Transparency Key to Effective Reform of Global Financial System in G-20 Process

LONDON - When leaders from the Group of 20 nations convene tomorrow to address the global financial crisis, increasing transparency will be essential to achieving success, says Global Financial Integrity (GFI). In addition to proposed stimulus and regulatory efforts, provisions to remove the prevalent and highly detrimental opacity which currently impairs the global financial system must be included.

“There is a shadow financial system comprised of tax havens, secrecy jurisdictions, disguised corporations and anonymous trusts which facilitates the movement of corrupt, criminal, and commercially tax-evading money across borders and around the world,” says Raymond Baker, director of GFI. “This shadow financial system is at the heart of the current global economic crisis. Secrecy prevents accurate appraisal of the depths of the subprime mortgage collapse and other collateralized debt obligations, credit default swaps, derivatives contracts, and more. Lending has nearly collapsed since financial institutions are unable to discern the quality of assets of those needing funds,” Baker notes.

GFI also notes that measures to increase transparency would significantly curtail illicit capital flight out of developing countries, which is estimated at nearly US$1 trillion per year. These capital outflows, which are the proceeds of illicit financial practices such as government corruption, criminal activity, and corporate evasion of taxes, undermine development efforts and outpace official development assistance at a ratio of 9 to 1. [GFI 12/01/08, OECD 3/30/09]

GFI recommends the following steps be taken to strengthen global finance: — Automatic cross-border exchange of tax information on personal and business accounts; — Country-by-Country accounting of sales, profits, and taxes paid by multinational corporations; — Confirmation of beneficial ownership in all banking and securities accounts; and — Curtailment of mispricing in trade imports and exports.

These measures will significantly hinder the transfer of capital out of developing countries, enable banks and companies to reliably lend and invest, and restore stability to global finance.

“Increasing aid money to the developing world is a laudable goal,” said Raymond Baker, “But as long as this shadow financial system exists and these illicit practices continue, much of the money that goes into these countries will be drained-out and shifted back into Western economies and tax havens,” said Baker.

“The G-20 cannot be expected to fix everything with one day of talks,” said Baker. “But with unprecedented political will and public support for cracking-down on secrecy jurisdictions the international community can begin to address a problem hidden in plain sight. For too long the means for illicitly shifting and depositing capital has outpaced regulatory capabilities. This is fiscally unhealthy and undermines international development efforts while enabling criminals the world over to carry on with business as usual.”

Global Financial Integrity (GFI) promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money. In putting forward solutions, facilitating strategic partnerships, and conducting groundbreaking research,

For additional information please visit www.gfip.org.

Source: Global Financial Integrity

Monique Perry Danziger of Global Financial Integrity, +1-202-293-0740, Monique at gfip.org