01 Feb 2001
Q&A - Dirty Money: Raymond Baker Explores the Free Market's Demimondeby Garry EmmonsTopics:
Getting Reality on the Table
One of the country's foremost experts on money laundering and illegal flight capital, Raymond W. Baker (MBA '60) set out for Africa one year after graduating from HBS, seeking "a taste of international business." In Nigeria, as a consultant and investor engaged in the acquisition of small- and medium-sized companies, Baker first observed the corrosive effect of corruption. "I didn't come out of HBS equipped to deal with it," he recalls. "It was so harmful to the business process, I started trying to figure out what it was all about."
After fifteen years in Africa, Baker returned to the United States and was involved for many years in a variety of trading activities that took him to some two dozen countries in Africa, Latin America, and Asia. Observing further how corruption could subvert markets and development, Baker decided to raise the issue's profile and, as he puts it, "get reality on the table." Since 1996, as a guest scholar at the Brookings Institution and, currently, as a senior fellow at the Center for International Policy in Washington, D.C., Baker has conducted research on and written, spoken, and testified before Congress about money laundering and illegal flight capital."
These are among the most opaque problems the world faces," Baker says. "In this era of globalization, they constitute the biggest loophole in the free-market system."
You assert that Western banks and companies are being used to launder some $1 trillion annually in corrupt and criminal money from around the world.
That's correct. Approximately half of that sum is generated by violent criminal activity, such as organized trafficking in drugs, weapons, or people. The other half is illegal flight capital — tax-evading money derived from kickbacks, bribes, falsified invoices, and sham transactions by overseas nationals who place that money into outside secure accounts, mostly in U.S. institutions.
Whether the individual behind these ill-gotten gains is a murderous "godfather," a corrupt government official, or a tax-evading but respectable executive, it's important to understand that they all use the same process to launder their money.
And you believe that some U.S. firms are complicit in that process?
When it comes to large deposits from overseas, far too often American banks assume a "don't ask, don't tell" philosophy. In fact, the Treasury Department estimates that 99.9 percent of the criminal money presented for deposit in the United States is accepted into secure accounts. It's a sad fact, but American banks, under an umbrella of conflicting American laws and policies, will accept money from overseas even if they suspect that it has been illegally obtained. Outside the financial institutions, recent cases involving a range of products — such as appliances, helicopters, and gems — demonstrate that a variety of companies aren't vigilant enough when dirty money is used to purchase legitimate merchandise, even though suspicious buying-patterns should set off alarms.
Why hasn't this issue received more attention?
In this country, we've had an implicit cost-benefit analysis in the backs of our minds for many decades that the movement of other people's money, tax-evading money in particular, is on balance OK. I'm all for the legal movement of capital, but illegal movement is damaging to corporate interests, to our society, and, of course, to the countries of origin — because it's illegal money, it's almost never repatriated.
What evidence do you have for your observations?
In the course of investigating the mispricing of trade as a means of moving tax-evading money across borders, I conducted a highly structured research project involving 550 business owners and managers in 12 countries. Later, when I came to the Brookings Institution, I traveled to 23 countries and talked with bankers, economists, lawyers, sociologists, and law-enforcement personnel about criminal, corrupt, and commercially tax-evading flows. U.S. and international agencies, such as the World Bank and the United Nations, are also important sources of information on these matters, as are a number of private and nonprofit organizations.
What are some solutions that you would recommend?
In 1977, the United States passed the Foreign Corrupt Practices Act (FCPA), which made it illegal to bribe a foreign government official. Two decades later, the Europeans passed similar laws. I'd like to see that same approach and unity in combating money laundering.
Western governments should urge their multinational corporations to stop the practice of over- and underpricing invoices, a commonplace procedure that fosters illegal flight capital. They should agree on mechanisms — some could be as simple as signed documents attesting to the legitimacy of transaction prices and bank deposits — that carry stiff penalties if violated.
What are the attitudes overseas about U.S. enforcement efforts?
The perception is widespread in developing and transitional economies that the West, including the United States, is not serious about reducing its accumulation of the proceeds of corruption — it's too profitable. For all its virtues, the FCPA is a case in point: It prohibits companies from bribing foreign officials but doesn't deter private banks from wooing potential depositors who have dubious fortunes to invest.
What would be the result of tougher, effectively enforced money-laundering laws?
For one thing, the flow of illegal drugs into this country would be significantly curtailed. At first, drug profits might simply be laundered elsewhere. Good! American banks and companies shouldn't be facilitating that business. Let's see that money go elsewhere and then work with those countries to clean up their act.
Most executives probably believe these problems don't affect them or their companies. Are they right? Assisting in the movement of tax-evading money is subtle and can manifest itself in many ways; it probably goes on in most big Western corporations, perhaps unwittingly. Corporate facilitation of tax evasion out of foreign countries has largely been overlooked by regulatory authorities, but the climate is changing. So executives could become liable to accusations of wire or mail fraud. Furthermore, the reputation of one's company can become severely compromised, as we have seen recently with several banks that repeatedly accepted huge deposits from corrupt government officials and organized crime elements.
What is the global impact of money laundering and illegal flight capital?
To cite just one example, nearly 40 percent of Africa's aggregate wealth has been transferred to foreign bank accounts, according to the World Bank. In Africa and elsewhere, the movement of corrupt and tax-evading money drains hard currency reserves, reduces government revenues, deters investment, hurts competitiveness, solidifies the permanence of poverty, props up tyrants, and undermines political stability and economic progress. As the world's largest repository of this kind of money, the United States erodes its own strategic objectives — and its moral stature — in countries around the globe.
— Garry Emmons
Class of MBA 1960, Section E