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Dirty Money and Its Global Effects

The globalizing era has produced anexplosion in the volume of illegitimatecommercial and financial transactions.North American and European banking andinvestment institutions have been floodedwith laundered and ill-gotten gains.Amounting to trillionsof dollars, most of thesesums are generatedthrough secretive ar-rangements between co-operating but distantprivate-sector entities.Lagging legal codes haveproven inadequate todeal with the situation.Much of this subject istaboo in business andgovernment circles, yetthis torrent of stolen,disguised and hidden re-sources poses a majorrisk to state security,corporate stability, de-mocracy, free enterprise, the effectivenessof international aid programs and the livesand well-being of billions across the world.

International financial statistics can neitherclearly trace the flow of illegal money nor firmlyestablish its total magnitude. However, we do knowits effects. We know, for example, that it drives thedrug trade, has moved hundreds of billions of dol-lars out of Russia in recent years, has shifted vast

sums from the southern hemisphere into the north-ern hemisphere, finances current wars and con-flicts in Latin America, Africa and Asia, and playedan enabling role in the events of September 11,2001. That tragedy led to the greatest assault everon a network that generates and utilizes money for

illegal purposes. And yet inthe midst of the post-Sep-tember 11th pursuit of ter-rorist funds, Osama binLaden said that attemptsto find and freeze such as-sets “. . . will not make anydifference to Al Qaeda orother jihad groups. AlQaeda is comprised ofmodern, educated youngpeople who are as aware ofthe cracks in the westernfinancial system as theyare of the lines in their ownhands. These are the veryflaws in the western finan-cial system which are be-

coming a noose for it.”Given political will, these “flaws” can be

largely corrected.

Dirty Money

“Dirty money” is money that is illegallyearned, illegally transferred or illegally utilized. Ifit breaks laws in its origin, movement or use, thenit qualifies for the label.

By Raymond BakerBrionne Dawson, Research AssociateIlya Shulman and Clint Brewer, Interns

Preface

January 2003$2.50

Compliments of Matt Wuerker

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There are three forms of dirty money thatcross borders: criminal, corrupt and commercial.

Criminal

Anti-money laundering legislation in theUnited States identifies more than 200 classes ofdomestic crimes, called “predicate offenses.” If aperson knowingly handles the proceeds of thesecrimes, then a money-laundering offense has beencommitted. However, only 12 to 15 of these offensesare applicable if the crime is committed outside U.S.borders, and these have to do principally withdrugs, crimes of violence and bank fraud. The listdoes not include, for example, han-dling the proceeds from foreigncrimes such as racketeering, secu-rities fraud, credit fraud, forgery,embezzlement of private funds,non-violent burglary, trafficking incounterfeit and contraband goods,alien smuggling, slave trading,sexual exploitation and prostitution,among others.

Corrupt

The corrupt component ofdirty money originates from bribery and theft byforeign government officials. The Foreign CorruptPractices Act, passed in 1977, made it illegal forAmericans to pay such bribes. However, that lawdid not specifically prohibit moving and managingbribe funds amassed by foreign government offi-cials. Many U.S. banks aggressively pursued thesestolen assets for the next quarter century. As partof the Patriot Act passed in 2001, knowingly facili-tating the proceeds of foreign corruption was fi-nally added to the list of money-laundering of-fenses.

Commercial

The commercial component is money whichintentionally and illegally evades taxes in countriesout of which it comes. There are two principal meth-ods for accomplishing this, one piggybacking on le-gitimate transactions and the other an outright, fic-

titious sham. First, mispricing transactions is themost frequently used mechanism – altering the realvalue of exports, imports, real estate sales, securi-ties deals, services and many other aspects of in-ternational trade. At any moment, thousands oftransactions at docks and airports and passingthrough electronic media have false prices built intocommercial invoices for the purpose of moving tax-evading money illegally out of other countries andinto western coffers. The second basic mechanismis misidentified transfers from one corporate en-tity to another. For example, a transaction can ap-pear to be an expense invoiced by one company toanother when it is simply a blatant shift of tax-evad-

ing capital or profits offshore toan affiliated company. Such fal-sifications, devoid of any un-derlying reality, are less fre-quently utilized but may nowtransfer more money thanmispricings which tag along withlegal trade.

The Western Role

Both the western and non-western worlds have cooperatedfor a century in creating and per-

fecting mechanisms for moving corrupt and com-mercially tax-evading money out of countries whereit is generated and into countries where it is se-creted. Western corporations and banks have takenthe lead in developing techniques for mispricing,false documentation, fake corporations, shell banks,tax havens, bank secrecy jurisdictions, numberedaccounts, payable-through accounts, concentrationaccounts and more. Drug dealers stepped into thesesame channels in the 1960s and 70s to move theirprofits from one country to another. Admiring thesuccess of drug cartels, other criminal syndicatesbegan utilizing these same channels in the 1980sand 90s to move their money into western accounts.And in the 1990s and the current decade, terror-ists have taken advantage of these same mecha-nisms to move major parts of their money. As aconsequence, U.S. Treasury Department officialsestimated that 99.9 percent of the foreign criminaland terrorist money presented for deposit in the

“What we have sown inthe business of movingcorrupt and commercial

dirty money, we nowreap in the inflow ofcriminal and terrorist

money.”

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United States gets into secure accounts. Key Eu-ropean officials made similar estimates for theircountries. To put the same point in the oppositeway, our anti-money laundering efforts fail 99.9percent of the time.

The prevalent view that drug dealers in-vented money laundering in the 1960s is misin-formed. Basic arrangements for laundering were,in fact, devised and honed years earlier. Thus, incountries that loudly tout the rule of law, statuteand tradition have long maintained the stream ofillegal money arriving from abroad. What we havesown in the business of moving corrupt and com-mercial dirty money we now reap in the inflow ofcriminal and terrorist money.

The linkage, the synergy, the similarity be-tween all three forms of dirty money is not widelyunderstood in western business and governmentcircles. It is clearly understood by every drug king-pin, criminal syndicatehead and terroristmastermind.

The idea at thecore of U.S. and Euro-pean anti-moneylaundering efforts isflawed. The idea that we can successfully protectourselves from a narrow range of dirty money wedo not want, while at the same time cultivating thereceipt of a much broader range of dirty money wedo want, is fundamentally unworkable.

Magnitudes

How much money are we talking about? TheInternational Monetary Fund estimates globalmoney laundering at $600 billion to $1.5 trillion ayear. A rough, working figure would be on the or-der of a trillion dollars a year. Breaking it into itscomponent parts reasonably produces a picture asfollows: some $500 billion a year in the criminalcomponent, $20 to $40 billion in the cross-bordermovement of corrupt money, and another $500billion or so in the tax-evading component.

Furthermore, it is likely that half of the to-tal, $500 billion, comes out of developing and tran-sitional economies, countries with often unstablegovernments, weak legal systems and 80 percentof the world’s population. This is largely a perma-

nent outflow. Little of it, perhaps less than tenpercent, returns to such countries as foreign directinvestment, masquerading under an acquired for-eign identity. The streams of money from poorercountries parked in western accounts have nowaccumulated to trillions of dollars.

Of the $500 billion estimated to pass annu-ally out of developing and transitional economies,perhaps half, $250 billion a year, is eventuallylodged in U.S. accounts or dollar-denominated as-sets elsewhere.

The estimate of $500 billion a year exitingillegally from developing and transitional economies,possibly half placed in dollar assets, could conceiv-ably vary by an order of magnitude. Wherever themost accurate figure lies, the margin of error is notgreat enough to affect the analysis that logically fol-lows from such numbers. Dirty money constitutesthe biggest loophole in the free-market system.

Impact on U.S.Interests

The uncheckeddiversion of tril-lions of dollars outof other countries

not only constitutes a gaping loophole in the free-market system, it is also the most damaging eco-nomic condition impoverishing the poor in devel-oping and transitional countries. It drains hard-currency reserves, heightens inflation, reduces taxcollection, worsens income gaps, cancels invest-ment, hurts competition, undermines free trade andsaps growth. It leads to shortened lives for mil-lions of people and deprived existences for billionsmore.

Compare the $500 billion a year estimatedto be moving illegally out of developing and transi-tional economies to the $50 billion a year in west-ern aid given to these same economies. In otherwords, for every $1 that is generously handed outin assistance across the top of the table, some $10in dirty money is taken back under the table.

Widespread lawlessness in the global finan-cial system facilitates drug trafficking, contributesto terrorism, cripples important domestic and for-eign interests of the United States and subvertsprogress for the global poor.

“For every $1 that is generously handed out inassistance across the top of the table, some

$10 is taken back under the table.”

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Traditional Explanations

The underlying reasons why such illegali-ties are so pervasive are often misunderstood.

For wealthy citizens in foreign countries whoillegally move their money abroad, the typical ra-tionales offered have to do with evasion of taxes,circumvention of exchange controls and protectionagainst inflation and confiscation. Although thesepoints have an element of truth, they do not iden-tify the primary intent. The predominant motiva-tion is the hidden accumulation of wealth. A sur-vey conducted in the 1990s of 550 business own-ers and managers in 11 countries produced this,among other startling conclusions. The essentialdrive is about getting rich secretly, hiding suchmoney at a distance and avoiding pressures for dis-tributions to employees and relatives locally.

For the United States, and also Europe, thejustification for encouraging and facilitating the in-flow of tainted money from abroad has beenstraightforward. We have been guided for manyyears by an implicit cost-benefit analysis suggest-ing that the receipt of such money is good forAmerica, good for Europe. It shows the strength ofour economies. People in foreign countries want tobring their money here and invest where they knowit will be safe and can grow. Succeeding adminis-trations have encouraged this view. U.S. TreasuryDepartment officials have indicated several timesin recent years that it is U.S. policy to support thedeposit of money from other countries. When askedif a distinction is made between the legal and illegalcomponents of such transfers, the answers typi-cally revert back to our very narrow definition ofthe few classes of illicit proceeds which we considerto be criminally laundered money. Other forms ofcriminal and commercial dirty money are regardedas acceptable.

Policy Implications

With broad, though not total, internationalcooperation after September 11th, Al Qaeda’s trace-able resources were, to a large extent, pushed outof the global financial system, confirming what canbe accomplished given the necessary political will.However, the ability of Al Qaeda or other terrorist

groups to recreate and employ similar financialnetworks of dummy corporations, disguised bankaccounts and falsified transactions for future usehas hardly been altered. Furthermore, the nega-tive impact of dirty money on developing and tran-sitional economies is severe, often catastrophic, asthe case studies below illustrate.

Today it is appropriate to ask two very fun-damental questions. First, can the case be madethat the inflow of dirty money is good for America?Our consideration of this question has so far fo-cused only on one side of the equation, the arrivalof hundreds of billions of dollars, perhaps $250 bil-lion annually, from offshore, serving, it seems, tobolster the U.S. economy. But the damage done tothe fabric of our society resulting from our appe-tite for dirty money is staggering. Domestically, itshields and thereby facilitates the passage of drug,criminal and terrorists’ money into U.S. invest-ments and holdings. And internationally, it under-mines key foreign policy objectives of the UnitedStates in poorer countries in Africa, Latin Americaand Asia and in the transitional economies of theformer Soviet Union and Eastern Europe.

Consider the commercially tax-evadingcomponent, which some people suggest is the morebenign part of the dirty-money problem. The ar-gument is often made that it is not our responsibil-ity to enforce other countries’ tax laws. While thisis true, it is not the right question. The importantquestion is, is it in our interest to break the taxlaws of other countries? When we do, we promotelawlessness in international trade and finance. Thisadds our hands to the mechanisms that move dirtymoney around the world. And, disturbing as it maybe, this adds our hands to the mechanisms thatenable terrorists to fly planes into the World TradeCenter and the Pentagon and into the ground inPennsylvania. The hundreds of billions of dollarsescaping illegally every year out of weaker coun-tries, amassing to trillions of dollars permanentlylodged in the most advanced nations’ repositories,arrive at a punishing cost.

If the case cannot be made that the inflowof dirty money or any part of it is good for Americaand other western democracies, then our percep-tion of this issue must change from an assumptionof its benefits to a recognition that the price tag

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attached to these felonious funds is altogether un-acceptable.

The second question is whether or not it ispossible to attack the global dirty-money problemmore aggressively without impeding the legitimatefree-market system. Here, it is important to un-derstand that the proper goal is not to stop all sus-pect transfers but rather to curtail — substantiallycurtail — dirty money and our facilitation of its safereceipt. Stopping dirty money would require dra-conian procedures. Significantly curtailing dirtymoney can be accomplished without throwing sandin the gears of legal trade and investment and isentirely a matter of political will.

Several steps can move this effort well for-ward of our current position, as enacted in earlierregulations and amplified in the Patriot Act:

n Anti-money laundering legislation shouldbe extended to bar knowingly handling all threeforms of illicit proceeds. We cannot expect to havehonest government and reputable commerce indeveloping and transitional economies, functioningin a global financial framework that facilitates ille-gal transfers of many forms of criminal money andvirtually all forms of tax-evading money. Incre-mental legislation reluctantly pushing the anti-money laundering agenda a few notches ahead ev-ery few years is an inadequate approach to an ur-gent issue.

n Access to all western clearing house sys-tems and correspondent bank relationships, withthe United States taking the lead, should bepromptly denied to offshore secrecy jurisdictions,laundering centers and shell banks. The FinancialAction Task Force in Paris has recently diluted thestrength of its “name and shame” approach to for-eign money-laundering centers, an effort that mustbe reinvigorated. And offshore tax havens, oftencomplicitous in channeling all forms of dirty money,are finding increased use by U.S. companies. Bar-ring access to western financial systems is anunderutilized instrument in the struggle againstdirty money and warrants application in a muchmore purposeful manner.

n Without being excessively burdensome,financial institutions and multinational corporationsneed to put in place enhanced measures to ascer-tain the legitimate origin of deposits and resourcesin cross-border transactions. The United States hashad repeated instances — Bank of New York,Citibank, IBM, Bell Helicopter, just to name a few— where failures to exercise due diligence broughtdirty money to U.S. shores, to the detriment of thebroader society. What remains to be instilled is aculture which asks rather than avoids the rightquestions. And this culture cannot be instilled aslong as an implicit assumption prevails that theinward transfer of dirty money is basically goodfor the United States.

We have a choice to make as a society. Whichis more important to us: to fight crime and terror-ism with all reasonable and legal means at our dis-posal, and to fight poverty which contributes tofailed states and fosters crime and terrorism, or tocontinue to cultivate the hundreds of billions ofdollars that flow into the United States illegally fromother countries? If not post-9/11, post- campaignfinance reform and post-Enron, then when?

The Center for International Policy has re-cently conducted extensive research on three ex-amples of the impact of dirty money on selectedcountries. These case studies illustrate some of thepitfalls for the United States and other nations aris-ing from facilitation of illicit proceeds.

Russia

Russia has suf-fered what appears tobe the greatest theft ofresources that has everoccurred in a short pe-

riod of time, estimated at $200 billion to $500 bil-lion during the 1990s. Active cooperation or be-nign neglect emanating from western corporationsand financial institutions facilitated virtually thewhole of this lawless transfer.

In the late 1980s and early 1990s, as theassets of the Russian state were being taken overby entrepreneurs, the richest among them later

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called “oligarchs,” exports of oil, gas, gold, diamonds,aluminum, pulp, timber and more were being madeout of Russia, primarily to buyers based in Europe.Kickbacks in the billions of dollars passed into cor-porate and personal accounts of the Russian ex-porters, in Switzerland, Germany, France, England,Spain, Cyprus and elsewhere.

As ownership of Russian assets continuedto gravitate to the private sector in the mid 1990s,many Russian exporters established their own of-fices in other countries to buy and sell resourcesand products comingfrom or going to theircountry. Hundreds ofsuch entities sprang upin Europe and the UnitedStates. Exports weresold to these companiesat very cheap prices andthen resold to foreignbuyers at world market prices. For example, someoligarchs purchased oil domestically for $10 a metricton, resold it to their own dummy corporationsabroad for about the same price, and then resold itagain to foreign buyers at $120 a metric ton. Inmany cases, 100 percent of the revenues from suchexports remained in foreign bank accounts, andnothing was remitted to Russia.

In 1996, the Russian central bank requiredRussian banks to advise exporters that they mustbring back 50 percent of export proceeds within aspecified period. This regulation was almost totallyignored. Two years later a revised regulation re-quired a higher percentage of export revenues tobe remitted according to a strict schedule. Export-ers reacted to this somewhat toughened statute byunderpricing their exports on outgoing commer-cial invoices, thus reducing the documented rev-enues to be returned. The underpricing was com-pensated for by normal pricing when the export-ers’ own overseas companies resold to foreign buy-ers, once again retaining the marked-up revenuesoffshore.

Russian exporters also found it useful to es-tablish their own banks. From the mid 1980s tothe mid 1990s, the number of banks in Russia grewfrom three to some 2,500, as companies establishedtheir own institutions, particularly to facilitate han-

dling their own trade documents. While many ofthese banks were limited to domestic, ruble ac-counts, hundreds had correspondent banking re-lationships overseas and dealt in foreign exchange,further lubricating the transfer of money abroad.

Lack of due diligence in overseeing corre-spondent relationships produced the Bank of NewYork fiasco. Utilizing home computers and dummycorporations, Lucy Edwards, a bank senior vicepresident, and her husband, Peter Berlin, managedto siphon some $7 billion out of Russia from 1995

to 1999.As early as

1993, even the Russiancentral bank set up anoffshore company,FIMACO, on the Brit-ish isle of Jersey, ap-parently as a reposi-tory for IMF funds in-

tended to reinvigorate the Russian economy andstabilize its currency. Some of the IMF funds werealleged to have been invested in Russian high-yieldgovernment bonds, known as GKOs, with the earn-ings allegedly pocketed by private individuals andgovernment officials. Attempting to probe the af-fair, a PricewaterhouseCoopers audit reported that,“We have not been provided access to Ost WestHandelsbank,” which was the recipient of a largepart of a $4.8 billion IMF tranche. In March 1999,then-Treasury secretary Robert Rubin stated be-fore a congressional panel that IMF funds sent toRussia “may have been siphoned off improperly.”

One of Russia’s premier entities, Gazprom,set up an affiliate, Itera, in Jacksonville, Florida, in1992. In a series of asset-stripping transactions,Gazprom shifted resources to Itera, producing lossesfor Gazprom and disproportionate benefits for itsU.S. affiliate. In one set of transactions, Gazpromsold gas to Itera at $2 to $4 per thousand cubicmeters, which Itera then resold at $30 to $90 perthousand cubic meters. Today, Itera Group N.V.,registered in the Netherlands Antilles, comprisessome 130 companies with stakes in metal, con-struction, chemical and other industries.

Two questions arise from this case study.First, was there a point at which western govern-ments and international financial institutions should

“Was there a point at which westerngovernments and international financial

institutions should have pushed tocurtail resource shifts out of Russia?”

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have pushed to curtail resource shifts out of Rus-sia? In the early 1990s, many Americans, Europe-ans and Russians themselves believed that the onlyway to prevent communism from returning to Rus-sia was by getting capital and property out of thecontrol of the state. This was largely accomplishedby 1994 or 1995. But then the bleeding of wealthfrom Russia into western coffers continued un-abated in the second half of the 1990s, long afterthe ability of communism to resurrect itself hadpassed, in the opinions of most observers. Indeedthe bleeding continues today. Even if one subscribesto the political argument that communism had tolose the opportunity to recapitalize and reconstructitself, the question remains, should the West havemaintained its facilitative role in the further dete-rioration of the Russian economy beyond the mid1990s?

Second, could the West have done anythingto curtail the deterioration of Russia’s economyfrom, say, 1995 or 1996? A centuries-old instru-ment is readily available to assure that export pro-ceeds are remitted – the confirmed, irrevocableletter of credit. Issued by a foreign bank, it requiresthat export proceeds be paid to the foreign bank,and that bank is then obligated to send the pro-ceeds back to the exporting country. Who shouldhave insisted on adoption of such commercial normsby Russian exporters? Certainly the IMF, in its loannegotiations with the Russian government, had thepower to do so.

Russian business executives and bankers didnot invent any new ways of stealing from their state.They simply stepped into well-established chan-nels. At the same time, equally well-establishedinstruments could have sharply curtailed the long-term damage done to the Russian economy, dam-age that may take a generation or more to recoup.

The greed of Russian entrepreneurs and thewillingness of the United States and Europe to co-operate in criminal activity deeply scarred the Rus-sian economy and set back for years the develop-ment of democratic capitalism in the country.

CongoCorruption and dirty

money in the Democratic Re-public of the Congo, formerlyZaire, led to state collapse. Sinceindependence, the nation hastwice been wracked by civilwars. The most recent out-break began in 1998 after rebelforces toppled the Mobutu re-gime the preceding year. Since

then, fighting over territory and mineral resourceshas involved Rwanda, Burundi, Uganda, Zimbabweand Angola and has caused two to three milliondeaths.

Congo’s rich mineral resources, possibly ex-ceeding South Africa’s, include diamonds, copper,zinc, uranium, geranium and coltan, used in pro-ducing cell phones and satellites. King Leopold II,the only individual ever to own a colony, pursuedthe plunder of his fiefdom across the turn of thelast century, extracting rubber, ivory, timber andproduce, until western — particularly American —pressure forced him to relinquish his title to theBelgian government. Official policy then continuedthe “strategy of attrition” for another half century.

Joseph Mobutu styledhimself as Mobutu Sese SekoKuku Ngbendu waza Banga,which means “the all-powerfulwarrior who, because of his en-durance and inflexible will towin, will go from conquest toconquest leaving fire in hiswake.” At least the last part ofhis self-anointment proved ac-curate. He came to power in

1965, after the first prime minister, PatriceLumumba, was assassinated in a plot condoned bythe CIA, with the knowledge of Belgium and France.As one of the world’s best known kleptocrats, heamassed a fortune estimated at more than $500million, held mostly in European property invest-ments and Swiss bank accounts. Bilateral aid, aswell as World Bank and IMF funding, were regu-larly diverted to his own pockets.

Mobutu is sometimes credited with invent-ing banking from home. He would often pick up thetelephone and order transfers from central bank

Mobutu Sese Sekogoverned the Congofor over thirty years.

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• Asset stripping

• Control of procurement and accounting

• Organized theft

• Using corporate facades as covers for criminal activities

• Purchase of military equipment

The free-for-all currently characterizingCongo’s economic affairs is illustrated in the link-age of conflict diamonds and outside powers. Min-erals Business Company is identified as handlingZimbabwe’s interest in the diamond trade:

The Minerals Business Company usesZimbabwe’s military and political in-fluence to evade the legal require-ments of the Democratic Republic ofthe Congo and to avoid paying thecostly licensing fees. The refusal ofMBC to honour its obligations to thepublic treasury has prompted officialcomplaints from the Ministry ofMines demanding that MBC complywith the law. MBC officials have as-serted that Zimbabwean entities arenot obliged to adhere to the laws ofthe Democratic Republic of the Congo.(p. 13).

Among companies named in the UN reportare First Quantum Minerals, Anglo American, DeBeers, Group George Forrest, Cabot Corporation,Orion Mining, Oryx Natural Resources, Tremaltand Eagle Wings Resources. Eagle Wings, for ex-ample, a subsidiary of Trinitech International, Inc.based in Ohio, reportedly maintains close ties tothe Rwandan regime. According to the UN report:

Eagle Wings operates in the Demo-cratic Republic of the Congo as aRwanda-controlled comptoir with allthe privileges derived from this con-nection. Eagle Wings is not obliged to

reserves into his own overseas accounts or deliv-ery of sacks of foreign currencies to his places ofresidence. Maintaining a large family and a coterieof sycophants costs real money.

In 1982 a retired German central banker,Erwin Blumenthal, who had earlier been secondedby the IMF to Zaire’s central bank, reported that“. . . the corruptive system in Zaire, with all its wickedand ugly manifestations, will destroy all endeavors. . . towards recovery and rehabilitation of Zaire’seconomy.” He went on to add that there is “. . . no(repeat no) prospect for Zaire’s creditors to get theirmoney back in any foreseeable future.” Despite suchwarnings, multilateral loans to Zaire totaling some$2 billion continued for the next decade. Congo’sforeign indebtedness remains over $10 billion to-day, a sum that can never be repaid.

A recent UN report released in October2002 entitled in part, “Illegal Exploitation of NaturalResources and Other Forms of Wealth,” documentscontinued pillage of Congo’s resources. The reportimplicates 85 multinational corporationinterns basedin the United States, Canada, the U.K., Belgium,Germany, Netherlands, Switzerland, Finland, SouthAfrica, Ghana, Zimbabwe, Thailand, China and else-where, all considered to be in violation of OECDGuidelines for Multinational Enterprises.

Financing supplied by such companies ex-acerbates the ongoing conflict, provides funding torebel authorities operating in the country and drainsthe government’s meager foreign exchangereserves. External involvement in the Congo rangesfrom occupying forces of Ugandan, Rwandan andZimbabwean troops, western businesses, arms traf-fickers and groups with ties to terrorist networkssuch as Amal and Hezbollah. In some cases, in re-turn for mineral resources, weapons and munitionsare given directly to warring factions.

The UN report declares that illicit proceedsare generated through “. . . organized systems ofembezzlement, tax fraud, extortion, the use of stockoptions as kickbacks and diversion of state fundsconducted by groups that closely resemble crimi-nal organizations.” In pursuit of all three forms ofdirty money – criminal, corrupt and commerciallytax evading — the study identifies five principalstrategies:

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fulfill its full responsibilities to thepublic treasury managed by theRCD-Goma [RassemblementCongolais pour la Démocratie] admin-istration. Like other Rwanda-con-trolled coltan comptoirs, Eagle Wingscollaborates with RPA [Rwandan Pa-triotic Army] to receive privilegedaccess to coltan sites and captive la-bor. (p. 16).

“Captive labor?” In the quest for question-able profits, is a U.S. company now repeating theworst excesses of the last century?

Argentina

Argentina is an excellent example ofhow habitual and pervasive illicit trans-actions and dirty money can deeplydamage the political and economic un-derpinnings of a nation.

Recall that Argentina dollarized itseconomy in 1991, making it legal for

anyone to take pesos to a bank and exchange themfor dollars, no questions asked. Many experts werecertain this would have multiple benefits for theeconomy, including cleaning up the outflow of il-licit proceeds. After all, why would anyone ex-change pesos for dollars, and vice versa, illegallywhen they can do the same thing legally at a bank?The avoidance of transparency lies at the heart ofmost schemes for moving ill-gotten gains. ThreeArgentine examples help illustrate the point.

First, trading patterns were for a decadebadly skewed in Argentina, as importers sought touse open convertibility to minimize value-addedtaxes. In cooperation with foreign suppliers, im-ports were often and significantly underinvoicedin order to reduce VAT charges on goods arrivingat the docks, airports and borders. Importers paidthe indicated amount on commercial invoices, leav-ing the underpriced amounts remaining to be paidby other means. Many Argentine businesspeoplebecame experts at keeping an entirely separate setof books, even separate entities, to sell part of theirimports or goods produced from such imports. Rev-enues from these unregistered and unrecorded

transactions were then taken to a bank, with in-structions to transfer capital abroad. These funds,shifted offshore, settled the balance on underpricedcommercial invoices. Thus, in the absence of ad-equate customs inspections and controls, free cur-rency convertibility contributed to substantiallyreduced collection of VAT taxes.

A second example demonstrates how IBMfound itself caught up in scandal. In an arrange-ment called Proyecto Centenario, IBM entered intocontract with Banco Nación to install computers val-ued at $250 million throughout the bank’s 525branch offices. Judge Aldolfo Bagnasco accused IBMof paying bribes, referred to in Buenos Aires as “alittle happiness,” to get the contract. IBM Argen-tina reportedly funneled these payments throughtwo local companies, Consad and its subsidiary CCR,which were supposedly functioning as subcontrac-tors to IBM. Payments of $37 million went to CCR,a firm with one employee and one telephone.

CCR redistributed millions which ended upin bank accounts in New York, Switzerland, Lux-embourg and Uruguay. Upon request from JudgeBagnasco, Swiss authorities revealed that benefi-ciaries of such accounts included directors or ex-directors of Banco Nación. At least two recipientsadmitted that they received millions and confirmedthat the payments were a gift from IBM.

Juan Carlos Cattaneo, former assistant to thesecretary general of the presidency, funded Consad,one of the companies fronting for bribes. Hisbrother, Marcello Cattaneo, apparently the bag manin the transactions, was found hanged from aradio antenna in 1998, under suspicious circum-stances. The IBM-Banco Nación contract was can-celled in 1997. Swiss banks turned over $4.5 mil-lion in frozen assets to the Argentine governmentin 2002.

At a minimum, it appears that IBM’s U.S.-based corporate office failed to exercise sufficientoversight of its Argentine subsidiary. In 2002, theJustice Department was reportedly conducting 65or 70 investigations of various U.S. companies sus-pected of violating the Foreign Corrupt PracticesAct in many countries.

Scandal has also reached into the adminis-tration of former president Carlos Menem.

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Fabricacciones Militares (FM), a weapons manu-facturer, was accused in 1998 of exporting 6,500tons of arms to Bosnian Muslims via Croatia in 1991

and 1993, in violationof a UN arms embargo.The U.S. governmentwas reportedly wellaware of the transac-tions.

Menem wasbriefly placed underhouse arrest in June2001, after being ac-

cused by Judge Jorge Urso of forging documentsthat facilitated the trades. Also indicted at the timewere three other former officials – an army chiefof staff and ministers of defense and foreign affairs.Originally valued at $35 million, with Panama in-dicated as the false destination, the arms wentthrough several intermediaries of Argentine, Chil-ean, South African, French and Austrian national-ity before final delivery by a Croatia Line vessel at$70 million.

The Balkans deals apparently emboldenedFM and the Menem government. In 1995, 8,000rifles were reportedly dispatched to Guayaquil, ata time when Ecuador was in a border conflict withPeru, and Argentina was offering to function as apeace broker.

These kinds of incidents, involving the busi-ness community, a major U.S. company and a dis-credited past administration, contributed to andnow underlie the political and economic breakdownof Argentina and suggest that a very long roadstretches ahead in the rebuilding task facing one ofAmerica’s most important neighbors.

Burying the Relic

For more than a hundred years, NorthAmerica and Europe solicited, transferredand managed illicit proceeds seeking exitfrom other countries and residence in west-ern accounts. In recent years, no nationreceived more such criminal, corrupt andcommercial dirty money than the UnitedStates. Our reasons are straightforward: welike the arriving billions of dollars and as-sume the inflows are good for our economy.And it is this equation that now demandssearching reevaluation.

America cannot wage a successful waragainst drugs, crime, terrorism, global pov-erty and state collapse, while simulta-neously seeking and harboring ill-gottengains from across our borders. To think wecan is folly.

Those who favor the status quo – fa-cilitating the inflow of all or some of thedirty money still legal – must make the ar-gument that the benefits outweigh the coststo our society. In the absence of such a cred-ible argument, logic dictates an alternativeconclusion: We don’t want it.

The remaining question is then nar-rowed and simplified: How do we curtail thebillions of illegal, unwanted dollars arriv-ing at our doorstep? The answer begins witha willingness to put all three forms of dirtymoney – criminal, corrupt and commercial– squarely on the political-economy tablefor determined action.

The notion that we can build the kindof orderly, globalizing world we want whilefeeding our appetite for dirty money is un-sustainable. This process, a relic of an ear-lier age, needs to be promptly changed.America will be stronger, not weaker, as aresult. Political will is the missing ingredi-ent.

Raymond W. Baker, with a career in internationalbusiness concentrated primarily in developingcountries, is a Senior Fellow for the Center forInternational Policy.

Carlos Menem, FormerPresident of Argentina

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STAFF:ROBERT E. WHITE, presidentWILLIAM GOODFELLOW, executivedirectorRAYMOND BAKER, senior fellowNICOLE BALL , senior fellowFRICK CURRY, senior associateLANDRUM BOLLING, senior fellowPARKER BORG, senior fellowMELVIN A. GOODMAN, senior fellowADAM ISACSON, senior associateANYA LANDAU, associateNITA MANITZAS, associatePAUL OLWENY, associateMIRANNA SMITH, director of operationsWAYNE S. SMITH, senior fellowSARAH STEPHENS, associateINGRID VAICIUS, associateALISON WHELAN, finance anddevelopmentBRIONNE DAWSON, research associateMELIS ALGUADIS, internCAROLINE DE COURREGES, internALIAKBAR ESFAHANI, internJULIE HARBOUR, internLIZZETTE HAMILTON , internSARAH LARMAN, internMONICA LUKASZEWICZ, internERIK SONNE, internTARA TEMPLIN, internROBERT WROBEL, intern

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