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Enforcing Laws Works: HSBC Money Laundering Edition

EJ Fagan

flickr / Kansir

Two pieces of pretty good news about anti-money laundering enforcement came out of HSBC this week. You might recall that earlier this year, a U.S. Senate investigation uncovered incredibly lax money laundering enforcement at the bank, including close ties to organized crime.

The first piece of news comes from Reuters, which reports that HSBC’s fine–long thought to end up around $1 billion–could not only be much higher than expected, but also be accompanied by real criminal penalties for individuals:

A U.S. fine for violating federal anti-money laundering laws could cost HSBC Holdings significantly more than $1.5 billion and is likely to lead to criminal charges as well, Europe’s biggest bank said on Monday.

HSBC said the U.S. investigation had damaged the bank’s reputation and forced it to set aside a further $800 million to cover a potential fine for breaches in anti-money laundering controls in Mexico and other violations. The provision was on top of $700 million it put aside in July

“It could be significantly higher,” Chief Executive Stuart Gulliver told reporters on a conference call, saying the latest provision was based on discussions with the various U.S. authorities involved in the probe.

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Video: How to Rob Africa

EJ Fagan

Africa and the rest of the developing world are often criticized for failing to effectively combat corruption. While many of these countries have a lot to do to get their domestic house in order, not enough attention is paid to the systemic global problems that make it very difficult for even a well-meaning, responsible African government to put a serious dent in illicit financial flows. Western financial secrecy and lax regulations make it very easy for elites in developing countries to squirrel away illicit money, far away from any tax authority.

In a great new documentary, Al Jazeera looks at how this is happening and how it prevents the continent from escaping widespread poverty despite immense natural resource wealth and an industrious, hard-working, young population. A great quote:

“When these diamonds came, they came as a God-given gift. So we thought now we are going to benefit from jobs, infrastructure, we thought maybe our roads were going to improve, so that generations and generations will benefit from this, not one individual. But what is happening, honestly, honestly it’s a shame!”

Watch the video below, or read more here.

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Task Force IACC Panel: Illicit Financial Flows: Plugging the Leaks to Curtail Corruption and Promote Economic Development

EJ Fagan

This afternoon, at Task Force member Transparency International’s International Anti-Corruption Conference in Brazil, the Task Force will be holding a panel discussion on illicit financial flows, corruption, and economic growth. Task Force Director Raymond Baker will be moderating the following panel:

  • Raymond Baker, Director of Global Financial Integrity and the Task Force
  • Heather Lowe, Director of Government Affairs of Global Financial Integrity and the Task Force
  • Øygunn Brynildsen, Policy and Advocacy Officer at Eurodad
  • Brigida Benitez, Steptoe & Johnson LLP
  • Marlon Paz, Principle Integrity Officer at Inter-American Development Bank

How does tax evasion undermine economic growth in developing countries? What infrastructure of the global financial system is shared by both multinational corporations and organised crime? The financial architecture that allows money to move around the world is the same one used by corrupt dictators and criminals to hide funds and evade law enforcement. The movement of dirty money around the globe is enabled by mechanisms of the shadow financial system, which in turn undermine development initiatives. These systemic issues have enabled some individuals to become spectacularly rich, while the poor in developing countries – and to an ever-growing extent the developed world – struggle to secure life’s basic necessities.

This workshop begins with an introduction to illicit financial flows, by Raymond Baker, one of the world’s foremost experts on the subject. A series of short presentations follows, addressing tax as sustainable development financing; money laundering; recent developments in country-by-country reporting; trade mispricing as a tool for trade based money laundering; transparency in beneficial ownership; the mechanics of transfer pricing and the need for greater monitoring for the proceeds of corruption in the finances of public figures.

Panelists will put forward strategies for regulatory authorities and the private sector to further transparency and accountability in the international financial system and curtail illicit financial flows.

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Legislative Priorities to Promote Transparency for President Obama

Ann Hollingshead

After a long, hard battle, President Obama won a second term from voters last night. The media has pointed out he’s not taking much time to celebrate; it’s time to back to the long, hard work of governing. In that spirit, this is a good opportunity to check the pulse of several important transparency-enhancing legislative initiatives that are on the table in Congress right now. Over the next four years, the President and his administration will have opportunities to promote transparency in the financial system, fight corruption worldwide, and enhance tax fairness, both abroad and at home. In that spirit, here’s a list of what I’d like to see him support and, hopefully, accomplish in the next four years.

  • Strengthen law enforcement and national security by signing the Incorporation Transparency and Law Enforcement Assistance Act in law. This bill would require companies to disclose the names of the beneficial owners of corporations and limited liability companies when formed. This would effectively put an end to “anonymous shell corporations,” closing a major loophole that criminals exploit to launder their funds within U.S. boarders. This bill would strengthen law enforcement officials’ ability to keep criminal and tax evading money out of the United States. As Joseph Kraus, Ph.D. and Stefanie Ostfeld pointed out on the Task Force blog recently, this “would increase our national security, lower the amount of money lost to tax evasion, and thwart the corruption that enables leaders to live extravagant lives to the detriment of their citizens.”

Likelihood of Obama’s support? Strong. President Obama was the lead sponsor of the bill when he was a U.S. Senator.

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Task Force Members Start Collecting Impressive Hardware

EJ Fagan

Two amazing stories have emerged out of the UK over the past few days for members of the Task Force. Our members in the United Kingdom are collecting meaningful and important recognition for their work on global tax dodging issues.

Task Force Assistant Communications Director Nick Mathiason was nominated by the Press Gazette for the Business Journalist of the Year British Journalism Award, for his work as part of the Bureau of Investigative Journalism. The Press Gazette editor, Dominic Ponsford, said:

“The genesis for these awards was the hacking scandal and the Leveson inquiry. If ever an industry needs some positive PR the journalism industry does.

“We knew there was far more important public interest journalism going on in the UK than our much-maligned colleagues get credit for and, like many others, Press Gazette has noted that Lord Justice Leveson saw mainly a one-sided and negative picture during his inquiry.

“The finalists for the first British Journalism awards prove comprehensively that there are two sides to this story.”

We not only congratulate Nick for becoming a finalist, but also will be rooting for him to come out on top and receive the award on December 4th. You can read more about the awards here.

John Christensen and Nicholas Shaxson of Tax Justice Network, were listed as two of the fifty most influential individuals and organizations in the world on global tax issues by International Tax Review. John was included for his work on country-by-country reporting, tax havens, tax avoidance, and automatic exchange of tax information. Nicholas earned his spot on the list through his landmark book Treasure Islands, as well as his reporting on U.S. Republican Presidential candidate Mitt Romney’s involvement with tax havens in Vanity Fair

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A bill to end secrecy surrounding shell companies

Joseph Kraus, Ph.D. and Stefanie Ostfeld

This post was originally written for The Hill’s Congress Blog.

flickr / Embassy of Equatorial Guinea

Did you know that it can take more information to obtain a driver’s license than to start your very own anonymous shell company with which you can use and abuse the U.S. financial system? In a matter of minutes, and with minimal documentation, you can own a company without disclosing that you are, in fact, the owner. These opaque entities are a favorite tool of terrorists, drug traffickers, arms dealers, corrupt government leaders, tax evaders and other criminals to launder money into the U.S.

Putting an end to the “anonymous” in “shell company” would increase our national security, lower the amount of money lost to tax evasion, and thwart the corruption that enables leaders to live extravagant lives to the detriment of their citizens.

Fortunately, Congress already has the tools to take this necessary action. Now it must act.

A bipartisan Senate bill, the Incorporation Transparency and Law Enforcement Assistance Act, and a companion House bill, would help end the secrecy surrounding shell companies. The legislation would require companies to disclose information about the real people who own or control them. Knowing the “beneficial owners” of such entities would better enable law enforcement to pursue terrorist cells, financial crime, and drug cartels.

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Transparency as Funding for the Millennium Development Goals

Ann Hollingshead

In September at the turn of this century, the leaders of the world convened at the Millennium Assembly of the United Nations. The Assembly was the culmination of nearly a decade of United Nations summits and conferences to address development and poverty. It was in 2000, however, that the world’s leaders adopted the United Nations Millennium Declaration, a commitment to a noble new partnership to drastically reduce poverty worldwide. All 193 member states of the United Nations and 23 organizations have agreed to achieve a set of eight goals by 2015. They are:

  1. Eradicate extreme poverty and hunger;
  2. Achieve universal primary education;
  3. Promote gender equality and empower women;
  4. Reduce child mortality;
  5. Improve maternal health;
  6. Combat HIV/AIDS, malaria, and other diseases;
  7. Ensure environmental sustainability; and
  8. Develop a global partnership for development.

By and large, developed countries and international organizations provide the policy advice, technical assistance, and financial support to achieve these goals. In 2005, members of the G8 also provided enough funds to forgive an additional $55 billion debt owed by Highly Indebted Poor Countries.

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Will the Berlusconi Sentence Stick?

Valentina Rigamonti

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

Silvio Berlusconi, the former prime minister of Italy was sentenced on 26 October to 4 years in prison for fraud but because of Italy’s laws limiting the length of trials, he is unlikely to serve any time.

Headlines around the world read “Berlusconi gets four year jail sentence.” But Berlusconi is unlikely to see the inside of a cell following his conviction for fraud, not because an appeal will overturn the case but because the case will be closed under Italy’s short statute of limitation laws.

How trial limits vary across Europe. Prosecutions for abuse of public function and bribery in Italy must end 7.5 years after the crime last happened. For money laundering, cases can last 15 years. Click the picture for the full report (p. 26).

Under Italian law Berlusconi can appeal to two more courts, a process that is likely to take several years, and as the Financial Times is already reporting, Italy’s strict limits on the length of trials – the “statute of limitations” – means the charges will very probably evaporate at the end of 2013 or early 2014.

If the courts are serious about their convictions, they need to find a way to make the punishments stick. Italy has one of the least effective statutes of limitations in Europe. Portuguese prosecutors get three times as long to finish a bribery case (22.5 years) than their Italian colleagues (7.5 years). The Council of Europe have long called for reform.

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Raymond Baker in the Huffington Post: China’s Illicit Financial Flows Should Worry Us All

EJ Fagan

Global Financial Integrity’s new report, Illicit Financial Flows from China and the Role of Trade Misinvoicing, was released yesterday. It found that China lost $3.79 trillion–an astonishingly high number–between 2000 and 2011 to illicit financial flows. In just 2011, China lost almost $600 billion. These outflows are the proceeds of crime, corruption, and tax evasion, and threaten Chinese social stability. The report first debuted exclusively in this week’s issue of The Economist.

The report also analyzed trade mispricing between the United States and China, finding that as much as $72 billion flows out of China to the United States every year.

In the words of GFI Lead Economist Dev Kar, ““The Chinese economy is a ticking time bomb. The social, political, and economic order is not sustainable in the long-run given such massive illicit outflows.”

Raymond Baker, Director of Global Financial Integrity and the Task Force, wrote about the problem that illicit financial flows poses for China, and how it could affect the rest of the world in the Huffington Post,

China has seen massive, world-changing, economic growth over the past three decades. However, corruption is undermining much of this growth. The infrastructure that China is building right now should drive growth, and therefore raise living standards for the Chinese people for a century to come. However, many of the brand new bridges, roads, and modern buildings in China have been plagued by shoddy quality and massive amounts of corruption. Our research suggests that much of this money is flowing out of China.

I spent most of my professional life as an entrepreneur in Nigeria, and lived there for 15 years. Despite massive oil wealth and a vibrant, young population, 45% of the population lives below the poverty line. Per-capita GDP has barely risen since I first set foot there in the 1960s. I know far too many people living worse off today than they did decades ago. This is not because the Nigerian economy lacks promise–it has huge oil exports, and the country is filled with good, ambitious, entrepreneurial people–but because crime, corruption, and tax evasion have torn the country apart.

When China is growing at close to 10% every year, China’s median citizen sees their life improving despite endemic corruption and illicit outflows. However, there are serious questions for the political and social stability of China’s economy if growth slows. Will the median citizen continue to tolerate obvious and tragic corruption on the scale that we are seeing when more modest growth is not improving their living standards? When we say that illicit flows drive inequality, it is because money moved illegally out of the economy hurts your average person. That money can’t be spent on schools, infrastructure or basic services. To make matters worse, our prior research finds that illicit flows drive underground economies, resulting in more organized crime, smuggling, and other factors that undermine the Chinese economy.

You can read the whole post here, and access the GFI report here.


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Keeping REDD++ Clean: A Step-By-Step Guide To Preventing Corruption

EJ Fagan

Transparency International today launched Keeping REDD+ clean – a step-by-step guide to guarding REDD+ against corruption, before it sets in.

Many of the world’s most densely forested countries have a poor track record for corruption. Politicians have been known to accept bribes – sometimes huge – to grant companies access to forest zones that should be protected. Meanwhile, some local communities have been forcefully removed from their homes in order to clear the way for forest exploitation, or have been coerced into selling their land for a fraction of its value.

REDD+ will inherit many of the corruption risks that have long beset the forestry sector, but it also brings with it new ones. Carbon is intangible, and so difficult to quantify. This opens the door to mistakes or manipulation – both of data and of people. Given the remoteness of REDD+ sites there may be no easy way of knowing whether a project on the voluntary carbon market is authentic or bogus. And forest communities may be marginalised from decision-making and profits.

At this critical stage in policy development Keeping REDD+ clean walks users through how to identify risks in REDD+ countries and find solutions. The book is already being used by our national chapters in IndonesiaPapua New Guinea and Vietnam.

You can read more about the report here.

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FCPA Regulation by Prosecution and the World’s New Norms

Ann Hollingshead

In late 1975 a Securities and Exchange Commission investigation into Lockheed Corporation revealed that the aircraft manufacturer had paid at least $22 million in bribes to foreign government officials and political organizations. At the time, this was not illegal and it resulted in a scandal, investigation, and a revelation that hundreds of other businesses were routinely involved in this practice. In response to the Lockheed scandal, Congress enacted the Foreign Corrupt Practice Act (FCPA) in an effort to “bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system.” The FCPA makes it unlawful for persons and entities to “make payments to foreign government officials to assist in obtaining or retaining business.”

Last year some members of Congress, including Rep. Jim Sensenbrenner, and the Chamber of Commerce brandished a crusade against the FCPA, hoping to weaken it with amendments. Rep. Sensenbrenner spent a great deal of valuable Judiciary Committee time last fall convincing other Congressmen to join him, rather than encouraging a thoughtful debate on the issue.

In a not-unrelated move, early last November, the Assistant Attorney General of the Department of Justice’s Criminal Division, Lanny Breuer, said in remarks at a national FCPA conference that his division expects to “release detailed new guidance on the act’s criminal and civil enforcement provisions,” in what he hoped would be “a useful and transparent aid.” Breuer didn’t promise a timeline, but he did mention the guidance would arrive sometime “in 2012.”

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Missing From Last Night’s U.S. Presidential Debate on Foreign Policy: Most of the World

EJ Fagan

flickr / CSIS

The United States is about to decide on who will be the most powerful person in the world for the next four years. The two candidates had set lines and issues that they wanted to talk about. These are issues that likely will play a role in determining who wins the election. I can understand that they will act this way as candidates running in a competitive race. But what I can’t understand is how a veteran reporter and moderator like Bob Schieffer can forget about most of the world.

In 90 minutes, the conversation barely strayed away from talking about U.S. national security in the MENA region. A few quick asides mentions China-related policy and some U.S. domestic policy, but that’s it. The closest thing to talking about other important issues that came up were brief mentions of continents. The phrase “Europe and Africa” was spoke once. Governor Romney brought up “Latin America” very briefly. But then the conversation shifted back to MENA national security.

Bob Schieffer should have asked the candidates questions about a range of important issues. We have debates for a number of reasons other than deciding a competitive election, and chief among them is so that we can hold candidates accountable for their actions in office. When the next President takes office, he is going to act on these issues. They need to be on record talking about them.

Obviously, timing is an issue. The debate doesn’t go on forever. But here are three questions that Bob Schieffer should have asked.

What should the United States do to help combat global poverty?

Under Secretary of State Hillary Clinton, the Obama Administration has been quite innovative in some ways on this front. Specifically, their push for domestic resource mobilization in developing countries. Secretary Clinton has supported combating illicit financial flows through extractive industries transparency, helping developing countries collect tax revenue, and fighting corruption.

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