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.

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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Increasing [Amicable] Cooperation on Offshore Tax Evasion

August 8, 2013

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.

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Income Inequality, Wealth, and Illicit Financial Flows in Asia

August 1, 2013

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).

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Looking Forward: Poverty in 2015

July 25, 2013

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.[1] Coupled with our understanding of illicit financial flows from developing countries, […]

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The Importance of Whistleblowers to Financial Transparency

July 17, 2013

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.

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Behavioral Economics and Lessons for FCPA, AML, and Tax Compliance

July 10, 2013

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.

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Liberty Reserve, Money Laundering, and Implications for Bitcoin

June 26, 2013

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?

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