Learn About Illicit Financial Flows
Key Terms



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 »


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 »


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 »


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 »


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 »


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 »


Why the U.S. Absolutely Should Have Prosecuted [People at] HSBC

EJ Fagan

Reuters Financial Blogger Felix Salmon today defended the decision by the United States to not prosecute individuals at HSBC for money laundering violations. Salmon writes:

But here’s the thing: you can’t jail a bank, or any corporation; a criminal indictment of a corporation is a bit of a peculiar fish at the best of times. Even if the bank survived, which Gongloff thinks is possible but no one knows for sure, there would certainly be massive job losses — and we can be sure that somewhere between 99% and 100% of those job losses would fall on people who had absolutely nothing at all to do with the money laundering that HSBC was getting up to.

What’s more, it’s important to put HSBC’s crimes in context. The United States, in its role as global hegemon and guardian of the world’s only real reserve currency, has unapologetically taken the opportunity to use its economic power to push its geopolitical agenda. For instance, if you’re an Iranian business and you want to do business in dollars, the US is determined to make your life as difficult as possible. The US might have no jurisdiction over Iranian businesses, but it does have jurisdiction over nearly all the important banks in the world, since it’s impossible to be a global bank without having some kind of presence in the US. And — as Argentina is finding out right now in its court case against Elliott Associates — if you want to send dollars around the world, you basically have to send them through the USA.

To put it another way, the laws that HSBC broke were laws designed to bolster the international standing of the US relative to Iran and other countries: they were geopolitically motivated, and the intended target was not the international banking system, with which the State Department has no particular beef, but rather countries the State Department doesn’t like.

Right off the bat: Salmon is right that individuals commit crimes and can be put in jail, but not institutions or corporations. A criminal sanction of a bank would be something closer to removing its banking license (something that Ben Lawsky in New York threatened to do to Standard Chartered), which would itself function as a pretty big penalty for the bank.

But let’s remove that from the table for now. Individual people at HSBC committed crimes, admitted to committing those crimes, and can in theory be held responsible in a court for them. 

Continue Reading »


The HSBC Deferred Prosecution Agreement: Just how much money are we really talking about?

Heather Lowe

flickr /  ell brownHSBC 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?

We are going to present you 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 explicitly has admitted to.

Excerpt 1: Just how much money are we really talking about?

The press has been reporting that HSBC USA allowed $670 billion in wire transfers from Mexico through the bank without legally required money laundering controls, $881 million of which has been directly linked to money laundered by Mexican and Columbian drug cartels.  These reports understate the problem by a few hundred trillion dollars:

Paragraph 10 of the Statement of Facts:

10. There were at least four significant failures in HSBC Bank USA’s AML program that allowed the laundering of drug trafficking proceeds through HSBC Bank USA:

  • a. Failure to obtain or maintain due diligence or KYC information on HSBC Group Affiliates, including HSBC Mexico;
  • b. Failure to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers located in countries that HSBC Bank USA classified as
  • “standard” or “medium” risk, including over $670 billion in wire transfers from HSBC Mexico;
  • c. Failure to adequately monitor billions of dollars in purchases of physical U.S. dollars (“banknotes”) between July 2006 and July 2009 from HSBC Group Affiliates, including over $9.4 billion from HSBC Mexico; and d. Failure to provide adequate staffing and other resources to maintain an effective AML program.

You can read the whole Statement of Facts here. We will be bringing you many more excerpts from it over the next few weeks.

Continue Reading »


The Death of Maria

Ann Hollingshead

flickr / andysternberg

In late November of this year, authorities found the body of Maria, a woman in her early 20s, outside an armored van along a mountainous road in northwestern Mexico. In February, Maria Susana Flores Gámez won the 2012 Woman of Sinaloa beauty pageant. She also became involved with the Sinaloa drug Cartel. Maria died in a shootout between the gang and the police in those mountains with a gun in her hand. The gun couldn’t do much to protect her. She was found riddled with bullets because someone had used her body as a human shield.

Maria was the fourth known beauty queen to get involved with Mexican drug traffickers. Javier Valdez, author of Miss Narco, a book about drug cartels and beauty pageants, says that this “recurrent story” seldom ends well. In this world, the beauty queens are “disposable objects, the lowest link in the chain of criminal organizations, the young men recruited as gunmen and the pretty young women who are tossed away in two or three years, or are turned into police or killed.”

Further south, in Colombia, the Norte del Valle Cartel has spent nearly two decades battling DEA, FBI, and the Colombian government’s efforts to dismantle it. In just two of those years it claimed 1,000 lives. This cartel has exported millions of pounds of cocaine to the United States and with its profits has bought safety for its members. Safety doesn’t come cheap. The cartel reportedly gave monthly payments of $160,000 to Attorney General Luis Camilo Osorio; $2 million to a prominent congressman to avoid a criminal’s extradition to the United States; and dozens of other bribes ranging from $12,000 to a police officer to $350,000 to a woman for handling “businesses.”

Continue Reading »


How Too-Big-To-Jail HSBC wriggled out of money laundering indictments

Nicholas Shaxson

Cross posted from the Treasure Islands blog:

flickr / Will Survive

This is shocking, if not surprising. From the New York Times (via Naked Capitalism):

“State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.

Instead, HSBC announced on Tuesday that it had agreed to a record $1.92 billion settlement with authorities. The bank, which is based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.”

The Times story spells it out:

“The case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict.”

Stop for a moment to ponder the implications of that. The criminalisation of finance, via too-big-to-fail. More from Global Witness:

Regulators should hold senior bankers legally responsible for their banks’ money laundering performance. . . . in the most serious cases, senior bankers should face jail.

Continue Reading »


End of the line for multinational tax abuse?

Nick Mathiason

flickr / soumit

Is it inevitable that multinational companies pay pitifully small sums in tax relative to huge profits? Not necessarily because amid growing political and public outrage at how multinationals organise their tax affairs, a new report today suggests there could be an alternative.

Towards Unitary Taxation of Transnational Corporations by Sol Picciotto, emeritus professor at Lancaster University, presents a blueprint for a complete overhaul of international corporate tax rules.

Today multinationals are able to avoid tax because global protocols, known as the Arm’s Length Principle (ALP), treat their extensive networks of subsidiaries as separate businesses. Under ALP, businesses can structure their operations using low tax jurisdictions to help reduce their tax exposure.

It is why, ‘consumer-facing’ companies like Amazon, according to Picciotto, classes its UK consumer operation as a logistics centre fulfilling orders that is supplied by a related, but legally separate Luxembourg ‘sales’ company.

Continue Reading »


Video: No Bribes Please! We’re British

EJ Fagan

This thought-provoking documentary from Exposure looks at the British Bribery Act and overseas bribery by British companies. In particular, it focuses on extractive industry companies in Nigeria. The documentary quotes Task Force member Global Witness’s Simon Taylor, and highlights the push for a Dodd-Frank 1504-style transparency law for European companies. The video below:

Continue Reading »

Pg 33 of 185 First...1020...32333435...4050...Last
Latest Press Releases

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 ...

Era of Bank Secrecy Still Far From Over For Developing Countries

Christian Aid · February 6, 2015

G20 Finance Ministers meeting in Istanbul this weekend still have much to do if the claim ‘the era of bank secrecy is ...

From the Atlantic to the Pacific, Civil Society Organizations across Africa Welcome AU Focus on Illicit Financial Flows

Tax Justice Network Africa · January 29, 2015

ADDIS ABABA— As African leaders are meeting in  Addis Ababa to discuss growing threats from extremist groups, instability, and poverty, Heads of ...