One of the best-known data points in the anti-corruption field is the estimate from Global Financial Integrity that US$ 1.1 trillion in proceeds of corruption, crime and tax evasion are taken from developing countries every year and invested in Western banks, real estate, and luxury goods. The volume of illicit financial flows is higher than the total value of development aid and foreign direct investment into poor countries combined. The revenues lost by poor countries through tax dodging alone are estimated at US$ 160 billion every year, money which could be used to build thousands of schools and hospitals.
If you’ve ever found yourself wondering how this scale of pillage is possible, the most recent round of reports from the Financial Action Task Force has the answer.
The Financial Action Task Force (FATF) is the world’s anti-money laundering standard-setter. Every seven years FATF assesses how much each of its 180 member countries has done to stop dirty money from being used to buy real estate, high-end cars and other luxury items, or be deposited into a bank account. In other words, how good is a country at preventing itself from aiding the corrupt.
Recently released reports on Austria, Canada and Singapore show how the corrupt have few roadblocks to parking and spending cash in these three countries. Similar to previous reports, the latest batch received limited media coverage aside from on specialist websites.
It doesn’t help that FATF assessments are dense. But from an anti-corruption perspective, it’s well worth diving into these reports. Tucked away among the acronyms are a surprisingly large number of major loopholes that clearly show three of the world’s wealthiest countries failing to stop the corrupt.
Here is a small selection:
Lawyers in Canada are exempted from the country’s anti-money laundering reporting regime. Following a Supreme Court decision in 2015, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations were found to breach attorney-client privilege insofar as record-keeping, client identification and verification, and compliance inspection by Canada’s Financial Intelligence Unit (FINTRAC) were concerned. The Government had previously withdrawn the reporting requirement for the law profession following injunctions by law societies. Though lawyers are subject to anti-money laundering rules set by Canadian law societies, according to the FATF the exemption of lawyers from federal legislation “constitutes a serious impediment to Canada’s efforts to fight money-laundering” (seepage 7, para 27).
It is common in Austria to pay large amounts of cash when buying luxury goods. Luxury goods dealers “do not feel that it could be suspicious if a customer insists to pay cash, even when it is a very high amount” (seepage 74, para 260). In fact, there is no limit on paying with cash in Austria, one of eight European countries still lacking a cash limit.
Lawyers, accountants and real estate agents rarely report suspicious activities. According to the global FATF standards, lawyers, accountants and real estate agents are supposed to report suspicious transactions to authorities. Yet as the table below shows, suspicious reporting by these and other non-financial sectors is remarkably low. For instance, accountants in Canada and real estate agents in Austria did not file any suspicious reports in the most recent year data was available.
Singapore’s authorities closed thousands of client accounts as part of a tax review, but did not bring a single enforcement action. Singapore’s authorities in 2012 and 2013 conducted a tax review which led to the closing of 22,000 accounts. Despite this exercise also generating 2,988 Suspicious Transaction Reports, no anti-money laundering law enforcement actions resulted (seepage 60, para 176 and page 113, para 356).
Canadian companies and trusts are at high risk of money-laundering abuse. Over 70 per cent of all money-laundering cases in Canada involved companies and trusts (seepage 102, para 281). However, there were hardly any prosecutions of these entities for money-laundering offenses, due to a shortage of resources and expertise (seepage 51, para 139). Transparency International’s research in 2015 also found significant weaknesses in Canadian measures to tackle the abuse of anonymous companies.
In Austria, the total penalties paid by financial institutions for anti-money laundering failings in 2014 amounted to €21,000. Three of the six penalties related to failings to do proper background checks on high-ranking public officials (Politically Exposed Persons), which led to maximum fines of €2,500 (seeTable 29, page 90). Austria has a highly developed financial sector holding over €1 trillion in assets, and is an important banking gateway to Central and Eastern Europe.
Singapore’s authorities don’t really know what’s going on inside their Freeport. As this Economist article explains, Freeports allow high-value goods to be stored “in transit” indefinitely, and can be a “unique money-laundering and terrorist financing threat”. In the case of Singapore, FATF found that “The authorities…did not demonstrate a comprehensive understanding of what activities were being undertaken in the Singapore Freeport” (seepage 29, para 73).
These gaps are often linked, weakening further the overall anti-money laundering defences of a country. For example, the use of shell companies to buy real estate – as seen in London and New York – makes it even more difficult to track the real buyers of property. In Canadian cities like Vancouver, the sharp rise in real estate prices has been linked to the influx of illicit flows, as money-launderers seek new destinations to park their dirty money.
Stopping illicit financial flows will require global, systemic reforms. The results of the FATF reports suggest there is also an urgent need for some basic national-level action in the regulation, supervision and sanctioning of money laundering activity.
The question remains, however, whether the world’s richest countries have the will to effectively address illicit flows at home, or whether they will continue to pass the buck waiting for other countries to show leadership.
The next round of FATF country reviews, to be released around December this year, will cover the USA and Switzerland. E-mail alerts from FATF can be found here.
* Max Heywood from Transparency International Secretariat in Berlin contributed to this blog.
Images: Toronto: Creative Commons, Flickr / thelearningcurvedotca | Singapore: Creative Commons, Flickr / snapah | Vienna: Creative Commons, Flickr / mrfederico