Illicit financial flows — A massive transfer of wealth from poor to rich

November 8th, 2013

This blog originally appeared on European Development Days’ website.

Earlier this month, the Financial Transparency Coalition organised the conference ‘Towards Transparency: Making the Global Financial System Work for Development’ in Tanzania. There, African civil society organisations and a coalition of leading international development organisations called on global policymakers to adopt measures to counter the hundreds of billions of euros siphoned out of the continent through money laundering and industrial-scale corporate tax avoidance.

The Africa Progress Panel led by Kofi Annan has estimated in its 2013 report that Africa loses twice as much in illicit financial flows as it receives in international aid. Others have even higher estimates. In short, Africa is not a net debtor to the world, but a net creditor.  

A continent crying out for investment has been pilfered with the aid of the mainstream global financial system. Illicit financial flows are one of the most crucial, but not necessarily the most obvious, cause of poverty in the world. Hidden from view, they erode tax bases, foster crime and corruption, and represent a massive transfer of wealth from poor to rich. But as civil society is demonstrating, there is unquestionably momentum for change to address the pernicious effects of illicit finance in Africa. And this is where Europe and the rich world can play a vital role.

Money launderers, corrupt politicians, tax dodgers and traffickers of all sorts rely on two things to move their ill-gotten gains. They need legal structures that allow them to hide their identity and move their money quickly. This often happens through anonymous companies, whose beneficial ownership is hidden in secretive tax havens.

But to ensure cash or assets are efficiently processed, corrupt officials and politicians require professional bankers, lawyers and accountants willing to help them. Either these professionals do not ask too many questions about where money or assets comes from, or they play a central role in making sure it is impossible to identify where corrupt money originates from and who controls it.

This is borne out by a survey conducted in 2011 by the UK’s Financial Services Authority (now the Financial Conduct Authority), which concluded that three-quarters of the 27 banks it surveyed had inadequate procedures in place to spot and block tainted money. The FSA study suggested that one-fifth of the banks surveyed failed to identify indirect beneficial owners who exercised ultimate control over the customer.

All too often, the true customer of corrupt assets can hide behind complicated corporate structures (imagine a Russian Matryoshka doll: a company inside a company, inside a company) that makes uncovering the true nature of transactions and their beneficiaries very difficult. Governments across the world should take action to tackle this problem by promoting transparency over the ownership and control of companies. Such policies were recommended by G8 leaders earlier this year.

The EU could and should play a central part in a global effort to stem the flows of illicit capital by promoting transparency. In its proposed update to the anti-money laundering directive, the European Commission has suggested all companies must hold details of their own beneficial ownership. This is a necessary first step, but not enough. Law enforcement would have to approach a company directly for this information, potentially tipping off any suspects. Instead, the EU could vastly increase the benefits if beneficial ownership information were to be made publicly available.

There is a growing public awareness of the harm caused by corruption and tax avoidance.The modus operandi of illicit financial flows are not aberrations, but part of a structural problem. Civil society, allied with journalists and academics, is determined to challenge this and put pressure on policymakers and regulators to eliminate the huge flows of illicit capital that condemn hundreds of millions of people to poverty every year.

Written by Koen Roovers

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