C Explanatory
memorandum by Mr Pleskachevskiy, rapporteur
1 Introduction
1. The underground or informal/shadow/grey economy is
by its very nature difficult to grasp. It is a parallel, bustling
world where jobs, services and goods are created and traded. However,
the money flows thus generated escape official accounts and government
budgets. There is a growing awareness – and concern – that it represents
a large and growing share of the overall economic activity in Europe
and the world at large. Moreover, part of the economic activities
unaccounted for are illegal transactions that fit more closely our understanding
of economic crime or “black” economy. They cover corporate crime
(“crime in business”) and organised crime (“crime as business”).
2. The informal economy and economic crime can take many forms,
the most common being undeclared work, smuggling, fraud, drug trafficking,
trafficking in human beings, counterfeiting, tax evasion, corruption, money
laundering, cybercrime and organised crime. They all produce illicit
gains, distort competition in regular markets and erode the capacity
of states for good governance. From a Council of Europe perspective,
this is also a direct threat to democracy, development, respect
for economic rights and the rule of law. Whilst this Organisation
has devoted considerable attention to the issue of economic crime
(notably following the Committee of Ministers Recommendation No.
R (81) 12), its consideration of problems stemming from the underground
economy has been insufficient.
3. The underground economy and economic crime have long been
a problem. They have kept abreast of the times by evolving and taking
advantage of the fact that official, state bodies are slow to adapt.
This phenomenon, which is now difficult to quantify in economic
terms and probably underestimated, varies greatly from one member
state to the next: it is thought to range from under 10% of gross
domestic product (GDP) in Austria and Switzerland, to about 25%
in Greece, 33% in Turkey, 37% in Bulgaria, around 40% in the Baltic states
and over 60% in the South Caucasus countries, to mention but a few.
The restructuring of the international economy in the last twenty
years, the geopolitical changes following the fall of the Berlin
Wall (globalisation, spread of cyber-technologies, opening of borders,
proliferation of free-trade zones, etc.) and, last but not least,
the global economic crisis have fostered the growth of the underground
economy.
4. The economic crisis has not only fuelled the underground economy
(in particular tax evasion, counterfeiting and money laundering),
but has also drawn attention to economic and financial practices
which, although legal, are not sufficiently well regulated and have
the same “side effects” as the underground economy.
Note The latter
often results in violations of citizens’ socio-economic rights,
whereas it is essential that these rights be protected, particularly
in times of economic crisis. The flouting of socio-economic rights
in turn leads to the violation of human rights in general and undermines
democracy and the rule of law in many states, particularly in those
referred to as the “new democracies” where the rule of law is still
very fragile and vested interest groups are firmly rooted.
5. The Council of Europe works in close collaboration with other
international and European organisations in this field, such as
the Organisation for Economic Co-operation and Development (OECD),
the World Bank, the European Union, the European Bank for Reconstruction
and Development (EBRD), the United Nations, Europol and Eurojust.
It has a series of legal instruments – conventions and their monitoring
mechanisms – that help member states’ efforts to eradicate the underground
economy and economic crime. Together with the European Union, the
Council of Europe is working on several projects dealing with corruption,
cybercrime, money laundering, terrorist financing, criminal asset
confiscation, economic crime and human trafficking in eastern Europe,
in addition to many long-term programmes for strengthening judicial
co-operation of European officials responsible for action against
organised crime.
6. The Council of Europe also follows closely the activities
of the OECD as regards corruption, tax evasion, counterfeiting and
piracy, money laundering and terrorist financing. The two organisations
have recently updated their joint Convention on Mutual Administrative
Assistance in Tax Matters (ETS No. 127) with an additional protocol
(CETS No. 208), which opens the instrument for accession of non-member
states. Moreover, the OECD Directorate for Financial and Enterprise
Affairs (DAF) has set itself the priority of fighting corruption
through its Anti-Bribery Convention
Note and
its working group. The latter, in its conclusions on bribery in
international business transactions adopted in June 2009, acknowledged
that “the global economic crisis may lead to increased competitive
pressures on companies to potentially engage in corruption, notably
in public procurement” and reaffirmed that the fight against transnational
bribery should remain a priority.
7. As it is difficult to be exhaustive on the underground economy
and economic crime, the rapporteur chose to focus on the specific
areas where the activities of the Council of Europe, in partnership
with other international organisations, can have the greatest impact.
2 The different
facets of the underground economy, including economic crime
8. The shadow economy springs from human nature, which
makes men choose underground activities in search of “better” conditions
– bypassing official laws, rules, regulations and practice. The
effect is that the underground economy impacts heavily on the official
accounts of states by depriving them of tax income and offsetting
vital investment; it also penalises law-abiding businesses by subjecting
them to unfair competition which, in particular, uses a labour force
which is often excluded from social protection in terms of benefits, working
conditions and contract enforcement. In times of economic crisis,
European governments have an added moral imperative to be vigilant
in protecting their resources (human and financial) and curbing
losses due to criminal activities.
9. Taking into consideration the gravity of the impact and harm
caused, the most severe forms of underground economy have been classified
as economic crime. Committee of Ministers Recommendation No. R (81)
12 contains a list of offences. These are: cartel offences; fraud
and abuse of economic situation and public funds; computer crime
(including personal data related violations); bogus firms; fraudulent
bookkeeping; fraud concerning economic situation and corporate capital
of companies; violation of security standards; fraud in respect
of creditors (including violation of intellectual and industrial
property rights); consumer fraud; unfair competition (including
bribery of employees and officials) and misleading advertising;
fiscal offences and evasion of social costs by enterprises; customs
offences; abuse of money and currency regulations; stock exchange
and bank offences; and environmental crime.
10. It is presupposed that these offences are knowingly committed
by persons with special business knowledge in the exercise of their
profession or functions. The boundary between the underground economy and
economic crime is blurred, as not only business entities but also
more and more individuals engage in off-track activities with wide-reaching
negative consequences for the economy and society at large. Minor infringements
which go unnoticed and unpunished may lead to more serious offences,
gradually increasing the feeling of impunity and de facto erosion of the rule of
law.
11. In central and eastern Europe, the informal economy thrived
under the communist system because it enabled people to remedy the
shortage in goods and services that the state-run economy failed
to provide. Informal economic activities in those times were associated
with economic freedom in the context of planned and ailing economies.
Note The
subsequent transition to market economy and a democratic governance
system released a vast labour force accustomed to shadow economy
or eager to work informally to “help themselves” as legal frameworks
and social systems were undergoing complete transformation.
12. With the current economic crisis, the informal sector has
resumed its expansion, thus cushioning the effects of unemployment
and poverty for many Europeans as job and income pools have been
shrinking. However, this may have attenuated social tensions and
prevented them from turning into violent disturbances in many countries.
Some experts believe that increased involvement in underground economic
activities has also helped avoid a chain of bankruptcies across
Europe, especially in smaller businesses.
13. World Bank research has shown that there is a strong correlation
between the size of the informal sector and the indicators reflecting
the “ease of doing business”: reducing the cost of doing business
helps countries improve their competitiveness and also reduce informal
economic activities. Moreover, poorer countries tend to have larger
shadow economies. The key driving forces of the shadow economy include
a heavy tax burden, cumbersome labour market regulations, low quality
public services and the state of the formal economy.
Note
2.1 Phantom jobs, undeclared
work
14. It is not rare, especially in eastern Europe, that
employees receive part of their remuneration informally as “envelopes”
or have to work for free even when they are officially on “technical
leave”. Unfortunately, this type of practice received a boost with
the global economic crisis as a sort of alternative to unemployment. According
to the OECD, at least 1.8 billion workers across the globe work
without any contract or social protection, as compared to only 1.2
billion who work in the legal sector. The International Labour Organization (ILO)
estimates that the ongoing economic crisis has cost at least 52
million official jobs, pushing workers into poverty, emigration
or undeclared employment. This precarious human condition may further
breed clandestine activities, such as smuggling, racketeering, trafficking
in human beings and even slavery.
15. A large source of undeclared work is migrant labour, especially
in the construction sector, agriculture, trade and services. An
additional factor is part-time and seasonal employment. Not only
does such undeclared labour cause serious friction and security
concerns in society in general, but it also distorts the functioning
of national welfare systems and erodes corporate compliance with
core labour standards. Notably, a trend for "low-cost" labour leads
to a race to the bottom, which depresses overall remuneration levels
of all workers, diminishes revenue of the social protection system
and increases the strain on these systems as welfare benefits are
abusively claimed by officially unemployed persons who are in reality
undeclared workers.
16. We shall note specific problems that Roma communities and
some other vulnerable groups (including minorities, refugees, asylum
seekers and displaced persons) are facing in many European countries.
These groups suffer from a particularly high level of unemployment
(over 70% in some countries) and are at a high risk of sliding into
the underground economy where they become locked in by seeking minimum
subsistence. In the framework of its country-by-country monitoring
reports, the European Commission against Racism and Intolerance
(ECRI) has issued a series of recommendations pleading for better
socio-economic integration of such communities through targeted
educational measures, support for employability training and self-employment
schemes, as well as improved access to decent housing and public
services.
17. Any effective strategies aiming to diminish the extent of
informal labour need to involve employers' and workers’ organisations
very closely and tackle administrative or regulatory barriers to
entry into mainstream economic activity. Moreover, state authorities
need to make special efforts to stimulate job creation and to reinforce
job inspection systems, including severe and dissuasive sanctions
for any infringement of labour or social protection codes. Some
economists argue that eliminating cash in labour market transactions
would help curb illicit activities. Norway, for instance, decided
to ban, as from January 2011, payments in cash for manual labour,
and anyone acquiring goods or services in the underground economy
is deemed financially liable for the seller’s actions.
Note The rapporteur believes that the Council
of Europe should examine trends in undeclared work more closely,
together with the IOM (International Organization for Migration)
and the ILO (International Labour Organization), in the light of
member states’ commitments to uphold core labour standards and decent living
conditions.
2.2 Invisible networks,
organised crime
18. Whilst “Europe without dividing lines” remains a
major pan-European political and economic goal, malicious minds
have long taken advantage of greater permeability of national borders
(not least as an unintended consequence of the Schengen Agreement)
for smuggling, fraud, counterfeiting and trafficking purposes. Organised
transnational rings operate criminal networks as shadow enterprises
with experienced “managers” and cohorts of disciplined “employees”
or complicit “intermediaries” – to the detriment of the rule of
law, thousands of victims and efforts to build a more unified (politically
and economically) greater Europe.
19. Globally, organised crime and trafficking account for about
a third of the world’s illicit money flows, which are estimated
at $2 trillion per year.
Note The
United Nations Convention against Transnational Organized Crime
Note remains the main international
instrument in this field. It helps countries use the mechanism of
the convention to adjust domestic provisions on criminal offences;
to co-ordinate frameworks for mutual legal assistance, extradition,
witness protection and law enforcement co-operation, as well as
facilitating cross-border technical assistance and training. A series
of Council of Europe conventions on mutual legal assistance, extradition,
cybercrime and trafficking in human beings usefully supplement the
global action through intra-Europe efforts.
20. Moreover, following the joint Council of Europe–United Nations
study and Assembly
Resolution
1782 (2011), there is increased public awareness that trafficking
of human organs constitutes an extremely serious problem worldwide
and that a new Council of Europe convention, open to non-member
states, to combat trafficking in organs, tissues and cells of human
origin is necessary.
Note The rapporteur views
this as a timely and highly pertinent initiative that should help
enhance Europe’s common legal space and trigger action beyond this
continent. Furthermore, considering that the last Council of Europe
study on organised crime was published in 2005, it seems necessary
to prepare a new study.
2.3 Fraud and tax evasion
21. It is a well-known story that the infamous criminal
Al Capone was sentenced and jailed not for his most odious crimes
(due to lack of proof), but for large-scale tax fraud. Nowadays,
the action of public tax services still proves highly useful in
helping to identify and dismantle tax evasion schemes as well as
much more serious tax fraud cases and criminal enterprises for which
the concealment of taxable income is only the “tip of the iceberg”.
Research also shows that underground economies tend to be larger
in countries with weaker institutions for tax compliance.
22. The Tax Justice Network (TJN), promoting transparency in international
finance, estimates that “tax is the foundation of good government
and a key to the wealth or poverty of nations”, yet “assets held
offshore, beyond the reach of effective taxation, are equal to about
a third of total global assets”. Such hidden assets of about $250
billion result in a loss of tax revenue of about $11.5 trillion
each year (due on the income from these assets); in addition, over
a trillion dollars annually in proceeds from crime and corruption
from developing and transition countries transits through offshore
accounts. Offshore financial centres have in fact become an interface
between the illicit and licit economies, according to the TJN experts.
23. Over the last few years, more determined action by states
has led to major revelations in the media, a spotlight on offshore
tax havens and improved inter-state co-operation in order to avoid
“blacklisting” by the OECD or any bilateral sanctions from the major
global economic players, such as the United States of America, the
United Kingdom, Germany and France. However, much still remains
to be done to render offshore financial services more transparent
and better regulated in a global context. This committee should
subsequently examine the issue in a separate report.
24. The outbreak of the global economic crisis has cast light
on some fraudulent actions in financial markets due to insider trading,
Ponzi schemes, price manipulation regarding stocks, commodities,
real estate and currencies, data manipulation, etc. We have also
seen that some enterprises are set up exclusively to conduct fraudulent
deals and disappear when such “business” is over. European countries
and their major international partners, notably in the G20 group,
are working to improve global rules for the regulation of financial
markets to prevent future breakdowns and to end abnormal practices.
2.4 Corruption and
vested interests
25. Corruption – a misuse of official or decision-making
power for private gain – is an endemic problem in Europe. It thrives
when bad regulation and red tape abound or where transparency, property
rights and law enforcement are weak. Worse still, corruption may
be the cause of poor decisions and bad governance. Empirical evidence
suggests that corruption can result in, on the one hand, reduced
economic growth, productivity and foreign investment, and, on the
other hand, an increased shadow economy and dubious public expenditure.
26. Corruption has many country-specific forms, depending on the
level of democratic and economic development, and the strength or
weakness of domestic institutions responsible for regulating economic activities
and enforcing laws. In some countries, for instance the Russian
Federation and many CIS countries, much corruption stems from insufficient
protection of property rights and vast discretionary powers concentrated
in the hands of state officials. The situation is further aggravated
by the underdevelopment of civil society institutions, which in
some countries may be explained by resistance of corrupt state officials. Strengthening
non-governmental organisations to act as whistle-blowers can help
to detect and prosecute corruption cases.
27. In the more developed countries, a major problem is insufficient
information on the state of affairs in financial markets and the
disproportionate influence of vested interests. In other words,
the work of regulatory authorities is hampered by the failures of
auditors or rating agencies to adequately disclose information on
the true position of some companies. The lack of accountability
and shortcomings in the regulatory and surveillance systems were
clearly revealed during the financial crisis of 2008, which affected
the Western economies more severely than the other economies. These
regulators have literally "slept through" the alarming increase
of high-risk transactions by the financial institutions. A vivid
example of this is that, shortly before the breakout of the financial
crisis, the ING Bank, Fortis, Lehman Brothers and several Icelandic
banks were considered as financially stable and solvent companies.
28. The Council of Europe, and in particular its Group of States
against Corruption (GRECO), takes the problem very seriously. GRECO,
which is a partial agreement established in 1999 by the Council
of Europe to monitor states’ compliance with the Organisation’s
anti-corruption standards, now has 48 members (47 member states
of the Council of Europe plus the United States). Its main aim is
to fight corruption in Council of Europe member states and to offer
expert assistance in improving national legislation on the basis
of the Criminal Law Convention on Corruption (ETS No. 173) and its
additional protocol (ETS No. 191), and the Civil Law Convention
on Corruption (ETS No. 174).
29. The Parliamentary Assembly has also addressed this issue.
Several of its committees have studied the different aspects and
effects of corruption. For example, reports have been prepared by
our colleagues Alain Cousin and Kimmo Sasi, respectively, on the
link between poverty and corruption
Note and on judicial corruption.
Note The Committee on Economic Affairs
and Development has also studied the issue of lobbying,
Note which
remains poorly regulated in European countries and which in extreme
cases may lead to corruption of political decision makers and public
officials (national and European) by vested interest groups, notably
from the business sector. The situation is particularly preoccupying
in central and eastern European countries, where corruption linked
to privatisations or relating to the funding of election campaigns
or political parties is a major problem.
30. It is therefore hardly surprising that many central and eastern
European countries continue to earn low scores on the Transparency
International Corruption Perception Index. The results for 178 countries
in 2010 rank these countries between the 26th (Estonia) and 154th
(the Russian Federation) place, with Azerbaijan and Ukraine ranking
134th, Armenia 123rd and Moldova 105th.
Note They are in stark contrast
to the position of Denmark, Finland, Sweden, the Netherlands, Switzerland
and Norway, which are in the top 10 of the best performing countries.
31. The rapporteur has taken note that the reply from the Committee
of Ministers (
Doc. 12438) to Assembly
Recommendation
1908 (2010) on lobbying in a democratic society (European code of
conduct on lobbying) contains positive opinions and comments of
GRECO and the Conference of International Non-Governmental Organisations
(INGOs) towards the drawing up of such a code. The rapporteur also
notes the intention of GRECO to use its forthcoming 4th Evaluation
Round on “Corruption prevention in parliamentary assemblies, the
judiciary and among other actors of the pre-judicial and judicial
process” to also assess existing standards of conduct for parliamentarians
vis-à-vis lobbyists and lobbying. Ideally, this evaluation should
also cover the executive branch of governance. The Assembly should
continue to follow closely developments in these areas.
2.5 Money laundering
32. Economic crime has changed significantly since our
committee’s last report in 2001.
Note The
events of 11 September 2001 and the resurgence of terrorist violence
followed by the economic crisis in 2008 have made the problem of
money laundering much more central. The understanding that the money
laundered through banks and tax havens may be used to finance terrorism
has sent a shock wave across the world and compelled strong action.
Hence the OECD’s different colour lists of tax havens and the debate
on the lifting of bank secrecy. The Council of Europe, in turn,
adopted
Note the
Convention on Laundering, Search, Seizure and Confiscation of the
Proceeds from Crime and on the Financing of Terrorism (CETS No.
198), which entered into force in May 2008.
33. Money laundering currently has the Council of Europe’s full
attention. In addition to its close co-operation with the FATF (Financial
Action Task Force), an intergovernmental body whose purpose is to
frame and promote policies to combat money laundering and the financing
of terrorism at both national and international level, the Council
of Europe also has a very effective tool, MONEYVAL, the Committee
of Experts on the Evaluation of Anti-Money Laundering Measures and
the Financing of Terrorism, which regularly monitors the efforts
made by member states to combat money laundering. On the basis of
MONEYVAL recommendations, the Council of Europe also conducts technical
co-operation projects (for example, the MOLI/MOLICO projects) in
countries such as the Russian Federation, Ukraine and Moldova.
2.6 Cybercrime
34. The sprawl of new means of communication and new
technologies over the last decade, in particular the Internet, has
had far-reaching implications for society and the economy. The Internet
is used not only as a tool to spread ideas and transmit information,
but also for economic transactions and flows of capital (about 90% of
the world economy depends on digital networks and services). At
the same time, economic crime on the Internet has also increased,
adapting to the new situation very quickly, while policies for ensuring
privacy, security (of networks and data) and consumer protection
have lagged behind at both state and enterprise levels.
35. The Internet is now part of a critical infrastructure that
requires adequate protection and regulation. The Council of Europe
is trying to fill the existing security gaps through its legal instruments,
such as the Convention on Cybercrime (ETS No.185), the only international
legally binding instrument dealing with this issue. It has been
signed not only by numerous member states but also by non-member
states such as the United States, Canada, Japan and South Africa.
Co-operation has also been established with Morocco, Nigeria and
the Dominican Republic.
36. The Council of Europe also adopted, in December 2010, a new
open convention – a binding international instrument criminalising
the counterfeiting of medical products and similar crimes that threaten
public health (Convention on the Counterfeiting of Medical Products
and Similar Crimes involving Threats to Public Health, "Medicrime
Convention", ETS No. 211), including through the use of the Internet.
We trust that this convention will soon be opened for signature.
This is truly urgent as there is a big surge in this criminal activity,
with seizures of fake medicines up by 400% since 2005 in European
distribution networks. In a separate move, the Organisation is updating
its Convention for the Protection of Individuals with regard to
Automatic Processing of Personal Data (ETS No. 108) in order to
take into account the need for better management of data flows over
the Internet, including for the purpose of enhanced transparency
(in the light of overriding public interest) to tackle tax evasion,
copyright violations and other crime. On 28 January 2011, the Council
of Europe and the European Union announced their intention to work
together on optimising their personal data protection rules.
2.7 “Rotten” assets
37. Illicit money flows (that is, money earned, transferred
or used illegally) continue to pose a real problem. Such funds –
including trade and asset mispricing
Note and sham transactions – are
often channelled through tax havens and this has a major impact
on national economies, which invest in public services (infrastructure, education,
judicial system, etc.) but are deprived of substantial dues from
private capital movements and might even be obliged to borrow to
cover the revenue gaps. This is a vicious cycle that leads to a
rise in public deficits, which in turn lead to economic crises,
monetary problems and lower investment levels with disastrous social consequences
and a growing public mistrust in the state’s ability to govern.
There needs to be greater public scrutiny of cross-border capital
flows and more pragmatic international co-operation in this matter,
not least as a means of protecting the national interest, sovereignty
and security.
38. Alongside illegal activities relating to the underground economy,
some perfectly legal financial practices have led to the same results,
in other words, heavy economic and financial losses in terms of
national wealth, economic activities and households’ financial resources.
Here, one should highlight the fault of financial institutions and
credit rating agencies. The latter gave high ratings to derivative
financial products which have since caused so many bankruptcies
in chain, whilst the former traded risky assets repackaged as top-grade without
any due check. This failure in due diligence can be assimilated
to stock exchange manipulation, misinformation and wide-scale customer
abuse – all liable for prosecution as economic crime.
39. The fall of Enron in 2001 was only a premonition of the future
problems that escalated from 2007 onwards: the oversight of critical
financial sectors was largely relaxed (“liberalised”) over the last
decade, instead of being strengthened, and shadow banking practices
became commonplace rather than the exception. Yet the rating agencies
– notably the oligopoly of the “Big Three”, all based in the United
States but operating across the globe – are still paid by the companies
which commission their evaluations and many European banks have
not yet completely cleared their accounts of the toxic assets which
were responsible for the economic crisis. These toxic assets continue
to be a major problem. One perhaps should not be surprised by this
international collision: “[w]hat else could one expect on a highway
where there were neither speed limits nor neatly painted lines?”.
Note
40. One of the aims of the Council of Europe, as indicated in
its Statute, is to protect human rights and to facilitate economic
and social progress in member states. Moreover, provisions of the
European Convention on Human Rights (notably Article 1 of Protocol
No. 1 on the protection of property, including savings) and the revised
European Social Charter cover a wide range of economic rights. Therefore,
in considering the real options to better protect the basic economic
rights of citizens, we should ensure that all member states subscribe
to these legal tools and that citizens are adequately informed in
order to take the right decisions on the use of their possessions.
In the wake of the global financial crisis, we see a strong need
to enhance transparency of financial information on market players
and to strengthen obligations for persons and institutions to disclose
information. A comprehensive mechanism of criminal and civil liability,
including sanctions, needs to be introduced with respect to the
reliability of information provided.
41. Finally, mention should also be made of the damage caused
by hedge funds which speculate on new crises. International financial
speculators, who bear a major responsibility for the 2008 financial
meltdown, are at work again just as some European countries such
as Greece, Ireland, Portugal and Spain are experiencing serious
financing difficulties. This type of activity therefore needs to
be strictly regulated on stock markets to avoid further economic
disasters. The European Union attempts to regulate hedge funds finally
yielded some results in November 2010 when the Alternative Investment
Fund Managers Directive was agreed. Although criticised as imperfect
and diluted, this directive will impose minimum capital requirements,
market licensing procedure and an obligation for such funds to disclose
their investment strategies and accounting practices to investors
and regulators in the European Union as from 2013. This directive
could give inspiration to non-EU legislators to take similar steps
across greater Europe.
3 Responsibility
of states, businesses and citizens
42. The shadow economy has a tendency to thrive when
taxpayers – individuals and companies – consider that the government
demands are exorbitant and unfair. In harsh economic times, economic
players’ tolerance towards rising unemployment, taxes, regulations
and/or inflation is even lower, thus weakening their respect for
the law and fuelling their propensity for underground activities
in order to augment their income, unless strong state institutions
can ensure compliance. Moreover, underground enterprises might stimulate
economic life wherever government has failed to regulate adequately.
43. Quality state institutions, policies and frameworks are therefore
key vaccines against the underground economy. They need to be constantly
adapted to a changing economic and social context. Continued dialogue with
employers’ and employees’ organisations plays a vital role in strategies
to trim informal activities and to improve the overall economic
climate for regular economic activities. The state – as a key regulator
and the guarantor of the rule of law – must seek maximum transparency
in its own affairs and request more transparency from the other
players of the economic system, in particular with regard to ownership
and income of economic entities. As the Assembly’s debate on “Human
rights and business” has shown,
Note the rise of enterprises as highly
influential actors on the global scene should be accompanied by
more clearly defined corporate responsibilities towards society.
44. The expansion of multinational enterprises and financial markets,
accompanied by the liberalisation of the world economy, has diminished
the power of individual states. As political and economic spheres
are increasingly interrelated, both the state authorities and the
corporate sector increasingly share concerns and responsibilities.
It is particularly important to protect sensitive personal data
from abuse by ill-intentioned entities and to raise public awareness
of the need to be vigilant about releasing personal data, especially
over the Internet. We should also bear in mind that for all the
shadowy ventures there is a demand side and a supply side: states,
businesses and citizens should therefore act on both fronts by spotting,
signalling, sanctioning and correcting deviations as far as possible
– including in their own ranks.
4 Concluding remarks:
the need for improved regulation, co-operation and law enforcement
45. As we see from this report, the underground economy
is not an abstract phenomenon. It not only severely cripples legitimate
businesses, violates economic rights and undermines living standards,
but is also a real threat to democracy and the rule of law. We therefore
need to promote a common, inter-state approach to fighting the shadow
economy. To this end, we have to harmonise the notions and clarify
the terms we use. Because there is no uniform definition of underground
economy, even the interpretation of terms such as cybercrime, corruption
or drug trafficking varies from country to country. This is explained
by the specificities of different economic and political systems
and countries. However, the lack of uniform terms is a significant challenge
for developing a common or similar toolbox for use by national jurisdictions.
46. Moreover, recognising national specificities with regard to
the various forms of shadow economy and economic crime, the practical
recommendations and measures on how to address these problems may
also differ. For some economies, it may be useful to carry out privatisation,
to adjust the functioning of public services, to implement administrative
reforms and to strengthen the systems of checks and balances, notably through
professional associations. In the more open and more advanced economies,
the creation of independent supervision mechanisms for ensuring
the truthful (accurate, complete and timely) disclosure of financial
information and the strengthening of regulatory functions may be
necessary.
47. Such measures would reflect a modern approach to protecting
civil freedoms and the principles of democracy. We need to accommodate
these mechanisms promptly, since the era of electronic money and
new technologies brings both new opportunities for market players
and new risks of abuse, as capital travels in less than a second
from one bank to another across the globe. With life getting more
sophisticated, European legislators and governments have to stay
vigilant and continuously adapt their policies in seeking pragmatic ways
to address modern challenges.
48. Sound economic governance entails a strong commitment to the
values of democracy, development and the rule of law. It requires
effectiveness of governing structures based on accountability and
transparency that leave no space for shadow dealings. However, this
state of affairs remains an ideal that the Council of Europe countries
should strive for. To start with, they must refine their data collection
methods so as to be able to measure the true extent of the underground
economy and economic crime in individual countries, to allow cross-country
comparisons and to evaluate progress made further to targeted action
measures introduced to combat the phenomenon. It is also necessary
to analyse the interface of the shadow economy with the formal economy
at national and European levels.
49. There is much scope for improvement in all European countries
in terms of regulation, taxation, state administration and law enforcement.
Moreover, the global economic crisis has clearly pointed to the
serious shortcomings in the existing economic and financial regulations,
above all where the public and international authorities’ supervision
of the activities of financial institutions is concerned. The Basel
Committee on Banking Supervision issued new regulations (Basel III)
in September 2010, aimed at strengthening the security and reliability
of the international financial system by establishing stricter standards
in banking oversight (notably as regards liquidity and prudential
ratios). The EU countries have recently moved to regulate hedge
fund operations on their territory, and other European countries
should follow suit. Moreover, the rapporteur is convinced of the
need for increased scrutiny of business transactions involving the
use of the services of offshore financial centres.
50. At the same time, member states should be careful not to increase
the overall regulatory burden which has been shown to negatively
affect competitiveness, economic climate and growth prospects whilst
also stimulating informal economic activities. They should therefore
assess the weight of their regulatory systems related to taxation,
licensing, labour, environment, health and safety, consumer protection,
and intellectual and industrial property rights, with a view to
determining whether these could be streamlined and the cost of compliance
lowered. The rapporteur further suggests studying the impact of
migrant labour, in particular the trend of “low-cost” labour, on
national welfare systems and on corporate compliance with core labour standards.
Specific assistance could be put in place to help better integrate
vulnerable groups (including minorities, refugees, asylum seekers,
displaced persons and Roma communities) through targeted educational schemes,
employability training, self-employment programmes and measures
to improve access to public services and decent housing.
51. The Parliamentary Assembly must help establish a healthier
financial system and propose further improvements in international
co-operation, such as for the supranational monitoring of money
flows (relating to both electronic and cash transactions), sharing
of best practices in surveillance, investigation and prosecution
techniques, and co-ordination of national policies for combating
the underground economy and economic crime. Some of its proposals
could concern the promotion of whistle-blowing and witness protection, tougher
sanctions for offering bribes (tackling the “supply side” of corruption),
stronger rules on the use of cash transactions and increased penalties
for unrecorded or undeclared cash receipts, the enhanced use of economic
intelligence, and the accelerated implementation and updating of
relevant Council of Europe treaties,
Note etc.
52. Using its existing links with the OECD, the Council of Europe
could explore the possibilities for joint action in order to promote
the participation of those of its member states which are not members
of the OECD in the Working Group on Bribery in International Business
Transactions and their subsequent accession to the OECD’s Anti-Bribery
Convention, which in addition to 34 OECD countries has so far been
adopted by Argentina, Brazil, Bulgaria and South Africa. This would
usefully complement these two organisations’ co-operation on anti-money-laundering
activities and joint instruments for mutual administrative assistance
in tackling tax evasion (Convention ETS No. 127 and an amending
protocol, CETS No. 208).
53. Whilst welcoming the recent adoption of the Medicrime Convention,
we should recall this Assembly’s request, contained in
Recommendation 1793 (2007), that a legal instrument be drawn up that would
cover not only medical products but also a full range of consumer
goods which, if counterfeited or adulterated, pose grave risks to
the lives and health of Europeans. As the implementation of the
Medicrime Convention will require relevant data, the rapporteur
believes that some form of European observatory could be set up
under the aegis of the Council of Europe, possibly in co-operation
with the European Union, to gather data on cases of fraudulent goods
that put public health at risk. This would help to collate the information
necessary to shape further action, such as considering the need
for an additional protocol to the Medicrime Convention so as to widen
the latter’s coverage to all consumer goods. The task is challenging,
but inevitable if this Organisation wishes to remain relevant in
Europe in the context of globalisation by being responsive to Europeans’
needs and by duly protecting their rights.
