HOT MILLIONS: MONEY LAUNDERING BUCK STOPS IN U.S.

Since the incidents of September 11, 2001, the US has launched a
special drive to ferret out the sources funding for terrorism. Yet,
its actual policies work to the contrary. It is, in fact, the single
most important money laundering destination in the world.

There are two important types of money laundering. One concerns money
which derives from business internationally accepted as being
criminal - such as narcotics or terrorism. The other concerns funds
from activities, such as tax evasion, recognised as criminal only in a
particular country. Yet money concealed in the business of narcotics
or terrorism is laundered in much the same way as illegal flight
capital. In their movement and concealment, the funds of such
international crime are gene-rally indistinguishable from capital flight.

Since the business of private banks and tax havens is managing flight
capital, it is simplest to conceal money from drugs and gun-running in
the same places. So, to really curb any particular sort of money
laundering, it is necessary to act against all of it. But the US
maintains the contradictory policy of seeming to campaign against
money laundering involved in international crime while encouraging the
other. As the result of the close connection between these two
businesses, America loses the power effectively to act against any
corrupt or criminal business, including the proceeds of international
crime.

Karin Lissakers who was the US executive director at the International
Monetary Fund during the Clinton administration has written in Banks,
Borrowers and the Establishment, about the lending boom to the Third
World during the seventies and eighties, and the collusion of bankers
in siphoning funds off to the private accounts of the Third World
elite. Private deposits from many developing economies have frequently
matched or exceeded the amounts lent to those countries.

The bulk of this money went into US banks. A number of measures
carried out by US policy-makers have assisted the flow of such
laundered money to the US. Lissakers points out that in 1984, US
treasury secretary James Baker had the withholding tax on non-resident
owners of US securities withdrawn for foreigners to use the US
financial system as a tax haven. And the Reagan administration
provided anonymity to foreign owners of US bonds when it made them
bearer bonds in 1985.

Raymond Baker who studies money laundering at the Center for
International Policy and at the Brookings Institution has shown how
multinational banks and corporations, including prominent American
ones, deve-loped techniques for mis-pricing, false docu-mentation, and
setting up fake companies, shell banks, tax havens and bank secrecy
jurisdictions. These were adopted by drug cartels in the 1960s and
1970s; and by other criminal syndicates beginning in the eighties.
More recently, terrorists have employed the same mechanisms.

The IMF estimates that capital inflows into the US amounted to $752.8
billion in 2001. Yet, the single most important policy undertaken by
the US is that it mounts, in every international forum, a sustained
campaign for the free convertibility of every currency. Since most
capital flight is to the dollar, the US is the most important
beneficiary of removing capital controls. Brazil, Chile, Colombia and
Peru had capital controls for most of the 1970s and 1980s, while
Argentina, Mexico, Uruguay and Venezuela did not. Apparently, the
first group suffered far less capital flight than the second. These
Latin American deposits landed up mainly in US banks. And Mr Baker has
pointed out that US regulators have turned a blind eye to the frequent
failure to file Suspicious Activities Reports, even when a number of
transactions show an exact percentage being paid out of an account in
a bank for what can only be kick-backs.

The US customs service does not challenge invoices which provide the
documentation to bring in money into the US through under-invoicing
imports into the US, or over-invoicing exports from the US. Exports of
goods and services from the US earned $998.022 billion in 2001. Mr
Baker points out that anti-money laundering legis-lation in the US
identifies "predicate offences" where a person knowingly handles the
proceeds of any of 200 classes of crime if committed domestically. Yet
the proceeds of all but 15 such crimes are exempt by US law, including
the Patriot Act 2001, if the crimes are committed overseas. These
include such acts as racketeering, securities fraud, credit fraud,
forgery, embezzlement of private funds, burglary, trafficking in
counterfeit and contraband goods, slave trading and
prostitution.

Reports of the United States Congress have detailed the scale of such
money laundering in Nigeria and Russia, and the specifics of the
involvement of important US banks. The financial action task force
(FATF), set up by the G-7 in 1989, is uninterested in any but a very
narrow definition of money laundering. It has recently diluted its
recommendations for limiting banking secrecy under pressure from the
Bush administration.

And the International Monetary Fund's lavishly-funded study in
progress pays no attention to the close connection between the
management of capital flight and other criminal money laundering. Any
campaign against money laundering will be meaningless as long as it
does not recognise the US role in encouraging this business all over
the world.

(The author is a visiting research fellow at the Asia Research Centre
of the London School of Economics and Political Science)