Criminal Capitalism and Quixotic Devotee


Raymond W. Baker knows of the working of world capitalist system in all its intricacies to the minutest details as he worked for almost four decades in Africa and South America as a prominent businessman. Later, he was associated with two prominent think-tanks of America, including the Brookings Institution.

The thesis, he has propounded in this book, is two fold: capitalism is rotten and badly stinking, yet it needs to be reformed, as there is no alternative to it. Baker, in his experience over a period of more than 40 years in more than 60 countries, has seen “the free–market system operate illicitly and corruptly” and its impact “on the lives of disadvantaged people on all six inhabited continents”. He very candidly admits that “The basic structure of our global economic system has fundamental flaws, and the accompanying risks are beginning to be evident to wealthy and impoverished alike.”

When Baker, after finishing Harvard Business School and teaching a course in management at the University of New Hampshire, joined the business world in Nigeria, he was surprised to find that a lot of people invested their money in one place but reaped huge profits somewhere else through a complicated mechanism based on over- and under-invoicing and transfer pricing among other things. To quote Baker, “It took me two or three years to realize that most foreign-owned companies were doing largely the same thing. And then it took another couple of years to learn that most wealthy Africans involved in foreign trade were illegally moving money abroad by the same means. As the decades rolled on and my activities spread to dozens of countries across the planet, I observed that countless forms of financial chicanery are prevalent in international business. Like an iceberg, the little that is visible is supported by vastly more hidden beneath the surface.”

Baker has found the reputation of free-market system, even in the West, in the mud as it abounds in all kinds of frauds, scandals and illegalities. “An assortment of frauds, thefts, corrupt practices, accounting irregularities, earning restatements, asset write downs, tax shenanigans, conflicts of interest, and other charges, probes, malpractices, and allegations have corroded the reputations of dozens of companies and sapped the net worth of untold numbers of shareholders and retirees. The list of financial institutions tarnished in the press reads like what should otherwise be the Who’s Who of propriety: Citigroup, J. P. Morgan Chase, Bank of America, Bankers Trust, Bank of New York and some 55 more on the roster I maintain. The corporate rap sheet, ranging from spectacular failures to merely disgraced executives, includes Enron, WorldCom, Global Crossing, Halliburton, and nearly 100 more on my list. All Big 5 accounting firms have been tarred and feathered. The number of law firms taking heat is too long to recount.”

It has been claimed time and again that uninterrupted operation of market forces globally will do away with all kinds of corruption and criminal activities, which are supposed to arise from government interventions and regulations and the emergence of monopolies. What has happened in practice is quite the opposite. Baker has come out with a damning indictment: “Since the end of the Cold War, the opening years of the globalizing era have produced an explosion in the volume of illegitimate commercial and financial transactions. North American and European banking and investment institutions have been flooded with laundered and ill-gotten gains. Totaling trillions of dollars, most of these sums generated through secret arrangements between cooperating but distant private-sector entities. Lagging legal codes have proven inadequate to deal with the situation. Much of the subject is a taboo in business and government circles, yet this torrent of stolen, disguised, and hidden resources poses a major risk to state stability, corporate security, democracy, and free enterprise across the planet.”

The major portion of the book is devoted to a discussion of dirty money, its various components, the mechanism by which it is generated, how the tax havens and Western financial institutions facilitate its generation and its laundering, and the way the U. S. and other governments, notwithstanding all their protestations abate it. ‘Dirty Money’ has been defined as “money that is illegally earned, illegally transferred, or illegally utilized. If it breaks laws in its origin, movement, or use, then it properly merits the label.”

There are three main components of dirty money, namely, criminal, corrupt, and commercial. The criminal component comprises wide-ranging evil activities such as racketeering, smuggling of men as well as material goods, all kinds of fraud, counterfeiting of goods and currency notes, embezzlement, fraud, forgery, prostitution, piracy of all types and so on. It needs to be noted that most countries have banned proceeds of drug trafficking, bank fraud, and terrorism. The corrupt component has in its fold the yield of bribery and theft by foreign government officials. The commercial component is generally the result of tax-evasion and it does not find any place in official records.

According to Baker, “What is most striking is that all three forms of dirty money –criminal, corrupt, and commercial–utilize basically the same subterfuges to roll through international channels: false documentation, dummy, corporations, shell banks, tax havens, offshore secrecy jurisdictions, mispricing, collusion, kickbacks, numbered accounts, wire transfers that disguise transactions, and more. Whether it’s moving drug money or tax-evading money, whether it’s a thug or tyrant or terrorist or corporate titan, all use the same bag of tricks. And the truth is, western business and banking sectors have developed and promoted the mechanisms for other countries for more than a century.”

There are many ways to get rich while the government and the society do not know where the money comes from. One of them is under- and over-invoicing. This is a very old tactics resorted to in international trade, real estate deals, purchase of services, etc. that form part of international business transactions. To give an example, an Indian businessman may export textiles worth $10m but show in the invoice just $8m and understanding is reached before hand with the importer that he would remit to the exporter $8m and deposit the rest in some Swiss bank account or somewhere else after deducting his commission or service charges. Similarly, some Indian businessman  imports machinery and equipment worth $8m but bills, as per the secret understanding, for $10m. The Reserve Bank of India releases on the basis of the invoice a sum of $10m. The exporter takes $8m and the rest of the amount is deposited in the name of the Indian businessman or his nominee, after deducting the service charges. Thus India is defrauded to the extent of $4m in these two transactions taken together and dirty or black money to the tune of $4m is generated, which multiplies if ploughed back in business activities. So far as India is concerned, its government is deprived of foreign exchange to the tune of  $4m that could have been used for developmental purposes.

Baker has found that not only goods but services also can be mispriced or subject to over- and under-invoicing. “Insurance is a regular candidate with premiums marked up to provide offshore kickbacks. Foreign advertising is another popular vehicle. Consulting contracts and advisory services are easy to load with kickbacks. Technical assistance agreements offer a regular outflow of money that can be shifted into offshore bank accounts. Similarly, royalties, patents, and licenses have become a recent favorite among skilled money shifters.”

The U.S. and other Western governments claim that they have legally forbidden their companies to indulge in bribery in foreign lands, but this stipulation is very easily circumvented. Baker has found that the usual trick is to allow 20 per cent or so in place of usual 10 per cent commission to the agents to procure the business. Agents understand the purpose of this unusually high rate of commission and they leave no stone unturned to influence and bribe the decision-makers. They offer money and various kinds of other inducements on one pretext or the other. As is widely known, one American company, Enron, now defunct, gave money to certain people in India in the name of promoting education! Baker mentions a widely used trick: “An expatriate lawyer in the MiddleEast does a thriving business representing arms manufacturers. He sets up billion-dollar weapons deals under two contracts, one for the main equipment and a second for support services such as training, maintenance, and software updates. The first contract with the government of the purchasing country is priced properly. The second contract is channeled through a joint-venture company in a Caribbean tax haven, owned by the arms manufacturer and by designated friends of the government officials in the buying country. While doing no work, these nominee partners share in the venture’s deliberately bloated revenues, passing the funds along to their principals, the officials who are the real but silent partners.” Even a reputed company like IBM entered into such an arrangement with an Argentine firm. Baker has the details of this shady deal.

The Indian government’s scheme of offering subsidy to exporters has led to inflating the items entering export trade to corner as much subsidy as possible. “Lots of exporters continue to get rich off their government’s programs, so be alert to this money-making opportunity.” This is one of the findings of Baker so far as India is concerned. It speaks volumes about the honesty of Indian businessmen and the media they control.

Another very useful trick is transfer pricing by multinational corporations who resort to “the use of trade to shift money at will between parents, subsidiaries, and affiliates operating in dozens of countries. For many multinational corporations, exaggerated transfer pricing is standard procedure, a major part of global strategies to minimize taxes and maximize profits.” Further, “Intracompany trade across borders represents about 50 to 60 per cent of all cross border trade. I have never known a multinational, multibillion-dollar, multiproduct corporation that did not use fictitious transfer pricing in some part of its business to shift money between some of its entities.”

Consulting contracts claims arising out of imaginary damages, warranty payments, countertrade deals, etc. are some of the other effective tricks to generate dirty money and fleece developing countries.

Another frequently used device is the formation of dummy or bogus companies. It is very simple, a reinvoicing company is formed that buys, changes prices, issues a new commercial invoice, and resells. This dummy company requires only a computer, a letterhead, and a bank account to come into play. Baker has given a number of concrete examples to illustrate the operation of dummy companies.

Dummy companies play a major role in disguising the source of dirty money and then help launder it. Baker has named a number of “delightful places where you can situate and purchase your secret companies.”  In all, they come to “63 jurisdictions providing varying degrees of incorporation concealment and protection from probing eyes.” There are printed manuals that guide all the way. These dummy companies have a number of variations such as trusts, foundations, and so on. Offshore dummy companies are known as international business corporations (IBCs) or personal investment corporations (PICs). If we believe Baker, then “the United States is encouraging havens and secrecy jurisdictions to keep up with the owners of IBCs and PICs and is trying to insist on mutual legal assistance and cooperation in specific tax and criminal matters.” If you are interested in details, then Baker has them. In addition to all this, one can very easily fake the entire transactions without stirring out of your home!

What Baker says is beyond any dispute. To quote: “Use of instruments in the dirty-money user kit carries a high price. The price is damage to the capitalist system. The price is bolstering international crime and terrorism. The price is deprivation for billions of people. The price is heightened risk to the shared security of a globalizing world.”

Raymond W. Baker’s study presents in great details how “corruption industry” has flourished over the years in Nigeria, Indonesia and Pakistan. It has led to worsening of poverty, limiting government tax revenues, curtailed expenditures on health and education, reduced economic growth, increased indebtedness and discouraged investments. The estimates of public funds looted by some of the corrupt rulers are mind- boggling. Suharto embezzled $15 to $35 billion while Marcos and Mobutu pilfered $5 to $10 billion and $$5 billion respectively. Sani Abacha of Nigeria stole $2 to $5 billion. Pinochet of Chile, who was once hailed as a great saviour of humanity from communism by the USA ate up public funds with the active help and connivance of the Washington-based Riggs Bank about which, to quote Baker, “groveled before some of the dirtiest money on Earth.”

“Prestigious” banks and financial institutions of the world actively helped all these plunderers of public funds. Take, for example, the case of Sani Abacha of Nigeria. His “plunder was facilitated by some 100 banks all over the world—in the United States, England, the Channel Islands, France, Switzerland, Germany, Luxembourg, Liechtenstein, Austria, Dubai, Singapore, Hong Kong, Austria, Brazil, and elsewhere, with services allegedly performed by such institutions as Citibank, Barclays, Standard Chartered, HSBC, NatWest (now part of the Royal Bank of Scotland), ANZ Grindlays Bank, BNP Paribas, Crédit Agricole Indosuez, Credit Suisse (including Bank Hofmann and Bank Leu), Banque Baring Brothers, Banque du Gothard, Union Bancaire Privée,  M. M. Warburg, Banque Edouard Constant, Deutsche Morgan Grenfell, J. Henry Schroder Bank, Picett & Cie, S. G. Ruegg Bank, Commerzbank, Bank of India, and many more. With a fortune estimated at $3 billion to $5 billion, a feeding frenzy arose to receive, shelter, and manage Abacha’s wealth.”   

Criminal component of dirty money has its source largely in drug trafficking, mostly from Afghanistan, Colombia, Peru, etc. and in thuggery and racketeering in which terrorists as well as Mafia have a key role. So far as commercial component is concerned, one has to look at the modus operandi of multinational corporations and the state of affairs prevailing in the Soviet Union and the East European countries after the collapse of socialist regimes. Baker has the details in his book.

Baker, in the context of what happened on 9/11, asks: “Was it just religious extremism that brought on the terrorists, power disparities, income imbalances, and social disaffections evident in their motivations?”

Baker thinks that, in spite of all its rottenness, capitalism has no alternative and it can be reformed and rejuvenated to take the humanity forward. It is difficult to accept this proposition because it is nothing but pure and simple quixotic.

Before we conclude, let us draw the attention of our readers to a write-up in Guardian (October 25, 2005), which says that the Mayor of London is ready to welcome the robber barons fleeing from Russia after plundering it mercilessly. Obviously, capitalism feels at ease with criminals of all kind.

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