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Why UN arms negotiations must include talk of ending corporate secrecy

Stefanie Ostfeld

This op-ed originally appeared in Al Jazeera English.


flickr / sdobie

Addressing anonymous shell companies andhidden company ownership will be essential to successfully stemming the flow of illegal weapons around the world and protecting the innocent civilians who suffer from their proliferation.

On April 5, it will be one year since Viktor Bout, also known as the Merchant of Death, was sentenced to 25 years in prison, finally putting an end to his notorious career as a weapons trafficker. Bout was convictedon terrorism charges in the Southern District of New York, including conspiring to kill Americans and provide material support to terrorists.

The case served as an indictment of Bout’s career as a gunrunner, fuelling conflict around the globe. The US Department of Treasury described Bout’s network as “one of the largest illicit arms-trafficking networks in the world” and submitted testimony to Congress stating that Bout “used US shell companies to mask his ownership and facilitate his illegal arms trafficking activities”.

Bout’s use of shell companies, including at least 12 incorporated in Texas, Florida and Delaware, was integral to his arms trafficking because it allowed him to hide his identity behind anonymous companies created in the US and abroad. Yet despite Bout’s conviction, this loophole in US law continues to be used by other sanctioned individuals, terrorists, corrupt dictators, drug traffickers, organised crime syndicates and tax evaders to legally hide their identities, access the US financial system and launder dirty money.

Each year, approximately 2 million corporations are formed in the US under state laws that often allow anonymous incorporation of companies. While some states require listing of shareholders, these can be other companies or “nominees” who serve as front people for the actual shareholder.

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No more shifty business: Campaigners call for new tax rules

Alex Pratts and Øygunn Brynildsen

Cross posted from Eurodad.

flickr / OECD

In a response to the OECD’s February report Addressing Base Erosion and Profit Shifting, 58 campaigning organisations say it’s time to make multinationals pay their fair share of tax. Eurodad, Christian Aid and others call on the OECD and G20 to work with the United Nations Tax Committee and governments in developing countries to define new rules for the taxation of multinational companies.

The international system for taxing multinationals is broken and out of date, with many loopholes which allow unscrupulous companies to avoid paying their fair share – as the recent Google, Ikea, Amazon, Glencore and Starbucks scandals have clearly shown.

Outdated rules

The OECD identifies aggressive tax planning by multinationals as a fundamental cause of base erosion, which includes tax avoidance and evasion. But countries such as the UK, Germany, France and the US have only asked for solutions when their own economies have felt the consequences. For many years, however, unfair tax rules have been seriously undermining efforts to tackle poverty in developing countries.

The current tax rules, which were written 80 years ago, assume that the different entities that form multinationals exchange goods and services as if they were mutually independent. But this is a fiction. These different subsidiaries follow an overall business strategy. The truth is that the tax system has not kept pace with the way multinationals operate.

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Farming for Rats: Perverse Incentives and Illicit Financial Flows

Ann Hollingshead

flickr / timparkinson

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.

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Illicit Wealth and Enormous Tax Dodging Fuel Inequality

EJ Fagan

Brad Plumer had a great article in The Washington Post today on the consequences of economic inequality in the United States. As inequality increases, all sorts of crazy things might happen: politicians may ease credit regulations, allowing middle class citizens (who are less wealthy due to inequality) to borrow from the future in order to keep up short term consumption, leading to bad long term consequences like increased bankruptcy, divorce, housing bubbles, etc.

What drives inequality? Plumer takes a shot:

One possibility is that in areas with high top-end inequality, politicians are more likely to favor policies that allow middle-class Americans to borrow more so that they can keep up. Another possibility, though, is that high inequality at the top is driven by a growing financial sector — and so politicians are more willing to loosen credit to placate the banks.

These are perfectly plausible causes of inequality, along with other usual explanations (globalized industry, technology, the ‘superstar economy’, etc). But I don’t think they really do a great job of internationalizing. A quick look at Wikipedia’s Gini index page shows the United States in the middle of the pack in Gini coefficient globally, and quite a lot of variation in between:


What’s going on here? There seems to be some clustering (Southern Africa, Northern Europe, South America), but little consistency. Growing financial sectors doesn’t explain why, for instance, the United States is significantly more unequal than the United Kingdom, or why Malaysia and India are so different.

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Task Force Recommendations to the BRICS Summit 2013

EJ Fagan

flickr / Blog do Planalto

For the first time, the Task Force Regional Representatives delivered specific recommendations to the BRICS governments, which met in South Africa this week. The BRICS countries hold a unique position among developing countries and emerging markets: they suffer from the same persistent problems relating to international taxation, transfer pricing, exchange of information, and tax evasion and avoidance that affect the rest of the developing world, but unlike many developing countries, hold significant power and influence at the international institutions and fora. All five BRICS are members of the G20, and Russia holds the Presidency this year.

In the Communiqué issued following the BRICS Head of Revenue Meeting on January 18th, they committed to the following principles:

  • (i) contribute to development of International Standards on  International Taxation and Transfer Pricing taking into account the aspirations of developing countries in general and BRICS Countries in particular,
  • (ii) strengthening the enforcement processes by taking appropriate actions for non-compliance and putting more resources on international cooperation,
  • (iii) sharing of best practices and capacity building
  • (iv) sharing of antitax evasion and non-compliance practices, including abuse of treaty benefits and shifting of profits by way of complex multi-layered structures,
  • (v) development of a BRICS mechanism to facilitate countering abusive tax avoidance transactions, arrangements, shelters and schemes
  • (vi) promotion of effective exchange of information.

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Taxcast Episode #15: March 2013

Taxcast by Tax Justice Network

In March 2013′s Taxcast: the crisis in Cyprus and the risk tax havens pose to the global economy, a surprise earthquake for UK-affiliated tax havens and a frustrated corporate tax inspector speaks out on the corrupting of the tax system.

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HSBC by the Numbers

Regina Morales

200: Full-time employees in HSBC USA’s Compliance Department from 2006 to 2009, out of total 16,500 employees, of which Anti-Money-Laundering-focused employees were only a “subset.”

1: Months after being hired in 2009 that HSBC USA’s AML director informed its Compliance official of HSBC USA’s “extremely high risk business model from AML perspective.”

17,700: Backlog of suspicious transaction alerts that had not yet been reviewed in 2010.

83: Number of “Matters Requiring Attention” notifications issued by the Office of the Comptroller of the Currency (OCC) to HSBC USA from 2005-2010.

50,000: USD-denominated accounts opened by HSBC Mexico’s Cayman Islands “branch” with inadequate customer due diligence.

2,000: Number of HSBC USA accounts opened with untraceable bearer share corporations as the owner over the course of a decade. 28,000: Number of transactions between 2001 and 2007 sent through HSBC USA involving countries, groups, or individuals that U.S. has financial sanctions against. The countries include Libya, Sudan, Cuba, Burma, North Korea, and Iran.

25,000: Number of the above transactions, totaling $19.4 billion, involving groups or individuals in Iran.

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Event: Financial Transparency: Challenges and Opportunities for Developing Countries

Sarah Bracht

When: April 3, 2013
Venue: India Habitat Centre
Where: New Delhi, India
Deadline for Registration: Friday, March 29th

The Task Force on Financial Integrity and Economic Development, in partnership with the Centre for Budget and Governance Accountability, will host its first Asia regional conference, Financial Transparency: Challenges and Opportunities for Developing Countries, at the India Habitat Centre in New Delhi on April 3, 2013

According to the latest report by Task Force member Global Financial Integrity, the Asia region lost an average of US$344.4 billion per annum in illicit financial flows from 2001-2010.  It accounted for 60.91 percent of the total illicit financial flows from the developing world, with China, Malaysia, the Philippines, and India among the top 10 countries with the highest measured average annual illicit financial outflows over that decade. Conference panelists will address the issue of illicit financial flows in the Asian context and discuss possible solutions.

Its not too late to register! Read more about the conference on the Task Force Conference website.

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Quartz: German Shell Companies in Panama, and the Hacker who Helped Expose It

Sydney Lucia

flickr / Contando Estrelas

Just yesterday the German newspaper Suddeutsche Zeitung published the names of wealthy Germans who are listed as company directors in the well-known tax haven of Panama.  An article entitled “Germany’s offshore money and the hacker who helped expose it” by Tim Fernholz at Quartz explains the details and the implications.  Among the names were some of the richest German families that include the automaker Porsche, the coffee king Jacobs, and the banker von Fink.  While some families claimed they knew nothing, that argument holds no water in a tax haven such as Panama.  These names were found by Daniel O’Huiginn, a politically engaged British coder, who was unsatisfied with Panama’s current company registration database and decided to create his own that allows you to search by the names of individuals.

Panama has long been an offshore financial center and secrecy jurisdiction, with laws that allow the beneficial owners to companies to remain secret.  However, with the U.S.-Panama Free Trade Agreement, Panama had to address its tax transparency practices, and subsequently created a database that allowed users to search directors by company name.  This act of transparency was a rare move, but it wasn’t easy to identify individuals, which resulted in O’Huiginn’s new database.  O’Huiginn found evidence of shady persons such as notorious arms-dealer Monzer Al-Kassar’s involvement with several shell companies.

Fernholz writes:

“Tax havens like Panama function not just because of low taxes but because their laws allow companies to keep their owners secret, or to use “nominee directors” to disguise who actually controls a company. (It’s not just Panama or the Cayman Islands; US states like Delaware offer this service as well.) The idea, of course, is that if you transfer money to a company you own in a tax haven, it’s nearly impossible to show that you control it. Creditors can’t track you down, and neither can the tax man.

But in 2008, Panama put its company registration information online, a rare move. You could only search by company name, making it difficult to identify individuals. O’Huiginn scraped the data and created an alternative database that allows you to do just that. In the process, he found the tracks of arms dealers, fraudster billionaires and associates of Saddam Hussein. This was important window on off-shore money in Panama—there’s even a tutorial to teach journalists how to look for people there.

This isn’t a guaranteed way to stop tax avoidance—Panama still allows nominee directors, and it’s safe to say that people who wish to keep their ownership of companies there a secret are switching to this method of control. But it was a small victory for transparency; somewhat poignantly, it seems the late hacker-activist Aaron Swartz was interested in the project.”

Read more here.

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Ghostbusting: phantom firms and dodgy deals

Alan Hudson

Cross posted from ONE.

flickr / badgreeb RECORDSWherever there’s a dodgy deal, a Phantom Firm is likely lurking in the shadows.

Phantom Firms are what enabled Teodorin Obiang, the son of the President of Equatorial Guinea, to launder more than $100 million into the USA. This financed a playboy lifestyle of fast cars, a $30 million mansion, a $38.5 million gulfstream jet, and various pieces of Michael Jackson memorabilia, including a diamond-encrusted glove from the Bad Tour. Meanwhile, back home in the oil-rich west African state, more than 1 in 7 children under the age of five were dying from a preventable disease.

Phantom Firms are anonymous shell companies that are set up to hide the identity of the people who control them. In addition to facilitating the financing of terrorism, they enable drug-runners, human traffickers, money-launderers, arms traffickers, corrupt politicians and dodgy businessmen to enjoy the fruits of their crimes without being found out.  They are the lynchpin of the global underground economy which harms us all. And, the activities that they conceal rob African countries of the resources that they need to invest in health, agriculture, infrastructure and poverty reduction.

Global Financial Integrity estimates that in 2010 African countries lost more ($51 billion) through illicit financial flows that are moved out of Africa illegally than they received in aid ($43 billion). As well as robbing countries of their resources, illicit financial flows foster corruption and damage the prospects for investment and growth. Phantom Firms undermine the fight against poverty and undermine the competitiveness of responsible businesses that have no need to hide their dealings behind a veil of secrecy and that see the wisdom of strengthening, not damaging, the environment in which they do business.

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New Report: Global financial flows, aid and development


Report by Jesse Griffiths

This paper, written by Eurodad for CONCORD’s Aidwatch coalition sets out all the financial resources potentially available for development, examines their key characteristics, and discusses their poverty and sustainable development impacts, and the implications for aid.

This discussion could not come at a more important time. Aid is under severe pressure as donors seek to cut budgets and to reorient aid to more clearly attribute direct ‘results’ to it. Recent initiatives at European and donor level have sought to change the focus of the aid debate towards stimulating the private sector, including emphasizing the role of private flows, particularly foreign investment. At the same time, the development community is gearing up to decide what targets should replace the Millennium Development Goals. Incorporating financing into this framework will be vitally important.

These changes in the aid debate take place against the backdrop of a greatly increased focus on other financial flows, including illicit capital flight, as governments seek to plug leaks in their revenues. They are also increasingly aware that the ongoing economic and financial crisis has demonstrated how fragile yet important finance flows, financial institutions and financial regulation are.

The key findings of this analysis are:

Scale and trends

  • Domestic resources are far larger than other financial resources, and have been growing as a share of GDP over the last decade.
  • Overall, outflows are significantly larger than inflows, largely caused by illicit capital flight and reserve-accumulation: both issues intimately linked to global policy failings.
  • The picture varies across countries, and low-income and vulnerable countries tend to be far more affected by external resources than other countries.

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The banks of Cyprus and the pursuit of integrity

Karen Egger

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

The bail out of the troubled banking sector in Cyprus has taken on serious political overtones as the crisis deepens. During the past few weeks Cyprus has been accused of failing to combat money laundering and fraud and that Russian oligarchs seek refuge for their money in this “tax haven” country.

Now the strongest members of the European Union want a tax on Cypriot bank deposits to pay for part of the bail out. This news has not only enraged many Cypriots, but more importantly it has also brought the focus back to Cypriot banks. The anger stems in part from the belief that the euro zone has a role in creating the crisis. In particular, euro zone leadership is blamed for playing a part in the decision to slash the value of Greek debt – a major holding of Cypriot banks, and precipitating the Mediterranean island’s banking crisis.

Still, among the contributing factors to the problems facing Cyprus is a lack of integrity in the financial sector – a central failure in the global banking system that created a fertile environment for the financial crisis of 2008.

Cyprus is not alone, but it illustrates the devastating effect that this lack of integrity can have. Like Ireland and Iceland before it, Cyprus must come to terms with a banking system that is devouring its economy.

For too long senior executives at the banks of Cyprus ignored the long term public interest in favour of short term, personal (or corporate) financial gain.

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