Global Financial Integrity

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Take Dirty Money off the Table

Jennifer Nordin
Global Financial Integrity
Raymond Baker

This article was originally published in theĀ San Francisco Chronicle.

Last month, we marked the fourth anniversary of the Sept. 11 terrorist attacks, which jolted the United States to a new understanding of the terrorist threat. After the smoke cleared, a second alarm went off: How did the terrorists pay for the crime? With newfound resolve, the U.S. government has made headway in choking off the flow of terrorist money, freezing and seizing some $200 million worldwide, according to the U.S. Treasury Department.

For all the new attention to terrorist financing, the United States has come late to the game. The channels through which terrorists’ money flows have existed for years. Drug cartels, dictators and corporate directors long ago perfected the artful dodge. Terrorist financing is just one aspect of the larger problem of dirty money.

Estimated at $1 trillion per year, dirty money is any that is illegal in origin, movement or use. It has three components: criminal, corrupt and commercial. Criminal dirty money encompasses proceeds from drug running, human trafficking, racketeering, securities fraud and more. Drug lords have used the black market peso exchange for decades, which moves money around without the tell-tale paper trail.

Corrupt dirty money flows from government officials who abuse their authority and dip their hands in the till, then hide their stolen wealth offshore. No one did this better than former Indonesian President Suharto and his family, who siphoned as much as $35 billion from their country, according to Transparency International.

Commercial dirty money is the most easily overlooked. Revenue vanishes illegally from a company’s books, beyond the reach of governments, employees and relatives. Tax evasion is an important incentive; indeed, many companies have whole departments dedicated to “transfer pricing,” a means to shift profits from country to country, regularly skirting laws around the globe. Russia is home to some of the worst cases. One Russian company bought oil in Russia at $10 per metric ton and resold it to its own subsidiary in Europe at $120 per metric ton, illegally enriching the owners. The ill-gotten gains were stashed in bank accounts in Cyprus and stripped Russia of millions in much-needed currency.

All three components of dirty money have a common motivation: to get rich secretly. Whoever is hiding wealth, for whatever reason, uses the same bag of tricks to accomplish the deed. Shell banks, offshore tax-havens, dummy corporations, mis-priced invoices, fake transactions and disguised accounts all shield dirty money from scrutiny. Dirty money is hardly a victimless crime. The home countries are robbed of resources that otherwise could fuel economic growth, fund essential services and infrastructure, and feed and educate their citizens. Dirty money leads to violence, poverty and instability, thus taking advantage of already weak countries and leaving the poor even more vulnerable.

Criminals and corrupt officials and corporate leaders certainly deserve their fair share of the blame. However, they don’t feed the system alone. American laws have left open legal loopholes to a torrent of dirty money. Treasury Department officials have admitted privately that 99 percent of dirty money deposited in the United States goes undetected, a figure that jibes with estimates by their foreign counterparts.

Before 2001, Congress shied away from passing anti-money legislation with any teeth. The simplest explanation for this is that we like the money that flows into the United States. The result is U.S. laws specifying some 200 crimes that can lead to a money-laundering charge if committed domestically, and a mere 15 applicable crimes if committed abroad. For example, profits from alien smuggling, trafficking in stolen goods, counterfeiting, arms export and many other crimes committed outside the United States, can be deposited legally into U.S. banks. That’s a loophole large enough to drive a truck bomb through.

Money is to criminality as oxygen is to fire. Whether it’s a terrorist, a thug, or a corrupt titan, each depends on the easy flow of dirty money to conduct operations. The first step to mopping up terrorist assets is to address dirty money in all its forms at the same time. This requires laws that criminalize all 200 kinds of dirty money, whether it comes from within the United States or from abroad. Canada, especially, leads the world in adopting such legislation that eliminates the distinction between domestic and foreign crimes which can lead to money-laundering charges.

The 2001 USA PATRIOT Act gave additional anti-money laundering tools to government agencies fighting terrorist financing. But if the United States intends to get serious about combating the problem, it must broaden its aim to the whole of dirty money and arm government agencies with the resources and laws they need to succeed.

Raymond W. Baker, author of “Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-market System,” (John Wiley and Sons, Inc., 2005) is a guest scholar at the Brookings Institution and senior fellow at the Center for International Policy in Washington, D.C. Jennifer Nordin was director of economic studies at the Center for International Policy.

This article was originally published in theĀ San Francisco Chronicle.