ACTION MEMORANDUM

To: Henry M. Paulson Jr., Secretary of the Treasury

From: Raymond W. Baker and Jennifer M. Nordin

Re: Dirty Money

Date: September 1, 2006

Riggs Bank’s dealings with corrupt foreign officials, corporate scandals like the collapse of Enron and WorldCom, terrorist financing and failing states all demonstrate the impact of “dirty money” on U.S. economic and national security interests. This memorandum outlines why curtailing dirty money is of vital importance to the United States and specifies eight steps the Treasury Department should take in this direction. Still in the early days of your tenure, Mr. Secretary, this is an issue on which you can make a major difference and ensure your legacy as an effective and influential public servant.

Money that breaks laws, whether because of its illegal origin, movement or use, is “dirty money.” Roughly $1 trillion in dirty money flows across international borders each year. Half of this comes out of developing and transitional economies into U.S. and European accounts. These illicit cross-border transfers are generated by three means:

• Corruption: Government elites who profit from the abuse of their authority and shift funds abroad produce about 3 percent of the global total of “dirty money.”
• Criminality: Proceeds from drug sales, arms trading, racketeering, counterfeiting and a host of other offenses constitute about a third of total cross-border dirty money.
• Illicit commerce: Corporations and individuals generate more than 60 percent of global dirty money by falsifying the pricing of imports and exports, faking transactions, laundering money and other techniques.

Clandestine funds move around the world, and both in and out of our own country, thanks to a comprehensive dirty money structure that has evolved over the past forty years. Components of this system include more than seventy tax havens and offshore secrecy jurisdictions; one to three million disguised corporations worldwide; “flee clauses” that allow disguised corporations to relocate from one secret enclave to another; anonymous trust accounts; fake foundations; false documentation; mispricing in international trade transactions; and loopholes in Western laws that facilitate the movement of proceeds through the dirty money structure into Western financial institutions.

U.S. banks and businesses bear too large a share of responsibility for dirty money, especially those financial institutions that actively solicit deposits from clients and corporations that abuse transfer pricing as a normal part of their international activities. These banks and businesses help the perpetrators of dirty money reach their goal: to get their cash into the legitimate financial system. Our toleration of the dirty money structure as it has grown in recent years guarantees that it will grow still further unless we...