International Anticorruption Day: Strengthening Governance Systems to Combat Illicit Financial Flows in the Time of COVID-19 - Masatsugu Asakawa

Speech | 9 December 2020

Speech by Masatsugu Asakawa, President, Asian Development Bank, at International Anticorruption Day: Strengthening Governance Systems to Combat Illicit Financial Flows in the Time of COVID-19, 9 December 2020

Introduction

Distinguished guests, colleagues, ladies and gentlemen: Good afternoon. Thank you for joining me to celebrate International Anticorruption Day.

We are fortunate to have with us today two experts who can share their wealth of practical experience in the area of illicit financial flows, or IFFs. I wish to extend a warm welcome to our two keynote speakers, Ms. Rewcastle-Brown and Ms. Kumar.

I. Why discuss illicit financial flows today? 

It is fitting and timely that this year’s key International Anticorruption Day event focuses on strengthening governance systems to combat IFFs. Let me highlight three reasons why.

First, cross-border IFFs constitute a huge drain on the resources of developing economies. Even under normal circumstances, we should not overlook these outflows, as they exacerbate the challenges governments face in mobilizing domestic resources to address the needs of their populations, to promote development, and to achieve the Sustainable Development Goals. 

The fight against IFFs is more important than ever before now that every government has significantly expanded its fiscal expenditures to mitigate the devastating health, social and economic impacts of the coronavirus disease (COVID-19) pandemic, while at the same time struggling with decreasing tax revenues.   

Second, IFFs erode trust in public institutions. This is especially concerning at a time of rising income inequality due to the pandemic. As government budgets are further strained to combat the public health and economic impacts, ordinary citizens find themselves carrying the financial burden for public services while others abuse gaps in regulatory systems and enjoy the fruits of their nefarious activities. Remember the public outcry after dubious offshore financing structures were exposed in the wake of global financial crisis in 2008.

Third, the COVID-19 pandemic has accelerated a digital transformation that allows the global economy to keep functioning efficiently while lockdown measures continue indefinitely. While digital technology promotes transparency and integrity by allowing broader data access and analysis, malicious actors are also developing new technologies to facilitate financial fraud through ransomware and other means; to conduct illegal transactions; and to hide ill-gotten wealth through unregulated digital assets.

As a result, we need concerted action more than ever to eradicate the scourge of illicit financial flows. I firmly believe that ADB must lead by example in the projects that we finance. Moreover, our capacity building efforts and policy dialogue with developing members must address IFFs and their links to other integrity risks  such as trade-related fraud, corruption, money laundering, and tax evasion.

II. ADB’s strategic approach

ADB has been a frontrunner in addressing these urgent challenges. In fact, one of our seven operational priorities under Strategy 2030 is “Strengthening Governance and Institutional Capacity,” and we can fight IFFs by adopting the following three measures:

First, we should continue to strengthen integrity checks in both our sovereign and nonsovereign operations that involve cross-border financial flows, to ensure that ADB’s projects do not facilitate IFFs and associated risks of corruption, tax evasion, and exploitative tax avoidance.

ADB’s integrity due diligence includes rigorous anti-money laundering reviews for partner financial institutions. When these reviews identify integrity risks, we must take proactive measures to strengthen compliance requirements; or to remove high risk individuals, entities, or components from project structures. In worst-case scenarios, ADB must be prepared to walk away from potential projects.

In fact, just this year, ADB suspended relations with four banks in its trade finance program that showed significant vulnerability to money laundering risks.

Second, at the country level, we should scale up our support for capacity building programs and policy reforms aimed at combating IFFs and underlying criminal activities in our developing member economies. This includes the application of new technologies to strengthen governance and public financial management systems. 

Here we can build on recent successes where ADB has assisted its developing members to address deficiencies in policy and institutional regimes in order to counter money laundering and terrorism financing. 

We are proud, for example, that ADB’s support enabled Mongolia to be removed from the Financial Action Task Force “grey list” within the shortest period on record. ADB’s Trade and Supply Chain Finance Programs are working to strengthen the capacity of partner banks, so that they can better detect and prevent trade-based money laundering, which can account for more than 80% of IFFs from developing countries annually.

Given the cross-border nature of IFFs, a third and final area I want to highlight is the importance of strengthening international tax cooperation. As you know, tax evasion is a typical way to hide dubiously earned income. Very often, taxable income is siphoned out of a country and transferred to jurisdictions with weak regulations and zero or minimal taxation. 

International initiatives, such as the Global Forum on Transparency and Exchange of Information for Tax Purposes, tackle this problem by setting standards on the exchange of tax information among jurisdictions. These initiatives include “Automatic Exchange of Information,” or AEOI, which increase the level of transparency needed to fight tax evasion and IFFs by promoting the automatic information exchange on financial accounts held by non-residents. ADB encourages all developing members to join this initiative and supports them to ensure that they effectively meet international standards.

In this regard, I am proud that we announced at our annual meeting last September the establishment of a Regional Hub on Domestic Resource Mobilization and International Tax Cooperation in Asia and the Pacific. One of the objectives of this hub is to promote strong participation among our developing members in global tax cooperation initiatives. Our hub will closely coordinate with global standard setters like the Organisation for Economic Cooperation and Development, the Global Forum, the International Monetary Fund. and the World Bank; as well as with regional tax administration associations and bilateral donors. 

Closing

Before I conclude, I would like to acknowledge the key role that the media, civil society and non-governmental organizations play in both exposing IFFs and underlying criminal activities, and analyzing the nature of these risks. Two very accomplished individuals will share their experiences with you today.

It is clear that collaboration among stakeholders is vital to our efforts to inform and strengthen national and international strategies. Let us do so passionately, while we carry out the responsibilities that each one of us has to faithfully implement our integrity policies and strengthen governance and institutional capacity among our developing members.

With this sustained and collective effort, we will achieve our operational objectives under Strategy 2030 and meet the needs of our region as it builds for a lasting recovery.

Thank you.