Cross posted from Transparency International’s Space for Transparency blog.

The bail out of the troubled banking sector in Cyprus has taken on serious political overtones as the crisis deepens. During the past few weeks Cyprus has been accused of failing to combat money laundering and fraud and that Russian oligarchs seek refuge for their money in this “tax haven” country.

Now the strongest members of the European Union want a tax on Cypriot bank deposits to pay for part of the bail out. This news has not only enraged many Cypriots, but more importantly it has also brought the focus back to Cypriot banks. The anger stems in part from the belief that the euro zone has a role in creating the crisis. In particular, euro zone leadership is blamed for playing a part in the decision to slash the value of Greek debt – a major holding of Cypriot banks, and precipitating the Mediterranean island’s banking crisis.

Still, among the contributing factors to the problems facing Cyprus is a lack of integrity in the financial sector – a central failure in the global banking system that created a fertile environment for the financial crisis of 2008.

Cyprus is not alone, but it illustrates the devastating effect that this lack of integrity can have. Like Ireland and Iceland before it, Cyprus must come to terms with a banking system that is devouring its economy.

For too long senior executives at the banks of Cyprus ignored the long term public interest in favour of short term, personal (or corporate) financial gain.

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If you only watch one video today, this one is for you. Task Force member Global Witness published their stunning investigation today. The documentary uncovers how corruption is facilitated in Malaysia. Hidden cameras show Malaysian money launderers explaining exactly how they are going to set up an anonymous shell company (complete with finding rural villagers to sign their names on as nominee shareholders), buy massive amounts of land from corrupt Malaysian officials, and move the money to a secret Singapore bank account.

Malaysia lost $285 billion in 2001-2010 to illicit financial outflows, and Global Witness has vividly demonstrated how such enormous sums manage to find their way out of the country. And to make matters worse, the corrupt and illegal logging and land deals contribute to the destruction of Malaysia’s vibrant rain forests. There are even connections to HSBC, which helped bankroll companies widely suspected of bribery and corruption.

You can read more about the investigation here. Video below:

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flickr / Department for Community and Local Government

If there is a one sentence argument that we forward here at the Task Force, it is this: financial opacity, of all kinds, is a root cause of global poverty. Media reports sometimes fail to make this connection and sometimes tinker around the edges of it, but rarely make the link as directly as Hakima Abbas’ excellent op-ed for Al-Jazeera did today.

As the post-2015 Millenium Development Goal process advances, we should pause and take the opportunity to take a step back and look at the big picture. Can the world continue to maintain an opaque financial system, where criminals, tax evaders, and corrupt public officials can easily move money in complete secrecy? Can we fight global poverty while this system is still in place?

Abbas writes,

The world is at a critical juncture where the necessity to rethink our economic modelling, the values of consumption and accumulation have become critical. The planet, not only the people, simply cannot sustain the massive inequality that exists. Despite what we are told and sold, inequality is not inevitable. Global impoverishment will end only when those who gain from the system are held to account and the rules of the system are radically transformed.

While the transformation of the system will require multiple strategies, there has been a renewed focus since the economic crashes in the Global North on the reform of the global financial system. The rules of the system are skewed to the few individuals and corporations that reap benefits from the world’s resources and operate with a veil of secrecy to make excessive profits while avoiding tax obligations which would, at the very least, lessen national tax burdens from ordinary citizens and contribute to essential services.

People are mobilising to end these practices. An unusual sight met London commuters this week: a subvertising campaign launched on phone boxes across the city, bringing a distinct message on the causes of global inequality. Bearing a striking graphic of the City of London as an “urban island paradise”, at first glance the adverts look like a tourist promotion for the capital, but they are in fact a campaign encouraging Londoners to take a new look at their city: “Visit the City of London – The Tax Haven Capital of the World”.

You can read the whole article here.

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flickr / European Parliament

Members of the European Parliament (MEPs) secured a big step towards the financial transparency needed to combat tax dodging last week when they made EU Finance Ministers agree on country-by-country reporting for EU banks from 2014. This represents a major victory after years of campaigning by Eurodad members and allies. The deal under the EU’s Capital Requirement Directive is timely and it can – and should – influence the final agreement on the Accounting Directive, where country-by-country reporting is still on the table.

MEPs requested urgent action on this issue in an open letter to EU Finance Ministers, and their persistence paid off. “The European Parliament is on a roll, enjoying its most influential week since the Lisbon Treaty gave it ‘co-decision’ authority over EU laws,” wrote the Financial Times.

Under the Capital Requirement Directive (CRD IV), the EU will require banks to disclose profits made, taxes paid and subsidies received, as well as turnover and number of employees for each country where they operate. This information will be included in the banks’ audited annual reports. From 2014, the information will be disclosed to the European Commission (EC). From 2015, the data will be made public, unless the EC finds significant economic disadvantages when carrying out an impact assessment, in which case they can propose a delay.

Last week’s agreement is referred to as a ‘political agreement’ that has to be approved by EU Member States and by the whole European Parliament, where a vote is expected in mid April.

Towards full country-by-country reporting

Thanks to strong pressure from civil society organisations, including Eurodad and our members, EU lawmakers have discussed country-by-country reporting extensively over the last year in negotiations over the Accounting Directive.

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Cross post from the Tax Justice Network blog.

flickr / Images of Money

. . . or at least that’s what seems to be suggested in an article entitled “Top executives join France exodus.” It focuses quite heavily (though not exclusively) on tax.

“Exodus” is a pretty big word.

Now let’s see. What does the article actually say?

“Two senior executives at Moët Hennessy, the champagne and cognac arm of the LVMH luxury group, are moving to London from Paris.”

That’s your exodus, right there. But it does, admittedly, come with a qualification, a bit lower down in the article: LVMH told the Financial Times that their moves were “not because of tax reasons.”

OK. There are, admittedly, high-profile names who have said they will move: Bernard Arnault applying for Belgian citizenship, which he doesn’t seem to be finding very easy, and, more quirkily, Gerard Depardieu, getting a Russian passport after criticising France’s high tax rates.

OK OK. Next, in the original FT article:

“Bernard Charlès, chief executive of Dassault Systèmes, was sharply critical of the high tax policies of Mr Hollande’s Socialist government, telling Le Monde newspaper in an interview: “Residing in France has become a big handicap. Very largely, our hiring of top managers will have to be done elsewhere than in France.”

The FT continues:

“He [Bernard Charlès] said he was considering “in all its aspects” a proposal by his chairman for him to leave the country. Asked if some of the company’s other leaders had already left, he replied: “Yes.”

And that’s the sum total of the FT’s evidence of the “exodus,” at least in this article. In a population of 65 million we have one confirmed departure, one effort to leave, and an unspecified number of anonymous departees. (Who, we might ask, are they? Will they confirm that they left for tax reasons?)

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flickr / Department of Defense

Yesterday, the nation’s top intelligence official, James R. Clapper Jr., briefed Congress on the most important security threats facing our nation. Clapper didn’t bother to hide his disdain for the annual event, calling an open hearing on intelligence matters a “contradiction in terms.” In a more subtle critique, Clapper also noted that it is virtually impossible to “rank—in terms of long-term importance—the numerous, potential threats to U.S. national security.” In that vein, Clapper said it is the “multiplicity and interconnectedness of potential threats—and the actors behind them—that constitute our biggest challenge.” On that critique, I couldn’t agree more.

One of the starkest examples of these dynamic forces are in Clapper’s testimony on money laundering, illicit financial flows, and the dangers of an opaque financial system. As Clapper notes in his statement for the record, “Criminals’ reliance on the U.S. dollar also exposes the U.S. financial system to illicit financial flows. Inadequate anti-money laundering regulations, lax enforcement of existing ones, misuse of front companies to obscure those responsible for illicit flows, and new forms of electronic money challenge international law enforcement efforts.”

Understanding how these forces weaken U.S. national security is, per Clapper, multifaceted. It’s also quite important.

Let’s take Clapper’s front company example first. In several states in the United States, it’s remarkably easy for criminals to use anonymous shell corporations to access bank accounts, leaving authorities unable to track their assets. Among those who have banked in the United States, are: an al-Qaeda fundraising organization, which used a company called Truman Used Auto Parts as a front; Iran, which owned a Manhattan skyscraper; and Viktor Bout, an arms trader nicknamed the “Merchant of Death” for his role in  funneling weapons to terrorists, including the Taliban and al-Qaeda.

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flickr / Thoma de Leeuw

If you only read one thing today, this article should be it. Nicholas Shaxson, author of Treasure Islands and member of Task Force member Task Justice Network, published his stirring, mammoth article on the City of London in Vanity Fair today. London is not only a major nexus of global finance, but also one of the central points in the global shadow financial system, where criminals, corrupt public officials, and tax evaders eventually plant their hidden wealth.

The piece speaks for itself:

The really curious aspect of One Hyde Park can be appreciated only at night. Walk past the complex then and you notice nearly every window is dark. As John Arlidge wrote in The Sunday Times, “It’s dark. Not just a bit dark—darker, say, than the surrounding buildings—but black dark. Only the odd light is on. . . . Seems like nobody’s home.”

That’s not because the apartments haven’t sold. London land-registry records say that 76 had been by January 2013 for a total of $2.7 billion—but, of these, only 12 were registered in the names of warm-blooded humans, including Christian Candy, in a sixth-floor penthouse. The remaining 64 are held in the names of unfamiliar corporations: three based in London; one, called One Unique L.L.C., in California; and one, Smooth E Co., in Thailand. The other 59—with such names as Giant Bloom International Limited, Rose of Sharon 7 Limited, and Stag Holdings Limited—belong to corporations registered in well-known offshore tax havens, such as the Cayman Islands, the British Virgin Islands, Liechtenstein, and the Isle of Man.

From this we can conclude at least two things with certainty about the tenants of One Hyde Park: they are extremely wealthy, and most of them don’t want you to know who they are and how they got their money.

Read the full article here.

 Some rights reserved by Thomas de Leeuw

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Cross posted from Transparency International’s Space for Transparency Blog

“The moral relativism that traditionally infects multinationals in hot, corrupt countries is going out of style.”

flickr, Leo Amato

This is according to Jonathan Guthrie of the Financial Times, in discussing the decision of HSBC to close down its operations in Panama (Corruption Perceptions Index score in 2012: 38 out of 100).  The decision was  purportedly to increase profits – but maybe not in the way one would expect.

HSBC was recently fined upwards of US $1.9 billion (with a “B”) by the United States for, among other things, its failure to prevent large scale money laundering in its Mexican subsidiary. It has publicly committed to operating to US standards throughout the world. In this context, an exit from a country like Panama may illustrate the hidden costs of doing business in countries with a poor record on corruption.  Such operations are by no means as profitable as they may seem.

Take away the moral relativism, and  the costs of continuing to operate in a higher risk country like Panama might become too great to make it worth while.  Those costs would include not only fines that, at the 1.9 billion mark, actually do grab the attention of senior management and investors. Other costs, such as risk management and compliance, and the need to turn away certain types of business, tip the scale from profitable to not. Add to these costs other indirect costs, like repairing damage to reputation, and the profit picture can change dramatically.

Although Panama has made a lot of progress in the years since it was placed, and subsequently removed, from the Financial Action Task Force’s list of Non-Cooperative Countries, its geographic location, coupled with issues relating to transparency, in particular, with respect to availability of ownership information of Panamanian companies and the availability of accounting information in respect of entities that do not receive any Panamanian-source income, would support a bank’s determination that doing business there is relatively high risk.

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Last week, Task Force and Global Financial Integrity Director Raymond Baker spoke at the prestigious Wilson Center in Washington DC, on the topic of Global Financial Integrity’s new report, Russia: Illicit Financial Flows and the Role of the Underground Economy, and its implications for Russia’s political and economic future. He also took questions from the audience.

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GFI and Task Force Director Raymond Baker present Senator Carl Levin with the 2011 Award for Exemplary Leadership for his contribution to financial transparency.

Senator Carl Levin has been the greatest champion of financial transparency in the United States Senate for over two decades. He will end his six-term career in two years, and will not run for reelection in 2014.

As Chairman of the Permanent Subcommittee on Investigations, he led efforts to investigate offshore abuse in the collapse of Enron, exposed rampant money-laundering facilitation on behalf of foreign dictators like Equatorial Guinea’s Teodoro Obiang at Riggs National Bank, and more recently, held hearings revealing how companies like UBS helped foreign tax evaders hide money from the IRS and companies like Microsoft and HP abused tax havens to lower their tax bill. He has introduced key pieces of legislation to help fulfill Task Force recommendations of country-by-country reporting, beneficial ownership, and automatic exchange of tax information.

From Politico:

“This decision was extremely difficult because I love representing the people of Michigan in the U.S. Senate and fighting for the things that I believe are important to them,” Levin, a Democrat, said in a statement released after the close of business.

The longest-serving senator in Michigan history spent months under pressure to announce his intention, from Democrats in Washington and back in his state. Party leaders have pushed members to make their plans known by the spring so that they can recruit and prepare top-flight candidates. He said he talked with his wife, Barbara, at length about whether to run.

“We decided that I can best serve my state and nation by concentrating in the next two years on the challenging issues before us that I am in a position to help address; in other words, by doing my job without the distraction of campaigning for reelection,” Levin said.

Senator Levin will be missed, although we look forward to the the great work he has planned for the next two years. You can read Ann Hollingshead’s profile of the Senator here.

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In late 2012 the Danish parliament decided to publish information about the amount of tax paid by all companies operating in Denmark. This move has increased the level of transparency considerably and has also spurred a debate on corporate tax payments in Denmark. According to the Danish Minister of Taxation, the so-called Open Tax lists are to increase transparency and should not pose a problem for the companies, unless they have something to hide.

68 percent of the companies operating in Denmark paid no corporate tax in 2011. This figure has attracted a lot of attention, but is probably an overestimation of the problem regarding tax evasion with which it is frequently linked. In reality it is difficult to estimate just how great the problem of tax evasion in Denmark is. According to a study made by The Economic Council (an independent economic advisory body established by law in 1962) a few years back, the loss of tax revenue, due to multinational companies transferring their profits abroad, amounts to as much as 14 billion kroner every year. In comparison, the total corporate tax revenues amounted to 40 billion kroner in 2011. It is also well known that large multinational companies such as for example Nestlé and Q8 have not paid any corporate tax in Denmark during the last 15 years.

The Confederation of Danish Industry (DI) is, however, concerned that the open tax lists might reinforce myths about the companies’ total contribution to the Treasury, which according to DI amounted to 450 billion kroner in 2011 (including the employees’ income tax, green taxes etc.). In a response, The Danish Minister of Taxation stated, that in his opinion, the increased level of transparency about companies’ tax payments both will be of benefit to society as such, and for the many companies that comply with and follow the Danish tax law, and therefore in some cases are competing on unequal terms.

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Yesterday, the U.S. Senate Banking Committee held a hearing titled, “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement.” The committee called three regulators to testify: David Cohen, Under Secretary for Terrorism and Financial Intelligence, United States Department of the Treasury; Thomas Curry, Comptroller, Office of the Comptroller of the Currency (OCC); and Jerome H. Powell, Governor, Board of Governors of the Federal Reserve System.

There were a lot of takeaways from this hearing. I’m sure that we will cover them on this blog in the days to come. But I think the clearest takeaway for policy change is that the U.S. needs some form of consolidation of the law enforcement and regulatory apparatus of its federal government. When repeatedly questioned, regulators from the OCC, Federal Reserve, and Treasury all passed the buck to other departments, and even resisted (video above) weighing in with their opinion on what enforcement is necessary. The Department of Justice wasn’t even called in to testify, even though the decision to criminally prosecute HSBC was ultimately in their hands. Enforcing AML laws is already a complicated process, but it is made even more complicated when you’re trying to coordinate between a half dozen different agencies and departments.

The most important impact of consolidation would be that one regulator would be held accountable for enforcing the law. Instead of calling in a panel of three different parties who can all (sometimes reasonably, sometimes not) point fingers at others for responsibility, (“The Justice Department didn’t prosecute, so we can’t do more”) oversees like the U.S. Senate could hold one authority accountable.

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