How the G-8 Can Help Africa—Choke $1 Trillion in Dirty Money
Bloomberg, July 11, 2005
By James Pressley

More than 40 years ago, an American fresh from Harvard Business School took a job in Nigeria to get overseas experience. He wound up embarking on a battle to stem more than $1 trillion in dirty money that he says sluices through Western banks, supports corrupt regimes and undermines efforts to lift Africa and other poor regions out of ``a debtor's prison.''

Those thematic crosscurrents should have made Raymond W. Baker's latest book, ``Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System'' (John Wiley & Sons, 448 pages, $27.95), required reading at last week's gathering of the Group of Eight richest nations in Gleneagles, Scotland.

Baker, a senior fellow at the Center for International Policy in Washington, convincingly argues that disrupting the flow of ill- gotten loot is more important for Africa than canceling debt, boosting aid and stepping up trade, however worthy those goals are. Western countries sink roughly $50 billion in foreign aid into poorer countries each year, he says, then take back 10 times that amount -- $500 billion a year -- by laundering dirty money fleeing those lands.

Choking the flow would push more cash into local banks, securities, real estate and consumer purchases, benefiting developing economies as the money circulates at home, he argues. A crackdown might even save capitalism itself, he says, cleansing a system replete with offshore havens that helped U.S. energy trader Enron Corp. and Italian dairy-products producer Parmalat Finanziaria SpA hide billions of dollars in debt.

No Profit Please

Baker's quest began in 1962, after the director of a U.K.- owned trading company explained how he did business in Africa: ``I'm not trying to make a profit!'' the man said.

The company, Baker learned, was artificially marking up the prices of cars and other goods it imported into Nigeria, a mechanism enabling managers to turn a profit in the U.K. instead of Africa. Baker discovered that most wealthy Africans engaged in foreign trade used the same technique to shift money abroad.

The son of a Louisiana wholesale grocer and banker, Baker stayed on in Nigeria, founding an investment company that set up, acquired and ran various ventures, including some that later featured in Harvard B-School case studies. Amid coups and countercoups, Baker turned around a trucking company by creating financial incentives for drivers to stop plundering diesel fuel, tires and their cargo, Guinness stout.

All the while, Baker's conviction grew that Western banks and utilitarian logic had created a financial system that sucks money out of developing and transitional economies, feeds criminality and erodes the foundations of capitalism.

Bipartisan Backing

Baker is no antiglobalist. The author has spent years studying tax havens, received a grant from the John D. and Catherine T. MacArthur Foundation and traveled to 23 countries to research money laundering. He has testified before U.S. congressional committees and his book carries endorsements from U.S. Senators Charles Grassley, a Republican from Iowa, and Carl Levin, a Democrat from Michigan. His voice, though at times caustic, is that of a world-wise uncle who laughs at his own failings and welcomes corrections from all comers.

How much soiled money churns through the global rinse and spin cycles? Drawing on sources ranging from Interpol to the Boston Consulting Group, Baker puts the figure at more than $1 trillion a year. That includes proceeds from crimes ranging from counterfeiting and art theft to human trafficking, and from fake pricing that hides kickbacks to phony fees that mask asset stripping.

Half of the loot flows out of developing or transitional economies, Baker says. Keeping that $500 billion at home, he argues, could do more to alleviate poverty than all the West's economic aid, export promotion, foreign investment and free-trade policies put together. Even if you cut Baker's estimate in half, it's still five times the $50 billion Western governments spend annually on foreign aid.

Bentham, Bin Laden

This is a complicated book that embraces everything from Baker's remembrances to statistics on poverty to the utilitarian philosophy of Jeremy Bentham.

The author starts with a ``Dirty-Money User Manual,'' a beginner's guide on how to hide fortunes abroad with the help of dummy corporations, fake transactions, tax havens and helpful Western bankers. He then offers up a compendium of rogues whom this system has aided, from rulers like Ferdinand Marcos to terrorists like Osama bin Laden.

Why isn't more done to halt the flow? The simplest answer is that Western banks and governments want to keep the cash coming, Baker says. Foreign money helps fill balance-of-payment deficits and swells banks with deposits and fees. Face it, Baker says: ``We like the money.''

World Bank

Kicking the dirty-money habit will take courage, but Baker says the means lie within our reach. We could, for example, freeze the Western bank accounts of public officials in countries that benefit from World Bank loans for as long as they are in office.

We could require Western corporations to publish tax returns and explain the purpose of units they register in offshore havens. Developing countries could bar foreigners from providing services that help local residents to evade taxes or move their money offshore.

Bankers will no doubt attack many of Baker's proposals as impractical and burdensome. Yet Western governments would do well to heed his advice. Citibank Inc., whose name crops up along with other leading lenders throughout the book, might want to include the title in the ethics classes that the bank is holding for its roughly 300,000 employees.

To contact the writer of this review:
James Pressley in Brussels at jpressley@bloomberg.net.