While
dirty money flows, the poor stay poor
Raymond
Baker and Jennifer Nordin International Herald Tribune
Wednesday,
April 13, 2005
Close
the back door
WASHINGTON In recent weeks, high-profile advocates have appealed
for more foreign aid for the developing world. The Commission
for Africa established by Prime Minister Tony Blair of Britain
recommends, in part, an additional $25 billion in aid per year
by 2010. The United Nations Millennium Project's recent report,
"Investing in Development," calls for more than doubling
foreign aid from rich to poor countries over the next 10 years.
These are certainly worthy goals, but what about the billions
of dollars that stream illegally the other way, from poor countries
to rich?
We've seen staggering examples of this phenomenon recently. A
substantial portion of the billions of dollars skimmed from the
UN oil-for-food program left Iraq with the assistance of overseas
businesses and, some reports say, even UN officials. Riggs National
Bank in Washington handled huge sums out of Chile and Equatorial
Guinea. Research by the Center for International Policy and other
organizations shows that the outflow of "dirty money"
from poor countries far surpasses the inflow of aid. Preventing
that money from leaving poor countries would give the West a way
to help developing economies even without necessarily increasing
foreign aid.
There are three sorts of cross-border dirty money: corrupt, criminal
and commercial. Corrupt dirty money flows from government officials
who abuse their authority and dip their hands in the till, then
hide their stolen wealth offshore. This grabs the most headlines,
but is actually the smallest part of the dirty-money problem,
only about 5 percent of the total. Criminal dirty money encompasses
proceeds from drug running, human trafficking, racketeering, securities
fraud and more. Commercial dirty money is the most easily overlooked.
Businesses try to hide revenue from their country's tax inspectors
by, say, directing buyers to deposit money in Western bank accounts.
Private studies have estimated such practices in developing countries
at 5 percent to 7 percent of their total trade, or more than $200
billion per year illicitly transferred abroad.
Even if foreign aid doubles, as the United Nations and Blair's
commission recommend, the outflow of dirty money is still vastly
larger. Annual foreign aid totals $50 billion or so, while dirty
money is upwards of $1 trillion per year, half of which passes
from developing and transitional economies to the West. Once this
money leaves a country, it rarely comes back.
What could such money accomplish if it stayed in poorer countries?
It could be spent on consumption, releasing a multiplier effect
through local economies. It could go into domestic capital investments,
thus increasing employment. It could be deposited in local banks,
forming the basis for matching loans.
Imagine hundreds of billions of dollars every year staying legally
in poor countries, providing the funds for improvements in health,
education, investment, employment - all the things that the UN
Millennium Project report and its supporters espouse. Closing
the West's back door to dirty money would strengthen the most
desperate countries, improving their ability to provide for their
own needs, rather than depending on the largess of the rich and
the powerful.
Even more than expanding their foreign aid packages, Western countries
could deliver a bigger bang for their buck by reining in the financial
abuses that they aid and abet. An elaborate structure of financial
secrecy exists to shield dirty money from scrutiny: more than
60 tax havens, a million dummy corporations, $8 trillion or so
parked offshore, porous anti-money-laundering laws in America
and Europe, plus myriad banks and consulting firms ready to recommend
intricate strategies that keep taxable profits out of the reach
of struggling home governments.
The United States and its allies could begin to curb these abuses
with a stroke of the legislative pen. A first step is to expand
the number of crimes whose proceeds are subject to money-laundering
charges. Incredibly, it is legal in the United States to handle
money from crimes committed abroad, including racketeering, securities
fraud, forgery, counterfeiting, human trafficking, slave trading,
prostitution and tax evasion.
The impact of foreign aid is diluted when the back door remains
open to illicit funds flowing out of developing and transitional
economies into willing Western coffers. Giving generous assistance
with one hand while taking in dirty money with the other hand
undermines our best efforts to help the poor.
(Raymond Baker, a senior fellow at the Center for International
Policy and guest scholar at the Brookings Institution, is the
author of the forthcoming book “Capitalism’s Achilles’
Heel.’’ Jennifer Nordin is the Center’s director
of economic studies.)
