Illicit Money: Can It Be Stopped?

Timothy O'Keefe/Monsoon/Photolibrary/Corbis
A pier in the Cayman Islands, the secret hiding place of many illicit money transactions

On May 4, the Obama administration announced a plan to crack down on offshore tax havens, which it said are costing the United States tens of billions of dollars each year. The President’s proposals were primarily aimed at finding ways to increase revenue from wealthy companies and investors who use loopholes in the law and offshore subsidiaries to reduce their US taxes. But the administration is largely missing a far more devastating problem related to offshore finance: money gained from criminal and other illicit sources. With the use of tax havens and other elements of an increasingly complex “shadow” financial network, vast sums of illegal money are being shifted throughout the global economy virtually undetected.

Illicit money is usually generated by one of three kinds of activities: bribery and theft; organized crime; and corporate dealings such as tax evasion and false commercial transactions. Be- cause they are largely invisible, flows of illicit money across borders are difficult to measure. The World Bank estimates that they range from $1 trillion to $1.6 trillion annually, of which about half—$500 billion to $800 billion—comes out of developing countries ranging from Equatorial Guinea to Kazakhstan to Peru.

Friedrich Schneider, an Austrian economist, suggests that money laundering on behalf of organized crime and other illegal sources in just twenty OECD countries amounts to some $600 billion per year. Global Financial Integrity, an organization in Washington, D.C., finds that illegal flows of money from developing countries to banks in Western countries may reach more than $1 trillion annually. While there are different ways to quantify the problem and obtaining reliable data is difficult, these estimates are within a surprisingly narrow range.1 Taken together, they suggest that trillions of dollars of illicit money are flowing through international financial markets. Where is this money coming from?

Drug trafficking, racketeering, and terrorist financing are among the leading causes of money laundering, while in recent years the financial corruption of rogue political figures such as General Sani Abacha of Nigeria, Vladimiro Montesinos, the former intelligence chief of Peru, Pavlo Lazarenko, the former prime minister of Ukraine, and others has received much attention in the press. In fact, however, organized crime accounts for only about a third of illicit money flows, while money stolen by corrupt government officials amounts to just 3 percent. The most common way illicit money is moved across borders—accounting for some 60 to 65 percent of all illicit flows—is through international trade.

According to the World Trade Organization, the total annual global trade in goods and services before the current economic crisis was approaching $40 trillion2; but as much as $2 trillion of the total may be illicit money that has been illegally moved out of a country, or has been used to provide illegal kickbacks to…

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