Cart before the horse

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M Ziauddin
THE sword of FATF continues to hang over Pakistan. We seem still to be lost in the woods. We do not know for sure whether by the final deadline of June this year—only two months away—we would be able to satisfy our interrogators sitting in the FATF on the twin issue of money laundering and terror-financing. In the case of Pakistan at least, it seems FATF has put the cart before the horse. There are a number of avenues the world over, especially in the civilized world, the very world which is worried about our indulgence in money laundering and terror financing where one can safely park one’s dirty money without the risk of being caught. While the types of legal structures and financial channels used by the corrupt vary, they all have one thing in common: secrecy.
The overall high level of secrecy gives the corrupt countless loopholes to choose from according to what they are trying to hide and who they are hiding it from. If the goal is to use the company to hide wealth and conduct business behind the facade of what appears to be a legitimate company, the US is said to be be a good option. The level of corruption in a country may be a factor in the decision of which secrecy loopholes to abuse and where. At the same time, high levels of secrecy in jurisdictions with strong rule of law and low levels of corruption provide the perfect destination to stash the proceeds of crime and corruption. The owners of illicit wealth can be certain that the system will protect their rights while keeping their identity secret. Another group of countries include those where secrecy is high and perceptions of public sector corruption are low, such as Hong Kong, Luxembourg, Singapore, Switzerland, the UAE, the US, and the UK, for example. These countries do not only have high levels of secrecy in corporate and financial sectors, they are usually also attractive places to park dirty money — either through the purchase of assets, like real estate and other luxury goods, investments in alternative investment funds, like hedge funds, or bank accounts. While public sector corruption in the form of bribes and direct embezzlement of public funds is less likely to take place in these countries, other forms of corruption including undue influence and regulatory capture ensures that a financial services industry that thrives on secrecy continues to operate and service corrupt actors from different countries, often with impunity.
Some of these countries, like the US, the UK, Luxembourg and Switzerland have recently taken steps to reduce secrecy. Nevertheless, sufficient loopholes remain, making it still worthwhile for criminals to take higher risks to launder or bring dirty money to these places. In the US, for example, law enforcement authorities have repeatedly underscored the challenges they face to investigate crimes due to the lack of information on the real owners of companies. In Switzerland, banks still have limited incentives to prevent and detect dirty money, according to the most recent Financial Action Task Force (FATF) mutual evaluation report that emphasizes that sanctions against financial institutions are not proportional nor dissuasive. Last month, Transparency International launched the 2019 Corruption Perceptions Index(CPI), which captures perceptions of a variety of forms of corruption in a country’s public sector. The CPI sheds light on countries where bribes or political connections are often necessary to win government contracts or obtain a business license, for example. But it does not capture the full range of corrupt behaviors. The CPI does not consider transnational forms of corruption, money laundering or the role of the private sector in allowing the corrupt to safely hide and enjoy the proceeds of corruption.
According to Maíra Martini and Roberto M. Kukutschka, both from Transparency International (Building a fuller picture: The Financial Secrecy Index & CPI—published on Feb. 19, 2020) the recent Luanda Leaks investigation showed that a myriad of shell companies incorporated in different jurisdictions — from Malta to Mauritius — were used to disguise ownership and gain contracts or subcontracts with the Angolan government and state-owned oil company. Anonymous bank accounts in different jurisdictions — from Portugal to UAE — were allegedly used to pay bribes and to launder stolen funds. Similar mechanisms were used by Odebrecht: the company relied on at least 42 offshore accounts to pay bribes to public officials across Latin America and two African countries.
Secrecy attracts illicit and illegitimate or abusive financial flows. The Financial Secrecy Index (FSI) released recently by the Tax Justice Network shows that, overall, countries remain extremely secretive. The FSI’s underlying Secrecy Score assesses the degree to which a country’s legal and regulatory systems enable illicit financial flows on a scale from 0 (full transparency) to 100 (full secrecy). The Secrecy Score results show that most countries still have a long way to go towards improving transparency in their financial sectors, by taking action on areas such as beneficial ownership information transparency (who owns and controls companies), data on who owns real estate, anti-money laundering laws and international cooperation.
The average secrecy score for the 133 jurisdictions evaluated by the FSI is 63.9. No country can be considered highly transparent. Slovenia, the country assessed as the least secretive received a score of 37.55 out of 100. Indeed, if the goal is to hide company ownership to avoid paying taxes, Mauritius offers secret company ownership and limited tax and international cooperation treaties — perfect for avoiding detection by national tax authorities. The level of corruption in a country may be a factor in the decision of which secrecy loopholes to abuse and where. In countries with high secrecy, high corruption which include Angola, The Gambia, the Maldives, and Venezuela, corruption is systemic and the rules of the game are made, implemented and enforced for the benefit of a small group very close to those in power. Secrecy is high and used by these groups to extract even more rents from the State. However, conflict, political instability and weak rule of law make these places unattractive to those wishing to park or launder their funds there. This helps to explain the low secrecy impact of these countries in their overall Financial Secrecy Index.
The combination high corruption and high secrecy can also be seen in more “traditional” tax havens. Those are places known for offering corporate secrecy combined with preferential tax rates for non-residents. The usual suspects include the Bahamas, Panama, Seychelles and Mauritius, for example. Recent corruption and money laundering scandals have also featured Cyprus, Latvia and Malta. In these countries, secrecy is a business model and the company formation industry represents an important part of the economy. As such, there is little incentive to promote transparency and crack down on abuses. Corruption and weak rule of law make it less likely that wrongdoing will be pursued and sanctioned, benefiting corrupt companies and politicians and allowing shady deals to take place across the globe. The Financial Secrecy Index is a reminder that the corrupt and other criminals still have plenty of options to hide and launder money extracted from around the world. Closing the loopholes that allow corruption schemes to take place and stolen money to be hidden and laundered should become an integral part of any anti-corruption strategy. If global financial centres are serious about maintaining their reputation and stopping dirty money from entering their borders, they need to shine a light on the real owners of companies, supervise and punish professional enablers who facilitate corrupt deals and identify and return stolen assets. Without that, any other effort to curb corruption in low- and medium-income countries are unlikely to succeed.
— The writer is veteran journalist and a former editor based in Islamabad.