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Capitalism’s Achilles Heel
Dirty Money and How to Renew the Free-Market System

Raymond W. Baker
John Wiley & Sons, $27.95, £16.99

The Washing Machine
How Money Laundering and Terrorist Financing Soils Us

Nick Kochan
Texere, $29.95

A little knowledge can be a dangerous thing. In the law school class that I teach on white-collar offences, some students view the class as a “how to” course. My aim is not to give tips about how to dodge taxes, insider trade or launder money. But the skills that students need to represent clients, prosecute criminals or improve government policy are the same as those needed to flout the law.

Two excellent new books on money laundering impart a lot of knowledge, and might suffer the same paradoxical fate. The authors explore how corrupt government and corporate officials, as well as terrorists, exploit loopholes to move dirty money around the world. These books might motivate governments and banks to adopt much-needed reforms. But it is just as likely, and perhaps inevitable, that they will become training manuals for budding money launderers-to-be.

In Capitalism’s Achilles Heel, Raymond W. Baker, a guest scholar at the Brookings Institution, argues that money laundering and related frauds have corroded the capitalist system. Baker’s project is ambitious and well researched, with the first-person perspective of four decades in international business.

He claims the most frequently used device for moving dirty money is transfer pricing – the mispricing of cross-border deals, not just to hide cash, but also to kick back payments to insiders.

A simple example illustrates the point. Suppose you agree to buy a friend’s car for £20,000. Instead of telling your spouse the actual price, say it costs £30,000instead instead. Then, siphon the extra £10,000 into an offshore account to support your bad habits. Your spouse will never know.

Trillions of dollars have moved in this way, with corrupt officials arranging kickbacks, particularly to heads of state and their families. The practice has become so common that One major accounting firm even offers a training manual with “creative and practical solutions for your transfer pricing needs”.

Transfer pricing also helps companies avoid tax, by reducing reported revenues and increasing reported expenses. Yes, that forklift truck being shipped to Jamaica was worth only $384.14. Of course, that ink-jet printer imported from Colombia cost $179,000. Given the off-market rates Baker reports, it is surprising that any multinational corporation reports income and pays tax.

Baker anticipates the dual nature of his audience – some lawmakers, some lawbreakers – and heanticipates the dual nature of his audience, including a brisk, 25-page Dirty-Money User Manual. Tongue firmly in cheek, he gives detailed advice about false documentation, fake corporations and tax havens. Inevitably, some readers will skip the interesting digressions about Adam Smith and Jeremy Bentham to copy down tips for shipping cash abroad. Yes, people actually stuff dead bodies with $100 bills.

Criminals also ship household appliances filled with cash, which brings me to the title of the other book, The Washing Machine: How Money Laundering and Terrorist Financing Soils Us, by Nick Kochan. (I cringed at this subtitle, and can only hope Mr Kochan, a skilled writer, had nothing to do with it.)

Kochan sets out some of the most outrageous instances of money laundering in recent years. The book has lucid and pithy descriptions of how the Bank of New York became the conduit for $10bn of criminal proceeds from Russia, how officials in Angola illicitly exchanged diamonds for cash and then for weapons, and how the City,
London’s financial district, became a hub for hot money.

It is a handy reference to a dozen or so leading scandals. Most interesting is the scathing attack on banks, particularly Citibank, which has been under investigation since a 2000 US Senate subcommittee report exposed its role in a series of scandals.

Kochan recounts Citibank’s dealings with what he calls “dirty clients”: President Sani Abacha, president of Nigeria; El Haj Omar Bongo of Gabon; Asif Ali Zardari, husband of Benazir Bhutto, the former Pakistani prime minister; and Raúl Salinas de Gortari, brother of the former president of Mexico and the infamous “tough guy who knows how to raise $20m over a weekend”.

Kochan’s account is a product of many years of research and interviews. He is tough but fair, noting that Citibank was not charged with crimes and has enacted modest reforms, and also making it clear that Citibank is not alone.

One interesting question remains unanswered: what role did terrorist financing play in the build-up to the attacks of September 11 20019/11? There are two pieces of evidence on this point. First, during the days immediately prior to 9/11 the volume of put options, investments that pay off only when a stock declines in price, surged in the parent companies of American Airlines and United Airlines. According to a footnote in the 9/11 commission report, this unusual trading had no connection to terrorism.

Some people remain suspicious, and have pointed to a second piece of evidence: the dramatic spike in US dollars – particularly $100 bills – in circulation in August 2001, one of the three largest monthly increases in fifty 50 years. This surge might have an innocent explanation. But it might also indicate that people with advance knowledge of the attacks were hurriedly withdrawing cash.

Is it possible that terrorists profited from inside information in advance of their attacks? Might they have funnelled cash out of the country just before 9/11?The US government insists the answer is no, but it is hard to imagine that terrorists who are savvy in using shell companies and offshore trusts to hide the identity of their contributors would not also think of trading on inside information or withdrawing cash early.

Perhaps government officials believe the details of these activities, like those about the manufacture of nuclear weapons, should remain out of print, lest they reach the wrong hands.

The author is professor of law at the University of San Diego

Copyright The Financial Times Limited 2017. All rights reserved.
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