Hidden Money, Hidden Resources Dinero oculto, recursos ocultos Who Makes the Financial Transparency Rules? An AML/CFT African Development Country View

Hidden Money, Hidden Resources Dinero oculto, recursos ocultos

Who Makes the Financial Transparency Rules? An AML/CFT African Development Country View

Kathy Nicolaou-Manias


OverviewWho bears the burden of ML and IFFs in Developing Countries?

Who Sets the Standards?

Which Developing Countries have a VOICE?

Can African Developing Countries Implement the IFF and ML Transparency Tools?

SO WHAT? – More Woes About Future Transparency: Bitcoin and BitPesa (Case study)

What can we do about Transparency Compliance in Africa?


Figure 1: Shadow, Illicit and Licit Real and Financial Markets

Who Bears the Burden of ML and IFFs in Developing Countries Understanding the link

between the Illicit Economy, IFFs and Money Laundering


Who Bears the Burden of ML and IFFs in Developing Countries

Who bears the burden of ML, TF and IFFs in Developing Countries? Global Distribution of Non-Normalised IFFs: Average between 2002-2006

Revenues: MNCs/Organised crime syndicates produce goods and services or extract resources (legally/illegally).

12

Resale and Investments: Products can be resold at market (or higher) prices, sometimes back to the original company (incurring further losses), while the surplus is transferred to developed countries.

3

Source: GFI and NyTid Magazine, United Nation Association of Norway, International Money Laundering Information Network

Capital Flight, IFFs, Tax Evasion and ML: MNCs/Organised crime syndicates sell goods and services (legally/illegally) to their subsidiaries or branches located in tax havens – at misrepresented (lower) prices. Tax evasion robs these countries of tax revenues and the rightful rents due to their productive resources. Using the multiplier effects, the socio-economic effects are large on these developing countries.


Who Bears the Burden of ML and IFFs in Developing Countries

Normative Illicit Financial Flows for the Regions – Billions of US Dollars (Current Prices): 2000-2009

Billions Dollars (US) - Current

PricesAfrica Asia Developing

EuropeMiddle East and North

AfricaWestern

HemisphereAll Developing

Countries

2000 10.1 199.7 34.0 43.0 66.5 353.3 2001 8.6 219.7 40.0 35.8 80.7 384.8

2002 12.2 186.5 57.6 37.4 83.4 377.1

2003 22.9 246.2 92.2 82.3 94.7 538.3

2004 26.6 322.5 109.4 135.2 91.3 685.0

2005 28.3 375.5 89.7 154.2 103.5 751.2

2006 38.1 368.2 148.2 247.1 118.7 920.3

2007 62.3 411.9 260.3 214.4 183.5 1 132.4

2008 63.0 493.8 300.2 307.3 150.3 1 314.6

2009 61.6 376.4 106.4 118.2 112.3 774.9

Total (Cumulative) 333.7 3 200.4 1 238.0 1 374.9 1 084.9 7 231.9

Share of the region in Total 4.6% 44.3% 17.1% 19.0% 15.0% 100.0%


Who Bears the Burden of ML and IFFs in Developing Countries Laundering

criminal proceeds

Corruption

Tax abuse

Market abuse

• Undermining trade

• Depleting investments and BEPS

Weakening governance

Monetary sector destabilisation

impact

Macro IMPACTS

Real sector growth

Y=C+I+G+(X-M)

ML and IFFs

Consequences

• Draining hard currency reserves

• Reduced tax revenues and collection (BEPS)

• Stimulating inflation

• Increasing financial liquidity risk

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Who?

Weakening social and economic stabilityEconomic IMPACTS



AccountingAML/CFT

and Corruption

Banking and

Payments Systems

Corporate Governance

Monetary and Fiscal

Transparency

Securities Market

Regulation, Insurance, Insolvency

and Creditors

Auditing

Financial Accountability, Stability, Integrity and Transparency

Type

In

stitu

tions

•International Accounting Standards Board (IASB)•International Federation of Accountants (IFAC)•Basel Committee on Banking Supervision (BCBS)

•International Federation of Accountants (IFAC)•International Auditing and Assurance Standards Board (IAASB)

•International Monetary Fund (IMF)

•Basel Committee on Banking Supervision•IMF •World Bank

•Financial Action Task Force (FATF)

•Egmont Group of Financial Intelligence Units•Eastern and Southern Africa AML Group•UNCAC

•International Organisation of Securities Commissions •International Association of Insurance Supervisors (IAIS)•World Bank•International Bar Association•UNCITRAL

•Committee on Payments and Settlement Systems (CPSS)•BASEL Committee on Banking Supervision•Financial Stability Board



AccountingAML/CFT

and Corruption

Banking and

Payments Systems

Corporate Governance

Monetary and Fiscal

TransparencyAuditing

Type

In

stitu

tions

• UN• IMF•WB

• G6/7/5• G20• OECD• NEPAD

Overarching Institutions

Standard Setting Authorities• BASEL• FSB/Forum• IBA• IASB• IFAC

• UNCAC• UNCITRAL• IAASB• FATF• CPSS

• IADI• IOSCO• IAIS• IOPS• EC/ECBInformal / Associate /

Committees / Agencies

Civil Society, NGOs etc…

• FAFT regional Bodies (CFATF, EAG, GIABA, ESAAMLG, Moneyval, APG, GAFISUD, MENAFATF)

• EGMONT• Credit rating agencies• African Tax Admin

Forum

• TI• EITI • GFI• FTC

• TJN• Christian Aid • Eurodad• Global Witness

• Latindadd• etc…

Financial Accountability, Stability, Integrity and Transparency



International Accounting Standards

Board

International Federation of Accountants

Basel Committee on Banking Supervision

Organization Category Developed CountriesNon-African Developing Countries

African Developing Countries

G6/ G7 / G8 • Economic and Financial Stability

Canada, France, Germany, Italy, Japan, UK, USA (and Russia)

None None

G20

• Economic Development • Tax

• Trade• Corporate

Governance

Australia, Canada, France, Germany, Italy, Japan, Republic of Korea, Russia, Saudi Arabia, EU, UK and USA

Argentina, Brazil, China, India, Indonesia, Mexico, Turkey

South Africa

IMF

•Monetary Transparency • Fiscal Transparency

• Economic Growth and

Development • Financial Stability,

Integrity and Transparency • Data dissemination

Total of 188 members. Represents Developed, Non-African Developing and African Developing Countries




Board



Organization Category Developed Countries

Non-African Developing Countries


WORLD BANK

• Corporate Governance • Economic

Development • Trade

• Data dissemination

188 countries represented in the International Bank for Reconstruction and Development (IBRD); and 172 countries represented at the International Finance Corporation (IFC). Each IBRD country should also be a member of the IMF.

UNCAC • Anti-corruption140 signatories 172 parties

*NON-AFRICAN MEMBERS include: Chad, Somalia, South Sudan, Eritrea

UNCITRAL

• International Trade law • Electronic

Commerce • Security Interests

14 Asian (11 Developing) 18 European (5 Developing) 7 South American (All Developing) 5 North American (3 Developing) 2 Oceanian (1 Developing)

Algeria, Benin, Botswana, Cameroon, Egypt, Gabon, Kenya, Mauritius, Morocco, Namibia, Nigeria, Senegal, South Africa, Uganda


Which Developing Countries have a VOICE


Board





Financial Stability Board

• Financial stability and integrity

Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Russia, Saudi Arabia, Singapore, South Korea, Spain, Switzerland UK and USA (BIS, ECB, EC, IMF, OECD, WB)

Argentina, Brazil, China, India, Indonesia, Mexico, Turkey

South Africa

BASEL Committee on Banking Supervision

• Banking supervision • Cross Border

banking • Capital adequacy

• Accounting and

auditing (ATF)

Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Korea, Luxembourg, Netherlands, Russia, Saudi Arabia, Singapore, Spain, Sweden, Switzerland, UK and USA.

Argetina, Brazil, China, India, Indonesia, Mexico, Turkey

South Africa

International Accounting Standards Board (IASB)

• Accounting and Reporting standards • Transparency,

integrity and accountability

INDIVIDUAL SPECIALISTS: Netherlands, New Zealand, France, Germany, South Korea, UK and USA (X3)

Brazil, China South Africa




Board




Non-African DevelopingCountries


International Federation of Accountants (IFAC)

• Strengthen accounting standards

179 Members from 130 countries

Botswana, Cameroon, Cote D'Ivoire, Ghana, Kenya, Lesotho, Liberia, Malawi, Morrocco, Namibia, Nigeria, Senegal, Sierra Leone, South Africa, Swaziland, Tanzania, Tunisia, Uganda, Zambia, Zimbabwe

International Auditing and Assurance Standards Board (IAASB)

• Auditing standards and quality control (falls under IFAC)

See IFAC See IFAC




Board





Financial Action Task Force

• Combat Money Laundering • Combat Terror

Financing • Financial

integrity • Financial

transparency

Australia, Austria, Belgium, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Cooperation Council, Hong Kong, Iceland, Italy, Japan, Republic of Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, UK and USA.

Argentina, Brazil, China, India, Mexico, Turkey

South Africa




Board






Egmont Group of Financial Intelligence Units

• Informal international network of Financial Intelligence Units• Combat Money

Laundering• Combat Terror

financing• Financial integrity,

stability and transparency

126 member country FIUs (21 from Africa)

Algeria, Angola, Burkina Faso, Cameroon, Chad, Core D'Ivoire, Egypt, Gabon, Ghana, Malawi, Mali, Mauritius, Morocco, Namibia, Nigeria, Senegal, Seychelles, South Africa, Tanzania, Togo and Tunisia

Committee on Payments and Settlement Systems (CPSS)

•Monetary and financial stability • Banking services

• Financial Integrity

• Cross-border flows

• Payments systems

172 countries




Board



Organization Category DevelopedCountries



International Association of Deposit Insurers (IADI)

• Deposit insurance integrity

Australia, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Guernsey, Hong Kong, Italy, Japan, Jersey, Korea, Liechtenstein, Palestine, Poland, Romania, Russia, Singapore, Slovenia, Sweden, Swtizerland, UK and USA.

Albania, Argentina, Azerbaijan, Bahamas, Bangladesh, Barbados, Bosnia, Brazil, Brunei, Bulgaria, China, Colombia, Croatia, Ecuador, El Salvador, Guatemala, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kosovo, Kyrgyzstan, Lebanon, Libya, Malaysia, Mexico, Mongolia, Montenegro, Nicaragua, Paraguay, Peru, Phillipines, Serbia, Thailand, Trinidad, Turkey, Ukrane, Uruguay, Venezuela, Vietnam

Algeria*, Kenya, Lebanon, Lesotho*, Libya, Mauritius*, Morocco, Nigeria, South Africa*, Sudan, Tanzania, Uganda, Zimbabwe (NOTE: * represents associates and not members)




Board






International Organization of Securities Commissions (IOSCO)

• Securities and future trade integrity and transparency • Corporate financial

disclosure and transparency

145 members (124 ordinary members, 12 associate members and 64 affiliate members

International Association of Insurance Supervisors (IAIS)

• Insurance integrity and standards •Macro-prudential risk

and financial stability • Banking and financial

regulation

135 countries (plus EC, IMF, OECD, World Bank etc…)

NOTE: Civil Society Organizations and NGOs are a voice monitoring exploitation, tax evasion and resource mobilization in the extractive sectors for developing countries (especially

Africa) and raise the plight of these countries.


Can African Developing Countries Implement the IFF and ML Transparency Tools?

Beneficial Ownership (and KYC)

Country-by-Country Reporting

Automatic Exchange of Information

Trade Mispricing

Anti-money Laundering

Tackling IFFs through

transparency

Excluded from most International Regulatory and Standard Setting bodies - they not involved in the decision making processes.Financial systems are not advanced – relevant electronic data repositories don’t always exist.Manual systems make inter-departmental and inter-regional collaboration between tax, customs and banking authorities timely, costly and complexCapacity and capability may not be present thus increasing the burden of compliance.


SO WHAT? The regulatory standards set by international bodies exclude a large proportion of African countries, who do not comply with the financial transparency standards.These standards add layers to the bureaucracy and increase the cost of doing business, especially in the financial (Banking, Trading and Insurance) space.African countries are extremely vulnerable to resource and factor of production “looting” leaving women, children, the unemployed, elderly and rural poor worst off – robbing them of their human right to a dignified life

Low income Developing Countries: Low level of compliance with international transparency tools regarding IFFs and ML. NOTE: There are exceptions with Moderate compliance.

Middle income Developing Countries: Moderate levels of compliance with international transparency tools regarding IFFs and ML. NOTE: There are exceptions with little compliance.

High income Developed Countries: High levels of compliance with international transparency tools regarding IFFs and ML. NOTE: there are exceptions with low compliance

FATF Standards initiated in 1998

After 16 years of standards set, policy amendments and incremental rules,

how much has been achieved? If Africa is only starting to comply, will there be

any resources left??

COM

PLIANCE TO

INTERN

ATION

AL TRANSPAREN

CY and FIN

ANCIAL STABILITY STAN

DARDS


So WHAT? More Woes About Future Transparency: Bitcoin and Virtual Currencies

Bitcoin (BTC) is a global Peer-to-Peer currency that is designed for the Internet. Modeled on gold, behaves like cash online, and can be used by anyone. There will only be a total of 21 million Bitcoins by 2140.Has no central authority and is a global currency. Is given value by the community – doesn’t need to be accepted by anyone or backed by any authority to succeed. Virtually impossible to counterfeit as it is an open source protocol.Can be divided into as small units (up to 8 decimal places - 0.00000001) It is a technology facilitating transactions. It is a protocol for exchanging value instantly over great distances via a digital connection (internet) without the need for a (financial) intermediary. Is being applied to payment applications to remit monies, facilitate micropayments, make donations, transfer large scale assets, identity and contract management.It changes our understanding of financial flows

and the macro-economy.

Universal

Bitcoin

Companies

Wallets

Exchanges

Other (Financial Services )

Mining

Payment

Processing

Bitcoin Value Chain

Due to the cryptography underpinning BTCs, it bypasses all existing financial stability, integrity and transparency standards set: accounting; auditing; banking; payments; AML/CTF; cross-border flows, capital flight, exchange controls; monitoring and tracking …


SO WHAT? Case of BitPesa - Less Compliance and Transparency in Kenya

BitPesa is a Bitcoin (BTC) remittance company that integrates with Kenya’s mobile money system M-Pesa. The service allows people living abroad to transfer the value of Bitcoin directly to M-Pesa accounts in Kenya. M-Pesa reached 17m Kenyans in 2012. M-Pesa is in SA, Uganda, Ghana and Botswana, and growing. BitPesa has seen astronomical growth recently.More cost effective than existing remittance services (Western Union, MoneyGram). Traditional remittance services charge up to 7% or more for a minimum amount of £100. BitPesa transfers small amounts at low costs. One can move a minimum of £20 to a maximum of £400 (due to M-Pesa wallet capacity limitations). BitPesa does not charge a transaction fee but levy a 3% exchange fee when converting from £ to shillings.Receipt is IMMEDIATE.

SenderBitPesa

converts BTC in KES and sends it on

3%Buy BTC in £ and send to

BitPesa

Recipient

Thought Experiment on Bitcoin Exchange

and Money Flows (IFFs)??


What Can We Do About Transparency Compliance in Africa?

A more inclusive approach is required for Developing Countries in Africa – and one that does not only rely on representation by South Africa (“Big Brother approach” which is met with resistance).Informal collaborations are more successful that mandatory unilateral standard setting approachesGreater collaboration is required between African countries, characterized through:

– Regional collaboration– Information sharing– Capacity-building and skill exchanges– Support in advancing technological innovations in the financial, payment, accounting, auditing and

AML/CFT spaceOversight over the BTC technology protocol innovations

– will easily be adopted in Africa due to the speed, ease and low cost of transacting– reduce the burden of transacting for the poor– will result in increased unreported, unrecorded (and illicit) transactions incl. Capital flight.– Requires a rethink of our understanding of IFFs and Capital Flight.– How is this going to be monitored, regulated in the future?

The plight of Developing Africa needs to be tackled - before resources and factors of production are “looted” from the continent - in a manner that is supportive, inclusive and collaborative, thus addressing the needs of the most vulnerable, namely women, children, the elderly, unemployed and rural poor, thus providing them with their basic human right to a dignified life filled with equal opportunities !!!


Questions

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Hidden Money, Hidden Resources Dinero oculto, recursos ocultos Who Makes the Financial Transparency Rules? An AML/CFT African Development Country View