The Senate subcommittee on investigations held their hearing today to highlight the problem of US law and money laundering activities from foreign officials. They also released a report, which can be downloaded here.
I wrote about the hearing yesterday, so I’d like to make a general comment about the report.
Reading through each of the case studies, a theme emerges. At various points in each study, certain public and private individuals and institutions identified the unlawful or suspect nature of the financial transactions taking place in front of them. Often, they acted to close a bank account, notify authorities, freeze assets, or start an investigation. However, the corrupt foreign officials continued to find ways to move their money to where they wanted it to be.
The problem was systematic. No one individual or agency can be blamed for any of these four cases occurring. Instead, they were able to establish a veneer of legitimacy using shell corporations, offshore bank accounts, and lax US financial law to turn an account being shut down by Wachovia or Bank of America or any number of large commercial banks into just a setback, instead of having their flow of money completely shut down.
The recommendations listed by the report reflect this. One suggested reform suggests strengthening PEP (Political Exposed Person) laws, which would do a better job of altering banks to who they are doing business with. Another set of reforms would close specific loopholes in anti-money laundering laws exposed by these case studies. But more importantly, the report attacks the systemic problem of shell corporations, immigration and visa issues, and ethical standards by professional organizations.
The military would call this an “effects-based” attack on the problem. Instead of simply aiming at the target (which, in this case, would mean closing individual loopholes used by these case studies to move money around, or punishing/firing the people directly involved in the case), the report also suggests focusing on the peripheral enablers and causes of the problem. While this is not exactly a novel concept, Congress’s anti-money laundering efforts have lacked a grand strategy for some time now.
Senate report: ‘Dirty money’ still entering US
The Associated Press, February 3, 2010
Switzerland Freezes Freed Duvalier Assets
The Wall Street Journal, February 4, 2010
Stolen Data Prompts Wave of Remorse: German Authorities Expect Tax Evaders to Fess Up
Spiegel, February 3, 2010
Bank Data May Unveil German Tax Evaders, Finance Official Says
The New York Times, February 3, 2010
U.S. Banks Abetting Corrupt Regimes, Probe Finds
IPS, February 3, 2010
Government to close tax avoidance loophole
The Irish Times, February 4, 2010
Why, despite the financial crisis and the sabre-rattling of the G-20 countries, do 
the ultra-rich and multinational companies still not pay tax? This extraordinary enquiry into the machinations of tax havens sends shivers down the back: nearly 12,000 billion Euros are still tucked away in these protected territories. And France is not immune from this scandal.
In a book loaded with revelations the author exposes the systems, the trusts, holding companies, redomiciliation, which enable the tax burden to be shifted onto the middle classes and small and medium enterprises, often in ways which are totally legal.
Time magazine recently published an article on how the US legal system often helps to enable international crime. Its definitely worth a read. Time’s point is very interesting: the race to the bottom among 50 states competing for businesses to call their state home has created a system where corporations can easily serve as masks for nefarious activities. Furthermore, the process is allowing domestic and foreign shell corporations to own other shell corporations creates an impossible situations for law enforcement who hope to crack down on all sorts of illicit financial flaws.
Who knew that Iran owned a prestigious building in the heart of Manhattan? I sure didn’t. It took years of investigation and hard work for law enforcement to figure that out. And that is only one case proper beneficial ownership rules could open the information floodgates for law enforcement to investigate. We might be surprised what other buildings, enterprises, and individuals are involved with people doing very bad things.
Tomorrow, the Senate Subcommittee on Investigations will hold a hearing to illustrate the problem of money laundering and how the US legal and financial systems help move dirty money in and out of the country. In addition to hearing testimony from officials in the State Department, Immigrations and Customs, and the Financial Crimes Enforcement Network, the committee will release and examine a report of four case studies where foreign political figures circumvented US anti-money laundering laws.
One such case study was revealed by Global Witness in 2009 in their report The Secret Life Of A Shopaholic, which tracked an official from Guinea ostensible using millions of dollars in corrupt dollars from his own country to buy a private jet, a mansion, and an array of luxury toys here in the United States. He pushed his money into the United States, despite the knowledge of the State Department, through a series of legal and well-known banks. However, State never denied him a visas.
Ecuador emerges as hub for international crime
Deutsche Welle, February 2, 2010
Dutch, Belgians Pressure Swiss Banks
Reuters, February 3, 2010
Switzerland To Continue German Double-Tax Pact Talks
Dow Jones Newswire, February 2, 2010
Mining is risky, creates enclaves – Zoellick
Ghana Business News, February 2, 2010
Egypt Planning Release of Transfer Pricing Guidelines
Tax Analysts, February 3, 2010
Most countries in the world are somewhere in-between a bipolar policy extreme characterized by either complete monetary dominance or complete fiscal dominance. Complete monetary dominance (equivalently zero fiscal dominance) is characterized by complete independence of the monetary authority. Under such a situation, any increase in debt (generated by the central bank selling government bonds in the open market) must be followed by increases in the current or future primary surplus (i.e., excess of the current government revenues from all taxes over current government expenditures) by the fiscal authority such that it is able to back the principal and interest payments on the newly issued debt. The other policy-mix extreme is complete fiscal dominance characterized by a monetary authority whose policies have been totally subordinated to the government. All outstanding debt is backed by the monetary authority in the form of current and future seigniorage revenues or that part of revenues accruing to the government through the creation of money (as in quantitative easing). A case of complete fiscal dominance would compel the monetary authority to fully accommodate the fiscal authority whenever a budget deficit is financed with debt. Obviously, the effectiveness of inflation targeting–arising out of the monetary authority’s pursuit of its primary policy objective—is reduced in the presence of fiscal dominance when monetary policy is subordinated to fiscal needs.
Why U.S. Law Helps Shield Global Criminality
TIME, Feb. 02, 2010
Swiss accuse Germans of bank robbery in data row
Reuters, Feb 2, 2010
German Tax Evasion Data Come From HSBC Accounts, FTD Reports
Bloomberg News, February 1, 2010
Obama Budget Has $1.9 Trillion Tax Rise for Richest, Businesses
Bloomberg News, February 1, 2010
Thais Say North Korea Arms Were Iran-Bound
The New York Times, February 1, 2010
Revenue Commissioners to get extra powers in new Finance Bill
SB Post, January 31, 2010
Obama tones down global company tax goals
Reuters, February 1, 2010
Mining firms ask for more tax incentives from govt
The Post (Zambia), February 1, 2010
UBS falls after Swiss minister comments on U.S. row
Reuters, February 1, 2010
Swiss Bank Data Offered to Germany
The Wall Street Journal, February 1, 2010
U.S. Examines Whether Blackwater Tried Bribery
The New York Times, January 31, 2010
High Court gives green light for offshore tax clawback – Times Online .
This is an important case for HM Revenue & Customs to win.
The core of the argument was that 2008 legislation that allowed the Revenue to backdate claims against an abusive form of offshore trust were illegal as an infringement of the human right to enjoy property.
The claimant took advantage of a scheme designed and marketed by Montpelier Tax Consultants (Isle of Man). The judge was told that he settled a trust in the Isle of Man, the “Robert Huitson Family Settlement”. The 2008 legislation means that Mr Huitson faces an overall tax demand in excess of £100,000 relating to the money he paid into the family trust back to 2001. As the Times notes:
Richard Murphy has just noted on his blog that the OECD is now estimating that 70% of world trade is happening between subsidiaries of the same multinational corporations. The former OECD estimate had been 60%.
This means that the profits resulting from 70% of the world’s trade isn’t being reported on a country-by-country basis – making it very easy for multinational corporations to manipulate their taxes. This is why the Task Force advocates country-by-country reporting.
The OECD is to set up a ‘task force’ to implement a coherent approach to tax and development issues, engaging developing countries and other key stakeholders including NGOs and business.
Membership is apparently to be of between 15 and 20 people.
The task force will convene in the next six weeks as an informal group representative of all stakeholders to develop clear and effective mechanisms for implementation and to avoid duplication. The informal task force will begin by mapping out existing international efforts relating to tax and development.
Crackdown on tax evasion in attempt to help poorer countries
The Guardian, January 26, 2010
Swiss Government Considers Reaction to Court Case Rejecting UBS Disclosure Agreement
Tax Analysts, January 28, 2010
Swiss Government Considers Parliamentary Vote to Permit UBS Disclosures
Tax Analysts, January 28, 2010
Bahamas Rejects US Extradition Bid for Financier
The Associated Press, January 27, 2010
WASHINGTON, DC – The UK’s proposal to tackle tax evasion in developing countries by instituting multilateral tax information exchange agreements and requiring multinational corporations to provide country-by-country reporting of profits and revenue could help prevent the loss of as much as $1 trillion from developing countries every year, says Global Financial Integrity (GFI).
“Every year crime, corruption, and tax evasion drain $1 trillion out of the developing world,” said GFI managing director Tom Cardamone, who will be in Paris for the second day of the OECD’s Global Forum on Development meeting, where the UK made its announcement today. “That’s ten times the amount of official development assistance that’s going in, or put another way, for every $1 in economic aid received by developing countries, $10 is being lost. The UK’s proposal is a critical first step in tackling this devastating problem.”
A new GFI report due out later this week, The Implied Tax Revenue Loss of Trade Mispricing, finds that developing countries are losing as much as $100 billion a year to just one form of tax evasion: trade mispricing.
It’s been widely reported today that the UK plans to crackdown on tax evaders in an effort to assist developing countries. Indeed, the Wall Street Journal reported this morning:
LONDON–The U.K. government will on Wednesday set out proposals to broaden the crackdown on tax evasion to benefit developing countries, setting a year-end deadline for a U.K.-led multilateral tax-information-sharing accord with emerging nations.
In an interview, Stephen Timms, the financial secretary to the Treasury, said that in a speech to the Organization for Economic Cooperation and Development on Wednesday, he will urge other developed nations to follow the U.K. lead. That could eventually open the way for multination tax-information accords, which would include former tax havens, developed and developing nations.
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