CAPITALISM’S ACHILLES HEEL
Dirty Money and How to
Renew the Free Market System
RAYMOND W. BAKER
Like Bhutto, offshore companies have been linked to Sharif, three in the British Virgin Islands by the names of Nescoll, Nielson, and Shamrock and another in the Channel Islands known as Chandron Jersey Pvt. Ltd. Some of these entities allegedly were used to facilitate purchase of four rather grand flats on Park Lane in London, at various times occupied by Sharif family members. Reportedly, payment transfers were made to Banque Paribas en Suisse, which then instructed Sharif’s offshore companies Nescoll and Nielson to purchase the four luxury suites
THE GREATEST economic arrangement ever devised needs an overhaul.
Capitalism s Achilles Heel invites you to join in this process, join in a
journey that winds its way across the global free market system. It begins
with little illicit transactions and leads on through massive illegalities used
by criminals, terrorists, and multinational corporations. It proceeds into
global income inequalities, worsened by the illegalities that have come to
permeate international capitalism. It continues into philosophical underpinnings
that appear to justify flaws in the system. And finally it concludes with
what we need to do to renew capitalism and spread its enormous potential
across the whole of humanity.
Before we begin this journey, let me set the stage by telling you how I
began my journey. For the first 15 years of my international career I lived in
Africa. What took me there in the first place After finishing Harvard Business
School and while teaching the upperclass course in management at the
University of New Hampshire, I decided to get a taste of business overseas.
Job applications went out to some 200 companies, and offers came back to
go to Iran, Nigeria, and Brazil. I chose Nigeria because it was a newly independent
country and the job had an immediate start date. In 1961, the first
year of the Kennedy administration, Africa was the new frontier, beckoning
businesspeople, Peace Corps volunteers, journalists, diplomats, and adventurers
to postcolonial nations brimming with opportunity and
excitement. It was a heady time to be going abroad.
Before taking up my position in Lagos, I was assigned as a representative
to a U.S. trade fair in Accra, Ghana. This brought me into contact with the
Rockefeller Brothers Fund (RBF) and its local agent, Bob Fleming, a burly,
articulate American who had lived in West Africa for several years. Bob was a
former military police officer in the U.S. Army, and the story was that he
had served as James Jones s model for the tough M.P. in the book From Here
to Eternity, a character played by Ernest Borgnine in the movie. Bob was
closing RBF s office in Accra and moving it to Lagos and wanted to get his
Land Rover into Nigeria. Customs duty would have to be paid on the import
of the used vehicle, about œ300, a little less than $1,000. I and two
other Americans, Bill Pribbeno, a wheat farmer from Nebraska, and Lyman
McKee, a dairy farmer from Minnesota, offered to drive the Land Rover to
Lagos and pay the duty, provided we could take the route we wanted, encompassing
a large swath of West Africa. Bob wisely inserted his personal
driver Steven into our group, in part because he spoke a bit of most of the
languages we would encounter along the way.
We set off on our 10 day escapade on December 22, 1961, driving
north out of Accra to Kumasi, the heart of the Ashanti region. Among the
attractions of the city was the Kumasi Zoo, containing an impressive collection
of West African wildlife. Walking through, we passed the cage of a
gnarled old chimpanzee. As my traveling companions moved on, I lingered
alone in front of this fellow s enclosure.
It reminded me of an incident out of my childhood, visiting an alligator
farm. There, the tour guide related how caretakers would bring chicken,
beef, rabbit, whatever, to the rail and grunt, Uuuhhh, Uuuhhh. Knowing
this was the signal for feeding time, the alligators would open their gaping
maws and the bearers of rations would throw in the meat. While my parents
went ahead I stayed behind and, with my most mature voice, looked at this
big 18 footer and called out, Uuuhhh, Uuuhhh. The gator opened its
mouth, and, having prepared for my little bit of mischief, I threw a clod of
dirt into its waiting jaws. Not altogether trusting the rail fence, I paused just
long enough to see this monster sputter and thrash before tearing off to
reach the safety of my family.
How would such utterances work on this primate now glaring at me
through the cage bars My voice had deepened, so no doubt my credibility
would be enhanced. Facing each other in a one on one I bellowed the magic
words, Uuuhhh, Uuuhhh.
2 CAPI TA L I S M S AC H I L L E S H E E L
This was not a dumb ape. He put his paw behind his rear, discharged
the contents of his bowels into his palm, and hurled the full load through
the bars of the cage at his protagonist. No time to duck. SPLAT! My face,
shirt, pants, and shoes are all hit with this brown, warm, icky, smelly mass.
Now, pause for a moment, taking in the whole scene. He s sitting there
in his cage, I m standing out here with you know what all over me, and I
could swear to God this furry half wit is laughing out loud.
Slinking off to rejoin my friends I get hit again with simultaneous
queries, WHAT HAPPENED TO YOU
Don t ask.
We motored on north in our open top Land Rover, through Tamale and
Navarongo and crossed into Upper Volta, since renamed Burkina Faso,
meaning land of the upright men. Here in the Sahel, the base of the Sahara,
the terrain, sprinkled with baobab trees, quickly turned more arid and
much less populated, and our paved road gave way to a dirt track.
Needing a place to spend our third night out, we passed small villages of
round mud huts often decorated with painted walls, sensing that we might
frighten the occupants if we veered into their comfort zone, and suddenly
lurched to a halt. Having driven some 50 miles from the border with our
eyes peeled and as it was now past nightfall, we finally decided to chance it
and stop at the next compound, go to the largest dwelling, and ask if we
could spend the night sleeping in our Land Rover parked in front. Another
five miles and something wondrous happened. We saw an electric light shining
in the distance, out in the middle of nowhere. We worked our way in
that direction, more lights, and we came upon a single story, white bungalow
with a tall, wrought iron fence around it. Pulling up to the front, we
called out to announce our presence, and soon a uniformed steward came to
the gate. Explaining that we were weary travelers, we asked if we could
spend the night sleeping on the ground inside the fence. He disappeared for
a moment and then returned to usher us into quite posh guest quarters at
one side of the enclosed area bedrooms, mosquito nets, toilets, showers,
A bit later the steward appeared again and invited us to dinner, which we
gladly accepted, still not having any idea what we d stumbled onto. A table
was set outside under the stars white cloth, china, silverware, glasses. We
washed up and put on decent clothes and appeared as instructed at 9:00 P.M.
In a few minutes out from the main house walks an absolutely beautiful
blonde woman. We re wondering, is this a mirage or what And a few minutes
later out walks a second absolutely beautiful blonde woman. We sit
down to a meal of soup, gazelle steak, potatoes, vegetables, and wine. After
taking the measure of us, the ladies open up. The first relates that she is
Parisian, married to an Italian contractor who owns a construction company
in Ouagadougou, the capital. The second is her younger sister visiting from
Paris. This is a weekend getaway house for the married couple, as the husband
particularly likes to hunt lions. We feasted and drank until midnight,
having chanced upon, according to our hosts, the one Shangri La in 10,000
The next day we bounced into Ouagadougou and traversed all 400
yards of paved roads of this premier metropolis of a new nation. No apparent
hotels, so we asked a Catholic priest if we could sleep on the bench pews
of his church; of course, he agreed.
A couple of days later we re in the middle of Upper Volta proceeding
east on another corrugated track that jolted us up and down like rubber
balls. I was sitting in the open rear on straw mats we brought as bedding,
when I reached back to check my wallet and found it missing driver s license,
money, everything. Coming to a halt, we agreed to drive slowly back,
stand up looking over the front and search for it, hopefully visible somewhere
in the center of the road. This was a deserted stretch, so we might get
lucky. We backtracked for about 30 miles, to no avail. In this distance, we
passed only one person walking along the side of the road carrying a large
straw basket on his head, covered with a cloth to protect its contents. As we
dispiritedly turned again in our original direction, we decided to stop and
ask if he had found anything in the road, a leather purse with papers and
money. He took the basket off his head, untied the cloth, and handed me
the wallet, with contents intact.
Coming into Niger Republic, we missed the last ferry across the Niger
River and spent the night on our mats looking at the small city of Niamey,
the capital, on the other side. After a day in this pleasant former French outpost,
we motored on east.
December is the height of the harmattan season in West Africa, when
dust storms in the Sahara blow fine grained silica across all the Sahelian and
coastal countries and even as far west as Brazil and the Caribbean. I was
badly congested with lungs full of sand, so we decided to stop at a Sudan
4 CAPI TA L I S M S AC H I L L E S H E E L
Interior Mission (SIM) hospital, about midway between Niamey and
Katsina, which is just inside the northern border of Nigeria. SIM had been
active in Africa since the 1890s. The very accommodating Canadian doctor
allowed us to sleep on the floor of his living room. The next day he gave me
some antibiotics and then took us on a tour of his facility. He and two
nurses treated an average of 400 patients a day. Based on word of mouth,
Tuaregs, Mossis, Dioulas, Hausas, and others would walk hundreds of
miles across the Sahel to reach this hospital, sometimes passing nearer clinics
along the way. We watched as the doctor and his staff set broken bones
and treated burns and cuts. He took us to the bedside of a case of smallpox,
a four year old boy totally covered in pustules, with no more than two or
three days of life remaining. And he took us to a lepers colony that the
hospital operated nearby, housing spouses and children as well as the
stricken in order to keep families together, rather than cloistering away infected
adults and leaving other family members at what might be even
greater risk of malnutrition, starvation, and death. We all came away with a
very large measure of respect for the work done by this fine organization,
now merged into a larger group.
Late that afternoon, we re tooling along in southern Niger when we pass
a line of white folks walking along the side of the road. Americans are recognizable
almost anywhere, and these certainly were. We stopped and asked
where we could get a hamburger and a milkshake, cheerfully bemoaning
with these Peace Corps volunteers the lack of stateside amenities. One chap
in his early twenties introduced himself as John Demos. I asked, Any kin to
He answered, He s my father.
I had studied twentieth century philosophical movements under Professor
Demos at Harvard that preceding summer. Not only was he a stimulating
teacher, he also had provided the classroom where I met Pauline,
my wife to be. His son is now Samuel Knight Professor of American History
Crossing into Nigeria, we drove on to Kano, a teeming city founded a
thousand years earlier, with remnants of medieval mud walls still visible.
More than a half million tons of groundnuts (peanuts) in bags were being
stacked in enormous manmade pyramids, awaiting rail shipment and export.
Dyers working at scores of large communal vats produced indigo cloth
for sale throughout West Africa. With paved roads once again, we motored
on through Kaduna and Ibadan to Lagos, completing 2,600 miles in 10
days, arriving at our destination on December 31.
Today, you would be taking your life in your hands if you made such a
trip in much of West Africa. Bandits, carjackers, roaming thugs, corrupt officials,
truck drivers stoned on hemp, AIDS, hospitals without medicines,
dashed hopes, duplicity, and deprivation have combined to make many
parts of the area inhospitable and unforgiving to strangers. The promises of
political independence and economic development remain unrealized for
millions of people. The onus for this outcome rests with both local elites and
helpful foreigners, those who plundered and pillaged and those who abetted
the process. The gap between early potential and later reality, not only for
Africa but for scores of countries across the world, has stirred my imagination
Settling down to work in 1962, I soon found myself managing the oldest
bakery in the country, delivering bread daily to 200 market women
spread around Lagos, at that time the nation s capital. By 1963, I decided to
strike out on my own, so I incorporated a company in New York and returned
to Africa s largest city to establish an office in Investment House.
Pauline and I were married in New York some months later. For the next 13
years, from my ninth floor perch on the upscale side of Broad Street, I
looked over the oldest part of Lagos, Isale Eko, two miles long by a half mile
wide (one square mile) with more than 200,000 people, making it one of
the more densely packed places on Earth. I came to know the area extremely
well and was often asked to take visiting foreigners on tours, particularly
through Jankara Market, where thousands of traders sold food, utensils, native
medicines, textiles, hardware, and just about everything else imaginable.
As the Nigerian Civil War the Biafran conflict began to draw to a
close in 1969, Pauline and I decided to reward ourselves for endless business
and personal risks we had been taking. We made arrangements to move into
a spacious house beautifully situated on Five Cowrie Creek (so named because
in years past it cost five cowrie shells, the currency of the time, to take
a canoe across) in the Ikoyi residential section of the city. Before relocating
our abode and while attending a late night party at the home of the Bank of
America manager, a Biafran plane bombed Lagos and then was shot down,
plummeting in pieces into the creek. We grabbed up Samuel, one of two Ibo
young men we d been hiding in our attic for months for protection from
tribal pogroms, changed him out of the clothes he was wearing to help at the
6 CAPI TA L I S M S AC H I L L E S H E E L
party, rushed him back to the safety of our home of recent years, and then
tore off to see if the new place was still standing.
Arriving on the scene, we found various aircraft and human parts spread
all over the premises. The cockpit was largely intact a few yards into the water,
so I waded out, leaned in, and retrieved the plane s documents. At that
moment a squad of armed and agitated Nigerian soldiers raced up, which required
some fast explanations on our part as I appeared to be emerging from
the wreckage and turning for the shore. Handing over the papers, I pointed
out that the plane was a converted Nigerian Airways Fokker F 27 that had
been hijacked a year earlier.
We moved into our new home a few weeks later. What made this place
special was its large patio next to the edge of the creek, sheltered by shade
trees and cooled by a breeze off the water. A half mile across on the other
side stood the American and Soviet embassies. Despite the occasional corpse
that washed up on the shore or four foot monitor lizard that slithered into
the backyard, this was a place of quiet and repose in the midst of usual tumult.
It was here that we talked, welcomed visitors, and entertained, but
most importantly for me it was here that I peered across Five Cowrie Creek
at those two embassies, representing opposing economic and political doctrines.
They, symbolically, focused my attention on competing ideologies
and their effects on people separated by enormous variations in resources
and opportunities. Much of what follows in this book is from the perspective
of that patio and the views it afforded, grounded in one part of the
world while contemplating what happens in another very different part of
By the mid 1970s, with ongoing military turmoil and rising corruption,
Nigeria was becoming uncomfortable for an expatriate family with
young children, so we returned to the States and settled in the Washington,
D.C. area. I organized a trading company and for the next 10 years did extensive
business in Central and South America, other parts of Africa, Australia
and New Zealand, Southeast Asia, and with our biggest buyer, the
People s Republic of China. In the late 1980s my activities shifted into offering
and providing trade and financial advisory services to governments
in developing nations, which enabled me to undertake confidential investigative
work in a dozen countries. With this accumulation of experiences, I
associated with the Brookings Institution in 1996 as a guest scholar in economic
Over a period now exceeding 40 years spread across more than 60 countries,
I have watched the free market system operate illicitly and corruptly
more often than anyone of my acquaintance. I have also seen the impact of
such behaviors on the lives of disadvantaged people on all six inhabited continents.
And I have reflected on how these conditions widespread illegality
and severe inequality can exist within the doctrine laid out by Adam
Smith precisely to avoid such outcomes. These encounters and observations
encompassing lawlessness, inequality, and philosophy have opened for me
an unusual window on the state of capitalism and have led to a series of conclusions
substantially at odds with prevailing wisdom. The basic structure of
our global economic system has fundamental flaws, and the accompanying
risks are beginning to be evident to wealthy and impoverished alike. This is
what I explore in this book, concluding with steps that must be taken if capitalism
is to achieve its potential and lift the whole of humanity.
Several prefatory comments may be useful to the reader. First, having
spent 35 years in international business before joining the think tank world,
I m all for the free market system free trade, free movement of capital, free
convertibility of currencies. I do, however, add a proviso to this: provided it s
legal. It s the illegal component of such flows and their destructive effects
and attendant rationalizations that have interested me for years.
Second, I make liberal use of the first person. Many points arise out of
my own activities and research and are related as such. Also, my venture
along the linkage between illegality, poverty, and philosophy has been a
rather unique experience. While there is ample work by others on questions
of law, the dimensions of inequality, and utilitarian and egalitarian concepts,
there is little that reaches across this terrain, attempting to comprehend their
Third, most stories and anecdotes are told and people named with welldocumented
notes (found at the end of the book). Some notes provide published
references on points about which I, in fact, have first hand
knowledge. Quotes are attributed where possible and are given without attribution
to those who asked for or were offered anonymity. At every point
my goal has been to write as honest a book as possible, which I hope will become
clear in the pages to follow.
Fourth, some paragraphs are disparaging of some elements in certain
groups. I confess to struggling with the tension between candor and diplomacy
and have decided to err on the side of clarity. Some readers may feel
8 CAPI TA L I S M S AC H I L L E S H E E L
that criticisms are inadequate, while others may feel they are overdrawn. I
apologize to anyone who is disappointed or offended. At a minimum, the
questions posed need to be carefully considered and answered.
Finally, I want to note, so it will not come as a surprise, that the tone of
this work shifts as it flows through its stories and subjects. It moves from irreverence
and disquiet and perhaps a familiar voice in the early pages to a
more serious and at the same time hopeful spirit toward the end.
My objective in writing this book is to contribute to reform of the freemarket
system, not with any intent that it should be replaced. I sincerely
hope that no one will come away thinking that this is an anticapitalist screed.
My purpose is the opposite to make the case for renewal of capitalism s immense
capacity for good. It has long been clear to me that the best way to
deal with a problem is to hold it up to the bright light of day and examine it
from all sides. I arrive at this task having benefited abundantly from a process
that rewards vitality and creativity, and I would hope to see similar opportunities
extended to everyone. We must accomplish this in the future with a
greater commitment to justice than now characterizes the way capitalism operates.
Change within the system is necessary to its long term success.
C H A P T E R 1
SAVIOR OR PREDATOR
Candidates for fortune too frequently abandon the paths of virtue; for
unhappily, the road which leads to the one and that which leads to the
other, lie sometimes in very opposite directions.1
Adam Smith, 1759
Today, the system of capitalism is at a crossroads.2
Joseph Stiglitz, 2002
I M NOT trying to make a profit! This rocks me back on my heels. It s
1962, and I have recently taken over management of an enterprise in
Nigeria. The director of John Holt Trading Company, a British owned firm
active since the 1800s, is enlightening me about how his company does
business in Africa. When I ask how he prices his imported cars, building
materials, and consumer goods, he adds, Pricing s not a problem. I m just
trying to generate high turnover.
Two years in graduate school reading balance sheets and income statements
leave me totally unprepared for this bit of wisdom. I haven t a clue
why anyone would run a business with disdain for the bottom line. Staring
at myself in the mirror every morning for the next two months, I ask, Now
why did you get an MBA
What could possibly be going on here You know and I know that people
will invest their money where they can earn a profit. Right This is the
fundamental precept, the foundation of capitalism. Right
Wrong! A lot of people will invest their money in one place in order
to earn a profit in a different place. John Holt was using artificially high
import pricing as a mechanism for transferring all its profits out of Nige
ria and back to Britain. It took me two or three years to realize that most
foreign owned companies were doing largely the same thing. And then it
took another couple of years to learn that most wealthy Africans involved
in foreign trade were illegally moving money abroad by the same means.
As the decades rolled on and my activities spread to dozens of countries
across the planet, I observed that countless forms of financial chicanery
are prevalent in international business. Like an iceberg, the little that is
visible is supported by vastly more hidden beneath the surface. Thus
arose my understanding that the free market system has a problem, which
I have come to appreciate is a combination of several interrelated and undeniably
If a system cannot correct its major malfunctions, then it will be replaced.
Pierre Defraigne, director of north south affairs at European Commission
headquarters in Brussels, was my guest at breakfast. Capitalism can
become very corrupt. Profits should be made in the marketplace through
quality of goods and prices, not through illegalities. The topic was dirty
money. We think this is part of the normal functioning of the capitalist system.
But it can be corrected and won t limit efficiency. It s up to those who
defend the system to put their house in order. 3
House in order It is difficult to argue that the free market system is currently
performing at the top of its game. While this is a book about global
capitalism, a brief detour into what has been transpiring domestically, that
is, within western countries, is useful. In North America and Europe, the
breadth of business scandals and the recklessness of officers and directors in
recent years have been simply astonishing. An assortment of frauds, thefts,
corrupt practices, accounting irregularities, earnings restatements, asset
write downs, tax shenanigans, conflicts of interest, and other charges,
probes, malpractices, and allegations have corroded the reputations of
dozens of companies and sapped the net worth of untold numbers of shareholders
and retirees. The list of financial institutions tarnished in the press
reads like what should otherwise be the Who s Who of propriety: Citigroup,
J.P. Morgan Chase, Bank of America, Bankers Trust, Bank of New York, and
some 55 more on the roster I maintain. The corporate rap sheet, ranging
from spectacular failures to merely disgraced executives, includes Enron,
WorldCom, Global Crossing, Halliburton, and nearly 100 more on my list.
All Big 5 accounting firms have been tarred and feathered. The number of
law firms taking heat is too long to recount.
12 CAPI TA L I S M S AC H I L L E S H E E L
Frank Partnoy, in his superb book, Infectious Greed, writes about how
U.S. stock markets lost $7 trillion of the wealth accumulated in the 1990s,
and he goes on to say:
To any close observer of the changes in financial practices since the late
1980s, the collapse was not a surprise. New forms of risk and deceit now
permeated every corner of the financial markets. Financial instruments
had continued to develop in complex ways, and no one including accountants,
bankers, directors, regulators, or even plaintiffs lawyers
was in a position to exercise even a modicum of control.4
For several years, the most publicized wrongdoings have captured our
attention. They revealed to us just how wrong we were. We thought that
these fine companies and their prestigious bankers and critical auditors and
cautious attorneys were upholding the highest standards of corporate conduct,
only to find out they were in cahoots to cook the books and deceive
their employees, shareholders, and regulators. We felt thoroughly violated.
This is a book that also addresses violation but on a global scale. Much
more disturbing than what has been happening inside our borders in recent
times is the destructive manner in which we have been operating the capitalist
system beyond our borders for many years. Subterfuge and dissembling
have been far worse in the international arena.
The accumulated outrages of late began to embed themselves into our
collective consciousness barely a decade after the twentieth century produced
one of history s great turning points. The strength of capitalism became
vividly clear, achieving its pivotal moment in the waning years of the
last millennium. On November 9, 1989, young people wielding sledgehammers
broke through the Berlin Wall, signaling the failure of the major competing
ideology, socialism. The end of almost all remaining communist
regimes swiftly followed, freeing Central and Eastern Europe and creating
15 independent nations out of the ashes of the Soviet Union. Even the surviving
centrally planned economies China, Vietnam, Laos, North Korea,
and Cuba were forced to recognize that private enterprise brought higher
standards of living, leading each of the contrarians to begin or advance its
march along the capitalist road. No alternative arrangement had demonstrated
such an ability to marshal the initiatives and energies of so many
people. After generations of uncertainty, capitalism had flat out won. The
Global Capitalism: Savior or Predator 13
most vocal free traders crowed that, despite occasional blips in emerging
markets, the system was working as intended.
But the hubris was short lived. Aircraft were hijacked and crashed, the
World Trade Center fell, and part of the Pentagon was destroyed on September
11, 2001, killing and injuring thousands in the world s greatest concentrations
of financial and military might. As capitalism s most robust symbols
toppled, a dozen years of hauteur ended for some people and were shelved
by others. Terrorists had focused on the soaring self confidence of America
and by extension its allies and had, at least for a moment, set back the measure
of certainty, of inevitability, that had come to characterize the western
example and the tone of advice given to the rest of the planet. A realization
that powerful and determined forces viewed the world in very different
terms came as a rude shock to many.
Americans responded to 9/11 with incredible resilience. Yet, months
later, even as deep pain and a thirst for revenge lingered, introspection began
to creep into public dialogue and press commentary. Was it just religious extremism
that brought on the terrorists, or were deeper frustrations, power
disparities, income imbalances, and social disaffections evident in their motivations
Those who thought that democracy, capitalism, and globalization
had emerged as standards after 1989 were set back when terrorists thrust a
dagger into the body of the strongest nation in 2001. The anticipation that
some fundamental consensus had been reached across vast stretches of humanity
yielded to renewed uncertainty. As the Peruvian scholar Hernando
de Soto had predicted a year earlier, The hour of capitalism s greatest triumph
is its hour of crisis. 5
Within the critical review now hesitantly unfolding, some of the old arguments
about capitalism are being revoiced. Optimists extol dazzling improvements
in living comforts over the past 50 years, as incomes for the
average person have more than doubled, and they are right. Pessimists
lament that billions of poor are living at historically low standards or are
only marginally better off than their ancient ancestors, and they are right.
How can both be right Or, more pointedly, if the first is true, why should
the second also be true The answer is, the second does not have to be, and
the fact that it is true poses a danger to rich and poor alike.
Despite banking and corporate scandals in North America and Europe,
practitioners generally regard capitalism as tested and proven in its ability to
produce and distribute wealth. Capitalism is the most successful wealth cre
14 CAPI TA L I S M S AC H I L L E S H E E L
ating economic system that the world has ever known; no other system . . .
has benefited the common people as much. 6 It encourages and rewards
business behavior that is honest, fair, civil, and compassionate, and . . .
heroic. 7 The misconduct of a few is seen as an aberration and certainly does
not detract materially from the high level of perfection the system has
achieved. Not only are markets not too free, but they cannot possibly become
too free. 8 For market fundamentalists, competitive self regulation in
economic and commercial affairs led by a wealthy vanguard is the panacea
for society s ills. Instead of an aristocracy of the merely rich, we are moving
to an aristocracy of the capable and the rich. The financial revolution is
opening the gates of the aristocratic clubs to everyone. 9 The prospect of a
new aristocracy is offered as a wonderful design for the years ahead.
This book presents a different view. It penetrates the depths of crime,
corruption, money laundering, tax evasion, and illegal transactions, joins
these concerns to the impact they have on global inequality, relates both issues
to some very basic conventions and ideas underpinning market economics,
and hopefully extends perspectives on improving capitalism into
Lawlessness has permeated global commercial and financial affairs far
more extensively than is commonly perceived, as explained in Part I. Writing
on the widespread incidence of fraud, corruption, organised crime and
abuse of power influencing the world economy since the 1970s, Harry
Shutt, formerly with the Economist Intelligence Unit in London, laments
the progressive removal of restraints to such criminal activity and indeed increasing
incentives to engage in it. 10 On the other side of Earth, a Pakistani
banker groused to me, We have lost the distinction between what is legal
and what is illegal. No one hates people who get their money through illegal
means. Society is not acting as a restraint. 11 The astute observer of Latin
American affairs, Norman Gall, talking with me at the Fernand Braudel Institute
of World Economics in S o Paulo, characterized international capitalism
as perversities built upon perversities. 12 Yet, we willingly tolerate
and indeed encourage a level of lawlessness in global trade and investment
that threatens the capitalist system.
The linkage between gross violations of legal norms and the diminished
lives of billions of people surviving on a dollar or two a day is not often discussed
in polite circles, but will be here, in Part II. If we have no answer to
our appetite for dirty money, we have no answer to the alleviation of
Global Capitalism: Savior or Predator 15
poverty, confided a French banker.13 But the question of income disparities
has been lost in the competition for growth rates, contended Gil Sung
Park, a sociologist sharing views with me in Seoul. Growth and distribution;
can they go together in a common debate They must go together. 14
Peter Dougherty, an editor at Princeton University Press, ponders . . . why
no one seems to be paying any attention to the social and political dilemmas
that continue to beset capitalism such as deepening inequality in the presence
of soaring affluence. These dilemmas are brought about by the very
success of economics, . . . at the expense of a more expansive and critical
worldly philosophy. 15 Yet, for most people, poverty and inequality are peripheral
issues properly left to specialists in international financial institutions,
largely irrelevant to capitalism s more fundamental concern with
market access and wealth accumulation.
Both of these conditions lawlessness and inequality find justifications
in twisted interpretations of the free market system s founding tenets,
addressed in Part III. Adam Smith, who opted for the interest of the poor
rather than the rich at every intersection in his writings, is rolling over in his
grave. While appreciating a rise in wealth, widespread abuses in global
movements of trade and capital, combined with staggering gaps in income
levels taken as inevitable and tolerable, is the opposite outcome from what
he hoped would arise. No society, he said, can surely be flourishing and
happy, of which the far greater part of the members are poor and miserable.
16 Smith s vision has been largely set aside, and instead capitalism has
drawn its sustaining rationale from his contemporary, Jeremy Bentham, who
despised the idea of inalienable rights and argued that it is acceptable to sacrifice
the rights or the interests of some people for the good of others. This
core idea that the well being of a part of society can be overridden for the
advantage of another part of society brutalizes our practice of capitalism in
a way completely unimagined by its seminal thinkers.
These three illegality, poverty, and distorted philosophy exist on a continuum,
and it is these combined systemic shortcomings that reveal capitalism s
Achilles heel, summarized in Chapter 11 of Part IV. Looking at each one yields
insights into the other two, and an understanding of all three is necessary to an
understanding of each. Illegality contributes to inequality. Inequality is worsened
by warped philosophy. And perverted philosophical maxims underpinning
capitalism serve to excuse rank illegitimacy and severe inequality.
16 CAPI TA L I S M S AC H I L L E S H E E L
We give short shrift to such concerns when we consider each in isolation.
Frankly, as I have learned over many years, it does little good to look at
illegal financial dealings detached from the larger context within which they
thrive. How many times have I heard the question, Why should I care It
is too easy to view such machinations simply as games played by the rich.
Grasping the impact these subterfuges have on the whole of humanity has
been missing in public dialogue for too long.
Equally, it does little good to look narrowly at inequality and poverty
and shrug our shoulders, self satisfied that this is their problem. For many
people, meting out foreign assistance, however begrudgingly, is the limit of
obligation. The contrasting fact is, our gains in income in the West flow in
part from losses in income in other regions, a point I hope will become unmistakably
clear in later sections of this book.
Equally again, philosophical inquiry is now largely separated from public
policy. Philosophy can and often does become culture, embedded in the
way we rationalize and live our lives. Today, the prevailing precepts underpinning
capitalism lend a measure of comfort to justifications for a divided
and hypocritical world.
The harmful aspects of modern capitalism which I am addressing illegality,
inequality, and misapplied philosophy can be viewed as segments
on a line, with illegality on one end, inequality in the middle, and economic
philosophy on the opposite end. Dropping down on any part of this line
leads logically to the other parts of the line. And what becomes evident with
growing clarity is the connection of each to the others. This is what has fascinated
me for years: the juncture, the nexus, between illegality and inequality,
between inequality and philosophy, and between distorted philosophy
and its outcomes in poverty and lawlessness.
It does not really matter to the story I am telling whether you start with
illegality and trace it through to its effect on inequality and its sustenance
in outdated philosophy. Or you do the opposite, and start with misshapen
philosophical precepts and trace them through to their impact on inequality
and lawlessness. Or you start in the middle with inequality and look on
either side at its contributing causes. The linkages are evident wherever the
starting point. What I strive to do is integrate these three into a continuum,
a triptych, a multiscreen picture, that provides a perspective on the nature
of global capitalism as it has come to be practiced today. Together, it is the
Global Capitalism: Savior or Predator 17
interrelated parts of this continuum that constitute capitalism s Achilles
heel and present the threat to stability and prosperity that must be resolved.
Are the challenges of these three issues so overwhelming as to be insurmountable
Absolutely not, the subject of Chapters 12 and 13. First, illegalities
that permeate our pursuit of global free markets can be greatly curtailed
with a few strokes of the pen and without harming efficiency and growth.
This is not a defeatingly complex issue; it is instead a matter of political will.
Second, inequality can be markedly reduced to the advantage of rich and
poor together. This will occur, not through the timid pursuit of poverty alleviation,
but through sensible steps underlying our own commitment to
shared good fortune. And third, a major contradiction needs to be confronted
the contradiction between fresh thinking emerging from schools
of philosophy in America and Europe and entrenched justifications for the
status quo in the free market s supporting canons. Revised canons can guide
us beyond an economically disjointed planet toward one in which capitalism
extends its opportunities and benefits to the whole of humankind.
Anything less than addressing all three of these concerns means that capitalism
will remain far short of its full potential. This book quite purposefully
takes a holistic view of global capitalism and seeks resolution of problems created
or worsened by what has now become a deeply flawed system.
Markets are made to serve man, not man the market, wrote John
Gray, a leading British intellectual.17 We take a great risk if we don t combine
freedom of markets with social policies that address imbalances, asserted
Muhammad Yaqub, a distinguished central bank governor talking
with me in Pakistan. Globalization is driving impatience. People are living
in dirt. It s not a vocal minority but a silent majority that must be heard. 18
With its victory over communism, wrote Hernando de Soto, capitalism s
old agenda for economic progress is exhausted and requires a new set of
commitments. It makes no sense continuing to call for open economies
without facing the fact that the economic reforms underway open the doors
only for small and globalized elites and leave out most of humanity. 19
Among the readers of this book, I hope that businesspeople and bankers
will come away with a heightened awareness of just how badly we are undermining
one of the greatest systems ever devised. I hope lawyers and accountants
will seriously reconsider the advice given to corporate clients that
places them in a position of risking felony offenses. I hope that development
economists will resolve to seek better data on the hundreds of billions, accu
18 CAPI TA L I S M S AC H I L L E S H E E L
mulating to trillions, of dollars flowing illegally out of poorer countries. I
hope that government officials will conclude that, yes, we can indeed improve
national security, spread democracy, and boost free markets by cleaning
up the global financial system. I hope that philosophers, particularly
those focusing on issues of distributive justice, will find additional reason to
include in their deliberations the potential offered by and the problems evident
in international capitalism. I hope that every concerned reader will
share my desire to see capitalism build on its strengths rather than cater to
its weaknesses. And finally to students and teachers, I hope that you might
come to appreciate with me the finest lesson I learned in graduate school. If
we ask the right questions, we can get the right answers. Or, put another
way, it is more difficult to ask the right questions than it is to get the right
answers. I will have succeeded if, upon finishing this book, you have in
mind questions to continue thinking about in years ahead.
Within the stories and remarks presented in Parts I, II, and III, I pose
three challenges. One is directed at business and banking sectors, the second
is a gauntlet flung down to the World Bank and other international financial
institutions, and the third is served up to scholars, wherever they may be
pursuing their professions. Each challenge, in my view, focuses attention on
the need for major revisions in the way we conceive of and practice global
The question Savior or Predator posed in the title of this chapter encapsulates
the issue and the choice before us. If capitalism is to offer adequate
abundance to Earth s growing billions, we must fight rampant
lawlessness, reduce inequality, and recast the free market s supporting structures
around principles of global justice. The progress of the twenty first
century will be influenced in good part by how purposefully we fashion a
new strategy to deal with capitalism s conspicuous failures and subtle deformities
and how successfully we extend capitalism s opportunities to the
whole of humanity.
Global Capitalism: Savior or Predator 19
P A R T I
WE LIKE THE MONEY
This [Citibank] account is turning into an exciting profitable one for
us all. Many thanks for making me look good.1
Amy Elliott, 1993
These are the very flaws in the western financial system which are
becoming a noose for it.2
Osama bin Laden, 2001
INTERPOL S HEAD of anti money laundering operations in Lyon, France,
leaned back and asked, Do you have anything to add 3
He was a highly competent official with three decades of experience in
law enforcement. After four years at Interpol and now approaching his retirement,
we struck up an easy rapport. For two and a half hours he told me
tales of assorted drug dealers and criminal syndicate heads illegally shifting
their money in and out of countries, washing their proceeds to make them
look clean and legitimate.
Anything to add I repeated. You haven t cited a single example of
moving criminal money that I haven t seen years ago in the business of moving
corrupt and commercial dirty money.
Flabbergasted, he bent forward, learning for the first time that everything
he d worked on had antecedents in the accepted routines of transferring
the proceeds of corruption and tax evasion. I was stunned to realize that
he thought money laundering was a new phenomenon, bursting onto the
scene in recent times.
Since the end of the Cold War, the opening years of the globalizing era
have produced an explosion in the volume of illegitimate commercial and financial
transactions. North American and European banking and investment
institutions have been flooded with laundered and ill gotten gains.
Totaling trillions of dollars, most of these sums are generated through secret
arrangements between cooperating but distant private sector entities. Lagging
legal codes have proven inadequate to deal with the situation. Much of
this subject is taboo in business and government circles, yet this torrent of
stolen, disguised, and hidden resources poses a major risk to state stability,
corporate security, democracy, and free enterprise across the planet.
22 CAPI TA L I S M S AC H I L L E S H E E L
C H A P T E R 2
PLAYING THE GAME
DIRTY MONEY is money that is illegally earned, illegally transferred, or
illegally utilized. If it breaks laws in its origin, movement, or use, then
it properly merits the label.
If you think this is just a matter for bankers and law enforcement officials,
do the following. Take the dollars, pounds, euros, rubles, pesos, or
other currency out of your wallet or purse. You could very well have your
fingers literally on cocaine. According to several studies, upward of 90 percent
of paper money in New York, Miami, and London, and, it is suspected,
other major cities as well, contains trace elements of drugs.1 And drugs are
the smaller part of the dirty money problem.
There are three forms of dirty money that cross borders: criminal, corrupt,
and commercial. The criminal component includes proceeds from a
boundless range of villainous activities including racketeering, trafficking in
counterfeit and contraband goods, alien smuggling, slave trading, embezzlement,
forgery, securities fraud, credit fraud, burglary, sexual exploitation,
prostitution, and more. However, in the statutes of many nations, the only
financial inflows from criminal activities that are barred are those arising
from drugs, bank fraud, and certain acts of violence, including terrorism.
The corrupt component stems from bribery and theft by foreign government
officials. While the United States outlawed paying bribes in 1977,
handling the proceeds of foreign bribery was not barred until 2001, and
most European nations began only in the late 1990s to legislate against paying
bribes or banking the proceeds of corruption.
The commercial component of cross border dirty money has two features
that distinguish it from legitimate outflows. First, it is usually tax evading,
although that is not the primary motivation for such transfers. And
second, it almost always disappears from any record in the originating country.
In other words, legal transfers are recorded as expenses or deposits or investments
and remain on the books of the company or individual making
the transfer. Illegal transfers are specifically intended to avoid reports or
bank statements or evidence of their place of relocation.
What is most striking is that all three forms of dirty money criminal,
corrupt, and commercial utilize basically the same subterfuges to roll
through international channels: false documentation, dummy corporations,
shell banks, tax havens, offshore secrecy jurisdictions, mispricing, collusion,
kickbacks, numbered accounts, wire transfers that disguise transactions, and
more. Whether it s moving drug money or tax evading money, whether it s a
thug or tyrant or terrorist or corporate titan, all use the same bag of tricks.
And the truth is, western business and banking sectors have developed and
promoted the mechanisms for bringing in dirty money from other countries
for more than a century.
What s in this bag of tricks If you re going to play the game, you should
understand the tools that make it so much fun for so many people. Here
they are. Enjoy the ride.
THE DIRTY MONEY USER MANUAL
So you want to get rich and hide money Not a problem! In a few pages I
can outline what you need to know to join the ranks of drug kingpins, criminal
syndicate heads, corporate executives, tax evaders, and terrorists. Can
you think of any reason why all these folks should be piling up wealth while
you re left behind Get ready to jump into the big time.
Reading the newspapers today might lead you to believe that conveying
illicit funds from country to country is a highly complex and specialized
process. Not so. Here s a starter kit that provides and illustrates most of the
basics. It tells you how to (1) pick your own price in international transactions,
(2) use dummy corporations to shield your activities, (3) fake transactions
to make it look like something is happening when it really isn t, and
(4) take advantage of a grab bag of tricks to handle special opportunities.
With these techniques you can shift all types of criminal, corrupt, and
commercial dirty money like a pro like a Mexican drug cartel or the Saddam
Hussein family or Al Qaeda or a corporate CEO. You don t have to in
24 CAPI TA L I S M S AC H I L L E S H E E L
vent anything; just reach in and use the tools that are already proven to be
Pick Your Own Price
Anything that can be priced can be mispriced. Fictitious pricing serves to
relocate money and implement tax evasion schemes between countries. As
you read this, there are tens of thousands of transactions at docks and airports
and on trucks crossing borders and in bits and bytes flitting through
electronic circuits with mispricing built into commercial invoices, as
agreed between willing buyers and willing sellers. This is by far the most
frequently used device for transferring dirty money. Common in exports,
imports, real estate deals, purchases of services, and nearly every aspect of
international business, false pricing has moved trillions of dollars illegally
A Venezuelan businessman calls on a U.S. machinery manufacturer to
negotiate purchase of up to date equipment for his factory in Caracas. After
hard bargaining, they settle on a price of $1 million. Then the buyer asks
that the commercial invoice be drawn to read $1,200,000. Why would he
want that Because when he pays the $1,200,000, he wants the extra
$200,000 sent for deposit into his New York bank account. The machinery
manufacturer, anxious to conclude the transaction, agrees; the sale is made.
A Ukrainian dealer in icons and antiquities negotiates with a German
gallery for sale of several dozen objets d art and they come to a price of
C= 200,000. Then she asks if she can invoice the shipment for C= 100,000.
Why would she do that Because together they arrange that, at the same
time the invoiced amount of C= 100,000 is transferred to her Kiev bank account,
the additional C= 100,000 will be deposited into her Frankfurt bank
account. The gallery, anxious to conclude the transaction, agrees; the purchase
Mispricing in transactions between unrelated parties can and is applied
regularly to virtually anything. A heavy equipment exporter pays a 20 percent
kickback into the offshore account of the owner of a foreign construction
company on his purchases of bulldozers, backhoes, scrapers, loaders,
and dump trucks. Mercedes Benz cars at the docks awaiting shipment have
often been invoiced at entirely different FOB prices, meaning prices free on
board the vessel before transportation charges are added. The price to the
Playing the Game 25
United States is not marked up; the price to a dealer in Africa may be 50
percent higher, helping move money out of the importing country. A U.S.
cigarette manufacturer makes a minority investment in a foreign company
and overprices the exported production line by enough to profit from the
equipment sale and recoup its investment before the first carton of smokes is
delivered off the shipping dock. A Swiss textile machinery producer gladly
pays a million franc kickback into the Geneva account of a Central American
purchaser who is buying equipment to add to his company s output capacity.
German printing presses going to the Middle East have been
generously overpriced, larding the European accounts of government and
private editors and publishers. Handcuffs sold to the police in Kenya with a
delivered value of 1,000 shillings each were invoiced at 3,500 shillings each,
making someone very satisfied with the transaction.
Besides physical items, services can also be mispriced. Insurance is a regular
candidate, with premiums marked up to provide offshore kickbacks.
Foreign advertising is another popular vehicle. Consulting contracts and advisory
services are easy to load with kickbacks. Technical assistance agreements
offer a regular outflow of money that can be shifted into offshore
bank accounts. Similarly, royalties, patents, and licenses have become a recent
favorite among skilled money shifters.
You can put together mispricing and bribery of foreign government officials,
with local agents playing an intermediary role. Since this is now
against the law in many countries, a bit of caution is called for if you are a
western executive or salesperson. A typical conversation today with your
company s agent or representative in a foreign country should go something
I want you to understand how extremely interested we are in getting
this contract. It s a very significant piece of business for our company in
this market. We anticipate that this will take a lot of time and a considerable
amount of entertaining and public relations on your part. In order
to underline how important it is to us, we want to double your
normal commission, from the usual 10 percent up to 20 percent, just
for this deal. Now let me be clear; none of this can be for bribery. That s
against the law. But we do want the contract. No bribery, but go out
and make every effort necessary to be successful. We need to understand
each other. Bring this one home. Now, have I been clear
26 CAPI TA L I S M S AC H I L L E S H E E L
If the local agent is any good, he throws his arm around your shoulders,
looks deeply and confidently into your eyes, and says, I understand perfectly!
An expatriate lawyer in the Middle East does a thriving business representing
arms manufacturers. He sets up billion dollar weapons deals under
two contracts, one for the main equipment and a second for support services
such as training, maintenance, and software updates. The first contract with
the government of the purchasing country is priced properly. The second
contract is channeled through a joint venture company in a Caribbean tax
haven, owned by the arms manufacturer and by designated friends of the
government officials in the buying country. While doing no work, these
nominee partners share in the venture s deliberately bloated revenues, passing
the funds along to their principals, the officials who are the real but
IBM was not sufficiently careful in this kind of business and made
the mistake of doing suspect business through its own local subsidiary.
In an arrangement called Proyecto Centenario in Argentina, IBM entered
into contract with Banco Naci¢n to install computers priced at
$250 million throughout the bank s 525 branch offices.2 The markup for
paying kickbacks was allegedly about 15 percent, some $37.5 million. A
local prosecuting judge, Aldolfo Bagnasco, getting wind of the deal, accused
IBM of paying bribes to get the contract, referred to in Buenos
Aires as a little happiness. IBM Argentina reportedly funneled these
payments through two local agents, Consad and its subsidiary CCR.
Payments of $37 million went to CCR, a firm with one employee and
In turn, CCR redistributed millions, which ended up in bank accounts
in New York, Switzerland, Luxembourg, and Uruguay. Upon request
from Judge Bagnasco, Swiss authorities revealed that beneficiaries of
such accounts included directors or ex directors of Banco Naci¢n.4 At least
two recipients admitted they received millions and confirmed that the
payments were gifts from IBM.5 The IBM Banco Naci¢n contract was
cancelled in 1997. Following action by the U.S. Securities and Exchange
Commission, IBM paid a $300,000 civil fine without admitting or denying
the bribery. Swiss banks turned over $4.5 million in frozen assets to
the Argentine government in 2002. The remaining $33 million has not
been fully recovered. The point is, don t use your own local subsidiary or
Playing the Game 27
affiliate as a conduit for a little happiness, especially when you re dealing
in big money. At a minimum, channel your bribe payments through an
unregulated entity operating out of a tax haven.
For someone in a developing or transitional economy who wants to
generate deposits into his or her external bank account, the flip side of overpricing
imports is underpricing exports, as the Ukrainian art dealer did. In
the business of selling commodities or processed or manufactured goods,
agreements between buyers and sellers to accomplish this are common, so
don t feel as though you are doing anything unusual.
Toys manufactured in China have produced several Chinese dollar millionaires
with their money safely stashed in foreign banks. The big toy companies
in the United States and Europe don t necessarily have to pay the
kickbacks; these can be handled by wholesalers who buy, mark up, pay the
kickbacks into hard currency accounts, and resell to the multibillion dollar
brand name companies and retail chains. The same mechanism has reportedly
produced a fair number of millionaire sneaker manufacturers. Oil has
been piped out of Russia at a fraction of its value and resold in Europe at
world market prices, with the difference ending up in Cyprus bank accounts
of the owners or executives of Russian producing and marketing companies.
Now, oddly enough, if you re fattening your foreign bank account by
overpricing imported raw materials and machinery and underpricing exported
commodities and manufactured items, you may be able to accomplish
the same ends by doing exactly the opposite. How can you consistently
underpay for your purchases and get anyone to continue selling to you And
how can you consistently overcharge for your sales and get anyone to continue
buying from you Believe me, it s been done a few million times.
Take Argentina as an example of underpricing imports. Argentina dollarized
its economy in 1991 and introduced open convertibility between the
peso and the U.S. currency. Earlier, Argentina had broadened its regime of
value added taxes (VAT) which meant that imports were taxed at an average
of about 18 percent of invoiced prices as they arrived, which later rose to 21
percent, plus additional tariffs and fees. Argentine businesspeople did not
take long to figure out how to use open convertibility and dollar bank accounts
abroad to minimize VAT. In cooperation with foreign suppliers, imports
were often and very significantly underinvoiced, so that the VAT tax
payable on goods arriving into the country was reduced in amount. Importers
then properly paid the indicated amounts on these fabricated com
28 CAPI TA L I S M S AC H I L L E S H E E L
mercial invoices, leaving the amounts not covered by the invoices to be settled
by other means. Okay, suppliers now had part of their money and were
waiting for the rest.
Argentines by the thousands became expert at keeping an entirely separate
set of books, even a separate set of entities, to sell part of their imports
or goods produced from such imports. Revenues from these unrecorded
transactions and unregistered entities were then taken to a bank for deposit,
with instructions to convert and transfer the proceeds into the depositors
dollar accounts abroad. From such dollar accounts overseas, the balances
due on underpriced imports were settled. The net result was straightforward;
the importer paid substantially less VAT taxes and, with off the books revenues
and an open pipeline to a foreign bank account, topped up dollar balances
out of the country. At least that s what happened until the Argentine
economy virtually collapsed.
That is on the import side, but how can you overprice exports that
you re selling into competitive markets and stay in business That makes no
sense. Unless the government pays you a subsidy to export; then it makes
sense. Take India, for example, which sometimes pays a percentage of the
value stated on commercial invoices to encourage exports from the country.
In recent years, incentives have often covered products with entirely domestic
content, such as leather goods, quarried granite, cotton garments, and
forest products. So, the Indian seller makes an agreement with his foreign
buyer to overprice the export. With the overpriced invoice the seller goes to
the Indian authorities and collects, say, the inflated 20 percent subsidy.
Meanwhile, the cooperating buyer can pay the overpriced amount in return
for a credit against future shipments or not pay the full invoiced amount after
asserting some spurious claim. Once again, everyone is happy, even the
government that, for awhile, doesn t realize it s been cheated. Finally reality
dawns, and most countries have now curtailed direct cash payments for exports.
Export subsidies remain rich and varied, however, including tax and
tariff exemptions, subsidized loans and credits, and reimbursements for storage,
transportation, insurance, market research, trade fairs, and promotions.
Lots of exporters continue to get rich off their government s programs, so be
alert to this money making opportunity.
I have been talking primarily about transactions between unrelated buyers
and sellers who cooperate to misprice trade, shifting money abroad and
in some cases making a little extra locally. An even bigger opportunity is
Playing the Game 29
transfer pricing within multinational corporations, the use of trade to shift
money at will between parents, subsidiaries, and affiliates operating in dozens
of countries. For many multinational corporations, exaggerated transfer pricing
is standard procedure, a major part of global strategies to minimize taxes
and maximize profits.
Intracompany trade across borders represents about 50 to 60 percent of
all cross border trade. I have never known a multinational, multibillion dollar,
multiproduct corporation that did not use fictitious transfer pricing in
some part of its business to shift money between some of its entities. In years
past, chemical companies were a common example of falsified transfer pricing,
taking advantage of proprietary products to move revenues and relocate
profits. Then pharmaceutical companies became widely known for the same
practice, invoicing as much as 10 times or more for the same product sold to
one subsidiary out of which profits were drawn as compared to another subsidiary
where profits were permitted to remain.
There are several firms that sell data on transfer pricing, that is, on the
laws and regulations that exist in countries that attempt or do not attempt to
control transfer pricing. If you ve got a question, contact Ernst & Young to
obtain the firm s Transfer Pricing Global Reference Guide, offering creative
and practical solutions for your transfer pricing needs. 6 For a hefty fee,
they ll tell you what s legal and what isn t in a selection of distant countries.
That s just to keep you informed, not to stop you from using transfer pricing
to shift revenues and profits with ease.
The most marvelous example of transfer pricing I have ever encountered
concerns diamonds out of South Africa, which illustrates what you can do in
cahoots with a government. For more than a century millions of carats of diamonds
were exported at essentially zero value, to be cut, graded, and sold
abroad with most of the revenues kept abroad as well. The real volume and
value of diamond exports was a classified state secret. When I inquired I was
told, This was a decision by government. It was not allowed to identify a specific
company or producer of diamonds for export or the value of diamond exports.
7 As a consequence, no one knows but the exporters what happened to
the hundreds of billions of dollars generated from diamond sales.
The situation changed a few years after majority rule was achieved in
South Africa. Today a Diamond Board assesses or approves the assessment of
diamonds for export, and their quantity and value are published by the
South African Revenue Service. In a recent month, exports of 66,560 carats
30 CAPI TA L I S M S AC H I L L E S H E E L
were valued in rand at R290,195,906, equivalent to $48 million, for an average
price of $715 per carat.8 The point is, when opportunities become
available to suborn a whole government, strike quickly, because, even after a
century, you never know when they will change their minds.
Arrangements for mispricing in transactions between unrelated parties
to generate foreign kickbacks or transfer pricing between affiliates intending
to reduce taxes are not matters that either buyers or sellers particularly like
to record permanently. Most such arrangements are based on verbal agreements
between cooperating parties, perhaps put into e mail communications,
but seldom reduced to paper with a signature. This is because in many
countries it s against the law to file a false customs declaration. An import
coming into the United States on which a duty is to be levied, for example,
would result in undercollected customs charges if the invoice was intentionally
underpriced. Similarly, an artificially priced export going out of the
United States, whether above or below its true value, results in erroneous
data being forwarded to the Customs service. These are felony offenses. And
they are probably the most frequently committed white collar felony offenses
in the United States. The same is true for many other countries. The
fact is, the customs declaration is almost always filled out by a freight forwarder
handling the paperwork for the buyer or seller. So long as the freight
forwarder enters on the customs declaration the same price that appears on
the commercial invoice, hardly anyone cares or ever pays attention.
Nevertheless, if erroneously pricing a transaction, which leads to filing a
false customs declaration, which can land you in jail, really worries you,
never mind. There are other ways to accomplish the same end without quite
so overtly counterfeiting the invoice. Let s go back to the Venezuelan businessman
who wanted his purchase priced at $1.2 million instead of $1 million.
In lieu of asking for the kickback to be sent to his bank account, he can
offer an alternative arrangement. The agreed price will be $1.2 million, and
you will please contract with my brother in law to do a market survey for
you in Venezuela, Guyana, Suriname, Colombia, and Panama and pay him
$200,000 into his Panama bank account. Again, agreed. It would be preferable
if the U.S. company ultimately received a few pages of paper purporting
to be the market survey, but if it never shows up, the company can claim it
just made a bad business deal.
Same thing for the Ukrainian art dealer. If the German gallery suddenly
gets pangs of conscience about depositing a C= 100,000 kickback into her
Playing the Game 31
Frankfurt account, then it can contract with her to be its eyes and ears in
Kiev for hot objets coming on the local market, at an agreed fee of C= 100,000
paid into her Frankfurt account. Again, a piece of paper gives some credence
to a payment under the table.
More opportunities are available besides consulting contracts. One of
the favorites is damage claims. A U.S. exporter based in New England routinely
pays for imaginary damages on sales of kraft paper shipped to an
Asian customer, of course, by deposits into the customer s U.S. bank account.
Warranty payments based on purported deficiencies in the performance
of machinery and equipment are another favorite, all agreed to in
advance and covered in the original purchase price. Freight allowances are
another, reimbursing the extra cost of delivery above an agreed figure. On
smaller transactions you can provide an extended family vacation for a good
customer or meet university tuition costs for sons and daughters or agree to
settle credit card charges. This aspect of international business offers wonderful
opportunities for creativity.
Even more secretive are some countertrade deals. A typical one is a
three way transaction, often with exchange conducted through barter rather
than payments with cash. For example, an Egyptian clothing manufacturer
can make an uninvoiced delivery of garments to a Spanish buyer. The Spanish
buyer sells the garments and puts part of the money into a Swiss bank account
for the Egyptian exporter. Then the Spanish firm pays a Polish
company for 10 electrical generators to be shipped to the Egyptian manufacturer
to provide backup power when outages occur. The generators arrive
in Cairo. The only thing the clothing company accountant can tell is that
clothes went out and generators came back, and it s rather difficult to equate
the value of the two noncash transactions and quite impossible to tell that
money got deposited into the factory owner s Geneva account.
False pricing in deals between related or unrelated parties tie the shift of
tainted money to legitimate transactions, whether the proceeds are commercially
tax evading or corrupt or criminal in origin. The cover provided by the
partially legal aspects of the business is a great advantage.
But there is another reason why it is the most popular means of moving
illicit funds. Falsifying prices of international transactions is the only mechanism
for shifting money out of a country where no one else in the country
needs to know about it. Only the CEO or proprietor or expatriate executive
or local purchasing manager or government official, whoever is making the
32 CAPI TA L I S M S AC H I L L E S H E E L
deal, has to interact with a foreign counterpart. Every other method requires
interfacing with some other person locally, whether an accountant or codirector
or banker or government official or black market money changer.
But varying prices in collaboration with an external trading partner does not.
Involving someone else locally risks that the illegal shift of money becomes
known by other shareholders, managers, workers, trade unions, tax collectors,
even the public. Dealing only with a foreign counterpart avoids this risk.
The first tool you want to reach for in your dirty money user kit is the
tried and true technique of billing otherwise legitimate transactions at false
prices. With this method under your belt, you are already in the pros.
Concocting bogus prices does require you to have that conversation or communication
with your foreign trading partner. Many people don t want to
do even this, don t want that person or company to know anything about
their shifts of money. Whether it s a first time transaction or a long term relationship,
many would prefer that these trading partners, maybe also
friends, do not know all the ins and outs of company or personal financial
affairs. If you, too, would like to utilize sham pricing while avoiding these
discomforting interfaces with your suppliers or customers, no problem. All
it takes is a reinvoicing company that will buy, change prices, issue a new
commercial invoice, and resell. In other words, the transaction isn t made directly
with you; it s made with this intermediary company, which buys or
sells on your behalf, marks the transaction up or down as you require, and
then sends the new paperwork on to the other end. With this reinvoicing
entity, comprised of a computer, a letterhead, and a bank account, you ve accomplished
your false pricing and never had to discuss it with your foreign
A major U.S. soft drink company has a franchise bottler in Africa
owned by noncitizens of that country, a relationship that has lasted for a
half century. At some point, the African bottler formed such a reinvoicing
entity in England. The U.S. soft drink company shipped the syrup used to
make the soda directly to Africa but sent invoices to the reinvoicing company
in England. This entity marked up the price of the syrup by several
times its original cost and sent the revised commercial invoices to its African
bottling operations in time to meet the arriving shipments of syrup. The
Playing the Game 33
owners of the African franchise got rich in sterling. The U.S. bottler understood
full well that it was abetting a tax evasion scheme taking profits out of
the continent, but who cares And this process continued for years, even after
the African firm, now expanded to several bottling plants, gained local
shareholders who knew nothing about this arrangement benefiting the original
Reinvoicing can be done more than once. A shipload of wheat left the
United States valued at $7 million. The commercial invoice went through
several repricings, finally arriving in Abidjan at $70 million. While some
Ivoirians got rich, a lot of Ivoirians angrily paid high prices for bread. Honestly,
I don t recommend tenfold markups on food items. It generates too
Russian exporters learned the repricing game very quickly. In the late
1980s and early 1990s, Russian exports were often sold directly to European
buyers, who paid generous kickbacks into offshore bank accounts. But the
Russians tired of these arrangements and, instead, set up hundreds of buying
entities in Europe to purchase their own exports from Russia. In this way,
commercial invoices could be drawn for underpriced amounts on sales made
to their own affiliated companies in Europe. Then those entities would reinvoice
to the final European buyers. Thus, exports of oil, gas, gold, diamonds,
aluminum, pulp, timber, and more left Russia at dirt cheap prices, were sold
to these branch offices domiciled in Europe, and then were resold again at
world market prices to European buyers. The profits, of course, stayed in
Europe, and in many cases not even the originally invoiced amount was ever
repatriated to Russia.
One of my favorite enterprises is a fruit exporter based in Latin America.
I would be happy to name it, but many of you might unnecessarily disturb
the equanimity of these fine fellows with excessive inquiries about their
well practiced money moving techniques. This group grows fruit on its extensive
plantation holdings, buys fruit from other nonassociated producers,
provides its own trucks to transport fruit to docks, delivers its fruit to distant
ports, owns numerous buying companies in overseas markets taking title to
arriving fruit for resale, purchases packaging materials abroad, brings these
back to the home country, and fabricates boxes in its manufacturing facilities.
Trade documents and financial transfers are handled by the group s own
banks in various countries and tax havens. This circle of companies performs
34 CAPI TA L I S M S AC H I L L E S H E E L
virtually every task, roundtrip, from the fruit plantations to the high seas to
the foreign importing organizations to the overseas exporting offices and returning
to the fruit plantations, transferring many millions of dollars from
place to place at will.
After figuring out how to make money by mispricing and transfer pricing
and by reinvoicing through a third company, you may want to disguise
where all this money originates from and goes to. For this it s useful to have
some additional dummy businesses, such as a nonfunctioning corporation
or two and possibly an offshore trust or foundation.
Offshore dummy companies are commonly referred to as international
business corporations (IBCs) or personal investment corporations (PICs).
The shareholders, directors, and officers are usually individual nominees
provided by the company formation agent or, alternatively, other dummy
companies controlled by the agent. A side letter may be the only evidence of
true ownership, and that letter is normally not included in the official incorporation
papers. As a rule, IBCs and PICs have no employees and no facilities
and are expected to avoid doing business in the countries where they are
established. Most are set up for the sole purpose of having bank accounts
hiding behind layers of secrecy.
Typically a lawyer in any one of more than 60 small countries or enclaves
prepares the incorporation papers or provides an off the shelf company
that has been preregistered. Already, lawyer client privilege affords
you a great deal of protection. Then, too, the laws of such jurisdictions
traditionally make it an offense to reveal any information about the secret
entity, its owners, or its transactions. Authorized capital can be negligible
or not paid up. Most commonly, income accruing to the IBC or PIC is either
tax exempt or subject to very low rates. Audit and reporting requirements
are usually nil. But with this well guarded dummy corporation and
its bank account, you can shift dirty money in where its identity is essentially
lost, and then shift it back out again with a company name disassociated
from you. For further protection, several dummy IBCs or PICs can
be set up or purchased in different jurisdictions, each functioning under a
different set of laws cloaking your identity, so that anyone, including disgruntled
trading or investment partners, assorted thugs, ex or soon to be
ex spouses, tax collectors, zealous journalists and prosecutors, will be frustrated
at every step in trying to trace a source of funds back to you.
Playing the Game 35
There are some delightful places where you can situate or purchase your
secret companies. In the Caribbean you have Anguilla, Antigua and Barbuda,
Aruba, Bahamas, Belize, Bermuda, the British Virgin Islands, Barbados, Cayman
Islands, Dominica, Grenada, Montserrat, the Netherlands Antilles, Saint
Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and the Turks
and Caicos Islands. Or there are Panama and Costa Rica in Central America
and Uruguay in South America. If you prefer the Pacific the choices include
the Cook Islands, the Marshall Islands, Tonga, the Maldives, the Marianas,
Nauru, Niue, Vanuatu, and Western Samoa. Asian and Middle Eastern secrecy
jurisdictions include Hong Kong, Macau, Singapore, Labuan off the
coast of Malaysia, Bahrain, Dubai, and Lebanon. Africa is getting into the
game with Mauritius, the Seychelles, South Africa, Liberia, S o Tom‚ and
Principe and the little enclave of Melilla, one of two parts of Spanish Morocco.
And, of course, Europe offers some of the most experienced and discreet jurisdictions,
including the Isle of Man, the Channel Islands of Jersey, Guernsey,
Alderney and Sark, the land Islands, the islands of Cyprus, Malta, and
Madeira, plus Gibraltar and Monaco at the southern edges of Europe, as well
as Switzerland, Austria, Liechtenstein, Luxembourg, Belgium, Hungary, Ireland,
the lovely enclave of Campione d Italia surrounded by Switzerland, and
the Principality of Andorra tucked in between France and Spain. Off the coast
of Newfoundland the French territory of Saint Pierre et Miquelon is reportedly
a player in this business. This totals 63 jurisdictions providing varying degrees
of incorporation concealment and protection from probing eyes.
As you select a place to acquire your anonymous international business
corporation and plan your circuitous travels to meet clandestinely with a shady
lawyer prepared to provide you with a dummy corporation to serve your unrevealed
interest in moving ill gotten gains with the utmost secrecy, you may actually
be disappointed to learn that you don t need to go there at all. In almost
every one of these jurisdictions, the whole thing can generally be done with a
phone call or fax or online. Using your search engine, enter international business
companies or offshore corporations, and scores of web sites will pop
into view offering instant service, comparing the pros and cons of various jurisdictions
and quoting fee schedules for creating your own shadowy company.
I have lost count of the number of anonymous entities existing in these
jurisdictions. Several years ago, the British Virgin Islands alone reportedly
had 180,000 and the Caribbean as a whole had 500,000. More were being
formed at a reported rate of nearly 200,000 a year. The total is certainly well
36 CAPI TA L I S M S AC H I L L E S H E E L
over a million by now, and some experts put the number as high as three
million. According to various estimates, half of cross border trade and investment
passes through a tax haven or a secrecy jurisdiction at some point
along the way. So you re already in the best of company.
Stealth and camouflage can also be taken a couple of steps further.
Ownership of your one or more IBCs or PICs can be transferred to an offshore
trust. In most secrecy jurisdictions contributors to trusts do not necessarily
have to be named in trust documents, and such documents do not
have to be filed with local authorities. Trustees can carry out your instructions
and, except in rare circumstances, avoid answering questions about
who is giving them instructions. Furthermore, trustees are usually absolved
from responsibility for directives issued, which protects both them and you.
Trusts typically offer a strong measure of asset protection from attacks by
creditors and, set up in tax havens, allow citizens of many countries to accumulate
revenues not subject to income or capital gains taxes. And, being
doubly cautious, many trust documents incorporate flee clauses, allowing
the domicile of the trust to be relocated to another secrecy jurisdiction
should anyone come asking questions. Be sure to get these flee clauses written
into your documents.
The evolution of trust law over a period of centuries typically has required
that the contributor to a trust and the beneficiary of a trust can t be
one and the same. In other words, you cannot set up a trust to benefit yourself.
But have no fear; secrecy jurisdictions are not about to be stopped by
such ancient traditions. Take Nevis, for example: Under the Nevis International
Trust Ordinance, the same person can, but is not required to be the
Settlor (creator), Beneficiary, and Protector of the trust. 9 Furthermore, foreign
laws, including U.S. laws, do not apply to Nevisian trusts. This means
that under Nevisian law, the claim will always have to be re tried, ab initio,
in the Nevisian courts, with Nevisian attorneys and with Nevisian judges
who can generally be expected to uphold the Nevisian trust. 10 If someone
pursuing you even sets foot in Nevis, he or she must first post a $25,000
bond with the court before any legal action can be undertaken. In other
words, now you ve got a secret company operated by a secret trust in a secrecy
jurisdiction determined to protect your secrets no matter what.
A variation on offshore trusts is an offshore foundation. This is a legal
entity that has no shareholders or members, but it can hold ownership interests
in other companies. Founders can be beneficiaries of a foundation, but
Playing the Game 37
neither founders nor beneficiaries are responsible for liabilities of the foundation.
Once again, anonymity reigns; founders and beneficiaries, as well as
operations of the foundation, can almost always be fully concealed. Liechtenstein
and Panama, among other countries, offer these vehicles, typically
suited for wealthy individuals hiding assets and escaping taxes.
Speaking of liabilities, dummy corporations are also useful places to
dump nonperforming assets. If you ve gotten overextended and need to
clean up a financial statement, just swap your junk for securities in some
fancy sounding financial corporation in a tax haven. You know your securities
are worthless, but other lenders and shareholders do not. Enron and Parmalat
are your models here.
Now the United States is encouraging havens and secrecy jurisdictions
to keep up with the owners of IBCs and PICs and is trying to insist on mutual
legal assistance and cooperation in specific tax and criminal matters.
This just means that you want to maintain a friendly and profitable relationship
with your offshore facilitator, so he will use that flee clause or other devices
if needed to protect your interests.
IBCs, PICs, offshore trusts, and private foundations make it possible for
you to disguise, shelter, move, and accumulate money that is unseen, unregulated,
and untaxed. With these devices and techniques, you can join millions
of others who beat the system every day.
So far, I ve been talking about transactions where prices are falsified and
money moved through layers of disguised entities. Another way to accomplish
very much the same end is by faking the transaction itself, in part or in
whole. In other words, you can manipulate the reality of the transaction
rather than the price of the transaction and still generate the illegal money
that moves across borders undetected.
For example, cooperating buyers and sellers can agree to vary counts,
weights, or measures as necessary to accomplish a shift of funds. Ten thousand
tons of tropical hardwoods being shipped out of Indonesia can be
documented as 6,000 tons, with the value of the extra 4,000 tons paid into
a foreign bank account. A small tanker can take on 20,000 tons of oil by
day, then the crew can repaint the water line of the vessel, load another
10,000 tons by night, and steam out of the harbor the next day unnoticed.
38 CAPI TA L I S M S AC H I L L E S H E E L
Oil trading offers many opportunities for manipulating recorded tonnages,
tanker charges, royalties, and more. A Russian fisherman operating out of
Vladivostok took the simplest approach. After laboring for days hundreds
of miles at sea, he offloaded his entire catch into another trawler of a different
flag, got paid in his Cyprus bank account, and returned to port bemoaning
his fruitless efforts.
Product quality can be falsified by cooperating buyers and sellers on
everything from cocoa butter to used cars to rice to steel. Carnuba wax can
be shipped out of Brazil labeled #3 yellow when it is in fact #1 yellow, a
higher grade, and the additional value deposited into the exporter s U.S.
bank account. The qualities of textile exports are often doctored. A thread
count can be described as 250 when it is really 400, a higher quality, and the
difference in value deposited to a foreign bank account. Shipping containers
arriving in Africa invoiced as expensive machinery for a local Chineseowned
factory turned out to be nothing but scrap metal, such fakery done
for the intended purpose of removing profits to Hong Kong. There are hundreds
of ways to document one reality and deliver another.
A creative example of faking it took place across a four year period in
the 1980s, eventually acquiring the name La Mina, The Mine. Colombian
drug dealers with enormous sums of money converted their cash to gold. At
least that s the way it started out.
The Medell¡n cartel s money manager, Eduardo Martinez, approached a
gold dealer in Argentina, Raul Vivas, who had an established international
business selling to jewelers. Martinez asked Vivas to ship gold to the United
States and accept cash in payment in the United States from the cartel. The
cartel, having converted its dollars to gold, could now sell the gold to other
bullion dealers, with the proceeds then wire transferred into innocent looking
bank accounts. This worked for awhile.
But why ship real gold to the United States when you can fake it Vivas
and Martinez concocted a scheme to put gold plating on lead bars. The cartel
paid cash for the bogus bullion in the States, and Vivas transferred the
money from his U.S. account to cartel accounts out of the country.
Why go to the trouble to ship anything at all Vivas opened a company
in Los Angeles to buy gold. The cartel brought in its cash, and Vivas used it
to buy gold locally from other dealers. Vivas would then truck the gold
across country to New York to sell to yet other dealers. When paid, he wire
transferred the funds to cartel accounts overseas.
Playing the Game 39
Why truck all that gold across country to New York Better to open a
New York office to receive cartel cash and buy gold. This, too, was done,
making it a bicoastal laundering scheme.
But dumping that gold back on the market in New York might look a
bit odd. So, how about trucking the gold from both New York and Los Angeles
to Florida, to a refiner there who will buy the gold and pay Vivas
Done. Vivas would then wire transfer the money to his own account in
Uruguay and from there distribute it on to cartel accounts.
But this was all getting much too slow and complicated and a bit suspicious
looking, especially with those armored trucks converging regularly on
Fort Lauderdale. So, let s skip the gold altogether and imitate the transactions
on paper. A California gold dealer and the Florida refiner were easily
enticed by Vivas into the following scheme. A cartel front company delivered
cash to the gold dealer. The gold dealer, with fake purchase orders, pretended
to buy gold on the open market. The pretend gold was, with fake
invoices, sold to the Florida refiner. The next day the refiner would resell
the pretend gold back to the dealer. The dealer would pay for the pretend
gold by wire transferring the money delivered to him by the cartel to the refiner s
account at Chase Manhattan in New York. The refiner then wire
transferred the money to Vivas s account offshore, who as usual sent it on to
cartel accounts. The Los Angeles dealer and the Florida refiner earned modest
fees for their fictitious paperwork.
The Drug Enforcement Administration finally closed down La Mina in
1989 with Operation Polar Cap, a parallel money laundering scheme that
penetrated Vivas s scam. Vivas was arrested, as were the Florida refiner and
the California gold dealer. What started out as gold shipments from Argentina
ended up as paper shuffling in the United States, and a billion dollars
went through this evolving little exercise and into Medell¡n cartel
coffers. But the idea of continuously changing your schemes is a good one.
These fellows were just unlucky.
It s not just tangible items that are put through this sort of subterfuge.
Billing for services can also be imaginary. A lot of invoices have shown up at
a lot of companies for consulting services, public relations, advertising, legal
advice, and financial planning without an ounce of underlying reality. Some
higher up in the company is topping off a foreign bank account.
A variation on this theme of creative artifice is where you fake or disguise
who is the buyer and who is the seller. Someone steps in between the
40 CAPI TA L I S M S AC H I L L E S H E E L
two. In the midst of its civil war in the late 1960s, Nigeria did not have
enough hard currency earnings to enable us local manufacturers to get the
foreign exchange we needed to buy imports. Intermediaries would call on
me offering to purchase abroad the raw materials we needed, ship the tonnage
to our companies, and I could pay them in local funds, avoiding the
long wait for allocations of foreign exchange from the Nigerian central bank.
The problem was they wanted a 20 percent commission, which was too
steep a hike in costs for my operations, so I never used them.
Today, similar arrangements are common in South America, known as
the Black Market Peso Exchange system. A typical peso broker will have offices
in, for example, the United States and Colombia. Drug dealers in the
States need to get rid of dollars. They deliver huge sums of cash to the U.S.
end of the peso broker s operation. The broker feeds the cash into the U.S.
financial system by carefully depositing modest sums into many U.S. bank
accounts or by paying cash for U.S. purchases.
Meanwhile, the Colombia office is receiving pesos from local businesspeople
who need to buy imported goods. Now the U.S. end has millions of
dollars and the Colombia end has millions of pesos. The Colombian businesspeople
give instructions that so many dollars are to be paid to their foreign
suppliers. The U.S. office of the peso broker pays the suppliers, who
ship the required goods to Colombia. Meanwhile, the U.S. drug dealers give
instructions that so many pesos are to be paid to their Colombian drug cartel
chieftains. The Colombia office of the peso broker is happy to oblige,
keeping about 20 percent as commission for services rendered.
Goods flow from the United States to Colombia, but no money is wire
transferred, thus avoiding bank scrutiny. Everyone ends up happy, except
the U.S. government, thoroughly frustrated that it cannot shut down this
system. The Customs service regards the Black Market Peso Exchange as an
unusually complex and sophisticated laundering mechanism. It s neither; it s
the same facilitation at the same level of commission that I was offered
nearly 40 years ago. And you can still use it today.
There are all sorts of financial ruses you should know about, useful in moving
dirty money. Many of these serve specialized purposes, so knowledge of
such techniques can come in very handy.
Playing the Game 41
Drug dealers in North America and Europe, for example, face the problem
every day of disposing of large amounts of cash. For a small local distributor
with a take of perhaps a million or two a year, the simplest way to
launder cash without detection is smurfing using innocuous looking bagmen,
named after the cartoon characters, to deposit a few thousand dollars at
a time into variously named accounts at many different banks. Due diligence
procedures at such banks, alert to cash transactions of more than $10,000,
rarely catch this activity. Drug kingpins with tens or hundreds of millions of
dollars in cash in assorted denominations, weighing several tons and occupying
a volume five times larger than the drugs themselves, have a more onerous
laundering task. Smurfing won t work because it would require hundreds of
innocuous looking bagmen making repeated trips to the banks, not to mention
the control problems arising from those bagmen foolish enough to try to
abscond with their day s deposit. Using cash to live high and buy cars and
houses isn t very smart and fails to soak up much of the millions. So basically
the kingpins are left with two choices, both of which move the transactions
into the international arena: ship cash or ship goods overseas.
Mules carry suitcases of cash to island tax havens for deposit, a bit
risky nowadays with heightened airport security. Couriers hide cash in their
clothing, wrap it around their bodies, conceal it in their onboard luggage, or
hide it in checked baggage.
More commonly, unaccompanied cash is hidden in something being
shipped abroad: appliances, overstuffed furniture, machinery, industrial products,
coffins, or even dead bodies. This form of handling drug profits has
soared in recent years, as customs authorities in western countries pay more attention
to what s coming in than what s going out. A few million dollars inside
nicely packaged computers and printers shipped from ABC Technical to XYZ
Technical is unlikely to arouse suspicion and, once retrieved, can be easily legitimized
in countries with lax controls on large currency deposits.
Something very much like smurfing can be combined with the Black
Market Peso Exchange system to handle large transactions. A Colombian,
later identified as having links to the drug trade both in his own country and
in the United States, approached the local sales agent of Bell Helicopter to
arrange purchase of a used chopper. Bell accepted the order at $1.5 million
and in 1998 received 30 wire transfers and one check covering the price,
none from the purchaser.11 The company placed a telephone call to the
American Embassy in Bogot asking about the buyer, and did not receive a
42 CAPI TA L I S M S AC H I L L E S H E E L
negative report. As it turned out, five of the payments came from undercover
U.S. Customs agents who had collected drug cash on the streets of
New York, banked the nearly half million dollars in Alabama, and then
made wire transfers to Bell on instructions received from a peso broker.12
The other 26 transfers also were apparently directed by one or more peso
brokers. Thirty one separate payments All from unknowns Destination
Colombia 13 Don t let yourself get caught making such elementary mistakes.
Another gimmick useful in providing kickbacks is the real estate swap.
For a favorite customer who has been paying intentionally marked up prices
for materials supplied by your company, you can deed to this trading partner
a house or building in one country and take in exchange a beach house
in another country. The fact that what you re giving away is a nice property
worth a million or two and what he s giving away is a grass shack on a desolate
shore will probably go unnoticed by authorities.14
Share swaps often have been used to move ownership beyond the reach
of local authorities, a particularly popular technique among Mexican and
Japanese entrepreneurs. An IBC is created in a tax haven, and business owners
exchange their shares for shares in the new company. With no money
changing hands, the business suddenly has a foreign domicile. From then
on, dividends are shifted to the offshore tax haven.
A similar technique for, in effect, conveying a bank overseas has occurred
several times in Russia and at least once that I know of in Argentina.
You form a bank or take over an existing bank. The bank has or soon accumulates
tens of millions in customer deposits. You set up a couple of disguised
offshore companies and then have the first company enter into
contract to do some fake piece of business with the second company. Your
bank issues letters of credit (L/Cs) to the second company guaranteeing the
creditworthiness of the first company. Of course, the first one fails to perform
on its nonexistent obligations to the second one. But your bank, being
an honorable institution, has to pay up on its L/Cs to the second company.
The bank goes bankrupt, the innocent depositors lose their savings, and
you ve made a bundle, now neatly stashed away on a tropical island.
If you don t want to own a bank, you can try cozying up to the key operator
in the wire transfer department. This is the fellow given code numbers
for making transfers to correspondent banks. For a big enough bribe, he
may reroute a transfer away from some intended recipient and direct it to a
different account your account in a tax haven. This may go unnoticed for
Playing the Game 43
quite awhile. By that time the key operator has understood that he can
transfer money, that is, steal it, for his own account. Out of many countries,
hundreds of millions of dollars have vanished, with hundreds of trusted employees
vanishing as well.
Ordinarily you would think that when you transfer money it has to go
from your account into the recipient s account. Well, not exactly. If you re a really
big player in this game, there s even a way around this. It s a little gimmick
called the concentration account. Raul Salinas, brother of the president of
Mexico, was an ideal candidate for this subterfuge. In providing services reserved
for only the largest and most clandestine operators, Amy Elliott, vice
president of Citibank, gave white glove treatment to Salinas s stolen millions.
Citibank Private Bank accepted Salinas as a client in May 1992, undertaking
no investigation of his sources of wealth. Over the next two years, Citibank
set up a string of anonymous trusts, international business companies, and secret
bank accounts for Salinas.15 A trust account number PC 4730/PT 5242
served as the owner of Trocca Ltd., a Cayman Islands shell corporation.16
Citibank then utilized six nominee companies to shield Trocca s true owner,
three functioning as Trocca s officers and nominee shareholders and three functioning
as its board of directors.17 Salinas s own name appeared nowhere in
Trocca s papers. Citibank added a second shell corporation in 1994, Birchwood
Heights, Ltd., to hold real estate Salinas owned in the United States, purchased
through yet another Caribbean shell company.18
Citibank Private Bank opened investment accounts under the Trocca
name in London and Switzerland and later another account in Switzerland for
Salinas and his wife, operated under the name Bonaparte.19 From 1992 to
1994 these accounts received some $87 million, $67 million of which was
transferred through Citibank s concentration accounts. These are internal accounts
used by banks to consolidate large sums from various sources before directing
individual sums into private accounts. Thus, funds were shifted from
Citibank Mexico to Citibank New York without being wire transferred out of
a Salinas Mexico account or being deposited into a Salinas New York account
and without ever identifying Salinas by name.20 When the consolidated funds
arrived in New York, Salinas s portion was separated by a communication stating
the amount that belonged to him and was then to be forwarded on to
Trocca s London and Zurich investment accounts. Amy Elliott enthused,
This account is turning into an exciting profitable one for us all[.] [M]any
thanks for making me look good. 21
44 CAPI TA L I S M S AC H I L L E S H E E L
In February 1995, Salinas was arrested on suspicion of murdering his
former brother in law, Ruiz Massieu, a leading politician. As Citibank s handling
of his ill gotten gains began to unravel, Elliott started covering her
own tracks, asserting in a telephone conversation with bank colleagues that
. . . in the very, very top of the corporation, this was known . . . on the very
top. You and I are little pawns in this whole thing . . . 22
Further investigations indicated that more than $300 million had been
moved by or for Salinas out of Mexico into foreign accounts, with several Swiss
banks also allegedly holding huge deposits including Banque Pictet, Julius Baer
Bank, and Banque Edmond de Rothschild.23 Salinas s wife was arrested in
Geneva in November 1995, trying to make a massive withdrawal. Swiss authorities
froze some $132 million, $27 million of which was still in Citibank
Private Bank, Zurich, nine months after Salinas s arrest. Swiss officials were unable
to make a money laundering charge stick against the Salinas couple.
After extensive investigations by U.S. prosecutors, Citibank was never
charged for accepting, wiring, disguising, hiding and overseeing wealth allegedly
stolen at the highest level from a neighboring country. The U.S. Senate s
Permanent Subcommittee on Investigations held hearings in November
1999, focusing on Citibank s dealings in the Salinas and other cases. Appearing
were seven Citibank officers, four government witnesses, a convicted exmoney
launderer cum ex Citibanker serving time in federal prison, and me.
Even in the absence of a money laundering charge, the bank was excoriated
in the two day sessions. For this and other reasons, the central character in
the hearings, John Reed, co chairman of Citigroup, resigned five months
later. But for you the point of this tale should be obvious. When you re laundering
your money through a really sophisticated bank, don t commit murder
at the same time.
Besides banks, remember all the other kinds of financial businesses that
can help you transfer illicit resources. Securities firms, brokerage houses,
commodity traders, insurance companies, money changers they re waiting
to offer you services that rival the banks in creativity and subterfuge.
In the aftermath of 9/11, many people learned about the hawala system,
known in Pakistan and India as hundi and in China in a slightly varied form
as chop. In existence for centuries, use of hawaladars soared when stringent
exchange control regulations were enacted in the subcontinent in the
1960s and 1970s. This system takes money in one place and hands it over in
another place without ever passing through the banking system. Independent
Playing the Game 45
dealers who know and trust each other arrange the transactions. In a simplified
example, suppose you want to send $5,000 to someone in Pakistan. You walk
into a hawala dealer in New York City and give him the $5,000 plus whatever
commission he requires, perhaps five percent or $250. You also provide the
name of the person in Karachi who is to pick up the money, and you are given
a code word that person is to use. The New York dealer telephones the Karachi
dealer, with whom he has done business many times, and provides that information.
The designated party in Karachi walks in, identifies himself by name
and code word and, presto, he s handed the rupee equivalent of $5,000, perhaps
less another commission charged on that end or some profit extracted on
the dollar/rupee exchange rate. New York hawala keeps a record that it owes
Karachi hawala $5,000. Over the next few months, Karachi hawala has the
same sort of transactions with New York hawala for money going the other
way. He keeps a record of what he owes New York. Eventually, if the balance of
what is owed gets tilted excessively on one side or the other, they will settle up
and then start a new set of records. Basically, what flows is, not cash, but accounts
receivable. Hawala, hundi, and chop move tens of billions of dollars
around the sphere. Most of it is in small amounts, often remittances by working
family members in one country sending money to struggling family members
in other countries. It is, however, available to move six and seven figure
amounts and has been an effective mechanism for positioning terrorists funds
Finally, you shouldn t forget the use of plain old credit cards. When you
have money in an offshore bank account, often that bank can issue you a
credit card in its own name, without your name or signature appearing anywhere.
With this you can live high on your ill gotten gains, and no one is
the wiser. Perhaps the perfect method for maneuvering hidden money has
already arrived: electronic banking. From a bank in the Caribbean, funds
can be transferred via personal computer to a bank account in Europe. With
a credit card on that bank, money can be spent anywhere. Or that bank can
make a credit to a smart card that is usable today in some countries and
could in the future be accepted universally.
So, keep in mind some of these gimmicks, like concentration accounts,
smart cards, credit cards in bank names, the hawala system, asset swaps, cash
smuggling, and so on, as you plan to move your money from place to place.
You never know when one of these techniques might provide just the right
way to meet an opportunity or handle an emergency.
46 CAPI TA L I S M S AC H I L L E S H E E L
YOU RE IN BUSINESS
Everything in your dirty money user kit basically falls into four categories: falsifying
prices, passing money through dummy entities, faking transactions,
and using a few specialized devices as needed. Occasionally a gimmick or two
may be declared illegal or require a bit of caution, but the basic facilitating
structure that has been around for years remains intact. Some of it may sound
a bit complicated, but it really is not. Besides, there are office buildings full of
bankers and lawyers and accountants here and abroad ready to help you,
whether you are a crook or a CEO or just a run of the mill tax evader. Most of
these professionals can do the dirty work for you, or structure deals to keep
you out of trouble, or tell you where laws are particularly lenient, or help you
stay ahead of authorities where laws are stronger, or defend you if in that extremely
rare circumstance you should get caught, or impart to you sage counsel
on how to place your criminal or corrupt or commercially tax evading
money in secure and profitable investments. The whole process of dealing
with dirty money is routine and well honed and functions effectively every day
for people just like you. And let s face it, it s so very satisfying being smarter
than the next person and making money no one knows about or can find.
There s only one catch. Use of instruments in the dirty money user kit
carries a high price. The price is damage to the capitalist system. The price is
bolstering international crime and terrorism. The price is deprivation for
billions of people. The price is heightened risk to the shared security of a
But I m getting ahead of myself. These are topics for the pages to come.
Playing the Game 47
C H A P T E R 3
HOW DO I tell the story of trillions of dollars of dirty money lodged
around the world, derived from many types of illegal activities, shifting
across some 200 countries, affecting both economic and political affairs
It s not easy. Some writers report tale after tale of illicit dealings, leaving unifying
themes unmentioned. Others delve entertainingly into a particular example
of skullduggery. Still others treat dirty money as just one item on a
laundry list of ills hurting a weakened state.
A French banker said to me something both simple and profound:
Politicians think nationally. Criminals think globally. They win. We lose. 1
He s correct. For people who deal in dirty money, the globe is their playground.
For nations trying to curtail some types of dirty money, their borders
are a major limitation. For me trying to convey the effect of dirty
money, this variety of sources and intermix of geographies, economies, and
legal systems makes for a complicated task.
I have found over the years that the best way to tell the story of dirty
money is by relating the impact of this phenomenon on particular countries.
In other words, global tax evasion, corruption, and crime are important
to understand and at the same time are somewhat fluid, abstract
concepts. But Russia or China or Nigeria or Indonesia or Iraq are nations
about which we already have some understanding. Therefore, while I write
about corruption and crime and tax evasion, I recognize that it is in the illustrations
of what happens in and between countries that the larger
points are best conveyed.
So, in handling this subject matter, two approaches are combined:
money and country. Dirty money is broken down into its three components:
corrupt, criminal, and commercial. Each is illustrated with stories of
countries that exhibit some of what is happening arising primarily from one
aspect of illicit dealings, while touching on other aspects as well. In other
words, I am talking globally and demonstrating locally.
Specifically, we proceed as follows:
Dirty Money Illustrated By
Corrupt World leaders: Nigeria and Indonesia.
Dominated by military: Pakistan.
Criminal Drugs: Afghanistan and Colombia/Peru treated together.
Thugs and racketeers: North Korea and the Japanese Yakuza.
Terrorists: Al Qaeda and Iraq.
Commercial Long in the business: Congo.
Transitional economies: China and Russia.
Furthermore, there is usually an interweaving of financial shenanigans
and political machinations, and in rounding out the impact of dirty
money, brief comment on national political affairs is offered as well. The
role of western financial and corporate interests and the use of mechanisms
created in the West for moving dirty money have a large place in
the tales to follow.
To put it simply, in this chapter I paint a word picture of corruption,
crime, and commercial deception and the damage these combined features
of the present age impose on our shared world. It is a picture rendered both
in broad brush strokes and in pointillism, which I hope in the end will leave
you with a deep impression of a capitalist system badly in need of change.
THE CORRUPTION INDUSTRY
Corruption shatters the economies of poorer countries and contributes to
conditions in which crime, in all its manifestations, including terrorism,
thrives. The word corruption as applied in the past 15 years refers to corruption
by public officials, not private citizens. A working definition of the
Dirty Money at Work 49
term is the abuse of public office for private gain. Bribery is the most common
form of public corruption. Additional forms include theft of money
and property from the public treasury, award of licenses or concessions to
personal, family, or associated interests, improperly obtaining intangibles
such as office, prestige, or power affording opportunities for future enrichment,
buying votes to rig elections, and more.
For years, I have observed people bribing those in power guided by the
simple question, Do the ends justify the means Right up front, it should
be acknowledged that the answer is, Sometimes, yes. Suppose you are
leading a convoy of trucks delivering emergency relief supplies to an encampment
of refugees. As you get within sight of hundreds of shelters containing
thousands of people, including the diseased and the dying, you
encounter a roadblock and an officer or rebel who demands a hefty bribe before
letting you pass. It could be thousands of dollars, or it could be the entire
contents of the first truck. You have a choice: Pay the bribe or return to
base. But the fact is, you don t have a choice, because delivering your lifesaving
cargo is far more important than your moral compunctions. This is
not a hypothetical situation; it is a reality encountered by countless humanitarian
aid workers, relief teams, and medical personnel working in the lawless
reaches of the planet. Anyone unprepared to answer, Sometimes, yes,
shouldn t go into this line of work.
Bribery under these conditions is only a tiny percentage of the global
problem. Virtually the whole of the problem is about getting rich or gaining
an advantage that leads to enrichment. Contrary to the views of some experts,
bribery and corruption (except in situations of saving lives) do not
have redeeming social value. They produce a litany of harmful outcomes,
devastating to scores of developing and transitional economies. Bribery and
Worsen poverty and inequality.
Limit government tax revenues.
Curtail health and education expenditures.
Reduce economic growth.
Discourage foreign direct investment.
Slow creation of new enterprises.
50 CAPI TA L I S M S AC H I L L E S H E E L
Channel public money into defense and infrastructure, where kickbacks
are typically high.
Increase debt burdens on poorer countries.
Having watched the debilitating effects of corruption for more than 40
years in dozens of countries, I don t want to hear the argument that it has a
good side, oiling the wheels of commerce and enabling rich people to dole
out money to poor people. That s like arguing that HIV/AIDS has a good
side, promoting research and enhancing profits of pharmaceutical companies.
No, there is no good side to HIV/AIDS, and there is no good side to
corruption. Both kill people.
The most nervous civil servant I ve ever encountered was a top official at
the Brazilian central bank during the administration of Fernando Collor de
Mello. I had been referred to him by a senior advisor in Palacio do Planalto,
the office of the president in Brasilia. This central banker monitored capital
inflows and outflows. I offered some preliminary data on illegal outflows
from Brazil, and he panicked. He paced, pulled another colleague into his
office, drew his chair close to mine, whispered, and squirmed. Little wonder.
Collor was accused a few months later of robbing the till to the tune of tens
of millions of dollars. Later, on a sunny Sunday in August 1992, I watched
as a hundred thousand people took to the broad avenues of Brasilia demanding
Collor s resignation, which was tendered a few weeks later. The Brazilian
Senate proceeded to impeach and convict him of corruption, though this
was later overturned by the country s supreme court for insufficient evidence.
Based on the Senate outcome, Collor was nevertheless barred from
public office for eight years.
Transparency International (TI) lists some of the larger kleptocrats of
recent years, as in Table 3.1. Many more names could be added. Saddam
Hussein must feel terribly slighted not being included among the great
thieves of recent years. During the presidency of Ibrahim Babangida of
Nigeria, $12.4 billion in oil revenues received during the Persian Gulf crisis
of 1990 1991 allegedly disappeared. Alfredo Stroessner of Paraguay was
world class, believed to have ripped off millions. The Angolan government
of Jose Eduardo Dos Santos was accused in a 2004 report by Human Rights
Watch of mislaying $4.2 billion from 1997 to 2002.2 Daniel arap Moi, expresident
of Kenya, is currently being suspected of frauds that allegedly gen
Dirty Money at Work 51
erated tens of millions of dollars sloshing out of the central bank. Benazir
Bhutto and Nawaz Sharif of Pakistan certainly understood the concept of
self enrichment and will be covered shortly. Omar Bongo of Gabon was
tagged with $130 million in U.S. deposits in a 1999 Senate hearing at which
I testified. Robert Mugabe of Zimbabwe is currently accused of grabbing all
he can and shifting money to Singapore and Malaysia. And then there is
that most genial of master pickpockets, Felix Houphou‰t Boigny, president
of C“te d Ivoire. The key person in the Bank of France in a position to know
told me that, at the time of Houphou‰t Boigny s death in 1993, his accumulated
assets outside C“te d Ivoire totaled seven billion dollars! Startled
that a small one crop country selling cocoa could produce such offshore
wealth for its leader, I blurted, Dollars or francs He repeated, Dollars!
C“te d Ivoire has since descended into chaos. This rogues gallery could continue
for many more paragraphs.
Indeed, where did the money go Into western coffers, where it can be
accommodated with all the courtliness and secrecy available to the world s
rich, whether saints or scoundrels.
52 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.1 WHERE DID THE MONEY GO
Estimates of Funds
Head of Government Allegedly Embezzled
Mohamed Suharto, Indonesia, 1967 1998 $15 to $35 billion
Ferdinand Marcos, Philippines, 1972 1986 $5 to $10 billion
Mobutu Sese Seko, Zaire, 1965 1997 $5 billion
Sani Abacha, Nigeria, 1993 1998 $2 to $5 billion
Slobodan Milosevic, Yugoslavia, 1989 2000 $1 billion
Jean Claude Duvalier, Haiti, 1971 1986 $300 to $800 million
Alberto Fujimori, Peru, 1990 2000 $600 million
Pavlo Lazarenko, Ukraine, 1996 1997 $114 to $200 million
Arnoldo Alem n, Nicaragua, 1997 2002 $100 million
Joseph Estrada, Philippines, 1998 2001 $78 to $80 million
Source: Transparency International, Global Corruption Report, 2004 (Sterling, VA:
Pluto Press, 2004), 13.
In terms of financial flows, the decade of the 1990s was the most corrupt
in the past half century and probably the most corrupt in history. And
despite all the attention being given to stemming corruption, it is not clear
that the current or next decade will be any better. Even the Economist said as
recently as 2002, Most half reliable measures of bribery around the world
show it to be growing, not fading away. 3
The United States passed the Foreign Corrupt Practices Act (FCPA) in
1977, after 400 U.S. firms were reportedly found using bribery of foreign
government officials as a primary negotiating tactic in overseas sales. The act
barred bribery for the purpose of obtaining or retaining business. It was
amended in 1988 in order to clarify that bribery was not intended to include
minor facilitating payments, a point that will become important in a
few pages. It was further amended in 1998 to bring the FCPA into line with
the Organisation for Economic Cooperation and Development (OECD)
convention against bribery, adding that payments to secure an improper
advantage are likewise barred. Nearly three decades after the act was first
passed, U.S. courts are still interpreting whether bribes to avoid foreign taxes
and duties come under the act.4 European Union countries began adopting
antibribery laws only in the late 1990s and will go through years of legal
wrangling before what is barred becomes clear. Meanwhile, there are legions
of lawyers who advise on how to get around anticorruption laws and win
While the FCPA made bribes by Americans illegal, handling the proceeds
of foreign bribery was not illegal, and U.S. banks continued their
pursuit of these billions from countless despots, tyrants, and corrupt government
officials for the next quarter century. Not only U.S. banks but
also banks in every European and many Asian countries went after looted
A few years ago I called on the regulatory compliance officers of two
Swiss banks. Each tried to convince me that his institution refused to handle
the proceeds of bribery and corruption or any other forms of illegal flight
capital. They both showed me their lengthy policy declarations demonstrating
how aggressively their banks fight the scourge of dirty money. I saw
through these elaborate statements, finally wringing confessions from the
two compliance enforcers that the only thing meant by their legal obfuscations
was that bank officers themselves should not physically carry cash,
gold, or negotiable instruments across borders on behalf of their clients.
Dirty Money at Work 53
That s all the statements meant: Transfer all the dirty money you can; just
don t carry it on your person!
For years U.S. and European bankers have tried to convince me and others
that handling dirty money is in the past: We don t cater to corrupt officials,
the institution s anti money laundering safeguards are very effective, our
reputation is our most valuable asset. Okay, bring all this reassuring talk
right up to 2004, to the capital of the United States and its venerable Riggs
Founded in 1836, Riggs catered to the elite of Washington, serving 17
presidents including Abraham Lincoln, generals and admirals including
Sherman and Grant from the Civil War and MacArthur and Nimitz from
World War II, and 95 percent of the embassies and foreign missions located
in the greater metropolitan area. It regarded itself as the most important
bank in the most important city in the world.
At the request of Senator Carl Levin, the U.S. Senate Permanent Subcommittee
on Investigations launched an examination in 2003 into money
laundering at Riggs. The report it released in 2004 plus a supplement in
2005 are the most damning documents produced on any financial institution
since the Bank of Credit and Commerce International (BCCI) was
turned inside out in the early 1990s.
Riggs had few scruples about the kind of money it accepted. It graciously
serviced the wealth of a murderous dictator, Augusto Pinochet of Chile; a
world class thief, Teodoro Obiang of Equatorial Guinea; and Saudi Arabian
money that was suspected of ending up in the hands of terrorists. Serviced is
an understatement; Riggs groveled before some of the dirtiest money on Earth.
Pinochet. As the Senate report says, Mr. Pinochet has been accused of involvement
with human rights abuses, torture, assassinations, death squads,
drug trafficking, arms sales, and corruption . . . 5 Riggs took deposits from
Pinochet as early as 1979, and then in the mid 1990s, using its own Bahamian
trust company, established two offshore shell corporations, Ashburton Company
and Althrop Investment Company. Riggs also issued up to nine certificates
of deposit (CDs), each for a million dollars or more for Ashburton and
54 CAPI TA L I S M S AC H I L L E S H E E L
Althrop. At various times, Riggs maintained 28 Pinochet related accounts and
CDs, and held $6 to $8 million of the ex dictator s funds. To meet its Know
Your Customer (KYC) requirements, Riggs described Pinochet as a retired
professional who achieved much success in his career and accumulated wealth
during his lifetime for retirement in an orderly way. 6
In 1998 Pinochet was arrested in London. In 1999, while Pinochet was
still detained, Riggs moved some of his money on deposit at its London
branch to its head office in Washington. Pinochet was freed in 2000, and
Riggs senior officials immediately flew to Chile to meet with him. As news
of the accounts began to leak out, Riggs altered their identifications, removing
Pinochet s name. From 2000 to 2002 Riggs issued 38 cashiers checks for
$50,000 each, eight in Pinochet s name and 30 in the altered names. Some
were hand delivered to Chile by Riggs officers.
Obiang. Equatorial Guinea is comprised of a small piece of the mainland
and five inhabited islands off West Africa. Teodoro Obiang overthrew and
executed his uncle in 1979 and has reigned as president ever since. Oil made
him very rich, very corrupt, and a very good Riggs customer.
From the mid 1990s on, Riggs opened and handled 60 accounts for
Obiang, his family members, other officials, and the Equatorial Guinea government.
As much as $500 million was on deposit, and Obiang could withdraw
funds from the main accounts on his sole signature or together with
his son or nephew. Riggs also helped set up Bahamian offshore shell corporations:
Otong S.A. for the president and Awake Ltd. for his sons.
Riggs ministrations to Obiang were effusive, including a luncheon
hosted in 2001, an invitation to visit the Ronald Reagan Library in California,
a private meeting with senior bank officials in 2003, and even a special
committee comprised of the chairman, president, president of the holding
company, and account manager. Writing to the embezzler, the bank confirmed
that the committee will meet regularly to discuss our relationship
with Equatorial Guinea and how best we can serve you and asked that you
provide us with any projects that you would like us to review on your behalf
. . . 7 After all, Equatorial Guinea, a tiny state being robbed blind by its
ruler, was Riggs biggest customer.
To be a really good banker to the corrupt of the world you have to be willing
to handle cash covertly. Six cash deposits were made to the president s
Dirty Money at Work 55
Otong account from 2000 to 2002, totaling $11.5 million. The senior Riggs
official overseeing Equatorial Guinea s needs hauled suitcases stuffed with dollars
into the bank for deposit. Similar courtesies were offered to Obiang s wife,
but cash deposits to her accounts were a mere $1.4 million. None of the cash
deposits led Riggs to file a Suspicious Activities Report, as required by law.
Perhaps this was because the Riggs account manager, Simon Kareri,
seemed to have ample reason to keep some of his dealings hidden. His wife
had an offshore shell corporation, Jadini Holdings, Inc., and wire transfers
totaling more than $1 million went from an Equatorial Guinea account into
a Jadini account.8 When discovered, Kareri took off for Equatorial Guinea
and, finding little solace there, returned to Washington to plead his Fifth
Amendment rights against self incrimination.
Out of the Equatorial Guinea oil account at Riggs, wire transfers totaling
$35 million were sent to a Banco Santander account in Spain and to an
HSBC account in Luxembourg. When Senate investigators attempted to
trace who owned the accounts into which Equatorial Guinea s oil money
was being shifted, they realized that, due to secrecy laws, the two European
banks were unable to find out from their own foreign affiliates who were
the beneficial owners on the accounts.9 Equatorial Guinea s oil money is disappearing
into a black hole, and even the power of the U.S. government
cannot plumb the depths.
Saudi Arabia. Riggs at one time had some 150 Saudi accounts for the embassy,
the long time ambassador Prince Bandar bin Sultan, his wife, and
others. A little more than a year after 9/11, the FBI began examining Saudi
accounts at Riggs. Expected to take one month, the probe lasted five
months, apparently producing disturbing information. Million dollar
movements of funds in and out of Prince Bandar s accounts and perhaps out
of embassy accounts, with little explanation, has led to speculation that
money could have unintentionally ended up in the hands of terrorists. The
U.S. administration seems hesitant to offer details of Saudi financial affairs,
choosing instead behind the scenes pressure on the kingdom to strengthen
Now, where were U.S. regulators during the years Riggs was laundering
the money of Pinochet and Obiang and paying little attention to
56 CAPI TA L I S M S AC H I L L E S H E E L
huge transfers in and out of 150 Saudi accounts Some of the responsible
officers were right across the street from Riggs at the U.S. Treasury
The Senate investigation found that the anti money laundering program
at Riggs Bank was almost completely dysfunctional. 10 Examiners
from Treasury s Office of the Comptroller of the Currency (OCC) reported
major deficiencies continuously from 1997 on but then failed
to take actions necessary to enforce corrections. Instead, examiners repeatedly
found that, despite obvious shortcomings, Riggs anti money
laundering efforts were making progress and were satisfactory. Furthermore,
the examiner in charge allegedly kept information critical of
Riggs out of OCC files and then left government employment for an executive
vice presidency at Riggs, where he continued to meet with OCC
officials, contrary to post employment regulations.
For Riggs Bank and its many customers in Washington and worldwide,
it seems that KYC meant Kleptocrats, You, and Crooks, all receiving polished
service from the bank s highly professional officers. Riggs and its regulators
utterly failed in their most fundamental task: insuring the integrity of
the institution. Riggs paid a fine of $25 million and a second fine of $16
million and agreed to settle court action in Spain by paying $8 million to a
foundation set up for victims of Pinochet s rule, with two owners of Riggs
agreeing to pay the foundation an additional $1 million. Sale of the bank to
new owners was completed in early 2005.
The proceeds of corruption coming out of developing and transitional
economies are lodged in western coffers. Many U.S. and European banks ignore
or skirt regulations in order to receive and profit from this money. The
following pages will focus on Nigeria, Indonesia, and Pakistan. In each, keep
in mind where the money goes.
Ladies and gentlemen, we have a winner. In the global corruption sweepstakes
the grand prize goes to and let s have a loud cheer for N I G E R I A the
most corrupt country in the world!!
How can I possibly make such a bald statement I ve observed financial
skullduggery in many countries, but from my perspective no nation with
Dirty Money at Work 57
which I am familiar has descended so deeply into this suffocating abyss as
Nigeria. Consider the following:
Joseph Stiglitz, Nobel Prize winner in economics, boldly went to the
capital, Abuja, and said that Nigerians have taken an estimated $100
billion out of their country. That s 2.3 times the current GDP. Almost
every dollar of this disappeared illegally. I do not know of any
large country that has a higher multiple of GDP spirited illicitly beyond
its borders into western accounts.
Corruption has permeated every level of society. Whereas after independence
it was limited to a few ministers receiving bribes, now
dash is necessary to get almost any routine service performed.
Political murders were common during military regimes and have
continued under civilian rule, recently reaching as high as a federal
Members of the judiciary, most of whom owe their appointments to
previous dictators, have become terribly corrupted, often selling
judgments to the highest bidder. The very weak rule of law curtails
investment and growth.
Nigeria has become world famous for 4 1 9 scams, advance fee
frauds that bring in millions of dollars. More on this shortly.
Nigerian criminals have spread throughout Africa, earning the enmity
of other states from south to north.
Nigerian drug gangs, estimated at 500 in number, have gone global.
Finally and most persuasively, Transparency International (TI), the anticorruption
organization, says that Nigeria is the longtime winner in the global
corruption sweepstakes. TI rates corruption perceptions for more than 130
countries on a 10 point scale, with 10 being the best. From 1996 to 2004,
Nigeria never rose above 1.9, and its average across these years is lower than the
average across the same period for any other country. In fact, Nigeria s total
score across these years is lower than the total score of many countries that have
been on the list for fewer years.11 I rest my case; Nigeria takes the blue ribbon.
I have both railed against corruption and been sucked into the edges
of it, and, consistent with trying to write as honest a book as I can, I tell
58 CAPI TA L I S M S AC H I L L E S H E E L
stories to illustrate each side of my own experiences. In the late 1960s,
while the Nigerian Civil War was still raging, I negotiated to buy a
medium sized packaging manufacturer whose pesky balance sheets and income
statements showed five years of losses. I figured the Syrian family
who owned majority interest, besides being poor managers, was overloading
imported raw material prices and thereby eliminating local profits in
order to generate hefty kickbacks out of the country. I offered 10 times
book value to buy the company. Harvard students later studying the case
unanimously agreed this was convincing evidence of tropically induced
dementia. After the acquisition, I purchased imported supplies at much
cheaper world market prices, paid off all the debts of the company in the
first year, and then distributed generous dividends to myself and minority
stockholders for years thereafter. It was simply a process of not overpricing
imports, but instead letting the profits earned locally accrue locally and be
properly recorded on the company s books.
Then in late 1972 I ran into a situation I couldn t sidestep. The military
was still in power, oil production was growing, money was flowing, and corruption
was soaring. In one of my companies, the purchasing manager and
the imports clearing clerk came to me and said that a senior customs officer
was demanding a bribe before he would release 500 tons of material waiting
at the docks. I sent them back to demand that the cargo be cleared without
delay. To no avail. I sent them again pleading for the needed goods, again to
no avail. I said I ll go with them, and they said, No, that will only drive up
the price of his extortion. Reluctantly I agreed to a œ200 clearing fee. Of
course, once that started, it never stopped. I finally allocated œ200 per
month for miscellaneous importation expenses and told my two employees
that if they did not have to spend it they could keep it but not to raise
the subject again.
This galled the hell out of me, being placed in a position where no
outcome was satisfactory, and I took little comfort in knowing that many
others were doing it without batting an eye. I sold the company a few
years later and eventually wrote a play in which a bribery situation was a
Then after carrying this unpleasant memory for 15 years or so, something
wondrous happened. The Foreign Corrupt Practices Act, originally
passed in 1977 and not in force when my incident in Nigeria occurred, was
amended in 1988 to clarify that these little facilitating payments, or grease
Dirty Money at Work 59
payments as they were called in congressional committee hearings, of less
than say $1,000, were not bribes at all. They were just a normal part of what
we have to do from time to time to stay in business. In other words, the U.S.
Congress came riding to the rescue of my conscience. Thank God! Here I d
been thinking for years that my corruption fighting credentials were compromised.
But, no, I never was a briber in the first place; I was merely a
greaser! What a relief!
The most brutal of Nigeria s military dictators was Sani Abacha, in
power from 1993 1998. When Abacha graduated from Sandhurst, the military
training college in England, his British instructors, recognizing that he
hardly possessed the qualities of an officer and a gentleman, noted on his
confidential personnel file that he should never be permitted to rise above
the rank of colonel. Three decades later as a general, he became possibly the
richest unelected person ever to take over a country. Amassing his initial fortune
allegedly through drug trafficking and arms purchasing, he was by
some estimates a dollar billionaire while still number two in the political hierarchy,
below Ibrahim Babangida.
Nigeria s position as a transit point for drugs emerged a little more than
a year after the notorious BCCI opened for business in the country in 1981
and began facilitating linkages with South Asian and Latin American
sources of heroin and cocaine. Nigerian generals competed to provide security
for shipments arriving at urban airports and military bases, arranging
temporary storage and perhaps movement to another landing strip, and then
overseeing reloading and onward flights to markets in North America and
Europe. Members of Abacha s family formed an air service and contracted
with American Trans Air based in Indianapolis, Indiana, for equipment and
services. This secured his hold on the Lagos to New York smuggling route,
though American Trans Air officials may not have known of his nefarious intent
even after he lost his U.S. landing rights.
Abacha had already developed a reputation for brashness in the business
of corruption. When he was head of the defense establishment he had government
checks for tens of millions of dollars written to his own name, supposedly
enabling him to go abroad and purchase arms for his forces. For
example, one check, said to have been for $75 million, was intended to fund
weapons procurement for Nigerian troops stationed in Liberia, with little or
nothing ever arriving.
60 CAPI TA L I S M S AC H I L L E S H E E L
Until the late 1990s, Nigeria had a succession of increasingly corrupt
military regimes that began in 1966, broken only by a four year return to
equally corrupt civilian rule in the mid 1970s. By the mid 1980s, it was
clear that when a general ascended to head of state he was expected to leave
the dirty business of drugs to lesser officers and concentrate his larceny on
loftier means of enrichment. Abacha followed suit. In 1993 he forced out a
weak, three month old, interim government and took over the country, thus
placing Nigeria s huge oil revenues at his disposal.
A portion of the nation s two million plus barrels per day oil production,
arising from joint ventures with foreign corporations, is allocated
to the federal government. Heads of state awarded lifting contracts
(purchase rights) to members of the elite whose support they valued. A
low purchase price paid to the government accommodated large profits
on sales to foreign buyers, generating huge margins out of which
multimillion dollar kickbacks were deposited into foreign bank accounts.
Marc Rich s Swiss trading company, Glencore, allegedly was a frequent
Even as one of the world s largest oil producers and with four local petroleum
refineries, Nigeria had to import diesel fuel, jet fuel, and gasoline.
Abacha starved the refineries of maintenance funds, cutting their combined
output to a fraction of capacity, so that products had to be purchased
abroad. By the tanker loads, hundreds of millions of gallons of usually offquality
fuel were brought in mainly from European refineries, at markups as
much as 400 percent above world market prices. This became one of
Abacha s most prized sources of graft, draining hundreds of millions of dollars
from state revenues.
Finally, Abacha entered that elite group of rogues who had the power to
direct the central bank to deliver currency straight out of the national treasury.
Locked trunks and canvas bags containing millions in dollars and
pounds often showed up late at night at Abacha s various residences. Ferdinand
Marcos of the Philippines and Mobutu Sese Seko of Zaire did the
When he took over the presidency of Nigeria in 1993, Abacha s ambition
seemed to be to stay in office longer and steal more money than any of his
predecessors. He was well on the road to success when unexpectedly in 1998
he succumbed during an orgy with two other generals and three prostitutes
Dirty Money at Work 61
imported from India. His legacy had to settle for a lesser distinction: merely
one of the world s two or three biggest thieves in his own time.
I have often been asked why dictators continue to steal long after they
have accumulated more than they can ever use. Beyond the first billion or
two, what s the point The answer is straightforward: It becomes addictive.
For Abacha it was the daily stimulant that fed his ego, proving to himself
that he was shrewder than those around him. Having street smarts but
only average intelligence and perhaps rather low self esteem, Abacha s kleptomania
was a habit central to his notions of power and satisfaction. Millions
of Nigerians lived lives of deprivation and destitution while he
continuously fed his insatiable appetite. The driving force for him and others
of his ilk, long after there is any rational purpose for continued theft, is
less the wealth and more the process of reaffirming total dominance.
Shortly after his death, his wife, Mariam, tried to take millions of dollars
in cash through the Kano airport in 38 trunks, bags, and briefcases in an unsuccessful
attempt to leave the country. In addition, one of Abacha s sons
was reportedly caught with $100 million in cash. It remains unclear how
much of these seizures was ever returned to the national treasury.
Abacha s plunder was facilitated by some 100 banks all over the world
in the United States, England, the Channel Islands, France, Switzerland, Germany,
Luxembourg, Liechtenstein, Austria, Dubai, Singapore, Hong Kong,
Australia, Brazil, and elsewhere, with services allegedly performed by such institutions
as Citibank, Barclays, Standard Chartered, HSBC, NatWest (now
part of the Royal Bank of Scotland), ANZ Grindleys Bank, BNP Paribas,
Cr‚dit Agricole Indosuez, Credit Suisse (including Bank Hofmann and Bank
Leu), Banque Baring Brothers, Banque du Gothard, Union Bancaire Priv‚e,
M.M. Warburg, Banque Edouard Constant, Deutsche Morgan Grenfell, J.
Henry Schroder Bank, Pictet & Cie, S.G. Ruegg Bank, Commerzbank, Bank
of India, and many more. With a fortune estimated at $3 billion to $5 billion,
a feeding frenzy arose to receive, shelter, and manage Abacha s wealth.
Citibank Private Bank, for example, opened accounts for Abacha s sons,
Mohammed and Ibrahim, in 1988, when the general was allegedly generating
the bulk of his money from drugs and arms. The two sons received the
most discreet treatment aimed at assuring transaction secrecy, including establishment
by Citibank of an offshore shell corporation, three additional
accounts set up under the names Navarrio, Gelsobella, and Chinquinto,
tailored codes to facilitate funds transfers, and a Hold All Mail
62 CAPI TA L I S M S AC H I L L E S H E E L
directive issued to bank employees in order to avoid any paper trail. Balances
reached $60 million in London and deposits and withdrawals approached
$50 million in New York. Account managers in both cities later claimed that
for years they were unaware that the brothers were sons of the man who
took over Nigeria. Becoming aware of this fact in January 1996, Citibank
calmly noted that wealth comes from father who accumulated wealth as
head of state, and Citibank then proceeded to handle a tripling of deposits
into the London account and to provide confidential services for the next
three years. Even after Sani Abacha died in June 1998 and the Nigerian government
initiated an investigation into his bank accounts, Citibank facilitated
the sons transfer of $39 million from London to Switzerland. The
money was on a time deposit requiring a penalty for early withdrawal, so
Citibank arranged a $39 million overdraft enabling the shift to be effected
immediately.14 In the entirety of this 10 year relationship, both before claiming
to know the identity of the account holders and after knowing of Nigerian
government investigations and seizures of Abacha family funds, Citibank
broke no U.S. laws in holding and transferring wealth stolen by one of the
decade s most corrupt individuals.
In Switzerland, 120 Abacha related accounts in Geneva and Zurich totaling
$670 million were found and frozen. The biggest offender, Credit Suisse,
was reprimanded in 2000 by the Swiss Federal Banking Commission
for failing to exercise due diligence in accepting more than $200 million in
Abacha funds.15 Banks in Luxembourg froze another $650 million and in
Liechtenstein $100 million was added,16 totaling more than $1.4 billion
that had been deposited in these three traditional money laundering centers.
In the United Kingdom, the Financial Services Authority found that
23 London banks had handled $1.3 billion in Abacha funds, some of it on
the way to Switzerland and elsewhere.17 Barclays was cited for handling
French implication in the Abacha scandal arose primarily through
branches of Paris banks in London and Switzerland. In October 2001 a
French parliamentary committee condemned feeble efforts in the City of
London s battle against money laundering, noting that, Great Britain does
not cooperate with European countries and offers a totally unacceptable
haven for criminal funds. 19
Abacha s frozen accounts have opened the door to protracted legal proceedings
to recover funds. For some countries, criminal charges must first be
Dirty Money at Work 63
lodged or adjudicated in Nigeria, not a certainty in a judicial system itself
steeped in bribery.
Meanwhile, Nigeria has spread its reputation for fraud worldwide.
Hundreds of thousands of businesses, organizations, churches, and individuals
in North America, Europe, Asia, and elsewhere have received letters
humbly asking for foreign assistance in pocketing remnants of wealth
stolen from the country by Abacha and others. Called 4 1 9 schemes for
the section of the Nigerian criminal code supposedly violated, these appeals
offer to give 25, 30, or even 40 percent of the purported $50 million or
$100 million stash, in return for facilitation through the contacted person s
overseas bank account. I have received dozens of these letters since the early
1990s. A recent bogus letter purported to be from a committee comprised
of officials of the Nigerian National Petroleum Corporation, the Federal
Ministry of Finance, and the Central Bank of Nigeria. After explaining how
they had acquired $75 million by carefully inflating the amount of indebtedness
owed by the government on a contract to rehabilitate a refinery, the
letter goes on to say:
We need a reliable company to be included in the list of companies to
be paid. We have agreed to share the funds thus: 1) 70 percent for us
(the committee members), 2) 25 percent for you (the account owner),
and 3) five percent will be used in settling taxation and all local and foreign
expenses that will be incurred in the course of this transaction. We
need assurance from you that you will let us have our share once the inflated
amount ($75 million) is transferred into your account. We shall
commence the transfer of the funds immediately we receive the following
information: 1) your company name and full address, 2) your bank s
name, telephone and fax number, 3) your account number and name of
the would be beneficiary.20
As correspondence with unsuspecting dupes progresses, an advance fee
of some thousands of dollars is requested to bribe others and speed matters
along. If money is not coughed up, then the fraudsters, now enlightened
with the mark s name, bank, account number, and perhaps signature, simply
order funds transferred out of the account. Some especially na‹ve individuals
have even been persuaded to travel to Nigeria for meetings with
supposed central bank or ministry of finance officers, often arriving with
64 CAPI TA L I S M S AC H I L L E S H E E L
out visas, where they can be further shaken down or even forced to ransom
The take from gullible foreigners has been estimated at more than $1
billion. As of this writing, five Nigerians are charged with defrauding a Cayman
Islands account of a Brazilian bank, Banco Noroeste S.A., of $242 million,
leading to the bank s collapse. The chairman of Nigeria s Economic and
Financial Crimes Commission reported in 2004 that 200 Nigerians are
currently serving jail terms for advance fee fraud all over the world but not a
single person has been convicted for the offense in the country. 21
In a private meeting with President Olusegun Obasanjo discussing
this and other corruption issues, I gave him a scam letter on official looking
presidential letterhead bearing his own forged signature. This was the
first one he had seen with that level of brazenness among his country s
With so many gangs doing this in Lagos and Abuja, infiltrating telephone
exchanges and post offices and now using e mail, competitive pressures
have forced some to take their activities on the road, setting up
operations in Ghana, Namibia, Angola, South Africa, Saudi Arabia, and
elsewhere. Who would fall for such schemes Professors, businesspeople,
managers, bookkeepers, religious organizations, charities, students, you
name it, on every continent. Nigerian advance fee fraudsters even work on a
personal, face to face basis in the United States and Europe, embarrassing
some very successful businesspeople. I know three wealthy Americans who
have been duped out of thousands of dollars.
Among multinational companies, which have been involved in corruption
in Nigeria Just a few names will suffice. American and British subsidiaries
of ABB Ltd., a Swiss engineering firm, recently paid fines of more
than $10 million to settle charges of alleged bribery in Nigeria to gain details
and recommendations on seven construction contracts.22 Baker Hughes, the
Houston based oil field services company, has been cooperating with U.S.
authorities investigating allegations of bribery in Nigeria.23 This follows settlement
of claims that the company bribed officials in Indonesia. One Enron
and four Merrill Lynch executives were convicted in 2004 for a bogus sale of
barges in Nigeria, done to dress up Enron s faltering income statement.
Halliburton has had many problems. In 2003 the company admitted
that it had paid a bribe of $2.4 million to a Nigerian tax consultant who offered
to intervene with the Federal Inland Revenue Service (FIRS) to reduce
Dirty Money at Work 65
taxes for the local subsidiary. Turns out the consultant was a FIRS officer
himself, in a position to make the tax go away.
The really big scandal centers on a $4.9 billion project in Nigeria. Natural
gas, produced together with Nigeria s oil and almost entirely bled off
and burned for three decades, is now being piped into gathering systems,
processed, frozen, and shipped to foreign buyers. A contract for expansion
of the liquefied natural gas plant was given in the mid 1990s to a consortium
of four companies: Technip of France, Snamprogetti Netherlands, an
affiliate of ENI of Italy, Kellogg Brown and Root (KBR), now a subsidiary
of Halliburton, and JGC Corporation of Japan. The four companies
formed a joint venture called TSKJ, drawing on the first initials of each corporate
name. This entity, along with a second consortium entity known as
LNG Servicos, was based in that nice little Portuguese tax haven, the island
Among the four partners, KBR was the coordinator of the project. A
London lawyer named Jeffrey Tesler reportedly had a relationship with Halliburton
dating from the 1980s and also was allegedly an advisor to Sani
Abacha.24 At some point in the 1990s he was designated as an agent to represent
TSKJ in Nigeria. He formed Tri Star Investments in Gibraltar and
made only one trip to Nigeria, yet from 1995 to 2002 payments totaling
$166 million were reportedly made out of a TSKJ slush fund to Tri Star
accounts in Switzerland and Monaco. In 2002 a French prosecutor pursuing
the much publicized bribery scandal involving Elf Aquitaine and French
politicians chanced upon information regarding these payments. An investigating
judge, Renaud van Ruymbeke, was assigned to the case. Thus far he
has reportedly turned up payments of $2.5 million into a Swiss bank account
belonging to former Nigerian oil minister Daniel Etete,25 $5 million
into a Swiss bank account of the former chairman of KBR Albert Stanley,26
and more than $1 million to William Chaudan, also a former KBR executive.
27 It is suspected that much of the remaining millions was transferred to
Abacha and other Nigerian government figures.
In 2003 a senior official of the Economic and Financial Crimes Commission
said, Most of the cases of corruption in Nigeria are linked to the
operations of multinationals in the country. 28 In June 2004, Halliburton s
chief financial officer was quoted saying, As anyone who does business in
Nigeria knows, one needs an agent in Nigeria. 29 This struck some people as
a justification for bribery. Halliburton beat a hasty retreat, severed relation
66 CAPI TA L I S M S AC H I L L E S H E E L
ships with Tri Star and Tesler, as well as with Stanley and Chaudan, and
agreed to cooperate with the ongoing French investigation. This story will
unfold for years to come.
To keep up with the country where I lived for 15 years and still have
interests and close friends, I read the excellent e mail newsletter Nigeria
2Day@aol.com. A sense of the severe strains on the country is conveyed by
a few excerpts from Nigeria2Day, quoted with the permission of the publishers
and with minor edits to abbreviate passages.
Oil industry experts say criminal networks, operating with the tacit
support of powerful political and military elements, are illegally siphoning
off about $1 billion of oil a year. Between 100,000 and
130,000 barrels a day with a market value of around $3 million is being
stolen. (May 30, 2003)
Over 150 villagers are now known to have died when a fire erupted
around a leaking fuel pipeline in the village of Amiyi Uhu. Despite
the risks, hundreds of people waded through a river of highly flammable
fuel with buckets and jerry cans. There is too much hunger,
there is too much unemployment says Bernard Orji, an extremely
angry local politician who visited the scene. Young boys and young
girls died here. If you look around you can see slippers and shoes that
belong to kids. It is an index of the poverty level in this community.
And it provides a stark image of the inequality and poverty that is
widespread in a country where successive governments have conspicuously
failed to invest the billions of dollars earned from oil over the
decades, back into developing the nation s potential. (July 7, 2003)
The federal government has told several international oil trading
companies to repay more than $100 million it says it was defrauded
of through the inflation of oil import costs. The Nigerian
National Petroleum Company fired seven oil trading officials last
month on suspicion of conspiring with suppliers to defraud it of
hundreds of millions of dollars by manipulating shipping documents.
(May 27, 2004)
Nigerian waters were the most deadly during the first half of 2004 according
to a new piracy report, and analysts are blaming the proliferation
of weapons in the coastal oil rich Niger Delta region where
Dirty Money at Work 67
armed gangs trade stolen crude. The International Maritime Bureau
said that half of the 30 deaths recorded in pirate attacks around the
world between 1 January and 30 June occurred in Nigerian territorial
waters. (July 29, 2004)
Three former Nigerian cabinet ministers and two other former government
officials are due in court today on charges of accepting part
of more than $1 million in bribes from France s electronics giant
SAGEM SA. (January 23, 2004)
The federal government released a report detailing a $400 million
graft case involving former ministers and other prominent figures
who helped ruin Nigeria Airways. (November 24, 2003)
Security agencies and human rights workers blame traffickers, operating
an international network that covers most of West and Central
Africa and several European cities, for the plight of tens of thousands
of children exploited for their labor and women bonded into prostitution.
(November 14, 2003)
Nigeria has had some very venal individuals in positions of power and
authority. The West has serviced their venality, opening its bank vaults to all
the money that can be extracted from the country. Tens of millions of Nigerians
are living at lower standards today than they were decades ago. Are the
billions of dollars that come to the West worth the cost to them
If Nigeria has a rival for the title Most Corrupt Country in the World, it s
Indonesia. A population of nearly 250 million lives on 6,000 islands spread
across 3,500 miles straddling the equator. Endowed with agricultural and
mineral resources, its diverse peoples, some 300 ethnic groups, have been
ripped off for 60 years by two regimes of autocrats and a succession of feckless
leaders, while the western world participated in a level of lawlessness
breathtaking in its sweep and duration.
Sukarno, preferring one name as did his successor, came to power at the
end of World War II, fought the Dutch for independence, and achieved
diplomatic recognition for his country in the late 1940s. Ruling an increasingly
corrupt regime, he was displaced in 1967 by his chief of army staff,
68 CAPI TA L I S M S AC H I L L E S H E E L
Suharto (also spelled Soeharto), already alleged to be an experienced sugar
smuggler. Suharto then unleashed a wave of mass arrests, internments, and
killings of perhaps a half million suspected communists, indelibly establishing
his willingness to use violence to maintain power. Over the next three
decades, he and his family centralized economic control and implemented
some very creative schemes for self enrichment.
His first major act of thievery was to take over two large business conglomerates
owned by cronies of Sukarno. Recast as a state enterprise called
PT PP Berdikari, control gradually passed to foundations under Suharto s
Another early step in 1969 allowed Liem Sioe Liong, a Chinese immigrant,
founder of the Salim Group and close Suharto associate, to establish
PT Bogasari as a virtual monopoly in flour milling, utilizing wheat supplied
under the U.S. Food for Peace program, which makes available surplus production
to needy nations.31 Wheat imports rose to four million tons a year,
making Bogasari reputedly the world s largest buyer of this grain.32 The
Salim Group expanded into instant noodles, cement production, and
dozens of other businesses and banks in Asia and North America, all the
while retaining various partnerships with Suharto family members.
From the 1970s onward, the Suhartos used almost every technique
known to man to extract money from the Indonesian people. Four methods
produced the most wealth, complemented by outright extortion and theft.
First, trade monopolies were a favorite mechanism, granting exclusivity over
some aspect of foreign or domestic commerce to a family member or crony.
Second, foundations known as yayasans were particularly innovative
schemes, taking percentages of revenues out of almost every rupiah that
moved in Indonesia. Third, incurring banking and commercial debts was a
favorite practice among Suharto s children, usually without the slightest intention
of repaying. And fourth, founder s shares in joint ventures with foreign
companies, whether given free or financed out of loans seldom repaid,
put the Suhartos in bed with many U.S., European, and Asian multinationals
operating in the resource rich country.
Exclusive monopolies were handed out by Suharto to family members
and friends for a range of commodities including flour, rice, sugar, cloves,
imported Chinese medicines, oil product imports, paper for currency printing,
urea fertilizer tablets, movies, armaments, military aircraft, and more.
Such monopolies made hundreds of millions of dollars for the clan.
Dirty Money at Work 69
But not nearly as much as the yayasans, ostensibly collecting money for
social welfare but in reality larding the Suharto coffers. George Aditjondro, a
courageous chronicler of Suharto wealth, reported that 97 foundations were
established over a 30 year period.33 A government investigation into just
seven of the foundations laid out some of the sources of donations :
Two and a half percent of the profits of the central bank and all
state owned banks.
Two percent of the incomes of individuals and state and private companies
making more than $40,000 a year.
A percentage off the salaries of civil servants and other government
A percentage off electric bills, movie tickets, and other consumer expenditures.
Some of the money was dispensed for the welfare purposes stated. Out of
the seven foundations probed, well over a trillion rupiah, adding up to billions
of dollars, flowed to enterprises controlled by Suharto family members
and their partners, as shown in Table 3.2.
To put it simply, Suharto ruled the country, set up the foundations, required
the donations, controlled the funds, approved the distributions, and
hugely enriched himself, his family, and friends. This is one of the neatest
cycles of corruption seen in the twentieth century, with nearly every foreign
investor required to participate. And, incidentally, it is the same technique
used by terrorists across two decades: collecting money for supposedly charitable
work, spending a little on social welfare, and using the rest for nefarious
When you are in full control of a nation, one of the great perks of office
is that you and your family can renege on personal debts or get the state to
pay them for you. Suharto s eldest daughter, Tutut, understood the drill well.
She set up a private television station, TPI, in the early 1990s, using equipment
borrowed from the state television service and funds borrowed
from her own Bank Yama. Running up heavy debts, she twisted the arm of
Indosat, the state long distance telephone company, to buy $45 million of
convertible bonds, rescuing both her TV station and her bank.35
Tommy Suharto, youngest son of the president, and crony Bob Has
70 CAPI TA L I S M S AC H I L L E S H E E L
san bought Sempati Airlines in the late 1980s. Competing against the
state owned Garuda Airlines, they decided that the best way to reduce
costs and assure profits was to stop paying the state owned oil company,
Pertamina, for jet fuel. Other charges for such things as landing fees and
catering expenses were left unpaid as well. Garuda, sensing that it, too,
had an excuse for nonpayment, also let the bills pile up, leaving Pertamina
holding the bag.36
One of the more blatant abuses was Tommy s pet scheme, the National
Car project. Tommy lived high, liked fast cars, and dreamed of owning a stable
of Lamborghinis, so when he got rich he bought them. Not the cars; the
whole Italian company! This whetted his appetite, so in 1995 he set out to
dominate the automotive industry in Indonesia. Cars already were being assembled
locally from imported parts by European, Japanese, and South Korean
manufacturers, but Tommy s idea was to work with Kia of South Korea
to produce a Timor car out of locally made parts. To get started, he imported
45,000 specially branded Kias from South Korea and got his dad to
Dirty Money at Work 71
TABLE 3.2 THE ABUSE OF FOUNDATIONS
Intake Outflows to Suharto Family, Friends,
Foundation (Purpose) (rupiah) Their Businesses, and Private Banks
Supersemar (scholarships) 1.54 trillion Bank Duta, Sempati Air, timber
companies, property investments
Dharmais (orphans, 1.54 trillion Bank Umum Nasional, Sempati Air,
homeless) timber, and industrial investments
Dakab (education) 950 billion Bank Pesona Kriyadana, Sempati Air,
timber, and industrial investments
Damandiri (poverty 4.96 trillion Bank Andromeda, Bank Alfa
Siti Hartinah Soeharto 88 billion Bank Alfa
(disaster relief )
Trikora (scholarships) 26 billion Private museum, other personal
Yamp (mosques) 79 billion Private investments
Source: Japan Economic Newswire, Suharto s Funds: Where Money Came From, Where
They Went, August 29, 2000, http://web.lexis.nexis.com/.
waive customs duties and sales taxes so he could price his imports one third
lower than competing vehicles.37
Tommy the all too visible playboy and his tinny little Timors were not
particularly popular in Indonesia. Driving the car and getting stuck in traffic
risked being set upon by angry youths wielding sticks and rods, beating the
thing into a pile of scrap. Thus, sales fell way below expectations. Tommy
leaned on the government to buy his inventory, resulting in a directive to
that effect issued to all departments and state institutions.38
Granted National Car status, PT Timor Putra Nasional needed $1.3
billion to commence manufacturing. Tommy, lacking a sound loan repayment
record, was turned down by every foreign and local bank he approached.
For you or me, this might be somewhat discouraging, but not for
Tommy. He marched into the central bank and insisted on a state guarantee
of the requested $1.3 billion. The bank choked, but finally, backed by the
government, ordered 4 state banks and 12 private banks to provide the financing,
resulting in an offer of $690 million.39 Work commenced on the
factory buildings, and production lines were imported, until the project was
finally cancelled in 1998.
The state banking system generally was ripe for picking by the Suharto
clan. No one could easily turn down their requests for multimillion dollar
fundings. As a member of the National Development Planning Agency said
to me quietly in his office, Being the son of a president or minister and getting
access to capital based on this heritage, that s feudalism, not economic
The World Bank certainly understood these realities as early as the
1970s, continued lending through the 1980s, and even advanced more than
$300 million to the Indonesian government in the early 1990s on a promise
that banking procedures would be strengthened. The Indonesian government
leaped at the money, plowed it into the state banks, and distributed
much of it to the Suhartos all over again. An astute observer Michael Backman
wrote, Thanks to the World Bank, the Soehartos had found a way to
pillage the funds of the international community and not just those of their
In the midst of the country s economic collapse, a highly respected official,
who later became minister of finance, met with me in Jakarta and said,
In government, corporations, banks, all sectors, transparency is at the heart
of the current crisis. We don t deserve this bad treatment on the basis of eco
72 CAPI TA L I S M S AC H I L L E S H E E L
nomic factors alone, but on the basis of succession issues and economic
transparency, we deserve it. 42
According to an estimate prepared by World Bank economists, by the
mid 1990s the Suharto family controlled 16.6 percent of Indonesia s market
capitalization.43 Generating huge sums of money from trade monopolies,
fraudulent charities, and unpaid banking and commercial debts, the Suhartos
parlayed their stolen loot into a staggering range of schemes, activities,
pursuits, and further ripoffs. In most of these, efficiency was not the goal;
easy money was. My list covers nearly a hundred categories of businesses encompassing
thousands of separate entities in manufacturing, oil, mining,
land, property, transportation, services, agriculture, and more.
Offshore properties and investments belonging to the Suhartos reportedly
included for profit toll roads in Malaysia, Philippines, Burma, and
China; mansions and penthouses in Singapore, Los Angeles, London,
Boston, Geneva, Auckland, Queenstown, Bermuda, and Hawaii; a hunting
lodge in New Zealand; an 18 hole golf course in Ascot; the Christmas Island
Casino; and assorted investments in Uzbekistan, Portugal, Sudan, Guinea
Bissau, Australia, and New Zealand. Accounts in bank secrecy jurisdictions
and tax havens were reportedly spread to Cura‡ao, Cayman Islands,
Panama, Bahamas, British West Indies, British Virgin Islands, Gibraltar,
Hong Kong, Cook Islands, Vanuatu, and West Samoa.
And I am only now getting to the Suharto s greatest money making
scheme of all, extracted particularly from foreign corporations: free shares,
or, as often called in conversations with me in Jakarta, empty shares.
Michael Backman wrote, The Soehartos power over foreign investors was
assisted by the fact that all foreign investments over US$100,000 had to be
personally approved by Soeharto himself. 44
The distribution of empty shares was accomplished in two ways, by giving
completely free shares at the outset or by giving a loan for purchase of
shares, with payments on the loan made out of future earnings. So long as the
free shares or the loan in purchase of shares appeared to be in return for some
small assistance rendered or patronage afforded, such actions on the part of
U.S. companies, at best, very narrowly skirted laws against bribery contained
in the Foreign Corrupt Practices Act. Or, to put it differently, the U.S. government
chose to overlook what could easily be interpreted as bribery.
The family accumulated interests, according to Backman, in 1,251 large
companies.45 George Aditjondro, taking into account both large and small
Dirty Money at Work 73
investments and the activities of Suharto hangers on, put the number at
more than 3,200 companies.46 Table 3.3 is a partial listing of family interests,
current or past, documented or alleged, in some cases reflecting the activities
of close cronies and foreign companies patronizing the ruling clan.
George Aditjondro alleges that a number of Dutch banks have been especially
close to the Suhartos, providing an international financial network
for the Soehartos to globalise their businesses. 47 He names MeesPierson,
ABN AMRO, ING Bank, and Rabo Bank. He further alleges that Credit
Suisse, UBS, and Swiss Banking Corporation have played an important
role in underwriting the fortunes of Indonesia s First Family. 48
The corruption of the Suhartos has corrupted many other institutions
in Indonesia. The army is deep into the charities scam, collecting money for
welfare in the ranks, while directing money to high ranking officers. The
civil service has compiled an impressive record of bribe demands that could
go on for pages, for administrative appointments, diplomatic postings, travel
documents, airport clearances, petty approvals, licenses, and everything else
imaginable. Officials in the Ministry of Forestry and Plantations are paid to
overlook unbelievably rapacious logging, which is followed by burning hundreds
of thousands of hectares of cleared land (spreading smoke to Singapore
and Malaysia), which is followed by driving villagers off their land,
which is followed by creating huge oil palm plantations belonging to the
president s family and friends. The central bank has been called a den of
thieves, with regulators taking bribes to overlook fraudulent practices in the
financial sector. Members of the judiciary buy more prestigious judgeships
and then charge litigants for favorable judgments. Foreign aid and World
Bank financing have been siphoned off for years, perhaps as much as 30 percent
going into the pockets of corrupt officials. Which all brings the country
close to the ranks of a weak or failing state, where terrorists thrive and
threaten the continuity of the nation.
Estimates of the accumulated wealth of the Suhartos are all over the
board. One of the best examinations was done by Time magazine in 1999
after Suharto s fall, placing the amount of money that had passed through
the family s hands at $73 billion and the amount that had remained in their
pockets at $15 billion. Time went on to report that as the regime tottered,
$9 billion of Suharto money was transferred from Switzerland to a nominee
bank account in Austria. 49 Angered Suhartos threatened suit and then
backed away, leaving the allegation uncontested.
74 CAPI TA L I S M S AC H I L L E S H E E L
Dirty Money at Work 75
TABLE 3.3 SUHARTO FAMILY HOLDINGS AND FOREIGN PARTNERS
Family Member and
Companiesa Principal Foreign Partnersb
Siti Hardiyanti Rukmana El Paso Energy, General Dynamics,c Lucent
Tutut Technologies, Motorola, Energy Equity,
Eldest daughter Marubeni
Siti Hediati Prabowo Titiek General Electric, Edison Mission Energy,c
Middle daughter Merrill Lynch,c Fashion Caf‚, National Power,
70 companies Tomen Power
Siti Hutami Endang Adyningsih
Sigit Harjojudanto California Energy, Du Pont, Freeport
Eldest son McMoRan, Unocal, British Petroleum, Thames
115 companies Water, Mitsui, Nichimen Corporation,
Sumitomo, Tomen Corporation
Bambang Trihatmodjo Atlantic Ritchfield, Duke Energy, Enron, Hughes
Middle son Communications, Hyatt,c Montrose,d Union
327 companies Carbide,d Uniroyal Goodrich,d United Parcel
Service, Warner Lambert,dWaste
Management,d Equatorial Energy, Telsat, BP
Chemicals, Ergon Energy, Lloyds of London,
National Power, Powergen, Alcatel, Deutsche
Telekom, Siemens, Nestl‚, Idemitsu
Petrochemical, Marubeni, Mitsubishi, Nippon
Shokubai, Hyundai, City View Energy, Nufarm
Hutomo Mandala Putra Bell Atlantic, Detroit Diesel, International
Tommy Wireless, Jupiter International, Guinness Peat,d
Youngest son Rolls Royce,c Mitsui OSK Lines, NEC, Nissho
127 companies Iwai Corporation, Sumitomo, Kia Motors,
Nettlefold Outdoor, Asia Power, Electricity
Half brother of Suharto
In an interview on the Australian Broadcasting Corporation, Indonesian
political commentator Wimar Witoelar was asked, So when it comes to the
kleptocrats, those dictators that corruptly took money from their own countries,
is Suharto at the top of the heap His reply well encapsulated years of
misrule: In modern times, I would say yes. It s hard to think of anyone who
can combine excellence in human rights abuse, in financial theft and in the
undermining of the legal system and the political system. He is a man who
did it all. He is the Grand Slam of all despots. 50
Arguably the most dangerous nation on Earth, Pakistan is a bubbling cauldron
of corruption and crime, where grasping politicians, greedy generals,
drug smugglers, and terrorists intermix in a volatile web, made more threatening
by a nuclear bazaar operated as a national sideline. Corruption and
criminality run from the top down, with the political class constantly loot
76 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.3 (Continued)
Family Member and
Companiesa Principal Foreign Partnersb
Sudwikatmono Lawry s Prime Rib, Morrison Knudsen, Planet
Cousin of Suharto Hollywood, Sotheby s, Asahi Glass, Pohang Iron
288 companies and Steel, Axiom Properties
Hashim Djojohadikusumo Cabot Corporation, Metropolitan Life, MEC,
Son in law s brother New Hope Corporation
Ari Sigit EDC International, Leever Continental, Kuk
Grandson Kong Construction
aMichael Backman, Asian Eclipse: Exposing the Dark Side of Business in Asia (Singapore: John
Wiley & Sons, 1999), 262 266.
bBackman, Asian Eclipse, 293 294 is the source of information in this listing, except where
cPeter Engardio and Michael Shari, The Suharto Empire, BusinessWeek, August 19, 1996,
dGeorge J. Aditjondro, US Business Links of the Suharto and Habibie Families and Their
Cronies, Southeast Asian Science Policy Advisory Network, July 1998, http://www.icsea.or.id/sea span
/0798/OT0819LL.htm, (accessed July 8, 2003; no longer available online).
ing the national treasury and distorting economic policy for personal gain.
Bank loans are granted largely on the basis of status and connections. The
rich stash much of their money abroad in those willing western coffers,
while exhibiting little inclination to repay their rupee borrowings. Banks fail
and Pakistanis lose their meager savings. At the bottom, wretched and illiterate
masses seethe with discontent, a perfect nurturing ground for terrorism.
It started a long time ago:
In the distant past the East India Company used to siphon away a great
deal of the assets and treasures of the Indian subcontinent or buy them
at very low prices and send them abroad when the British ruled the
But in recent decades it is the rich and crafty Pakistanis who have siphoned
away a large part of the resources of the country with unremitting
vigor. That began when a part of our export earnings was allowed
to be kept abroad, with the practice of under invoicing the exports or
over invoicing the imports. And that was followed by retaining abroad
an increasing part of the money obtained as kickbacks during the import
of machinery from the late 1950s.
Later, politicians in office, senior bureaucrats and top military commanders
joined them by sending their illegally earned money abroad.
Subsequently, obtaining large bribes abroad and putting them in their
bank accounts there became the fashion. Some of the top rulers too
joined them merrily. . . .
The total wealth siphoned away in this manner has been estimated
to be between 60 billion and 100 billion dollars.51
Pakistan s recent history has been dominated by two families the
Bhuttos and the Sharifs both merely tolerated by the military, the real
power in the country. When it comes to economic destruction, there s not a
lot of difference among the three.
Benazir Bhutto. Born in Karachi in 1953 and educated in private
schools, Benazir Bhutto graduated from Radcliffe College at Harvard University
in 1973. Going on to Oxford for a master s degree, she displayed her
budding political skills and was elected president of the Student Union in
- Meanwhile, her father had become prime minister of Pakistan in
Dirty Money at Work 77
1971, was ousted in a military coup in 1977, and was executed in 1979 on
charges of conspiracy to commit murder. In and out of prison and house arrest,
Benazir was not allowed to leave the country until 1984 but then returned
to lead the democracy movement two years later. Her father s
usurper, General Muhammad Zia ul Haq, was killed in a mysterious plane
crash in 1988, which also took the life of the U.S. ambassador Arnold
Raphel, and the head of the U.S. military aid mission to Pakistan, General
H.M. Wasson. Benazir was elected prime minister that year, served until her
ouster in 1990 on charges of corruption and nepotism, was reelected in
1993, and ousted again in 1996, amidst more charges of corruption. During
her two terms in office and since, what has come out portrays Bhutto and
her husband Asif Ali Zardari as world class thieves.
Upon taking office in 1988, Bhutto reportedly appointed 26,000 party
hacks to state jobs, including positions in state owned banks. An orgy of
lending without proper collateral followed. Allegedly, Bhutto and Zardari
gave instructions for billions of rupees of unsecured government loans to be
given to 50 large projects. The loans were sanctioned in the names of front
men but went to the Bhutto Zardari combine. 52 Zardari suggested that
such loans are normal in the Third World to encourage industrialisation. 53
He used 421 million rupees (about œ10 million) to acquire a major interest
in three new sugar mills, all done through nominees acting on his behalf. In
another deal he allegedly received a 40 million rupee kickback on a contract
involving the Pakistan Steel Mill, handled by two of his cronies. Along the
way Zardari acquired a succession of nicknames: Mr. 5 Percent, Mr. 10 Percent,
Mr. 20 Percent, Mr. 30 Percent, and finally, in Bhutto s second term
when he was appointed minister of investments, Mr. 100 Percent.
The Pakistan government s largest source of revenues is customs duties,
and therefore evasion of duties is a national pastime. Isn t there some way to
tap into this major income stream, pretending to fight customs corruption
and getting rich at the same time Of course; we can hire a reputable (or disreputable,
as the case may be) inspection company, have the government pay
the company about a one percent fee to do price checking on imports, and
get multimillion dollar bribes paid to us upon award of the contracts. Soci‚t‚
G‚n‚rale de Surveillance (SGS), headquartered in Switzerland, and its then
subsidiary Cotecna, the biggest group in the inspection business, readily
agreed to this subterfuge. Letters in 1994 promised consultancy fees, meaning
kickbacks, of 6 percent and 3 percent to two British Virgin Island (BVI)
78 CAPI TA L I S M S AC H I L L E S H E E L
companies, Bomer Finances Inc. and Nassam Overseas Inc., controlled by
Bhutto and Zardari. Payments of $12 million were made to Swiss bank accounts
of the BVI companies.54 SGS allegedly has paid kickbacks on other inspection
contracts around the world. Upon being accused in the inspection
kickback scheme, Bhutto sniffed, I ran the government to the best of my
honest ability. And I did it for nothing but acknowledgment and love. 55
Then there was the 1994 deal to import $83 million worth of tractors
from Poland. Ursus Tractors allegedly paid a 7 percent commission to another
of Zardari s Caribbean companies, Dargal Associated. Bhutto waived
import duties on the tractors, costing the Pakistani government some 1.7
billion rupees in lost revenues. Upon discovery of this scheme the Poles hastened
to turn over 500 pages of documentation confirming the kickback.56
The Polish tractor deal was just a warm up for the French fighter jet
deal. After the U.S. government cancelled a sale of two squadrons of F 16s,
Bhutto dangled a $4 billion contract for Mirages in front of the French
Dassault Aviation; Snecma, the engine manufacturer; and Thomson CSF,
producer of aviation electronics. Without missing a beat they allegedly
agreed to pay a remuneration of 5 percent to Marleton Business S.A., yet
another of Zardari s British Virgin Island companies.57 This would have generated
a tidy $200 million for the Bhutto Zardari couple, but unfortunately
for them she was driven from office before they could collect.
Ah, but the gold deal gave some comfort to these aspiring kleptocrats.
Gold is culturally important in the Asian subcontinent, in particular as a
way for women to accumulate wealth. Upwards of $100 billion is invested
in this unproductive asset in Pakistan, India, and surrounding countries.
Smuggling is big business. Ostensibly to regulate the trade, a Pakistani bullion
dealer in Dubai, Abdul Razzak Yaqub, asked Bhutto for an exclusive
import license. In 1994, yet another Zardari offshore company, M.S. Capricorn
Trading, was created in the British Virgin Islands. Later in the year, Jens
Schlegelmilch, a Swiss lawyer who was the Bhutto family s attorney in Europe
and close personal friend for more than 20 years, 58 opened an account
for Capricorn Trading at the Dubai branch of Citibank. According to a
1999 U.S. Senate report: Mr. Schlegelmilch did not reveal to the Dubai
banker that Mr. Zardari was the beneficial owner of the PIC [private investment
company], and the account manager never asked him the identity of
the beneficial owner of the account. . . . Shortly after opening the account in
Dubai, Mr. Schlegelmilch signed a standard referral agreement with
Dirty Money at Work 79
Citibank Switzerland private bank guaranteeing him 20 percent of the first
three years of client net revenues earned by the bank from each client he referred
to the private bank. 59 In other words, Citibank was contracting to
pay a finder s fee for millions brought in from dubious sources. Citibank
went on to open three accounts in Switzerland for Zardari, with
Schlegelmilch as the signatory.
In October 1994, Citibank records show that $10 million was deposited
into Capricorn s Dubai account by Razzak Yaqub s company, A.R.Y. International
Exchange.60 In December, Razzak Yaqub received an exclusive import
license and proceeded over the next three years to ship more than $500 million
in gold to Pakistan. Additional deposits flowed into the Dubai and
Swiss Citibank accounts, and funds also were shifted to Citibank Channel
Island subsidiaries. The original ceiling on the accounts of $40 million was
Toward the end of her second term, the Bhutto case took a bizarre turn.
Representatives of the Pakistan Muslim League, an opposition party, met in
1995 with private investigators in London who offered documentary proof
from an unnamed source of Bhutto s corruption, in return for a modest fee
of $10 million. That deal was not consummated, but two years later, with
Bhutto out of office and under investigation, the offer was reportedly concluded
for $1 million.62 The documents appeared to have been taken from
the Geneva office of Jens Schlegelmilch. 63
In 2000 Pakistan s National Accountability Bureau, with the thankless
task of investigating corruption, drew upon these documents and other
sources and released details of assets and accounts belonging to Bhutto and
Zardari. Even to jaded observers, the scale of their holdings was stunning:
hundreds of properties, dozens of companies, and dozens of bank accounts.
A partial listing of only foreign holdings reported by the National Accountability
Bureau is provided in Table 3.4.64
Summarizing this and other documentation, the New York Times reported
that the material included . . . letters from executives promising
payoffs, with details of the percentage payments to be made; memorandums
detailing meetings at which these commissions and remunerations were
agreed on, and certificates incorporating the offshore companies used as
fronts in the deals. . . . The documents also revealed the crucial role played
by Western institutions. Apart from the companies that made payoffs, and
the network of banks that handled the money . . . the arrangements made by
80 CAPI TA L I S M S AC H I L L E S H E E L
Dirty Money at Work 81
TABLE 3.4 FOREIGN ASSETS ALLEGEDLY BELONGING TO BHUTTO AND ZARDARI
Country Properties/Companies Bank Accounts
United Rockwood Estate, Surrey, 20 Barclays Bank, 3 accounts;
Kingdom room mansion, 355 acres, polo National Westminster Bank;
grounds; 4 London flats Harrods Bank; Midland Bank
France Normandy chateau, in Cr‚dit Agricole, 3 accounts;
Zardari s parents name; Banque Nationale de Paris; Banque
Cannes properties La Henin
Switzerland Union Bank of Switzerland;
Barclays Bank (Geneva); Citibank
(Geneva); Banque Nationale de
Paris; Swiss Bank Corporation;
Credit Suisse; Pictet et Cie; Banque
Francaise du Commerce; Cantrade
Ormond Burrus; Banque Pasha
United Wellington Club East, Florida; Barclays Bank, New York;
States India Mound, Florida; Citibank, New York;
3 residential properties, UBS, New York
Florida; Lapworth Investment,
Florida; Intro Food, Florida;
Dynatel Trading, Florida; A.S.
Realty, Florida; Bon Voyage
British Bomer Finance, Mariston
Virgin Securities, Marleton Business,
Islands Capricorn Trading, Dargal
Associated, Fargarita Consulting,
Marvil Associated, Penbury
Finance, Oxton Trading,
Brinslen Investment, Climitex
Holding, Elkins Holding,
Minterler Invest, Silvernut
Investment, Tacolen Investment,
Tulerston Invest, Marledon
Invest, Dustan Trading,
Reconstruction and Development
Finance, Nassam Alexander
the Bhutto family for their wealth relied on Western property companies,
Western lawyers and a network of Western friends. 65
Even the Swiss finally had had enough. Seventeen bank accounts linked
to Bhutto and Zardari were frozen. The two were charged with money laundering
in connection with bribes received from the inspection company
SGS and were convicted by a Swiss court in 2003, with fines and suspended
prison sentences. This was short lived; the decision was overturned and referred
back to cantonal prosecutors upon appeal. Meanwhile, Zardari was in
prison in Pakistan from 1996 to 2004 on assorted charges.
Bhutto, with her father executed, two brothers assassinated, her mother
an amnesiac, her husband still troublesome, and she living in exile between
London and Dubai, portrays herself as the victim: I never asked for power.
I think they [the Pakistani people] need me. I don t think it s addictive. You
want to run away from it, but it doesn t let you go. . . . I think the reason
this happens is that we want to give love and we receive love. 66
Save your tears. In the global collection of displaced leaders, Benazir
Bhutto may be the least sympathetic character of all.
Nawaz Sharif. While Benazir Bhutto hated the generals for executing her
father, Nawaz Sharif early on figured out that they held the real power in
Pakistan. His father had established a foundry in 1939 and, together with
six brothers, had struggled for years only to see their business nationalized
by Ali Bhutto s regime in 1972. This sealed decades of enmity between the
Bhuttos and the Sharifs. Following the military coup and General Zia s assumption
of power, the business Ittefaq was returned to family hands in
- Nawaz Sharif became a director and cultivated relations with senior
military officers. This led to his appointment as finance minister of Punjab
and then election as chief minister of this most populous province in 1985.
During the 1980s and early 1990s, given Sharif s political control of
Punjab and eventual prime ministership of the country, Ittefaq Industries
grew from its original single foundry into 30 businesses producing steel,
sugar, paper, and textiles, with combined revenues of $400 million, making
it one of the biggest private conglomerates in the nation. As in many other
countries, when you control the political realm, you can get anything you
want in the economic realm.
With Lahore, the capital of Punjab, serving as the seat of the family s
82 CAPI TA L I S M S AC H I L L E S H E E L
power, one of the first things Sharif did upon becoming prime minister in
1990 was build his long dreamed of superhighway from there to the capital,
Islamabad. Estimated to cost 8.5 billion rupees, the project went through
two biddings. Daewoo of Korea, strengthening its proposals with midnight
meetings, was the highest bidder both times, so obviously it won the contract
and delivered the job at well over 20 billion rupees.
A new highway needs new cars. Sharif authorized importation of 50,000
vehicles duty free, reportedly costing the government $700 million in lost
customs duties. Banks were forced to make loans for vehicle purchases to
would be taxi cab drivers upon receipt of a 10 percent deposit. Borrowers got
their Nawaz Sharif cabs, and some 60 percent of them promptly defaulted.
This left the banks with $500 million or so in unpaid loans. Vehicle dealers
reportedly made a killing and expressed their appreciation in expected ways.
Under Sharif, unpaid bank loans and massive tax evasion remained the
favorite ways to get rich. Upon his loss of power the usurping government
published a list of 322 of the largest loan defaulters, representing almost $3
billion out of $4 billion owed to banks. Sharif and his family were tagged for
$60 million. The Ittefaq Group went bankrupt in 1993 when Sharif lost his
premiership the first time. By then only three units in the group were operational,
and loan defaults of the remaining companies totaled some 5.7 billion
rupees, more than $100 million.67
Like Bhutto, offshore companies have been linked to Sharif, three in the
British Virgin Islands by the names of Nescoll, Nielson, and Shamrock68 and
another in the Channel Islands known as Chandron Jersey Pvt. Ltd.69 Some
of these entities allegedly were used to facilitate purchase of four rather
grand flats on Park Lane in London, at various times occupied by Sharif
family members. Reportedly, payment transfers were made to Banque
Paribas en Suisse, which then instructed Sharif s offshore companies Nescoll
and Nielson to purchase the four luxury suites.70
In her second term, Benazir Bhutto had Pakistan s Federal Investigating
Agency begin a probe into the financial affairs of Nawaz Sharif and his family.
The probe was headed by Rehman Malik, deputy director general of the
agency. Malik had fortified his reputation earlier by aiding in the arrest of
Ramzi Yousef, mastermind of the 1993 World Trade Center bombing. During
Sharif s second term, the draft report of the investigation was suppressed,
Malik was jailed for a year, and later reportedly survived an
Dirty Money at Work 83
assassination attempt, after which he fled to London. The Malik report, five
years in the making, was released in 1998, with explosive revelations:
The records, including government documents, signed affidavits from
Pakistani officials, bank files and property records, detail deals that Mr.
Malik says benefited Mr. Sharif, his family and his political associates:
At least $160 million pocketed from a contract to build a highway
from Lahore, his home town, to Islamabad, the nation s capital.
At least $140 million in unsecured loans from Pakistan s state banks.
More than $60 million generated from government rebates on
sugar exported by mills controlled by Mr. Sharif and his business
At least $58 million skimmed from inflated prices paid for imported
wheat from the United States and Canada. In the wheat
deal, Mr. Sharif s government paid prices far above market value
to a private company owned by a close associate of his in Washington,
the records show. Falsely inflated invoices for the wheat generated
tens of millions of dollars in cash.71
The report went on to state that The extent and magnitude of this corruption
is so staggering that it has put the very integrity of the country at
stake. 72 In an interview, Malik added: No other leader of Pakistan has
taken that much money from the banks. There is no rule of law in Pakistan.
It doesn t exist. 73
What brought Sharif down in his second term was his attempt to acquire
virtually dictatorial powers. In 1997 he rammed a bill through his
compliant parliament requiring legislators to vote as their party leaders directed.
In 1998 he introduced a bill to impose Sharia law (Muslim religious
law) across Pakistan, with himself empowered to issue unilateral directives in
the name of Islam. In 1999 he sought to sideline the army by replacing
Chief of Staff Pervez Musharraf with a more pliable crony. He forgot the
lessons he had learned in the 1980s: The army controls Pakistan and politicians
are a nuisance. As Musharraf was returning from Sri Lanka, Sharif
tried to sack him in midair and deny the Pakistan International Airways
flight with 200 civilians on board landing rights in Karachi. Musharraf radioed
from the aircraft through Dubai to his commander in Karachi, order
84 CAPI TA L I S M S AC H I L L E S H E E L
ing him to seize the airport control tower, accomplished as the plane descended
almost out of fuel. Musharraf turned the tables and completed his
coup, and Sharif was jailed.
But Sharif had little to fear. This, after all, is Pakistan. Musharraf needed
to consolidate his power with the generals, and Sharif knew details about the
corruption of most of the brass. Obviously, it is better to tread lightly
around the edges of your peer group s own thievery. So Musharraf had Sharif
probed, tried, convicted, and sentenced to life in prison, but then in 2000
exiled him to Saudi Arabia. Twenty two containers of carpets and furniture
followed, and, of course, his foreign accounts remained mostly intact. Ensconced
in a glittering palace in Jeddah, he is described as looking corpulent
amidst opulent surroundings.74 Reportedly, he and Benazir Bhutto
even have an occasional telephone conversation, perhaps together lamenting
how unfair life has become.
Military, Inc. The Pakistani military controls some of the largest business
conglomerates in the nation and has monopolies in several areas of production
and services. As chief of the army, Musharraf heads a vast empire of industrial,
commercial, and real estate interests worth an estimated $5
billion.75 A principal function of these businesses is to serve as a private
piggy bank for the privileged military hierarchy.
Four foundations, originally created to provide welfare for retired soldiers,
are now bloated enterprises employing tens of thousands and generating
hundreds of millions in annual revenues. The largest is Fauji
Foundation, fauji meaning military. Each of the armed services has its own
individual foundation: Army Welfare Trust, under Army GHQ; Bahria
Foundation, under Navy HQ; and Shaheen Foundation, under Air Force
- The vast scope of these foundation holdings can be seen in the range of
their subsidiary operations, as shown in Table 3.5.
As for the rest of the commanding heights of the economy, what the
military does not own it controls. Active or retired officers have recently or
still now head the National Highway Authority, the water and power agency,
the tax collection agency, Karachi Electric Supply, the Employees Old Age
Benefit Institution, the Federal Public Services Commission, the National
Accountability Board, and much more.76 Musharraf reportedly has appointed
some 500 officers to positions as chairmen, directors, agency heads,
and commissioners, permeating every aspect of the economy. You cannot
Dirty Money at Work 85
turn around in Pakistan without putting money into service coffers. With
what is almost certainly the largest holdings on the Karachi Stock Exchange77
and vast holdings outside the exchange, the military owns, controls,
and directs the economy of the country and is not about to give it up.
And what do rich generals do with their money Why, they take it offshore,
just like rich politicians and rich businesspeople. Court papers have
listed innumerable generals, other officers, and their family members with
86 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.5 PAKISTANI MILITARY FOUNDATION HOLDINGS
Fauji Foundation Fauji Cereal, Fauji Poly Propylene Products, Fauji Sugar Mills,
Fauji Oil Terminal, Fauji Cement, Fauji Corn Complex,
Fauji Kabirwala Power Company, FONGAS, Fauji Jordan
Company, Fauji Fertilizer Company, Mari Gas Company
Army Welfare Army Welfare Sugar Mill, Askari Housing Scheme, Army
Trust Welfare Shoe Project, Askari Welfare Rice Mill, Army Welfare
Woolen Mill, Askari Welfare Pharmaceutical Project, Army
Welfare Hosiery Unit, Askari Stud Farms, Askari Commercial
Bank, Askari Fish Farm, Askari Commercial Enterprises,
Askari Welfare Saving Scheme, Askari Power Limited, Askari
Associate Limited, Askari Information Service, Askari Leasing,
Magnesite Refineries Limited, Askari Aviation
Bahria Bahria Construction, Bahria Bakery, Bahria Holdings, Bahria
Foundation Catering and Decoration, Bahria Dredging, Bahria Security and
Systems Services, Bahria Coastal Services, Bahria Travel and
Recruiting Agency, Bahria Diving and Salvage, Bahria
Complexes, Bahria Shipping, Bahria Town and Housing
Schemes, Bahria Ship Breaking, Bahria Farming, Bahria Harbor
Services, Bahria University, Bahria Deep Sea Fishing, Falah
Trading Agency, Bahria Paints
Shaheen Shaheen Airport Services, FM 100 radio channel, Shaheen Air
Foundation Cargo, Shaheen Knitwear, Shaheen Air International,
Shaheen System, Shaheen Aerotraders, Shaheen Complex
Source: Ayesha Siddiya Agha, Power, Perks, Prestige and Privileges: Military s Economic Activities
in Pakistan, paper presented at the International Conference on Soldiers in Business,
Jakarta, Indonesia, October 17 19, 2000. Also, interview with Ayesha Siddiya Agha by the
author, Washington, D.C., September 7, 2004.
substantial foreign bank accounts. This is part of the reason why Nawaz
Sharif was allowed to go into exile in Saudi Arabia; he knew their foreign
Pakistan s pursuit and attainment of nuclear weapons and transfer of
bomb building components provides a frightening example of the many
failings of the Pakistani state. A.Q. Khan stole centrifuge blueprints in Europe
and then returned home to build a secret nuclear lab near Islamabad,
supported by the notorious BCCI. According to a thorough New York Times
report, Dr. Khan boasted, My long stay in Europe and intimate knowledge
of various countries and their manufacturing firms was an asset.
Business executives and merchants, including German, Dutch and
French middlemen, flocked to Pakistan to offer price lists for high technology
goods and learn what Pakistan needed. The multilingual Dr.
Khan led the acquisition effort. His shopping spree spanned the world.
Africa was important because of the materials needed. . . . Europe was
crucial for bringing in high tech machines and components. Dubai was
the place for shipments and payments. 78
When Khan purchased components from his willing suppliers, he
bought much more than needed by Pakistan alone, apparently with the
early intent of selling nuclear materials to other countries. By the late 1980s
he was supplying Iran, by 1991 North Korea, and at least as early as 1997
was in negotiations with Libya. The Libyan deal leaked, caused an international
uproar, and Khan was forced out of the lab bearing his name. He
made a public confession and was immediately pardoned by Musharraf and
allowed to keep the millions in property and cash he had accumulated in
Pakistan and abroad. Reports suggest that his daughter hastened out of the
country with documents and a videotape in which Khan claims that all the
chiefs of army staff since 1977, including Musharraf, were aware of his
The bottom line on Pakistan is that ruling elites were and continue to
be thoroughly corrupted, and western business and banking sectors have in
the past and continue today to service their corruption. Billions of dollars
have been siphoned abroad, millions of people are deprived and uneducated,
drugs move freely, terrorism finds accommodation, and nuclear sales
threaten global stability.
Dirty Money at Work 87
THE CRIMINAL COMPONENT:
DRUGS, THUGS, AND TERRORISTS
Global crime is surging exponentially. Mechanisms for shifting illicit proceeds
across borders are the key enabling factor.
Taking advantage of available techniques, hundreds of billions of drug
dollars have been conveyed into U.S. and European deposits since the
1960s. Despite setbacks for the Cali and Medell¡n cartels in recent years and
crop destruction at the behest of the United States, coca cultivation in Latin
America appears to be holding steady. Colombia, with anti government revolutionaries
and pro government paramilitaries both raking in revenues
from trafficking, has been destabilized for decades. Other criminal cells specialize
in transportation or money laundering, aiding the smuggling of cocaine
and heroin northward through Central America, Mexico, Caribbean
islands, and Cuba to North America and Europe. Mexican cartels easily get
their money into California and Texas banks, while tax havens in the
Caribbean continue to welcome illicit deposits. On the opposite side of the
world, drugs coming out of North Korea, Pakistan, Afghanistan, and other
Asian countries are similarly transported by cooperating syndicates smuggling
their goods across the stans, Russia, Iran, Turkey, and Eastern Europe
into Western Europe and the British Isles.
The ease with which drug kingpins washed their profits whetted the appetites
of other thugs, furthering the worldwide reach of crime in the 1980s
and 1990s. Regional and international syndicates honed their skills in protection
rackets, extortion, loan sharking, kidnapping, murder for hire, prostitution,
alien smuggling, advance fee fraud, art theft, counterfeiting of
currencies and consumer products, trafficking in human and animal parts,
and assorted villainies. Globalization has brought unprecedented opportunities
to criminal syndicates, and they have responded more quickly than law
enforcement agencies can begin to match.
Seeing how simple it was for others to do it, terrorists hopped onto the
money laundering bandwagon in the 1990s. With U.S. leadership and
broad international cooperation, the network of bank accounts that provided
wherewithal for the plots leading to September 11 was, to a reasonable
extent, quickly rolled up; however, the ability of the next group to employ
the same devices again has hardly been affected.
Drug kingpins, racketeers, and terrorists all draw from the bag of dirty
88 CAPI TA L I S M S AC H I L L E S H E E L
money tricks to move their illegal proceeds across borders. Corporate executives
using the same devices help keep open the doors to criminal funds.
Drugs kill people and destroy nations. They kill people in countries where
they are consumed, in countries through which they are trafficked, and in
countries where they are grown and produced. We fight drugs by eradicating
crops, destroying processing labs, and seizing shipments. But of all the
global efforts made to combat drugs, the weakest link is our feeble
anti money laundering efforts. Basically, drug kingpins know that, once the
sale is made, the cash is easy to move and legitimize.
Drugs are not just a minor irritant but a major global scourge. Of the
world s population aged 15 and older, nearly one out of 20 is an abuser, as
shown in Table 3.6.
When Peru and Bolivia cracked down on coca, Colombia increased its
crop fivefold in the 1990s.80 In the current decade, joint Colombian U.S.
eradication efforts have barely dented cultivation in that country, while
Peruvian and Bolivian authorities now indicate that production is under
Dirty Money at Work 89
TABLE 3.6 WORLDWIDE DRUG ABUSE
Abuse Number of Abusers
Globally, all types, including 200 million
users of multiple drugs
Cannabis, including 163 million
marijuana and hashish
Cocaine 14 million
Heroin 10 million
Other opiates 5 million
Amphetamines 34 million
Ecstasy 8 million
Source: United Nations Office on Drugs and Crime,
Global Illicit Drug Trends 2003 (New York: United Nations,
estimated in their countries. Growers have learned how to plant in smaller
plots and under trees where helicopters, aircraft, and satellites cannot spot
plants thriving beneath a loose canopy of foliage.
Opium poppy cultivation has been reduced in the infamous Golden
Triangle of Burma, Laos, and Thailand, only to surge again in Afghanistan.
Furthermore, cultivation has also spread to new growing areas in South
America and Europe. Authorities hate to admit it, but the truth is global
drug production is like an inflated balloon; you squeeze it in one place and it
expands in another place.
Cannabis, from which marijuana and hashish are produced, is grown all
over the world in warm climates, cold climates, outdoors, indoors, backyards,
and living rooms. Two thirds of countries reporting to the United Nations
Office on Drugs and Crime see an increase in consumption, making
marijuana and hashish far and away the most heavily produced and widely
consumed illicit drugs on the planet.
Synthetic drugs are soaring in use. Amphetamines are cutting into other
drug markets. Production centers include China, Burma, North Korea, Australia,
New Zealand, Belgium, Netherlands, Poland, Czech Republic, South
Africa, Mexico, and the United States. Recipes are readily available on the
Internet. In the current decade, tens of thousands of labs everything from
home kitchens producing a few ounces at a time to super labs capable of
producing up to 10 pounds of methamphetamines a day have been seized
in the United States and Mexico.
Meth, available in powder, rock, or tablet form, is glorified with a variety
of street names such as crystal, ice, crink, glass, chicken
feed and the poor man s cocaine. A versatile drug, it can be injected,
ingested, smoked, or snorted. Another type of the drug, which is known
as 3 4 methylenedioxymethamphetamine (MDMA), or ecstasy, go, or
the hug drug, is available for about $20 to $30 a pop, and school surveys
in North America and Europe show that consumption is growing
among younger users.81
The economics of trafficking explain why this line of work is so attractive.
Take just two drugs for which data in metric measurements are reasonably
reliable cocaine and opiates, including heroin as shown in Table 3.7.
The $35 billion wholesale value for opiates and nearly $9 billion for cocaine,
received by drug cartels and kingpins, roughly suggests the amount of
money that is laundered into the international financial system from these
90 CAPI TA L I S M S AC H I L L E S H E E L
two drugs alone. Retail values derived by street dealers are higher but are less
likely to be shifted out of the country where the final sale is made.
The drug business has come close to repealing the laws of supply and
demand. Look at the broad realities of the trade:
Eradication 10 to 20 percent of acreage.
Seizures 15 to 40 percent of supplies.
Wholesale prices to street vendors Stable for years.
Confiscated drug proceeds 0.1 percent.
And the last item is the key. Anti money laundering efforts don t work.
Big time drug dealers know that if they can convert their products to cash,
Dirty Money at Work 91
TABLE 3.7 ECONOMICS OF DRUG TRAFFICKING
Global plant cultivation 300,000 tonnes coca leaves 4,500,000 kg opium gum
Approximate growers price $1,000/tonne $200/kg
Approximate value, growers $300 million $900 million
Global drug production 800,000 kg 450,000 kg
Approximate 1st stage $1,000/kg $3,500/kg
Approximate value, 1st $800 million $1.6 billion
Deduct drug seizures (365,000 kg) (76,000 kg)
Available for consumption 435,000 kg 353,000 kg
Approximate wholesale $20,000/kg $100,000/kg
Total wholesale value $8.7 billion $35.3 billion
Source: Author s compilation and interpretation of data from United Nations Office on
Drugs and Crime, Global Illicit Drug Trends 2003 and International Narcotics Control
Board, Annual Statistics of Production, Manufacture, Consumption, Stocks and Seizures of Narcotic
Drugs, 9th ed., January 2003. The approximate wholesale prices for cocaine and opiates
are intended to illustrate global averages and may be higher than prevailing prices in major
metropolitan markets such as New York City.
they can keep the cash 99.9 percent of the time. Losses of product up to that
point are merely inconveniences but not deal breakers. Cartels and kingpins
thrive because they win the end game. Countries fighting drugs falter because
they lose the end game.
An active drug trade stimulates other forms of crime and usually is accompanied
by political instability. A brief tour of Afghanistan followed by
Colombia and Peru treated together will round out the picture.
We clearly have a possible narco terrorist state in the making in
Afghanistan, with all that means for our short and long term strategic
and security interests. 82 U.S. Congressman Henry Hyde was calling for a
greater U.S. military role in combating drug trafficking in the recently
Through coups, wars, and strife, drug production in Asia grew almost
continuously for a generation. As Burma and Laos reduced opium poppy
cultivation, Afghanistan took up the slack, increasing output fifteenfold
since 1979. Under the Taliban, opium production peaked to 4,600 metric
tonnes in 1999, almost all from irrigated fields, sometimes beautifully terraced
on lush hillsides.
The following year, Mullah Omar, the Taliban leader, banned poppy
cultivation. Why is unclear. One theory is that, because drugs are haram,
forbidden by Islam, the ban was intended to bolster the Taliban s thrust for
diplomatic recognition from other Muslim states. Another theory is that,
with large stocks of opium on hand, the Taliban simply wanted to drive up
the price of continued sales, which they did tenfold. Production in 2001
dropped to less than 200 tonnes. Then, after the Taliban were ousted, production
soared back to more than 3,000 tonnes in 2002 and 2003 and was
expected to exceed 4,000 tonnes in 2004.
The economics are enticing. A family cultivating poppies on as little as
one acre can generate an income of $2,000 to $4,000. There are well over
200,000 acres under cultivation, producing a value to growers of $400 million
to $800 million. More than a quarter million families are raising the
crop, spread across 28 of Afghanistan s 32 provinces. Processing labs converting
opium to morphine base, brown heroin, and white heroin are now
appearing in many areas, adding value to the raw opium gum. According to
92 CAPI TA L I S M S AC H I L L E S H E E L
UN estimates, opium generates about $1.2 billion for Afghan growers and
processors combined. A million local addicts consume part of the output.
Another $1.3 billion accrues to local traffickers,83 and then another $4 billion
is earned by traffickers who take deliveries in Pakistan, Iran, Tajikistan,
and other surrounding countries84 for onward delivery, eventually reaching
Russian and European markets at a wholesale value of $30 billion.85
Afghanistan today has four power centers: (1) the government headed
by Hamid Karzai, with limited control beyond the capital Kabul, (2) a
dozen warlords backed by militias numbering in the tens of thousands, (3)
the Taliban who, with sympathetic tribal groups, influence about 30 percent
of the country, primarily in the east bordering Pakistan, and (4) Al
Qaeda, continuing to attract support from fundamentalists. Added to this
volatile brew is the presence of strong foreign military forces U.S., British,
Karzai spoke faintheartedly of curbing poppy production in 2004, but
opted instead to win popular election as president with the support of the
warlords, mostly ex mujahideen who had helped oust the Soviets. The
warlords finance their militias and provincial control mechanisms largely
through crime, including drug cultivation, processing and trafficking, and
extortion from other traffickers. The Taliban s sway is in eastern provinces
which account for some 30 percent of poppy cultivation.86 And intelligence
reports suggest that Al Qaeda has been taking delivery of up to
2,000 kilos of opium bimonthly, with a value delivered into Pakistan of
more than $35 million annually. As a diplomatic source reportedly said recently,
Any operation that Al Qaeda or the Taliban could conceive of
could be funded right now. In terms of their needs, [drugs are] an unlimited
source of financing. 87
Some modest steps forward have been taken for Afghanistan s 28 million
people. The 2004 election was reasonably fair and peaceful, though
voter turnout was limited. Four million children are in school, about onethird
of them girls. Two and a half million refugees have returned from
neighboring countries. But neither a viable democracy nor a stable economy
can be built on drugs, and how Afghanistan can be weaned from its national
dependency is uncertain. Local warlords are already the functional equivalent
of Colombian drug lords. The Taliban and Al Qaeda are hurt but not
yet defeated. U.S. and British troops, focusing on terrorists, have hesitated
to fight drug processors and traffickers at the same time, a policy that has
Dirty Money at Work 93
only begun to change in 2005. And no one wants the weak Afghan army to
plunge the nation again into violence while trying to extend control
throughout the country.
Over the past decade, the linkages between drugs, criminal syndicates,
and terrorists have become unmistakably and frighteningly clear. The
war on terror cannot be won without waging an equal war on drugs, and the
war on drugs cannot be won without waging an equal war on drug money.
Remember what I said earlier: When you get to the end game, converting
product to cash, the drug kingpins and their terrorist allies win 99.9 percent
of the time. This is dirty money at work.
Colombia and Peru
Drug trafficking in the Western Hemisphere has gone through an interesting
metamorphosis over the past 30 years, essentially starting with several
competing groups, then evolving into large integrated structures, and now
shifting back to smaller franchise operations. The ease with which drug revenues
are laundered gives the industry its staying power through these cycles,
taking full advantage of the tried and proven holes in the global
Pablo Escobar intimidated, bribed, and murdered his way to the top of
the Colombian drug trade in the 1970s and 1980s. Emerging as El Patr¢n
among traffickers, he elevated Medell¡n drug lords into a cartel, cooperating
at the top, and assuring an endless supply of drugs to western markets. Escobar
was for a time perhaps the richest criminal in the world.
The violence of the Medell¡n cartel was also its undoing. In the 1980s a
justice minister, a newspaper publisher, an attorney general, and a leading
presidential candidate, Luis Carlos Gal n, were assassinated. An Avianca
flight was blown out of the air, killing 107. Even the national police agency
was bombed. The government set about confiscating cartel assets nearly a
thousand properties, 367 airplanes, 73 boats, 700 vehicles, 1,200 guns, and
tens of thousands of rounds of ammunition. Escobar was shot to death in
1993, and the Medell¡n cartel was broken.
Only to be replaced by the Cali cartel. Also formed in the 1970s, it
was headed by Gilberto Rodriguez Orejuela, named the Chess Player for
his strategic cunning, and younger brother Miguel Rodriguez Orejuela. In
the early 1990s, with rising resentment of Medell¡n s violence, the Cali
94 CAPI TA L I S M S AC H I L L E S H E E L
group provided money to a shadowy lot known as PEPES (People Persecuted
by Pablo Escobar), essentially hired killers who murdered Escobar s
lieutenants and provided intelligence to the army and police on his activities
The Cali cartel quickly became bigger than its rivals, controlling some
80 percent of cocaine shipments to the United States and Europe. It distinguished
itself from its competitors by operating in a businesslike, hierarchical
fashion, employing producers, chemists, truckers, pilots, accountants,
bankers, wholesalers, and retailers, while also maintaining scores of politicians
on the take. Regarded by the police as los caballeros, the gentlemen,
cartel members invested heavily in Colombia, reportedly owning, for example,
Drogas La Rebaja, the largest drugstore chain in the country and an
ideal business for recycling laundered money.88 The Cali cartel also formed
close alliances with Russian and Italian mafias, pioneering the cooperation
among criminal groups that now characterizes global racketeering.
Observing these growing connections, the Drug Enforcement Administration
(DEA) mounted Operation Green Ice against the Cali cartel in
1992, resulting in some 200 arrests and seizures of more than $50 million in
assets in the United States, the United Kingdom, Spain, and Italy. The DEA
chief bragged that We have damaged the cartel s financial operations and
disrupted their cash flow. 89 A DEA chief of operations also noted that . . .
the major result . . . was the message it sent to the drug mafias that the
number of safe havens for their drug money is quickly dwindling. 90 If so,
the cartel didn t notice. Its operations mushroomed over the next three years,
conservatively reaching $8 billion annually in revenues, easily laundered
into the global financial system.
The Rodriguez Orejuela brothers were finally captured in 1995 and became
model prisoners enthusiastically participating in a jailhouse workstudy
program. This and probably a few million dollars contributed to their
release in 2002, although they were recently extradited to the United States
to face charges. But the Cali cartel had nevertheless been largely broken up.
Only to be replaced by dozens of smaller groups, decentralized and diverse
and subcontracting major parts of their trafficking to independent producers,
transporters, smugglers, wholesalers, and money launderers. This
process has made anti drug activities even more difficult than in the heyday
of the cartels. General Rosso Jose Serrano, head of the Colombian National
Police, said it well: It is a whole new generation of traffickers who have
Dirty Money at Work 95
carefully studied and learned from the mistakes of the groups that went before
them. They maintain an extremely low profile, they mix their licit and
illicit businesses, they don t carry out terrorist acts and they operate in small,
autonomous cells. They are much harder to fight than previous groups because
they are much harder to find. 91
Today, Colombia is a narco state. As in Afghanistan, there are four competing
power centers. These include left wing guerillas, right wing paramilitary
groups, the Colombian army and police, and the drug traffickers.
Incessant violence has blighted this beautiful country for more than 30
years, and drug dollars brought back from the United States and Europe finance
all sides of the conflict. U.S. policy is, in a nutshell, hard on the producers
and distributors of drugs but soft on the international structures that
facilitate their illegal financial flows. And frankly, the smartest thing the
drug traffickers can do is continue paying for chaos in Colombia, because
out of chaos comes continued freedom of movement for clandestine criminal
groups. Every line snorted in North America and Europe, every $10 for
a dime bag of drugs, produces anguish for someone in this benighted country.
Tax havens, secrecy jurisdictions, and money laundering schemes make
it worthwhile for everyone involved.
Now, drug lords and guerrillas find it useful to have friends in neighboring
countries. Enter Vladimiro Montesinos, Peruvian spy master, CIA informant,
and world class thief.
Montesinos s father, a leftist intellectual, named his son Vladimiro Illych
in honor of Lenin. Entering the army, Montesinos soon became a principal
advisor to the prime minister in Peru s military government. Young and irritating
to senior officers, he was eventually shifted to a remote posting. But,
having already come to the attention of U.S. embassy officials, he was invited
to Washington and, with forged travel papers, showed up at CIA headquarters
in Langley, Virginia, in 1976. An early U.S. acquaintance enthused
that Montesinos is a firm friend of the United States, and the results of his
visit will accrue benefits to both nations for many years to come. 92 But
upon returning to Lima, the unauthorized trip, forged papers, and CIA visit
got him sacked from the army and jailed for a year.
Studying law and qualifying for the bar, Montesinos found his niche defending
Colombian drug dealers and murderous Peruvian army officers,
honing his skills by bribing police, prosecutors, and judges and intimidating
others who remained uncooperative. Accumulating influence, he wormed
96 CAPI TA L I S M S AC H I L L E S H E E L
his way into close contact with Peru s National Intelligence Service (SIN).
And, most importantly, he represented the wife of aspiring politico Alberto
Fujimori in several shady real estate deals.
As he was running for the presidency of Peru in 1990, Fujimori s own
alleged tax evasion was about to be revealed by the opposition. Meeting with
Fujimori, Montesinos assured the candidate that he would make the problem
immediately disappear, which he did. Improbably, the son of Japanese
immigrants was elected, and Montesinos was rewarded with the position of
deputy head of SIN, over which he exercised total dominance.
Across the 1990s, Montesinos received and dispensed bribes and kickbacks
in the hundreds of millions of dollars. Drug traffickers continued to
be key allies. Up to 700 flights a year reportedly departed from Peru s Huallaga
Valley and other areas, carrying coca leaves, paste, and refined product,
both to neighboring processors and to U.S. markets.93 The top dog in Huallaga
was Demetrio Limonier Chavez, known as El Vaticano after he made a
trip to Rome, who later after his capture confessed to paying Montesinos
$50,000 a month to assure army protection of his flights.94
One of Montesinos s more notorious deals was supplying AK 47s to
the Revolutionary Armed Forces of Colombia (FARC). In 1998 an international
arms dealer, Sarkis Soghanalian, agreed with Montesinos to purchase
50,000 Bulgarian manufactured automatic rifles from Jordan for delivery
to the military in Peru. Amman authorities were sufficiently cautious to ask
the CIA station chief in Jordan if the United States had any objection.
With a U.S. nod of approval, the deal went ahead, paid in cash. But instead
of being delivered to the Peruvian army, weapons were parachuted into
Colombia. In 1999 four aircraft loads, almost 10,000 rifles, were dropped
to the FARC military command. At least one source claims that additional
flights into the following year dropped up to 30,000 more rifles to the
What s a few thousand AK 47s when much bigger money is made on jet
fighters An arms trafficking gang known as Los Gordos worked closely with
Montesinos on several deals, reportedly utilizing a network of some 50 front
companies. Through this ring, Peru bought helicopters, missiles, air defense
systems, telephone tapping equipment, riot gear, bulletproof vests, and
more.96 A killing was made off decrepit Belarussian aircraft 36 MiG 29s
and 18 Suckhoi 25s, plus spare parts and a radar system.97 Worth about
$120 million at best, this purchase was consummated at either $445 million
Dirty Money at Work 97
or $770 million, according to alternative sources. Allegedly, Montesinos s
kickbacks were up to 50 percent, and the three principal partners in Los
Gordos allegedly contributed $30 million each to Fujimori s 1995 reelection
And who were Montesinos s staunch supporters through the 1990s
Why, his close friends at the CIA, reportedly paying SIN, Montesinos s intelligence
service, $1 million a year through the decade. This caused consternation
within the DEA, which had long recognized Montesinos for the
criminal and drug facilitator that he was. But the intelligence folks were
steadfast: At U.S. interagency meetings about U.S. policy toward Peru in
the late 1990s and 2000, the CIA was the agency that spoke most forcefully
on behalf of the maintenance of the U.S. relationship with Vladimiro
Montesinos, and its position prevailed through approximately June
Montesinos s grip on power finally began to unravel later that summer.
In connection with the AK 47s parachuted into Colombia, Fujimori held an
August press conference with Montesinos, praising his spy chief for breaking
up an international arms smuggling ring. Knowing they had been duped by
Montesinos, the Jordanians blew a gasket and undiplomatically suggested
that, instead of dismantling the ring, Montesinos was the ring. A video was
leaked by his enemies showing Montesinos bribing a congressman to change
parties. It turns out Montesinos had thousands of videos implicating much
of Peru s political class.
Montesinos escaped first to Panama in September 2000, then came
back, then escaped again to Venezuela. Fujimori, after a few weeks of pretending
he was cleaning up the mess, left town, too, sending his resignation
as president back to Lima by fax from Japan. In mid 2001, Montesinos was
captured in Caracas and returned to Peru, where he is incarcerated in the
prison he built to hold members of Peru s Shining Path guerrilla movement.
Details of his financial skullduggery came gushing forth. Bank accounts
and other financial arrangements were reportedly uncovered in the United
States, Mexico, Panama, Bolivia, Uruguay, the Cayman Islands, Luxembourg,
and Switzerland. Principal banks allegedly providing Montesinos or
his front men with their services included in the United States, Citibank,
Bank of New York, and Pacific Industrial Bank, and in Switzerland, UBS,
Canadian Imperial Bank of Commerce, Cr‚dit Agricole Indosuez, Cr‚dit
Lyonnais, Bank Leumi, FIBI Bank, Bank Adamas, and Bank CAI. In addi
98 CAPI TA L I S M S AC H I L L E S H E E L
tion, Banco Wiese Sudameris in the Cayman Islands and in Uruguay and
Banco Interamericano de Finanzas and Banco de Comercia in Peru allegedly
In November 2000, immediately following Montesinos s escape, Fujimori
reportedly handed U.S. Ambassador John Hamilton in Lima a note
with the following information, asking the ambassador to determine if this
was Montesinos s account: The Bank of New York, 51 West 51st Street,
New York, New York, 10019. Telephone (212) 408 4194. In care of Bill
Paying Department, Beverly Jones. 99 According to a declassified U.S. State
Department cable, the ambassador was informed two days later by an unnamed
source that Montesinos s primary bank account is in New York and
that, as of the first week in November, contained $146 million. 100
Citibank in Miami reportedly had $18 million belonging to a Montesinos
henchman.101 Pacific Industrial Bank reportedly seized $38 million
and returned it to Peru.102 The Swiss froze numerous accounts and reportedly
returned $77.5 million to Peru and held another $33 million pending
legal clearances.103 Perhaps all this was just part of his stash. As a U.S. official
testified at a Senate hearing: Intelligence information revealed that Montesinos
had maintained a global network of bank accounts and front companies
to move and hide hundreds of millions of dollars received from drug
traffickers, defense contract kickbacks, embezzlement of public funds, and
gun running since the mid 1990s. 104
As of mid 2004 Montesinos faced 70 charges, had been convicted on a
half dozen counts, was sentenced to 9 years in prison, and might get up to
20 years for selling those arms to the FARC. Some 40 other people were on
trial for related charges as well.
Back in the land of his parents, Japan, Fujimori created a web site,
http://www.fujimorialberto.com, claiming that he will run again for the presidency
of Peru. Not very likely. Interpol has issued a Red Notice for his arrest,
wanted for assault, forgery, fraud, kidnapping, hostage taking, murder, organized
A Swiss banker said to me, As long as tax evading money is not on the
same level as drug money, then we cannot curtail money laundering. 106
This may be an unwelcome comment to people who live off tax evading
money, but it happens to be correct. When we cultivate and facilitate hundreds
of billions of dollars of illicit proceeds we do want, then it must come
as no surprise that flowing by the same means are hundreds of billions of
Dirty Money at Work 99
dollars of illicit proceeds we don t want. When this is fully internalized, then
the West can begin to curtail drug trafficking and other forms of global
crime much more effectively.
Thugs and Racketeers
While drugs are the largest single component, they do not constitute the
majority of cross border crime. Much bigger than drugs is the combination
of human trafficking, illegal arms trading, smuggling, counterfeiting, fraud,
piracy, environmental offenses, and a host of other illicit pursuits. These activities
have soared in the last 15 years, with the collapse of socialist
economies and the acceleration of globalization.
Two key factors underpin the rapid growth in international crime: (1)
alliances and agreements spanning national, regional, and ethnic divisions
assure enormous profits for criminal syndicates choosing to cooperate rather
than compete, and (2) the ease with which money is shifted among groups,
laundered across borders, and transferred into the legitimate financial system
is the primary facilitating mechanism that makes such operations so successful.
Global crime is out of control and will remain so as long as dirty money
flows effortlessly into respectable particularly western accounts.
A selective listing of some of the major types of crimes that involve
cross border activity and brief notes on their scope, origin, or direction only
begins to suggest the magnitude of this phenomenon. (See Table 3.8.) Terrorism
will be treated separately in the next section. Money laundering suffuses
all of these pursuits.
These crimes generally have a lower risk level than drug trafficking. And
because most have emerged as major concerns in recent decades, estimates of
their magnitudes are in some instances still being formulated. Just the combination
of counterfeiting and smuggling appears to exceed the drug business.
Along with narcotics, a huge revenue generator for criminal syndicates is
human trafficking across borders and sexual exploitation in destination
countries. This is the fastest growing form of cross border crime and the
ugliest aspect of globalization.
Within the subject of illegal migration, a distinction is made between
those who are trafficked and those who are smuggled. Human trafficking
refers to forceful recruitment or fraudulent inducement for the purpose of
100 CAPI TA L I S M S AC H I L L E S H E E L
Dirty Money at Work 101
TABLE 3.8 CROSS BORDER CRIMINAL ACTIVITY
Type of Crime Scope, Origin, or Direction
Trafficking for prostitution 600,000 to 800,000 annually; women, men,
and slavery, plus alien children, babies. Most for prostitution.
Organ smuggling Unknown magnitude. South Africa, Brazil, and
Israel implicated in organ extraction and
Illegally traded small arms More than 1,000 small arms manufacturing
plants in nearly 100 countries. Legal trade,
$4 billion. Illegal trade over $1 billion.
Illegally traded heavy arms, Estimated at $2 billion to $10 billion annually.
both new and used Primarily out of former Soviet Union countries.
Nuclear, radioactive, Hundreds of attempts to sell nuclear materials have
chemical, and biological been reported in Germany, Italy, Switzerland, Poland,
materials Romania, Hungary, Bulgaria, Slovakia, Russia,
Tanzania, Dubai, Turkey, Iran, India, and elsewhere.
U.S. currency Most commonly, the U.S.$100 bill. Major
counterfeiting operations in North Korea, Colombia,
and Brazil. More than 30 forgers shut down in
Travel documents Fake passports and visas, essential for cross border
syndicates, produced in more than 100 countries.
Brand name apparel, Primarily from Asia, Central America, Italy, and
cosmetics, and toiletries Egypt.
Software, CDs, videos China a major source country.
Cigarettes Estimated 200 billion counterfeit cigarettes sold
annually. Plus billions of legitimately manufactured
cigarettes smuggled across borders annually to evade
duties and taxes.
102 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.8 (Continued)
Type of Crime Scope, Origin, or Direction
Fake pharmaceuticals Estimated at $15 billion to $50 billion annually.
and vaccines China, India, and Southeast Asia are major sources.
International Chamber of Commerce estimates
counterfeiting of all above consumer goods at $450
Cars; theft and delivery Hundreds of thousands of vehicles annually. U.S.,
to other countries Europe, and Japan are sources. Eastern Europe,
Russia, China, Latin America, and Africa are major
Gold, other precious Gold into Asia. Conflict diamonds from Africa.
metals, and gems Precious stones from South America.
Art, antiquities, and Could be up to billions of dollars annually.
cultural items Paintings stolen in Europe are often brought to
Japan. Antiquities come primarily out of Middle
East and China. In a single arrest, a 100 member
gang was apprehended in Spain in 2002 with
Pornographic materials Large markets in Japan and China.
Endangered species, Hundreds of thousands of live animals are exported
especially large cats, annually. Together with animal parts, believed to be
rare birds, reptiles, a multibillion dollar trade. Southern Africa is an
and botanical specimens important source region.
Animal parts, especially Estimated one million elephants killed since the
rhino horns, elephant 1970s. Rhino population reduced by an estimated
tusks, shark fins 90 percent in 30 years. Markets primarily in Asia.
Illegal logging From Russia, Indonesia, Central and South
America, and Africa. In the hundreds of millions of
tons annually, valued at up to $15 billion.
Waste dumping, primarily Tens of millions of tons shipped and sunk in oceans
metals, toxic chemicals, and or dumped in developing countries annually.
exploitation. Victims are bought, kidnapped, or enticed with job offers,
transported across borders, and coerced into prostitution or servitude. Human
smuggling differs in that the individual chooses to be taken across borders
for the purpose of illegal entry into another country. Once there, he or
she may similarly be forced into servitude to pay off the cost of transportation
and local protection. Trafficking involves human rights violations and is
a crime against the person. Smuggling with its attendant illegal entry is considered
a crime against the state. There is ample grey area between trafficking
and smuggling, particularly as these two crimes often involve underage
migrants receiving false promises of employment, leading instead to forced
labor and sexual enslavement. The term trafficking is often applied to all
forms of illegal human movements.
Cooperation between local gangs and international syndicates is clearly
demonstrated in the human trafficking trade. Local recruiters obtain willing
or unwilling victims. Transporters move them across borders and onto international
routes. Corrupting police, immigration, border, and airport officials
is a key part of the transporter s job. Channels and techniques used are
often the same as those already proven safe in drug smuggling and arms
trading. A network of overseers and informers protects the cargo and assures
Dirty Money at Work 103
TABLE 3.8 (Continued)
Type of Crime Scope, Origin, or Direction
Credit cards; counterfeited, Losses estimated at roughly 1 percent. Single
stolen, skimmed, and counterfeiters produce thousands of cards daily.
Advance fee fraud, primarily African scam artists generate millions annually.
for future services or payoffs
On the high seas 325 piracy attacks in 2004. The Strait of Malacca
between Singapore and Indonesia is one of the most
perilous in the world.
In coastal waters, inlets, Nigeria, for example, loses an estimated 100,000
and ports barrels of oil a day from theft and illegal bunkering.
its final delivery. Criminal syndicates usually take over in the destination
country to force victims into prostitution or to collect smuggling fees. And
then money laundering assures that every link in the chain is well rewarded
for its portion of the enterprise.
In the U.S. State Department s estimate of 600,000 to 800,000 people
trafficked across borders annually, 70 to 80 percent are females and at least a
third of them are underage. An estimated 70 percent of all trafficked females
end up being sexually exploited in conditions that deny them freedom. Other
groups studying human trafficking estimate even higher annual numbers.107
Little girls and young women are bought cheap, reportedly in Nepal for
$4, in West Africa for $14, in Central America for $25. Delivered to a
brothel owner, a Malaysian reportedly might cost $5,000, a Thai $14,000, a
blonde Russian Natasha perhaps $20,000. Criminal syndicates investing
in human inventories expect to get high returns.
Out of Africa come an estimated 50,000 trafficking victims a year.
Central American and Caribbean women have been found in the sex
trade in France, Germany, Switzerland, the Netherlands, Austria, Portugal,
Greece, and elsewhere. Mexican women are a favorite in Japan. Reportedly
75,000 Brazilian women are in forced prostitution in European
Union countries. Women from Colombia are trafficked along drug paths
leading all over the world.
Russia and other countries of the former Soviet Union may be the largest
sources of human trafficking, estimated in the hundreds of thousands annually.
The collapse of the USSR led to the feminization of poverty and has produced
a massive outflow of women.108 Most countries of South and Southeast
Asia are supplying women to Japan and the Middle East. The CIA has estimated
that some 50,000 women are trafficked for sexual exploitation into the
United States annually, with source countries including Thailand, Vietnam,
Malaysia, China, South Korea, the Philippines, Russia, Ukraine, Czech Republic,
Poland, Hungary, Latvia, and most countries in the Western Hemisphere.
Drugs, girls, and guns are the stock in trade for a good part of global
crime. Add to these the further panoply of counterfeiting, contraband,
fraud, environmental damage, and international theft, secure all with powerful
state sponsors and large multinational criminal syndicates, and the picture
of this planetary menace begins to take shape.
Government sponsors or endorsers of overt criminal activity in recent
years have included Russia, China, North Korea, Afghanistan, Pakistan,
104 CAPI TA L I S M S AC H I L L E S H E E L
Burma, Turkmenistan, Iraq, Belarus, Serbia, Sudan, Libya, Liberia, Peru,
Mexico, Panama, many of the Caribbean and south Pacific islands, and others.
Not at any former time have so many state actors crossed the line into
criminal pursuits. In many more nations, police and security officials have
been easily bribed to look the other way as criminals ply their trade.
But governments and officials are the smaller part of the problem. The
larger part are the triads, yakuzas, mafias, cartels, posses, gangs, and assorted
collections of hoodlums that have gained control of global crime. The extent
of their activities underlines the damage done by global dirty money. Whittling
away their hold will be a long and difficult effort.
A selective listing of major criminal groups and brief notes on their size
and reach can begin to illuminate the threat from organized syndicates. (See
Table 3.9.) Mafia and Japanese yakuza groups are typically hierarchical. Chinese
triads are looser confederations of gangs.
Cross border cooperation and easy money laundering have produced
the fastest change in crime that has ever been witnessed. Yet it is a change
that has registered only modestly on public consciousness. Drugs, once
thought to be the principal global bad, have been overtaken by a combination
of other criminal activities that draw upon the experience of drug cartels
but expand into everything else imaginable, ranging from sexual slavery
to nuclear materials. One country, North Korea, and one criminal syndicate,
the yakuza, only begin to illustrate the damage done.
Take the worst that I write about in this chapter money laundering, drugs,
trafficking, racketeering, counterfeiting, arms trading, and terrorism add
the claim of nuclear weapons, wrap it all up in a package of political repression,
gulags, executions, and starvation, and you get North Korea today.
This is a country that essentially functions as a state level crime syndicate,
according to U.S. Senator Peter Fitzgerald.109
Twenty three million people on 46,000 square miles, poor soils, devastating
floods, dependence on grain imports, and an insularity stretching back
hundreds of years earning for this land the name Hermit Kingdom combine
to produce what may be the most lethal brew in the nation state system.
Place on top a paranoid and unstable dictator, Kim Jong Il, the country s
Dear Leader, who likes alcohol, gambling, and Scandinavian women,
Dirty Money at Work 105
106 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.9 MAJOR CRIMINAL GROUPS
Criminal Group Size, Base, or Extent
Chinese Triads Chinese officials estimate that 150,000 gangs
and others operate internally, with membership in the millions.
Hong Kong officials estimate the city s gang
population at 80,000, divided into 57 triads and
Sun Yee On 50,000 members, a traditional triad. Originally
based in Hong Kong but allegiance now to China.
Active in major cities in Europe, U.S., South Africa,
Big Circle Boys 5,000 members, based in China. Derived from
formerly imprisoned Red Guards. Active in U.K.,
Europe, U.S., Canada, and elsewhere.
14K 20,000 members. Also originally based in Hong
Kong but now directed toward China. Active in
Europe, U.S., Australia, the Philippines, Japan, Taiwan,
Wo groups Based in Hong Kong; operates as a triad. Includes
Wo Hop To, Wo On Lok, and other groups. Active
in Australia and elsewhere.
United Bamboo 20,000 members; based in Taiwan. Founded by sons
of ex Kuomintang army officers who fled China.
Active in U.S., Europe, Canada, and Latin
Four Seas 5,000 members; based in Taiwan; active
Sung Lian 10,000 members; Taiwan.
Tian Dao Man 2,000 members; Taiwan.
Hundreds of other Including Red Sun in Europe; Wo Shing Wo in
groups, most U.K., Europe, South Africa, and elsewhere; Wah
with a base in China Ching in California; Shui Fong in U.K., and
Snakeheads Usually loose gangs, often family oriented, involved
in human trafficking.
Dirty Money at Work 107
TABLE 3.9 (Continued)
Criminal Group Size, Base, or Extent
Yamaguchi gumi 17,500 members, based in Kobe and Osaka, hierarchically
organized. Into human trafficking, sex trade, drugs, gun
running, real estate, and more. Activities in South Korea,
Taiwan, the Philippines, Pacific islands, Europe, Canada,
U.S., Mexico, and Central and South America.
Sumiyoshi kai 6,200 members, Tokyo based, organized as a
federation of gangs. Into drugs, human trafficking,
sex trade, extortion, gambling, and more. Active in
Hong Kong, Taiwan, the Philippines, Australia, and U.S.
Inagawa kai 5,100 members, Tokyo based. Into gambling, drugs,
loan sharking, and construction. Active in Hong Kong,
South Korea, the Philippines, South America, and U.S.
Kyokuto kai 1,700 members; Tokyo based.
Matsuba dai 1,500 members; Tokyo based.
More than 1,000 Combined yakuza members and associates estimated
additional gangs at more than 80,000, plus linkages to tens of
thousands more, particularly among immigrant
Korean and Chinese communities.
Other Major Asian Criminal Groups
Korean Often yakuza style organizations. Into drugs and
Filipino Often closely linked to yakuza and triad groups.
Into human trafficking and arms smuggling.
Thai Drugs, prostitution, and human trafficking.
Vietnamese Drugs, human trafficking. A reputation for violence,
even in the U.S.
Cambodian Drugs, illegal logging.
Laos Drugs, illegal logging.
Burmese Some 35 armed militias, into drugs, kidnapping,
human trafficking, illegal logging, smuggling of
endangered species, and more.
108 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.9 (Continued)
Criminal Group Size, Base, or Extent
Russian Mafias 12,000 groups, estimated 3 million criminals, 300
and Mobsters groups operating internationally in conjunction with
syndicates in more than 50 countries, 300 percent
increase in activities in 15 years. Russian Ministry of
Internal Affairs estimated in late 1990s that 40 percent of
private firms, 50 percent of banks, and 60 percent of stateowned
enterprises were controlled by organized crime.a
Various groups have merged, splintered, strengthened,
and weakened over the past 15 years.
Solntsevskaya 5,000 members. Founded in 1980s in a Moscow
suburb. Sometimes called Brigade of the Sun.
Allegedly headed by Sergei Mikhailov. Into drugs,
human trafficking, prostitution, kidnapping,
extortion, arms smuggling, car theft, excise tax
fraud, banking fraud, and money laundering.
International activities in Europe, Israel, Central and
South America, and many cities in the U.S.
Ismailovskaya 1,000 members. Allegedly close to powerful Kremlin
figures. Deep into corporate fraud, drugs, human
trafficking, extortion, and money laundering,
reportedly through scores of foreign shell companies.
International operations in Europe South America,
Mexico, Canada, and U.S.
Mogilevich Headed by Semion Mogilevich who, with an
Organization advanced degree in economics, is called the brainy
don. Into arms smuggling, drugs, prostitution,
extortion, corporate and banking fraud, art theft,
and suspected smuggling of nuclear materials.
Operations in Europe, South Asia, South America,
and major U.S. cities.
Victor Bout Reportedly an ex KGB officer, a major illegal arms
trafficker since the early 1990s. Sources include
Russia, other former Soviet Union countries, Eastern
Europe, and allegedly Pakistan. Deliveries include
small arms, machine guns, ammunition, mortars,
armored personnel carriers, tanks, and helicopters to
Dirty Money at Work 109
TABLE 3.9 (Continued)
Criminal Group Size, Base, or Extent
conflict situations throughout Africa and to warlords
and the Taliban in Afghanistan. Dozens of companies,
40 to 60 aircraft, up to 300 employees, headquartered
at various times in UAE and Russia.
Other Russian Groups
Moscow Dolgopruadnenskaya, Podol skaya, Kurganskaya,
Lyuberetskaya, Leninskaya, Pushinskaya,
Orekhovskaya, Taganskaya, Balashikhinskaya,
Bortsovskaya, 21st Century Association.
St. Petersburg Tambovskaya, Kazanskaya, Malyshevkaya
Chechen gangs Obshina, Abdulkardyrova, Tsentralnaya,
Eastern European Among the most aggressive and violent are ethnic
Groups groups from Georgia, Armenia, Moldova, Albania,
Slovenia, Croatia, Kosovo, Bosnia Herzegovina, and
Serbia. Activities include drugs, human trafficking,
prostitution, protection rackets, car theft, bank
Italian Organized Law enforcement in Italy and U.S. has somewhat
Crime reduced mafia dominance, only to have other criminal
groups proliferate. Italian mafias estimated at 25,000
members and perhaps 250,000 affiliates worldwide.
Into drugs, smuggling, arms dealing, kidnapping,
human trafficking, counterfeiting, bribery, and
money laundering. Largest is the Sicilian Mafia,
followed by Camorra based in Naples, Ndrangheta
based in Calabria and Sacra Corona Unita in the
Puglia region. In the United States, La Cosa Nostra
cooperates with criminal syndicates from all over the
Nigerian Groups Estimated 500 gangs active in 80 countries. Into drug
smuggling, advanced fee frauds, credit fraud, some
human trafficking, and money laundering.
aRussian Organized Crime (Washington, D.C.: Center for Strategic and International Studies,
plays 18 holes of golf at 38 under par, and allegedly possesses the world s
largest collection of Daffy Duck cartoons, and this is more than enough to
keep us awake at night.
An unidentified North Korean defector testifying before a U.S. Senate
committee in 2003 reported that Dear Leader s father, Kim Il Sung, started
the country on the path of drug cultivation as early as the 1970s in Yangkang
and Hamkyung provinces. The latter area had been used years ago by the
Japanese colonial government to grow poppies. Collective farms in several
towns were pressed into cultivation of broad bellflowers, with the opium gum
output sent to government labs for processing into heroin. By the 1990s this
was big business, supervised by imported Thai experts. In 1997 the government
allegedly ordered all collective farms to cultivate poppies, as additional
processing facilities were established and guarded by state security agents.110
Methamphetamine production reportedly was added in 1996, following
heavy rains that affected poppy crops. Usually produced from ephedrine,
which is subject to trade regulations, North Korea may be experimenting
with a benzene derived product that would have unlimited production potential.
111 With an estimated 2.2 million users in Japan alone, Asia s largest
meth market is just a short boat trip away.
Diplomats, agents, and masquerading businessmen all have been used
to distribute North Korean drugs worldwide. Seizures from diplomatic
pouches and from travelers suitcases, briefcases, clothes, shoes, and more
have been made in South Korea, Japan, China, Taiwan, Russia, India, Laos,
Nepal, Sweden, Germany, Zambia, Ethiopia, Egypt, Venezuela,112 and Mexico.
113 North Korean ships have been detained, searched, and found with
drugs in Japan, Indonesia, Australia, and South Korea. A five day, high seas
chase off the shores of Australia in 2003 netted tens of millions of dollars in
heroin, along with the ship s crew of 34, including a political secretary of the
Korean Workers Party.114
Responding through a translator to questions at the Senate hearing in
2003, a North Korean defector said the following:
Senator Fitzgerald: The poppy fields that you described, did you personally
see those fields
Former Official: Yes, numerous farms, myself, with my naked eyes.
Senator Fitzgerald: Were you personally involved in trafficking heroin,
as a high ranking officer in the North Korean Government
110 CAPI TA L I S M S AC H I L L E S H E E L
Former Official: Yes, there was a time that I was directly involved in
. . . the trafficking myself. . . .
Senator Fitzgerald: Were you directed by your superiors in the North
Korean Government to traffic in the drugs you trafficked in or were
you doing that on your own
Former Official: There is nothing in North Korea a person can do
voluntarily to help the regime. And especially speaking of production
and selling, trafficking drugs, and processing or growing poppies
and processing poppies into heroin, these are all done on the
state level, as a state business. . . .115
North Korea s drug trafficking skills are used for counterfeiting and
smuggling many other items as well. Diplomats and agents have also been
caught in various countries with illicit cigarettes, liquor, gold, pirated CDs,
diamonds, ivory, endangered species, animal parts, electronic goods, fake
brand name apparel, and more.
North Korea s wide ranging drug and smuggling businesses bring government
agents into frequent relationships with other organized crime elements:
Japanese yakuza, Chinese, Hong Kong, and Taiwanese triads, Russian
mafias, and Thai gangs. In the meth trade with Japan, for example, North
Korea acts as the producer and wholesaler, and yakuza gangs function as retailers.
In some cases, Japanese and Taiwanese vessels meet North Korean
ships in open seas and take deliveries of multimillion dollar drug shipments.
With a strong resume in domestic crime and global smuggling, it is little
surprise that North Korea combines these skills to facilitate its primary
source of export earnings: arms trading. Beginning in the 1980s with
SCUDs, North Korea reportedly has exported more than 500 missiles to
Libya, Syria, Egypt, Yemen, the United Arab Emirates, Iran, and Pakistan.
Revenues from missile sales in just one year, 2001, were estimated at $560
million.116 In return for missile technology, Pakistan provided North Korea
with uranium enrichment technology, lending credibility to the fear that
North Korea has successfully produced nuclear weapons. Furthermore, evidence
arose in 2004 indicating that North Korea had exported uranium
hexafluoride back to Pakistan, which can be converted to weapons grade
material, and had offered and perhaps provided bomb making blueprints to
Libya and Iran. Who else purchased nuclear components and designs from
this rogue state
Dirty Money at Work 111
Missile sales, unfortunately legal, and drug trafficking and all manner of
smuggling, thoroughly illegal, produce hard currency earnings for North
Korea well in excess of $1 billion a year.117 But this certainly isn t enough
money for Kim Jong Il and his coterie of henchmen, so they resort to the
simplest solution of all: printing more.
North Korea has one of the most sophisticated counterfeit currency operations
in the world. In the 1970s the regime allegedly imported from Europe
various models of printers, along with currency inks. Observing the
improving quality of output, Bruce Townsend of the U.S. Secret Service
commented: In the last 14 years, 14 additional variations (referred to as circulars)
have been identified and linked together either through forensic or
investigative associations. The manufacturers of this family of counterfeit
notes utilize complex and expensive printing methods such as intaglio and
typographic. The sophisticated printing method is evidence of a wellfunded,
ongoing, organized criminal enterprise, with a significant scientific
and technological component. 118
Major parts of Kim Jong Il s illicit empire allegedly are controlled by a
murky group called Division 39, with operating companies, trading houses,
Pyongyang and Macau banks, and until recently the Golden Star bank in
Vienna. According to reports, the Korean Workers Party Central Committee
oversees Daesong General Bureau Division 39, which in turn controls
Korea Daesong Bank, which directed Golden Star.119 The Austrian Interior
Ministry s 1997 annual report noted that: . . . the only European branch of
the North Korean state bank might have played a significant role in different
dubious North Korean activities. This bank has been repeatedly linked to
money laundering, distribution of counterfeit money, and involvement in illegal
trade with nuclear material. In this context, Vienna has to be regarded
as the center of North Korean financial deals and transactions in Europe. 120
Again in 2002, the Austrian Interior Ministry s report stated that: . . .
since 1982 North Korea has maintained a bank in Vienna. From the beginning,
intelligence and security agencies repeatedly linked the bank to money
laundering and financing of proliferation deals. There has never been concrete
proof . . . 121
Austrian authorities are notoriously lax on money laundering matters.
Pressure from the United States finally got their attention, and Golden Star
closed in 2004. Perhaps an important contribution came from another recent
North Korean defector, Kim Dok Hong, who reportedly served for 17
112 CAPI TA L I S M S AC H I L L E S H E E L
years on the Central Committee. His message was simple: With a financial
assault on Division 39 companies, you can shut down Kim Jong Il. 122
No story about North Korea is complete without commenting on the
enormity of the human tragedy occurring in the countryside. An estimated
600,000 to 1,000,000 people died in the famines of the 1990s,123 and some
experts believe the figure could be as high as 2.5 million. Between 100,000
and 300,000 people have crossed the 877 mile border into China.124 Perhaps
another 200,000 are imprisoned in gulags and often worked to death.
Torture, forced abortions, medical experiments, gassing, and grisly executions125
appear to be common in six or more enormous penal colonies and
innumerable other labor camps and political stockades.126 Life expectancy
has fallen and infant mortality has risen. There have been repeated reports of
cannibalism, both of those dying of natural causes and of others murdered
for their I hate to say it food value.
North Korea presents the twenty first century with a completely criminalized
Stalinist regime, fielding a million man army, likely possessing nuclear
weapons, apparently exporting nuclear materials, growing and
trafficking drugs, producing and selling missiles, and counterfeiting currency
and laundering it all over the world, while at the same time repressing
millions of its people, generating a sense of desperation unparalleled in Asia
in recent decades. The dilemma for the West is the link that connects nuclear
capabilities and criminal pursuits. While we seek a solution to the
North Korea problem, the impact of this regime s global criminal activities
could be with us for years to come.
If racism is the original sin of America and caste the original sin of India,
then gangsterism may be the original sin of Japan. Perhaps no other modern
state has such a deep and troubling legacy with organized crime.
After centuries of internal conflict, two contenders for power and
160,000 combatants led by samurai warriors met in 1600 in the Battle of
Sekigahara, as important to Japan as Gettysburg is to the United States and
Waterloo to Europe. The cunning head of eastern forces, Ieyasu Tokugawa,
emerged victorious, minor rivals were soon subdued, and the relatively
peaceful Edo Period followed for more than 250 years.
Peace was good for the unified country but bad for the samurai. Some
Dirty Money at Work 113
became merchants and bureaucrats, but others resorted to roving banditry as
masterless samurai, or ronin, ennobled in the movie Seven Samurai. To defend
against them, other groups of toughs formed, called machi yakko, or
servants of the town. Glorified in legend as chivalrous defenders of the weak,
they eventually descended into subgroups of gamblers and street peddlers
and, later, collections regarded simply as hoodlums. Living on the edges of
society, the term yakuza became attached to such gangs, referring to the
numbers eight, nine, and three, which is a hand held by losers in a popular
Ultranationalists began to capture the imagination of Japan in the late
1800s, advocating militarization and foreign expansion. They found natural
allies in secret criminal societies, which soon played important roles as intelligence
gatherers, provocateurs, and assassins in the occupation of Korea, in
the Russo Japanese War of 1904 1905, and later in the conquest and plunder
of Manchuria and China. Bonds between far right wing politicians and
yakuza thugs solidified, while at the same time factions of radicals and conservatives
developed within the military. By the outset of World War II,
these two tracks were still evident in the Japanese armed forces, and a third
force, an independent yakuza with rightist political links, was no longer tolerable.
Many gang members found themselves either in uniform or in jail.
The U.S. occupation of Japan from 1945 to 1952 contributed to rebuilding
yakuza strength. From black market distribution of rationed
goods, to control of docks, trucking, and massive new construction projects,
to blunting the ambitions of immigrated Chinese and Koreans, yakuza
gangs reasserted their might. As Mao s communists took over China and
Japanese leftists threatened the democratic transition, U.S. occupiers, cooperating
Japanese politicians, and both sides intelligence and police services
found yakuza thugs especially useful in putting down Red sympathizers.
Long time yakuza observers David Kaplan and Alec Dubro noted: The
money, the favored treatment, and the privileged relationships accorded to
rightists and their gangster allies by U.S. officials created a corrupt power
structure that would last for decades. The yakuza now resumed their role in
Japanese politics providing money and muscle in a stronger position
than ever. 127
A pivotal figure in yakuza resurgence was Yoshio Kodama, ex spy and
profiteer in China. After the war, while held as a suspected war criminal in
Tokyo, he entrusted his considerable fortune to a right wing cohort, who fi
114 CAPI TA L I S M S AC H I L L E S H E E L
nanced the establishment of the Liberal Party. Merging with the Democratic
Party in 1955, the resulting LDP has continued to rule Japan from a foundation
built in part on criminal money.
Released from prison in 1948, Kodama was promptly recruited by U.S.
intelligence and for the next 35 years moved at the highest levels among
yakuza bigwigs, right wing politicians, and U.S. businessmen. Among corporations
that came calling on Kodama was Lockheed Aircraft. Anxious to
sell Starfighter jets, Tristar airliners, and Orion anti submarine planes,
Lockheed paid more than $12 million to Kodama over 20 years, most of it
in yen notes, much of which he used to bribe politicians and defense and
airline officials. When the scandal broke in 1976, it led to passage of the
Foreign Corrupt Practices Act in the United States the following year, barring
bribes to foreign government officials. Japanese ex prime minister
Kakuei Tanaka was convicted in 1983 of accepting more than $2 million of
Lockheed s bribe money, while earlier press reports alleged that more than
$250 million of illicit money had been passed through dummy corporations
to his LDP faction.128
Today, yakuza ranks are estimated at about 80,000, among more than a
thousand gangs spread across the Japanese islands and dozens of other
countries. This gives organized crime a far heavier presence in Japan than in
any other industrialized democracy. The largest syndicate, Yamaguchigumi,
is based in Kobe and Osaka, has a membership of about 17,500, and
in recent years has operated thousands of businesses in most of Japan s prefectures.
The next four largest syndicates are headquartered in Tokyo and
have a total membership of some 15,000. Combined criminal revenues are
estimated by cowed police officials at $10 billion and by other analysts at
vastly higher figures.
The range of yakuza activities in Japan is breathtaking, mixing illegallyderived
revenues with semilegitimate businesses across the economic spectrum.
Trillions of yen are generated from both usual and unique forms of
Drugs. Before World War II, the yakuza controlled importation of opium
and heroin from China. Frenetic years of economic expansion in the postwar
occupation period produced a huge market for methamphetamines,
with China, Taiwan, and South and North Korea providing pills and powder
from dozens of labs. By the 1980s, meth may have accounted for half of
Dirty Money at Work 115
yakuza income, in the tens of billions of dollars, making Japan easily one of
the world s largest consumers of the drug.
Human Trafficking. This is the seamiest side of Japan s attachment to
yakuza syndicates. In the 1960s and 1970s, as income levels grew and commercial
and tourist travel soared, yakuza gangs launched sex tours, taking
businessmen on wild jaunts to Taiwan, the Philippines, South Korea, Hong
Kong, Malaysia, Indonesia, Thailand, the United States, and elsewhere. Prostitution
and sexual slavery grew all over Asia, with estimates of sex workers
put at 700,000 in Thailand, 300,000 in the Philippines, 200,000 in South
Korea, and more in other countries.129 Europeans were soon attracted to these
fleshpots as well. Protests in several nations, particularly by church and
women s groups, curtailed blatant sex tours in the 1980s, a challenge which
the ever resourceful yakuza met by reversing the trade and bringing women
and young girls instead to Japan. Whether enticed with promised jobs or purchased
outright from destitute families, tens of thousands of women are
flown every year into Japan from other parts of Asia, Latin America, and
Eastern Europe, usually admitted on visas as entertainers, stripped of their
identifications and forced into prostitution in brothels and clubs. They are
the central elements in Japan s estimated $80 billion sex industry,130 now believed
to employ as many as 150,000 non Japanese.131 Men are also imported
for sexual service. The U.S. State Department has condemned this traffic,
stating in a 2004 report: The Government of Japan does not fully comply
with the minimum standards for the elimination of trafficking. . . . The government
should pursue efforts to prosecute the powerful organized crime figures
behind Japan s human trafficking. . . . Japan could do much more to
protect its thousands of victims of sexual slavery . . . 132
Unpaid Loans. Perhaps the murkiest part of yakuza involvement in
Japanese business has to do with the bubble economy, which began in the
1990s, and the amount of unpaid loans owed by criminal groups. As land,
buildings, and corporate shares rose to dizzying heights in the 1980s, banks
and developers flush with paper profits often turned to criminal syndicates
to clear urban and farm areas for new real estate projects. Leveraging off of
their growing connections in the banking sector, many yakuza groups and
their hundreds of related construction companies went into property development
themselves. Financial institutions, desperate to put massive cash re
116 CAPI TA L I S M S AC H I L L E S H E E L
sources to work, reportedly made heavy advances to deals known to have
yakuza affiliations, often through kigyou shatei, front companies for mob
activities. Even respected Nomura Securities and Nikko Securities were
found to have knowingly participated with other firms in loans of more
than $2 billion to Inagawa kai companies, one of the country s largest
Then in the early 1990s the bottom fell out of Japanese asset values.
Banks were left with trillions of yen in nonperforming loans, yakuza borrowers
refused to pay, and bankers trying to collect found that they were taking
their lives in their hands. In the early 1990s, a vice president of
Sumitomo Bank was assassinated, and a vice president of Hanwa Bank was
murdered. In 2000 the president of Nippon Credit Bank was found asphyxiated
after fighting was heard in his hotel room. Another half dozen banking
officials have similarly died in recent years under mysterious circumstances.
As one observer commented, The banks are still afraid of foreclosing on
some companies because they are afraid of what the yakuza will do to
them. 134 The Far Eastern Economic Review goes on to report: Many Japanese
politicians are reluctant to address the yakuza s role in the bad debt crisis
because they rely on gangsters for help raising campaign funds and fending
off intra party rivals. There s not a single Diet member who doesn t know
his local yakuza boss . . . 135
Bad debts at Japanese banks have been variously estimated to range
from $150 billion to $1.5 trillion or even more. How much of this is yakuza
related is unknown, but some observers suggest as high as 30 percent to 50
percent. Clearly, yakuza criminal syndicates have a significant if undetermined
measure of responsibility for a dozen years of stagnation in the second
largest economy on the planet, a stagnation that earned the name
yakuza recession and affected growth across the whole world.
Besides these principal activities, yakuza groups are into many other
criminal, legitimate, and indistinguishable ways of generating millions, including
corporate shakedowns threatening to disrupt annual meetings or
distribute unfavorable publicity, protection rackets preying on tens of thousands
of businesses, murder for insurance, import export, casinos, professional
sports, loan sharking, gambling, counterfeiting, pornography, bid
rigging, waste disposal, guard services, fish markets, armored car and ATM
heists, merchandise thefts, stock manipulation and financial fraud, and even
book shops, art galleries, and hospitals. Money laundering, of course, keeps
Dirty Money at Work 117
it all going, which unfortunately, due to lax regulation, is accomplished with
Furthermore, the yakuza have greatly extended their international reach.
Japanese and Korean gangs cooperate in amphetamine manufacture, smuggling,
and distribution. Japanese gangs residing throughout Asia supply
women and young girls for the Japanese sex trade, and trafficking routes often
parallel well worn paths that bring drugs out of Colombia, Brazil,
Burma, Laos, and elsewhere. The Russian mafia cooperates in supplying
women and weapons. Pacific island nations have a strong yakuza presence in
hotels and casinos, and Australia is feeling the onslaught. Yakuza groups reportedly
are heavy investors in Hawaiian real estate. Gang members are frequently
spotted on the West and East coasts of the United States, often
purchasing cheap firearms to be smuggled into Japan and sold for fat profits.
Particularly in California, alliances with Vietnamese and South Korean
gangs, Chinese triads, and U.S. mafias have solidified in recent years.
Legislation adopted in the 1990s gives Japanese police greater powers in
fighting crime. But, as the Far Eastern Economic Review again reported,
Since Japan launched its yakuza crackdown a decade ago, serious crime has
soared by 70 percent. 136 In other words, the world s oldest criminal syndicate,
facing mounting pressure, yet operating with growing sophistication
appears to have extraordinary staying power and bright prospects in this
rapidly globalizing twenty first century.
Transnational crime, whether perpetrated by syndicates or governments,
has grown far too large to be defeated by ordinary police methods. Curtailing
illicit financial flows is the key to curbing this global scourge, and in this
effort, capitalism has the major role to play.
Whatever line may have once separated drug traffickers, criminal syndicates,
and terrorist groups is now becoming increasingly blurred. Terrorists very
often resort to crime and cooperate with criminals in generating money, obtaining
arms and explosives, and moving operatives. And criminals are not
averse to using terrorist tactics and random violence in pursuit of revenues.
As explained in the preceding sections, criminal gangs tend to specialize
in particular skills and cooperate with each other across borders.
Drugs and drug revenues, for example, may be handled by a dozen
118 CAPI TA L I S M S AC H I L L E S H E E L
groups, each performing some part of the task from production to transportation
to sale to laundering. Each element in the chain is linked by a
common motivation profit.
Terrorist groups exhibit somewhat less cooperation because they are not
necessarily driven by a common motivation, instead each usually pursuing a
rather narrow agenda. Financing may be shared among terrorist groups, and
training may be offered to sympathizers. Communication and laundering
networks link some organizations, but specialization among many groups,
each contributing to a single attack, is infrequent. The need for secrecy in
planning, mobilizing, and executing terrorist operations precludes such extensive
cooperation as characterizes global criminal activities.
If there is any commonality in the agendas of various terrorist groups it
generally flows from a strong antagonism toward or a sense of disaffection
from the broader society. This can be rooted in political, religious, ethnic,
cultural, or economic conditions, each grounded in a sense of separation so
strong as to justify killing or being killed in pursuit of group objectives.
How does capitalism fit into this picture In two ways. First, enormous
disparity, both economic and political, characterizes our shared
world, and disparity, however caused or perceived, promotes among some
powerful feelings of alienation and fatality. Capitalism can do a much better
job of giving everyone a stake in prosperity, ameliorating part of the
tendencies toward dissociation. Second, capitalism maintains the structure
of tax havens, secrecy jurisdictions, dummy corporations, mispricings,
fake transactions, and more, which terrorists utilize in the same way as
criminal syndicates. As the U.S. State Department reported, The methods
used to move money to support terrorist activities are nearly identical
to those used for moving and laundering money for general criminal purposes.
137 In other words, the structure that facilitates crime, corruption,
and tax evasion equally facilitates terrorism.
Just as we have state supporters of crime, as discussed earlier, we have
state sponsors of terrorism. In 2004 the United States had six countries on
its sponsors list: Libya, Sudan, Iran, Syria, North Korea, and Cuba. Iraq, included
the previous year, got a temporary pass because the United States
ousted Saddam and took over the country s administration. An aging
Muammar Qaddafi is trying to rehabilitate Libya s reputation by giving up
weapons of mass destruction, curtailing terrorists inside the country s borders,
and providing major financial support to the continent s African
Dirty Money at Work 119
Union political grouping.138 Whatever reasons exist for including Cuba
among sponsors of terrorism are tenuous at best. And then governments
that terrorize their own populations are overlooked, such as Burma, Sudan,
Liberia, Sierra Leone, Zimbabwe, Turkmenistan, and others.
By mid 2004, the U.S. government had designated nearly 400 organizations
and individuals as terrorists. Terrorist incidents are in the hundreds annually,
and deaths run from several hundred a year to the staggering blow
delivered against the United States in 2001, costing nearly 3,000 lives in a
Recognizing that the distinction among criminal gangs, terrorist groups,
and, for that matter, guerrilla armies, is not always clear, a brief review of some
of the more violent terrorist organizations as shown in Table 3.10 underlines
the extent of their activities across the globe.
I have said it several times: Crime and terrorism are related. When
western nations overlook or facilitate the flow of criminal money, terrorists
merely step into these same well worn paths to move their money. They,
the terrorists, have not invented a single new way of generating and transferring
resources. Available techniques are all laid out for them, ready for
Terrorists have three means of obtaining money. They can earn it, steal
it, or beg for it. Each of the three has brought them millions of dollars.
Terrorists own businesses. Particularly preferred are retail stores that
generate cash, import export firms that provide cover for arms and drugs, remittance
systems sending money across borders, and even banks that provide
some legitimate services while shielding transfers of terrorist funds.
Aum in Japan runs computer stores, and Al Qaeda has received millions
from cooperating banking operations.
Then there are hundreds of ways to make money illegally. Bank robberies
utilize terrorists expertise, for example, pulled off by ETA in Spain.
Kidnapping and extortion are favorite devices among Colombian groups.
Protection rackets and community taxation are simply thefts by other
names, often used in the Philippines and South Asia. Many types of fraud
are available credit card, insurance, medical payments, and more promoted,
for example, by Middle Eastern cells in the United States. Smuggling,
also drawing on terrorists skills, is a favorite technique all over the
world, avoiding excise taxes or customs duties and selling at fat profits.
Counterfeiting or buying and reusing counterfeit currencies brings several
120 CAPI TA L I S M S AC H I L L E S H E E L
Dirty Money at Work 121
TABLE 3.10 TERRORIST ORGANIZATIONS AROUND THEWORLD
Groups with Estimated Operatives
Numbering 1,000 or More Areas
Aum Shinrikyo Japan, Russia
Communist Party of Philippines/ The Philippines
New People s Army
Hamas Israel and Palestine Occupied
Hezbollah Middle East, with cells in Asia,
Africa, Europe, South and North
Jemaah Islamiya Indonesia, with cells in Malaysia,
Singapore, Thailand, and perhaps the
Kurdistan Workers Party Turkey
Lashkar Tayyiba Kashmir and India, with bases in
Liberation Tigers of Tamil Eelam Sri Lanka
Mujahedin e Khalq Organization Iran, from Iraq
National Liberation Army (ELN) Colombia, Venezuela
Al Qaeda South and Southeast Asia, Middle
East, Europe, and U.S.
Revolutionary Armed Forces of Colombia, with forays into
Colombia (FARC) neighboring countries
United Self Defense Forces of
Colombia (AUC) Colombia
Groups with Estimated Operatives
in the Hundreds Areas
Abu Nidal Organization Middle East
Abu Sayyaf Group The Philippines
Al Aqsa Martyrs Brigade Israel and Palestine Occupied
Ansar al Islam Iraq
Middle Eastern terrorist organizations to the tri border region of South
America, where Brazil, Argentina, and Paraguay meet. And terrorist groups
parallel criminal syndicates in trafficking drugs and arms. Many terrorist
cells are expected to be self supporting, with theft, fraud, and smuggling offering
easy money making opportunities.
Finally, after running through all the legal and illegal ways that funds
can be generated internally, terrorists turn to that tried and true financing
technique known to every good businessperson by its initials OPM other
people s money. Governments, as already mentioned, write checks: Libya,
122 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 3.10 (Continued)
Groups with Estimated Operatives
in the Hundreds Areas
Armed Islamic Group Algeria
Asbat al Ansar Lebanon
Basque Fatherland and Liberty (ETA) Spain and France
al Gama a al Islamiyya Egypt
Harakat ul Mujahidin Kashmir, with bases in Pakistan
Islamic Movement of Uzbekistan Uzbekistan, Afghanistan, Tajikistan,
Kyrgyzstan, and Pakistan
Jaish e Mohammed Kashmir, India, and Pakistan
Palestinian Islamic Jihad Israel and Palestine Occupied
Palestine Liberation Front Middle East
Popular Front for the Liberation Israel and Palestine Occupied
of Palestine Territories, with bases in Syria and
Popular Front for the Liberation of Israel, Palestine Occupied Territories
Palestine General Command and other parts of Middle East
Real IRA Northern Ireland, Ireland, and U.K.
Salafist Group for Call and Combat Algeria
Sendero Luminoso (Shining Path) Peru
Syria, Iran, Pakistan, Sudan, and the PLO. Masquerading humanitarian
charities divert millions to terrorist organizations. And individual sympathizers,
often among ethnic groups in foreign countries, send contributions
amassing to millions. Al Qaeda and Palestinian terrorists certainly prospered
from other people s money in recent years.
When it comes to cash, terrorists and criminals are two peas in the same
pod. Al Qaeda, which earned, stole, and cajoled hundreds of millions of dollars,
and Iraq, which made billions from manipulating oil prices, illustrate
Afghanistan, characterized by drugs, crime, corruption, war lords, and political
chaos, served as the incubator hatching Al Qaeda and its thousands of
terrorist warriors. Drawn to repel Soviet invaders in the 1979 1989 Afghan
war, Osama bin Laden ran Mektab al Khidmat, or the Services Office,
which recruited, trained, and equipped foreign volunteers to join Afghan
mujahideen fighters. Supported by Pakistan, Saudi Arabia, and the United
States and making effective use of shoulder fired missiles against helicopters
and aircraft, the mujahideen heaped mounting losses on Soviet forces, leading
to their announced intention to withdraw in 1988 and complete withdrawal
the following year. Bin Laden, with thousands of highly trained and
motivated fighters now at his beckoning, formed Al Qaeda in 1988 and established
relationships with other radical Islamist groups.
The son of a billionaire Saudi contractor, bin Laden returned to his
country, Saudi Arabia, in 1989 and laced into the royal family for corruption
and religious deviance, resulting in his house arrest in 1991. Whether
pushed or eased into exile, he departed that year back to Afghanistan and
then relocated to Sudan, attracted by the ruling party s Islamic ideology. Al
Qaeda, which means the Base, found a home in Khartoum, the capital,
and the sprawling deserts of Africa s biggest country, with nearly a million
square miles and ample room for terrorist training facilities. The organization
gave arms to Sudan s National Islamic Front, and in return the Sudanese
government gave land, hospitality, and construction contracts to bin
Laden and passports to Al Qaeda operatives.
Bin Laden, perhaps at first utilizing some inherited money, made a
number of investments in Sudan, reportedly in construction, trucking, im
Dirty Money at Work 123
porting and exporting, farming, cattle breeding, tanning, furniture manufacturing,
currency trading, and, allegedly in the newly formed Al Shamal
Islamic Bank. Business was conducted under such names as Ladin International,
Taba Investment, Al Hijra Construction, and many more. Other investments
reportedly included a car dealership, ostrich farm, and shrimp
boats in Kenya, gemstone trading in East and later West Africa, bakery and
honey shops in several countries in the Middle East, forestry in Turkey, and,
it is believed, shipping, with vessels registered under several flags of convenience.
How financially successful these investments were is unknown.
What is known is that bin Laden, already an effective fundraiser, turned increasingly
to other people s money in the 1990s.
Resources made their way to Al Qaeda from charities, foundations, financial
institutions, wealthy individuals, mosque collections, and governments
or quasi government organizations. Some of the charities and
foundations that allegedly provided funds to or had links with Al Qaeda,
whether intentionally or unintentionally, and were placed on the U.S. terrorists
list include the following: Al Haramain Islamic Foundation, Holy
Land Foundation for Relief and Development, Wafa Humanitarian Organization,
Al Rashid Trust, Afghan Support Committee, Benevolence International
Foundation, and Rabita Trust. In addition, scores of individuals are
alleged to have contributed to Al Qaeda.139
Over two decades, the Saudi Arabian government probably distributed
upwards of $75 billion to other countries promoting its conservative brand
of Islam, Wahhabism, with contributions to schools, hospitals, and charities.
Some of this undoubtedly reached Al Qaeda coffers.140
Under pressure from the U.S. government, Sudan asked bin Laden to
decamp in 1996. He left his investments behind, picked up his organization,
and returned to Afghanistan, eventually reconstituting his financing stream
and buying his way into the good graces of the radical Taliban movement
with arms and money badly needed in their fight for control of the fractured
country. Meeting Al Qaeda s cash flow requirements of roughly $30 million
a year took on greater urgency.
One group allegedly offering assistance was Al Taqwa Trade, Property
and Industry Company Limited, set up in the late 1980s, utilizing basic
steps outlined in the Dirty Money User Manual. It was incorporated in
Liechtenstein, Europe s most intractable soul of discretion, where the firm s
legal requirements, if you can call them that, were duly handled by a registry
124 CAPI TA L I S M S AC H I L L E S H E E L
office known as Asat Trust. It operated out of Lugano, Switzerland, a town
of some 30,000 with one of the world s higher concentrations of money
launderers. Its owners lived a few minutes away in Campione d Italia, that
little enclave surrounded by Switzerland that offers lax Italian residency rules
for launderers working in Switzerland. And it had its own bank in the Bahamas,
Bank Al Taqwa, giving it access to correspondent accounts with respectable
financial institutions in many countries.
Al Taqwa, which means Fear of God, was formed and managed by
Youssef Mustafa Nada, born in Egypt and a member of the Muslim Brotherhood
since the 1950s. His principal associate was Ali Ghaleb Himmat, who
served as executive director. Both lived in the United States in the late 1970s
and early 1980s, part of the time in Silver Spring, Maryland, on the outskirts
of Washington, D.C. And both easily obtained Italian citizenship
upon moving to Europe and creating Al Taqwa.
Over time, Al Taqwa developed an impressive list of shareholders, reportedly
745 names long, many subsequently investigated by the U.S. Treasury
Department. At a point it became necessary to put a Swiss citizen on
the board. Ahmed Huber was a natural choice, formerly Albert Huber before
converting to Islam in the 1960s. He is allegedly an avowed admirer of
Adolf Hitler and Ayatollah Khomeini and a staunch Holocaust denier. Huber
and his Al Taqwa colleagues deny any connection to financing terrorists.
Nevertheless, he travels the world speaking to radical Muslims and Aryan
youths and has been quoted saying, We are making a link between Islamic
movements and the New Right in Europe. 141 Muslims and Nazis [are] involved
in the same fight. 142 Now there s a frightening thought!
Al Taqwa operated out of a small apartment in Lugano, with four people
making financial transfers by computers through correspondent bank accounts.
For Hamas alone, Al Taqwa reportedly handled as much as $60
million a year. Some clients accounts were identified by number only.
Youssef Nada, the managing director, had relationships with many Muslim
leaders, allegedly including Saddam Hussein. Reportedly, Al Taqwa received
money Saddam extracted from kickbacks on UN Oil for Food contracts.
Nada was also linked to the SAAR network of charities and foundations operating
in Virginia. In total, over the 12 to 14 years of its operations, Al
Taqwa is believed to have handled hundreds of millions of dollars, some of it
for terrorist groups.
In the month after 9/11, Swiss authorities investigated Al Taqwa and
Dirty Money at Work 125
found nothing out of the ordinary. Meanwhile, Nada had already begun
changing the names of his companies. A bit of additional intelligence provided
by the United States led Swiss and Italian authorities to take another
look at Al Taqwa and its operators living in Campione d Italia, finally freezing
its accounts in late 2001. However, the Swiss suspended their investigation
into the company in 2005, despite speculation that the money shifting network
may still be functioning. Al Taqwa and its associated companies, as well
as Nada, Himmat, and Huber, have all been placed on the U.S. terrorists list.
The point bears repeating: Al Taqwa, operating in tax havens and secrecy
jurisdictions with dirty money and disguised accounts, did not invent
any new ways of moving laundered proceeds for Al Qaeda or other terrorist
groups. It simply took advantage of the structure that is used every day by
criminals, corrupt government officials, and commercial tax evaders, the
structure that also well serves terrorists in spreading mayhem and death.
Much has been made of the fact that the perpetrators of 9/11 needed
only some $400,000 to $500,000 to pull off their attack. This is misleading,
since it took an organization built with hundreds of millions of dollars and
years of preparation to organize, train, house, feed, indoctrinate, arm, transport,
and position terrorists to carry out their crime. Years of shifting large
sums of illicit proceeds around the world underlay the 9/11 operation.
When the attackers were identified as primarily Saudi nationals, attention
turned to that country s widespread support of fundamentalist movements
and loose financial controls. Saudi officials proved extraordinarily
reluctant to pursue intelligence leads offered by the United States, until Al
Qaeda s attacks became a threat to the royal family personally and to regime
stability. Cooperation in sharing operational and financial intelligence is
now improved, if still only marginally satisfactory. As a task force sponsored
by the Council on Foreign Relations concluded: Saudi Arabia has taken
two or three important steps to improve its capability to cooperate on these
matters with the United States, for which it should be commended. A hundred
more steps and Saudi Arabia may be where it needs to be. 143
As the United States and cooperating countries worked to seize funds
and close bank accounts, Al Qaeda reportedly shifted assets into diamonds
and gold. In fact, the process had begun well before 9/11. In 1999 the U.S.
Treasury Department froze assets belonging to the Taliban $217 million in
gold and cash at the Federal Reserve Bank of New York and another $34
million in U.S. commercial banks. In the same year, Al Qaeda was formally
126 CAPI TA L I S M S AC H I L L E S H E E L
designated by the U.S. State Department as a terrorist organization. The
message for terrorists was clear: Remove assets from the legitimate financial
system as fast as possible.
If demand deposits, CDs, and negotiable instruments are no longer safe,
two basic options remain currency notes and commodities. Al Qaeda
probably put some of its resources into gems and precious metals. An absorbing
account of paying cash for conflict diamonds is offered in Blood
From Stones: The Secret Financial Network of Terror, by Douglas Farah, formerly
West African correspondent for the Washington Post. Farah details his
observations of how Al Qaeda, Hezbollah, and other terrorist groups bought
diamonds from thugs across Africa. Particularly in West Africa, Charles Taylor
in Liberia, Foday Sankoh in Sierra Leone, and others sold bags of rough
diamonds to Muslim terrorists, South African mercenaries, and U.S. profiteers,
then used the proceeds to purchase guns and munitions, delivered by
the Russian arms merchant Victor Bout, that killed an estimated 200,000 in
these two benighted countries alone. At least one diamond dealer in the
greater Washington, D.C., area participated in this scurrilous business.
The 9/11 Commission Report published in 2004 is a detailed and wellwritten
document. However, in a chapter entitled What To Do: A Global
Strategy, the commission erroneously concludes that Obvious vulnerabilities
in the U.S. financial system have been corrected. 144 That must be music
to Al Qaeda s ears, because the truth is just the opposite. The structure that
supports the flow of dirty money mispricing, transfer pricing, dummy corporations,
tax havens, secrecy jurisdictions, the legal deposit of many forms
of criminal proceeds, and virtually all forms of tax evading proceeds all of
this is intact, used every day by thugs and cheats and remains available to
terrorists. Any thought that obvious vulnerabilities have been corrected
fails to recognize how obvious U.S. vulnerabilities are to others. Al Qaeda is
likely to take advantage of such flawed thinking again.
When President George W. Bush labeled Iraq part of his axis of evil, he neglected
to mention the many western corporations trading with the enemy
and the many respectable financial institutions handling funds for Saddam
Hussein and his clique. In Iraq we had a world class thief who used the tried
and proven dirty money package to expand his evil regime: false pricing,
Dirty Money at Work 127
fake transactions, dummy companies, and laundering techniques. How
many people civilians and combatants, including Iraqis, Americans,
British, Italians, and others have been killed by munitions bought with
proceeds derived from illegal transactions
The Iraqi oil industry was nationalized in the early 1970s. Saddam
emerged as the most powerful man in the country in the mid 1970s and assumed
the presidency in 1979. With billions of barrels of proven reserves
and millions of barrels of daily production now under his personal control,
he required oil purchasers to pay a 5 percent kickback into his coffers.
Japanese buyers, considered easier to deal with, had to pay 7.5 percent.
Saddam also began setting up a structure of cronies operating trading
companies in every major country in Europe and also in the United States
and Canada. These companies were heavy buyers of goods shipped to Iraq,
and they also paid commissions to Saddam, rarely less than 5 percent and
usually in the 10 percent to 35 percent range. Peril awaited foreign based
Iraqi buying agents who got too greedy and tried to profiteer at Saddam s expense.
Upon returning to Baghdad for routine consultations, they were
To handle all the money coming in, Saddam set up a string of companies
and accounts in tax havens and secrecy jurisdictions, including Panama,
the Netherlands Antilles, Switzerland, Luxembourg, Liechtenstein, the
Channel Islands, the Isle of Man, Cyprus, and Gibraltar. Furthermore, Saddam
or his immediate henchmen opened bank accounts, set up foundations,
and even established family pension funds that received billions of dollars,
no questions asked, from all sorts of remitters who were obviously not in any
known legitimate business. Accounts were operated in the United States,
United Kingdom, France, Switzerland, Germany, Liechtenstein, Austria,
Greece, Cyprus, Tunisia, Egypt, Lebanon, Jordan, the United Arab Emirates,
Japan, and elsewhere. In fact, transfers were made out of the Iraqi
Central Bank account with the U.S. Federal Reserve Bank of New York directly
into Swiss bank accounts under the control of the dictator. By the end
of the 1980s, money stashed in Switzerland and elsewhere for Saddam, his
family, the Iraqi Baath Party, and the intelligence service known as
Mukhabarat has been estimated at some $20 to $40 billion. Of this, $7 billion
was alleged to be in gold 700 tons of gold! Two family pension funds
allegedly held $1.6 billion.
I have reviewed hundreds of pages of confidential documents on Sad
128 CAPI TA L I S M S AC H I L L E S H E E L
dam s overseas structure and the businesses and banks that cooperated in filling
his coffers. Suffice it to say that many, many individuals, multinational
corporations, and financial institutions buying from or selling to or banking
for Iraq supported his rip offs.145
In 1990 the Simon Wiesenthal Center issued a report listing more
than 60 German companies that had provided unconventional technologies
to Iraq for missiles, nuclear components, chemical production systems,
biological warfare, and other applications. Among those named were
Siemens, Thyssen, Ferrostaal, M.A.N., Sigma Chemie, Karl Kolb, and
Carl Zeiss.146 Allegedly, some of this surreptitious trade was carried on
with falsely declared exports and fake end user certificates.
During the Iran Iraq war from 1980 to 1988, Iraq often utilized Jordan
as a sourcing country. Armaments and munitions were sold to Amman,
which promptly transferred them to Iraq. Allegedly, commissions on arms
deliveries were paid to a member of the Jordanian royal family in amounts of
$25 million, $70 million, $200 million, and more.
The world was shocked to see Saddam invade and annex Kuwait in
- This was perhaps the greatest heist since World War II and its immediate
aftermath, as Iraqis made off with thousands of cars and trucks, hospital
and telecommunications equipment, computers, gold, antiquities, and
Kuwaiti dinars. The dinars were offered at heavy discounts to Kuwaiti
princes waiting out the war in Egypt, hoping to use the money at face value
when they got their country back.
As coalition forces in Operation Desert Storm pushed Saddam out of
Kuwait in February 1991, the Iraqi Central Bank reportedly transferred
$5.2 billion to Amman. From there funds were distributed to various foreign
entities controlled by Saddam, to be used specifically to evade trade
sanctions and rearm Iraq.
In the wake of the Persian Gulf War and the imposition of trade sanctions,
the Iraqi people suffered. Saddam intentionally worsened their plight
for political ends. Reacting to conditions in the country, the United Nations
Security Council passed Resolution 986 in 1995, establishing the Oil for
Food program. This set up a mechanism for petroleum exports and humanitarian
imports approved by the UN. A year later, the first oil sold under the
program flowed out, and in March 1997, the first food shipments came in.
Initially, major oil companies purchased Iraqi crude under the plan. But
in November 2000 Iraq demanded a kickback of about $1.20 per barrel,
Dirty Money at Work 129
then $0.50 per barrel, then $0.40 a barrel, to be paid directly to the Iraqi
Central Bank. Incredulously, the UN sanctions committee approved $0.30 a
barrel in December 2000, legalizing a mispricing scheme that violated its
Major oil companies balked at paying kickbacks but soon gladly purchased
oil from smaller firms paying kickbacks. Eventually such firms were
reported to number more than 250,148 including many that had never before
touched the oil business. As one legitimate buyer reportedly said, Everyone
and his dog is trading Iraqi oil. 149
Earlier I wrote about a small tanker that loaded oil legitimately, repainted
its waterline at night, secretly added half again to its load, and then
departed the harbor the next day with its extra cargo unnoticed. If you are
going to use this type of fakery, why do it on a modest scale A Dutch oil
buyer, Trafigura, allegedly bought 1.8 million barrels of Iraqi oil from a
French trader, Ibex Energy, loaded it onto a Liberian registered tanker at the
Mina al Bakr offshore terminal at the northern end of the Persian Gulf, obtained
approval as required for the transaction from UN inspectors, and
then secretly loaded an additional 270,000 barrels before steaming away.
The buyers of the crude were reportedly Koch in the United States and
PDVSA in Venezuela, and at least parts of the payments wound up, not in
the UN s Oil for Food account, but in Swiss and Lebanese banks.150
Besides subverting so called legal oil sales through the UN, Saddam s
regime made even more money by smuggling oil to neighboring countries.
These sanctions busting sales were condoned by the UN and by western
powers. Anxious purchasers included Turkey, Syria, Jordan, and even former
enemy Iran, all pouring billions into Saddam s till.
Russian tankers loading oil in Iran were caught by the U.S. Navy with
oil originating in Iraq. In 2000 the Volgoneft 147, jointly owned by a Russian
company SovFinAmTrans partnering with a U.S. company Transcisco
Industries, was boarded and found with Iraqi crude purchased by a British
Virgin Islands firm, Primstar.151 Another tanker owned by Novorossiisk
Shipping carrying a cargo owned by Royal Dutch/Shell was intercepted with
100,000 barrels of alleged Iraqi crude out of its 500,000 barrel total load,
costing Shell a $2 million fine.152
Besides making illicit money in every possible way from its oil exports,
Iraq likewise made money from kickbacks on its imports, again under the
noses of UN overseers. The established supply procedure allowed Iraqis to
130 CAPI TA L I S M S AC H I L L E S H E E L
negotiate purchase prices and delivery arrangements, while the UN paid for
approved contracts. However, imports outside the Oil for Food program
streamed into Iraq, as monitors from Lloyd s Register and then from the
Swiss firm Cotecna physically checked only a fraction of cargoes at just five
points of entry into the country.
A 2002 General Accounting Office (GAO) report to the U.S. Senate on
Iraqi financial machinations estimated that, in connection with UN authorized
imports, the commission is five to 10 percent of the commodity contract, with
the funds paid directly to officials connected with the Iraqi government. 153
This is entirely consistent with kickback levels common in many developing
and transitional economies and is also a rate of mispricing with which many exporting
companies are quite comfortable.
Through 2002, the UN took in some $67 billion in Iraqi oil revenues
and paid or committed $38 billion for purchases of humanitarian supplies.
An updated 2004 GAO report states that, From 1997 through 2002, we
estimate that the former Iraqi regime acquired $10.1 billion in illegal revenues $
5.7 billion in oil smuggled out of Iraq and $4.4 billion in surcharges
on oil sales and illicit charges from suppliers exporting goods to Iraq
through the Oil for Food program. 154 According to a U.S. Department of
Defense review, an estimated 48 percent of imports through the UN program
were overpriced by an average of 22 percent.155 Applying weighting
factors and multiplying these two figures indicates that Iraq s total visible
imports bill was overpriced by about 9 percent. This is the first time I have
seen a government source perform the kind of research and calculation that
I have been doing for years: percentage of trade mispriced and the percentage
by which it is mispriced.
Saddam s overseas structure for generating illicit revenues was functioning
from the 1970s onward and received billions in additional support funds
in the 1990s. UN diplomats and bureaucrats in New York were ill equipped
to spot and control what goes on in the seamy underside of global trade
every day. Worse, some important figures in New York and elsewhere apparently
succumbed to temptations dangled by Iraq, allegedly accepting vouchers
for purchase of crude oil at discount prices.156 Saddam s import and
export manipulations were accomplished with western facilitation. The
chance that the UN s Oil for Food functionaries, operating with little western
support and with a great deal of Saddam s finagling, could effectively
curtail this process was zero.
Dirty Money at Work 131
After the Iraqi regime was driven from power by coalition forces in April
2003, U.S. soldiers found hundreds of millions of dollars in U.S. currency
hidden at several locations in Baghdad. The initial haul was $650 million,
shortly followed by another discovery of $112 million, and eventually
amassing, along with other assets, to more than $900 million. Most of the
U.S. currency was neatly shrink wrapped with identifications confirming
that it had originated from three banks of the U.S. Federal Reserve system.
The Fed uses authorized commercial banks to distribute new U.S. currency
and retrieve old notes. Tracing currency serial numbers, it was found that
the notes recovered in Baghdad had been allocated to UBS in Zurich, Bank
of America in Zurich, HSBC in London and Frankfurt, and the Royal Bank
of Scotland in London.157 Digging first into UBS, Fed officials discovered
that, contrary to strict U.S. regulations and the bank s contractual obligations,
UBS had distributed U.S. currency to prohibited buyers, including
Iran, Libya, Serbia and Montenegro, and Cuba, some of which seems to
have made its way to Iraq. UBS had been filing false returns with the Fed for
eight years and, even after the investigation had begun, further attempted to
conceal its actions. The Fed hit UBS with a $100 million fine and cancelled
its currency distribution contract. Perhaps the other offending banks will be
sanctioned as well.158
When a multibillion dollar institution lies to central banks, falsifies
records, ships currencies to barred governments, and indulges in systematic
cover ups, then the global financial system has some very serious problems.
It s no wonder that rogue regimes that terrorize their citizens and neighbors
find it so easy to sustain themselves with illicit proceeds. Dirty money put
Saddam Hussein back in business, murdering his own people, and, it was
thought, threatening the world with weapons of mass destruction. The
United States and its coalition partners fought a second war with Iraq, in
part because the structure of false pricing, fake transactions, dummy corporations,
tax havens, and secrecy jurisdictions had allowed Saddam to rearm.
And western collaborators fully participated, putting the services of the
global dirty money system again at his disposal. As a returning Iraqi said, It
was very cruel to aid a dictator and his regime when all of you knew what
the money was and where it was going. Instead of letting his resources dry
up, you let the dictatorship last longer. 159
The earlier question bears repeating: How many people lost their
lives from armaments and munitions purchased with Saddam s illicit rev
132 CAPI TA L I S M S AC H I L L E S H E E L
enues, revenues that we helped provide Estimates run in the hundreds of
thousands. But the key point is not the accuracy of an estimate; the point
is to make it clear that dirty money buys death for untold numbers of
GLOBAL COMMERCE AND TAX EVASION:
COIN OF THE REALM
Forget it! The present supplier handles the managing director s kickbacks in
I was in a developing country together with my local agent, and we
were calling on potential customers for linerboard, which is the heavy kraft
paper used to manufacture corrugated boxes. My firm, working closely
with several U.S. mills, bought and sold thousands of tons of this trade
item annually. We went to see the managing director of a large packaging
producer, and he brought his purchasing manager into the meeting. After a
tour of the factory and some pleasant conversation back in the boss s office,
he gave us an idea of what kind of price and terms we would have to meet
to be competitive. We quoted a good bit lower price, agreed to the same
terms, and guaranteed shorter delivery times. He seemed pleased, saying he
would consider our offer, and we shook hands and departed, optimistic
about future business. As we were about to reach the parking lot, the purchasing
manager came running after us and delivered his Forget it line.
Free trade thwarted again.
I have seen exactly this kind of situation hundreds of times, where cooperative
and confidential arrangements exist in export and import transactions,
with illegal kickbacks built into every shipment. Once initiated, false
pricing usually continues unabated, because altering or stopping the over or
under billing risks losing the feature of invisibility. When solidified, such alliances
between buyers and sellers are impossible to break, undermining the
fabric of competitive capitalism.
In Ecuador, for example, the managing director of a substantial company
meets annually with his employees, and the story is usually the same:
It s been a tough year, there s severe pressure on selling prices, imported raw
materials and machinery are getting more costly, the company cannot afford
to increase wages or benefits, we all have to work harder in hopes of better
Dirty Money at Work 133
times soon. Meanwhile, with the help of entrenched foreign suppliers, he
and one or two of his top officers are salting away a half million dollars a
year in a Miami bank account, and no one can lever into this tight knit little
Let me repeat: I m all for free trade. Provided it s legal. It s the illegal
components of trade that I oppose the use of trade to move illicit flight
capital, to evade taxes, to stifle competition, and to defraud employees and
mislead investors. As an Indian businessman put it to me, this is straight
theft, even if you are stealing it from your own company. 160
Manipulation of trade takes many forms, as laid out in the Dirty
Money User Manual. Exports and imports of goods and services are falsely
priced, referred to as mispricing in unrelated party transactions and as abusive
transfer pricing in related party transactions. Not only are prices subject
to manipulation, but also quantities, qualities, weights, and measurements.
And transactions can be completely faked, with money easily flowing to pay
for trade that never existed.
About 65,000 multinational corporations operate across borders.
Trade within corporations comprises some 50 to 60 percent of global
commerce. The remaining 40 to 50 percent is trade between unaffiliated
parties. And an estimated 50 percent of all global commerce passes
through tax havens and secrecy jurisdictions at some point between seller
Much of this global trade is falsely priced. This serves to eliminate
taxes, avoid regulations, and accumulate wealth secretly. A few examples
(Table 3.11) of items and invoiced prices into and out of the United
States, drawn from the work of Professors Simon Pak and John Zdanowicz,
will make the point. Besides the excellent work of these two gentlemen,
I also have trade data on thousands of transactions, with buyers and
Recall the advice offered in the Dirty Money User Manual: Anything
that can be priced can be mispriced. False pricing is done every day, in every
country, on a large percentage of import and export transactions. This is the
most commonly used technique for generating and transferring dirty
money money that breaks laws in its origin, movement, or use. False pricing
is cooperation among the world s powerful for exploitation of the world s
weak. The fact is, for almost every illegal dollar, euro, pound, peso, ruble, or
other currency that moves out of poorer countries by this means, there is a
134 CAPI TA L I S M S AC H I L L E S H E E L
western trader, manufacturer, or financier that directly or indirectly facilitates
The business of global tax evasion takes many other forms as well. As
the economist Vito Tanzi says, Tax evasion prospers when society condones
- 161 A popular technique in recent years is transferring copyrights, logos,
trademarks, patents, and other such intangibles to offshore subsidiaries in
Dirty Money at Work 135
TABLE 3.11 INVOICED PRICES OF SELECT ITEMS
Exports from U.S.
Item Destination Country Price per Unit
Bulldozers Mexico $527.94
ATM machines El Salvador $ 35.93
Missile/rocket launchers Bolivia $ 40.00
Television antennas China $ 0.04
Aluminum ladders Japan $ 4.40
Forklift trucks Jamaica $384.14
Clinical thermometers Germany $ 0.05
Car seats Belgium $ 1.66
Imports into U.S.
Item Originating Country Price per Unit
Flashlights Japan $ 5,000.00
Ink jet printers Colombia $179,000.00
Syringes Switzerland $ 2,306.00
Wrenches France $ 1,089.00
Toothbrushes United Kingdom $ 5,655.55
Hacksaw blades Germany $ 5,485.00
Razor blades India $ 461.00
Tweezers Japan $ 4,896.00
Source: Simon J. Pak and John S. Zdanowicz, U.S. Trade with the World: An Estimate of
2001 Lost U.S. Federal Income Tax Revenues Due to Over invoiced Imports and Underinvoiced
Exports, working paper from the Center for International Business Education and
Research, Florida International University, Miami, Florida.
tax havens. Revenues derived from licensing or selling these corporate assets
to other subsidiaries and affiliates can accumulate in the haven tax free.
Then, millions piling up in the tax haven subsidiary can be loaned to the
parent company, upon which interest is paid back to the subsidiary. The interest
payment is tax deductible; the interest income received in the haven is
again tax free.
Many business owners in developing and transitional economies have
set up holding companies in tax havens and secrecy jurisdictions. The local
owners exchange their shares in the local company for shares in the offshore
company. All of a sudden the business has foreign owners, and profits flow
abroad. U.S. and European companies are now doing the same thing, referred
to as inversion. Bermuda is a popular place to set up the new parent
company, with the domestic operating company functioning as a subsidiary.
Profits accumulate in the tax haven, and tax collections are minimized in the
principal country of operation.
Free trade zones have been badly abused. Usually expected to provide
duty free importation, minor fabrication or conversion, and then re exportation,
many such trade zones have instead become routes for smuggling
into the countries where they are situated and to regions beyond.
False pricing and tax havens can be put together for major savings. A
simplified example is illustrated in Table 3.12. The net result is the company
has an initial production cost of $1,000, a final selling price of $1,500, and a
profit of $500. No taxes of any significance are incurred, and, in fact, a loss
carry forward of $500 has been created to offset future taxes. These kinds of
transactions are entirely routine.
The outcome is the legitimization of illegitimacy. The combination of
mispricing, transfer pricing, tax havens, dummy corporations, shielded
foundations, secrecy jurisdictions, flee clauses, the whole gamut of techniques
and structures that support dirty money, affords a quasi legal veneer
over a system that revels in its ability to walk on the edge and get away with
subterfuge, disguise, and theft. Just like drug dealers, criminal syndicate
heads, terrorist organizers, and corrupt government officials, corporate executives
add their support to maintenance of the system.
Earlier I wrote that I have never known a multinational, multibilliondollar,
multiproduct corporation that did not often use transfer pricing to
move tax evading money between parent, subsidiaries, and affiliates. Trans
136 CAPI TA L I S M S AC H I L L E S H E E L
fer pricing by multinationals is the same as smuggling by citizens, in the
view of a Japanese economist.162 Yet, this is the way international business is
done. It has become a central element in global strategies. And, before corporate
executives and their advisors leap to defend these actions as within
the law, consider the possibility that abusive transfer pricing is a felony offense,
as laid out in the next chapter. This is an area in which corporations
must begin to exercise extreme caution, in order to protect officers and employees
from any possibility of criminal actions, whether caught and charged
Referring primarily to the United States, Robert Kuttner could have
equally directed the following to the whole of the western world:
It s one thing to believe that low tax rates are good for economic growth.
It s quite another to collude in tax evasion. The former is the subject of a
fair debate between liberals and conservatives. The latter undermines
the rule of law and the transparency that we preach to the rest of the
world. Today, corporations can book the same income differently in different
countries. International tax planning is part of the same corporate
culture of creative accounting that led to the Enron Corp. scandal.
Conservatives and liberals alike ought to favor consistent tax enforcement.
For every dollar owed but not collected by the IRS, either
taxes must rise or budget deficits must widen, sending interest rates
higher and placing a heavy burden on our children to pay down the debt.
Dirty Money at Work 137
TABLE 3.12 HOW TO SUCCEED IN BUSINESS WITH FALSE PRICING AND
Parent Co. Subsidiary Dummy Co. Subsidiary Sales Co.
Country A Tax Haven B Country C
Production costs $1,000
Selling price $1,000 Buying price $1,000
Selling Price $2,000 Buying price $2,000
Selling price $1,500
Profits $0 Profits $1,000 Profits (Loss) ($ 500)
Taxes $0 Taxes $0/negligible Taxes offset/loss C/F
You would also think, given worries about terrorists laundering
money, that the Administration would welcome closer international information
sharing among banking and tax authorities. But evidently tax
favoritism for corporations and high bracket individuals trumps even
Beyond legal issues and beyond domestic interests is the question of
western capitalism s relationship to the rest of the world. Falsified pricing,
haven and secrecy structures, and the illicit movement of trillions of dollars
out of developing and transitional economies break the social contract, however
it may be defined, that Adam Smith incorporated into the core of the
free market system. The following pages demonstrate some of these concerns
with illustrations drawn from Congo, commercially exploited for
many years, and China and Russia, transitional economies with the greatest
illegal outflows of money ever seen.
As the forces of decolonization swept Africa in the 1950s, Belgium granted
independence to the Congo on June 30, 1960, and the country immediately
descended into chaos. Colonel Joseph Mobutu, commander of the Congo
army and acting with CIA encouragement, temporarily took over the government
in September. After he relinquished control, rebellions erupted,
mercenaries poured into the vacuum, and the central government teetered,
leading Mobutu to return to power in 1965 and declare himself president.
Having learned his lessons well from studying the Belgian colonialists,
Mobutu, already a millionaire from foreign bribes, launched one of the most
incredibly venal regimes of modern times. Congo sank into what has been
called the gloomy vision of a Hobbesian state of nature. 164 A council of local
prelates characterized commerce in their country as organized pillage for
the profit of the foreigner and his intermediaries. 165
Indeed, there was much to pillage. Besides copper and gold, Mobutu s
Congo, the size of the United States east of the Mississippi River, was a major
producer of diamonds, cobalt, tin, tungsten, zinc, silver, uranium, lead,
iron ore, coal, manganese, and a bit of oil. Congo also had a reasonable agricultural
base and exported rubber, timber, palm oil, coconut, coffee, cocoa,
and tobacco. Mobutu profited directly from export transactions, by receiv
138 CAPI TA L I S M S AC H I L L E S H E E L
ing kickbacks into his foreign bank accounts from local producers and by
commandeering shipments from state owned companies for payment into
his accounts. Take just diamonds as an example: Tens of millions of stones
were exported at prices as low as $8.55 per carat, with the rest of the value
paid to Mobutu abroad.166 But as Jonathan Kwitny, a reporter for the Wall
Street Journal, wrote: The hard Western currency that pays for all [these]
goods stays outside the country. It goes into the pockets of Western businessmen.
. . . The elite may bring a few million dollars of the stolen wealth
back into Zaire in the form of Mercedeses, and other goods for their private
use. But the development capital their countrymen need to pull themselves
into the twentieth century never makes it home. 167
Not only did Mobutu and his rotating clique of sycophants tap export
proceeds for their foreign bank accounts, they indulged in almost
every conceivable form of self enrichment. Bribes were elicited for special
and even routine services. Bribes were demanded from foreign companies
for incorporation papers, licenses, and permits. Bribes were even paid by
the U.S. government. Roger Morris, an ex National Security Council official
in Washington, estimated that Mobutu personally got perhaps $150
million from the CIA just through the mid 1970s.168 Mobutu also pocketed
CIA money he was supposed to pass to Angolan rebels in the
In 1971 Mobutu changed the name of his country to Zaire and the next
year dropped the Joseph from his own name and rechristened himself as
Mobutu Sese Seko Kuku Ngbendu waza Banga, which means the all powerful
warrior who, because of his endurance and inflexible will to win, will go from
conquest to conquest leaving fire in his wake. The last part of his self anointment
proved entirely accurate.
In 1973 Mobutu began transferring ownership of foreign owned businesses
to local citizens, meaning himself and other senior party and government
officials. Some 1,500 to 2,000 enterprises were taken away from
expatriate farmers, transporters, shop owners, and small manufacturers, with
predictably disastrous results for the local economy.
Mobutu is sometimes credited with inventing banking from home. He
often would pick up the telephone and order transfers from central bank reserves
into his own overseas accounts or delivery of sacks of foreign currencies
to his several places of residence. Budgeted presidential allowances
represented some 15 to 20 percent of government expenditures, but
Dirty Money at Work 139
Mobutu frequently drew much more for other goods and services, in the
hundreds of millions of dollars a year.170
Then, of course, there was an unending stream of bilateral foreign aid
and World Bank and International Monetary Fund (IMF) money, as well as
private sector loans from nearly a hundred foreign banks. After a point in
the 1980s, every loan and grant was made with full awareness that proceeds
were either wholly or partially diverted to Mobutu s pocket, yet so great was
the desire to assure that Zaire stayed in the western orbit that the money
never slowed for a quarter of a century.171 In 1982 a retired German central
banker, Erwin Blumenthal, who had earlier been assigned by the IMF to
Zaire s central bank, reported that . . . the corruptive system in Zaire, with
all its wicked and ugly manifestations, will destroy all endeavors . . . towards
recovery and rehabilitation of Zaire s economy. Bluntly, he concluded that
there is . . . no I repeat no prospect for Zaire s creditors to get their
money back in any foreseeable future. 172
Like most other tyrants, Mobutu brought the bulk of his money to the
West. After only a decade in power he reportedly had substantial real estate
holdings chateaux, villas, buildings, apartments in Belgium, Switzerland,
Italy, Spain, France, Ivory Coast, and Senegal and a vast hunting preserve
in Central African Republic. An opposition group estimated that he
had $125 million in Swiss bank accounts.173 But to be entirely fair, he did
not take all his wealth out of Zaire. He also accumulated some 14 plantations
and 8 related properties in the country, grouped under the name
CELZA,174 reportedly employing 25,000 people and making him, owning
some 132,000 head, the biggest cattle rancher in the country.175 He also became
a principal owner in the Banque de Kinshasa and reportedly had indirect
shareholdings in the local affiliates of U.S. and European companies,
including Unilever, ITT, Gulf Oil, Pan Am, Volkswagen, Peugeot, and Renault.
176 Mobutu s fortune has been estimated at $4 billion by the mid
1980s.177 In 1988, wanting to appear more modest, he stated for the record
in an interview with U.S. Congressman Mervyn Dymally: Clearly, I would
be lying if I said I do not have a bank account in Europe; I do. I would be lying
if I said I do not have considerable money in my account; I do. Yes, I
have a fair amount of money. However, I would estimate it to total less than
$50 million. What is that after twenty two years as head of state of such a
big country 178
140 CAPI TA L I S M S AC H I L L E S H E E L
Jonathan Kwitny once again summarized the situation well:
Still, despite poverty, misery and injustice, the people of Zaire can be
grateful to the people of the United States for one thing: we have kept
their country from communism. What is less widely considered, but
equally true, however, is that we have also kept it from capitalism or at
least from anything that might remotely resemble a free market. And
therein lies a key to many of the world s problems. The free market is
demonstrably the most bountiful economic system on earth. And it has
become the odd role of the United States of America to deny that system
to hundreds of millions of people the world wide.179
Stricken with cancer, Mobutu s grip on his country weakened in the
mid 1990s. Laurent Kabila, initially supported by Che Guevara in the mid
1960s (who soon departed in disgust), fomented trouble in the east. Together
with troops from Uganda and Rwanda, Kabila s 50,000 man army
swept across the country in seven months, taking Kinshasa on May 17,
- Mobutu fled, while his son, Captain Kongulu Mobutu, lingered long
enough to kill turncoats willing to negotiate surrender. Mobutu died in exile
in Morocco later in the year. The Swiss froze his bank accounts, supposedly
containing only a little more than $3 million. Zaire reverted to its former
name, the Democratic Republic of the Congo.
Democratic it was not. Kabila suspended political parties, had a falling
out with his Rwandan and Ugandan interlopers, saw his country lapse into
war again and, after less than four years in power, was assassinated in early
- Congo descended again into chaos, as competing powers set out to
grab its resources Rwanda, Burundi, Uganda, Zimbabwe, Angola, and assorted
local ministates. Several groups viciously settled scores from the genocide
that convulsed the Great Lakes region in 1994. An estimated three
million people died in eastern Congo during the four years at the turn of the
century, with perhaps another one million dying since then.
In one of the most courageous pieces of work I have ever read, a United
Nations team, with principal members drawn from Egypt, the United
States, Senegal, Belgium, and Canada, investigated the illegal exploitation
of natural resources in the Congo.180 The panel interviewed hundreds of
people in the region and in Europe and the United States and thanked in
Dirty Money at Work 141
particular those Congolese individuals who put their lives at risk in order
to provide the Panel with information. 181 Carefully documenting an elite
network of political, military, and commercial interests that benefits from
instability in the Democratic Republic of the Congo, their report asserted
that just one part of this den of thieves transferred ownership of at least
US$5 billion of assets from the State mining sector to private companies
under its control in the past three years with no compensation or benefit
for the State treasury . . . 182 The report describes various collections of
thugs linked to the armies of Rwanda, Uganda and Zimbabwe and the
Government of the Democratic Republic of the Congo who have built
up a self financing war economy centred on mineral exploitation. 183 Illicit
proceeds are generated through organized systems of embezzlement, tax
fraud, extortion, the use of stock options as kickbacks and diversion of
State funds conducted by groups that closely resemble criminal organizations.
184 Set out in detail are the allegedly illicit activities of government
ministers and military officers from several countries, toughs from throughout
the region, suspect entrepreneurs overseas such as George Forrest in
Belgium, arms dealers including the notorious Russian Victor Bout and his
henchman Sanjivan Ruprah, and Lebanese diamond traders based in
Antwerp with reported links to Hezbollah and Amal. Front companies in
the region are named, including their ownerships through shell companies
based in the Channel Islands and British Virgin Islands.
Take just one mineral, coltan, as an example. Coltan is an ore made of
columbium (properly known as niobium) and tantalum. Congo has perhaps
60 percent of the world s reserves of coltan, from which tantalum is refined
for use in cell phones, laptops, PlayStations, avionics, and atomic energy applications.
The UN report speaks of prisoners, indentured laborers, and conscript
workers forced to exploit coltan sites under extreme conditions,
working under Rwandan army officers functioning as comptoirs, or buying
and marketing syndicates. According to the report, Rwanda controlled comptoirs
forced captive labor to work coltan sites. Captive labor In the twentyfirst
century, were the worst excesses of the mid twentieth century being
repeated in a dark corner of the globe
The report named 54 ministers, military officers, politicians, ambassadors,
parliamentarians, intelligence officials, chairmen, stockholders, managers,
and businesspeople it recommended should be slapped with financial
restrictions and travel bans. Twenty eight mining, trading, and transporting
142 CAPI TA L I S M S AC H I L L E S H E E L
companies were recommended for financial sanctions. And it named 85 corporations
based in Europe, the United States, Canada, Africa, Asia, and
Caribbean tax havens that it alleged were in violation of OECD guidelines
for multinational enterprises.
In the latter years of my career I have asked a lot of very sensitive questions
in a lot of very squirrelly places. I give high fives to the people who did
this work. The sad part is much of the issue remains unchanged. Some corporations
and individuals loudly protested their innocence, the western
world moved on to other concerns, and the Congolese continue today to be
drained, ripped off, threatened, brutalized, and killed.
True or false With its booming economy, soaring per capita income, huge
inflows of foreign investment, and large hard currency surpluses, China
need not worry about dirty money.
False. Pervasive domestic corruption and massive outflows of illegal proceeds
threaten China s hope for peaceful transition to a sound market economy.
Instability is the one thing that China cannot risk. Every other nation
that illegally ships immense amounts of its wealth offshore is eventually
destabilized. There s no reason to believe that China is an exception.
Minxin Pei, a China expert at the Carnegie Endowment for International
Peace in Washington, writes: Corruption since the mid 1990s has
become intolerable. The blending of a semi reformed economy, authoritarian
politics, decentralisation and burgeoning links to the outside world has
allowed corruption to mutate into a voracious and dangerous strain. . . .
Corruption in authoritarian regimes tends to amplify systemic risks and undermine
the rulers legitimacy. He goes on to suggest that China may already
be in the late stages of regime decay. 185
The Economist presents an equally sober assessment: Scholars in China
are beginning to suggest what was once heretical: that the country suffers
from systemic corruption. . . . [I]t would be hard to find any leader whose
associates and family members are beyond suspicion. 186
The Chinese Academy of Social Sciences extended its courtesies to me,
arranging appointments and providing translators on two occasions as I researched
corruption in and capital flight out of China. On the second trip,
after one day of interviews the academy designated translator was replaced
Dirty Money at Work 143
by a young woman from the Central Committee of the Chinese Communist
Party. She was perfectly bilingual and as far as I could tell across the next
several days translated both sides of conversations accurately. I assume the
Central Committee was interested both in what I was asking and what I was
hearing. As well they should be, because in China the ripoffs are done by the
According to one source, researchers in China have reportedly estimated
that perhaps 80 percent of communist officials are guilty of corruption.187
With party membership recently pegged at 64 million, this would suggest
that 51 million are compromised. In recent years more than three quarters
of a million party stalwarts have been disciplined for corrupt practices. That
is the good news. The bad news is this leaves an estimated 50 million still
getting away with their financial shenanigans.
And the money they are stealing is staggering. IMF statistics for China
show errors and omissions, which is only a partial indicator of illegal outflows,
at $127 billion during the eight years from 1993 to 2001.188 Because
this measure is limited to what can be recorded, it probably covers no more
than half of illicit flight capital during the period. The problem is understood
at the highest levels of government: One official source quoted Zhu
Rongji, the premier, as saying in an internal meeting recently that capital
flight during 2000 and 2001 amounted to Rmb550bn [$66 billion] and
Rmb600bn [$72 billion] respectively, equal to about one third of total government
Estimates of fraudulent funds coming out of China are always in the
hundreds of billions of dollars. My own inquiries lend credence to numbers
averaging in the range of roughly $20 billion to $40 billion annually since
- If these orders of magnitude are accurate, then China has illegally
transferred offshore upwards of $300 billion and perhaps as much as twice
this figure in the past decade and a half. This rivals, maybe even exceeds,
Russia. Illicit outflows have continued strongly in the current decade, even
though the incomplete errors and omissions figures show some of it coming
back. If there is any country in the world where I could be significantly underestimating
illegal outflows, it is indeed China.
The official People s Daily outlines the usual strategy of escaping with illegal
funds as follows: [M]ost of the criminals behind various forms of capital
flight have turned out to be government officials or senior executives of
China s state owned enterprises. . . . Typically the officials transfer money
144 CAPI TA L I S M S AC H I L L E S H E E L
into accounts abroad opened either by branches of their company, business
associates or overseas relatives. The usual way for a corrupt official to escape
is to send the wife and children abroad first, transfer illegal assets out of
China and then flee when the time is ripe. 190
Mispricing and transfer pricing of imports and exports: This is the primary
mechanism used by Chinese and foreign firms, and Chinese firms disguised
as foreign firms, to move billions offshore. One analysis found that
Chinese exports were underpriced by an average of 17 percent and imports
were overpriced by around 9 percent.191 These are considerably higher percentages
than I utilize in further estimates laid out in Chapter 4. Another indicator
of transfer pricing is loss operations. Out of nearly 400,000
companies with foreign investment, some 60 to 65 percent showed negative
profits and paid no income taxes in the period from 1996 to 2000.192 The
Chinese government is attempting to crack down on transfer pricing, but,
with officials of state owned and private companies actively participating in
the process, it s a distant goal.
Like many others, Chinese businesspeople have learned how to set up
overseas offices and dummy corporations. Exports are made at low prices to
wholly owned foreign affiliates, and imports are received from these affiliates
at high prices. Profits accumulate in the foreign company, while the local
firm putters along as one of the hundreds of thousands of losing businesses.
A foreign entity buying and selling and keeping all the profits is standard
operating procedure in the game of global financial skullduggery.
These entities and their related dummy corporations also are used to
channel money back into China as foreign direct investment (FDI), a
process called round tripping. Perhaps as much as 50 percent of FDI going
into China is, in fact, Chinese money that came illegally out, disguised itself
as a foreign company, and returned, giving the appearance of a joint venture
with overseas partners. Now that such an investment link supposedly has
been created, dividends, fees, and royalties can continue to flow outward
forever. By this mechanism, Hong Kong, the British Virgin Islands, and the
Cayman Islands have accounted in some years for as much as 45 percent of
FDI into China, while the United States accounted for around 10 percent.
Another key device drawn from the dirty money user kit is asset stripping.
Managers of state owned enterprises (SOEs) spin off productive assets
for little or nothing into affiliated companies owned by themselves, family
members, or cronies. This leaves unproductive assets and usually large debt
Dirty Money at Work 145
burdens in the SOEs. Thus the state gets ripped off, and state owned banks
either continue making loans to losing SOEs or write off loans defaulted on
by bankrupt SOEs. In recent years, a large chunk of state assets simply disappeared
in the process of transferring the SOE attached collectives into private
or completely autonomous collective enterprises. 193 This large
amount (estimated by one researcher at $3.7 trillion!) has been moved from
state to private hands at zero or minimal prices.194Weak SOEs are left owing
around $600 billion to $700 billion in loans they cannot service. These nonperforming
loans could be as much as 30 percent, or in the estimates of
some experts as much as 50 percent, of all bank lending, meaning that many
depository institutions would be technically bankrupt. In other words, party
officials and enterprise officers have become very rich, and the people are left
holding the bag.
The disturbing story in China is the very wide range of government officials
and enterprise managers who are corrupt and use the mechanisms for
creating and moving dirty money for personal enrichment. China is often
praised for its controlled transition to market economics. The truth may be
just the opposite: As corruption becomes institutionalized, the long, drawnout
transition process risks spiraling beyond control. A few examples drawn
from China s encyclopedia of fraud make the point.
Bank of China. We might as well start at the top. Wang Xuebing is a former
president of the Bank of China (BOC), likewise former president of the
China Construction Bank, also former chairman of China International
Capital Corporation, an investment banking venture with Morgan Stanley
Dean Witter, and an alternate member of the 15th Central Committee of
the Communist Party of China. Fluent in English and accustomed to the
finer things of life, he cut a wide swath through earlier assignments in New
York, Hong Kong, and Beijing. That is, until he was removed in 2002 from
all his positions and exposed for embezzlement and corruption.
Wang ran BOC s New York branch from 1988 to 1993. An eight year
scheme in the 1990s generated suspect loans reportedly totaling $326 million.
195 Following a two year investigation the U.S. Treasury s Office of the
Comptroller of the Currency fined Bank of China $10 million for unsound
banking practices.196 In one of these schemes John Chou and his wife Sherry
Liu, living large in a mansion in New Jersey, borrowed a total of $34 million,
which they shifted around the world, reportedly to Hong Kong, the
146 CAPI TA L I S M S AC H I L L E S H E E L
United Kingdom, Singapore, Switzerland, and the Cayman Islands. BOC
repeatedly added to the mounting unpaid loan balances. Allegedly, a Chinese
municipal SOE was a partner in laundering schemes. After paying the
$10 million fine, BOC sued Chou and Liu and won a $35 million judgment,
and the couple also faced indictment in Manhattan in 2004. Other
schemes at BOC s New York branch may have been even bigger.
Beijing authorities apparently concluded that embezzlement from BOC
in New York, and also perhaps from Los Angeles and Hong Kong, could not
have gone on without Wang s knowledge. His career was finished, and he
was tried and sentenced in 2003 to 12 years in prison.
State Administration of Foreign Exchange. The acronym SAFE should
not remotely imply that China s hundreds of billions in foreign exchange reserves
are safe in the hands of the state administrative body. On the contrary,
a black hole in China s reserves has never been explained.
During the late 1990s, as inflows of foreign direct investment and trade
surpluses swelled to around $70 billion to $90 billion a year, foreign exchange
reserves grew by less than $10 billion a year. Flight capital accounts
for much of the gap but not all. Some of the gap seems to have arisen from
direct misuse of reserve funds. Questions over what happened to billions in
missing reserves remain unanswered to this day. . . . Officials at several government
owned banks in China . . . have confirmed they have in the past received
funds from the reserves in transactions that were not made public. 197
Zhu Xiaohua was director of SAFE in 1992 and 1993 and later head of
China Everbright Bank in Hong Kong from 1996 to 1999. Amid allegations
of corruption, loan scandals, and tax evasion at Everbright, Zhu was recalled
to Beijing and promptly disappeared from view for three years.
Li Fuxiang, former head of foreign exchange trading at Bank of China
in New York, was director of SAFE from 1998 to 2000. He seems to have
committed suicide by jumping out of a seventh floor window at a Beijing
hospital. Apparently the arrest of Zhu and his subsequent interrogation unnerved
Among other allegations, Zhu and Li were suspected of funneling
some $200 million of state reserve funds from SAFE through China Everbright
to invest in a Shanghai international investment company. As the
global intelligence firm Stratfor summarized: Li s death comes amid reports
that he was recently called to assist in the investigation of former
Dirty Money at Work 147
SAFE head, Zhu Xiaohua, and that Li himself may have been under investigation
for irregularities perpetrated by SAFE. With even the most
reform minded among China s economic policymakers facing charges of
corruption and mismanagement, the nation s economic policy is approaching
total disarray. 198
In August 2002 Zhu was subjected to a one day trial in Beijing s Number
One Intermediate People s Court. Found guilty of taking $500,000 in
bribes while at China Everbright, he was sentenced to 15 years in prison.
This was, in all likelihood, the very least of his transgressions, but the most
that China s leadership would allow to be publicly exposed.
The Kaiping Case. In the biggest embezzlement in China s history, the
Bank of China admits that $483 million was stolen, and investigators think
the figure may be as high as $725 million. In its drive to modernize, BOC
integrated more than a thousand computer centers into one unified accounting
system in October 2001. When they threw the switch oops
there was nearly $500 million less than the total that had been reported by
branches in the past. The problem was traced to the Kaiping branch in
Guangdong province. Three days later, three local managers beat it out of
town, escaped to Hong Kong, fled to Canada, and then worked their way to
Las Vegas in the United States, where they had forwarded some of their
money in advance.
Xu Chaofan became manager of BOC s Kaiping branch in 1993, while
still in his 20s. After five years in that position he was promoted to a BOC
management job at area headquarters in Guangzhou. Two co conspirators,
Yu Zhendong and Xu Guojun, continued to run the Kaiping branch. Between
them they had concocted schemes to bleed the bank of cash and
transfer most of their take out of China.
Xu Chaofan bribed others to set up cooperating companies in Hong
Kong.199 To get cash into these companies, a favorite technique was lending
money to state owned enterprises, which for a bribe would transfer
the money to his Hong Kong entities as payments for fake orders of raw
Xu s Hong Kong front companies, called window companies in
China, reportedly opened accounts at Standard Chartered Bank, UBS,
HSBC Broking Securities, ING Bank, and Fortis Bank.200 Millions were invested
in stocks and real estate in Hong Kong and in Macau. Stocks alone
148 CAPI TA L I S M S AC H I L L E S H E E L
were reportedly worth some $100 million at their peak during the 1997 red
chip boom prior to the British handover of Hong Kong to China. Afterwards,
the value of Xu s portfolio plummeted, as he seems to have had a
knack for picking bad investments.
In 2001 Xu and his accomplices began transferring money to the
United States: $200,000 to Citibank in San Francisco and $10.5 million to
casinos in Las Vegas.201 Upon fleeing China using fake travel documents,
they also made large deposits at the Vancouver and Richmond branches of
the Royal Bank of Canada, the Canadian Imperial Bank of Commerce, and
the Hong Kong Shanghai Banking Corporation.202
Chinese authorities asked for U.S. cooperation. Xu was arrested in San
Francisco in December 2000 for passport fraud. He was then taken to Las
Vegas where in 2004 he pleaded guilty to misappropriating public funds, a
crime in the United States under the Patriot Act. FBI and Immigration officials
handed Xu over to authorities at the Beijing airport in April 2004. As
of this writing, his two partners in crime are still on the run, probably in the
United States or Canada.
The biggest embezzler in Chinese history, plying his craft for more than
a decade, was 41 years old when he was returned to face punishment. Bank
of China is probably wondering how many more young managers are ripping
off the people s money.
Po Sang Bank. Possibly the largest money laundering case ever prosecuted
anywhere. 203 Hong Kong court proceedings in 2004 were off to a
dramatic start. The territory s Independent Commission Against Corruption
put a figure of up to HK$50 billion (US$6.4 billion) on the indicted
ring s haul.
Complex transactions Sophisticated techniques Hardly. This group
simply packed up currency notes in mainland China and hauled them to a
moneychanger, Guardecade, in Hong Kong. Three mainland syndicates
used couriers to smuggle billions in criminal proceeds and corporate embezzlement
across the border. Plastic bags full of notes, in reportedly 29 different
currencies,204 were delivered and converted into Hong Kong dollars.
Guardecade then deposited the HK dollars at Po Sang Bank.
But you can t just walk in with HK$50 million or so a day without raising
suspicions. You need the services of branch manager Lam Yiu Chung.
Lam entered the deposits into the bank s own suspense account, a temporary
Dirty Money at Work 149
facility used internally by the bank to deal with discrepancies or pending
clearances. In due course, balances would be transferred to Guardecade s Po
Sang bank account. From there, distributions were made to some 1,300
other bank accounts in Hong Kong and around the world, belonging to the
mainland criminals and embezzlers.205
Authorities got wind of the operation and arrested 39 people, including
Lam, two other bank officers, 14 owners and employees of Guardecade, and
others. Detailed examination of records of only 35 days of activity revealed
that HK$3.2 billion (US$410 million) had been handled. And the operation
had been going on for more than five years!
Lam and five others were indicted, and in July 2004 Lam alone was convicted
of corruption and given a light sentence of one year in prison. Po
Sang in the meantime merged as a unit into the Bank of China (Hong
Kong). China s relationship with Hong Kong one nation, two systems
well serves every criminal and embezzler on both sides of the borders.
There are hundreds of additional stories that can be told about assorted
perversities in the Chinese economy. Bruce Gilley writing in the Far Eastern
Economic Review summarized officially published figures as follows:
Fifty percent of the contracts signed in China are fraudulent in some
Economic corruption costs up to 17 percent of the country s annual
Tax evasion accounts for 50 percent of taxes due in the private
Counterfeit goods and substandard goods account for 40 percent of
all products made in China.
Two thirds of the biggest state firms produce false accounts.206
He Qinglian, author of the book China s Pitfall, says: The emergence
of the government underworld alliance shows that progress toward a civil
society ruled by law is no more likely an outcome for our country than a descent
into a mafia model. . . . The systemic corruption in which pursuit of
private interest undermines society s legal system and public morality will inevitably
kill [China s] reform before it matures. . . . When you have develop
150 CAPI TA L I S M S AC H I L L E S H E E L
ment that is built on the premise that people will pursue their interests at the
cost of . . . property and lives of others, is it really worth it 207
Systematic corruption, regime decay, high growth, and massive capital
flight will not long coexist within the same borders. How China resolves
these dilemmas will be felt across the entire globe. Western countries must
ask themselves a basic question: Facilitating and accommodating hundreds
of billions of illegal dollars pouring out of China is it worth it
Russia has suffered what appears to be the greatest theft of resources that has
ever occurred in a relatively short period of time, estimated at $200 billion
to $500 billion during the 15 years from 1989 to 2004. Most analysts put
the annual outflow of dirty money into western accounts at $20 billion to
$30 billion a year. Only China rivals this level of larceny.
One of the best studies of the magnitude of illegal capital flight out of
Russia is The Diagnostic Assessment of Russian Corruption: The Sociological
Analysis, undertaken by the Institute for Information and Democratization
based in Moscow. It summarizes as follows:
[L]oss resulting from illegal corruption elicited capital flight, with
1988 as a starting point, averages some $20 billion per annum; other estimates
place it at $24 to $25 billion per annum, therefore accumulating
to $300 to $350 billion in 12 years. If one were to include the loss
resulting from customs corruption another $20 to $25 billion annually
as well as that due to the Central Bank, the tax system and export
currency control, then the grand total for the same period would effortlessly
climb to $400 $500 billion. Of this amount, probably some $300
billion rests in western and offshore accounts.208
The biggest component of such sums arises from underpricing of resource
exports out of Russia by the business sector. The next major component
arises from the activities of Russian criminal gangs (to the extent
that they can be distinguished from the business community) in shifting
profits earned in drug and human trafficking, extortion, and arms trading.
Finally, elements of the Russian government have likewise been involved
Dirty Money at Work 151
in stripping the wealth of the state. Using the standard package of falsified
trade documents, offshore subsidiaries, dummy corporations, and disguised
bank transactions, Russians relied on active cooperation or benign
neglect emanating from western corporations and financial institutions to
facilitate virtually the whole of this lawless transfer. Through much of the
1990s, Moscow was crawling with foreigners helping set up schemes to
shift money out of the country.
The underpricing of exports from Russia has gone through three phases.
First, in the late 1980s and early 1990s, the assets of the Russian state were
being taken over by entrepreneurs, the richest among them later called oligarchs.
During this period exports of oil, gas, gold, diamonds, aluminum,
nickel, tin, zinc, pulp, timber, and other resources were sold primarily to European
buyers, and, in many if not most cases, kickbacks were paid into corporate
and personal accounts of the Russian exporters in Switzerland,
Germany, France, the United Kingdom, Spain, Cyprus, and elsewhere.
While such arrangements were very cozy, Russian exporters soon figured
out that they would prefer to control the whole of the fleecing process,
rather than rely on cooperation from buyers abroad. Thus was ushered in
the second phase of mispricing, with Russian firms setting up their own offices
in Europe to buy their own exports and then resell to foreign buyers.
When you are buying from yourself, you can pay any price you want. Hundreds
of subsidiaries and affiliates of Russian companies sprang up in Europe
and the United States. Exports were sold to these entities at cheap prices and
then resold to foreign buyers at world market prices. Take oil, for example.
Russian oil priced for sale internally at $10 a metric ton was instead sold to
the exporter s foreign subsidiary at $10 a metric ton and then resold to foreign
buyers at the world market price of $120 a metric ton.209 In such cases,
the $110 per metric ton profit margin was kept entirely in the bank account
of the foreign subsidiary. In some cases, even the $10 domestic price was not
remitted back to Russia, meaning that 100 percent of the revenues from
such exports were kept out of the country and nothing was brought back.
This process, particularly in handling oil and gas exports, accounted for
hundreds of billions of dollars disappearing permanently out of Russia.
The third and current phase of trade mispricing started around 1997
when the Russian Central Bank began modestly enforcing regulations on remittance
of foreign earnings. At this point, retention abroad of 100 percent
of export proceeds became more difficult. Russian exporters settled into the
152 CAPI TA L I S M S AC H I L L E S H E E L
tried and proven mechanism of routinely underpricing commercial invoices,
so that whatever had to be brought back into the country would still not
represent the whole value of the export. This is the process that maintains
today: underpricing of exports sold to foreign buying offices owned by the
exporters, so that even though some remittance is required, it does not represent
the real transaction value.
With a view to ascertaining what was legal or illegal for Europeans and
Americans in facilitating mispricing schemes, a privately commissioned
study concluded the following:
The research poses the question whether it was illegal for a foreign citizen
to come to Russia and participate with a Russian in a scheme to
evade Russian taxes. This question is still the issue of the day since there
is no shortage of firms that advise Russian businesses on offshore corporation
setup and similar issues. Since there were no regulations that
would explicitly prohibit mispricing of trade, parties involved in
money laundering schemes could only be prosecuted for violations of
related regulations such as tax evasion or bribery. Foreign businesspeople
or bankers could have been charged along with Russian officials or
businesspeople for these violations. In this case, bankers and consultants
could have been tried as held liable accomplices for the crimes.210
The Russian Central Bank, a respectable institution at the height of the
Soviet era, virtually presided over the outflow of wealth in the 1990s.
Mikhail Gorbachev signed a presidential decree in 1990 mandating that 40
percent of currency income derived from export operation had to be sold
to a designated government bank for rubles at an exchange rate set by another
government bank.211 This decree was almost universally ignored. In
1992, Boris Yeltsin signed another presidential decree raising the required
repatriation of export earnings to 50 percent.212 Again, ignored. The central
bank devolved responsibility to commercial banks for informing exporters
of the requirement for remittance of foreign proceeds. If exporters ignored
the admonition, banks had . . . no obligation to report exporters who don t
bring back their export proceeds. 213
In 1999 Yeltsin signed another presidential decree raising the remittance
requirement to 75 percent of foreign earnings,214 and the central bank put
more teeth into regulation of this decree. This brought on the current state
Dirty Money at Work 153
of affairs, with exporters drawing their commercial invoices to show only a
part of the real value of the shipment, so that repatriation of the stated
amount is still less than the total value.
So, the central bank has now strengthened oversight requirements
placed on commercial banks processing export transactions. But who owns
these commercial banks Why, the exporters themselves! In the beginning of
1988 only four banks existed in the whole of the Soviet Union. By 1996
there were some 2,600 in Russia itself. Large and medium sized Russian
manufacturers and traders set up their own pocket banks to handle their
own trade documents to export to their own overseas buying offices. The
bank executive telling the corporate executive to bring back his export proceeds
to Mother Russia is the one and the same executive talking to himself.
Little wonder then that exports in the tens of billions of dollars continue to
go out of Russia annually at a fraction of their true value.
The looting of Russia was accomplished by people using techniques already
well established in other countries. Most were driven by almost
unimaginable levels of greed, while some attempted to justify their actions
on what was, in their view, best for the country.
In the early 1990s, many Americans, Europeans, and Russians themselves
believed that the only way to prevent communism from returning to
Russia was by getting capital and property out of the control of the state.
Among young reformers in the government, Anatoly Chubais took up the
task of creating the State Privatization Committee, Gosudarstvennyi Kommitet
Imushchestva (GKI), which he quickly established in 1992 with offices
in every region of the country. To make his privatization program
politically acceptable, he agreed that managers and workers would be allocated
shares in their companies for purchase at nominal prices. In addition
he gave vouchers worth 10,000 rubles (about $25) to an estimated 144
million Russians, everyone born by September 2, 1992, which could be
used to buy reserved shares, invested in mutual funds, or traded for other
property. Instead of spreading the benefits of ownership, what happened
was the opposite. Vouchers found a market and were gobbled up into increasingly
narrow hands. And factory directors bought shares belonging to
their workers, often using money embezzled from the factory itself. Concentration
of ownership further contributed to the massive shift of wealth
out of the country.
154 CAPI TA L I S M S AC H I L L E S H E E L
In her excellent book, Sale of the Century: Russia s Wild Ride From Communism
to Capitalism, Chrystia Freeland reports later remarks by Chubais:
They steal and steal and steal. They are stealing absolutely everything and it
is impossible to stop them. But let them steal and take their property. 215
Chubais was committed to privatization no matter the cost.
Another Russian architect of the transition to a market economy, who
had advised Gorbechev and went on to become a frequent counselor to
Yeltsin, lamented to me: Never could I imagine we would pay such an
enormous price. Some sacrifices were inescapable. But the cynicism and rapaciousness
of some of our people was unimaginable. The price was not
worth it. 216
Another eyewitness to the drama laid part of the responsibility on foreign
economists who were offering assorted remedies: Western advisors
were clueless as to what people could be up to, how corrupt they could be.
They were caught up in their own mindset, unable to see the corruption as
serious and pervasive as it was. 217
Take Vladimir Kadannikov, for example, the Red Director of one of
Russia s largest works, and couple him with Boris Berezovsky, a mathematically
astute, cunning manipulator. Kadannikov s empire was Avtovaz, producer
of the Lada automobile. Berezovsky allegedly approached Kadannikov
with a scheme to set up a separate selling arrangement for Lada cars, to be
known as Logovaz. This was nothing more than a means of transfer pricing.
Logovaz bought cheap from Avtovaz and sold dear to the Russian public
and, for hard currency, into the export market. Avtovaz teetered toward
bankruptcy, yet was always bailed out by the Russian government, while Logovaz
reaped hundreds of millions in profits.218
If you can get away with it once, why not twice Berezovsky lifted his
eyes higher, toward Aeroflot, the state owned airline. The idea was not to
buy the creaky, capital intensive business but instead to grab hold of its
cash flows. Using a Swiss company, Andava, which was making money out
of the Avtovaz/Logovaz rip off, he brought in William Ferrero, former
head of Volvo Group Finance Europe, as manager.219 Berezovsky then installed
one of his partners into Aeroflot s management, and, voil…, Aeroflot
began transferring 80 percent of its revenues to Andava for proper cash
management. What about those bothersome presidential decrees and central
bank regulations requiring that a portion of foreign exchange earnings
Dirty Money at Work 155
be repatriated to Russia Berezovsky got a government license exempting
Aeroflot from such foolishness. And, not content to be handling 80 percent
of Aeroflot s foreign ticket sales, he went on to set up a company to
collect Aeroflot s earnings from foreign airlines for overflight rights across
Russia and a second company to pay Aeroflot s bills while charging usurious
How about stealing a large part of Russia s oil and gas industry and
transferring it to the United States Gazprom was created in 1989 by Viktor
Chernomyrdin to bring much of the Russian gas industry into one monopoly,
with himself as chairman. A 40 percent shareholding was retained by
the state, with Chernomyrdin empowered to vote these shares in stockholders
meetings. Another 15 percent was sold to management and workers,
and the company retained the power to approve all private sales and purchases
of Gazprom stock in the future. Chernomyrdin thus made himself
into the premier capitalist in the country, presiding over more than 300,000
employees and 30 percent of known global gas reserves.
In 1992 Gazprom created Itera, an affiliated company in Jacksonville,
Florida. Since then, through a series of asset stripping deals, properties and
profits have been siphoned off to Itera. For example, gas with a Russian domestic
price of $2 to $4 per thousand cubic meters has reportedly been sold
at that price to Itera in the United States, which then resold it as it was flowing
through Russian pipelines to other former Soviet republics for anywhere
from $30 to $90 per thousand cubic meters. Itera collected the hard currency
from other ex Soviets, and Gazprom lost billions of rubles in the
In another transaction, Gazprom and Itera set up a joint venture
called Purgaz to handle certain gas producing properties in Russia.
Gazprom soon transferred half its interest in Purgaz to Itera for no apparent
reason and later allegedly sold another 32 percent of its Purgaz interest
to Itera for the wonderful price of $1,200. At this point it s not just
revenues that are flowing to Jacksonville; it s ownership of Russian gas
fields and producing facilities.221
Not only did Gazprom sell to Itera at low prices; Itera sold to Gazprom
at high prices. Gas produced in Turkmenistan was reportedly sold to Itera,
which sold it at a substantially higher price to Gazprom, again stripping
Gazprom of profits.222 Who negotiated this deal Why, the manager of
Gazprom, on Itera s behalf.
156 CAPI TA L I S M S AC H I L L E S H E E L
Were these just transfer pricing arrangements between parent and subsidiary
Not a chance. More than 60 percent of Itera was reportedly owned
by two equity funds overseen by a trust company, Van Doorn FSI Limited,
based in Jersey, one of the Channel Islands. 223 Who owns these equity
funds is not a matter of public record.
Gazprom allegedly transferred billions of dollars in profits and properties
to Itera through the Yeltsin years, and even under Putin the drainage
may have continued at the rate of billions annually.224 Itera Group NV, now
the parent company registered in the Netherlands Antilles, holds interests allegedly
in some 130 companies, not only in the oil and gas industry but also
in metals, construction, chemicals, and other businesses.225 If you like asset
stripping, this is one for the record books.
Now, Russian Central Bank executives watching all this skullduggery
may have been feeling a bit left out. So perhaps they asked themselves what
entities they had offshore that could be used for creative ends. As it turns
out, Eurobank is a Russian Central Bank subsidiary based in Paris, with a reported
23 percent of its shares owned by Russian companies and private individuals.
226 Better yet, Eurobank is the majority owner of Fimaco,
Financial Management Company, Ltd, located in Jersey. Furthermore, Fimaco
is a co owner of Evrofinance Bank back in Moscow which deals in
short term Russian government bonds, known as GKOs. The linkage between
the Russian Central Bank in Moscow and Fimaco in Jersey and Evrofinance
back in Moscow offered wonderful opportunities.
According to reports, the central bank sent billions of dollars to Fimaco
beginning in the early 1990s. This in itself might not be problematic if Fimaco
was merely to hold such funds. What makes it problematic are three
other aspects of the transactions. First, Fimaco was entitled to a management
fee of 0.06 percent of the funds, and, being a Jersey based entity, there
is no adequate way to account for millions of dollars of such fees. Second,
IMF loan proceeds were funneled to Fimaco. Whether all the funds were
ever brought back to the central bank is unclear, but what is clear is that
Russia then misstated to the IMF the amount of its reserves, breaking a cardinal
rule of transparency in dealing with the IMF. Third, Fimaco is widely
believed to have sent money back to Evrofinance in Moscow to invest in the
GKO market, which at times was paying as much as 200 percent interest.
Converting foreign reserves to rubles removes that amount from foreign reserves
and puts the Russian Central Bank in the business of manipulating
Dirty Money at Work 157
Russian government bond prices. Furthermore, what happened to Fimaco s
profits earned from investing in GKOs remains unclear.
As the story became public, the Russian government commissioned
PricewaterhouseCoopers (PwC) in June 1999 to audit the central bank s
transactions. In its report, PwC attempted to trace the flow of IMF funds
but ultimately admitted, We have not been provided access to Ost West
Handelsbank [the recipient of a large part of the $4.8 billion IMF
tranche]. 227 Robert Rubin, U.S. Treasury secretary, said that some of the
IMF s loan of $4.8 billion may have been siphoned off improperly. 228
Michel Camdessus, then managing director of the IMF, accused the Russian
Central Bank of lying about its financial condition, but went on to
suggest later that no misuse of funds had been firmly established. Four
weeks after PwC s report appeared confirming that the IMF s $4.8 billion
could not be adequately traced, the IMF approved another loan to Russia
of $4.5 billion.
Dirty money out of Russia into the United States provided one of the
biggest financial scandals ever. Lucy Edwards, vice president of Bank of New
York, and her husband Peter Berlin, both Russian born and naturalized U.S.
citizens, laundered an estimated $7 billion to $10 billion for Russian mobsters
and tax evaders. Berlin set up several companies Benex, Becs, Lowland,
and others each with accounts at Bank of New York. When transfers
came in from Moscow to these accounts, Berlin, using computers in a
Queens flat, gave instructions for the money to be sent on to other accounts
around the world.
In 1995 Lucy Edwards was approached by principals of a Moscow bank,
DKB, who requested that Benex open a separate account at Bank of New
York utilizing micro/CASH software, enabling Benex to initiate and execute
wire transfers. By this means, DKB, and later a second Moscow bank named
Flamingo, were able to transfer cash into and out of Benex without a U.S. license.
Over a six year period extending to 1999, Benex, Becs, and Lowland
handled some 160,000 wire transactions, each one earning a fee for Berlin
and Edwards, accumulating to millions.
The feds began watching these accounts in September 1998, and the
story broke in August 1999. Edwards was fired from the bank, and in October
she and her husband and an accomplice were indicted for conspiring
to take deposits illegally and for transferring money without a license. Interestingly,
they were not indicted for money laundering, because to make
158 CAPI TA L I S M S AC H I L L E S H E E L
that case it must be proven that the source of the money stemmed from
one of the few predicate offenses under U.S. anti money laundering legislation,
and, without the cooperation of Moscow authorities, this could not
Now here is the twist to the tale. Bank of New York was lightly rapped
on the knuckles for deficiencies in its anti money laundering procedures.
The bank s share price, after a small dip, nearly doubled in six months.
Berlin and Edwards pleaded guilty in February 2002 but since then they
have not been sentenced. Their escapade could not be made as a moneylaundering
case at all, and it has quietly slipped from view.
What Berezovsky did in diverting revenues to his own pocket and what
Gazprom did in asset stripping were repeated by many other oligarchs, corporations,
and pretenders. What central bankers did in ripping off the state
was repeated by countless other functionaries. What happened at Bank of
New York was repeated by many other large banks.
Some observers justify the oligarchs actions in Russia as simply a robber
baron phase, similar to what the United States went through in the
1800s. But there is a fundamental difference. The robber barons kept their
money in America. The oligarchs took their money out of Russia. When I
asked one of these zillionaires in Moscow a few years ago if any of this
money was coming back into Russia he dismissed the ridiculous notion with
a flick of his wrist and said, None, none! 229
Stephen Cohen in his book, Failed Crusade: America and the Tragedy of
Post Communist Russia, laments as follows: The nation s economic and social
disintegration has been so great that it has led to the unprecedented demodernization
of a twentieth century country. 230 It is indeed ironic that,
at the moment of its global triumph, capitalism lapsed into a perverted,
nightmarish orgy of robbery, collusion, and deceit, with ex communist
states and western corporations and financial institutions cooperating in
Was there a point at which western governments and international financial
institutions should have pushed to curtail resource shifts out of Russia
For those who wanted to prevent communism from returning by getting
capital and property out of the hands of the state, this was largely accomplished
by 1994 or 1995 and finished with the reelection of Yeltsin in 1996.
But then the bleeding of wealth from Russia into western coffers continued
unabated for the rest of the 1990s and indeed continues today.
Dirty Money at Work 159
Could the West have done anything to curtail the deterioration of Russia s
economy from, say, 1995 or 1996 Yes. Nonremittance of export proceeds
was the most frequently and blatantly used technique for stripping
Russia of wealth. A centuries old instrument is readily available to deal with
this problem, to assure that export proceeds are brought back: the confirmed,
irrevocable letter of credit. This is an arrangement between two
banks, one representing the buyer and the other representing the seller. In
the simplest illustration, the buyer s bank opens a letter of credit guaranteeing
payment to the seller s bank for the shipment upon arrival. That letter of
credit is confirmed to the seller by the seller s bank, guaranteeing payment to
the seller. In other words, two banks step in between, and, on the strength of
the credit rating and reputation of the buyer s bank, usually in Europe or
North America, the banks assure that payment for the shipment will be remitted
to Russia and will be deposited to the seller s account.
Who should have insisted on adoption of such standard commercial
norms by Russian exporters Certainly the IMF, in its loan negotiations with
the Russian government, had the capacity to do so. In its inimically diplomatic
manner, the IMF should have raised the issue in one meeting, asked
for a working plan requiring export letters of credit in a second meeting, insisted
on adoption of L/C procedures in a third meeting, and withheld the
next tranche of loans in a fourth meeting.
Russian businesspeople and bankers did not invent any new ways of taking
illegal money out of their country. They simply stepped into well established
techniques and channels. At the same time, equally well established instruments
could have curtailed not stopped, but sharply curtailed the long term damage
being done to the Russian economy, damage that may take a generation or
more to recoup, damage that postpones, if not imperils, democratic capitalism
in the country well into the twenty first century.
With Russia I conclude Chapter 3, Dirty Money at Work. For each
tale presented, many others are available and many more may emerge in the
future, every one unique and at the same time illustrative of a disturbing
I set out in this chapter to paint a word picture of criminal, corrupt, and
commercial dirty money, some of the damaging impact these illicit flows
have on developing and transitional economies, and the active participation
of western countries in promoting and facilitating the fullest possible range
160 CAPI TA L I S M S AC H I L L E S H E E L
of financial subterfuges. Money laundering, tax havens, secrecy jurisdictions,
dummy corporations, mispricing, transfer pricing, falsified transactions,
fake swaps, concentration accounts, fraudulent foundations, and an assortment
of gimmicks combine to wreak unnecessary havoc on the lives of billions
of people. Whether it s moving the ill gotten gains of corrupt
government officials, or the proceeds of drugs, racketeering, human trafficking,
counterfeiting, fraud, illegal arms dealing, smuggling, or any of the
other myriad forms of global crime, or whether it s generating and shifting
terrorists funds, or whether it s companies and individuals breaking laws
and evading taxes, all make use of the same techniques and mechanisms,
varying only in degree of preference for one bit of skullduggery over another.
Appreciating the range across which global capitalism has become embroiled
in illegal dealings is an essential part of the story I am telling and a necessary
introduction to understanding the depth of the problem.
Dirty Money at Work 161
C H A P T E R 4
THIS IS a number no one wants to know. Jack Blum, the most aggressive
American lawyer chasing dirty money, is lamenting with me the lack of
official attempts to estimate illegal financial flows. Because hundreds of billions
are known to stream annually out of other countries into western coffers,
U.S. and European governments are guided by the old adage, Mum s
HOW MUCH MONEY
There is no place in international financial statistics where you can find
dirty money or laundered proceeds or flight capital or trade mispricing
or any account remotely suggesting such figures. Most illicit flows are
either disguised or invisible, as shown in the Dirty Money User Manual,
and therefore hard data are nonexistent.
There are two ways to produce assessments of global dirty money: top
down and bottom up. By top down I mean approximating dirty money as a
percentage of global GDP. By bottom up I mean constructing a total from
component parts added together.
First, the top down approach. In 1998, Michel Camdessus, then
managing director of the IMF, said in a speech in Paris that estimates of
the present scale of money laundering transactions are almost beyond
imagination 2 to 5 percent of global GDP would probably be a consensus
range. 1 I was delighted that, finally, someone had mentioned a figure.
Applied to global GDP of approximately $32 trillion, this would indicate
a range of roughly $640 billion to $1.6 trillion annually.
IMF officials have declined to clarify whether Camdessus s statement
was limited to the worst of criminal and corrupt money or was also intended
to include the commercially tax evading component. This gets into a definitional
question that has affected commentary on these issues for years.
Dirty money and laundered money : Are they the same thing
In my use of the terms, the answer is no. Laundered money is money
that breaks anti money laundering laws. For many countries this is limited
to drug proceeds and terrorist financing and a few other categories. More on
this later in the chapter. But seldom does anti money laundering law include
tax evading funds, the commercial component I have written about
extensively, as a major part of the dirty money phenomenon. In other
words, laundered money is narrowly defined as some of the criminal and
corrupt money. The designation cannot properly be applied to proceeds that
are not specified in anti money laundering legislation. Dirty money is the
whole of illicit proceeds, a much larger sum. If it breaks one country s laws
in its origin, movement, or use, then it s dirty money, regardless of whether
it s singled out as laundered in another country s laws.
With this clarification, let s go back to the IMF s figure of $640 billion
to $1.6 trillion for laundered money. If this was not intended to include the
commercial component, which is almost certainly the case, then the larger
dirty money figure would easily rise to the range of $1 trillion to $2 trillion
annually. Furthermore, the context of Camdessus s address implies that he
was talking about cross border flows, not what remains inside national jurisdictions.
Thus, $1 to $2 trillion annually can be taken as a rough estimate of
global dirty money.
Do such numbers make sense One way to get a feel for this is to examine
offshore assets. Merrill Lynch/Cap Gemini Ernst & Young produces an
annual World Wealth Report, based on high net worth individuals with liquid
financial assets of $1 million or more. Data from 2002 and 2003 are
shown in Table 4.1. From 1996 to 2001, offshore liquid holdings of high
net worth individuals rose from $5.5 trillion to the $8.5 trillion figure
shown. This is a rate of increase of $600 billion per year.
The data in this survey do not include offshore holdings of individuals
with investible liquid assets below $1 million, and corporations, which reportedly
pass more money through tax havens than individuals.2 Nor does
Magnitudes and Misunderstandings 163
the study make any effort to distinguish between what was sent offshore
legally or illegally. Nevertheless, adding corporate offshore holdings at least
equal to personal holdings and those of smaller net worth individuals to the
preceding yearly increase of $600 billion could easily double or triple the annual
flow to some $1.5 to $2 trillion. The portion of this that is corrupt,
criminal, or commercially tax evading, the latter including all mispricing
and abusive transfer pricing, easily should fall within the order of magnitude
of upwards of $1 trillion a year.
A second compilation is provided by The Boston Consulting Group using
$250,000 in listed securities and cash deposits as its threshold for high
net worth individuals. The group s 2003 Global Wealth report provides the
information summarized in Table 4.2. With a higher global figure of $38
trillion, this analysis produces considerably higher percentages held offshore
by the developing and transitional economies of Asia and the Middle East,
Latin America, and Europe ranging from 20 percent to 70 percent.
A third and very interesting set of figures on global money laundering
and projections of its expected growth has been produced by Celent Communications,
summarized in Table 4.3. In Celent s use of the term, money
laundering refers to criminal proceeds. Celent s figure for 2005 approaches
$1 trillion a year.
In summary, the top down approach supports the IMF s criminal
money laundering consensus range of $640 billion to $1.6 trillion, and
164 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 4.1 HOLDINGS OF HIGH NET WORTH INDIVIDUALS OFFSHORE
($1 MILLION OR MORE), IN US$ TRILLIONS
Total Percent Amount
Area Holdings Offshore Offshore
North America $ 7.4 34% $2.5
Europe $ 8.8 31% $2.7
Asia $ 5.7 30% $1.7
Latin America $ 3.6 31% $1.1
Middle East $ 1.1 27% $0.3
Africa $ 0.6 33% $0.2
Total World $27.2 31% $8.5
Source:Merrill Lynch/Cap Gemini Ernst & Young, World Wealth Report, various years.
adequately suggests a larger figure for all dirty money, reaching perhaps to
$2 trillion annually or higher.3
Now, can similar figures be developed from the bottom up Can the individual
components of criminal, corrupt, and commercially tax evading
money be approximated and totaled
I have for several years estimated global cross border dirty money at well
over $1 trillion annually and the flow out of developing and transitional
economies at roughly $500 billion annually. In arriving at these estimates,
Magnitudes and Misunderstandings 165
TABLE 4.2 HOLDINGS OF HIGH NET WORTH INDIVIDUALS
($250,000 OR MORE), IN US$ TRILLIONS
Region Total % Held Offshore
North America $16.2 Less than 10%
Europe $10.3 20% to 30%
Asia Pacific and $10.2 Japan, less than 10%
Middle East Asia not incl. Japan, 30%
Middle East, 70%
Latin America $ 1.3 Above 50%
Total World $38.0
Source: Winning in a Challenging Market: Global Wealth 2003, The
Boston Consulting Group.
TABLE 4.3 ANNUAL MONEY LAUNDERING BY REGION IN US$ BILLIONS
Region 2000 2001 2002 2003 2004 2005
Americas $313 $323 $328 $335 $341 $350
Asia Pacific $246 $254 $254 $270 $280 $292
Europe $230 $233 $234 $236 $238 $241
MEast/Africa $ 38 $ 39 $ 40 $ 41 $ 43 $ 44
Total World $827 $849 $856 $882 $902 $927
Source: Anti Money Laundering: A Brave New World for Financial Institutions, Celent Communications,
September 2002. The author, Dr. Neil Katkov, kindly made available spreadsheets
supporting data in the report.
the criminal component is compiled from the work of others, while the corrupt
and commercial components come from my own investigations.
First, criminal money. Global organized crime is estimated to have annual
revenues of around $1.5 trillion.4 Drugs are a large part of this figure,
but the cumulative total of other activities exceeds the drug trade.
Estimates of the street value of global drug sales start at about $400 billion
annually and go far upward from there. Most of the street value stays in
the country where the drugs are consumed. The proportion that is involved
in cross border financial flows is on the order of 15 to 30 percent of the
street value, or $60 to $120 billion. In Chapter 2, I estimate that just cocaine
and opiates trafficked out of growing regions generate upwards of $40
billion in wholesale values, and marijuana and methamphetamines easily increase
this figure to $60 billion, lending credence to the low end estimate.
Counterfeit goods resemble drugs in that only a portion of global values
constitute cross border financial flows. These items include videos, CDs,
DVDs, computer software, cosmetics, pharmaceuticals, jeans, handbags, and
more. The Counterfeiting Intelligence Bureau of the International Chamber
of Commerce estimates counterfeiting at five percent or more of world merchandise
exports.5 The OECD lifts its estimate to as high as seven percent.6
With current world merchandise exports at $6.5 trillion, this would suggest
that the total value of counterfeit goods is on the order of $325 billion to
$455 billion annually. Interpol places its estimate at $450 billion annually.7
As with drugs, estimating 15 to 30 percent as the portion of value that is
laundered and applying these percentages to a consensus estimate of around
$400 billion of total value produces figures of roughly $60 billion to $120
billion of illegal money entering the financial system from trade in counterfeit
goods. The greater part of this business, probably more than threefourths,
emerges from Asia into world markets. At the low end, this indicates
$45 billion coming out of developing and transitional economies.
Counterfeit currency is a special category, much of which is the U.S.
$100 bill. North Korea and the tri border region of South America are big
in the business. The numbers, however, are fairly small, perhaps $1 billion
on the low side and probably no more than $3 billion to $4 billion on the
high side, virtually all of it crossing borders.
Human trafficking is estimated by several sources at $10 billion to $12
billion annually.8 Virtually all of this flow, as discussed in Chapter 3, comes
out of poorer countries.
166 CAPI TA L I S M S AC H I L L E S H E E L
The illegal arms trade is especially difficult to estimate, because in recent
years Russia and ex Soviet states have been dumping large stocks of surplus
arms on world markets, as well as delivering newly manufactured weapons
to clandestine buyers. The Small Arms Survey in 2003 estimated global illegal
sales of this portion of the trade at $1 billion annually.9 Illegal sales of
conventional weapons are a black hole in arms data but are estimated by several
sources at $2 billion to $10 billion annually. Conservatively, for small
arms and conventional weapons together, a low end figure of $3 billion is
suggested, ranging as high as $10 billion.
Smuggling of items other than arms and counterfeit goods is another
large uncertainty. Cigarette smuggling is big business, with tobacco manufacturers
themselves sometimes found to be complicit. UN statistics put
global exports at $16 billion.10 The proportion of legitimately exported cigarettes
that are then illegally imported into other countries has been estimated
at some 25 percent, or $4 billion. In addition, the transportation cost
and a slice of usually hefty customs duties not paid adds to cross border
flows of money arising from cigarette smuggling, probably bringing the take
from this activity into the $5 to $10 billion range.
Unrecorded oil sales out of Saudi Arabia (believed to be ongoing for
years), Russia, Nigeria, Angola, perhaps still Iraq, and elsewhere easily push
upwards to 500,000 barrels a day, valued at some $8 billion annually. Most
of this ends up deposited abroad, adding to laundered funds entering the financial
Illegal timber trade is estimated at 10 percent of the legitimate trade of
$150 billion a year, putting this business at $15 billion annually, emerging
from the Amazon Basin, Central America, Africa, Russia, and Southeast
Asia.11 Of the $15 billion export value, perhaps $5 billion enters the global
financial system annually. Smuggling of endangered species may be overestimated
at $8 billion a year.12 Conflict diamonds and other gems smuggled
out of Africa and Asia add millions a year to distant accounts.
The cross border traffic in stolen goods has surged. Cars heisted in
Western Europe are taken east, in North America are taken south, and in
Japan are taken to other Asian countries. This trade is easily in the range of
$10 to $20 billion annually. Interpol puts art and antiquities theft as the
fourth largest criminal activity, with one estimate placing a value of $5 billion
a year on stolen objets.13
Combining just cigarettes, oil, timber, endangered species, gems, cars,
Magnitudes and Misunderstandings 167
and art and antiquities produces an estimate for the cross border value
earned from smuggling of roughly $35 to $80 billion a year. And, of course,
smuggling is a rich and varied field encompassing much more than this narrow
Organized criminal activity in other forms not included earlier is also
huge. Criminal income in the United States derived from fraud, prostitution,
loan sharking, illegal gambling, larceny, burglary, robbery, and other
types of crimes is close to 1 percent of GDP.14 Europe and Japan are easily
within the same range, and developing and transitional economies are much
higher. Nevertheless, taking 1 percent of global GDP as a minimal estimate
produces a figure for such activity of roughly $320 billion, and applying the
15 to 30 percent cross border range to this figure indicates that perhaps $50
billion to $100 billion is laundered from these sources.
Second, corrupt money. In 1997 I conducted 335 interviews with central
bankers, commercial bankers, government officials, customs officers, tax collectors,
economists, sociologists, lawyers, security personnel, and others. This
included the United States and in addition I traveled to 23 other countries:
Venezuela, Brazil, Argentina, Nigeria, South Africa, Kenya, Egypt, the
United Kingdom, France, Germany, Switzerland, Belgium, Poland, Ukraine,
Russia, Saudi Arabia, Turkey, Pakistan, India, Indonesia, the People s Republic
of China, South Korea, and Japan. One object of this exercise was to accumulate
informed estimates of cross border flows of corrupt proceeds, taken as
local bribes remitted abroad or as bribes paid abroad.
It s the cross border flows that interest me, not the total of global corruption.
Corruption that stays within a country is bad enough, but at least it
tends to get recycled locally, even if only in the lifestyles of greedy officials.
Corrupt proceeds that are transferred out or paid out of the country are a
complete loss to the local economy, and little of it ever comes back. It s what
goes out and stays out that has been the focus of my inquiries, because this is
by far the more destructive part of the corruption phenomenon.
Based on my 1997 work, I developed an estimate of corrupt proceeds
transferred out of just 20 developing and transitional economies of $20 to
$40 billion annually. Included in this estimate are Russia, China, Ukraine,
Nigeria, Indonesia, Venezuela, Argentina, Iraq, Egypt, Turkey, Saudi Arabia,
Pakistan, India, C“te d Ivoire, Kenya, Algeria, Mexico, Belarus, Kazakhstan,
and Turkmenistan. A great many more countries could have been added to
168 CAPI TA L I S M S AC H I L L E S H E E L
Corruption is by far the smallest of the three components of crossborder
dirty money. However, it has an influence on a society well beyond
its size. A country that is corrupt at the top also will have large criminal
and commercial components of dirty money. There is no such thing as a
nation with corrupt leaders and officials on the one hand and low levels of
crime and tax evasion on the other hand. Government corruption creates a
permissive environment, and this magnifies criminal activities and financial
shenanigans in the rest of the economy.
Third is the commercially tax evading money arising through (1) mispricing,
(2) abusive transfer pricing, and (3) a broad range of generalized
fakery, the catalogue of methods covered in Chapters 2 and 3. Getting a
handle on this requires asking people carefully what they are doing.
In the early 1990s, I undertook a project to examine the amount of mispricing
in international trade between unrelated parties, which I first observed
in Africa in the 1960s and have seen all over the world ever since. My company
conducted 550 interviews with presidents, managing directors, or
deputy heads of trading companies in 11 countries: the United States, the
United Kingdom, France, Netherlands, Germany, Italy, Brazil, India, South
Korea, Taiwan, and Hong Kong.
We used local languages in all interviews, which usually lasted an hour
or longer. We gave respondents a written assurance of anonymity, and no
record was maintained of individuals names or their companies. We used
survey forms with 85 specific questions, and answers were recorded in both
tabular and verbatim form. We asked respondents about trading relations
with any two countries, both of which they were permitted to select from
two different continents, so it was apparent that our queries were not focused
on any particular country. Questions covered the entire range of what
is encompassed in international trade transactions: negotiating, ordering,
purchasing, shipping, paying and handling claims. Within these questions,
mispricing in order to generate kickbacks into foreign bank accounts was
treated as a well understood and normal part of transactions. Because kickbacks
were accepted as routine and discussed openly, because respondents
could select the trading partner countries they wanted to talk about, and because
their anonymity was guaranteed, we recorded good data on a sensitive
Magnitudes and Misunderstandings 169
subject. In addition to this procedure, I have also taught other economic intelligence
methodologies to security officials.
The results of this survey did not surprise me. For Latin America, between
45 and 50 percent of foreign trade transactions were revealed to be
falsely priced, with Argentina, Brazil, and Venezuela all falling within or
close to this range. Levels of mispricing in these falsified transactions averaged
more than 10 percent. Multiplying these two percentages produces an
estimated mispricing component for Latin American trade between unrelated
parties of 5 percent.
For Africa, 60 percent of trade transactions were indicated to be intentionally
mispriced by an average of more than 11 percent. This produces
an estimated mispricing component for African trade between
unrelated parties of about 7 percent. Nigeria significantly exceeded the
norm of 7 percent.
Another method for checking false pricing is to take a sample of commercial
invoices for imports and exports and negotiate as an interested buyer
or seller for the same goods and quantities. This is a costly procedure but can
be very revealing.
I have rechecked my figures in the Middle East and Asia, confirming
the 5 to 7 percent range of mispricing commonly observed. What has been
happening in the former communist countries, however, far exceeds this
mispricing level. The simple truth is, thousands of companies provide
helpful mispricing services to tens of thousands of their overseas customers
in hundreds of thousands of transactions moving billions of dollars into
Falsified pricing is not only a feature in trade between unrelated parties. Exactly
the same device is used in transfer pricing between parent, subsidiary,
and affiliate companies. As discussed in Chapter 3, transfer pricing is used
by virtually every multinational corporation to shift profits at will around
the globe. While I have independently investigated mispricing between unaffiliated
companies, I have not done a formal investigation of transfer pricing
between affiliates. I have, however, observed enough transactions, seen
enough exaggerated intracompany prices, asked enough questions in dozens
of countries, and collected and reviewed more than enough trade data to
170 CAPI TA L I S M S AC H I L L E S H E E L
have every reason to conclude that, on a global scale, abusive transfer pricing
between affiliated entities greatly exceeds mispricing between unaffiliated
entities. Nevertheless, to be conservative, I take the percentage level of abusive
transfer pricing between related parties as equal to the level of mispricing
between unrelated parties 5 to 7 percent even though I have many
indications that it is substantially higher.
Imports and exports into and out of developing and transitional
economies currently total approximately $4 trillion a year. Multiplying this
figure by the 5 to 7 percent average range of variant pricing produces a total
for falsified pricing of $200 to $280 billion a year, shifting money out of
these countries into western accounts by this mechanism. This in my judgment
is a low range. Others who have considered these issues think it is way
short of the mark.
Billing and receiving payment for goods and services never delivered is a frequently
used technique for generating dirty money. Illegal transfers devoid of
authenticity have sucked billions out of the former Soviet Union just in the
past 15 years. The billions coming out of Russia into the Bank of New York
and other European and U.S. banks are included in this category of fake
transactions. It is not proper to put these sums into the criminal category because
the criminal origin for such fake transactions is seldom established.
Fake or vastly exaggerated charges for services, royalties, patents, trademarks,
advertising, consulting, management contracts, software updates, insurance
policies, and countless other subterfuges are common. The whole
business of asset stripping is included in this category. Swapping shares with
offshore companies and swapping real estate in fraudulent transactions is
here. I put illicit countertrade into this category, since it is barter trade rather
than invoiced trade that underlies most of these deals.
Other observers think that such pure fakery now significantly exceeds
the low end estimate of $200 billion for mispricing and abusive transfer
pricing I have estimated globally. Correspondent banking relationships have
become so porous that wire transfers in the billions now fly around the
world without a particle of underlying reality or financial oversight. Nevertheless,
I am not yet satisfied that purely fictitious transactions with no
goods and services delivered exceed the false pricing attached to goods and
Magnitudes and Misunderstandings 171
services delivered. Hence, my own figures put nonpricing illegal transfers
lower than pricing transfers.
With these explanations, Table 4.4 summarizes my bottom up summation
of global dirty money. Rounding down, I put the global total at
$1 trillion a year and the portion of this coming out of developing and
transitional economies at $500 billion a year. I think these numbers are
conservative, as do others who have reviewed them.
But before we leave this section, three further questions bear asking. The
$500 billion coming illegally out of developing and transitional economies
is about 8 percent of their combined GDP. Does this seem too high No, for
172 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 4.4 CROSS BORDER FLOWS OF GLOBAL DIRTY MONEY IN US$ BILLIONS
Dirty Money High Low High Low
Drugs $ 200 $ 120 $ 90 $ 60
Counterfeit Goods $ 120 $ 80 $ 60 $ 45
Counterfeit Currency $ 4 $ 3 $ 2 $ 1
Human Trafficking $ 15 $ 12 $ 12 $ 10
Illegal Arms Trade $ 10 $ 6 $ 4 $ 3
Smuggling $ 100 $ 60 $ 40 $ 30
Racketeering $ 100 $ 50 $ 30 $ 20
Sub Total $ 549 $ 331 $238 $169
Corrupt $ 50 $ 30 $ 40 $ 20
Mispricing $ 250 $ 200 $150 $100
Abusive Transfer Pricing $ 500 $ 300 $150 $100
Fake Transactions $ 250 $ 200 $200 $150
Sub Total $1,000 $ 700 $500 $350
Total $1,599 $1,061 $778 $539
two reasons. First, much of this money never appears in GDP. It departs
without being recorded in national statistics. (More on this in Chapter 5.)
And second, these economies have the weakest legal structures. This facilitates
unrecorded economic activity in the corrupt, criminal, and commercial
components of dirty money flows.
From poorer countries, what is the accumulated total of illegally derived
money shifted to the West There is a Nobel Prize awaiting anyone who can
answer this question. At the very minimum, I would take the estimated
$500 billion a year, multiply it by just 10 years, and produce a figure of $5
trillion. In fact, outgoing transfers have been a reality for far longer than 10
years, and a better estimate is probably a great deal higher.
What about inflows of foreign investment, foreign aid, and remittances
sent home by family members living abroad: Doesn t this offset the illegal
money moving out of poor countries No; for many if not most developing
and transitional economies it does not. And even for those that may at the
moment have a modest net inflow, this does not justify or excuse the illegal
outflows. Illicit offshore transfers damage poorer countries, regardless of any
other economic factors.
One trillion dollars total; $500 billion out of developing and transitional
economies. These are my estimates. I look forward to additional figures
from others in the future.
A FAILURE RATE OF 99.9 PERCENT
Several years ago I called upon U.S. Treasury Department officials for a discussion,
on background, concerning the amount of dirty money coming
into the United States and the portion of this amount caught by
anti money laundering laws and enforcement efforts. They put the illicit inflows
into the country from other nations at roughly $250 billion a year.
They then said that in a really good year, seizures of drug and criminal
money in cash and in bank accounts might capture $250 million of laundered
funds. I made a quick calculation: U.S. anti money laundering efforts
by their estimates succeed 0.1 percent of the time and fail 99.9 percent of
the time. In other words, total failure is just a decimal point away.
In 2001, U.S. figures showed that seized money laundering assets had
risen to $386 million.15 Of course, the total amount of laundered money
Magnitudes and Misunderstandings 173
coming into the United States is also believed to be rising, and most people
following these questions, including me, think this yearly figure is above the
modest $250 billion offered by Treasury. Thus, the 99.9 percent failure rate
shows little if any trend toward declining.16
Even worse, an official of the Swiss central bank added a digit and
placed the percentage failure rate for his country at 99.99. Likewise, a German
compliance officer at a major bank quoted figures suggesting the same
level of failure for his country.17 To put it simply, anti money laundering efforts
do not stop the deposit of laundered money.
How can this be We frequently read and hear about drug busts, cash
seizures, and frozen terrorist finances. Aren t we succeeding in the global
fight against dirty money Not even close. And by the end of this chapter
you will appreciate why. Some of the gross misunderstandings surrounding
this subject need to be cast aside.
WELL INTENTIONED EFFORTS
The United States initiated steps in the 1970s and 1980s to combat money
laundering, aimed primarily at the proceeds of the drug trade. The Racketeer
Influenced and Corrupt Organizations Act (RICO) was passed in 1970, giving
law enforcement officials stronger powers to go after drug cartels and criminal
mafias. The Bank Secrecy Act (BSA) also was passed in 1970, misnamed
because it, in fact, encroaches upon rather than preserves bank secrecy. This
act did not outlaw money laundering as such but did place record keeping and
reporting requirements on financial institutions. Many banks both widely ignored
and legally contested these requirements into the 1990s, until the U.S.
Supreme Court established that BSA demands were constitutional.
Over a period of years the Treasury Department has imposed regulations
requiring currency transaction reports (CTRs), which eventually established
a filing threshold of anything more than $10,000 on cash transactions, and
international transportation of currency and monetary instruments reports
(CMIRs), requiring travelers to declare movements of more than $10,000 in
cash or equivalents across U.S. borders. CTRs and CMIRs kicking in at this
level (sometimes even lower) have played a powerful role in curtailing smurfing,
forcing many drug dealers with tens of millions to pack up their stacks of
currency and truck or ship them across borders.
174 CAPI TA L I S M S AC H I L L E S H E E L
Money laundering was made a federal crime for the first time in 1986
with adoption of the Money Laundering Control Act. This was followed by
a prosecution improvements act in 1988 that authorized money laundering
sting operations and provided for fines and penalties of anyone facilitating
money laundering, including negligent bankers.
Several additional steps rounded out U.S. efforts in the 1990s. The
Treasury Department established its Financial Crimes Enforcement Network
(FinCEN) in 1990. Two years later the Annunzio Wylie Anti Money
Laundering Act became law, requiring banks to file suspicious activity reports
(SARs) on large or unusual transactions that suggest the possibility of
In the late 1990s an annual National Money Laundering Strategy was
authorized, requiring participation by many branches of the U.S. government
in formulating and implementing anti money laundering efforts. This
has been a useful instrument, tying together the work of several departments
One of the important outcomes of U.S. activity has been stimulation
of international interest in combating money laundering. A provision of
the 1986 Money Laundering Control Act required the chairman of the
Federal Reserve Board, at that time Paul Volker, to meet with G 10 central
bankers in order to begin focusing global attention on money laundering.
Growing from these consultations, the G 7 heads of state and
government agreed in 1989 to form the Financial Action Task Force
(FATF), housed at OECD headquarters in Paris, to coordinate anti
money laundering programs globally. Taking its cues from the United
States, FATF focused its early efforts almost exclusively on the proceeds
of drug trafficking, tiptoeing around corrupt money and burying consideration
of tax evading money.
In 1990 FATF drew up 40 recommendations laying out the scope of
money laundering, provisions for due diligence by financial institutions,
recordkeeping norms, suspicious activity reporting, cross border currency
monitoring, creation of national financial intelligence units, and standards
for international cooperation. In 2001, eight additional recommendations
were added, targeted specifically at curtailing terrorist financing. Together,
these are known as the 40 + 8 recommendations, setting terms for the
global fight against money laundering. A ninth focusing on cross border
movements of cash was added in 2004.
Magnitudes and Misunderstandings 175
176 CAPI TA L I S M S AC H I L L E S H E E L
UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.
Came into force in 1990. Requires states to establish as criminal offenses
the cultivation, manufacture, transport, sale, and possession of narcotics.
International Convention for the Suppression of the Financing of Terrorism.
Came into force in 2002. Requires all states to take steps for the identification,
freezing, and forfeiture of terrorists funds.
UN Convention against Transnational Organized Crime. Came into force in
- Requires states to adopt laws tackling international criminal syndicates,
money laundering, corruption, and obstruction of justice.
UN Convention against Corruption. Signed in 2003, with ratification continuing
through 2005. Requires states to adopt laws barring bribery, embezzlement,
laundering of public funds, and procurement fraud.
Anti Bribery Convention of the OECD. Came into force in 1999. Requires signatory
countries to make bribery of foreign public officials a criminal offense.
OECD s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
First addressed by the OECD in 1979 and updated in 1984,
1987, 1993, 1995, and 1997. Urges adoption of arms length pricing between
OECD Guidelines for Multinational Enterprises. Revised in 2000. Nonbinding
recommendations for corporations to avoid practices that are deceptive, misleading,
fraudulent, or unfair and to comply with tax laws and regulations in
all countries and to act in accordance with both the letter and the spirit of
those laws and regulations.
OECD Principles of Corporate Governance. Revised draft text released in
- A guide for investors, corporations, and stock exchanges, primarily applicable
to publicly traded companies, focusing on shareholder rights, board
responsibilities, and financial disclosure.
The Wolfsberg Group. Formed in 2000 and now comprising 12 international
private banks pledging to adopt a rather limited code of conduct in dealing
with wealthy clients.
The Egmont Group of Financial Intelligence Units. Set up in 1995 and now including
nearly 60 members, aimed at coordinating the work of financial intelligence
groups, such as the U.S. s FinCEN, globally.
International Money Laundering Information Network (IMoLIN), part of an
anti money laundering program in the UN s Office of Drugs and Crime in Vienna.
IMoLIN probably has the best country by country money laundering
FATF is not an organization established by treaty. It is an intergovernmental
body, with 33 members and 20 observers as of this writing and
several regional cooperating groups. It cannot impose conditions on
members or nonmembers; however, its recommendations are generally
accepted as international standards. The United States, with a narrow definition
of money laundering as is covered in this chapter, hardly meets
In addition to FATF s recommendations, many other international
efforts are focused on global money laundering and their underlying
crimes, briefly summarized in the preceding box. These are just some of
the international efforts organizations, conventions, consultative
groups, and more aimed at attacking and curtailing global money laundering.
Dozens of bodies, thousands of people, millions of documents,
and billions of dollars concentrated on staffing anti money laundering
programs became a feature of our globalized world by the start of this
THE PATRIOT ACT
Which obviously means that when terrorists struck on September 11,
2001, an enormous apparatus was already in place and primed to trace
their dirty money, and the entire world was psychologically attuned to the
urgency of this task, because of all the attention given to criminal money
laundering over the preceding 30 years. Right Regrettably, nothing could
be further from the truth. Which leads to October 2001, the U.S.A. Patriot
Act and the ugliest period ever in the history of anti money laundering legislative
With glaring weaknesses in U.S. laws and hundreds of billions of dollars
of dirty money streaming into U.S. banks, several senators had been pushing
for stronger anti money laundering legislation for years. Most prominent in
this effort were Senators Carl Levin of Michigan, Charles Grassley of Iowa,
and John Kerry of Massachusetts. But they faced ideological foes within the
Senate Banking Committee, who, by September 2001, had already stopped
some 11 bills containing strengthened anti money laundering provisions
from getting to the Senate floor. The latest of these, entitled the Money
Laundering Abatement Act, was introduced by Senator Levin on August 3,
Magnitudes and Misunderstandings 177
2001, with support from Senators Grassley, Sarbanes, Nelson, Kyl, and
Within weeks of the terrorists attacks it was well understood that the
terrorists left a long paper trail of bank accounts, credit cards and money
transfers showing that they used the ordinary banking system with little
scrutiny. 19 As the Patriot Act laying out legislation for the fight against terrorism
was being formulated, Senator Levin and others insisted that their
anti money laundering provisions must be included.
This deeply concerned, if not angered, the American Bankers Association
and particularly its largest New York members, including Citigroup
and J.P. Morgan Chase. How could anyone think that money had anything
to do with 9/11 Led by Citigroup, a lobbying effort was mounted
to abort or dilute the threatening legislation. As the Washington Post reported
at the time:
Some of the nation s largest banks including Citigroup and JP Morgan
Chase are lobbying to change key provisions of proposed money
laundering legislation. . . . The legislation is intended to make it easier
for federal authorities to detect and dismantle the financial networks of
global terrorists, drug dealers and other criminals. . . . Sens. Carl M.
Levin (D Mich.) and Charles E. Grassley (R Iowa) . . . criticized . . .
what they described as efforts by industry to water down the bill. They
said any terrorism bill that lacks comprehensive money laundering provisions
would, in Levin s words, have no teeth and could subjugate national
security interests to those of big business. . . . They are being
unpatriotic in their approach, said Grassley, . . . referring to industry
Unpatriotic. Subjugate national security interests to those of big
business. These words were more than mere political posturing; they were
an indictment of an industry seen to be unpersuaded and unmoved by the
events of September 11.
The banks reportedly sought to:
Uncouple the anti money laundering proposals from the Patriot Act,
so that anti money laundering could be fought separately and hopefully
178 CAPI TA L I S M S AC H I L L E S H E E L
Reduce the strengthened due diligence requirements on banks,
lessening their obligation to know their customers sources of
Avoid restrictions on correspondent accounts with overseas banks.
Continue doing business with foreign shell banks.
Shift as much discretionary authority as possible to the Secretary of
the Treasury, where further lobbying could limit requirements even
According to In These Times:
[Shell banks] are used to hide and launder perhaps billions of dollars a
year. Citibank is the only major bank in the United States that admits
to having shell banks as clients, and it doesn t want to give them up,
says a congressional staffer. . . . Citibank is the most active bank trying
to gut the ban on shell banks, and the American Bankers Association is
trotting behind them. Richard Small, director of Citibank s
anti money laundering department, lobbied the House and Senate
committees to insert an exception that would allow U.S. banks to work
with shell financial service companies. . . . 21
In late October 2001, the fate of money laundering abatement provisions
hung in the balance. Senator Levin made this issue his personal crusade,
joining forces with Senators Grassley, Kerry, Sarbanes, and others to
ensure that anti money laundering measures were included in the Patriot
Act. The issue, after years of frustrating delays, carried.
I have referred to October 2001 as the ugliest period in the history of
anti money laundering efforts. How the biggest banks in New York, following
the city s most tragic event, a shattering experience for the whole of
America, could go to Washington and argue against tougher anti money
laundering provisions directed in good part at terrorists is for me unfathomable.
Together, they should have done just the opposite. They should
have gone to Washington to say we are here to work with you to take all
possible steps to see that our banks and the U.S. financial system are not
used by terrorists. Yes, this means increased due diligence and tougher
controls on correspondent bank accounts. Yes, this means no more shell
Magnitudes and Misunderstandings 179
banks and no more secret offshore entities. It s the security and safety of
our nation first, and it s our bottom line second. We re here to help in
every conceivable way.
In the weeks following 9/11, Citibank, arguing vehemently against key
aspects of the Patriot Act, vividly demonstrated its lack of perspective and
patriotism. The relatives of the victims and, more broadly, the people of
New York deserve an apology from Citigroup s highest executives.
Now, for the Patriot Act itself. Covering such areas as domestic surveillance
and security procedures, border protection, coordination of investigations,
improving intelligence, and strengthening criminal laws, its
longest section is Title III, known as the International Money Laundering
Abatement and Anti Terrorist Financing Act. Key anti money laundering
provisions of this section are briefly summarized in the box on
page 181. Clearly, the Patriot Act is the most comprehensive and important
piece of anti money laundering legislation adopted in years. Belated
as it may be, it requires better identification of account holders, extends
the range of financial institutions that must set up programs, suggests the
need for better customer due diligence, begins to address concentration
accounts, criminalizes handling the proceeds of foreign corruption, takes
shell banks off the table, forces hawaladars to register, and offers sweeping
definitions of terrorist acts and resources. In the minds of some people
this caps three decades, since the Bank Secrecy Act was passed in 1970, of
great progress on the anti money laundering front.
I do not agree that great progress is anywhere evident. The distinction
that has to be made is between efforts and results. I wrote the following
in the November December 2001 issue of Foreign Affairs: The
proper measure of success is not the level of well intentioned activity but
how many billions of fraudulently acquired dollars are prevented from
being legalized. 22
So the question is, what are the results of now 35 years of anti money
laundering efforts Or, what is not included in the legislation of the United
States, European Union countries, and other states that still sustains the
level of criminal, corrupt, and commercial dirty money I am writing about
How can a trillion dollars a year or more of illicit funds, despite all the
laws we have passed and programs we have set up, still move with ease and
abandon around the globe
180 CAPI TA L I S M S AC H I L L E S H E E L
Magnitudes and Misunderstandings 181
Requires all U.S. financial institutions to establish anti money laundering
programs, not only banks but also securities dealers, insurance companies,
credit card companies, investment companies and money transmitters.
Requires securities brokers and dealers to submit suspicious activity reports,
and authorizes the Treasury Department to extend this provision to other
types of financial service businesses. (Sec. 350)
Requires U.S. financial institutions to establish procedures for verifying
the identity of any person seeking to open an account, but gives the
Secretary of the Treasury authority to allow exemptions from this provision.
Requires enhanced due diligence when opening and operating accounts
for wealthy foreign private bank clients, including enhanced scrutiny of
accounts for foreign political figures and their families. (Sec. 312)
Authorizes the Treasury Department to take actions against any foreign
country, financial institution, or other entity deemed to be of primary
money laundering concern, including prohibiting U.S. banks from doing
business with named offenders. (Sec. 311)
Allows the U.S. government to seize from a U.S. correspondent bank account
an amount equivalent to terrorist or criminal funds deposited in a foreign
bank account. (Sec. 319)
Bars banks and securities firms operating in the United States from providing
U.S. correspondent accounts to serve foreign shell banks, that is, a foreign
bank that does not have a physical presence in any country. (Sec. 313)
Authorizes the Treasury Department to prohibit financial institutions from allowing
clients to direct transactions . . . through . . . concentration accounts,
as were used to route Raul Salinas s millions out of Mexico. (Sec. 325)
Makes the act of smuggling bulk cash, above $10,000, a criminal offense.
Criminalizes handling the proceeds of foreign bribery of a public official,
or the misappropriation, theft, or embezzlement of public funds for the
benefit of a public official. (Sec. 315)
Makes it a criminal offense to operate an unlicensed money transmitting
business. At last report, some 18,000 money service businesses and
hawaladars have since registered in the United States. (Sec. 373)
DIRTY MONEY IS ON THE RISE
No one I have ever talked to thinks dirty money is declining or that
anti money laundering efforts are stemming the global tide of illicit proceeds.
Indicators point in the opposite direction:
Nonbank private sector deposits outside countries of origin are rising,
as said earlier, a portion of which is illegal.
Offshore assets in tax havens and secrecy jurisdictions are rising, as
shown by the Merrill Lynch/Cap Gemini and Celent studies.
Private banking assets continue to rise, far faster than the rate of
growth in global GDP. Again, some of this is legal and some is tax
evading, and every private banker on the planet willing to speak honestly
knows this statement is correct.
Global crime has exploded over the past 20 years or so, according to
all respected studies. As said earlier, the ease with which dirty money
moves across borders is a major driving force.
The prices of illegal drugs are stable, despite all the anti money
laundering efforts devoted to this particular source of revenue over
the past 35 years. If long term anti money laundering efforts
should work anywhere it should be here, on the supplies and prices
of drugs, and there is not any believable evidence that drug prices
are up or drug profits are down because money laundering costs
182 CAPI TA L I S M S AC H I L L E S H E E L
Criminalizes smuggling or export control violations of munitions and
firearms. (Sec. 315)
Broadens anti terrorism statutes to include biological, chemical, nuclear,
and cyber attacks against persons or properties, public or private. (Sec.
808) Criminalizes conspiring with, supporting, harboring, and concealing
terrorists. (Secs. 803 and 811) Identifies terrorists assets as all assets, foreign
or domestic . . . acquired or maintained by any person with the intent
. . . of supporting, planning, conducting or concealing an act of domestic
or international terrorism. (Sec. 806)
Global corruption probably has not yet turned down, despite a
decade of concerted effort.
Abusive transfer pricing by corporations that break laws of tradingpartner
countries has become normalized, used by tens of thousands
of global businesses.
The flow of tax evading money out of the richer countries into tax
havens has soared.
The torrents that have come out of Russia and other countries of the
former Soviet Union and China are probably the largest illegal flows
ever seen, as discussed in Chapter 3.
We seem to be failing across the board. Are there any bright spots at all
Yes, the pursuit of terrorists financing is a bright spot. Which indicates what
can be accomplished given political will to tackle at least an element of the
dirty money problem in a determined manner.
CHASING TERRORISTS MONEY
When 9/11 occurred, there was nothing, absolutely nothing in place to go
after terrorist financing, according to David Aufhauser, at that time general
counsel at the U.S. Treasury Department.23 Two years later, following his
leadership as chairman of the National Security Council s no name committee
on terrorist financing, he was able to say: In broad strokes, Al
Qaeda is two thirds less rich than they were when we started. The budget is
one third of what it was when we started. 24
It wasn t anti money laundering procedures that accomplished this; it
was just the opposite post money laundering procedures. U.S. authorities
looked for and found the hijackers financial transactions prior to 9/11 and
then traced the transactions to the persons, companies, banks, and charities
that had assisted them. This was an after the fact exercise, entirely different
from the before the fact efforts on which anti money laundering is built.
Following the money trail means we will freeze the accounts of people
whom we suspect are involved in terrorist financing, if we are lucky enough
to know their names. 25
Three days after 9/11, President Bush activated the Foreign Terrorist
Magnitudes and Misunderstandings 183
Asset Tracking Center within the Treasury Department, a unit that had
been authorized by Congress the preceding year but had never gotten underway.
Months later, due to bureaucratic infighting, this activity was
shifted to the CIA. Also launched immediately after 9/11 was Operation
Green Quest, headed by the U.S. Customs Service and directed to block
and seize Al Qaeda and other terrorist funds.26 Ten days later the United
States froze the assets of Osama bin Laden and 26 other individuals and organizations.
Additional names were quickly put on the list: 39 in October,
84 more in November, and the process continued until it now includes
nearly 400 entries.
Extending the list comes from old fashioned investigative work. One
transaction leads to another. One bank account leads to another. The same
thing is true of credit and debit card purchases, wire transfers, ATM transactions,
airlines tickets, hotels, rental cars, and more. The majority of transactions
can be traced from place to place simply by sifting through financial
documents and computer files.
As Customs grabbed the limelight, FBI officials chafed. Serious contention
arose between the two, a battle that had to be settled in a carefully
negotiated memorandum signed in May 2003 by the secretaries of Justice
and Homeland Security, designating the FBI as the lead agency in investigating
terrorist financing. Customs and the FBI shared personnel, and coordination
problems finally began to ease.
By 2004 there were more than 25 departments, agencies, and offices of
the U.S. government chasing after, blocking, and deterring terrorist financing.
27 What was accomplished by this massive effort More than 1,400 accounts
containing some $136 million accumulated by terrorists for years
were frozen worldwide, according to recent U.S. reports.28 A United Nations
Monitoring Group offered a different figure: $75 million frozen by 21 countries.
29 Whatever the correct amount, seizures of such magnitudes put a
crimp in the style of Al Qaeda and other terrorists.
The United States and cooperating countries can give themselves a light
pat on the back for taking some portion of terrorist funds out of the legitimate
financial system. But let us be quite clear about this. The United States
has focused an enormous amount of attention on terrorists money and has
spent hundreds of millions, if not billions, of dollars in the hunt. This has
been directed at the smallest part of the dirty money problem. Out of the
global total of roughly $1 trillion annually, terrorists funds at their height
184 CAPI TA L I S M S AC H I L L E S H E E L
may have been only some $15 million to $50 million annually. Even at the
higher number, this is 0.005 percent of the $1 trillion dirty money total. In
other words, with the bulk of our efforts concentrated on the smallest part
of the problem, we have had some success. And the dedicated people who
have achieved this much, especially David Aufhauser then at Treasury, merit
our sincerest thanks.
But the task is nowhere near complete. The UN Monitoring Group s
critique underlines the seriousness of the ongoing problem:
Al Qaida continues to have access to funds through charities and deep
pocket donors, and from business and criminal activities, including the
drug trade. Extensive use is being made of alternative remittance systems
and cash couriers. Al Qaida has shifted much of its financial activity
to areas in Africa, the Middle East, and South East Asia where
authorities lack the resources or the resolve to closely regulate such activity.
There are also indications that a number of entities and persons
that have been designated on the list are still able to continue their
funding activities, using trusts, front companies and other arrangements
to veil their assets and activities. The [UN Monitoring] Group remains
concerned that Al Qaida, the Taliban, and those associated with the
network are still able to obtain, solicit, collect, transfer and distribute
considerable sums to support their ideological, logistical and operational
The use of shell companies and offshore trusts to hide the identity
of individuals or entities engaged in the financing of terrorism . . .
make[s] it difficult to locate and deal with terrorist related financial assets.
. . . [S]hell companies, offshore trusts and other beneficial ownership
arrangements have allowed [terrorists] to circumvent the full
application of the measures set out. . . .31
In summary, with a huge expenditure of investigative and legal time and
money concentrated like a laser beam on 0.005 percent of the dirty money
problem, which moves through the same mechanisms available to drug dealers,
racketeers, despots, and tax evaders, Al Qaeda remains in the dirtymoney
Why, despite all our efforts I ll tell you, in the context of why dirty
money flows around the globe with such ease.
Magnitudes and Misunderstandings 185
ILL INTENTIONED LOOPHOLES
Suppose a U.S. banker or businessperson with a range of financial services to
offer goes abroad to call on potential customers. Let s say the first stop is Singapore.
Here, a wealthy individual says to the visiting American: I m a businessman.
I make my money by smuggling aliens men, women, and
children out of western China and southern Russia and putting them into
the sex trade and into low wage jobs in Thailand, Malaysia, Korea, Taiwan,
and Japan. I have a great deal of money on deposit here in Singapore, but I
would prefer to have it in the United States, managed by a firm such as
yours. Can you take it
The American looks over the list of prohibited sources of funds coming
into the United States, finds that alien smuggling out of and into foreign
countries is not on the list and warmly replies, Of course, sir; we would be
delighted to receive and manage your money.
Going further with this example, suppose that when these aliens are
smuggled out of China and Russia, they are required to bring illegal drugs to
their destination countries. And suppose that these illegal drugs are supplied
by Al Qaeda. Now, our wealthy individual in Singapore is an admitted alien
smuggler and an unadmitted drug smuggler and terrorist facilitator, and he s
about to do business with the financial services industry in the United States.
How can this be Very simply because the United States has two different
lists of funds prohibited under anti money laundering legislation, one a
very long list of proceeds arising from crimes committed inside the country
and the other a very short list of proceeds arising from crimes committed
outside the country. The domestic list includes some 200 specified unlawful
activities, meaning that if you knowingly handle the proceeds of these
activities, you have committed a money laundering offense. The foreign list
has only a few specified unlawful activities, focused on drugs, corruption, violence,
terrorism, and certain treaty violations.
This is the most important point in the dirty money issue, this difference
between what is criminalized if it occurs inside a country s borders and
what is criminalized if it occurs outside a country s borders. Table 4.5 summarizes
the differences between onshore and offshore specified unlawful activities
under U.S. anti money laundering law. The criminal activity
indicated usually involves several variations but for purposes of brevity all
are included under the general heading. An X means that handling such
186 CAPI TA L I S M S AC H I L L E S H E E L
Magnitudes and Misunderstandings 187
TABLE 4.5 SPECIFIED UNLAWFUL ACTIVITIES UNDER U.S. ANTI MONEY
If Committed If Committed
Criminal Activity in US Outside US
Aircraft piracy X
Alien smuggling X
Arms export X
Bank fraud X X
Bank robbery/burglary, gov. property X
Bank Secrecy Act crimes X
Bankruptcy fraud X
Bribery X X
Computer crimes X
Congressional/cabinet assassination X
Conspiracy to kill, kidnap, maim, injure X
Copyright infringement X
Counterfeiting and forgery X
Customs crimes X
Destruction of aircraft X
Destruction, explosive/fire, gov. property X
Embezzlement and theft X X
Emergency Economic Powers Act crimes X
Export crimes X X
Extortion and threats X X
Extortionate credit transactions X
Food stamp crimes X NA
Foreign Agents Registration crimes X
Foreign corrupt practices X X
Fraud and false statements X
Health care fraud X
Kidnapping X X
Mail fraud X X (thru US)
Mail theft X
Malicious mischief X
Murder on federal facility X
Murder, foreign officials/protected persons X X
188 CAPI TA L I S M S AC H I L L E S H E E L
TABLE 4.5 (Continued)
If Committed If Committed
Criminal Activity in US Outside US
Murder, U.S. employee X X
Narcotics offenses X X
National resource conservation X
Obstruction of justice X
Ocean dumping X
Passport/visa crimes X
Peonage and slavery X
Presidential violence/kidnapping X
Prohibited nuclear materials transactions X
Securities fraud X
Sexual exploitation, children X
State felonies X NA
Tariff Act crimes X
Terrorism X X
Threatening/injuring federal official family X
Trading with the Enemy crimes X
Trafficking contraband cigarettes X
Trafficking in counterfeit goods X
Trafficking in stolen property X
Transportation for illegal sexual activity X
Treaty violations requiring extradition NA X
Unauthorized sound/video recordings X
Union/labor mgt. embezzlement X
Unlawful citizenship X
Violence at international airports X
Violence, maritimes navigation/platforms X
Water pollution X
Wire fraud X X (thru US)
Source: Information in Table 4.5 is drawn from Alert Global Media, Inc., in Miami, Florida, with
their permission, and supplemented with additional legal research. For more than a decade, Alert
Global Media, publisher of Money Laundering Alert, has done an outstanding job of tracking laws
and conducting conferences and training seminars, drawing attention to money laundering issues.
Most prominent in this effort have been Charles Intriago and Saskia Rietbroek Garces. Through
their programs, thousands of anti money laundering specialists have been trained in the United
States, Latin America, and Europe.
funds violates U.S. anti money laundering laws. A blank space means that
handling such funds does not violate U.S. anti money laundering laws.
As the right hand column shows, there are a great many more open
holes than closed avenues if the money is coming from abroad. Profits from
alien smuggling by our Singapore based businessman are right up there on
the legal list. Also not illegal are proceeds arising from crimes such as racketeering,
securities fraud, credit fraud, forgery, counterfeiting, trafficking in
counterfeit and contraband goods, trafficking in stolen property, loan sharking,
protection rackets, advance fee fraud, asset stripping, foreign money
laundering, sexual exploitation, prostitution, slave trading, and much more.
And tax evasion Forget that one. The United States is wide open to just
about every dollar of foreigners tax evading funds that can be found.
Compared to the United States, some other western countries are more
open to dirty money and some are less open, and variations in laws are far
too extensive to comment upon in depth here. Suffice it to say that no country
puts the full range of dirty money on its list of laundered money.32
Take just tax evading money as an example; these proceeds flow illegally
out of every developing and transitional economy into every major western
economy I have ever researched. The following testimony is revealing: Private
bankers go to foreign countries to recruit capital flight and to meet with the
clients who have taken billions of dollars out of the countries. . . . [R]egarding
the tax issues and the laws of the foreign country, . . . it is best not to ask those
questions of the client because it is not our responsibility . . . if the client is
complying with . . . any laws within their country. . . . Basically it is that we
don t want to know. . . . 33 In other words, the easiest thing for criminals to do
is make their criminal money look like it is merely tax evading money, and
when they do it passes readily into foreign economies.34
The fact is that laundered proceeds of drug trafficking, racketeering, corruption,
and terrorism tag along with other forms of dirty money to which the
United States and Europe extend a welcoming hand. These are two rails on
the same tracks through the international financial system. Holes intentionally
left in anti money laundering laws provide a road map to foreigners, showing
them how to relabel their money in order to get it into the western financial
system. This is the reason western countries, by their own estimates, have better
than a 99 percent failure rate in stopping deposits of laundered money.35
When we remain legally open to many forms of dirty money we do want, we
remove the possibility of successfully curtailing a few forms of laundered
Magnitudes and Misunderstandings 189
money we don t want. The global anti money laundering regime has indeed
grown, but it remains ineffective because it is narrowly defined, easily circumvented,
and poorly enforced.
The linkage, the synergy, the similarity among all forms of dirty money
is not widely understood in western business and government circles. It is
clearly understood by every drug kingpin, criminal syndicate head, and terrorist
The idea at the core of U.S. and European thinking about illicit money is
flawed. The idea that we can successfully protect ourselves from a narrow range
of dirty money we think hurts us, while at the same time cultivating a much
broader range of dirty money we think helps us, is fundamentally unworkable.
The situation is far worse than simply holding open the bank vaults to
dirty money in its various forms. We re not passive; we re active in this pursuit.
Western banks solicit, transfer, accumulate, and manage dirty money in
the trillions of dollars, raking in hundreds of billions every year. The tension
between anti money laundering compliance and bringing in business is no
contest. New bank deposits, private accounts, and fee services win nearly
every time. When knowledgeable experts on these matters get together, they
often talk about how anti money laundering regimes are designed, first, to
offer financial institutions plausible deniability when caught with laundered
money and only secondarily to avoid actually receiving dirty money.
Western corporations divert profits out of many countries where they
are in business, including where they are headquartered. An entire structure
has been created, as laid out in the Dirty Money User Manual, that facilitates
that guarantees! illicit financial flows. This structure consists of
dummy corporations, tax havens, secrecy jurisdictions, shielded trusts,
anonymous foundations, flee clauses, falsified pricing arrangements, fake
transactions, disguised transfer techniques, and more, which I have been
writing about. And this structure and the trillions of dollars it shelters and
shifts is without question the biggest loophole in the free market system. A
brief review of its size is appropriate. On this subject, reality resides in grasping
the enormity of the problem:
More than 60 tax havens and secrecy jurisdictions spread across the
More than a million dummy corporations shielding their owners
190 CAPI TA L I S M S AC H I L L E S H E E L
Some $17 trillion lodged in private banks catering to tax evasion.
Assets of $11 trillion or so parked offshore, outside the reach of
In the Cayman Islands itself, foreign deposits of more than $1 trillion.
Cross border dirty money flows estimated at $1 trillion a year, with
half $500 billion a year coming out of poorer countries.
Hundreds of billions of dollars in lost tax revenues for rich and poor
Drug dealers, racketeers, thugs, kleptocrats, terrorists, and corporate
CEOs using precisely the same structures.
By some accounts, half the world s money sitting in or passing
through systems designed to handle illicit proceeds.
This structure is capitalism s darkest accomplishment. How did we
get here We created this parallel system that operates largely beyond the
rule of law. It therefore needs to be better understood. I address two aspects
of the structure s origins and supports. First, tax havens and secrecy
jurisdictions bringing money into western banks, and second, falsely
priced transactions shifting revenues and avoiding taxes for multinational
HAVEN AND SECRECY STRUCTURE
The Swiss, profiting off hot money in Europe, sanctified bank secrecy:
Threatened by the depression of 1929 and in particular by the series of
bankruptcies in Austria and Germany in the early 1930s, the Swiss financial
industry managed to persuade Swiss authorities to adopt the
stricter principles of bank secrecy. In an amendment to the Swiss Banking
Law of 1934, for the first time in history the principle of bank secrecy
was put under the official protection of the penal law. It became a
criminal offense for bank officials to divulge any information regarding
a customer s identity, even to the Swiss, and the protection was extended
to foreign nationals as well.36
Magnitudes and Misunderstandings 191
The British sanctified the separation of place of incorporation from
place of business:
The precedent for this was the 1929 case of the Egyptian Delta Land
and Investment Co., Ltd. v Todd. It was demonstrated that although the
company was registered in London, The business of the company was
entirely engaged and controlled from Cairo where the directors and secretary
permanently resided [and] the seal, minutes, and books of accounts
and transfer were kept. . . . Companies could now incorporate
in Britain but avoid paying British tax. The ruling of the British courts
proved significant because it laid down the rule not only for the United
Kingdom but also for the entire British Empire, a point later exploited
by jurisdictions such as Bermuda and the Bahamas and perfected in the
1970s by the Cayman Islands.37
Now, combine bank secrecy protected by national law together with incorporation
separated from activity, add in silent directors, nominee shareholders,
secret trust accounts, veiled foundations, and disguised financial
transfers, and you the get the modern dirty money system that significantly
obscures global capitalism today.
Not all uses of tax havens and secrecy jurisdictions are illegal. But this is
partly because the law in these places can be bought. Sovereignty, or autonomy,
gives you the right to package and market deviations from commercial
and financial norms the right to write laws. 38 What is legal is commercialized
by authorities and sold as a product. Many havens and enclaves are
niche players in this business of legalizing subterfuge. Tax lawyers go treaty
shopping for the most favorable legislation protecting certain types of activities.
What they often find is that laws are highly flexible and minimal tax
rates are further negotiable. For example, an economic adviser to Jersey, one
of the Channel Islands, recalls that a major European bank that had a registered
Jersey international business corporation negotiated how much profit
it would declare for its registered business (œ60 million), and how much tax
it would pay (0.5 percent). Such meetings were not uncommon and were
conducted in complete secrecy. 39
As one economist put it: The value added component of a transaction
being routed through, for example, the Cayman Islands, does not lie with
192 CAPI TA L I S M S AC H I L L E S H E E L
any intellectual or other activity performed in Georgetown, Grand Cayman.
It lies instead in the tax benefits or in the secrecy space afforded by routing
the transaction through the offshore circuits. Without such offshore spaces
there is no economic reason to divert a transaction through a tax haven en
route to a large capital market. 40 And as another commentator cogently observed:
[T]ax havens as states . . . have learned to use their legislative capacities
as baits to attract business into their jurisdictions. Such apparently
rational arrangements between states and private operators are . . . deeply
disturbing, not least because the two parties to the exchange, one of them a
sovereign government, handle highly charged . . . issues . . . in purely utilitarian
terms. The willful misuse of ideas and practices that go to the heart of
the legitimacy of the modern state . . . is the most disturbing aspect of the
tax haven phenomenon. 41
There are some uses of tax havens and secrecy jurisdictions that have become
routine and at the same time risky.
Much of what is called offshore banking is the business of borrowing
money from nonresidents and lending money to nonresidents.
Major banks participate in this from offshore entities, in order to
avoid the bank reserve requirements that would apply onshore. Ultimately,
the risk of this activity conducted without reserves is borne
by the home institution, its central banker, and the taxpayers of the
Offshore investment funds are unregulated. They often take gambles
that are not fully disclosed and keep books in ways that would not be
acceptable onshore. The most threatening element of their operations
is the ability to leverage and hedge investments in unsupervised
ways. Long Term Capital Management came close to collapse in
1998, posed a major risk to global financial stability, and was rescued
through intervention of the U.S. Federal Reserve Board.
Concealing liabilities in tax havens has become big business. Structured
finance often makes use of offshore special purpose entities to
shield debt, in deals that draw close to or become criminal frauds.
With this technique, Enron produced the biggest corporate failure in
Magnitudes and Misunderstandings 193
Leasing through tax havens is an area of quasi legal double dealing.
Special purpose entities established in some tax havens can facilitate
full depreciation on leased assets for both lessor and lessee.
In short, tax havens and secrecy jurisdictions permit operations outside
the rule of law and outside the process of regulation. This benefits the generators
and facilitators of criminal, corrupt, and commercial dirty money far
more than it benefits the legitimate capitalist system.
Banking communities in the United States and Europe strongly support
the dirty money structure, most especially the operation of tax havens and
secrecy jurisdictions.43 For them, this system serves to feed a good part of the
estimated half trillion illegal dollars a year coming out of nonwestern countries
into western coffers. And it provides a cover story for this inflow, that
is, much of the dirty money arrives through this semi legitimizing intermediary
beyond western borders, allowing western banks to claim ignorance of
its origins. And, as a banker said to me concerning his Cayman Islands unit,
it enables his institution to accommodate corporate clients for staff payments,
tax evasion, transfer pricing, etc. 44
No one should think for a moment that the West is an innocent victim of
vile machinations by drug kingpins, crooks, and tax evaders from other countries.
No; this system was developed in the West and advanced by the West,
and it serves what some people think are purposes beneficial to the West.
FALSIFIED PRICING STRUCTURE
The second major piece of the edifice supporting cross border dirty money
is falsified pricing and the extent to which this practice has become so widespread
and out of control. It is a complex subject that engages the attention
of thousands of officials, lawyers, and executives. Broadly speaking, individual
particularly western nations attempt to protect their own revenues
while avoiding protection of other nations revenues. By eschewing the second
responsibility, the United States and Europe make it much more difficult
to achieve the first responsibility. I boil it down to its essentials.
No country ever takes notice of the revenue laws of another. 45 So said
Lord Mansfield in 1775 in England. This was at a time of growing competition
between England and continental Europe and coincided with Adam
Smith s completion of Wealth of Nations, which appeared the following year.
194 CAPI TA L I S M S AC H I L L E S H E E L
Ever since, Mansfield s judicial opinion has been known as the revenue
rule, which means that it is not the duty of one nation to enforce the tax
regulations of another nation. With this as common law, incentives for tax
evasion via falsified pricing and revenue havens steadily grew.46
In the United States, the 1928 Revenue Act gave the Secretary of the
Treasury the power to allocate income between related parties as necessary to
record accurately the tax that should accrue to each party. Section 482 of the
Internal Revenue Code reflects this as follows: In any case of two or more
organizations, trades, or businesses . . . owned or controlled directly or indirectly
by the same interest, the Secretary may distribute, apportion, or allocate
gross income, deductions, credits or allowances between or among
[them] if he determines that such distribution, apportionment, or allocation
is necessary in order to prevent evasion of taxes . . .
Regulations adopted in 1934 applied the arms length rule to transfer
pricing decisions, requiring businesses to price transactions between related
entities as they would with an unrelated third party. Methods for testing
arms length pricing were laid out in 1968 regulations, which also extended
application of transfer pricing rules to services and intangibles.
For the next 20 years, the U.S. Congress watched as U.S. corporations
shifted revenues from imports and exports of both tangibles and intangibles
into low tax jurisdictions. This led to the Tax Reform Act of 1986 and additional
temporary and final regulations in the 1990s, which together multiplied
the ways in which arms length transfer pricing could be calculated.
These various methods are now referred to as cost plus, resale price, comparable
profit, profit split, comparable uncontrolled price, comparable adjustable
transaction, matching transaction, and more.
Not only was Congress concerned about U.S. businesses shifting
taxable profits out of the United States, it was also angered to find that
U.S. subsidiaries of foreign corporations were doing likewise. The GAO
completed a study in 1992 that found that, for the year 1986, foreigncontrolled
corporations in the United States reported sales of $543 billion
and losses of $1.5 billion, possibly because of inappropriate transfer
pricing practices. 47 Continuing this line of investigation, a 1999 GAO
report covering the period 1989 1995 found that, among some 60,000
foreign controlled corporations, an average of 70 percent paid no taxes
during the period.48 Yet another GAO report in 2004, covering the period
1996 2000, put the foreign nonpayers at 71 percent.49
Magnitudes and Misunderstandings 195
Of course, U.S. corporations cannot afford to be outdone by their foreign
competition. So they, too, curtailed paying taxes. In the 1989 1995 period,
60 percent of U.S. corporations were nonpayers, rising by 2000 to 63
percent, including some of the country s largest multinationals.50
Quite simply, using abusive transfer pricing techniques, often combined
with tax havens and secrecy jurisdictions, many U.S. and foreign corporations
operating in the United States ceased paying taxes. Profits were at alltime
highs, but never mind. For some European countries, corporate tax
bases have been similarly eroded. In other words, the methods developed in
the West, intended at first to pull money out of developing and transitional
economies into western coffers, have now come back to bite us taking
money out of western economies into the global netherland and slashing tax
revenues in the process.
Now, consider abusive transfer pricing from a different angle: whether
it s criminal. This should be a key question for thousands of officers and
managers in multinational corporations. I set up a typical situation in the
United States. Laws of many other countries are similar.
Suppose your company has an established manufacturing subsidiary in,
for example, Malaysia. In connection with new products to be produced
there, new materials are to be shipped from the United States. Operating
profits are high in the United States, and taxes are low in Malaysia, because
you still have a couple of years to run on the tax incentives given to establish
your business in Kuala Lumpur. Malaysian customs duties on the imports
will be 15 percent. Given these factors, a decision is made to shave profits in
the United States by selling the new supplies at a low price to the subsidiary.
You and several colleagues meet to discuss the matter and decide on charging
60 percent of the price at which the same items are sold to several other
subsidiaries around the world. This price may not even cover all production
costs in your U.S. plant. Commercial invoices are prepared, shipping documents
drawn, the subsidiary is advised by telephone what the price will be,
papers are mailed to Kuala Lumpur, the items arrive, and payment is wire
transferred to the parent company. These kinds of conversations, decisions,
communications, and financial arrangements are common in thousands of
companies every day.
Key elements of this scenario include: agreement to lower U.S. taxes,
substantially variant transfer pricing, use of mails and wires, and depriving
Malaysia of customs duties.
196 CAPI TA L I S M S AC H I L L E S H E E L
Does this transaction violate U.S. laws, specifically laws dealing with:
schemes to defraud, mail fraud, wire fraud, filing a false customs declaration,
or general false statements
Both statute law and case law need to be considered. Transfer pricing
occupies a central position in global tax evasion and money laundering, and
a few of the regulations and cases bearing on this need to be touched upon.
Scheme to Defraud
General elements of a common law action for fraud and deceit require a
false representation of a material fact, with knowledge of the false representation
that someone relies upon as true and acts upon to his or her detriment.
The decisive element to determine the existence of a scheme is not the
number of participants but whether the scheme had the ability to deceive.51
The general conspiracy statute (18 U.S.C. 371) makes it an offense If two
or more persons conspire either to commit any offense against the United
States, or to defraud the United States, or any agency thereof in any manner
or for any purpose . . .
It is a federal crime (18 U.S.C. 1341) for anyone to use the U.S. mail in
carrying out a scheme to defraud. The law states in part, Whoever, having
devised or intending to devise any scheme or artifice to defraud, . . . places
in any post office or authorized depository for mail matter, any matter or
thing whatever to be sent or delivered by the Postal Service . . . in furtherance
of that fraud has committed an offense. While use of mails in the conduct
of a scheme to defraud appears to be clearly laid out, mail fraud is not
commonly applied in cases with extraterritorial jurisdiction.
In 1956, Congress amended the wire fraud statute (18 U.S.C. 1343) to
include foreign commerce. The law has been applied to cases that occurred
in the United States, wholly outside the United States, and to
money laundering cases where transfers were routed, however fleetingly,
through the United States. Application of wire fraud to situations that
Magnitudes and Misunderstandings 197
deprive a foreign government of revenues is problematic and will be discussed
under case law next.
Filing a False Customs Declaration
Imports into and exports out of the United States have to be accompanied
by a customs declaration, which states the classification and value of
the items. When a company has a normal price of 1X and then trades
overseas sometimes at 0.1X and sometimes at 10X, you would think
somewhere, someone is filing a false Customs declaration. How can
$0.10, $1.00, and $10.00 all be accurately stated prices for the same
thing Well, because the U.S. Customs is not altogether clear on this subject.
First, Customs law is focused primarily on imports and the collection
of customs duties on imports. Customs officials say that applicable
regulations apply equally to exports, but for decades Customs has looked
the other way as U.S. exporters build kickbacks into export prices in order
to facilitate capital flight coming out of developing countries and into
the United States. Second, Customs defines value as transaction value,
meaning the price actually paid or payable for the merchandise. Customs
then goes on to modify this by stating that transaction value is acceptable
only when the relationship between the buyer and seller did
not influence the price actually paid or payable. 52 This is the arms length
standard discussed earlier. But Customs seldom uses its extensive database
to ask questions of corporations that export at 0.1X, 1X, 10X, or other
levels of variation. Third, Customs hides behind Part 764.2(g) of its Export
Administration Regulations, which states that No person may make
any false or misleading representation, statement, or certification . . . in
connection with export documentation. The potential power of this is
undercut when price, no matter what it is or how much it varies, is taken
as transaction value.
General False Statements
The submission of false documents to Customs constitutes a legal violation
(18 U.S.C. 1001). Because Title 18 of the United States Code does not
contain a specific statute making it a crime to file false Customs declarations
for exports, such activity can probably also be successfully prosecuted under
198 CAPI TA L I S M S AC H I L L E S H E E L
this general false statements statute.53 Customs has shown little inclination
to do so.
As for the example of underpriced exports from the United States to
Malaysia, three conclusions are suggested by these five sets of statutes. One,
you may very well be committing a felony offense under one of the preceding
laws by participating in this or a similar transaction. Two, the U.S. Customs
has not exhibited any interest in pursuing you. And three, you have to
decide whether you really want to be or risk being a felon, despite the fact
that law enforcement is currently weak.54
Robert Leo, writing in International Law Practicum, does not hedge at
all: U.S. laws on exports require the proper value of the export be declared
on the Shipper s Export Declaration (SED) and prohibit the filing of false
documents with Customs and the Bureau of Census. . . . In the U.S., a
party s intentional misdeclaration of the amount paid for the goods, whether
for import or export purposes, is considered civil fraud and may be pursued
as a criminal offense, as well. 55
Law is also evolving on the question of cheating foreign governments out of
revenues. This could be the point on which the Malaysian transaction and millions
of other falsified pricing arrangements eventually get serious attention from
western governments. The centuries old revenue rule, giving comfort to courts
deciding that a foreign nation s revenues are an inadmissible issue, is under attack.
Three U.S. circuit courts in recent years have addressed the revenue rule
in cases involving wire fraud and Canada. Additional cases will no doubt
continue to arise, as this issue works its way toward resolution. Briefly, the
three cases are as follows:
United States v Boots. (1996) Tobacco was smuggled through two Indian
reservations in Maine by water into Canada, avoiding Canadian customs.
The First Circuit affirmed the revenue rule, deciding that a wire
fraud statute could not be applied to [a] foreign smuggling scheme. 56
United States v Trapilo. (1997) Liquor was smuggled from the St. Regis
Mohawk Indian Reservation in New York across the St. Lawrence
River into Canada, avoiding Canadian customs. The Second Circuit
looked past the revenue rule, asserting that, At the heart of this indictment
is the misuse of the wires in furtherance of a scheme to de
Magnitudes and Misunderstandings 199
fraud the Canadian government of tax revenue, not the validity of a
foreign sovereign s revenue laws. 57
United States v Pasquantino. (2003) Liquor was smuggled from Maryland
through New York into Canada, avoiding Canadian customs. The
Fourth Circuit, overruling an earlier panel, also looked past the old revenue
rule in order to vindicate the United States substantial interest in
preventing our nation s interstate wire communication systems from being
used in furtherance of criminal fraudulent enterprises. 58 This decision,
upon appeal to the U.S. Supreme Court, was upheld in 2005.
A careful review of these three circuit court rulings concluded as follows:
[C]ourts must conclude that Congress intended fraudulent schemes seeking
to evade foreign excise taxes to fall within the broadly established scope
of 1341 and 1343 [mail fraud and wire fraud statutes]. The misuse of
U.S. mails and wires in furtherance of an illegal operation transforms
schemes to defraud foreign governments of import duties into crimes
against the United States. 59
Crimes against the United States. Much the same thing can be said
about many other countries. Within the framework of mail fraud, wire
fraud, filing false customs declarations, and making false statements, enough
law exists to curtail substantially the very widespread practice of mispricing
in transactions between unrelated parties and abusive transfer pricing in
transactions between related parties. A senior Treasury Department lawyer
talking with me about available statutes said, With mail fraud and wire
fraud we can do anything we want to do. 60 When I asked him why the
United States chooses not to use these instruments to combat false pricing,
he hemmed and hawed and backed away from the subject. Because the business
of falsified pricing underlies so much of global capitalism and has
brought more money into western coffers than it has taken out, western nations
are reticent to attack the goose that lays the golden egg. The World
Trade Organization and the OECD get into the game with regulations and
guidelines, to little avail because the concept of reining in false pricing essentially
lacks support from its bigger members.61
The whole litany of mechanisms and structures false pricing, tax
havens, secrecy jurisdictions, dummy corporations, anonymous foundations,
flee clauses, money laundering techniques, legalized criminal inflows,
200 CAPI TA L I S M S AC H I L L E S H E E L
concentration accounts, and more moves trillions of dollars out of poorer
countries into western accounts and has begun to move billions out of taxable
western profits into distant sink holes.
The only question left to ask is why. And the answer is the simplest one
WE LIKE THE MONEY
The U.S. has supported this as a matter of policy. 62 A senior Treasury Department
official, after explaining the role of his unit in fighting money
laundering, was lamenting with me how much more difficult his task is
made by the door held open to many forms of illegal proceeds flowing out
of other countries into the United States.
Efforts to curtail flight capital would deprive U.S. banks of deposits.
There would be major pressure against it. 63 Another Treasury official was
confiding to me his lesson in political reality.
You should open a branch in the Caribbean to capture your fair share
of flight capital. 64 An executive vice president of a major West Coast bank
was passing on to me the advice he had received from a Treasury official.
A 2002 article in World Policy Journal put it as follows: Traditionally,
the U.S. Treasury has welcomed foreign money from any source to fill the
gap in the country s balance of payments. Only in the last years of the Clinton
administration did the Treasury begin to draw the line at laundered
money, and even then it was tentative, lest it impede global money flows
into Wall Street. 65
At this point, I want to reiterate what I said in the Prologue. I m all for
the free market system free trade, free currency convertibility, free movement
of capital. Provided it s legal! And that means legal in origin, movement,
and use legal at every point along the way. Legal money stays on the
books. Legal money serves legitimate trade and investment. Legal money is
properly taxed. Legal money fuels economic growth. Illegal money that is
criminally, corruptly, or commercially generated sneaks across borders and
hides in secret havens, often disappears from the books, undermines free
trade and investment, skips taxation, and reduces growth.
For the United States and Europe, the justification for encouraging and
facilitating the inflow of illicit money from abroad has been straightforward.
Magnitudes and Misunderstandings 201
We have been guided for many years by an implicit cost benefit analysis
suggesting that the receipt of such money is good for the United States,
good for Europe. It shows the strength of our economies. People in foreign
countries want to bring their money into our systems where they know it
will be safe and can grow. Succeeding administrations in the United States
and Europe have encouraged this view.
Supporters of dirty money have never subjected this issue to a real
cost benefit analysis. I outline some of what must be included in such an
appraisal and then at the end of this chapter lay down a challenge to others
who should delve into these same questions.
Dirty money brings hundreds of billions of dollars out of nonwestern countries
into western countries. My figure is a half trillion dollars a year, accumulating
to trillions lodged permanently in deposits, properties, and market
investments in Europe and the United States. The other half trillion out of
the trillion dollar annual flow circulates between western countries themselves
and cooperating tax havens. Some may feel that this is a benefit to the
West, contributing to maximizing private profit and reducing the role of
government. This is a dubious argument at best, and I record it only to
round out the case that others make for dirty money.
If a half trillion is supposedly a net gain to the West and another half trillion
may serve to discipline overreaching western governments, what is the
downside attached to these flows The costs can be seen in the impact on
both domestic and foreign interests of western countries. Domestically it
shields and thereby facilitates drug, criminal, and terrorist money passing
into the West. This voids anti money laundering as an effective instrument
in the fight against such perils, thereby weakening the ability of western
states to counter some of their most serious threats. And internationally it
undermines key foreign policy objectives of the United States and Europe in
poorer countries in Asia, Latin America, and Africa and in the former Soviet
Union and Eastern Europe. Together the damage done to the fabric of western
societies resulting from an appetite for dirty money is staggering.
202 CAPI TA L I S M S AC H I L L E S H E E L
Drugs. Decades into efforts to staunch laundering of drug money hasn t
made a dent in the availability or street price of drugs. Money laundering is
the reason drug dealers are in business. It s the end point of their game, and
it s almost 100 percent successful. The drug problem for the United States,
Europe, and now most other major countries absorbs resources, diminishes
productivity, foments local gang warfare, expands prison populations, exacerbates
racial tensions, contributes to social decay, and threatens generations
of urban and rural youth. It costs governments billions trying to counteract
drugs, but drug revenues flow easily into western accounts alongside other
forms of illicit proceeds.
Global Crime. Taking their cues from drug traffickers, other global criminal
syndicates have enjoyed excellent growth rates in recent decades. Crime
accepts no borders. Russian mafias, Chinese triads, Japanese yakuza, Nigerian
fraudsters, East European thugs, Sicilian mobsters, all have learned that,
while crime is occasionally violent and risky, money laundering is the easiest
aspect of the criminal enterprise. This accounts for organized crime s crossborder
reach, newfound cooperation, and phenomenal expansion.
Terrorism. Part of the responsibility for 9/11, Madrid, Bali, Nairobi, Dar
es Salaam, and many other terrorist attacks rests with the global system that
shields and facilitates flows of dirty money. Observing how drug dealers launder
their profits, the director of the U.S. Drug Enforcement Administration,
Karen Tandy, said at a Senate hearing where I also testified, The American
drug consumer is the single largest funder of terrorism . . . 66 And let me repeat
for the third time Osama bin Laden s own words: These are the very
flaws in the western financial system that are becoming a noose for it.
Corruption. Government officials the world over know that if they can
steal it, someone will shield it. The ill gotten gains may have to be loosely
disguised as a family business or nominee company, but there are plenty of
bankers who will take this or a similar subterfuge as quite sufficient explanation
for millions in deposits.
Failed and Nearly Failed States. Dirty money plays a huge role in Iraq,
Afghanistan, Pakistan, North Korea, Colombia, Liberia, Sierra Leone, Zimbabwe,
and other countries.
Magnitudes and Misunderstandings 203
Strained States. Hundreds of billions in cumulative outflows undermine stability
and progress in Russia, Ukraine, Kazakhstan, Belarus, Egypt, Nigeria, Angola,
Argentina, Venezuela, Indonesia, the Philippines, and many more
countries and could take a heavy toll on China and other transitional economies.
Severe Poverty. Foreshadowing Part II of this book, dirty money has an
enormously damaging impact on the poorer 80 percent of the world, taking
resources out of their countries.
Corporate Criminalization. In western countries themselves, thousands
of businesspeople participating in falsely priced transactions are placed in a
position of being, quite possibly, indictable for felony offenses. What are the
costs of criminalizing our own citizenry
Western bankers and businesspeople anxiously seek to hold on to parts
of the dirty money structure. Many bankers want to keep tax evading
money flowing out of other countries into western deposits. Many corporate
executives want to keep false pricing and tax manipulation as central features
of global enterprise. Still others want you to believe that these are minor, benign
parts of the dirty money equation. The argument is often made that it
is not our responsibility to enforce the tax laws and pricing laws of other
countries. While this is an important legal matter, it misses a much more
fundamental concern of western nations. Is it in our interest to break the tax
laws and pricing laws of other countries, and likely our own laws in the
process When we do, we promote lawlessness in international trade and finance.
This adds our hands to the mechanisms that move dirty money
around the world. This adds our hands to the techniques that sustain drug
dealers, racketeers, human traffickers, illegal arms merchants, despots, and
tyrants. This adds our hands to the methods that worsen poverty and deprivation
and produce failed states. And, disturbing as it may be, this adds our
hands to the instruments that enable terrorists to fly planes into the World
Trade Center and the Pentagon and into the ground in Pennsylvania, and to
blow up trains in Madrid and embassies in East Africa and nightclubs in Bali
and hundreds of other atrocities around the world.
Global capitalism is not to blame for the world s ills. But the way global
capitalism is practiced has become a contributing factor to global ills. The
hundreds of billions of dollars escaping illegally every year out of weaker
204 CAPI TA L I S M S AC H I L L E S H E E L
countries, amassing to trillions of dollars lodged in the most advanced nations
repositories, arrive at a punishing cost. What we have sown in the century
long business of moving corrupt and commercial dirty money we now
reap in the inflow of drug, criminal, and terrorist money.
I have referred to the annual flow of roughly a trillion dollars of dirty money
and the mechanisms and structures that facilitate such a flow as the biggest
loophole in the free market system. Yet, it is a loophole that many people, particularly
in western private sectors, particularly in countries that receive most of
this money, want to maintain. Now it s time for these people to step forward
and make their case for dirty money. The first of my three challenges, focusing
on the pervasive illegalities that characterize global capitalism, is as follows:
To: Western Business and Banking Communities
From: Capitalism s Achilles Heel
Subject: Challenge: Case for Dirty Money
Assume any reasonably developed estimate of illicit financial flows
passing (1) globally and (2) specifically out of developing and
transitional countries into western countries. Make the case that the
benefits of such flows or any part of such flows outweigh the costs. In
appraising such costs, take into consideration the impact that dirty
money has on what are generally considered to be major global
concerns, including: drugs, racketeering, human trafficking, illegal
arms dealing, transnational crime in other forms, terrorism,
corruption, tax evasion, poverty and failed states, plus the potential
criminalization of corporate personnel. Produce the requested study
for western countries in general or for your country in particular.
The challenge calls for works supporting the idea that dirty money or
any part of it is good for the West or any country in the West. If the implicit
cost benefit analysis can hold up that many forms of dirty money are
good for western economies then it is time for adherents to this view to
present it as an explicit cost benefit analysis. Make the case that the costs are
worth the benefits.
Magnitudes and Misunderstandings 205
If the position that the inflow of dirty money to the United States and
other western democracies cannot be defended, then our perception of this
issue must change, from an assumption of its benefits to a recognition that
the price tag attached to these felonious funds is unacceptable. Then a very
interesting question arises. Is it possible to attack the global dirty money
problem more aggressively without impeding the legitimate free market system
Here, it is important to understand that the proper goal is not to set up
a process intended to stop all suspect transfers but rather to curtail very
substantially curtail dirty money and our facilitation of its safe receipt.
Stopping dirty money completely would require draconian procedures. Significantly
curtailing dirty money can be accomplished without throwing
sand in the gears of legal trade and investment and is entirely a matter of political
Rampant illegality is the first station along the continuum that threatens
global capitalism. With common techniques and use of the same structures,
drug dealers, other criminals, terrorists, corrupt government officials, and
corporate CEOs and managers are united in abuse of capitalism, to the
detriment of the rich in western societies and billions of poor around the
world. Global capitalism is operating at a low common denominator. It is
underachieving. It is far from spreading maximum or even acceptable levels
of prosperity across the globe. And it is capitalists themselves who should
have the greatest interest in eliminating the pervasive illegalities that have
come to characterize the global capitalist system.
206 CAPI TA L I S M S AC H I L L E S H E E L
PA R T I I
THE GAP MATTERS
Now the big challenge and threat is the gap in wealth and health that
separates rich and poor. . . . Here is the greatest single problem and
danger facing the world of the Third Millennium.1
David S. Landes, 1998
Well, forget convergence the overwhelming feature of modern
economic history is a massive divergence in per capita incomes between
rich and poor countries, a gap which is continuing to grow today.2
Lant Pritchett, 1996
PLEASE, PLEASE, I beg you. Take my son to America. Let him be part of
your family! I beg you! I beg you!
I ve witnessed the effects of dirty money on poverty in all six inhabited
continents, but the most poignant incident is this one. The impact on me
was so powerful that it led to the writing of this book.
On one of my periodic trips abroad I asked my colleagues in Nigeria to
arrange for me to see Mary, the nanny who had taken care of our children
when they were infants. We had hired Mary in Lagos in 1972 before Deren
was born in New York. She was a cheerful, slight framed woman in her thirties,
with small tribal marks on her cheeks, indicating that she was from the
Calabar area in the southeast of the country. Upon returning to Nigeria, she
was gentle and loving with our one month old son and became attached to
him, as he did to her. It took her some time to master the admittedly difficult
task of putting disposable plastic milk containers onto the Playtex baby bottle
holder, but other than this little mechanical problem, she was a delight and
her performance was flawless.
With Pauline s second pregnancy, we brought Mary back to New York
to help take care of Deren, as well as Gayle after her birth. Mary had a natural
affinity for little girls and took to our daughter immediately.
Moving to Bethesda, Maryland, in late 1975, we brought Mary to the
States a second time. Taking care of the kids during much of the day, she resolved
to use her time well and arranged to attend cooking and knitting
classes in the evenings. Brimming with self confidence, she returned to Lagos
the next year.
On my trips to Africa every year or two, I made a point to see Mary, as
she always wanted to be kept up to date on the kids. She held various jobs as
a nanny and seemed to be doing quite satisfactorily. On this occasion in the
mid 1990s, it had been a couple of years since we last met.
My driver picked up Mary and brought her to the Eko Meridian hotel in
Lagos. She telephoned me from the lobby, took the elevator up, and knocked
on my door. I opened it, and there in front of me stood a wizened, emaciated,
and disheveled old woman, who seemed to have aged 30 years since our last
visit. I tried to conceal my shock as I brought her into the room.
Mary greeted me warmly and asked about Deren and Gayle, as I started
to reach for their latest pictures. But unable to contain her emotions, she fell
to her knees on the floor and begged me with her hands gripping my ankles,
her head touching my feet, and her tears flooding the carpet begged
me repeatedly to take her only child back to America and bring him up as a
member of my own family.
This was during the Abacha years. Nigeria s worst dictator had plunged
the country into a downward economic spiral, virtually bankrupting the society.
Mary was a victim of this process: Abacha s theft, decades of endemic
corruption, stolen oil revenues, tax evasion, money laundering, illegal transfers,
the whole package of economic ills contributing to impoverishment of
a nation. She had fallen through the cracks in Africa s extended family system.
She was unemployed, homeless, destitute, and completely despondent.
Yet she was not asking for money but instead pleading to give up the only
thing in the world she still had, the only person who might provide for her
in her old age. She was on her knees in front of me because tens of billions
of dollars had been embezzled from her country and spirited into accommo
208 CAPI TA L I S M S AC H I L L E S H E E L
dating foreign coffers, producing disaster for her and her child, as it had also
for millions of others.
This was a shattering experience for me. And before you begin to think
this is a tale told by a bleeding heart, let me ask you to imagine that you
were in that hotel room. Further, let me ask you to keep this image of Mary,
weeping, on her knees, in mind for the rest of Part II. Then you will more
easily grasp the linkage between dirty money and global poverty and inequality,
which is the second part of capitalism s threatening continuum.
The unchecked diversion of trillions of dollars out of other countries
into western accounts not only constitutes the biggest loophole in the freemarket
system, as Part I concluded. It s also the most damaging economic
condition impoverishing the poor in developing and transitional economies,
as Part II reveals. It drains hard currency reserves, heightens inflation, reduces
tax collection, worsens income gaps, cancels investment, hurts competition,
and undermines trade. It leads to shortened lives for millions of
people and deprived existences for billions more. Within the economic
realm, as distinguishable from political affairs or environmental constraints,
nothing approaches the harmful effects caused by massive outflows of illegal
money from poor nations into rich nations.
So what as I ve heard many times. Or, as a senior Federal Reserve
Board official in Washington asked, If the foreign government isn t concerned
about it, why should we be concerned about it 3
So what Why should we care Government officials, academics,
and businesspeople have expressed these sentiments repeatedly. And it always
leaves me completely incredulous. The cause and effect relationship between
dirty money and global inequality is not some vague, abstract notion.
It is an overarching reality in today s world. It devastates or impairs the lives
of Mary and her son and billions like them. Their poverty flows in part from
our complicity. And, given the complicity of affluent nations in encouraging,
accommodating, and holding illegal wealth from abroad, the extent of
disparity across the planet needs to be understood and appreciated.
Why should you care Because of all the features of global capitalism,
good and bad, the one reality that has the potential to bring the structure
down is inequality. On this rock the system could founder.
Inequality: The Gap Matters 209
C H A P T E R 5
THE GLOBAL DIVIDE
WRITING MORE than 2,300 years ago, Plato spoke about the dangers of
inequality: If a state is to avoid the greatest plague of all I mean
civil war, though civil disintegration would be a better term extreme
poverty and wealth must not be allowed to arise in any section of the citizenbody,
because both lead to both these disasters. 1
The broad subject of poverty in the midst of wealth has been around for
a long time. However, over the past 30 years or so, the study of poverty and
wealth has been extended much more aggressively than at any earlier time.
Global income and consumption data covering almost the entire world s
population are now available. The good news is that a great deal of attention
is being focused on the measurement and analysis of global poverty and inequality.
The bad news is twofold: (1) the emerging picture shows a global
gap much wider than we had earlier imagined it to be, and (2) there is, despite
all the scholarship, great confusion and uncertainty about whether the
gap is expanding or contracting.
Capitalism does indeed have a huge problem with inequality, and it is
important to grasp just how big this problem is.
THE QUINTILE CANYON
The easiest way to talk about global income disparities is to divide the
world into equally populated segments, ranging from poor to rich. The
most widely available data for this purpose use 20 percent groupings, or
quintiles, to array everyone in a country by income levels into an appropriate
ranking. Then these five quintiles within countries can be further
arranged into global quintiles to offer a picture of all the world s six billionplus
The work of several economists has produced a fascinating picture of
global income disparities beginning in 1820 and extending to 1980. Figure 5.1
illustrates the stark two centuries long rise in inequality. From a gap of 12 to
1 between top and bottom quintiles in 1820, the gap rose to 35 to 1 by
- As one of these writers, Angus Maddison, reported, total output of
the advanced capitalist countries increased 70 fold, population increased 5
fold, per capita output increased 14 fold, average hours worked dropped by
half, and life expectancy doubled. In other words, rich countries soared
while poor countries lagged.2
In 1994, a United Nations ranking showed that the ratio between the
top and bottom income quintiles of the world s population was 60 to 1, a
figure that was repeated often in the press. Unfortunately, the tally was far
from accurate. It was made by ranking countries from richest to poorest
based on their average income, then dividing the countries into five roughly
equal population groups, or quintiles. This meant that all citizens of a country
were put into a single global quintile regardless of their actual income,
which may have been much lower or higher than the average. Coming up
with an average income for a whole society is virtually meaningless. Thus, in
The Global Divide 211
FIGURE 5.1 WORLD INEQUALITY 1820 1980
Source: Bourguignon and Morrison, 2002.
the 1994 UN ranking, Brazil, which has an extravagant upper class, was put
into the richest quintile all of its 150 million plus people despite the
fact that Brazil has some of the poorest people on Earth living in favalas,
shanty towns. And China, which has an average income just a bit higher
than the lowest fifth on Earth, had none of its billion plus population in the
bottom quintile, despite the fact that the country has hundreds of millions
of people whose low incomes qualify them for admission into the ranks of
the poorest. Trying to make world income comparisons by using averages for
entire nations is completely misleading.
In recent years, income breakdowns into 20 percent groupings within
countries that comprise 96 percent of the world s people have become available.
The World Bank s annual statistics provide data for almost all nations,
including GDP and quintile shares of GDP. This enables global quintiles to
be compiled regardless of where income groups reside. Economists often
take shares of GDP as an acceptable measure of personal income and use the
terms interchangeably. Unless otherwise indicated, the following pages treat
income as shares of GDP.3
Using World Bank statistics, we can find the poorest group of people in
the world. This happens to be the bottom quintile in Sierra Leone, with an
annual per capita income of $8 per year! Then we can find the next group a
bit better off, and the next, until we finally reach the richest group of people,
which happens to be the top quintile in Luxembourg with a per capita income
of $92,000 per year.
The five income quintiles of the world are summarized from World
Bank statistics4 in Table 5.1. There is a major assumption in these data. Income
levels are based on converting the currencies of foreign countries to
U.S. dollars at prevailing exchange rates. If one U.S. dollar can be converted
to six South African rand, then a South African income of R6,000 could be
swapped for a U.S. income of $1,000.
This is not a particularly accurate way to compare incomes. The fact is
R6,000 will get you more food, clothing, and housing in South Africa than
$1,000 will get you food, clothing, and housing in the United States. The
financial exchange rate between the two currencies doesn t satisfactorily reflect
the difference in what can be purchased with the two equivalent incomes.
A better way to compare the two incomes is to equate what they
will buy locally, rather than what they can be exchanged for at a bank or
bureau de change.
212 CAPI TA L I S M S AC H I L L E S H E E L
This has led to development of purchasing power parity (PPP) figures.
If, in fact, the food, clothing, and housing that you can buy in South Africa
with R4,000 is the same or the equivalent of the food, clothing, and housing
you can get in the United States for $1,000, then it s fair to say that R4,000
equals $1,000 in purchasing power, rather than the R6,000 figure at exchange
Purchasing power parity calculations have been made for most countries.
Again, the beginning and ending points of the global quintiles, drawn
from World Bank statistics and based on PPP data,5 are shown in Table 5.2.
Figure 5.2 presents bar charts showing global income disparities as of
- Both sets of numbers are depicted: currency exchange rates and purchasing
power parity. The bar based on currency exchange rates shows a level
of inequality between the richest 20 percent and the poorest 20 percent of
121 to 1. The bar based on PPP shows the level of disparity at 31 to 1. These
The Global Divide 213
TABLE 5.1 RANGE OF ANNUAL PER CAPITA INCOMES IN EACH GLOBAL QUINTILE,
AT EXCHANGE RATES
1st 2nd 3rd 4th 5th
Quintile Quintile Quintile Quintile Quintile
Income at bottom $ 8 $285 $ 516 $1,042 $ 3,964
Income at top of $282 $516 $1,036 $3,963 $92,104
Source: Calculations based on World Bank data from World Development Indicators 2004.
TABLE 5.2 RANGE OF ANNUAL PER CAPITA INCOMES IN EACH GLOBAL QUINTILE,
1st 2nd 3rd 4th 5th
Quintile Quintile Quintile Quintile Quintile
Income at bottom $ 29 $1,217 $2,138 $ 4,759 $ 11,443
Income at top of $1,213 $2,136 $4,731 $11,443 $119,024
Source: Calculations based on World Bank data from World Development Indicators 2004.
two ratios of global income disparity are obviously very different and are discussed
But there is something else in the bar charts that is not so different the
percentage of global income accruing to the top 20 percent. In the exchange
rate figures it s 87 percent. In the PPP figures it s 68 percent. And therein lies
the danger. Whether the more accurate figure is 87 percent or 68 percent
hardly matters. Both figures demonstrate a world in which there has arisen
an enormous concentration of income in the top 20 percent, leaving 80 percent
to meagerly share all the rest. This is the second part of capitalism s
214 CAPI TA L I S M S AC H I L L E S H E E L
FIGURE 5.2 GLOBAL GDP AND GLOBAL QUINTILE INCOME DISPARITY, 2002
Source: Calculations based on World Bank data from World Development Indicators 2004.
Data from World Development Indicators 2005 show no significant differences.
Achilles heel, this enormous disparity that, no matter how you measure it,
demonstrates a level of income concentration that is foreboding. And, worse
than this, even these percentages are too low, because the amount of illegal,
unmeasured, and unrecorded money flowing out of poor countries into rich
countries serves to understate the income accruing to the top 20 percent,
unavailable to the bottom 80 percent.
Before moving ahead, further explanation of purchasing power parity is
needed. This is the basis for nearly all commentary about the comparative
state of the economic world.
Almost everyone who has ever traveled outside his or her country knows
that familiar items may cost more or less in another country. The Economist
annually publishes its Big Mac price comparison, based on how much it
costs to buy McDonald s favorite hamburger in some 32 countries. A recent
survey showed local prices converted into U.S. dollars ranging from $1.23
in the Philippines to $2.90 in the United States to $4.90 in Switzerland.6
The Economist has also experimented with a Starbucks tall latte index. These
are interesting little numbers but hardly sufficient for sophisticated international
The idea behind PPPs focuses on identifying the costs in different countries
of purchasing the same basket of commodities. For example, we can
come up with a representative basket of goods for an American and then
take that same basket to a foreign country and price it in local currency. Perhaps
for the American we could choose appropriate amounts of sugar, coffee,
bread, cheese, pasteurized milk, ground beef, jeans, and underwear and
add some electricity, gasoline, telephone charges, rent, and credit card interest.
Sounds like a reasonable range of items on which many Americans regularly
spend money. So we can take this basket of commodities abroad and
see how others spend money on the same basket. The trouble is, when we
get to Burkina Faso, we find that most consumers have never bought any of
these items in the American basket, and there s no reasonable way to make
any such price comparisons. So maybe we can make the process work in the
opposite way: Take a basket of their typical commodities and compare those
prices in the United States. The Burkina Faso basket has cassava, millet,
warm milk straight out of the cow s udder, bush meat, spear points to drive
away marauding lions, straw for thatching the roofs of mud huts, and an imputed
amortization cost for the price of a bride. None of this can be converted
for comparative purposes back to the United States. In other words,
The Global Divide 215
it s very difficult to come up with a basket of commodities that forms a reliable
picture of prices between countries.
Enter the United Nations. In the 1950s and 1960s, the UN participated
in developing a System of National Accounts (SNA) forming a common basis
by which nations could compile data on their economies. The wellknown
scholar Simon Kuznets was instrumental in this work, receiving an
early Nobel Prize in economics. The SNA format for national accounting is
now used by most UN members. While standardizing pictures of national
economies at a point in time, SNA does not by itself readily facilitate crosscountry
comparisons. To accomplish this, more detailed purchasing and
pricing correlations between states are needed.
In 1968 the UN and the University of Pennsylvania, with funding from
the Ford Foundation and the World Bank, set up the International Comparison
Program (ICP) to facilitate purchasing power measurements. Benchmark
price data have since been collected in 10 countries in 1970, 34
countries in 1975, 60 countries in 1980, 65 countries in 1985, and 117
countries in 1993/1996. A survey begun in 2004 will cover even more countries.
Indices based on assembled price information are then applied to each
country s standardized SNA accounts, in order to come up with valid estimates
of GNP and GDP and details on the composition of national income.
Reams of data emerging from these studies have been extremely useful in analyzing
income, growth, poverty, and inequality within individual countries,
regionally, and globally.
The data are also controversial and subject to widely varying interpretations.
A basic criticism is that the ICP s collection of price data is primarily
designed to fit into the SNA. This serves the purpose of measuring GDP in
terms of purchasing power parity. It does not serve particularly well to measure
poverty and inequality within a country or globally. To accomplish this
effectively would require a different survey with a different set of questions,
not to mention additional funding.
As recently as 1995, an IMF working paper concluded the following:
[B]ecause of unresolved data and methodological issues, the use of PPPadjusted
estimates would seem inappropriate for the Fund s operational
purposes at this time. Although it is generally agreed that PPP rates are appropriate
conversion factors from a conceptual viewpoint, their practical
implementation has been hampered by the uneven quality of the PPP indices
currently available. 7 While improvements in coverage of countries
216 CAPI TA L I S M S AC H I L L E S H E E L
have continued over the past decade, serious questions remain as to the accuracy
of PPP estimates.
Nevertheless, taking the World Bank s PPP data as the best numbers
available, these compilations can be further laid out to exhibit recent
trends. We can begin with 1993, when the Bank expanded its quintile income
database to encompass a large number of countries. Figure 5.3 shows
how global GDP and the planet s richest and poorest quintiles have progressed
over 10 years. It also shows total GDP and richest and poorest
quintiles for the world s three biggest economies the United States,
China, and Japan. Figure 5.4 provides similar information for 12 selected
countries. Notice how every chart depicts growth in GDP and a growing
dollar gap between rich and poor quintiles. This is the threat to capitalism,
the growing accumulation of income dollars accruing to the rich, unavailable
as purchasing power to the poor. And this leads directly into the following
section on how to gauge poverty and inequality.
MEASURE FOR MEASURE
In William Shakespeare s play Measure for Measure, Duke Vincentio wants
someone else to clean up his town while he observes the proceedings disguised
as a monk. In Act 3, Scene 2, he speaks the following line: There is
scarce truth enough alive to make societies secure. The Duke would feel
right at home today.
How many poor people are there in the world How poor are they
What makes them poor A half century into the business of development
you might think we should have answers to such basic questions. Not a
chance. If anything, scholars are more divided than ever. For every ideological
bias, evidence is available, confirming what anyone already wants to believe.
The truth, if it exists, is elusive.
There is an old saying among corporate executives, What gets done is
what gets measured. In other words, if a CEO or division head or department
manager wants to focus attention on accomplishing some goal, then he or she
should devise a measure of progress toward that goal and review it together
with others continuously. With this in mind, I suppose it s useful to have so
many measures of poverty and inequality and so much argument about what
each means, in the hope that some consensus may emerge eventually.
The Global Divide 217
218 CAPI TA L I S M S AC H I L L E S H E E L
FIGURE 5.3 TOTAL GDP AND SHARES OF RICHEST AND POOREST, 1993 2002
Source: Calculations based on World Bank data from World Development Indicators for 1995
The Global Divide 219
FIGURE 5.4 TOTAL GDP AND SHARES OF RICHEST AND POOREST, 1993 2002
Source: Calculations based on World Bank data from World Development Indicators for 1995
220 CAPI TA L I S M S AC H I L L E S H E E L
FIGURE 5.4 (Continued)
In the 1950s the development community was focused on growth in
GDP as the all revealing measure of progress. By the 1960s experts realized
that this wasn t satisfactory; it had to be per capita growth in GDP, to assure
that rising populations enjoyed rising personal incomes. Then in the 1970s
this focus was supplemented with the idea of basic human needs, the notion
that everyone deserves to have at least the minimum components of food,
clothing, and shelter. What these minimums should be was never fully
agreed. The 1980s produced another shift, adding to per capita GDP such
nonmonetary factors as life expectancy and literacy in measuring well being.
Starting in the 1990s, this trend among some scholars toward broadening
the meaning of poverty continued, now including deprivation of capabilities
and social opportunities.
Through it all, there has been no accepted definition of poverty. Part of
the reason is because poverty is both a moving target and a relative term.
Furthermore, what is considered as poverty in the United States has no comparison
to the far more severe levels of deprivation I have seen in Africa,
Latin America, and Asia. Despite the complexities of the matter, however, a
basic grounding in some of the common measures of poverty and inequality
is useful in appreciating the scope of these issues.
First, the poverty line. In monetary terms, the World Bank most often
uses $1 a day and $2 a day. Other levels, such as $3 a day and $5 a day also
appear in the literature. And the poverty line is adjusted for inflation, so that
$1 a day may actually mean $1.08 or $1.34 or some other figure.
Poverty head counts are important. With a poverty line set at $1 a day,
how many people around the world are living at or below this level Depending
on their calculations, various researchers have produced figures of
300 million, 766 million, 1.2 billion, and more than 1.8 billion.8 In other
words, with estimates varying by as much as a factor of six, there is no consensus
on the count of the global poor.
Poverty gaps can be measured, providing a sense of the depth of poverty.
For those living below $1 a day, what is their average distance below this
poverty line Are they just below it or far below it Take Sierra Leone as an example.
The three poorest quintiles have average annual PPP incomes of $29,
$52, and $256, respectively. This averages $112 per year across the three
quintiles, which is far below a poverty line set at $1 a day. In other words, in
Sierra Leone the poverty gap is huge and the depth of poverty is extreme.
The Global Divide 221
Relative poverty is becoming more widely used. Instead of basing a
poverty line on $1 or $2 or any other fixed amount, poverty can be measured
against the average income of a society. The World Bank occasionally
provides analyses of poverty levels at one third, one half, and two thirds of
average incomes. In the United Kingdom, the low income line is set at 60
percent of median income, or about œ10,000 per year based on a national
median income of some œ16,800 per year.9 This is not done to meet any
technical requirements but rather is a political decision.
Just as poverty is gauged by many forms of measurement, inequality
lends itself to even more. Figure 5.2 presents the easiest way to visualize inequality,
as percentages of income accruing to each quintile of society. Economists
generally prefer more sophisticated equations.
The most commonly used technique is the Gini coefficient, named after
Corrado Gini, an Italian statistician writing in the early twentieth century.
Suppose a society has perfect income equality, that is, everyone has the same
income: 20 percent of the population receives 20 percent of the income, 40
percent receives 40 percent of the income, and so on. This is depicted as a
45ø line in Figure 5.5.
In the real world, this never happens. Obviously, rich people have more
income than poor people. In order to depict this skewed distribution, the
Lorenz curve was introduced early in the past century, conceptualized by
Max Lorenz, an American economist. A society s real income distribution
222 CAPI TA L I S M S AC H I L L E S H E E L
FIGURE 5.5 PERFECTLY EQUAL SOCIETY
might look like Figure 5.6, with 20 percent of the population receiving 2
percent of the income, 60 percent receiving 12 percent of the income, and
Inequality in the society is measured by how much the real income distribution
falls below the 45ø equal income distribution line, as shown in Figure 5.7.
In this illustration, the shaded area amounts to 65 percent of the whole area below
the line of equality. This is the Gini coefficient for this society, expressed as
The Global Divide 223
FIGURE 5.6 LORENZ CURVE
FIGURE 5.7 WORLD LORENZ CURVE (Gini ÷ 0.65)
65 or 0.65, and this picture corresponds approximately to today s Gini coefficient
for the whole world.
Gini coefficients are useful but imperfect. Not every society has a nice,
smooth income distribution curve. Some have lumpy curves, corresponding
to concentrations of income at various levels. Thus, two societies with the
same Gini coefficient can show quite dissimilar curves, depending on where
their incomes may be clustered. In fact, to be even clearer, there are an infinite
number of curves that can produce the same Gini.
While Gini coefficients are commonly referred to in the popular
press, there are a great many other inequality measures that are used by
specialists. By way of mention only, these include the Dalton measure,
the Theil index, the Atkinson index, variance of logarithmic income,
squared coefficient of variation, and mean logarithmic deviation, as well
as some with whimsical names such as the Parade of Dwarfs and the
Robin Hood index. Suffice it to say that an enormous amount of scholarly
attention is focused on measurement issues and will likely pay off in
future years with greater public attention devoted to global inequality
and poverty concerns.
IT S AN UNCERTAIN WORLD
As poverty and inequality are studied more deeply, the fog of statistics confirms
the enormous uncertainties surrounding fundamental questions still
facing our shared planet. Some of these shape the way we think about philosophical,
geopolitical, and security issues. I address six of these big questions
in this section.
First, are monetary measures the right bases for evaluating poverty and
inequality A number of researchers are pushing definitions of poverty well
beyond per capita GDP and its various PPP conversions. The direct calorie
intake measure sets a basic nutritional requirement at 2,112 calories per person
per day and considers poverty to be any shortfall below this level. The
food energy intake method prices the 2,112 calorie intake and sets that expenditure
as the poverty line. A variation on these themes defines extreme
poverty as households that spend 80 percent or more of their total income
on food and yet still receive 80 percent or less of their daily calorie require
224 CAPI TA L I S M S AC H I L L E S H E E L
ments. At least these techniques focus on the most crucial aspect of poverty:
simply having enough to eat.
The United Nations Development Programme annually publishes a
composite index of monetary and nonmonetary indicators, called the
Human Development Index (HDI). This was an early 1990s brainchild
of Mahbub Ul Haq, a distinguished Pakistani economist at the UN. HDI
contains three elements: life expectancy at birth, a composite of school
enrollment and adult literacy, and GDP per capita. At first rejected by
other economists, Haq successfully argued that a broader measure than
GDP alone was needed, one that focused attention on health and education
as well. Ranking development standards from 0 to 1, the 2004 HDI
put Norway at the top with an index of 0.956, and clustered 31 African
countries at the bottom with indices all below 0.5.10 The HDI has also
spawned the UNDP s Human Poverty Index, which measures population
below the poverty line, availability of improved water sources, proportion
of underweight children under the age of 5, and probability of death before
the age of 40. Together, these two indices have helped meet Haq s
goal of shifting social development from the periphery to the core 11 of
Amartya Sen, distinguished economist and philosopher and 1998 Nobel
Prize winner, added to the intellectual ferment surrounding these issues with
his concept of development as the expansion of human capabilities. Sen refers
to Aristotle s views in The Nicomachean Ethics: First ascertain the function of
man and then proceed to analyze life in the sense of activity. 12 For Sen,
capability is a kind of freedom: the substantive freedom to achieve 13 a set
of functions, as Aristotle spoke of, in order to live a fulfilling life. In this perspective,
poverty must be seen as the deprivation of basic capabilities rather
than merely as lowness of incomes. 14 In other words, Sen sought to refocus
assessments of poverty from means to ends, for example, from the means
the money available to buy food to the ends of being adequately nourished.
To Sen s ideas about capabilities, others have added the concept of social
exclusion, that is, exclusion from normal activities in a society such as
employment, housing, minimal income, citizenship, democratic rights, and
communal contacts. In fact, the European Union has made the concept of
social exclusion a central tenet of its policy, focusing on any process
whereby certain individuals are pushed to the edge of society. 15
The Global Divide 225
Nonmonetary measures of poverty and inequality social exclusion,
Sen s capabilities, the UNDP s Human Development Index, caloric requirements,
and more are difficult to quantify and operationalize. Nevertheless,
they are steadily working their way into the framework of
economic policy, first in western countries and perhaps eventually in developing
and transitional economies. I am not yet persuaded that these
broader measures are necessarily more accurate or revealing than monetary
measures. This leaves me somewhat conflicted over their use. On the positive
side, they have the benefit of bringing more disciplines sociology,
psychology, even philosophy into the business of global development.
This is especially important, as I address again in Chapter 12. On the negative
side, they contribute to removing western business and banking sectors
from development concerns, convinced that these issues are the
province of specialists and peripheral to commercial pursuits. As it is,
many informed people believe that development is primarily a function of
foreign aid dispensed by economists, statisticians, and do gooders, and
this view is reinforced by measurements that are, rightfully or wrongfully,
seen as soft, esoteric, and subjective.
What is the preferable approach to evaluating poverty People living on
$1 a day and percentage growth in GDP these are the kinds of numbers
that can hold the attention of corporate and financial executives. Capabilities
and social exclusions these can expand the community of global development
experts. Both monetary and nonmonetary measures will no doubt
be used for the foreseeable future. It s uncertain which is likely to contribute
more to the alleviation of poverty.
Second question: Is global poverty rising or falling I say earlier that
you can find evidence to support any ideological position you want to
take. With this in mind, the few quotes on the facing page may be mildly
Wide press commentary followed the April 2002 release of a study by
the economist Xavier Sala i Martin, demonstrating that global poverty had
plummeted between 1976 and 1998. In his analysis, the number earning
$2 a day or less declined by 450 million and those earning $1 a day or less
fell by 234 million.16 Free market fundamentalists cheered the result, proof
that capitalism s invisible hand spread the benefits of prosperity all across
226 CAPI TA L I S M S AC H I L L E S H E E L
The study was based on income share data for 125 countries, encompassing
about 90 percent of the world s population. Multiyear data were
available for 68 countries. Only a single year s data were available across the
28 years of the study for another 29 countries. And no income share data
were available for 28 countries, more than half of them in Africa, which
were nevertheless included by assuming that everyone had the same income.
Furthermore, neither Russia nor any of the other former Soviet Union countries
were included in the 125 nation sample.
Considering limitations inherent in the sample and rather serious uncertainties
in the income distribution measures, the conclusions of Sala i Martin s
study extrapolated across the globe a huge drop in poverty would appear to
be overdrawn. Insights into what is happening within various regions are more
convincing. Asia shows a major decline in poverty. Latin America experienced
The Global Divide 227
Global Poverty Is Down! Global Poverty Is Up!
Poverty not only declined from 1985 A growing divide between the haves
to 2000, but did so at a faster pace and the have nots has left increasing
than at any time in world history.17 numbers in the Third World in dire
The one dollar a day poverty rate fell Statements that global poverty is
from 20 percent in 1970 to 5 percent decreasing have no evidential
in 1998. The two dollar rate fell justification . . .20
from 44 percent to 8 percent.19
We find that there was a net It is estimated that the actual number
decrease in the overall incidence of income poor people increased by
of consumption poverty over almost 100 million during that
1987 98.21 period [1987 93] from 1.2 billion
to 1.3 billion, and the number
appeared to be growing in every
region except Southeast Asia and