Abstract
The Scale of the Global Financial Structure Facilitating Money Laundering
Raymond W. Baker
What do we mean by money laundering? Are we referring to money that breaks
anti-money laundering laws? Or are we referring to money that breaks any laws
in its origin, movement, or use and therefore is handled in a secretive manner to
avoid detection of its illegal trail?
The former concept leaves out many forms of illegally generated money. For
example, in the United States AML legislation bars only the knowing receipt of
the foreign proceeds of drugs, corruption, terrorist funds, bank fraud, and certain
treaty violations. Not barred are funds arising from other forms of racketeering,
handling stolen property, credit fraud, counterfeiting, contraband, slave trading,
alien smuggling, trafficking in women, environmental crimes, tax evasion, and
more.
I prefer the latter concept and thus refer to illicit financial flows. Illicit money is
money that is illegally earned, transferred, or utilized, in any country where it is
generated, through which it moves, or into which it arrives. In my use of the term
“money laundering,” I am referring to the whole gamut of illicit financial flows.
There are three forms of cross-border illicit money—1) the proceeds of bribery
and theft by government officials, 2) the proceeds of criminal activity by drug
dealers, racketeers, and terrorists financiers, and 3) the proceeds of tax evading
and laundered commercial transactions.
Since the 1960s we in the West have built and expanded a global structure to
facilitate the movement of illicit money. A few elements were available before
then, but the evolution of the structure accelerated in the 1960s for two reasons.
First, it was the period of decolonization. From the late 1950s to the end of the
1960s, 48 countries gained their independence from European powers. Many
political leaders and wealthy businesspeople wanted to take their money out of
these newly independent countries, a desire which was well serviced by our
financial institutions. Second, corporations began to spread their flags across the
planet. Certainly there were international companies before the 1960s, but
typically an international oil or trading company had overseas branches in only
12 or 15 countries. The great thrust to expand all over the globe took off in the
1960s and has continued up to the present. Most multinational corporations
utilize abusive transfer pricing and tax evading techniques to relocate profits
across borders at will. For these two reasons—decolonization and the spread of
multinational corporations—the 1960s marked the point at which the expansion
of the illicit financial structure took off in earnest.
Il l ic it Fin a n c ia l st r u c t u r e
TAX HAVENS
OFFSHORE SECRECY JURISD ICTIONS
D ISGUISED CORPORATIONS
FLEE CLAUSES
ANONYMOUS TRUSTS
FAK E FOUND ATIONS
FALSE D OCUMENTATION
Fa l sif ied Pr ic in g
Mo n ey La u n d er in g t ec h n iq u es
LOOPHOLES LEFT IN LAWS OF WESTERN COUNTRIES
This illicit financial structure consists of a number of interrelated parts:
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Tax havens, now 91in number across the globe, allowing non-functioning
entities to buy and sell and accumulate profits without tax consequences.
Offshore secrecy jurisdictions, where such entities can be set up behind
nominees and trustees so that no one knows who are the real owners and
managers.
Disguised corporations, now numbering in the millions across the world.
Flee clauses, allowing disguised entities to instantly relocate from one secrecy
jurisdiction to another when anyone tries to discover the real beneficial
ownership.
Anonymous trust accounts, shielding both the donor and the beneficiary.
Fake foundations, enabling creators and beneficiaries of charitable entities to
be one and the same.
False documentation, used in all sorts of trade and capital transactions.
Falsified pricing, by far the most commonly used element in the illicit financial
structure, enabling mispriced imports and exports to be used to shift capital
across borders.
Money laundering techniques, specialized devices created to facilitate
disguised transfers of funds.
Holes left in western laws, allowing movement of money through the illicit
financial structure and ultimately into western economies.
All three forms of illicit money—corrupt, criminal, and commercial—use this
structure. It was developed in the West originally for the purpose of moving flight
capital and tax evading money across borders. In the late 1960s and 1970s drug
dealers stepped into these same channels to move their illicit money across
borders. In the 1980s and 1990s, seeing how easy it was for the drug dealers to do
it, other kinds of racketeers stepped into these same structures to move their illicit
money across borders. In the 1990s and in the current decade, again seeing how
easy it was for drug dealers and racketeers, terrorist financiers also stepped into
these same channels to move their illicit money across borders. From my research
and observations all over the world, drug dealers, criminal syndicate heads, and
terrorist masterminds did not invent any new ways of shifting illicit money across
borders. They merely utilized the mechanisms we had created originally to move
other forms of illicit money.
How much illicit money in all its forms does this structure move? My estimation is
$1 to $1.6 trillion a year. This estimate has been adopted by the World Bank,
pending further study which may reduce or expand the range. I further estimate
that half—$500 to $800 billion a year—comes out of developing and transitional
economies. These are countries that often have the weakest legal and
administrative structures, the largest gangs of drug dealers and racketeers, and,
far too often, economic and political elites who want to take their money out by any
means possible.
In cross-border illicit financial flows, the proceeds of bribery and theft are the
smallest, at only perhaps three percent of the global total. Criminally generated
funds account for some 30 to 35 percent of the global total. Commercially tax
evading money, driven in particular by abusive transfer pricing, is by far the largest
component, at some 60 to 65 percent of the global total.
The consequences of global illicit financial flows are staggering:
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It eviscerates foreign aid, with an estimated $10 in illicit money draining out
of poor countries for every $1 of development assistance going in.
It makes the drug problem insolvable, in producing, transiting, and
consuming countries.
It explains the explosion in cross-border crime over the past quarter century,
one of the fastest growing activities in the world.
An estimated $300 million passed through the illicit financial structure into Al
Qaeda’s hands in the decade prior to 9/11.
It is the way that Saddam Hussein rearmed after the first Persian Gulf War,
with an estimated $10 billion passing through this structure into his coffers.
A.Q. Khan operated his nuclear network utilizing the global illicit financial
structure, buying and selling nuclear components and materials across the
continents.
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This structure and the money it moves has contributed to a number of failed
states.
The question is sometimes asked whether or not wealth data can be used to
estimate global money laundering? Wealth data has several problems:
1) The data is largely dependent on World Development Indicators, which attempts
to make estimations of country income distributions in quintiles or in some cases
smaller divisions. Such quintile distributions do not even begin to record
satisfactorily the offshore asset accumulations of the rich and the income earned
thereon. Assets of the rich held offshore, often in disguised entities in which
nationalities of beneficial owners are unknown, are substantially underestimated in
wealth data and therefore that portion of income which is illicitly generated or
resulting from money laundering is likewise substantially underestimated.
2) The Bank for International Settlements generates data on holdings of non-banks
in foreign bank accounts. However this data only records end-of-period balances in
personal or commercial accounts. It does not record throughput, and it does not
record money that is shifted into custodial accounts.
3) Analysis of market capitalizations and holdings of high net-worth individuals
include a portion arising from stockholdings. Share values of multinational
corporations include a portion generated through abusive transfer pricing, which in
almost all cases violates the VAT laws, customs duty regulations, or income tax
statutes of countries out of which tax evading money is taken. But, again, it is very
difficult to disaggregate the legal component of capital gains from gains
accumulated on illicitly generated holdings.
Much further research needs to be done to improve estimates of global illicit
financial flows and money laundering. Sources of data include the Bank for
International Settlements, U.S. Treasury International Capital Reporting System,
Merrill Lynch Cap Gemini Ernst & Young World Wealth Reports, Organization of
Economic Cooperation and Development, Financial Action Task Force, World
Bank governance data bases, International Monetary Fund assessments,
International Money Laundering Information Network, and many more. Estimates
of criminal flows are available from many organizations researching and analyzing
particular types of criminal activities. Customs data from major trading nations
would be an invaluable contribution to analyzing trade-based money laundering,
but such data is closely guarded by the governments of nations into which
laundered money traditionally flows.
In which direction is the trend line? Quite clearly, global money laundering is
growing every year.