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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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Press Releases
Sep
5

G20 Leaders Must Deliver on “Growth Through Trust and Transparency”

Financial Transparency Coalition

WASHINGTON, DC – As G20 leaders gather in Moscow to discuss continued global economic instability and the pressing need for increased growth, the Financial Transparency Coalition (FTC) urges them to consider recent milestones as a foundation for action.

“Moscow’s G20 focus on ‘growth through trust and transparency’ as one of three summit priorities is commendable. Without greater transparency in financial markets, the chances of a real global financial recovery – one that benefits poor and rich alike – remain slim,” said Porter McConnell, Manager of the Financial Transparency Coalition. “Corruption, tax evasion and aggressive tax avoidance do very real damage to people and communities around the globe. If G20 leaders ignore the corrosive effects of a dysfunctional financial system, they will be imperiling the global growth and stability they seek to establish,” she added.

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Sep
4

The Need for an International Framework for Regulating Digital Currency

Ann Hollingshead

Undoubtedly, the world has made progress on financial transparency to reduce illicit financial flows in recent years, and the evidence suggests we will continue to do so, at perhaps an even faster rate, in the near future. Yet as these efforts are going strong, threats to efforts to stem illicit financial flows will emerge from technological advancements in currency, most notably Bitcoin. So far, most nations have pursued a piecemeal and largely unilateral approach to regulate digital currency, but this must change. To truly deal with the threat digital currency imposes on continued illicit financial flows, we need an international framework for their oversight and regulation.

At the bilateral and multilateral levels, the world has made clear progress on financial transparency, including in automatic tax information exchange, beneficial ownership, and country by country reporting. The current policies are not sufficient to stem the tide of illicit wealth transfer, but they remain promising. Yet as the world steps up both its proactive and retroactive scrutiny of overseas transfers of wealth, criminals and corrupt politicians will have to become more creative in their approaches to wealth management in order to continue to store illicit funds abroad. With technological advancements in digital currency, there are new ways for them to do so.

There are several forms of digital currencies currently in circulation, but generally when discussing these issues I focus on Bitcoin, the digital currency with the arguably most mature markets. It is also the only truly decentralized digital currency, endowing it with some unique characteristics that make it difficult to regulate and its transactions difficult to track.

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Press Releases
Sep
3

SEC must take opportunity to re-issue a strong rule for the vital US transparency law under Dodd-Frank 1504

Global Witness

WASHINGTON DC - Global Witness joins Members of Congress and investors representing more than US$5.6 trillion in assets in calling on the US Securities and Exchange Commission (SEC) to re-issue a strong ruleunder Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act—a vital piece of bipartisan US transparency legislation.

Specifically, Section 1504 requires U.S.-listed oil, gas and mining companies to publish details of their revenue payments to governments, such as taxes, royalties and licence fees, on a country- and project-level basis so that citizens in resource-rich countries can ‘follow the money’ and ensure it is used for their benefit.

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Press Releases
Aug
30

China: The Politics of Fighting Corruption

Transparency International

BERLIN - The well-publicised trial of Bo Xilai, a former politburo member and populist politician, for corruption and abuse of power does not prove China is serious about fighting corruption. Nor does it show that no one, not even a powerful politician, is above the rule of law. This elaborately choreographed prosecution is simply an exercise in demonstrating where power lies in an authoritarian state.

In March Transparency International welcomed China’s strong commitment to fighting corruption and called on the authorities to take concrete steps to uphold best international practices for preventing and prosecuting corruption both at home and abroad. Show trials are not part of this process.

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Aug
28

A Liberty-Preserving Alternative to Mass Surveillance

Ann Hollingshead

Since Edward Snowden leaked the details of the National Security Administration’s top secret mass surveillance programs, Americans have been talking a lot about the tradeoffs between liberty and security. There are, of course, varying perspectives on the issue. Some, like Senator Ron Wyden (D-OR) argue the government’s actions in this area threatens to “give us an always expanding, omnipresent surveillance state that—hour by hour—chips needlessly away at the liberties and freedoms our Founders established for us.” Others, such as NSA head General Keith Alexander argue the program has permitted the intelligence community to “better connect the dots and learn from mistakes,” which has allowed Americans to live in “relative safety and security” over the last decade.

Whether arguing that the NSA programs are warranted or not, both sides do acknowledge that this program represents a loss of liberty for Americans. As a natural result, both sides sometimes propose liberty-preserving (or at least liberty-conserving) alternatives to such programs. For example, some argue investigators should not actively hold the data—instead leaving them in the hands of phone companies—and only take data that are part of an investigation.

When examining alternatives to mass surveillance, the national discourse does not, however, focus much on banks and bank accounts. It should. Phones are one way to track terrorists, especially with those with ties to the United States, and to reveal their networks. But money is another.

The U.S. Patriot Act did a great deal more than establish the legal basis for wiretapping and mass surveillance.[1]  It also significantly altered anti-money laundering enforcement by officials in the United States.  Among other advances, the Patriot Act sought to prevent foreign shell banks from having access to the U.S. financial system; encouraged cooperation and information sharing among law enforcement, regulators, and financial institutions; and required financial institutions to establish anti-money laundering programs.

But terrorists have adapted, too, by learning to avoid traditional banking channels for moving funds. Terrorists use cheap, informal money-transfer methods like hawala swaps and couriers. And organizations like al Qeada, which once had a much stronger centralized core group in Pakistan, has reduced profit-sharing among affiliates in order to avoid detection. Stuart Levey, the former head of the Treasury’s Office of Terrorism and Financial Intelligence, explains “Illicit actors are now savvy to the fact that the formal financial system is quite well-monitored, so they look for other ways, and it’s hard to keep up with that. It’s a bit of a cat-and-mouse game.”

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Latest Press Releases

European Commission’s Tax Transparency Package keeps tax deals secret

Financial Transparency Coalition · March 18, 2015

The European Commission’s new measures to combat secret tax deals made between multinational companies and governments cannot be called ...

The world can’t afford to exclude developing countries from new anti-tax evasion system

Financial Transparency Coalition · March 16, 2015

BRUSSELS—Weeks after the shocking revelations of wide-spread tax evasion at HSBC’s Swiss branch, a new report from a European Commission expert ...

Leaked HSBC Records Shed Light on Culture of Corruption in the International Banking System

Global Financial Integrity · February 9, 2015

WASHINGTON, DC – Leaked HSBC documents revealed today by the International Consortium of Investigative Journalists (ICIJ) highlight a culture of corruption in the ...