Privacy, Transparency and Combatting Illicit Financial Flows – IMF F&D
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- Authors: JAY PURCELL, IVANA ROSSI
- Published: September 1, 2019
Executive overview
- Transparency is presented as a potent weapon against illicit financial flows, corruption, and tax evasion.
- Trade-offs exist: transparency improves enforcement, accountability, trust, and deterrence by increasing detection risk, but it entails loss of privacy for some individuals with legitimate reasons for discretion.
- Recommendation principle: manage trade-offs to maximize public availability and safeguard sensitive details rather than using privacy concerns as an excuse for inaction.
Problem definition: illicit financial flows
- "Illicit financial flows" covers at least three types:
- Funds generated by illegal acts (e.g., corruption, smuggling, drug trafficking).
- Funds whose transfer constitutes an illegal act (e.g., transfers to hide income—tax evasion—even if income was legally generated).
- Funds destined for an illegal purpose (e.g., financing of terrorism).
Case study: Pakistan’s tax-disclosure initiative
- Context and facts:
- Pakistan’s tax revenue to GDP ratio was 9.2 percent, ranked lower than that of all but 1 of 154 jurisdictions.
- Population: 180 million.
- Number filing income tax returns: 1.2 million people and firms.
- 70 percent of Pakistani lawmakers had not filed returns in the cited year.
- 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.
- Outcomes and trade-offs:
- Some evidence of improved compliance, though compliance remains low.
- Improvement came at the cost of reduced privacy for all citizens.
- Purpose: to shame noncompliers and enable civil society and journalists to hold them to account.
Disclosure by public officials
- Prevalence and scope:
- 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 grant access in practice.
- Typical disclosure contents:
- All income, assets, and liabilities held by officials or close family members (e.g., spouse), domestic or abroad.
- In some cases, assets for which they are ultimate or "beneficial" owners.
- Benefits:
- Advances anti-corruption objectives from prevention to enforcement.
- Helps determine politically exposed persons for customer due diligence and aids asset-tracing and recovery.
- Public access enables watchdogs, journalists, and civil servants to generate leads that spur investigations (examples: Croatian prime minister resignation in 2009; French budget minister scandal leading to conviction and reform).
- Privacy-management considerations:
- Public access need not mean publishing entire declarations; highly sensitive information (e.g., bank account numbers) is kept confidential.
- Tailor public access (e.g., only high-level officials).
- Growing recognition, including case law, that public interest can outweigh personal privacy for high-level officials.
Beneficial ownership transparency
- Scale of concern:
- 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.
- International standards and policy direction:
- FATF recommends enhanced transparency of legal entities and beneficial ownership; basic company-register information should be public and beneficial ownership information should always be available to competent legal authorities.
- Group of Twenty and OECD Global Forum have focused on enhancing beneficial ownership transparency.
- EU decision: member states must establish publicly available beneficial ownership registries as of 2020.
- Benefits of public registries:
- Supports financial institutions’ due diligence.
- Enables public monitoring of government procurement 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 where there is evidence of a serious risk of violence or intimidation.
- Examples:
- United Kingdom and Denmark are noted as pioneers in creating public beneficial ownership registries.
Geographic targeting orders (real estate)
- Rationale:
- Real estate purchases can be used to launder or invest illicit proceeds via single large transactions and by obscuring beneficial owners using corporate vehicles.
- U.S. FinCEN example:
- Early 2016 FinCEN issued temporary geographic targeting 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 be provided to the government but not the general public, balancing investigative access with buyer privacy.
- In 2017 FinCEN indicated that more than 30 percent of purchases reported pursuant to its geographic targeting orders were conducted by people already suspected of involvement in questionable dealings.
- FinCEN has consistently renewed and expanded the orders’ scope to other major metropolitan areas without unduly compromising buyer privacy.
- Applicability:
- Similar measures could be implemented with respect to land registries in other countries.
Tax records and public disclosure of taxpayer information
- Scale of issue:
- Tax evasion costs governments more than $3 trillion a year (2011 estimate by the Tax Justice Network).
- Public-disclosure practices:
- Norway publishes taxpayers’ incomes and returns since at least 1863.
- Pakistan began public disclosure to a somewhat lesser degree 150 years later.
- Finland publishes citizens’ income and tax payments on November 1 each year ("National Jealousy Day").
- Privacy-management mechanisms:
- Norway requires individuals to log in to a dedicated system that tracks their searches; taxpayers can see who has viewed their information.
- Users are limited to searching 500 records a month in Norway.
- Sweden maintains similar controls; media may be allowed anonymous searches in certain cases.
- Impacts:
- Controls appear to have reduced frivolous record requests while preserving investigative functions of the media.
Key findings and policy recommendations
- Findings:
- Transparency tools—public disclosures by officials, beneficial ownership registries, geographic targeting orders, and public or controlled publication of tax records—can materially help detect, deter, and investigate illicit financial flows.
- Transparency enhances accountability, builds trust in institutions, and enables third-party scrutiny by journalists, academics, and civil society.
- Privacy concerns are real and can provoke opposition; they can also be invoked disingenuously to resist transparency.
- Recommendations and good practices:
- Ensure relevant authorities have ready access to complete information.
- Aim to maximize public availability of non-sensitive information, tailoring availability to different stakeholders.
- Safeguard sensitive personal details (e.g., bank account numbers) and provide mechanisms for case-by-case exemptions (e.g., serious risk of violence or intimidation).
- Implement technical and procedural controls to discourage frivolous searches and commercial data mining (e.g., search limits, audit trails, controlled anonymous access for journalists where appropriate).
- Manage trade-offs deliberately; do not use privacy concerns as an excuse for inaction on illicit financial flows.
IMF Finance & Development, September 2019 — Jay Purcell and Ivana Rossi
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