Colour does not matter

WITHIN MONTHS after coming to power, the Bush administration in the U.S. shocked the world by reneging on the Kyoto Protocol on the environment. It is unrepentant on its new posture notwithstanding intense global pressures whether at the recent Bonn meeting or the G-8 at Genoa. It is firm in its view that it is not in its interest ``to come back to the protocol" as it would slow down its growth.

This unilateralist approach is visible in another less known area and is disturbing many countries, especially its OECD (Organisation for Economic Cooperation and Development) partners. The reference here is to moves to evolve measures to curb money laundering. As Le Monde described it editorially, ``After dirty air, dirty money."

The work on this began in 1989 under the Financial Action Task Force (FATF) located in the OECD. Since the time work commenced, the U.S. had extended full support with zeal bordering on a crusade. Suddenly, the U.S. is turning its back and at a time when the OECD needs its cooperation more.

What the President and his men did not elaborate for some time a la Kyoto was that it is not in U.S. interests to continue to work with other countries on anti-money laundering efforts. There is evidence that the new administration takes the view that when it deals with money, the colour does not matter.

Why has the Bush administration changed track on policies pursued by earlier administrations for over two decades? In the Senate subcommittee meeting on July 18 Senator Levin was critical of U.S. actions to undermine longstanding effort, ``just when it was beginning to bear fruit."

U.S.' earlier stand

For the U.S., in the early years, it was more of a domestic issue and confined to curbing drug traffic. The foundation of U.S. money laundering laws is the Bank Secrecy Act (BSA) of 1970 which did not criminalise the activity but required financial institutions to preserve ``paper trail" for various types of transactions and those exceeding $10,000 had to be reported to IRS. As drug traffic grew, the Congress outlawed it in 1984. More amendments were made in 1994 and 1996 including `conspiracy' and `terrorism' as components of laundering violations.

Increasingly, money laundering came to be viewed as a global threat. The Clinton administration released its first National Money Laundering Strategy in September 1999 and the Strategy for 2000 in March 2000. The strategy gave priority to cooperating with the FATF in its work on identifying jurisdictions posing money laundering threats to the U.S. and to work towards implementation of the FATF-40 Recommendations.

During those years, it seemed that there was goal congruence between the OECD and the U.S. on most issues. The present writer has dealt with the work of FATF and related matters in a separate article. (``The colour of money", The Hindu, January 11, 2001.)

Though the FATF was expected to complete its work soon, none anticipated that it would go on for a decade. More and more issues were put on the table and negotiations became difficult with a diffused and contradictory agenda.

Unhealthy tax competition among countries or what the FATF described in its 1998 document as ``harmful tax practices" became an issue and some pressed for tax harmonisation. These set in motion debates on thorny issues over the creation of new ``tax havens" with weak administration and minimal or no tax. More and more multinational companies, banks and hedge funds came to be registered in convenient geographical locations.

Action against tax havens

The financial crisis in Asia in 1997 and 1998 added a new dimension as these tax havens were seen to be spreading volatility and contagion. Financial stability issues were added to the brew and money laundering got intertwined with them. In the end, too many agencies like the BIS, G-7, G-8, G-20, EU's Groups of Finance and Justice Ministers, several UN agencies, the World Bank, the International Monetary Fund, the Financial Stability Forum and a horde of NGOs jumped into the fray.

The year 2000 marked a high point in the work of FATF. In June 2000, after pruning an initial list of 35 countries, it drew up a list of 15 countries and territories as potential havens for ill- gotten wealth. These were considered non-cooperative countries and territories (NCCTs). Inclusion of Israel and Russia in the list was considered significant viewed against their political relationship with the U.S. The idea was ``to name and shame" the countries which do not conform to established norms. Pressure was to be exerted on NCCTs to bring about `good' behaviour leading to their removal from the list. When they fail to `behave', it was even proposed, as a final option, to ban all financial transactions between those countries and banks and brokerage houses elsewhere. It appeared that the FATF was becoming effective and some analysts commented favourably on the results achieved in ``disciplining" errant countries. The OECD could not have stepped up its efforts further without U.S. ratification of its scheme.

The U.S. could not have gone along with the OECD without Congressional support. In June 2000, the House Banking Committee approved by an overwhelming majority a bill giving the Treasury the power to ban some transactions between U.S. banks and offshore havens and also to collect data from offshore banks and companies. Appeals made by Secretary Lawrence Summers ``to protect the U.S. financial system against money laundering" and to strengthen the hands of the U.S. vis-a-vis the OECD were in vain. The Republicans blocked the passage of the bill and the bankers' lobby from Texas was behind it.

The second half of 2000 was uneventful, being an election year and OECD partners expected no new initiative. However, the Clinton administration continued its support to multilateral efforts. It requested the IMF/World Bank to play a greater role in fighting abuses and preserving the integrity of the international financial system. At the Vienna meeting in September 2000, the Treasury officials requested them to prepare a joint paper clarifying their roles in combating laundering and other financial malpractice. These reports were released in February 2001.

The end of the Clinton era was marked by sensational disclosures made in the ``Report on Correspondent Banking: A Gateway for Money Laundering" prepared by the Democrats of the Senate Subcommittee on Investigations. It exposed the weakness of the U.S. banking system and how correspondent banking provided a ``significant gateway for rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the U.S." and how they flourished under the protection given by the U.S. banking system.

Even though these Senate reports, hearings and developments on the OECD front had set the stage for early action, the Bush administration did not reveal its hands till March 2001. The earlier bill was in the limbo in the Senate. Further progress on FATF list was dependent on U.S. cooperation and OECD partners were getting restive over the delay. There were indeed apprehensions whether the new administration would go along. And the question was how they could reverse track. There were certain other developments which helped them perform the act.

FATF's flawed strategy

What made it easier for the U.S. was the fact that the FATF/OECD had over-reached itself in its attempt to ``rein in" smaller and weaker countries. The so-called FATF-40 lacks coherence and consistency, as there is no accepted definition of the term ``laundering" and, as a legal concept, it varies from country to country. Even within the OECD, there are policy differences over levels of taxation. Countries like France aim at higher taxes and are thus more concerned over tax evasion; while others, like the Bush administration, want to lower taxes. Finally, if there is competition among small countries in lowering taxes, is this not a reasonable response to the global strategies of multinationals with their headquarters in OECD? Did not the OECD itself press developing countries to lower taxes to encourage foreign investment? In the end, it turned out that FATF/OECD strategy was flawed and contained the seeds of its own destruction.

It was the Commonwealth Working Group consisting of island countries, which rose against the OECD. A stormy joint meeting held in Paris early in March broke up without any discussion. The Commonwealth Secretary General issued a strong statement that ``the Commonwealth will not be `reined in' on the issue."

The Caribbean countries were equally agitated. In the Third Summit of the Americas held in Quebec in April they presented a letter to President Bush seeking U.S. support against ``what this region considers as the unfair, harmful and illegal efforts of the OECD to force changes in competitive tax practices in their banking sector."

Given the U.S. attention to the ``Americas" as an economic group, it became clear to OECD partners that the U.S. would have to consider the ``strong views" of the Caribbean countries and resist OECD campaign against tax havens. Secretary Paul O'Neil could also say, ``We have no business telling any nation what their tax rates should be."

The Group of Seven meeting held in Washington early in May failed to get the U.S. support to a communique on NCCTs. It was a week later that Secretary O'Neil further clarified in an article in Washington Post that ``the OECD project was too broad and not in line with the administration's tax and economic priorities."

Distinction drawn

The OECD meeting held in Paris early in June was portentous. It was in this meet that the U.S. drove home the distinction between legitimate tax competition and tax evasion and urged the need to have information sharing arrangements confined to criminal investigations. The OECD had no choice but to agree with this approach. It decided to shift the deadline for compliance from July 31, 2001 to 2003. The new deadline also includes, surprisingly, tax havens in OECD countries such as Switzerland. This is to make the exercise appear evenhanded.

Though official reports on the hearings of the Senate subcommittee on July 18 are not yet available, Secretary O'Neil reiterated that ``the threat of such measures by a group of 30 large, developed countries is by its nature highly coercive" and should be reserved only for jurisdictions acting in bad faith. He denied the allegations that he was undermining OECD attempts and leaned on the decisions taken in the June meeting.

Leaving aside the assertion ``to crack down on Americans using offshore entities or secret bank accounts to evade U.S. taxes", the broad U.S. strategy has been spelt out. It will unilaterally enter into information-sharing agreements with tax havens and it will not have collective or multilateral arrangements for action. Thus ends with a whimper a decade long saga of a multilateral effort to curb money laundering. Any hope that the U.S. would cooperate in future with developing countries for a wider or more comprehensive arrangement is misplaced.

K. Subramanian

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