Africa, Civil Society, Economy & Trade, Eye on the IFIs, Financial Crisis, Global, Global Geopolitics, Global Governance, Headlines, Trade & Investment, Trade and poverty: Facts beyond theory

Q&A: "Political Elites Ensure Continuing Flight of Dirty Money"

Hilaire Avril interviews RAYMOND BAKER, campaigner against corruption and money-laundering

PARIS, Sep 16 2009 (IPS) - Illegal capital flight in the form of corrupt, criminal and illicit commercial proceeds out of developing economies could be as high as one trillion dollars a year.

Raymond Baker: The poor are the hardest hit by illegal capital flight. Credit:

Raymond Baker: The poor are the hardest hit by illegal capital flight. Credit:

Not only does it dwarf the 50 billion dollars in development assistance that rich countries disburse annually but it is largely facilitated by the western financial system of tax havens and secrecy jurisdictions.

This is according to Raymond Baker, the director of Global Financial Integrity, a Washington D.C.-based think tank that campaigns against corruption and money laundering. He is the author of a new book called "Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System".

He has also acted as an advisor to several African countries.

Hilaire Avril spoke to him about the recent Group of 20 (G20) decision to curb capital secrecy jurisdictions — in response to the global economic crisis — and concerns about political elites’ possible backsliding on corruption in certain African countries.

IPS: You wrote that "criminal, corrupt and commercial dirty money transferred out of developing and transitional economies is the biggest loophole in the global free-market system and the most damaging economic condition hurting the poor". What makes dirty money the biggest obstacle to poverty reduction? RAYMOND BAKER: I know of no other economic condition that is so damaging to the poor. The only other obstacle of this magnitude to poverty reduction is hyperinflation. But hyperinflation is always a short-term phenomenon. It may go on for several years, but it’s nothing like illegal flight capital, which goes on for generations.

Illicit outflows from developing countries have moved cumulatively trillions of dollars abroad. In the long scope of my 48 years in developing countries, I know of nothing that is so harmful to them.

Another reason is that this phenomenon is a one-way flow. This money never comes back from abroad. It has been a massive one-way transfer of wealth — out of developing countries and into Western economies.

IPS: Your figures are staggering: 500 billion dollars of dirty money leave developing countries every year, whereas international aid amounts to a 10th of that. And yet, development professionals and institutions rarely mention this problem? RB: The figures I used in my book are actually lower than the ones we posted on the Global Financial Integrity (GFI) website.

We have recently done a study using standard economic models and came up with an even bigger figure (for illicit financial flows from developing countries between 2002 and 2006): 850 billion to a trillion dollars a year of illicit money draining out of developing countries. We still think that is a conservative estimate.

IPS: Why hasn’t the development community addressed this issue? RB: I think it’s because, firstly, we are dealing with data that is difficult. There is no place where you can look up "flight capital" and find statistics. You have to go through fairly interesting analytical exercises in order to arrive at these numbers. For my book, I used a survey method, that is, I interviewed people.

At GFI, we employ an economist from the International Monetary Fund (IMF), who’d been with the IMF 32 years, and we use economic models that have been used by many economists.

But it just happens that we were the first people to apply these models to the whole of the developing world, to the data available from the World Bank and the International Monetary Fund that is relevant. Economists have been hesitant to deal with this because the data is a little bit dodgy. You have to massage it a little to get intelligible results.

But I think there is a second reason why the development community hasn’t examined this issue, and that’s because it’s been far too focused on the foreign aid component of development. That is, the money that goes into developing countries. We don’t pay attention to the money that comes out.

That’s part of the reason GFI was established: to draw attention to the fact that this business of development is two-way street. It must also consist of what we in our Western economies need to do to foster development in poor countries.

IPS: Are you optimistic that recent initiatives to recover assets diverted from developing countries, such as the World Bank’s Stolen Assets Recovery (StAR) programme, will succeed? RB: I think the StAR initiative is primarily focused on helping developing countries themselves figure out how to recover their stolen assets. The problem with that strategy is that there are a lot of developing countries that do not want to do that, or are afraid to do that.

There are a lot of countries where the group in power doesn’t want to dig up the transgressions of the group that is out of power, because the situation could easily be reversed at another point in time. The question of motivation is not addressed in initiatives such as StAR.

However, given that it is an effort to help developing countries pursue those stolen assets, it is a very good initiative.

IPS: You have advised a number of governments in developing countries, including in Africa. What were your most frequent recommendations? RB: We lead the Task Force on Financial Integrity and Economic Development, which believes that much more could be accomplished through transparency than through regulation.

While regulation simply tries to provide a tighter set of rules governing financial transactions, transparency requires that the shadow financial system itself be largely dismantled.

So we advocate curtailing the mispricing of trade imports and exports; accounting faithfully for sales, profits and taxes paid by multinational corporations in all countries; disclosing ownership of all bank accounts; setting up automatic cross-border exchanges of tax information on personal and business accounts; and harmonising anti-money laundering laws internationally.

A lot of people think that it is difficult to do. But it is not. It’s only a matter of political will. The outflow of illicit money can be substantially curtailed, to the benefit of developing countries. But it does take a regime that wants to accomplish that goal.

You cannot approach this kind of problem thinking that you only want to prevent multinational corporations from extracting hidden wealth out of developing countries. Whatever you apply to those entities, you probably ought to apply to your own domestic citizens as well. And that is where the political will breaks down.

IPS: The G20 (summit held in London in April 2009) proclaimed a number of measures to limit tax and judicial havens. Is this cause for optimism, or just more promises? RB: We are happy with the forward movement, but there’s a great deal of distance left to go.

I think in fact the recent Liechtenstein case (in which hundreds of German nationals have been accused of owning secret accounts for tax-evasion purposes) and the UBS case (similarly affecting U.S. account holders in Switzerland) have been even more important than G20 pronouncements as to the curtailment of tax havens.

Having said that, there is a movement trying to minimise the harm they do around the globe, which is encouraging. But there still is a lot of distance to go.

IPS: Do you feel there is increasing momentum from governments to tackle these issues? RB: Yes, I think there is growing momentum from governments. You can see this in G8 or G20 announcements, and in the new tax information exchange agreements that are being signed between countries.

But another factor to consider is the effect of the market itself. Investors are pulling their money out of Switzerland and tax havens. Lots of capital has passed back to the United States over the past several months, and additional sums are now going to Dubai and Singapore.

Two things are happening. Those who are frightened of being caught are bringing their money back and trying to handle it responsibly. And those who are continuing to seek secrecy are taking it to other jurisdictions. So these changes are not only brought about by pressure from governments, but also by fear in the marketplace.

IPS: Several initiatives against capital flight have been launched in Africa in recent years, but they seem mostly due to civil society rather than governments. Why is that? RB: I think that is a fair comment, and the hope is that NGOs (non-governmental organisations) will keep up the pressure. But there has been a lot of backsliding on the part of governments on this issue, in Nigeria and in Kenya. There is also concern that there may be some backsliding in South Africa and other places.

The anti-corruption agenda cannot be said to be moving forward in all countries, by any means.

Republish | | Print |

native american history books pdf