What the Panama Papers Taught us about Legalising Criminality


Wednesday, December 7th, 2016 | by Khadija Sharife

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This blog is part of the series Follow The Money: How to Formalise the Gold Sector. In May 2016, The GIFF Project hosted an International Symposium at the OECD-ICGLR-UN GoE Forum on Responsible Mineral Supply Chains in Paris, France. The Symposium featured presentations by some of the world’s leading lights on illicit financial flows as impediments to artisanal and small-scale gold mining formalisation. The Follow the Money series features blogs derived directly from the speakers’ presentations and interviews.

Let’s begin with a story. In 2003, Dubai had a diamond-trading sector worth $5 million dollars. In 2004, the Kimberley Process Certification Scheme (KPCS) was implemented, an origin certification system designed to reduce the global trade in conflict-affected rough diamonds.

Understanding the trading of Congolese and Angolan diamonds in Dubai

Understanding the trading of Congolese and Angolan diamonds in Dubai

Dubai, like other diamond trading hubs, evolved.

Dubai’s diamond traders found they were able to use mixed origin certificates on its diamond parcels, which effectively muddied the waters on the origin. Here’s the moral of the story: When tax havens – like Dubai – are allowed to use mixed origin certification there is little value left to the concept of origin. Paperwork, thy name is Subterfuge.

Ten years later, Dubai’s diamond trading sector was worth $35 billion dollars. The flow of diamonds from the DRC, Angola, and Zimbabwe comprised 60% of the diamonds that were coming in and out of Dubai — countries whose diamond sectors continue to be marred by severe human rights abuses, sometimes carried out by government forces.

When looking at illicit financial flows, the focus can’t be on the illegal: a tax haven legalises what is illegal in jurisdictions where the activity would otherwise occurs. That’s the whole point.

Dubai is essentially a commodity-focused tax haven. Much of what they are doing there is, technically, legal.

When looking at illicit financial flows, the focus can’t be on the illegal: a tax haven legalises what is illegal in jurisdictions where the activity would otherwise occurs. That’s the whole point.

Commercializing Sovereignty

What the Panama Papers really illuminate is that, in the process of outsourcing illicit activities taking place in less visible countries, what has also been commercialised is poor nations sovereignty. Most financial flows pass, directly or indirectly, through offshore territories such as the British Virgin Islands, Guernsey, Bermuda. These territories write their laws to enable a tax-haven status. It’s not that they are bad or indifferent to global realities; it’s that these are vulnerable jurisdictions politically dependent on the UK and major onshore hubs.

These tax havens – island economies dependent on coconuts or criminalities – are perceived as the moving force. This is not the case.  It is the UK, and the major financial powers of the world, which use these jurisdictions to outsource activities that cannot occur within their own borders.

Blurred Lines

If we don’t understand anymore the context of, and the definitions of, the words that we use, what is ‘criminal’? At what point does something become criminal? To return to Angola, we found $3.5 billion dollars of criminal arms monies being laundered through the diamond industry.[1]

This isn’t difficult to do. Diamonds can be highly variable in terms of value: one kilogram can be worth $50 million, or $100,000. It depends on the characteristics of the diamonds, but most importantly to those seeking to avoid taxes, it really depends how accurately the diamonds are graded. Since many diamond producing countries do not have sufficiently trained customs officials to determine the actual value of diamond exports, they are easily mislabelled, thus robbing countries of revenues from their mineral resources.

A recent example from the gold industry took place in Sudan. A gold deposit was rushed by 80,000- 100,000 artisanal miners. All of that gold was exported to one gold refiner in Dubai who then exported it to Switzerland. We find that the majority of the world’s biggest refiners are based in commodity-focused tax havens, where again you have the legal and financial secrecy that is not conducive to disclosure. In fact, in some countries like Switzerland, companies are legally restricted from disclosing financial or sourcing information. Such actors, when challenged on the origin of their imports, simply assert that their jurisdiction stipulates that the disclosing of origins is illegal.

A Systemic Problem

The Panama Papers demonstrated that the issues are systemic. There isn’t one single villain. Even a company who puts in great efforts in relation to due diligence on suppliers, like Apple, can’t breach the sovereign secrecy of tax havens that are used like parking lots rented by banks and accounting firms to park toxic or secret or valuable assets. It is a systemic issue. The biggest clients of Mossack Fonseca were not politicians or companies, but actually intermediaries: banks, accounting firms, and offshore trusts. This is the infrastructure of how financial activities occur.

One dictator will be replaced by another, one criminal group will be superseded by another… We need to understand the entire operating system; going after individuals isn’t enough.

NGO’s, governments, and companies must study the forensic landscape in which this occurs, so that they can protect themselves and understand the issue in context. Ultimately, one dictator will be replaced by another, one criminal group will be superseded by another. Often multi-nationals don’t even know who their partners are. We need to understand the entire operating system; going after individuals isn’t enough.

What Now?

I’d like to propose two things, one abstract, and the other concrete.

We must look at these issues within a systemic context. There is a caricaturing and dumbing down of a very complex narrative that needs to be unpacked. That means challenging the people in power, who have created and sustained the myth of the offshore hub so that they can divest themselves of accountability.

We must redefine the way illicit criminal activity is understood. Frequently, the facilitators of criminal and illicit activity and corruption are listed as some of the cleanest countries in the world. That’s Switzerland, the Netherlands, Luxembourg, the United Kingdom, etc. Yet many of the clients of these secrecy jurisdictions are listed as the dirtiest countries.  In Nigeria, the government doesn’t even know how much oil they are producing. And they are comfortable with that, because key players  get pay-offs from the companies that are self-regulating to look the other way. Over 70% of all of Nigerian oil-rigs are registered in maritime tax havens and more than 50% of the countries oil, extracted from water not land, generates no royalties whatsoever thanks to gaps in government contracts.

The need for a gold registry

Rather than vilifying individual companies or refiners, we must concretise changes that will promote transparency.

For example, a gold registry of i) importers and exporters, ii) the financial institutions used by the beneficial owners and iii) which countries the gold transits through.

This registry needs to be publically available. This way it will be possible to see, for example, where and how refineries that are based in tax havens conduct a sideways trade that, once again, neatly circumvents origin of mined gold. We need data to see the processes used to obfuscate origin: for example where mined gold is deliberately incorrectly classified as scrap or recycled gold, because scrap gold is already refined as is thus ‘cleansed’ of a country of origin.

With a gold registry, an actual sanction is imposed on the intermediaries, since all of this information is already public. The level of scrutiny is thus de facto already there. All of the escape routes for people who engage in that kind of illicit activity are then closed off.

The OECD and ISB should stipulate disaggregated country-by-country reporting, so that all the linked countries, all the beneficial owners, are there. This information, which companies already have (and thus would not create undue burden) would then be in the public domain. This would again create a natural sanction on all of the escape routes that the companies, the refiners, the banks, and others, can exploit and manipulate for their own ends.

We need to have the data on the record, we need to understand and squeeze and verify that data; but the data can’t be about transparency if it’s not also linked to accountability.

That’s where we go next.

Khadija Sharife is an investigative journalist and editor of the African Network of Centers for Investigative Reporting. She recently published on illicit financial flows from gold in Sudan, and was one of the team of journalists to break the Panama Papers stories, reporting specifically on their connection to natural resources including oil and gold.

[1] http://www.worldpolicy.org/journal/winter2013/kimberleys-illicit-process

The GIFF Project is a collaboration of The Global Initiative Against Transnational Organized Crime and Estelle Levin Ltd. with generous funding from The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). Please find the full International Symposium Report, here

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