This week the world saw a huge leap forward on automatic tax information exchange and, more broadly, the effort to crack down on tax evasion. As the recent investigation by the International Consortium of Investigative Journalists has shown, governments around the world have a big problem, not only with tax evasion specifically, but also the broader use of offshore vehicles for hiding cash and corruption.
Yet this week, the governments of ten European nations have answered this challenge in stunning fashion. Their efforts have ignited momentum on an effort that could be an integral part of not only reducing tax evasion, but also improving economic development and reducing poverty worldwide. Of course, we’re not there yet, we might even not be past the end of the first quarter. But we could get there.
Here’s where we are: On April 10th, the governments of France, Germany, Italy, Spain, and the United Kingdom announced they will launch the first ever multinational system of automatic tax information exchange. Shortly afterwards, the government of the Czech Republic and Poland, followed by Belgium, the Netherlands, and Romania, also signed up, bringing the number of participating countries to 10.
As Raymond Baker, Director of Global Financial Integrity, noted: “This is a resounding victory for taxpayers and transparency groups; it’s not possible to overstate the significance of this news.”
Sarah Petre-Mears controls more than 1,200 companies across the Caribbean, Ireland, New Zealand, and the United Kingdom. Supposedly. Actually Petre-Mears doesn’t know much about the companies for which she passes resolutions and helps set up bank accounts; all she needs to do is sign her name. Because Petre-Mears is actually just a nominee-director, who keep the real owners of her companies secret by selling their names for use on official company documents, whilst giving addresses in obscure places all over the world.
Walk into Madrid’s famed art museum, Thyssen-Bornemiza, and you’ll find the private art collection of Carmen Thyssen-Bornemisza, which includes Monets, Matisses, and Van Goughs. But technically Thyssen-Bornemisza doesn’t own the paintings you see in the museum named for her family. Instead they are owned by secrecy-guarded companies in Liechtenstein, the Cayman Islands, the British Virgin Islands, and the Cook Islands. Not only does this ownership structure give Thyssen-Bornemisza some tax benefits, but it also allows her some flexibility to move the paintings across borders. She’s not the only one; many other of the world’s biggest art collectors use tax havens to buy and sell art.
We wouldn’t know about the antics of Sarah Petre-Mears and Carmen Thyssen-Bornemisza if it weren’t for an investigation by the International Consortium of Investigative Journalists (ICIJ). After a three year investigation into Australia’s Firepower scandal, a case involving offshore abuse and corporate fraud, Gerald Ryle, ICIJ’s Director, obtained a hard drive with a trove of corporate data, personal information, and e-mails on offshore companies and trusts.
Move over, Cayman. Step aside, Switzerland. The world’s next offshore powerhouse won’t be in the Caribbean or the Alps. It won’t be an island surrounded by water, a peninsula in Asia, or a tiny nation barely larger than a city. It won’t be in New York, Delaware, or London. Because it won’t be anywhere. It will all be a figment of our imaginations—and of course the internet.
I’m talking about internet currencies, and specifically, the largest of them all: Bitcoins. And I firmly believe they will pose the next great challenge for stemming money laundering, corruption, and illicit financial flows.
Bitcion is money, but Bitcoins are issued by complex computer algorithms rather than a government. They exist completely online, using peer-to-peer networks rather than a centralized system. And they serve, like all other forms of money, as a medium of exchange. Like the U.S. dollar or the euro, you can buy and sell them on markets. You can also use them buy things like an upgrade on Reddit, blog services in Wordpress.com’s store, and pizza deliveries from Domino’s through Pizzaforcoins.com. You can use them to transfer money to a friend overseas or you can use them to buy drugs, sell illegal arms, and launder money. I’ll get to those in a second.
Until now, I would have said the challenges that Bitcoins face overwhelmed its potential to replace other currencies as criminals medium of exchange in the future. That’s because it faced three very real impediments: its size, its stability, and its security. Like I said, until now.
In the words of two of my personal heroes: “Economists love incentives. They love to dream them up and enact them, study them, and tinker with them.”
For good reason; incentives make the world go round. They are the reason we get up in the morning, the reason we go to work, and definitely the reason we brush our teeth. They are dictate the speed we drive, the groceries we buy, and the pace of our work. Sometimes they are negative (the prospect of getting a cavity or a speeding ticket) and sometimes they are positive (a raise, or a hug from a child). But they are always at work in hundreds of ways, sometimes conscious and sometimes not.
Politicians like incentives almost as much as economists do. Federal and state governments incentivize all sorts of things, from milk production to renewable energy, and everything in between. The problem is though, that incentives are often difficult to design and, even more importantly, result in a whole new set of incentives that the designer never intended.
These are called perverse incentives and history is replete with them. Take nineteenth century China, for example, when paleontologists looking for dinosaur fossils paid peasants for handing over pieces of dinosaur bone. Later they discovered the peasants were digging up the bones, smashing them into many pieces to maximize their payments, and greatly diminishing their scientific value in the process. Others have pointed out that structuring bonuses for company executives around earnings encourages them to artificially inflate profits and make decisions targeting short-term gains at the expense of long-term profitability.
Yesterday, the nation’s top intelligence official, James R. Clapper Jr., briefed Congress on the most important security threats facing our nation. Clapper didn’t bother to hide his disdain for the annual event, calling an open hearing on intelligence matters a “contradiction in terms.” In a more subtle critique, Clapper also noted that it is virtually impossible to “rank—in terms of long-term importance—the numerous, potential threats to U.S. national security.” In that vein, Clapper said it is the “multiplicity and interconnectedness of potential threats—and the actors behind them—that constitute our biggest challenge.” On that critique, I couldn’t agree more.
One of the starkest examples of these dynamic forces are in Clapper’s testimony on money laundering, illicit financial flows, and the dangers of an opaque financial system. As Clapper notes in his statement for the record, “Criminals’ reliance on the U.S. dollar also exposes the U.S. financial system to illicit financial flows. Inadequate anti-money laundering regulations, lax enforcement of existing ones, misuse of front companies to obscure those responsible for illicit flows, and new forms of electronic money challenge international law enforcement efforts.”
Understanding how these forces weaken U.S. national security is, per Clapper, multifaceted. It’s also quite important.
In December of last year the U.S. Department of Justice discovered that HSBC, a large British bank, “willfully failed” to apply money laundering controls to at least $881 million in drug trafficking proceeds from Mexico and covered up illegal transactions for Burma, Iran, Sudan, Cuba, and Libya. To escape criminal charges, HSBC admitted to wrongdoing and paid a record $1.92 billion settlement. Yet despite this massive offense, not a single person went behind bars as a result.
This wasn’t just a failure of the system or the anonymous bureaucracy of a massive corporation. The investigation revealed that senior HSBC officials were complicit in the illegal activity. They did not go to jail. According to court documents, individuals at HSBC went out of their way to allow the bank to act as a financial clearing house for these criminals. They will did go to jail. Other bank officials at HSBC made a “knowing calculation” that they would rather do business with criminals and “make a profit from those illegal transactions” than fulfill their obligations under U.S. law. They did not go to jail.
While critics pointed out the hypocrisy and inconsistency of this message, U.S. government officials called the fine a success. For example, U.S. Attorney Lynch, one of the architects of the settlement, said: “That’s a very short-sighted view, I think, because in this case they’re obviously paying a great deal of money, but they also have to literally had to turn their company inside out.”
In the last few years—and particularly since Vladamir Putin retook power—Russia has increasingly retreated to Cold War tendencies. Russia’s relationship with the United States has soured over its ban on American adoptions of Russian children, a clash over its missile defense problem, and USAID’s democracy promotion efforts. This week, in perhaps the most obvious flashback of all, President Putin announced his nation requires an immediate and massive military upgrade by 2016. And the former KGB agent plans to spend $750 billion over the next seven years to accomplish it.
Yet Russia’s existential threat is not from the United States. No, that threat comes from within.
Two weeks ago, Global Financial Integrity released a report on illicit financial flows from Russia. In the report, authors Dev Kar and Sarah Freitas detail the cross-border flow of illicit funds to and from Russia over the period 1994 to 2011. Usually, I would focus on the illicit outflow component of the report. Yet in this case, I think there is another interesting story to tell—and that’s about the inflows.
Illicit inflows to Russia ranged from a low of $11.1 billion in 1994 to a high of $80.6 billion in 2007. In 2011 they were $58.7 billion. As the report points out, there is no reason to believe “that money brought into a developing country through illicit channels will be declared as taxable income or can be used for economic development” because an investor has no incentive to smuggle in capital from abroad if it represents a genuine return of funds. In fact, rather than adding to a productive capacity, that money can “drive a speculative real estate boom, create a housing bubble and push the country towards economic instability.”
This week North Korea released an inflammatory new propaganda video showing President Obama and United States troops in flames. The video then credits America’s “gangster-like policy of hostility” for the country’s decision to become a “strong military power” and conduct its latest nuclear test. Like many other North Korean propaganda videos, this one also blames the nation’s overwhelming poverty—including chronic food shortages—to the imperialist bullying of America.
Although the video and its sentiment is far from new—North Korea has been releasing such propaganda for years—the implications of this one are a little more pressing this time around. That’s because North Korea detonated a third nuclear test explosion on February 12th, about two months after firing a missile into orbit. As John Bolton, former U.S. ambassador to the United Nations and a senior fellow at the American Enterprise Institute, puts it, North Korea is “perilously close to becoming a nuclear weapons state in fact, not just in the regime’s extravagant rhetoric.”
Most of the time, North Korea’s propaganda and rhetoric is so convoluted that calling it “extravagant” is probably being too kind. In what is more a force of coincidence than reason, however, the logic of its most recent video is not too far off the mark. Namely, the video argues that America’s sanctions are to blame for the nation’s poverty and that America’s hostility (read: sanctions) are likewise to blame for the country’s decision to obtain a nuclear weapon. Of course, none of us can make much of an assessment about North Korea’s decision to do anything, but there is one thing we do know. And that is: the sanctions aren’t working. In fact they’re making matters worse. Let me explain.
President Obama’s State of the Union address this week included an impassioned argument for a “balanced approach” to deficit reduction; meaning that spending cuts should be coupled with revenue increases. Many Republicans disagree—arguing we should cut spending while leaving taxes at their current rates.
The bright line between taxes and spending is, in fact, not so bright. One obvious example is tax expenditures—government spending through the tax code, also called loopholes. In some ways tax expenditures are good; for example, they can be used as incentives to encourage corporate and private behavior that provides a social benefit. On the other hand, these expenditures both lower government revenue and can skew the horizontal and vertical equity of our tax system. For example, corporate loopholes can result in dramatically different effective corporate rates for nearly identical companies. Similarly, they allow some very wealthy American families to pay lower tax rates than their counterparts in the middle class.
Last week Senator Bernie Sanders (I-Vermont) introduced the Corporate Tax Fairness Act, a proposal to cut one of the U.S.’s tax expenditures. The bill would raise an estimated yearly $60 billion by ending “deferral,” which allows U.S. corporations to indefinitely defer payment of overseas earnings. This loophole creates two incentives: (1) for corporations to shift profits overseas to tax havens using transfer pricing, and (2) for those corporations to hold large deposits of untaxed cash sitting in bank accounts overseas.
On January 22nd, 2010, the day after the Supreme Court ruled on the Citizens United v. Federal Election Commission case, Americans knew elections in our nation would never be the same. Although no one was really sure exactly how. In the landmark 5-4 decision, the court ruled that, under the First Amendment, the government could not restrict independent political expenditures from corporations, non-profits, and unions.
In his dissent, Justice John Paul Stevens argued that allowing unlimited corporate money to flood the political marketplace would corrupt our democracy.
We might not all agree with the contentious Citizens United decision, but it is the law of the land. And while we don’t all agree on whether or not corporations should be able to exercise a “right to free speech” with unlimited spending on election advertisements, most Americans do agree on two things: 1) foreign nationals shouldn’t be allowed to spend money on American elections, and 2) the American people have the right to know who’s doing the spending.
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.