As part of the World Bank Group, The International Finance Corporation (IFC) has a mission to promote development. The IFC uses public aid money, to fund private companies’ operations in poor countries, which should generate growth and increased government revenues. But reports by IBIS and Eurodad found these companies using tax havens, taking revenue from those countries that they are meant to benefit.

To prevent is partners from undermining its mission the IFC should require transparency from companies that it funds. Firstly by demanding sufficiently detailed country-by-country reporting and secondly requiring beneficial ownership disclosure; meaning a company must reveal all subsidiary companies that it owns a stake in or exercises control over. By setting an example of good practice for governments to follow the IFC could really leverage its impact and ensure the private sector contributed much more to development by paying its share of tax.

Development institutions are meant to pioneer good practices and the fact that public funds for development are channeled into tax havens is a scandal in itself. The World Bank Group’s new policy will take concrete steps “to improve transparency” and to “ensure that its private sector operations are not used for tax evasion” but UN principles which this policy is supposedly based on, clearly say tax avoidance must be prevented too.

The new policy will help countries to cooperate on tax matters by sharing information, but it will only promote the weak standards of the OECD Global Forum process. Bolder steps should be taken requiring the main users of tax havens - companies and financial intermediaries to be transparent, disclosing their identity, financial performance and relevant details of their activities in each and every country where they operate.

In a study conducted between November 2010 and February 2011 on ill-gotten money and the economy, the Financial Integrity team looked at the experiences of Malawi and Namibia. We approached the project with an open mind and without any assumptions, finding that for Malawi, corruption and tax evasion as a percentage of GDP represent a significant drag on economic development. Corruption is estimated at 5% of GDP and tax evasion, at a whopping 8-12% of GDP.  Meanwhile, we estimated that tax revenue actually collected by the Malawi Revenue Authority is only 22% of GDP. Thus, if the national tax authority had successfully collected all the taxes it was due, government revenue would increase by 50 percent. This is approximately about how much Malawi receives in foreign aid (11.7 percent of GDP). As one Malawi Revenue official stated when being interviewed during the study: “if we collected all the taxes, we will then not have to depend on foreign aid”.

The Namibian tax evasion situation is no better, as uncollected taxes are equivalent to about 9% of the GDP. This is larger than education’s share of the economy and almost as large as the mining sector—which generates most of the country’s export income. What makes things worse is that Namibia suffers from the highest income inequality in the world: The Gini co-efficient, which measures the gap between rich and poor, is estimated at 70.7. Tax evasion siphons away money that could be invested in productive resources needed to diversify the economy and address urgent social problems.

Furthermore, the revenue lost through corruption and tax evasion represents a diversion (“leakage”) of financial resources away from the national budget toward private spending. And these private expenses or expenditures have much lower “multiplier effects” than expenditures on, for example, agricultural fertilizers, education, health, and infrastructure.

There are four key things that practitioners can take away from the new World Bank study “Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia”.

1. Losses caused by corruption and tax evasion are powerful examples of how criminal activities can potentially have tremendous negative effects on economic development.
2. Ill-gotten money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few.
3. Policymakers in governments and development institutions such as the World Bank cannot afford to ignore issues that stand in the way of achieving economic progress, because it means that many people remain in poverty. So, in the case of Malawi and Namibia, addressing corruption and tax evasion should be part of a continuing dialogue with the two governments in our engagement with policymakers.

The study confirms the importance for developing countries to adopt, for their own benefit, customized legal regimes and institutions to go after dirty money. The regimes should reflect local political, economic and social contexts.

As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or a bloated public sector—is our responsibility. No matter how contentious or uncomfortable it may be, we should avoid ignoring this “elephant in the room” and not look the other way when we know that any of these big issues are affecting a client country. We should explore initiatives that target the root of the problem—helping governments implement solutions to critical problems like tax evasion in the short-term, and exploring behavior-changing programs by educating youth on the perils of corruption in the longer term. We hope that policy makers will take our findings into account and do the same.

Global Financial Integrity

WASHINGTON, DC – The past twenty-four hours has seen the publication of two reports and the disclosure of an asset forfeiture complaint which, collectively, lay bare the size and seriousness of a global money laundering epidemic—underscoring the need for better incorporation transparency measures.

The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, published yesterday by the Stolen Asset Recovery Initiative (StAR)—a partnership between the World Bank and the UNODC, calls on world leaders to require the disclosure of the names of the beneficial owners of corporations, trusts and foundations upon formation, in addition to conducting a review of the effectiveness of anti-money laundering enforcement.

A civil forfeiture complaint, filed today by the U.S. Department of Justice (DOJ) against Teodorin Obiang, accuses the infamous son of Equatorial Guinea’s president of amassing over $70 million in ill-gotten gains, which he used to purchase “a Gulfstream jet, a Malibu mansion and nearly $2 million in Michael Jackson memorabilia.”

 A separate report, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crime, released this afternoon by the United Nations Office on Drugs and Crime (UNODC), estimates roughly $1.6 trillion was laundered globally by criminals in 2009.

The reports underscore the need for legislation like the bi-partisan Levin-Grassley Incorporation Transparency and Law Enforcement Assistance Act in the United States, which would help prevent criminals and tax evaders from laundering illicit money through U.S. financial institutions.

“Criminals, tax evaders, and kleptocrats from around the world like Teodorin Obiang are taking advantage of corporate secrecy structures in the U.S. to hide and launder illicit money here,” said Global Financial Integrity’s Legal Counsel & Director of Government Affairs, Heather Lowe. “This financial opacity puts law enforcement at a major disadvantage. Too often cases are dropped, or investigations are closed, due to a lack of evidence connecting the illicit funds held in accounts owned by anonymous corporations to the criminal owners of those companies.”

“The U.S. financial system is a playground for corrupt, criminal, tax evading individuals from other countries,” said Ms. Lowe. “It is far too easy to gain access to financial services in the U.S. through anonymous U.S. corporations, while it is far too difficult for law enforcement groups to figure out who is really behind those corporations.”

Moreover, The Puppet Masters validates calls by the Financial Accountability and Corporate Transparency Coalition (FACT Coalition), of which GFI is a member, for the U.S. to perform a regulatory review to determine the extent to which American banks are complying with anti-money laundering laws designed to keep criminal money, including the proceeds of corruption, out of U.S. banks.

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Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext. 222

Monique Perry Danziger
mdanziger@gfintegrity.org
+1 202 904 3113

Notes for Editors:

1. Click here for more information on the StAR Initiatve, and to download the new report, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It.
2. Click here for more information on/to download the new report from the UN Office on Drugs and Crime, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crime.
3. Click here for more information on the Incorporation Transparency and Law Enforcement Assistance Act.
4. Click here to read Global Financial Integrity’s statement on the Incorporation Transparency and Law Enforcement Assistance Act
5. Click here to read Sen. Carl Levin’s statement on the civil forfeiture actions filed against Teodoro Obiang
6. Click here to read Global Witness’ statement on the civil forfeiture actions filed against Teodoro Obiang
7. Click here to download the FACT Coalition’s letter to U.S. bank regulators calling on them to conduct a review of U.S. anti-money laundering compliance.

“We need to put corporate transparency back on the national and international agenda,”said Emile van der Does de Willebois, World Bank Senior Financial Sector Specialist who led the StAR research team. “It is important for governments to increase the transparency of their legal entities and arrangements and at the same time improve the capacity of law enforcement.” 

The report, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, examines how bribes, embezzled state assets and other criminal proceeds are being hidden via legal structures – shell companies, foundations, trusts and others. The study also provides policy makers with practical recommendations on how to step up ongoing international efforts to uncover flows of criminal funds and prevent criminals from misusing shell companies and other legal entities.

The study explains how corrupt public officials and their associates conceal their connection to ill-gotten funds by exploiting legal and institutional loopholes that allow opacity in companies, foundations and trust-like structures. It also lists obstacles to investigating and establishing the origin and ownership of stolen assets: the difficulty of identifying where legal entities operate and have business relationships, lack of access to information on beneficial ownership and the use of complex and multi-jurisdictional corporate structures.

Drawing on evidence from relevant stakeholders, the report advises policymakers on how to effectively address the problem of corrupt payments made through opaque companies. In particular, the study recommends that more detailed information be collected in corporate registries, and that providers of legal, financial and administrative (incorporation and management) services to legal entities more effectively conduct due diligence on those controlling corporate entities.

The study is based on research including an analysis of 150 grand corruption cases and an examination of the practices of 40 jurisdictions and their company registries in collecting, updating and providing access to beneficial ownership information of legal entities. The report also draws on the experiences of more than 77 experts from 33 jurisdictions in investigating the misuse of transnational legal structures.

To access the report, please visit www.worldbank.org/star

Contacts:
In Washington DC: Xenia Zia Morales, +1 202 473 9027, xmorales@worldbank.org

For Broadcast Requests: Natalia Cieslik, (202) 458-9369, ncieslik@worldbank.org

Fortunately, as a result of efforts by organizations like the Center for International Private Enterprise, international aid and development organizations have increasingly understood the importance of addressing both the supply and the demand of corruption.

The OECD 2009 Anti-Bribery Convention, for example, specifically addressed the issue of the supply of corruption, while also attempting to addressing demand. The OECD notes:

It is clear that there are two sides to bribery. As the largest exporters of trade and investment in the world, multinationals represent, by far, the greatest potential source of bribe money. The supply side was a logical place for our countries to start, notably given that these countries are home to most multinational enterprises. However, the problem of the demand for bribes is not being neglected. The OECD promotes cooperation with a number of other regions of the world, and other international instruments also offer sound strategies to combat the demand side.

The World Bank (WBG), like the OECD, has become concerned with the supply of corruption, particularly as it applies to WBG operations. In 2007 the Bank adopted a new Governance and Anticorruption (GAC) Strategy in March and an Implementation Plan in October. The Strategy shows promise, but has experienced an interesting limitation. A recent audit by the Independent Evaluation Group shows that since adoption of the GAC, the World Bank has remained too focused on improving its own resources and reputation in dealing with those issues. That is to say, the Bank has been so careful about providing a potential supply of money for corruption that it has overlooked other important elements of anticorruption.

What are those other elements? According to the Navin Girishankar, the study’s main author, the Bank needs to focus on institutions and policies within borrowing countries that will make them more accountable. And while the Bank has made a lot of promises to help countries strengthen their public sector, they have yet to show results in any concrete projects. As Girishankar put it: “The bank has to focus on helping countries develop the capacities to govern… There is a gap between the plans and the follow-through that needs to be filled.”

It’s true. It is easy to become overly focused on the micro-interactions that take place in a corrupt exchange. Those are important and powerful factors, but so are the surrounding institutions that allow the exchange to take place. Or as an economist might see it: there is a demand of corruption, a supply of corruption, and a set of “market” conditions that drive the transaction. Those market conditions are the nation’s institutions.

Joachim von Amsberg, vice president for the Bank’s operations policy and country services, responded that he could “live with a criticism that we have spent too much time protecting our own money.” And it’s good to hear the Bank is being careful. But now it’s time to solve the problem.

Vietnam and the World Bank recently held the first Viet Nam Anti-Corruption Intiative, or VACI.  The Initiative encouraged the public—whether ordinary citizens, NGOs, or private business—to develop proposals to help combat corruption in their communities.  VACI then selected 34 promising ideas, and awarded a total of approximately $450,000 to help fund the implementation of these plans in the coming year.  It is hoped that this initiative will be repeated in 2013.

In order for pervasive corruption to be combated effectively, public support for anti-corruption initiatives is essential, and this year has seen people around the world taking a stand against graft in their societies.

The year began with ordinary Tunisians and Egyptians boldly casting out the corrupt dictators who stole their countries’ resources for decades.  Bribery reporting websites, such as IPaidABribe.com (I Paid A Bribe), have become popular in India, China, and elsewhere.  I Paid A Bribe has seen over 12,500 bribes reported, totaling almost $7,000,000 (317 million rupees).  Now, the Indian public continues to take a strong anti-corruption stance, with students, Bollywood stars, and even Mumbai’s famed dabbawallahs, or lunch-deliverymen, have thrown their support behind Anna Hazare and his India Against Corruption movement.

The persistence of, bribery in the developing world, or tax evasion in countries like Greece and Italy, stem from the pervasive nature of the problem.  When people feel that corruption is just part of “the cost of doing business” or that they have no realistic alternative to resorting to bribery, it becomes intractable.  Programs like this initiative from the World Bank offer people in developing countries the resources they need in order to rid their societies of corruption.

VACI’s sponsored initiatives include seemingly basic elements, like educating members of the country’s Khmer minority about their legal rights and resources when dealing with corruption.  These basic tools are the first step towards empowering populations   With luck, this model of financing grassroots efforts towards transparency will provide a successful model to emulate elsewhere.

For similar reasons, researchers collect countries into groups based on a variety of metrics that define prosperity. These systems allow us to compare gains in development, to better understand how gains in development can be achieved, and determine appropriate aid packages. It isn’t always easy because there isn’t any one parameter that successfully defines wealth or prosperity.

The most ubiquitous parameter of wealth is Gross Domestic Product (GDP) or Gross National Income (GNI). I won’t get into the finer details of the difference between the two, but if you don’t know already and you’re interested, check out this explanation. In fact, GNI per capita is the standard and only parameter by which the World Bank classifies economies. The Bank notes:

The Bank’s analytical income categories (low, middle, high income) are based on the Bank’s operational lending categories (civil works preferences, IDA eligibility, etc.). These operational guidelines were established based on the view that since poorer countries deserve better conditions from the Bank, comparative estimates of economic capacity needed to be established. GNI, a broad measure, was considered to be the best single indicator of economic capacity and progress; at the same time it was recognized that GNI does not, by itself, constitute or measure welfare or success in development. GNI per capita is therefore the Bank’s main criterion of classifying countries. [emphasis mine]

As I’ve noted before, and as the Bank and other organizations recognize, GDP and GNI are problematic measures of wealth and prosperity. These statistics tend to over-emphasize certain elements of wealth and under-estimate others. So grouping nations along these lines would (misleading) place some countries in higher income categories than their true level of development (for example, Qatar, which has one of the highest rates of GDP per capita in the world, but is still …) or might classify an otherwise prosperous nation as developing.

No where are these distinctions more important—or more difficult—than in the classifications between low income and middle income economies. Many countries have a relatively high GDP per capita, but still struggling populations living in poverty. Take Nigeria, which falls into the World Bank’s category of “lower-middle income economies,” with a GDP per capita of $2,500. YetNigeria still suffers from serious developmental blocks, including widespread poverty, poor governance, and instability.

Nigeriais not alone. In fact, a phenomenon is now emerging that this group of economies is rapidly growing. As the Economist recently noted, 15 of the 56 countries on the “bank’s lower-middle income list (ie, over a quarter) also appear on the list of fragile and failed states maintained by the OECD.” The article calls them MIFFs or Middle-Income Fragile or Failed states and accurately notes that they present a huge developmental obstacle for aid-donors. As the Economist observes, “Being no longer poor, their elites rarely see the need for aid, military or developmental. Being fragile, their governments often consist of complex, fractious coalitions that are hard to deal with.”

It is important that we do not treat these countries like their low-to-middle income cohorts that are successfully growing out of poverty. Their political systems prevent them from achieving true development, despite growing incomes or resource endowments. In some places—Equatorial Guineacomes to mind—this prosperity actually hinders development. As in medicine, treatment requires an accurate diagnosis, which can only be achieved with a nuanced and precise classification of symptoms.

This is certainly a major step forward in improving transparency and effectiveness in foreign aid.  By making the amounts of aid devoted to specific projects immediately accessible, anti-corruption advocates will have more information to help ensure aid is being spent effectively and not being diverted by corrupt officials for personal gain.  It also provides tools for ensuring that members donating to the Bank’s various funds live up to their promises and meet their funding commitments.

Calls for improved transparency and an increased focus on aid effectiveness have been a major goal of U.S. Senator Dick Lugar, one of the main advocates for changing the culture at the World Bank and similar institutions.  Last March, the U.S. Senate Committee on Foreign Relations, where Lugar is the ranking member, released a report, titled “The International Financial Institutions: A Call For Change,” focused on the effectiveness of the World Bank and its regional counterparts, noting:

The study explicitly concerns reforms that will “enable the recovery of stolen assets” as the result of corruption. It is a topic which has been given a fair amount of attention lately, particularly in the wake of the Arab Spring. Ben Ali of Tunisia, Hosni Mubarak of Egypt, and Muammar Qaddafi of Libya all hid millions of dollars abroad, money that was frozen and publicized soon after revolutions began in their (respective) countries. Of course, as I’ve noted, injustice also lives outside the headlines. These three men are not the only leaders to steal money from their citizens and stash it abroad. And it is not only the men (and women) at the top levels of leadership who commit these crimes. In fact, proceeds of corruption escape the boarders of developing countries from nearly all levels of government.

The World Bank paper specifically addresses this issue and it also…

…recommends eight strategic actions and other recommendations for policy makers, legislators and practitioners. They include the implementation of new policies and operational procedures to foster trust and mentor other jurisdictions, legislative reforms to facilitate freezing and confiscation of stolen assets, and better application of existing anti-money laundering measures.

So what does this have to do with illicit financial flows? A lot, actually. It turns out as part of these recommendations, the World Bank also notes:

Because criminals often use other individuals, attorneys, and legal persons to hide assets, such tools would be even more useful if they identify the beneficial owner of the account and any power of attorney related to the account. By helping to identify accounts, central bank registries…speed the work of law enforcement authorities in asset recovery cases.’ [emphasis mine]

This is a big step forward because requiring banks to identify the beneficial owners of accounts will aid developing countries (and developed countries, too) in recovering assets from not just corrupt leaders, but also criminals, tax evaders, terrorists and other transmitters of illicit financial flows. As the Task Force notes:

Financial institutions, including banks, are required to identify their customers as part of their account opening due diligence, but the true customer is often hidden behind layers of companies and trusts. Then, if money needs to be traced by investigators, these structures also make uncovering the true nature of transactions and tracing beneficial ownership and the origin of funds very difficult. The modus operandi of illicit financial flows are not aberrations but a part of a broad structural problem. [emphasis mine]

Those concerned with illicit financial flows have welcomed this report with open arms. David McNair, Christian Aid’s Senior Adviser on Economic Justice, has noted his organization is “pleased to see the Bank recognizing what it calls ‘excessive banking secrecy’ is part of the problem facing poor countries and that greater exchange of financial information between countries is part of the solution.”

Even if it is tacit (or possibly unknowing), the World Bank has taken a big step forward in the fight to curtail illicit financial flows. This is good news all around.

LONDON – Christian Aid has welcomed a new from the World Bank for countries to exchange information about who really owns companies, bank accounts and other financial assets within their borders, in a bid to help recover the billions currently stolen from poor countries each year.

‘Christian Aid is delighted that the Bank is speaking out about the urgent need for countries to lift the financial secrecy which criminals abuse to hide dirty money,’ said DrDavid McNair, the agency’s Senior Adviser on Economic Justice.

‘At present, some countries obstruct investigators who are attempting to trace and recover the staggering amounts of money stolen from poor countries, by claiming that they do not have the information sought.

‘The Bank’s recommendation that countries should create publicly-available registries of who owns what within their borders could make a dramatic difference to poor countries, which currently struggle to trace and recover even a small fraction of the billions they lose to tax dodging, corruption and other financial crimes.

‘Christian Aid estimates that at present, the amount developing countries lose to tax dodging by companies trading across borders is some $160 billion a year, which is one-and-a-half times the amount they get in aid from rich countries.

‘Access to information is also crucial for tax authorities wanting to pursue suspected international tax dodgers. At present, many developing countries cannot access this information – global financial secrecy works powerfully against them.’

The Bank’s recommendations about reforms needed to help recover stolen assets come in a new 196-page report called Barriers to Asset Recovery.

It states: ‘Establishing a national bank registry of account holder information is a powerful tool to facilitate the tracing of assets and to accelerate and assist international cooperation.’

The World Bank also notes: ‘Because criminals often use other individuals, attorneys, and legal persons to hide assets, such tools would be even more useful if they identify the beneficial owner of the account and any power of attorney related to the account. By helping to identify accounts, central bank registries…speed the work of law enforcement authorities in asset recovery cases.’

As well as recommending the creation of such registries, the report makes a host of other suggestions aimed at helping developing countries recover more of the $20 to $40 billion which it estimates they currently lose through corruption each year. The Bank also estimates that of this huge outflow, only $5 billion of stolen assets has been repatriated over the last 15 years.

‘Christian Aid is also pleased to see the Bank recognising that what it calls ‘excessive banking secrecy’ is part of the problem facing poor countries and that greater exchange of financial information between countries is part of the solution,’ added Dr McNair.

Christian Aid is part of the End Tax Haven Secrecy campaign, which is calling on G20 leaders to agree at their November summit in Cannes, France, on action to effectively end tax haven secrecy. A new system through which all countries can automatically share financial information with each other is a critical part of such action.

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Contact:

Rachel Baird
+44 0207 523 2446
+44 07545 501 749
rbaird@christian-aid.org

Notes to Editors

1. Christian Aid works in some of the world’s poorest communities in nearly 50 countries. We act where the need is greatest, regardless of religion, helping people build the lives they deserve.
2. Christian Aid has a vision, an end to global poverty, and we believe that vision can become a reality. Our report, Poverty Over, explains what we believe needs to be done – and can be done – to end poverty.  Details at http://www.christianaid.org.uk/Images/poverty-over-report.pdf
3. Christian Aid is a member of the ACT Alliance, a global coalition of 100 churches and church-related organisations that work together inhumanitarian assistance anddevelopment.  Further details at http://www.actalliance.org
4. Follow Christian Aid’s newswire on Twitter: http://twitter.com/caid_newswire
5. For more information about the work of Christian Aid visit www.christianaid.org.uk

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The Task Force on Financial Integrity and Economic Development addresses inequalities in the global financial system that penalize billions of people, and advocates for improved transparency and accountability.

Christian Aid is a coordinating committee  member of the Task Force on Financial Integrity & Economic Development.

For additional information please visit http://www.financialtaskforce.org.