Financial Transparency Coalition

The term G7 sounds a little weird. We’ve been calling it the Group of 8 (G8) since Russia joined in 1998, but now that Russia has been indefinitely suspended, the group is one member short. Undoubtedly, the very issue that stemmed the name change, the crisis in Ukraine, dominated much of the two-day talks, which finished today in Brussels.

But just last year, G8 leaders were talking about another important issue, one that, at first glance, might not seem connected to the crisis in Ukraine: transparency of the real owners of companies.

In a post on the TED blog, Charmain Gooch, head of Global Witness, an FTC coordinating member organization, wrote about why it is vital for the G7 to look at Ukraine through the lens of financial transparency:

The role of anonymous companies in triggering this unrest was significant. If you want to hide the kind of corruption that will eventually drive despairing citizens out onto the streets in bloody protest, there are few better ways to do it than setting up a web of sham companies. Like a Russian doll, you can stack one inside another, making it almost impossible for law enforcement, other businesses, civil society, journalists and, most important, citizens, to know who really owns and controls companies.

That’s exactly what happened in Ukraine. The corruption that underwrote the regime of former president, Viktor Yanukovych, was engineered by the use of such companies. My organization, Global Witness, has worked with Ukrainian activists to show how British and Austrian companies were used to disguise who really owned Yanukovych’s palace compound. It’s not just Ukrainian politics, either: according to Reuters, people close to Russia’s political elite have also been using secretive British companies to hide taxpayer financing of lavish palaces on the Black Sea.

In northern Nigeria too, two seemingly unconnected issues, financial transparency and terrorism, may be more explicitly linked. In an opinion piece in the Financial Times, Mo Ibrahim, prominent businessman and head of the Mo Ibrahim Foundation, compelled the leaders of the G7 to not only see the links between transparency, corruption and Ukraine, but to the Nigerian government’s ongoing fight with the Islamist terrorist group Boko Haram.

From the article:

These problems may seem far away from Brussels but some of the solutions are in the G7′s grasp. To combat them, the G7 must take concrete steps to fight corruption and address the development gaps that devastate local communities and provide openings for groups such as Boko Haram.

The UK has announced it will implement a public register on company ownership to track the ultimate owners of UK companies, thereby making it more difficult for firms to evade tax or funnel corrupt funds – including those from developing countries – into shell companies.

In Nigeria, Boko Haram’s rise is, in part, linked to the frustration of ordinary citizens who want to see an improvement in their quality of life. The G7 can take steps to address that frustration, by encouraging investments in agriculture, healthcare and infrastructure.This would allow people in places like northern Nigeria the opportunity to work and grow their way out of poverty and hence build the sort of society where groups like Boko Haram can find no foothold.

As Mr. Ibrahim points out, regions where development is lagging can become fruitful grounds for corruption, lawlessness, and extremism; but some of the underlying issues that proliferate poverty are directly rooted in the lack of financial transparency in the world’s richest countries.

According to a new report from the OECD, low-income countries in Africa have an average tax base of just 16.8% of GDP, which is noticeably lower than the 20% recommended by the UN to meet the Millennium Development Goals. Without a strong internal tax base, it’s difficult for developing countries to spend heavily on infrastructure, education, and health, which are the very initiatives that can drive development.

So why are African tax collections so low?

While there are many other reasons, few are so stark as the lack of financial transparency worldwide, including in countries of the G7. Through gimmicks proliferated with the help of anonymous companies, willing bankers, lawyers and accountants, and financial centers in G7 countries that covet secrecy, corporations and individuals have moved vast amounts of money out of developing regions for decades, robbing countries of tax revenue that rightfully belongs to their citizens.

Research from our colleagues at Global Financial Integrity estimates that in 2011 (the most recent year data is available) roughly US$957 billion in illicit financial flows—money that is illegally earned, transferred, or utilized—made its way out of developing countries.

So, while G7 leaders continue an ongoing global debate, they should be sure to draw the connection between their declaration last year, and the crises engulfing their discussions this year.