After years of mounting frustration, the world is cracking down on countries that launder money and shelter funds for criminal enterprises. Several recent reports have identified primary offenders in the fight against money laundering. Sanctions are not yet on the agenda, but shame alone seems to be working: Six countries have already agreed to reform practices that won them places in the international spotlight.
Financial black boxes — places where funds enter and exit without scrutiny — are essential parts of criminal enterprises. Illicitly obtained funds have to be scrubbed clean of their origins or they are useless. Modern technologies that zip money around the globe at the push of a button have made it easier to launder funds. Some governments have learned that a willingness to look the other way when these transactions come their way can be very profitable.
It is estimated that about $600 billion in criminal funds is laundered every year. About 10 percent of that is thought to pass through Caribbean offshore centers. The Russian Central Bank reported that $74 billion left Russia and was deposited in offshore banks in 1998, a sum equal to about one-quarter of the country’s gross domestic product. While $2 billion a day sounds like a lot, it is mere drop in the $1 trillion foreign-exchange bucket that is traded daily.
The damage done is incalculable. After all, money is the life blood of criminal activity. Vast quantities of money sloshing around also lead to corruption. And even when funds are merely sheltered and not laundered, governments lose tax revenues. Britain has put its losses at about $1.6 billion a year.
Law-enforcement officials long ago realized that the best way to fight crime is to hit criminals where it hurts most — in the wallet. But they have lacked the tools to do so. International coordination has been slow and many of the chief offenders do not have the resources to fight money laundering even when they have the desire. In the Turks and Caicos Islands, for example, there are only seven officials to monitor 13,000 registered companies.
Slowly, however, progress is being made. The newest strategy is “name and shame”: Make public the names of countries that provide havens for ill-gotten funds. Last week, the Finance Action Task Force on Money Laundering, a group of 26 countries associated with the Organization for Economic Cooperation and Development, put 15 countries on a list of “noncooperative” centers in the international fight against money-laundering. Last month, the Americas Review Group and the Financial Stability Forum of the G7 listed all but one Caribbean offshore center as “noncooperative” and inadequately supervised.
The FATF list contains many nations long criticized for lax financial supervision, such as the Bahamas, the Cayman Islands and St. Kitts-Nevis in the Caribbean, and the Cook Islands, the Marshall Islands and Nauru in the South Pacific. There are some surprises as well: Russia, Israel, Lebanon, Liechtenstein and the Philippines. Liechtenstein was also in the spotlight this week, when the OECD released a list of havens that impede efforts to fight tax evasion.
There is no penalty to being named by the FATF. There is growing sentiment to impose sanctions against nations that do not improve bank supervision. France has vowed to work with other governments to punish the countries that do not reform.
Public censure has sparked outrage among the governments named. That is good. It means that shame stings. That bodes well for reform. Six popular tax havens — Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino — have promised within five years to end the practices that gave them the reputation for being friendly to ill-gotten gains.
Cleaning up the mess will not be easy. Some developing countries depend on the offshore banking industry for more than half of their revenue. Substitute sources of funds will be needed. In addition, creating a supervisory regime takes personnel and training. Developed countries are going to have to help.
The developed countries that are complaining loudest must also realize that they are part of the problem, too. Experts concede that there is more money-laundering in the United States that anywhere else in the world. Political pressures in the U.S. have blocked implementation of measures that would have helped fight such transactions. And, of course, one of the best ways to fight illegal activity, such as drug trafficking, is to limit demand. Unfortunately, that list of offenders, unlike the FATF’s hall of shame, is much too long to publish.
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