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Commentary: Shruti Shah

A case for more integrity in the financial sector

By Shruti Shah17 January 2013

An anti-corruption rally in New Delhi, India. The continuing discontent of ordinary people – whether in the Middle East, India or even the United States – shows that tackling corruption will continue to be front and center in 2013, writes Shruti Shah. Photo by: India Kangaroo / CC BY-ND

A 2011 BBC poll surveying more than 11,000 people across 23 countries showed that corruption was the most talked about global issue. In the same survey, 69 percent of respondents rated corruption as a “very serious” global issue.

This is not surprising, as corruption underpins many of the main global challenges. Corruption undermines economic growth, erodes trust in institutions, diverts scare resources that could be used for development, subverts open markets and is perceived to have played a significant role in the recent financial crisis. The continuing discontent of ordinary people – whether in the Middle East, India or even the United States – shows that tackling corruption will continue to be front and center in 2013.

An important issue often missing from discussions on corruption is that preventing the ability of individuals to export, launder and conceal ill-gotten gains can significantly reduce corruption.

It is difficult to reliably estimate how much money is laundered globally. The managing director of the International Monetary Fund in 1998 estimated that the aggregate size of money laundering in the world could be somewhere between 2 percent and 5 percent of the world’s gross domestic product. Even the lower end of the scale of this rather old estimate is staggering. It would be equally if not more difficult to understand the true effect of this leakage on developing countries. The true cost exceeds the value of the stolen assets – siphoning funds away from important development goals, undermining the rule of law. 

Many countries have established laws, regulations and procedures to prevent money laundering. In the United States, for example, financial institutions have an obligation to file suspicious transaction reports, conduct customer due diligence and engage in anti-money laundering, or AML, compliance. However, as a recent World Bank report highlights, in many countries, both developing and developed, including in the United States, there are still significant loopholes allowing corrupt individuals to launder and ultimately enjoy their illegally obtained gains. One such loophole in the United States allows for the formation of companies without disclosing the identity of their ultimate owner (referred to as “beneficial” owner) – thus creating a so-called anonymous or shell company. The lack of beneficial ownership transparency makes it too easy to hide the proceeds of corruption and other illegal activities. Once these anonymous companies are formed, they easily enter the global financial system to begin the process of laundering money.

In February 2010, the U.S. Senate Permanent Sub-Committee on Investigations issued a report presenting four case histories on how foreign kleptocrats, and their close associates, were circumventing or undermining U.S. AML controls to bring funds into the United States that may have been the product of foreign corruption. However, weak AML controls have implications well beyond corruption. Money launderers can take advantage of weak AML controls to disguise the origin of the profits of different criminal activities, such as drugs and arms trafficking, and reuse them to fund other illegal activities, including those that have enormous global repercussions for all countries, such as terrorism.    

In acknowledgement of this growing threat to our security, much has been written about this in the last few years. In fact, several large banks have been subject to large fines relating to money laundering deficiencies. Most notably, HSBC was fined $1.9 billion in December. Other institutions fined for similar offenses include ING, Standard Chartered and Wachovia. The growing fines point to the fact that anti-money laundering compliance in large financial institutions is weak and needs to be strengthened.

To address the legislative loophole related to the ability to form anonymous corporations in the United States, Sens. Carl Levin, a Michican Democrat, and Chuck Grassley, the Republican from Iowa, reintroduced the Incorporation Transparency and Law Enforcement Assistance Act in the Senate in 2011.  This was the third time such a bill had been introduced. However, the bill did not make it past the committee level and meaningful progress remains elusive.

Strengthening AML compliance and addressing the issue of anonymous shell corporations may very well be among the most important corruption and compliance challenges to tackle in 2013. In an effort to address this in part, the Obama administration announced in November 2012 a review of U.S anti- money laundering rules to correct gaps, redundancies or inefficiencies. 

While a review of laws and regulations on paper is certainly a welcomed effort, to effectively deter money laundering, there needs to be a commitment by financial institutions to effectively implement anti-money laundering controls. One way to get that commitment is effective enforcement directed at both corporations and individuals. If enforcement action is directed singularly at corporations, its officers who have targets to meet will not have an incentive to refrain from improper conduct. Prosecuting individuals is also important as corporations rely on employees and officers to design, implement, review and adhere to anti-money laundering controls. Similarly, if only employees are targeted, the board may not have an incentive to commit resources to implementing anti-money laundering controls.

This is part of a series of guest opinions by NGO leaders on ways to make U.S. foreign assistance more effective.

About the author

Shruti shah profile
Shruti Shah

Shruti Shah is senior policy director at Transparency International-USA, responsible for the promotion of TI-USA’s anti-corruption law and regulation policy agenda. In that capacity, she develops and implements advocacy campaigns and builds strategic partnerships with international organizations, senior government officials and private sector and NGO representatives to ensure that laws against bribery and corrupt practices, and favoring transparency, are implemented and effectively enforced. Shah also leads InterAction's G20 anti-corruption policy team and is a contributing editor of "The FCPA Blog."


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