The Task Force on Financial Integrity and Economic Development, a consortium of governments and research and advocacy organizations, focuses on achieving greater transparency in the global financial system for the benefit of developing countries.
Global Financial Integrity, a Washington, DC-based think tank and leader of the Task Force, estimates that the amount of money draining illicitly out of developing countries into western economies is approximately $850 billion to $1 trillion a year. These cross-border funds are generated as the proceeds of a) bribery and theft by government officials (about 3 percent of the global total), b) criminal activity such as drug trading and racketeering (comprising some 30 to 35 percent of the global total), and c) commercial tax evasion accomplished primarily through the mispricing of exports and imports (by far the largest component at about 60 to 65 percent of the global total).
Almost all of these shifts constitute permanent outward transfers. Only a fraction of them return to the countries of origin, and even then only as foreign direct investment. This massive transfer of wealth out of poorer nations is the most damaging economic condition undermining poverty alleviation and sustainable growth efforts in these countries, which are home to 80 percent of the world’s population.
The enormous transfers of financial resources have been facilitated for decades by a shadow financial system that has expanded globally since the beginning of the 1960s (see Appendix 2). This system was created originally to move flight capital and tax evading money across borders and has since come to be used by criminals and terrorist financiers as well.
This same shadow financial system is now at the heart of the global financial crisis. It shields from view and from accurate appraisal the depths of the global problem with subprime mortgages and other collateralized debt obligations, credit default swaps, derivatives contracts, and more. Lending has nearly collapsed, since financial institutions are unable to discern the quality of assets of those needing funds.
Lack of transparency in the global financial system affects rich and poor countries alike. This may be a first in modern history, where the same economic phenomenon impacts the haves and have nots in similar proportions.
Solutions to the current crisis highlight the need for improved regulation and greater transparency. In commentary to date, much more emphasis has been given to strengthening financial regulation, while meaningful improvements in global transparency are seldom mentioned. We believe this is precisely the wrong balance. We believe that much more can be accomplished through transparency than through regulation. While regulation simply tries to provide a tighter set of rules governing financial transactions, transparency requires that the shadow financial system itself be largely dismantled.
The Task Force on Financial Integrity and Economic Development advocates five priorities in addressing the current global financial crisis, each one focusing on transparency and extending initiatives that have already begun to be put into place:
- Curtailment of mispricing in trade imports and exports;
- Country-by-country accounting of sales, profits, and taxes paid by multinational corporations;
- Confirmation of beneficial ownership in all banking and securities accounts;
- Automatic cross-border exchange of tax information on personal and business accounts;
- Harmonization of predicate offenses under anti-money laundering laws across all Financial Action Task Force cooperating countries.
Thus, transparency means public records, multiple oversight mechanisms to review financial structures, a genuine curtailment of tax-evading activities, and trade conducted without disadvantaging weaker nations. Through transparency the shadow financial system, currently moving upwards of one trillion dollars a year of illicit money out of developing countries, will be contained. This will result in 80 percent of the world’s 6.5 billion people being able to participate in a free-market system that is not biased against them. Transparency means that economic prosperity has a chance of becoming a reality for all.
However, we are deeply concerned that what appears to be a focus on “stabilizing” the financial system could in fact mean maintaining the status quo, merely accompanied by improvements around the regulatory edges. In resolving the current financial crisis, the interests of developed and developing countries should be identical—elimination of the realities that caused the global meltdown. This requires, not adjustments, but sharp curtailment of the shadow financial system at the heart of the crisis. Resolving this issue must be the key concern in rebuilding the global free-market system.