Dirty Money: an interview with Raymond Baker


Raymond Baker is the author of the recently published book _Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free Market System_ (Wiley, 2005), which examines the illegal system for transferring money that regularly siphons off about $1 trillion a year in illicit proceeds, about half of which comes out of the world’s poorest countries and into the world’s richest. A long-time veteran of international business, Baker is now a guest scholar at the Brookings Institute and a Senior Fellow at the Center for International Policy. His book is a damning indictment of the link between dirty money, inequality, and global poverty, but it also offers practical steps that the United States and the international community could take to sharply curtail the system.

*Twin Cities Daily Planet*: The title of your book is _Capitalism’s Achilles Heel_, implying that capitalism itself is in some kind of jeopardy from the system you have studied. Can you explain what you mean?

*Baker*: I treat capitalism as having three interrelated shortcomings that have to change if it is to survive and truly spread prosperity. One is illegality – the way it has come to permeate global capitalism, with most companies routinely indulging in illegal transactions. Breaking laws in one or more countries has become virtually normalized.

The second critical issue it has to face is global inequality. Illicit transactions worsen global inequality. Capitalism can operate successfully within a band of disparity that is fairly modest in Western Countries – about 4:1 to 10:1. Globally, the ratio of inequality is 31:1. Capitalism cannot function with that degree of disparity. The level of inequality means that products produced by one set of people cannot be purchased by others. If that disparity continues it threatens the system.

The third piece is the way we have distorted the underlying philosophy of capitalism – we have undermined Adam Smith’s original notion of capitalism as elaborated not just in _The Wealth of Nations_ but in _Theory of Moral Sentiment_, which argues that individual liberty can only exist where self-reliance and self-interest are restrained by natural law, and have adopted instead Jeremy Bentham’s philosophy which proposed that the good and the ethical is represented by whatever produces the greatest good for the greatest number, with selective sacrifices accepted as part of the system. In this philosophy the distribution of goods doesn’t matter, just the sum total of advantages for a society as a whole. Capitalists took this idea to heart, which easily translates into the belief that the ends justify the means. That thinking has come to permeate capitalism, which has got to rethink its philosophical underpinnings if it is going to address the inequality and illegality that are part and parcel of the global capitalist system.

*TCDP*: How long has the dirty money system been in place?

*Baker*: Most of what has happened has been the product of the last 40 years. There were elements of the dirty money structure in the 30s, 40s, and 50s, but it was not as widespread. But over the last 40 years we have developed a whole global financial structure whose sole purpose is to transfer money illegally across borders. And it is being expanded to the point where some estimates now claim that half of all global trade and transactions involve illegal movement of money across borders.

*TCDP*: What’s been the impetus behind all this?

*Baker*: There are two reasons why the dirty money structure grew from the 1960s forward. The first was decolonization – 48 countries have become independent since that time. A lot of political and economic elites in those nations wanted to take their money out of their native countries. We in the West obliged by creating a system to facilitate that movement.

The second reason that the 60s mark the point where this took off is that this was the decade when multinational corporations really began to spread across the world. The great drive to expand operations across the planet began then. So to help elites to transfer money and because multinational corporations wanted ways to shelter money, we built this whole system.

Now we’ve reached the point where $1 trillion a year crosses borders in all permutations of illegal transfers – criminal trade, straightforward corruption, and rigged commercial transactions. Everybody else who looks at the $1 trillion figure I use say it should actually be higher but I am being conservative. Corruption actually represents the smallest part of this; criminal trade is next, while the largest is commercial. Of course, we like to focus on corrupt villains because it allows us to shift responsibility to those bad guys.

*TCDP*: $1 trillion a year? How much of that is being transferred to the industrial world out of the developing world?

*Baker*: About half of it, or $500 billion a year in my estimate. That figure, incidentally, is almost exactly ten times the total amount of foreign aid donated by the industrial world to the developing world every year. So you can see why this system cripples any chance of poorer countries accumulating the kind of resources they need for economic development.

Now, there are three reasons why the developing world is such a large part of the global total: one, these are counties with the weakest legal and administrative structures; two, these are countries with the biggest gangs of drug dealers and racketeers; and three, these are counties that have elites that want to transfer money out of countries.

*TCDP*: Why are these elites – kleptocrats, essentially – so eager to transfer funds out of their countries?

*Baker*: Economic theory says these are rational actors seeking to protect their assets, but my research shows that one of the primary motivations is the desire to get rich secretly and to accumulate wealth in ways that cannot be seen within a country and therefore does not have to be shared with fellow citizens. This is what drives it. The corrupt and criminal components of the dirty money system don’t care about tax evasion – they don’t pay taxes anyway. The commercial component of the system may in some instances be trying to evade taxes, but there are many cases where money that wouldn’t be taxed is being transferred out of one country into another.

Take the case of Argentina, for example. In the early 90s it dollarized its economy. You would think this would end anybody’s desire to shift money abroad. All you had to do was go to the bank and exchange your unstable currency for American dollars. But on the contrary, Argentines continued to send money abroad because they wanted to keep their wealth accumulation a secret. The best way to ship money out of the country without anyone knowing about it was then, as it is now, through falsified pricing of imports and exports.

*TCDP*: Explain what you mean by falsified pricing.

*Baker*: The easiest way to explain is to give an example. Say a purchasing agent from a poor country goes to a sales agent for a foreign company and says he wants to buy equipment. Together, the two negotiate a price, but then make an agreement to invoice the shipment at a higher price, one that includes a kickback. When the purchasing agent receives the inflated invoice, he sends the money to the sales agent, who keeps some of the kickback for himself and puts the rest into a private bank account for the purchasing agent. Another variation on this is the completely false transaction where a purchasing agent pays the invoice on a shipment that never occurred.

*TCDP*: What percentage of the dirty money system does falsified pricing represent?

*Baker*: The commercial component of the illegal cross border flow of money is about 60 percent of the total traffic, or about $600 billion a year. About two thirds of that total comes by way of falsified pricing. So, about $400 billion a year.

*TCDP*: Is there any hope of curtailing this kind of corruption?

*Baker*: It could be curtailed very easily. All you would need is to require that there be a signature on every trans-border shipment by both the buyer and the seller stating that the price has not been inflated, there is no mispricing or falsification or violation of any law either in the country of origin, transshipment or destination. You will always have people who will sign anything, but most prudent people will not sign a sworn statement they know is a lie and that will land them in jail if they are found out.

*TCDP*: Are there other steps the U.S. could take to curtail the dirty money system?

*Baker*: Yes. We can make ourselves a little more selective about what money we will accept in U.S. banks. Again I would apply a two signature approach – the signature of the bank official accepting funds and the signature of the foreign account holder. For its part the bank informs the account holder that it only accepts deposits or money that is legally earned, legally transferred, and intended to be used only for legal purposes. The account holder must sign the same statement declaring that all those things are true. This isn’t rocket science, but it would require a sea change in the way our banks operate. We could so this, if we have the political will.

*TCDP*: Are there any signs that we are making headway on any of this?

*Baker*: There are. Sen. [Charles] Grassley (Rep.-Iowa) has sponsored a bill that would make virtually all dirty money from abroad come under U.S. money laundering laws. At the moment, this is not the case. It is also encouraging to see that the World Bank is making anti-corruption measures a priority, which means that it may start cracking down on all the money coming out illegally from developing countries. In addition, 9/11 focused our attention on terrorist funding and led to stronger measures against money transfers. So there are signs we are beginning to understand the system that thrives on the movement of illicit money, but we still have a long way to go to bring it under control.