Tag Archives: illegal markets

How to Evade Capital Controls: the case of China

People's Bank of China. image from wikipedia

Is capital fleeing China? The recent crackdown on official corruption might suggest that fat cats are busy whisking their money out of the country to avoid scrutiny. That impression is strengthened by the apparently endless flow of Chinese money into luxury goods, penthouses and other trophies in London, New York and Paris.  Lots of money is undoubtedly leaving China, despite the country’s strict currency controls. However, a close look at the official figures suggests that, on balance, more hot money… has been flowing in.

A new study by Global Financial Integrity (GFI), a research firm, highlights one popular way illicit flows enter the mainland.   It claims that well over $400 billion has poured into China since 2006 outside the official channels, with inflows in the first quarter of 2013 alone topping $50 billion. GFI believes exporters on the mainland exaggerate the prices of goods sent to Hong Kong in order to evade China’s strict currency controls and bring back pots of cash.  Why would they bring money into China? One reason is to take advantage of a steadily appreciating yuan. Once punters sneak money into China, eye-catching if risky investments beckon in the overheated property market and poorly regulated shadow-banking sector.

Another explanation relates to the prolonged period of low interest rates in America. GFI notes that flows of hot money into China surged when the Federal Reserve began trying to suppress rates by buying up government bonds and other securities. Now that the Fed is “tapering” its asset purchases, it is reasonable to ask if the flow of hot money will slow or even reverse.  Chinese regulators have noisily complained about the illicit inflows. In December they promised a crackdown on over-invoicing and other such scams.

Chinese capital flows: Hot and hidden, Economist, Jan 18, 2014, at  73

West Africa Piracy: in full swing

Africa_map_regions

A spike in piracy off Nigeria’s oil-rich coast has shown gangs are willing to venture further afield and use more violent tactics, increasing the risk of doing business in Africa’s largest energy producer.Pirates demanded a 200 million naira ($1.3 million) ransom for the release of six foreigners kidnapped on Sunday (Feb. 17, 2013), the latest in at least five attacks in Nigerian waters this month.

Exxon Mobil and Shell officials said this week that security was a major factor in Nigeria, and it was one of the most expensive oil-producing countries to operate in.  “The recent upsurge in maritime kidnaps off the Niger Delta … has not been witnessed since 2010,” said Tom Patterson, maritime risk analyst at Control Risks.  “It is easy to underestimate the debilitating effect such a situation can have, even on larger corporations,” Patterson added.

Oil and shipping companies have to hire crisis management teams, pay huge insurance premiums and face the prospect of ransom payments, as well as brace themselves for damage to their reputations.  At the same time, pirates are becoming more ambitious.  Three crew members were kidnapped on Feb. 7 from the British-flagged cargo ship Esther C around 80 miles offshore, the furthest pirates have reached in the Gulf of Guinea.  A Filipino crew member was killed when gunmen attacked a chemical tanker three days earlier, in the first confirmed case in Nigerian waters of crew killed on a vessel that deployed a private armed team, security firm AKE said.

“The main problem with the increase in West African piracy is the consequences to the crews,” said Jakob Larsen, maritime security officer with BIMCO, the world’s largest private ship owners’ association.  “Given the more violent nature of the pirate attacks off West Africa, there is every reason to exercise caution when deciding whether to use armed guards or not.”

The prime suspects for most attacks are Nigerian oil gangs, who already carry out industrial scale crude theft, called ‘bunkering’ in the restive onshore Niger Delta swamplands.  Nigeria’s oil minister said this week that oil theft, which can amount to 150,000 barrels per day (bpd), was the work of an international criminal syndicate. President Goodluck Jonathan has asked Britain for help.

Security experts also believe Nigerian security officials and politicians are complicit in oil theft and piracy.  “There are many top people in Nigeria involved in commissioning these attacks and sharing the profits,” said Michael Frodl, head of U.S. consultancy C-Level Maritime Risks.  “It’s obvious to us that they’ve been bringing in people in other nations into the game, and sharing a cut in exchange for tips for tankers and cargoes.”…

“Piracy off Nigeria and West Africa is really much more an extension of the ‘bunkering’ that’s endemic on shore, and we think that as oil prices continue to rise, the potential for making bigger profits by reselling stolen oil will only further accelerate attacks and hijackings,” C-Level’s Frodl said.  The rise in pirate attacks comes as Nigerian forces have been more stretched in the last two years due to an Islamist insurgency in the Muslim north.

Excerpts, Joe Brock and Jonathan Saul, UPDATE 1-Nigerian offshore attacks surge as pirates advance, Reuters, Feb 21, 2013

Black Wood: 100 ways to finance the criminal cartels who decimate tropical forests

The report – Green Carbon, Black Trade (2012) – by UNEP and INTERPOL focuses on illegal logging and its impacts on the lives and livelihoods of often some of the poorest people in the world set aside the environmental damage. It underlines how criminals are combining old fashioned methods such as bribes with high tech methods such as computer hacking of government web sites to obtain transportation and other permits. The report spotlights the increasingly sophisticated tactics being deployed to launder illegal logs through a web of palm oil plantations, road networks and saw mills. Indeed it clearly spells out that illegal logging is not on the decline, rather it is becoming more advanced as cartels become better organized including shifting their illegal activities in order to avoid national or local police efforts. By some estimates, 15 per cent to 30 per cent of the volume of wood traded globally has been obtained illegally…

The much heralded decline of illegal logging in the mid- 2000s in some tropical regions was widely attributed to a short-term law enforcement effort. However, long-term trends in illegal logging and trade have shown that this was temporary, and illegal logging continues. More importantly, an apparent decline in illegal logging is due to more advanced laundering operations masking criminal activities, and notnecessarily due to an overall decline in illegal logging. In many cases a tripling in the volumes of timber “originating” from plantations in the five years following the law enforcement crack-down on illegal logging has come partly from cover operations by criminals to legalize and launder illegal logging operations….

Much of the laundering of illegal timber is only possible due to large flows of funding from investors based in Asia, the EU and the US, including investments through pension funds. As funds are made available to establish plantations operations to launder illegal timber and obtain permits illegally or pass bribes, investments, collusive corruption and tax fraud combined with low risk and high demand, make it a highly profitable illegal business, with revenues up to 5–10 fold higher than legal practices for all parties involved. This also undermines subsidized alternative livelihood incentives available in several countries.

[It is important to discourage] the use of timber from these regions and introducing a rating og companies based on the likelihood of their involvement in illegal practices to discourage investors and stock markets from funding them.

Excerpts from Nellemann, C., INTERPOL Environmental Crime Programme (eds). 2012.Green Carbon, Black Trade Illegal Logging, Tax Fraud and Laundering in the Worlds Tropical Forests. A Rapid Response Assessment United Nations Environment Programme

How the United States Funds the Insurgency, Afghanistan

Trucking contractors who pay off the Taliban, warlords and government officials to ensure safe passage for U.S. military goods in Afghanistan do so because they believe they have no choice if they want to avoid attack, a senior military official told a congressional oversight panel Thursday (Sept. 15, 2011).  “Some of that money, for sure, is going to the insurgency,” Brig. Gen. Stephen J. Townsend said. “I can’t quantify how much is going to attacks against us. . . . I don’t think you can completely stop it, but we’ve got to minimize it.”  Townsend and Pentagon officials told a House subcommittee that a new trucking contract, which goes into effect Friday, will decrease the level of corruption through wider competition, increased vetting and improved military oversight, along with a “code of ethics” for the contractors.

The new contract is worth about $1 billion over the next year. Under the contract it replaces, tens of millions of dollars had been diverted to “malign actors,” according to congressional and military investigators.  The officials offered no assurances that the payoffs or wider corruption can be eliminated. But they said Afghan corruption is endemic and the need to supply U.S. troops is critical.  “As bad as it is, it would be worse if we had U.S. personnel guarding convoys,” Deputy Assistant Defense Secretary Gary Motsek said. “The body count would be unacceptable.”

Nearly all of the supply convoys — which transport more than 70 percent of all food, fuel, construction material and weapons to the nearly 100,000 U.S. troops across Afghanistan — are guarded by private Afghan security companies.  Military concern over payoffs first arose more than two years ago, when U.S. army investigators estimated that the going rate for protection was $1,500 to $2,500 per truck. But the military did not launch formal investigations into the issue until congressional committees conducted their own inquiries last year.  Military investigators concluded in May that U.S. funds had flowed to criminals and insurgents through four of the eight companies that were part of the earlier contract and that six of the eight were associated with “fraudulent paperwork and behavior,” including profiteering, money laundering and kickbacks to Afghan government and police officials….

Lawmakers appeared far from satisfied. Rep. John F. Tierney (D-Mass.) said military investigations had identified more than $360 million in overall U.S. contract funds diverted to “warlords, power brokers, insurgents, and criminal patronage networks” in Afghanistan. A separate government commission had estimated this month that as much as $60 billion had been lost to waste, fraud and abuse.

Tierney and others also questioned the military’s zeal in pursuing contract abusers. Last December, the U.S. command in Afghanistan announced that it had suspended Watan Risk Group, the major security subcontractor for trucking convoys, for diverting funds and violating weapons regulations. …Last month, however, the military overturned Watan’s debarment and that of one of Watan’s security subcontractors, Haji Ruhullah. Ruhullah, widely considered a leading warlord in southern Afghanistan, acknowledged making payoffs, but he was excused by the army’s legal department on grounds that Watan had not explained contract rules to him and that his inability to speak English prevented him from reading the rules himself.

The General Accountability Office  has released a report saying that the departments of Defense and State and the U.S. Agency for International Development had failed to comply with laws and agreements requiring them to keep accurate count of the number of contractors employed in Iraq and Afghanistan and of the money distributed to them.  Data compiled last year by all three had “significant limitations,” including an underreporting of “at least $4 billion in contract obligations,” the GAO said.

Excerpts, Karen DeYoung, Corrupt Afghan trucking for U.S. military probed by Congress, Washington Post, September 15, 2011