PROSPERING ON CRIME:
MONEY LAUNDERING AND FINANCIAL CRISES
In 1998 , the
International Monetary Fund estimated that illicit funds, worldwide, amount to
between $800 billion and $2 trillion -- two to five per cent of the world’s
GDP. These facts are no longer a great surprise.
Leading journals have recently published articles on the magnitude and
processes of money laundering. The incredulity of
those who act as if they are just discovering corruption in emerging nations brings
to mind the police officer in
The post-Cold War financial system rests on
two assumptions that fracture one another.
The first is that free capital flows – like international trade --
optimize the allocation of global resources.
This assumption is dubious, both theoretically and empirically. Although the massive
increase in direct foreign investments has contributed to economic development
in the South, the larger bank loans and other short-term financial have
produced the opposite effect, diverting investment from productive sectors to
areas of potentially rapid capital appreciation, such as highly speculative
stock markets and real estate. This damages the export competitiveness of
developing countries, the supposed basis for repaying foreign loans. Moreover, increasingly frequent recourse to
foreign loans for the purpose of financing public debt (supposedly to reduce
the risk of inflation) aggravated the risk of currency crises and default on
The second assumption is that the legal and
institutional infrastructure that enabled free financial flows between North
The Growth of “Grey” and “Black” Markets
The sizeable development of the “gray economy” in the context of finance-driven globalization favored the spectacular expansion of offshore markets and tax havens through which nearly half of the world money supply is currently funneled. In 1979, there existed only 75 offshore funds. Today, they number more than 3,000. These havens institutionalize tax evasion, especially by the world’s great fortunes—a third of whose holdings, estimated at $5.5 trillion (or 18% of the world’s GDP) are placed in offshore funds. Sheltered from central bank supervision, these new extra-territorial spaces are the home of choice for hedge funds that manage some two-thirds of their assets from tax havens. Even though all hedge funds combined amount only to some $300 to $400 billion -- rather little compared with the $26 trillion of the major financial institutions (insurance firms, pension funds, banks) - they have privileged access to credit, and this multiplies risks to the financial system. In the fall of 1998, the last-minute rescue of Long Term Credit Management (LTCM), a Wall Street darling located in Connecticut, but officially headquartered in the Cayman Islands, proved to the world that a single institution with assets of less than $5 billion could threaten the entire financial system by taking positions in excess of $200 billion, thanks to the credit received from major banks and brokerages.
Globalization has been accompanied not only by the growth of the gray economy but that of a black economy as well. According to the UN, organized and unorganized crime now generates annual sales on the order of 3% of the world’s GDP, about $1 trillion, half of which is in drug sales, which have boomed over the last decade, stimulated by an abundant supply and diversification into synthetic narcotics. Other profits from crime are drawn from multi-service activities such as the control of legal and illicit gambling establishments, the arms trade, human smuggling, traffic in body organs, car theft, prostitution and racketeering. These profits boost demand for money laundering, which favors offshore markets because of their secrecy and immunity from legal oversight.
In response to the demand for money laundering services tax havens and offshore markets have developed into international hubs for three kinds of illegal legality: 1) the white economy of banks, investors, and fund managers; 2) the grey economy of tax evasion and corruption; and 3) the profits that organized crime seeks to recycle. The boundaries among these three domains are nebulous since the illegal activity occurs prior to transfer of funds to offshore markets. In addition, it is usually impossible to distinguish between tax evasion and profits from crime because the recycling techniques are identical.
The Functions of Money Laundering
the evasion of legal regulation, offshore markets in the post-Cold War period are
all the more threatening because money laundering has played a significant role
in (post-Cold War) the financial crises of nation states. The experience in
are other examples, as well, which are typically overlooked in neoclassical economic
analyses that remain limited to empirical testing of limited models. Yet such examples
reveal the sometimes incestuous relations between the laundering of “funny money”
and financial crisis.. The Mexican crisis of
1994-1995, and the “tequila effect”,
or the repercussions which it triggered in Latin American countries
through the regionalisation of exchanges , can only be
understood if the “cocaine effect” is also taken into account. Starting in the
1990’s, Mexican drug dealers took charge of one half of the Colombian drug
trade to the
democratization of the Thai political system during the 1990s gave a clear
advantage to the provinces rather than the
role of money laundering is also evident in developed economies, e.g. in
having speculated on the upside, the yakuzas then
speculated on the downside, trying to buy up real estate assets at fire sale
prices and by blocking, through targeted operations, the liquidation of the
liabilities of certain firms which resort to the yakuzas’
illegal services in order to escape their engagements. This explains why the fall in real prices of
real estate, between 30 to 70 percent since the beginning of the 1990s, did not
coincide with a corresponding rise in transactions, and thus retarded the
reconstruction of the financial sector, the supply of credit, and, in the end,
new growth. There are of course other
factors that explain
September 11th and Beyond
Although it is clear that the masses in the
Arab world have been subdued -- under humiliating conditions -- by Western
nations and by their own governments, the September 11th massacre does not
reflect an act of revenge to
this state of affairs. On the contrary, it illustrates, with
unprecedented drama, the political strength of criminal networks whose power,
in this case, stems from the systematic destruction of enlightenment Islam, and
the symbolic manipulation of a sect of wahabic
origin, supported by rent-seeking families of
Copyright : Guilhem Fabre
*Professor of International Affairs,
Co-Director, UNESCO and UNODCCP (United Nations Office for Drug Control and Crime Prevention) Joint Program on the International Drug Problem.
Senior Research Associate, Ecole des Hautes Etudes en Sciences Sociales (EHESS) China Centre, 54 Bd Raspail, 75006, Paris, France.
 William F. Wechsler, “Follow the Money”, Foreign Affairs, July/August 2001, p.45.
 William F. Wechsler, “Follow the Money”, Foreign Affairs, July/August 2001; Nigel Moris Cotterill, “Money Laundering”, Foreign Policy, May/June 2001. Nigel Moris Cotterill is editor of World Money Laundering Report.
 Jagdish Bhagwati, “The Capital Myth,” Foreign Affairs, May 1998.
 Jean de Maillard, Un monde sans loi, La criminalité financière en images, Paris: Ed. Stock, 1998.
 Guilhem Fabre, Criminal Prosperity : Drug Trafficking, Money Laundering and Financial crises after the Cold War, RoutledgeCurzon, 2003, p.77-78.
 Barry Eichengreen and Donald Mathieson, Hedge Funds and Financial Market Dynamics, IMF, May 1998.
 Robert M. Morgenthau, “On
the Trail of Global Capital,” The New York Times, Sept.
 Franklin R. Edwards, “Hedge Funds and the Collapse of Long-Term Capital Management,” Journal of Economic Perspectives, Spring 1999.
 World Drug Report, United Nations International Drug Control Programme, Oxford University Press, 1997, p.123-143.
 Nigel Morris-Cotterill, “Money Laundering”, Foreign Policy, May/June 2001.
 Guilhem Fabre, op.cit, p.163-164.
 William F. Wechsler, op.cit., p.47.
 For more details on
 Cf. Pasuk Phongpaichit, Sungsidh Piriyarangsan, Nualnoi Treerat, Guns,
Girls, Gambling, Ganja:
 For more details on the Thaï crisis, see Guilhem Fabre, op.cit., ch. 6.
 Odile Cornet, Le MOCI (Moniteur du Commerce International), 3/11/99.
 “The Dark Side of Private Ordering : An Institutionnal and Empirical Analysis of Organized Crime,” The University of Chicago Law Review, vol.67, Winter 2000, n°1.
 Philippe Pons, Misère et crime au Japon du 17ème siècle à nos jours, Ed. Gallimard, Bibliothèque des Sciences Humaines, 1999.
 For more details on
 Velisarios Kattoulas,
Miyawaki even estimates that “up to 50% of the bad
debt held by Japanese banks could be impossible to recover because
they involve organized crime and corrupt politicians.” See “The Yakuza
recession,” Far Eastern Economic Review,
Teruhiko Mano, “New Moves in the Money and Capital Markets,” Japan Review of International Affairs, no. 4, Winter 1998.
 Fethi Benslama, “Islam : quelle humiliation ?”, Le Monde, November 28, 2001.
 These movements which are highly sensitive in the markets for
derivatives, have been described by Jacques Follorou
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