How can we stop illicit flows of money?

One of the goals of the World Economic Forum’s Global Meta-Council on the Illicit Economy is to bring illegal flows of money out of the shadows, and to deal with them in a constructive and responsible manner.

We are not here to lecture governments or private sector partners about their shortcomings, real or otherwise. We do not want to slow unnecessarily the global supply chain or financial flows.

However, we do wish to create a safe space to have complicated conversations so that we can identify and enlist the help of key stakeholders in this effort – though we are under no illusions that this will be easy.

The only serious way to tackle such a complex global problem is to unpack its three component parts; product & industry groups; the people involved; and the infrastructure that keeps it flowing.

  1. Product & industry groups

Let’s take counterfeiting, which is projected by the International Criminal Court to reach 1.7 trillion dollars, or close to 10% of total global trade, this year. It is relatively straightforward to identify the intellectual property owners and products that are most at risk. We know that counterfeit alcohol, for example, not only represents business and tax revenue lost, but also a serious health risk.

Just recently, according to the BBC, nearly 100 people were killed after consuming counterfeit alcohol in two separate incidents in India and Mozambique. Counterfeit pharmaceuticals, estimated to be a 200 billion dollar a year business, kills more than 1 million people annually, according to Interpol. The counterfeiting of high-value consumer products, while not mired with the same health and safety issues, is also a major tax loss for countries and revenue loss for businesses. All these contribute in one way or another to the strengthening of the shadow or illicit economy, and impede the competitiveness of the formal one.

  1. Actors involved

While there is no doubt that corrupt customs inspectors or distributors are involved, the bigger problem is the direct involvement of transnational organized crime. It is wrong to assume that these criminal organizations are only interested in narcotics; actually, they will move anything that brings them lucrative profits from trading in counterfeit or fake goods, or by trading legitimate goods through illicit channels. Consequently, each of us should understand that any counterfeit product, some as innocuous as a handbag or a watch, contributes to criminal enterprises. They then use the profits to fund other criminal activities such as drug trafficking, human trafficking, and illegal mining.

  1. Enabling infrastructure

In terms of enabling infrastructure, criminal networks exploit new technology, differences among national regulatory regimes, and links between the global economic, financial and transportation systems for their gain. But one of the most important and perhaps least obvious is the financial system on which this 1.7 trillion dollar enterprise operates.

We may be inclined to think that illicit financial flows only run through the dark web using Bitcoin and other virtual currencies, which does play a part, albeit small. Instead, most of this illicit economy travels on the same global systems as the regular economy. For this reason, greater transparency in the global financial system is fundamental. The challenge is to get ahead of this movement and to try and shape the outcomes in a constructive manner.

Steps in the right direction are being taken. For example:

1) Automatic exchange of tax information across borders, led by U.S. FACTA legislation, is emerging and requires foreign financial institutions to report earnings on foreign accounts by U.S. persons.

2) Knowledge of the beneficial ownership of corporations is moving forward, with the UK taking a lead role, striking a blow at shadow enterprises.

3) Payments by resource companies to foreign governments is required under Dodd-Frank, affecting many non-U.S. companies.

4) Country-by-country reporting is advancing, particularly in the European Union, with efforts under way to require all corporations to report their financial results in each taxing jurisdiction where they conduct business.

Further movement in these areas and steps toward greater financial transparency is inevitable. So, how do we work with the primary stakeholders to influence this change? Hold a special event drawing attention to the issues? Produce, from our Meta-Council, a brief on these matters? Assemble a small group of progressive companies to champion greater financial transparency?

These are some of the questions that we hope to answer.

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