Global Financial Integrity

 

On International Anti-Corruption Day, GFI Reviews Major Developments from 2013

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Clark Gascoigne, +1 202 293 0740 ext. 222
E.J. Fagan, +1 202 293 0740 ext. 227

WASHINGTON, DC – As the world commemorates International Anti-Corruption Day on Monday, December 9, 2013, Global Financial Integrity (GFI)—a Washington-based, non-profit research and advocacy organization—reviewed many of the most notable achievements, developments, and shortcomings in fighting corruption and illicit financial flows for 2013.

“2013 has proven to be a landmark year in terms of policy advancements to curtail corruption and illicit financial flows,” said GFI President Raymond Baker, a longtime authority on financial crime. “Years of hard work by policymakers, researchers, and advocates culminated in real, on-the-ground policy achievements that will directly impact the amount of money leaving developing countries. We saw a few setbacks, but overall the year was very encouraging.”

International Action Leads to Multilateral Automatic Exchange of Tax Information

At the G20 St. Petersburg Summit in September, leaders of the world’s largest economies for the first time committed to automatically exchange tax information with each other by the end of 2015.

“This is a major advancement in the battle against tax evasion,” said Heather Lowe, GFI’s Legal Counsel and Director of Government Affairs.  “Four or five years ago, the idea of automatically exchanging tax information wasn’t even on the table.  Now, the twenty largest economies in the world have announced that they will begin sharing information automatically within two to three years.  This is really a sea change.”

Even before the G20 Summit, the United Kingdom and David Cameron—aided by a push from the United States to sign intergovernmental agreements around the Foreign Accounts Tax Compliance Act (FATCA)—began organizing the first-ever multilateral system of automatic tax information exchange. The multilateral pilot program was initially limited to countries in the European Union, but it has rapidly expanded to cover 37 parties, including notable tax havens and developing countries. Global Financial Integrity is highly encouraged by the quick growth of the system, and it applauds its inclusion of developing countries.

UK Announces Public Registries of Beneficial Ownership

In October, UK Prime Minister David Cameron announced that the United Kingdom will create a central public registry of corporate beneficial ownership information and called on other countries to join the United Kingdom by establishing their own public registries. The registry will make it difficult for criminals, kleptocrats, tax evaders, and others to use an anonymous UK shell corporation to hide the true identities of the beneficial owners of a business entity.

Ms. Lowe, praised the historic move, “David Cameron is proving to be the true global leader on tackling the kind of financial opacity that has stymied growth in developed and developing nations alike. October’s announcement that the United Kingdom will not only be the first nation to collect information on who owns and controls the companies created in the UK—but that the information will be available to the public—is truly groundbreaking.”

Mixed Progress on Beneficial Ownership outside the UK

While there was tremendous progress in 2013 on beneficial ownership in the United Kingdom, the rest of the world lagged behind in following through on policy measures to address phantom firms. At the Lough Erne Summit in June, all G8 countries agreed that anonymous shell companies are an international problem, but most countries—including the United States—failed to offer strong commitments to implement policies to fix the problem, including committing to public registries of beneficial ownership.

“Anonymous shell companies are the most-widely used method for laundering the proceeds of crime, corruption, and tax evasion,” noted Ms. Lowe. “But these phantom firms are also used to disguise campaign contributions, get around being barred from an industry, and dupe other business owners. Public registries of meaningful corporate ownership information are not only about stopping crime, they are about sound business practice and open and fair elections, among other things.  The G8 Leaders failed to grasp this basic and important concept.”

GFI Study Finds for the First Time Africa is a Net Creditor to the World

May 2013 study jointly produced by Global Financial Integrity and the African Development Bank found for the first time that the rest of the world takes more money from Africa than it gives back.

The report, Illicit Financial Flows from Africa and the Problem of Net Resource Transfers, found that Africa ran a net resource transfer deficit of between US$597 billion and US$1.4 trillion between 1980 and 2009.

Mr. Baker remarked, “For decades, the narrative from Western countries has been that we are generously giving billions in foreign aid to Africa, but Africa fails to utilize it and develop. This report makes it clear that Western countries were really giving back just a fraction of what they were absorbing in illicit financial outflows and capital flight from Africa.”

GFI Study Examines Illicit Financial Flows from Russia

In February, Global Financial Integrity released a report analyzing illicit financial flows from Russia. For the first time, the study, titled “Russia: Illicit Financial Flows and the Underground Economy,” looked at both illicit inflows and outflows, and found startling results. US$211.5 billion in illicit outflows and US$552.9 billion in illicit inflows moved in and out of Russia from 1994 through 2011.

The report found strong evidence of a dangerous feedback loop between total illicit flows and the growth of Russia’s underground economy. GFI Chief Economist Dr. Dev Kar, the primary author of the report, called the connection, “a snowball effect, whereby both the underground economy and illicit flows continue to grow at an increasing rate until policy measures and institutions intervene.”

The controversy surrounding the Cypriot financial crisis brought increased attention to the report’s findings. The study found that Cyprus, a small island nation with a GDP of just US$23 billion, is both the largest source and destination of Russian foreign direct investment (FDI) from 2009-2011. Cyprus sent US$128.8 billion into Russia in 2011 alone, more than 5 times Cyprus’s GDP.

Dr. Kar notes that, “The recorded FDI positions merely reflect the round-tripping of prior illicit deposits from Russia into Cyprus,” making Cyprus a major money laundering machine for Russian criminals.

Courts Stall New Extractives Transparency Rules

In July, a decision by Judge John D. Bates of the United States District Court for the District of Columbia to vacate key extractive industry transparency rules was a major setback for transparency advocates in the United States. The rules were sent back to the Securities and Exchange Commission (SEC) to be reissued.

The rules—which the SEC finalized last summer after two years of deliberation—implemented Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also known as the “Cardin-Lugar provision,” this statute requires all oil, gas, and mining companies that report to the SEC to publicly disclose all of the payments they make to governments worldwide. The rules were to take effect in September of this year, but will be delayed as a result of the court decision.

Mr. Baker noted that, “The SEC has not yet put reissuing these rules on the agenda. The court’s concerns should be quickly addressed, so the rules can go back into force. Dodd-Frank was passed in 2010, and it is inexcusable that the SEC may push the rule-making process into Year 4.”

UN High Level Panel on Post-2015 MDGs

In June, the United Nations High-Level Panel (HLP) of Eminent Persons on the Post-2015 Development Agenda made the curtailment of illicit financial flows and tax evasion an explicit goal of the global anti-poverty agenda following the expiration of the Millennium Development Goals in 2015.

“This is a big development and a major advancement for the world’s poor,” said Raymond Baker. “In making the curtailment of illicit financial flows a priority, the High Level Panel is truly confronting one of the major, underlying causes of extreme poverty.”

“Tax haven secrecy drained developing countries of US$859 billion in illicit financial outflows in 2010, ten times more than the US$88 billion they received in official development assistance that year,” continued Mr. Baker. “This is an astronomically large amount of money. We’re talking about nearly US$1 trillion that could have been used to invest in healthcare, education, and infrastructure in the world’s poorest countries. It’s nearly a US$1 trillion dollars that could have been used to pull people out of poverty and save lives.”

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Note to Editors:

  • Global Financial Integrity is preparing to release its annual update on illicit financial flows from the developing world on Wednesday evening, December 11, 2013 at 18:59 EST / 23:59 GMT.  The full report, “Illicit Financial Flows from Developing Countries: 2002-2011,” will include data from 150 different developing and emerging countries, and it will be the first of GFI’s studies to include estimates for the year 2011.  To receive an embargoed copy of the full report, accredited journalists, who will respect the embargo, should contact Clark Gascoigne at +1 202 293 0740, ext. 222 or cgascoigne@nullgfintegrity.org.

Contact:

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

E.J. Fagan
efagan@nullgfintegrity.org
+1 202-293-0740 ext.227

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Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization, which promotes transparency in the international financial system as a means to global development.

For additional information please visit www.gfintegrity.org.

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