With the integration of the global superpowers into the tax haven game, money laundering regulations are unlikely to change much in the near future. After all, there is no interest group more powerful than the rich.
From September 2005 to December 2007, $ 14 billion in laundered money passed through Wachovia, one of the largest banks in the United States. It is, to date, one of the biggest money laundering scandals in history.
During their investigation, the US government found readily available signs of this money being laundered. Yet Wachovia did nothing.
This problem is obviously not exclusive to the West. The Panama Papers, published in 2016, found two money laundering entities in Bangladesh called Seven Seas Assets Ltd and Swayne Investments Ltd, proving that this is a bigger global problem than we have been able to perceive. .
The recent “Pandora Papers” bear witness to the fact that money laundering has not only been able to survive, but also flourish, even after national and international law and regulatory bodies have desperately tried to prevent it.
The Pandora Papers investigation, the largest of its kind, uncovered 206 US-based trusts linked to 41 other countries, holding nearly $ 1 trillion. However, the total amount of money laundered around the world is estimated to be around $ 32 trillion.
The question therefore remains, how can such a wealth of wealth be appropriated under the noses of the governments of the world? The answer is not straightforward, however, precisely because it is designed to be so.
Existing anti-money laundering mechanisms
Defining money laundering is a difficult task in itself. But to put it simply, money laundering is the process that makes dirty money look legitimate. This âdirty moneyâ can come from several sources such as the proceeds of a crime such as drug trafficking, corruption, extortion or tax evasion.
After the adoption of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in 1988, countries began to criminalize money laundering in all its forms. Currently, the OECD Financial Action Task Force (FATF) and EU Moneyval are trying to thwart global money laundering attempts.
As money laundering looks like ordinary financial transactions to the naked eye, it is mainly identified through suspicious activity reports (SARs) from financial institutions like banks.
These SARs are deposited whenever large sums of money are transferred between multiple accounts at random to hide their ownership. But in today’s globalized economy, where acquiring sophisticated financial tools is easier than ever, money laundering is not following the patterns we anticipate.
The sharpest tools in the hangar
Financial tools can be incredibly powerful for quick and easy transactions and efficient allocation of capital. But in the hands of money launderers, they can be the best tools to bypass the global anti-money laundering system.
Take, for example, a government employee who wants to receive a $ 10 million bribe. Transferring such a large amount of money to your own personal bank account is undeniably suspect. So he contacts a lawyer and a financial advisor. With their help, he sets up three companies in the British Virgin Islands where these companies do not have to declare their ownership to register.
He also sets up a trust and transfers ownership of these companies to him. As trusts do not require any registration, it can be completely anonymous. Companies and trusts are managed and maintained by various business service providers and his family becomes the beneficiaries of said trust.
Money laundering reduces a significant portion of government revenue. While the rich continue to dodge taxes, the poor must catch up and pay more. It also allows government employees to get away with the abuse of power, perpetuating a cycle of poverty, crime and corruption.
Now the bribe payer can simply transfer the money to the employee’s company accounts and the employee can enjoy the benefits of his illegal income without arousing any suspicion because he has bypassed the established mechanism that aims to identify money laundering.
He can also add other companies, trusts or foundations to this basic structure to protect his identity and facilitate more secure transactions of illegal products.
The concept of âoffshoreâ comes up very frequently in discussions on money laundering. But what exactly is âoffshoreâ?
Offshore basically means outside of someone’s home jurisdiction. As a Bangladeshi, if I open a bank account in India, India will be âoffshoreâ for me. But in the context of money laundering, offshore refers to a group of jurisdictions that have very little or no taxation, as well as very low regulatory standards for financial institutions.
Countries like the aforementioned British Virgin Islands, Jersey, Panama, Cyprus or Saint Kitts and Nevis are almost infamous for being offshore hubs. These countries have little or no natural resources and very little trade potential. As a result, they almost have to act like tax havens to attract capital into their economies.
But that doesn’t mean their law isn’t good for criminals. Switzerland, one of the most famous tax havens in the world, has a âdouble criminalityâ rule. If a criminal launches money in a Swiss bank, his earnings will only be returned if the crime he has committed is also illegal in Switzerland.
TBS sketch by Readus Salehin
TBS sketch by Readus Salehin
But the often demonic portrayal of these countries is simply not true. Their model has worked so well that developed countries like the US, UK, Ireland and the Netherlands have attempted to adopt it.
The UK, for example, has decided to exempt foreigners living in the UK from tax on any income from outside the UK. These wealthy individuals have invested heavily in real estate. According to Oliver Bullough, author of the book “Moneyland”, more than 100,000 houses in England and Wales are owned by offshore companies, around half of them not even in use.
Pandora’s papers testify to this. According to the leaks, more than 1,500 properties are held through offshore accounts. The Qatari royal family, the King of Jordan and the Azerbaijani presidential family have bought properties in the UK to avoid taxes.
The survey also reveals that many US states operate as offshore tax havens. South Dakota, Nevada, Delaware and Alaska now hold money from people accused of fraud, corruption and human rights violations, like the Central Romana Corp.
A 2012 study also showed that it is three times more difficult to establish a shell company in well-known offshore centers than in developed economies.
But why are developed countries participating in fueling global money laundering? Because attracting capital is a zero-sum game for countries. If capital flows out of a country for the benefit of an offshore destination, the first country will try to do everything in its power to prevent this from happening.
Countries have tried to prevent it by passing anti-money laundering legislation, which clearly does not work. They clearly can’t beat the launderers, maybe they can join them.
The mad race for profit
According to the US government, $ 881 million in drug money entered the country from 2012 to 2017 through HBUS, the US arm of HSBC. The money came from Mexico, through the Mexican branch of HSBC. How to launder such a large sum without sounding the alarm?
Because the two HSBC branches did not follow the standard procedure. HBMX allowed risky wire transfers from various Mexican exchange bureaus, a favorite sport for drug dealers to turn their dollars into pesos. HBUS, on the other hand, has marked HBMX as one of the most secure partners. As a result, dirty money entered the US financial system with impunity.
Such examples are abundant in the global financial system. But they don’t stop there. According to the Pandora Papers, Baker McKenzie, the largest law firm in the United States, helped Jho Low – an adviser to the former Malaysian prime minister – to steal hundreds of millions of dollars from the United States’ economic development fund. Malaysia.
Baker McKenzie also suggests a policy favorable to money launderers internationally, such as when he opposed a measure intended to tackle offshore tax evasion in Australia.
In the highly competitive market, each institution fights for itself. As a result, it becomes foolish to deny a client with a large estate to simply comply with a few miserable rules. Making the maximum profit becomes the primary motivation of all financial institutions.
A losing battle for the people
The Pandora Papers are not the first of their kind and it certainly won’t be the last. Money laundering has been able to thrive in the modern global economy, where anyone can set up a business without even being on the same continent or where any transaction amount is possible at the click of a button. There are more possibilities for anonymity and secrecy, something valuable to launderers.
According to estimates by French economist Gabriel Zucman, 10% of Western Europe’s total wealth is hidden offshore. The number rises to 30% for African countries. Meanwhile, 52% of Russia’s wealth is in tax havens. For the Gulf countries, the number is 57%.
Money laundering reduces a significant portion of government revenue. While the rich continue to dodge taxes, the poor must catch up and pay more.
It also allows government employees to get away with abuses of power, thus perpetuating a cycle of poverty, crime and corruption.
This article has no message of hope and neither does the Pandora Papers. With the integration of the global superpowers into the tax haven game, money laundering regulations are unlikely to change much in the near future. After all, there is no interest group more powerful than the rich.