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98 WORLD DEVELOPMENT REPORT 2016 Box S2.2 Technology can help unveil illicit money flows SPOTLIGHT 2 Global communication networks have made it easier to move illicit money around the world and to shelter assets from domestic tax authorities. But recent high-profile cases also show how a combination of human intervention and technology increases the chances of detection. In each case, large datasets were leaked by insiders to tax officials or watchdog groups such as the International Consortium of Investigative Journalists (ICIJ). One case in 2014, Offshore Leaks, yielded 260 gigabytes of accounts data in offshore tax havens, including the British Virgin Islands and Cook Islands. Collaborating with media outlets, experts from Costa Rica, Germany, Malta, and the United Kingdom developed automated software tools for organizing and searching this massive dataset. Sources: http://www.icij.org; press reports. country of financial resources that, in aggregate, are thought to exceed the value of development aid. 13 The anonymity, speed, ease of transaction, and global reach of digital finance make illegal and illicit transfers easier, including through the ability to split large transactions into small tranches. Internet sites such as online casinos and digital currencies that offer a high degree of anonymity aid such activity. One study found that online casinos offered customers a choice of 235 payment options. 14 And Bitcoin has been used to circumvent capital controls. Because these flows as well as cybercrime generally cross borders, it is not always clear which jurisdiction is responsible. Although the internet might make illegal money transfers easier, it can also help address the problem. In contrast to cash, electronic transfers leave a trail that can aid law enforcement. Digital technologies could also help establish registries of beneficial ownership of financial and commercial holdings and transaction monitoring systems, a current priority of the G-20. This could reduce tax evasion and cyberlaundering— although the barriers to developing such directories tend to be due more to resistance by tax havens than to technical reasons, and reforms have mostly been prompted by high-profile disclosures (box S2.2). More generally, technology as a tool for tackling the problem of illicit financial flows can complement, but not substitute for, proper legal frameworks, international cooperation, and public-private collaboration. The largest number of addresses tied to these offshore accounts were from a number of large emerging economies. Besides Offshore Leaks, Swiss Leaks yielded data about secret bank accounts in Switzerland, and Lux Leaks documented strategies that international corporations use to avoid taxes in countries where they make profits, notably by channeling them through Luxembourg. While many clients are from developing countries, they get help from western accountants, and much of the money ends up in industrialized countries or their offshore territories. Increased transparency, thanks to technology’s ability to sift through large leaked datasets, is encouraging reforms that will make it harder to hide assets in foreign jurisdictions. As with international reporting obligations aimed at preventing financing of illegal activities or terrorism, a greater regulatory burden and reporting requirements can tax the resources of smaller countries, which may require assistance to comply. Digital finance is developing rapidly, and constant changes will challenge the ability of regulators to catch up. Both too much and too little intervention by policy makers entails risks. Even in light of new types of financial crime online, however, the opportunities of digital finance for inclusion, efficiency, and innovation will likely outweigh the risks. Notes 1. Case study from Grossman and Tarazi 2014. 2. See Bossone 2015. 3. World Bank 2014. 4. World Bank 2014. 5. World Bank 2014. 6. World Bank 2014. 7. Data from the World Bank Findex database, which covers 148 countries. 8. World Bank 2014. 9. McKinsey, as cited in World Bank 2014. 10. Bank of England 2014. 11. Chatain and others 2011. 12. Council of Europe 2012; Tropina 2015. 13. Tropina 2015. 14. Tropina 2015.
DIGITAL FINANCE 99 References Bank of England. 2014. “Innovations in Payment Technologies and the Emergence of Digital Currencies.” Quarterly Bulletin 2014 Q3. Bossone, Biagio. 2015. “Internet, Finance and Development.” Background paper for the World Development Report 2016. World Bank, Washington, DC. Chatain, P. L., A. Zerzan, W. Noor, N. Dannaoui, and L. De Koker. 2011. Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions. Washington, DC: World Bank. Council of Europe. 2012. “Criminal Money Flows on the Internet: Methods, Trends and Multi- Stakeholder Counteraction.” http://www.coe.int/t /dghl/monitoring/moneyval/. Grossman, Jeremiah, and Michael Tarazi. 2014. Serving Smallholder Farmers: Recent Developments in Digital Finance. Washington, DC: CGAP (Consultative Group to Assist the Poor). Suri, Tavneet, William Jack, and Thomas M. Stoker. 2012. “Documenting the Birth of a Financial Economy.” Proceedings of the National Academy of Sciences 109 (26): 10257–62. Tropina, Tatiana. 2015. “Do Digital Technologies Facilitate Illicit Financial Flows?” Background paper for the World Development Report 2016. World Bank, Washington, DC. World Bank. Various years. Findex (database). World Bank, Washington, DC, http://www.worldbank.org /en/programs/globalfindex. ————. 2014. The Opportunities of Digitizing Payments. Report prepared by the World Bank Development Research Group for the G20 Australian presidency. Washington, DC: World Bank. SPOTLIGHT 2
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A World Bank Group Flagship Report
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Contents xiii xv xix Foreword Ackno
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CONTENTS vii Boxes O.1 5 Frequently
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CONTENTS ix O.24 35 Digital safegua
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ACKNOWLEDGMENTS xvii Karl Chua, Mas
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xx ABBREVIATIONS GDP GIS GNI GPS GS
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xxii ABBREVIATIONS BFA Burkina Faso
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Inclusion Efficiency Innovation
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