As economies become more interconnected, and borders between them effectively disappear, the complexity of financial transactions is reaching new levels.
The difference between the current stage of globalisation versus the previous one of the late nineteenth and early twentieth century lies both in the direction of capital flows and where it comes from. Between 1870 and 1913 Great Britain and France invested abroad 6.5% and 3.7% of their GDP respectively. In the case of Great Britain, this was about 34% of its total capital investments. And, there was virtually no money from peripheral countries deposited in British and French banks, and there were only a few dozen properties owned by investors from these countries. If there were cases of wealthy overseas entrepreneurs or noblemen bringing money to the most developed nations of the time, they were well-known, with their properties well-documented.
Now, everything has changed: every year $800 billion to $2 trillion, or roughly 10% of the combined GDP of the European Union, arrives in global financial capitals like London, New York, or Zurich from developing countries. Most of this money comes through various off-shore jurisdictions, with its owners unknown.
In recent decades, a completely new industry has emerged to deal with this. It includes investment bankers who attract the money and deposit it into different investment funds; the lawyers who oversee a large network of offshore and shell companies, trusts and SPVs; the crowds of directors and legal owners; the real estate agents and luxury developers who sell the assets to the super-rich; the producers of exclusive goods from jewellery and watches to luxury cars and mega-yachts; and even the government officials who elaborate different citizenship-for-investment programmes.
The impact of this new industry on the global economy is enormous. Today, about a third of all multinational corporations’ FDI goes through different tax havens. The figures for the corporate sector are unknown, but the most conservative assessments for tax evasion amongst individuals reach $1 trillion per year. The investment funds and large banks which claim to be completely transparent, are often sued for violating different money-laundering acts or sanction regimes – and if they are accused and fined, the average fine they agree to pay has skyrocketed from $22 million in the mid-2000s to $1.6 billion in 2014–2015. The largest fine, at $9 billion, was paid by BNP-Paribas when it settled its dispute with the U.S. Justice Department in June 2014. But how can the legal banking business repay such substantial amounts and manage to stay afloat? What operations aren’t uncovered that allow such funds and banks to prosper? More than $230 billion was laundered in 2007–2015 by the Estonian subsidiary of Danske Bank, which represented a nation with a GDP that is eight times smaller than this sum, and which is proudly ranked eighteenth in the 2018 Global Transparency Index.
Around 35,000 houses and apartments in London are owned by companies whose real beneficiaries remain unknown, and in New York City, close to 250,000 apartments in residential buildings are unoccupied, with at least half being bought in the name of offshore companies. I’m not addressing the issue of where the world’s super-yachts or business jets are registered, but more than 80 percent of these “luxury toys” carry flags of countries with low taxes.
All of this depicts the reality of the modern money laundering business that has become part of today’s “financial capitalism.” Many left-wing writers argue that it devastates the peripheral nations – and I agree with that argument – but as important, I believe, is to understand that this new reality harms developed nations just as much as it does developing nations.
It used to be argued that money directed from these peripheral countries to wealthier ones was enriching to the latter – but that seems no longer the case. The inflow of dirty funds from the global “South” distorts the normal functioning of European and American business. The cities to which the super-rich flock are becoming too expensive for the locals and their economies are pushed to the brink of crisis. More and more city dwellers are squeezed into suburbs, and local authorities must invest more money into affordable housing. In London, these allocations rose to £3.15 billion which are to be spent on new ninety thousand affordable homes between 2017 and 2020. The financial system is overloaded by laundered funds, and so, bubbles become more widespread and common.
As I mentioned earlier, in some cases, illicit dealings with money lead to penalties by the authorities, which in turn only push the bankers to take a higher-risk business strategy to cover the losses. The governments of European countries are facing dilemmas with the new capital inflows: both wanting to encourage them and feel obliged to defend their political system from corruption. But with three-fifths of the United Kingdom’s richest residents being either foreign nationals or foreign-born (as are thirty-five out of fifty-five billionaires residing in London), it becomes more problematic from year to year.
There is another problem. In poorer nations where their politicians and businessmen try to channel their capital to Europe, the quality of life decreases even further, and desperate people start to emigrate. Of the top ten countries that have seen the highest levels of emigration into the EU in the 2010s, eight (Pakistan, Ukraine, Iran, Nigeria, Bangladesh and Syria) are found at the lowest ranks (from 117 and 178) in the 2018 Corruption Perception Index. So by accepting hundreds of millions of dollars into European banks, the European authorities must pay dozens of billions of euros to accommodate new migrants while also facing growing social tensions caused by this inflow.
Moreover, emigration from the peripheral nations, which is caused by the corrupt governments, jeopardizes their development since it deprives them of their best human capital, which has resulted in many cases in ethnic and civil conflicts which often descend into full-scale civil war (this was the case of the Democratic Republic of the Congo after Mobutu Sese Seko, one of the world’s corrupt dictators, fled to France where his fortune was kept, in 1997). Western countries are forced to spend additional billions to provide food, medical care, and even armed humanitarian assistance to the nations ruled by the most renown kleptocrats. This is a high price for the joy of allowing several thousand people to manage money laundering operations from their luxury offices in London or Zürich.
But why does the fight against this evil appear so ineffective? Why are the people that stripped their states of their taxpayers’ money, presided over the largest deliberate bank failures, or those engaged in looting the natural resources of their countries, all still living in Europe without experiencing any consequences?
To deal with the problem, the focus is on so called “problematic jurisdictions.” These are areas which the West’s authorities believe are either engaged in offshore banking or lack the necessary financial regulations. The EU and the American “Financial Action Task Force” (FATF) have tried to list them. The FATF comprised forty states and territories, and the EU’s has sixteen. But neither include, for example, Russia or China. Russia was successfully removed from the FATF list back in 2003 and has never appeared on the European Union’s list – even though it’s a common point that the Russians are among the largest final beneficiaries of companies that own real estate in the UK. China never appeared on either, while the offshore companies controlled by the Chinese are among the most active buyers of expensive mansions in the United States.
At the same times, there are many countries on the list that might harbour terrorists and jihadis, but do not possess either the funds to be laundered nor the modern banking systems that would allow to transfer money into the European banks. The excessive attention paid to these countries rather than to the likes of Russia and China is the first tremendous challenge the fight against money laundering faces today.
