Global Financial Integrity

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Event Recap: How Illicit Financial Flows are Europe’s Common Enemy

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On Wednesday, representatives from the Senate, European Embassies of Luxembourg, the Netherlands, and anti-corruption NGOs, including GFI’s Tom Cardamone, gathered in the U.S. Senate’s Kennedy Caucus Room to discuss the growing dangers of illicit financial flows in Europe as major contributors to the European financial crisis.

U.S. Senator Jeff Sessions (R-AL) spoke about his experience with Russia’s systematic aggression in the Balkan areas, and advised they take a stronger stance against Russian encroachment. Dependence on American financial and military hegemony in the region is not a sustainable security solution, he added. Sessions, who also served as Attorney General of Alabama, urged that Central and Eastern Europe push for anti-corruption and transparency laws.

I am convinced that prosperous and open societies make the world better. The values of financial integrity are exactly what we need.

All agreed that financial integrity is the linchpin of stability and security. Hon. Becky Norton Dunlop, Vice President of the Heritage Foundation, said:

Ensuring transparency is key to dealing with corruption.

This is not just a Republican issue. This is not just a Democratic issue; this is an issue for all Americans.

The crisis in Crimea was preventable, argued Natasha Srdoc, Chairman of the Adriatic Institute for Public Policy. Regional stability is greatly undermined by Western European banks promoting fraudulent transactions in the Balkans. Had Ukraine formally broken its ties to Russia and joined the EU, it could have deterred Russia from annexing Crimea. Yet joining the EU may also have exposed the corruption schemes of Ukrainian elites, including that of former President Viktor Yanukovych and former PM Pavlo Lazarenko, whose own anonymous shell company was based in Wyoming.

Yet the annexation of Crimea wasn’t the only crisis that could have been avoided. The European economy may have fared better in the Eurozone crisis had illicit cash flow not undermined the system’s integrity.

Whistleblower John Christmas, exiled from Latvia in 2009, provided a perfect case study: a staggering fourteen of Latvia’s seventeen major banks are offshore specialists for Central Asia and Eastern Europe. In 2008, Latvia’s economy plummeted when Parex, Latvia’s second largest bank (and Christmas’s former employer), collapsed and was bailed out with taxpayer money. Puzzlingly, however, the taxpayer-funded European Bank for Reconstruction and Development bought a 25% stake in the virtually worthless Parex for a staggering $104M. This purchase was later revealed as fraudulent due to a secret “put option” which made the transaction reversible. In 2010, when Parex split and created the Reverta and Citadele Banks, the EBRD received a huge return on its investment in Citadele, though all other Parex shareholders received nothing. Neither Citadele nor EBRD has offered an explanation.

There isn’t one silver bullet to eliminating the outflow of capital from developing economies, but the United States and the West can start by making it more difficult to stash the proceeds of corruption in their banks and behind anonymous companies incorporated in their jurisdictions. The U.S. can start by adopting the Incorporation Transparency and Law Enforcement Assistance Act, currently in the Senate Judiciary Committee.