February 8, 2016
A Whole of Government Approach to Fighting Financial Crime
Panel Discussion by GFI President Raymond Baker at the 4th OECD Forum on Tax and Crime. This session focused on the specific challenges faced by developing countries as illicit flows continue to deprive them of scarce resources. The panel discussed how developed and developing countries can work together to address these challenges for the benefit of all countries. This session shared experiences from the OECD International Academy for Tax Crime Investigation, which helps countries detect and investigate financial crimes by developing the skills of tax crime investigators through intensive training courses.
As Prepared for Delivery
Amsterdam, The Netherlands
Thank you, Grace. I had the pleasure of participating in the first OECD Tax and Crime conference in 2011 in Oslo, and it’s very gratifying to see that this effort is continuing unabated.
Can we curtail global crime while we welcome tax evasion? In my opinion the answer to this question is a resounding “NO.” But this is what we are trying to do.
Let us be very honest with ourselves. We in the West have over the past 4 or 5 decades built a global shadow financial system designed to move tax evading and tax avoiding money across borders. I think by now all of us are familiar with its elements – tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, money laundering techniques, trade misinvoicing is the most commonly used component of this structure, and then there are holes left in the laws of our western countries that facilitate the movement of money through this shadow financial system and ultimately into our own economies.
I interact with many people who are fighting crime. I find several viewpoints frequently expressed. 1) Tax evasion is a fairly benign activity that is far removed from the hard elements of crime that we fight. 2) Our job is to fight the crime. We don’t have anything to do with commercial issues — tax issues and the like. And 3) Look at the success we are having, busting up drug rings and human traffickers and counterfeiters and more.
I disagree with each of these viewpoints. 1) Tax evasion is not benign because it makes us hold open the doors of the shadow financial system that are then used by the criminals. 2) Our job – your job – is not to fight the crime. Your job is to curtail the crime. And 3) Success? We are having virtually no visible success in curtailing any aspect of global crime. On the contrary, cross-border crime seems to be growing in just about every category we can examine.
My favorite example of this lack of success, this failure, is the Drug Enforcement Administration in the United States. Established more than 40 years ago, DEA has not succeeded in curtailing the drug problem in the U.S. DEA focuses on drug busts, that is to say it goes after the product. The United Nations Office of Drugs and Crime estimates that globally we, DEA included, succeed in interdicting some 40 percent of hard drugs – cocaine and heroin. But, more importantly, UNODC also estimates that we capture less than 1 percent of drug money. DEA has defined as success the seizure of drugs. They go after the product. Yet across these 40 years they have not succeeded in curtailing the supply or increasing the price of drugs. This is the definition of failure.
I had a former DEA agent in my office recently and he said that agents prefer to go after the bad guys. This is much more fun and much more immediately rewarding. Going after the money? That’s so soft, not exciting.
I asked him as I have asked others, how do you curtail the supply of something that is in endless supply? How do you do that? Drugs are in endless supply. And even if our efforts succeed in interdicting 50 percent or 60 percent or 70 percent of drugs, the market will still be supplied. Because the money remains safe. Drug dealers can easily afford to lose the drugs; they know they will be able to harbor the money.
We are dealing with a systemic problem. We have allowed, indeed facilitated, the growth of a non-transparent, secretive global shadow financial system. We have done this under the mistaken impression that it contributes to free trade and economic growth. Not correct. I was in the private sector for 35 years, doing business all over the developing world, before seguing into the think-tank world. I know that perfectly satisfactory business can be done without using the global shadow financial system.
The key fallacy in our global crime fighting efforts is the idea that we can make the criminals give up their use of the global shadow financial system, while we continue to use the system for our tax evasion and tax avoidance activities. This is not possible. Crime and tax evasion must be put on the same level. You are being asked to fight the crime while operating within a system that facilitates the crime. You are being asked to enforce the law within a system that is full of holes in the law. My sympathy is with you. I don’t know how it is possible to succeed within this system.
I’ve had the pleasure over the last 3 ½ years of serving on the High Level Panel on Illicit Financial Flows From Africa, led by former President of South Africa Thabo Mbeki. We’ve traveled all over Africa talking at all levels about the confluence of crime and corruption and tax evasion. It is perfectly clear to us that you cannot deal with these problems piecemeal. You cannot curtail one aspect of these closely related problems without curtailing the other aspects of these closely related problems. No continent is so plagued by the confluence of crime and corruption and tax evasion as Africa.
Think of the range of criminal and corrupt and terrorist activities that are being facilitated in Africa by the shadow financial system. ISIS in North Africa. Boko Haram in Nigeria. The theft of oil in the Niger Delta. GFI did an analysis of this phenomenon using a three-part approach — satellite imagery, interviews with the bunkerers themselves, and interviews with industry executives. We concluded that $6 to $12 billion of oil is being stolen annually straight out of the pipelines. Look at poaching in East Africa, decimating animal populations. The drug trade is alive and well in most costal countries, handling aircraft and vessels arriving from Latin America and Asia and departing primarily for Europe. Illegal logging, illegal fishing, illegal gold mining are all facilitated by the shadow financial system. The High Level Panel very conservatively estimates that $50 to $60 billion a year is disappearing illegally out of the continent, more than the total amount of foreign aid and foreign direct investment coming into the continent. Think of this; the shadow financial system has made Africa a net creditor to the rest of the world, a net transferor to the rest of the world. This is unacceptable, not only for Africa but also for the rest of the developing world and indeed for the whole world. This reality of illicit money impacting every aspect of our security has to change.
What I’m asking of you, ladies and gentlemen, is recognize that we are dealing with a systemic problem that requires a systemic solution and help resolve this systemic problem. In addition to your very laudable crime fighting efforts, spend a substantial portion of your time talking with elected and appointed and employed government officials about the systemic problem – the shadow financial system that facilitates every aspect of crime you are trying to fight.
I’m not going to go into a long discussion of how you solve the systemic problem. Suffice it to say, get rid of the shadow financial system. Believe me, free trade and free movement of capital will not be negatively affected by getting rid of the shadow financial system. What will be decidedly affected and positively affected is your ability to curtail the crimes against which you are valiantly fighting.