Who Makes the Financial Transparency
Rules?
An AML/CFT African Development Country
View
Kathy Nicolaou-Manias
Hidden Money, Hidden Resources
Dinero oculto, recursos ocultos
Overview
Who bears the burden of ML and IFFs in Developing Countries?
Who Sets the Standards?
Which Developing Countries have a VOICE?
Can African Developing Countries Implement the IFF and ML
Transparency Tools?
SO WHAT?
– More Woes About Future Transparency: Bitcoin and BitPesa (Case study)
What can we do about Transparency Compliance in Africa?
Hidden Money, Hidden Resources
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Who Bears the Burden of ML and IFFs in
Understanding the link
Developing
Figure 1: Shadow, Illicit
and Licit Real and Countries
Financial Markets
between the Illicit
Economy, IFFs and
Money Laundering
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Who Bears the Burden of ML and IFFs
in Developing Countries
Global Distribution of Non-Normalised IFFs: Average between 2002-2006
Resale and Investments: Products can
Who bears the burden of ML, TF and
3 IFFs in Developing Countries?
be
resold at market (or higher) prices, sometimes
back to the original company (incurring further
losses), while the surplus is transferred to
developed countries.
Capital Flight, IFFs, Tax Evasion and
1 Revenues: MNCs/Organised crime
ML: MNCs/Organised crime syndicates sell
syndicates produce goods and services or
goods and services (legally/illegally) to their
extract resources (legally/illegally).
subsidiaries or branches located in tax havens –
at misrepresented (lower) prices. Tax evasion
robs these countries of tax revenues and the
rightful rents due to their productive resources.
Using the multiplier effects, the socio-economic
Source: GFI and NyTid Magazine, United Nation Association of Norway, International Money Laundering Information Network
effects are large on these developing countries.
2
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Who Bears the Burden of ML and IFFs
in Developing Countries
Normative Illicit Financial Flows for the Regions – Billions of US Dollars (Current Prices): 2000-2009
Billions Dollars
Middle East
Developing
Western
All Developing
(US) - Current
and North
Africa
Asia
Europe
Hemisphere
Countries
Prices
Africa
2000
10.1
199.7
34.0
43.0
66.5
353.3
2001
8.6
219.7
40.0
35.8
80.7
384.8
2002
12.2
186.5
57.6
37.4
83.4
377.1
2003
22.9
246.2
92.2
82.3
94.7
538.3
2004
26.6
322.5
109.4
135.2
91.3
685.0
2005
28.3
375.5
89.7
154.2
103.5
751.2
2006
38.1
368.2
148.2
247.1
118.7
920.3
2007
62.3
411.9
260.3
214.4
183.5
1 132.4
2008
63.0
493.8
300.2
307.3
150.3
1 314.6
2009
61.6
376.4
106.4
118.2
112.3
774.9
333.7
3 200.4
1 238.0
1 374.9
1 084.9
7 231.9
4.6%
44.3%
17.1%
19.0%
15.0%
100.0%
Total
(Cumulative)
Share of the
region in Total
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Laundering
criminal
proceeds
ML and
IFFs
Corruption
Consequences
Macro IMPACTS
Who?
Monetary sector
destabilisation
impact
Vulnerable and poor: those dependent on
social services and welfare, i.e. women,
children, the elderly and the unemployed.
Who Bears the Burden of ML and IFFs
in Developing Countries
• Draining hard currency
reserves
• Increasing financial
liquidity risk
• Stimulating inflation
Tax abuse
• Reduced tax revenues
and collection (BEPS)
• Undermining trade
Market
abuse
Economic IMPACTS
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Real sector
growth
Y=C+I+G+(X-M)
• Depleting investments
and BEPS
Weakening governance
Weakening social and economic stability
Institutions
Type
Who Sets the Standards?
Accounting
Auditing
•International
Accounting
Standards
Board (IASB)
•International
Federation of
Accountants
(IFAC)
•Basel
Committee
on Banking
Supervision
(BCBS)
•International
Federation of
Accountants
(IFAC)
•International
Auditing and
Assurance
Standards
Board
(IAASB)
AML/CFT
and
Corruption
Banking
and
Payments
Systems
•Financial
Action Task
Force (FATF)
•Committee
on Payments
and
Settlement
Systems
(CPSS)
•BASEL
Committee
on Banking
Supervision
•Financial
Stability
Board
•Egmont
Group of
Financial
Intelligence
Units
•Eastern and
Southern
Africa AML
Group
•UNCAC
Corporate
Governance
•Basel
Committee
on Banking
Supervision
•IMF
•World Bank
Monetary
and Fiscal
Transparency
•International
Monetary
Fund (IMF)
Financial Accountability, Stability, Integrity and Transparency
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Securities
Market
Regulation,
Insurance,
Insolvency
and Creditors
•International
Organisation
of Securities
Commissions
•International
Association
of Insurance
Supervisors
(IAIS)
•World Bank
•International
Bar
Association
•UNCITRAL
Institutions
Type
Who Sets the Standards?
Accounting
• G6/7/5
• UN
• G20
Overarching Institutions
• IMF
• OECD
• WB
• NEPAD
Banking
AML/CFT
Monetary
and • BASELCorporate
and
• IADI
Auditing
• UNCACand Fiscal
Governance
Standard Setting
AuthoritiesPayments
Transparency
Corruption
• IOSCO
• FSB/Forum • UNCITRAL
Systems
• IAIS
• IAASB
• IBA
• IOPS
• FATF
• IASB
Informal / Associate /
• EC/ECB
• CPSS
• IFAC
Committees /
Agencies
Civil Society, NGOs
etc…
• FAFT regional
Bodies (CFATF, EAG,
GIABA, ESAAMLG,
Moneyval, APG,
GAFISUD,
MENAFATF)
•
•
•
•
TI
EITI
GFI
FTC
•
•
•
•
•
•
•
EGMONT
Credit rating agencies
African Tax Admin
Forum
•
TJN
•
Christian Aid
Eurodad
Global Witness
Latindadd
etc…
Financial Accountability, Stability, Integrity and Transparency
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Which Developing Countries have a
VOICE?
International
Accounting
Organization
Standards
Board
G6/ G7 / G8
G20
IMF
International
Federation
of
Category
Accountants
Basel
Committee
Developed Countries
on Banking
Supervision
• Economic and
Financial Stability
• Economic
Development
• Tax
• Trade
• Corporate
Governance
• Monetary
Transparency
• Fiscal Transparency
• Economic Growth
and Development
• Financial Stability,
Integrity and
Transparency
• Data dissemination
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Non-African
Developing
Countries
African Developing
Countries
Canada, France,
Germany, Italy, Japan,
UK, USA (and Russia)
None
Australia, Canada,
France, Germany, Italy,
Japan, Republic of Korea,
Russia, Saudi Arabia, EU,
UK and USA
Argentina, Brazil,
China, India,
South Africa
Indonesia,
Mexico, Turkey
None
Total of 188 members. Represents Developed, Non-African
Developing and African Developing Countries
Which Developing Countries have a
VOICE?
International
Accounting
Organization
Standards
Board
International
Federation of
Category
Accountants
Basel
Committee Developed
on Banking
Countries
Supervision
• Corporate
Governance
• Economic
WORLD BANK
Development
• Trade
• Data dissemination
UNCAC
UNCITRAL
• Anti-corruption
• International Trade
law
• Electronic
Commerce
• Security Interests
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Non-African
Developing
Countries
African Developing
Countries
188 countries represented in the International Bank for
Reconstruction and Development (IBRD); and 172 countries
represented at the International Finance Corporation (IFC). Each
IBRD country should also be a member of the IMF.
140 signatories
172 parties
*NON-AFRICAN
MEMBERS include:
Chad, Somalia, South
Sudan, Eritrea
14 Asian (11 Developing)
18 European (5 Developing)
7 South American (All Developing)
5 North American (3 Developing)
2 Oceanian (1 Developing)
Algeria, Benin,
Botswana, Cameroon,
Egypt, Gabon, Kenya,
Mauritius, Morocco,
Namibia, Nigeria,
Senegal, South Africa,
Uganda
Which Developing Countries have a
VOICE
International
Accounting
Organization
Standards
Board
Financial
Stability
Board
BASEL
Committee
on Banking
Supervision
International
Accounting
Standards
Board (IASB)
International
Federation
of
Category
Accountants
Basel
Committee
Developed Countries
on Banking
Supervision
Australia, Canada, France,
Germany, Hong Kong, Italy,
Japan, Netherlands, Russia, Saudi
• Financial stability
and integrity
Arabia, Singapore, South Korea,
Spain, Switzerland UK and USA
(BIS, ECB, EC, IMF, OECD, WB)
Australia, Belgium, Canada,
• Banking supervision
France, Germany, Hong Kong,
• Cross Border
Italy, Japan, Korea, Luxembourg,
banking
Netherlands, Russia, Saudi
• Capital adequacy
Arabia, Singapore, Spain,
• Accounting and
Sweden, Switzerland, UK and
auditing (ATF)
USA.
• Accounting and
INDIVIDUAL SPECIALISTS:
Reporting standards
Netherlands, New Zealand,
• Transparency,
France, Germany, South Korea,
integrity and
UK and USA (X3)
accountability
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Non-African
Developing
Countries
African
Developing
Countries
Argentina,
Brazil, China,
South Africa
India, Indonesia,
Mexico, Turkey
Argetina, Brazil,
China, India,
Indonesia,
Mexico, Turkey
South Africa
Brazil, China
South Africa
Which Developing Countries have a
VOICE?
International
Accounting
Organization
Standards
Board
International
Federation of
Category
Accountants
Basel
Committee
Developed
on Banking
Countries
Supervision
Non-African
Developing
Countries
International
Federation of
Accountants
(IFAC)
• Strengthen
accounting
standards
179 Members from 130 countries
International
Auditing and
Assurance
Standards
Board (IAASB)
• Auditing
standards and
quality control
(falls under IFAC)
See IFAC
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African Developing
Countries
Botswana, Cameroon,
Cote D'Ivoire, Ghana,
Kenya, Lesotho, Liberia,
Malawi, Morrocco,
Namibia, Nigeria,
Senegal, Sierra Leone,
South Africa, Swaziland,
Tanzania, Tunisia,
Uganda, Zambia,
Zimbabwe
See IFAC
Which Developing Countries have a
VOICE
International
Accounting
Organization
Standards
Board
Financial
Action Task
Force
International
Category
Federation
of
Accountants
Basel
Committee
Developed Countries
on Banking
Supervision
• Combat Money
Laundering
• Combat Terror
Financing
• Financial
integrity
• Financial
transparency
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Non-African
Developing
Countries
Australia, Austria, Belgium,
Denmark, European
Commission, Finland,
France, Germany, Greece,
Gulf Cooperation Council,
Argentina, Brazil,
Hong Kong, Iceland, Italy,
China, India,
Japan, Republic of Korea,
Mexico, Turkey
Luxembourg, Netherlands,
New Zealand, Norway,
Portugal, Russia,
Singapore, Spain, Sweden,
Switzerland, UK and USA.
African
Developing
Countries
South Africa
Which Developing Countries have a
VOICE
International
Accounting
Organization
Standards
Board
Egmont Group
of Financial
Intelligence
Units
Basel
International
Committee Developed
Federation
of
Category
on Banking Countries
Accountants
Supervision
• Informal international
network of Financial
Intelligence Units
• Combat Money
Laundering
• Combat Terror
financing
• Financial integrity,
stability and
transparency
• Monetary and
Committee on
financial stability
Payments and • Banking services
Settlement
• Financial Integrity
Systems (CPSS) • Cross-border flows
• Payments systems
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Non-African
Developing
Countries
African Developing
Countries
Algeria, Angola, Burkina
Faso, Cameroon, Chad,
Core D'Ivoire, Egypt,
Gabon, Ghana, Malawi,
126 member country FIUs (21 from Mali, Mauritius,
Africa)
Morocco, Namibia,
Nigeria, Senegal,
Seychelles, South Africa,
Tanzania, Togo and
Tunisia
172 countries
Which Developing Countries have a
VOICE?
International
Accounting
Organization
Standards
Board
International
Association of
Deposit
Insurers
(IADI)
International
Categoryof
Federation
Accountants
• Deposit
insurance
integrity
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Basel
Developed
Committee
on Banking
Countries
Supervision
Non-African Developing
Countries
Albania, Argentina,
Azerbaijan, Bahamas,
Australia, Belgium,
Bangladesh, Barbados,
Canada, Czech
Bosnia, Brazil, Brunei,
Republic, Finland,
Bulgaria, China, Colombia,
France, Germany,
Croatia, Ecuador, El
Greece, Guernsey,
Salvador, Guatemala,
Hong Kong, Italy,
Honduras, Hungary, India,
Japan, Jersey, Korea, Indonesia, Jamaica, Jordan,
Liechtenstein,
Kosovo, Kyrgyzstan,
Palestine, Poland,
Lebanon, Libya, Malaysia,
Romania, Russia,
Mexico, Mongolia,
Singapore, Slovenia, Montenegro, Nicaragua,
Sweden, Swtizerland, Paraguay, Peru, Phillipines,
UK and USA.
Serbia, Thailand, Trinidad,
Turkey, Ukrane, Uruguay,
Venezuela, Vietnam
African
Developing
Countries
Algeria*, Kenya,
Lebanon,
Lesotho*, Libya,
Mauritius*,
Morocco,
Nigeria, South
Africa*, Sudan,
Tanzania,
Uganda,
Zimbabwe
(NOTE: *
represents
associates and
not members)
Which Developing Countries have a
VOICE?
International
Accounting
Organization
Standards
Board
International
Organization of
Securities
Commissions
(IOSCO)
International
Association of
Insurance
Supervisors
(IAIS)
Basel
International
Committee
FederationCategory
of
on Banking
Accountants
Supervision
Developed
Countries
Non-African
Developing
Countries
African
Developing
Countries
• Securities and future
trade integrity and
transparency
145 members (124 ordinary members, 12 associate
members and 64 affiliate members
• Corporate financial
disclosure and
transparency
• Insurance integrity and
standards
• Macro-prudential risk
135 countries (plus EC, IMF, OECD, World Bank etc…)
and financial stability
• Banking and financial
regulation
NOTE: Civil Society Organizations and NGOs are a voice monitoring exploitation, tax evasion
and resource mobilization in the extractive sectors for developing countries (especially
Africa) and raise the plight of these countries.
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Can African Developing Countries Implement
the IFF and ML Transparency Tools?
Beneficial Ownership
(and KYC)
Country-by-Country
Reporting
Tackling IFFs
through
transparency
Automatic Exchange
of Information
Trade Mispricing
Anti-money Laundering
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Excluded from most International
Regulatory and Standard Setting
bodies - they not involved in the
decision making processes.
Financial systems are not
advanced – relevant electronic
data repositories don’t always
exist.
Manual systems make interdepartmental and inter-regional
collaboration between tax,
customs and banking authorities
timely, costly and complex
Capacity and capability may not
be present thus increasing the
burden of compliance.
SO WHAT?
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COMPLIANCE TO INTERNATIONAL TRANSPARENCY
and FINANCIAL STABILITY STANDARDS
The regulatory standards set by
international bodies exclude a
large proportion of African
countries, who do not comply
with the financial transparency
standards.
These standards add layers to
the bureaucracy and increase
the cost of doing business,
especially in the financial
(Banking, Trading and Insurance)
space.
African countries are extremely
vulnerable to resource and
factor of production “looting”
leaving women, children, the
unemployed, elderly and rural
poor worst off – robbing them
of their human right to a
dignified life
After 16 years of standards set, policy
amendments and incremental rules,
how much has been achieved? If Africa
is only starting to comply, will there be
any resources left??
High income Developed
Countries: High levels of
compliance with international
transparency tools regarding
IFFs and ML. NOTE: there are
exceptions with low compliance
Middle income Developing
Countries: Moderate levels of
compliance with international
transparency tools regarding
IFFs and ML. NOTE: There are
exceptions with little
compliance.
FATF
Standards
initiated
in 1998
Low income Developing Countries:
Low level of compliance with
international transparency tools
regarding IFFs and ML. NOTE: There
are exceptions with Moderate
compliance.
So WHAT? More Woes About Future
Transparency: Bitcoin and Virtual Currencies
Bitcoin (BTC) is a global Peer-to-Peer currency
that is designed for the Internet.
Modeled on gold, behaves like cash online, and
can be used by anyone. There will only be a total
of 21 million Bitcoins by 2140.
Has no central authority and is a global currency.
Is given value by the community – doesn’t need
to be accepted by anyone or backed by any
authority to succeed.
Virtually impossible to counterfeit as it is an open
source protocol.
Can be divided into as small units (up to 8 decimal
places - 0.00000001)
It is a technology facilitating transactions.
It is a protocol for exchanging value instantly over
great distances via a digital connection (internet)
without the need for a (financial) intermediary.
Is being applied to payment applications to remit
monies, facilitate micropayments, make
donations, transfer large scale assets, identity and
contract management.
It changes our understanding of financial flows
Hidden Money, Hidden Resources
and the macro-economy.
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Bitcoin Value Chain
Wallets
Payment
Processing
Exchanges
Universal Bitcoin
Companies
Mining
Other
(Financial
Services )
Due to the cryptography underpinning BTCs, it
bypasses all existing financial stability,
integrity and transparency standards set:
accounting; auditing; banking; payments;
AML/CTF; cross-border flows, capital flight,
exchange controls; monitoring and tracking …
SO WHAT? Case of BitPesa - Less
Compliance and Transparency in Kenya
BitPesa is a Bitcoin (BTC) remittance company that integrates with Kenya’s mobile money
system M-Pesa. The service allows people living abroad to transfer the value of Bitcoin
directly to M-Pesa accounts in Kenya. M-Pesa reached 17m Kenyans in 2012. M-Pesa is in SA,
Uganda, Ghana and Botswana, and growing. BitPesa has seen astronomical growth recently.
More cost effective than existing remittance services (Western Union, MoneyGram).
Traditional remittance services charge up to 7% or more for a minimum amount of £100.
Thought
Experiment
BitPesa transfers small amounts at low costs.
One can
move a minimum of £20 to a maximum
on
Bitcoin
Exchange
of £400 (due to M-Pesa wallet capacity limitations). BitPesa does not charge a transaction fee
Money
Flows
but levy a 3% exchange fee when convertingand
from
£ to shillings.
(IFFs)??
Receipt is IMMEDIATE.
Sender
Buy BTC in £
and send to
BitPesa
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3%
BitPesa
converts BTC
in KES and
sends it on
Recipient
What Can We Do About Transparency
Compliance in Africa?
A more inclusive approach is required for Developing Countries in Africa – and one that
does not only rely on representation by South Africa (“Big Brother approach” which is met
with resistance).
Informal collaborations are more successful that mandatory unilateral standard setting
approaches
Greater collaboration is required between African countries, characterized through:
–
–
–
–
Regional collaboration
Information sharing
Capacity-building and skill exchanges
Support in advancing technological innovations in the financial, payment, accounting,
auditing and AML/CFT space
Oversight over the BTC technology protocol innovations
–
–
–
–
–
will easily be adopted in Africa due to the speed, ease and low cost of transacting
reduce the burden of transacting for the poor
will result in increased unreported, unrecorded (and illicit) transactions incl. Capital flight.
Requires a rethink of our understanding of IFFs and Capital Flight.
How is this going to be monitored, regulated in the future?
The plight of Developing Africa needs to be tackled - before resources and factors of
production are “looted” from the continent - in a manner that is supportive, inclusive and
collaborative, thus addressing the needs of the most vulnerable, namely women,
children, the elderly, unemployed and rural poor, thus providing them with their basic
human right to a dignified life filled with equal opportunities !!!
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Questions
Hidden Money, Hidden Resources
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