Friday, 4 March 2011

Law of Large Numbers

If you thought this blog is about probability theory of the law of large numbers, please read no further!

This note is about......the absence of law for large numbers!  Or more precisely, a totally different set of rules!!

Every time a despot or a politician is ousted, stories of their ill-gotten wealth make the headlines. This begs the question(s) – why were they allowed to stash? Why does this not hit the news while they are in power? Why is stashing cash so easy? When does wealth become ill gotten so that it becomes topic of national interest?  Is it only after a dictator or a politician is ousted? Does it require a revolution in a country to bring it to the fore?  A multi-trillion dollar issue, quite literally!!

When Roman Abramovich buys up Chelsea FC or Thaksin buys Man City or Mohammed Al Fayed makes significant business investments, the source of their wealth seldom attracts sufficient scrutiny.  Whereas you and I would be asked to explain much smaller credits in our account sighting “Know your Customer” (KYC) and Anti money laundering (AML) rules.  It seems that those rules go out of the window for large numbers….

Why is stashing cash so easy?

It is reported that the wife of ousted Tunisian President Zine al-Abidine Ben Ali shoved 1.5 tons of gold (worth $60 million) in her bag before fleeing to Saudi Arabia last month. However, illicit funds are not always so brazenly swept from a nation.  We have this image from movies where guys show up with a million dollars of ransom in a small suitcase – apparently, you can’t do it: as it takes three small suitcases!
But there are many ways of moving money to the international money centers with the help of lawyers, accountants and bankers. During one of my forensic audit assignments, many moons ago, I had unearthed a suspect transaction wherein a Libyan official had carried bearer bonds worth $ 200 million in a bag to London where it was deposited with a private bank.  There are other ways too…payments from corporates’ to a web of companies in the guise of commissions or consultancy fees for contracts……names like A. Raja, Kalmadi, Adnan Khashoggi and Ottavio Quattrocchi rings a bell…

The World Bank estimates $20-40 billion is stolen from developing countries each year, while a report from Global Financial Integrity put that figure over $1 trillion annually. Often this money is held through a web of companies for the benefit of politicians, ruling families, cronies, corrupt officials and tax dodging businessmen.

Leading the list is China, which reportedly lost over $200 billion annually in illicit financial flows since 2000. During his 30-year-rule, Hosni Mubarak and his family reportedly amassed a fortune estimated up to $70 billion. It is estimated that the Libyan leader has plundered over $20billion with several American and European banks managing his wealth. Many Indian politicians and businessmen have their billions stashed in Leichtenstein, Switzerland, St. Kitts, Channel Islands, Luxembourg etc. And the government is dithering to come out with the details.

Most of these kleptocrats also own significant real estate, financial and business assets in the western world and their families enjoy a very lavish lifestyle while the vast majority of their countrymen struggle for daily meal. 

The estimates of illicit money in the major wealth centres like Switzerland, Leichtenstein and other financial safe havens in the western world is mind bogglingly large. 

The rules are there……..

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. In order to protect the financial system from money laundering and terrorist financing risk and as part of on-going efforts in this area, the FATF has identified and will work with jurisdictions with strategic AML/CFT deficiencies.

FATF has laid out measures to be taken by financial and non financial businesses and professions to prevent money laundering and terrorist financing.  The rules are all there…..but the enforcement of these rules are neither stringent nor consistent.

So what makes it easy…

Switzerland, Britain, and the United States are historically financial beehives for kleptocrats looking to stash money, because their cities offer the best bankers, lawyers, and financial resources. In these countries with large concentrations of financial advisors, with clusters of services such as banks, lawyers, corporate advisers – there is everything that is required to manage wealth.  Money is often laundered through a web of legal entities and structures. It's like untying the Gordian knot. These people have protected themselves with various layers and to break through all these layers is a complex procedure.

About 27 percent ($2 trillion) of the world's privately held offshore wealth is managed in Switzerland, according to Boston Consulting Group.  Switzerland's new Return of Illicit Assets Act, which took effect Feb. 1 allows the Swiss government to determine the legality of funds of any person hailing from a "failing state". 

The focus seems to be on remedial measures than preventative measures.  How do these institutions and countries get away from not enforcing the laws in the first place? Stricter enforcement of rules with severe consequences for non-compliance has to be way ahead.

What can be done?

In June, the US Justice Department launched a new Kleptocracy Asset Recovery Initiative.  It is well laid out that Banks must take reasonable measures to establish the source of wealth and source of funds related to their customers and the beneficial owners of the funds.  

But a real difference can only be made, when they start throwing the facilitating bankers, lawyers and accountants in jail and cancelling banking licenses of conniving institutions for “Knowing their Customers too well”!!

That will be a pipe dream!!!

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