Development Channel

Supply Chains Take Center Stage at International Labor Conference Of the $26 trillion in commerce flowing around the world, over 70 percent are intermediate goods. This reflects the rise of global supply chains. The International Labor Organization (ILO) conference put this dominant means of production on the agenda for the first time this year, addressing working conditions for those within these chains. Government and business leaders from the ILO’s 187 member countries spent the past two weeks debating whether to set official standards to push companies like Walmart, Gap, and Nestlé to address labor violations along their transnational production chains. Though any new rules would be non-binding, historically ILO standards have prompted legislation. Bank Secrecy Act Takes On Corruption Goldman Sachs may have run afoul of the Bank Secrecy Act in its dealings with Malaysian state development fund 1MDB. The 1970 legislation requires U.S. banks to report suspicious deposits or transfers. In 2013 Goldman transferred $3 billion from a 1MDB bond deal to a small Swiss bank. Days later, half the funds disappeared offshore, with some resurfacing in Malaysian President Najib Razak’s personal accounts. J.P. Morgan and HSBC have also been penalized under the act for neglecting to report the Madoff Ponzi scheme and providing financial services to Mexican drug cartels, respectively. Designed originally to target money laundering, the Goldman Sachs probe shows the act can help take on global corruption. Kimberley Process Lifts Diamond Ban on CAR     The Kimberley Process—a joint initiative by producer and consumer countries, jewelry companies, and civil society to keep “conflict diamonds” out of global markets—lifted a three-year embargo on the Central African Republic (CAR). In the wake of a 2013 coup, the government lost control of mining regions to rebel groups, making it unable to confirm the origins of its gems. The nation’s newly-elected government promises to trace its stones again, at least those from certain stable regions. Advocates for continuing the ban doubt the government’s capacity to weed out blood diamonds in the face of roving militias and active smuggling.

Fast Fashion Still Exploits Workers While multinational retailers such as H&M, Gap, and Walmart can get a swimsuit or sundress from the factory floor to customers’ closets within weeks, new reports show they still do not protect the workers that make this possible. Three years after Bangladesh’s Rana Plaza building collapse, which killed over a thousand workers and injured another 2,500, Walmart refuses to disclose details on factory safety inspections. Documents from a more forthcoming H&M show nearly 80,000 Bangladeshi workers make their clothes in workrooms without basic safety measures such as fire exits. And Gap has balked at Cambodian worker demands for a living wage—they now earn as little as $5 a day. At this week’s International Labor Conference in Geneva, unions and other groups will try to force measures to improve workers’ rights by holding multinationals more accountable. Corruption Brings Down Ten Percent of Brazil’s Two-Week-Old Cabinet Just two weeks into his interim term, Brazilian President Michel Temer has already lost two ministers—or 10 percent of his cabinet—to corruption. His planning minister, Romero Juca, stepped down after a recording emerged of him plotting to obstruct the Lava Jato corruption investigations. Temer’s transparency minister, Fabiano Silveira, resigned after a second recording caught him advising Senate President Renan Calheiros on how to evade prosecution. And Brazilian authorities are actively investigating another six ministers. These scandals weaken Temer’s already limited legitimacy, leading some to postulate Dilma Rousseff could return. Politicians Try to Silence the International Press Already having cowed or repressed local reporters, angry leaders in Malaysia and Venezuela are going after the Wall Street Journal for exposing their (alleged) crimes. In Malaysia, Prime Minister Najib Razak ordered police to investigate the paper for illegally publishing classified documents. This comes after the Journal uncovered the transfer of up to $1 billion dollars from the state investment fund 1MBD to Najib’s personal bank accounts, and then reported on government whitewashing of the subsequent official investigation. In Venezuela, the former head of the national assembly, Diosdado Cabello, filed a libel suit over a 2015 Wall Street Journal story reporting he was under U.S. investigation for running an extensive money laundering and drug trafficking ring. In harassing a free press, Cabello may give them an even juicier story—opening up sealed U.S. government evidence in the case.    

April and May brought some of the most important movement on the anticorruption front of any two-month period in the past decade. Recapitulating briefly: - In April, the International Consortium of Investigative Journalists (ICIJ) began release of the Panama Papers, roughly 11 million leaked documents from the Mossack Fonseca law firm detailing the creation of more than 15,000 shell companies and providing information on more than 200,000 offshore entities. The lists touched on a variety of presumably legal uses of offshore firms, but also sprayed egg on a number of prominent faces, including in Russia, Ukraine, China, the United Kingdom (UK), Spain, Chile, Argentina, Iceland, and within the International Federation of Association Football (FIFA), among others. A follow-up manifesto by John Doe, the whistleblower at the heart of the leak, noted the extensive use of offshore accounts as part of a system of “massive, pervasive corruption” in the global economy. If nothing else, the Panama Papers have introduced the concept of “beneficial ownership” to a broader public, and fomented a larger discussion of how the West enables corrupt practices through loose monitoring of offshoring and financial disclosure. - The reports were followed in May by measures by the Obama administration to “combat money laundering, corruption, and tax evasion…,” stimulated in part by the Panama Papers, as well as the impending UK Anti-Corruption Summit (below). Among the administration measures were proposals to strengthen anticorruption efforts by requiring greater due diligence and disclosure regarding corporate ownership, and requiring foreigners setting up shop in the United States to obtain a tax identification number. Critics have noted (for example, here and here) that many of the measures will require legislative approval, which will be slow in coming, and many of the proposals do not go far enough in involving important gatekeepers in due diligence. But the Obama administration’s moves are at least a recognition of the problem, and perhaps may set the stage for future change. They also come in the wake of the announcement of much-needed increases in the human resources devoted to anticorruption efforts at both the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice. - Finally, on May 12, at the Anti-Corruption Summit in the UK moved forward, millimetrically, on a proposal for public registries and an international information-sharing center on beneficial ownership. Only six countries are fully committed to the registries project, and the United States remains aloof, but at least the idea is on the table. If nothing else, governments will need to explain what they find problematic about the idea, even if they ultimately refuse to join up. These three developments highlight the stop-and-start nature of anticorruption efforts: as so often happens in the public policy world, a small group of anticorruption campaigners have kept the issue on the table during times of relative inattention to corruption. The shock generated by the Panama Papers created a small window of opportunity for policy change, when campaigners’ ideas and proposals could be placed before policymakers briefly focused on the problem and eager to hear about ready solutions. Whether these proposals move forward will depend significantly on the support they receive against a barrage of likely opposition. Five years ago, author Nicholas Shaxson noted that the biggest tax havens in the world are islands. Islands, he concluded tongue-in-cheek, such as Manhattan and the City of London. Tax havens are estimated to hold as much as $20 trillion, more than all U.S. banks. Furthermore, the Tax Justice Network ranks the U.S. as the world’s third-easiest place, after Switzerland and Hong Kong, to set up offshore companies that can be used for everything from tax evasion to hiding beneficial ownership (more here). As Daniel Kaufmann and Alexandra Gillies and Shruti Shah have noted separately, less background information is needed to set up a shell corporation in Delaware than to get a driver’s license or a library card. Beneficial ownership rules thus may face an uphill battle against opposition from the representatives of states dominated by the financial services industry or from lawyers and business groups concerned by increased regulatory costs. Ultimately, success in moving forward in fighting the corruption that disproportionally milks many of the world’s poor will require a sustained campaign that makes it clear to voters and policymakers that it is in the best interest of the United States to staunch the flow of illicit funds around the world. The experience of the past forty years suggests a way forward. The Foreign Corrupt Practices Act (FCPA) of 1977, for example, could never have moved forward without recognition that the offshore corruption of U.S. firms was circling back home in the form of highly damaging illegal campaign finance contributions. Following the FCPA’s passage, business complained—rightly—about the FCPA’s anticompetitive effects, and pressure from business and anti-corruption groups eventually led to passage of international agreements, such as the 1997 Organisation for Economic Co-operation and Development (OECD) Convention on Corruption, that imposed similar corruption-busting regulations on other countries, generating improved conditions for clean global business. There may be costs, in other words, to being a first mover. But there is significant and clear damage to the U.S. national interest when other countries’ corporations compete with ours on an uneven playing field, when corruption weakens and destabilizes our allies, when our treasury is depleted by offshore maneuvering, and worst of all, when our reputation is sullied because we are seen as part of the problem rather than the solution. Everything should be done to reduce the regulatory burden and lessen the costs of compliance. But if there is one lesson from the Panama Papers, it is that the days of ethical neutrality about the tangible costs of undisclosed and unidentifiable offshore financial movements are coming to an end.