Dirty Money and Its Global Effects by Raymond Baker Brionne Dawson, Research Associate Ilya Shulman and Clint Brewer, Interns

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Dirty Money and Its Global Effects by Raymond Baker Brionne Dawson, Research Associate Ilya Shulman and Clint Brewer, Interns 1 $2.50 January 2003 Dirty Money and Its Global Effects By Raymond Baker Brionne Dawson, Research Associate Ilya Shulman and Clint Brewer, Interns Preface The globalizing era has produced an sums from the southern hemisphere into the north- explosion in the volume of illegitimate ern hemisphere, finances current wars and con- commercial and financial transactions. flicts in Latin America, Africa and Asia, and played North American and European banking and an enabling role in the events of September 11, investment institutions have been flooded 2001. That tragedy led to the greatest assault ever with laundered and ill-gotten gains. on a network that generates and utilizes money for Amounting to trillions illegal purposes. And yet in of dollars, most of these the midst of the post-Sep- sums are generated tember 11th pursuit of ter- through secretive ar- rorist funds, Osama bin rangements between co- Laden said that attempts operating but distant to find and freeze such as- private-sector entities. sets “. will not make any Lagging legal codes have difference to Al Qaeda or proven inadequate to other jihad groups. Al deal with the situation. Qaeda is comprised of Much of this subject is modern, educated young taboo in business and people who are as aware of government circles, yet the cracks in the western this torrent of stolen, financial system as they disguised and hidden re- are of the lines in their own sources poses a major hands. These are the very risk to state security, Compliments of Matt Wuerker flaws in the western finan- corporate stability, de- cial system which are be- mocracy, free enterprise, the effectiveness coming a noose for it.” of international aid programs and the lives Given political will, these “flaws” can be and well-being of billions across the world. largely corrected. International financial statistics can neither Dirty Money clearly trace the flow of illegal money nor firmly establish its total magnitude. However, we do know “Dirty money” is money that is illegally its effects. We know, for example, that it drives the earned, illegally transferred or illegally utilized. If drug trade, has moved hundreds of billions of dol- it breaks laws in its origin, movement or use, then lars out of Russia in recent years, has shifted vast it qualifies for the label. There are three forms of dirty money that titious sham. First, mispricing transactions is the cross borders: criminal, corrupt and commercial. most frequently used mechanism – altering the real value of exports, imports, real estate sales, securi- Criminal ties deals, services and many other aspects of in- ternational trade. At any moment, thousands of Anti-money laundering legislation in the transactions at docks and airports and passing United States identifies more than 200 classes of through electronic media have false prices built into domestic crimes, called “predicate offenses.” If a commercial invoices for the purpose of moving tax- person knowingly handles the proceeds of these evading money illegally out of other countries and crimes, then a money-laundering offense has been into western coffers. The second basic mechanism committed. However, only 12 to 15 of these offenses is misidentified transfers from one corporate en- are applicable if the crime is committed outside U.S. tity to another. For example, a transaction can ap- borders, and these have to do principally with pear to be an expense invoiced by one company to drugs, crimes of violence and bank fraud. The list another when it is simply a blatant shift of tax-evad- does not include, for example, han- ing capital or profits offshore to dling the proceeds from foreign an affiliated company. Such fal- crimes such as racketeering, secu- “What we have sown in sifications, devoid of any un- rities fraud, credit fraud, forgery, derlying reality, are less fre- embezzlement of private funds, the business of moving quently utilized but may now non-violent burglary, trafficking in corrupt and commercial transfer more money than counterfeit and contraband goods, mispricings which tag along with alien smuggling, slave trading, dirty money, we now legal trade. sexual exploitation and prostitution, reap in the inflow of among others. The Western Role criminal and terrorist Corrupt money.” Both the western and non- western worlds have cooperated The corrupt component of for a century in creating and per- dirty money originates from bribery and theft by fecting mechanisms for moving corrupt and com- foreign government officials. The Foreign Corrupt mercially tax-evading money out of countries where Practices Act, passed in 1977, made it illegal for it is generated and into countries where it is se- Americans to pay such bribes. However, that law creted. Western corporations and banks have taken did not specifically prohibit moving and managing the lead in developing techniques for mispricing, bribe funds amassed by foreign government offi- false documentation, fake corporations, shell banks, cials. Many U.S. banks aggressively pursued these tax havens, bank secrecy jurisdictions, numbered stolen assets for the next quarter century. As part accounts, payable-through accounts, concentration of the Patriot Act passed in 2001, knowingly facili- accounts and more. Drug dealers stepped into these tating the proceeds of foreign corruption was fi- same channels in the 1960s and 70s to move their nally added to the list of money-laundering of- profits from one country to another. Admiring the fenses. success of drug cartels, other criminal syndicates began utilizing these same channels in the 1980s Commercial and 90s to move their money into western accounts. And in the 1990s and the current decade, terror- The commercial component is money which ists have taken advantage of these same mecha- intentionally and illegally evades taxes in countries nisms to move major parts of their money. As a out of which it comes. There are two principal meth- consequence, U.S. Treasury Department officials ods for accomplishing this, one piggybacking on le- estimated that 99.9 percent of the foreign criminal gitimate transactions and the other an outright, fic- and terrorist money presented for deposit in the United States gets into secure accounts. Key Eu- nent outflow. Little of it, perhaps less than ten ropean officials made similar estimates for their percent, returns to such countries as foreign direct countries. To put the same point in the opposite investment, masquerading under an acquired for- way, our anti-money laundering efforts fail 99.9 eign identity. The streams of money from poorer percent of the time. countries parked in western accounts have now The prevalent view that drug dealers in- accumulated to trillions of dollars. vented money laundering in the 1960s is misin- Of the $500 billion estimated to pass annu- formed. Basic arrangements for laundering were, ally out of developing and transitional economies, in fact, devised and honed years earlier. Thus, in perhaps half, $250 billion a year, is eventually countries that loudly tout the rule of law, statute lodged in U.S. accounts or dollar-denominated as- and tradition have long maintained the stream of sets elsewhere. illegal money arriving from abroad. What we have The estimate of $500 billion a year exiting sown in the business of moving corrupt and com- illegally from developing and transitional economies, mercial dirty money we now reap in the inflow of possibly half placed in dollar assets, could conceiv- criminal and terrorist money. ably vary by an order of magnitude. Wherever the The linkage, the synergy, the similarity be- most accurate figure lies, the margin of error is not tween all three forms of dirty money is not widely great enough to affect the analysis that logically fol- understood in western business and government lows from such numbers. Dirty money constitutes circles. It is clearly understood by every drug king- the biggest loophole in the free-market system. pin, criminal syndicate head and terrorist Impact on U.S. mastermind. “For every $1 that is generously handed out in Interests The idea at the assistance across the top of the table, some core of U.S. and Euro- The unchecked pean anti-money $10 is taken back under the table.” diversion of tril- laundering efforts is lions of dollars out flawed. The idea that we can successfully protect of other countries ourselves from a narrow range of dirty money we not only constitutes a gaping loophole in the free- do not want, while at the same time cultivating the market system, it is also the most damaging eco- receipt of a much broader range of dirty money we nomic condition impoverishing the poor in devel- do want, is fundamentally unworkable. oping and transitional countries. It drains hard- currency reserves, heightens inflation, reduces tax Magnitudes collection, worsens income gaps, cancels invest- ment, hurts competition, undermines free trade and How much money are we talking about? The saps growth. It leads to shortened lives for mil- International Monetary Fund estimates global lions of people and deprived existences for billions money laundering at $600 billion to $1.5 trillion a more. year. A rough, working figure would be on the or- Compare the $500 billion a year estimated der of a trillion dollars a year. Breaking it into its to be moving illegally out of developing and transi- component parts reasonably produces a picture as tional economies to the $50 billion a year in west- follows: some $500 billion a year in the criminal ern aid given to these same economies. In other component, $20 to $40 billion in the cross-border words, for every $1 that is generously handed out movement of corrupt money, and another $500 in assistance across the top of the table, some $10 billion or so in the tax-evading component.
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