Egypt Losses $6 Billion Per Year in Illicit Outflows; Illicit Outflows from MENA Growing Faster than Any Other Region
Reverberations from the violent protests in Tunisia are knocking on Egypt’s door. On Wednesday, the Egyptian authorities threatened “immediate” arrest for any public gatherings or protests in response to a massive march in opposition to the current leadership, President Hosni Mubarak.
“No provocative movements or protest gatherings or organizing marches or demonstrations will be allowed,” the Interior Ministry said in a statement. According to the New York Times, on Wednesday some protesters persevered as they chanted slogans at hundreds of security officers saying “You’re protecting thieves.”
It’s clear that opposition to Mubarak’s rule stems from Egyptians angered by the corruption and economic hardship that they face. The country’s official unemployment rate is over nine percent and in actuality is likely much higher as it continues to struggle with reducing poverty. Living conditions for the average Egyptian remain poor, despite the relatively high levels of economic growth the country has seen.
President Zine el-Abdine Ben Ali of Tunisia fled his country on Friday, and Prime Minister Mohammed Ghannouchi has announced that he is now in charge. Tunisia is a country known for its oppressive government rule and, according to a BBC analysis, “human rights groups say the authorities tolerate no dissent, harassing government critics and rights activists.”
Unrest among Tunisians has lead to deadly riots this month over unemployment and poor governance. According to the Associated Press at least 23 people have died, and the opposition says that figures could be much more than that.
Anti-Government protests have increased in the wake of a college-educated street vendor who burned himself to death in protest against corrupt police officers who confiscated the produce he was trying to sell.
Forthcoming Global Financial Integrity Report Finds Mexican Economy Lost Over US$460 billion between 2000 and 2008
Mexico is struggling with some serious economic and political threats to stability. Drug cartels, corruption, and lower confidence in Mexican markets are eating away at prospects for economic growth. As Mexico teeters closer to a failed state, threats to U.S. national security rise commensurately.
Mexican efforts at improving governance are falling short, and billions of dollars in illegal money are flying out of the country each year. In August of 2010, Mexican authorities fired almost 10 percent of the federal police force trying to halt the bribery and widespread corruption that has been nurturing the country’s drug trade and violence. According to a government report, 22,700 people have been killed in drug violence since President Calderon launched an anti-drug-cartel initiative in December 2006. On top of that Mexico’s wealthy tends to evade taxes that are as high as 70% for professionals and small businesses, and 40% for larger businesses. The cross-border transfer of funds is a primary means of evading taxes depriving the government of tax revenues crucial for providing public goods like domestic security. Illicit outflows also drain capital needed for various investment projects, poverty alleviation, and economic growth.
Policy makers and economists around the world are being challenged with the question “what needs to be done to ensure the soundness of the global financial system?” Scholars are introducing non-traditional methods for attacking the question. Some economists say that traditional economic theory holds, and that the best approach is to allow for free markets with minimal regulatory distortions. Others argue that we must be open to an alternate paradigm. In a letter to George Soros, financier and founder of the Institute for New Economic Thinking, a group of economists expressed “dissatisfaction with the state of economic theory, and it is obvious that new approaches are needed to address the fundamental and practical challenges of our financial, economic and social system.”
One proposed approach is to compare financial systems with natural ecosystems. A burgeoning field of econophysics is studying and developing this idea. These econophysicists observe that “extreme events can be the result of systemic instabilities.” That is to say that, like earth quakes, large shocks to the economy can occur and be the result of friction between unstable components of its foundation.
“Coffee shops” are causing trouble and increasing crime rates in small Dutch towns that border neighboring countries. To some degree it’s drug tourism, visitors coming from other countries to engage in infamous Dutch, legal pastimes. However, these “coffee shops” that sell drugs are also facilitating the expansion of organized crime and of the underground economies both in the Netherlands and in neighboring states. As the underground economy grows, the government’s ability to govern slowly erodes, and the bigger fish become harder to track and catch.
While drug tourism is a small problem compared to, for example, a corrupt African official stealing government money or huge multinationals evading hundreds of millions of dollars in taxes annually, transporting drugs into a country where their sale and/or consumption is illegal contributes to undermining state security.
According to a recent New York Times article, the Dutch city of Maastricht now has a crime rate three times that of similar-size cities in the country that are farther away from the Dutch border. Criminals from other countries are coming into the Netherlands to buy large volumes of cannabis and other drugs to then smuggle across the border and sell in their home countries. The article cites estimates of up to US$ 2 billion a year in business – “much of it tangled in organized crime and money laundering.”
A few weeks ago, the U.S. upped its economic sanctions on North Korea, trying to block the rampant illegal activities taken by, or on behalf of, the political elite of the state. Kim Jon Il manages his regime, in part, by using government resources to funnel exotic, luxury goods – jewelry, cars, yachts – to his large ring of cronies. This abuse falls directly under the broad definition of illicit financial flows (IFFs) as unrecorded funds and goods promoting illegal activity.
Serious corruption and continued illicit activity within North Korea is becoming a larger threat to global security. These new economic measures are largely in response to the sinking of the South Korean ship Cheonan which killed 46 South Korean sailors. North Korea has also expanded its nuclear and missile program and is suspected of conventional arms sales as well as the trafficking of nuclear technology.
The under secretary of the Treasury for terrorism and financial intelligence explained in a briefing, “The North Korean government also benefits from illicit activities including drug trafficking, counterfeiting U.S. currency, and selling counterfeit cigarettes. All of this activity makes up a crucial portion of the North Korean government’s revenues. These activities are carried out by a global financial network that generates this income and procures the luxury goods for the government of North Korea.”
Central Bank Governors met in Basel, Switzerland earlier this month and proposed tripling the capital reserve requirement to 7 percent. This came shortly after the Financial Stability Board and Basel Committee for Banking Supervision released a joint statement that said that the benefits of implementing stronger capital and liquidity requirements – which increase the safety and soundness of the banking system – would have net, long-term benefits for the global economy. Many banks argue that having to comply with higher capital requirements by holding onto more of their money would hamper economic development and slow the banks’ lending.
The August joint statement by the FSB and Basel Committee said that if the capital and liquidity requirements are phased in over four years, for every 1% increase in the ratio of capital to risk-weighted assets that banks are asked to keep, growth would fall by only 0.04% a year over four years. They said a 25% increase in liquid assets held by banks would have less than half of the effect of a 1% rise in capital ratios over the same period. In short, increasing the requirements and enhancing safety and soundness of the global banking system has nominal effect on economic growth.
India’s economic boom continues with an average growth rate of over eight percent between 2004 and 2009 by GFI calculations. As the money flows, however, the poor continue to stay poor. Corruption is rampant in India as it is in almost all developing countries. Both corrupt political and corporate officers manage to siphon off funds – intended to aid the people of India – off to political and private sector elite. Recent efforts in India to challenge this corrupt affront on humanity have been met with severe violence.
An article in the Washington Post reviewed recent violent crimes in India related to whistle blowing on corrupt acts and proposed legislation to protect individuals who divulge information about corrupt officials. According to the article, “eleven people have been killed or found dead in mysterious circumstances in India this year after exposing corruption in schools and public utilities, illegal mining and unauthorized water and electricity hookups, according to activist groups. Hundreds of others have been attacked, threatened or harassed for similar crusades.”
On June 28th, only six days before the election for governor of the Mexican state of Tamaulipas, favored candidate Rodolfo Torre, was shot and killed by masked gunmen. Torre was a member of the Institutional Revolutionary Party (PRI) whose main message commanded a fight against Mexico’s crippling drug activity. Drug-related violence and corruption continue to stifle efforts at economic and political stability and development in the country.
Mexico’s largest economic challenges are primarily reducing poverty and creating jobs, both of which are extremely hard to tackle with continued political violence and little trust by investors in the stability of Mexican markets.
According to the US Department of State 2010 International Narcotics Control Strategy Report, Mexico is a major source of and a transit country for drugs entering the U.S. Approximately 90 percent of the cocaine that enters the US market is trafficked through Mexico. Clearly, the drug-related violence in Mexico is not only a problem for the country’s own political stability and economic development, but also a threat to U.S. security.
Creative corporate tax strategy is nothing new. As Congress passes laws and the tax code changes, so does the strategy of how firms choose to declare their revenues and losses and financial flows overall. Many times, in efforts to avoid intended taxes on their profits, corporations will create and use a foreign-based shell company in a tax haven or secrecy jurisdiction. Doing this allows the company to siphon funds away from the eyes of the U.S. government to a company that it fully or partially owns, in a destination like the Cayman Islands, and then later to filter the funds back in, or repatriate them, to the United States through various methods that avoid taxation.
A recent article by Lucy Komisar in The American Interest demonstrated such a method ofshifting funds offshore then back to the U.S. Komisar lays out the mechanics: ICE Holding Co. L.P. was established in the Caymans in 2008. Soon after, The Clearing Corporation (TCC) – whose owners include Goldman Sachs, Citigroup, JPMorgan Chase, BofA, Merrill Lynch and Morgan Stanley – merged with this newly formed ICE Holding Co. L.P. in the Caymans. Effectively, these major trading firms became owners in an offshore clearinghouse. Clearing houses provide clearing and settlement services for firms trading financial products, and when these institutions are located offshore, they are not subject to SEC reporting and monitoring and pay little or no taxes. Adding this offshore twist to the mix changes how and under what conditions financial flows and profits from those firms may be taxed in the United States. When these banks trade derivatives – which are contracts derived from the value of some other thing – between their offshore company and their domestic firm, through a series of loopholes, they effectively either 1) bring the money back into the U.S. minimally or completely untaxed or 2) continue to use the money offshore to increase profits.
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