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Jul
10

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

Ann Hollingshead

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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Jul
9

Are High Bribery Rates in Poor Countries Blocking Development?

Craig Fagan

Cross posted from Transparency International’s Space for Transparency blog.

New findings from the United Nations show that global development commitments – called the Millennium Development Goals – are off track. Governance and corruption are one of the culprits.

Yet whole regions are behind on achieving the targets set for 2015, such as making sure all children are in school and that women get proper healthcare.

People from these same regions are more likely to pay bribes when using basic services, according to Transparency International’s Global Corruption Barometer 2013.

These results show the terrible impact corruption has on efforts to fight poverty. Almost one of every two people living in poor countries reports having paid a bribe in the last year when trying to do such basic things as seeking services from public utilities, enrolling their child in school, interacting with the police and getting an identity card.

You are twice as likely to pay bribes if you live in a poor country

The 20 nations included in the survey which fall among the least developed countries in the world have an average rate of bribery that is almost twice as high as the average for all 107 countries surveyed.

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News
Jul
8

Global Witness’s Charmian Gooch at TED Global: Meet global corruption’s hidden players

EJ Fagan

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Press Releases
Jul
3

GFI Disappointed by Court Decision to Vacate Key Extractives Transparency Rules

Global Financial Integrity

WASHINGTON DC – Global Financial Integrity (GFI) expressed disappointment today at the decision by Judge John D. Bates of the United States District Court for the District of Columbia to vacate key extractive industry transparency rules. The decision prevents the rules from taking effect until the Securities and Exchange Commission (SEC) revises the rules to address the court’s concerns.

The rules—which the SEC finalized last summer after two years of deliberation—implemented Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also known as the “Cardin-Lugar provision,” this statute requires all oil, gas, and mining companies that report to the SEC to publicly disclose all of the payments they make to governments worldwide. The rules took effect in September of this year despite the lawsuit, with companies due to file their first reports in 2014.

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Jul
1

Corruption is Still a Problem for Croatia

Transparency International

Cross posted from Transparency International’s Space for Transparency blog.

Croatia became EU member number 28 today. After Tudjman and Milosevic and a bloody war 20 years ago in the Balkans, this is definitely good news for both the European Union and Croatia.

The new story of the Balkans started with disintegration 20-odd years ago, but Croatia’s membership is a clear sign of the era of re-integration. We can only hope that the engine of the EU project will not be switched back into a reverse mode, and Croatia’s membership will give new incentives for the others in the Balkans to join the EU.

Nevertheless, we cannot ignore the risks this membership brings both to the EU and to Croatia. Joining the EU requires across-the-board reforms, particularly in the area of corruption. At Transparency International, we are worried about what happens after accession.

The last countries to join the EU, Romania and Bulgaria, are still plagued by corruption.

So are the majority of former Communist countries. A stark warning was issued by our report on corruption in Europe in June 2012:

In some countries of Central and Eastern Europe – particularly the Czech Republic, Hungary and Slovakia – there has been a rolling back of positive progress on anti-corruption since accession to the EU.”

By being “in the club”, the pressure dissipates and ironically political elites have much less incentive for good behaviour and hardly any sanctions if they “misbehave”. Based on their current performance, some members would not be admitted to the EU today.

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News
Jul
1

Taxcast Edition 18: June ’13

Taxcast by Tax Justice Network

In the June 2013 Taxcast: ‘Coulds’ and ‘shoulds’ – but any real action? We analyse what the G8 summit did for tax justice and why some tax havens may get a competitive advantage. And, while the world waits for reform, the Taxcast looks at how some countries are finding creative ways around the current global tax system.

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Jun
26

Liberty Reserve, Money Laundering, and Implications for Bitcoin

Ann Hollingshead

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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Jun
19

Why Developing Countries Should Care About the G8 Summit

Ann Hollingshead

The leaders of the world’s eight wealthiest economies have finished their meetings, headed home, and issued a final communiqué for the G8 summit in Lough Erne. And though emerging economies are not represented at the meetings,[1] there are plenty of reasons they should deeply care about what was said. In general, the G8 communiqué goes a long way to calling out important tax issues, but in particular understands the importance of tax in the context of mobilizing domestic resources, curtailing illicit financial flows, and promoting development. And while the G8 did not go as far as they should have on some issues, they did make a fair number of important promises on tax and transparency to developing countries. Developing countries should take heed of these promises—and hold the G8 accountable to them.

Before I dive down into the specifics, I’ll start with a quote from the G8 communiqué that reiterates the importance of these ideas:

It’s in everyone’s interests for developing countries to be able to: strengthen their tax base to help create stable and sustainable states; improve their ability to fund their budgets through their own domestic revenues; and increase ownership of their own development processes.

This quote is significant. First, it acknowledges that the world is not a zero sum game. In the last few years, the world accepted that a less polarized global economic system, one in which all of the players drive economic demand and where wealth is more diffuse, would benefit everyone. That developing countries should grow their economies is not only in the interest of those in the developing world, but in the industrialized world, as well. Second, this quote draws a strong connection between development, sustainable economic growth, and taxes. In particular, it acknowledges the importance of mobilizing domestic resources in the context of economic development. It’s a simple idea that has gained a lot of traction in the last few years. I’m glad the G8 has paired these ideas together—and taken them as given.

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News
Jun
19

Taxcast Edition 17: May ’13

Taxcast by Tax Justice Network

In the May 2013 Taxcast: Google and Apple are forced to defend their tax affairs in public, how anti-EU sentiment serves offshore interests and the Taxcast looks at tax havens and the arms trade: how secrecy kills. The Lord of War makes an appearance.

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Press Releases
Jun
18

Statement from the Financial Transparency Coalition: G8 leaders fail to reach financial transparency agreement

Financial Transparency Coalition

At this year’s summit, G8 leaders had an opportunity to pursue tax and transparency policies that would provide economic stability, root out systemic corruption and enhance the democratic process in rich and poor nations alike. Today G8 leaders largely failed to seize this opportunity.

David Cameron’s desire to see the creation of public registries disclosing the beneficial owner of companies is admirable. But world leaders agreed today only to ad-hoc, national-level promises to introduce registries, with no guarantee that even this limited information will be made public. There was no G8-wide commitment to introduce registries containing the beneficial owners of companies and trusts, and this is deeply disappointing.

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Jun
17

Tax wars: EU playing catch-up with US

Markus Meinzer

Last week, while showcasing draft EU laws on tax transparency, commissioner Algirdas Semeta told media in Brussels he is building “the most comprehensive information exchange system in the world.” He added: “The EU system will become even broader than the US system.”

It is an astonishing claim.

The wide-reaching impact of the new US regime – the Foreign Account Tax Compliance Act (FATCA), which came into force on 1 January – has been demonstrated by a storm of angry reactions in worldwide financial centres. Some of Semeta’s proposals, notably his amendments to the EU Savings Tax Directive (EUSTD), do broaden the scope of information to be shared inside Europe and do go beyond FATCA. But other elements of the US law are missing from the EU package.

Meanwhile, even if the European Commission now has the legal instruments to create a FATCA-plus system, there is no guarantee they will ever be used.

Semeta’s laws must first be unanimously agreed by EU countries. So long as Austria and Luxembourg, two EU financial centres, are allowed to delay and frustrate the EUSTD amendments, the entire project will remain what it has been for the past five years: a lovely idea on paper, nothing more.

Despite reports to the contrary, the last meeting of EU finance ministers in May did not mark a change of heart in this respect. Austria and Luxembourg did not abandon their old tactic of saying “we will happily join if and when Switzerland joins as well.”

Instead, EU countries agreed to make progress by the end of the year, a deadline which falls after elections in Austria and Germany. Judging from the two countries’ track record on tax transparency, it does not bode well.

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Jun
17

New EU anti-corruption standards increase demands for greater transparency to combat tax dodging

Øygunn Brynildsen

After years of talking, EU leaders seem willing to take action at last on requiring transparency that will shed light on tax dodgers. There are at least two opportunities for concrete legislation that the EU cannot afford to miss this year, although Member States still seem to be dragging their feet.

After a year of negotiations with Member States and the European Commission, and strong involvement by Eurodad and our partners, the European Parliament this week voted in favour of new accounting rules for extractive and logging sectors. The Accounting Directive will require companies in these two sectors to disclose their payments to governments in every country where they operate.

While this is a vital step towards combating corruption, the question now is whether action will be taken to produce the transparency needed to fight tax evasion and avoidance. Knowing a company’s tax payments is not enough to assess whether those payments are fair, as it does not reveal where the real economic activity takes place. Forthcoming research from Eurodad and CIP into a European mining company in Mozambique provides a concrete example of how this lack of detailed reporting prevents citizens and tax authorities from detecting harmful tax practices. Assessing whether a company pays its fair share of taxes requires country-by-country reporting –including country-level disclosure of profits, sales, tax payments, assets and the number of employees.

Movements towards legislation

  • It is very welcome that the EU has announced that the Capital Requirement Directive (CRD IV) will go further and require banks to disclose profits made, taxes paid, subsidies received, turnover and number of employees on a country-by-country basis.
  • In France, President Hollande has signalled that he wants the reporting requirements for banks to be expanded to all large companies, and the French parliament has expressed its support.
  • In Norway, a working group with participants from both the finance and foreign ministries has issued a report to the Ministry of Finance, recommending legislation that requires extractive and logging companies to disclose country-level reporting, not only of payments to governments (as has now been established in the Accounting Directive), but also on investments, sales revenues, production volume, purchase of goods and services and number of employees. The proposal is now subject to a public hearing.
  • Michael Barnier, EU Commissioner for Internal Market and Services, also has higher ambitionsthan those presented in the Accounting Directive. While welcoming the European Parliament vote, he said:

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