Transparency International Chair Huguette Labelle wrote a great article in The Huffington Post today. As the G20 meets in Los Cabos, Mexico today, world leaders will try and solve global issues. Financial transparency has always been on the agenda, but world leaders have at times struggled to act. Labelle writes,

At the November 2010 Seoul summit, the agreed plan covered a broad swath of action: from tackling financial crimes like money laundering and bribery, to improving protection for people exposed to reprisals if they blow the whistle on problems such as dodgy bank loans.

Importantly, the plan if implemented would bring badly needed improvements to regulation of the international financial system, with more transparent management of public finances, more transparency on financial vehicles, such as trusts, misused to conceal their true nature and their owners, better oversight of illicit cross border financial flows, stronger watchdogs and greater cooperation between officials. It would also help countries dealing with corruption, allowing faster recovery of stolen assets and sanctioning of corrupt officials.

The whole article is definitely worth reading, here.

Despite declaring that, “the era of banking secrecy is over”, the G20 has been slow to back up its words with action. Despite repeating in its statements all the way back to 2009 that tax havens and illicit financial flows harm developing and developed countries alike, the G20 has stopped short of implementing measures that would actually curtail them, like automatic exchange of tax information, country-by-country reporting, or increasing incorporation transparency through beneficial ownership.

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Global Witness

Task Force coordinating committee member Global Witness released Grave Secrecy today, a report telling the story of companies which were used to launder the proceeds of corruption, tax evasion and other crimes.  The report shows how shell companies based the UK, Bulgaria, and New Zealand were used to launder corrupt money originating from Kyrgyzstan’s AsiaUniversialBank.

The report gives tailored recommendations to countries, the European Union and the Financial Action Task Force on what steps they can take to help fix these costly problems.  The report outlines how a lack of beneficial ownership information, off-shore secrecy jurisdictions and weak anti-money laundering and anti-corruption laws enable money laundering, and how the national and international actors can fix them.

Global Witness’ new report, Grave Secrecy, shows how companies can be used as cover to launder the proceeds of corruption, tax evasion and other crimes.  It is so easy to set up a company in a way that hides the owner’s identity that criminals, terrorists and corrupt politicians can easily move money around the world with impunity.  Hidden company ownership facilitates state looting, denying the citizens of poor countries the chance to lift themselves out of poverty and leaving them dependent on aid.

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Cross-posted with permission from Transparency International’s Space for Transparency blog.

flickr / lets.book

This week the heads of state from the G20 are meeting in Mexico, where we hope they will take action to meet their 2009 promise to end bank secrecy. One step already taken is making tax evasion a predicate offence for money laundering.

What does that mean?

Money laundering is defined as taking the proceeds of a crime and making them legitimate.

In order to find money laundering, you must be able to identify the underlying crime that gave rise to the funds.  Each jurisdiction defines the crimes that “qualify” for money laundering.  They generally include drug trafficking, murder, and other serious crimes.

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flikr / eeskaatt

The developing world has long been plagued with poverty, political turmoil, and corruption.  This vicious cycle has been extensively researched, combated, and discussed from many different angles, but nothing has been able to completely ‘solve’ it.  While it is unrealistic to seek a blanket solution to the issues that keep countries perpetually poor and unstable, one must look at the wider spectrum of developmental issues and ask, “Why do they persist?”  Oscar Abello brings to light one huge reason why they do: financial opacity.

“Let’s say I’m a South Africa-based factory owner and you’re a solar panel salesperson from New York City. I want some solar panels to make my factory more self-sufficient, and we agree I’ll pay you $1 million for them. But I ask you a favor: Could you invoice me for $1.2 million and then deposit the extra $200,000 that I just gave you into another company’s bank account in New York City. You’re eager to close a big sale, so we agree to the deal.

You might know false invoicing is illegal, you might not, but it’s very unlikely either of us gets caught anyway. What you don’t know is that I actually made most of that $1,200,000 from my side business, smuggling poached elephant ivory to China; the money I’m about to wire into your bank account comes from my Canary Islands bank account where I send all my business earnings to minimize tax obligations; and I’m going to use that $200,000 to purchase stolen art from a broker in midtown Manhattan so I can decorate my future retirement home in the Seychelles, where another company I control anonymously just purchased some beachfront property.”

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flikr / treehouse1977

Corruption is notoriously difficult to measure. It’s not just because it is an illicit activity. In part it’s because the concept itself is undefined and relative. Transparency International found a (brilliant) way around this when they began surveying each nation’s public perception of corruption, rather than trying to define a concrete set of corrupt activities.

So what is corruption?

Transparency International uses the following working definition of corruption: “the abuse of entrusted power for private gain.” I imagine that’s vague on purpose.

So how do we define specific corrupt activities? Corruption isn’t just bribe paying, although that’s often it. It’s not just in business relationships, but also political, social, and even athletic ones. Corruption isn’t necessarily illegal, although it’s often so. And in some cases, while it may be illegal, it isn’t always enforced, which makes it legal in practice.

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flikr / The EITI

Senator Lugar (R.-IN) helped insert Section 1504, a provision requires oil, gas, and mining companies to disclose all payments to governments in each jurisdiction in which they operate, into the Dodd-Frank Wall Street Reform and Consumer Protection Act. He delivered the keynote speech at Georgetown University for the annual USAID conference, “Frontiers of Development,” this week.  He placed transparency at the heart of his speech,

This is vital not only to provide taxpayers a clear picture of how their money is being used, but also to reinforce U.S. leadership in transparent economic development.   Transparency helps level the playing field for U.S. companies, counters the propensity of resource-rich developing countries toward wasteful spending, and combats the corruption that the World Bank has identified as “the single biggest obstacle to economic and social development.”  Toward this end, the U.S. government should be moving forward with full implementation of the 2010 Cardin-Lugar Amendment, which requires all companies listed on the New York Stock Exchange to publish their payments to foreign governments for oil, natural gas, and mineral development.  Failure to fully implement Cardin-Lugar would squander an opportunity to transform the development scenarios of resource-rich countries mired in poverty.

Dodd-Frank was passed in 2010, but the SEC has still not yet issued the final rule on Provision 1504.  The deadline for the ruling is now over a year in the past (and counting).  Earlier this Spring, on the one-year anniversary of the missed rule-making deadline for Dodd-Frank Provision 1504 (as well as other provisions), Task Force Managing Director Tom Cardamone commented on the matter,

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Cross-posted with permission from Transparency International’s Space for Transparency blog.

flickr / International Monetary Fund

It is increasingly recognised that corruption can only be tackled effectively through the joint action of all stakeholders, i.e. the public sector, business and civil society. There is a growing trend to include the private sector in development initiatives to ensure that it becomes part of the solution rather than being part of the problem. But can companies that are driven by short-term business interests really be part of the solution to corruption? And can multi-stakeholder groups made up of actors with very different aims and approaches really lead to effective solutions?

The Group of 20 (G20) leading economies, first convened as a forum to tackle the global financial crisis in 2008, is responsible for 80 per cent of world trade and more than 80 per cent of [global] gross national product. The private sector seized the opportunity to represent its views vis-à-vis the G20 early on. The first Business 20 (B20) Summit took place in parallel to the Canadian G20 Summit in 2010. Issues discussed at the B20 Summits included corporate social responsibility, employment, food security and corruption.

Civil society groups, including Transparency International, have been following the G20 process and emphasizing that a lack of integrity, transparency and accountability by both public and private actors significantly contributed to the global financial crisis of 2008. From the start, we have called for civil society to be at the table and for the G20 political process to be more transparent and accountable.

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