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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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Podcast: Taxcast October Episode

EJ Fagan

In October’s Taxcast episode: Helsinki declares itself a tax haven-free zone, Starbucks joins the tax avoidance Roll of Dishonour and we follow the money: asset recovery, dictators and the selling of secrecy. You can view more Taxcast episodes here.

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Green Climate Fund: with so much at stake we can’t afford foul play

Alice Harrison

Cross-posted from Transparency International’s Space for Transparency blog. The original version of this article was written last week. Since then, South Korea was chosen to host the planned US$100 billion per year Green Climate Fund. 

Urgency and precaution are not easily reconcilable. The Green Climate Fund – which met last week for the second time – will have to negotiate that balance. As climate negotiations chug along laboriously, this global fund will ensure that much-needed investment is not stalled as a result. By 2020 it could be holding the purse strings for up to US$100 billion in climate money every year.

But not before it is decided how the fund will operate. Events in the lead-up to last week’s meeting in Songdo, South Korea signal an inauspicious start to that process.

Currently the green fund consists solely of its executive board, inaugurated last month. An illustrious group of Finance Ministers, Environment Ministers, diplomats and bankers, board members have been tasked with crafting their fund from scratch – people, policies and systems to allocate and monitor spending. Until the fund becomes operational in 2014, board members will be quite literally writing their own rules.

It is hard to overstate the responsibility entailed. We are entrusting this global fund with spending scarce public resources as efficiently as they can, and leveraging the private capital required to meet the task of climate action. Ultimately these decisions will impact the success of efforts to reduce carbon emissions, raise us above ground level, shield us from storms and tidal surges, and channel water through drought.

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Trade Mispricing: An Exercise in Vastness

Ann Hollingshead

flickr / ulricjoh

According to Global Financial Integrity (GFI), in 2009, importers and exporters sent $569 billion out of developing countries through trade mispricing. Trade mispricing, in case you’re not already aware, is a process by which individuals can transfer money abroad without detection. By over-invoicing imports and under-invoicing exports, individuals can evade taxes and avert capital controls through routine trade.

Here’s how it works: Suppose a Mexican furniture manufacturer, who wants to send money abroad illegally, imports $100 worth of timber from the United States.  Instead of paying $100, the furniture company reports and pays $200.  The company’s U.S. trading partner takes $100 for the furniture, reports the $100 on its own invoice, and shifts the extra $100 to a secret Delaware bank account (and maybe keeps an extra few dollars as a transaction fee).  Now the furniture company has shifted the $100 to the United States without Mexico’s knowledge.

But the $100 discrepancy is also reflected in the difference between what the United States says it exported to Mexico and what Mexico reports it imported from the United States. So GFI calculates these figures by comparing world trade data. Trade data is bilateral, which means that we can compare what County A says it exported to the world against what the world says it imported from Country A. Of course, these statistics are by no means perfect so some of the observed differences are just the result of statistical errors. But some of the difference is not statistical noise; it’s illicit transfers of wealth. And that’s what GFI tries to measure.

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Book Launch: Global Corruption: Money, Power and Ethics in the Modern World

EJ Fagan

Event: Global Corruption: Money, Power and Ethics in the Modern World
A Panel Discussion on Corruption, Development and Democracy

Monday, October 29th, 2012, 10:00am – 11:30am
Carnegie Endowment for International Peace
Choate Room
1779 Massachusetts Ave. NW
Washington, DC 20036


Laurence Cockcroft, author
Michael Hershman, President & CEO of The Fairfax Group, former federal fraud and financial crime investigator
Claudia Dumas, President & CEO of Transparency International USA
Raymond Baker, Director of Global Financial Integrity


Send RSVPs to Patrick Benson at pbenson@gfintegrity.org

Corruption is a key factor in sustaining appallingly high levels of poverty in many developing countries, particularly in relation to the provision of basic services such as education and health. It is also a major reason why increases in the growth rate in Africa and South Asia have failed to benefit large segments of the population. Corruption drives the over-exploitation of natural resources, capturing their value for a small elite – whether timber from Indonesia or coltan from the Congo. In the developed world, corrupt party funding undermines political systems and lays policy open to heavy financial lobbying.

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The Slow But Meaningful Evolution of the G20 on Illicit Financial Flows

Arya Andersen

flickr / Downing Street

The G20, as anyone who is familiar with the slow moving tendencies of international organizations will attest to, has taken quite awhile to get behind the idea of cracking down on tax havens and fighting illicit financial flows from both developed and developing countries. The G20 initially recognized these issues as a problem for the internet national community to do something them in early 2009, but it took a slow evolution of statements over the three years for that recognition to be fully fleshed out into concrete actions and orders.

Illicit financial flows are a global systemic problem, and can only ultimately be significantly curtailed with a global systemic solution. That is why the G20′s progress on the subject is so interesting.

I track statements by the G20 on offshore transparency and tax issues, corruption, illicit financial flows, and their solutions.  Below is the evolution of the bureaucratic discourse.

G20 London Summit, Final Declaration, April 2009

“To take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information.”

G20 Pittsburgh Summit, Final Declaration, September 2009

“To take new steps to increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows. Steps to reduce the development gap can be a potent driver of global growth.”

Here, we see recognition that secrecy jurisdictions and banking secrecy are a problem, and we get a pledge to take action against tax havens. Then, at the next three summits, we get:

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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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