Though Ireland is the European country headlining this week with words like “DEFAULT” and “CONTAGION” looming overhead, let’s not forget that the flames have not yet been completely doused on Greece. To prevent the country from defaulting on its debt, this May 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 (earlier this year the IMF estimated the Greek deficit was 8.6 percent in 2009, but recently Eurostat estimated it “above 15 percent,” up from a previous estimate of 13.8 percent).
Despite the doomsday scenarios, Greece seemed to be evening its keel in recent months. In October, Prime Minister George Papandreou pledged to cut next year’s budget deficit faster than agreed in the bailout deal. He noted the “aim is none other than to get out of the tunnel as soon as possible,” impressive words for a country which was uncertain of its future a few months earlier.
Though it has lost its status of “European Country in Crisis,” thanks in large part to the mess the Celtic Tiger has found itself in, Greece isn’t out of the woods yet.
When it comes to policy change, what should come first: financial regulation or corporate responsibility?
I have argued for corporate responsibility—morality, in fact—before. My conclusion was that corporations, like people, do have the duty to act morally. I argued that there is such a thing as moral behavior when it comes to business and when we, as consumers, should reflect our own brands of morality in our purchasing decisions.
The same thing should be true of investing. And when it comes to these funds, some firms have already led the way with “socially responsible” investment firms. Members of such investment firms and associations advance investment practices that consider environmental and social consequences in addition to their bottom lines.
For this reason, the approach has also been called “triple bottom line,” whereby business success is judged not just on economic profits, but also its yield in terms of ecological and social benefits. Proponents of this idea argue that triple bottom line creates sustainable businesses that will stand a better chance of remaining successful. As Andrew Savitz, author of The Triple Bottom Line, and a former lead partner of PriceWaterhouseCoopers puts it: “Increasingly businesses are expected to find ways to be part of the solution to the world’s environmental and social problems. The best companies are finding ways to turn this responsibility into opportunity.”
Lord of War, a 2005 film starring Nicolas Cage, tells the story of Yuri Orlov, a man born in Soviet Ukraine, but raised in America, who sells illicit weapons to terrorist groups, corrupt African leaders, and criminal organizations. He describes himself as an “equal opportunity merchant of death,” selling to whoever and whatever side that is willing to pay. Orlov becomes tangled up with several criminal men, including a Colombian drug lord who insists on paying him in cocaine and a West African Dictator, who compensates Orlov with blood diamonds.
Through a voice-over, Orlov describes one method he uses to ship his illicit goods—mislabeling. He says “I had a number of methods for discouraging a search. I routinely mislabeled my arm shipments as farm machinery and I have yet to meet the lowly-paid customs official who will open a container marked ‘Radioactive Waste’ to verify its contents.”
Though the characters and the plot lines in this movie are fictional, there is a basis of reality that forms the foundation of the story line. For one thing, the illicit trade in weapons is a enormous global problem that fuels bloody violence in places where ethnic, political, and religious divisions have combusted into conflict. Also the methods outlined by the movie, including trade mislabeling, fraudulent ship registrations and falsified end-user certificates, are very real. It also illustrates an important point about the interconnectivity of illegal trades—even an arms dealer who wants to be paid only in cash eventually finds himself entangled in the drug trade and up to his knees in conflict gems.
In America in the 1920s, during the years of prohibition, bootlegging became a pervasive and widespread problem. Bootlegging, named after the practice of concealing illicit liquor in boot tops, was the illegal traffic in liquor in violation of restrictions on sale and transportation of alcohol. As with drugs, human trafficking, or endangered species, when a government restricts the supply of a good with a demand, a black market emerges. Though there was a generous domestic supply—underground distilleries often made liquor out of corn and of course there was “medical” whiskey prescribed by doctors—many Americans got liquor from across the boarder. Liquor (literally) poured in from Canada, Mexico, the Bahamas, and Cuba, among other countries.
Today the term “bootlegging” has a wide variety of connotations. In addition to referring to rum running, it can describe illict coal mining, the use of illegal frequencies for radio broadcasting, or even smuggling more generally. In our lives, we often understand the term in the context of “bootlegged DVDs,” or illegally manufactured copyright movies. Some are produced domestically, but many are imported from countries with lax regulations on intellectual property rights—namely China, Thailand, or Russia—and they are often sold in the alleys of large U.S. cities. We think of them as cheap, often of poor quality, and otherwise innocuous.
For the first time in its history, France has admitted a lawsuit brought by an anti-corruption agency against foreign nationals for money-laundering and embezzlement within the country’s boarders. Transparency International (TI), a Task Force member and prominent anti-corruption campaign organization, launched the suit in May of 2009. It brings money laundering charges against three African leaders: the Republic of the Congo President Denis Sassou Nguesso, Equatorial Guinea’s Teodoro Obiang Nguema, and Gabon’s late president Omar Bongo. TI maintains each leader has used his position of power to enrich himself with the complicity of the French government under the Françafrique policy, which lets France retain influence among its former colonies.
Obiang has controlled Equatorial Guinea since he overthrew and executed his uncle in a bloody coup d’état in 1979. Obiang rules Equatorial Guinea with an iron hand and has been called Africa’s worst dictator. He also frequently projects his ruthless ego across the state-operated radio, which has declared him a God who “can decide to kill without anyone calling him to account and without going to hell.” Obiang has also been implicated in extensive corruption charges. In the mid-1990s U.S. based Riggs National Bank opened 60 accounts for Obiang and his family members, helping him hide $11.5 million in assets. More recently, watchdog organization Global Witness showed Obiang was at it again—uncovering confidential U.S. government documents showing that Obiang’s son recently purchased a $33 million private jet, a $35 million Malibu mansion, speedboats and a fleet of fast cars.
Obiang’s antics, while shocking, don’t compare to the pillaging by his now-deceased counterpart in Gabon, Omar Bongo. Bongo died in June of last year, after 41 years of rule, which made him Africa’s longest serving President. In the words of the Telegraph’s obituary, Bongo “treated Gabon as a self-obsessed landlord treats his private estate. He considered everything inside its borders to be his personal property and elevated corruption to a method of government.” Like other dictators, Bongo curtailed dissent, opposition and the press. His political strategy combined with a boom in Gabon’s lucrative oil wells ensured his prosperity; he died in his $500 million presidential palace as one of the world’s richest men.
At the age of 15 I moved away from home to live at the Olympic Training Center in Lake Placid, New York, where I lived and trained year-round for the sport of sprint kayaking. Surrounded by some of the country’s finest athletes through most of my formidable years taught me a lot about who athletes are and how they think. Honor was paramount to (almost) everyone of them—whether they were bobsledders or speed skaters, ski jumpers or rhythmic gymnasts. Everyone wanted to achieve their best performance, everyone wanted to make the team or win the race, but no one wanted to cheat to do it.
It therefore troubles me to try to reconcile my memories and images with the reality I see on the news. Reading about steroid-injecting baseball players, blood-doping cyclists and plotting figure-skaters challenges my memories of the decent, strong, driven people who cared about the sweat and honor on the road to victory more than the glory of a gold medal.
But as the headlines we have become all-too-familiar-with will tell you: the doping and the cheating and the plotting are very real. And as decent and courageous as our athletes are, they do cheat.
Recently I wrote a post on illegal logging—a type of illicit financial flow—and the practice’s adverse effects on development. I noted that as with other, more widely understood, types of illicit financial flows, illegal trans-boundary logging can undermine political legitimacy, rob developing countries of tax revenue, and exacerbate conflicts. Moreover this practice can rob developing countries of a resource that—unlike drugs and minerals—has value even as it remains stationary, as 1.2 billion people depend on forests for wood, fuel, fodder and food.
One reason deforestation and loss of biodiversity are such alarming problems is that the full costs and benefits of the action are not considered, as they are not included in formal valuations of a nation’s wealth. In fact, all over the world our systems of accounting—whether on a macro or a micro level—have a number of holes and discrepancies.
For example, as Christian Aid, Publish What You Pay, the Task Force and many others have repeatedly pointed out, the International Accounting Standards Board should mandate a country-by-country financial reporting standard. Such practices should be common sense. In recent months some countries have made strides toward this goal, but until the standard is universal, the rules will not be completely effective.
Similarly, the way that the world as a whole and individual countries think about national accounts can be flawed. In general terms, national accounting provides a conceptual framework for measuring the economic activity of a nation, including “macroeconomic accounts, balance sheets, and tables based on internationally agreed concepts, definitions, classifications, and accounting rules.” But it can sometimes miss critical component, including assets that are not traditionally valued by the system, but nonetheless have value.
International consensus on almost any policy usually happens step by (excruciating) step. Even reforms that seem obvious in retrospect, like the international laws with respect to bribery and foreign corruption, are initiated by a pioneer (in this case the U.S. in 1977), but take years or even decades for the international community to follow suit. One poignant example is the case of women’s suffrage, which originated in France in the late 1700s, but didn’t take its first big step until the early 1900s, when Australia and Finland granted their citizens universal suffrage. Even with these early pioneers, it took another 50 or so years before voting rights for women were adopted into international law with the United Nations’ Universal Declaration on Human Rights. It’s worthwhile to note that while the overwhelming majority of states have followed suit (some as late as a few years ago), Saudi Arabia still does not extend the right to vote to its women.
Change takes time, even change as morally obvious as human and equal rights. Those of us who feel compelled to move the world forward must come to terms with that fact that change is slow, but yet must simultaneously continue pressing as if the change must happen today. We push a few countries to be pioneers first and then wait for international and universal consensus later. It’s patient persistence.
When it comes to illegal, transboundary smuggling, the study of illicit financial flows generally focuses on problems that are on a massive scale worldwide, for example the illegal drug trade, smuggling of precious metals and gems, and human trafficking. On these subjects, there is a wealth of literature and organizations devoted to understanding and eradicating their damaging effects on development. There are other types of illicit cross-boarder movements of goods, however, which are not discussed as widely, but which may be just as harmful to development.
One example is illegal logging, a practice which strips developing countries of a valuable resource and hastens deforestation on a massive scale, with devastating environmental and economic consequences. Like other types of smuggling, the international trade in illegally logged timber can strip developing country governments of much needed tax revenues, promote corruption and conflict, and undermine the rule of law. Despite these issues and similarities to other types of illicit financial flows, illegal logging is a practice often discussed only by environmentalist groups, like Greenpeace International and the World Wildlife Fund. It is not a problem that is often discussed by the development community (though certain organizations, in particular the World Bank is a notable exceptions). In particular—and more importantly for this forum—it is not a problem frequently discussed by the group of organizations concerned with illicit financial flows. That should change.
The Organisation for Economic Cooperation and Development (OECD) recently evaluated the United States on its effectiveness in implementing the goals and standards outlined by the Anti-Bribery Convention. The sizeable OECD report overall applauds the U.S. for its current efforts and offers a few areas for improvement.
First, some background. The U.S. foreign anti-bribery laws are outlined by the Foreign Corrupt Practices Act (FCPA), which Jimmy Carter signed into law on December 19, 1977. The FCPA makes it unlawful for persons and entities to “make payments to foreign government officials to assist in obtaining or retaining business.” The legislation also gave both the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) jurisdiction over the FCPA. Though it remained unique worldwide for almost 20 years, the U.S. began negotiations with the OECD in 1988, seeking agreement from major trading partners to enact legislation similar to the FCPA. In 1997, almost ten years later, thirty-four countries signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, committing to put in place legislation that criminalizes the act of bribing a public official.
So back to the report card. The recent OECD report points out many areas where the U.S. is exceeding expectations and a few areas where the U.S. could improve. Though I won’t go into all the details, here is a rundown of a few important points.
Sanctions are penalties imposed by a single country—or a group of countries—on a state which has taken a troublesome economic or political action. They can be economic, for example bans on exports, or they can be financial, which often bar banks from maintaining accounts in the offending country. Trade sanctions, which are often rooted in economics and not politics, include import duties, tariffs, and import or export quotas. The idea behind these restrictions is that a sanction will cause economic harm to the recipient, thereby pressuring that country into compiling with international or bilateral will. It is one of the few non-violent alternatives countries can use to compel a sovereign nation to take (or refrain from) a certain action.
Examples include the U.S. fifty-year-old embargo on Cuba, which is so tight it includes travel restrictions and bans on almost any kind of import or export, and the escalating sanctions against Iran for its nuclear weapons program. Countries that have received sanctions for human rights violations include Libya, Sudan and Burma.
Economic sanctions are usually only implemented when the underlying action is pretty abhorrent. Many countries, in light of our increasingly globalized world, depend on trade and international financial markets for economic growth. Furthermore many sanctions can lie at odds with rules under the World Trade Organization (WTO), which exists for the explicit purpose to liberalize trade, whereas sanctions are, by nature, constricting.
The truth is, however, that sanctions seeking to conform political behavior frequently, indeed almost universally, don’t work. There are a number of reasons for this. First, the underlying principal assumes that the offending nation will be damaged economically–and therefore politically–from the sanction. Often the leaders of the offending nation, a prime example is North Korea, which is already isolated and improvised, don’t really care. The burden of most sanctions are borne by the poorest citizens and as many dictators prove through their economic policies and human rights violations, the poor members of their societies are not their priority.
There’s been a lot of chatter about the yuan lately. Well, honestly there’s been a lot of chatter about the yuan for a lot of years. For over a decade, China pegged the yuan, which is the basic unit of the Chinese currency called the renminbi (yes—confusing), to the U.S. dollar. The Chinese government sets its ideal exchange rate by buying foreign exchange with yuan, thereby increasing the number of yuan per dollars in the global market. This keeps the ratio of yuan to dollars high, which means the exchange rate is artificially low (again—confusing—no one ever said international finance is straightforward).
China keeps its currency artificially low to make its exports artificially cheap, which means more American buying and more Chinese manufacturing, jobs, and economic growth. Americans don’t like this policy because it means a wider U.S. trade deficit (exports minus imports). A lot of people think of exchange rates, and even the trade deficit, as rather abstract and sometimes even meaningless. They’re not. C. Fred Bersten, director of the Peterson Institute for International Economics, recently argued a 20% rise in the yuan’s value would translate into an additional 500,000 American jobs.