Stealth money is crippling democracy, authority on financial crime argues
A Q&A with Raymond W. Baker, the “Invisible Trillions” author on kleptocracy, corruption, and its place in United States politics.
By Alex Katsomitros
‘If you don’t know what I’m doing, how do you stop me?’ says Raymond W. Baker.
When Raymond Baker went straight from Harvard Business School to Nigeria in 1961, he was astonished by the mix of corruption, despotism and post-colonial greed that condemned parts of Africa to perpetual poverty. In 2006, after a long career in business that had taken him to the planet’s most remote corners, he decided to do something about kleptocracy, founding Global Financial Integrity, an organization that campaigns against illicit financial flows.
His latest book “Invisible Trillions” casts a harsh light on modern capitalism’s greatest sin: a “secrecy motivation” that decouples ownership from control and value from price, making profit-making almost synonymous with surreptitiousness. Today, Baker argues, kleptocracy is not exclusive to Africa; it has engulfed Western economies through a maze of shell companies, tax havens and falsified trade techniques used by the world’s largest corporations. An army of bankers, accountants and lawyers have become willing enablers of a system fueling inequality and authoritarianism. The veteran campaigner explains how stealth money is crippling democracy from inside and how we can kill this shape-shifting monster before it’s too late.
How did capitalism develop what you call a “secrecy motivation”?
Two things drove the creation of the financial secrecy system. One was the independence of nearly 50 countries in the ’50s and ’60s. Not trusting their new governments, local elites created mechanisms for taking their money out. Colonialist countries also retained mechanisms for moving money out of these countries.
The other reason was the spread of multinational corporations. Before the ’60s, few companies operated worldwide. Multinational corporations wanted ways of getting profits out. The techniques existed before, but their use has now been normalized.
How does financial secrecy affect democracy?
The purpose of the financial secrecy system is to facilitate the movement of dirty money. Moving inadequately reported trillions of dollars drives wealth from the bottom to the top. This contributes to extreme inequality, which is harmful to democratic capitalism. Inequality has been rising globally, undermining our attachment to democracy.
Some would argue that a degree of inequality is natural, rather than an obstacle to democracy. How would you respond?
I would argue that extreme inequality and particularly the perception of unfairness undermine democracy. That’s what’s going on in America. Most people have no objection to some level of inequality, as long as they perceive themselves as being treated with fairness, but this is not happening. When a chief executive makes 350 times as much money as a low-paid worker, it’s not fair. This sense of being treated unfairly lies at the core of America’s political angst.
Why doesn’t dissatisfaction with the economic system lead to opposition to financial secrecy?
It leads to authoritarianism. People look for appeals to their grievances. It’s a false hope that authoritarianism will produce fairness. The opposite happens. I’ve never known an authoritarian who didn’t use the financial secrecy system for self-enrichment. I have seen people worldwide appeal to grievances to gain power. That’s happening in the U.S. now. The elite is careful to cast blame for inequality on other parts of our economic and political system.
Why isn’t financial secrecy front and center in the political debate?
Let me draw an analogy with climate change. Up to the ’90s, scientists knew it was real, but it hadn’t sunk into global consciousness, the so-called “Overton window.” Financial secrecy is in the same position. We understand the issue, but it takes effort and time to make it a public priority. Climate change was finally made a public issue by Al Gore with his prestige, films and awards. Now, most people regard global warming as a problem.
That hasn’t occurred yet with financial secrecy. It’s not widely understood what its components are, particularly that falsified trade is at its core. Capitalism also bought through political donations the mechanisms that allow it to operate in secret. The elite benefits from these measures and has no reason to change anything. The middle and lower classes don’t understand the system. Climate change shows how to go.
Are there any similarities between what you saw in Africa and what’s going on in the U.S.?
I have watched African leaders use populist appeals to gain power, and then steal money. I have been told many times: “He may be a thief, but he’s our thief. He says what we want to be said.” That’s going on with Donald Trump, who has made money through tax evasion and avoidance techniques, and yet has a populist appeal no different than what I saw elsewhere. He speaks to our grievances.
Why does the U.S. government condone parts of this system, such as tax avoidance?
One reason is political donations. The Citizens United SCOTUS decision legitimized corporate money pouring into election campaigns, facilitating donations that maintain the secrecy mechanisms. Legislators are beholden to that money.
The Treasury is also conflicted. Part of it wants to fight dirty money, another part wants to ameliorate trade and budget deficits. It has never come down on one side or the other. Take beneficial ownership information, which requires companies to identify their owners. The Treasury kicked this down the road and left it to Congress to solve, although it could have taken steps unilaterally.
Years ago, a Latin American official asked the Treasury to require banks in his country to send dollars to its central bank and identify their origin before sending them to the U.S. His country’s central bank had removed that requirement, allowing banks to send money directly to the U.S. The Treasury declined his request. It’s determined to keep the dollar the prominent currency in international trade, both legitimate and illegitimate.
How do disguised companies, including foreign ones, influence U.S. politics?
They donate money to election campaigns. A foreign corporation may have U.S. shareholders, which means individual shareholders can get around individual donation restrictions. It’s a process intentionally full of holes.
As a solution, you propose federal funding of elections. How would that help?
Federal funding would help reduce money pouring into elections. We have a law that allows you to tick on your tax return an amount of money to fund elections. We can expand the current level of campaign donations from $3 to $100. With enough federal money, you reduce the need for candidates to secure money from wealthy donors. You would reduce the problem, not eliminate it. Ultimately, Citizens United has to be repealed. It’s the worst SCOTUS decision since “separate but equal.”
What’s the role of the media? Are they complicit?
They are aware of some elements of financial secrecy. But most blame those “other” countries for “their’’ corruption. Well, there is not a single element of the financial secrecy system that hasn’t been created by us Westerners. So there’s no introspection.
Take drugs for example. I have read many stories about dealers smuggling drugs. I haven’t ever read a story about how we maintain financial mechanisms that facilitate the movement of drug money into the U.S. The D.E.A. hasn’t curtailed the drug supply. How do you curtail something that is in endless supply? But you can curtail the money.
How did the U.S. become the preferred destination for money laundering?
The steady expansion of the financial secrecy system facilitated money coming into the U.S. More dirty money comes here than anywhere else. What accelerated this was that after 9/11 the Treasury encouraged banks to receive dirty money and then notify the authorities, so that they could trace the sources of terrorist financing. The banks took that latitude and ran with it. Today, U.S. banks file an average of 80,000 currency transactions and suspicious activities reports daily and leave it to the government to determine if it’s bad money. So our banking system remains open to dirty money.
How can we eliminate tax havens?
All it takes is eliminating disguised corporations. After 9/11, the U.S. passed the Patriot Act, including a provision about the elimination of “shell banks” with unknown owners. No U.S. bank could receive money from shell banks and no financial institution worldwide could send to the U.S. money received from them. Shell banks were instantly wiped out. We could do the same with shell corporations if we had the political will. This would pull the rug out from under tax havens.
What about domestic tax havens?
The same law would work domestically. After Delaware permitted the establishment of shell companies, every other state followed suit. You can’t solve this on a state-by-state basis. The Treasury or Congress need to get involved.
Wouldn’t that cause tension between the federal government and some states?
Possibly, but the elimination of shell banks didn’t cause any tension. If the same rule applied to all states, there would be less opposition. States regulate commerce, but interstate commerce has a large degree of federal regulation.
Promoting democracy is a U.S. foreign policy goal, but you argue that the national security community doesn’t see the connection with financial secrecy. Why?
They think that financial matters are beyond their purview, which includes military issues and diplomacy. Sometimes intelligence agencies shut down this discussion because they use these mechanisms to hide their money. This is a flawed approach. Take Afghanistan. We paid billions to buy support there, and if anything it extended the length of the war. Security services say quietly to the foreign policy establishment to leave these doors open. But you can do this without maintaining the financial secrecy system.
What role did financial secrecy play in the corrosion of Russia’s democracy?
Authoritarianism, of which kleptocracy is the most extreme form, is the world’s greatest money-making scheme. It gives you control of both the political and financial sides. Business in Russia operates at Putin’s pleasure. You can get rich, but you don’t challenge Putin’s power. If you do, he will put you in jail or push you out of a window. And they don’t want democracy, because that brings public oversight. So financial secrecy propels and maintains authoritarianism and kleptocracy.
Do sanctions reinforce financial secrecy?
Sanctions propel those keen on operating secretly to find means of doing so. The U.S. has sanctioned oligarchs, but we’ve allowed private equity firms to continue receiving money for investment. Due to lobbying, they don’t have to identify its origins, staying immune from anti-money laundering measures. So we still take money from sanctioned oligarchs.
How different is the Chinese approach to financial secrecy?
China is the world’s biggest money launderer. Chinese money launderers have taken over the drug money laundering business, putting Latin Americans out of business. China encourages state-sponsored crime. State-owned enterprises establish subsidiaries abroad to facilitate the movement of money between Chinese and foreign entities for the owners’ benefit. The C.C.P. allows that, provided you toe the party line.
China also encourages criminal activities elsewhere. For example, illegal gold mining in Ghana. Chinese firms buy gold by paying the village chief and export it to China.
You argue that we can’t regulate financial secrecy. How can we dismantle it?
If you don’t know what I’m doing, how do you stop me? You can only get rid of secrecy through transparency and accountability. I favor mandated disclosure, starting with identifying company ownership. No disguised operations anymore. The Corporate Transparency Act, which affects 90% of U.S. companies, is a start. Also disclose what taxes you’re paying, how and where. The next stage is establishing publicly available company registries. Why does Maryland, my home state, authorize an entity to exist beyond my knowledge as a taxpayer?
What does accountability mean in practice?
It means “Sign it.” Senior executives should be signing statements saying that they don’t use trade misinvoicing, disguised corporations or tax evasion methods. False declarations should be leading to severe penalties.
At 87, what continues to drive your passion for this cause?
I spent 35 years in business and saw capitalism being misused worldwide to accumulate wealth. I’ve seen as much poverty as anyone has seen. This finally got to me, especially as I became aware of the impact on democracy. I segued into the think-tank world to focus on these issues. Part of this linkage stems from my wife, a political scientist who headed the Fund for Peace. She serves as a stimulator for my work, helping me link my financial thinking to her political thinking.
Alex Katsomitros is a Paris and London based freelance journalist specializing in finance, technology, and trade.
✨ This article is available for republication as part of U.S. Democracy Day, a nationwide collaborative on Sept. 15, the International Day of Democracy, in which news organizations cover how democracy works and the threats it faces. To learn more, visit usdemocracyday.org.
🗳️ Contact the Democracy Day organizing team!
Email info@usdemocracyday.org, sign up via Airtable here, or check out the Democracy Day project page to learn more about what pro-democracy reporting looks like in practice.
The Democracy Day project is supported by Democracy Fund and sponsored by the John S. and James L. Knight Foundation.
