This overview summarizes recent research papers aiming at revealing these transactions presented at a workshop organized at the university of Birmingham the 12th of July.
On 29 June the Financial Times reported on the Russian Invading force in Ukraine and its spoils of war: grain being smuggled from Melitopol, a ship disappearing in the proximity of Crimea and reappearing in the vicinity of the Russian port of Kavkaz, shady intermediaries and complicit firms in Turkey.
To counter Russian aggression the West has declared a total economic and financial war on the Russian economy. Key to the efficiency of this strategy is the ability of western financial institutions to follow Russian money and reveal the hidden transactions nurturing the Russian state apparatus.
Revealing hidden transactions was the central theme of our workshop organised at the University of Birmingham with the support of the SOC ACE research programme, where Dr Sami Benassi leads one of the research projects on illicit finance. The workshop brought together several leading researchers in order to assess the current strategies to unveil hidden transactions, discuss new methods and propose relevant tools, such as money laundering or IFF metrics, to support policy makers’ decisions.
From a macro, at the country level, to a micro, at the firms or transactions level perspective:
- Sawssen Benameur from the Upper School Of Economic Sciences and Commercial in Tunis looked at the size of the informal economy for Tunisia and is especially interested in its evolution after the 2011 revolution. She adapted the multiple indicators multiple causes model to this case by introducing the difference between reported imports by the Tunisian authority and reported exports from partner nations (also called trade gap) as a cause in the model. Her research showed how unrecorded economic activities by the Tunisian government seemed to have increased markedly in the period of political instability following the revolution.
- Research by Max Gallien and Giovanni Occhiali focused on Sierra Leone as a case study to explore the relation between taxation on cigarettes and smuggling of this product. They combined qualitative and quantitative methods to propose a detailed analysis of the formal and informal trade of cigarettes in the country . They showed that increasing taxation on cigarettes does not automatically increase smuggling in developing countries. This finding importantly undermines claims made by international tobacco companies operating in developing countries that increasing taxes on their product will lead to significant increases in smuggling. This is in part because, as their research also shows, smuggling was thriving in Sierra Leone even with low taxation.
- Dr Benassi's own research with Arisyi Raz tests the efficiency of Financial Action Task Force (FATF) recommendations in reducing hidden transactions between African and Middle Eastern countries that have adopted these recommendations the last 10 years. They show that FATF recommendations, such as improving due diligence, record keeping, and correspondent banking information, checks on wire transfer and money and value transfer service, are likely to reduce the flow of hidden transactions.
- Joras Ferwerda of Utrecht University presented a method to detect suspicious foreign ownership of companies and another to appraise money laundering by economic sectors1. Transnational shell companies are important nodes in the networks of hidden and opaque transactions, and their research makes it possible for national authorities to systematically scan their existing transactions for the most likely culprits. Some economic activities are also more vulnerable to use by criminal organisations for disguising the proceeds of their activities.
- Miroslav Palansky presented his most recent work on financial secrecy, its evolution and how economic indicators such as portfolio assets and bank deposits react to it. He introduced participants in the workshop to the Financial Secrecy Index, an index that ranks jurisdictions according to the level of secrecy they provide based on factors such as ownership registration, legal entity transparency, integrity of tax and financial regulation and participation to international standards and cooperation. Crucially, the Index helps to show how a group of countries appears to be adept at a form of “transparency washing” - increasing their level of participation in international forums (in particular by accepting to exchange information with other countries, for example through the Standard for Automatic Exchange of Financial Account Information in Tax Matters) while stagnating or even worsening in comparison to their peers regarding the quantity and quality of the information collected by national system.
- Rasmus Jensen of Aarhus University uses highly disaggregated data and machine learning methods to help compliance officers to flag suspicious transactions. Improving the efficiency in the reporting of suspicious transactions would give officers more time to focus on enquiring about the most serious cases rather than spending a large amount of time on false positives.
Astronomers look for the existence of planets outside the solar system by detecting small disturbances in the light of their stars. A bit like them, as researchers, we’re looking for hidden transactions by examining the small ripples they leave in the financial system and trade networks 2. This is hard work, from identifying the disturbances in the first place, to separating out the signal from the noise once we have information. It’s essential work, though, if we’re to bring the fight against rogue states, criminal organisations and corrupt officials to the heart of their financing operations.