Stopping the betrayals

The first two articles in this series (Oct. 18, Nov. 1) detailed the repeated betrayal of Balkan countries by big powers of Europe, and now the United States as well. In this article we’ll examine how the United States could help the Balkans and other poor areas of the world by fighting international poverty in a way different from that emphasized in recent decades by evangelicals of either the left or the right.

Here’s a quick summary. In recent years the debate among Christians on foreign aid has been two-sided. Some Christians say more dollars to poor countries, along with forgiveness of debts they owe, is a theological imperative. They say if only the United States and the European Union were generous, poor countries would soar.

That viewpoint has been undercut in recent years by books from Africans and others showing how foreign aid hurts more than helps, in part because it allows dictators to grab income flows and build up their armies and bureaucracies. As the “send money” view has lost authority, other Christians have focused on the fatalistic worldviews that hold back many individuals in poor countries and the dependency that international aid builds.

While some among the wealthy could certainly be more generous and some among the poor could certainly be more industrious, a third emphasis (which could complement either of the other views) is now emerging: Dollars in help only if they do not become dollars out to secret bank accounts. One Washington research organization, Global Financial Integrity, says at least $950 billion illegally exits developing countries each year.

In this view, poor persons are held back because corrupt politicians and oligarchs, money launderers, tax evaders, terrorists, and smugglers of arms, drugs, and humans, move those billions by using banks where they can stash what they’ve stolen and companies that allow them to hide their identities. Corruption has a corrosive and dispiriting effect: Fight corruption and those countries have a fighting chance.

Global Financial Integrity’s 10 staffers work out of a small office four blocks from the White House. The office sits amid a maze of squat buildings the law forbids from rising above the height of the U.S. Capitol, but the staffers fly higher: They’ve visited a combined 47 countries on six continents in the last 12 months, as they work to expose how what GFI founder Raymond Baker calls “dirty money” flows around the world.

The flows are huge. From Croatia alone between 2001 and 2011, $17 billion from criminal and corrupt practices headed into foreign accounts, according to the Adriatic Institute, a free-market think tank. The Balkans region as a whole lost $112 billion during that period, and one result is economic hemorrhaging: Croatia, in its seventh straight year without economic growth, has 20 percent unemployment and 52 percent youth unemployment.

A small neighboring country, Montenegro, saw $6.2 billion pulled out of it from 2001 to 2010, according to GFI. The family of Prime Minister (and former Communist Party member) Milo Djukanovic is now one of the world’s richest ruling clans, and even the crumbs that fall from his table are large. At least two out of five young Montenegrin adults are unemployed, but Djukanovic’s nephew Edin, as a student, bought a Manhattan apartment for $900,000, according to Monitor, a Balkan weekly.

Parts of Africa, South America, and Asia are Montenegro writ large. Last month’s poster child for corruption was Teodoro Nguema Obiang Mangue, son of Lt. Gen. Teodoro Obiang Nguema Mbasogo, dictator of Equatorial Guinea. That small West African country’s oil revenues should make it one of the world’s richest nations, but wealth is concentrated in the hands of a few persons in the president’s inner circle. Most of Equatorial Guinea’s 700,000 residents live on less than $1 a day.

Obiang, only 10 when his father murdered his uncle in a 1979 coup, acquired over the years a fleet of yachts and expensive cars, a $38 million Gulfstream jet, a $30 million mansion in Malibu, Calif., and an extensive collection of Michael Jackson memorabilia. Between 2005 and 2007 alone Obiang transferred about $75 million to the United States, according to Global Witness, an international anti-corruption group.

The U.S. Department of Justice has done many things wrong over the last six years, but here’s something it did right: It pursued Obiang through a Kleptocracy Asset Recovery Initiative, and last month reached a deal with him. Obiang will turn over what he receives from selling his Malibu mansion and one Ferrari, along with six life-size Michael Jackson statutes. Obiang, also under investigation in Spain and France, says he gained his wealth “in accordance with the laws of my country.”

GFI’s Baker has visited dozens of poor countries during his 79 years, along the way collecting art displayed on his office walls such as a purple quilt made of Afghan wedding veils and a shawl made by a blind man in Mali. Baker’s easy smile suggests why his marriage has lasted 50 years: for two-thirds of those years he managed and built companies in Nigeria and other parts of the developing world. He doesn’t smile about what he saw: “financial skulduggery going on all around me.”

Baker says the United States is on the right track with the anti-kleptocracy initiative, which since its 2010 launch has collected about $600 million of the $1.2 billion in illicit funds it pursued in 15 cases, according to a Wall Street Journal analysis. Much of that came in August when the family of former Nigerian dictator Sani Abacha, who died in 1998, turned over about $480 million.

The next steps, although faltering, may result from measures like the Foreign Account Tax Compliance Act (FATCA), a 2010 law that took effect in July. FATCA requires foreign financial institutions to give information about U.S. account holders to the Internal Revenue Service, or face major penalties. It does nothing directly about the Djukanovics and Obiangs of the world, but it seems to have started a trend that will make hiding stolen money more difficult for the rest of the world. Last month at a summit in Berlin, 89 countries, including the largest economies of the world, committed to implement automatic exchange of financial information by 2018.

“This is the way the world is moving,” said GFI’s Clark Gascoigne, noting that 44 countries have already started sharing information with the United States. “FATCA ignited a flame.” The European Union is now following the U.S. lead and clamping down on secret bank accounts. Switzerland in 1934 adopted banking legislation that created secret accounts, but 80 years later the Swiss are dropping their special rules. Austria, Liechtenstein, and Luxembourg, also oligarch favorites, are putting up resistance but making small changes.

The next front in the battle is what Global Witness calls “the getaway car” for criminals: shell companies. These anonymous corporations, while not illegal themselves, enable copious criminal behavior around the world—and the United States appears to have more shell companies than any other country. Every state allows formation of them, often collecting less information from applicants than it takes to get a driver’s license. Often the entities only exist on paper, perhaps with a post office box.

The United Kingdom, under heavy pressure over rampant financial misdeeds, is taking the lead in creating the world’s first public registry of real owners. It’s now pressuring British dependencies and territories to do the same: Jersey, Cayman Islands, Bermuda, and the British Virgin Islands are all favorite havens for anonymous companies. Other countries and the European Union are heading in that direction. In the United States, retiring Sen. Carl Levin, D-Mich., and Sen. Chuck Grassley, R-Iowa, are two co-sponsors of a bill that would require states to use an incorporation system requiring applicants to disclose their real owners.

Grassley told WORLD the bill’s premise is simple: “to force criminals out of the shadows. … What’s wrong with just knowing who is benefiting from the establishment of a company?” Of course, one reason for American economic progress over the decades has been that it’s easy to set up new businesses, and it’s important to make sure that any new regulations don’t gum up the works.

The Foreign Corrupt Practices Act of 1977 made it illegal for an American anywhere, and for some foreign persons within the United States, to offer a bribe to a foreign official so as to further business goals. Some critics have said this ties the hands of business executives competing for international business. Some agree that the U.S. economy is slightly worse off than it would otherwise be, with fewer jobs than would otherwise result, but they are willing to accept that so as to discourage a tawdry practice common in the rest of the world.

FATCA and the Levin-Grassley proposal are also measures that could modestly reduce available capital for lending and job creation: Some citizens from corrupt countries have already removed their money from U.S. financial institutions. If that’s the case, what are we willing to put up with economically in the name of helping the poor internationally?

One recent example of accepting corruption: HSBC, the world’s second-largest bank, laundered Mexican drug cartel money in an operation so blatant that cartel smurfs would arrive for daily deposits with boxes of cash sized to fit the HSBC teller windows. HSBC, a British bank founded in 1991 by the Hongkong and Shanghai Banking Corporation, accepted the money because that’s how it makes more money—but a record $1.92 billion U.S. fine for failing in basic due diligence is discouraging such practice.

Should JPMorgan Chase, Bank of America, or Citigroup, the three largest U.S. banks, say no to deposits from the Djukanovics and Obiangs? That does reduce available capital, and the question is obvious: Are we our brothers’ keepers? But some American Christians and others concerned with international poverty-fighting are asking: How can we help our brothers and sisters in countries held back by corruption?

Every four years a group of leading economists formulates the Copenhagen Consensus on the best way to spend money for global development. Its 2012 report argued that the top five priorities should be nutritional supplements to combat malnutrition, expanded immunization for children, and redoubled efforts against malaria, intestinal worms, and tuberculosis. But countries have trouble making progress on those positives as long as the big negative, corruption, remains.

WORLD interviews in the Balkans this summer uncovered a residue of good will toward the United States (except in Serbia, which Americans bombed 15 years ago). That’s why this April’s photo of Vice President Joe Biden shaking hands with Milo Djukanovic puzzled some Balkan residents and deepened the cynicism of others. Theodore Roosevelt famously spoke softly and carried a big stick, but since Woodrow Wilson a century ago, many U.S. presidents have offered loud happy talk and waved what they thought was a magic wand.

Fighting corruption isn’t painless. Part four will conclude this series with an examination of how lobbyists and interest groups are dealing with these issues.

Moving money

Criminals often escape prosecution by using lawyers to devise elaborate webs of anonymous companies and banks through which to funnel proceeds. For example, a criminal might sell drugs in the United States and deposit the proceeds in a Mexican bank that wires money to a shell company in Delaware—no real owners listed—that then buys U.S. real estate.

Corrupt leaders and transnational companies also use the trade-based money laundering technique known as “misinvoicing” to move illicit funds across international borders. The practice often involves natural resources such as oil or timber but could be most anything, including automobiles and other goods. Here’s a diagram similar to one GFI uses:

In this case of import over-invoicing, the Balkan importer illegally moves $500,000 out of the country. Although he is only buying $1 million worth of used cars from the U.S. exporter, he uses an anonymous Liechtenstein intermediary to re-invoice the amount up to $1,500,000. The U.S. exporter gets paid $1 million. The $500,000 that is left over is then diverted to an offshore bank account owned by the Balkan importer. —J.C.D.