Learn About Illicit Financial Flows
Key Terms

Latest

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.

Continue Reading »

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. 

Continue Reading »

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.

Continue Reading »

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.

Continue Reading »

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.

Continue Reading »

Dec
27

The Booms and Busts of Austrian Economics

Ann Hollingshead

This week and next I am 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.” Many of those who use it, including Ron Paul who declared we are “all Austrians now” after his third place finish in Iowa, are referring to a narrow segment of the body of thought. That segment might be better termed “libertarianism.” Other bloggers and thinkers have already written extensively about the relative merits and failures of Paul’s interpretation of Austrian economics and I’ll leave continued discourse on that subject to them. What I’m more interested in—and what I’ll explore with this two-part blog series while I travel the birthplace of this economic school of thought—is the academic discussion and resurgence of Austrian economics that has followed from the financial crisis and the European debt crisis.

First some history.

The Austrian school of economics got its name from its German opponents. The founder of the school of thought is Venetian professor and economist Carl Menger. In 1871 Menger published his Principals of Economics, which not only lays the groundwork for Austrian economics, but also advanced the theory of marginal utility. Proving that economists have been snarky since the 19th century, Menger dedicated his book to his German rival William Roscher. Roscher and his students, summarily rejecting Menger’s work, derogatorily labeled him and his colleagues “Austrian school” because their positions at the University of Vienna.

Continue Reading »

Dec
19

Comment: Illicit Financial Flows from Developing Countries 2001-2010

Ann Hollingshead

This week Global Financial Integrity released their periodic estimate of worldwide illicit financial flows authored by Dev Kar and Sarah Freitas. The report finds the developing world exported an estimated US$859 billion in illicit financial flows in 2010. In case you like moving words, here’s a presentation I put together on what that number means.

The GFI model of illicit financial flows includes two components: (1) an estimate of money that exits developing countries via trade channels (called trade mispricing) and (2) an estimate of money that leaves developing countries through other, private capital flows. Traditionally GFI has estimated the second type of flows using the World Bank Residual Method, which uses a country’s balance of payments (a bit like a balance sheet) to calculate leakages by comparing a country’s source of funds to its use of funds. By definition, if a country’s source of funds is greater than its use, there must have been an outflow. But as GFI lead economist Dev Kar notes, this is not necessarily an illicit outflow. This model does, to some extent, capture licit funds as well.

To correct for this fact, in this round Kar has modified his traditional model, instead using the Hot Money Narrow Method. In its classic sense, hot money involves the flow of capital between financial markets to earn a short term profit. It’s “hot” because it can move quickly and sometimes results in instability, particularly for developing countries. The Hot Money Narrow method calculates flows of illicit capital by going back to the balance sheet, but this method focuses on the “net errors and omissions” line item. Net errors and omissions (or NEO) is catch-all line to correct for the discrepancies between a country’s current account and capital account (which must be inversely equal). To the extent that the NEO captures flows of money (and not statistical errors) it must include only illicit flows. It is therefore a more conservative estimate than the World Bank Residual model.

Continue Reading »

Dec
19

Why Fight for Transparency? Publish What You Pay Activists Tell their Story.

Alice Powell

Publish What You Pay (PWYP) has been mapping the stories of our activists, explore them here. Publish What You Pay is an international group of civil society coalitions that advocate for financial transparency in the extractive industries. 

nullFor some time, we at PWYP have been exploring new ways to talk about the need for transparency in the extractive sector.  Communications in this field isn’t always the most obvious thing. It can be tricky to present a complex – and sometimes dry – subject in an engaging and accessible manner. Behind the jargon and the polysyllabic words lies a genuine – and exciting – fight for justice. How do we express the scale of what is at stake?

We realised that finding out what drives our activists – day in and day out – to campaign on this issue would highlight the human side of our work and get to the stories behind the campaign. We often speak in rather abstract terms of accountability and transparency, but here we were able to create pictures illustrating the effects of opacity and what transparency can deliver, whether activists were discussing their visits to mines in Mauritania or protecting the environment in Mongolia.

Aside from the content itself, part of our role as an International Secretariat is to amplify the national and local work our members do. We want people to see the diversity of our members and learn more about the specific contexts in countries – from Niger to Tajikistan – that might not always get a lot of coverage. We wanted to offer our audiences meaningful and relatable snapshots of why transparency is so important all over the world. Another important corollary was giving our activists the chance to tell their story.

Continue Reading »

Dec
18

New Report: Developing Countries Lost $5.86 Trillion from 2001-2010

EJ Fagan

nullTask Force member Global Financial Integrity released their newest report on illicit financial flows from the developing world last night. The report found that $5.86 trillion left the developing world due to crime, corruption, and tax evasion from 2001-2010, $859 billion in 2012 alone. The report uses a new, broader, methodology to estimate illicit financial flows, and the numbers should be considered very conservative. They also set up a very cool Explore page if you would like to delve deeper into the data.

These illicit financial flows are one the least talked about causes of global poverty. They drain much-needed capital out of developing economies, make it more difficult for governments to raise revenue, transfer money from corrupt public officials to safe havens abroad, and fuel organized crime. Most of the money ultimately ends up in tax havens and banks in the West. Because of this, they represent a massive, and still-growing, transfer of wealth from the poorest places in the world to the richest.

For years, members of the Task Force have helped bring to light the tremendous tragedy brought on by illicit financial flows, the global shadow financial system, and the human greed, corruption, and blight that they enable. Its time that the world did something about it. The Task Force recommends five courses of action that the international community can do to break down the systemic facilitation of illicit financial flows:

Continue Reading »

Dec
14

HSBC Deferred Prosecution Agreement: Not HSBC’s First Run-In With the Law

Heather Lowe

flickr / Scott*

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.

Excerpts 2 and 3: This isn’t HSBC’s first run-in with the law 

Before the gross violations of U.S. anti-money laundering and foreign asset control regulations that lead to the $1.9 billion fine, HSBC Bank USA was already fingered for substantial problems with its anti-money laundering regime:

Paragraph 8

From 2003 to 2006, HSBC Bank USA operated under a written agreement issued by its regulators. A written agreement is a formal supervisory action that requires a financial institution to correct operational deficiencies. The written agreement in this instance required HSBC Bank USA to enhance its AML compliance with the BSA, and specifically required HSBC Bank USA to enhance its customer due diligence or “know your customer” (“KYC”) profiles and the monitoring of funds transfers for suspicious or unusual activity.

Paragraph 25 

In the face of known AML deficiencies and high risk lines of business, HSBC Bank USA further reduced the resources available to its AML program in order to cut costs and increase its profits. By 2007, only a year after the written agreement had been lifted, HSBC Bank USA had fewer AML employees than required by its own internal plans. Moreover, beginning in 2007, senior business executives instructed the AML department to “freeze” staffing levels as part of a bank-wide initiative to cut costs and increase the bank’s return on equity. This goal was accomplished by not replacing departing employees, combining the functions of multiple positions into one, and not creating new positions.

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

Continue Reading »

Dec
14

Will billions in fines alone make banks respect the rules?

Karen Egger

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

flickr / ostrograd

How banks implement international financial sanctions may not strike many as the sexiest news story of the day, but its importance comes alive when one remembers that holding a banking license and taking deposits from the public at large is not a right, but a privilege. It is bestowed on certain companies by the public through government regulators and it should make banks accountable to that same public.

Still, numerous banks have recently agreed to pay billions of dollars in fines for not respecting international sanctions.  Does more need to be done?

That so many of the world’s leading banks admitted to, or may allegedly have, breached government sanctions is disappointing.  Whether one agrees that sanctions are an appropriate tool to rein in foreign governments or not, the fact is that sanctions are imposed by regulators as a condition for doing business. They are imposed for the public good.

HSBC was just the latest big bank to grab headlines this week after violating U.S. sanctions against Iran and other countries. They agreed to pay a record US$1.9 billion fine. Standard Chartered Plc agreed to a $327 million in a similar settlement and other banks facing charges of failing to abide by sanctions include Lloyds Banking Group and Barclays Plc in Britain, Credit Suisse Group in Switzerland and Dutch banks ABN Amro Holdings NV and ING Bank NV.

Continue Reading »

Dec
13

What Billions in Illicit and Licit Capital Flight Means for the People of Zambia

Sarah Freitas
A forthcoming report by Global Financial Integrity finds that Zambia lost US$8.8 billion in illicit financial outflows from 2001-2010

flickr / photosmith2011

In our newest report, Illicit Financial Flows from Developing Countries 2001-2010, we look at illicit financial flows–the proceeds of crime, corruption, and tax evasion–leaving the developing world. Illicit financial flows are a type of capital flight, and have been a persistent plague on the developing world for some time now. Our new report will be released on Tuesday morning. But for today, I want to focus more narrowly on Zambia, one of the poorest nations on earth and one of the clearest examples of the damage caused by both illicit and licit capital flight.

Our research finds that $8.8 billion left Zambia in illicit financial flows between 2001 and 2010. Of that, $4.9 billion can be attributed to trade misinvoicing, which is a type of trade fraud used by commercial importers and exporters around the world.

This is a very serious problem. Zambia’s GDP was $19.2 billion in 2011. Its per-capita GDP was $1,413. Its government collected a total of $4.3 billion in revenue. It can’t afford to be hemorrhaging illicit capital in such staggering amounts.

In previous reports, we’ve proven that illicit financial flows drive the underground economy. This means that as criminals and tax evaders avoid law enforcement and move their money overseas, it becomes easier for them to operate in Zambia. The underground economy becomes bigger, which makes it even more difficult for Zambia’s government to collect taxes. This in turn drives illicit financial flows further, completing the vicious feedback loop.

Continue Reading »

Pg 31 of 183 First...1020...30313233...4050...Last
Latest Press Releases

$2 lost for every $1 gained: New report shows global financial system fails developing countries

Eurodad · December 18, 2014

Developing countries are losing twice as much money as they earn because of issues like tax evasion, profits taken out by foreign ...

Eurodad and Tax Justice Network Named to List of “Global Tax 50”

Financial Transparency Coalition · December 17, 2014

WASHINGTON D.C.—The Financial Transparency Coalition congratulates two members of its Coordinating Committee who were named to the International Tax Review’s “Global ...

EU compromise tightens regulation on shell companies, but without public access, many still in the dark

Financial Transparency Coalition · December 17, 2014

BRUSSELS — In a deal reached last night, parliamentarians and campaigners have succeeded in making company ownership a fundamental topic. While EU ...