Despite the post 9/11 efforts to cut the funding of international terrorism, money laundering persists and is growing. That is because in the 1990s the world became a paradise for smugglers and money launderers and a nightmare for governments trying to stop them. According to the IMF, money laundering today runs at between 2%-5% of the world’s GDP; that is $800bn to $2000bn. Other reliable estimates place it as high as 10% of global GDP.
Money laundering altered drastically in the 1990s as a result of changes in technology and politics. New technologies popularised electronic banking and lowered costs. Today the direct cost to a bank of a typical transaction drops by 40% when the client conducts it over the phone instead of showing up at a branch in person. The cost plummets 98% if it is done online, regardless of where the customer is located.
Going global
The politics of the 1990s popularised financial deregulation, which in turn brought fewer obstacles and more lax controls over the movement of money across borders. Booming international trade and investment, immense liquidity, economic growth and low inflation also contributed to reshaping the global financial system.
The size of the system expanded dramatically. The global daily volume of exchanged currency has skyrocketed, from $590bn a day in 1989 to $1880bn in 2004. Since 1990, international portfolio investment has risen from less than $5bn a year to more than $50bn.
The global financial system grew not only in size but also in complexity. New financial products were launched: from ATM cards that operate globally to complex derivative contracts capable of moving huge quantities of money in ways that only a few specialists can understand. Inevitably, moving money illicitly across borders became far easier.
The more stringent rules imposed after 9/11 undoubtedly increased the risks for money launderers. “The attitude of the international community must change, quickly and permanently,” said a report signed by the then US treasury secretary, Paul O’Neill, and the attorney general, John Ashcroft. A justice official told a gathering of US bankers: “Like it or not, you are going to be on the front lines of the coming war on terrorism.”
Reports from the front lines are not encouraging. In 2004, the most comprehensive and rigorous evaluation of the anti-money laundering regime conducted by Ted Truman and Peter Reuter, two respected experts, conclude: “The risk of conviction faced by money launderers is about 5% annually.” Another expert, Nigel Morris-Cottrill, argues that: “Money launderers seeking a legal framework that provides them with shelter could do worse than to choose the United States.”
An editorial in the Financial Times headlined “London’s dirty secret: crooks can launder money through trusts and companies” argued that the UK accounted for an estimated 10% of all funds laundered globally because “British authorities are less willing to crack down on money launderers”. During the 1990s, up to 23 London-based banks laundered more than $1.3bn stolen by general Sani Abacha, the former Nigerian dictator. Not a single institution has been prosecuted by the British authorities. Ironically, the British authorities had forced offshore financial centres to strengthen their rules while neglecting to apply the same regulations onshore.
One problem is that not all governments attach the same priority to anti-money laundering activities. Another problem is that even among those who see it as a top priority, many lack the resources to fight it effectively. As Rudolf Hommes, a former finance minister of Colombia, told me: “I remember how agonising it was for me to decide to spend what, for Colombia, was a lot of money to fund our financial crime unit, while knowing it was still a fraction of what the narcos [drug traffickers] could spend.”
Losing battle
Germany’s former deputy finance minister, Caio Koch-Wieser, says: “Unless more top-level government attention, better thinking and much-enhanced international co-operation is applied to curbing the money laundering abuses that are common in the international financial system, societies will be fighting a losing battle.”
Unfortunately, when societies fight losing battles, some groups and individuals do very well. In Zurich I met a private banker who specialises in very high-net worth clients. I asked him: “If someone wants your services to ‘manage,’ say, $50m, how much harder is it today to help them to keep the money hidden from authorities, compared with 10 years ago?” He smiled and replied: “The main difference is that now I charge more.”
Moises Naim, editor of Foreign Policy magazine, is author of Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy.
