Global Financial Integrity

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Developing Countries Are Being Undermined by Rich Nations’ Greed

Tom Cardamone
Clark Gascoigne

Australia’s Complicity in Money Laundering Hurts the World’s Poor

This article was originally published by The Sydney Morning Herald.

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.

On December 11, Global Financial Integrity released its annual assessment of the amount of money flowing illegally out of the developing world, and the picture is stark. The global ”south” lost nearly $US1 trillion ($1.13 trillion) in illicit financial outflows resulting from crime, corruption and tax evasion in 2011 (the most recent year for which there is reliable data) – roughly 10 times the amount of money these nations received in official development assistance.

The scariest part is just how fast the problem is growing. The $US946.7 billion in illicit outflows in 2011 is a historic high, and it’s up nearly 14 per cent from the previous year. Indeed, over the decade analysed in the report, average annual illicit outflows increased at a rate of 10 per cent a year.

Unless major policy interventions are made soon, the accelerating scourge of illicit financial flows could be disastrous for the developing world – and the global economy.

That’s why a report published by the Organisation for Economic Co-operation and Development (OECD) should raise eyebrows. It found its members – 34 of the world’s wealthiest nations – are largely failing to halt money laundering due to tax evasion and corruption in the developing world.

For decades, the dominant view in the developed world was that illegal capital flight was a problem only for the world’s poorest nations, whose purportedly corrupt governments and poor business environments drove capital to flee their economies. However, this is a two-way street. The countries absorbing illicit financial flows – that is, offshore secrecy jurisdictions and developed countries such as the US, Britain, and Australia – likewise bear responsibility.

Over the past half-century, Western nations established an offshore financial system comprised of tax havens, anonymous shell companies and various trade-based money-laundering techniques, designed to facilitate the outflow of capital from developing countries and into Western banks.

While anonymous shell companies are the top tool for laundering criminal money, the OECD’s study reveals that 27 of its 34 member countries are either ”non compliant” or only ”partially compliant” with the recommendations on transparency of corporate ownership information from the Financial Action Task Force, the anti-money laundering standard-setting body. Worse, none of the OECD countries are ”fully compliant” with the standards.

On the eight task force recommendations related to customer due diligence and record-keeping by banks, Australia actually comes out worst – failing to comply with six of eight recommendations and only partially complying with the other two. But Australia has a chance to redeem itself.

Next year, Prime Minister Tony Abbott is hosting the annual G20 Summit – consisting of the world’s 20 largest economies – and the government is now formulating its G20 agenda. The Prime Minister should make sure that tax evasion, money laundering and illicit financial flows feature prominently.

This year, British Prime Minister David Cameron used his chairmanship of the G8 Summit to push for important tax evasion and transparency measures which led to a breakthrough at the G20 Summit in September, where nations agreed to adopt automatic exchange of tax information as the new global standard. Talks are being held on how to implement this measure and it’s vital Australia pushes to include developing countries in these discussions.

Cameron made history again in October, when he decided to go beyond the task force standards on anonymous shell companies and create the world’s first public registry of corporate ”beneficial ownership.” Public registries ensure law enforcement, journalists, policy-makers, investors and others have access to information on who truly owns a corporate entity. Australia should create its own public registry and make the transparency of corporate entities a focal point of the 2014 summit. If not, we can expect the outflow of illicit money from developing countries to continue to grow.

Tom Cardamone is managing director of Global Financial Integrity, a Washington research organisation. Clark Gascoigne is GFI’s communications director.

This article was originally published by The Sydney Morning Herald.