Pandemic-era FinCEN leaks ratchet up the urgency of lifting the veil on financial secrecy

As the coronavirus pandemic reverses decades of gains in combatting inequality, it’s more urgent than ever that authorities excise the dirty money that has “metastasized” within the financial system’s guts.

After the Lux Leaks laid bare the Grand Duchy’s tax avoidance schemes, the Panama Papers lifted the lid on the offshore financial sector and the Paradise Papers showcased the sweetheart deals reducing the tax burden of the world’s wealthiest. Now, the FinCEN Files have once again aired the global financial sector’s dirty laundry and underlined how governments and financial institutions have failed, following previous leaks, to take concrete action to seal the loopholes that allow trillions of dollars of tainted money to flow freely.

In particular, their failure to adequately address financial secrecy has led to rampant tax abuses, money laundering, and corruption which, as a recent UN report underscored, is a key factor in condemning billions around the world to poverty. As the coronavirus pandemic reverses decades of gains in combatting inequality, it’s more urgent than ever that authorities excise the dirty money that has “metastasized” within the financial system’s guts.

Rather than the incremental steps taken following previous leaks, policymakers must take decisive action in several key areas to root out dodgy financial flows. First, regulators must drastically reform—or shutter entirely—the tax havens and freeports which have made financial secrecy the lynchpin of their economic model. Furthermore, they must exact greater transparency from mainstream financial institutions, doling out real consequences rather than slap-on-the-wrist fines, and holding top executives personally accountable for failing to build a culture of compliance.

Trouble in paradise: tax havens spreading inequality

A particular priority is addressing the secrecy jurisdictions dotted around the world which have allowed multinational corporations and the über-wealthy to stash away a staggering $36 trillion in untaxed funds. Given that the World Bank has estimated that an annual expenditure of a mere $3.4 billion could have allowed developing countries to build up a robust pandemic prevention capability, it’s hard to overstate the importance of bringing this money in from the cold.

What’s more, these jurisdictions are hampering international development even beyond the substantial sums they hide from the taxman. Secrecy jurisdictions deploy a potent cocktail of low tax rates and an opaque financial system to attract their wealthy clients, a toxic mixture that drives global inequality in a number of ways.

Secrecy jurisdictions enable individual corrupt actors by concealing and protecting their ill-gotten gains. They create a two-speed tax code, in which the rich and powerful have access to fiscal advantages that ordinary citizens don’t have.  Secrecy jurisdictions, meanwhile, become trapped in a “race to the bottom”, spurred to adopt less effective regulation and more opaque financial processes in order to garner badly-needed business.

Freeports: a “black hole” of unaccountability?

Nation-wide secrecy jurisdictions, unfortunately, are not the only boltholes giving tax evaders and organized crime groups a place to stash their cash. Special tax facilities are known as freeports initially popped up as a way to ensure that commodities weren’t excessively taxed in transit.

Thanks largely to the machinations of scandal-prone Swiss entrepreneur Yves Bouvier, these special customs areas became an “attractive new breed of tax haven” for the ultra-rich, who can store—and even trade—everything from gold bullion to artistic masterworks without incurring tax as long as their treasures never leave the facility.

Bouvier, himself under investigation by Swiss authorities for tax evasion and fending off lawsuits from a former client whom he allegedly scammed out of more than $1 billion, built opulent freeports in Singapore and Luxembourg, complete with climate-controlled vaults and 50cm-thick metal doors—and a rigorous commitment to client confidentiality and a general lack of scrutiny which have raised red flags with policymakers. He denies all charges.

Nevertheless, the Financial Action Task Force (FATF) singled out Yves Bouvier’s Singapore Freeport as a particular risk for money laundering and terrorist financing, while MEPs from the European Parliament’s special committee on financial crime were alarmed after a visit to the Luxembourg facility. “[The freeport] is a way that could be easily used to store goods away from anybody's control, for putting them in the dark when it's more convenient, avoiding tax,” former MEP Ana Gomes explained. “The controls were extremely perfunctory and we did not see any real attempt to establish who were the real owners of the goods”.

With Gomes’ colleagues describing the Luxembourg freeport as a “black hole” and a “blind spot” in the fight against financial crime, it’s not surprising that the European Parliament recommended that the facilities be urgently phased out. It’s a recommendation that policymakers around the world should take up as well. Though Le Freeport Luxembourg and similar facilities insist that they comply with anti-money laundering regulations, the truth is that—much like a secrecy jurisdiction—opacity is central to Bouvier-style freeports’ business model.

Bringing mainstream finance inline

If cleaning up secrecy jurisdictions and freeports is particularly urgent, the recent FinCEN leaks have emphasized how a broken enforcement system has allowed the rot to spread to mainstream financial institutions and processes. The leaks uncovered more than $2 trillion in dubious transactions that were allowed to go ahead by the likes of JP Morgan and HSBC despite internal compliance officers flagging them as suspicious.

Perhaps most concerningly, banks greenlit these problematic transactions in violation of good behavior promises following previous incidents. In 2012, after laundering more than $800 million for Latin American drug cartels, HSBC cut a deal with U.S. prosecutors contingent on aggressively monitoring the flow of dirty cash. According to the FinCEN Files, however, HSBC continued to move millions for Ponzi schemes and suspected fraudsters.

To restore accountability to the financial sector, banks must be subject to far more rigorous reporting requirements. Long able to shield themselves behind a veneer of plausible deniability, financial institutions should face stricter liability if they fail to uncover the ultimate beneficiaries of the shell companies whose transactions they rubberstamp.

Second, the penalties imposed on financial institutions need to be bruising enough to actually change behavior and must hold bank leaders personally accountable. At the moment, the risk-reward equation is so unbalanced, particularly that individual “bank fines become a cost of doing business” that pales in comparison to the profits to be made by turning a blind eye to suspicious transactions.

Despite the flurry of media attention following the FinCEN leaks, it’s likely that the same pattern will play out as with previous leaks: the financial sector will pledge to clean up its act, regulators will impose a handful of fines on the biggest offenders, and money laundering and tax abuses will continue with impunity. With governments around the world facing tax shortfalls and rising inequality, will they determine to take more radical action to stamp out damaging financial secrecy?

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)