Kathy Nicolaou-Manias Who Makes the Financial Transparency Rules? An AML/CFT African Development Country View Kathy Nicolaou-Manias

Overview Who bears the burden of ML and IFFs in Developing Countries? Who Sets the Standards? Which Developing Countries have a VOICE? Can African Developing Countries Implement the IFF and ML Transparency Tools? SO WHAT? More Woes About Future Transparency: Bitcoin and BitPesa (Case study) What can we do about Transparency Compliance in Africa?

Who Bears the Burden of ML and IFFs in Developing Countries Understanding the link between the Illicit Economy, IFFs and Money Laundering

Who Bears the Burden of ML and IFFs in Developing Countries Global Distribution of Non-Normalised IFFs: Average between 2002-2006 Who bears the burden of ML, TF and IFFs in Developing Countries? Resale and Investments: Products can be resold at market (or higher) prices, sometimes back to the original company (incurring further losses), while the surplus is transferred to developed countries. 3 Capital Flight, IFFs, Tax Evasion and ML: MNCs/Organised crime syndicates sell goods and services (legally/illegally) to their subsidiaries or branches located in tax havens – at misrepresented (lower) prices. Tax evasion robs these countries of tax revenues and the rightful rents due to their productive resources. Using the multiplier effects, the socio-economic effects are large on these developing countries. 2 Revenues: MNCs/Organised crime syndicates produce goods and services or extract resources (legally/illegally). 1 Source: GFI and NyTid Magazine, United Nation Association of Norway, International Money Laundering Information Network

Who Bears the Burden of ML and IFFs in Developing Countries Normative Illicit Financial Flows for the Regions – Billions of US Dollars (Current Prices): 2000-2009 Billions Dollars (US) - Current Prices Africa Asia Developing Europe Middle East and North Africa Western Hemisphere All Developing Countries 2000 10.1 199.7 34.0 43.0 66.5 353.3 2001 8.6 219.7 40.0 35.8 80.7 384.8 2002 12.2 186.5 57.6 37.4 83.4 377.1 2003 22.9 246.2 92.2 82.3 94.7 538.3 2004 26.6 322.5 109.4 135.2 91.3 685.0 2005 28.3 375.5 89.7 154.2 103.5 751.2 2006 38.1 368.2 148.2 247.1 118.7 920.3 2007 62.3 411.9 260.3 214.4 183.5 1 132.4 2008 63.0 493.8 300.2 307.3 150.3 1 314.6 2009 61.6 376.4 106.4 118.2 112.3 774.9 Total (Cumulative) 333.7 3 200.4 1 238.0 1 374.9 1 084.9 7 231.9 Share of the region in Total 4.6% 44.3% 17.1% 19.0% 15.0% 100.0%

Who Bears the Burden of ML and IFFs in Developing Countries Laundering criminal proceeds Corruption Tax abuse Market abuse Consequences Macro IMPACTS Who? Draining hard currency reserves Monetary sector destabilisation impact Vulnerable and poor: those dependent on social services and welfare, i.e. women, children, the elderly and the unemployed. Increasing financial liquidity risk ML and IFFs Stimulating inflation Reduced tax revenues and collection (BEPS) Real sector growth Y=C+I+G+(X-M) Undermining trade Depleting investments and BEPS Economic IMPACTS Weakening governance Weakening social and economic stability

Who Sets the Standards? Type Institutions Accounting Auditing AML/CFT and Corruption Corporate Governance Monetary and Fiscal Transparency Securities Market Regulation, Insurance, Insolvency and Creditors Banking and Payments Systems Financial Action Task Force (FATF) Egmont Group of Financial Intelligence Units Eastern and Southern Africa AML Group UNCAC Institutions International Accounting Standards Board (IASB) International Federation of Accountants (IFAC) Basel Committee on Banking Supervision (BCBS) International Federation of Accountants (IFAC) International Auditing and Assurance Standards Board (IAASB) Committee on Payments and Settlement Systems (CPSS) BASEL Committee on Banking Supervision Financial Stability Board Basel Committee on Banking Supervision IMF World Bank International Monetary Fund (IMF) International Organisation of Securities Commissions International Association of Insurance Supervisors (IAIS) World Bank International Bar Association UNCITRAL Financial Accountability, Stability, Integrity and Transparency

Who Sets the Standards? Overarching Institutions Type Apart from bodies traceable to the “international administration” model, such as the International Monetary Fund (IMF), the World Bank (WB) and the Organization for Economic Co-operation and Development (OECD), transnational regulatory networks such as the Basel Committee on banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS) and the most recent International Organization of Pension Supervisors (IOPS) also develop rules for banking, securities, insurance and pension supervision respectively9. Within these bodies, not the states themselves, but national administrative authorities are represented. Moreover, transnational administrative bodies’ powers are not based on formal treaties but on informal agreements, so both the organization and the functioning of these bodies are flexible and mostly dependent on cooperation between their members10. In addition to the above mentioned transgovernmental regulatory networks, it also brings together intergovernmental international organizations (such as the IMF and the World Bank), national financial authorities and private bodies with regulatory functions, such as the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). While in the past they were simply transnational fora of discussion, they have suddenly become important standard setters. In other words, from places devoted to the exchange of ideas, they have evolved into transnational regulatory bodies, shifting many regulatory decisions from the national to the global level. The main reasons for this development can probably be found in the need for regulation perceived by market participants in a globalized world. In order to expand their market position and reduce costs, large firms call for a level playing field12. In other words, global bodies are filling the normative gap left by domestic regulation13. Of course, the rules established by these global bodies are not formally binding. They are issued in the form of guidelines, standards and other norms of general applicability. However, in practice, they are implemented at a national or international level as though they were mandatory. Within the context of financial markets, the IMF and WB play a key role toward the implementation and effectiveness of standards. More precisely, the Reports on the Observance of Standards and Codes (ROCSs) compiled by the two above mentioned organizations and their conditioned lending policy are considered two of the most important factors through which non binding standards tend to become mandatory, especially for developing countries21. Basel Committee on Banking Supervision (BCBS) is the oldest and the least formal of these standards setters. Set up by the G-10 central bank governors at the end of 1974, the Committee does not rely on any treaty or bylaws. The number of its members is very limited (fourteen). The Committee is compounded only by central banks’ governors of the richest countries. It is not a formal supranational authority, but provides a place for the on-going co-operation and coordination of prudential supervision policies by formulating standards, best practice and guidelines. For example, it is widely believed that developing countries are mostly encouraged to implement global standards by the WB and the IMF35. These organizations are able to include compliance with standards in the conditions that must be fulfilled by a borrowing state. The latter is thus practically forced to apply them. The same does not occur for standard setters’ members. Their compliance is essentially a political issue36. As it happens within traditional international organizations, since decisions are primarily taken on a consensus basis, members are expected to implement rules on which they have previously given their consent37. UN IMF WB G6/7/5 G20 OECD NEPAD Overarching Institutions Type Accounting Auditing AML/CFT and Corruption Corporate Governance Monetary and Fiscal Transparency Banking and Payments Systems BASEL FSB/Forum IBA IASB IFAC UNCAC UNCITRAL IAASB FATF CPSS IADI IOSCO IAIS IOPS EC/ECB Standard Setting Authorities Informal / Associate / Committees / Agencies Institutions FAFT regional Bodies (CFATF, EAG, GIABA, ESAAMLG, Moneyval, APG, GAFISUD, MENAFATF) EGMONT Credit rating agencies African Tax Admin Forum Civil Society, NGOs etc… TI EITI GFI FTC TJN Christian Aid Eurodad Global Witness Latindadd etc… Financial Accountability, Stability, Integrity and Transparency

Which Developing Countries have a VOICE? International Federation of Accountants Basel Committee on Banking Supervision Organization Category Developed Countries Non-African Developing Countries African Developing Countries G6/ G7 / G8 Economic and Financial Stability Canada, France, Germany, Italy, Japan, UK, USA (and Russia) None G20 Economic Development Tax Trade Corporate Governance Australia, Canada, France, Germany, Italy, Japan, Republic of Korea, Russia, Saudi Arabia, EU, UK and USA Argentina, Brazil, China, India, Indonesia, Mexico, Turkey South Africa IMF Monetary Transparency Fiscal Transparency Economic Growth and Development Financial Stability, Integrity and Transparency Data dissemination Total of 188 members. Represents Developed, Non-African Developing and African Developing Countries International Accounting Standards Board

Which Developing Countries have a VOICE? International Federation of Accountants Basel Committee on Banking Supervision Organization Category Developed Countries Non-African Developing Countries African Developing Countries WORLD BANK Corporate Governance Economic Development Trade Data dissemination 188 countries represented in the International Bank for Reconstruction and Development (IBRD); and 172 countries represented at the International Finance Corporation (IFC). Each IBRD country should also be a member of the IMF. UNCAC Anti-corruption 140 signatories 172 parties *NON-AFRICAN MEMBERS include: Chad, Somalia, South Sudan, Eritrea UNCITRAL International Trade law Electronic Commerce Security Interests 14 Asian (11 Developing) 18 European (5 Developing) 7 South American (All Developing) 5 North American (3 Developing) 2 Oceanian (1 Developing) Algeria, Benin, Botswana, Cameroon, Egypt, Gabon, Kenya, Mauritius, Morocco, Namibia, Nigeria, Senegal, South Africa, Uganda International Accounting Standards Board

Which Developing Countries have a VOICE Organization Category Developed Countries Non-African Developing Countries African Developing Countries Financial Stability Board Financial stability and integrity Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Russia, Saudi Arabia, Singapore, South Korea, Spain, Switzerland UK and USA (BIS, ECB, EC, IMF, OECD, WB) Argentina, Brazil, China, India, Indonesia, Mexico, Turkey South Africa BASEL Committee on Banking Supervision Banking supervision Cross Border banking Capital adequacy Accounting and auditing (ATF) Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Korea, Luxembourg, Netherlands, Russia, Saudi Arabia, Singapore, Spain, Sweden, Switzerland, UK and USA. Argetina, Brazil, China, India, Indonesia, Mexico, Turkey International Accounting Standards Board (IASB) Accounting and Reporting standards Transparency, integrity and accountability INDIVIDUAL SPECIALISTS: Netherlands, New Zealand, France, Germany, South Korea, UK and USA (X3) Brazil, China International Federation of Accountants Basel Committee on Banking Supervision International Accounting Standards Board

Which Developing Countries have a VOICE? International Federation of Accountants Basel Committee on Banking Supervision Organization Category Developed Countries Non-African Developing Countries African Developing Countries International Federation of Accountants (IFAC) Strengthen accounting standards 179 Members from 130 countries Botswana, Cameroon, Cote D'Ivoire, Ghana, Kenya, Lesotho, Liberia, Malawi, Morrocco, Namibia, Nigeria, Senegal, Sierra Leone, South Africa, Swaziland, Tanzania, Tunisia, Uganda, Zambia, Zimbabwe International Auditing and Assurance Standards Board (IAASB) Auditing standards and quality control (falls under IFAC) See IFAC International Accounting Standards Board

Which Developing Countries have a VOICE Organization Category Developed Countries Non-African Developing Countries African Developing Countries Financial Action Task Force Combat Money Laundering Combat Terror Financing Financial integrity Financial transparency Australia, Austria, Belgium, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Cooperation Council, Hong Kong, Iceland, Italy, Japan, Republic of Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, UK and USA. Argentina, Brazil, China, India, Mexico, Turkey South Africa International Federation of Accountants Basel Committee on Banking Supervision International Accounting Standards Board

Which Developing Countries have a VOICE Organization Category Developed Countries Non-African Developing Countries African Developing Countries Egmont Group of Financial Intelligence Units Informal international network of Financial Intelligence Units Combat Money Laundering Combat Terror financing Financial integrity, stability and transparency 126 member country FIUs (21 from Africa) Algeria, Angola, Burkina Faso, Cameroon, Chad, Core D'Ivoire, Egypt, Gabon, Ghana, Malawi, Mali, Mauritius, Morocco, Namibia, Nigeria, Senegal, Seychelles, South Africa, Tanzania, Togo and Tunisia Committee on Payments and Settlement Systems (CPSS) Monetary and financial stability Banking services Financial Integrity Cross-border flows Payments systems 172 countries International Federation of Accountants Basel Committee on Banking Supervision International Accounting Standards Board

Which Developing Countries have a VOICE? Organization Category Developed Countries Non-African Developing Countries African Developing Countries International Association of Deposit Insurers (IADI) Deposit insurance integrity Australia, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Guernsey, Hong Kong, Italy, Japan, Jersey, Korea, Liechtenstein, Palestine, Poland, Romania, Russia, Singapore, Slovenia, Sweden, Swtizerland, UK and USA. Albania, Argentina, Azerbaijan, Bahamas, Bangladesh, Barbados, Bosnia, Brazil, Brunei, Bulgaria, China, Colombia, Croatia, Ecuador, El Salvador, Guatemala, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kosovo, Kyrgyzstan, Lebanon, Libya, Malaysia, Mexico, Mongolia, Montenegro, Nicaragua, Paraguay, Peru, Phillipines, Serbia, Thailand, Trinidad, Turkey, Ukrane, Uruguay, Venezuela, Vietnam Algeria*, Kenya, Lebanon, Lesotho*, Libya, Mauritius*, Morocco, Nigeria, South Africa*, Sudan, Tanzania, Uganda, Zimbabwe (NOTE: * represents associates and not members) International Federation of Accountants Basel Committee on Banking Supervision International Accounting Standards Board

Which Developing Countries have a VOICE? Organization Category Developed Countries Non-African Developing Countries African Developing Countries International Organization of Securities Commissions (IOSCO) Securities and future trade integrity and transparency Corporate financial disclosure and transparency 145 members (124 ordinary members, 12 associate members and 64 affiliate members International Association of Insurance Supervisors (IAIS) Insurance integrity and standards Macro-prudential risk and financial stability Banking and financial regulation 135 countries (plus EC, IMF, OECD, World Bank etc…) International Federation of Accountants Basel Committee on Banking Supervision International Accounting Standards Board NOTE: Civil Society Organizations and NGOs are a voice monitoring exploitation, tax evasion and resource mobilization in the extractive sectors for developing countries (especially Africa) and raise the plight of these countries.

Can African Developing Countries Implement the IFF and ML Transparency Tools? Excluded from most International Regulatory and Standard Setting bodies - they not involved in the decision making processes. Financial systems are not advanced – relevant electronic data repositories don’t always exist. Manual systems make inter-departmental and inter-regional collaboration between tax, customs and banking authorities timely, costly and complex Capacity and capability may not be present thus increasing the burden of compliance. Beneficial Ownership (and KYC) Country-by-Country Reporting Automatic Exchange of Information Trade Mispricing Anti-money Laundering Tackling IFFs through transparency

FATF Standards initiated in 1998 After 16 years of standards set, policy amendments and incremental rules, how much has been achieved? If Africa is only starting to comply, will there be any resources left?? SO WHAT? The regulatory standards set by international bodies exclude a large proportion of African countries, who do not comply with the financial transparency standards. These standards add layers to the bureaucracy and increase the cost of doing business, especially in the financial (Banking, Trading and Insurance) space. African countries are extremely vulnerable to resource and factor of production “looting” leaving women, children, the unemployed, elderly and rural poor worst off – robbing them of their human right to a dignified life Low income Developing Countries: Low level of compliance with international transparency tools regarding IFFs and ML. NOTE: There are exceptions with Moderate compliance. Middle income Developing Countries: Moderate levels of compliance with international transparency tools regarding IFFs and ML. NOTE: There are exceptions with little compliance. High income Developed Countries: High levels of compliance with international transparency tools regarding IFFs and ML. NOTE: there are exceptions with low compliance COMPLIANCE TO INTERNATIONAL TRANSPARENCY and FINANCIAL STABILITY STANDARDS FATF Standards initiated in 1998

Universal Bitcoin Companies Other (Financial Services ) So WHAT? More Woes About Future Transparency: Bitcoin and Virtual Currencies Bitcoin (BTC) is a global Peer-to-Peer currency that is designed for the Internet. Modeled on gold, behaves like cash online, and can be used by anyone. There will only be a total of 21 million Bitcoins by 2140. Has no central authority and is a global currency. Is given value by the community – doesn’t need to be accepted by anyone or backed by any authority to succeed. Virtually impossible to counterfeit as it is an open source protocol. Can be divided into as small units (up to 8 decimal places - 0.00000001) It is a technology facilitating transactions. It is a protocol for exchanging value instantly over great distances via a digital connection (internet) without the need for a (financial) intermediary. Is being applied to payment applications to remit monies, facilitate micropayments, make donations, transfer large scale assets, identity and contract management. It changes our understanding of financial flows and the macro-economy. Universal Bitcoin Companies Wallets Exchanges Other (Financial Services ) Mining Payment Processing Bitcoin Value Chain Due to the cryptography underpinning BTCs, it bypasses all existing financial stability, integrity and transparency standards set: accounting; auditing; banking; payments; AML/CTF; cross-border flows, capital flight, exchange controls; monitoring and tracking …

SO WHAT? Case of BitPesa - Less Compliance and Transparency in Kenya BitPesa is a Bitcoin (BTC) remittance company that integrates with Kenya’s mobile money system M-Pesa. The service allows people living abroad to transfer the value of Bitcoin directly to M-Pesa accounts in Kenya. M-Pesa reached 17m Kenyans in 2012. M-Pesa is in SA, Uganda, Ghana and Botswana, and growing. BitPesa has seen astronomical growth recently. More cost effective than existing remittance services (Western Union, MoneyGram). Traditional remittance services charge up to 7% or more for a minimum amount of £100. BitPesa transfers small amounts at low costs. One can move a minimum of £20 to a maximum of £400 (due to M-Pesa wallet capacity limitations). BitPesa does not charge a transaction fee but levy a 3% exchange fee when converting from £ to shillings. Receipt is IMMEDIATE. Thought Experiment on Bitcoin Exchange and Money Flows (IFFs)?? Buy BTC in £ and send to BitPesa 3% BitPesa converts BTC in KES and sends it on Sender Recipient

What Can We Do About Transparency Compliance in Africa? A more inclusive approach is required for Developing Countries in Africa – and one that does not only rely on representation by South Africa (“Big Brother approach” which is met with resistance). Informal collaborations are more successful that mandatory unilateral standard setting approaches Greater collaboration is required between African countries, characterized through: Regional collaboration Information sharing Capacity-building and skill exchanges Support in advancing technological innovations in the financial, payment, accounting, auditing and AML/CFT space Oversight over the BTC technology protocol innovations will easily be adopted in Africa due to the speed, ease and low cost of transacting reduce the burden of transacting for the poor will result in increased unreported, unrecorded (and illicit) transactions incl. Capital flight. Requires a rethink of our understanding of IFFs and Capital Flight. How is this going to be monitored, regulated in the future? The plight of Developing Africa needs to be tackled - before resources and factors of production are “looted” from the continent - in a manner that is supportive, inclusive and collaborative, thus addressing the needs of the most vulnerable, namely women, children, the elderly, unemployed and rural poor, thus providing them with their basic human right to a dignified life filled with equal opportunities !!!

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