Imagine for a moment that airline security were left up to individual states, rather than the federal government. It’s perhaps not too much of a stretch of the imagination to conclude that different states would adopt different levels of security. For example, some states might require their passengers to provide identification to ensure they aren’t terrorists and pass their bags through x-ray machines to ensure those passengers aren’t trying to load illicit materials onto the airplane. Other states, though, might think it’s advantageous to reduce their security requirements. They might argue that by reducing screening, they could trim down wait times and attract more passengers into their airport. They might argue this would create more jobs and incomes within their state.
Do you see the problem with this? Of course by reducing security, those states would also attract another kind of crowd. The criminal kind. Terrorists would take advantage of these weak screening procedures. One state’s security gap would open the entire country to risk.
We would never allow it to happen in aviation. So why do we allow it to happen in banking?
This entire blog post is devoted to three sentences that came out of Senator John McCain’s mouth on Tuesday. “A whole blog post for three sentences?” You might ask. Well, yes. Those sentences were just that shocking. But before I get down to exactly what Mr. McCain said here’s a little background.
In 2004 Congress passed the Homeland Investment Act, which provided a one-time tax holiday for the U.S. multinationals to repatriate foreign earnings. Normally, when companies bring back profits that are earned abroad, they are taxed at the standard 35% corporate tax rate. The Act allowed those companies to bring back their profits—one time only—at a 5% rate. The legislation even specified that the funds should be “earmarked for activities like hiring workers or conducting research” to prevent the companies from using the money for executive compensation or buying back stock.” Proponents argued the funds would generate jobs and other economic activity as companies took advantage of the tax break and brought dollars back to American soil.
It didn’t work.
About two weeks ago, I wrote about the “upward trajectory” of India’s stance on black money and transparency in international finance. I predicted that the country (eventually) would become a leader in this arena.
In case you’ve missed India’s catapult into this discussion, here’s the background.
In April of 2009, after becoming very upset by the evidence there are rivers of ‘black money’ flowing out of India, the president of the Bharatiya Janata Party (BJP), Rajnath Singh, told voters that if they elected his party into office he would, within 100 days, “bring back all the black money stashed in foreign banks and distribute [it] among ‘the common poor people.’” As we know, the BJP did not come to power inIndia in 2009 so fortunately for Rajnath Singh, his party never needed to prove this monumental task was possible. It’s not, by the way.
In the last two years there has been relentless pressure from Indian citizens and politicians on President Manomohan Singh to “bring it back;” a phrase which has become something of a common term in the world’s largest democracy. Unfortunately for India, this has proven to be a monumental—make that impossible—task.
Yesterday Heather Hobson, the jury forewoman in the trial of Viktor Bout, looked the infamous illegal arms dealer in the eyes and announced the jury’s final finding of guilt.
Bout, a former Soviet air force pilot, has been nicknamed the “Merchant of Death” for his role in funneling weapons to terrorists, including the Taliban and Al Qaeda; trans-national criminals; and armed combatants locked in some of the world’s bloodiest conflicts. Though Bout has claimed on a Russian radio program that he has “never gotten into the arms trade,” according to European intelligence sources and documents from an African country uncovered by the Center for Public Integrity, Bout “ran guns for the Taliban on behalf of the Pakistan government.” UN monitors have revealed Bout has shipped “contraband weapons to rebel movements in Angola and Sierra Leone and to the rogue regime of Charles Taylor in Liberia” and has also operated in Cameroon, Central African Republic, Democratic Republic of Congo, Equatorial Guinea, Kenya, Libya, Congo-Brazzaville, Rwanda, South Africa, Sudan, Swaziland and Uganda
In 2008, Bout was arrested in Thailand after an international sting operation led by American undercover agents posing as Colombian FARC rebels convinced the Russian businessman to sell them missiles and rocket launchers. The Justice Department quickly sought his extradition, claiming the weapons would have been used to kill Americans in Colombia. But a reluctant Thailand, not wishing to step on Russia’s toes, refused the extradition request for two years. Finally, almost exactly one year ago, Thailand unexpectedly extradited Bout to the United States. That day, a motorcade whisked him to Don Maung airport and onto a 20-seat American aircraft.
Mountaintops provide a convenient symbol for anything from achievement to power. So it doesn’t come as a surprise that the meeting of the world’s twenty most powerful leaders is called the G20 “summit.” Actually, the copycat nomenclature runs far deeper. For instance: the diplomats who lay the groundwork for the G20 leaders’ trip to the summit? They’re dubbed “Sherpa,” with a dash of self-aware irony, after the Nepalese guides who help mountaineers scale peaks inNepal. And with what may be a move to thrash the symbol to death, the G20 Sherpa’s aides are called “yaks.”
It was just over two years ago that the G20 started seriously talking about illicit financial flows. It was then that a leaked letter from Michael Froman, the U.S. Sherpa, ahead of the G20 Summit in 2009, read: “As we take these steps to increase the flow of capital to developing countries, we also need to prevent its illicit outflow. We should work with the World Bank and others to stem these flows and to secure the return of stolen assets to developing countries.”
At the time, I expressed optimism, but noted that the declaration was only a midway point; the real work was still ahead. I wrote: “G20 summits, much like their namesakes, are often self-admiring [and] short lived…the summit is the halfway point. The descent is often equally, if not more, dangerous than the ascent. After all, once a group of climbers has committed to a project (and by my count there is nothing more committing than climbing a mountain or signing a declaration issued by the world’s most powerful), they have to follow through.”
Although most people don’t know this, the tailspin that Greece’s economy is in now did not begin in 2008, but rather in 2001, when it joined the euro. Although that statement doesn’t necessarily imply causality. The problem was there, but festering. When the financial crisis did get going, it didn’t so much create Greece’s problems, as it revealed them. At the beginning of 2010,Greece found itself on a precipice of financial ruin, driven by years of excess spending and borrowing and insufficient revenue.
To prevent the country from defaulting on its debt, in May of 2010 the International Monetary Fund and the European Union promised to provide Greece with a €110 billion rescue package. But in the terms of this agreement, Greece was to meet certain deficit goals: including reducing the budget deficit to 7.6% of GDP.
To meet this challenging goal, Greece has implemented a series of austerity measures, including spending cuts in the public sector, mainly in the form of pay cuts, pension cuts, and privatization, and also increases in taxes, whether they are indirect, like those levied on alcohol and tobacco, or the VAT. Every step of the way, Greek citizens have greeted these prospects with protests, which have sometimes turned violent. And despite the government’s efforts, the response from the international community has largely been “not enough.” In January, Moody’s and Standard’s and Poor downgraded Greece’s debt to junk status.
Teodoro Nguema Obiang has controlled Equatorial Guinea since he executed his uncle in a bloody coup d’état in 1979. Equatorial Guinea is a country in Middle Africa on the coast. It is one of the smallest and wealthiest countries in the continent, in large part because it holds Africa’s largest oil reserves. Yet the wealth is extremely concentrated in the hands of the government and the ruling elite. As a result over 75% of the population lives below $2 per day, 35% of its citizens do not live past the age of 40, and nearly 60% do not have access to safe drinking water.
Over Obiang’s three decades as president, Equatorial Guinea has witnessed many disappointments. The IMF and World Bank have both withdrawn aid programs, citing massive government corruption and theft. The International Red Cross has accused Obiang of human rights violations. The Alliance of Professional Africans in the Diaspora has called Obiang one of Africa’s “worst dictators,” along with Zimbabwe’s Robert Mugabe and Angola’s Jose Eduardo dos Santos.
In 2009 campaign group and Task Force member Global Witness uncovered documents showing Obiang’s son, Teodorin Obiang, purchased a $38 million Gulfstream private jet, a $35 million Malibu mansion, speedboats and a fleet of luxury cars in the United States. Then, earlier this year, Global Witness revealed that Teodorin Obiang, the son of the dictator, “commissioned plans to build a superyacht worth $380 million.” That’s nearly three times the amount Equatorial Guinea spends annually on both health and education programs.
Yesterday I switched on the radio in my car and heard a familiar phrase. Just as I started listening, NPR had just started reading a story on the Foreign Corrupt Practices Act, or FCPA, and the recent efforts by the U.S. Chamber of Commerce to amend the law. Feeling excited, I turned up my dial.
The Chamber’s basic argument is that the FCPA, the flagship U.S.legislation that makes it illegal to bribe a foreign official, is too cumbersome on U.S. businesses. For months now, the Chamber has been lobbying to weaken the FCPA and has even retained former U.S. Attorney General Michael Mukasey to help. According to a compelling article by Raymond Baker, Director of Global Financial Integrity, the Chamber’s requests include (among many others) giving “subsidiaries of multinational companies a loose rein” with the FCPA so that the actions of a foreign subsidiary should not expose the parent company to liability and limiting successor liability in cases of mergers and acquisitions.
The Chamber and Mukasey have already won over Rep. Jim Sensenbrenner (R-Wi), who is now leading the charge to amend the FCPA. Sensenbrenner is now spending valuable Judiciary Committee time convincing other Congressmen to join him, rather than encouraging a thoughtful debate on the issue.
So back to my moment of excitement in the car. As I listened to the NPR story, which gave a pretty impartial overview of the situation, I had one, overwhelming thought: the Chamber of Commerce is going to fail.
In April of 2009, after becoming very upset by the evidence there are rivers of ‘black money’ flowing out of India, the president of the Bharatiya Janata Party (BJP), Rajnath Singh, told voters that if they elected his party into office he would, within 100 days, “bring back all the black money stashed in foreign banks and distribute [it] among ‘the common poor people.’”
As we know, the BJP did not come to power in India in 2009 so fortunately for Rajnath Singh, his party never needed to prove this monumental task was possible. It’s not, by the way.
At the time Global Financial Integrity (GFI) had estimated annual illicit financial flows from India were somewhere between $22 and $27 billion. Last year GFI released another report examining IFFs from India and found that between 1948 and 2008 India lost a total of $213 billion as a result of corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.
Since then, India has only become more excited about black money. There has been relentless pressure from Indian citizens and politicians on President Manomohan Singh to “bring it back;” a phrase which has become something of a common term in the world’s largest democracy. Unfortunately for India, this has proven to be a monumental—make that impossible—task. As Dev Kar, GFI’s Lead Economist has suggested, to differentiate the licit from illicit would be like distinguishing two cups of water—one hot and one cold—that were poured into the same bowl. It just doesn’t work that way for many reasons. For one, that illicit money has accumulated overseas for decades, which means that some of it wasn’t illegal at the time it was sent away, some of has passed its statute of limitation, and for much of it the home country just doesn’t have jurisdiction over.
Weakening the Foreign Corrupt Practices Act Makes Sense from Neither a Moral nor Economic Perspective
American businesses sometimes argue against the Foreign Corrupt Practices Act, the U.S. flagship legislation which makes bribery of foreign officials a crime, using economics. We see this, in particular with the latest inundations of attacks from the U.S. Chamber of Commerce, which has taken it upon itself to single-handedly dismantle the effectiveness of the FCPA. These interests claim that the FCPA makesU.S. businesses less competitive internationally because other businesses from other countries are “allowed to bribe.” Of course, they don’t put it that crudely. But you get the point. They also argue that the FCPA adds undue costs to U.S. businesses—administrative costs for training and compliance for example—that make those businesses less efficient and less competitive worldwide.
Ignore for a moment the fact that thirty-four OECD countries committed to put in place similar legislation, which creates a quasi-international consensus on such issues and therefore dispels much of this “competitive” myth anyway. But the truth is, at their core, these arguments fail to reflect the dynamic nature of international business.
There’s a story—perhaps a joke—that some of my economics professors used to tell. Suppose a technological change allows a company to improve the efficiency of, say, indoor electric heating by 50%. An engineer—they would tell us—is going to assume that expenditures on heating would decline by 50%. An economist would say, not so fast. It doesn’t just matter what the initial change is—but rather consumers’ reactions to that change. Maybe consumers will leave their thermostats at the same temperature and will, indeed, save 50% of their heating costs. Or perhaps they will increase the temperature of their homes until they are paying the same amount they were before, using the same amount of electricity, but enjoying much more heat. They might even surpass that point, depending on their personal preferences.
In 1862 Victor Hugo, widely considered one of France’s greatest poets, published Les Misérables, literally translated to The Miserable Ones. The story, which has been adapted into dozens of versions in film, television, radio, and most famously as a musical—follows the story of a man who survives persecution amidst social and political upheavals in 19th century Paris. While the story traverses countless themes and motifs, one of the central ideas of the novel is social injustice and Hugo uses the novel as a platform to condemn the unjust class-based structure of the times.
Today Action Aid released data on the UK’s biggest businesses and their presence in tax havens. Action Aid found that the 100 FTSE-registered UK firms had 34,216 subsidiaries altogether and of those about 25% are in tax havens. The data is reminiscent of a U.S. GAO study that found 83 of the 100 largest U.S. corporations have subsidiaries in tax havens.
In its third week, the Occupy Wall Street movement, which began on the streets of New York, has spread across the country and the world. Most people call the protestors “anti-bank” or “anti-corporation,” but the movement is neither. The media portrayed them as scatterbrained, listless, and fractured. Even some liberals declared the movement wanting in solutions, demands, and goals.
With some notable exceptions, most scholars and politicians believe the world should limit the proliferation of nuclear weapons. For the overwhelming majority of countries, this is not a problem. Most countries do not have the resources—or more importantly the aspirations—to gain nuclear capabilities. But the problem with nuclear weapons is that even one of these weapons in the wrong hands could inflict overwhelming injury to thousands. Which is why the world doesn’t just need a majority consensus; it needs a complete consensus.
The international community has a few tools to limit nuclear proliferation. The most notable of these is the Nuclear Non-Proliferation Treaty (NPT), which came into force on March 5th, 1970 and currently has 189 signatories. Five of those signatories, the United States, Russia, the United Kingdom, China, and France are recognized nuclear states—which is just another way of saying that the international community has agreed to trust these nations with nuclear capabilities. Not that the world would have any choice anyway.
The first problem is that compliance with the treaty is mostly based on the good faith, although countries are expected to submit to inspection by the International Atomic Energy Agency (IAEA) when requested. This has proved to be a problem in particular with countries like Iran, who is party to the NPT, but the IAEA has found to be non-compliant. Iran continues to argue it is developing peaceful nuclear capabilities for energy production—which is allowed under Article IV of the NPT. U.S. Intelligence has stated that if Iran pursues nuclear capabilities, it will likely attain them by 2013 or 2015.