Tag: Matti Kohonen

A Guide on How Russian Oligarchs Dodge Sanctions — Global Issues

  • Opinion by Matti Kohonen (london)
  • Inter Press Service

LONDON, Jun 22 (IPS) – The author is Executive Director of Financial Transparency CoalitionThe sanctions against Russian oligarchs who hold billions of dollars have mostly failed to have a real impact beyond freezing a few yachts and properties. So, what went wrong? Now we know.

The “Rotenberg Files”, a mass leak of over 42,000 emails and documents, has showed how Russian oligarchs Boris and Arkady Rotenberg hid their assets and those of Vladimir Putin, using trusts and private equity investment funds, taking advantage of the lack of public beneficial ownership registries.

Since the Russian invasion of Ukraine in 2014 and especially since 2022, sanctions on Russian oligarchs and legal entities linked to the Russian invasion of Ukraine include 12,900 designations against Russia. Some estimates say that Russian oligarch offshore wealth is over US$1 trillion, but sanctions so far have only frozen US$58 billion, due to difficulty in establishing ownership.

Sanctions vary but have been mainly implemented by G7 countries and the European Union. Their effectiveness depends on setting up beneficial ownership registries that cover all possible legal vehicles, and the obligation to cross-check beneficial owners against sanctions regimes by a wide variety of professional enablers for due diligence purposes.

This has largely not happened. Despite progress in establishing centralised beneficial ownership registries, a commitment made by nearly 100 countries, very few of them are open to public access and are ridden with loopholes. In reality, global South countries are now leading the way in establishing effective BO registries after the European Court of Justice ended public access to EU-wide BO registries in November 2022.

This has allowed trusts to become the legal vehicle of choice by Russian oligarchs to hide their wealth. They are also very hard to detect as the presence of a trust deed can be kept at a lawyer’s office if there is no requirement to register the trust in a beneficial ownership registry. Many BO registries do require declaring trusts, but there are loopholes that allow for setting up trusts in jurisdictions that do not require registration of trusts or have loopholes regarding thresholds or exemptions. Only 65 countries require some form of registration of trusts.

Eight of the 18 BVI companies mentioned in the Rotenberg leaks were ultimately dissolved, and two relocated to Cyprus. This implies that Cyprus has become a key location to use trusts and other instruments to conceal ownership. As a European Union member, Cyprus was obliged to create a central register of beneficial ownership in line with the EU’s fifth Anti-Money Laundering Directive. Trusts based in Cyprus do come under this requirement, but the Rotenbergs used a loophole in the BO laws to conceal ultimate ownership that goes around the existing EU 5th Anti-Money Laundering Directive.

They effectively created a complex ownership structure around different entities in order to be below the trigger points for reporting beneficial ownership (in most cases 25 percent of control), yet still retaining control through power through potential voting coalitions in the complex structure that were concealed elsewhere. The structure used by the Rotenbergs involved a US entity that is owned by entities elsewhere, including Italy, the UK, Luxembourg, Cyprus, Bahamas (four entities), the British Virgin Islands and Cayman Islands,

Along with trusts, private equity firms have been revealed as another preferred vehicle to dodge sanctions. Investment vehicles called “closed mutual funds,” in Russian abbreviated as “ZPIFs,” held these assets. They are not considered legal entities under Russian law, and thus are not under obligations to reveal their shareholders to the authorities. The leaked files show that 13 ZPIFs were linked to the Rotenbergs.

To evade questions about the true nature of the beneficial owners, the leaked files show that “there is a practice where the General Director of the Management Company is recognized as the ultimate beneficiary”. The ZPIF’s invested in Russian companies, Monaco real estate, and other assets where beneficial ownership checks do not take place. Companies where they owned minority stakes could do business relatively normally.

Private equity and mutual funds are a global concern. According to a recent report, “Private Investments, Public Harm”, there are nearly 13,000 investment advisers in an $11 trillion industry with little or no anti-money laundering due diligence responsibilities in the USA, with the real possibility that sanctioned oligarchs use such vehicles to conceal their ownership. The US Enablers Act seeks to remove the exemption from due diligence checks from investment managers but the bill did not pass last December.

Art is another way to conceal ownership, as art dealers are not under any reporting requirements for money laundering purposes. A July 2020 report by a U.S. Senate subcommittee detailed an elaborate scheme in which the Rotenberg brothers spent more than US$18 million on art purchases in the months after they were sanctioned by the U.S. in March 2014. They acquired several artworks, including a US$7.5 million René Magritte, through a web of offshore companies based in Cyprus and the British Virgin Islands.

The tools to hide wealth used by Russian oligarchs to evade sanctions are exactly the same than the ones used by those behind natural resource crimes such as illegal, unregulated and unreported fishing, or indeed wealthy billionaires abusing laws to pay less than what they should in taxes. One cannot create a regime to just catch Russian billionaires. An overhaul of ownership transparency, from companies and trusts to art, vessels, aircraft and among other asset classes, including private equity and hedge funds, is required. Otherwise Russian oligarchs and kleptocrats around the world will continue dodging controls, keeping their shady money safely hidden.

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G20 Summit, a Missed Opportunity to Tackle Global Cost of Living Crisis — Global Issues

  • Opinion by Matti Kohonen (london)
  • Inter Press Service

The G20 summit motto was “Recovering Together, Recovering Stronger” yet the Joint Declaration failed to deliver any alternatives to the wave of austerity engulfing the world. It ignored the option of raising enough tax revenues from large corporations, taxing the wealthy and tacking illicit financial flows and tax abuses which alone accounts for over US$200 billion of tax revenue lost per year due to profit shifting in the global South.

For one, the summit blocked any progress towards the negotiations of a UN Tax Convention that would address the issues of corporate tax abuses and illicit financial flows, as denounced in an open letter from the Asian People’s Movement on Debt and Development (APMDD).

In an open letter denouncing this inaction to tackle corporate tax abuses and IFFs, delivered to embassies of Indonesia, India and Brazil, Lidy Nacpil from the Asian People’s Movement on Debt and Development (APMDD) said that the summit blocked “any progress towards the negotiations of a UN Tax Convention that would address the issues of corporate tax abuses and illicit financial flows,” but there was no reaction.

Making matters worse, the Organisation for Economic Co-operation and Development (OECD) failed to deliver on mandates to publish country-by-country reporting before the summit. This would have allowed to monitor the performance of mechanisms to prevent for example multinational companies shifting profits to tax havens and avoid paying taxes.

The data was only published on 17 November, a day after the summit, which was too late to hold the G20 leaders accountable. According to Alex Cobham, Director at the Tax Justice Network, “without the transparency data, neither the Tax Justice Network nor any other independent research can evaluate how much each government is losing to multinationals’ corporate tax abuse, or any progress made to curb tax losses in recent years.”

But that is not everything since the summit did not confront the hidden offshore wealth and kleptocracy problem. Maira Martini from Transparency International said that the G20 members “in recent years have dragged their feet, unable to agree on key measures and failing to implement even those to which they had already committed. In the meantime, the corrupt have consolidated wealth and power, allowing them to attack everything from sustainable development to global security to democracy.”

In an open letter released ahead of the Bali summit, Transparency International representatives from across G20 countries called on their governments to take immediate action against cross-border corruption. The Joint Declaration stated its support towards implementing Financial Action Task Force (FATF) recommendations for improved financial transparency, but does not say that beneficial ownership registries should be public, a critical element to enable stakeholders and the authorities to uncover hidden assets.

Also the declaration included regional efforts related to signing of the Asia Initiative Declaration in July 2022 on tax and financial transparency in Asia. However, it did not specify whether this initiative would create a stronger standard than the current OECD transparency standard, or simply implement an OECD standard in the Asian regional context.

Positively, the Bali Joint Declaration made a link between increased beneficial ownership information and tackling natural resource crimes, but offered no specific proposals to address this issue. Indonesia loses an estimated US$4 billion in Illicit Financial Flows (IFFs) each year due to illegal, unregulated and underreported (IUU) fishing alone, while Africa loses an estimated US$11.5 billion to this illicit activity. It would be vital that beneficial ownership information on all vessels and fishing companies is collected on a public registry, to hold those responsible for illicit fishing activities accountable.

Between 75 and 95 million people are expected to be thrown into extreme poverty this year as a result of the pandemic and the effects of rising inflation and the war in Ukraine, according to the UN. Many other are struggling to make a living and feed themselves as governments around the world are resorting to painful austerity measures.

The G20 had an opportunity to offer solutions to these crises and a lifeline to struggling nations. Unfortunately for all of us, they have failed.

Matti Kohonen is executive director, Financial Transparency Coalition.

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A Raging Storm for the Developing World that can be Avoided — Global Issues

  • Opinion by Isabel Ortiz, Matti Kohonen (london / new york)
  • Inter Press Service

LONDON / NEW YORK, Oct 24 (IPS) – Finance ministers of the G20 and the world met in Washington, October 10-16, to discuss how to navigate multiple crises, including rising cost-of-living, broken global supply chains, climate shocks, and the lingering COVID-19 pandemic.

All this weighted heavily on the IMF outlook, pointing to a bleak future ahead.

This is particularly bad news for developing countries. Using IMF data, our research showed that recovery spending in the last two years of the pandemic in the Global South was only 2.4% of GDP on average, a quarter of the level recommended by the UN and a fraction of what rich countries spent.

Meanwhile, only 38% of the total went to social protection, with corporate loans and tax breaks getting the lion’s share.

Things will get worse unless there is a fundamental policy change. This year recovery funds have dried up and, as most countries are heavily indebted, the IMF projects large expenditure cuts.

In 2023, at least 94 developing countries are expected to cut public spending in terms of GDP. Our report estimates that 85% of the world’s population living in 143 countries will live in the grip of austerity measures by 2023, and the trend is likely to continue for years.

Unless these policies are reversed, people in developing countries will suffer as a result cuts to social protection and public services at a time they are most needed, with 3.3 billion people (or nearly half of mankind) expected to be living below the poverty line of US $5.50/day by the end of 2022.

This crisis will affect especially women who received half less COVID-19 recovery funds than their male counterparts.

But the impact goes far beyond women. Elderly pensioners and persons with disabilities will receive lower pension benefits. Workers around the world will see less job security, poorer pay and working conditions as regulations are dismantled.

A recent study on inequality found that the vast majority of countries were making labor markets more flexible to help big corporations. As inflation keeps rising, worsened by higher consumption taxes, families will be much affected while any support they receive will be less due to austerity cuts.

South Africa reflects the crisis of countries falling into the austerity trap. The government provided Social Relief of Distress (SRD) grants of R350 (US$24 in 2021) per month that were instituted at the start of the pandemic, supporting for the first-time low-income individuals who are of working age.

These grants have been extended several times, providing a lifeline for those worst hit by the pandemic.

However, despite the cost-of-living crisis, the government -advised by the IMF- is now considering reducing social expenditures and helping only the most vulnerable, leaving many low-income households without any support. Other austerity measures being discussed include cuts to the salaries of civil servants, and labor flexibilization reforms.

Instead of these austerity cuts, the South African government and the IMF should focus on raising additional revenues to fund social protection and public services, making sure everyone pays taxes, reducing corporate tax loopholes and exemptions, taxing excess profits and wealthy individuals.

Similarly, Ecuador has been shaken by social unrest because of austerity reforms. In 2019, after large riots, the government of Lenin Moreno flew from the capital and had to stop a loan with the IMF that had proposed cuts to subsidies and other austerity reforms.

In 2021, the same austerity policies were proposed again by the IMF, such as cuts to subsidies and public services, reducing social protection and labor regulations.

In 2022, farmers, indigenous men and women, marched again to the capital with pitchforks to join students and workers protesting austerity policies, forcing President Lasso to back down and agree to grant subsidies and other demands.

These are only two examples reflecting the austerity storm gathering around the world. This is extremely unfair and will generate unnecessary social hardship, as populations are struggling with a severe cost-of-living crisis, especially at a time when many countries are losing significant amounts of revenue to tax abuses, illicit financial flows and tax exemptions to large corporates that are wholly unnecessary.

Austerity cuts are not inevitable, there are alternatives even in the poorest countries. Instead of austerity cuts, governments can increase progressive tax revenues, restructure and eliminate debt, eradicate illicit financial flows, and re-allocate public expenditures, among other options.

Policy makers must act on this. All the human suffering and social unrest that austerity inflicts is unnecessary.

Civil society organizations have launched a global campaign to End Austerity, including, among others, ActionAid International, European Network on Debt and Development (Eurodad), Fight Inequality Alliance, Financial Transparency Coalition and Oxfam International.

Austerity campaign calls on citizens and organizations from all around the world to fight back against the wave of austerity sweeping the globe, supercharging inequality and compounding the effects of the cost-of-living crisis.

Our decision-makers need to wake up and change course. There is no time to lose.

Matti Kohonen is Executive Director of Financial Transparency Coalition; Isabel Ortiz is Director of the Global Social Justice Program at Joseph Stiglitz’s Initiative for Policy Dialogue

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Davos Fails on Financial Transparency

  • Opinion by Matti Kohonen (london)
  • Inter Press Service

LONDON, May 31 (IPS) – At this year’s World Economic Forum (WEF) at Davos which ended last week, the attention of the world’s financial and economic elite was captured by the war in Ukraine whose president Volodimir Zelensky used his address to call to “complete withdrawal of foreign businesses from the Russian market”, despite 380 of the largest multinational companies still operating in Russia.

Many companies still present in Russia were sitting in the audience while Zelensky spoke including HSBC that still maintains operations for existing clients, and Credit Suisse that is scaling them back without signalling that it would pull out of Russia due to the invasion. This is especially troubling given the leaked data in Suisse Secrets about how Credit Suisse oiled the wheels of many oligarchs prior to the Russian Invasion in Ukraine.

The banks at Davos are likely to hold assets of many of the over 6,163 sanctioned Russian individuals and entities despite anti-money laundering efforts to trace these funds hidden behind shell companies. This money in turn is often held in accounts in banks participating at the annual Davos meetings and their assets may never even be revealed due to the lack of stricter banking and financial transparency laws.

Ironically, even talking about these secretive accounts, and the leaks related to these is a criminal offence in Davos under draconian Swiss banking secrecy laws, so raising the issue could get you arrested and fined. Credit Suisse only committed itself to “stop new business in Russia while meaningfully cutting exposure by 56%.” The imbalance is striking, and none of the panels at Davos addressed this uncomfortable issue.

Alarmingly, this signals a business-as-usual approach by many of the top companies represented in Davos, not only failing to tackle Russian oligarchs but more broadly ignoring the issue of offshore funds held by powerful individuals and politicians from the global South.

Revealingly, the event only had 52 participants on the official list from Africa, out of a total of over 1,500 disclosed participants. Winnie Byanyima, director of UN AIDS, was one of them. She called out vaccine inequality and asked delegates to “stop pushing Africa to the back of the queue in terms of vaccine access” and called the patent protection laws a form of institutional racism in times of a global pandemic like COVID-19.

The debt crisis should also have been on the Davos agenda, as on the eve of the opening of Davos on 19 May we saw Sri Lanka descend into a balance of payment and debt crisis as their 30-day grace period to make debt payments to its creditors expired. The dues are mainly due to private creditors who form the largest single creditor group to Sri Lanka, many of whom again such as JP Morgan and Goldman Sachs were sitting in the audience at Davos, unwilling to commit to debt restructuring of private creditor debt.

Some of these issues were picked up by the annual Global Risk Report, where the key global risks that are identified in the next two years include extreme weather and livelihood crisis, followed by risk of not tackling climate change. Debt ranks as the 8th greatest risk, not something picked up by many of the respondents to the annual survey – of whom 63% were male, and 41% were from the business sector, largely overall represented by Europeans with 44% of all respondents drawn from the region, with only 6% from South Asia.

Why then the media focus on a Davos meeting that fail to deliver anything meaningful? It is a symbol of our age, and a place where the corporate elite get together and offer their view of the world – and where a few critics get to express their opinion about how it is failing to deliver each year. Given the mounting crises we are currently facing, and the role of responsible big business should take, this is plainly not enough.

Matti Kohonen is the director of the Financial Transparency Coalition and previously worked at Christian Aid as the Principal Advisor on the Private Sector, working to ensure that the private sector is a responsible and accountable actor in global development.

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