Wed, Dec 18, 2013

http://www.theguardian.com/global-development/2013/dec/18/rich-countries-money-laundering-tax-evasion-oecd

The world's richest countries are failing to deliver on their pledges to crack down on money laundering and tax evasion, which drains billions of dollars from poor countries, a report said on Wednesday.

The damning assessment from the Organisation for Economic Co-operation and Development (OECD), a group of 34 countries, comes despite tough rhetoric on illicit financial flows from leaders of the G8 group of industrialised countries, particularly the British prime minister David Cameron.

According to Global Financial Integrity, a US NGO, illicit financial flows from developing countries between 2001 and 2010 reached $5.8tn, with China responsible for almost half of the total – five times as much as the next highest source country, Mexico.

At a time of declining official development assistance, donors and aid recipients see the loss of revenues to poor countries through illicit flows as an increasingly urgent problem. The OECD report measures for the first time its members' responses to the flows – money laundering, bribery by international companies, recovery of stolen assets and tax evasion, including abusive transfer pricing (pricing goods to minimise tax payments). In all areas, OECD countries are found wanting.

Anti-money laundering and counter-terrorist financing are governed by 40 recommendations drawn up by the Financial Action Task Force (FATF), an inter-governmental body established in 1989. The recommendations cover areas such as beneficial – or true – ownership of companies, and customer due diligence and record-keeping (knowing customers and understanding their risk profiles).

On average, OECD countries' compliance with key recommendations on money laundering is low, said the report. The lowest areas of compliance includebeneficial ownership and politically exposed people (prominent individuals who can abuse their position).

"The results are appalling," said an OECD official. "It's striking how poorly G8 countries score on core recommendations, which have to do with due diligence and beneficial ownership. They are weakest on issues where they make the grandest statements."

Cameron and G8 leaders have sought to tackle the beneficial ownership issue. In October, the UK announced that a planned register setting out the true owners of companies will be open to the public for scrutiny, not just to the tax authorities.

A register of beneficial owners was one of the key demands of campaigners when Britain chaired June's G8 summit of world leaders in Northern Ireland. This followed a commitment in the summer by Cameron to crack down on UK accountants, lawyers and business figures who use shell companies – often located in offshore tax havens – to hide the identity of ultimate beneficiaries.

Welcome as those moves are, more needs to be done according to the OECD. The organisation noted that 27 out of 34 member countries demand insufficient beneficial ownership information for legal persons, while no country is fully compliant with the beneficial ownership recommendations made by the FATF.

"The G8 are the laggards on beneficial ownership," said the OECD official.

Even on basic customer due diligence requirements (checking the identity of customers), OECD countries show a woeful lack of compliance. The report cited a 2011 review by the UK's Financial Services Authority (now the Financial Conduct Authority) that found a third of British banks routinely flout customer due diligence requirements, even when they have enough information to identify clients as "political exposed persons" (prominent political people).

On tax evasion, the report said there is a trend to move towards automatic exchange of information among OECD countries, with both the G8 and G20 groups endorsing the OECD's work to set a new single standard for this form of exchange. However, developing countries lack the relevant technical standards and safeguards to transmit, receive and protect confidential information. Poor countries have also tended to focus on tax avoidance by international companies rather than by rich individuals.

In Zambia, for example, Norway is supporting the renegotiation of contracts between the Zambian government and large multinationals in the mining sector. But developing countries have put less emphasis on national fraud and corruption.

"There are not that many which are keen to address tax avoidance in their own countries, as it involves their own elites," said the OECD official.

As of last year, 221 individuals and 90 companies have been sanctioned for foreign bribery, yet about half of all OECD countries have yet to see a single prosecution. The most widely accepted estimate of global bribery puts its total at about $1tr every year. In the developing world, bribery amounts to around $20bn a year – equivalent to 15%-30% of all ODA. Between 2010 and 2012, OECD countries returned $147m and froze almost $1.4bn in stolen assets.

The issue of illicit flows is one area where the interests of rich and poor countries converge, said Erik Solheim, chairman of the OECD development assistance committee. "OECD members themselves only stand to gain from strengthening their safeguards against money laundering, tax evasion and bribery," said Solheim.