The Global Financial Crime Wave Is No Accident

By Nat Dyer, a freelance writer based in London. He was previously an investigator and campaigner at Global Witness, an anti-corruption group. He tweets at @natjdyer. Originally published at openDemocracy

There was a little bit of good news this month for those worried about a tidal wave of McMafia-style financial crime. A new UK government agency tasked with fighting it – the National Economic Crime Centre (NECC) – opened its doors.

I say “little” because financial crime is far more deeply rooted in our financial and political systems than we like to acknowledge.

From the LIBOR-rigging scandal to the offshore secrets of the Panama Papersand ‘dark money’ in the Brexit vote, it is everywhere. In my recent work with anti-corruption group Global Witness, I saw first-hand how ordinary people in some of the world’s poorest countries suffer the consequences of corruption and financial crime. We exposed suspicious mining and oil deals in Central Africa, in which over a billion dollars of desperately-needed public finances were lost offshore. The story is about the West as much as Africa. The deals were routed through a dizzying web of offshore shell companies in the British Virgin Islands, often linked to listed companies in London, Toronto and elsewhere. Even if the NECC is given enough resources and collaborates widely, it has got its work cut out.

One reason all this financial crime is tolerated is that thinkers who shine a light on its systemic nature have been erased from the record. Top of my list of neglected economic superstars is Professor Susan Strange of the London School of Economics, one of the founders of the field of international political economy. In a series of ground-breaking books – States and Markets, The Retreat of the State and Mad Money – Strange showed how epidemic levels of financial crime were a consequence of specific political decisions.

“This financial crime wave beginning in the 1970s and getting bigger in later years is not accidental,” Strange wrote.

It would have hardly been possible to design a system, she said, “that was better suited than the global banking system to the needs of drug dealers and other illicit traders who want to conceal from the police the origin of their large illegal profits.”

For Strange, money laundering, tax evasion and public embezzlement were a result of the collapse in the 1970s of the post-war financial order. Here are four ways she showed how politics and the financial crime epidemic were intimately connected.

1) Money Is Global, Regulation Is National

There was nothing inevitable about financial globalisation, Strange said. It was born out of a series of political decisions. It means that global money can skip freely across borders beyond the reach of national laws and supervision. For smart operators tax, regulations, and compliance become a choice, not an obligation. Strange argued that international organisations lack the power to control global money, only coordination between the world’s major economies can rein it in.

2) Tax Havens Are an Open Invitation to Embezzlement

Unless you have somewhere to stash the cash, the looting of public money and state enterprises can only go so far.

Tax havens give “open invitations”, Strange said, to corrupt politicians to steal from their people.

Banking secrecy in the havens allows money from tax evasion, drug trafficking and public embezzlement to mix together until they become indistinguishable from legitimate business.

3) Extravagant Banker Bonuses Contaminate Politics

For Strange the “obscenely large” bonuses paid to those in financial markets leads to a kind of “moral contamination”, she wrote which has “reinforced and accelerated the growth of the links between finance and politics”. Strange recognised that corruption and bribery were a problem in London and New York as well as Asia, Africa and Latin America. “Bribery and corruption in politics are not new at all. It is the scale and extent of it that have risen, along with the domination of finance over the real economy,” she wrote.

4) Money Is Political Power

Globalisation has redefined politics, Strange argued. Political power is not just what happens in governments, but money and markets also have power. As legitimate and illegitimate private operators grow richer, they increase their power to shape the world system. States starved of tax revenues grow weaker and retreat, in a reinforcing spiral. National politics becomes captured by global money markets.

In the twenty years since Susan Strange’s death in 1998, these trends have only bedded down. Bankers’ bonuses have continued to skyrocket and in 2018 reached their pre-crisis peak.

Columbia University professor James S Henry estimates tha tin 2015 a scarcely imaginable $24 trillion to $36 trillion of the world’s financial wealth was held offshore. Much of that is money from legitimate businesses but contributes to a system where financial crime can prosper.

We cannot hope to get out of the morass of financial crime, and out-of-control financial markets, without understanding how they relate to one another. The genie of globalised money cannot be put back into the bottle, but Strange would argue that we should challenge banking secrecy, and through coordinated action of the world’s large economies close down tax havens.

Finance and crime was only one strand of her work, but it contributed to her unnerving, perhaps prophetic, conclusion that unless we rein in the financial system it could sweep away the entire Western liberal order. One only has to glance at the combination of financial chicanery and violent rhetoric that characterises the Trump presidency to see that her concerns could hardly be more contemporary.

Strange would tell us that we need more than a new government agency to turn back the tide of financial crime. We need nothing less than a new approach to political economy at national and global level.

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    1. Enquiring Mind

      and note the role played by the US as described by Shaxson. Aiding and abetting in the offshore/onshore casino.

    2. RBHoughton

      Oliver Burroughs in his new book “Moneyland” (wherein at Page 252 and thereafter the author reveals that USA is closing the world’s tax havens except those in the continental USA (Delaware, Nevada, South Dakota, Wyoming, and a good many others as their legislatures become more aware of the new opportunity.).

      The Modus operandi is to use the OECD’s Common Reporting Standard and Washington’s Foreign Account Tax Compliance Act together which will leave USA as the sole tax haven on the planet. The restrictive terms of the two commitments are enforceable against the old treasure islands but not against USA.

      One hundred tax havens have signed up to the Standards. They are listed at exchange-of-tax-information/MCAA-Signatories.pdf. They agree to publish information on bank account holders and exchange it with other jurisdictions.

      A primary effect will ensure of this agreement and the US Act will be that surplus revenue from tax havens goes directly to the Fed.

      1. larry

        Yes, it is a great shame, Rev. I read her obit, too, and I agree with you. I do recommend Casino Capitalism and its sequel, Mad Money (Manchester U Press editions). She was ahead of her time.

        1. Steve H.

          > were a result of the collapse in the 1970s of the post-war financial order

          > It means that global money can skip freely across borders beyond the reach of national laws and supervision.

          Did she set out the mechanisms of this happening? The flatline after ’73 is so clear.

          1. John Zelnicker

            @Steve H.
            November 24, 2018 at 9:20 am

            The precipitating event for the collapse of the post-war financial order known as Bretton Woods was Richard Nixon’s decision in the middle of August, 1971, to remove the US completely from the gold standard.

            His decision was in part a response to a demand from Charles deGaulle to exchange the excess dollars held by France for gold according to the existing rules. Fulfilling this demand would have reduced the US’ gold stock substantially and Nixon refused to do that.

            It was the moment when the US dollar truly became a fiat currency.

            1. The Heretic

              Money has always been fiat. Pre and Post war Nations wrote the rules of their monetary system around gold, resulting in a self reinforcing delusions that they needed gold to back money. Bad rules around Gold, credit and money and bad international management (the draining of Germany), and you get hyperinflation, and despair; and a Weimar Germany vulnerable to fascism.

              The truth is that good rules, well monitored and enforced, and good management is what makes money. It is sound government policies (which include taxation) combined with a harmonious cooperation of people and industry (and a healthy environment) that produces the goods and services that makes the money valuable. In truth, Gold has nothing to do with the value or stability of money

              1. Wukchumni

                WW1 is a real turning point, in that it’s aftermath brought unlimited amount of money via what is now a completely fiat economy. and unlimited amount of food thanks to the Haber-Bosch process, resulting in what would be considered an unlimited amount of people on this orb, compared to say on a day in late June in Sarajevo in 1914.

              2. John Zelnicker

                @The Heretic
                November 24, 2018 at 2:52 pm

                Of course money has always been fiat as it is the creation of the laws created by the people who write the government policies, out of thin air, as it were. However, when it’s nominal value is pegged to some other substance, such as gold, or another country’s currency, it loses the power that an unencumbered fiat currency has. See Newton Finn’s link just above.

                Nixon removed the final barrier to unleashing the power of our fiat currency, other than delusional thinking.

  1. William Beyer

    Thanks for the reference to Susan Strange. Not so strangely, I’d never heard of her, but will start reading her stuff as soon as possible. Adam Smith assumed that capital should always stay at home. Banking secrecy killed that idea. As Dan Moldea, writing about our first mobbed-up president in Dark Victory: Ronald Reagan, MCA, and the Mob wrote in 1987:

    Meyer Lansky, the financial wizard of organized crime, knew perhaps better than anyone else that the successful annihilation of organized crime’s subculture in America would rock the “legitimate” world’s entire foundation, which would ultimately force fundamental social changes and redistributions of wealth and power in this country. Lansky’s dream was to bond the two worlds together so that one could not survive without the other. Those of us who recognize the vast power of the underworld in our nation today also understand how close that dream—and our nightmare—is to coming true.

  2. Sound of the Suburbs

    Money is also used to corrupt our knowledge base, so that they can get away with what they are doing.

    Ben Bernanke had thought banks were financial intermediaries and his work on the Great Depression is based on this assumption. This was widely acclaimed, showing our policymakers didn’t understand the dangers they were facing before 2008.

    The central banks started revealing the truth in 2014, starting with the BoE.

    Bank loans create money and debt repayments to banks destroy money.

    This explains why markets are not behaving as the economists expect as bankers can inflate markets with the money they create from loans, e.g. real estate.

    They had worked this out in the 1930s and this is why Irving Fisher and Henry Simons had called for the Chicago Plan to take away the bank’s ability to create money, so free markets would behave as the neoclassical economists expect.

    Bankers inflating asset prices with the money they create from loans.

    1929 – Inflating the US stock market with loans (margin lending)
    2008 – Inflating the US real estate market with loans (mortgage lending)

    Our knowledge of banks has been going backwards since 1856.

    Credit creation theory -> fractional reserve theory -> financial intermediation theory

    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

    Milton Freidman’s monetarism didn’t work as he used the “fractional reserve theory” and thought the money supply could be controlled by central bank reserves.

    They then moved further away from reality with “financial intermediation theory” which left policymakers, like Ben Bernanke, completely clueless to the dangers that were there before 2008.

    1. Sound of the Suburbs

      MMT has had to rediscover the wheel with publicly created money.

      It was obvious how it worked in the distant past, but they hid what was really going on.

      MMT finds things were known at various times in the past, but this then disappears again.

      1. rob

        I don’t think MMT HAS “rediscovered” “public Money”.
        Nothing I have seen of the MMT framework, would change the money creation /indebted system as it is right now. MMT says that sovereign wealth creation is good , because the issuing country can always create more money to pay for today’s and yesterdays ;debts. i.e. The charges made by the selling of the initial product(money,credit,), by the brokers traders and the creatures of the federal reserve monetary system. All of the private entities that wholesale that debt from a low interest rate, through to the consumer networks who offer that money in later forms at a high interest rate, to the people for every thing that money does buy; are not changed in the least.
        The treasury now buys the money created by the federal reserve by issuing obligations of more money to be paid in the future.The federal reserve creates the money. the gov’t gets some. other financial service entities get some, at low rates, and then are able to speculate, loan,invest, in whatever they choose. After the money is created by the federal reserve, the gov’t now owes more in debt than what was created.
        MMT says that doesn’t matter because more can be made later. Which is true. But my problem with that is at every moment and turn, that money is created and used by “the powers that be” NOW, who have been “the powers that be” up until now, and will be “the powers that will bee tomorrow ,too” with the profit inherent in the ability to have streams of cheap money that all they have to do is increase the return on what they get for nearly nothing. ad infinitum.
        With this they speculate on the stock market, creating perverse investment.
        they pervert the political/ media frameworks. They fund the “all propaganda, all the time “, “information age” , we live in . and have for a hundred years now. They skew the value of our money, and they dictate the substance of our republic. And they just plain ruin our world.
        Now, The “chicago plan” was when 400 economists of the time circa 1939, after deliberation as the the root causes of the depression, came away with a unified proposal to end what they deemed to be a mostly private monetary creation system , that was controlled by the federal reserve structures that were created in 1913. That plan made a lot of sense .
        IN 2011 and 2012 when in HR 2990 house bill proposal in the 115th congress that was named “the NEED act”, was a new version of the chicago plan, where in the power of the federal reserve could be returned to the treasury, where the constitution put it. The bill which is on public record, lays out its principles, and objectives. as well as a plan as to how to retire the debt created by the federal reserve system without shocking the economy or the markets. It also creates a space and an atmosphere, for actual transparency.
        Personally, I think the congress needs to be a hell of a lot more transparent and accountable. But at least it is SUPPOSED to be these things. The federal reserve allows no such illusions, in that it has never been audited and holds no air of accountability. Look at what happpened in the time after the 2008 crash, suddenly they could create 16 trillion dollars or something, and just “put it on the books”, of insider companies, never making it to the money supply ,per se; but to a bank or an insurance co, money “on the books” seems like “money in the bank” for all intents and purposes.
        In other words, The chicago plan wanted to end the privately controlled monetary system we have had for a hundred years now, an is about the treasury creating our money ,without the unnecessary step of adding debt to be repaid for the creation of that money.
        The up side of that is the money ;instead of being used by wall st raiders, could instead be spent into existence funding single payer healthcare, or a fair education system from pre-k to post graduate. Or even for infrastructure, or for sane energy production, or anything that (according to civics 101) would be a collectively thought of, “good idea”.
        That would be “public money”

    2. Sound of the Suburbs

      It gets worse.

      The University of Chicago has always been free market headquarters and this is where Henry Simons was in the 1930s.

      Somehow they had forgotten about his work in a few decades.

  3. JTMcPhee

    Looking for stuff to read? How about Alexander Pope, who centuries ago observed the phenomenon:

    Blest paper-credit! last and best supply!
    That lends Corruption lighter wings to fly! 40
    Gold imp’d by thee, can compass hardest things,
    Can pocket states, can fetch or carry kings;
    A single leaf shall waft an army o’er,
    Or ship off senates to some distant shore;
    A leaf, like Sibyl’s, scatter to and fro 45
    Our fates and fortunes as the winds shall blow;
    Pregnant with thousands flits the scrap unseen,
    And silent sells a King or buys a Queen.

    Moral Essays, Of The Use of Riches.

    Archaic language, but “paper credit” (bearer bonds, promissory notes, Swiss account passbooks, derivatives, blockchain, etc.) is the stuff of which the corruption noted here and in the link on buying votes in the Security Council and the stuff of the Clanton Foundation’s wherewithal are made.

    Is resistance futile?

      1. JTMcPhee

        The paper/electonic kind sure makes it easier, does it not? Along with all the other corruptions we chat about here, and the distributive properties of MMT money…

        1. Wukchumni

          Only a government can take something useful-paper suitable for writing notes, and render it pretty much useless by printing stuff all over & giving it a denomination.

      2. steven

        You probably couldn’t find a brown paper bag that is strong enough to hold the minimum required to get an audience.

        1. JTMcPhee

          A thumb drive will also hold a boatload of money-equivalent. As will a slip of paper with an account number on it.

  4. John Wright

    This closes with “One only has to glance at the combination of financial chicanery and violent rhetoric that characterises the Trump presidency to see that her concerns could hardly be more contemporary.”

    Throwing a brick at Trump in closing may make some believe that removing Trump would somehow make things better.

    But looking at the recent arc of US politics, the Democrats via Bill Clinton and Barack Obama-Eric Holder-Tim Geithner and Dodd-Frank put much of the current financial-justice system in place.

    I have told a few people that Trump “is so bad he is good for the USA” as his manifestly bad decisions/tweets may force the Democrats to ACTUALLY do something.

    If Trump decides to go to war, this time Democrats might actually oppose the decision, rather than fall in line behind as they did with Bush Jr in Iraq (see HRC, Biden, Kerry).

    But it remains to be seen if Trump’s actions will “empower” the Democrats to do more than fund raise using the Trump brand in their efforts.

    And throw bricks at Trump in opinion pieces and speeches.

    1. NotTimothyGeithner

      If Trump decides to go to war, this time Democrats might actually oppose the decision,

      What is “never going to happen” for $200, Alex? Opposing Trump tweets and protecting Bush Administration officials is the driving force of Team Blue.

  5. steven

    History’s greatest financial criminal is by far the US government. Even before it usurped Britain’s “exorbitant privilege” of supplying the world’s reserve currency, US bankers were loading domestic investors down with what they knew were likely to be unpayable debts. (See Nomi Prins’ All the Presidents’ Bankers). Shortly after WWII US politicians joined ranks with their bankers, running up now unpayable government debts. As the author says

    Money Is Political Power

    Politicians like Richard Nixon used that power to continue pursuing the geopolitical ambitions of global hegemony with which the US Western oligarchies are still obsessed. To put Nixon’s fear the country would become “a pitiful helpless giant” if it withdrew less than victorious from Vietnam in plain English, ‘why let a little thing like national solvency under the rules of the post-WWII international monetary system stand in the way of continuing to pursue global military dominance?’

    At the cost of every principle in which the United States and the rest of Western civilization professes to believe, we continue to accept financial help in financing the costs of pursuing this hegemony from our Saudi ‘friends’. Both Dyer and Strange fail to mention that the global monetary system is all but synonymous with the global banking system. In the decades following the collapse of the 1944 Bretton Woods monetary system, that help at first came in the form of accepting – and compelling other nations to accept – the US government debt being created by its politicians and bankers in exchange for their and OPEC’s oil. As national treasuries around the world filled to overflowing with this debt, the emphasis has shifted to direct control of the world’s energy supplies.

    Korea and Vietnam may have been unnecessary wars fought mainly to preserve the principle of US global military and political hegemony. But Iraq, Libya and Syria are arguably “necessary” – if:
    • we wish to continue buttressing a status quo with Pentagon pork
    • defending the nation (and Western Civilization) from imaginary (or internally manufactured) enemies
    • holding the country and the world back from the transition to renewable energy sources so the US can continue to control access to perhaps the primary ingredient of wealth “natural energy”, AKA “ancient sunlight” and oil.

    In the face of real threats like global climate change, US and Western ‘defense’ budgets are a sick joke, the blackest of black humor. And all of this so we in the comfortable West won’t have to change, to challenge the lies we have been fed for more than a half century, so financial criminals can continue to plunge the global economy into a new Dark Ages of neo-feudalism.

    P.S. So add to your reading list Michael Hudson’s Super Imperialism

  6. Chauncey Gardiner

    The title of this post resonates. How might this vast network be disrupted without adversely affecting legitimate business activities?… IMO resolving this is largely a matter of political will and the desire by beneficiaries of the current system to preserve the status quo. I believe the capability exists at the nexus of existing government and banking structures to monitor and disrupt International funds transfers through the international payments system and SWIFT network down to the level of specific individuals. This was revealed in the threat by a senior U.S. government official in September to impose sanctions against the International Criminal Court, as well as the previous imposition of sanctions against specific Russian oligarchs.

    1. FluffytheObeseCat

      It’s telling isn’t it, how these governmental capabilities are never discussed in the context of offshore tax havens or money laundering. Just high level foreign affairs. They leave the entire system in place in order to make selective use of it on occasion when geopolitics trumps commerce.

      If the U.S. government can target and impoverish individual Russian oligarchs, it can target and impoverish individual Scottish shell companies. And whatever entities they own. And their ultimate owners or beneficiaries. And it has had these highly granular capabilities for decades.

    2. Jeremy Grimm

      “I believe the capability exists at the nexus of existing government and banking structures to monitor and disrupt International funds transfers through the international payments system and SWIFT network down to the level of specific individuals.” INDEED!
      All this time I thought the DHS was monitoring all financial transactions and transfers of money to protect us from terrorists. Isn’t there some way they might work with the IRS, and their own child, the FBI, to also protect us against tax cheats and money lauderers and other financial criminals? Maybe they could also work with the SEC — if we actually had an SEC — to add a little honesty to corporate reports.

    3. Chauncey Gardiner

      The amounts are staggering… $36 trillion in 2015 of total estimated private wealth held offshore… ten times the reported holdings of U.S. Treasury debt by China. More than the cumulative market capitalization of the U.S. stock markets…. more than annual U.S. GDP… more than the reported total deposits in the U.S. banking system, much more.

      Based on how quickly the Panama Papers quietly fell off the media’s radar screen and have slipped out of our collective working memory, I suspect that besides the political influence of the relatively small number of people who indirectly own this wealth, there is a perception that opening this up would prospectively be too disruptive to the entities that James Henry of the Tax Justice Network identified in the link as the true havens for much of this wealth: the financial institutions and related entities who are located in the world’s financial centers. But where else are their customers, clients, and investors going to go?

  7. kiwi

    Oh, give it up: “One only has to glance at the combination of financial chicanery and violent rhetoric that characterises the Trump presidency to see that her concerns could hardly be more contemporary.”

    Madonna – wants to bomb the WH
    Johnny Depp talks about murdering Trump
    Kathy Griffin holds up head of Trump
    Waters tells people to harass Trump officials wherever they are
    Booker tells people to get up in repub’s faces
    Erick Holder says to kick them
    Sarah Sanders – harassed to leave a restaurant
    Atty general of Florida harassed at a movie
    Mitch McConnell harassed leaving someplace
    A repub congressperson is shot
    A repub congressperson is harassed to leave a Mexican restaurant
    Numurous public officials claim Trump is treasonous, a dictator, and is causing continual constitutional crises; numerous commenters everywhere parrot the notion that Trump is a violent dictator
    Trump gets elected and hysteria ensues-women are screaming and crying in the streets

    Trump has been in office for a big whopping < 2 years, and yet to hear the left side, all humanity is now suffering because of him. Suddenly, the left is concerned about wars and likes Bush and Nixon.

    If you were to ever listen to him, instead of parroting bs, you would realize that he does not promote violence, nor is he shredding the Constitution any more than any other president did.

    Financial chicanery? Really? As if it never happened before Trump came along.

    1. Nick Stokes

      Sorry, but this post is a waste. Politics is politics. All things you posted, “righties” have done and most of the people you mentioned are not “left”.

      Try harder and stop whoring for Ashkenazi Trump. Roy Cohn and Al Liddenbaum nod…………..

      1. witters

        Well, Nick, one can define “left” and “rightists” as one wants. But I fail to see how “politics is politics” helps any kind of analysis, however one might wish to agree or disagree with what one takes such an analysis to be.

  8. Mael Colium

    Finland was able to manage the predation of it’s currency and harm to the real economy from the global financial parasites with capital movement controls. They were pilloried for it as pronouncements by were made of life ceasing as we knew it, but two years on and the evidence is before us that it worked. Some money shufflers lost their shirts, but who cares?
    Sovereign currency issuing Governments are always able to control the financial markets, by cutting off their corporate welfare bond issuance for starters. The cross border shuffling is even easier with capital controls. Politicians just need to shut out the noise of the monied elites and weather the storm. It can be done …………….. if they want to, but do they? The wiff of regulatory capture permeates my nostrils.

  9. Robin Kash

    Does MMT only apply in the absence of some arbitrary standard, like gold, which limits a country’ s obligations.
    Nixon’s decision to abandon gold seems to have thrust leveraged debt to the fore as the means of international finance, in general, and made the US’s flooding the world with dollars the way to keep its ship of state afloat.

  10. greg

    This crap is all under the cover of the darkness created by ever increasing complexity. Finance can create new complications faster than governments can create regulations to rein them in, And search algorithms are always more costly to implement than simply creating a path, (say, for laundering money,) between two points. And the higher the complication, the higher the dimensionality of the system, the greater the profit from criminal activity, and the costs involved in stopping it.

    Financial enterprises know this. NONE of them complain about it. And it is in fact a feature of modern finance. Every added complication to the financial market provides new and often illegal profit opportunities. And the cost of these manipulations is always externalized onto real producers.

    The growth of the financial sector in recent years is merely a measure of its increasing plundering of the real economy. Society, and its growth, are suffering more and more.

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