Garry Emmons

Corruption fight begins at home

By Garry Emmons
June 25, 2010

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DURING THE G8/G20 summits that begin today in Canada, the global economy and international development will be topics of earnest discussion. Lurking at the margins of this polite conversation will be the skunk at the garden party: corruption.

Everyone’s against corruption, or so they say. But virtually every country in the world is awash in cross-border flows of corrupt, criminal, and tax-evading money. To Western eyes, the Third World is the locus of this shady behavior. Yet the rich and powerful countries, the winners that write the rules for the global financial system, are corruption’s pinstriped enablers.

With bribery, the most recognizable of corruption’s many faces, we often forget that both parties are equally guilty, and equally capable of initiating it. Still, it’s the corrupt dictator who offshores his millions while his people are starving that most infuriates us. But where’s the outrage at the reception those ill-gotten gains routinely enjoy at Western banks? The Treasury Department says that virtually 100 percent of criminal and corrupt money presented to American banks is accepted into secure accounts, prompting Time magazine to dub the United States as possibly “the world’s biggest washing machine for dirty money.’’

But what’s really troubling is that bribery makes up a mere 3 percent of the world’s estimated $2 trillion in annual illicit money flows, according to Global Financial Integrity, a Washington research group. Organized crime and trafficking account for another 30 to 35 percent. A whopping 60 to 65 percent of the world’s dirty money stems from the intentional, illegal manipulation of taxes and of commerce (e.g., falsified pricing, sham transactions), particularly by multinational corporations.

Some 60 percent of world trade (about $35 trillion, pre-recession) consists of “intratrade’’ by multinationals. Intratrade is business conducted among parent companies, affiliates, and subsidiaries, frequently dummy sites in tax havens (In 2008, Boeing had 38 such subsidiaries; Morgan Stanley had 273). In a legal process called transfer pricing, multinationals set their own artificial (non-market) price for “transactions’’ that are moved on paper through multiple subsidiaries in several jurisdictions, until maximum tax benefits accrue.

Transfer pricing’s guidelines can be murky, but its inherent conflict-of-interest is what creates one of business’s worst-kept secrets: most multinationals (and most of the top 100 are American) deliberately engage in illegal tax evasion in at least some of their transactions. Hundreds of billions of dollars in annual tax revenues are lost this way, most critically to countries in dire need of money for development.

In effect, the global financial system’s secrecy jurisdictions and tax havens have become an equal-opportunity repository for all illicit money, similarly available to and exploited by the murderous “godfather,’’ the corrupt official, or the tax-evading executive. Crime should not be facilitated by an opaque global financial system that accepts and then conceals dirty money.

Multinational companies, which do much good around the world, should not risk their reputations by conducting business through the same mechanisms that shelter blood-stained funds. Relatively simple expedients — automatic exchange of tax information between countries, or country-by country accounting of sales, profits, and taxes paid by multinationals, for example — would greatly increase transparency and accountability around the globe.

According to GFI, developing countries lose $1 trillion annually due to crime, government corruption, and tax evasion. That outflow of funds is roughly 10 times greater than the amount of aid for development and poverty alleviation that poor countries receive from wealthy ones. Yes, it’s ultimately up to the people of the developing countries to throw their own bums out, build their own institutions, and stand on their own two feet. No one wants all that more than they do.

We in the West have a voice they don’t; we can demand that the architects of the global financial structure redesign it so sunlight will stream into now-dark corners. Getting our own house in order would help make the world a brighter and better place.

Freelance writer Garry Emmons lives in Cambridge.

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