Transnational corruption and financial crime control calls for state’s unflinching political will and widening of its bilateral mechanisms
In recent years, illicit financial flows (IFF) has drawn paramount interest and attention globally.The Global Financial Integrity (GFI), a Washington-based non-profit research body, finds that US $9.1 billion flowed out of Nepal from 1990 to 2008 illegally, nearly eight times the official development assistance (ODA) Nepal received in the period. This is indicative of Nepal facing an array of threats, including those resulting from corruption, trade mispricing, tax evasion, smuggling and fraud. Nepal’s fat underground economy has also offered enormous opportunities for such illicit outflows.
The GFI research Illicit Financial Flows from the Least Developed Countries: 1990-2008 ranks Nepal sixth among the countries that witness biggest illicit financial flows among the 48 least developed countries (LDC). For countries like Nepal, flow of illicit financial resources has become a big challenge that call for urgent policy interventions as they lose much more in illicit outflows than what they receive in ODA. The volume of such flows among the LDCs markedly increased from US $9.7 billion in 1990 to US $26.3 billion in 2008 recording 6.2 percent annual rise. Illicit financial flow as a transnational problem has plagued countries of all stripes. The GFI in 2009 reported that developing countries were losing between US $858 and US $1.06 trillion annually in corruption, trading of smuggled goods and criminal activities such as drug trafficking and counterfeiting. This is 10 times the amount they received in foreign aid.
The illicit financial flow is a cross-border movement of proceeds of corruption, trade in contraband goods, criminal activities and tax evasion. It has been identified as one of the major obstacles to economic development, especially in poor countries from where huge amounts of illegally-earned money are stashed in secrecy jurisdictions. London-based Tax Justice Network in 2005 estimated that the world’s high net-worth individuals held some US $11.5 trillion in offshore tax havens. Yet another study by the IMF in 2010 estimated that just small financial centers (excluding Switzerland) had deposits of some US $18 trillion in secret assets.
ILLICIT FINANCIAL FLOWS
Cumulative IFFs from LDCs by country, 1990-2008 (US$ million)
(1) With full data, 1990-2008 for both CED and GER, (2) With almost full data,
1990-2008 (missing 5 years or less).
(3) With partial data. (4) Somalia, Tuvalu, Timor-Leste are not ranked because of missing data in all years.
LL=Landlocked; SI=Small Island; N=Neither
Increasing of offshore deposits in secrecy jurisdictions at an annual rate of nine percent is a worrying trend for policymakers around the globe. In 2010, the UN estimated that money laundering made up for two to five percent of global GDP (amounting to US $800 billion to US $2 trillion). These criminal flows of underground economy have become indistinguishable from the aboveground economy which electronically processes over US $ 1.9 trillion per day. The huge volume of illicit financial flow largely emanates from commercial tax evasion, criminal activities, drugs trafficking, corruption, bribery, theft and other illegal dealings.
All kinds of dirty money use similar financial channels and techniques to illegally transfer money taking advantage of global financial institutions that facilitates the movement of such illicit flows. These channels and techniques comprise of secrecy jurisdictions, tax havens and a wide range of services offered by global banking institutions such as multiple accounts, high-secrecy products and anonymous trust accounts.
To control the flow of such dirty money, some developed countries have adopted stringent laws in line with the UN Convention against Corruption (UNCAC). The US has put in place US Foreign Corrupt Practice Act to convict corruption beyond borders. The Obama administration last year also endorsed Dodd-Frank Wall Street Reform and Consumer Protection Act to further tighten its grip on these practices. Similarly, the UK last year enforced the UK Bribery Act to augment its crackdown on movement of corrupt money through extraterritorial application of their anti-corruption provisions.
In an effort to consolidate exchange of information of offshore tax evasion, some countries have initiated signing bilateral agreements with high secrecy jurisdictions. The UK has signed an agreement with the Swiss authorities for mutual sharing of tax information. Following the agreement, Switzerland from 2013 will have to tax Swiss bank accounts of UK citizens. Between £3 billion and £6 billion a year is expected to be transferred to the UK from taxes of those who have undisclosed bank accounts in secrecy jurisdictions such as Switzerland.
Germany also signed a similar deal with Switzerland last year ending its long debate on tax evasion by wealthy Germans holding cross-border accounts. The agreement foresees US $2.2 billion as upfront payment to the German government from Swiss banks to cover the failure by their clients to declare holdings. Similarly in the US, the Internal Revenue Service intensified its global campaign to sniff out offshore tax evasion by US citizens. In 2011, eight offshore banks were under federal grand jury investigation for facilitating tax evasion by US citizens. In 2009, the US prosecutors charged USB AG, the largest Swiss bank, with aiding tax evasion by US clients. The UBS AG later admitted that it had fostered tax evasion and avoided prosecution by paying US $780 million in fines, and provided the US IRS data on more than 4,450 accounts.
Under increasing global pressure for openness and transparency in banking transactions, the Swiss government in October 2011 adopted standards on banking secrecy laid out by the Organization for Economic Cooperation and Development. Recent relaxation of banking secrecy by Switzerland and its move to distance itself from money laundering and untaxed funds mark a new chapter in global campaign against the movement of illicit finances. This has allowed foreign authorities signing bilateral agreements with Switzerland to pursue their citizens suspected of using hidden Swiss accounts.
In the backdrop of these global bilateral initiatives to foster transparency in cross-border transfer of dirty money, Nepal also needs to immediately embark on informed strategic debate and frame appropriate policies to tackle this problem. Nepal government ought to take three key policy measures to control illicit financial flows. First, country by country reporting system must be put in place and it should be mandatory for all companies including multinationals to publicly report their sales, profits and taxes paid in all jurisdictions where they operate. Second, new bilateral agreements regarding cross-border exchange of information between tax authorities must be signed. Exchange of such information between countries has to be automatic rather than on request. Third, Nepal government must give utmost priority to improve effectiveness and transparency of its tax regime through timely reforms.
Besides the endorsement of two ordinances on the Mutual Legal Assistance Bill and Extradition Treaty in June, Nepal will have to take some other initiatives to strengthen institutions to fight this transnational malaise and pass one more bill on Organized Crime. Anti-graft body and watchdog agencies such as Money Laundering Investigation Department and Financial Information Unit must be strengthened and provided adequate resources and expertise to keep oversight over operations of the financial system including customs authorities and tax regime. Similarly, domesticating entire UNCAC provisions in our context is another pressing need. It can prevent illicit financial flows by creating an environment which prevents corruption from occurring in the first place and illicit flows from being generated.
The UNCAC offers enormous opportunities to shore up international efforts against illicit capital by allowing the tracing and recovery of secret assets stashed abroad. But investigating illicit flows generated through transnational forms of corruption and financial crime requires state party’s unflinching political will and bilateral cooperation at the international level. Nepal urgently needs to amend relevant laws (27) and formulate new legislations (seven) to fulfill its international commitment to fully implement the UNCAC tin order to control illicit financial flows.