Since Edward Snowden leaked the details of the National Security Administration’s top secret mass surveillance programs, Americans have been talking a lot about the tradeoffs between liberty and security. There are, of course, varying perspectives on the issue. Some, like Senator Ron Wyden (D-OR) argue the government’s actions in this area threatens to “give us an always expanding, omnipresent surveillance state that—hour by hour—chips needlessly away at the liberties and freedoms our Founders established for us.” Others, such as NSA head General Keith Alexander argue the program has permitted the intelligence community to “better connect the dots and learn from mistakes,” which has allowed Americans to live in “relative safety and security” over the last decade.
Whether arguing that the NSA programs are warranted or not, both sides do acknowledge that this program represents a loss of liberty for Americans. As a natural result, both sides sometimes propose liberty-preserving (or at least liberty-conserving) alternatives to such programs. For example, some argue investigators should not actively hold the data—instead leaving them in the hands of phone companies—and only take data that are part of an investigation.
When examining alternatives to mass surveillance, the national discourse does not, however, focus much on banks and bank accounts. It should. Phones are one way to track terrorists, especially with those with ties to the United States, and to reveal their networks. But money is another.
Over the last year, from the symbolic to the substantive, leaders in China have shown an interest in seriously tackling the issue of corruption. These changes have included charging Bo Xilai, the powerful former Communist Party chief in Chongqing, with corruption, bribery and abuse of power and, the relatively symbolic gesture, of banning the construction of new government buildings, which are often ostentatious relative to the communities they inhabit. Yet these changes have raised questions over the daily reality that citizens of China (and every other nation) confront as they interact with policemen, building inspectors, and customs officials—but also as they watch news. Indeed, citizens of the world confront two different, yet highly related forms of corruption; these exist both on the large-scale and on the small-scale. And these types of corruption interact with each other, but also and with citizens’ perceptions of their nations.
On a large-scale corruption undermines development and democracy, exacerbates poverty, erodes civil society, stifles social services, and worsens public health. When it involves cross-border flow of money, it is damaging to economies not just because of the underlying corrupt acts, but also because it deprives the country of both public and private resources—including financial capital—that might otherwise be diverted to productive activities.
Corruption on a small scale, sometimes called “petty corruption,” occurs in thousands of contexts daily. Every day people, usually in developing countries, make thousands of routine payments to building inspectors, customs officials, and other bureaucrats for the services that those employees are obligated to perform, but don’t without a little extra. This type of corruption has a much different effect than its large-scale counterpart. When a person pays a bribe, the venal official need not necessarily transfer it abroad. In fact, they are more than likely to just spend the cash.
There is an old proverb that goes something like this: “one finger cannot lift a pebble.” And while reducing cross-border tax evasion is not like lifting pebble—it’s more like hauling a boulder—it is true that it cannot be achieved unilaterally. No single country can stop, stem, or slow offshore tax evasion by its own citizens without the help of at least one other nation. This is true by definition.
Historically much of the bilateral cooperation on tax evasion has been less than amicable. That is changing. Increasingly, we are seeing that the cooperation in matters of tax between nations—particularly wealthy ones—is neither begrudging nor forced. These nations are not just cooperating to stem tax evasion abroad; they are doing so willingly and proactively.
The countries which have begun to cooperate on these matters mainly includes wealthy Western nations, including the United States and most of the European Union. The most notable recent occurrence of this cooperation, at least symbolically, occurred at the G8 summit in June of this year. It was at this summit that the leaders of the world’s wealthiest countries agreed to work towards sharing “information automatically to fight the scourge of tax evasion.” An admirable goal, if even a symbolic gesture.
In recent years wealth among the wealthiest has increased. This trend is well-documented in the United States, where commentators have noted that since 1979, the rich have become richer and the poor have become (relative to the rich) poorer. Dubbed the “Great Divergence” by NY Times op-ed columnist Paul Krugman, this phenomenon may be both a driver and the result of tax policy and tax evasion in the United States. But America isn’t the only country vulnerable to these kinds of trends. In fact, evidence from recent years has suggested that these trends are at play in several emerging markets, particularly those in Asia, where incomes are rising with steady economic growth.
Wealth among the wealthiest residents of Asia has increased in recent years. In particular, as the effects of the Great Recession ebbed, the economic recovery came much faster to high net worth individuals in Asia. In recent years, more people in Asia have become millionaires. For example, according to RBC Wealth Management and Capgemini, in 2011, the number of people in Asia-Pacific with assets between $1 and $5 million rose from 1.9 to 3.08 percent, while their total wealth increased 1.5 percent. In fact, in recent years, the countries with the largest increases in populations of ultra high net worth individuals have been emerging markets, including India and China.
There are now 18,000 centa-millionaires, that is, those who have more than $100 million in assets, in Southeast Asia, China and Japan. This is more than both the number of centa-millionaires in North America (17,000) and Western Europe (14,000).
Every year the OECD Development Assistance Committee publishes a report on resource flows to fragile states. This year’s report, Fragile States: 2013 Resource flows and trends in a shifting world, provides some fascinating insights into the future of global poverty, particularly among fragile states. Coupled with our understanding of illicit financial flows from developing countries, […]
This week Edward Snowden, the whistleblower who leaked information about the National Security Agency’s data collection program, may be allowed to leave his temporary station at the Moscow International Airport, where he has been staying since he fled Hong Kong in June. Snowden’s leak has brought the concept of whistleblowing into sharp focus in our headlines lately, including the controversies over the relative benefits and costs of these individuals and programs that support them. As in the case of Snowden, the concept of whistleblowing can be controversial, and it is always painful for the entity or government who is having the whistle blown on it.
In many cases, whistleblowing has proven an effective tool for improving democracy and transparency—it increases information and public engagement, encourages debate, and strengthens oversight. These concepts all have particular importance to some of the issues the Financial Transparency Coalition faces. Transparency, information, engagement, and oversight are critical to each of our recommendations. As such, whistleblowers have often proved critical to fostering these values.
Here are a few of the important whistleblowers in the history of our causes, namely in tax evasion and corruption. As always, this list is representative and not exhaustive.
Under the standard economic theory of crime, compliance with laws is a mix of two important factors. One: the penalty that results if the offender is caught and 2: the probability of the offender getting caught in the first place. If the fine is proportional to the crime, but the probability of being caught is almost certain, few will risk it. In the same way, if the probability of being caught is low, but the penalty is very high, again few will risk it.
Gary Becker—the libertarian economist who wrote Crime and Punishment: An Economic Approach, an authoritative economic theory on crime—has described his own encounter with these tradeoffs. In one inspirational moment for his research, while teaching at Columbia University, Becker asked himself whether he should park in a spot that was closer to campus, and illegal, or in a lot which was somewhat further away. He notes that he had to make a calculation: What was the likelihood that he’d be caught if he parked down the street, versus the time and the money that would be lost by parking further away?
Economists often use this framing device when talking about a whole host of crimes—including white collar crime—and, I have discussed these tradeoffs as well, in particular with respect to the Foreign Corrupt Practices Act.
In April, I argued Bitcoin, one of the world’s most mainstream currencies currently operating, may become a viable, sizeable, and more dangerous alternative to offshore accounts for money laundering and tax evasion. I argued the U.S. government isn’t paying close enough attention to the growing threat posed by these currencies. Yet, just a month later, the Department of Justice arrested the founders of Liberty Reserve, another digital currency, and charged them with money laundering. It might seem I was wrong. I say not so fast. For counter-intuitive reasons, Bitcoin still poses a more serious, and long-term, threat than currencies like Liberty Reserve.
First a recap of what happened. In May, DOJ charged Liberty Reserve, Arthur Budovsky (its founder), and his associates with conspiracy to commit money laundering. According to DOJ, nearly all of Liberty Reserve’s five million transactions were illegal and used to launder more than $6 billion in proceeds from drug trafficking, child pornography, ponzi schemes, and many other crimes. The founders of Liberty Reserve incorporated the company in Costa Rica, which later seized about $19.5 million from the company’s bank account as requested by U.S. government officials.
Liberty Reserve posed obvious money laundering threats. So what does that mean for other online currencies, particularly mainstream ones such as Bitcoin?
The leaders of the world’s eight wealthiest economies have finished their meetings, headed home, and issued a final communiqué for the G8 summit in Lough Erne. And though emerging economies are not represented at the meetings, there are plenty of reasons they should deeply care about what was said. In general, the G8 communiqué goes a long way to calling out important tax issues, but in particular understands the importance of tax in the context of mobilizing domestic resources, curtailing illicit financial flows, and promoting development. And while the G8 did not go as far as they should have on some issues, they did make a fair number of important promises on tax and transparency to developing countries. Developing countries should take heed of these promises—and hold the G8 accountable to them.
Before I dive down into the specifics, I’ll start with a quote from the G8 communiqué that reiterates the importance of these ideas:
It’s in everyone’s interests for developing countries to be able to: strengthen their tax base to help create stable and sustainable states; improve their ability to fund their budgets through their own domestic revenues; and increase ownership of their own development processes.
This quote is significant. First, it acknowledges that the world is not a zero sum game. In the last few years, the world accepted that a less polarized global economic system, one in which all of the players drive economic demand and where wealth is more diffuse, would benefit everyone. That developing countries should grow their economies is not only in the interest of those in the developing world, but in the industrialized world, as well. Second, this quote draws a strong connection between development, sustainable economic growth, and taxes. In particular, it acknowledges the importance of mobilizing domestic resources in the context of economic development. It’s a simple idea that has gained a lot of traction in the last few years. I’m glad the G8 has paired these ideas together—and taken them as given.
The summit between leaders of the world’s wealthiest economies will get underway next week in Northern Ireland. British Prime Minister David Cameron, leading the summit, has put three things at the top of his agenda: trade, tax, and transparency. There are a lot of issues directly relevant to the Financial Transparency Coalition in there, and I don’t have time to address them all, but one of the most promising, and interesting, is Cameron’s commitment to improving information on beneficial ownership of companies via public registries.
Anonymity is prevalent under the world’s status quo. It is exceptionally easy (and relatively cheap) to set up a company, trust, or foundation anonymously. By that I mean that the process obscures the “beneficial owner” of the entity, that is, the flesh and blood person who has control over or benefits from the corporation. Companies, trusts, and foundations accomplish this by incorporating subsidiaries in a secrecy jurisdiction or by using nominees in place of the true directors.
The injustices that result from secrecy are numerous. Given that other people and organizations have outlined some of these injustices in beautiful detail, I won’t name them all (see, for example, this excellent report by Global Witness). Anonymous companies facilitate corruption and bribery by allowing government officials to transfer money undetected; they ease crime by allowing criminals to launder the proceeds of criminal activity and avoid detection by law enforcement; they facilitate tax evasion, costing American taxpayers alone an estimated $150 billion annually; and they facilitate global illicit financial flows that bleed developing countries of billions of dollars every year.
That Africa is poor is assumed, but rarely well explained. Generally, we—both in terms of those who study these issues and collectively as a society—have accepted the fact that Africa is underdeveloped. Yet this conclusion is neither forgone nor self-evident. Even more infuriating, it is often explained, but never sufficiently explained. That is, there are a lot of competing theories on the subject, but most fail to give a complete picture. Of course, it’s a complicated issue, so it makes sense that no one theory would prove universal. Yet, even with intense academic scrutiny, the picture is incomplete.
The solutions to problems are often implicit in the way they are framed. If I tell you my car won’t start, you might tell me to consult a mechanic. If, on the other hand, I tell you I can’t find my keys, well, we have a completely different problem. In public policy, frames can often conflate symptoms with causes, other times, such as with the example I gave, they just obscure a possible solution.
But frames turn out to be fundamentally important to the problems’ solutions. As Albert Einstein once said, “If I had an hour to solve a problem and my life depended on the solution, I would spend the first fifty-five minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.”