This post is the second in a two-part series on the report and recommendations of the UN’s High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (the FACTI Panel). In its report, published this past February, the Panel issued 35 recommendations (grouped into 14 categories) for addressing the problem of illicit financial flows. Of those 35 recommendations, 8 principally concerned tax matters, but the other 27 are directly relevant to corruption—especially though not exclusively grand corruption, which often involves cross-border flows of illicit money. I decided that it might helpfully contribute to the conversation about these topics to respond directly with a bit of commentary on each of those 27 recommendations. My last post covered the first 13, and this post will cover the remaining 14. With that prologue out of the way, let’s dive in. Continue reading
- The Interdisciplinary Corruption Research Network (ICRN) website
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- Pocket Cases
- Radio Public
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.)Continue reading
The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development, or FACTI, presents its interim report tomorrow, September 24, 8:00 – 10:30 a.m. Eastern Time, 12:00 – 14:30 UTC (register for webinar here). The report will identify reforms to the laws governing international tax cooperation, anticorruption, and money laundering needed to staunch illicit financial flows and hasten the return of stolen assets. As explained last week, the FACTI panel was created by the UN General Assembly and the Economic and Social Council as part of the effort to ensure developing states will have sufficient resources to meet the 2030 Sustainable Development Goals.
Professors J.C. Sharman, Daniel L. Nielson, and Michael G. Findley of Cambridge, Texas, and Brigham Young Universities respectively, prepared a background paper for the panel assaying the progress made in curbing money laundering and other abuses of the financial system that facilitate corruption. A summary of their paper is below; the full text is here.
Progress in Global AntiCorruption Efforts? Not So Fast
In April of 1989, Laurence Greenwald, a partner in the NYC law firm Stroock & Stroock & Lavin had reached the end of his patience. His firm had spent thousands of hours and tallied $1.2 million in legal fees seeking to identify and seize hundreds of millions of dollars in assets stolen from Haiti’s treasury by its notorious dictator Jean-Claude “Baby Doc” Duvalier. The successor Haitian government had retained Stroock firm to investigate and launch recovery proceedings. Yet after years of legal work by Stroock and other firms around the globe, in 1988 the new government stopped cooperating and refused to pay its legal bills.
In a letter to the Haitian government, Greenwald fumed, “The behavior of your ministers leaves us no alternative except to conclude that your ministers apparently want our efforts on behalf of Haiti to fail, are not concerned that Haiti will lose the substantial investment it has made in pursuing the Duvaliers, and want the Duvaliers to keep the money they stole.” Such frustrations commonly afflicted those seeking an end to corrupt practices in the international financial system during the late 20th Century. What progress has the international community made in the intervening decades?Continue reading
Global trade has quadrupled in the last 25 years, and with this growth has come the increased risk of trade-based money laundering. Criminals often use the legitimate flow of goods across borders—and the accompanying movement of funds—to relocate value from one jurisdiction to another without attracting the attention of law enforcement. As an example, imagine a criminal organization that wants to move dirty money from China to Canada, while disguising the illicit origins of that money. The organization colludes with (or sets up) an exporter in Canada and an importer in China. The exporter then contracts to ship $2 million worth of goods to China and bills the importer for the full $2 million, but, crucially, only ships goods worth $1 million. Once the bill is paid, $1 million has been transferred across borders and a paper trail makes the money seem legitimate. The process works in reverse as well: the Canadian exporter might ship $1 million worth of goods to the Chinese importer but only bill the importer $500,000. When those goods are sold on the open market, the additional $500,000 is deposited in an account in China for the benefit of the criminal organization. Besides these classic over- and under-invoicing techniques, there are other forms of trade-based money laundering, including invoicing the same shipment multiple times, shipping goods other than those invoiced, simply shipping nothing at all while issuing a fake invoice, or even more complicated schemes (see here and here for examples).
As governments have cracked down on traditional money-laundering schemes—such as cash smuggling and financial system manipulation—trade-based money laundering has become increasingly common. Indeed, the NGO Global Financial Integrity estimates that trade misinvoicing has become “the primary means for illicitly shifting funds between developing and advanced countries.” Unfortunately, trade-based money laundering is notoriously difficult to detect, in part because of the scale of global trade: it’s easy to hide millions of dollars in global trading flows worth trillions. (Catching trade-based money laundering has been likened to searching for a bad needle in a stack of needles.) Furthermore, the deceptions involved in trade-based money laundering can be quite subtle: shipping paperwork may be consistent with sales contracts and with the actual shipped goods, so the illicit value transfer will remain hidden unless investigators have a good idea of the true market value of the goods. Using hard-to-value goods, such as fashionable clothes or used cars, can make detection nearly impossible. Moreover, sophisticated criminals render these schemes even more slippery by commingling illicit and legitimate business ventures, shipping goods through third countries, routing payments through intermediaries, and taking advantage of lax customs regulations in certain jurisdictions, especially free trade zones (see here and here). In a world where few shipping containers are physically inspected (see here, here, and here), total failure to detect trade-based money laundering is “just a decimal point away.”
The international community can and should be doing more to combat trade-based money laundering, starting with the following steps:
Illicit financial flows have dreadful consequences across the world, not least because they facilitate kleptocracy and other forms of grand corruption. A crucial step toward addressing this issue is identifying those jurisdictions that are the most significant contributors to the problem, and offering specific, concrete recommendations for how they can improve. The Tax Justice Network aims to help do this through its Financial Secrecy Index (FSI), the latest edition of which was published this last January. The 2018 FSI includes a ranking of 112 countries and territories according to their global impact of their financial secrecy, measured by balancing the level of secrecy and the country’s weight in the international financial sector.
The FSI differs from standard “tax haven” lists in that it does not purport to single out a handful of jurisdictions for special opprobrium. Such lists tend to imply that only a few jurisdictions, often small countries, are responsible for all of the world’s illicit financial flows. The 2018 FSI, by contrast, covers 112 jurisdictions, and the next assessment will analyze 130. (The objective is to eventually cover all countries and territories.) Moreover, the FSI ranks countries not solely on the degree of financial secrecy that they allow, but rather on a combination of the degree of financial secrecy (the “Secrecy Score”) and the actual use of a jurisdiction’s financial services (the “Global Scale Weight”), in order to rank countries according to their overall contribution to the problem of illicit financial flows. In other words, the FSI ranking is not necessarily ranking the most secretive countries at the top; rather, the FSI identifies the biggest “problem countries”—those that have financial systems that are both secretive (even if not the most secretive) and that are large and used frequently by non-residents. According to this measure, the ten jurisdictions that make the largest contribution to global financial secrecy are (in order starting with the worst contributors): Switzerland, the United States, the Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, the United Arab Emirates, and Guernsey. These are the jurisdictions that bear the greatest share of responsibility for enabling global illicit financial flows, including those stemming from corruption and tax evasion, and these are therefore the jurisdictions that most urgently need to become more transparent if we are to see real progress in the fight against illicit global financial flows. While all jurisdictions should act to become transparency, starting with these ten jurisdictions would have the most significant impact in the short term.
Interestingly, and perhaps unsurprisingly for those who follow these issues, a “heat map” of the worst offenders on the FSI looks like the inverse of the more familiar heat map showing the countries perceived to be most corrupt, according to Transparency International’s Corruption Perception Index (CPI). One way to interpret this is the following: public officials and their private-sector cronies in the world’s most corrupt countries according to the CPI (such as Yemen, Sudan, Afghanistan, Venezuela, Libya, etc.) very likely take advantage of financial secrecy to hide the proceeds of corruptions in the countries that most contribute to financial secrecy according to the FSI. Put differently, the worst CPI countries depend on jurisdictions like the FSI’s top ten in order to launder the proceeds of illicit activities.
And what should these (and other) jurisdictions do? On this question, it is important to emphasize that the FSI is not just a ranking system. The FSI report also includes in-depth discussions of all relevant loopholes and sources of information related to financial secrecy in each jurisdiction. This enables researchers, government authorities, activists, and financial institutions to obtain relevant information to be used for risk assessment, policy decisions, or to advocate for specific transparency measures. (All these details are available online, for free and in open data format.) And while every country is different, most jurisdictions would do well to implement what the Tax Justice Network refers to as the “ABC of Fiscal Transparency”:
- Automatic exchange of bank account information with all other countries, especially developing countries, pursuant to the OECD’s Common Reporting Standard;
- Beneficial ownership registration in a central public register for companies, partnerships, trusts and foundations (for more specific information, see Tax Justice Network publications here, here, here, and here, as well as this recent paper I published with the Inter-American Development Bank) ; and
- Country-by-Country reporting, where all multinational companies publish this information online.
Thanks to high profile reports by Global Integrity, Eurodad, the OECD, and the African High Level Panel spotlighting losses developing countries suffer from the manipulation of tax laws and other forms of illicit financial flows, questions about “tax fraud,” “tax evasion,” “tax avoidance,” and “tax abuse” are now on the development policy agenda. These terms and their equivalents in other languages are, with the exception of “tax fraud,” ambiguous — sometimes used to mean actions that are unlawful and sometimes used to refer to legal ones. Before the debate on how to ensure developing countries receive the tax revenues they are due goes any farther, it may be helpful to explain how the ambiguity arises. Continue reading