Dark corners for dirty money

Shahid Mehmood offers a short exposition of the methods that are used to hide wealth and remain anonymous

Dark corners for dirty money
About 17 years ago, in Kyrgyztan, the government of Kurmanbek Bakiyev was overthrown by a popular uprising. While in power, he set new standards of plundering national wealth. In a desperate attempt to save his unpopular regime, he even ordered firing upon a procession in the capital Bishkek which led to the death of over 40 people. For a person with such criminal deeds on his resume, one would expect exemplary justice to be meted out.

But Mr Bakiyev and his son, Maxim, are leading a comfortable, cosy life in London. While Bakiyev travels around a bit, his son lives in a mansion bought at an astonishing $4.3 million. It was not purchased directly by Bakiyev or his son, but through an anonymous offshore company that is located somewhere in Bolivia. Nor is this investment, undoubtedly financed by Bakiyev’s plunder back home, the only one that finds its way to London’s property market. A recent research report estimated that London receives around $125 billion annually in property investment from such dubious companies, usually financed by illicit or black money. A staggering 40,000 properties in London alone are owned by anonymous companies around the world.

This kind of dirty money, its flow and its accumulation, is at the heart of what became known to the world as the Panama Leaks. After their release, these leaks have managed to kick up a storm of controversies, allegations and investigations in more than 79 countries around the globe. More than 6,500 companies and individuals are under investigation and various measures are in the offing to curb such practices. Former prime minister Nawaz Sharif is one of the many prominent casualties around the globe. But these measures may very well come to naught in the long run. That is because much of the running around is about catching individuals and individual countries trying to protect their own interests while devising new laws regarding dirty money. What is missing is a combined global narrative that could really ameliorate this kind of a problem.

17 years ago, Kurmanbek Bakiyev was overthrown by a popular uprising

Let’s briefly revisit some details. One night in 2014, Bastian Obermeyer (a German journalist) received an anonymous message asking whether he would be interested in receiving some highly secret and important documents. Later, he and Frederick Obermaier received a staggering 11 million documents related to a famous offshore company, Mossack Fonseka. The documents revealed an unsavoury tale of hidden wealth accumulated through dubious means across the world. As Obermaier rightly pointed out, the issue was not that the rich were hiding their wealth. Rather, the surprise lay in the details of money earned through illegal means (like drug trafficking) being kept in these safe havens, under various pseudonyms and heads.

Whether it’s a millionaire drug peddler, a tyrant or a democratically elected leader, the methods of laundering their dirty money are usually the same. One of the most preferred ways is to form a shell company, a sort of an organisation consisting mostly of accountants, lawyers and other office staff which manages money of an unknown client. Of course, the money is shown to be in the name of the firm and as someone else’s wealth in order to make it almost impossible to trace the original owner.

Offshore financial centres are another preferred method. Their main attraction is that they uphold secrecy of the depositors, much like the Swiss banks used to do. For these financial centres, these inflows are of paramount importance since their sources of domestic earnings are limited. In return, they pledge complete secrecy regarding the owners of money. Panama, British Virgin Islands and Macao are some of the leading names in this list. Internationally, their status as legal tax havens is recognised, which makes it much easier for them and for the owners of illegal wealth.
Whether it's a millionaire drug peddler, a tyrant or a democratically elected leader, the methods of laundering their dirty money are usually the same

And then there is the good old bond, which is one of the handiest financial innovation when it comes to remaining anonymous or hiding wealth. For example, estimates suggest that a large part of bond buying in Pakistan (especially the Rs40,000 bond) is done using illegally earned money. There is no way of knowing where the money came from, and the bearer has the right to keep it with him for as long as he likes. Governments, in this case, are obligated to exchange the bearer’s money on the return of bonds without asking any questions. This is a global trend, not just limited to Pakistan. Bearer bonds are famous in this category. The US banned them in 1982 to discourage dumping of dubious money.

Last, but not the least, is the method of coming up with government sanctioned regulation that makes it easier to hide wealth. The preferred method in this category is to announce schemes that help legalise illegal money. The advantage is that no questions would be asked about how the money was earned in the first place. Pakistan has witnessed many such schemes in the past, with another one in operation right now. Pakistan’s experiments with such schemes go back to 1992, when a legislation was introduced that barred any questions regarding the inflow of foreign exchange and its sources.

This is a short exposition of the methods that are used to hide wealth and remain anonymous. Tax havens like Panama were founded on the premise of providing a legal way to avoid high taxes (like financial service levies). These were given legal cover by the global community for a legal purpose. But this business of legal tax havens has by now morphed into a major problem, whereby all of the world’s dirty money flows to these havens which promise anonymity in return. All this time, the world turned a blind eye to this scourge.

After the exposition of tax havens as places for siphoning off illegal wealth, it was hoped that the world will now awaken to this menace and do something constructive about it. It called for a serious discourse on plugging the holes and designing a global system that would act as a deterrent to those who channel their dubiously earned wealth into offshore accounts. Instead, up till now, it has been huff and puff and little substance.

I mentioned London’s property market as a getaway for illicit wealth flowing from other regions. Has London, or Britain for that matter, taken any steps to halt these kinds of transfers? The answer is no. And London is but one example of many metropolises around the world (like Dubai) that welcome flow of money into their coffers without asking where it came from. How does one expect anti-money laundering steps to succeed when outside channels provide an incentive to do so?

And this, in essence, is where the bigger picture lies. Whatever the nations do individually to counter trafficking and transfer of illegal wealth, they won’t succeed until meaningful cooperation from outside. In short, there needs to be a global effort that is missing. Witness the backtracking of European Union on this matter, after many of its member states objected to transparency in financial flows through a public register. If anybody is serious in putting an end to flow of illegal wealth across boundaries, then individual actions won’t suffice.

The writer is an economist. He tweets at @ShahidMohmand79