Capital amnesty may legitimize criminal assets

Tirana Times
By Tirana Times March 7, 2020 12:50

Capital amnesty may legitimize criminal assets

Interview with Dr. Zef Preci, Director of Albanian Center for Economic Research (ACER)

Mr Preci thank you for this interview with Tirana Times. I want to start by asking your expert insights on the latest initiative put forward by Prime Minister Rama for a full fiscal and penal amnesty for Albanian citizens that want to formalize their accumulated savings and other forms of income. Do you believe this measure is necessary at this time?

Firstly, I would like to thank you for the interview as well. Although the specific provisions of the most common types of fiscal amnesty vary from country to country, they share a common feature: a temporary amnesty period during which delinquent taxpayers can resolve their unpaid tax debts or rectify other tax violations with reduced financial and legal penalties. Generally, amnesties are undertaken to include all taxpayers or large groups of taxpayers, although specific amnesty conditions may vary.

In my opinion, the launch of this complex initiative (fiscal amnesty is not only legal, but also social, political, because it has to do with human rights and equality between citizens, the country's relations with international financial institutions, etc.), more than an indication of the awareness of the government, it shows the serious problems which the business climate in our country faces. So, the 2019 ended with a serious non-realisation of budget revenues, the amount of money circulation outside banks reached the highest level of the last decade, the Albanian national currency (Lek) remains appreciated due to the presence of large amount of money from criminal activity for two to three years, the so-called "war against informality" of the government undertaken over the last four-five years resulted in a failure, while the influence from lobbyists, oligarchs, domestic and foreign government clients on the decision-making process seems to have reached its peak. In addition to this situation, there is a lack of functionality of the judicial system in the country, serious problems with properties especially regarding their legal certainty, frequent variability of legal acts in the fiscal aspect and diminishing presence of well-known companies (otherwise "brand names") from "offshore" companies or Chinese, Turkish, Arab countries, etc. companies. Moreover, the political situation within the country, especially during the last year when the opposition left the Assembly, does not favour such an initiative.

However, to undertake a full fiscal amnesty under such socio-economic, political and institutional conditions, at least two clearly distinguished aspects are required: on one hand, the great need of the government for supplementary budget revenues as the election year is approaching, and on the other hand individuals and businesses that own undeclared assets and cash, make today's composition of the political decision-making process (governed by a single party) and the law-maker (a quasi-monopoly parliament with missing legitimacy), favorable for the legitimization of this money through amnesty, at least legally. Not to mention the so-called "Anti-KCK package" and related implications, which deserves another special analysis...

What are the key expected positive impacts of this measure? PM Rama in his rationale mentioned that the injection of legal money into the system will be beneficial in many fronts including the reconstruction program. Do you agree with these arguments?

From the history of economy we have learned that the first documented tax amnesty dates back to more than two thousand years ago, as described in the Rosetta's Stone (200 B.C.) in Egypt, which envisioned tax evaders being released from prison. By this I mean that fiscal amnesty is not an Albanian phenomenon, it is old, probably as much as the state itself.

Meanwhile, in our country, the idea of undertaking a full fiscal amnesty, which would lead to a "zero year" in terms of financial resources, origin of assets, etc. of individuals and businesses is a well-known idea taking into consideration the last two decades. However, as our experience over the last two decades has shown, since this initiative was first launched in the domestic policy-making environment, all efforts made during this period to bring under common denominator matters such as: steady increase in budget revenues, reduction of the informal sector of the economy, creation of conditions for credit expansion of real economy by the banking system, sustainable and final resolution of property and land ownership problems, narrowing the gaps for money laundering that enter into the economy from fiscal evasion, corruption of officials and organized crime, good governance practices on public finances as well as domestic obligations stemming from treaties, conventions and international agreements including those with the IMF, etc., have proved unsuccessful, if not a complete failure. 

So apart from partial fiscal amnesties such as pardoning the interest on water and electricity bills, social and health contributions accumulated interests - pardons that remain inextricably linked to electoral campaigns, they have therefore been "translated" in favor of governments to the different strata of society – the very broad and high cost amnesty for the entire Albanian society, such as the legalization process, carried out before the urbanization of informal construction, remain a failure and are counterproductive.

It is difficult to find an exhaustive explanation on what moral and legal basis the Albanian governments of the last two decades have supported the legalization process, the result of which is the failure to meet the legal obligations for the protection of the state institutions territory (and therefore private and public property and land are occupied by the uncontrolled and unregulated movement of the population), and on the other hand the legitimization of this process that continues to this day through the issuance of ownership acts (certification) using budgetary funds to compensate landowners whose territories have been occupied informally. If the legalization of informal construction is significantly motivated by electoral interests, the use of public funds to compensate owners is nothing more than the "privatization of benefits and socialization of losses”, i.e. a failed variant of amnesties. Shortly, our experience does not help us undertake such an initiative, especially in the context of the current condition of Albanian society and state.

The arguments used so far for undertaking such an initiative fall short on just one argument: is there any barrier today to put into circulation the savings and equity of that part of society and business that has provided them in legal manner? I think not.

Is the Albanian society ready, one part that regularly pays taxes and levies both individually and as a business (i.e. "the obedient") to accept that another part (the "disobedient one"), which has not paid taxes and social security thus breaking the laws at that time, to be placed in a privileged position thus providing competitive advantages in the market? ” I think not.

Is the country's opposition ready to make a historic compromise on not changing the legal framework of the general fiscal amnesty initiated by the current majority in the future when in power? I think not.

Does the Albanian administration have the necessary capacities and infrastructure to take such a step? With more than 1/5 of the money circulating outside of the banking system, when property and land registration has not been completed and there are serious problems and endless conflicts, when cash flow from criminal origin poses a threat to the banking system itself, I do not think it is possible. The Albanian tax administration is not prepared for such an initiative.

In addition, there is a high likelihood that in an economy that is almost half informal and where there is a circulation of hundreds of millions of euros from drugs and trafficking, money from corruption and organized crime, this operation (fiscal amnesty) will be widely used from the latter, endangering the country's macro-economic and political stability at the same time.

Last but not least, there is a necessity for coordinating this policy with international financial institutions, in particular securing IMF support. Experience of countries that have pursued such policies shows that the IMF has strongly opposed the undertaking these policies, and the institution's reliance on policies that promote the expansion of the taxpayer base through narrowing the informal sector of the economy should not be confused with, because it allows the official penetration of criminal money into the economy as well. The latter has neither been allowed nor encouraged and I do not believe that it can find IMF support even in the case of our country.

Often international financial institutions have been skeptical and even refused previous attempts for such blanket amnesties. Do you foresee a similar kind of position for this measure as well? Can it be overruled?

To be frank, I think there is a different notion about the assessment of a country’s socio-economic situation by those who see it "from the outside" (e.g. international financial institutions) and from domestic academic and professional circles.

This is probably due to the fact that the first ones start from long-term perspectives, from the experience of poor countries that have taken decades to embark on the path of development, from fancy communications with the government and its institutions, etc. the latter form of the observations of daily life or the expectations built by one government or another... Between them lies the difference between real and virtual Albania. This perhaps gives illusory support to the argument that the government will secure the support of international financial institutions towards such initiatives, just as it is difficult to find an argument for silencing these institutions against the country's cannabis crisis 4-5 years ago…

In my estimation, the country's current macroeconomic situation, problems with public debt, etc., make the presence and support of the IMF, world financial institutions and EU, more necessary than ever. The fact that any electoral rush in the name of "sovereignty" or a purely numerical majority in the Assembly of Albania for a full fiscal amnesty may lead to the depreciation of our economy by specialized agencies such as and become an alarm for our country's creditors. This would have serious consequences for its economic and political stability as well.

Some categories exempt from the amnesty mentioned are politicians, public administration high ranking officials and alleged criminals that are now the subject of operation ‘OFL’. How can these exceptions be operationalized in reality? Is it easy to separate these categories?

It is interesting to note that this police operation was originally proclaimed by the government as legal proof that bypassing the "anti-Mafia" law would accelerate the collection of assets and money in the state budget which the justice system had robbed from citizens and businesses by “selling its decision-making”. It was later transformed by setting up a "sui generis" structure that duplicated somehow the special anti-corruption unit (known as SPAK), which turns out to be operating on the basis of information gathered two or three years ago exactly against these assets. However, avoiding the debate over the constitutional basis of setting up this structure, I think that the accumulation of the assets and money in the state budget  that public officials in the justice and other fields of public and political services remains the main indicator of the performance of all state structures, both the old ones and the new, with and without the duplication of their legal functions. On the contrary, the justice reform itself and the expectations of the Albanian citizens are at stake.

Based on the way in which the implementation of the OFL operation is proceeding, the impression is that the electoral use of this legal initiative is equally present. This is due to the simple fact that law enforcement agencies have to work 24/24 hours, not with campaigns, announcements that are sent out 2-3 years late give time to criminal activity and the possession of assets by this activity to distribute and lose traces of these assets by doing their own cleaning. Herein lies the greater danger of the full fiscal amnesty itself launched by the current government. There is an obvious risk that assets of criminal origin can be legitimized and marketed legally by further distorting them. I am using the term "deformation" as there is still sufficient evidence today that a number of building permits for skyscrapers or public-private partnership projects have been granted to companies created specifically for such activities (without appropriate experience), without their necessary financial capacities nor supported by banks, etc., which have led to reasonable doubts about their use for money laundering of criminal origin as well as the increase in sale prices even though transactions in this market are minimal.

I mention this case to say that there is sufficient evidence that a large number of Albanian businesses, including large ones, have informal parts, that formalizing this part is a historic process and that any rush in providing amnesty only increases the chances of money laundering and the widespread penetration of organized crime segments into our national economy, further exacerbating the business climate in the country.

Many have alleged that this measure comes at a political context and for electoral purposes. How do you see the context, the timing and situation around, in which this measure is proposed? How do you see the initial steps of SPAK activities?

There is no doubt that the period in which the full fiscal amnesty initiative is being introduced, as well as the OFL operation, have been undertaken in a strong electoral context, and not without regrets, I can say that, among other things, widespread political support, compromise between the government and the opposition in such initiatives is a "si ne qua non" condition for their success. Nevertheless, for the success of the Special Anti-Corruption Unit (SPAK) to which the OFL operation is linked, I think it is urgent to amend the legal framework on which this institution is set up.

Under this law, the SPAK is the body responsible for investigating and prosecuting corruption and organized crime representing the prosecution before special courts. The Special Prosecution Office “… prosecutes and represents the state on behalf of the State before the Court of First Instance against corruption and organized crime, the Court of Appeal against corruption and organized crime, and the Supreme Court, takes action and supervises the execution of decisions, criminal activity, and performs other duties assigned by law. ”If we take a look at the scope of the activity of the Romanian National Anti-Corruption Directorate (DNA) established in 2002 - the model agency for our SPAK and the neighbouring countries where justice reform is being implemented, we cannot stay without noticing a change that I think it will become problematic in the efficiency and results of this agency very soon.

Thus DNA - the specialized anti-corruption prosecution agency in Romania - focuses on and specializes in dealing with high-level and medium-level corruption cases that were previously handled in all prosecution offices and police inspectorates. That is, the creation of a special unit relates to the concentrated use of the resources available for specialization, training and technical ones. From a simple comparison of the activity focus shows an ambiguity and lack of priorities in our agency that is taking shape these days. SPAK has a formally broader jurisdiction but is sufficiently undefined...

The second detail in the similarities and differences between the Romanian DNA and the Albanian SPAK concerns the legal definitions regarding the criteria on the basis of which the agency exercises its activity. According to Romanian law, DNA bases its activity on the three basic criteria, which are: a) public positions held by persons suspected of having committed a corruptive act; b) the value of the damage caused; c) the value of the bribe given or received. While the law on Albanian SPAK suffices with the foregoing, stating in which institutions the Special Prosecution Office represents the indictment as well as its independence in the investigative process as constitutional prerogatives. Perhaps this is the biggest contribution that the SPAK can offer to the Albanian government and the international community in the first weeks of its operation.

Do you think this measure has the potential to improve the macro-economic indicators of Albania’s performance which have all turned out to be less than expected? 

To achieve success in the case of a full fiscal amnesty, as the world experience shows, strong political and managerial leadership is needed; stringent measures are needed to strengthen the internal control of the tax administration, the recognition and implementation of a Code of Conduct, as well as the merciless punishment of corruption. To the extent these are found in our country, any comment would be unnecessary. Meanwhile, it is the worldwide experience that teaches us that in the case of full fiscal amnesties, the shortfalls are medium and long term, but if the preconditions analyzed above are met…

Tirana Times
By Tirana Times March 7, 2020 12:50