Task Force Blog

Posts by Ann Hollingshead

About the Author:

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

Beyond Bitcoin: Other Technological Advancements in Money Laundering

November 15, 2013

Technological advancements in currency are already challenging our efforts toward transparency. As I’ve discussed before, digital currency, most notably Bitcoin, grant added flexibility and opacity to the international financial system for criminals, money launderers, and tax evaders. If trends continue on their current trajectory, these technological developments, namely digital currency, will represent a significant obstacle to stemming the continued tide of illicit financial flows from developing countries.

Yet there are other technological—and digital—pathways for criminals to launder money. These are still not well-understood, but are nonetheless vitally important. The earlier—and better—we can understand them, the better our chance of tackling them early.

Jean-Loup Richet, an Information Systems Service Manager at Orange and Research Associate at ESSEC Business School, recently published a report on this topic for the United Nations Office of Drugs and Crime. Richet’s report outlines a variety of digital tools money launderers now use to clean their dirty funds. They extend far beyond currencies like Liberty Reserve and Bitcoin, which we’ve discussed here, and venture into online-realms that few would expect to include the nefarious activities of money laundering criminals.

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Closing Tax Loopholes: A Political Compromise for the Budget Conference Committee

November 7, 2013

With the government running again, the joint Senate and House Budget Conference Committee has begun meeting to hammer out, if not a grand bargain, at least a small one. The Committee must deliver a report by December 15 and, to avert another shutdown, Congress must extend government funding by January 15.

It’s difficult to overstate the political importance of a compromise, but the economics are important here, as well. The federal deficit has been declining since it hit a high of 10.1% of GDP in 2009 (though most American’s don’t know it). The deficit today is about 7% of GDP and the Congressional Budget Office (CBO) expects it to fall to about 2.4% of GDP by 2015.

Yet the CBO does not expect this downward trend to continue. As a result of an aging population, rising health care costs, and growing interest payments, the CBO expects (if policy remains at the status quo) the deficit will begin rising again the coming decade. In the long-term this is a rather significant problem to the extent that it contributes to a continued growth in public debt, which will likely exceed 71% of GDP by 2018.

While economists don’t agree on timing, most will say that the U.S. federal government needs to bring its expenditures in line with its revenues. On the expenditures side, many analysts and politicians have focused on the importance of reducing entitlement spending. For good reason—the cost of Social Security Insurance, Medicare and Medicaid are expected to grow at levels that many term unsustainable.

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Campaigns and Policy: Public Registries and Beneficial Owners

October 31, 2013

Nuance can be a challenge for Financial Transparency Coalition issues. To the average citizen or politician, the relationship between banking laws in developed countries and poverty in developing countries is not self-evident. On its face, it’s not obvious that public registries in the United Kingdom have anything to do with corruption in the Democratic Republic of the Congo. Yet there are compelling connections between these issues and strong causal relationships between them. Our challenge is to explain why.

At the risk of sounding too self-congratulatory, I must say the group of organizations who work on these issues does a phenomenal job of explaining these connections in ways that both citizens and politicians can understand. This week this fact is evidenced by two very different, but connected, developments. The first is a brilliant public outreach campaign by the ONE campaign called Stash the Cash. The second is a promising development toward public registries of beneficial owners in the United Kingdom, which, if you read this blog, you’ve already heard about.

First, in the spirit of connecting the dots, let me say a bit about beneficial ownership, public registries, and their connection to economic development and corruption. Criminals and corrupt business and politicians use anonymous shell companies (or “phantom firms”) to avoid taxes, launder the proceeds of crime, and steal public money. Via these phantom firms, dirty money flows from the developing world to banks and trusts in developed countries. Which means developed countries have the power to curtail it. Yet the inadequacy of anti-money laundering standards and laws on beneficial ownership in many developed countries and secrecy jurisdictions allows these flows of cash to continue.

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How Will New York City’s Next Mayor Respond to Rising Income Inequality?

October 24, 2013

In less than two weeks New Yorkers will head to the polls to replace Mayor Michael Bloomberg, who has hit his term limit. In the race, Bill de Blasio, the Democratic candidate, is the clear frontrunner over Republican Joe Lhota by 64 percent to 23 percent.

To voters, the campaign has centered on the economy and jobs, public education, and affordable housing—issues which all relate to major concerns over New York’s rising income inequality. In New York City income inequality is a huge concern. In fact, according to the Census Bureau, the income gap in the City is higher than in any other metropolitan region in the United States. On this issue, many New Yorkers have expressed a preference for de Blasio, and noted that during 12 years of Republican-turned-Independent Mayor Bloomberg, the city “paid too much attention to the rich and not enough to the poor.”

Mayor Bloomberg, who is a billionaire himself, has not responded to this issue with much sympathy. “Wouldn’t it be great if we could get all the Russian billionaires to move here?” he said recently in his weekly radio interview, “You picture this income inequality measure, but if we could get every billionaire around the world to move here, it would be a godsend.”

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Human Rights, Tax Evasion, and Our Moral Imperatives

October 18, 2013

Tom Cardamone, Managing Director of Global Financial Integrity, recently published a piece in Reuters on the connections between human rights and tax evasion. He references a recent report Tax Abuses, Poverty, and Human Rights, published by the International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty, and Human Rights. The report finds that the evasion of taxes “has considerable negative impacts on the enjoyment of human rights.”

The IBAHRI report goes beyond this connection, however. Developed nations, they write, have an “obligation to assess and address the domestic and international impacts of corporate, fiscal and tax policies on human rights.” These ideas are worth fleshing out.

Much of the IBAHRI report reflects the philosophies of Thomas Pogge, a member of IBAHRI and a chair of Tax Force on Illicit Financial Flows, Poverty, and Human Rights. Pogge’s philosophies are grounded in the philosophical principal on the two types of moral imperatives: negative duty and positive duty. Negative duty is the moral obligation not to cause harm (that is, non-interference), whereas positive duty is the moral responsibility to prevent harm (that is, assistance). For example, you have a negative duty not to push another person in front of a speeding train. You might also have a positive duty to pull an injured man out from in front of a speeding train.

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Getting the Regulations Right: Oil in Liberia and the Democratic Republic of the Congo

October 11, 2013

The Democratic Republic of the Congo is widely considered one of the world’s nations with the highest levels of natural resource wealth. In particular, the nation is richly endowed with many types of mining industries—including copper, cobalt, gold, diamonds, and tin—and timber. In fact, DRC accounts for 51% of the world’s extraction of cobalt and is the world’s fourth largest producer of diamonds.

Despite this wealth, and in part because of it, the country also has experienced conflict, economic instability, and systematic corruption since its independence in 1960. These dynamics have contributed to its status as the world’s poorest nation in terms of per capita GDP. In particular, DRC suffers from an uncertain legal framework and a paucity of transparency in government. As I explained in a recent series of blog posts, nations that have vast natural resource wealth, but do not take the necessary steps to keep the extractive industries accountable, transparent, and honest, are likely to suffer from corruption and, ultimately, the resource curse. DRC’s policies and dynamics fall squarely in these criteria.

Given these existing dynamics, it is difficult to see that expanding oil production—as the government now hopes to do—will stimulate economic growth. In 2012, oil revenues contributed $325 million to DRC’s GDP, but according to Nathaniel Dyer, a campaigner for Global Witness, these revenues are expected to “rise sharply,” particularly given the DRC’s recent deal with Angola to exploit offshore fields.

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Why Are Extractive Industries Prone to Corruption? (Part III)

September 26, 2013

This blog post is the third post in a series on the connection between extractive industries and corruption in developing countries. You can read part one here and part two here.

In a blog post two weeks ago, I discussed the relationship between extractive industries and corruption, noting that while they are related, the presence of extractive industries alone does not inherently lead to their political exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption. Last week, I introduced a few alternative hypotheses that explain the connection between extractive industries and corruption. I used a framework to explicitly point out the causal links between extractive industries and governance. This week, I’ll discuss some of the proposed solutions to the resource curse, again in the context of this model.

In each of these posts I’ve started with a framework adapted from a model presented by Tsegaye Lemma, a policy analyst with the United Nation Development Program’s Bureau for Development Policy. Lemma defines corruption as a function of monopoly, discretion, accountability, integrity, and transparency. Specifically:

Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)

Last week I noted that extractive industries can increase the government’s discretion, create monopolies, reduce integrity and accountability. Missing from this discussion, however, was the issue of transparency. As it would turn out, many of the solutions to this problem lie in that variable.

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Why Are Extractive Industries Prone to Corruption? (Part II)

September 19, 2013

This blog post is the second post in a series on the connection between extractive industries and corruption in developing countries. You can read part one here.

In a blog post last week I discussed the relationship of extractive industries and corruption, noting that while they are related, the presence of extractive industries alone does not inherently lead to their political exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption.

Conceptually, we can think about this in terms of a model presented by Tsegaye Lemma, a policy analyst with the United Nation Development Program’s Bureau for Development Policy. Lemma defines corruption as a function of monopoly, discretion, accountability, integrity, and transparency. Specifically:

Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)

Extractive industries can affect each of these components of governance and economic conditions. Below, I consider alternative hypotheses to explain the connection between extractive industries and corruption and, using this framework, will point out how these industries affect each of these categories of governance and economics.

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Why Are Extractive Industries Prone to Corruption? (Part I)

September 13, 2013

This blog post is the first post in a two-part series on the connection between extractive industries and corruption in developing countries.

Natural resources, particularly fuels and ores, are often associated paradoxically with stagnant economic growth. More intuitively, natural resource wealth is also often associated with poorer governance, most notably corruption. Understanding why this is the case, however, is not necessarily intuitive. To that end, I’ll explore the correlational relationship between natural resource wealth and corruption in this post and show a model for examining these issues. Next week, I’ll use these theories to talk about some specific hypotheses explaining the relationship between large exports in extractive industries and corruption in developing countries.

The relationship between corruption and natural resource wealth, like so many things in this world, is not empirical. Notably, it’s difficult to tease out a cause and effect relationship between natural resource endowments, corruption, and governance, particularly without observing the effect of other factors—as geography, poverty, and conflict—which also tend to be correlated with natural resources and governance.

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The Need for an International Framework for Regulating Digital Currency

September 4, 2013

Undoubtedly, the world has made progress on financial transparency to reduce illicit financial flows in recent years, and the evidence suggests we will continue to do so, at perhaps an even faster rate, in the near future. Yet as these efforts ramp up, threats to efforts to stem illicit financial flows will emerge from technological advancements in currency, most notably Bitcoin. So far, most nations have pursued a piecemeal and largely unilateral approach to regulate digital currency, but this must change. To truly deal with the threat digital currency imposes on continued illicit financial flows, we need an international framework for their oversight and regulation.

At the bilateral and multilateral levels, the world has made clear progress on financial transparency, including in automatic tax information exchange, beneficial ownership, and country by country reporting. The current policies are not sufficient to stem the tide of illicit wealth transfer, but they remain promising. Yet as the world steps up both its proactive and retroactive scrutiny of overseas transfers of wealth, criminals and corrupt politicians will have to become more creative in their approaches to wealth management in order to continue to store illicit funds abroad. With technological advancements in digital currency, there are new ways for them to do so.

There are several forms of digital currencies currently in circulation, but generally when discussing these issues I focus on Bitcoin, the digital currency with the arguably most mature markets. It is also the only truly decentralized digital currency, endowing it with some unique characteristics that make it difficult to regulate and its transactions difficult to track.

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A Liberty-Preserving Alternative to Mass Surveillance

August 28, 2013

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.

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Interactions Between Small- and Large-Scale Corruption in China

August 15, 2013

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.

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