Follow the Money Part 2
2001-06-24
THE NAME (AND SHAME) GAME
THE CLINTON administration realized that any new approach had to focus on stemming the proliferation of underregulated jurisdictions and tackling those jurisdictions that were already established. The strategy also had to recognize the limits of traditional law-enforcement and regulatory channels as well as the relative ineffectiveness of previous diplomatic efforts. Furthermore, any strategy had to be global and multilateral, since unilateral actions would only drive dirty money to the world's other major financial centers. Yet Washington could not afford to take the "bottom-up" approach of seeking a global consensus before taking action; if the debate were brought to the U.N. General Assembly, for example, nations with underregulated financial regimes would easily outvote those with a commitment to strong international standards. Finally, the strategy had to be politically tenable, given the varied U.S. interests in many nations with underregulated financial sectors.
Led by Treasury Secretary Lawrence Summers, the Clinton administration worked with its allies to develop a three-pronged strategy focused on rogue banking, money laundering, and tax evasion. Three multilateral organizations -- the G-7's FSF, the FATF, and the OECD -- were asked to address these issues separately but to proceed on similar timetables so that they could conclude their work before the G-7 summit in July 2000. The objective was to "name and shame" those nations that had developed underregulated financial centers and threaten appropriate countermeasures if the pressure was not sufficient. The three efforts each followed a "top-down" approach in which nations committed to regulatory and law enforcement regimes would establish international standards and evaluative criteria before engaging with those who lacked the commitment.
The FSF comprised finance ministers, central bankers, and supervisory officials from 11 nations with advanced financial systems. Also represented were international institutions such as the IMF and the Bank for International Settlements, regulatory bodies such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, and committees of central bank experts such as the Committee on Payment and Settlement Systems. The FSF aimed to compile a list of underregulated offshore centers, decide how to respond to new international developments, and assess their potential to contribute to instability. To these ends, the FSF created a survey that asked banking, insurance, and securities supervisors in both onshore and offshore centers about offshore laws and supervisory practices, the level of resources devoted to supervision and international cooperation, and the degree of cooperation. The FSF then grouped offshore jurisdictions into three categories, from high quality to low quality. n1 Its most significant conclusion was that "offshore financial centers that are unable or unwilling to adhere to internationally accepted standards for supervision, cooperation, and information-sharing create a potential systemic threat to global financial stability." Finally, the FSF identified key supervisory standards, recommending that the IMF take charge of deciding how to assess adherence to these standards and proposing ways to enhance compliance.
n1 The FSF's "high quality" category included Dublin (Ireland), Guernsey, Hong Kong, the Isle of Man, Jersey, Luxembourg, Singapore, and Switzerland. The "middle quality" jurisdictions were Andorra, Bahrain, Barbados, Bermuda, Gibraltar, Labuan (Malaysia), Macau, and Monaco. The "low quality" group comprised Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, Costa Rica, Cyprus, Lebanon, Liechtenstein, the Marshall Islands, Mauritius, Nauru, the Netherlands Antilles, Niue, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, the Seychelles, Turks and Caicos, and Vanuatu.
For its part, the FATF was responsible for reviewing the countries that resisted global efforts to combat money laundering, both offshore and onshore. This was an expanded mandate for the group, which the G-7 had established in 1989 to set and evaluate international standards against money laundering and which has since grown to include 29 members. The FATF developed 25 criteria for identifying uncooperative nations, focusing on bank regulation, customer identification, the reporting of suspicious activity, international cooperation, and the criminalization of money laundering. It then began to analyze the laws and practices of the 29 nations identified as meriting review. In turn, these nations were allowed to provide their own input and to challenge FATF assessments. In June 2000, the FATF issued a concluding report that identified systemic problems in 15 "noncooperative" jurisdictions and deficiencies in another 14. n2
n2 The FATF list of "noncooperative" jurisdictions included the Bahamas, the Cayman Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. The jurisdictions that the FATF also reviewed were Antigua and Barbuda, Belize, Bermuda, the British Virgin Islands, Cyprus, Gibraltar, Guernsey, the Isle of Man, Jersey, Malta, Mauritius, Monaco, St. Lucia, and Samoa.
Meanwhile, the OECD was responsible for investigating tax evasion and establishing a consensus -- ultimately opposed by only Switzerland and Luxembourg -- on how to tackle harmful tax practices. The organization then set out to identify the tax havens that undermine other nations' tax bases. These havens, according to the OECD, shared four key factors: lack of transparency, lack of effective exchange of information, "ring-fencing" regimes (whereby foreign customers are subject to rules different from those applied to citizens), and no or low effective tax rates. (On the last point, however, the OECD made clear that low taxes alone do not make a country a tax haven. Low taxes are problematic only when combined with harmful tax practices.) Like the FATF, the OECD permitted the countries being reviewed to have their say in the assessment process. In June 2000, the OECD announced that six jurisdictions under review -- Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino -- had committed to eliminate harmful tax practices by the end of 2005 and to embrace international tax standards. Others did not, however, and by the end of the month the OECD released a list of these tax havens. n3
n3 The OECD found the following jurisdictions to be tax havens: Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, the British Virgin Islands, the Cook Islands, Dominica, Gibraltar, Grenada, Guernsey, the Isle of Man, Jersey, Liberia, Liechtenstein, the Maldives, the Marshall Islands, Monaco, Montserrat, Nauru, the Netherlands Antilles, Niue, Panama, Samoa, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, the Seychelles, Tonga, Turks and Caicos, the U.S. Virgin Islands, and Vanuatu.
In July 2000, the G-7 finance ministers met and endorsed the recommendations of all three initiatives. More pointedly, they also issued formal advisories to their domestic financial institutions, informing them of the FATF actions against money-laundering havens and calling on those institutions to scrutinize transactions involving the nations on the FATF list. This unprecedented step was, in essence, a warning light from the ministers. They also threatened that if listed countries did not take immediate steps to fight money laundering, the G-7 would consider additional measures, such as restricting financial transactions with those jurisdictions and conditioning support from international financial institutions.
WINNING FRIENDS AND INFLUENCING PEOPLE
THE G-7's THREAT was credible and the global reaction was immediate. Markets responded first: the day the FATF released its list, for instance, Standard & Poor's downgraded its rating for a top Liechtenstein bank. An industry reaction followed, as banks from G-7 nations began to review their relationships with banks from many of the listed countries. Numerous reports emerged of old ties being broken and new relationships being abandoned. Finally, there was a diplomatic reaction: some of the listed countries started complaining about new difficulties in processing international wire transfers and in balancing accounts by settling their daily dollar transactions. After the initial predictable denunciations of the "naming and shaming" initiatives, many of the targeted countries began to make politically difficult pledges to bring their regimes up to international standards. More countries began to cooperate with the OECD. By the beginning of 2001, 32 of the 35 listed tax havens had sought further dialogue with the OECD. The Isle of Man, the Netherlands Antilles, and the Seychelles took the next step and signed commitments to eliminate harmful tax practices; others were working with the OECD to follow suit. The IMF and other international institutions also incorporated anti -- money laundering measures into some of their country reviews and assessments.
Steeled by this reaction, key nations began to apply additional pressures where they held special influence. The French came down particularly hard on Monaco, and the British stepped up pressure on their dependencies in the Caribbean and in the English Channel. The European Union began difficult discussions with Luxembourg and Switzerland about their refusal to cooperate on tax matters. The United States abstained from a vote on an IMF program for the Philippines, which Manila interpreted as a sign of increasing concerns about money laundering. Washington also got tough on Panama. After Peru's Montesinos fled there, Panama told the United States that it would give him asylum only if the United States would rescind its anti -- money laundering advisory -- a deal that the United States quickly rebuffed.
As a result of this pressure, the short period since the report's publication has seen substantial progress. By this February, 7 of the 15 targets of FATF action -- the Bahamas, the Cayman Islands, the Cook Islands, Israel, Liechtenstein, the Marshall Islands, and Panama -- had completely reinvented their approaches to combating money laundering. For the first time ever, money laundering is a crime in Israel and customer identification is mandatory in the Cayman Islands. Rogue banks have been closed and new law enforcement investigations have begun. Although full implementation of the new laws is yet to be confirmed in most cases, many listed nations have already cooperated more in assisting investigations.
This policy's success offers several important lessons. First, multilateral efforts can be productive globally without requiring global consensus. Coalitions of the willing can successfully influence and enforce international standards, especially if the coalition partners have a predominant interest in and influence over the subject at hand. In this case, the coalition that drove the FATF, FSF, and OECD process represented the dominant players in the global financial system, so it could effectively set the rules. Second, globalization and the integration of world financial markets give policymakers new abilities to influence events on a global scale. When governments are able to harness market forces, they can incite foreign private actors to lobby their own governments to take action. Third, such multilateral actions are most effective when no special favors are given. During this process, some of the targeted countries urged the United States to protect their interests; at times, divisions emerged within the U.S. government about how Washington should handle sensitive cases such as Israel, Panama, and Russia. In the end, thanks primarily to Deputy Treasury Secretary Stuart Eizenstat, the United States played no diplomatic favorites. This fairness made it much easier for France and the United Kingdom to be equally tough. And fourth, the initiative showed that U.S. leadership was essential even in a multilateral setting. With perhaps the sole exception of France, no other country could apply anywhere near the same degree of diplomatic efforts and legal and regulatory resources to this project.
A WAY FORWARD
THE WORK is far from over. The IMF and the World Bank still need to better incorporate measures to combat financial abuses into their regular programs. The OECD is working with its targeted countries to bring them closer into compliance with international standards -- and it must decide what to do about countries that do not respond. The FATF is working to determine which countries have made enough progress toward full reform to be taken off the list; it is also reviewing additional countries to determine whether any should be added. Finally, both the FATF and the G-7 will have to confront the issue of countermeasures.
As successful as this process has been, not every targeted country has responded constructively. For instance, the United States received a letter from the president of Nauru soon after the FATF list's publication. He charged that, because Nauru was the "victim" of adverse publicity, business had taken a turn for the worse. Before Nauru could proceed with reforming its offshore financial regime, he concluded, it would need compensation for its losses -- $ 10 million, to be exact.
Countries such as Nauru are primary targets for multilateral countermeasures. In February, the FATF identified three other states, along with Nauru, that had thus far done little or nothing of substance to improve their anti -- money laundering regimes: Lebanon, the Philippines, and Russia. Lebanon has since rushed through new laws, and Russia has now introduced new legislation (after vetoes by former President Boris Yelstin and broken promises by President Vladimir Putin). But the Bush administration must determine before the next G-7 summit in July whether it wants to support multilateral penalties if that progress is not adequate. These penalties could range from strengthened advisories to bilateral actions such as denying visas or withholding loans. They could even involve outright economic sanctions such as the wholesale restriction of financial transactions.
A number of other initiatives remain necessary to build on the success so far. The United States should continue to improve its own anti -- money laundering regime, balancing law enforcement and privacy interests, so that it can continue to lead the world's efforts. All U.S. financial institutions, not just banks, should be brought into the U.S. anti -- money laundering regime. Pockets of domestic under-regulation, such as Delaware's loose oversight of company incorporation, need additional scrutiny. Overly burdensome regulations, such as the blanket requirement to report cash transactions over $ 10,000 (a level that has not changed since the 1970s), should be relaxed to balance stronger requirements elsewhere. Most important, Washington should find a better way to share its information on criminal foreign banks with the domestic financial industry to help prevent U.S. banks from being abused.
The United States and its allies should also begin engaging strategically important developing countries such as China, India, and South Africa on this subject. The G-7 should do much more to coordinate action to track funds stolen by former kleptocrats such as Nigeria's Sani Abacha and Indonesia's Suharto. The FATF has already begun to review and improve international standards against money laundering. This review should address tough questions: Should tax fraud formally be an offense under the money-laundering statutes? How can anti-money laundering provisions be applied to the growing Islamic banking system and underground banking mechanisms such as the hawala system, which caters to Middle Eastern and South Asian populations around the world? Lastly, the United States and other interested nations should view the "naming and shaming" efforts of the FATF, the FSF, and the OECD as models for other policy areas.
A BUSH BACKTRACK?
IT IS PERHAPS too early to know how the Bush administration will confront abuses in the global financial system. But initial signs indicate that George W. Bush may be less interested in multilateral approaches and strong regulatory actions than his predecessors. Some law enforcement experts are already worried about the views of Bush's chief economic adviser, Lawrence Lindsey, who has long opposed the legislative foundations of the U.S. anti -- money laundering regime. In a 1999 article in The Financial Times, for example, he challenged the regime's very constitutionality, arguing that the "current money-laundering enforcement practices are the kind of blanket search that the writers of the Constitution sought to prohibit."
Lindsey is correct on one point: the need to balance law enforcement interests against concerns over privacy. In recent years, several good proposals have emerged for modifying U.S. laws and regulations to better address legitimate privacy concerns -- something moderates on both sides of this debate should embrace. Otherwise, Lindsey's positions are far from mainstream. He ignores the fact that efforts to balance enforcement and privacy interests have always been integral to U.S. banking laws and regulations. That understanding has resulted in a steady tradition of bipartisan support for efforts to prevent money laundering. Richard Nixon signed the Bank Secrecy Act in 1970 and established the modern regulatory framework. Ronald Reagan signed legislation in 1986 making money laundering a federal crime and expanding Nixon's framework. And George H. W. Bush led the G-7 initiative to create the FATF and established the Treasury Department's Financial Crimes Enforcement Network. Indeed, the same principles that concern Lindsey are central tenets of the international standards that the United States has been urging the rest of the world to adopt. If Washington backtracked from those tenets now -- as Lindsey has advocated -- it would seriously undermine a successful bipartisan effort.
Lindsey's views are not the only ones that cause concern, however. During his first two meetings with his G-7 counterparts in February and April, Treasury Secretary Paul O'Neill retreated from the previous U.S. position of strong support for the FATF and OECD initiatives, insisting they were now "under review." Then in May, he wrote in The Washington Times that he shares "many of the serious concerns that have been expressed recently about the direction of the OECD initiative" and that "the project is too broad and it is not in line with this administration's tax and economic priorities." He left the other finance ministers publicly questioning whether the United States would go along with the critical next step in these efforts: multilateral countermeasures against the most egregious havens for financial abuses.
In taking these positions, O'Neill was reflecting the views of a vocal, well-financed minority of Americans who oppose any multilateral discussions of tax issues for fear of an imaginary "global tax police" -- the financial equivalent of U.N. black helicopters. These ideologues have targeted the OECD initiative to combat harmful tax practices, arguing that it would somehow prevent the United States from lowering taxes at home. But nothing could be further from the truth. The OECD initiative clearly allows countries to lower taxes -- indeed, to zero if they desire. Otherwise, places such as the Cayman Islands would have been listed as tax havens.
Meanwhile, O'Neill's insistence on a lengthy "review" of the OECD initiative has already seen predictable diplomatic consequences. Many countries on the OECD list immediately adopted a new confrontational approach. Rather than working with OECD technical experts to address clear concerns about transparency and information sharing, they now, in the words of one Antiguan official, "seek a global tax forum to resolve these issues, rather than one dominated by the OECD." Of course, if a "global forum" such as the U.N. General Assembly became the venue for establishing international standards, the votes of underregulators would easily carry the day. Money launderers and tax evaders around the world would then breathe a deep sigh of relief.
This July, at the annual G-7 summit in Italy, the Bush administration's official approach will become clear. Notwithstanding Lindsey's previous positions or O'Neill's early statements, the Bush administration could still decide to continue the successful multilateral approach to combating money laundering, tax evasion, and rogue banking. Such a decision would be a victory of good policy over bad politics. But if the United States weakens or withdraws its support, the entire effort will be grievously -- perhaps irreparably -- harmed. If G-7 decisions about countermeasures are delayed in July, much of the diplomatic momentum will be lost. If no effective sanctions are imposed at all against the worst offenders, the credibility of the entire effort will be put in doubt. Those who would look to the Bush administration to take tough measures against international money laundering and tax evasion would then likely have to wait -- at least until the next big money laundering scandal emerges.
Terms and Conditions
Copyright© 2000 LEXIS-NEXIS, a division of Reed Elsevier Inc. All rights Reserved.
quamnet.com |
