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urban development

Piggybanks for plunder: Corrupt cash flows to Global Cities, requiring transparency and complete disclosure of assets

Christopher Colford's picture

Corrupt cash from secretive international sources – deliberately funneled through ‘shell companies’ to conceal the money’s illicit origins – is often used to buy ‘Towers of Secrecy’ in leading global cities like New York, as documented by a recent New York Times investigation.

Cities exert a magnetism that’s irresistible – attracting not just the most ambitious who seek economic opportunity and the most creative who revel in cultural richness, but also lawbreakers and looters: notably nowadays, the corrupt kleptocrats and tax-avoiding oligarchs whose hot money increasingly flows into the safe haven of prime real estate in the world’s leading cities.

At least part of the trend toward soaring center-city property prices, according to many anticorruption monitors, is due to the impact of illicit financial flows. It’s not just the plutocratic One Percenters who are steadily bidding up real-estate valuesPlunderers and profiteers – often concealing their identities, with the aim of shielding their wealth from tax authorities and international asset-trackers – use prestigious parcels of center-city property as a piggybank to shelter their tainted lucre.

The most vibrant and most competitive of Global Cities – notably London, Paris, New York, Hong Kong and Singapore – have long been magnets for money, luring the world’s most enterprising entrepreneurs as well as its most desperate refugees. As their global vocation and vitality have lured the ambitious and the avaricious, however, the “priced out of Paris” syndrome has often taken over: Gentrification has morphed into “plutocratization,” notes Simon Kuper of The Financial Times, with “global cities turning into vast gated communities where the One Percent reproduces itself.”

Meanwhile, “the middle classes and small companies [are] falling victim to class-cleansing," Kuper asserts. "Global cities are becoming patrician ghettos” – with the middle class and the poor being driven ever-further out from the center-city in search of affordable housing, doomed to interminable commutes to sterile suburbs or brooding banlieues.

Most of the property price spiral in world-leading cities is surely attributable to the allure of cosmopolitan life in an age when urbanization is accelerating worldwide. But as two members of the World Bank Group’s unit on Financial Market Integrity (FMI) and the Stolen Asset Recovery (StAR) Initiative recently wrote in a StAR blog post, the melt-up of prime property prices often involves corrupt money and evasive property-registration practices.

Citing a recent New York Times investigative series that meticulously documented suspicious practices within Manhattan real-estate trends, FMI specialists Ivana Rossi and Laura Pop noted that the property-buyers “took several steps to hide their identity as the real owners of the properties. Some of these steps involved buying condos through trusts, limited liability companies or other entities that shielded their names. Such tactics made it very hard to identify the 'beneficial owner': to figure out who owned what, or who was the ultimate controller of a company (or other legal entities) since the names were not shown in the company records.”

Vast sums are flowing unchecked around the world as never before – whether motivated by corruption, tax avoidance or investment strategy, and enabled by an ever-more-borderless economy and a proliferation of ways to move and hide assets,” said the painstaking New York Times investigation, "Towers of Secrecy," by Louise Story and Stephanie Saul.

Probing “the workings of an opaque economy for global wealth,” the reporters excavated the substrata of this enduring scandal. “Lacking incentive or legal obligation to identify the sources of money, an entire chain of people involved in high-end real-estate sales – lawyers, accountants, title brokers, escrow agents, real-estate agents, condo boards and building workers – often operate with blinders on.”

In a moment of inadvertent self-revelation, a Manhattan real-estate broker confessed her look-the-other-way negligence “when vetting buyers: ‘They have to have the money. Other than that, that’s it. That’s all we need.’ ” A former executive of a property-development firm was equally blunt: “You pretty much go by financial capacity. Can they afford it? They sign the contract, they put their money down with no contingency, and they close. They have to show the money, and that is it. I don’t think you will find a single new developer where it’s different.”

No wonder that the upper reaches of the U.S. real-estate market are “more alluring for those abroad with assets they wish to keep anonymous,” the Times analysis found. “For all the concerns of law-enforcement officials that ‘shell companies’ can hide illicit gains, regulatory efforts to require more openness from these companies have failed.”      

The Times’ discoveries, asserted Rossi and Pop, thus underscore the important issues involved in asset disclosure and "beneficial ownership” rules. Many nations require that public officials fully disclose their financial holdings. Such transparency is one important safeguard against the plundering of public wealth by kleptocrats, corrupt clans or well-connected cronies in countries that are vulnerable to chronic larceny.

Yet some dishonest public officials exploit legal loopholes – or flout the law entirely: “As the StAR publication ‘Puppet Masters’ demonstrated, those that do engage in corrupt activities are likely to use entities such as companies, foundations and trusts to hide their ill-gotten wealth,” wrote Rossi and Pop. “These conclusions are also confirmed by a recent Transparency International UK report. It showed that 75 percent of UK properties in the UK, under criminal investigation since 2004 – as the suspected proceeds of corruption – made use of offshore corporate secrecy to hide the owner’s identities.”

Drawing on a new World Bank Group report (which they co-authored with Francesco Clementucci and Lina Sawaqed), “Using Asset Disclosure for Identifying Politically Exposed Persons,” Rossi and Pop argued that accurate and complete financial disclosure by officials in positions of public trust (known in the financial-integrity world as “Politically Exposed Persons”) are an essential safeguard against the diversion of assets. Such disclosures, by themselves, don’t provide a “magic bullet” solution to prevent corruption, yet they are a vital mechanism in building transparency and trust.

“Once there is an ongoing investigation, the information declared can be very helpful as evidence, both in what has been included as well as omitted,” wrote Rossi and Pop. “In many countries, intentionally leaving out information on a house or a bank account carries serious penalties. Furthermore, financial disclosures can help catch a dishonest public official whose lavish lifestyle – including real estate in a prized location – could not be supported by the resources, such as a public-sector salary, indicated in the declaration.” The key factor in ensuring integrity and combating corruption is thus the full disclosure of “beneficial ownership.”

Property prices in Global Cities are already being propelled upward by the gusher of money that is flooding, through fully legal channels, into the world’s most desirable and stable locations – thus threatening to put affordable housing, in many major cities, beyond the reach of all but the fortunate few. The last thing that already-unaffordable cities need is an unchecked flood of illicit billions and furtive real-estate transactions, which will only intensify the pressure that now threatens to create a renewed boom-and-bust cycle of unstable housing prices.

Urban advocates who are working to promote inclusive, sustainable, resilient and competitive cities will applaud the continued vigilance of asset-trackers and corruption-hunters – like the FMI and StAR units, through their work sans frontières
on the disclosure of beneficial ownership – whose efforts to halt illicit financial flows will provide an additional instrument to help ensure that cities will be as inclusive as possible in a relentlessly urbanizing age.


#TakeOn Corruption

2014 Annual Meetings Guide to Webcast Events

Donna Barne's picture

How can economic growth benefit more people? What will it take to double the share of renewables in the global energy mix? Will the world have enough food for everyone by 2050? You can hear what experts have to say on these topics and others, ask questions, and weigh in at more than 20 webcast events from Oct. 7 to 11. That's when thousands of development leaders gather in Washington for the World Bank-International Monetary Fund Annual Meetings. Several events will be live-blogged or live-tweeted in multiple languages. You can also follow the conversation on Twitter with #wblive and other hashtags connected to events. We’ve compiled a sampling of events and hashtags below.  Check out the full schedule or download the Annual Meetings app for Apple devices and Android smartphones.

Fostering cities as technology innovation ecosystems: a big opportunity for developing countries

Victor Mulas's picture
Source: Florida, Richard (2013) “The Global Startup Cities”

​Cities are becoming the new ecosystems for innovation. Recent studies on venture capital (VC) investment in the United States reveal that innovation is moving from suburbs to downtown areas. Today, San Francisco hosts more VC investment than Silicon Valley and New York – a city where the innovation startup scene was merely anecdotic 10 years ago – has become the third-largest technology startup ecosystem in the United States, with more than US$2.4 billion VC investment in 2011.  

This trend is not unique to the United States. Start-ups are surging in other major cities around the world, including London, Berlin, Madrid, Moscow, Istanbul, Tel Aviv, Cape Town, Mumbai, Buenos Aires and Rio de Janeiro, to name a few.

New technology trends have reduced the cost of technology innovation. Cloud computing, open software and hardware, social networks and global payment platforms have made it easier to create a startup with fewer physical resources and personnel. If in the 1990s, an entrepreneur needed US$2 million and months of work to develop a minimum viable prototype, today she would need less than US$50,000 and six weeks of work (in some cases, these costs can be as low as US$3,000). This trend is allowing entrepreneurs to take advantage of cities’ agglomeration effects: entrepreneurs “want to live where the action is,” where other young people, social activities and peers and entrepreneurs are. They look for conventional startup support, such as mentor networks or role models, but also for nightlife, meet-ups, social activities and other potential for “collisions” – a combination best provided by cities.

Seize the space! Reclaiming streets for people

Verónica Raffo's picture

Increasing numbers of citizens all over the world are demanding that urban planners and political authorities in their cities “get it right” when designing public urban spaces. People living in cities, both in developed and developing countries are reclaiming streets as public spaces, demanding urban planners to re-design streets to ensure a more equitable distribution of these public spaces, and prioritizing the allocation of streets for people to walk, cycle and socialize. This was the central topic discussed last week at the “Future of Places” conference in Buenos Aires, Argentina.
How do we contribute to a more equitable society by building more equitable cities?  In an increasingly urbanized world, urban mobility is central to citizens’ social and economic wellbeing. However, current urban transportation systems – based primarily on the movement of private motorized vehicles – have prioritized road space and operational design of streets for automobiles over other modes of transport, which has caused many social, environmental and economic consequences, therefore reducing urban livability and equitable access.
The values of urbanity and mobility are being rethought all over the world, and Latin American cities are no exception to this questioning of how cities are to be developed today. One of the answers to sustainability issues lies in the concept of proximity, which combines different dimensions of the urban proposals that the 21st century requires. These dimensions include public health – particularly the fight against sedentary habits – as well as density, compactness, closeness, resilience, and livability of the public space. These all point to a new urban paradigm that all creative cities wish to adopt in order to attract the knowledge economy and guarantee social cohesion.

Five Opportunities for 21st-Century Transport

Jose Luis Irigoyen's picture
The world is in the midst of unprecedented urbanization, with cities expected to hold 5.2 billion residents by 2050. One of the major challenges of the 21st century, therefore, is achieving a sustainable future for our cities. And transport – which connects people to economic opportunities, education, health services, and more – can make or break “The Future We Want.”

Decisions made at international summits this year and next will establish the framework for global action for decades to come. The transport sector’s future impact on mobility, congestion, economic opportunity, human health, and climate change will be determined by the choices we make today. To ensure transport contributes to poverty reduction and shared prosperity, a shift is needed in the way urban mobility systems are planned and designed. Building a sustainable transport future will require an integrated approach with the cooperation of multiple stakeholders: transport and city leaders, as well as the development and business communities.

In this spirit, the team of co-organizers and partner organizations behind Transforming Transportation – a two-day conference beginning today that convenes business leaders, policymakers, and city and transport officials – has identified five opportunities to move human society toward transport of the 21st century. These areas for action include: road safety, mid-sized cities, regional and local governments, finance, and data and technology.

Transforming Transportation for More Inclusive, Prosperous Cities

Jose Luis Irigoyen's picture
Also available in: Español | Français | 中文

 UNFCCC/FlickrLeaders in the transport, development, and for the first time, business sectors will convene for Transforming Transportation this week in Washington, DC.

Cities are the world’s engines of economic growth. Yet many have a long way to go when it comes to ensuring safe and affordable access to jobs, education, and healthcare for its citizens—in part because their transport systems are inadequate and unsustainable. This weakness is visible in packed slums and painful commutes in cities that fail to provide affordable transport options.

Inadequate transport comes with other costs related to air quality and safety. Beijing, China, battles dangerous levels of air pollution due in large part to motor vehicle emissions. Major Indian metropolises like Mumbai, Kolkata, and Chennai are growing out instead of up, contributing to increased travel distances and an estimated 550 deaths every day from traffic accidents. And across the globe, cities are the locus of up to 70 percent of greenhouse gas (GHG) emissions driving climate change.

Poor transport systems not only hinder the public health and economic growth of cities, they can spur civil unrest. More than 100,000 protestors, for example, gathered in Rio de Janeiro, Brazil, on one night in June 2013 to express a wide range of grievances, including transportation fare hikes, poor public services despite a high tax burden, and other urban issues.

But in these challenges lie significant opportunities – particularly for the business and transport sectors at the city level.

The Way We Move Will Define our Future

Marc Juhel's picture
Mobility is a precondition for economic growth: mobility for access to jobs, education, health, and other services. Mobility of goods is also critical to supply world markets in our globalized economy. We could say that transport drives development.

Cities’ Elusive Quest for a Post-Industrial Future

Stefano Negri's picture

What do rusting industrial cities have in common with outmoded BlackBerries? In this era of constant technological progress, talent mobility and global competition, it's striking how many similarities can be drawn between cities and companies, and the need for both to continuously adjust their industrial strategies to avoid oblivion or bankruptcy.

Cities can lose their vigor and vitality just as surely as a once-hot product can lose its cutting-edge cool. RIM, the maker of the the once-ubiquitous BackBerry,
has been leapfrogged by companies with more nimble technologies; Kodak, once synonymous with photography, went bankrupt when it failed to make the transition
from film to digital. The roll call of withering cities – once proud, yet now reduced to rusting remnants – shows how cities, like companies, can lose their historic raison d’etre if they fail to hone their competitive edge.

Heavy industries like steelmaking and automobile assembly once powered some of the world’s mightiest economic urban areas: Traditional manufacturing industries shaped their identity, giving their citizens income and pride. But globalization, competition, shifting trade patterns and changing consumer trends are continuously reshaping the competitive landscape, with dramatic impact on cities and people. Over the past century, industrialized regions like the Ruhr Valley of Germany, the Midlands of Great Britain and the north of France – along with the older shipbuilding cities around the Baltic and North Seas, and the mono-industrial cities of the former Soviet Union – have struggled to make the transition to different industries or toward a post-industrial identity. Their elusive quest for a post-industrial future has had a dramatic impact on their citizens.

The same issue has become daunting in recent decades for aging manufacturing regions in the United States, which have suffered the prolonged erosion of their industrial-era vibrancy. That kind of wrenching change is bound to soon confront other cities in the developing world, as they struggle to adapt their urban cores, civic infrastructure and industrial strategies to an era that puts a higher premium on nimble cognitive skills and advanced technologies than on bricks-and-mortar factories, blast furnaces and big-muscle brawn.

For fast-growing cities in the global South, many of which are urgently seeking solutions amid their sudden urban growth, there could be many lessons in the experience of older cities in the developed world in making such a transition.

A series of recent conferences among urban policymakers and practitioners – backed by a wide range of rigorous academic research and practical client-focused experience in building competitiveness – provide insights that city leaders and the World Bank Group’s practitioners can leverage as they craft programs for transformative urban strategies. 

One Investment that Can Make Unhealthy Cities Livable and Fight Climate Change: Sustainable Transportation

Rachel Kyte's picture

Guangzhou's bus rapid transport system cut traffic and travel time. Benjamin Arki/World BankThe more the world urbanizes – and we’re forecast to be 70 percent urban-dwellers by 2050 – the more critical clean, efficient, safe transportation becomes. Access to better jobs, schools, and clinics gives the poor a ladder out of poverty and towards greater prosperity.
But transport as we know it today, with roads clogged with cars and trucks and fumes, is also a threat. We have inefficient supply chains, inefficient fuels, and a growing car culture, with all the congestion, lost productivity, and deadly crashes that brings. Urban air pollution exacerbated by vehicle traffic is blamed for an estimated 3 million deaths a year, according to the Global Burden of Disease report, and the black carbon it contains is contributing to climate change. The transport sector contributes 20 percent of all energy-related CO2 emissions, with emissions growing at about 1.7 percent a year since 2000, contributing to the growing threats posed by climate change
To sum it up, much of today’s transport is unhealthy for people and planet.

It’s Time to Take the Bus!

Ahmad Iqbal Chaudhary's picture
Rapid motorization and traffic congestion are becoming a major challenge for large cities in the developing world, and generating significant economic and social costs. In Cairo, for instance, the World Bank estimates that congestion costs are as high as US$8 billion or 4% of the city’s GDP.