Tag Archives: FACTI

Three Measures to Put Corruption Enablers Out of Business

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The most common way corrupt officials hide money is by stashing it in an “offshore vehicle.” The “vehicle” will be a corporation, trust, or other legal person. It is termed “offshore” because it will be organized under the laws of another country. Stolen funds and assets purchased with them can then be listed in the name of the offshore entity.

To create an offshore vehicle, the official will turn to someone with expertise in creating offshore entities and disguising their ownership: a lawyer, accountant or other professional who knows corporate and trust law and how to use it to hide the owner’s identity. The anticorruption community has dubbed these intermediaries “enablers,” for they enable corruption by providing corrupt officials with a way to enjoy the proceeds of their corruption.   A typical scheme is shown in the diagram below.

An official in country A wanting to hide assets first hires an enabler.  Although the enabler could be a professional in country A, hiring one located in another state makes it that much harder for local authorities to uncover wrongdoing. The enabler, shown in the diagram as located in country B (most often a wealthy country), then creates the offshore vehicle.  The enabler could have created the vehicle, in this case a corporation, in the enabler’s own country.

 But again, to make it harder for investigators to trace assets, the enabler will usually form the vehicle in still another country, here labelled C. As the diagram shows, to further frustrate efforts to track money flows the anonymous corporation (or shell or letter-box company — the terminology differs in different jurisdictions) will then open a bank account and buy real estate and perhaps art works or other personal or moveable property in still a fourth country.

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FACTI Background Paper: Analysis of the Different Peer Review Mechanisms for Ensuring Compliance with Anticorruption and Financial Integrity Norms

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For two decades governments have been signing agreements where they promise to curb corruption and halt the international flow of illicit funds. A promise, however, is only as good as the method for enforcing it, and in the case of international conventions and treaties the only method available is the peer review.  Experts from neighboring or similarly situated nations review how well the government is keeping its promises, recommending ways it can do better and sometimes chastising it for breaking its promises. The theory is that threat of a bad review will put pressure on a government to live up to its commitments.

Peer reviews come in various shapes and sizes, and experience with ones has shown that some are more effective than others.  At the request of High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI), Valentina Carraro, Lecturer in International Relations at the University of Groningen, and Hortense Jongen, Assistant Professor in International Relations at the Vrije Universiteit Amsterdam, reviewed the effectiveness of the peer review mechanisms of six of the most important anticorruption and financial integrity agreements:

  • the Implementation Review Mechanism of the United Nations Convention against Corruption,
  • the Follow-Up Mechanism for the Implementation of the Inter-American Convention against Corruption (MESICIC),
  • the Organization for Economic Co-Operation and Development Working Group on Bribery (OECD Antibribery Convention),
  • the Global Forum on Transparency and Exchange of Information for Tax Purposes,
  • the Inclusive Framework on Base Erosion and Profit Shifting,
  • the Financial Action Task Force and the Financial Action Task Force-Style Regional Bodies.

Their summary of their findings and recommendations is below. and their paper here.  (Background on the FACTI and a link to its interim report recommending changes in international and domestic laws to combat corruption and stem  illicit financial flows is here.)

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FACTI Background Paper: Beneficial Ownership

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The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI) is developing reforms to tax and anticorruption laws, asset recovery rules, beneficial ownership disclosure requirements, and other international norms to staunch the outflow of illicit funds from developing nations and speed the return of corrupt monies held abroad (preliminary report here).

A critical issue the panel will address is the reforms necessary to ensure corrupt officials cannot use a corporation, trust, or other legally created entity – a “legal person” in lawyer-speak — to hide their wrongdoing.  Those investigating corruption, money laundering, tax evasion, and other financial crimes must be able to identify the real, natural person – the beneficial owner – behind a legal person if we are to curb the massive theft of assets from poor nations. In his background paper for the panel, Andres Knobel of the Tax Justice Network explains how criminals use legal persons to shield their wrongdoing and the measures required to end these abuses.  Most importantly, his condemnation of the injustice of the current laws governing legal persons serves as a powerful prod to action. His summary of the paper is below and the full text here.

Beneficial ownership: more than transparency, it’s about justice

The Panama Papers revealed the involvement of many public figures in offshore legal vehicles causing turmoil all over the world. But the real scandal wasn’t the data that was revealed. Rather, the scandal was the fact that we needed a leak to obtain data that should have been available in the first place.

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