21-27 February 2014 #695

Dirty money

Erik Solheim

SPEAK UP: Demonstrators in New York protest against HSBC in February 2013 for the bank’s involvement in money laundering for drug cartels and alleged terrorists.
The world is now less than a year away from the deadline to meet the United Nations Millennium Development Goals set in 2000. Extreme poverty has been halved, as promised. But more must be done to meet the health, education, environment, and gender-equality goals.

One way to speed up the progress is to limit the large amounts of money illicitly flowing out of developing countries, where it could be invested, into assets and bank accounts in the OECD.

An estimated $1 trillion, almost one-third of Africa’s GDP, leaves less developed countries (LDC) annually, though the true size of hidden transfers is, by definition, almost impossible to ascertain.

One obvious cause of these outflows is poor governance in developing countries. But recent OECD research suggests that rich countries are also at fault for failing to devise and enforce adequate laws to track and prevent illegal money transfers.

Governments are concerned mainly with two types of illicit financial flows. The first involves cash from criminal activities such as human trafficking, drugs, smuggling, and corruption. The profits are laundered via intricate webs of shell companies into foreign banks and property, emerging in the form of respectable homes and legitimate businesses. The second involves legitimately-earned money seeking to evade taxes.

In either case, the illicit cash requires access to the global financial system in order to find a safe hiding place. It is not in a country’s interest to allow that. For starters, illicit financial flows deprive governments of tax revenues to fund health care, education, and other vital public services. Worse, once legitimised, illicit money is often used to fund further illegal activities, including civil wars and terrorism.

Money launderers and tax evaders can be stopped if they are exposed to the harsh light of financial transparency. Unfortunately, even the best-governed countries are unable to see the full picture.

27 of the 34 OECD countries do not have sufficient corporate ownership information and none is fully compliant with the Financial Action Task Force’s recommendations on preventing money laundering. The priority for tax and legal authorities must therefore be to discover who owns what assets and where they come from.

This is best achieved through global governance and cooperation. But there are other potholes too. For example, efforts to improve tax collection – a key problem for many struggling economies – will achieve little if corrupt officials can simply siphon revenues. Similarly, improved tax collection will not prevent multinational companies from using their complex global shareholding structures to transfer profits to lower-tax jurisdictions.

Fortunately, there is growing political will to tackle these issues. The G-8 and G-20 recently agreed to share tax information. Governments have started to close loopholes and force companies to disclose full ownership information.

The United Kingdom, for example, recently approved the creation of a public registry of company owners. At the same time, banks found guilty of assisting money laundering now face record penalties. HSBC, accused of laundering Latin American drug money, was fined $1.9 billion.

Britain’s new financial-crime investigators have also managed to repatriate $1.2 billion of the missing $4 billion that former Nigerian dictator Sani Abacha hid in Switzerland, Luxembourg, Jersey, Liechtenstein, Belgium, and the UK.

Such successes may deter crime, but only up to a point. An estimated $1 trillion in bribes to state officials continues to be paid every year by companies and wealthy individuals.

Half of OECD member states have yet to see a single prosecution. If such crimes are not prosecuted and severely punished, dishonest companies will continue to flout the law, while responsible companies, having lost business after refusing to pay bribes, may start to rethink whether the ethical approach makes commercial sense.

Corruption corrodes trust in our financial institutions, brings out the worst in even the best of us, and, when one considers its impact on ordinary lives, is morally repugnant. We must thus take our own rules and responsibilities more seriously.


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