A New BOSS in Town: Changes to BVI Beneficial Owner Information Regime

As the British Virgin Islands (BVI) continue to recover from the devastation of Hurricane Irma, attention is properly focused on humanitarian relief and the repair of the BVI’s physical infrastructure. But there have also been important recent developments associated with the BVI’s legal infrastructure—changes designed to address the BVI’s reputation as one of the world’s premier tax havens, and as a popular destination for money laundered by corrupt public officials, organized crime networks, and others.

Thanks in part by a campaign by former UK Prime Minister David Cameron to remove the “cloak of secrecy” from Britain’s offshore territories, and in part to the embarrassing publication of the Panama Papers, the BVI recently enacted a new Beneficial Ownership Secure Search System (BOSS) Act, which went into effect last June.

The BOSS Act is the latest in a series of steps designed to clean up the BVI’s image. Previous moves have included signing an intergovernmental agreement with the United States on Foreign Account Tax Compliance and becoming a signatory to the OECD’s Common Reporting Standard for the automatic exchange of tax and financial information. In 2016, the BVI changed the law to make it mandatory – for the first time – for companies to report their lists of directors to the government. Overall, it’s not yet clear whether these moves have had any effect on the island’s offshore economy. Indeed, the BVI’s interest in preserving its status as a center of the world’s offshore economy has prevented more drastic steps and weakened those that have been taken. (The 2016 law changes, for instance, did not require the reporting of ownership stakes.) Half-measures are unsurprising given the centrality of secrecy to the BVI’s economic success – after all, you can’t expect turkeys to vote for Thanksgiving. While the BVI points out in its defense that its level of transparency is no worse than that of other UK offshore territories, and is in fact better than that of some US states, the fact remains that most of the BVI’s legal reforms have weighed business interests in secrecy more heavily than public interests in transparency.

The BOSS Act unfortunately seems to suffer from the same problem, though it is a step in the right direction. Continue reading

Guest Post: The Link Between Perceived Corruption and Sovereign Risk Ratings

Today’s guest post is from Roberto de Michele and Francesco De Simone, of the Inter-American Development Bank and Ugo Panizza of the Graduate Institute of International and Development Studies in Geneva.

A year ago, at a seminar at the Inter-American Development Bank (IDB), a representative from one of the major private credit rating agencies got everyone’s attention with a single slide. That slide showed a strong positive correlation between corruption perception indicators and sovereign risk ratings. The simple yet compelling message: corruption, or at least its perception, negatively affects a country’s perceived credit risk, in turn may raise the country’s borrowing cost.

What are we to make of this correlation? Does it indeed indicate a causal connection between corruption and high borrowing costs? If so, what are the implications for policymakers? Although there was some discussion of this issue in the academic literature a decade ago, the subject had not received much attention. Intrigued by this simple correlation, the IDB Transparency Fund sponsored a study of this topic, for which one of us (Ugo Panizza) served as principal investigator. That study, published last October, is available in English and Spanish on the IDB website. The main findings were as follows: Continue reading

Enlisting the Private Sector in the Fight Against Corruption

Governments need all the help they can get in the war against corruption.  The enemy is resourceful, well-financed, and will engage in tactics legal and illegal to frustrate an investigation, defeat a prosecution, or undermine prevention policies.  When looking for allies, though, many governments have until recently ignored an obvious source of recruits: the corporations they license to do business.  Doing business in a country is not a right but a privilege, one commonly conditioned on a corporation’s agreement to register, hold an annual meeting, and publish a yearly financial report.  There is no reason, however, why the privilege of conducting business should not also be conditioned on the corporation’s willingness to join the fight against corruption.

As the chart below shows, more and more governments now realize the advantages of enlisting the corporate sector in the fight against corruption.  By my count (additions/corrections welcome) today 21 countries plus the Canadian province of Quebec require corporations to help in someway in the fight against corruption.  The movement to enlist the private sector is picking up steam.  Of the 22 jurisdictions shown below, 15, or almost three-quarters, have enacted legislation in 2016 and 2017.  Argentina is the most recent additon, where a law was approved November 9, and if press reports are accurate Vietnam is about to become the 23rd.

Country Date Country Date Country Date
Argentina 2017 Colombia 2016 Germany 2010
France 2017 Czech Rep 2016 U.K. 2010
Malaysia 2017 South Korea 2016 Chile 2009
Mexico 2017 Spain 2015 Switzerland 2005
Peru 2017 Brazil 2014 Tanzania 2005
Thailand 2017 Russia 2013 U.S. 2004
Ukraine 2017 Quebec 2012 Italy 2001
    South Africa 2012    

The approaches vary.  In a later post I will discuss the differences and also flag some of the ways these laws can be abused.   In the meantime, I again solicit readers help in ensuring the chart is accurate.

 

Tracking Corruption and Conflicts of Interest in the Trump Administration–November 2017 Update

Last May, we launched our project to track credible allegations that President Trump, as well as his family members and close associates, are seeking to use the presidency to advance their personal financial interests.Just as President Trump’s son Eric will be providing President Trump with “quarterly” updates on the Trump Organization’s business affairs, we will do our best to provide readers with regular updates on credible allegations of presidential profiteering. Our November update is now available here. A few highlights from the most recent update:

 

  • The Republican tax plan, strongly supported by President Trump, would result in enormous benefits to President Trump, his businesses, and his family. While it is difficult to assess the degree to which President Trump’s personal financial interests–as opposed to a general ideological/policy preference for cutting taxes on the super-rich–may have influenced the tax plan, the concern (which, as Jacob recently pointed out, is exacerbated by President Trump’s lack of transparency regarding his past tax returns) is a real one.
  • A relatively minor but nonetheless troubling report involves the Chinese government’s attempts to get the United States to return billionaire Guo Wengui, who has applied for asylum in the U.S. After Trump supporter Steve Wynn, who relies on Chinese government permits to operate his casinos in Macau, delivered (and apparently endorsed) a message from the Chinese government asking for Guo’s return, Trump initially agreed that he should be sent back, but changed his mind after aides informed him that Guo was a member of Trump’s Mar-a-Lago resort. In this case, improper financial interests seem to have played a role in both sides of the debate within the U.S. government on Guo’s case.
  • The recent “Paradise Papers” revelations, reported by the International Consortium of Investigative journalists, have suggested that Commerce Secretary Wilbur Ross’s conflict of interest may go beyond what had already been reported: The leaks from the Appleby law firm indicate that Secretary Ross maintained an interest in a shipping company that received significant revenue from a Russian company co-owned by Vladimir Putin’s son-in-law.
  • As has been widely-reported, Puerto Rico initially granted a substantial no-bid contract for the repair of the island’s power grid to a tiny firm located in the hometown of Interior Secretary Ryan Zinke, despite the firm’s lack of capacity and experience. While Secretary Zinke insists that he had nothing to do with the contract, the governor of Puerto Rico has called for cancellation of the contract, and several federal agencies are investigating.
  • President Trump is breaking with past practice by personally interviewing candidates for U.S. Attorney positions in New York and Washington, D.C., which has raised concerns given that these offices would have jurisdiction over substantial portions of the Trump Organization.

We will continue to monitor and report on allegations that Trump, or his family and close associates, are seeking to profit from the presidency. As we are always careful to note, while we try to sift through the media reports to include only those allegations that appear credible, we acknowledge that many of the allegations discussed are speculative and/or contested. We also do not attempt a full analysis of the laws and regulations that may or may not have been broken if the allegations are true. For an overview of some of the relevant federal laws and regulations that might apply to some of the alleged problematic conduct, see here.

Fixing India’s Anti-Money Laundering Regime

In the past year, India has been among the most zealous countries in the world in stepping up the fight against money laundering and related economic and security issues. The effort that probably got the most attention was last year’s surprise “demonetization” policy (discussed by Harmann in last week’s post), which aimed to remove around 85% of the total currency in circulation. But to assess India’s overall anti-money laundering (AML) regime, it’s more important to focus on the basic legal framework in place.

The most important legal instrument in India’s AML regime is the Prevention of Money Laundering Act, which was enacted in 2002, entered into force in 2005, and has been substantially amended since then. The Act defines a set of money laundering offenses, enforced by the Enforcement Directorate (India’s principal AML agency), and also imposes a range of reporting requirements on various institutions. Furthermore, the law gives the Enforcement Directorate the authority to freeze “tainted assets” (those suspected of being the proceeds of listed predicate offenses), and to ultimately seize those assets following the conviction of the defendant for the underlying offense.

How effective has India been in its stepped-up fight against money laundering? On the one hand, over the past year (since the demonetization policy was announced), banks logged an unprecedented increase of 706% in the number of suspicious transaction reports (STRs) filed, and reports from last July indicated that the total value of the assets frozen under the Prevention of Money Laundering Act in the preceding 15 months may have exceeded the cumulative total of all assets frozen in the prior decade-plus of the law’s operation. And the government further reported that its crackdown on shell companies had discovered around $1.1 billion of unreported assets.

Yet these encouraging numbers mask a number of serious problems with India’s AML system, problems that can and should be addressed in order to build on the momentum built up over the past year. Here let me highlight two areas where greater reform is needed: Continue reading

Compensating Victims of Corruption

That corruption is not a victimless crime is no longer in doubt.  The once fashionable argument that corruption advances human welfare by “greasing the wheels” of clunky bureaucracies has been entombed thanks to a plethora of academic studies, media reports, and first-person accounts showing the undeniable, often enormous, harm corruption wreaks on individuals and society as a whole.  As UN Secretary General António Guterres told this week’s seventh meeting of the parties to the UN Convention Against Corruption, that harm ranges from denying citizens access to such basic rights as “health services, schools and economic opportunities” to undermining the very foundation of the state through enabling “a small elite in positions of power to prosper” thus destroying citizens’ “faith in good governance.”

While the damage corruption does is now clear, how to recompense the losses it causes is anything but.  The definitive legal text, the UN Convention Against Corruption, offers little help.  To be sure, article 35 requires state parties to give those “who have suffered damage as a result of an act of corruption … the right to initiate legal proceedings against those responsible … to obtain compensation and article 57 directs governments that have recovered the proceeds of corrupt acts to give priority to “compensating the victims of the crime.” Nowhere, however, does the convention offers any guidance on how to determine who is a victim of corruption or how their damages should be determined.  As a result, both international and domestic law on victim compensation will have to develop through court decisions, learned commentary, and legislation.

An important step in developing this law is the paper the UNCAC Coalition, a network of some 350 civil society groups from over 100 countries, submitted to this week’s meeting of UNCAC state parties.  “Recovery of Damages and Compensation for Victims of Corruption” draws on international law and emerging law and practice in both developed and developing states to guide the creation of laws governing corruption victim compensation.   The Coalition urges governments to: Continue reading

US Anticorruption Policy in a Trump Administration Revisited: An Evaluation of Last Year’s Doom-and-Gloom Predictions

Almost exactly one year ago, the day after the U.S. presidential election, I published a deeply pessimistic post about the likely future of U.S. anticorruption policy under a Trump presidency. As I acknowledged at the time, “the consequences of a Trump presidency are potentially so dire for such a broad range of issues–from health care to climate change to national security to immigration to the preservation of the fundamental ideals of the United States as an open and tolerant constitutional democracy–that even thinking about the implications of a Trump presidency for something as narrow and specific as anticorruption policy seems almost comically trivial.” That statement is, alas, still true. But what about the impact on anticorruption specifically? In my post last year, I made a bunch of predictions about the likely impact of a Trump presidency on corruption, anticorruption, and related issues. What did I get right and where did I go wrong?

This may seem a bit self-indulgent, but I think it’s often useful to go back and assess one’s own forecasts, not only in the interests of accountability and self-criticism, but also because examining where we got things right and, more importantly, where we went wrong can help us do a better job in the future. Of course, one difficulty in assessing my own predictions is that many of them concerned longer-term effects that we can’t really assess after one year (really 9+ months). And in some cases the predictions concern things that it’s hard to assess objectively. But it’s still a useful exercise. So, here goes: Continue reading