Countering illicit financial flows

The illicit movement of funds is a global challenge, threatening domestic and international financial systems. The United Nations Office on Drugs and Crimes (UNODC) has recently highlighted that the total value of money laundered globally is around 2 to 5 percent of the Global GDP, or around US$800 billion to US$2 trillion.

The global community has been fervently trying to reduce illicit financial flows recognizing it in 2023 agenda for Sustainable Development Goals (SDGs).

Point 16.4 of ‘Indicators & Monitoring Frame of SDGs’ requires a significant reduction in illicit financial and arms flow, strengthening recovery and return of stolen assets, and combating all forms of organized crime by 2023.

The proposed indicator necessitates “proportion of legal persons and arrangements for which beneficial ownership information is publicly available”. Primary SDG goal 16 includes promotion of “peaceful and inclusive societies for sustainable development, providing access to justice for all, and building effective, accountable, and inclusive institutions at all levels”.

The target SDGs include a reduction of all forms of violence and related death rates around the globe. Other targets include the end of abuse, exploitation, trafficking, and all forms of violence including torture against children, promoting rule of law, ensuring equal justice, reduction of illicit financial flows, reduction of corruption and bribery in all their forms, development of an effective accountable and transparent system.

The target of SDG 16 also includes ensuring responsive, inclusive participatory, and representative decision-making at all levels and broadening and strengthening the participation of developing countries in the institutions of global governance.

The implementation of SDG’s agenda will make a difference and contribute to making this planet peaceful by reducing violence, corruption, and illicit financial flows.

However, it appears that more than half of the world is not serious about curtailing corruption and ensuring transparency. The recent Corruption Perception Index (CPI) noted no visible change since last decade in CPI score, which is still 43.

Similarly, a two-thirds of countries score below 50. Despite strict measures by the global watchdog, 26 countries’ scores have fallen to a historic low, which includes the United Kingdom and Qatar as well.

CPI highlights that corruption is undermining the democratic process, causing pervasive civil unrest and fueling violence. It confirms that despite continuous monitoring, the corrupt mafia is not ready to follow the global rules and continuously posing formidable challenges for the global financial system through their ill-gotten wealth.

The UNDOC and the United Nation Conference on Trade and Development (UNCTAD) are custodians of SDGs, however, the pace of implementation of the agenda seems very slow.

All the member states of the United Nations (UN) have adopted 2023 agenda but even after lapse of half of the period, the international community and the governments are far from transforming the world as well as ensuring the health, justice, and prosperity of all the people living on this planet.

The main factor that is an impediment to achieving these targets is absence of proper checks and balances with continuous monitoring and evaluation by the global watchdog.

Resultantly, violence has increased whereas no improvement is noted in curtailing corrupt practices despite the active role played by the Financial Action Task Force (FATF).

The FATF plenary is scheduled from February 22-24, 2023, under the two-year Singapore presidency of Raja T. Kumar. Delegates representing 206 members of the global network along with observers’ organizations, including the International Monetary Fund (IMF), the UN, the World Bank (WB), International Police Organization (INTERPOL), and Egmont Group of Financial Intelligence Units, remained engaged in working group and plenary meetings in Paris during FATF Week.

So far, the watchdog listed around 23 jurisdictions under increased monitoring. Similarly, most of the member states have not fully implemented the beneficial ownership rule.

The Organisation for Economic Co-operation and Development (OECD) in their report ‘The Hidden Wealth of Nations: The Scourge of Tax Havens’ by Gabriel Zucman states that tax havens have increased by over 25% whereas hidden wealth accounts for at least US$7.6 trillion equivalent to 8% of the global financial assets of households.

The Reuters in a story [Super rich hold $32 trillion in offshore havens] has highlighted that the super-rich hold US$32 trillion in offshore havens. The State of Tax Justice 2022 claims that the world is losing over US$483 billion in tax to multinational corporations and wealthy individuals using tax havens to underpay tax.

The report further states that one in four dollars lost to corporate abuse could have been prevented by tax transparency. The ratio of illicit financial flows is higher in developing countries due to weak controls and ineffective monitoring and justice system.

The report highlights that Pakistan loses around US$759 million every year to global tax abuse equal to 2.7% of tax revenue. The report further shows the country loses US$735 million to tax abuse committed by multinational corporations whereas US$24 million is being lost due to tax evasion committed by private individuals.

All these figures are alarming. The major portion of the revenue which needs to be spent on the well-being of the people and improvement of the social sector has gone wasted in the hands of the corrupt mafia that hardly cares about laws and regulations.

The UN being a sole intergovernmental organization as well as other watchdogs trying to make the world a safer place needs to act proactively in evaluating the performance of the member states in addressing these concerns. The failure(s) on the part of member states should entail some consequences.

The UN and other monitoring bodies should also evaluate the justice system of member states and jurisdictions where judiciary is adversely affected by political or military interventions.

They should be forced to follow international standards failing which they should be made to face serious consequences. Unfortunately, although in the IMF (International Monetary Fund) programme, we have so far failed to honour our commitments to the global lender for improving anti-corruption laws and those ensuring transparency in state-owned entities.

Pakistan was supposed to launch the Public Officials Assets Declaration System, but missed various deadlines agreed with the IMF. Finally, during the start of 10-day visit [January 31 to February 9, 2023] of IMF technical delegation, the Federal Board of Revenue (FBR) issued ‘Sharing of Declaration of Assets of Civil Servants Rules, 2023’ for performing Know Your Client (KYC) on transactions of grade-17-22 officers to comply with the global lender’s demand. However, these rules are in contrast with the prevailing laws and regulations as well as international best practices.

The government of Pakistan should realize that we, as fifth populous country in the world and a responsible nuclear power have some obligations and commitments requiring immediate attention to safeguard our image and ensure prosperity for the citizens.

The government should acquire the services of experts in complying with matters related to financial crimes. These actions will not only help in stopping wastage of revenues, but also generating enough funds to invest in the social sector to address the needs of the common people.

(Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions)

Copyright Business Recorder, 2023