Are the global financial regulatory institutions and organisations doing enough to check or contain illicit financial flows (IFFs), especially from the developing countries? There is no simple answer to the question as the issue is a complex one.
IFFs are generally considered as unrecorded capital flows. These originate from the proceeds of theft, bribery and other forms of corruption including criminal activities like drug dealing, counterfeiting, terror financing and so on. Tax avoidance and laundered commercial transactions are also part of such flows. Thus, IFFs include a wide range of illegal financial transactions which are sometime termed 'dirty money.'
The United Nations (UN) Agenda 2030 or Sustainable Development Goals (SDGs) puts emphasis on containing IFFs. The global commitment set a deadline of 2030 to 'significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime.' It is the fourth target of the 16 goals set and agreed by world leaders in 2015. SDGs comprise 17 broader goals and 169 related targets.
To determine the level of illicit financial flows, SDGs framework sets the total value of inward and outward IFFs of the countries as the prime indicator. There is, however, no clear baseline value of the indicator. So, the estimation of the Global Financial Integrity (GFI) may be considered as such base value. GFI, a Washington-based research firm, estimated that US$1.1 trillion flowed illicitly out of developing and emerging economies in 2013. So far, it is the latest estimation, though it is believed be a conservative estimate due to lack of sufficient data.
Campaigner and activists have argued that curbing IFFs requires strong global cooperation as there is a lack of such initiatives. That's why, they are trying to throw light on the role of leading financial regulators or similar bodies.
A policy brief, prepared and published by the Financial Transparency Coalition (FTC) this year reviewed the rule making and standard settings practices of six global bodies. Actively engaged in global financial system, these bodies are: Bank of International Settlements (BIS), Basel Committee on Banking Supervision (BCBS), Financial Action Task Force (FATF), Financial Stability Board (FSB), International Accounting Standards Board (IASB) and International Organisation of Securities Commissions (IOSCO).
These organisations are not official global financial regulators, but are playing almost similar roles. That's why, their functions need closer watch. FTC termed them as 'institutions of soft laws.' Soft law means legally non-binding laws, standards, norms or principles. FTC brief said: "Despite being institutions of soft law, many of their non-binding norms and standards are generally being implemented without question at a national level (this is particularly the case for low-income countries trying to comply with global standards)."
Such adaptation of global standards for financial services or manufacturing may be unavoidable to some extent. The general argument is that developing countries do not have the capacity to develop higher standards and so they should adopt the standards set by the developed countries or global bodies to be competitive. But, without being sufficiently capable to maintain such higher standards, it is not helpful for the poor countries to adopt global standards.
Moreover, financial standards are not like the standards of products or production processes. It requires much more sophistication and understanding on the complex world of global financial market. So, imposing stringent rules and complex standards on the developing countries will not bring any fruitful result to combat the rising tide of dirty money. GFI estimate showed that from 2004 to 2013, developing countries lost S$7.8 trillion to illicit outflows. The annual increase of illicit outflows was 6.5 per cent on an average during the period and above the average economic growth rate of the countries.
Again, the outbreak of the Global Financial Crisis (GFC) in 2007-08 reflected the hollowness in the enforcement of financial regulations in the developed world. Nevertheless, global bodies are eager to adopt BASEL-III standards for strengthening the regulation, supervision and risk management of the banks across the world. Though voluntary in nature, countries like Bangladesh and India are contemplating on adoption and implementation of BASEL-III standards by 2018. But, a progress report, prepared by the BIS last year showed that developed countries including the US are way behind to implement the higher banking standards.
The FTC brief thus rightly argued that the automatic nature of this "global norm to local law" path is worrisome. It also mentioned that these standards and rules have a 'huge influence on how the financial sector operates, and whether financial industry professionals support or impede efforts for greater financial transparency.'
In fact, the rules or norms setting process of these bodies are mostly non-transparent, secretive and beyond the reach of the developing and poor countries. That's why, many of the problems of these countries are not adequately addressed by these rules and norms.
Another aspect of these non-binding rule settings needs attention. The non-transparent practices of these bodies sometimes encourage the government and regulators of the poor countries to adopt secretive practices. Aided by the already weak governance, such practices pave the way for these countries to embezzle funds from the banks. During the last few years banking sector in Bangladesh witnessed such embezzlement of depositors' money. State-owned Sonali Bank lost some Tk 40 billion, while the loss of BASIC Bank stood at Tk 50 billion. It is widely believed that a good portion of the embezzled fund has flown out of the country. No strong evidence is there to substantiate the speculation except few proxy indicators.
The FTC paper strongly and rightly pleaded for transparency and accountability of these institutions. It also suggested that their membership needs to be globally representative. FTC pointed out that the 'first step to greater accountability is to better understand this global financial architecture that makes the rules for all of us.' The next step should be to ask whether this 'patchwork system of clubs is sufficient to meet the challenge of tackling illicit financial flows and safeguard global financial sustainability in a new era.' Developing countries like Bangladesh need to support the campaign to raise their voices in these global bodies.