10
International Institutions to the Rescue?
THE PRECEDING CHAPTER ON NATIONAL GOVERNMENTS, both weak and strong, failing to address the financial secrecy system and its impact on capitalism and democracy leads logically to the question: Can international institutions step up and effectively foster conditions enhancing prosperity for all? The answer is, some can and some cannot. Without attempting to address the full range of work by each major global organization, this chapter focuses on institutional willingness and capacity to deal with striking flaws within capitalism that are undermining democracy.
The United Nations merits high praise. Besides its work through 22 agencies on peace and security, climate change, human rights, gender issues, labor, food, and more, the UN has well embraced the matter of illicit financial flows (IFFs) and how they forestall development for billions of people. In 2010 the UN Economic Commission for Africa, under the leadership of its chief economist, Abdalla Hamdok (later prime minister of Sudan), took up the matter of IFFs impacting Africa; appointed a high-level panel led by Thabo Mbeki, former president of South Africa; and advanced the issue across the continent and into Western capitals. The UN then tasked each of its other four regional economic commissions in Latin America, the Middle East, Europe, and Asia to do the same. Illicit financial flows were secured into the Addis Ababa Action Agenda and the UN Sustainable Development Goals, both adopted in 2015. Now, as said earlier, 193 countries are committed, at least on paper, to curtailing IFFs, the most damaging manifestation of the financial secrecy system.
Not leaving it there, two nations—Nigeria and Norway—have for years aligned in hosting numerous events at the UN and elsewhere to drive home the seriousness of illicit financial flows, leading in 2020 to the appointment of the Panel on International Financial Accountability, Transparency and Integrity. This panel’s report has the potential to generate further multilateral commitments addressing the most important changes required in global capitalism. The United States, true to form, aligned with Switzerland and other tax havens and opposed the panel’s mandate:
We are concerned that this body is built upon the faulty premise that the current international architecture to prevent and combat illicit finance is broken or inadequate. We remain concerned about the conflation of tax avoidance and evasion with financial crimes.1
Well, tax evasion is a financial crime in the United States, so why do US policy makers have so much difficulty dealing with this reality when the tax-evading money comes from abroad? Fortunately, Norway, Nigeria, and dozens of other countries moved purposefully forward with this important initiative. Under UN auspices, national delegations often— not always but often—demonstrate a willingness to ask hard questions and pursue uncomfortable answers.
US influence is even more evident in the World Bank, more so than in any other global institution, in part because tradition gives the American president the right to name its president. The “Washington Consensus,” codified by John Williamson in 1989 while at the Institute for International Economics, laid out 10 economic and policy imperatives for developing countries, and dominated US and World Bank thinking into the next century. Advocating sensible measures needed for stability and growth, the consensus was, however, completely devoid of introspection, failing to include any hint of criticism of financial practices in the West that facilitate billions of dollars illicitly streaming out of developing countries, debasing the lives of generations across the globe. The message to the poor was “be more like us.”
The World Bank has been slow and weak for decades in addressing issues that upset the wealthier nations, principal funders of its budget. Beginning in the 1980s, the bank spent 15 years dodging the issue of corruption, arguing that this was political rather than economic and therefore beyond the bank’s purview. Finally admitting that illicit activity drains more money out of developing countries than foreign aid brings money into developing countries, the bank now gingerly treats this strictly as a concern surrounding tax collection, and therefore the proper goal should be helping poorer countries strengthen their revenue departments. In other words, the focus of the World Bank is on the victim, not the perpetrator, a common predilection well illustrated by Anand Giridharadas in his book Winners Take All.
World Bank analysts studiously avoid the reality, explained earlier, that the primary motivation driving money out of developing countries is the conversion of soft currencies into hard currencies, fully enabled by the financial secrecy system. In millions of international transactions, this is the fundamental point. Tax evasion or avoidance is very much a tertiary concern. But the World Bank cannot go in this direction because the United States in particular and other wealthy countries as well facilitate and welcome illicit money flowing from abroad into the coffers of the already rich. The World Bank will not bite the hand that feeds it, no matter how many people are hurt by its intransigence.
Another reality characterizes the World Bank: an almost universal sense of defensiveness. Both in written materials and public utterances, the bank portrays itself as unfailingly on top of its game, undoubting of its excellence, disseminating necessary wisdom, and solving economic and social problems. The level of self-justification belies a deeper unease. Defensiveness and intransigence go hand and hand, stifling initiative and reducing the bank to a low common denominator. Many extraordinarily capable individuals among the bank’s staff of 10,000 are stymied, unable to pursue or suggest fresh thinking. This largely explains the years it took to address corruption and the additional years it will take to address the financial secrecy system and the harm it does to billions of people. Bright voices within the World Bank yearn to speak freely.
Existing within the World Bank Group is the International Finance Corporation, which invests in private-sector ventures across the developing world. Yet, the corporation channels a high percentage of its investments through tax haven entities, which then reinvest in projects. Policing money laundering and tax evasion is left largely to the tax haven parent company, with little oversight from IFC. This puts the World Bank solidly in the business of supporting the financial secrecy system, contradicting its stated principles.
The new mantra in the World Bank is “public-private partnerships,” an attempt to marshal accumulating private wealth into development projects. As posited in chapter 2, more than $100 trillion in broad money, much of it earning less than the rate of inflation or even intentionally invested at negative interest rates, is firmly held for security, purposefully avoiding risks, and precious little of it will find its way into joint ventures with foreign governments. Lamenting abdication of its original development mandate, Steven Friedman argues that the World Bank’s shift
places the fate of the global poor largely in the hands of private wealth. It seeks not to find ways in which private money can serve public needs but how public needs can shift to meet the demands of private money.2
Among all international institutions, the World Bank most clearly requires redirection and revitalization. Perhaps opening candidatures for the presidency of the bank would be a first step.
Tradition gives Europe primacy in naming the head of the International Monetary Fund. Focusing principally on global financial stability, the IMF nevertheless gets into issues of inequality, corruption, tax evasion, and, of late, illicit financial flows. Engaged in recent years on concerns surrounding inadequate taxation of multinational corporations, the IMF finds itself somewhat constrained on a definitional question: what constitutes an illicit financial flow and therefore contributes to tax evasion? Is tax avoidance, for example, through trade misinvoicing, legal or illegal? Chapters 3 and 9 go to some lengths making the point that trade manipulations done for the purpose of manipulating taxes in nearly all cases constitute schemes to defraud or offenses against property and therefore are illegal. The IMF needs to recognize and treat the financial secrecy system in all its manifestations as threatening to its core mandate: global financial stability.
The Organisation of Economic Co-operation and Development based in Paris, comprising in its core membership 38 higher-income countries, is criticized by civil society organizations as a “rich man’s club.” Perhaps it is, but the OECD has reached out to more than 60 additional countries to participate actively in its quarter-century effort to reform global taxation far more aggressively than have the World Bank and the IMF, which should be the lead institutions. Recognizing that corporations are not paying their taxes, the OECD launched its “Base Erosion and Profit Shifting” initiative in 2013, focusing on corporate practices that erode tax collections in some countries and shift tax-free profits to other countries. Incomplete as this “BEPS” process is, more than 135 countries are cooperating in the broad effort, providing a starting point for further and more fundamental reform measures. Asked why the OECD, dominated by richer countries, is pursuing this agenda even more than the World Bank and the IMF, José Ángel Gurría, OECD executive director, said quietly, “Perhaps because we are not based in Washington.”
Five more international organizations are especially important. The Financial Action Task Force, created in 1989 to set voluntary anti–money laundering standards, now has 39 member countries and 9 regional bodies. Noted for its 40 recommendations, which, following 9/11, also encompass terrorist financing, the FATF performs peer group evaluations of its members on about eight- to ten-year cycles, regularly faulting the United States for failing to address its millions of anonymous companies. Curtailing falsified trade, the centerpiece of the financial secrecy system, is not yet delineated in FATF recommendations.
The Bank for International Settlements, based in Basel, Switzerland, has for many years compiled confidential data on cross-border bank deposits, that is, how much money citizens of one country have in current bank accounts in other countries. Recently, with agreements from its 63-member central banks, BIS has begun opening these records. Economists Thomas Piketty, Gabriel Zucman, and others are better able to estimate the staggering sums stashed outside countries of origin, though data does not include stocks, real estate, art, and other assets. As covered in chapter 4, James Henry estimates total holdings abroad at well upward of $30 trillion.
Interpol, now with 195 member countries, includes money laundering, transnational crimes, and terrorist financing in its coordination and training agendas, urged particularly by former head Khoo Boon Hui, Singaporean by nationality and an expert on the subject. Two other past Interpol leaders, South African and Chinese by nationality, have been tagged with corruption charges. Interpol is known especially for its “Red Notices” seeking arrests of wanted persons; other notices include yellow, blue, black, green, orange, and purple, disseminating information or providing warnings. While Interpol attempts to remain nonpolitical, member governments often use notices against opponents and critics, complicating the organization’s laudable efforts. Through its cooperation with financial intelligence units across the world, linked within what is called the Egmont Group, Interpol should be an invaluable service in fighting economic crimes, but its functioning must remain completely apolitical.
The World Trade Organization based in Geneva and successor to the General Agreement on Tariffs and Trade, now has 164 member states that account for 98 percent of global trade. Its stated goal is to “ensure that trade flows as smoothly, predictably and freely as possible.”3 Note that this does not include as “legitimately” as possible. While acknowledging that trade should be priced according to authorized valuation standards, the WTO does not get into the business of enforcing legitimacy in pricing. Its operating agreements accept that “the actual price of the goods . . . is generally shown on the invoice.” Yet customs agencies in many countries report that 80 percent or more of invoices are falsified. WTO operating agreements also state that there are no “conditions for the valuation of goods for taxation or foreign exchange control.”4 Tens of thousands of trading partners have taken this to mean that one invoice can be used for customs purposes and a different invoice for payment purposes. The WTO’s recently named and very capable director-general, Ngozi Okonjo-Iweala, the former minister of finance in Nigeria and thoroughly familiar with the linkage between trade misinvoicing and grinding poverty, will likely push her organization into issues surrounding trade legitimacy.
The World Customs Organization has in recent years taken up the mantel. Growing out of an earlier convention centered in Brussels, the WCO acquired its name in 1994 and today has 183 member countries focusing on best practices in customs administration.
The G20 meeting of world leaders in China in 2016 took the following decision:
We will continue our work on addressing cross-border financial flows derived from illicit activities, including deliberate trade misinvoicing, which hampers the mobilization of domestic resources for development, and welcome the communication and coordination with the World Customs Organization for a study report in this regard following the Hangzhou Summit.5
WCO secretary-general Kunio Mikuriya, from Japan, seized the opportunity to assemble a global conference of experts in 2018, resulting in a 171-page analysis for which he wrote a foreword:
Over the past decade, the topic of Illicit Financial Flows via Trade Misinvoicing (IFFs/TM) has been debated at length in literature and research publications, with international organizations signaling the dangers of such illicit flows, which enable trade payments and receipts to be exploited for the transfer of capital. . . . During the analytical and compilation process, the Secretariat became increasingly cognizant of the pernicious effects of IFFs/TM, . . . both over-invoicing and under-invoicing, as well as irregularities in both export declarations and import declarations. . . . [A]ttention should instead focus on actions to combat IFFs/TM, the existence of which is indisputable.6
This is a major breakthrough among international organizations, both the charge by the G20 and the response by the WCO. Repeatedly within this book emphasis is laid on the fact that falsifying trade is the primary means by which the financial secrecy system operates. This is the preferred way to shift illicitly generated money across borders, producing impoverishment for billions in poorer countries, inequality for hundreds of millions in richer countries, and enormous wealth for the system’s operators in poor and rich countries alike. This is the principal mechanism by which capitalism is undermining the democratic-capitalist system. This is how you do it, now normalized in international trade and financial dealings.
So, as posed at the beginning of this chapter, are international institutions coming to the rescue of democratic capitalism? Unfortunately, the United States is enfeebling its leadership role in responsible free market ideology. The UN and the WCO are acquitting themselves well. For the World Bank and the IMF, both heavily influenced by the decades-long practice of the United States in welcoming dirty money from abroad, not yet, with the World Bank in particular requiring some serious soul-searching. Other institutions mentioned here likewise need to recognize the stakes—quite literally, the survival of the democratic-capitalist system—and widen and deepen their respective commitments.