Presentation by Raymond Baker at the Brown Bag Lunch
on Corruption July 18, 2006.
I have observed
corruption for 45 years. During the first 15 years of my international career I
lived in Nigeria, building a group of companies. In my more jocular moments I
comment that I’ve had the good fortune of studying corruption at the feet of the
masters. Having said that, let me assure you that I retain a great deal of
affection for Nigeria, have many friends there, and stay in close contact with
economic and political developments. I’m especially delighted to note the
progress made in Nigeria in recent years.
I want to talk
briefly about corruption and then place the subject into the larger picture of
illicit financial flows.
I’ll adopt the
usual definition of corruption—bribery and theft by government officials. I
analyze corruption in two forms, depending on what happens to the stolen
proceeds. Corruption that generates proceeds that stay in a country is bad
enough, but at least those proceeds tend to get recycled in the economy.
Corruption that generates proceeds that go out of a country is far more
damaging, because those proceeds of corruption rarely return to the country of
origin. This is the component that has interested me.
For many years the
World Bank fought against addressing corruption, particularly during the
presidencies of Barber Conable and Louis Preston. When Jim Wolfensohn came into
office, Peter Eigen of Transparency International organized a seminar on the
damaging effects of corruption, convincing Wolfensohn that the issue had to
become part of the World Bank’s efforts in developing countries.
Over the past 10
years that corruption has been on the agenda, I think the World Bank’s efforts
have been marred by three conceptual flaws. First was the idea that you don’t
fight corruption by fighting corruption. You fight it with economic development.
This served to bring the subject back into the World Bank’s comfort zone. Pay
the police and the civil servants more and they will have less inclination to be
corrupt. I think the World Bank has now moved beyond that. It has certainly been
clear to me for the entirety of the 45 years that I have been working on
corruption that you fight it frontally and not obliquely. You fight corruption
with judicial and police and investigative functions that are aimed at
addressing the problem quite directly. I think the World Bank is beginning to
come to that point of view as well.
A second
shortcoming in my opinion is the early view of the World Bank that you fight it
from the bottom up or you fight it in a balanced manner across the society. The
bottom up idea is that you make the people sensitive to the issue of corruption
and then that will have an impact on curtailing corruption in the country. The
balanced approach suggests that you fight it across the board— high, medium, and
low parts of the society. Once again I don’t agree with that. Corruption will
prevail at lower and middle levels as long as the top is seen to be or believed
to be corrupt. Fighting corruption is a top down exercise and has to be if it’s
going to succeed. The top levels of the country, and I mean the president, the
ministers, and parliamentarians and other elected officials must be seen as
being clean if anti-corruption efforts are going to work at the middle and lower
ranks.
Thirdly, the
emphasis at the present time in the World Bank is primarily on those corrupt
countries and less so on the facilitative role played by western institutions.
I have said this in the Bank. What is the percentage? 80 percent or 90 percent
of the effort is devoted to those corrupt countries. Only a very small amount of
effort is directed to western countries. Whether it’s 80 or 90 percent doesn’t
really make any difference. Yes, there is a list of companies that are barred
from bidding on World Bank contracts. That is a contribution. That list is
primarily comprised of companies in the counties, that is, subcontractors and
agents in the countries. Executive directors of the larger western countries are
very aggressive in trying to keep their companies from their countries off the
list of barred contractors. The bulk of the effort has been focused on those
corrupt countries without much work being devoted to the facilitative role
played by western countries.
With that, I would
like to segue into talking about the larger issue of where corruption resides
within the global financial system. Corruption is in fact a part of the bigger
problem of what I call dirty money. Dirty money is money that is illegally
earned, illegally transferred, or illegally utilized. If it breaks laws in its
origin, movement, or use it merits the label. Since the 1960s, basically since
I started looking at this phenomenon, we in the West have created and expanded
an entire integrated global financial structure for the purpose of shifting
illicit money across borders. The 1960s marked the point at which this took off
in earnest for two reasons. First, it was the decade of decolonization. From
the late 1950s to the end of the 1960s, 48 countries gained their independence,
and a lot of the political and economic elite in those countries wanted to take
their money out, and we in the West created a system that facilitated the
movement of illegal flight capital out of developing countries.
The second reason
that the 1960s marked the point when the development of this structure took off
in earnest was because that was the decade that multinational corporations began
to spread all over the globe. Yes, there were international companies before
that, but typically an international oil company or manufacturing company would
have investments in only twelve or fifteen countries. Beginning in the 1960s
the corporate flag was planted all over the globe, and this went on into the
1970s, ’80s, ’90s and into the current period. For these two reasons the 1960s
really marked the point when this took off—decolonization and the spread of
multinational corporations.
This dirty money
structure that we have created for handling corrupt and criminal and
commercially tax evading money comprises a number of elements:
Tax havens. There
are now more than 70 tax havens around the world. These are places where you
can create an entity, and you can sell to that entity, and that entity can sell
to other entities, and you can structure the pricing in such a way that most of
the profits are earned by the tax haven entity and it doesn’t have to pay taxes
or at least very minimal taxes on the profits that accumulate in that tax haven
entity.
Offshore secrecy
jurisdictions. Many of the tax havens offer secrecy provisions whereby you can
set up entities that hide behind layers of nominees and trustees such that
nobody will know who are the real owners and the real managers of these
entities. These disguised corporations now number some 1 to 3 million around the
world. Sani Abacha’s family used disguised corporations. Theodoro Obiang used
disguised corporations that were facilitated by Riggs National Bank. Benazir
Bhutto and her husband in Pakistan had more than 20 disguised corporations in
the Channel Islands and in the Caribbean. This is a very common part of this
structure.
Many of these
disguised corporations are equipped with flee causes. Flee clauses mean that if
anyone comes knocking on the door trying to figure out who really owns this
disguised corporation, the trustees and the nominees can have that corporation
flee from one secrecy jurisdiction to another without ever asking the real
owners or managers. It is written into the documents that set up the business
in the first place. It can flee from one jurisdiction to another always staying
ahead of enquiring minds.
Anonymous trust
accounts are part of this structure. You can set up trust accounts behind
nominees and trustees.
Fake foundations.
You can create a charitable foundation, you can put money into that charitable
foundation, and then you can designate yourself as the beneficiary of the
charity of that foundation. You can’t do that in the United States, but you can
do that in some of these tax havens and secrecy jurisdictions.
False documentation
is used in all sorts of trade and capital transactions.
And then there’s
the two ways in which you can falsify the pricing of exports and imports—
mispricing in arms length transactions between unrelated parties and abusive
transfer pricing between related parties. This is what multinational
corporations so frequently do to shift tax evading money across borders.
And then there are
a great many loopholes left in western laws to facilitate the movement of money
through the dirty money structure into western accounts.
All three forms of
illicit money (corrupt, criminal and commercially tax evading) make use of this
structure, this dirty money structure, to shift money across borders.
In the late 1960s
and in the 1970s drug dealers looked at this structure and decided that it was
ideally suited for them, and they stepped into these same mechanisms to move
their money around the world. In the 1980s and the 1990s racketeers of other
kinds looked at these same structures and saw how easy it was for the drug
dealers to do it and they too stepped into these same structures in order to
move their money across borders. In the 1990s and in the current decade
terrorist financiers, again seeing how easy it was for the racketeers and drug
dealers to do it, they too stepped into these same channels in order to move
their money around the world.
Drug kingpins,
criminal syndicate heads, and terrorist masterminds did not invent any new ways
of shifting illicit money across borders. They simply stepped into the structure
that we had created originally for the purpose of moving corrupt money and
commercially tax evading money across borders.
I estimate that a
trillion dollars of illicit money crosses borders every year. This is a
conservative estimate; other people who look at the data think my numbers are
quite conservative, but I choose to be conservative with this estimate. Of this
trillion dollars a year, I further estimate that half of it comes out of
developing and transitional countries—$500 billion a year. This is a large
percentage of the global total for several reasons. One, developing and
transitional economies are the countries that have the weakest governments and
the weakest legal and administrative structures. Two, these are also countries
that have the biggest gangs of drug dealers and racketeers. And thirdly, these
are countries that often have political and economic elites who want to take
their money out by whatever means are available, and we have provided the means
to facilitate that.
I want you to
understand something. The major purpose of the dirty money structure that we in
the West have created and expanded is the movement of money from poor to
rich—out of the hands of the poor, into the hands of the rich; out of the
countries where 80 percent of the world’s population lives, into the countries
where 20 percent of the world’s population lives. This is the purpose that
unites the movers of the corrupt and the criminal and the commercially tax
evading components of illicit financial flows. The primary purpose is the shift
of money from poor to rich.
Corruption in fact
is the smallest part of cross border flows, representing only about 3 percent of
the global total. The criminal component is about 1/3rd of the
global total. and the commercially tax evading component, the component that
arises primarily through falsified pricing of trade and false documentation in
capital transactions, is by far the largest, and it represents 65 percent,
perhaps two-thirds, something on that order of magnitude, of the total amount of
illicit money that crosses borders.
Having said all of
this, nevertheless, we have put on our political economy table the proceeds of
corruption, the proceeds of drug trafficking, and the proceeds of terrorist
financing. The problem is that many other forms of illicit money shifting across
borders are not on the table. For example, in the United States it is illegal to
knowingly handle money generated abroad that arises from drugs, corruption,
terrorist financing, bank fraud, and certain treaty violations. It is not
illegal in the United States to knowingly handle the proceeds coming from abroad
of a whole host of other kinds of criminal activities—racketeering, handling
stolen property, slave trading, trafficking in women, alien smuggling,
contraband, counterfeiting, and more. For all those kinds of criminal activities
and many more, that money can come legally into the United States.
We cannot
successfully fight corruption—the smallest part of the global illicit financial
flows— while at the same time cultivating so many other parts of illicit
financial flows.
The take away point
that I would leave you with is, yes, the anti-corruption agenda is growing and
that’s to be applauded, but to be successful in the anti-corruption agenda we
ultimately have to be willing to address the ways in which we have contributed
to the corruption of the international financial system. That has to be the
goal, in order to succeed in the fight against any part of the problem. Thank
you |
