For a more equal world post-COVID-19: Focus on the financial gatekeepers

Inequality has been one of the defining issues of our times. Gaps between the rich and poor have widened even in the world’s wealthiest nations, where the post-2008 crisis economic recovery often failed to prioritise those most in need.

A recent selection of research by Transparency International shows that the COVID-19 pandemic risks becoming another such disruption. It also makes clear the urgent need for global action to stop that from happening.

Recent revelations from the FinCEN Files add to the overwhelming evidence that lacklustre supervision of the banking industry – who remain a weak link in global efforts to combat the corruption, tax evasion and tax avoidance – fuel economic and social inequalities.

The movement of money that is illegally acquired, transferred or spent across borders is often described with an umbrella term, ‘illicit financial flows’.

These flows are a key driver of economic inequalities both between and within countries, particularly when the money is taken from developing countries and stashed in developed ones. Developing countries are deprived of opportunities to close the wealth gap while rich countries become richer still.

Within countries, illicit financial flows mean that people are deprived of high-quality public services and social protection. State capacity also suffers, which makes it difficult for governments to take meaningful action against corruption and financial crimes. Through this vicious cycle, illicit financial flows serve to reinforce and exacerbate pre-existing economic and social inequalities, leaving the most vulnerable further behind.

Moving illicit funds often requires the help of professionals such as bankers, real estate agents, notaries, lawyers, accountants and corporate service providers to set up shell companies, open bank accounts or purchase luxury goods. These professionals, therefore, have a potentially key role in either enabling or stopping illicit financial flows.

In the best case, these professionals act as gatekeepers of the financial system and fulfil their anti-money laundering (AML) obligations.

But they may willingly or negligently end up facilitating criminal activity, particularly during times of economic crisis when the pressure to generate revenue is higher. In the aftermath of the 2008 financial crisis, banks laundered drug money amounting to US$352 billion, and professionals such as financial advisers were involved in looting funds for responding to the Ebola crisis.

While it is too early to get the full picture the behaviour of the professional intermediaries during the ongoing COVID-19 crisis, our recent study highlights several features of the pandemic that may determine their role.

Alarmingly, as the economic impact of the crisis is felt, professional enablers may find themselves in positions where they think they have to accept dirty money to save their businesses and remain operational, or facilitate business schemes with high risks of money laundering, such as purchases of golden visas or luxury real estate.

The European Banking Authority has warned that, considering past crises, illicit financial flows will likely continue regardless of impending economic problems. Professionals have been warned to remain vigilant in dealing with clients who may attempt to exploit them for money laundering purposes.

Over-reliance on banks is hindering corruption and money laundering investigations. In the FinCEN Files, banks lacked information about one or more entities behind suspicious transactions in half the SARs filed to authorities, according to the International Consortium of Investigative Journalists.

Banks’ inability to identify the true owners of companies involved in transactions should accelerate reforms to end anonymous company ownership.

The lessons from the previous financial crisis must inform the economic recovery and global action.

In the context of the COVID-19 pandemic, which has already seen nearly US$9 trillion unleashed in dedicated lending, persisting loopholes in the global financial system risk increasing illicit flows of money.

Navigating this crisis depends on public funds being effectively spent and not subject to theft by the corrupt. This, in turn, cannot be divorced from the reality that the long-term negative impacts of COVID-19 will be worst felt by the most vulnerable, and that the pandemic itself risks becoming a driver of deepening global inequality.

Over the coming months and years, international forums like the G20, IMF, Financial Action Task Force, the UN’s FACTI Panel and the General Assembly Special Session on Corruption (UNGASS 2021) will continue to talk about the importance of economic and social equality in the wake of the COVID-19 pandemic. For those words to be meaningful, however, they must pay attention to the gears in the machinery of transnational corruption.

To this end, we recommend that these and other forums:

• Ensuring that gatekeepers’ AML obligations are upheld and increase awareness of money laundering risks associated with the COVID-19 crisis.

• Promote beneficial ownership registers globally as a means to combat corruption and illicit financial flows, by strengthening the Financial Action Task Force standard on beneficial ownership (Recommendation 24) to mandate verified, central registers of beneficial ownership information.