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Shruti Shah: A case for more integrity in the financial sector

EJ Fagan

flickr / Pablo Manriquez

Shruti Shah of Transparency International-USA wrote a great op-ed on Devex last week. Ms. Shah connects the dots between the crimes committed at HSBC, the influx of money to the United States from kleptocrats like Teodorin Obiang, and the hundreds of thousands of anonymous shell corporations created every year in the United States. The result? Individuals are able to use the United States and its institutions to, “export, launder and conceal ill-gotten gains” derived from corruption.

Her point is important: there is a causal connection between the facilitation of corruption and corruption itself, in the sense that facilitation is necessary for much of the grand corruption that occurs to exist. Without the ability to easily move money out of the home country, it becomes a lot more difficult to perpetually conceal what you are doing. When you decrease incentives – the potential for dynastic wealth that can be spent with impunity – you decrease the activity.

Shah writes,

2011 BBC poll surveying more than 11,000 people across 23 countries showed that corruption was the most talked about global issue. In the same survey, 69 percent of respondents rated corruption as a “very serious” global issue.

This is not surprising, as corruption underpins many of the main global challenges. Corruption undermines economic growth, erodes trust in institutions, diverts scare resources that could be used for development, subverts open markets and is perceived to have played a significant role in the recent financial crisis. The continuing discontent of ordinary people – whether in the Middle East, India or even the United States – shows that tackling corruption will continue to be front and center in 2013.

An important issue often missing from discussions on corruption is that preventing the ability of individuals to export, launder and conceal ill-gotten gains can significantly reduce corruption.

It is difficult to reliably estimate how much money is laundered globally. The managing director of the International Monetary Fund in 1998 estimated that the aggregate size of money laundering in the world could be somewhere between 2 percent and 5 percent of the world’s gross domestic product. Even the lower end of the scale of this rather old estimate is staggering. It would be equally if not more difficult to understand the true effect of this leakage on developing countries. The true cost exceeds the value of the stolen assets – siphoning funds away from important development goals, undermining the rule of law.

You can read the entire op-ed on Devex here.

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Resource Revenue Management 101

Katherine Lay

Cross posted from The ONE Campaign.

flickr / deep_schismic

Say that your country is blessed with natural resources. Oil, gas, minerals – it has it all. The future looks good. But deep down you worry that the bonanza could turn into a bust – maybe you live in Africa and have seen how windfalls have been wasted before. How do you know that’s not going to happen now? Are there any tell-tale signs of sound management of “commodity wealth”?

Marcelo Giugale, the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa, recently asked these questions and, in response, offers us a combination of measures that every government should have in place to help citizens get a good deal from their resources.

We’ve looked at four of these measures and how they’re playing out in Africa.

First Measure: Governments publish their extractives contracts

Extractive resources are public assets and decisions about their use should be subject to public oversight. But many African governments are keeping their oil, gas and mining contracts firmly under wraps. This is a problem because confidential contracts prevent citizens from holding political and corporate leaders to account for the deals they’ve struck. Closed contracts may contain unreasonable tax breaks, terms that contravene national legislation or clauses that allow companies to ignore changes in national law. By contrast open contracts help maximize gains for citizens, and are a deterrent to self-serving actions on the part of government leaders. They also increase investment stability for companies by securing balanced deals from the outset.

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Stephen Colbert on HSBC

EJ Fagan

Satirist Stephen Colbert dismantled HSBC on his show last night. He criticizes both HSBC for helping to launder tremendous amounts of drug money, helping to finance murder, and the U.S. government for treating them as “Too Big to Jail.” Below are two videos: the first shows Colbert directly addressing HSBC, and the second is an interview with Rolling Stone’s Matt Taibbi on the scandal.

Money quote: “”[HSBC was] slammed with a $1.9 billion fine. Do you know how long it would take HSBC to earn that back? Four weeks. You could do the Special K challenge twice!”

Second video below the fold:

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German Pot, Meet Cypriot Kettle

Ann Hollingshead

flickr / …Tim

Over the last few months, an aid program (read: bailout) for Cyprus’ banks put together by EU rescuers has met mounting resistance among Europeans. The reason? Money laundering… and the alleged ties of Russian oligarchs to Cyprus’ banks.

There does seem to be a questionable relationship there. Last fall, Der Spiegel reported on Germany’s Federal Intelligence Service’s (BND) secret report on money laundering in Cyprus. According to Der Spiegel, the report finds that the people who would benefit most from a European bailout of Cyprus banks are Russian oligarchs, mafiosi, and businesspeople who have parked illegal earnings in the small Mediterranean nation. Even the simplest of facts are pretty compelling: the list of Russian investors in Cyprus is almost identical to the list of the country’s richest men and almost every well-known oligarch in Russia has at least one offshore company in the nation.

The reports have thrown the future of an aid program that would deliver $22.7 billion to Cyprus’ failing banks into confusion and uncertainty. On the one hand, Cyprus really does need the money. If the plan doesn’t pass, it would be a bit of a disaster, at least for the island nation, and likely also for its neighbors. On the other hand, opposition to bailing out tax evading Russian oligarchs is mounting.

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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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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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New Eurodad Report: Secret structures, hidden crimes


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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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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Cash and Corruption in God’s City

Ann Hollingshead

Some rights reserved by CameliaTWU

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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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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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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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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