Nawaz Sharif setup 4 offshore Companies: Nescoll, Nielson, Shamrock and Chandron Jersey Part-I by Raymond Baker


CAPITALISM’S ACHILLES HEEL

 

Dirty Money and How to

Renew the Free  Market System

RAYMOND W. BAKER

2005

 

 

 

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

 

 

 

 

 

 

 

PROLOGUE

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

1

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,

the works.

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.

Prologue 3

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

square miles.

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

Rafael Demos

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

at Yale.

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

Prologue 5

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

for years.

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

the world.

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

studies.

Prologue 7

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

combined impact.

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.

Prologue 9

 

C H A P T E R 1

GLOBAL CAPITALISM:

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

11

 

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

serious problems.

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

new territory.

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

economic affairs.

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

ILLEGALITY:

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

21

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

23

 

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

effective.

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

between countries.

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

is made.

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

like this:

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

silent partners.

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

one telephone.3

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.

Dummies Incorporated

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

counterpart.

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

owners.

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

much emotion.

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.

Faking It

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.

Gimmicks Galore

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

where needed.

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

globalizing world.

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

DIRTY MONEY

AT WORK

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:

48

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:

Type of

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

corruption:

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

coveted contracts.

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

funds.

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!

Riggs Bank

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

National Bank.

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

laundering controls.

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

Department.

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.

Nigeria

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

attorney general.

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

central event.12

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

intermediary.13

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

same thing.

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

$170 million.18

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

their departure.

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

con artists.

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

of Madeira.

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

Indonesia

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

personal direction.30

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

employees.

A percentage off electric bills, movie tickets, and other consumer expenditures.

34

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

purposes.

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

alleviation)

Siti Hartinah Soeharto 88 billion Bank Alfa

(disaster relief )

Trikora (scholarships) 26 billion Private museum, other personal

foundations

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

democracy. 40

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

countrymen. 41

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

111 companies

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

Mamiek

Youngest daughter

6 companies

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

Corporation

Probosutedjo

Half brother of Suharto

119 companies

(Continued)

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

Pakistan

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

9 companies

Ari Sigit EDC International, Leever Continental, Kuk

Grandson Kong Construction

28 companies

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

otherwise noted.

cPeter Engardio and Michael Shari,  The Suharto Empire,  BusinessWeek, August 19, 1996,

46 47.

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

country.

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

  1. 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

reached quickly.61

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

Travel, Florida

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

  1. 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

associates.

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

  1. 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

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

holdings well.

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

actions. 79

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

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,

2003), 101.

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

Cocaine Opiates

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

producers  price

Approximate value, 1st $800 million $1.6 billion

stage producers

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

price

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.

Afghanistan

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

liberated country.

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,

and others.

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

financial system.

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

and whereabouts.

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

FARC.95

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

campaign.

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

  1. 98

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

provided services.

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

crime. 105

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

Human Trafficking

Trafficking for prostitution 600,000 to 800,000 annually; women, men,

and slavery, plus alien children, babies. Most for prostitution.

smuggling

Organ smuggling Unknown magnitude. South Africa, Brazil, and

Israel implicated in organ extraction and

smuggling.

Arms Trafficking

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.

Counterfeiting

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

Colombia alone.

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.

(Continued)

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

billion annually.

Smuggling

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

destinations.

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

200,000 artifacts.

Pornographic materials Large markets in Japan and China.

Environmental

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.

radioactive materials

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

Fraud

Credit cards; counterfeited, Losses estimated at roughly 1 percent. Single

stolen, skimmed, and counterfeiters produce thousands of cards daily.

illegally used

Advance fee fraud, primarily African scam artists generate millions annually.

for future services or payoffs

Piracy

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.

North Korea

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

other structures.

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,

and elsewhere.

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,

and elsewhere.

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

America.

Four Seas 5,000 members; based in Taiwan; active

internationally.

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

many more.

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

Japanese Yakuza

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

gambling.

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.

(Continued)

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,

Ostankinskaya.

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

robberies.

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

world.

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,

1997), 25.

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.

Yakuza

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

card game.

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

crime.

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

criminal syndicates.133

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

comparative ease.

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.

Terrorists

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

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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

single day.

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

the picking.

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

Territories

Hezbollah Middle East, with cells in Asia,

Africa, Europe, South and North

America

Jemaah Islamiya Indonesia, with cells in Malaysia,

Singapore, Thailand, and perhaps the

Philippines

Kurdistan Workers Party Turkey

Lashkar  Tayyiba Kashmir and India, with bases in

Pakistan

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

Territories

Ansar al  Islam Iraq

(Continued)

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,

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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

Territories

Palestine Liberation Front Middle East

Popular Front for the Liberation Israel and Palestine Occupied

of Palestine Territories, with bases in Syria and

probably Lebanon

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

the point.

Al Qaeda

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

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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.

Iraq

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

sometimes hanged.

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

  1. 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

own procedures.147

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

people.

GLOBAL COMMERCE AND TAX EVASION:

COIN OF THE REALM

Forget it! The present supplier handles the managing director s kickbacks in

Europe.

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

fraternity.

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

and buyer.

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

sellers identified.

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

its receipt.

The business of global tax evasion takes many other forms as well. As

the economist Vito Tanzi says,  Tax evasion prospers when society condones

  1. 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

or not.

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

TAX HAVENS

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

antiterrorism.163

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.

Congo

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

1980s.169

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,

  1. 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

  1. 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.

China

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

Reds themselves.

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

revenues. 189

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

  1. 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

Li.

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

materials.

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

respect.

Economic corruption costs up to 17 percent of the country s annual

GDP.

Tax evasion accounts for 50 percent of taxes due in the private

economy.

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

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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

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

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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

interest rates.

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

process.220

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

be accomplished.

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

the plunder.

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

global pattern.

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

MAGNITUDES AND

MISUNDERSTANDINGS

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

the word.

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.

162

 

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

system.

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

compilation.

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

the list.

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.

Mispricing

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

western accounts.

Transfer Pricing

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.

Fake Transactions

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

Developing and

Transitional

Global Economies

Dirty Money High Low High Low

Criminal

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

Commercial

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

criminal activity.18

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

and agencies.

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

  1. 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

associated companies.

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

  1. 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

database available.

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

FATF expectations.

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

new century.

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

efforts.

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

DeWine.

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

lobbyists.20

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

killed.

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

money.

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

more.

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.

(Sec. 352)

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.

(Sec. 326)

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.

(Sec. 371)

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)

(Continued)

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

are rising.

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

activities.30

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

business.

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

LAUNDERING LAWS

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

Espionage X

Export crimes X X

Extortion and threats X X

Extortionate credit transactions X

Firearms X

Food stamp crimes X NA

Foreign Agents Registration crimes X

Foreign corrupt practices X X

Fraud and false statements X

Gambling 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

(Continued)

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

Obscenity 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

Racketeering 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

mastermind.

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

world.

More than a million dummy corporations shielding their owners

identities.

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

regulation.

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

countries alike.

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

corporations.

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

home country.42

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

history.

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 . . .

Mail Fraud

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.

Wire Fraud

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

possible.

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.

The Benefits

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.

The Costs

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.

CHALLENGE

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:

Memorandum

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

will.

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

INEQUALITY:

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

207

 

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

210

arranged into global quintiles to offer a picture of all the world s six  billionplus

inhabitants.

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

  1. 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

rates.

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

  1. 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

of quintile

Income at top of $282 $516 $1,036 $3,963 $92,104

quintile

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,

AT PPP

1st 2nd 3rd 4th 5th

Quintile Quintile Quintile Quintile Quintile

Income at bottom $ 29 $1,217 $2,138 $ 4,759 $ 11,443

of quintile

Income at top of $1,213 $2,136 $4,731 $11,443 $119,024

quintile

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

later.

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

economic comparisons.

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

through 2004.

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

through 2004.

(Continued)

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

so on.

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

poverty debates.

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

amusing.

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

the globe.

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

poverty.18

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

the Pacific.22

 

 

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