Curbing illicit flows of money

This article originally appeared on Canadianbusiness.com.

The expansion goals of many underdeveloped nations are seriously hampered by illicit flows of money.

Though money is sent into those countries in the form of aid and foreign direct investment, the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing often dwarfs it.

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Some estimates put that outflow as high as a trillion dollars—and a lot of that money flows through, between, or within corporations.

I recently took part in a panel discussion on this topic at a event called Academics Standing Against Poverty (ASAP), during which we discussed several key points about corporations’ responsibilities.

To start, we outlined the two different categories of responsibilities they have when it comes to curbing illicit financial flows.

First, they’re of course responsible for their own behaviour. They can’t avoid taxes, and minimizing taxes—which can lead to going to significant lengths to avoid taxes—may seem to be part and parcel of a manager’s obligation to maximize profits.

But there is no general obligation to maximize profits, and certainly no such obligation to do so at all costs. Even the weaker duty to put shareholders first is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance.

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A second direct obligation relates to transfer price transparency; when goods or services are being sold between branches of a multinational, the prices charged should be fair and rooted in a clear methodology.

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And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.

Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, it’s a lousy competitive strategy and isn’t a necessary evil.

In addition to these direct obligations, major companies have some responsibility for the indirect effects of their operations.

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They often support entire ecosystems of smaller businesses—suppliers, subcontractors and agents—and their activities can be a major source of illicit transfers.

All companies should assume some responsibility for the illegal and unethical activities in their shadow. This starts with setting clear behavioural standards and best practices for the companies with which they interact.

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Next came a discussion about how businesses interact with governments. Seems the over-arching norm for business is to play by the rules of the game. And as long as businesses play within these boundaries, they’re at least coming close to meeting their obligations.

The problem is not all governments are equally capable of setting and enforcing requisite rules. But companies can’t be complacent even if the government of a small developing nation hasn’t passed regulations regarding fair transfer pricing, for example.

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Finally, it’s important to avoid thinking of transnational corporations as the enemy.

My sense is that the significant subsets concerned with development are focused on the negative side effects of corporate involvement in developing nations.

What we need to do, though, is harness the power of corporations that have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee, after all.

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Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits.

But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.