But frames turn out to be fundamentally important to the problems’ solutions. As Albert Einstein once said, “If I had an hour to solve a problem and my life depended on the solution, I would spend the first fifty-five minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.”

As a report recently released by Christian Aid shows, this is the case with world hunger. One of every eight people in the world—that’s nearly 868 million people—are hungry. This number has come down a bit over the last few years, down from a high of 1.02 billion in 2009 and 925 million in 2010. Of course, we’re still a long way off from meeting the United Nation’s 2001 Millennium Development Goal of eradicating hunger. Specifically, the organization hoped—and still hopes—to halve, between 1990 and 2015, the number of people who suffer from hunger.

Depending on how you frame the question of world hunger you might get a different answer. For example, you might say flood and droughts ruin crops and lead to shortages of food in many parts of the world and that, with climate change, these problems will get worse. Well then, I might reply that we need to address carbon emissions (in the long-term) and improve barriers to trade in food commodities between regions in the short. Suppose, on the other hand, you told me that subsidies for biofuels have encouraged the proliferation of large-scale cash-crop plantations, pushing small-scale farmers off the land, and pushed up the prices of important dietary grains. Well then I might respond we need to rethink our subsidy schemes. We could also address investments in farmers, conflicts, corruption, and women’s cooperatives, and food aid. Each frame would have a different solution.

Indeed all of these issues are relevant in world hunger. But so–as the Christian Aid report I referred to earlier shows–is another one. Provided you frame the question correctly. Here it is. Another way to frame the problem is that developing countries do not have adequate resources to combat hunger. This frame begs for a different solution. It compels us to as, “So how could developing countries ensure they do have sufficient resources?” One answer, as Christian Aid points out, is tax revenue.

Christian Aid estimates that businesses that exploit opaque trade and financial systems “deprive poor countries where they trade of some $160 billion in tax revenue every year—far more than those countries receive in aid.” Compare this figure to $50.2 billion, the yearly (additional) total the UN’s Food and Agriculture Organization (FAO) recently as the cost of creating a “world free from hunger” by 2025.

In addition to examining this problem on a global scale, the report also looks at the impact of tax dodging on three countries in the developing world: India, Ghana and El Salvador. These countries are prime illustrations of the report’s message because they have “economies strong enough to put them in the middle income bracket, but where malnutrition remains rife.” In a survey of more than 1,500 multinationals, Christian Aid finds that “those with subsidiaries and/or shareholders in tax havens paid on average 28.9 percent less tax per unit of profit than those without such links. In India the figure rose to 30.3 percent.”

Of course, every country experiences malnutrition in a unique way and this solution is by no means “one size fits all.” A full 19 million of the world’s hungry live in developed countries; many others live in countries with corruption so rampant that an increase in tax revenue would not necessarily improve the experience of the poorest citizens. Like any other proposed solution to the problem of hunger, this one does not exist in a vacuum. The other frames are relevant as well.

Nonetheless, the Christian Aid report provides us with a new perspective on one of the world’s most endemic, and critical, problems. Which is exactly what we need, for without the right perspective, we will not find the right solution.

Source: Tax Havens of the Wealthy and Powerful

Kofi Annan’s Africa Progress Panel released a report this week called Equity in Extractives. In an International Herald Tribune op-ed, Annan wrote:

With Africa’s economies riding the crest of the global commodities wave, there is an unprecedented opportunity to convert the region’s vast resource wealth into investments that could lift millions out of poverty, create jobs, and bring hope to future generations.

Seizing that opportunity will require strengthened governance backed by international cooperation to stem the hemorrhage of revenues associated with tax evasion, secret deals and illicit financial transfers.

Economist Jeffrey Sachs, a longtime friend of transparency who keynoted the Task Force’s 2011 conference in Paris, wrote in Huffington Post:

In recent weeks, citizens in many countries suffering from government budget cutbacks have been learning more and more about one of the biggest and most dangerous scams in the world: the global web of tax havens that U.S. and European politicians and bankers have nurtured over the years. The only real purpose of these havens is to facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities inflicted by international companies.

Now, a new analysis by a group of international organizations throws this system into sharp relief. Figures from the Enough Food for Everyone IF campaign – supported by almost 200 organizations including Actionaid, Christian Aid, Oxfam, and Save the Children — are revealing more about the extent of these havens. There are trillions of dollars tied up in the tax havens, with massive worldwide evasion of tax payments that undermines the budgets of rich and poor countries alike. The IF campaign makes a basic point: poverty can be fought, and austerity overcome, IF taxes are properly paid by those who owe them. Ending the tax havens and their financial secrecy is therefore urgent.

And finally, Semkae Kilonzo (@Semkae) of Policy Forum in Tanzania, sent us via Twitter (follow us @Task_Force), the following resolution from the Tanzanian Parliament:

1. That, The Government shall investigate extensively, usinginternal and external expertise on the illicit money transfer from Tanzania and Tanzanians hiding money in tax havensand other offshore jurisdiction and submit its report at the 11th session of parliament. If the report will not suffice, parliamentwill form its own parliamentary probe team.

2. That, all Tanzanians with foreign bank accounts must explainhow they obtained the money and Prevention of CorruptionBureau (PCCB) shall take actions against all owning wealthnot in line with their legal incomes.

3. That, the government communicate with the World Bank’sAssets Recovery Unit so that they help to trace and bringback hidden cash and assets of Tanzanians in Switzerlandand other offshore jurisdictions as these assets are either products of tax evasion, tax avoidance or corruption.

4. That, the government explore the feasibility of introducing afinancial transaction tax in order to track the flow of money in and outside the country.

There is a huge volume of drug trade that flows between these two countries—Mexico is a major supplier of the United States’ consumption of heroin and the largest foreign supplier of methamphetamine and marijuana. Since the drugs flow north, the money has to flow south. But since the government of Mexico has become particularly relentless on both cutting down drug trafficking and oversight of money laundering, getting money from the United States to Mexico has become more difficult. For example, former Mexican President Felipe Calderon, who called illicit money “vital for criminals,” crafted a variety of money-laundering laws to help stem the flow of dirty money. Some of his reforms bar cash purchases of real estate and limit cash purchases of items like cars and planes with a price tag that exceeds $10,000.

And given the United States’ intense oversight of its banks, and its keen eye for dirty money, depositing those sums in U.S. banks is more difficult still.

As they say, necessity is the mother of invention, so those criminals have invented some new ways of moving money.

Traditionally, drug traffickers move cash carried in suitcases. Federal authorities estimate that between $18 and $39 billion in illicit cash is laundered across the southwestern border between the U.S. and Mexico every year. And as we step up our scrutiny of banks, expect criminals to increasingly resort to physically moving money.

In other more “traditional” systems that don’t involve cash movements, Mexican criminals launder money through trade-based mechanisms—either by trade mispricing or legitimate exports. In the first method, a Mexican front company can ship, say, computers to the United States and, by over-invoicing the goods, can include in the invoice enough for both the merchandise and the extra laundered funds. The buyer on the other side, whose holding the illicit cash, remits the payment for the computers and sends the funds, which are in the banking system as a formal, legal transaction, to the Mexican company’s account. This method skirts the warning flags provided by most laws and regulations.

In a new method, criminals in the United States buy actual goods with dollars, export them to Mexico and then sell them for pesos. Often this method requires a complicit legitimate business, which earns a cut of the proceeds. This accomplishes two goals at once: criminals are able to transfer illicit funds between boarders and convert dollars to pesos without raising any of the normal red flags. In a recent example, the owners of a U.S. toy company, called Woody’s Toys Inc., were recently sentenced for depositing about $3 million of drug proceeds into their bank accounts. They made small deposits to avoid scrutiny and then purchased merchandise from “legitimate” companies in Mexico, funneling the money back to the drug traffickers.

Tom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles called the method a “growing phenomenon.” Increasingly, he says, drug traffickers “are using legitimate businesses to launder money as opposed to literally smuggling giant bricks of cash back to Mexico.”

Other criminals have found the money laundering restrictions in both the United States and Mexico are too stringent (by law  Mexicans with bank accounts can deposit up to $4,000 in cash per month, but Mexicans without accounts can exchange only $300 a day up to $1,500 a month). Coming up against this wall, those Mexicans have devised another work around. First they smuggle the drug proceeds into Mexico (as cash). Then they bring the money back across the U.S. border as a financial-services business, deposit the cash into U.S. banks, and wire the money wherever they’d like.

Invention, indeed.

A few weeks ago, a few House Republicans introduced H.R. 1613, the innocuous sounding “Outer Continental Shelf Transboundary Hydrocarbons Agreement Act”. A little over four pages long, H.R. 1613 is primarily designed to provide Congressional approval to a US-Mexico Transboundary Hydrocarbons Agreement (TBA) signed by both governments over a year ago.

Oxfam has no problem with the approval of the US-Mexico TBA which simply lays out the rules for how hydrocarbons reserves in the Gulf of Mexico that straddle our maritime borders would be developed.

We do have a big problem with an irrelevant provision inserted into the bill designed to weaken the payment disclosure requirements in the “Cardin-Lugar” provision or Section 1504 of the Dodd-Frank Act. That law provides for the annual disclosure of payments made by oil, gas and mining companies to host governments around the world – final rules were issued by the SEC in August last year. H.R. 1613 would exempt any covered company from reporting payments from in accordance with any transboundary hydrocarbons agreementanywhere in the world.

The American Petroleum Institute (API) – backed by companies such as Exxon, Shell, Chevron and BP – is nowsuing the SEC in federal court and are now hoping that Congressional allies can help weaken this landmark law.Oxfam is intervening to defend the rule. Meanwhile, the European Union has reached agreement to put in place similar reporting requirements.

I spoke this week with Neil Brown who was, until very recently, a top Senate Republican aide working on energy issues for Senator Lugar, who was the ranking member of the Senate Foreign Relations Committee. He told me that “this exemption is unnecessary and inclusion would only forestall quick approval of this important agreement.”

He should know. As both the co-author of a Senate Foreign Relations Committee minority staff report on “Oil, Mexico and the Transboundary Agreement” as well as someone intimately familiar with the “Cardin-Lugar” provision in  Dodd-Frank, Mr. Brown would know if the reporting requirements in Dodd-Frank Section 1504 present any issue in approving the US-Mexico TBA. The short answer – they don’t. The minority staff report envisions reporting under Section 1504 and says that under Section 1504 covered companies “would already have to disclose payments” to the SEC if “they invest in Mexico”.

The US-Mexico TBA requires that certain information be kept confidential unless disclosure is required by law.The TBA text demonstrates that the US and Mexico have already made the correct policy judgment that the specific confidentiality provisions of the TBA should be subordinated to each country’s commitment to openness and subject to each country’s disclosure requirements. Nothing in the TBA would require the exemption provided by HR. 1613.

Tellingly, the Senate Energy Committee has introduced a bi-partisan bill, S. 812, sponsored by Senators Ron Wyden (D-OR) and Lisa Murkowski (R-AK) to approve the US-Mexico TBA and it contains no Section 1504 exemption provision. If Congress is truly interested in approving this agreement and providing the “rules of the road” for joint development of oil and gas reserves straddling the US-Mexico maritime boundary then it should adopt the clean Senate bill without the reporting exemption.

Former Senator Jeff Bingaman, past Senate Energy Committee chairman, told Reuters that the exemption proposed by the House “complicates things significantly” for passage of the bill. Referring to the Section 1504 exemption language, he said “They’ve added in some things that are going to make it difficult to pass in that form”.

The Mexican Congress ratified the TBA a year ago and the Obama administration – and the oil industry – would like to see it approved. The Obama administration, though, has made clear that implementation of Section 1504 is a priority.

In a letter to Oxfam, Sec. of State Kerry said “The Department of State and Administration strongly support transparency in the extractives sectors, as outlined in Section 1504 of Dodd-Frank, and the new rule issued by the SEC. The new SEC standard directly advances our foreign policy interest in increasing transparency and reducing corruption, particularly in the oil, gas and mineral sectors.”

My guess is that the oil industry lobby wants this TBA approved far more than it wants this unnecessary Section 1504 exemption. Surya Gunasekara, a tax and trade counsel with the American Petroleum Institute told me that there is “no doubt” that API cares more about Gulf of Mexico access than the proposed Section 1504 exemption.

“Imagine an African continent, where leaders use mineral wealth wisely to fund better health, education, energy, and infrastructure too. Africa, our continent has oil, gas, platinum, diamonds, cobalt, copper, and more. If we use these resources wisely, they will improve the lives of millions of Africans. If we don’t, they can fuel corruption, conflict, and social instability. Transparency and accountability are key. The US and Europe are demanding new transparency from companies who work in Africa. We must also take responsibility. Our governments may have become more open. Big businesses may have improved their ways of working.

But we — Africans –must do so much more. This issue is too big for the politicians and big business to manage without the involvement of civil society. I’m Kofi Annan, former Secretary-General of the United Nations and Chair of the Africa Progress Panel. Work with me to demand more transparency from Africa’s national leaders and foreign investors. What are they doing? How much is it worth? And how will the money be spent? Because this is our continent, our minerals, our children’s and grandchildren’s future.”

flickr / Images of Money

Last year Itai Grinberg, Associate Professor at Georgetown University Law Center in the U.S., published an important paper entitled Beyond FATCA: An Evolutionary Moment for the International Tax System, providing a comprehensive overview of the emerging international architecture of financial transparency, with different models of information exchange (see below) jostling for supremacy.

It is a most useful paper which remains relevant for analysing the rapid changes that are now underway.

Now Grinberg has a new draft working paper available entitled Emerging Countries and the Taxation of Offshore Accounts, which provides further illumination. There’s far too much in here for us to summarise comprehensively, so we’ll just pick out a few points that catch our attention. The abstract begins:

“A new international regime in which financial institutions function as cross- border tax intermediaries is emerging. The contours of that regime will be established during a narrow window of opportunity over the span of the next few years. The resulting regime will have especially important consequences for emerging countries. A uniform, multilateral automatic information exchange system would improve both these jurisdictions’ ability to tax the offshore accounts of their residents and their capacity to tax certain domestic-source income from capital.”

Clearly, these are all issues that are dear to our hearts.

The paper skips through a recent history of information exchange, with a look at the four models. The first is the OECD’s original, only slightly better than useless, “on request” information exchange model. Next comes the gold standard principle, automatic information exchange, which is currently in the ascendant partly due to the political muscle of the United States and the European Union. The U.S. and the EU each have major systems for automatic information exchange systems up and running and in the process of expansion and improvement.

The core U.S. process is FATCA, which recruits financial institutions to find out the relevant information about beneficial owners. Potentially, financial institutions a going to ferret out hidden assets wherever in the world they are held, and we think this a highly effective broad principle. It is currently mostly a unilateral system, but we are now seeing the first steps towards a broader and more multilateral framework, with the U.S. reciprocating with other changes.

The core EU process is the Savings Tax Directive, which involves governments exchanging information directly (and automatically) with each other, rather than getting financial institutions to do so. FATCA and the EU process are complementary, though some problems of ‘meshing’ between the two systems are anticipated as ways are found for them to coexist. Each has strengths and weaknesses although the approach of using financial institutions as cross-border tax agents to provide the information exchange is potentially very powerful. We discuss all these issues automatic information exchange extensively here.

Grinberg’s new paper doesn’t discuss the EU scheme in very great detail, but he emphasises two crucial issues for a working mulitlateral AIE (automatic information exchange) system which seem to be quite effectively addressed in FATCA:

• detailed and deep and thorough customer due diligence protocols and processes to identify real account owners, combined with realistic threat of financial punishment for failing to do so properly;
• a good combination of (very big) sticks and carrots to make sure that this spreads widely through the international system

His paper also pays a good bit of attention to the dangers posed by another model: that posed by Switzerland, which as we have noted many times in the past has been the global leader in trying to sabotage progress on the main information exchange models, by putting forward its anonymous witholding tax model, which has served as a spoiler. As Grinberg puts it:

“Switzerland, which manages approximately 30% of the world’s offshore wealth, has rejected automatic information exchange in principle. This refusal is an important obstacle to implementation of automatic information exchange, both in its own right and because Switzerland often acts as a leader of other offshore asset-management jurisdictions.    In a rearguard action to prevent automatic information exchange from becoming a global standard, the Swiss have been offering anonymous withholding to a few—and only a few—large developed economies.

. . .

Automatic information exchange may plausibly be made multilateral, whereas anonymous withholding will not be, and instead could prevent a multilateral automatic information exchange system from emerging.”

We don’t necessarily agree with that 30% figure, but the analysis is generally correct.

And now something that has not been widely discussed.

“Tax administrations in emerging and developing economies have a significant stake in ensuring that whatever benefit the large developed economies obtain in the form of automatic information exchange is available to them, too. For these jurisdictions, a uniform multilateral automatic information exchange system could positively affect their ability to address offshore tax evasion and, further, could serve to improve the structure of their domestic information reporting and withholding regimes more generally.”

And there are risks here, of course, that current trends lead to:

“fragmented automatic information reporting to a limited number of developed economies under varying compliance rubrics, and only limited improvement for those sovereigns facing the most severe offshore tax evasion problems.

. . .

Whether FATCA will develop into a uniform multilateral system remains unclear. Instead, a fragmented automatic information exchange system that serves only the interests of the strongest states may emerge.”

And that is one of the gigantic questions in international finance today.

On the positive side, financial institutions may well play an important positive role (for once) in achieving international coherence on the rules, and it seems that this is already being felt. An announcement in February 2012 by the governments of the U.S., France, Germany, the U.K, Italy and Spain) that they had reached an intergovernmental agreement (IGA) for implementing FATCA gave the system an important international underpinning, but the announcement also revealed how the original version of FATCA was not able to steamroller its way intact through international realities and local laws. As Grinberg put it:

“The legislation’s infirmities, when juxtaposed with its political force, forced financial institutions to lobby foreign governments for a more workable regime.”

But the concessions to other jurisdictions have already led to some fragmentation, and we now see three models:

• The original FATCA model, where financial institutions don’t report directly to the country that needs the information;
• IGA Model 1. Here, financial institutions don’t report directly to the relevant jurisdiction but instead report to their ‘home’ country which then transmits the information to the relevant jurisdiction – so for example a British Bank with US clients would first report to the UK government which would then transmit it to the U.S.) This model is more in line with the existing EU model; the U.S. has discussed this model with over 75 countries, though only five have actually been signed so far.
• IGA Model 2, with Switzerland as pioneer. This does not envisage automatic information exchange directly. Instead, Switzerland hands over information for consenting account holders, and only aggregated information on the non-consenting account holders. But Switzerland then agrees information ‘on request’ for the recalcitrant holders, in a way that is tantamount to automatic information exchange. This model is much more cumbersome.

Even with Model I there is some fragmentation, as different implementing regulations come into force in different jurisdictions. What is more, U.S. politics (such as lobbying by some senators, along with the Florida and Texas banking industries which make large profits from Latin American dirty money) currently makes it hard for the U.S. to be truly reciprocal: it demands more than it gives in this respect. This would make its international progress harder, though the 2014 U.S. Federal budget does contain encouraging signs that full reciprocity is envisaged.

Britain seems to be lagging behind in following the U.S. example here, as they are carving out special rules for US residents instead of improving customer due diligence across the board. Britain is also signing agreements with its overseas territories and crown dependencies that are similar to FATCA but not identical. Britain’s inexplicable signature of an appalling bilateral deal with Switzerland based on the “Rubik” anonymous withholding model (which we have roundly criticised many times) poses dangers for the emerging architecture, as Grinberg explains:

“The U.K. proceeded to ratify its anonymous withholding agreement with Switzerland. After the United States, the U.K. is the financial center with which Switzerland has the strongest ties.    The U.K. thus could have pressured Switzerland for arrangements similar to the information reporting agreement with the U.S.

Instead, as a result of the U.K. ratifying their anonymous withholding agreement, Switzerland argues that the U.S. agreement represents a special case.    The Swiss have thus stated that they do not intend to reprise their U.S. agreement with another jurisdiction, and that they are only interested in anonymous withholding with neighboring countries (France, Germany, Italy, and Austria).    The Swiss-U.K. agreement therefore helps establish the basis for a suboptimal equilibrium that militates against the emergence of a uniform multilateral automatic information exchange system.”

These examples and others suggest that the omens in this respect are not particularly good, and we at TJN would always have expected Switzerland and the UK to play the spoiler, even if the UK has given some encouraging signs in some respects.

The UK’s announcement yesterday that its Overseas Territories and Crown Dependencies would move forwards on tax transparency leave big unanswered questions. The press release trumpets that “much greater levels of information about bank accounts will be exchanged on a multilateral basis,” which is in itself an improvement. But – and this is potentially a large but – gigantic secrecy jurisdictions such as the British Virgin Islands are not about bank deposits. They are about entities and structures such as secret companies. And all we get from the UK announcement on this is:

“These jurisdictions have, as well as this, committed to taking action to ensure they are at the forefront of transparency on company ownership.”

We are not sure what that means. The devil may well be in the detail, and to be frank we at TJN do not trust the British government to do the right thing on tax havens, given the appalling history (also see this, a couple of pages in).

Despite all these concerns, however Grinberg does suggest the possibility of an interesting (and perhaps unlikely) confluence of interests between developing countries and large financial institutions. The financial institutions, he notes, would hate a fragmented global architecture of multiple compliance regimes, and would prefer a single uniform system – and this would also be of benefit to developing countries.

“As a result, financial institutions and emerging and developing economy tax administrators may find improbable allies in one another as they navigate the battle over taxing offshore accounts.”

It’s a strange but at least hopeful perspective. Strange creatures do sometimes fly. Given the sheer weight of entrenched malign interests at play here, we will not be surprised (though we will still be horrified) if the changes end up serving only the interests of rich countries, and leave poor countries wide open to those giant sink holes of dirty money.

 Some rights reserved by Images_of_Money

Two key moments stand out for me last week. On Monday I saw former Senator Lugar (R-IN) receive Transparency International USA’s “Integrity Award” for his work to combat corruption, whether through his oversight hearings of World Bank projects or his leadership on the Dodd-Frank Act, specifically the Cardin-Lugar oil, gas and mining payment disclosure provision. . During a dinner co-sponsored by Exxon, Senator Lugar recounted his lobby visits from oil company representatives during the consideration of this legislation that now requires oil, gas and mining companies to disclose their payments to host governments. After hearing them out, Lugar and his staff simply weren’t persuaded by industry arguments about competitive harm or compliance costs. Looking forward, Lugar referenced the litigation that the American Petroleum Institute has launched against the provision bearing his name and said that no matter the outcome, “The trend is in our direction.”

The case will now go back down to the district court where there will be more opportunity for a comprehensive review of the administrative record, which we believe will demonstrate the hollowness of oil industry arguments.

Indeed it is. On Friday morning I learned that the US Court of Appeals was not persuaded by the jurisdictional arguments of the oil industry’s lawyers, (Eugene Scalia and company from Gibson Dunn).The Appeals Court dismissed the case agreeing with Oxfam’s lawyers that the case should be heard the district court first as Congress had instructed. Oxfam, as an intervener, was the only party to argue that this case does not belong in the Appeals Court and the court adopted Oxfam’s reasoning throughout the entire opinion.

This is a victory for transparency campaigners in the Publish What You Paycoalition. With the dismissal, the case will now go back down to the district court where there will be more opportunity for a comprehensive review of the administrative record. Such a review, we believe, will demonstrate the hollowness of industry arguments.

While the legal process continues, global momentum for increased transparency in the oil, gas and mining industry gains steam. In April, the European Union agreed on tough new rules that mirror Cardin-Lugar, with no exemptions for companies for alleged host government prohibitions. Once again, politicians and regulators were not persuaded by industry arguments and fear mongering. In Canada, Publish What You Pay is working with the Mining Association of Canada to develop mandatory disclosure proposals for the government. Later in May, Newmont Mining, the US and UK governments, and investors will highlight the importance of mandatory disclosure rules on the sidelines of the Extractive Industries Transparency Initiative global conference in Sydney, Australia. Finally, the UK government is championing transparency as part of its hosting of the G8 in June.

As the transparency tide reaches many corners of the globe, the war on transparency being waged by companies such as Shell, BP, Exxon and Chevron will seem increasingly doomed and misguided.

flickr / US Embassy Kabul Afghanistan

The U.S. government is not unfamiliar with short-sighted policies, indeed short-sightedness in political systems often seems often more familiar than not. Yet of all the short-sighted policies the United States has engaged in, and especially of those overseas, the recent reports on ghost money in Afghanistan take the cake.

I wish I could say I was surprised.

According to a report by the New York Times, the Central Intelligence Agency has literally been dropping off “bags of cash” at Afghanistan President Hamid Karzai’s office for decades. Karzai called the amounts “small,” but evidence indicates the amounts are anything but—perhaps totaling tens of millions of dollars.

The presidential palace in Kabul said the money has been used “for different purposes, such as in operations, assisting wounded Afghan soldiers and paying rent.” But the truth is that if the means were so honest CIA wouldn’t have bothered delivering it so secretly— often in suitcases. In reality, the agency was using it to buy the loyalty of Afghans and encourage their support in the war against the Taliban. Karzai, in turn, has used it to buy power, fuelling corruption and empowering warlords.

As it would turn out, according to one American official, “the biggest source of corruption in Afghanistan, was the United States.”

As the understandably puzzled House Representative Jason Chaffetz (R-UT) and a critic of the war effort in Afghanistan put it: “I thought we were trying to clean up waste, fraud and abuse in Afghanistan.”

So did we.

In fact this policy is exactly at odds with America’s stated goals for the nation. In an interview last year former Secretary of State Hilary Clinton said: “President Karzai has made a strong public commitment to stamping out corruption, implementing key reforms and building Afghanistan’s institutions. We will support him and the government in that endeavor to enable Afghanistan to move forward toward self-reliance.”

Put bluntly, this statement is a joke. Corruption is a major—if not the major—cause of Afghan societal and governmental instability. In 2009, then U.S. commander in Afghanistan General Stanley McChrystal said this about the nation: “There are no clear lines separating insurgent groups, criminal networks (including narcotics networks) and corrupt [government] officials. Malign actors within the [government] support insurgent groups directly, support criminal groups that are linked to insurgents and support corruption that helps feed the insurgency.”

Karzai, from his dealings with the nearly-imploding Bank of Kabul to his almost laughable openness on the CIA ghost money—has proved nothing but a strong public commitment not to stamp out corruption.

That the CIA would encourage bad behavior by engaging in it itself is, of course, laughable in hindsight. Such a stark example of irony and short-sightedness is easy to ridicule and, indeed, nearly everyone has done so. Black money, ghost money, secret money—or illicit inflows if you will—are bad for nations and their economies. They encourage corruption. They foster underground economies and worsen crime. Yet society does not laugh when illicit financial inflows should be netted out from outflows—suggesting they somehow offset the damage. Yet this notion is equally absurd. It is as short-sighted and laughable as the CIA’s bags of ghost money. Yet many do not laugh.

 Some rights reserved by U.S Embassy Kabul Afghanistan

After a whistleblower revealed that billions of dollars in tax evasion were being facilitated by the Swiss Bank UBS in 2009, the IRS launched a voluntary disclosure program to try and recover some of the money. After several extensions, the result has been $5.5 billion recovered by the U.S. treasury. At first glance, this is a lot of money, but the GAO thinks that offshore account holders could be evading tax through “quiet disclosure”:

Since 2003, IRS has carried out four offshore voluntary disclosure programs, collectively referred to in this report as “offshore programs,” that offer incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest, and penalties. Generally, the programs offered somewhat reduced penalties and no risk of criminal prosecution if eligible taxpayers fully disclosed their previously unreported offshore accounts and paid taxes due plus interest. As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues.

Some taxpayers with unreported foreign accounts may have chosen not to participate in one of IRS’s offshore programs, and attempted to circumvent some taxes, interest, and penalties owed. One technique, which IRS calls a “quiet disclosure,” is to file amended tax returns that report offshore income from prior years. Another technique is for taxpayers to declare existing offshore accounts for the first time with their current year’s tax return, but not amend prior year returns. If successful, these techniques result in lost revenue for the Treasury, and undermine the offshore programs’ fairness and effectiveness.

All the more reason to push forward at the G8 this year on automatic exchange of tax information, so the IRS doesn’t have to wait for people to tell them about their Swiss bank accounts before trying see if they paid their taxes. You can read the full report here. (PDF)