The last blue moon occurred on August 31st of 2011 and we won’t enjoy another until 2015. In the meantime, the Senate has fulfilled its duty to introduce truly bipartisan legislation on a hot button political topic exactly once. I’m talking about the Senate’s immigration reform plan—which this week a group of senators from both parties unveiled and President Obama promptly endorsed.
One key element of the Senate’s plan is a provision which stipulates that illegal immigrants would not be able to become American citizens until the U.S. government takes action to adequately secure the border. Of course, this brings up the question of what does a “secure border” even mean? At what point can we say that the border is completely secure? And given our looming budget problems, how much will the boots, trucks, x-rays, fencing, dogs, and cameras we need to get to that complete security cost us?
Over the last ten years, the focus in the conversation about border control has shifted several times. Just after 9/11, the U.S. bolstered border security out of the fear that terrorists could sneak weapons in from Mexico. Later, when cartels threatened to unravel Mexico, these concerns were overshadowed by drug trafficking. Then, when unemployment in America soared, the central theme in the issue turned to illegal immigrants.
With his inauguration only a few minutes behind him, President Obama officially submitted his initial round of Cabinet nominations to the Senate on Monday. Among them is Jacob “Jack” Lew, the current White House Chief of Staff and Obama’s pick to replace Timothy Geithner as the next Secretary of the Treasury. Before getting the post, though, Mr. Lew will face a tough round of questioning from the Senate Finance Committee, which is in charge of vetting his nomination.
The next Secretary of the Treasury will have enormous influence nationally, and globally, on issues important to the Task Force, including the combating of terrorist financing, offshore tax haven abuse, and money laundering. Below, I outline four questions I would ask Mr. Lew at his confirmation hearing, if I could. Below each, I describe why it’s important and what I’d like to hear in Mr. Lew’s response.
1. Can you describe your approach to preventing Iran from avoiding international financial sanctions as part of its larger objective to obtain a nuclear weapon?
The U.S. Department of the Treasury plays an integral role in enforcing U.S. (and the world’s) financial sanctions against Iran by sharing information with key financial actors globally and investigating offshore front companies.
Over the last few months, an aid program (read: bailout) for Cyprus’ banks put together by EU rescuers has met mounting resistance among Europeans. The reason? Money laundering… and the alleged ties of Russian oligarchs to Cyprus’ banks.
There does seem to be a questionable relationship there. Last fall, Der Spiegel reported on Germany’s Federal Intelligence Service’s (BND) secret report on money laundering in Cyprus. According to Der Spiegel, the report finds that the people who would benefit most from a European bailout of Cyprus banks are Russian oligarchs, mafiosi, and businesspeople who have parked illegal earnings in the small Mediterranean nation. Even the simplest of facts are pretty compelling: the list of Russian investors in Cyprus is almost identical to the list of the country’s richest men and almost every well-known oligarch in Russia has at least one offshore company in the nation.
The reports have thrown the future of an aid program that would deliver $22.7 billion to Cyprus’ failing banks into confusion and uncertainty. On the one hand, Cyprus really does need the money. If the plan doesn’t pass, it would be a bit of a disaster, at least for the island nation, and likely also for its neighbors. On the other hand, opposition to bailing out tax evading Russian oligarchs is mounting.
The day before I left for my trip to Germany last month, I was warned to bring plenty of money in cash. You see, the country has transitioned to chip-and-PIN cards, which use embedded microprocessor chips for financial transactions instead of traditional magnetic stripes. The problem is that this means it’s becoming increasingly difficult for oblivious American travelers (myself included) to use their credit cards. Hence the cash. Although I could have circumvented this problem with a little foreknowledge and a call to my bank, I found this problem to be particularly irritating. After all, in this century, who carries around cash?
It is precisely this pesky problem—carrying around cash—that travelers to the Vatican are now stomaching. And in this case there aren’t any easy answers for the savvy; museums and businesses in the Holy See are declining credit and debit cards following concerns of inadequate money laundering controls. If using cash instead of electronic payments to avoid money laundering seems a bit backward to you, that’s because it is.
The Vatican, with at least a touch of irony, is no stranger to immoral and otherwise shady finances. In one of the more spectacular historical examples, in 1982 Roberto Calvi, nicknamed “God’s Banker,” and chairman of Banco Ambrosiano hanged himself. His bank had recently collapsed after a scandal involving shadowy finance. As it would turn out, the deceased Calvi wasn’t just a loyal banker for holy men. He was also a loyal banker for the Sicilian Mafia, arms dealers in Iran, dictators in Latin America, and the Contras in Nicaragua.
In the past few years the world—and the United States in particular—has witnessed a resurgence of the term “Austrian economics.” Last week I wrote a post about the academic history and resurgence of Austrian economics in the last few years. I wrote that the reason for this is that the school of thought actually does a fairly good job of both explaining and predicting the financial crisis of 2007-8. Yet while the Austrians have enjoyed a boom in their theories as they are able to explain the sources of the world’s crises, their proposed solutions are a bust. In fact, the evidence, politics, and most mainstream economists have summarily rejected its prescriptions for our ills. The logic behind this rejection is the topic I’ll take on this week.
This week and next I am traveling to Austria. Following from this trip, I am writing this two-part blog series on Austrian economics, its successes, failures, and application to current dilemmas in economic theory and policy.
In the past few years the world—and the United States in particular—has witnessed a resurgence of the term “Austrian economics.” Many of those who use it, including Ron Paul who declared we are “all Austrians now” after his third place finish in Iowa, are referring to a narrow segment of the body of thought. That segement might be better termed “libertarianism.” Other bloggers and thinkers have already written extensively about the relative merits and failures of Paul’s interpretation of Austrian economics and I’ll leave continued discourse on that subject to them. What I’m more interested in—and what I’ll explore with this two-part blog series while I travel the birthplace of this economic school of thought—is the academic discussion and resurgence of Austrian economics that has followed from the financial crisis and the European debt crisis.
First some history.
The Austrian school of economics got its name from its German opponents. The founder of the school of thought is Venetian professor and economist Carl Menger. In 1871 Menger published his Principals of Economics, which not only lays the groundwork for Austrian economics, but also advanced the theory of marginal utility. Proving that economists have been snarky since the 19th century, Menger dedicated his book to his German rival William Roscher. Roscher and his students, summarily rejecting Menger’s work, derogatorily labeled him and his colleagues “Austrian school” because their positions at the University of Vienna.
This week Global Financial Integrity released their periodic estimate of worldwide illicit financial flows authored by Dev Kar and Sarah Freitas. The report finds the developing world exported an estimated US$859 billion in illicit financial flows in 2010. In case you like moving words, here’s a presentation I put together on what that number means.
The GFI model of illicit financial flows includes two components: (1) an estimate of money that exits developing countries via trade channels (called trade mispricing) and (2) an estimate of money that leaves developing countries through other, private capital flows. Traditionally GFI has estimated the second type of flows using the World Bank Residual Method, which uses a country’s balance of payments (a bit like a balance sheet) to calculate leakages by comparing a country’s source of funds to its use of funds. By definition, if a country’s source of funds is greater than its use, there must have been an outflow. But as GFI lead economist Dev Kar notes, this is not necessarily an illicit outflow. This model does, to some extent, capture licit funds as well.
To correct for this fact, in this round Kar has modified his traditional model, instead using the Hot Money Narrow Method. In its classic sense, hot money involves the flow of capital between financial markets to earn a short term profit. It’s “hot” because it can move quickly and sometimes results in instability, particularly for developing countries. The Hot Money Narrow method calculates flows of illicit capital by going back to the balance sheet, but this method focuses on the “net errors and omissions” line item. Net errors and omissions (or NEO) is catch-all line to correct for the discrepancies between a country’s current account and capital account (which must be inversely equal). To the extent that the NEO captures flows of money (and not statistical errors) it must include only illicit flows. It is therefore a more conservative estimate than the World Bank Residual model.
In late November of this year, authorities found the body of Maria, a woman in her early 20s, outside an armored van along a mountainous road in northwestern Mexico. In February, Maria Susana Flores Gámez won the 2012 Woman of Sinaloa beauty pageant. She also became involved with the Sinaloa drug Cartel. Maria died in a shootout between the gang and the police in those mountains with a gun in her hand. She was riddled with bullets because someone had used her body as a human shield.
Maria was the fourth known beauty queen to get involved with Mexican drug traffickers. Javier Valdez, author of Miss Narco, a book about drug cartels and beauty pageants, says that this “recurrent story” seldom ends well. In this world, the beauty queens are “disposable objects, the lowest link in the chain of criminal organizations, the young men recruited as gunmen and the pretty young women who are tossed away in two or three years, or are turned into police or killed.”
Over the last ten years, the Norte del Valle Cartel in Columbia has battled the DEA, FBI, and the Columbian government’s efforts to dismantle it. In just two of those years it claimed 1,000 lives. This cartel has exported millions of pounds of cocaine to the United States and with its profits has bought safety for its members. This doesn’t come cheap. The cartel reportedly gave monthly payments of $160,000 to Attorney General Luis Camilo Osorio; $2 million to a prominent congressman to avoid a criminal’s extradition to the United States; and dozens of other bribes ranging from $12,000 to a police officer to $350,000 to a woman for handling “businesses.”
Last week I wrote about a post, inspired by TIME Magazine’s Person of the Year, about who I would pick for a “Transparency Person of the Year.” Keeping with TIME’s definition, this would be someone who influenced the news, for better or worse, on issues related to financial transparency. I got so many great suggestions for additions to the list that I’m following up this week. Without further ado, here’s some (additional) picks:
SHELDON ADELSON The billionaire casino mogul has dominated headlines this year. He made TIME Magazine’s nominations for “what critics cast as trying to buy the election,” through liberal use of Super PACs. But I’d include him here for a different reason. An investigation this year revealed that Adelson (or at least his executives) may have violated the Foreign Corrupt Practices Act in their casino business in Macau. According to a former executive Adelson’s Las Vegas Sands casino may have had illegal dealings with a public official, as well as a tie to an organized crime figure. The whistleblowing—and the controversy—got the FCPA back into the spotlight at a watershed moment for the legislation. (H/T Clark Gascoigne and EJ Fagan, of Global Financial Integrity and the Task Force, respectively)
GARY GENSLER The Chairman of the Commodities Future Trading Commission has fought long and hard to bring transparency to the derivatives industry, a $650 trillion market made up of financial instruments whose misuse significantly contributed to the 2008 financial crisis. By the end of this year, in large part as a result of Gensler’s work, the industry will report transactions of these instruments in real-time and certain derivatives will report their transactions to Swap Data repositories. (H/T Cate Long, Riski.us)
This week TIME Magazine opened polling to their readers to weigh in on their nominations for Person of the Year. Generally, I think their picks are pretty good, although sometimes their nominations are a little off the mark (Roger Goodell, really?). Anyway, the nominations got me to thinking what a Transparency Person of the Year would look like. Keeping with TIME’s definition, this would be someone who influenced the news, for better or worse, on issues related to financial transparency. Here are my picks.
CARL LEVIN. I’m going to go with the most obvious one first. If I did this list every year, the Senator from Michigan’s name would probably appear every time. Over his tenure in the U.S. Senate, Senator Levin has proved himself a formidable adversary for those powerful interests who seek to take advantage of weakness in our economic and financial system at the expense of ordinary Americans. Senator Levin has sponsored three key pieces of legislation that would promote transparency: the Stop Tax Haven Abuse Act; the Incorporation Transparency and Law Enforcement Act; and the Equal Access to Tax Planning Act. He’s continued to fight for this legislation this year.
NGOZI OKONJO-IWEALA. The globally renowned economist, Nigeria’s finance minister, and one of three candidates in this year’s race for President of the World Bank has long been an advocate of improving the financial systems to reduce illicit financial flows. At the Center for Global Development / Washington Post forum in April she again encouraged the International Monetary Fund and the World Bank to take up the issue of illicit financial flows. As Finance Minister in Nigeria, she’s helped the country get proactive about these issues, fostering greater fiscal transparency to combat corruption.
In 2010 Congress enacted the Foreign Account Tax Compliance Act (FATCA), which aims to combat tax evasion by U.S. citizens holding investments in offshore accounts. Under this law, the IRS and the U.S. Department of the Treasury require U.S. taxpayers holding financial assets on foreign soil to report those assets. FATCA also requires foreign financial institutions to report certain information about U.S. taxpayers directly to the IRS. The Treasury planned to phase in the law’s requirements in several stages. Starting in 2013, the IRS would require participating banks to conduct due diligence for identifying new and pre-existingU.S. accounts and reporting requirements would begin in 2014.
FATCA faced a lot of criticism from both Americans living abroad, foreigners, and heads of foreign institutions. Institutions maintained there are “huge expenses” associated with implementation; American Citizens Abroad claimed it would “destroy the lives average, honest and hard working Americans;” and other opponents called it “big brother” legislation. My own post about FATCA compliance got a lot of the same remarks.
Partly in response, the Treasury has modified its approach. I don’t agree with much of the criticism, nor do I admire the opprobrium. At the same time, however, I do believe the extended approach represents a strong, sustainable future for global tax compliance.
After a long, hard battle, President Obama won a second term from voters last night. The media has pointed out he’s not taking much time to celebrate; it’s time to back to the long, hard work of governing. In that spirit, this is a good opportunity to check the pulse of several important transparency-enhancing legislative initiatives that are on the table in Congress right now. Over the next four years, the President and his administration will have opportunities to promote transparency in the financial system, fight corruption worldwide, and enhance tax fairness, both abroad and at home. In that spirit, here’s a list of what I’d like to see him support and, hopefully, accomplish in the next four years.