The damning assessment from the OECD, a group of 34 countries, comes despite tough rhetoric on illicit financial flows from leaders of the G8 group of industrialised countries, particularly the British prime minister David Cameron.

According to Global Financial Integrity, a US NGO, illicit financial flows from developing countries between 2001 and 2010 reached $5.8tn, with China responsible for almost half of the total – five times as much as the next highest source country, Mexico.

At a time of declining official development assistance, donors and aid recipients see the loss of revenues to poor countries through illicit flows as an increasingly urgent problem. The OECD report measures for the first time its members’ responses to the flows – money laundering, bribery by international companies, recovery of stolen assets and tax evasion, including abusive transfer pricing (pricing goods to minimise tax payments). In all areas, OECD countries are found wanting.

Big rich countries often accuse small offshore financial centres, such as Jersey and the Cayman Islands, of acting as willing conduits for dodgy money. The minnows say they are being bullied: big hypocrites should clean up their own acts first. This case is bolstered by a damning report on its own members by none other than the Organisation for Economic Co-operation and Development (OECD), a Paris-based club of industrialised countries.

The report is harshest in its assessment of how international money-laundering standards crafted by the Paris-based Financial Action Task Force (FATF) are implemented. Only 12 of the OECD’s 34 members were fully or largely compliant with a majority of the standards that recent peer reviews have set on customer due diligence and record keeping. Penalties for banks with poor controls are (America apart) mostly feeble. Anonymous shell companies are easier to set up in the OECD (especially in America) than in tax havens. Barely any countries apply the FATF rules to non-financial “gatekeepers”, such as lawyers and incorporation agents, who play an important role in setting up opaque ownership structures.

The rich countries also score poorly on recovering and returning assets looted by kleptocrats and their clans. They repatriated a mere $147m between 2010 and 2012.

The report could have been tougher still. Strong resistance from the OECD’s constituents and some secretariat officials repeatedly delayed its publication and diluted its content. In particular, a section on “transfer mispricing” – trade between related parties, such as two companies in a multinational group, designed to hoodwink tax authorities or manipulate markets – was removed after the OECD’s tax division complained. It was apparently worried about maintaining consensus on an overhaul of international corporate tax.

Fortunately, Canada, Australia and other countries that fared poorly in the international comparisons (see chart) failed in their efforts to have them all taken out. They had argued that such rankings would not reflect improvements made since their last peer reviews. Outside experts counter that these have been modest at best.

The developed countries claim to comply with FATF’s recommendations. In reality however, the OECD countries’ compliance with key recommendations on money laundering is low. The lowest areas of compliance include beneficial ownership and politically exposed people, according to the OECD.

“The results are appalling,” said an OECD official. “It’s striking how poorly G8 countries score on core recommendations, which have to do with due diligence and beneficial ownership. They are weakest on issues where they make the grandest statements.”

The OECD is confirming what we have been saying all along. See for example – “G-20′s Wishful Thinking and ML-Reality”

The top four countries with a total non-compliant score of zero are Austria, Czech Republic, Slovenia and Belgium. These four countries are plagued by Organized Crime, Money Laundering, Corruption and Bribery.

The world’s least corrupt country strangely appears to be quite bad at fighting dirty money.

New Zealand’s 18 non-compliant scores include those relating to wire-transfer rules, non-profit organizations, internal controls, and audits and unusual transactions. It also racks up one of the lowest tallies of “compliant” ratings in the 30-country survey—just five. This seems a bit surprising for a country that, along with Denmark, is perceived as being the least corrupt of the 177 countries on Transparency International’s most recent annual Corruption Perceptions Index.

It’s unclear what, if anything, the FATF ranking means for New Zealand’s anti-corruption status. For one thing, several other countries with nearly spotless reputations, such as Denmark and Canada, rack up a relatively high number of FATF’s “non-compliant” ratings and few “compliant” ones. For another thing, the OECD report is larded with caveats (see p. 47) about the unreliability of the FATF data, warning that they span several different years, are partly out of date (New Zealand’s are from 2009), and may not be directly comparable anyway.

Still, it’s a puzzling finding. And whatever the reason, it’s a reminder that all such international rankings should be treated with caution. As we pointed out ealier, country comparisons based on FATF-style mutual evaluations may lead to wrong conclusions.

“The G8 are the laggards on beneficial ownership,” the OECD complains

Cameron and G8 leaders have sought to tackle the beneficial ownership issue. In October 2013, the UK announced that a planned register setting out the true owners of companies will be open to the public for scrutiny not just to the tax authorities. On April 24, 2013, UK Prime Minister David Cameron has written to Herman Van Rompuy, President of the European Council, setting out the case for radical global action to tackle tax evasion, money laundering and aggressive tax avoidance.

A register of beneficial owners was one of the key demands of campaigners when Britain chaired June’s G8 summit of world leaders in Northern Ireland. This followed a commitment in the summer by Cameron to crack down on UK accountants, lawyers and business figures who use shell companies – often located in offshore tax havens – to hide the identity of ultimate beneficiaries.

Welcome as those moves are, more needs to be done according to the OECD. Without action, for example, OECD countries are at risk of becoming safe havens for illicit assets by neglecting transparency of ownership: 27 out of 34 OECD countries perform below expectations on beneficial ownership of corporate vehicles and trusts. Furthermore, OECD countries will need to continue to prosecute foreign bribery offenders: the report shows that only approximately half of OECD countries have sanctioned a party for a foreign bribery offense.

Even on basic customer due diligence requirements (checking the identity of customers), OECD countries show a woeful lack of compliance. The report cited a 2011 review by the UK’s Financial Services Authority (now the Financial Conduct Authority) that found a third of British banks routinely flout customer due diligence requirements, even when they have enough information to identify clients as “political exposed persons”.

On tax evasion, the report said there is a trend to move towards automatic exchange of information among OECD countries, with both the G8 and G20 groups endorsing the OECD’s work to set a new single standard for this form of exchange. However, developing countries lack the relevant technical standards and safeguards to transmit, receive and protect confidential information. Poor countries have also tended to focus on tax avoidance by international companies rather than by rich individuals.

In Zambia, for example, Norway is supporting the renegotiation of contracts between the Zambian government and large multinationals in the mining sector. But developing countries have put less emphasis on national fraud and corruption.

“There are not that many which are keen to address tax avoidance in their own countries, as it involves their own elites,” said the OECD official.

As of last year, 221 individuals and 90 companies have been sanctioned for foreign bribery, yet about half of all OECD countries have yet to see a single prosecution. The most widely accepted estimate of global bribery puts its total at about $1tr every year. In the developing world, bribery amounts to around $20bn a year – equivalent to 15%-30% of all ODA. Between 2010 and 2012, OECD countries returned $147m and froze almost $1.4bn in stolen assets.

The issue of illicit flows is one area where the interests of rich and poor countries converge, said Erik Solheim, chairman of the OECD development assistance committee. “OECD members themselves only stand to gain from strengthening their safeguards against money laundering, tax evasion and bribery,” said Solheim. OECD_IFFS_18.12.13

Source: www.frank-cs.org