Analysis: Dirty money cleanup gains speed

By MEGAN HARRIS, UPI Correspondent  |  Jan. 29, 2008 at 9:02 AM
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WASHINGTON, Jan. 28 (UPI) -- Illegal money hurts development efforts in poor countries and may be used to fund terrorism, but new cleanup efforts offer significant hope for curbing dirty money flows.

A major step began last summer, when Norway requested that the World Bank conduct a study of illicit financial flows and tax havens, which Norway offered to finance. World Bank President Robert Zoellick subsequently agreed that a study of the development impact of offshore financial centers would be a valuable contribution to the governance and anti-corruption agenda, a representative of the Norwegian Ministry of Foreign Affairs told United Press International in an e-mail message.

A representative of the Bank told UPI: "The World Bank has agreed to continue working with the Norwegian government and others to see that analysis in this area is done. The specifics of this still have to be decided."

Since the study proposal, the Norwegians have established a task force to study illicit financial flows and organized a conference last December, said Raymond Baker, senior fellow at the Center for International Policy who directs the center's Global Financial Integrity program.

Baker keynoted last December's conference in Oslo, Norway, and helped organize an earlier conference on illicit financial flows in June 2007 in Washington, where a representative of Norway's Foreign Ministry announced that Norway would request the World Bank study. Baker said then that "numbers would drive policy."

Estimates of the illegal flow from criminal activities, corruption and tax evasion are between $1 trillion and $1.6 trillion, up to half of which probably comes from developing countries, a representative of the Norwegian Ministry of Foreign Affairs said in an e-mail message.

"It is important to analyze the development impact of these flows and there is a need to substantiate the figures and to develop better knowledge of the actors involved and the methods they use," the ministry representative explained, adding that good analysis is needed to shape policy.

Baker said the task force will meet this April and again this summer in preparation for the Doha Round of trade talks in December. The illegal flows of money are relevant to trade because "an element (of trade) is looking at new ways to finance development," Baker explained, "and curtailing the flow of illicit money out of developing countries that is so damaging."

Baker has long said that curbing the dirty money problem is the correct approach because abolishing it entirely isn't feasible.

When money has already left poor countries, the World Bank's Stolen Assets Recovery Program can help countries recover money illegally taken abroad and use the money for public works projects. Baker believes that StAR, which primarily provides administrative and legal assistance on how to recover assets, "will prove to be effective."

Baker has highlighted the holes in U.S. law that allow money from such activities as slave trading, female trafficking, environmental crimes and tax evasion to enter the U.S. financial system because only three types of dirty money are actually illegal: money from corruption, drugs and terrorism. Baker pointed out these gaps in a memorandum to Treasury Secretary Henry Paulson published in the September/October 2006 issue of The National Interest.

Illicit funds that fall under U.S. legal radar can also be used to finance terrorist activities. Terrorist financing is already prohibited by U.S. anti-money laundering laws, but Baker is surprised that "so many other forms of illicit money are not predicate offenses -- with these other forms potentially facilitating the movement of terrorist money into the United States."

Stronger anti-laundering laws would help curb illegal money flows, and Baker hopes a bill (S.473) introduced by Sen. Charles Grassley, R-Iowa, last year that expands the range of what can be barred under U.S. anti-money laundering legislation will move out of committee this session.

Lucy Komisar, an investigative journalist and co-chair of the Tax Justice Network-USA, which has been an important partner in promoting a study of illicit financial flows, said the study aims to end the non-transparency aspect of tax havens. She believes a coordinated effort by the Group of Seven countries and Russia or the Organization for Economic Cooperation and Development would be most effective. The OECD began working on policy in the late 1990s to prevent jurisdictions with no or minimal tax rates from setting different rates for foreigners who did no business there, but when the Bush administration came to power and didn't support it, the initiative effectively died as tax havens stopped negotiating with the OECD, she said.

Former Treasury Secretary Paul O'Neill said in 2001 that the United States had re-evaluated its participation in the OECD task group on harmful tax practices because low tax rates are not inherently suspect and the United States doesn't wish to interfere in any nation's ability to construct its own tax system.

Komisar counters that this initiative didn't undermine tax sovereignty, but rather sought to increase transparency and targeted only dirty and tax-evading money.

At the time of writing, the Department of the Treasury hadn't responded to an e-mail message for comments on the OECD initiative or Grassley's bill.

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