Ahead of Anti-Corruption Day, GFI Reviews the Major Developments of 2012

Washington DC, 7 December 2012, Global Financial Integrity.

This post was originally published on the Global Financial Integrity website.

As the world observes International Anti-Corruption Day this Sunday, December 9, 2012, Global Financial Integrity highlighted some of the most notable achievements, developments, and short-comings in the fight against corruption over the past year.

Dodd-Frank Section 1504 (Cardin-Lugar) Enacted

Perhaps the greatest anti-corruption victory of the year, the Securities and Exchange Commission adopted a strong set of rules enabling the Cardin-Lugar provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to take effect last month. Cardin-Lugar requires companies registered with the SEC that operate in the oil, gas, and mining sectors to publicly report the payments they make to foreign governments.

The provisions have garnered praise from civil society groups around the world as an historic measure to bring increased stability, accountability, and transparency to a multi-billion dollar, global industry, and similar provisions are now being considered in the European Union.

“The enactment of Cardin-Lugar is likely the biggest anti-corruption achievement of the year,” said GFI Director Raymond Baker. “Developing countries lose $1 trillion per year to crime, corruption and tax evasion, much of which is facilitated by opacity in the global financial system. The transparency measures included in Section 1504 could help significantly curtail these illicit outflows.” Read more about the provisions here.

G20 Renews the Anti-Corruption Working Group

Another victory for the anti-corruption movement came in June at the G20 Los Cabos Summit, where world leaders renewed the mandate of the G20 Anti-Corruption Working Group for another two years. Commissioned at the Seoul Summit in 2010, the Working Group’s mandate was originally set to expire at the end of this year.

“We were extremely happy to see the mandate of the Anti-Corruption Working Group extended,” noted Mr. Baker. “The Working Group has been crucial to progressing global anti-corruption initiatives. Its renewal ensures that anti-corruption fighters will continue to have a strong voice at world summits in the coming years.” Read more about it here.

Anti-Money Laundering Crackdown and Enforcement

A number of money laundering compliance scandals at major international banks made it clear this year that financial institutions in the U.S. and abroad are not adequately complying with anti-money laundering regulations. In July, a U.S. Senate Permanent Subcommittee on Investigations hearing on HSBC painted a picture of a bank that chose profit over protection, failing to apply legally mandated anti-money laundering protections to many of its accounts. Additional scandals broke involving lax compliance at ING Bank, Standard Chartered, JP Morgan Chase, and elsewhere.

U.S. financial regulators have taken note, stepping up enforcement and issuing larger fines, but it remains unclear as to whether the bankers who failed to comply with anti-money laundering policies will be held criminally liable.

GFI has noted that fines, monitoring, and deferred prosecution agreements are likely not adequate to ensure compliance. Heather Lowe, GFI’s legal counsel and director of government affairs, said “At some point, guilty individuals and companies are just guilty. Law enforcement has to stop handing out get-out-of-jail free cards. Banks can’t be too big to prosecute, and the people responsible for making the decisions to launder criminal money must be held legally accountable.” Read more about HSBC and money laundering.

Anonymous U.S. Shell Companies Remain Intact

Despite mounting evidence of the harm that anonymous shell companies do to the international financial system, legislators in the U.S. have thus far failed to pass the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483 / H.R. 3416), legislation requiring that information on the true, human owner of any U.S. company be available to law enforcement. A recent World Bank report revealed that the U.S. was the favorite destination of corrupt politicians trying to set up shell companies to access the financial system, and a separate academic study released earlier this fall demonstrated that the U.S. was the second-easiest country in which to establish an anonymous shell company after Kenya.

“Anonymous shell companies are routinely used by kleptocrats, drug traffickers, tax evaders, and terrorists to launder their money and impede law enforcement investigations,” said Tom Cardamone, GFI’s managing director. “There is no legitimate reason why the real owners of corporations should not be available to law enforcement authorities.” Read more about the Incorporation Transparency and Law Enforcement Assistance Act.

A major disappointment on the international front was the failure by the Financial Action Task Force, which revised its 40 international money laundering standards earlier this year, to require countries complying with its standards to collect information on the true “beneficial owners” of corporate entities when they are formed. Instead, the international body chose to make such disclosure an optional approach, thereby leaving intact one of the major loopholes used by financial criminals to anonymously launder their money. Read more about the FATF Standards here.

Illicit Financial Flows from China

The Chinese economy hemorrhaged US$3.79 trillion in illicit financial outflows from 2000 through 2011, according to an October report by GFI. Amidst increased domestic concern over inequality and corruption, GFI’s study raised serious questions about the stability of the Chinese economy as it transitions into the new era of Xi Jinping’s leadership.

“The Chinese economy is a ticking time bomb,” said Dr. Dev Kar, GFI’s lead economist who co-authored the report. “The social, political, and economic order is not sustainable in the long-run given such massive illicit outflows.” Read more about the report.

Wal-Mart, U.S. Corporations, and Foreign Bribery

An investigation by the New York Times published in March alleged that Wal-Mart, the world’s largest retailer, engaged in systemic bribery in Mexico in order to gain a competitive advantage in the Latin American nation. Subsequent reporting has revealed that the retailer may be under investigation for bribery in other countries such as China, India, and Brazil. GFI notes that foreign bribery by major U.S. and international corporations remains a problem, undermines transparent markets, and highlights the need for strong U.S. anti-corruption enforcement. Read more.

Illicit Financial Flows from Mexico

A January report from Global Financial Integrity found that crime, corruption, and tax evasion cost the Mexican economy US$872 billion between 1970 and 2010. The illicit financial outflows, which averaged a massive 5.2% of GDP, grew significantly over the 41-year period studied from just US$1 billion in 1970 to US$68.5 billion in 2010.

“This is a devastatingly large amount of money for any developing country to lose,” noted GFI’s director, Raymond Baker. “$872 billion is gone, which could have been used to develop the Mexican economy, to invest in education, to build roads, or to fight the drug cartels. The negative ramifications are huge for everyday Mexicans.” Read more about the report.