FIGHTING CORRUPTION IN THE OFFSHAORE TAX HAVENS
 

French Republic

Speech by Dominique Strauss-Kahn - Minister of Economy, Finance, and Industry
to
Paris Group of Experts
on the international financial channels of corruption

March 30, 1999

Ladies and Gentlemen:

I would like to welcome you to the Pierre Mendes France Conference Center of the Ministry of Economy Finance, and Industry. I hope that you will be happy working at this location.

Representatives of 42 countries and 12 international organisations have travelled here, in  some instances, from very far, to consider new international initiatives related to combating corruption and in particular, the international financial chains of corruption.

It is my hope that your ideas on this subject will be fruitful, constructive, and ambitious.  In recent years, efforts to combat corruption have been receiving growing and ongoing attention from the international community. Several multilateral initiatives, spanning virtually all the continents, have been launched and numerous
Movements have been made. several conventions have been negotiated and signed,
within the framework of the Organisation of American States, the OECD. The Council of Europe, and the European Union. They are now being implemented in many countries.  Global programs to combat corruption among them the United Nations Program, are also being drafted.

These conventions have enabled their signatories to harmonise their definition of criminal offenses, and the pertinent sanctions. Some have made a commitment to establish new offenses and will permit the sanctioning of practices hitherto tolerated or overlooked. All these conventions will facilitate and enhance the quality of international legal cooperation aimed at combating corruption. These achievements represent an important phase of the application of ethical standards to financial and commercial activities. They demonstrate the recent awareness of the international community of the problems posed by corruption and signal the end of a certain kind of hypocrisy by developed countries, which for a long time viewed corruption as a problem that plagued developing countries. The OECD convention to combat corruption by foreign government officials exemplifies this awareness by the most developed countries of their responsibilities in this area

From the vantage point of efforts to combat corrupt practices, that is, efforts to combat the "supply side' of corruption, namely the corrupters or active corruption, or the demand side,' namely the corrupted or passive corruption, the record of the international community in the past three years is very heartening.

However a great deal still remains to be done, in my opinion, on two fronts:

       - Resolutely combating the financial channels of corruption; and
       - Encouraging all countries to participate actively in these efforts.

There is no doubt that in both areas, international organisations, in particular the United Nations, have a major role to play.

      I. The international financial channels of corruption must be blocked

There is no need for over-optimism in this regard. Without a doubt a great task still lies ahead for us.

First, certain aspects of corruption have not been addressed by the international community, and we must now treat them as a priority In defining a global strategy to combat corruption, these aspects must be taken into account.  There is one that lies at the very heart of the mechanisms of corruption and it must be tackled immediately since its ramifications are so numerous: I am referring to the national and international financial channels of corruption.

Everyone knows that the driving force behind corruption is the money that it permits those involved in this activity to obtain and that it is the heart of the relationship between the corrupter and the corrupted that must now be targeted. The matter is complex, sensitive, and sometimes elusive. However, it is one that cannot be ignored since it is crucial. Failure to make progress on this front would be an act of hypocrisy.

Without a doubt, the complexity of the financial channels of corruption is their main characteristic. Perhaps the Epinal image of a suitcase of money still lingers in some quarters. However, everything indicates that, unfortunately, corruption, like many other forms of criminal activity, has been considerably modernised. Investigators
and magistrates are well aware that money derived from corruption is now being
channelled through convoluted and most often international channels, that very
elaborate financial techniques are being used by the corrupters and large-scale traffickers to conceal the origin of funds.  It is important to expand the focus from
financial flows linked to corruption only to all financial flows related to criminal
activity. Since all forms of trafficking, that is, trafficking in narcotics, weapons, or
human beings, generate, as does corruption, considerable financial flows.

However, the complexity of the subject or the defence of interests that are not well-understood pertaining to prosperity or development should not dampen the efforts of the international community to come up with effective solutions. For all the countries of the world, it is critical to combat criminal financial flows for many reasons.

First. this is a prerequisite for the success of all efforts undertaken in recent years

The Managing Director of the International Monetary Fund. Mr. Michael Camdessus,
said recently during a speech to the Financial Action Task Force (FATF) that money laundering represents between two and five percent of the world's Gross Domestic Product. We am therefore speaking about a sum in excess of one trillion dollars At that level, criminal financial flaws have a powerful macro-economic impact on the
functioning of financial markets and pose a direct threat to the stability of the
international financial system- Such amounts can destabilise in real terms, the economies of entire regions.

For all these reasons, them is an urgent need for the international community to come up with an effective response to this challenge which is certainly unprecedented in scope, but one that our authorities have faced for many years now. Offshore financial centres and other countries or territories pose special problems from this point of view

Moreover, the circle of countries that are fully committed to combating corruption remains too small. Steps must be taken to ensure that more countries spanning all the continents join this effort.

In this open world which we inhabit as the sun sets on the twentieth century, in this global village in which we live in a state of interdependence where financial exchanges are virtually limitless and instantaneous among all the countries of the world, we can no longer permit situations where countries or territories are bereft
of the resources to assume their responsibility in this effort, or even to shirk this responsibility.

Financial globalisation calls for the heightening of international co-operation that involves all financial markets and directly affects the money of criminals. Every
weak link in the international system endangers the entire international financial system.

The international community must bear in mind that its efforts will be largely futile unless uniform systems for the detection of criminal financial flows are put in place the world over.

However. despite this, the current situation in this area is very disturbing. Ten years ago, responding to a call from the G-7, several countries met within the FATF and designed systems to combat money laundering. They charted a course and gradually instituted systems which have proved effective at the local level.

However, this action has not permitted a decisive solution to be found to the problem of international financial crimes The volume of criminal assets derived from  corruption or organised crime that are recycled in the international financial system continues to increase every year.

The weak links that I mentioned a moment ago are the chief cause of this situation since they permit the skirting of the systems already in place.

These weak links have a number of common features, namely:

     - extensive bank secrecy;

     - insufficient regulation of financial activities and control of banking and other financial institutions that is too lax; lax commercial law regulations, which make it possible to form "front" companies or opaque structures that facilitate concealment of the identity of the beneficiary of a financial transaction; and

     - restrictive rules related to international administrative judicial co-operation.

Clearly, offshore financial companies are at the top of the list of countries or territories that are likely to be identified based on this profile.

Currently, offshore financial centres play a major role in the international movement of capital, regardless of whether its origin is legal or illegal.  Some experts estimate that almost half of the global monetary stock passes through them. They are often an indispensable tool in the conclusion of corrupt deals and thus have a critical responsibility in efforts to block dirty money channels.  They can no longer side-step international regulations governing the oversight of financial activities or refrain from co-operation in efforts to combat financial crimes

However, while it is a certainty that these offshore centers constitute the core of the problem, they are not alone. Too many countries lack the resources to detect criminal financial flows and make too small a contribution to the efforts made by others to combat financial crimes.

Financial globalisation and the liberalisation of capital exchanges has permitted new actors to play an important role in the international financial system.  These actors must now assume responsibilities with respect to the global financial system as a whole and re-examine their conduct. They have become accomplices and must therefore act accordingly.

Failing that, the international community must draft ad hoc measures to protect the international financial system and not hesitate to implement them with respect to those that might provide the biggest loopholes, as I suggested to the FATF.  In fact, I have suggested. on behalf of the French Government, actions and counter-measures aimed at protecting our economies from dirty money.

In order to ensure the transparency and proper functioning of the international financial system, as well as the effective prevention of financial crime, all the financial centres of the world need, now more than ever, to have comprehensive
mechanisms for control, regulation, and oversight, and strict obligations must be imposed on all financial agents, particularly in the areas of prevention, detection,
and the suppression of financial crimes.

France is therefore proposing that Initially, diplomatic action be taken to convince these jurisdictions to review their rules and practices that have harmful effects.

Beyond these diplomatic actions, France is proposing to strengthen the preventive aspect of anti-laundering legislation of FATF countries, by adapting it to the threat of offshore financial centres The rationale behind these counter-measures is the protection of our economies and dissuasion of the countries or territories that pose
the greatest problems.

I will prepare, before the upcoming meetings in Washington at the end of April, proposals to plug these "black holes" in international regulations which serve as
banking and tax havens. Elisabeth Guigou and I are determined to combat them
forcefully.

Economic efficiency is dependent on this, as is a more just international order.

I am therefore making the following proposals to our FATF partners:

 - step up oversight of the financial institutions of FATE member countries by imposing on them the obligation to exercise special diligence in certain situations, in particular in the identification of their customers.

 - subject financial institutions of FATF member countries to an obligation to report suspicious transactions of a certain amount conducted with individuals or legal entities that have their account at a financial institution in a country or territory identified as being unco-operative;

 - Finally and as a last resort, make provisions for a partial or total ban on financial transactions with jurisdictions whose actions are the most deficient.

International organisation's must expedite their work in this area

The global strategy to combat corruption for which we are making an earnest appeal must include, in addition to a focus on supply and demand, actual financial channels, In this regard, at the point of convergence between efforts to combat corruption and concerns related to money laundering lies a vast area for action on the part of the International community. There is an urgent need for all countries and all international organisations to fully commit themselves to this effort.

I know that a number of international organisations have already started in-depth work,

First, I will mention the FATF, which, at the request of the G-7, conducted a study and identified the countries or territories that are the most problematic.  The FATF will prepare new recommendations in the near future, which are aimed at shielding the world economy from the consequences of the harmful rules and practices of these countries and at convincing them to rejoin the community of nations that are involved in combating financial crimes.  The strengthening of the means of detection of financial flows from or to offshore centres constitutes the crux of this work. I would like to reiterate here the support of France for this FATF initiative, and I call on all countries that want this undertaking to succeed to support it and to participate in this joint effort.

The OECD is also working actively on this matter, as are many other organisations, the International Monetary Fund, the International Organisation of   Securities Commissions (IOSCO). and the United Nations Global Program on money laundering which has also produced reports containing a wealth of information on this matter.

I encourage all international organisations to forge ahead, to expedite their work, and to draft Specific measures that are Commensurate with the threat, in a spirit of complimentarity and reciprocal consultation.

In particular I urge the United Nations, which heeded the call of France and is in the best position to spearhead the deliberation on this subject, to continue its work. The universal scope of its action confers on it a unique capability and critical responsibility.

 Ladies and gentlemen, you have a responsibility, here in Paris, to lay the foundation for a global strategy for combating corruption. During the course of the next three days, I call on you , and through you, on your governments and international
organisations, to give thought, beyond the initiatives under way, to the drafting of new
initiatives that directly target criminal financial flows of all kinds and all aspects of
corruption.  The task is a Herculean one, but only an effort of this magnitude will permit us to make decisive progress in the effort to combat dirty money and will respond to the legitimate expectations of the citizens of our country.

I declare open this United Nations seminar on combating the financial channels of corruption. Thank you.