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An Indictment of Financial Crime Enforcement

A Year after HSBC, Is the U.S. Doing Enough to Fight Money Laundering?


By Joshua Simmons
Thomson Reuters Foundation
January 14, 2014


Writing in the current New York Review of Books, Jed S. Rakoff castigates the U.S. government for failing to prosecute any executives of financial institutions responsible for the recent, world-shaking financial crisis. As a judge on the U.S. District Court for the Southern District of New York, Rakoff has witnessed firsthand much of the legal denouement of the crisis, and his disappointment with the government’s inadequate response carries a great deal of weight. Rakoff questions the government’s reasoning in generally not even threatening criminal charges for executives, despite overwhelming evidence that knowledge and responsibility for the mortgage-backed asset bubble predicating the financial crisis rose to the highest levels in many banks.

But this hesitancy to prosecute individuals is a much broader phenomenon, afflicting recent government investigations into all types of financial tomfoolery. The American financial system continues to launder criminal and terrorist money from all over the globe on a daily basis, often right under the noses of executives in the banks responsible. Massive breakdowns of the compliance programs legally required under the Bank Secrecy Act (BSA) have led to tens of billions of dollars in fines, but almost no repercussions for the responsible individuals—and none at all for the high-level executives who enabled their behavior.

Illicit Trade Invoicing Fuels China’s Currency, Housing Speculation

US$400 Billion Smuggled into China from Hong Kong through Trade Misinvoicing Since 2006

By Brian LeBlanc
Thomson Reuters Foundation
January 7, 2014

China’s regulatory body responsible for managing the country’s foreign exchange reserves (SAFE) announced last month that it was planning to increase enforcement and penalties associated with the abuse of trade payments to mask illicit inflows of foreign exchange. The Wall Street Journal reports that Chinese authorities have uncovered 1,076 instances of false reporting of export invoices by 112 companies, adding up to approximately $2.5 billion. Still, SAFE has not disclosed the severity of the problem nor how it would clamp down on such practices—leaving many questions to be answered. Allusions to “fishy” trade with Hong Kong were given, but specifics were lacking.

How exactly are traders using trade payments to circumvent controls on bringing foreign capital into China? One measurable way which Chinese regulators alluded to is a process known as “export over-invoicing”. This involves the deliberate falsification of export invoices to make it seem as if exporters are sending more goods out than they actually are. By doing this, an  exporter can smuggle in additional capital—under the guise of legitimate trade payments—before diverting the foreign capital (illegally) into other more lucrative  investments like bonds or real estate.

Developing Countries Are Being Undermined by Rich Nations' Greed

Australia's complicity in money laundering hurts the world's poor.


By Tom Cardamone and Clark Gascoigne
The Sydney Morning Herald
December 30, 2013


When you hear the words ''global development'' what comes to mind? Foreign aid? Malaria prevention? Humanitarian assistance?


These are all worthy causes, but the most damaging economic problem facing the world's poor today is the flow of illicit money leaving developing economies as a result of crime, corruption, and tax evasion. Two recent studies drive this point home.


U.S. Must Do More to Tackle Phantom Firms on International Anti-Corruption Day

By Joshua Simmons
Thomson Reuters Foundation
December 10, 2013

Monday was International Anti-Corruption Day, an occasion for those who work to fight bribery, money laundering, and illicit capital flight to reflect on the past year and set goals for the next. We have many reasons to celebrate 2013, but also plenty of work still to do in 2014. At Global Financial Integrity, our research shows that nearly $1 trillion leaves developing countries each year (many times the amount such countries receive in official development assistance) through illicit financial outflows, a devastating loss of capital facilitated by a shadow financial system more than happy to accommodate corrupt assets. Gains in tax information exchange and other areas this year will surely help curtail some of this moving forward, but there are many more policy changes needed before this economic scourge can be effectively addressed.

One ubiquitous component of the shadow financial system is the use of phantom firms—otherwise known as “anonymous shell companies,” legal entities with no physical assets or discernible owners—to open bank accounts and transfer money worldwide. Corrupt officials and criminals have used phantom firms for decades to evade detection, and—according to multiple international studies—the United States is one of the easiest countries in the world in which to establish one. The solution to this problem is conceptually quite simple: require legal entities to disclose the names and addresses of their “beneficial owners”—the real human beings behind them—so that law enforcement can follow the money trail when a company is used for nefarious purposes.

Why Bitcoin (& Other Cryptocurrencies) Will Inevitably Become Tools of the Rich, Powerful & Criminal

By E.J. Fagan
Business Insider
December 3, 2013


Last week, an op-ed that I wrote for The Baltimore Sun prompted a lot of very strong reactions, both positive and negative. I argued that efforts to make Bitcoins functionally anonymous are very dangerous, because money laundering is inherently very dangerous.


To summarize my argument: transnational crime is a global business valued in the hundreds of billions of dollars, and criminals need a way to easily launder, move, and invest that money to make it worth the risk. I brought up two examples—rhino poaching and human trafficking—in the op-ed, but there are dozens more crimes (including drug trafficking and weapons smuggling) to which you can refer.


Bitcoin and International Crime

A Johns Hopkins professor's efforts to develop an untraceable digital currency are dangerous

By E.J. Fagan
The Baltimore Sun
November 25, 2013

U.S. law enforcement officials have been shutting down giant illegal marketplaces that do business in "bitcoin" and are beginning to lay out plans to regulate such digital currencies — like we do any other kind of money — by requiring that money laundering controls be applied to the transactions.

The virtual bitcoin currency is not backed by any central bank or government and can be transferred "peer to peer" between any two people anywhere. It is created through a complex computer mining process that allows people to earn new bitcoins by solving certain mathematical problems.

Following the Money: Tracking Illicit Cash Flows from Developing Countries

The US is the second easiest country to open a money laundering firm in. And despite tax reforms, the government is perilously behind in the movement for corporate transparency


By Raymond Baker
The Guardian
October 18, 2013


In March 2010, facing high unemployment in the wake of the largest financial crisis since the 1930s, the US Congress passed the Hiring Incentives to Restore Employment Act (Hire), hoping to stimulate the American job market. While the Hire act dominated news headlines at the time, a lesser-known provision of the legislation, known as the Foreign Account Tax Compliance Act (Fatca), was included in the bill as a means of paying for the stimulus measure. Few people remember the Hire act; Fatca was a real game changer.


For the first time ever, foreign financial institutions were required to report information to the Internal Revenue Service (IRS) about their American clients, or they would automatically face a 30% tax on their US source income. This quintessentially American—my way or the highway—approach to tax policy indubitably ruffled some feathers. However, the result of the legislation has been the largest collaborative, cross-border crackdown on tax evasion in history.


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