Legitimising the illegitimate

A recent headline in the UK-based publication Accountancy Age says it all: "IMF gives Liechtenstein qualified praise." It was referring to a new IMF report looking into Liechtenstein's efforts to stop money-laundering and terrorist financing under the Financial Action Task Force (FATF) methodology. The IMF report did raise a number of concerns but, as Accountancy Age reported, Liechtenstein's Prime Minister Otmar Hasler used the IMF's qualified praise as a weapon in his fight against the forces of transparency and democracy:

The prime minister remained delighted with the IMF's assessment of its efforts at overcoming financial crime. . . . 'The praise by the IMF shows that we are on a successful path of reform. We have consistently followed this path so far and will continue to do so.'

It is quite astonishing that the FATF, which is an IMF-linked initiative, has removed all countries - including Liechtenstein - from its "blacklist" of non-co-operative countries. Yet the still-emerging Liechtenstein tax evasion scandal shows clearly that this is a pirate state dealing in stolen public assets (which is what evaded taxes are.) It is, as has been remarked elsewhere, engaging in parasitic behaviour, not wealth creation - just see this Global Witness report and put in "Liechtenstein" in the search field, for one of many examples. And that is not to mention the myriad other of the word's dirty secrecy jurisdictions, from Panama to Curação to Monaco.

In their reports, the IMF and the FATF have, as TJN's John Christensen and David Spencer remarked in a recent Financial Times comment article, "legitimised the illegitimate." This is, simply put, a great international scandal, and the world's most important financial institutions and others must extricate themselves from this mess. Civil society organisations and honest citizens around the world should be hounding them in the process.

The essence of the problem is this: international financial institutions, and many others, have chosen to focus on ridiculously narrow aspects of the problem, and ignore much bigger ones. (see here for an exploration of some of the history of the different initiatives in this field.) Money laundering under current initiatives tends to focus almost entirely on drugs money, and little else. But drugs money laundering and terrorist finance are dwarfed by the much, much larger flows of tax evasion and other illicit funds seeking the secrecy of tax havens like Liechtenstein (the World Bank has reported a $1.0-1.6 trillion annual figure) yet little attention is paid to these bigger flows. Raymond Baker of the Global Financial Integrity Program put it like this, in his book Capitalism's Achilles' Heel:
Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand. These are two rails on the same tracks through the international financial system.

Yet little information is shared between drugs money-laundering agencies and tax authorities, for example. As the Financial Times remarked recently, in an editorial:

Havens should provide information to foreign tax authorities that have reason to suspect evasion. Most countries already do this for money laundering and terrorist finance: the crime of tax evasion should be treated no differently.

Quite so. Tax evasion must be made part of the money-laundering equation; tax evasion should be a predicate crime in money laundering investigations. While on this subject, we should also mention that we want the 2003 UN Convention Against Corruption (UNCAC, which is gradually being ratified around the world) to have tax evasion as a predicate crime in corruption investigations. Corruption, like money laundering, is too narrowly defined.

TJN has already criticised the OECD for its feeble approach of information exchange on request between national tax authorities, and the approach of bilateral tax treaties - and for its elimination of almost all the world's tax havens from its own backlist. As far as the IMF is concerned, an e-mail from a legal expert in this field put it like this:

The way the IMF has been conducting its ROSCs (Reports on the Observance of Standards and Codes) has led to turning its Offshore Financial Centre surveillance process into a grant of a seal of approval. Plus, the anti-money laundering reviews are conducted by regional bodies, which means Caribbean supervisors review each other etcetera - which hardly leads to rigorous reviews.

And then look at this - how the FATF has accepted what could be construed as bribes from the tax haven of Luxembourg.

It is now time to put and end to the half measures that do little but legitimise crime and sleaze. Tax evasion is a crime against society, and it must now be treated more seriously. It is time for the world's financial institutions to embrace the need for an all-encompassing approach to money-laundering and corruption.