Earlier this week, Facebook, and other sites, were buzzing with talk about Warren Buffett’s op-ed in The New York Times, where the American billionaire called on U.S. policymakers to raise the income tax rate for the richest Americans. Indeed, The Washington Post even posted a link on its Facebook page to an AP article about the op-ed with this apt description: “In case you missed it — and there’s only a slim chance you did — Warren Buffett is calling on the so-called ‘mega-rich‘ to pay more in taxes.” Most of the reactions I saw were supportive of Mr. Buffett’s message, while others supported part of it but argued that the solution is a flat tax rate. But one post stood out for me – while commenting on Mr. Buffett’s op-ed, a friend of mine drew the connection to the uproar only a few months back about the effective tax rate G.E. pays. Mr. Buffett’s populist message sounds nice, but what is he really calling for, and how would it affect the budget and inequality issues plaguing the U.S. economy?
Mark your calendar for the 2011 annual conference of the Task Force on Financial Integrity and Economic Development! This year’s conference will take place in Paris, France from October 6-7, 2011. Stay tuned for more information on the event through our website, on our Facebook page, and via our Twitter account.
Last month, the Secretary General of the OECD, Angel Gurría, came to Washington, and among his appointments was a public talk at the Center for Global Development (where he is a member of the board of directors). A former finance minister and foreign minister for Mexico, Sr. Gurría was every bit the politician and statesman – smiling, good projection and eye contact, very personable and very optimistic – hardly a negative word was mentioned about himself or the OECD.
Secretary General Gurría began his talk with a brief summary of the world economy. He noted that the center of economic gravity is increasingly shifting towards developing countries, although OECD members still represent 60% market share of the global economy. Interestingly, there has also been a dramatic shift in aid flows and development paths. Developing countries are increasingly trading with each other, and the more developed among them are providing aid to their weaker colleagues – 15% of aid now comes from developing countries, which is 100 times more than just 20 years ago. The figures also show that millions of people have risen above poverty; however, Sr. Gurría noted that they have almost all been in China, so we are still far off from achieving the Millennium Development Goals. Inequality is actually increasing in high-growth countries. Youth unemployment, mostly among low-skilled males, is also a serious problem – 17 million unemployed at last count. Such is his world view and assessment of the global economy and its problems.
An article the other week in the Ugandan Daily Monitor quotes an official from the Uganda Revenue Authority (URA), Mr. Patrick Mukiibi, on the value and implications of illicit flows from that country. According to the article, Uganda loses UGX 2 trillion (approx. USD 866 million) annually through “tax crime”, also termed “economic and tax fraud”. The Ugandan Ministry of Finance says that the current fiscal year (2010/2011) government budget is UGX 7.5 trillion (approx. USD 3.2 billion), and it will need loans and other development assistance to cover 26 percent of this. In other words, the article says, development aid into Uganda roughly equals the tax revenue it loses from illicit flows. “If we were able to collect all the money we are supposed to get, we would be able to fund our entire budget without any external support,” says Mr. Mukiibi. It is on this idea that we want to focus.
First, however, we need to talk a bit more about the figures Mr. Mukiibi uses. The Daily Monitor article does not discuss the data or methodology behind the UGX 2 trillion IFF figure, so we do not want to rely on it (although we applaud the government for even being willing to come up with and publicly discuss a figure for its illicit flows and associated tax loss). Instead, let’s take the figures from the latest report from Task Force member Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2000-2009. GFI’s economics team estimates that Uganda lost an average of USD 509 million in illicit outflows per year between 2000 and 2008 (the most recent year for which the IMF’s macroeconomic data are available). This means that, on average, Uganda loses five percent of its GDP in illicit outflows each year. If we apply this average to the FY 10-11 government budget from the Daily Monitor article, illicit outflows would represent approximately 16 percent of the total budget. The majority of these outflows resulted from trade mispricing (unrecorded transfers flows in the IMF’s Direction of Trade Statistics). Trade mispricing means that the value of a good or service being exchanged has been deliberately altered, usually to avoid paying taxes.
WASHINGTON, DC – Nearly 250 prosecutors, civil society representatives and other officials gathered in Washington, DC this week for a World Bank-hosted meeting of the International Corruption Hunters Alliance. Speakers at the three-day event included World Bank President Robert B. Zoellick, United States Senator Patrick Leahy, Transparency International Chair Huguette Labelle, EU MP Eva Joly, ICC Prosecutor General Luis M. Ocampo, Fridtjov Thorkildsen of Norad, and dozens of other notable corruption fighters. Overall the event was a good opportunity to hear what effort the Bank is making to curb bribery, to better understand initiatives underway in developed countries, and to hear what challenges prosecutors and corruption watchdogs are still facing in developing countries.
Here are some highlights from the presentations:
Who is Mina Corp and why is the U.S. government doing business with it? Last week Andrew Higgins and Walter Pincus at the Washington Post wrote an article highlighting the U.S. military’s connection with this fairly mysterious company. The Subcommittee on National Security and Foreign Affairs of the U.S. House of Representatives’ Committee on Oversight and Government Reform is investigating the contracts awarded to Mina Corp and its associated form Red Star Enterprises and is expected to publish a report on its findings sometime this month. While we wait for the report from Congressional investigators, let’s take a closer look at risks such secrecy poses for our integrity and national security.
Mina Corp Ltd and Red Star Enterprises are registered in Gibraltar, which is a secrecy jurisdiction. These jurisdictions, sometimes also referred to as tax havens, can be used to facilitate tax evasion, money laundering, and other illegal activities. The secrecy services Gibraltar and other jurisdictions provide prevent tax authorities in the United States, for example, from finding out who owns the company and how much its financial accounts contain. Why is the U.S. government giving $3 billion in tax payer money to a company that has at least positioned itself to avoid coming under (some) U.S. business and taxation regulations?
In just four short weeks the Task Force will host its second annual conference, and we want you to be there! Titled Achieving Transparency: A Dialogue for Action, the 2010 annual conference of the Task Force on Financial Integrity and Economic Development will take place at the Radisson Blu Hotel Norge in beautiful Bergen, Norway from September 28-29, 2010.
The current financial crisis evidences the same lack of transparency in the global financial system that has affected developing countries for decades. Concrete, practical means exist for enhancing transparency to the benefit of rich and poor nations alike.
Speakers and panelists will address the Task Force’s five recommendation areas for achieving financial transparency: country-by-country reporting, knowledge of beneficial ownership, automatic exchange of tax information, curtailment of trade mispricing, and harmonization of predicate offenses among FATF countries. Breakout sessions will focus on upcoming projects and specific areas of concern within illicit financial flows, including a new financial integrity index, corruption, Millennium Development Goals, the G20 process, Africa’s concerns about illicit outflows, and more. Together, speakers and participants will contribute ideas for an action agenda aimed at achieving transparency, a plan that will guide the Task Force’s further programs!
I read an article from The Wall Street Journal (WSJ) today detailing the settlement of charges by United States and New York prosecutors against UK-based Barclays PLC for accepting money from sanctioned countries. The bank was accused of concealing the origins of and then accepting money from Cuba, Libya, Iran and other sanctioned countries whose money may not legally enter the United States.
According to U.S. prosecutors, Barclays followed instructions from foreign banks to omit their names from payment messages. Barclays also routed certain payments through an internal account so they would appear to be coming from Barclays rather than a bank in Iran or Cuba…In one email referenced by prosecutors, an employee wrote about how to avoid detection: “A good example is Cuba which the US says we shouldn’t do business with but we do.”
It sounds like good news, but is it? Unfortunately, this case is not likely to change the behavior of banks – maybe not even Barclays. The agreed upon fine, $298 million, is the same amount that Barclays claims to have processed in payments from these countries between 1995 and 2006. (The Justice Department says that an internal review came up with $500 million as the value of the illicit transactions.) According to the WSJ, Barclays earned $4.6 billion in profits for the first six months of 2010, which is already far in excess of the value of the fine. Furthermore, from 1995-2006, Barclays reported pre-tax profits of roughly £40.5 billion, which, if you will permit me the liberty of using current exchanges rates, is approximately US$63.31 billion. A fine of $298 million then is only about 0.5% of the profit Barclays earned during the12-year period of the illicit activity!
Christine Clough analyzes whether the recent discovery of minerals in Afghanistan will have a positive or negative impact on quality of life in the country.
Earlier this year the New York Times reported the discovery of vast, untapped mineral deposits in Afghanistan, a country previously considered to be devoid of any valuable natural resources. For the impoverished people of Afghanistan—and for the NATO countries, especially the United States, that have poured money into the country for nearly a decade—this discovery could be very good news. Yet if these mineral deposits are not responsibly managed, quality of life for the majority of Afghanis could actually deteriorate through what is commonly referred to as the “paradox of plenty” or “resource curse.” Under this paradigm, countries with lucrative natural resources—diamonds, timber, minerals, oil, etc.—find themselves plagued by conflict and unable to realize the economic benefits of their natural resources.
The African continent provides several illustrative examples of the resource curse. The discovery of large diamond reserves in Sierra Leone led to (or was at least a main contributor to) a long civil war that was highly destructive—exacerbating poverty, killing tens of thousands of people, and crippling the country’s economy. Corruption and mismanagement in the diamond sector were rampant, and Sierra Leone was one of the poorest countries in the world.
On Friday, May 28th, the Washington Post published an article discussing efforts by the Thai government/army to identify and punish financial supporters of the ‘red shirt’ movement—the Thai political opposition whose protests recently paralyzed Bangkok for several weeks. The Post article particularly highlights the exploits of one businessman, a steel and Nestlé instant coffee producer named Prayudh Mahagitsiri, who was recently placed on a financial blacklist of 151 wealthy Thais by the government’s Center for the Resolution of the Emergency Situation. But Mr. Mahagitsiri is not the only wealthy individual the government has been targeting lately. In February, Thailand’s Supreme Court seized $1.4 billion of former Prime Minister Thaksin Shinawatra’s assets (the court permitted him to keep $900 million).
Of course, neither the Post nor the government have addressed the lack of financial transparency in Thailand. According to a 2008 report from Global Financial Integrity, which leads the Task Force, Thailand lost up to US$6.3 billion in illicit outflows between 2002-2006 due to the opacity provided by tax havens and secrecy jurisdictions around the world. These jurisdictions obscure the beneficial owners of corporations, trusts, and charities, and refuse to share account information with other tax authorities, thereby enabling up to US$1 trillion to flow out of the developing world each year.
The Task Force is currently accepting applications for Program Director of our new Economic Transparency Initiative (ETI). Qualified candidates will have a PhD in macro economics, fluency in English and a second language (preferably French), and strong written and verbal communication skills. Our goal for ETI is to significantly increase the amount and types of data available to the public related to illicit financial flows, so that we can better understand the nature and volume of the problem and then apply this knowledge towards amelioration efforts.
A full description of the position and qualifications is available in the jobs section of the Task Force website. Applications are due by June 4 at 11:59 ET.
Good news for the economists and statistics wonks among us: the World Bank has recently made its substantial catalogue of data available on the web for free at http://data.worldbank.org! We applaud the Bank for taking this important step! The site and the data are available in four languages: Arabic, English, French and Spanish. Open access to this data is invaluable for researchers and interested members of the public who want to better understand global trends on a host of topics.
Tell us, how would you like to see this data used?