The Mall of Arabia / flickr ActiveSteve

In many ways, the Kingdom of Saudi Arabia contains one of the most unique styles of government and political culture in the world. The central institution of the government is the monarchy—headed by King Abdullah. The Holy Qur’an is the constitution of the country and the nation is governed on the basis of Islamic law or Shari’a. The reaches of the king’s power are essentially limited only by Saudi tradition, Shari’a, and consensus among the royal family and religious leaders.

Saudi Arabia holds a tight grip on the nation’s government, politics, and culture in large part because the country has so much oil wealth–Saudi Arabia holds nearly 21.5 percent of the world’s proven oil reserves. The Kingdom’s ability to maintain control over this political structure depends on its ability to use oil to increase well-being in the nation and maintain a position as the leading player in the region’s power politics.

When the rest of the region was rocked by anti-corruption demonstrations and regime change during the Arab Spring, Saudi Arabia, with the exception of some demonstrations by a Shia minority in the east, remained relatively calm. These political demonstrations against corruption have little opportunity or likelihood of success for two major reasons. First because the monarchy has deep pockets of military power and isn’t afraid to use it. Second because the general population is generally content. Saudi citizens may be interested in reform, but not fundamental change. In fact, according to a nationwide survey in 2008, 80 percent of Saudis supported a free press, but a nearly equal majority (79 percent) also supported an absolute monarchy. King Abduallah enjoyed a 95 percent favorable rating.

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Panel Title: Transitioning to Transparency: Advancing Financial Integrity in the Middle East and North Africa

Panelists: Raymond Baker, Task Force on Financial Integrity & Economic Development; Jean Pesme, StAR Initiative, World Bank Group; Valerie Silensky, Bureau of International Narcotics and Law Enforcement Affairs, US Department of State; Philip C. Wilcox, Jr., Foundation for Middle East Peace

Logistics: April 19, 2:00-3:30pm, World Bank MC C1-110

The Task Force on Financial Integrity & Economic Development (Task Force) is hosting an expert discussion on the linkages between illicit financial flows, transparency and the Arab Spring during the Civil Society Forum (CS Forum) at the 2012 World Bank/IMF Spring Meeting. Fiscal accountability is a key component of a well-functioning social contract, both of which have been absent in many countries in the MENA region, including Libya, Tunisia, Egypt and Syria.

According to a report by Task Force member Global Financial Integrity, MENA countries have the highest average annual illicit outflows of any region: $146 billion. Establishing transparent financial systems helps secure democracy and avoids a return to authoritarian rule. The panelists will debate the role illicit financial flows have played in the MENA region, particularly with regards to low levels of financial and political transparency.

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flickr / Securities and Exchange Commission

Today is not just Tax Day in the United States. It is also the first anniversary of the deadline for the SEC to issue rules on Dodd-Frank Secti0n 1504 – the breakthrough transparency provision for the oil, gas, and mining sectors. Task Force Managing Director Tom Cardamone, as a guest post at Trust Law, writes,

A year after the deadline, established by Congress when Dodd-Frank passed, the SEC has still not yet issued the final rule on Section 1504. The delay comes as the regulator faces intense pressure from oil industry lobbyists, including from the American Petroleum Institute (API). The API wrote a letter to the SEC laying out the basis for a legal challenge to potential rules, which some have characterized as an implicit threat of expensive litigation. These demands include shifting the reporting requirement from a project-by-project basis, which is explicitly required in the statute, to a geographic basis, such as by a geological basin or province. This move would maintain opacity in the extractive industries, and allow an environment that fosters corruption and bribery to continue.

The SEC needs to stop delaying and issue the strong transparency rules that Congress passed nearly two years ago. Further delay only serves as an invitation to industry lobbyists to continue to push for loopholes that allow them to execute unaccountable deals with governments. These rules are already long overdue.

Resource-rich developing countries often face a Faustian relationship with their extractive industries wealth. While exports of oil, gas, and minerals can create significant wealth for a society, it can also invite staggering levels of corruption. Many lack the governing institutions necessary to maintain an effective rule of law.

You can read the rest of the article here. More coverage of the anniversary at Revenue Watch.

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Just One Example of Massive Illicit Outflows from China, Which Lost US$2.74 Trillion Last Decade

Gu Kailai, the wife of Bo Xilai, a rising star in the Chinese Communist Party, has been arrested by Chinese police on suspicion of arranging the murder of Neil Heywood. Heywood was, according to Reuters, poisoned this past November. The article reports that no motive for the murder had surfaced, until now,

Bo’s wife, Gu Kailai, asked Heywood late last year to move a large sum of money abroad, and she became outraged when he demanded a larger cut of the money than she had expected due to the size of the transaction, the sources said.

She accused him of being greedy and hatched a plan to kill him after he said he could expose her dealings, one of the sources said, summarising the police case. Both sources have spoken to investigators in Chongqing, the southwestern Chinese city where Heywood was killed and where Bo had cast himself as a crime-fighting Communist Party leader.

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flickr / afagen

Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”

Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States “could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.

So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.

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Following traces of money flowing through the criminal underworld has long been an important strategy for law enforcement. German investigators were trying to do just that, following US$150 million in corrupt money back from Germany to a number of Russian officials. However, the investigators were forced to give up their search after the trail brought them to an anonymous corporation, and uncooperative Russian officials. From Corruption Currents:

Under the settlement, all five people maintained their innocence. Four defendants will pay between EUR5,00o to EUR40,000 ($6,500 to $52,000) in exchange for dropping the charges, the Journal report said, citing a court spokesman. Charges against the fifth defendant, a banker still employed by Commerzbank, were dropped because the statute of limitations had expired, the spokesman said.

The spokesman said, according to the Journal, that because the statute of limitations loomed on the others, the court told prosecutors to give up and settle.

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flickr / World Economic Forum

At the Center for Global Development / Washington Post forum yesterday, Nigerian Finance Minister and nominee for the World Bank Presidency Ngozi Okonjo-Iweala answered a series of questions about the World Bank, and the challenges it faces moving into the future. The whole interview is available on video here.

The subject of illicit financial flows, and their impact on development, was brought up at 66:00-70:00. The transcript:

Question: When you mention the word ‘taxes’, I thought immediately of the illicit financial flows issue and the amount of money escaping from developing countries. Not principally through corruption or, you know, gangs of drug lords, but rather the use of mispricing through transfer pricing, the transfer mispricing phenomenon where corporations don’t pay their fair share. Does the World Bank have a role in addressing that issue as countries lose substantial amounts of money?

Ngozi Okonjo-Iweala: “The question of taxes and illicit financial flows and mispricing is a very important one. And I think that, when I think about who should be dealing with this, I think the IMF should also be brought into the picture on this one. They have more of a comparative advantage in dealing with this than the World Bank.

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Kyrgyzstan is a country that has long been riddled with corruption. Endemic graft and nepotism was a major factor in the 2010 revolution that the country underwent, and attempts by the government to tamp down corruption have been largely unsuccessful since. The country completely disbanded the Finance Police, who used to be their anti-corruption watchdog. In a unique exercise in transparency, Kyrgyzstan will this week be broadcasting the entrance exam for a new anti-corruption agency on live television,

The prime minister’s office released a statement upon completion of the first session of 100-minute-long quizzes Monday, naming and shaming the lowest scorer and praising the best performer for answering 95 out of a total of 100 questions.

The tests, to be held over four days, will initially whittle the 1,400 applicants aspiring to join the State Service for Combating Economic Crimes to 400.

After medical examinations, fitness tests and interviews, a group of 177 successful candidates will be admitted to the agency.

Such exercises in transparency are virtually unheard of in a country where many obtain government posts through personal recommendations or by paying bribes.

This type of action is more symbolic than anything, but definitely seems like a step in the right direction.

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flickr / European Parliament

With the €1 Trillion the EU governments lose each year to tax dodging at stake. The prospect of a debt ridden jobless future has EU the asking questions. DG TAXUD the tax arm of the EU civil service will prepare a communication by December on the broad topic of tax havens and unfair tax competition.

One facet of this problem is double non-taxation, this happens as countries try to divide the proceeds of trade so companies and individuals don’t get taxed twice. However many have taken advantage to pay nothing at all. Until May DG TAXUD is seeking the views of people and organisations on double non taxation the results will feed into the Commission’s communication. The language is encouraging but Taxud’s hands are probably tied because whatever it and the European Parliament suggest on tax any member state can veto. This veto does not apply to ongoing measures to promote financial transparency through measures such as  Anti-money Laundering reform and country-by-country reporting.

The UN vs OECD: Representativeness and policy positions

The UN Represents 192 countries and most of the World population the OECD 34 Countries and only about a fifth the world’s population. No one is saying that the UN is perfect and agencies are more effective that others. However most developing countries want the UN Tax Committee to have more say. Understandably the rest of the World are increasingly tired of the OECD’s undemocratic dominance of international tax policy. Especially when its transfer pricing standards and the Global Forum process with which it is very closely associated are so ineffective. So many developing countries are calling for the UN Tax Committee to have more power. The Indian Government has made this point clearly in a letter to the OECD .

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Last week Coutts, banker to the Queen, was fined £8.75 million for failing to take corruption risk seriously enough. The Financial Services Authority (FSA) found problems with over 70 percent of the client files they reviewed; in some cases, allegations that customers were involved in looting state funds were brushed aside by bankers keen to increase the bank’s profits – and presumably their own bonuses.

This fine is part of a belated crackdown by a financial regulator that has, at least a decade too late, finally woken up to the fact that British banks are looking the other way when it comes to potentially corrupt customers.

Last year a damning FSA report found that in far too many cases banks were ignoring an extremely high risk that they were handling the proceeds of corruption, if the bank felt that they would not get caught or suffer bad publicity. The FSA rather sheepishly admitted that not much had changed since its previous review 10 years ago, after a billion pounds of funds linked to former Nigerian dictator Sani Abacha were found to have flowed through British bank accounts.

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flickr / teachandlearn

It’s an interesting time for east Africa. Until recently, no one believed it had much energy wealth at all—6 billion barrels, tops, compared to its western counterpart, which boasts at least 60. But the times they are a-changin’. At the end of last month, Kenya sent the world and the markets a buzz when the government announced Canada’s Africa Oil Corp discovered oil in the northern region of Turkana. Given the geographical proximity and similarities, this discovery also has implications for Ethiopia. And additional discoveries have already been made in neighboring Tanzania and Mozambique.

The oil strike in Turkana does have the potential to transform Kenya’s economy and propel its ambitions to become a leading regional power. But despite the almost-auditory-cheers echoing from Kenya’s leaders, the discovery is not all good news. Of course, analysts are already cautioning the country against falling victim to the resource curse. Many point to Uganda, another in the east African nation that recently joined the energy club, as an example of what not to do.

No one is going to start drilling tomorrow. For one thing, a worldwide rig shortage is delaying production. But in many ways, Kenya itself isn’t ready. The discovery was unexpected enough that the country does not have the experience or the regulatory framework to handle the oil sector. James Phillips, chief operating officer of Canada’s Africa Oil Corp., said “the company won’t…move ahead with its plans in the area until Kenya’s energy ministry develops rules that would determine how that gas could be produced and sold.” Kenya has insisted it is ready. Yet the country regulates oil and gas production and exploration with the Kenya Petroleum Act, a 13-page law passed around 1986. And Kenya’s leaders are on the verge of passing an exemption in its value-added tax for oil and gas exploration companies, in an effort to avoid the “cooling effect” that the tax would have on imports and purchases in the scramble.

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The Economist came out today with two great investigative articles on shell corporations. Shell, or anonymous, corporate structures are used to do business without the real actor behind the activity being known. While we usually associated shell corporations with, to quote one of the articles, “sunny places for shady business”, the reality is that the United States and the United Kingdom are some of the world’s worst offenders. Cottage industries have developed in many of the  U.S. states where incorporation is easiest.

The first article documents this quickly-growing new business around the world,

As in any industry, incorporation includes a mix of wholesalers and retailers. The wholesalers, such as Hong Kong-based Offshore Incorporations Ltd (OIL), sell companies to legal and accounting firms, banks, corporations and also (often in bulk) to web-based resellers. Martin Crawford, the chief executive, says reputation is crucial in this market segment.

The two largest providers offshore may each have 10% of the global market, estimates Jason Sharman, an Australian professor who studies the industry. Onshore markets are more concentrated. Two firms handle two-thirds of all Delaware companies: CT Corporation (part of Wolters Kluwer of the Netherlands) and CSC—though both companies’ websites give little hint of this, focusing on their less controversial compliance services.

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