## illicit-financial-flows-and-privacy-vs-transparency-purcell

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### Overview
- Examines the tradeoff between transparency and privacy in combating illicit financial flows.
- Argues that transparency improves enforcement, accountability, and deterrence but involves privacy costs that must be managed.
- Emphasizes there is no universal formula; international standards and good practices should guide tailored approaches.

### Definition of illicit financial flows
- Illicit financial flows encompass at least three types:
  - Funds generated by illegal acts (for example, corruption, smuggling, and drug trafficking).
  - Funds whose transfer constitutes an illegal act (for example, transferring money to hide income from the authorities—tax evasion—even if the income was generated legally).
  - Funds destined for an illegal purpose (for example, financing of terrorism).

### Country example: Pakistan (transparency initiative and effects)
- Contextual figures:
  - Tax revenue to GDP ratio: 9.2 percent.
  - Population: 180 million.
  - People and firms filing income tax returns: 1.2 million.
  - Share of Pakistani lawmakers who had not filed returns in 2011: 70 percent.
- Policy action:
  - In 2014 the Ministry of Finance authorized the Federal Board of Revenue to make public how much income tax every company and individual pays each year.
- Outcome:
  - Some evidence of improved compliance, but with loss of privacy as a tradeoff.

### Disclosure by public officials
- Coverage and variability:
  - More than 90 percent of countries have legislation requiring financial disclosure by at least some public officials (World Bank statistics).
  - Only about 50 percent of those that require disclosure allow public access by law; a much smaller percentage actually grant that access in practice.
- Typical disclosure requirements:
  - Officials must disclose all income, assets, and liabilities held by them or close family members (for example, a spouse), whether in the country or abroad.
  - In some cases officials must also disclose assets for which they are the ultimate or “beneficial” owners.
- Benefits:
  - Supports anti-corruption objectives from prevention to enforcement.
  - Helps fight money laundering (for example, identifying politically exposed persons, facilitating customer due diligence, advancing asset-tracing and recovery).
  - Public access enables watchdogs, journalists, and civil servants to crowdsource scrutiny, generating leads that spur investigations (illustrative cases: Croatian prime minister resignation in 2009; French budget minister’s Swiss accounts leading to conviction and reform).
- Privacy-sensitive design considerations:
  - Public access need not publish entire declarations; highly sensitive information (for example, bank account numbers) can remain confidential.
  - Public access can be tailored (for example, publish only declarations of high-level public officials).
  - Growing recognition, including in case law, that public interest can outweigh personal privacy for high-level officials.

### Beneficial ownership transparency
- Problem statement:
  - Research by Damgaard, Elkjaer, and Johannesen (2018) estimated that $12 trillion—almost 40 percent of all foreign direct investment—passes through empty corporate shells associated with no actual economic activity.
  - Lack of beneficial ownership information enables masking of questionable dealings.
- International standards and initiatives:
  - FATF recommendations require enhanced transparency of legal entities and their beneficial ownership; basic company register information (for example, company name, type of incorporation, legal status, address, list of directors) should be public.
  - Beneficial ownership information should be available to competent legal authorities, whether held in a registry, by financial institutions, or by companies themselves.
  - Group of Twenty and OECD Global Forum efforts also focus on enhancing beneficial ownership transparency.
  - European Union decision: member states must establish publicly available beneficial ownership registries as of 2020.
- Benefits of public registries:
  - Supports financial institutions’ customer due diligence.
  - Enables public monitoring of government purchases and verification of officials’ disclosures.
- Privacy management recommendations:
  - Provide enough information to identify beneficial owners without unnecessary details.
  - Establish case-by-case exemptions from publication when there is evidence of a serious risk of violence or intimidation.
- Country examples:
  - United Kingdom and Denmark pioneering public beneficial ownership registries.

### Geographic targeting orders (real estate)
- Rationale:
  - Real estate can be used to move, launder, and invest illicit proceeds via single transactions and corporate vehicles that obscure beneficial owners.
- US example (FinCEN):
  - In early 2016 FinCEN issued temporary orders requiring certain US title insurance companies to identify natural persons behind companies used to pay “all cash” for high-end residential real estate in parts of New York and Florida.
  - FinCEN’s approach: require beneficial ownership information to be provided to the government but not to the general public.
- Outcomes:
  - In 2017 FinCEN indicated that more than 30 percent of purchases reported under geographic targeting orders were conducted by people already suspected of involvement in questionable dealings.
  - FinCEN has renewed and expanded the orders to other major metropolitan areas while protecting buyer privacy from public disclosure.

### Tax records and public disclosure
- Fiscal impact:
  - Tax evasion costs governments more than $3 trillion a year (according to a 2011 estimate by the Tax Justice Network).
- Public disclosure practice:
  - Norway has made taxpayers’ incomes and returns public since at least 1863.
  - Pakistan started publishing tax information some 150 years after Norway.
  - Finland publicly publishes citizens’ income and tax payments on November 1 each year (referred to as “National Jealousy Day”).
- Privacy controls used:
  - Norway requires individuals to log in to a dedicated system that tracks searches; taxpayers can see who viewed their information.
  - Users are limited to searching 500 records a month in Norway.
  - Sweden maintains similar controls.
- Observed effects:
  - Controls appear to have reduced frivolous record requests while allowing media to continue critical investigative functions, sometimes with anonymous access in specific cases.

### Findings and trade-offs
- Transparency is a potent weapon against illicit financial flows because it:
  - Allows journalists, academics, and others to scrutinize large datasets and report possible abuses.
  - Builds trust in institutions, increases accountability, and may diminish perceptions of public corruption.
- Privacy concerns are significant and can:
  - Justifiably protect individuals from theft, kidnapping, or harassment.
  - Be invoked disingenuously by actors seeking to obscure questionable dealings.
- Key principle:
  - Trade-offs can and should be managed, not used as an excuse for inaction on illicit financial flows.

### Policy recommendations and good practices
- Ensure relevant authorities have ready access to complete information.
- Aim to maximize public availability while tailoring access to different stakeholders.
- Safeguard sensitive personal details (for example, bank account numbers) from public disclosure.
- Discourage frivolous searches and commercial data mining through technical and procedural controls (for example, login tracking, search limits).
- Provide mechanisms for case-by-case exemptions from public disclosure when evidence exists of serious risks (for example, violence or intimidation).
- Balance the benefits of public scrutiny with privacy protections to maintain public trust and enable effective enforcement.

### Key statistics and dates (preserved exactly)
- Tax revenue to GDP ratio in Pakistan cited in 2011: 9.2 percent.
- Pakistan population referenced: 180 million.
- Number of people and firms filing income tax returns in Pakistan: 1.2 million.
- Share of Pakistani lawmakers who had not filed returns in 2011: 70 percent.
- Share of countries with legislation requiring some public officials to disclose finances: more than 90 percent.
- Share of countries that require disclosure and allow public access by law: about 50 percent.
- Estimated value passing through empty corporate shells: $12 trillion.
- Share of all foreign direct investment represented by that amount: almost 40 percent.
- European Union public registry requirement effective: as of 2020.
- Share of purchases reported under FinCEN geographic targeting orders in 2017 conducted by people already suspected of involvement in questionable dealings: more than 30 percent.
- Estimated government revenue loss from tax evasion (2011 Tax Justice Network estimate): more than $3 trillion a year.
- Norway has published tax data since at least 1863.
- Pakistan began publishing tax data about 150 years after Norway.
- Finland publishes citizens’ income and tax payments on November 1.
- Norway’s user search limit example: 500 records a month.

*Jay Purcell and Ivana Rossi, “Privacy vs Transparency,” Finance & Development, September 2019.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/september/illicit-financial-flows-and-privacy-vs-transparency-purcell.pdf_