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Follow the Money

William F. Wechsler

From Foreign Affairs, July/August 2001

Summary: Financial abuses ~ money laundering, tax evasion, and rogue banking -- have been around for as long as
there have been finances to abuse. But globalization is creating new challenges as borders dissolve. New technologies
enable tiny, remote countries to make quick money through their underregulated banking systems. Recent multilateral
initiatives have started to attack the problem. But if the Bush administration fails to follow through on reforms, the
entire effort could fall apart.

SECRETS AND LIES

As the international financial system has expanded, so too have financial abuses ~ money laundering, tax evasion, and
rogue banking. Globalization is now changing the nature of these age-old problems, threatening to undermine U.S.
diplomatic, economic, and even strategic interests. Multilateral efforts have begun to combat these abuses and have
already achieved some impressive results. But time is running short for the Bush administration to act, and its decisions
now will determine whether these multilateral efforts will continue.

Financial abuses have been around for as long as there have been finances to abuse. Money laundering and tax evasion
are often viewed as complicated, boring matters hinging on the minutiae of tax codes and regulatory laws. But that
image masks a destructive, often bloody reality. Drug cartels, arms traffickers, terrorist groups, and common criminal
organizations use banks to launder their dirty money, making it appear as the product of legitimate business. Tax
evaders structure transactions to hide their wealth from legitimate authorities, weakening national tax bases. Corrupt
government officials exploit banks to facilitate their own misdeeds, breeding a lawless business culture and
undermining public confidence in national financial systems. And the underregulated banking systems that facilitate
these abuses have sparked financial meltdowns around the world.
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The United States and many of its economic allies have long understood these threats,and know that "following the
money" can unearth big vulnerabilities in criminal syndicates. Over the years, their gpvernments ~ remembering that
Al Capone was put behind bars for tax evasion rather than murder — developed legal and regulatory regimes to help
detect and deter financial abuses. Banks and other financial-service providers were regulated and supervised. Money
laundering and tax evasion were criminalized, banks were required to identify and report suspicious transactions,
company-incorporation and trust-formation laws were passed to encourage transparency, and law enforcement
agencies developed specialized investigative skills.

As criminal organizations began to operate across international borders, national regulators and law enforcement
agencies began to share information. In recent decades, international standards for financial transparency were
established through such multilateral organizations as the Financial Action Task Force (FATF) and the Basel
Committee on Banking Supervision. But these efforts were not truly global. For the most part, only wealthy countries
with well-developed financial systems participated; smaller and less-developed countries were mainly absent from
these discussions. This did not seem a problem, however, because most of the world's funds routinely passed through a
small number of highly developed economies. In comparison, the banking systems in the developing and then-
communist nations were exceedingly small and not globally integrated.

Even among nations with well-developed financial systems, however, a few countries took different approaches.
Switzerland and the Cayman Islands, for example, were notoriously reluctant to disclose information on their secret
bank accounts. Moreover, they shared certain features that made their banks attractive to money launderers and tax
evaders: both possessed stable political and economic environments, professional work forces, and ~ most important —
physical proximity to more tightly regulated financial centers. A banker in London or Frankfurt needed only . ..

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