The governments must install expert investigators to fight huge corruption cases, terrorist financing and money laundering practices to increase corporate transparency, urges a joint report by the World Bank and the United Nations.
A joint report by the World Bank and the UN Office on Drugs and Crime (UNODC) published on Monday urged governments to devote more resources to training investigators in fighting financial crime, including large-scale corruption, money laundering and terrorist financing.
American banks are not currently obliged to collect beneficial ownership information when establishing a business relationship/ Photo credit: Peter Foley/EPA According to the Stolen Asset Recovery (Star) initiative of the World Bank and the UNODC, most large-scale corruption cases involve using legal entities to conceal ownership and control of corrupt proceeds – hence the need for greater transparency to reduce opportunities for wrongdoing.
"We need to put corporate transparency back on the national and international agenda," says Emile van der Does de Willebois, a World Bank financial expert, leader of the Star research team behind the report on the corrupt use of legal structures. "It is important for governments to increase the transparency of their legal entities and arrangements, and at the same time improve the capacity of law enforcement."
The report, the Puppet Masters, examines how bribes, embezzled state assets and other criminal proceeds are being hidden via legal structures – shell companies, foundations, trusts and others. The study's release coincided with a UN conference on corruption in Marrakesh, Morocco, bringing together anti-corruption advocates and representatives from 154 states.
With the Arab spring in mind, Transparency International, together with other civil society organisations attending the fourth session of the conference of states parties to the UN convention against corruption (UNCAC), are calling for action to step up the recovery of stolen assets. Under the banner: "Return stolen public assets now!", they are also demanding more robust anti-money laundering measures.
The World Bank/UNODC report illustrated the use of shell companies through reference to a case in 2002, when Kenya invited bids to replace its passport printing system. Despite a 6m euro bid from a French firm, a 31.89m euro contract was awarded to Anglo Leasing and Finance Ltd, an unknown shell company, whose registered address was a post office box in Liverpool. The decision was taken despite the fact that Anglo Leasing proposed to sub-contract the actual work to the French company.
The report said leaks by whistleblowers suggested that corrupt senior politicians planned to pocket the excess funds from the deal. Attempts to investigate the allegations, the report continued, were frustrated when it proved impossible to find out who really controlled Anglo Leasing. The scandal nearly brought down the Kenyan government at the time.
The World Bank and the UN note that 100 countries have ratified the 2003 UN convention against corruption and 170 jurisdictions have endorsed the 2003 recommendations of the Financial Action Task Force (FATF). But, they say, laws and regulations, while important, are insufficient in themselves.
"In any complex corruption investigation involving the use of corporate vehicles, an imaginative, tenacious and expert investigator is indispensable," said the report. "In our research, we have discerned a wide disparity among investigators in different jurisdictions around the world in terms of their knowledge and expertise, as well as the technological and budgetary resources made available to them to conduct investigations into corporate vehicle misuse schemes. Given the transnational nature of such schemes, however, it is imperative that this gap in knowledge and resources be narrowed."
While the company registry is the first source of information about companies, this is no panacea for the misuse of legal entities. Other vital sources of information are banks and trust or company service providers (TCSPs). However, the World Bank and the UNODC said its review showed that banks and TCSPs "still do not adequately identify the beneficial owner (a legal term where specific property rights in equity belong to a person even though legal title of the property belongs to another person) when establishing a business relationship".
American banks are not generally obliged to collect beneficial ownership information when establishing a business relationship. "At the very least, an official declaration by the customer as to beneficial ownership could be useful in improving the situation," said the report. "If a service provider is obligated to gather full due diligence information, it becomes impossible for the intermediary to legitimately plead ignorance regarding the background of a client or the source of his or her funds. Second, having all such information duly gathered by the service provider means that investigators have an adequate source of information at their disposal."
Campaigners welcomed the report but said the private sector too needed to be more transparent. "Companies need to be more transparent in their country-by-country reporting," said Robin Hodess, Transparency International's director for research and knowledge. "In oil and gas, for example, very few countries disclose how much they pay into national budgets in terms of royalties, taxes and revenue payments. Companies need to improve as well as governments."