June 23, 2010
This article was originally published by The Diplomatic Courier.
Last December an ageing Russian Ilyushin Il-76 cargo plane flying from Pyongyang, was detained during a scheduled refueling stop in Bangkok. When the belly of the plane was inspected security personnel found 35 tons of illicit military equipment that, it was later discovered, was on its way to Iran. While it is a positive development that the $18 million cargo of rockets, surface-to-air missile launchers and rocket-propelled grenades was detected before reaching its intended destination, the arms shipment was anything but a rare occurrence. Worse, the shadowy world of shell companies, nominee directors and multi-jurisdictional layering of corporate entities, which are at the heart of this affair, was left completely intact. Fortunately, the G20 nations can play a hugely positive role in ameliorating this growing problem.
For most observers the Bangkok arms story began and ended the day it first hit the wires: gun runners flying from a rogue state, the CIA picks up the trail, they tip off the Thai military and the guns are seized. But upon closer inspection this interdiction had all the makings of a fast-paced spy novel. The shipment was part of a complex web of companies based in several countries, which had the sole purpose of distancing the owners of the aircraft from the arms shipment. The cargo plane is owned by a UAE company but is registered to a firm in Georgia. In the weeks preceding the flight, the aircraft was leased to an entity in New Zealand, which then chartered it to a newly established company in Hong Kong. Along the way, banks in New York, Georgia and Denmark were used to facilitate the transactions. The New Zealand business was set up by an enterprise in Vanuatu that openly promotes financial secrecy.
The simple, but chilling fact is that the global economic system which easily facilitates tax evasion, money laundering and government corruption is the same system employed by gun runners, drug cartels and terrorist groups to perpetuate their illegal, and sometimes deadly, activities. Fraudulent foundations, secret bank accounts and flee clauses, which allow corporate entities to shift jurisdiction with little difficulty, are all components of a system designed to hide funds and shield ownership. Opacity in the international financial system was once thought to be a problem solely for tax authorities, especially during the current economic slowdown, but is increasingly understood by policy planners to be a national security challenge of great significance.
Indeed, the Taliban and al Qaeda have also used this financial structure to support their terrorist networks. News reports have estimated that last year alone the Taliban received $100 million from supporters outside Afghanistan. This figure is in addition to untold millions of dollars received from the opium trade and its related money laundering activity. This has not escaped the notice of the U.S. Treasury Department. In January, the Assistant Secretary for Terrorist Financing David Cohen told a Washington audience that “our actions, and those of our . . . partners, are much more effective when there are strong systemic safeguards built into the international financial system.” Cohen went on to note that “laws and policies [are needed] to foster financial transparency and to enable swift and sure action against terrorist financing.”
The world’s largest economies have become awakened to the deleterious effect that opacity can have on the global economy. In London last year, the G20 noted that “the era of bank secrecy is over” and in L’Aquilla the G8 said it will work to “fight against . . . illegal financial flows.” But with no nation being immune to terrorist attacks it is time for the international community, specifically the G20 states, to take concrete steps to undermine terrorist financing networks. To do this, actionable mandates infusing more transparency into the legitimate economic system are critically important. These should include instructions that:
- the FATF require that the beneficial ownership of all companies, trusts, foundations, and charities be made a matter of public record;
- predicate crimes for a money laundering charge, especially those committed outside the borders of the country in which the funds are laundered, be harmonized among G20 nations;
- the FATF include tax evasion as a predicate crime for a money laundering charge;
- the World Customs Organization, and the World Trade Organization if applicable, address trade-based money laundering by requiring both buyer and seller to sign a declaration on a commercial invoice stating that no price manipulation has occurred.
By directing the FATF and multilateral groups to implement these steps the G20 will put teeth behind its positive statements about the globe’s financial problems. Individual member states should jettison traditional discussions about north-south priorities. Transparency should be a priority for all nations that want to protect themselves from terrorist bombings. Taking action should not even be considered a matter of political will; it should be seen as a common sense approach to national security.