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Countries must do more to avoid being havens for dirty money - OECD

Source: Thu, 19 Dec 2013 09:38 AM
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Euro banknotes which were damaged during the recent floods, are laid out for inspection at the money analyzing laboratory of Germany's Federal Reserve bank, Deutsche Bundesbank, in Mainz July 31, 2013 REUTERS/Kai Pfaffenbach
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LONDON (Thomson Reuters Foundation) – Rich countries are failing to stem the enormous flow of dirty money from developing countries, and are essentially becoming havens for funds from money laundering, tax evasion and bribery, while depriving poor source countries of much-needed public funds, according to a report released on Wednesday.

The Organisation for Economic Cooperation and Development (OECD) report examined the group’s 34 member countries efforts in combating economic and financial, and found them falling short.

“OECD countries still have weaknesses that allow the entry of illicit funds. It is important that OECD countries take measures to avoid becoming safe havens for illicit financial flows from the developing world,” the report said.

Washington-based Global Financial Integrity estimates illicit financial flows from developing countries in the decade through 2011 at $5.9 trillion - money that is diverted, the OECD report says, from public use for hospitals, schools, police and roads, to private consumption of luxury cars, mansions, art and precious metals.

“Every year huge sums of money are transferred out of developing countries illegally. These illicit financial flows strip resources from developing countries that could be used to finance much-needed public services, from security and justice to basic social services such as health and education, weakening their financial systems and economic potential,” it said.

“The social impact of a euro spent on buying a yacht or importing champagne will be very different from that of a euro spent on primary education.”

TAX EVASION

The report measured the efforts of OECD countries against international standards in five policy areas: money laundering, tax evasion, bribery, asset recovery and the role of donor agencies in combating illicit financial flows from developing countries.

“Fighting international tax evasion is important because it is a major source of illicit financial flows from developing countries,” the report said. “Sub-Saharan African countries still mobilise less than 17 percent of their gross domestic product (GDP) in tax revenues.”

While OECD countries have signed 1,300 bilateral agreements with developing countries on exchange of information between authorities to tackle tax evasion, there is room for improvement, the report said.

The 121 member countries of the OECD’s Global Forum on Transparency and Exchange of Information on Tax Purposes in November established a new group for global automatic exchange of tax information between countries, which would deter tax evaders and increase the amount of taxes paid voluntarily.

The European Union agreed this year to introduce an automatic exchange of tax information between countries in the EU, and the Group of 20 (G20) richest countries also agreed to implement automatic exchange of tax information by the end of 2015.

However, the report adds that some developing countries suffer such weak capacity and corruption that they may struggle to enact exchange of tax information agreements effectively.

MONEY LAUNDERING

The report also rated OECD countries on their compliance with the 40 anti-money laundering recommendations of the Financial Action Task Force (FATF), an intergovernmental body set up in 1989 to combat money laundering and terrorist financing.

On average, OECD countries’ compliance with FATF recommendations is low, and they scored worst on the recommendation to identify the “beneficial owners” - that is, the actual person(s) - behind a company, partnership or trust that controls an account or investment. This is key, “given the tendency of criminals to hide behind various corporate or legal structures in order to launder money,” the report said.

Nearly 80 percent of OECD countries were either non-compliant or partially compliant with the corporate beneficial ownership recommendation, while 90 percent were non-compliant or partially compliant with the recommended provision of information regarding the beneficial owners of trusts.

OECD countries also scored poorly for compliance with FATF recommendations on customer due diligence and record keeping by financial institutions, and the reporting of suspicious transactions by financial institutions.

For example, banks in OECD countries have to seek senior management approval for a “politically exposed person” (PEP) and determine the source of their wealth and funds, but enforcement of these requirements is often lax, the report said.

“Many banks rely on self-reporting, by simply asking a person at the time of opening an account whether or not they are a PEP or closely related to one, without any subsequent verification,” it said.

“Where customers have been identified as PEPs, enhanced due diligence measures have not always been taken and red flags have not always been followed up.”

Once illicit funds are spotted, progress in repatriation has been modest, the report said, with only a limited number of countries having frozen or returned assets.

“Repatriation of stolen assets to their country of origin can provide developing countries with additional resources, offering a powerful deterrent as well as justice for the societies whose funds are repatriated,” it said.

“Proving that assets are linked to criminal conduct can be a complex process. As seen in some cases, one successful way to counter this problem is to require proof that excessive wealth has a legitimate origin.”

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