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Sep
30

Financial Transparency Conference Attracts International Attention

Financial Transparency Coalition

Dar es Salaam, Tanzania, September 30, 2013 - The Financial Transparency Coalition (FTC) and Tanzania’s Policy Forum, will host the highly anticipated conference Towards Transparency: Making the Global Financial System Work for Development at the White Sands Hotel on October 1 and 2, 2013. Topics to be discussed include the detrimental effects of illicit financial flows on the extractive industries (oil, gas, timber and mining), conflict and instability, illicit wildlife and arms trade. An expected two hundred guests from over 30 countries will look at how to make the global economy work for rich and poor by increasing financial transparency.

In remarks on the eve of the conference, Policy Forum coordinator Semkae Kilonzo said “of the roughly US$1 trillion that leaves developing countries in illicit financial flows each year a staggering US$50 billion – comes out of Africa. These proceeds of crime, corruption, and tax evasion represent an unacceptable drain on developing economies that is equivalent to eight times the size of global foreign aid.”

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News
Sep
30

#FTCDar2013 in The Guardian’s Development Blog Today

EJ Fagan

Greetings from Dar es Salaam! We’re still half a day away from the beginning the 2013 FTC Conference main program, and we’ve already seen a number of exciting developments. One big development: Semkae Kilonzo, Coordinator for Policy Forum, our partners for the conference in Dar, had a great blog post published at The Guardian this morning. Check it out here.

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Sep
29

FTC Conference 2013 Preview: Why We’re Here

Porter McConnell

Towards Transparency: Making the Global Financial System Work for Development, the Financial Transparency Coalition 2013 Conference, will take place in Dar es Salaam on October 1-2. To join in the discussion, or ask questions of the panel, Tweet us using the #FTCDar2013 hashtag, or follow FTC on Twitter at @FinTrCo.

Illicit financial flows are one of the leading, and most under-appreciated, causes of poverty in the developing world. They erode taxes bases, facilitate crime and corruption, and represent a massive transfer of wealth from poor to rich. Financial Transparency Coalition member Global Financial Integrity finds that developing countries lost US$859 billion to illicit flows—defined as cross-border movements of funds that are illegally earned, transferred, or utilized—in 2010 alone. And the estimates are conservative, since they fail to include important sources of illegal money, including cash movements, mispriced services, hawala networks and most transfer mispricing.

This creates a tremendous drain on the developing world’s resources, outpacing aid coming in by 8 to 1. When this is taken into account, the conventional wisdom by many in the West of global development changes. A study GFI conducted with the African Development Bank found that when you take into account the illicit financial flows, as well as flows of foreign direct investment, aid, remittances, debt relief, imports and exports, and all other private sector flows into and out of Africa, the country is a net creditor to the rest of the world.  US$1.4 trillion left the continent on net from 1980-2009. Developed countries may think they are being generous to Africa, but in reality they are taking far more than they are giving.

Even absent the other harms caused by illicit financial flows, like the erosion of tax bases and public trust, this capital loss is one of the primary explanations for why much of Africa is struggling to develop. It is also one of the biggest drivers of global inequality.

Where does the money go? It is roughly split  between offshore financial centers, like the Cayman Islands and Switzerland, and developed countries, like the United States and United Kingdom. It’s moved to these locations using the global shadow financial system—a worldwide network of secrecy jurisdictions, anonymous shell corporations, partnerships, and trusts, and banks and other institutions with permissive money laundering standards.

Deep down, this is a moral issue. Developed countries cannot continue to claim they are committed to aiding Africa while simultaneously taking vast sums of ill-gotten gains away from the continent. It is wrong and has gone on long enough.

That’s why we’re excited to join forces with civil society and government partners from around the globe this week to work towards a solution. If you haven’t been able to join us here in Dar es Salaam, fear not. You can join the discussion this week by following the FTC on Twitter at @FinTrCo and using the #FTCDar2013 hashtag.

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Sep
26

Why Are Extractive Industries Prone to Corruption? (Part III)

Ann Hollingshead

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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Sep
26

FTC 2013 Conference Preview: How Europe can set the standard on anti-money laundering rules

Koen Roovers

Towards Transparency: Making the Global Financial System Work for Development, the Financial Transparency Coalition 2013 Conference, will take place in Dar es Salaam on October 1-2. To join in the discussion, or ask questions of the panel, Tweet us using the #FTCDar2013 hashtag, or follow FTC on Twitter at @FinTrCo.

Less than a month ago I started working for the Financial Transparency Coalition (FTC) in Brussels. I’m no stranger to the city, having lived and worked here for almost 7 years. In different positions I witnessed the European policy-making process at work. In the European Parliament I helped a Dutch politician with work ranging from co-legislating local public transport to reporting on the progress made by candidate countries wanting to join the European Union (EU). Afterwards I coordinated a network of organizations that aims to make the EU’s consultation and decision-making processes more transparent. In short, I got a close-up of the EU’s decision-making process and a general sense of who’s trying to influence it.

Do you care about stamping out corruption, money-laundering and tax dodging? (Yes!) Immediately my attention was drawn to FTC’s vacancy that listed tasks and asks that pretty much summed up who I am and what I stand for. I wrote, prepared, was interviewed, prepared some more, got interviewed some more.. And then, on a warm summer night in July, received a liberating call from FTC’s secretariat in Washington DC.

I haven’t had time to put the family pictures up on the new desk yet. The EU’s well underway to revise its anti-money laundering rules – with the Commission proposal being discussed by both the EU’s member states and the European Parliament – so my colleagues and I are doing all we can to convince them to do the right thing. This revision might be a once in a decade chance to get one of the FTC’s main asks codified: transparency around companies’ beneficial ownership. Beneficial owners are people that ultimately own and control companies and other legal entities that are used as such.

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Sep
24

FTC Conference 2013 Preview: Trade Crimes: Illicit Financial Flows from Wildlife to Weapons

Stefanie Ostfeld

Towards Transparency: Making the Global Financial System Work for Development, the Financial Transparency Coalition 2013 Conference, will take place in Dar es Salaam on October 1-2. To join in the discussion, or ask questions of the panel, Tweet us using the #FTCDar2013 hashtag, or follow FTC on Twitter at @FinTrCo.

What do human trafficking, the arms trade, rhinoceros poaching, and illegal logging all have in common? All are revenue-generating industries perpetrated by transnational criminals, involving the movement of highly prized illicit goods. Our panel, Trade Crimes: Illicit Financial Flows from Wildlife to Weapons, will examine how money-laundering mechanisms, particular trade-based mechanisms, enable transnational criminals to move vast sums of money out of developing countries.

According to United to End Poaching, 668 rhinoceros have been illegally killed in 2012 alone, mostly in South Africa. The rate of rhinoceros poaching has exploded since 2007, when only 13 were killed. Why the rise? Demand for rhino horn out of Vietnam—where it is believed to cure disease—has driven the price of each rhino horn to stratospheric levels with estimates ranging from US$50,000 to US$300,000 per horn. Do the math, and you’ll find that up to $200 million in revenue was generated by the illicit rhinoceros trade alone in 2012. Poaching networks are showing increasing sophistication, including using helicopters, night vision scopes, and silencers in carrying out their crimes.

The problem extends far beyond the illicit wildlife trade. Notorious arms dealer Viktor Bout operated a massive illicit arms-trafficking network that extended across multiple continents. He used a global network of anonymous shell companies, including at least 12 incorporated in the United States, to facilitate his activities, fueling conflict around the world.

That kind of sophistication, and that level of revenue, would not be possible without the ability to quickly and easily move huge amounts of money between countries without being detected by law enforcement. Organized criminal networks are increasingly globalized, and operate on a massive scale. Without easy access to secrecy jurisdictions and phantom firms, they would not be able to maintain that scale, and their crimes could be curtailed.

On our panel, I hope to lead a vibrant discussion about how criminals move this kind of money, how that kind of movement enables crime, and what policies we can adopt to assist law enforcement and civil society in fighting them.

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Sep
19

FTC Conference 2013 Preview: Ending the Race to the Bottom: Finance in a Cooperative World

Joseph Stead

Towards Transparency: Making the Global Financial System Work for Development, the Financial Transparency Coalition 2013 Conference, will take place in Dar es Salaam on October 1-2. To join in the discussion, or ask questions of the panel, Tweet us using the #FTCDar2013 hashtag, or follow FTC on Twitter at @FinTrCo.

They say all is fair in love and war.  But what about tax?

Our panel at the 2013 Financial Transparency Coalition, Ending the Race to the Bottom: Finance in a Cooperative World, will discuss many of the pressing tax issues facing countries, both in Africa and throughout the developing world. I will moderate the panel.

Where are the boundaries on how one countries tax policies impact on another?  Is it okay to entice a business to move a factory because of a lower tax rate?  Is it okay to entice a business to move the registration of its patents and trademarks, but no actual employees, because of a lower tax rate?  Is it okay to entice a business to set up conduit companies in their complex structure that have no or minimal employees but allow a company to save significant taxes?

What are the duties of one country to another in helping enforce taxation of international actors?  Should countries be obliged to automatically share information with others about the assets and financial activities of foreign companies and individuals?  Should countries be obliged collect and share information on the foreign tax planning strategies of their registered companies?  Do countries that regulate the headquarters of multinational companies have duties towards the countries those companies operate in?  Do the countries who have designed the rules and regulations for international finance have duties towards developing countries to helping them enforce their tax rules?

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Sep
19

Why Are Extractive Industries Prone to Corruption? (Part II)

Ann Hollingshead

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.

Natural resources and land are often owned or controlled by the government

In principle, state ownership of natural resources would be a net benefit for a nation if it had good governance and the profits from the extraction are used to the benefit of the public. The fact that a government has substantial control of a significant portion of an economy does not alone give rise to corruption. Yet without good governance and strong accountability, government ownership of mineral wealth can contribute to corruption. For example, in some countries with large quantities of extractive industries, the line between government and private sector becomes blurred and sometimes erased. In these cases, this blurring may mean private entities will have high levels of political sway and, in turn, political officials have more opportunities to profit from corrupt behavior.

This explanation is related to Lemma’s parameters of discretion and integrity. Extractive industries can reduce the integrity of government by opening opportunities for private sector companies to influence politics, and government officials to seek illicit wealth through those industries. Governments with large ownership stakes in the economies have more discretion over decisions that typically remain in the private sector—giving rise to opportunities for corrupt behavior.

Natural resources dominate the economy, crowding out other industries, and limiting competition

Termed “Dutch Disease,” economists generally accept the principle that natural resource wealth can crowd out other productive industries, such as manufacturing and agriculture. For example, recent evidence has suggested that the oil sector in Gabon is crowding out other economic sectors, including agriculture. To see why this phenomenon can lead to corruption, I’ll use an enlightening example from Nicholas Shaxton’s paper on oil, corruption, and the resource curse. In the paper, Shaxton defines two hypothetical countries, Agricolia, a nation whose main industry is agriculture, and Petroland, a nation whose main source of economic activity is in extractive industries. He says:

In the economy of Agricolia, citizens who want to prosper must work hard and cooperate with others—say, by building fl our mills or trading networks—to get ahead. These are horizontal political relationships, essential building blocks of successful, unified societies. In Petroland, however, the relationships are more often vertical: to get ahead individuals look upwards to get access to a piece of the oil rent, and compete against, rather than collaborate with fellow citizens. Agricola is about production; Petroland is about acquisition. This dynamic leads to both conflict and corruption, which this analysis views as two sides of the same coin. Both involve different ways of fighting for a share of the ‘cake’, in a zero-sum game.

In essence, this explanation captures the monopoly characteristic of Lemma’s model, which has a positive relationship with corruption.

Nations with wealth from natural resources does not depend on its citizens for taxation—less accountability.

As we see in countries like South Sudan (which derives nearly 98% of its government budget from oil) and Libya, the government and its leaders can use uses profits from natural resources to govern. As a result, those leaders are not held accountable to their populations through taxation. By contrast, citizens in countries without natural resource wealth have an opportunity to have a direct relationship, through taxation, with their leaders. In oil-dependent states, the state has a relationship with the mineral or with extraction companies and is not accountable to its people. Fitting into the model above, this dynamic leads to a decrease in government accountability, therefore increasing corruption.

No country with natural resource wealth would ever choose to leave those minerals in the ground for the sake of reducing corruption. So how do we think about solutions to this problem, particularly given the indirect relationship between extractive industries and corruption? I’ll answer that question next week when I wrap up this series by talking about some was to increase accountability, integrity, and transparency.

 

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Sep
17

FTC Conference 2013 Preview: Towards Transparency: Making the Global Financial System Work for Development

Tom Cardamone and Jesse Griffiths

Towards Transparency: Making the Global Financial System Work for Development, the Financial Transparency Coalition 2013 Conference, will take place in Dar es Salaam on October 1-2. To join in the discussion, Tweet us using the #FTCDar2013 hashtag, or follow FTC on Twitter at @FinTrCo.

Every year, developing countries lose around $1 trillion per year to illicit financial flows, which are the proceeds of tax evasion, crime, and corruption. They undermine accountable government, enable organized crime on a massive scale, and make it more difficult for governments to provide basic services. Illicit financial outflows dwarf foreign aid, and represent one of the biggest impediments to development in Africa.

In two weeks, the Financial Transparency Coalition will meet in Dar es Salaam, Tanzania, for our annual conference. Along with our partner, Policy Forum, we hope to bring together leaders in the development and finance communities to draw attention to the growing problem of illicit financial flows.

The conference will address how to increase global financial transparency and bolster equitable economic development. Conference speakers and participants will discuss the mechanisms of illicit financial flows and how the current system enables the movement of illegal money around the globe.  Presentations throughout the two days will examine the links between illicit financial flows and extractive industries, conflict and instability, illicit wildlife, the illegal arms trade, and more.  Participants will also discuss current proposals for greater financial transparency.

This is the first post in a series to introduce the topics of the conference. We hope we will be seeing you in Dar, but even if we won’t, we would like to offer the opportunity to join the discussion. If you would like to suggest a question or discussion topic for the panel moderator, you can Tweet using the hashtag #FTCDar2013, or write in the comment section of our blog. The conference will not be live streamed, but video of all the panels and speeches will be posted online shortly afterwards.

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News
Sep
13

FACT Coalition (US) Seeks a Policy Analyst

EJ Fagan

The Financial Accountability and Corporate Transparency (FACT) Coalition is looking to hire a Policy Analyst. FTC, Global Financial Integrity, and Global Witness all work very closely with the FACT Coalition on legislation and policy to fulfill FTC’s five recommendations.

You can read the job posting here.

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Sep
13

Why Are Extractive Industries Prone to Corruption? (Part I)

Ann Hollingshead

This blog post is the first post in a 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.

I won’t summarize the literature exhaustively, but some examples are relevant. Leite and Weidman (2002), for example, use a cross-country model to find that larger exports of fuels and ores are associated with worse corruption scores, while agriculture and food exports are related to better scores. There are also some empirical studies that have shown resource wealth, particularly in minerals and ore, lead to increased corruption. For example, Vincente (2010) compares San Tome and Principe to Cape Verde, to show how the discovery of offshore oil reserves in San Tome and Principe may have resulted in increased perceived corruption in the public sector.

While the results of the studies I summarized above did find a positive relationship between corruption and natural resource endowments, there have been others that have not found a correlation between these variables (particularly in between-country studies).

While these studies do find a correlational relationship between corruption and extractive industries, they do not present a model for understanding how the phenomena are related. In fact, I don’t believe the presence of extractive industries alone does not inherently lead to exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption.

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News
Sep
10

The Guardian: Tax avoidance ‘not a legal duty’

EJ Fagan

When accused of abusive tax avoidance, the first words out of a mouth of a large-company CEO are usually, “We have a fiduciary responsibility to our shareholders to avoid taxes.” According to a new opinion from Farrer & Co, a major law firm in the UK, that may not be the case.

The opinion, which applies only to the United Kingdom, states, “It is not possible to construe a director’s statutory obligation to promote the success of the company as a positive duty to avoid tax.” FTC Coordinating Committee member Tax Justice Network will be sending a letter to each FTSE-100 Index CEO containing the document.

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