Crime and Corruption
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Sam Vaknin >> Crime and Corruption
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7 Crime and Corruption
1st EDITION
Sam Vaknin, Ph.D.
Editing and Design:
Lidija Rangelovska
Lidija Rangelovska
A Narcissus Publications Imprint, Skopje 2002
First published by United Press International – UPI
Not for Sale! Non-commercial edition.
© 2002 Copyright Lidija Rangelovska.
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Review":
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http://samvak.tripod.com/after.html
Created by: LIDIJA RANGELOVSKA
REPUBLIC OF MACEDONIA
C O N T E N T S
I. Slush Funds
II. Corruption and Transparency
III. Money Laundering in a Changed World
IV. Hawala, the Bank that Never Was
V. Straf – Corruption in Central and Eastern Europe
VI. Russia’s Missing Billions
VII. The Enrons of the East
VIII. The Typology of Financial Scandals
IX. The Shadowy World of International Finance
X. Maritime Piracy
XI. The Author
XII. About "After the Rain"
Slush Funds
According to David McClintick ("Swordfish: A True Story of Ambition,
Savagery, and Betrayal"), in the late 1980's, the FBI and DEA set up
dummy corporations to deal in drugs. They funneled into these
corporate fronts money from drug-related asset seizures.
The idea was to infiltrate global crime networks but a lot of the
money in "Operation Swordfish" may have ended up in the wrong
pockets. Government agents and sheriffs got mysteriously and
filthily rich and the whole sorry affair was wound down. The GAO
reported more than $3.6 billion missing. This bit of history gave
rise to at least one blockbuster with Oscar-winner Halle Berry.
Alas, slush funds are much less glamorous in reality. They usually
involve grubby politicians, pawky bankers, and philistine
businessmen - rather than glamorous hackers and James Bondean secret
agents.
The Kazakh prime minister, Imanghaliy Tasmaghambetov, freely
admitted on April 4 to his country's rubber-stamp parliament the
existence of a $1 billion slush fund. The money was apparently
skimmed off the proceeds of the opaque sale of the Tengiz oilfield.
Remitting it to Kazakhstan - he expostulated with a poker face -
would have fostered inflation. So, the country's president,
Nazarbaev, kept the funds abroad "for use in the event of either an
economic crisis or a threat to Kazakhstan's security".
The money was used to pay off pension arrears in 1997 and to offset
the pernicious effects of the 1998 devaluation of the Russian ruble.
What was left was duly transferred to the $1.5 billion National
Fund, the PM insisted. Alas, the original money in the Fund came
entirely from another sale of oil assets to Chevron, thus casting in
doubt the official version.
The National Fund was, indeed, augmented by a transfer or two from
the slush fund - but at least one of these transfers occurred only
11 days after the damning revelations. Moreover, despite
incontrovertible evidence to the contrary, the unfazed premier
denied that his president possesses multi-million dollar bank
accounts abroad.
He later rescinded this last bit of disinformation. The president,
he said, has no bank accounts abroad but will promptly return all
the money in these non-existent accounts to Kazakhstan. These
vehemently denied accounts, he speculated, were set up by the
president's adversaries "for the purpose of compromising his name".
On April 15, even the docile opposition had enough of this fuzzy
logic. They established a People Oil's Fund to monitor, henceforth,
the regime's financial shenanigans. By their calculations less than
7 percent of the income from the sale of hydrocarbon fuels (c. $4-5
billion annually) make it to the national budget.
Slush funds infect every corner of the globe, not only the more
obscure and venal ones. Every secret service - from the Mossad to
the CIA - operates outside the stated state budget. Slush funds are
used to launder money, shower cronies with patronage, and bribe
decision makers. In some countries, setting them up is a criminal
offense, as per the 1990 Convention on Laundering, Search, Seizure,
and Confiscation of the Proceeds from Crime. Other jurisdictions are
more forgiving.
The Catholic Bishops Conference of Papua New Guinea and the Solomon
Islands issued a press release November last in which it welcomed
the government's plans to abolish slush funds. They described the
poisonous effect of this practice:
"With a few notable exceptions, the practice of directing funds
through politicians to district projects has been disastrous. It has
created an atmosphere in which corruption is thought to have
flourished. It has reduced the responsibility of public servants,
without reducing their numbers or costs. It has been used to confuse
people into believing public funds are the "property" of individual
members rather than the property of the people, honestly and fairly
administered by the servants of the people.
The concept of 'slush-funds' has resulted in well-documented
inefficiencies and failures. There were even accusations made that
funds were withheld from certain members as a way of forcing them
into submission. It seems that the era of the 'slush funds' has been
a shameful period."
But even is the most orderly and lawful administration, funds are
liable to be mislaid. "The Economist" reported recently about a $10
billion class-action suit filed by native-Americans against the US
government. The funds, supposed to be managed in trust since 1880 on
behalf of half a million beneficiaries, were "either lost or stolen"
according to officials.
Rob Gordon, the Director of the National Wilderness Institute
accused "The US Interior Department (of) looting the special funds
that were established to pay for wildlife conservation and
squandering the money instead on questionable administrative
expenses, slush funds and employee moving expenses".
Charles Griffin, the Deputy Director of the Heritage Foundation's
Government Integrity Project, charges:
"The federal budget provides numerous slush funds that can be used
to subsidize the lobbying and political activities of special-
interest groups."
On his list of "Top Ten Federal Programs That Actively Subsidize
Politics and Lobbying" are: AmeriCorps, Senior Community Service
Employment Program, Legal Services Corporation, Title X Family
Planning, National Endowment for the Humanities, Market Promotion
Program, Senior Environmental Employment Program, Superfund Worker
Training, HHS Discretionary Aging Projects, Telecomm. & Info.
Infrastructure Assistance. These federal funds alone total $1.8
billion.
"Next" and "China Times" - later joined by "The Washington Post" -
accused the former Taiwanese president, Lee Teng-hui, of forming a
$100 million overseas slush fund intended to finance the gathering
of information, influence-peddling, and propaganda operations.
Taiwan footed the bills trips by Congressional aides and funded
academic research and think tank conferences.
High ranking Japanese officials, among others, may have received
payments through this stealthy venue. Lee is alleged to have drawn
$100,000 from the secret account in February 1999. The money was
used to pay for the studies of a former Japanese Vice-Defense
Minister Masahiro Akiyama's at Harvard.
Ryutaro Hashimoto, the former Japanese prime minister, was
implicated as a beneficiary of the fund. So were the prestigious
lobbying firm, Cassidy and Associates and assorted assistant
secretaries in the Bush administration.
Carl Ford, Jr., currently assistant secretary of state for
intelligence and research, worked for Cassidy during the relevant
period and often visited Taiwan. James Kelly, assistant secretary of
state for East Asian and Pacific Affairs enjoyed the Taiwanese
largesse as well. Both are in charge of crafting America's policy on
Taiwan.
John Bolton, undersecretary of state for arms control and
international security, admitted, during his confirmation hearings,
to having received $30,000 to cover the costs of writing 3 research
papers.
The Taiwanese government has yet to deny the news stories.
A Japanese foreign ministry official used slush fund money to
finance the extra-marital activities of himself and many of his
colleagues - often in posh hotel suites. But this was no exception.
According to Asahi Shimbun, more than half of the 60 divisions of
the ministry maintained similar funds. The police and the ministry
are investigating. One arrest has been made. The ministry's
accounting division has discovered these corrupt practices twenty
years ago but kept mum.
Even low-level prefectural bureaucrats and teachers in Japan build
up slush funds by faking business trips or padding invoices and
receipts. Japanese citizens' groups conservatively estimated that
$20 million in travel and entertainment expenses in the prefectures
in 1994 were faked, a practice known as "kara shutcho" (i.e., empty
business trip).
Officials of the Hokkaido Board of Education admitted to the
existence of a 100 million yen secret fund. In a resulting probe,
200 out of 286 schools were found to maintain their own slush funds.
Some of the money was used to support friendly politicians.
But slush funds are not a sovereign prerogative. Multinationals,
banks, corporation, religious organizations, political parties, and
even NGO's salt away some of their revenues and profits in
undisclosed accounts, usually in off-shore havens.
Secret election campaign slush funds are a fixture in American
politics. A 2-year old bill requires disclosure of donors to such
funds but the House is busy loosening its provisions. "The
Economist" listed lately the tsunami of scandals that engulfs
Germany, both its major political parties, many of the Lander and
numerous highly placed and mid-level bureaucrats. Secret, mainly
party, funds seem to be involved in the majority of these lurid
affairs.
Italian firms made donations to political parties through slush
funds, though corporate donations - providing they are transparent -
are perfectly legal in Italy. Both the right and, to a lesser
extent, the left in France are said to have managed enormous
political slush funds.
President Chirac is accused of having abused for his personal
pleasure, one such municipal fund in Paris, when he was its mayor.
But the funds were mostly used to provide party activists with mock
jobs. Corporations paid kickbacks to obtain public works or local
building permits. Ostensibly, they were paying for sham "consultancy
services".
The epidemic hasn't skipped even staid Ottawa. Its Chief Electoral
Officer told Sun Media last September that he is "concerned" about
millions stashed away by Liberal candidates. Sundry ministers who
coveted the prime minister's job, have raised funds covertly and
probably illegally.
On April 11, UPI reported that Spain's second-largest bank, Banco
Bilbao Vizcaya Argentaria (BBVA), held nearly $200 million hidden in
secret offshore accounts, "which were allegedly used to manipulate
politicians, pay off the 'revolutionary tax' to ETA - the Basque
terrorist organization - and open the door for business deals,
according to news reports."
The money may have gone to luminaries such as Venezuela's Hugo
Chavez, Peru's Alberto Fujomori and Vladimiro Montesinos. The bank's
board members received fat, tax-free, "pensions" from the illegal
accounts opened in 1987 - a total of more than $20 million.
Latin American drug money launderers - from Puerto Rico to Colombia
- may have worked through these funds and the bank's clandestine
entities in the Cayman Islands and Jersey. The current Spanish
Secretary of State for the Treasury has been the bank's tax advisor
between 1992-7.
The "Financial Times" reported in June 2000 that, in anticipation of
new international measures to curb corruption, "leading European
arms manufacturers" resorted to the creation of off-shore slush
funds. The money is intended to bribe foreign officials to win
tenders and contracts.
Kim Woo-chung, Daewoo's former chairman, is at the center of a
massive scandal involving dozens of his company's executive, some of
whom ended up in prison. He stands accused of diverting a whopping
$20 billion to an overseas slush fund.
A mind boggling $10 billion were alleged to have been used to bribe
Korean government officials and politicians. But his conduct and
even the scale of the fraud he perpetrated may have been typical to
Korea's post-war incestuous relationship between politics and
business.
In his paper "The Role of Slush Funds in the Preparation of
Corruption Mechanisms", reprinted by Transparency International,
Gherardo Colombo defines corporate slush funds thus:
"Slush funds are obtained from a joint stock company's finances,
carefully managed so that the amounts involved do not appear on the
balance sheet. They do not necessarily have to consist of money, but
can also take the form of stocks and shares or other economically
valuable goods (works of art, jewels, yachts, etc.) It is enough
that they can be used without any particular difficulty or that they
can be transferred to a third party.
If a fund is in the form of money, it is not even necessary to refer
to it outside the company accounts, since it can appear in them in
disguised form (the "accruals and deferrals" heads are often
resorted to for the purpose of hiding slush money). In light of
this, it is not always correct to regard it as a reserve fund that
is not accounted for in the books. Deception, trickery or forgery of
various kinds are often resorted to for the purpose of setting up a
slush fund."
He mentions padded invoices, sham contracts, fictitious loans,
interest accruing on holding accounts, back to back transactions
with related entities (Enron) - all used to funnel money to the
slush funds. Such funds are often set up to cover for illicit and
illegal self-enrichment, embezzlement, or tax evasion.
Less known is the role of these furtive vehicles in financing unfair
competitive practices, such as dumping. Clients, suppliers, and
partners receive hidden rebates and subsidies that much increase the
- unreported - real cost of production.
BBVA's payments to ETA may have been a typical payment of protection
fees. Both terrorists and organized crime put slush funds to bad
use. They get paid from such funds - and maintain their own. Ransom
payments to kidnappers often flow through these channels.
But slush funds are overwhelmingly used to bribe corrupt
politicians. The fight against corruption has been titled against
the recipients of illicit corporate largesse. But to succeed, well-
meaning international bodies, such as the OECD's FATF, must attack
with equal zeal those who bribe. Every corrupt transaction is
between a venal politician and an avaricious businessman. Pursuing
the one while ignoring the other is self-defeating.
Corruption and Transparency
I. The Facts
Just days before a much-awaited donor conference, the influential
International Crisis Group (ICG) recommended to place all funds
pledged to Macedonia under the oversight of a "corruption advisor"
appointed by the European Commission. The donors ignored this and
other recommendations. To appease the critics, the affable Attorney
General of Macedonia charged a former Minister of Defense with abuse
of duty for allegedly having channeled millions of DM to his
relatives during the recent civil war. Macedonia has belatedly
passed an anti-money laundering law recently - but failed, yet
again, to adopt strict anti-corruption legislation.
In Albania, the Chairman of the Albanian Socialist Party, Fatos
Nano, was accused by Albanian media of laundering $1 billion through
the Albanian government. Pavel Borodin, the former chief of Kremlin
Property, decided not appeal his money laundering conviction in a
Swiss court. The Slovak daily "Sme" described in scathing detail the
newly acquired wealth and lavish lifestyles of formerly impoverished
HZDS politicians. Some of them now reside in refurbished castles.
Others have swimming pools replete with wine bars.
Pavlo Lazarenko, a former Ukrainian prime minister, is detained in
San Francisco on money laundering charges. His defense team accuses
the US authorities of "selective prosecution".
They are quoted by Radio Free Europe as saying:
"The impetus for this prosecution comes from allegations made by the
Kuchma regime, which itself is corrupt and dedicated to using
undemocratic and repressive methods to stifle political opposition
... (other Ukrainian officials) including Kuchma himself and his
closest associates, have committed conduct similar to that with
which Lazarenko is charged but have not been prosecuted by the U.S.
government".
The UNDP estimated, in 1997, that, even in rich, industrialized,
countries, 15% of all firms had to pay bribes. The figure rises to
40% in Asia and 60% in Russia.
Corruption is rife and all pervasive, though many allegations are
nothing but political mud-slinging. Luckily, in countries like
Macedonia, it is confined to its rapacious elites: its politicians,
managers, university professors, medical doctors, judges,
journalists, and top bureaucrats. The police and customs are
hopelessly compromised. Yet, one rarely comes across graft and
venality in daily life. There are no false detentions (as in
Russia), spurious traffic tickets (as in Latin America), or
widespread stealthy payments for public goods and services (as in
Africa).
It is widely accepted that corruption retards growth by deterring
foreign investment and encouraging brain drain. It leads to the
misallocation of economic resources and distorts competition. It
depletes the affected country's endowments - both natural and
acquired. It demolishes the tenuous trust between citizen and state.
It casts civil and government institutions in doubt, tarnishes the
entire political class, and, thus, endangers the democratic system
and the rule of law, property rights included.
This is why both governments and business show a growing commitment
to tackling it. According to Transparency International's "Global
Corruption Report 2001", corruption has been successfully contained
in private banking and the diamond trade, for instance.
Hence also the involvement of the World Bank and the IMF in fighting
corruption. Both institutions are increasingly concerned with
poverty reduction through economic growth and development. The World
Bank estimates that corruption reduces the growth rate of an
affected country by 0.5 to 1 percent annually. Graft amounts to an
increase in the marginal tax rate and has pernicious effects on
inward investment as well.
The World Bank has appointed last year a Director of Institutional
Integrity - a new department that combines the Anti-Corruption and
Fraud Investigations Unit and the Office of Business Ethics and
Integrity. The Bank helps countries to fight corruption by providing
them with technical assistance, educational programs, and lending.
Anti-corruption projects are an integral part of every Country
Assistance Strategy (CAS). The Bank also supports international
efforts to reduce corruption by sponsoring conferences and the
exchange of information. It collaborates closely with Transparency
International, for instance.
At the request of member-governments (such as Bosnia-Herzegovina and
Romania) it has prepared detailed country corruption surveys
covering both the public and the private sectors. Together with the
EBRD, it publishes a corruption survey of 3000 firms in 22
transition countries (BEEPS - Business Environment and Enterprise
Performance Survey). It has even set up a multilingual hotline for
whistleblowers.
The IMF made corruption an integral part of its country evaluation
process. It suspended arrangements with endemically corrupt
recipients of IMF financing. Since 1997, it has introduced policies
regarding misreporting, abuse of IMF funds, monitoring the use of
debt relief for poverty reduction, data dissemination, legal and
judicial reform, fiscal and monetary transparency, and even internal
governance (e.g., financial disclosure by staff members).
Yet, no one seems to agree on a universal definition of corruption.
What amounts to venality in one culture (Sweden) is considered no
more than hospitality, or an expression of gratitude, in another
(France, or Italy). Corruption is discussed freely and forgivingly
in one place - but concealed shamefully in another. Corruption, like
other crimes, is probably seriously under-reported and under-
penalized.
Moreover, bribing officials is often the unstated policy of
multinationals, foreign investors, and expatriates. Many of them
believe that it is inevitable if one is to expedite matters or
secure a beneficial outcome. Rich world governments turn a blind
eye, even where laws against such practices are extant and strict.
In his address to the Inter-American Development Bank on March 14,
President Bush promised to "reward nations that root out corruption"
within the framework of the Millennium Challenge Account initiative.
The USA has pioneered global anti-corruption campaigns and is a
signatory to the 1996 IAS Inter-American Convention against
Corruption, the Council of Europe's Criminal Law Convention on
Corruption, and the OECD's 1997 anti-bribery convention. The USA has
had a comprehensive "Foreign Corrupt Practices Act" since 1977.
The Act applies to all American firms, to all firms - including
foreign ones - traded in an American stock exchange, and to bribery
on American territory by foreign and American firms alike. It
outlaws the payment of bribes to foreign officials, political
parties, party officials, and political candidates in foreign
countries. A similar law has now been adopted by Britain.
Yet, "The Economist" reports that the American SEC has brought only
three cases against listed companies until 1997. The US Department
of Justice brought another 30 cases. Britain has persecuted
successfully only one of its officials for overseas bribery since
1889. In the Netherlands bribery is tax deductible. Transparency
International now publishes a name and shame Bribery Payers Index to
complement its 91-country strong Corruption Perceptions Index.
Many rich world corporations and wealthy individuals make use of
off-shore havens or "special purpose entities" to launder money,
make illicit payments, avoid or evade taxes, and conceal assets or
liabilities. According to Swiss authorities, more than $40 billion
are held by Russians in its banking system alone. The figure may be
5 to 10 times higher in the tax havens of the United Kingdom.
In a survey it conducted last month of 82 companies in which it
invests, "Friends, Ivory, and Sime" found that only a quarter had
clear anti-corruption management and accountability systems in
place.
Tellingly only 35 countries signed the 1997 OECD "Convention on
Combating Bribery of Foreign Public Officials in International
Business Transactions" - including four non-OECD members: Chile,
Argentina, Bulgaria, and Brazil. The convention has been in force
since February 1999 and is only one of many OECD anti-corruption
drives, among which are SIGMA (Support for Improvement in Governance
and Management in Central and Eastern European countries), ACN
(Anti-Corruption Network for Transition Economies in Europe), and
FATF (the Financial Action Task Force on Money Laundering).
Moreover, The moral authority of those who preach against corruption
in poor countries - the officials of the IMF, the World Bank, the
EU, the OECD - is strained by their ostentatious lifestyle,
conspicuous consumption, and "pragmatic" morality.
II. What to do? What is Being Done?
Two years ago, I proposed a taxonomy of corruption, venality, and
graft. I suggested this cumulative definition:
(a) The withholding of a service, information, or goods that, by
law, and by right, should have been provided or divulged.
(b) The provision of a service, information, or goods that, by law,
and by right, should not have been provided or divulged.
(c) That the withholding or the provision of said service,
information, or goods are in the power of the withholder or the
provider to withhold or to provide AND That the withholding or the
provision of said service, information, or goods constitute an
integral and substantial part of the authority or the function of
the withholder or the provider.
(d) That the service, information, or goods that are provided or
divulged are provided or divulged against a benefit or the promise
of a benefit from the recipient and as a result of the receipt of
this specific benefit or the promise to receive such benefit.
(e) That the service, information, or goods that are withheld are
withheld because no benefit was provided or promised by the
recipient.
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