By Claire Provost From The Guardian, UK

Controversial UK development fund spent almost £180m via jurisdictions including Cayman Islands and Luxembourg

The controversial private-sector arm of the British government aid programme routed nearly half of its investments in developing countries last year through offshore tax havens, the Guardian can reveal, despite the prime minister’s pledges to clamp down on financial secrecy and help poor countries boost their tax revenues.

CDC, formerly the Commonwealth Development Corporation, has been criticised for years over its use of tax havens but there has never been figures for the extent of their use until now.

A Guardian analysis of data released in response to a Freedom of Information request reveals how the CDC spent almost £180m of a total £375m of development money via Mauritius, the Cayman Islands, Luxembourg, Guernsey, Jersey and Vanuatu

Ivan Lewis, the shadow development secretary, said both the Department for International Development (DfID) and CDC had serious questions to answer about the use of tax havens. “It is extraordinary that CDC, which is effectively the investment arm of DfID, is using tax havens … CDC and DfID have a moral duty to adopt the highest ethical standards if they are to have moral authority as the UK’s leading development actors,” he said.

Wholly owned by DfID, CDC is supposed to be a “pioneering investor” in developing countries. Its net investments count as official aid, and towards meeting the UK commitment to spend 0.7% of gross national income as aid. Coalition development secretaries have pushed for increased private sector investment as a core plank of British aid policy.

David Cameron, meanwhile, put clamping down on financial secrecy at the heart of Britain’s recent G8 presidency and said companies paying proper taxes “matter just as much” as aid.

According to the new data, more than £125m was sent via Mauritius, including £60m for investment in India. Mauritius is known for its secrecy, negligible corporate tax rates, and for being a favoured conduit for wealthy individuals and multinationals wishing to avoid tax on African and Asian profits.

More than £30m went via the Cayman Islands, including £10m for investment in China and £2.6m for investment in Bangladesh.

Almost all of CDC’s money goes through investment funds, which then invest in businesses in developing countries. In addition to the money spent last year, much of which will be a result of previous commitments, CDC made at least six new long-term financial commitments to funds in Mauritius, Luxembourg, Guernsey, and the Cayman Islands.

Development experts said the CDC’s use of tax havens undermined the UK’s efforts to help poor countries.

Alex Cobham at the Centre for Global Development said: “CDC’s behaviour is completely at odds with the government’s positions on the importance of tax for development, and the need for financial transparency to fight corruption and illicit flows.”

Nuria Molina at ActionAid UK said the evidence revealed by the Guardian was “staggering and indefensible”, because tax havens deprive poor countries of money that could otherwise pay for education, hospitals, and decent roads.

But a spokesperson for the CDC defended its use of places such as Mauritius, saying this was key to bringing in other investors, who favour such jurisdictions’ clear legal systems and stable environments.

“It is a sad fact, but many developing countries do not yet have these systems in place. One day that will change, but in the meantime CDC – and other development investors such as the International Finance Corporation and the African Development Bank – uses OFCs [offshore financial centres],” he said.

Other European countries, including Norway and Sweden, have moved to restrict the use of tax havens by their equivalents of CDC. In July, the Belgian government approved a bill which would ban its version, BIO, from investing in low tax or offshore jurisdictions.

DfID said it will ensure CDC only invests via jurisdictions deemed to have substantially implemented tax standards, according to the OECD global forum on tax and transparency. The OECD mechanism has been criticised by campaigners as weak and insufficient, however.

A DfID spokesperson said: “Every business CDC invests in is required to pay the taxes owed in the countries in which they operate. This is producing real results: last year companies in which CDC invests paid £2.6bn in taxes to their local governments, and together provided over a million jobs in some of the world’s poorest countries.”

Jayati Ghosh, economics professor at Jawaharlal Nehru University in New Delhi, criticised the idea that CDC could invest responsibly in India via Mauritius, however. “‘Responsible investment’ in Mauritius is an oxymoron – this is a tax haven that is especially exploited by Indian investors because of India’s double taxation agreement with Mauritius … It seems to be inexplicable why a development finance institution concerned with the public good would choose that location,” she said.

The CDC has a controversial history. In 2011 MPs on the international development select committee said it was not doing enough to help tackle global poverty and paid its bosses too much. Last year the CDC launched a new business strategy, which says it will also invest directly in businesses, focus more on poor parts of sub-Saharan Africa and south Asia, and pay more attention to its impact on development.

PHOTO: George Town in the Cayman Islands, one of the low-tax jurisdictions through which CDC has channelled aid. Photograph: Stephen Frink/Corbis

For more on this story go to:

http://www.theguardian.com/global-development/2013/aug/14/cdc-aid-tax-havens