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FOOD FOR THOUGHT
A Review of Chasing Dirty Money: The Fight Against Money Laundering
by Joseph D. Douglass, Jr.
A
review of...
Chasing Dirty Money: The Fight Against Money Laundering
by Peter Reuter and Edwin M. Truman
Washington, D.C., Institute for International Economics, 2004
Organized crime and drug trafficking,
the two are joined at the hip, along with their life blood, money laundering, is
probably one of the most critical problems or threats we face in the United States,
but also by all other peoples of the world. Why, is clearly evident in this short,
clearly written book, especially when augmented with a few statements from the US International
Crime Threat Assessment report of December 20, 2000. Simply
stated, the amounts of monies involved have approached unbelievable levels, even
the minimum bounds, and the implications, especially the corruption of high-level
officials around the world, are correspondingly horrific.
Chasing Dirty Money begins by teaching
us that all estimates of criminal money laundering (more politely described as the
underground economy) are grossly inaccurate. After carefully studying a wide range
of estimates, the authors conclude that these estimates are probably only within
a factor of ten of what the real numbers are. Given the nature of the operations
and associated secrecy, good data (or easily obtainable good data) are scarce. Notwithstanding
this imprecision, however, the numbers are such that one can still easily appreciate
how truly serious the problem is.
The authors begin with macro economic
estimates of the size of the underground economy. These are indirect measures that
they see as roughly equivalent to upper bound estimates. They focused on the time
from 1989 to 2001. The estimate they put together applies to only 21 countries:
the United States, Canada, Great Britain, Ireland, Scandinavia, most of the Europe,
Japan, Australia, and New Zealand. They evidently were unable to
gather data from the rest of the world, particularly Eastern Europe, Russia,
China, Hong Kong, Singapore, Israel and the Middle East, Africa, all of Latin America,
Luxembourg, Lichtenstein, and all the famous "off-shore" islands. These excluded
countries are almost all regarded as major money laundering countries.
Their estimate of the upper bound
for the 21 countries in 2001 was $3.4 trillion. This suggests
that the upper bound without considering all the excluded money laundering havens,
would be closer to $5 trillion today. It is unfortunate that the authors did not
take that final step and offer their educated guess what the estimate would be if
all the excluded countries were included. It is unfortunate because the totals for
the 21 countries are in the ball park of prior estimates where there is no allowance
for excluded countries, thus making it easy for the reader to not recognize how
much higher than prior estimates this new estimate is. While the macro estimates
have their problems, they have one major advantage over micro estimates,
that are based on individual data for various crime categories and, hence, next
to useless because to really do a good job, one has to dig into the who, where,
what, and how, which is risky to one's life and livelihood. Given the nature and
reputation of the excluded countries as money laundering havens, it does not seem
unreasonable to expect the total to rise by a factor of two or three or even more,
thus bringing a more global estimate to $12 to $15 trillion. Moreover, this is just
the money laundering part of the underground economy. The total revenues would be
still larger, perhaps 30 percent larger, bringing the total criminal
revenues up to the vicinity of $15 or $20 trillion per year.
How one accounts for monies from
hidden activities not yet included in the list of crimes is
another question that can raise the total still further. The list of "crimes" has
been growing as the research into prevention, still skimpy and lacking, proceeds.
As new improper or fraudulent activities and incomes are identified, they are quickly
added to the list of components, with some important exceptions, one can surmise,
that are politely sidestepped because of the implications to the global financial
and political systems. Some of these exceptions, by the way they are hidden, are
also unlikely to be part of the indirect (macro) estimates. In a sense, it is a
shame not to have the thoughts of these author experts. These implications must
have been part of their thoughts over the course of their research.
Their study correctly identifies
the United States as being one of the top money laundering countries in the world,
mainly because its economy is so large. This statement, in my opinion, is also incorrect
insofar as it ignores other serious factors, the presence of so much money has lead
to the current situation in which there is almost no oversight in Congress, no accountability
(especially at high levels) in Washington DC, lots of rhetoric but little honest
concern for the national interest, and an increase in focus on spin to the detriment
of substance, honor, and integrity. As a general rule, using the macro economic
approach, the amount of money laundering taking place in the United States they
estimate at $800 billion or 8.7 percent of GDP. If we add the portions of the criminal
revenues that are not laundered to this estimate, the upper bound of the total revenues
rises to over $1 trillion.
Micro economic estimates, which attempt to
add together the monies associated with major organized crime categories, are lower
than macro estimates, among other reasons
because the data are so poor and because of the related risks identified above.
We are told they tend to run in the 2 to 5 percent of GDP range. Such percentages
may make sense in the case of nations with diverse economies, but they would hardly
apply to small countries where money laundering may be a major component in their
GDP, which may just be why many of the countries excluded from the macro estimates
are not enthusiastic supporters of strict anti-money laundering (AML) regimes and
why good data are not available from them.
Their estimated lower bound for money
laundering in the United States is $400 billion. While enormous, this seems too
low insofar as this would mean that illegal drugs with revenues over $200 billion
were close to half of organized crime, which seems like too high a contribution,
meaning the total is too low. The problem here may be a consequence of the official
estimates of illegal drug revenues, which have generally been gross underestimates
because of the assumptions used in the estimating process. It is clear that the
authors do not understand the illegal drug problem. Otherwise, it would be hard
to explain one of their recommendations, which is to require an annual report to
congress for money laundering that is comparable to the State Department's narcotics
control annual statement, which traditionally has been politically contrived (bearing
in mind Customs Commissioner von Raab's statement in 1989 when he left office that
the State Department was the United States' "conscientious objector in the war on
drugs").
Chasing Dirty Money is additionally
valuable because it provides useful introductions to a number of important subjects,
including 1) money laundering methods, 2) anti-money laundering (AML) regimes, 3)
combating predicate crimes, 4) protecting the financial system integrity, 5) combating
the "public bads," and 6) suggestions for improving the money laundering regime.
These sections are good because of the realistic approach the authors take in laying
the basis for questioning the value of AML initiatives. This is approached from
a US perspective. Their conclusions here are the most eye-opening findings in the
study. For example, in the United States, the number of money laundering convictions
averages less than 2000 per year, and these are mostly associated with
sums less than $1 million. This is out of an estimated 30,000 money launderers.
This is similar to trying to fight the war on drugs by arresting street peddlers.
It does not matter how many you arrest, there are replacements waiting in line to
replace those incarcerated. As for the seizures and forfeitures, they averaged less
than $700 million out of a total that is 1000 times larger
($700 to $1,000+ billion) hardly enough to even be called a pittance.
Continuing, to achieve this dismal
record, the U.S. federal government is now spending annually $3 billion for
so-called prevention and $37 billion for
enforcement, for a total of $40 billion to
convict under 2000, mostly small time, money launderers. On top of this, we need
to add to the $40 billion the federal government spends, the costs to the private
sector, which are certainly non-trivial. The activity is not cost
effective - not by a long shot. The impact on discouraging the criminal activities
that generate the illegal revenues is as small as the seizures and forfeitures;
thus one is hard pressed to claim its value lies in its criminal deterrent impact.
All that the AML laws and efforts have accomplished is to cause money launderers
a small measure of inconvenience and need to keep changing their methods while giving
rise to a very lucrative $40 billion cottage industry for lawyers and accountants.
Moreover, the authors, while identifying
recommendations for improvements, were hard pressed to find any that would realistically
hold promise for achieving any significant improvements. And, with respect to combating
the "public bads" " terrorism, corruption/ kleptocracy, and failed states " each
is so individually complex that AML regimes, the authors explain, can only contribute
modestly to combating it. For their capstone in this scathing indictment, the authors
state that the elaborate system of laws and regulations costing billions of dollars
has been based to a substantial degree on untested assumptions
that do not look particularly plausible.
The question of combating global
"Public Bads", raises another set of disturbing questions. This chapter in the book
addresses the problems of terrorism, corruption/kleptocracy, and failed states.
Unfortunately, the nature of the problems here is what makes organized crime and
money laundering such a critical problem. The problem goes beyond complex and enters
the region of very politically sensitive, which may explain
the superficial treatment they are given in the book. This problem is characteristic
of many attempts to deal with these "public bads," especially the corruption/kleptocracy
aspects, beginning with an important question: Who are the crooks? the 30,000
money launderers (and their clients) in the United States engaged in moving around
a million here and a million there? What about those who are engaged in moving not
millions but many billions and in such a way that it all seems legal.
This is where it is useful to bring
into play a few statements on the nature of the threat in the 2000 US International
Crime Threat Assessment. These passages all focus on the massive
corruption that creates the friendly environment in
which organized crime can grow and propagate that is, an environment in
which there is no accountability. Consider, the following quotes:
-
Criminal groups cultivate and rely
on corrupt political elites, government officials and law enforcement and security
personnel to protect their operations and to provide cover.
-
Criminal groups are the most successful
in corrupting high‑level politicians and government officials in countries that
are their home base of operations" Illicit proceeds are used to finance political
campaigns, buy votes, protect their operations, influence legislation, gain insider
access, and preempt prosecutions.
-
International criminals spare no expense
to corrupt government and law enforcement officials in foreign countries that serve
as their bases of operations or as critical avenues for transshipment of drugs,
arms, other contraband, illegal aliens, or trafficking in women and children.
-
Most organized crime groups have
been enormously successful in their illegal ventures because they have successfully
corrupted those persons charged with investigating and prosecuting them. In fact,
some of these groups have so thoroughly and utterly corrupted those officials that
it is no longer possible to distinguish between the two.
-
Corruption remains an indispensable
tool of the criminal trade. Criminal groups corrupt society, business, law enforcement,
and government.
-
International criminals are attracted
to global finance and trade. They are able to avoid scrutiny because of the importance
to businesses and governments of facilitating commercial and financial transactions.
-
International criminal organizations
use financial experts (some trained in the world's best business schools) to
identify new money-laundering mechanisms, to manage investments, and to establish
fronts that can be used as covers for smuggling and fraud schemes.
-
Huge sums of money are laundered
in the world's largest financial markets--such as Hong Kong, Japan, Germany,
the United Kingdom, and the United States.
-
Lawyers in their pay have used detailed
knowledge of the law to manipulate the judicial system and to influence law enforcement
legislation to protect criminal interests in countries around the world.
The two messages in this threat assessment
are that the problem is gigantic (beginning with the monies involved) and that it
is the corruption of the elite that
is their indispensable tool. That is, corruption/kleptocracy among and within:
-
Government Officials and Politicians
-
Investigations,
Law & Order, and Intelligence
-
Banking and International Finance
-
Investment and Financial Planning
-
Top Law Firms and
Lawyers
To state this in a more succinct
and direct manner, organized crime and big money laundering operations
have been enormously successful and have grown so gigantic because they are politically
protected by exactly those people and institutions that are supposed to be engaged
in combating them. Moreover, how can the law enforcement apparatus be effective
when it operates under the direction of the crooks and is itself also corrupted?
Accountability is for the small fries. In considering the nature of the corruption,
which most reports explicitly see as a consequence of the large amounts of money
available, this conclusion is drawn too easily. Money is an incentive, but it also
leaves a trail. Additionally, many people are as motivated by power, positions,
and promotions as by money and the former are more important in the long run and
harder to tie in as a quid pro quo, especially when someone else in the network
makes the decision on positions and promotions power and there is no paper trail.
The explicit message in Chasing
Dirty Money is that a mass of laws and procedures is as complex
as the money laundering itself, and little has been or will be accomplished. Less
explicit (almost non-existent) is the nature of the problem being addressed, which
in this study come across as the small time operators and three or four banks, only
one of which was dealt with harshly. And then, only by luck. This refers to the
common example, BCCI - known before its demise as the Bank of Crooks and Criminals
International. Congress stopped its investigation after the appropriate campaign
donations were received. The Feds took no action. The BCCI was brought down only
after the key staffer took the data, carried it up to New York City, and laid it
on NY District Attorney Morgenthau's desk. But, 2,000 money launderers getting caught
by dealings in millions of dollars is unlikely to add up to a trillion dollars.
Does corruption/kleptocracy at the government, executive, and state level, even
enter into the AML considerations. Not likely, because of the political sensitivities.
There is no discussion of investigations of top level corruption being deliberately
derailed by the heads of investigatory agencies or those above and how these activities
play in the AML regimes/activities.[1]
This issue is so serious it warrants
a few explanatory remarks. What happens when most of the political system at the
upper echelons has been corrupted? Or, in the extreme, when the political system
is itself much like an organized crime family? Is that what we are approaching today?
To place this in perspective, consider The
Black Book of Communism[2], which
is a study of the crimes of communism conducted after the self-destruction of the
Soviet Union in 1989-1991. The researchers that produced this study concluded that
the record of Communist governments was the most colossal case of political carnage
in history, far, far worse than Hitler's Germany.
The dry academic book, first published
in France in 1997, became a publishing sensation, the focus of an impassioned debate.
But, it was not the magnitude of the
Communist tragedy that was news but, rather, the fact that the truth should come
as such a shock to the public at this late date.
The problem is that there had been
maintained (and still is) a silence respecting
the crimes of the Soviet Union (Russia): "Knowing the truth about the U.S.S.R. has
never been an academic matter. . . Revelations concerning Communist crimes
[among the intellectuals and politicians] cause barely a stir. Why
is there such an awkward silence from politicians? Why such a deafening silence
from the academic world regarding the Communist catastrophe, which touched the lives
of about one-third of humanity on four continents during a period spanning eighty
years?"[3]
If the crimes of these nations are
"out of bounds" insofar as investigations are concerned, and their debate, how can
they be considered in the discussions of AML regimes and accomplishments? Obviously,
they cannot, and there is not the slightest suggestion in Chasing
Dirty Money that the authors were even aware of the problem.
Because of this silence there is
almost no awareness of the criminal conduct " especially crimes against nations
other than their own " of the Communist states operating as states,
with all the assets and resources of the state available in their organized criminal
pursuits. Why this is so important, or should be, to Chasing Dirty
Money is that in 1955, international terrorism,
drug trafficking, and organized crime became strategic stateintelligence
operations run by the Soviet/Russian intelligence services.[4] China
and the Soviet Union, especially the Soviet Union, are the granddaddies of today's
international terrorism, drug trafficking, and organized crime, and, along with
these operations, the wholesale corruption of people of power and
influence around the globe. In these operations, the money laundering was
organized - not by the KGB or GRU, but, rather, by the respectable
leaders in international finance,[5] which
existed as a partner, not victim, of the chief crooks. Because the operations were,
in effect, politically protected, as evidenced in part by the �silence,� one would
be most na�ve to assume they ceased in conjunction with the changes of 1989-1991.
The operations were simply too valuable.[6] Why
stop them anyway since no one (e.g., the media, politicians, government officials,
intelligence experts, pundits in various policy centers) can be said to have raised
even a minor stink about them for over 50 years.
As one reads through the material
in Chasing Dirty Money on terrorism,
corruption/kleptocracy, and on the AML regimes, it is easy to conclude that the
AML efforts have evolved with their focus on the little guys, the street crimes,
with no sustained effort focused on the global elite, governments, and international
finance/banks, which may be where the lion's share of the attention should be focused.
Nor is there any discussion of all
the cases where investigations were shut down or neutralized by directions from
those higher up in the government bureaucracy or any number of people with power
and influence. It would appear that even Presidential pardons have had this effect.
Consider also certain activities of the Federal Reserve in enabling the shipment
of tons of U.S. 100 dollar bills to Russia,
for example, via the "money plane" every week (circa 1994) as revealed in the organized
crime and money laundering investigations of Robert Friedman[7]-
or the shipment of 353 tons of 100 dollar bills to Baghdad, subsequently unaccounted
for, to help spur on economic redevelopment. What good are all those 100 dollar
bills with no small bills and change to go along with them? Has no one recognized
that 100 dollar bills are the staple of international organized crime � unlike economic
reconstruction � and that that might be the ultimate repository of all these shipments
and give-aways? Or, consider one of the techniques for laundering money that the
Czechs used was, in cooperation with the largest West German banks, to design bogus
public works projects as covers for the shipments of large sums
of money.
So long as there is no real accountability
or oversight, those who understand the system and have been taught that the system
is a tool to be exploited in their rightful interests, the system will be exploited.
To identify candidates, just look where accountability is well under control of
inside elites or non-existent, as for example in the case of foreign aid, or intelligence
(there is no effective oversight), or highly classified sections of national security,
or the Federal Reserve, or the White House itself.
Ten years ago, an official from Europol
intelligence in a talk on the problems they faced made the following points:
In the latter point, the speaker
was not advocating the use of illegal weapons. He was only recognizing the consequences
of growing political, government, and elite (news media) corruption where the corrupted
holders of the reigns of power also can control or manipulate the levers of justice.
The problem can not be defeated with legal means when those means are in the hands
of people who are among those who are �the problem� or beholden to them.
The money laundering problem may
not seem as such a critical issue that would put it ahead of nuclear war and terrorism
in terms of the problems it presents, but perhaps this is because the continuing
reign of political correctness prevents us from examining the full nature of the
problem and what is happening to all governments
as a consequence. Indeed, given the nature of the participating elite, might it
be that wars have been encouraged to provide diversions and covers to enable massive
economic shifts and societal changes, such as entry into a new world order, without
the public being aware of what was really happening.
Why Chasing
Dirty Money is important and worth your time to read and consider
is because of the almost unbelievable size of the monies involved, the related massive
corruption of the world's elite, the careful look at the AML efforts, the absence
of a satisfying explanation respecting the reason the AML regimes have and will
continue to be ineffective, and the absence of any serious talk about governments,
large state intelligence activities, and global corruption/kleptocracy and its political
protection. Most important is the need to begin asking questions and engaging
in an informed debate in which the participants are not restricted by concerns of
political correctness or their livelihoods should they dig in the wrong places and
too deep.
Unfortunately, this is reality. Get
the book and enjoy reading it slowly. It will wake you up to what the authors call
"the dark side of globalism."
Joseph D, Douglass Jr.
Basye Virginia
[1] Former DEA agent Michael Levin's two books, Deep
Cover and Big White Lie are
filled with examples of investigations that were trashed right at the time when
the next step was indictments and prosecutions.
[2]Stephane Courtois et. al., The Black Book of Communism (Cambridge,
MA: Harvard University Press, 1999), p. xii.
[3] Ibid, emphasis added, pp. 17-18.
[4] This is described as Gen. Maj. Jan Sejna, a top
Czech Communist official told the author of this paper in Joseph D. Douglass Jr., Red
Cocaine: The Drugging of the West (London and New
York: Edward Harle, 1999). See also - Drugs, Russia, and Terrorism,
Part 1, http://www.newsmax.com/archives/articles/2002/3/7/212349.shtml
Part 2, http://www.newsmax.com/archives/articles/2002/3/10/222920.shtml,
�Russian Organized Crime and Financial Markets,� http://www.newsmax.com/articles/?a=1999/10/12/63024.
[5] Ibid.
[6] Not just money, but equally important the massive
compromise and corruption blackmail and extortion files. These files, tens of thousands
of them, were a major byproduct of this operation and in many respects considered
more effective than money in pursuing future influence operations.
[7] See Robert I. Friedman, The Money Plane, New
York Time,s 22 January, 1996.
© 2007 Joseph D. Douglass, Jr.
Joseph D. Douglass, Jr., Ph.D., is a defense
analyst, author of The Soviet Theater Nuclear Offensive and
co-author of CBW: The Poor Man's Atomic Bomb and America the Vulnerable: The Threat of Chemical and Biological Warfare. His most recent books are Red Cocaine:
The Drugging of America and Betrayed: The Story of America's Missing POWs.