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‘Fines Only’ Is Not Enough For Money Laundering Victims

Farida Aboulmagd

flickr / Canadian Pacific

Since 1979, but particularly after the invasion of Iran by Iraq, the United States has imposed sanctions against Iran. Whether or not those sanctions are justified or sufficient is not up for discussion, but rather the integrity of American laws and decisions is. Standard Chartered, ING, and HSBC have been circumventing American laws and foreign policy decisions through their lack of transparency and the deliberate lapse of any and all anti-money laundering systems.

Although it is normal to automatically place the blame on the banks, perhaps the blame needs to be distributed in a more representative manner. It is true that the banks are the ones who were complacent in the handling of illicit flows of money and thus were (and perhaps continue to be) collaborators in the rise of financial crime, not to mention the blatant disregard for US law.

In order to accomplish this, they buried suspicious files and hired incompetent and gullible personnel, clearly revealing their intent. What must be noted; however, is that the circumvention of sanctions and other related political decisions is facilitated by the absence of any deterring consequence. Conversely, the respect for political decisions and monitoring mechanisms cannot be expected of firms whose sole purpose of being is money and profit.

So far, HSBC has reportedly set aside $700 million to cover fines (plus $28 million against for the charges raised by the Mexican government against its Mexico subsidiary), ING was fined $619 million, and Standard Chartered agreed to pay $340 million and submit to monitoring in order to settle the allegations levied against it. To put these numbers into perspective, HSBC’s fine is under 5% of their 2012 pretax profit; Standard Chartered paid $340 million in fines on $250 billion worth of transactions. Any simple business model would conclude that this is purely the cost of doing business.

In response to the rise of money laundering and its effect on other crimes, such as drug trafficking and terrorism, the United States established both preventative and criminal measures. It began with the Bank Secrecy Act in 1970, which required individuals, banks and other financial institutions to record and report on their transactions.

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New TJN research into banks, accounting firms and tax havens

Markus Meinzer

TJN today publishes new research into banks’ and Big 4 accounting firms’ global geographical reach and presence. Using data from our Financial Secrecy Index (FSI) project, our research finds a positive correlation between the number of banks and the Big 4 firms of accountants in a jurisdiction, on the one hand, and the jurisdiction’s degree of secrecy, on the other.

The research suggests that banks and Big 4 firms are likely to shift activity to locations with a high level of financial secrecy because profitable business opportunities increase in conditions of secrecy. Such patterns of behaviour mean that they are likely to facilitate the handling of illicit financial flows and/or fail to meet the required standards of behaviour expected by law or codes of ethics. In addition, it is argued, a high number of banks and Big 4 firms per capita in a jurisdiction results in them having a disproportionate political influence, which can lead to an increase in the financial secrecy offered by such places through law and regulations.

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Looking At Mexico’s New Anti-Money Laundering Legislation

Arya Andersen

flickr / World Economic Forum

Mexican President Felipe Calderon signed a bill, unanimously passed by the Senate, today aiming to crack down on money laundering that according to experts may account for at least $10 billion every year in Mexico, or as high as $50 billion, according to estimates from Global Financial Integrity. The bill prohibits the giving or accepting of cash payments greater than half a million pesos ($38,750) for real estate purchases, as well as forbidding cash transactions of more than 200,000 pesos ($15,500) for items such as cars, jewelry or lottery tickets.

The law also requires brokers and dealers report the forms of payment for any purchases over half a million pesos and for credit card companies to report when monthly balances exceed 50,000 pesos ($3,875). Violators of the law will face up to 20 years in prison, and a specially-designed financial analysis unit has been set up to work under the prosecutor in tandem with the finance ministry.

The reasoning behind the law is simple. Financial windfall provides incentives for criminals to continue to break the law, use violence as a means of communication and to generally act with impunity. Closing one very financially beneficial door for organized crime is a logical step in fighting it.

“There is no way to go after organized crime, if not to hit their finances,” said Senator Cristina Diaz Salazar, a member of President-elect Enrique Pena Nieto’s Institutional Revolutionary Party. As long as cartels can legitimize their illegally-obtained billions in real estate, vehicles, lottery tickets and other luxury goods, they’ll be able to continue to fund the violence that has plagued Mexico since it became the main transit point for U.S.-bound South American narcotics in the early 1990s.

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Is Anti-Money Laundering Enforcement Helping to Tank the Iranian Rial?

EJ Fagan

flickr / basheem

Iran’s currency is in free-fall. After a slow slide throughout 2012, the Iranian Rial all of the sudden took a dive last week, according to CNN:

So Iranians, who need dollars to both buy imported goods and guard their savings against rampant inflation, have developed an extensive black market in dollars. It’s on this market that the value of the rial has tumbled.

At the beginning of the year, rials on the black market were worth [relatively close] to the official rate. But by late September, the rial had lost half its value, trading around 24,000 to the dollar.

In the last few days the currency has plummeted even further. Reports Wednesday said money changers in Tehran were charging 39,000 rial for a dollar — a staggering 60% slide in a matter of days.

“This is one of the most intense episodes for the county in the last 100 years,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.

The price of local currency can depreciate versus foreign currency for three primary reasons. The first is that the supply of the local currency increases – governments print money, and so the existing money becomes less valuable. But this is only part of what is happening to the rial right now.

The second is that the real demand for exports of the country increases. When a country exports goods, people who buy them often pay for the goods in their own currency, which means they need to buy that currency in order to pay for it. This drives demand for that currency up and increases the price. A country like Iran might also trade exports directly for foreign currency like dollars, which they can use more easily to buy goods on the international market.

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New York City District Attorney Cyrus Vance Jr: It’s time to eliminate anonymous shell companies

EJ Fagan

No one knows better than law enforcement officials on the ground about how dangerous anonymous shell companies are. They allow criminals and criminal organizations to secretly access the financial system, which in turn enables them to commit more crime.

New York City District Attorney Cyrus Vance Jr, in an op-ed at Reuters, argues that anonymous shell companies prevents law enforcement from following the money up from street-level crime to the kingpins and bosses up top.

There is no reason why anonymous corporations should exist in the United States. Congress could eliminate them overnight, at relatively little cost, by passing the bipartisan Incorporation Transparency and Law Enforcement Assistance Act, which would require states to collect information about the real people who own or control companies. The Senate bill, which is pending before the Committee on Homeland Security and Governmental Affairs, is supported by a broad array of law enforcement groups, including the Justice Department, the Society of Former Special Agents of the FBI, and the Fraternal Order of Police.

This bill is critical to the work of law enforcement and district attorneys, because all too often investigations are stymied when we encounter a company with hidden ownership. These nameless, faceless companies can do business just like any other, but it is difficult, if not impossible, to identify the real people behind them.

“Follow the money” is a standard investigative strategy. Law enforcement agents start at the street level — the drug dealer or low-level lackey — and try to follow the paper trail to the ringleader. When we can identify the owners of anonymous shell companies, we can track down those kingpins and bring them to justice.

Read the full article here.

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Video: Book Launch for Waging War on Corruption

EJ Fagan

Last week, Global Financial Integrity hosted the first official book launch for Waging War on Corruption by Frank Vogl, co-founder of Transparency International. Mr. Vogl began the panel discussion by telling the story of what inspired him to write the book, then joined a panel discussion on illicit financial flows, corruption, and global security.

The panel included:

  • Frank Vogl, author and Transparency International co-founder
  • Raymond Baker, Director of Global Financial Integrity and the Task Force
  • Ted Greenberg, former head of the Department of Justice’s anti-money laundering unit
  • Jean Pesme, Director of the StAR Initiative at the World Bank

You can read more about the book here.


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Fuzzy Math and Magic Math on Taxes at the Presidential Debate

Ann Hollingshead

We heard a lot about taxes in the first presidential debate last night. In fact, it largely dominated the first forty-five minutes in what amounted to a ridiculously-long-back-and-forth-that-silent-Jim-Lehrer-couldn’t-seem-to-interrupt. But that’s not a bad thing. It’s an important issue. It’s a defining issue. And it’s one that says a lot about the candidates, their values…and their grip on reality.

Before we talk about the debate, though, let’s start with some politics and some economics. Last week, when former California Governor Arnold Schwarzenegger went on the Daily Show, Jon Stewart pointed out that his state is an interesting example of the effect democracy has on deficits. Essentially, everyone wants this government service or that government service, but doesn’t want to pay for any of them. As Stewart puts it: “it’s the perfect symbol for the problem we have in this country between getting the services we want while convincing people they do have to pay for them.”

In California, the people get to vote directly on both services and taxes, but on a federal level we vote on those issues indirectly, by voting for a candidate.

For that reason, it is incredibly unpopular in America for politicians to advocate raising taxes (unless they are someone else’s taxes) or cutting services (unless they are somebody else’s services). The problem is, given that it’s also become popular to advocate cutting the federal government’s budget deficit, the three cannot exist simultaneously. That is, in the most simple mathematical terms, in order to cut the deficit, you either need to raise taxes or cut services, or both. Let’s call that Fiscal Policy 101.

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Sophisticated Crime Groups Need Sophisticated Financing – Illegal Logging Edition

EJ Fagan

A new UN report finds that illegal logging is on the rise in part due to increased levels of organized criminal activity around logging. Brad Plumer of Wonkblog writes,

The phrase “organized crime” typically conjures up images of drug trafficking or stolen-car rings. But it turns out that the illegal logging trade is just as lucrative — and far more destructive. Between 50 to 90 percent of forestry in tropical areas is now controlled by criminal groups, according to a new report (pdf) from the United Nations and Interpol.

Across the globe, deforestation is a major contributor to climate change, responsible for one-fifth of humanity’s emissions. Farming and logging both play big roles. What makes this area so difficult to regulate, however, is that a great deal of logging simply takes place illegally — much of it in tropical areas such as the Amazon Basin, Central Africa, and Southeast Asia. The U.N. estimates that illicit logging is now worth between $30 billion to $100 billion, or up to 30 percent of the global wood trade.

Plumer touches on this, but I think its important to think about how these types of organized crime activities are enabled. Sophisticated transnational organized crime cannot exist without ready access to sophistical transnational money laundering. If you increase the difficulty, risk, and availability of the money laundering, you increase the cost of doing business for organized criminals seeking to profit off of illegal logging, and therefore decrease the amount of timber being cut down in the world. Like many other problems caused by the opaque, often anonymous flow of money around the world, this one represents some low-hanging fruit for activists trying to reduce deforestation.

Of course, we’re not confronting organized crime with any serious degree of difficulty to launder their money. The recent Senate investigation of HSBC found that the bank was widely involved in all sorts of activity either directly or indirectly connected to drug cartels and terrorist groups. The Senate report was clear that their investigation of HSBC was a case study, and many other banks were likely to be violating anti-money laundering (AML) laws in the exact same way.

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Mystery shopping exercise shows how easy it is to set up anonymous companies in the U.S. and UK

Rosie Sharpe

flickr / Voxphoto

You’re a criminal and you’ve got loads of cash.  You really want that mansion in London. But how are you going to get it?  You need a company service provider to set up an anonymous shell company to disguise who’s behind the money and a bank willing to do business with your shell.

But how simple is this process given international law, and in virtually every country[*], national law too, insists companies should not be anonymous?

A new study out last week shows it is disturbingly easy for criminals to hide their identity behind companies.  Academics Michael Findlay, Daniel Nielson and Jason Sharman proved this in their revealing study which tested the effectiveness of this key area of law in the fight against dirty money.

Posing as consultants, they asked more than 3,700 company service providers in 182 countries to each set up a shell company for them.  Then they recorded how many of them abided by the law by recording who owned and controlled that company. 

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Redistribution Is a 14-Letter Word, But It Shouldn’t Be

Ann Hollingshead

Redistribution is a dirty word. It’s become something of a catch phrase for the Tea Party and Libertarians. In 2008 the McCain campaign sought to unfavorably label Obama a “redistributor” in speeches and attack ads. But perhaps this is not a recent development. Libertarians point out that many of our early presidents were also suspicious of redistributionist policies. President Grover Cleveland, for example, vetoed a bill in 1887 that would have given $10,000 in aid to Texas farmers struggling with a drought. He rationalized that he did not believe it is the duty of the government to relieve “individual suffering which is in no manner properly related to the public service or benefit.”

Most recently, it’s come up in the presidential campaign. To take some heat off of their candidate’s own “47 percent” comments, the Romney campaign last week circulated a video of Barack Obama from 1998 in which he seems to favor “redistribution” of wealth. In the clip—which is abruptly truncated so harshly out of context—then State Senator Obama says: “I actually believe in redistribution, at least at a certain level, to make sure that everybody’s got a shot.”

In a campaign speech, Romney attacked the statement, saying: “He really believes in what I’ll call a government-centered society. I know there are some who believe that if you simply take from some and give to others, then we’ll all be better off. It’s known as redistribution.”

Romney’s characterization of the quote is a bit misleading. Obama does go on to explain that he is interested in pooling resources while decentralizing delivery systems in order to foster competition and innovation at the local level. But the campaign’s—albeit misleading—use of this buzz word is the perfect example of just how toxic the word has become.

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Extractive Industries Transparency and the Resource Curse

Arya Andersen

flickr / World Economic Forum

The resource curse has long been a problem for Africa. The continent’s economies have remained stagnant and hollow for nearly 60 years while a succession of autocrats and their clients have become fabulously wealthy. With huge natural gas discoveries off of the Mozambican coast, vast newfound oil reserves in the Great Lakes region and more than $1 trillion worth of minerals in the Democratic Republic of Congo, there is vast potential for another wasted generation.

Equatorial Guinea, with an overabundance of lumber and petroleum, has one of the highest per capita GDP in Africa, yet more than 60 percent of the population struggles to survive on less than $1 a day. It is a similar story in Angola, a country that has become one of the United States’ largest source of oil imports but still struggles to feed its people. American and European extractive industries have done business for decades across Africa without having to report their payments to governments, a loophole that has allowed for the siphoning of funds to flourish. New developments in the U.S. regulatory mechanism should begin to change that.

On August 22nd, financial regulators ruled to implement Section 1504 of the Dodd-Frank Act, better known as the Cardin-Lugar Amendment. The amendment requires extractive companies to publish in an annual document for the Securities and Exchange Commission the payments they make to foreign governments in the countries where they operate. Almost instantly, the opacity in reporting that has allowed corrupt autocrats to drain their states’ resources has vanished. Beginning in 2013, extractive industries will publish all of their 2012 payments to governments worldwide.

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The 2012 Annual Task Force Conference Has Been Cancelled

Raymond Baker

Due to current tensions in Tunis and elsewhere in the Middle East and North Africa, the 2012 Annual Conference of the Task Force on Financial Integrity and Economic Development has been cancelled.

This decision was not made lightly. The US State Department has issued a travel warning for Tunisia, it has evacuated family members and nonessential staff, and the US Embassy in Tunis remains closed following the September 14 protests. We also consulted with a number of local and area experts.

We are deeply indebted to our Tunisian partners, who have spent many months working with us to create what we believe would have been an excellent conference on a very important issue. To the extent that the current political situation permits, we plan to continue working together to help Tunisia, and other countries of the region, continue their “transition to transparency”.

We are also indebted to the numerous experts who were planning to attend the conference–either in person or via live-stream. We regret any inconveniences created by the cancellation of this conference.

We look forward to working with you in the future. Please feel free to email us with any questions, or continue to follow our blog for future updates.

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