still uncertain on whether this type of dispute would lead to a reform on U.S. tax code.

Details of the hearing – including panelist information and video – are available at: http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-the-us-tax-code_-part-2

Last month, central bank governors, finance ministers, bankers, academics, lobbyists and members of civil society from around the world arrived in Washington, DC for the 2013 IMF-World Bank Spring Meetings. New Rules for Global Finance was active hosting, coordinating and attending meetings. See our recap of the Spring Meeting events below - including a discussion on global financial reforms hosted by New Rules with FSB staff, central bankers from emerging markets and developing economies (EMDEs) and civil society. Looking beyond the Spring Meetings, three other issues emerged in April that we will be working on.

First, the debate on austerity was reignited by the recent debunking of the influential paper by Carmen Reinhart and Kenneth Rogoff which claimed that 90 percent debt-to-GDP was the threshold for economic growth. In April, a graduate student and two professors of economics at the University of Massachusetts at Amherst discovered an error in Harvard Professors Reinhart and Rogoff's data - which provoked to other critiques of their methodology. These findings changed the outcomes of this study and raised doubts about the efficacy of austerity. Even the IMF, long a prescriber of austerity, is now struggling with its position on this issue. It is becoming clear that austerity measures are not the recipe for economic recovery. Over the last 4 years, Europe has been under the spell of austerity and in the last quarter of 2012, theEurozone as a whole contracted for the first time ever.

The reality is that austerity, especially public spending cuts, harm the poor disproportionately - which in the end increases the need for more public spending while higher unemployment reduces government revenue. Although the IMF is beginning to shift its rhetoric, its loan conditions and policy recommendations for member countries do not reflect this change. In the case of Egypt, the IMF is requiring a string of austerity measures to be implemented before Egypt is eligible for the $4.8 billion loan it has been negotiating for two years. Despite the dynamic political and economic changes in Egypt, the IMF's policy recommendations have remained the unchanged since 2010 (pre-Hosni Mubarak).

Second, the recent bout over capital requirements for foreign banks between the US Federal Reserve and EU commissioner Michel Barnier underscores the need for greater cooperation on financial reforms. Mr. Barnier argues that by requiring EU bank's US-based subsidiaries to hold more capital locally, the US is creating barriers to the US financial market (accusing the US of protectionism). This is not the case. The Fed's rule is geared to protect the US taxpayers from the bailing out of foreign banks. When global systemically important banks (G-SIBs) face heavy losses or failure, their foreign subsidiaries close first and the host-country economy - in this case the US - suffers losses.

To manage this dilemma, the global financial system needs a "resolution regime" that winds down banks and their subsidiaries. With such a regime in place, the US Fed would be less inclined to require foreign subsidiaries to hold additional capital locally - since resolution procedures would protect the US from bank collapses overseas. The Financial Stability Board (FSB) has been developing an effective resolution regime policy since 2010 and recently reported its progress to the G20. Unless the global financial system intends to continue operating in the "too-big-to-fail" paradigm, we need to reduce uncertainty about financial institutions that can and will fail. This requires a greater international cooperation on developing an effective resolution regime - a process that must include developing economies (non-G20), as they are host to hundreds of bank subsidiaries and suffer disproportionately when G-SIBs collapse.

Lastly, and an issue that was raised at the Spring Meetings as well, is the continued inability of the United States to ratify the2010 IMF reforms - the only action impeding their implementation. The US agreed to approve these reforms by November 2012. It is now 7 months overdue. It remains unclear when the US will ratify the reforms. There is growing concern about the reform process coming to a halt. During the Spring Meetings, IMF Executive Director for Brazil, Paulo Nogueira Batista, expressed his concern that the IMF reforms were "losing inertia." Reforming the governance of the IMF means decision-making that is more inclusive, balanced and reflective of emerging markets and developing countries. We anticipate that the US Administration will submit legislation to Congress before the end of the year. New Rules will be urging Congress to pass these reforms, but we will need your support. To support these efforts, please visit us at IMF Reform Letter or Support New Rules.

To read the rest of our May 2013 Newsletter, click here

The Financial Stability Board:

Views from Insiders and Campaigners

Saturday, April 20, 2013

Executive Summary:

This report documents the discussion and outcomes of the session FSB: Views from Insiders and Campaigners at the 2013 IMF-World Bank Spring Meetings in Washington DC. This session brought together secretariat staff from the Financial Stability Board (FSB), central bankers from emerging market and developing economies (EMDEs), and experts from civil society to discuss the major challenges in global financial reform from the perspective of developing countries. Country representatives shared their views and all engaged in a constructive discussion on financial reforms – including important issues that are not currently on the FSB agenda.

Country Representatives:

Mr. Turalay Kenc, Deputy Governor, Central Bank of the Republic of Turkey

H.E. Dr. Hasan, Deputy Governor, Central Bank of Jordan

Mr. Grant Spencer, Deputy Governor, Reserve Bank of New Zealand

Mr. Ajith Nivard Cabraal, Governor, Central Bank of Sri Lanka

Panelists:

Michael Taylor, Financial Stability Board (FSB) Secretariat Staff

Lori Wallach, Director, Global Trade Watch, Public Citizen

Chair:

Jo Marie Griesgraber, Executive Director, New Rules for Global Finance

Key Points:

●        Michael Taylor reviewed the mandate of the FSB, the Regional Consultative Groups (RCGs) and the FSB’s recent work geared toward financial service regulations and fiscal policy implementation.

●        Mr. Grant Spencer laid out his position that the FSB does not focus on the situation of small countries.

●        Mr. Turalay Kenc discussed the importance of accounting standards and credit ratings agencies.

●        H.E. Dr. Hasan advised how he would like to see more credible policies being implemented by the FSB.

●        Mr. Ajith Nivard Cabraal addresses his concern over banking regulations and gives examples of productive counter policies. He also advocated an increased inclusion of Civil Society Organizations regarding financial stability reforms.

●        Lori Wallach highlighted that the authority of national regulators could be jeopardized by obligations in trade agreements that FSB member countries are currently negotiating

●        Jo Marie Griesgraber presented her concern for the two-way flow between Regional Consultative Groups (RCGs) and the FSB but even more so, how non-RCG/non-FSB countries can share their suggestions and concerns of FSB actions and inactions.

●        Questions for the panelists include: transparency and accountability for the FSB’s fiscal policies, concerns about trade regulations, Basel III’s impact after the 2008 crisis and more.

Treasury Under Secretary Lael Brainard announced in the FY2014 budget that it seeks legislation to implement the IMF quota and governance reforms agreed to in 2010.  This legislation is said to reduce United States participation in the New Arrangements to Borrow by approximately $63 billion and increase the size of the U.S. quota by an equal amount.  It would also authorize the U.S. to accept an amendment to the International Monetary Fund (IMF) Articles of Agreement that will facilitate changes in the composition of the IMF Executive Board while preserving the U.S. seat on the Board. As noted in the Administration's request, the legislation will be submitted separately to Congress. This legislation is also said to be essential in order to preserve U.S. leadership and veto position in the IMF and to maintain a well-resourced and effective IMF.

The Monetary Policy and Trade Subcommittee Hearing on “Evaluating U.S. Contributions to the International Monetary Fund” was held on Tuesday, April 24, 2013 and chaired by Representative Campbell and Members of the Sub-Committee. The hearing examined the U.S. role in the IMF and the Obama Administration’s request that Congress approve a much larger U.S. quota contribution to the IMF.

Testifying before the panel, Lael Brainard, Treasury's undersecretary for international affairs defended the safety of U.S. contributions to the Washington-based lender. As the only witness, Lael Brainard pledged to push the IMF to toughen its analysis of member countries’ exchange rates.

“The IMF is now providing much greater in-depth coverage of exchange rates, as well as related analysis on reserves, current-account imbalances and capital measures,” she said in prepared remarks to a House Financial Services subcommittee. “We will continue to urge the IMF to actively exercise its oversight role in this area.”

To see the Justification for Appropriations FY 2014 Budget Restquest, click here

To see the Memorandum on the subject of the House of Representatives' April 24, 2013, Monetary Policy and Trade Subcommittee Hearing on “Evaluating U.S. Contributions to the International Monetary Fund”, click here

To view an article by Bloomberg with further details, click here

To view Tweets from New Rules, click here

Dear Friends and Colleagues,

The IMF is still in the process of reviewing its Transparency Policy. Civil society has already submitted some comments and suggestions (see below). The IMF has now asked for additional comments/suggestions. Please view the attached suggestions and send any additional comments you have to  This e-mail address is being protected from spambots. You need JavaScript enabled to view it  by Friday, April 26, 2013.

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I.   Civil Society Organization (CSO) Views on the IMF’s Transparency Policy

To ensure that a wide range of views are reflected in the 2013 Board paper, Civil Society Organizations (CSOs) were invited to express their views on the Fund’s transparency policy. The consultation comprised two approaches. First, CSOs were invited to respond to an online consultation page. Second, representatives from selected CSOs participated in a conference call to exchange views on the Fund’s Transparency Policy. [1][2] While CSOs conceded that some improvements have occurred since the 2009 review, they saw the need for further reforms to catch up with current international standards. The discussions centered around five key themes summarized below:

Overarching Principles: Follow the lead of other IFIs

• Despite recent reforms, the Fund’s transparency policy continues to be seen as more restrictive than that of other IFIs, including the World Bank. The CSOs urged the Fund to follow the lead of other IFIs in the following areas:
• Presumption of disclosure. The World Bank moved in 2010 to a policy of full disclosure except for a limited set of documents on a “negative list”, an approach that was seen as superior to the Fund’s practice of seeking consent from country authorities or Board approval prior to publication.
• Board meetings. Some institutions provide live streaming of Board meetings and the World Bank issues summary minutes immediately after the meeting.  In contrast, the Fund’s summing ups are issued later, without attribution, and verbatim minutes are made available to the public with a five-year lag. More generally, information about the Fund Board’s calendar and activities was seen as limited and often unreliable.
• Governance of information releases. A number of IFIs have clear procedures for handling information requests from the public and have established independent bodies to adjudicate complaints in this area, including appeals when information requests are turned down. The IMF has not established such developed procedures.

Consultations with stakeholders: Gather broader perspectives 

• The Fund should strike a balance between its duty to advise country authorities and its wider responsibility to countries as a whole. In response to worldwide moves towards participatory democracy, the Fund should step up its interaction with other stakeholders, e.g. parliaments, opposition groups, CSOs and trade unions.
• The Fund’s handling of consultations with CSOs on policy papers is seen as suboptimal, including the current review of the transparency policy, as CSOs were allowed only to provide general comments ahead of time, limiting their scope to influence decisions. Instead, CSOs should be given an opportunity to review and comment on draft policy papers before issuance to the Executive Board.
• The Fund should increase its interactions with CSOs and representation on public forums, including through IMF’s resident representatives (res. rep.) offices.
• The Fund should publish CSOs’ full comments on its website.

Candor and timely disclosure: Increase transparency on decision-making processes

• Greater candor and timely disclosure of information would enhance the Fund’s accountability, and reduce the risk of it being used as a scapegoat by governments.
• The emphasis on market sensitivity in the Fund’s transparency policy was seen as overblown. The Fund should define more clearly the concept of “market sensitivity”. The Fund should put the emphasis on keeping the public informed rather than on maintaining market stability in cases when these two objectives come into conflict. In general, the Fund should realize the difference between secrecy and responsibility.
• Fund documents should clearly highlight differences of views between the various parties concerned: the Board, staff, management and the authorities. This would strengthen staff independence and avoid the suppression of views, as flagged by the IEO. More attribution of views was also seen as needed in Board summing ups.
• The Fund should disclose the list of unpublished and modified documents, as well as modification requests with justifications as to why they have been permitted. If documents are modified, they should be published with black line redactions to clarify the nature of the change.
• While the Fund was seen as having made progress at releasing information on “outcomes”, but information on “processes” that lead up to decisions is more limited. There is a need for more systematic disclosure on how decisions are made, including on technical assistance funding and program conditionality. 

Evenhandedness: a new approach to information sharing

• The Fund should be more willing to respond to information requests from outside stakeholders. This would improve evenhandedness as information would be “pushed out” in addition to voluntary publication.
• The Fund should systematically include a section on stakeholders’ views in staff reports.

Communication: Cut back on jargon and improve ease of access

• The Fund should cut back on jargon and in general use language that makes documents more accessible to the general public. More documents—including policy papers—should be translated, including into languages beyond the five official UN languages. Country papers should be translated into at least the language of the country concerned.
• The Fund should make a clearer distinction between papers with policy content cleared by the Fund, and those that do not represent the Fund’s official position. Doing so would help clarify the Fund’s position on key issues and the Fund’s message to stakeholders.
• The Fund should create a web page for all resident representative offices, and those  offices should maintain a mailing list of key CSOs and distribute news releases to them electronically.
• Information related to a country should be housed in a single location to facilitate searching. In addition, country pages on the IMF website should include a factsheet on IMF involvement with the country, and a list of forthcoming and recently completed interactions with authorities (staff visits, technical assistance, meetings with CSOs, etc.). Information on ways to engage with the visiting teams should also be disclosed.

As you may know, the Obama Administration is working with the Congress to introduce legislation affecting the International Monetary Fund (IMF).  The legislation would implement the 2010 G-20 agreement in Seoul on financing the IMF and reform of its governance. One important reform is the move to an all elected Executive Board (an initiative of the US government), which will create greater flexibility for countries to re-form constituency groups, since the US, Japan, Germany, the UK and France will all be able to have additional members in their constituencies.* Overall, we recognize that this reform package is imperfect, but this package must be approved by Congress before we can move forward with other reforms. 

A group of organizers composed a letter supporting enactment of this legislation by the US Congress. The letter, signed by over 130 individuals, was delivered to the leaders of the House and Senate as well as other members of the House and Senate on March 11, 2013. To view letter, click on link below:

Letter to Speaker Boehner

Sign-on:

We are continuing to collect signatures from those that support this initiative. If you would like to urge the US Congress to approve IMF reforms, please contact Nathan Coplin ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) who is collecting signatures (see up-to-date list below).

Please also indicate any affiliation (for identification purposes only) that you would like to be associated with your participation.  Listing an affiliation is not necessary.

Signatures  (Affiliations are for identification purposes only)

By Robin Harding at the Financial Times

The signatories argue in an open letter sent to House of Representatives and Senate leaders on Monday and seen by the Financial Times that if the US does not sign up, it will undermine its authority in negotiations at the G20 and other institutions that govern the world economy.

“Failure to act would diminish the role of the United States in international economic policy making and undermine US efforts to promote growth and financial stability,” the letter says.

Signatories include holders of the top international economic job at the US Treasury under Republican and Democratic administrations. They include Tim Adams, who worked for former president George W. Bush, and Jeffrey Shafer, who was part of the Clinton administration.

The 2010 reform doubles the IMF’s quota – in effect its equity capital – to $720bn; it shifts six percentage points of total quota to developing countries; and moves two of the 24 IMF directorships from European to developing countries.

But it cannot take effect until the US ratifies the package. Some Republicans in the House oppose giving any extra US resources to the fund.

One option is to bundle the quota increase in a law to fund the government – a so-called “continuing resolution” that must pass by the end of the month – but the House did not include the IMF in a version it passed last week.

“We are actively working with Congress to get quota legislation completed as soon as possible,” said the US Treasury, which declined to comment on the continuing resolution or other legislative options. “As the only country with a veto, implementing the quota reform will enable the US to preserve its leadership in the IMF without any new financial commitments.”

The US can boost its quota without extra exposure to the fund because it has promised to lend $100bn to the IMF as needed. Once it ratifies the reform, it will convert $65bn of that into quota.

If IMF quota is not part of the continuing resolution then it may be months before Congress takes up another big, must-pass package of economic measures.

Having spearheaded IMF reform efforts in the first place, the US is now holding its completion back, said Domenico Lombardi, senior fellow at the Brookings Institution and a signatory of the letter.

Failure to shift representation and voting power to fast-growing countries such as China threatens the legitimacy of international financial institutions such as the fund, said Mr Lombardi. “There is a real risk that IMF reform may be losing momentum.”

A further round of IMF quota reforms is already under discussion and due for completion in January 2014. The US has less voice in that debate while it is still holding up the last round, according to several people involved in the process.

The letter was co-ordinated by New Rules for Global Finance, a non-governmental organisation that scrutinises international financial institutions such as the IMF and the World Bank.

Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement

United States Senate Committee on Banking, Housing and Urban Affairs

On Thursday, March 7, 2013, the Senate Banking Committee held a hearing to examine the extent, causes, and penalties of banks’ failure to adhere to anti-money laundering laws, and the lack of discipline of regulators who are meant to keep the banks in check with the law.

Witnesses for the hearing included representatives from the US Department of the Treasury, Office of the Comptroller of the Currency and the Federal Reserve System. These experts were primarily asked why they are not holding banks to the law when those banks have been found guilty of money laundering. 

In December, the giant international bank HSBC was only penalized $1.9 billion for laundering money for the drug cartels and other illicit financial activity. The highlight of the hearing was U.S. Senator Elizabeth Warren grilling banking regulators on why banks could commit crimes and not be prosecuted by the law.

“What does it take?” Warren asked the panel of banking regulators. “How many billions of dollars do you have to launder for drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this? 

Comptroller of the Currency Thomas Curry and Federal Reserve Governor Jerome Powell explained that a charter repeal process would depend on a bank being convicted of a crime, for which Powell said the Justice Department has “total authority.”

All of the regulators stated they are working on improving regulations and enforcement and disputed that it was up to the Department of Justice to decide whether prosecution was appropriate. (The Justice Department did not have a witness at the hearing.) They were reluctant to weigh in on whether they thought HSBC should have faced trial, even though they consult closely with the DOJ on bank’s activities.

The Committee hearing was a good indication that the current system to bring banks to justice is disconnected and dysfunctional. There is no incentive to comply with the law when there are no consequences for individuals and only meager monetary penalties for financial institutions. Until the punishment fits the crime, there will be a continued disregard for anti-money laundering obligations. Subsequently, the US financial system will continue to complicity finance organizations responsible for drug and human-trafficking, extreme violence and terrorism.

Sources:

Warren Questions US Agencies’ Light Touch on Money-Laundering (click here)

Congress must end “too big to jail” (click here)

US Senate Committee on Banking, Housing & Urban Affairs (click here)