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Jan
16

Flashback: Russians Take To The Street Over More Than Just A Fraudulent Election

Sarah Freitas

Editors note: Global Financial Integrity will release a new report, titled, “Russia: Illicit Financial Flows and the Underground Economy” later this month. To help preview the report, and the relevant issues that Russia and the global economy are dealing with, below is a December 2011 post on corruption in Russia from GFI Lead Economist Dev Kar, who is co-author of the new report. The post has been updated to include the latest data from the report, Illicit Financial Flows from Developing Countries 2001-2010, to avoid confusion.

[Paragraph Updated: 1/16/2013] As tremors of distrust resonate throughout Russia due to widely-believed allegations of fraud in Sunday’s Parliamentary elections, new research reveals that US$152 billion in illicit money has left the country in the ten years (2001-2010) following Vladimir Putin’s rise to power. The report, Illicit Financial Flows from Developing Countries 2001-2010, was published in December by Global Financial Integrity (GFI).  To make matters worse, The Wall Street Journal reports that Finance Minister Anton Siluanov has predicted net capital flight upwards of US$85 billion for this year, further adding to the illicit component of GFI’s estimates.

statement released by the Organization for Security and Cooperation in Europe (OSCE) described the contest as “slanted in favor of the ruling party,” pointing to “several serious indications of ballot box stuffing.” By Tuesday, police arrested around 800 protesters across Russia, including those defying the rally ban in Moscow, and were bracing for a potential protest of 14,000 this coming Saturday in what could be the decade’s largest opposition demonstration in Moscow.

However, I doubt that the average Russian protester on the street is simply unhappy with Vladimir Putin. They are looking to their left and their right and seeing Russia’s enormously wealthy ruling class prosper through corruption, tax evasion, and crony capitalism. Indeed, wealthy Russian officials and businessmen have been transferring massive amounts of capital out of the country.

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Jan
15

Video: We’re Not Broke Documentary on Multinational Tax Dodging

EJ Fagan

We’re very excited to share with you the newly-available documentary We’re Not Broke. Many multinational corporations in the United States pay a 0% tax rate. In a few cases, major brand-name corporations paid a negative tax rate in 2010–meaning they received a check from the IRS, instead of paying in.

The documentary doesn’t look at developing countries, but this sort of behavior is exactly what companies in the world’s poorest countries to avoid paying tax. Profit shifting for the purpose of tax dodging siphons billions away from the developing world every year, and is a major root cause of global poverty. Here at the Task Force, we advocate for country-by-country reporting, which would force companies to disclose exactly figures for sales, number of employees, costs, taxes paid, revenue, and profit in every individual country in which they operate.

The trailer for the documentary is below. You can watch the (non-embeddable) version for free on Hulu. Unfortunately, it is only available for free online in the United States at this time.

Learn more about We’re Not Broke here.

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Jan
14

New Eurodad Report: Secret structures, hidden crimes

Eurodad

Tax evasion poses an acute challenge to developing and developed countries. From 2000 to 2010, illicit financial flows deprived developing countries of US$5.86 trillion. Tax evasion is not a victimless crime – for people in the developing world, the consequences of tax evasion can be a matter of life and death. If developing countries could recover this untaxed wealth, it could mobilise enormous resources for improving their public services and their citizens’ lives.

The new Eurodad report “Secret structures, hidden crimes” finds that the hidden ownership of companies and other legal structures facilitates tax evasion, corruption and related crimes. It outlines the different ways that individuals abuse companies, trusts and other vehicles in order to evade taxes.

It argues that better information about who owns and controls these companies and other set-ups is key to bringing trillions of dollars of offshore wealth back into the tax net and helping to prevent capital flight in the future.

It argues that all forms of tax evasion can be more effectively fought where they are recognised as a “predicate offence” of money laundering as this makes it a criminal offence to help someone to hide and shift tax-evaded money. For some countries tax evasion is already a predicate offence, but only in a limited set of circumstances.

A first step is to implement a robust interpretation of the Financial Action Task Force’s set of recommendations from February 2012. In Europe, the review of the EU’s Anti-Money Laundering Directive (AMLD) in 2013 will be one of the biggest opportunities. The report recommends that this political opportunity is used to:

  1. Create publically available government registers of the real owners and controllers of companies, trusts and other such legal structures.
  2. Make all tax evasion, a predicate offence of money laundering
  3. Improve compliance with and enforcement of anti-money laundering rules and introduce credible sanctions.

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Jan
11

Heather Lowe at Trust Law: Money Laundering and HSBC – How it affects you

EJ Fagan

flickr / Will Survive

Heather Lowe, Director of Government Affairs at Global Financial Integrity and the Task Force, is writing a serious of posts on the horrible crimes that HSBC has admitted to as part of its deferred prosecution agreement with the U.S. government.   No one will go to jail from HSBC for these crimes.

What’s important to remember is that money laundering is not a victimless crime. Real people were hurt by HSBC, and they deserve justice. And when law enforcement officials decline to do their job and prosecute people who committed heinous crimes, it only sets the stage for another round of money laundering by the world’s biggest banks.

Yesterday, Heather continued to write on this topic at Trust Law. In a thought-provoking, at times gut-wrenching, op-ed, she writes,

HSBC agreed last month to pay the U.S. government $1.9 billion to settle a probe into widespread money laundering facilitation by the New York branch of Europe’s largest bank.  But, this is not mere money we are talking about; it is the daily gang violence on the streets of our cities and towns, it is the increased likelihood that your children will be offered drugs in their schools, it is the abduction of children and selling them into the sex trade.  Authorities estimate that the average annual income generated from a trafficked child is $200,000 per year. That money has to be laundered somewhere, by someone.

Money laundering is taking the proceeds of crime (“illegitimate” money) and bringing it into the legitimate financial system so that the criminals can use that money without being tied to those terrible crimes – crimes like manufacturing and distributing drugs, selling people into the sex trade, trafficking in illegal weapons, and selling knock-off, unsafe products like toys with high levels of lead paint into the marketplace.

You can read the read of the op-ed on Trust Law here.

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Jan
9

Cash and Corruption in God’s City

Ann Hollingshead

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The day before I left for my trip to Germany last month, I was warned to bring plenty of money in cash. You see, the country has transitioned to chip-and-PIN cards, which use embedded microprocessor chips for financial transactions instead of traditional magnetic stripes. The problem is that this means it’s becoming increasingly difficult for oblivious American travelers (myself included) to use their credit cards. Hence the cash. Although I could have circumvented this problem with a little foreknowledge and a call to my bank, I found this problem to be particularly irritating. After all, in this century, who carries around cash?

It is precisely this pesky problem—carrying around cash—that travelers to the Vatican are now stomaching. And in this case there aren’t any easy answers for the savvy; museums and businesses in the Holy See are declining credit and debit cards following concerns of inadequate money laundering controls. If using cash instead of electronic payments to avoid money laundering seems a bit backward to you, that’s because it is.

The Vatican, with at least a touch of irony, is no stranger to immoral and otherwise shady finances. In one of the more spectacular historical examples, in 1982 Roberto Calvi, nicknamed “God’s Banker,” and chairman of Banco Ambrosiano hanged himself. His bank had recently collapsed after a scandal involving shadowy finance. As it would turn out, the deceased Calvi wasn’t just a loyal banker for holy men.  He was also a loyal banker for the Sicilian Mafia, arms dealers in Iran, dictators in Latin America, and the Contras in Nicaragua.

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Jan
9

Flashback: Endemic Corruption In And Illicit Flows From Russia

Dev Kar

Editors note: Global Financial Integrity will release a new report, titled, “Russia: Illicit Financial Flows and the Underground Economy” later this month. To help preview the report, and the relevant issues that Russia and the global economy are dealing with, below is a January 2011 post on corruption in Russia from GFI Lead Economist Dev Kar, who is co-author of the new report.

New Global Financial Integrity Report Reveals Russia is Losing US$50 Billion Annually in Illicit Outflows

flickr / Alexanda Hulme

Recent news from Russia confirms that corruption is a serious issue that, unless curbed, can prevent the country from emerging as a global economic powerhouse.  Corruption in Russia has been a hangover from the Soviet Union days. It is just that the forces of globalization have provided old hands and the up-and-coming younger generation of Russians with unprecedented opportunities to make money under the table. Of course, the exponential increase in Russia’s natural resource exports (such as petroleum products and natural gas) has not helped matters as far as overall governance is concerned. There is simply too much money in the hands of the too few.

The history of advanced nations shows that, while each had to find its own way to fight this scourge of illicit capital, the rule of law has always been essential in efforts to raise living standards.  In contrast, significant weaknesses in overall legal, institutional, corporate and political governance in many emerging market countries is posing an increasingly serious challenge for governments to meet the aspirations of the poor for a better life.

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Jan
8

Course for Journalists: Introduction to Illicit Finance, Financial Secrecy and Asset Recovery

EJ Fagan

Task Force member Tax Justice Network and the Centre of Investigative Journalism are offering journalists primarily from the developing world training in illicit finance, financial secrecy and asset recovery. Classes will take place from March 19th to March 23rd at City College in London. Instruction will take place in English.

From the the Center for Investigative Journalism website, the course outline:

Over four days you will be shown how to investigate corporate accountsoffshore activity and corporate corruption. We will show you where to find documents, how to analyse them and other practical tools to help uncover financial secrecy.

A combination of hands-on training and guidance from senior practitioners will give you the basis to investigate financial corruption as well as offering the opportunity to network with other journalists. This course is aimed at practicing journalists who have an interest in investigating business and the flow of money. Experience in financial reporting is an advantage but not a prerequisite.

The structure of the course is close to being finalised but will follow the format below:

Day 1 The pillars of Offshore and Illicit Finance. Understanding the scale of the problem, the techniques used to avoid, evade and launder and policy responses and relevant institutions

Day 2 Technical Day: Reading accounts and financial statements

Day 3 Investigating: Practitioners take attendees through how they brought home investigations in developing and developed countries

Day 4 Developing attendees story leads and targeting investigations

The deadline for application is January 11th. You can read more about the course here.

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Jan
8

Raymond Baker: Illicit Financial Flows: The Scourge of the Developing World

EJ Fagan

flickr / airpantherSometimes, it is easy to lose sight of the big picture when talking about illicit financial flows. We either spend time talking and reading about big numbers–the total amount of money flowing out of countries–or individual events, like the horrible things facilitated by HSBC. Today, Task Force and Global Financial Integrity Director Raymond Baker took a step back and discussed the big-picture implications of illicit financial flows, and what they do to a society, in the Huffington Post.

He writes,

For most of my professional life, I owned and operated a number of businesses in Nigeria. My partners and I would find a failing company, buy it out, and rebuild it as an efficient, well-run enterprise that turned a profit. We paid our taxes, refused to participate in bribery or corruption, and created jobs.

I am sad to say that when Nigerians look into the future, they do not see the optimism that I experienced back in the 1960s and ’70s. Their country has been torn apart not just by civil war, but also by the terrible forces of crime, corruption, and tax evasion. After years of seeing the quality of life for so many people in Nigeria decrease, I decided that I was obligated to do something about it. I founded Global Financial integrity, an organization dedicated to curtailing illicit money leaving countries like Nigeria around the world.

Late last month, we released a new report showing that $5.86 trillion left the developing world due to crime, corruption, and tax evasion from 2001-2010, including $859 billion in 2010 alone. These illicit transfers of money away from developing countries are known as illicit financial flows, and they are one of the least talked about challenges that the world needs to overcome in order to fight global poverty.

You can read the rest of the article here.

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Jan
3

HSBC Deferred Prosecution Agreement: Helping Clients Evade U.S. Sanctions

Heather Lowe
null

flickr / ozze13x

HSBC Bank USA N.A. and HSBC Bank Holdings plc, its parent company, agreed to forfeiture and penalties of a little more than $1.9 billion dollars for systemic and willful violations of U.S. anti-money laundering and foreign sanctions laws. $1.9 billion may sounds like a lot, but does the penalty fit the crime?

This is part 2 of a series of excerpts from the Statement of Facts, which constitutes Attachment A to the Deferred Prosecution Agreement entered into between U.S. regulators and the HSBC banks, and let you decide for yourself. These are excerpts detailing events that HSBC has explicitly admitted to.

Except 4: Evasion of U.S. Sanctions

52. From the mid-1990s through at least September 2006, HSBC Group Affiliates violated both U.S. and New York State criminal laws by knowingly and willfully moving or permitting to be moved illegally hundreds of millions of dollars through the U.S. financial system on behalf of banks located in Cuba, Iran, Libya, Sudan, and Burma, and persons listed as parties or jurisdictions sanctioned by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) (collectively, the “Sanctioned Entities”) in violation of U.S. economic sanctions.

53. HSBC Group Affiliates engaged in this criminal conduct by: (a) following instructions from the Sanctioned Entities not to mention their names in U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States; (b) amending and reformatting U.S. dollar payment messages to remove information identifying the Sanctioned Entities; (c) using a less transparent method of payment messages, known as cover payments; and (d) instructing at least one Sanctioned Entity how to format payment messages in order to avoid bank sanctions filters that could have caused payments to be blocked or rejected at HSBC Group or HSBC Bank USA. 

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Jan
3

The Booms and Busts of Austrian Economics (Part II)

Ann Hollingshead

nullThis week and last I have been traveling to Austria. Following from this trip, I am writing this two-part blog series on Austrian economics, its successes, failures, and application to current dilemmas in economic theory and policy.

In the past few years the world—and the United States in particular—has witnessed a resurgence of the term “Austrian economics.”  Last week I wrote a post about the academic history and resurgence of Austrian economics in the last few years. I wrote that the reason for this is that the school of thought actually does a fairly good job of both explaining and predicting the financial crisis of 2007-8.[1] Yet while the Austrians have enjoyed a boom in their theories as they are able to explain the sources of the world’s crises, their proposed solutions are a bust. In fact, the evidence, politics, and most mainstream economists have summarily rejected its prescriptions for our ills. The logic behind this rejection is the topic I’ll take on this week.

Whereas before the crisis the Austrians might have gotten a thing or two right about its sources and determinants, the school of thought leaves a great deal to be desired when it comes to proposed solutions. In the 1930s, following the Great Depression, the world’s most severe economic contraction of all time, the Austrians argued that the only “cure” for such a contraction is to prevent it from occurring in the first place. That is, during an expansion: recognize economic bubbles, keep credit on a tight leash, and don’t let the economy expand at too rapid a pace. In the event of a contraction, like the one in the 1930s or the one in 2008, the Austrians would have argued to let everything be liquidated—that is to just let it all go bankrupt. The Austrians would have let the banks fail; they would not have passed a stimulus package and would have let unemployment rise unabated; and they certainly would not have bailed out the American auto industry. They would advocate this is necessary no matter how painful the economic repercussions.

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Jan
2

HSBC Deferred Prosecution Agreement: The Caymans Connection

Heather Lowe

flickr / Roger4336

HSBC Bank USA N.A. and HSBC Bank Holdings plc, its parent company, agreed to forfeiture and penalties of a little more than $1.9 billion dollars for systemic and willful violations of U.S. anti-money laundering and foreign sanctions laws. $1.9 billion may sounds like a lot, but does the penalty fit the crime?

This is part 2 of a series of excerpts from the Statement of Facts, which constitutes Attachment A to the Deferred Prosecution Agreement entered into between U.S. regulators and the HSBC banks, and let you decide for yourself. These are excerpts detailing events that HSBC has explicitly admitted to.

Excerpt 4: The Caymans Connection: Dedicated to Anthony Travers.

32. One area in which KYC was particularly poor was HSBC Mexico’s Cayman Island U.S. dollar accounts. Mexican law prohibited most individuals from maintaining U.S. dollar denominated deposit accounts in Mexico unless they lived near the U.S.-Mexico border or were a corporation. However, Mexican law permitted almost any Mexican citizen to maintain offshore U.S. dollar accounts. These HSBC Mexico accounts were based in the Cayman Islands, but were essentially offshore in name only, because HSBC Mexico had no physical presence in the Cayman Islands and provided the front and back office services for these accounts at its branches in Mexico. Customers holding these accounts did all of their banking, including depositing physical U.S. dollars, at branches in Mexico. Nevertheless, the accounts were legal under Mexican and Cayman law.

33. In January 2006, HSBC Mexico conducted an internal audit of the Cayman Islands U.S. dollar accounts. At that time, there were only approximately 1,500 such accounts. Over 50 percent of the audited accounts lacked the proper KYC information, while 15 percent of audited accounts did not contain any KYC documentation. Over the next two years, nothing was done to address the KYC issues with these accounts. By 2008, there were 35,000 Cayman Island U.S. dollar accounts. At least 2,200 of these accounts were designated high risk due to suspicious activity within the accounts and/or negative information regarding the account owners. In July 2008, the total outstanding balance of these high risk Cayman accounts was approximately $205 million. Without adequate KYC information, HSBC Mexico knew very little about who these high risk customers were or why they had such large amounts of U.S. dollars.

However, even without the benefit of adequate KYC information, the risks were obvious. Indeed, one HSBC Mexico compliance officer noted “the massive misuse of [the HSBC Mexico Cayman Islands U.S. dollar accounts] by organized crime.” One example, identified by HSBC Group’s Head of Compliance in July 2008, involved “significant USD [U.S. dollar] remittances being made by a number of [HSBC Mexico’s Cayman Islands U.S. dollar] customers to a US  company alleged to be involved in the supply of aircraft to drug cartels.”

You can read the whole Statement of Facts here. Part 1 of the series is here. Part 2 is here.

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Jan
2

Reporting Corruption in the Greek Tax System

EJ Fagan

flickr / Aster-oid

We’ve covered Greece quite a bit here on the Task Force blog. Tax evasion and corruption are both endemic in Greece, and they have played no small part in the current financial crisis in both Greece and Europe. Wealthy Greeks have moved significant amounts of money overseas to tax havens like Switzerland.

Tax evasion in Greece was accelerated in part through bribery and corruption in the tax collection system. Websites like IPaidABribe.com have been successful at identifying and tracking bribery in other sectors of the Greek economy, but so far have shown little progress in revealing bribes paid to Greek tax collectors. BBC News has a great story explaining the problem:

Concern about corruption has risen as the Greek economy worsens. Last month, Transparency International’s annual international survey of public perception of corruption found that the situation in Greece has deteriorated further. Greece has slipped from 80th to 94th place in the last year, making it the most corrupt country in Europe in terms of people’s perceptions.

One of the biggest areas of concern is over corruption in the tax system. Tax evasion is known to be endemic in Greece, and is one of the areas the European Commission is pressing the government to improve. One of the latest scandals was over the failure by Greece to investigate the so-called “Lagarde List” of 2,000 Greeks with Swiss bank accounts.

However, there are relatively few cases of tax evasion reported on whistleblowing websites like edosafakelaki. Only 3% of entries here relate to tax. The website’s founder believes this is because bribing a tax inspector is only likely to happen when someone is trying to evade tax, making them unlikely to want to tell people about it, even anonymously. It is an obvious drawback of any self-reporting system.

Read the whole story here. I would be interested to hear of any innovative models of measuring and/or reporting bribery by illegal actors, such as tax evaders looking to move money past tax inspectors.

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Latest Press Releases

TED Prize Winner Charmian Gooch Announces Global Campaign to Abolish Anonymous Companies

Global Witness · March 19, 2014

Vancouver, Canada, March 18, 2014 –This year’s TED Prize winner – Charmian Gooch of Global Witness – has announced that she will use the prestigious million-dollar award “to make it impossible for criminals and corrupt dictators to hide behind anonymous companies.” The announcement was made live and online from the TED stage in Vancouver, with support from leading members of the business, political, law enforcement and campaigning community.

European Parliament Gives Overwhelming ‘yes’ Vote to End Secret Corporate Ownership

Financial Transparency Coalition · March 11, 2014

Joint NGO Media Reaction Financial Transparency Coalition – Eurodad – Global Witness – Transparency International EU Office – Oxfam Brussels, March 11, 2014 – Today, the European Parliament endorsed the creation of public registers of who really owns companies, trusts and other legal structures. This will make it much harder for criminals, tax evaders, corrupt politicians and other money launderers to hide their identity, and their illicitly-acquired assets, behind anonymous companies and trusts.

NGOs welcome MEPs’ vote for ground-breaking changes to fight money laundering

Financial Transparency Coalition · February 20, 2014

Joint NGO media reaction Financial Transparency Coalition – Eurodad - Global Witness - Oxfam A cross political party agreement in the European Parliament ...