Guidelines for Norfund

The Commission has been asked to make recommendations which can be

incorporated as elements in the operational guidelines for investment activities by the Norwegian Investment Fund for Developing Countries (Norfund). It has also been asked to assess the extent to which transparent investments via tax havens contribute to maintaining the structures used to hide illicit capital flows from developing countries. The Commission accounts below for its conclusions on these issues and provides recommendations concerning Norfund’s operational guidelines.

9.2.6 The Commission’s recommendations on Norfund’s investment activities 1. Guidelines and reporting

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a) In dialogue with its owner, Norfund should develop and publish ethical guidelines for its choice of investment location.

b) Norfund’s operations divide naturally into two components: (i) fund investments in which the institution joins forces with other investors to establish a fund which acquires shares in or lends money to companies, and (ii) direct investment in companies in developing countries in the form of loans or share purchases (often in combination – in other words, loans to and shares in the same company). The Commission believes that Norfund should report the following:

− the proportion of Norfund’s capital invested in funds and direct investments respectively, and the return on these two categories as well as on the sub-categories of loans and shares before and after tax

− where the funds are registered

− a breakdown by country of the investments made by the funds in which Norfund invests (overview of how much goes to each country and continent)

− co-owners of the funds

− for both funds and direct investment, how the investments break down proportionately between loans and shares

− for fund investments, Norfund’s share of tax paid as a proportion of its share of the capital in the fund.

c) Norfund should work to ensure that the funds in which it invests have publicly accessible accounts.

Most of the type of information which the Commission believes Norfund should present under section (b) is easily available and very useful for owners, investors and the financial market in general. Some of the data are also available today, either on Norfund’s website or in its report on operations. In the Commission’s view, this type of information should be brought together in one place and positioned centrally so that stakeholders can readily identify the principal features of Norfund’s investment strategy.

Norfund has previously reported that it contributed NOK 3.2 billion in tax revenues to developing countries in 2008 (Norfund’s website, see also chapter 7 above). If, on the other hand, that figure is weighted by Norfund’s share of the risk capital, tax

payments come to only NOK 66 million in the same year. The Commission takes the view that Norfund should report in the future on its weighted contribution to tax paid by the companies as a proportion of the total risk capital. In addition, Norfund should report what it has paid in tax deducted at source as a proportion of its own share of the investments.

2. Analysis of investment locations

The Association of European Development Finance Institutions (EDFI) adopted a recommendation in May 2009 on guidelines for the use of offshore financial centres by its member institutions. Norfund and other state-owned funds which invest in developing countries belong to the EDFI. The main thrust of the guidelines is that members of the association should avoid investing in or via jurisdictions which fail to satisfy certain minimum standards. These requirements relate mainly to systems for combating money laundering (the FATF’s recommendations) and information sharing on tax issues (OECD agreements). The guidelines also include requirements related to

147 involvement in capital flight from developing countries, but these have no specific content. As a result, the Commission recommends that:

a) Norfund should conduct country analyses of the jurisdictions it utilises

b) such analyses should include a detailed assessment of the relevant legal system, including legislation on tax, company and enterprise registration, banking and finance, money laundering and anti-corruption

c) Norfund should assess whether African countries can be found which do not have the harmful structures associated with tax havens and which can function as investment locations.

3. Choice of commercial jurisdiction

The Commission would make the following recommendations concerning Norfund’s choice of commercial jurisdictions:

a) The institution’s goal should be that the investment funds in which it is a partner will be registered in the country, or one of the countries, where the companies in receipt of the investments are located. This will ensure a better tax base for the developing countries and will send an important signal globally that a genuine desire exists to eliminate the damaging effects created by tax havens, regardless of the costs this might be incurred in the short term. Such investment could moreover make a positive contribution to improving relevant legislation and to developing the banking/financial sector in the investment country.

b) The Commission takes the view that Norfund can choose to participate in funds based outside the countries in which the companies receiving the investments are located when good reasons exist for so doing. In that context, Norfund should make proposals on investment countries which are considered and approved by the owner. It follows from the Commission’s discussion in chapters 2 and 3 that such jurisdictions should as far as possible possess credible public company and owner registries, no secrecy regulations, and legal structures which create as little asymmetry as possible and which are directed at undermining the rule of law in other states as little as possible. When choosing investment jurisdictions, Norfund should endeavour to find at least one African country. It is also anticipated that Norfund will involve its sister organisations in this work.

c) Norfund is one of many investors in various funds, and often has a relatively small holding. The Commission has discussed what view to take on this, and has decided that it would be desirable in the long term for Norfund to invest together with investors who do not wish to use tax havens. However, the Commission is aware that it could be difficult to find such partners in the short term. It

accordingly recommends a transitional arrangement whereby Norfund gradually reduces new investment via tax havens to zero over a three-year period after the Commission’s recommendation take effect. That length of time will give

Norfund and the Norwegian authorities time to work on the investors with whom Norfund invests so that these give their support to the work of combating harmful tax regimes.

d) The Commission takes the view that no purpose would be served by requiring Norfund to withdraw from existing investment funds currently registered in tax havens. This is partly because the institution would lose money on such a withdrawal, particularly in those cases where the lifetime of the funds is

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relatively short, and also because such sales would reduce the size of Norwegian development assistance funds.

4. Cooperation with Norfund’s sister organisations

The Commission takes a positive view of the fact that the EDFI, through its guidelines on the use of offshore financial centres, demonstrates a view that its members should take account of the role of tax havens in relation to developing countries. However, it also believes that these guidelines are not suitable for excluding locations with harmful structures, and accordingly recommends that:

− Norfund works for a revision of the criteria for selecting investment locations to bring them into line with the criteria specified in sections 1 and 2 above.