Copyright The International Herald Tribune
Wednesday, April 13, 2005
WASHINGTON In recent weeks, high-profile advocates have appealed for more foreign aid for the developing world. The Commission for Africa established by Prime Minister Tony Blair of Britain recommends, in part, an additional $25 billion in aid per year by 2010. The United Nations Millennium Project’s recent report, “Investing in Development,” calls for more than doubling foreign aid from rich to poor countries over the next 10 years. These are certainly worthy goals, but what about the billions of dollars that stream illegally the other way, from poor countries to rich?
We’ve seen staggering examples of this phenomenon recently. A substantial portion of the billions of dollars skimmed from the UN oil-for-food program left Iraq with the assistance of overseas businesses and, some reports say, even UN officials. Riggs National Bank in Washington handled huge sums out of Chile and Equatorial Guinea. Research by the Center for International Policy and other organizations shows that the outflow of “dirty money” from poor countries far surpasses the inflow of aid. Preventing that money from leaving poor countries would give the West a way to help developing economies even without necessarily increasing foreign aid.
There are three sorts of cross-border dirty money: corrupt, criminal and commercial. Corrupt dirty money flows from government officials who abuse their authority and dip their hands in the till, then hide their stolen wealth offshore. This grabs the most headlines, but is actually the smallest part of the dirty-money problem, only about 5 percent of the total. Criminal dirty money encompasses proceeds from drug running, human trafficking, racketeering, securities fraud and more. Commercial dirty money is the most easily overlooked. Businesses try to hide revenue from their country’s tax inspectors by, say, directing buyers to deposit money in Western bank accounts. Private studies have estimated such practices in developing countries at 5 percent to 7 percent of their total trade, or more than $200 billion per year illicitly transferred abroad.
Even if foreign aid doubles, as the United Nations and Blair’s commission recommend, the outflow of dirty money is still vastly larger. Annual foreign aid totals $50 billion or so, while dirty money is upwards of $1 trillion per year, half of which passes from developing and transitional economies to the West. Once this money leaves a country, it rarely comes back.
What could such money accomplish if it stayed in poorer countries? It could be spent on consumption, releasing a multiplier effect through local economies. It could go into domestic capital investments, thus increasing employment. It could be deposited in local banks, forming the basis for matching loans.
Imagine hundreds of billions of dollars every year staying legally in poor countries, providing the funds for improvements in health, education, investment, employment – all the things that the UN Millennium Project report and its supporters espouse. Closing the West’s back door to dirty money would strengthen the most desperate countries, improving their ability to provide for their own needs, rather than depending on the largess of the rich and the powerful.
Even more than expanding their foreign aid packages, Western countries could deliver a bigger bang for their buck by reining in the financial abuses that they aid and abet. An elaborate structure of financial secrecy exists to shield dirty money from scrutiny: more than 60 tax havens, a million dummy corporations, $8 trillion or so parked offshore, porous anti-money-laundering laws in America and Europe, plus myriad banks and consulting firms ready to recommend intricate strategies that keep taxable profits out of the reach of struggling home governments.
The United States and its allies could begin to curb these abuses with a stroke of the legislative pen. A first step is to expand the number of crimes whose proceeds are subject to money-laundering charges. Incredibly, it is legal in the United States to handle money from crimes committed abroad, including racketeering, securities fraud, forgery, counterfeiting, human trafficking, slave trading, prostitution and tax evasion.
The impact of foreign aid is diluted when the back door remains open to illicit funds flowing out of developing and transitional economies into willing Western coffers. Giving generous assistance with one hand while taking in dirty money with the other hand undermines our best efforts to help the poor.
(Raymond Baker, a senior fellow at the Center for International Policy and guest scholar at the Brookings Institution, is the author of the forthcoming book “Capitalism’s Achilles’ Heel.’’ Jennifer Nordin is the center’s director of economic studies.)