Swiss lower house rejects UBS deal with US
Financial Times, June 8, 2010
Tax information exchange champions transparency
Business Standard, June 7, 2010
Has banking secrecy come to an end in Singapore?
The Business Times (Singapore), June 8, 2010
2nd UPDATE: Argentina Tightens Foreign-Exchange Rules
Dow Jones, June 7, 2010
Nigeria launches $15 mln Daimler bribery probe<
Reuters, June 7, 2010
UN leader tasked with Guatemala crime woes resigns
AP, June 8, 2010
Shareholders Say Oil Firm Paid Bribes
Courthouse News Service, June 7, 2010
Corruption pervasive in Tanzania – report
ThisDay, June 8, 2010
Nigeria: Nuhu Ribadu – the Triumph of Good
Leadership (Nigeria), June 8, 2010
Governance: EU’s justice mission pursues corruption at the highest level
Financial Times, June 8, 2010
Last week, we saw some very heartening news from Fitch Ratings. The powerful credit-rating agency announced on Tuesday that it would consider violations of the Foreign Corrupt Practices Act (FCPA) a credit liability for corporations.
According to Reuters:
“Companies that violate FCPA or other anti-bribery conventions have committed a criminal act that makes them potentially subject to indictment,” Fitch said. “Criminal indictment can be hazardous to the financial health and existence of corporations.”
Indictment alone can trigger onerous reporting requirements, civil lawsuits, business losses and reputational risks, Fitch said. Violations of the act can also become a sticking point in acquisitions or dispositions of businesses, Fitch added.
It only makes sense, then, that a violation of the act would lead to a potential credit downgrading.
This is also good news for good-governance advocates, as corporations now have another reason—indeed, a private-sector reason—to practice good corporate governance.
Kudos to Fitch for upping the CSR pressure on corporations. Now, let’s hope that Moody’s and Standard & Poor’s follow suit.
German minister sees need to respect bank secrecy
Reuters, June 5, 2010
Over 32 tax-related pacts inked globally every month
PTI, June 6, 2010
Pamrapo Savings Bank gets one year of probation and loses $5 million as federal judge hands down sentence for misdeeds
The Jersey Journal, June 4, 2010
Italy Finance Police Uncover 30 Million-Euro Tax-Evasion Ring
Bloomberg, June 4, 2010
Dutch tax evaders declare 180 mln euros this year
Reuters, June 4, 2010
420 companies sealed over tax evasion
Next (Nigeria), June 5, 2010
Fugitive Czech businessman detained in Vienna
Prague Daily Monitor, June 3, 2010
Customs facing ‘massive reform’
The Tribune (Bahamas), June 3, 2010
A three-pronged approach to confront Afghanistan’s corruption
The Christian Science Monitor, June 4, 2010
Companies can’t choose ‘bribery threshold’
The Times (South Africa), June 6, 2010
Cracking Down on Corruption
The Moscow Times, June 7, 2010
UK raises the bar in corruption battle
Emirates Business 24/7 (UAE), June 6, 2010
Police probe leaves out Bakrie firms
The Jakarta Post, June 7, 2010
‘Tenderitis’ at root of ANC’s corruption problem in South Africa
Times Online (UK), June 5, 2010
Nigeria loses billions of naira to corruption annually –Akunyili
Punch (Nigeria), June 6, 2010
Cambodia: Donors pledge $1 billion but criticise corruption
Spero News, June 4, 2010
Sarkozy took Pak kickback?
Hindustan Times, June 4, 2010
Macedonia: Corruption destroys business relations and decreases economic growth
Transparency International, June 2, 2010
Corruption could undermine REDD
MongaBay.com, June 3, 2010
Corruption, Poverty, and our Honor
Philippine Daily Inquirer, June 4, 2010
Namibia: Corruption in Mining Sector Alleged – Report
The Namibian, June 4, 2010
High-level corruption in diamond licensing
The Standard (Zimbabwe), June 5, 2010
France told to enact money laundering law
Financial Times, June 3, 2010
Lebanese-American couple charged with supporting Hezbollah
AFP, June 3, 2010
Hawala operator accused in Koda case detained at airport
PTI, June 3, 2010
Search for Common Ground (SFCG) will be hosting a panel discussion on corruption and violence this Friday, June 11th. The event, which will take place at the Council on Foreign Relations, feature’s GFI friend Nuhu Ribado, among others.
Full details below:
Friday, June 11th
9:00 to 10:30am
Council on Foreign Relations
1777 F Street, NW
Corruption is a leading driver of conflict and the closest affiliated condition with instability and violence. Corruption incites conflict, fuels fighting, complicates peacebuilding, and obstructs nation-building. Yet anti-corruption and peacebuilding have historically been unaligned fields and the relationship between them has been distant at best, adversarial at worst. This forum, the first in a series to examine economics and conflict, will investigate the nexus between conflict and corruption. How and where can peacebuilders work with anti-corruption efforts? What are the benefits – and the barriers – to collaboration?
The G20 finance minister’s communiqué says:
We expressed the importance we place in achieving a single set of high quality, global accounting standards and urged the International Accounting Standards Board and the Financial Accounting Standards Board to redouble their efforts to that end. We encouraged the International Accounting Standards Board to further improve involvement of stakeholders.
This is, of course, totally appropriate. Stakeholders are probably the biggest users of accounts. And they come in a wide variety of forms – as I have documented in this briefing sheet.
More importantly, this is happening at the time that the IASB has published a response to the biggest ever demand to the IASB that it consider stakeholder needs. This is, of course, the demand that it supply country-by-country reporting for the extractive industries. My full response to that IASB proposal is published here.
The most telling feature of that IASB response is, however, the refusal of the IASB to consider the needs of stakeholders when setting accounting standards. As they say in their report (6.11):
In Chapter 1 the project team proposed that, for the purposes of this discussion paper, financial reporting should be regarded as including information that:
(a) helps users of financial reports to make decisions;
(b) can reasonably be viewed as being within the scope of a complete set of financial statements; and
(c) meets a cost-benefit test.
The IASB, however, notes (6.10):
the Framework indicates that financial reporting is primarily directed to meet the needs of existing and potential equity investors, lenders and other creditors (ie capital providers). Information that is useful to capital providers for making decisions may also be useful to other users of financial reporting. These other users include suppliers, customers and employees (when not acting as capital providers), as well as governments and their agencies and members of the public.
In other words, the IASB explicitly rejects the notion that stakeholders have any interest in financial statements and refuse to recognise their needs because they deny they exist.
In that case what chance is there that the IASB will do as the G20 asks?
Without an explicit response – or without explicit movement on the issue of country-by-country reporting – which is now the biggest campaign for accounting information ever mounted by civil society – there is no chance of thinking that they will meet the G20’s reasonable demand.
That leaves the G20 with one option: the IASB will have to be taken under international control.
Director of Global Financial Integrity Raymond Baker addressed international tax cooperation as a panelist at the informal United Nations panel discussion held yesterday in New York. Mr. Baker participated in the event’s second panel on innovative development financing initiatives under development.
Philippe Douste-Blazy, Special Adviser to the Secretary-General on Innovative Financing for Development, chaired the day-long event and provided opening and closing remarks. The meeting allowed for informal and interactive discussion of all the issues related to accomplishing the Millennium Development Goals (MDGs) by 2015. The first panel focused specifically on mechanisms of innovative development financing in operation.
The G77 and China statement said that the group “believes that innovative mechanisms of financing can make a positive contribution in assisting developing countries to mobilize additional resources for financing for development on a stable, predictable and voluntary basis.” The European Union also made a statement identifying its current initiatives and goals.
Representatives of all member states, observers, relevant entities of the UN system and other accredited intergovernmental organizations, as well as representatives of accredited civil society organizations and business sector entities were invited to participate, according to the event’s concept note. Mr. Baker was joined by a range of international finance and development experts including Cyrille Pierre, Deputy Director for Global Economic Affairs and Development Strategy from the French Ministry for Foreign and European Affairs, France; Susan McAdams, Director of Multilateral and Innovative Financing Department at the World Bank; Håkon Gulbrandsen, Senior Adviser for International Development at the Norwegian Ministry of Foreign Affairs; and Susan Durston, Associate Director of Education at UNICEF.
Yesterday’s discussion will result in a Chairman’s summary as an input to the preparatory process of the High-level Plenary Meeting of the General Assembly on the MDG to be held on September 20-22 in New York.
To view Mr. Baker’s presentation, click here.
Global Financial Integrity Economist Devon Cartwright-Smith analyzes the relationship between illicit financial outflows and illicit financial inflows in developing economies in this two-part series.
Yesterday I posed the question of whether it is wise to subtract evidence of illicit inflows from illicit outflows (which are known to hinder developing country economies), as if one would cancel the other out. If billions of dollars are leaving a developing country through illicit channels and billions of dollars are being brought in through illicit channels, can we say with utter certainty that the country has no problems with illicit money? I think not. In fact, I can only think of two enterprises in developing countries that would require the inflow of large sums of cash, and neither offsets the problems created by outflows nor helps the developing country’s economy stabilize and grow.
The first use of the money brought into a developing country under the government radar, through illicit channels, is to finance activity in the underground economy. Do you need to buy a fancy car but do not want to leave a paper trail and pay a small fortune in sales tax? Easy: get it from the black market and pay cash. Like copious quantities of drugs? Better have lots of cash on hand. (They don’t take plastic…I’m told.) Are you a drug lord in need of a massive hacienda to impress your friends and wow your enemies? I bet you can find some contractors to build it, and they probably would have no problem being directly compensated with fat stacks of tax-free cash. A study by Global Financial Integrity finds, tucked away in the appendix at the back, an average of US$30 billion was secreted into Russia from 2002-2006 through trade misinvoicing. Since I cannot personally measure the shadow economy in Russia, I can only point to the numerous suggestions I’ve found that Russia’s black market has flourished. Money makes the black market move all over the world. The entire drug trade is financed and run by cash transactions. Money opens doors and persuades good but poor people to turn a blind eye when they know they shouldn’t. Excessive flows of money (bribes) encourage systems of corruption that undermine a struggling country’s ability to stabilize itself and grow. Underground flows of cash finance terrorism and war. Illicit funds brought into developed countries through hidden channels and fed into the underground economy are not used for the good of the people, and they do not offset the problem of illicit outflows.
The second use involves the hawala money transfer system. The hawala system is run by a network of hawala brokers, or hawaladars, in separate countries all over the world. Transferring money between countries is as simple as giving an amount of money to a hawaladar, A, in country A, Mr. A calling his counterpart in country B and telling Mr. B that this amount of money (converted into local currency) is owed to you, or to whoever is arranged to receive the transfer in country B (such as a family member or henchman). The hawaladars in both countries settle up the debt at a later time. This system is entirely based on trust between the hawaladars, which is why it’s common for hawaladars to use family members in foreign countries as their counterparts.
Consider the following illustration. Suppose there’s a man in the U.S. named Raj who wants to send $100 home to his family in India. He can use the local bank to transfer the money, for a fee of $20, and the money will arrive in the Indian bank in a week or so, ready to be picked up. Or he can go to a nearby U.S.-based hawala broker and for a transaction fee of, say, $5, have an Indian hawaladar provide his family the $100 (in rupees, of course) the next day. Some hawaladars in developing countries will even deliver the funds to the family, a door-to-door courtesy that no bank offers.
Here’s where the illicit inflows comes in. Suppose Raj wanted to transfer $50,000 between countries. If his local hawaladar calls his Indian counterpart to arrange to have $50,000 worth of cash available in Indian rupees, that Indian hawaladar better have the rupees available or he is going to lose his business. If he doesn’t have the cash handy the U.S. hawaladar will find someone else and may never call again. Hawaladars must have large amounts of cash readily available at all times. Since the whole system is based on the belief that debts can be settled later and that transactions with the counterparts will be completed quickly and without fuss, and since this whole system operates under the radar, hawaladars rely on illicit inflows to keep their business afloat.
There is some evidence that hawaladars do most of their transactions through the mispricing of trade. Hawala brokers are often businessmen with a legitimate business. Their foreign-country contact may also be a businessman or may be a member of a tiered network of hawaladars, many of whom may also run a business. To settle debts, to provide sources of cash, and to keep up notions of trust between parties, hawala partners who engage in international trade in their normal business routine can misprice trade invoices to conceal money transfers. The same study by Global Financial Integrity also finds that an average of US$17 billion was funneled into the UAE through trade misinvoicing, from 2002-2006—an estimate consistent with the claim (page 3): “The United Arab Emirates, especially Dubai, are believed to handle the largest volume of [hawala] transactions…” Hawaladars in Dubai need to provide for billions of USD worth of transactions and the evidence is clear that the manipulation of trade misinvoices is a preferred avenue for providing adequate cash flows into the UAE.
Since the money floating around in the hawala system exists outside of the official system, the government cannot generate revenue by subjecting these transactions to taxes. Money brought into a developing country to finance the hawala system undermines the formal financial system and reduces government income. Thus, even if the illicit flows models identify net inflows, rather than outflows, it is foolish to let evidence of illicit inflows wash out the estimates of illicit outflows. To more accurately gauge the problem developing countries face from illicit flows, it may be better to add the two estimates together. Then we may see a more realistic estimate of how much illicit money is enabling illegal activities and undermining development efforts.
Swiss Panel Backs UBS-U.S. Deal but Urges Referendum
Reuters, June 2, 2010
Gov’t to expedite efforts to get black money info
PTI, June 2, 2010
Taxing the Poor
IPS, June 2, 2010
The Taxman Cometh
Foreign Policy, June 2, 2010
Christian Aid calls on giants to open their books
Accountancy Age, June 3, 2010
Corruption can be good – Museveni
The Observer (Uganda), June 2, 2010
Ex-Florida GOP chief Jim Greer charged with siphoning cash
Miami Herald, June 2, 2010
Haiti Telecom exec sentenced to 4 years
Miami Herald, June 3, 2010
Dawn, June 3, 2010
Jamaica has chance to rid country of corruption
The Guardian, June 2, 2010
Study: Mexico drug cartels avoid bank deposits
AP, June 3, 2010
Collin Swan analyzes the groundbreaking, new reporting requirements at the Hong Kong Stock Exchange and examines the implications they will have on the proposed Energy Security Through Transparency (ESTT) Act in the United States.
Today, the Hong Kong Stock Exchange (HKEX) is enacting a clear and comprehensive set of listing requirements for mineral companies that are in line with international standards and encourages greater disclosure and transparency. Under the new Chapter 18 of the HKEX Listing Rules, mineral companies applying for a listing on HKEX will be required to disclose important information about their exploration and extraction activities, including payments made to host governments. Revenue Watch has heralded these new rules as a “significant step forward in the global campaign to establish greater transparency and accountability in the extractive industries.” While these new rules are far from perfect and do not require country-by-country reporting on an annual basis, they are still a step in the right direction. After today, the HKEX will become the first stock exchange in the world to require any kind of country-by-country reporting by companies operating in extractive industries.
The new Chapter 18 will apply to any “new applicant whose Major Activity (whether directly or through its subsidiaries) is the exploration for and/or extraction of Natural Resources [including both minerals and/or Petroleum].” Therefore, a company that has more than 25 percent of its total assets in natural resources will have to comply with Chapter 18 when applying for a listing. To accommodate the increasing interest of foreign mineral companies to list in HKEX, the exchange is ultimately trying to establish itself as a creditable place for mineral companies to raise capital while providing investors with enough information to feel secure in their investments. And for that, HKEX should be applauded.
As part of its listing application, a mineral company will be required to disclose any “relevant and material” information concerning a number of different categories, including environmental, social, health and safety issues and the company’s historical experience with host country laws and practices. These progressive rules require new mineral companies to disclose in their listing application all “payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis.”
However, Chapter 18 does have its limitations, and the HKEX ultimately fails to take this country-by-country reporting requirement far enough. The new rules only apply to mineral companies applying for a listing on HKEX, and do not dramatically affect the obligations of companies already listed. Listed companies would be required to make similar disclosures only if they were to conduct a major acquisition or disposal of mineral or petroleum assets (i.e. the acquired or disposed assets were at least 25 percent of the company’s total assets). Perhaps most significantly, mineral companies subject to Chapter 18 are only required to disclose their country-by-country payments during the listing application process and would not be required to update this data annually.
This is where the United States can take the reins and make country-by-country reporting a meaningful disclosure. The U.S. Senate is currently considering the Energy Security Through Transparency Act (ESTT), which would require all mineral companies registered with the Securities and Exchange Commission (SEC) to disclose payments made to governments on a country-by-country basis in their annual reports. A similar bill is expected to be introduced in the House of Representatives soon.
The steps Hong Kong has taken reaffirms that country-by-country reporting standards are not only positive but essential for investor security and risk analysis. They provide investors with a deeper look into a mineral company’s allocation of resources on a global basis and enable them to make more accurate risk assessments.
Now is the time for Congress to step up to the plate. Hong Kong’s new rules already demonstrate the formal recognition of a growing international standard in support of country-by-country reporting. Transparency is good for both investors and companies, and it helps to ensure that mineral-rich countries actually obtain the profits they deserve from their resources.
When determining the amount of money that flows out of developing countries, a question naturally arises once the calculations are complete: “Why do some of these countries have huge negative outflows?” If outflows are measured as positive figures, negatives must indicate inflows. So are developing countries really recipients of huge swaths of cash, brought in through illicit channels? If these inflows were legitimate and intended to help alleviate the damage done by illicit outflows, developing countries shouldn’t need quite so much foreign aid from the wealthier countries of the world. Plus, they should be able to pay off all that odious outstanding external debt. Unless, of course, this evidence of inflows is just some data error. Perhaps these countries don’t have their books in order and the numbers they report, or fail to report, don’t jive with reality? This is possible, but unlikely when the evidence of inflows is in the range of billions of US dollars. Data discrepancies aside, suppose the data are good and these recorded illicit inflows are legitimate. Does it make sense to let the amount of illicit inflows be subtracted from the illicit outflows for a net estimate of illicit money moving into or out of a country?
It’s easy to come up with an explanation for why someone in a developing country might want to send money abroad. Political instability, poor economic performance, and inefficient capital markets in the home country all discourage domestic saving or investment. Macroeconomic instability might foreshadow a decreasing value of the country’s currency, so residents would want to keep their assets in a foreign, more stable currency, such as the Euro or US dollar. Investment in foreign assets is an option for developed country residents who want to diversify their portfolio (as if to take advantage of better interest rates than domestic offerings or to minimize risk across their portfolio), but is generally not an option for residents of developing countries due to restrictions on foreign investment. Moreover, some developing country governments offer large incentives in order to entice foreign investment into their countries for future development, even offering guarantees on the foreign debt, while there are few incentives and few guarantees for domestic investors. For residents with shady morals, tax evasion is an obvious and well known reason to stash their cash abroad. Similarly, if a country has capital controls, such as limits on how much money may be exchanged for foreign currency or transferred abroad?as is the case in most developing countries, illicit channels are the only ways to fully skirt these controls.
With these driving motivations for developing country residents to send money out, coupled with incentives to bring money in from abroad through official channels as foreign direct investment, what possible reason could someone in a developing country have to bring money in through illicit channels, under the government radar? Additionally, once the money is successfully sneaked in, it’s unlikely that the illicit inflows will be declared as income and given over to the government in income taxes. Nor is it likely that those who bring the money in through illicit channels will be putting the money toward efforts to help develop and stabilize the economy. Only two uses come to mind. Neither of them is good for the official economy. Neither would offset the detrimental effects of the illicit outflows. Neither suggests that it would be reasonable to let this evidence of inflows wash out any evidence of outflows (as if one flow is good and the other flow is bad). In fact, both uses encourage me to think that to properly capture the damage done to developing countries by illicit flows one would need to add the two flows together, not let them wash each other out…
Coming soon (tomorrow), the exciting conclusion where everything is revealed! Stay tuned.
Offshore Corporate Tax Havens: Why Are They Still Allowed?
The Huffington Post, June 1, 2010
Tax haven crackdown coming to close
MoneyManagement.com (Australia), June 2, 2010
Uncle Sam to keep a closer eye on offshore trusts and accounts
The Royal Gazette, June 1, 2010
SEC Is Boosting Scrutiny of Offshore Accounting, Fagel Says
Bloomberg, June 2, 2010
Ghana lost $36 million of gold revenue
GhanaWeb.com, June 2, 2010
Cancun mayor arrested on drug charges
Associated Press, June 1, 2010
Nigeria: Democracy, Their Democracy, And Citizen Kuti
Daily Champion (Nigeria), June 1, 2010
Corruption thrived in country this year: TI report
Daily Times (Pakistan), June 2, 2010
Georgian mafiaso fined for money laundering in Spain
Reuters, June 1, 2010
U.S. Treasury Designates Mozambique Firms in Narcotics Network
Bloomberg, June 1, 2010
Liberian President’s Son Wore Wire for DEA In Massive Drug Sting
MainJustice.com, June 1, 2010
UK jury: Nigerian leader’s sister laundered money
Associated Press, June 1, 2010
Vatican bank under scrutiny
AFP, June 1, 2010
Koda graft trail leads to Dubai
India Today, June 2, 2010
Ecuador Won’t Work With Sanctioned Iranian Banks – Correa
Dow Jones, June 2, 2010
U.S. Attorney General Says More Individuals to Face Bribery and Corruption Charges
Business-Ethics.com, June 1, 2010
Key Swiss report raps government over UBS crisis
Reuters, May 31, 2010
Tax collectors expand probe of Canadians hiding money in Liechtenstein
The Globe and Mail, May 31, 2010
Swiss banks to focus on ‘taxed assets’ from foreign clients
Press Trust of India, May 30, 2010
Tax-haven poker websites hit jackpot
Sydney Morning Herald, May 30, 2010
Op-Ed: Demystifying tax-haven hypocrisy
The Economic Times, June 1, 2010
Fin Min: Greece Short On Revenue Targets, Vows Tax-Evasion Crackdown
Dow Jones, May 31, 2010
Yacht seizure made my breast milk dry up, says Flavio Briatore’s wife
Times (of London), May 30, 2010
Editorial : The Road to Ruin
Barron’s, May 30, 2010
Uruguay Legislates On Bank Secrecy
Tax-News.com, June 1, 2010
OECD And Council Of Europe Strengthen Tax Cooperation
Tax-News.com, June 1, 2010
Opinion: We will all benefit from further business tax reforms
The Globe and Mail, May 31, 2010
Opinion: Dispute resolution panel needs change for effectiveness
The Economic Times, May 31, 2010
Mulroney-Schreiber relationship ‘inappropriate,’ probe finds
The Globe and Mail, May 31, 2010
Israel fraud squad quiz Olmert over property scandal
AFP, May 30, 2010
Kremlin bribery whistleblower flees to UK
Times (of London), May 30, 2010
OECD concern over Irish international bribery laws
The Sunday Business Post (Ireland), May 30, 2010
S.Africa ruling alliance faces split over corruption
AFP, June 1, 2010
Bangladeshi PM ‘cleared of corruption cases’
AFP, May 31, 2010
Anti-bribery act could weigh on corp ratings: Fitch
Reuters, June 1, 2010
UPDATE 1-Indonesia to scrap permits to save forests-official
Reuters, May 31, 2010
Kenneth Starr – the rise and fall of a Ponzi star
International Business Times, May 31, 2010
Country-by-country look at Europe’s debt crisis
Associated Press, May 31, 2010
France to Host 25th Annual Africa-France Summit
Voice of America, May 29, 2010
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