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Review of “South Africa: Potential Revenue Losses Associated with Trade Misinvoicing”, Global Financial Integrity, November 2018

This little review seeks to explain the evolution in the methods Global Financial Integrity (GFI) uses to make trade misinvoicing estimates, and its new focus on “potential revenue losses”. GFI has taken a very one-sided approach to potential revenue losses, only counting the taxes it implies are not paid as a result of its estimates of trade misinvoicing behaviours but ignoring the extra taxes that would be paid were its estimates of trade misinvoicing accurate. The net revenue outcome would be much more balanced.

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3-part series on Illicit Financial Flows: Making Sense of Confusion

My 3-part series on Illicit Financial Flows is now complete. Hopefully it adds to the prospects of making real progress towards curbing illicit financial flows. Part III runs through the ways existing economic policies tend to increase – rather than reduce – illicit financial flows and suggests several ways policies could be made more coherent, so that countries can achieve development and still curb illicit financial flows. It also advocates that the IMF should step up to a leadership role in this search for coherence.

Part I.    Search for Meaning. 13 March 2018.

Part II.   Count the Devils. 27 July 2018.

Part III. Tackle the Drivers. 12 October 2018.

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China Financial Summit 2018

A China Financial Summit 2018 was held in Beijing in association with a large innovation exhibition, CHITEC. The session I was invited to address (as a former chief economist for ASIC) was on listing on the Australian stock market. My speaking notes, my slides and a surprisingly good staged photo. It will be interesting to see if there is increasing interest amongst Chinese companies, large or smaller, in listing on the Australian stock markets (ASX, NSX or SSX) over the next year.

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Tanzania country study of illicit financial flows

The project was commissioned by the Bank of Tanzania and funded by the Government of Norway. It involved 5 one-month visits to Tanzania, four months of research off-site (at least!), copious fact-finding and research (including into how others have estimated illicit financial flows), and many meetings in Tanzania with government, agencies and the private sector. Dr Ameth Soloum Ndiaye was the International Technical Adviser and hails from from University of Dakar, Senegal. I was International Project Manager. The report was submitted to Bank of Tanzania in early 2016, after presentation to the project’s Advisory Board in December 2015. The report is not being published.

I learned a lot about how such illicit financial flow country studies might best be undertaken in future. The UN Sustainable Development Goals (especially Goal 16, target 4) are likely to drive the need for a common research approach. In my view, it would be best if this approach focused on crime-based activities that lead to net cross-border resource losses and can be seen (and thus resonate) in-country. I am keen to discuss how this might be done, as well as why approaches deployed in multinational and country studies to date have been inadequate or misleading.

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Murray drops ball on regulatory reform

The Report of the Financial System Inquiry led by David Murray was published on 7 December 2014. This is my comment, focused on regulatory reform, the topic of my paper earlier this year for the Australian Centre for Financial Studies.

“David Murray and his committee have put their energies into the urgent, the de-risking of Australia’s banks and the avoidance of the more obvious risks mounting in superannuation, but seem to have had no energy left to take on the important, the longer-term need to reform the regulators.

As far as the regulatory architecture goes, the Financial System Inquiry makes almost no significant recommendations. So virtually all the predictable weaknesses will be sustained into the next crisis. The Murray Inquiry has fallen into the same trap as the rather more revolutionary Campbell Inquiry, which failed to recommend a regulatory architecture that would limited the likelihood or extent of the next crisis. The Wallis regulatory architecture got Australia through the GFC, but only with a Wallis-free-market-philosophy-busting taxpayer guarantee of the banks. Luckily the bill was never crystalised.

The informality and clubbish weaknesses of the Council of Financial Regulators (CFR, an in-house committee of ex-officio heads of the regulatory agencies) are to be maintained, so the potential for stronger regulatory oversight has been lost. The recommendation for a new Financial Regulator Assessment Board, with ex-post review responsibilities (a revitalisation of the almost unknown Financial Sector Advisory Council, bolstered by a secretariat in Treasury) surely is only a bandaid. While the RBA and APRA have been goaded into talking more positively about macroprudential policies through the course of the FSI, the absence of any recommended change to the CFR (no independent chair and no explicit responsibility for macroprudential policy) means the likelihood of actual implementation of any macroprudential policies is now much lower again.

The FSI proposes more tinkering with powers for ASIC, very much the usual mission creep favoured by past inquiries. Defensively, Murray claims he is not recommending extra responsibilities for ASIC, only extra funding and beefed up powers, but undermines that purity by arguing that ASIC’s mandate should take competition explicitly into consideration. ASIC’s decision-making will appear yet slower and more confused and its scope will remain too widely drawn: structurally it remains set up to fail.

About the only ‘improvement’ in the regulatory architecture is another recommended non-change: the Financial Claims Scheme (FCS, a generous ex-post-funded deposit insurance scheme) is recommended to be maintained even in the face of a heightened pretence pre-crisis (for that is surely all that it ever is) that banks will be allowed to fail and taxpayers will not be exposed. Together with continued depositor preference, the maintained FCS will help protect consumers careful enough to use banks, and thereby protect the banks and the banking system (and therefore the essential structure and operations of the Australian financial system) from shadow or non-banks.

The regulators and the Government will be relying on the good sense of the Australian public to keep using the banks through thick and thin. Strangely, Murray make no recommendation to publicise the FCS, so consumers are to be left in the dark, or at least poorly informed, until after the next crisis.”