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Money laundering and global debt

by Jeff Kingston

CAPITALISM’S ACHILLES HEEL: Dirty Money and How to Renew the Free-Market System, by Raymond W. Baker. Hoboken, N.J.: John Wiley and Sons, 2005, 438 pp., $27.95 (cloth).

Reviewed by JEFF KINGSTON The scandalous tolerance of massive money laundering by global financial institutions contributes to poverty and stifles development. An estimated $5 trillion has flowed through such laundering mechanisms from poor countries to the banking system of wealthy nations. While world leaders fiddle with debt relief and battle aid fatigue, they ignore the far larger sums involved in this racket.

The messenger is part of this powerful and compelling message. Raymond W. Baker, an American businessman and ardent capitalist, asserts that battling corruption is in the interest of the wealthy nations because stopping the outflow of dirty money from poor countries will accelerate their development, lessen their dependence on development assistance and transform them into more robust markets.

Here we are offered a grand vision — rolling back poverty worldwide — with concrete suggestions regarding the abuse of tax and banking systems. Western countries continue to turn a blind eye to money laundering at their own peril. Baker asserts that the global financial system is riddled with falsification and illicit practices by well known banks, so it is no wonder that rogue regimes and terrorists have such an easy time sustaining themselves with illicit proceeds. Terrorists, drug barons and gangsters do their laundering along side tonier clients with the same impunity. Baker explains that the mechanisms facilitating tax evasion, poverty and terrorism are one and the same and should be treated as such.

He writes: “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, tyrant or terrorist or corporate titan, all use the same bag of tricks. The truth is, Western business and banking sectors have promoted and developed the mechanisms for bringing in dirty money.”

This expose of financial chicanery is based on the author’s extensive business experience in the developing world. While fingering fat-cat bankers, Baker draws our attention to, “The linkage between gross violations of legal norms and the diminished lives of billions of people surviving on a dollar or two a day.”

The challenge is not only in cracking down on Third World kleptocrats, but also in weaning banks from their appetite for this capital. International organizations, governments, development specialists and the banking community are in a state of denial. Coming from such a credible source, this book is an important step toward an overdue awakening.

The good news is that curtailing this system can be accomplished “with a few strokes of the pen without harming efficiency and growth.” The bad news is that unraveling this poverty spreading con game is, according to Baker, a matter of political will. He may be right that the payoff of taking such measures to markedly reduce global inequalities would greatly exceed “the timid pursuit of poverty alleviation” that currently masquerades as a development policy. However, one is left wondering where the political will to transform those strokes of the pen into effective policies will come from given the clout of those who stand to lose.

Baker fumes at the prevailing hypocrisy: “Many bankers find it acceptable to subvert poor countries, while insisting that poor countries have to pay off or sustain their debts in order to be creditworthy in the future. The arrogance of this position is breathtaking . . . The fact is, the borrowers stole the money and the lenders helped them steal it and neither side can say so.”

Thus, the issue of debt relief is at an impasse, reduced to small gestures of a few billion dollars — while economic assistance totals $50 billion per annum — paltry sums compared to the $500 billion annual outflow of illicit proceeds from poor countries to Western bank accounts. The institutionalization of corruption in Kenya recently exposed by a whistle-blower is part of a larger scam replicated all over the world.

The development community’s cognitive dissonance about this problem is stunning. Baker sensibly asks how all the World Bank’s experts have managed “to pay attention to only a part of the development equation, the money that goes into needy countries, while ignoring a far larger part of the development equation, the money that illegally gushes out of these same countries.”

Clearly, the seamy practices of the international financial community lay at the heart of global poverty, and bankers and government leaders are accomplices of larcenous dictators. This powerful indictment is a call to arms, but are those who can make a difference listening? Unveiling this hidden scandal is a start, but the odds against substantive reform are high because cracking down on the nefarious also impinges on the prerogatives of the well-heeled Establishment.