PAST THE PANAMA PAPERS
How the Kleptocrats’ $12 Trillion Heist Helps Keep Most of the World Impoverished
An investigative economist has crunched 45 years of official statistics to discover just how much kleptocrats have plundered from 150 mostly poor nations.
For the first time we have a reliable estimate of how much money thieving dictators and others have looted from 150 mostly poor nations and hidden offshore: $12.1 trillion.
That huge figure equals a nickel on each dollar of global wealth and yet it excludes the wealthiest regions of the planet: America, Canada, Europe, Japan, Australia, and New Zealand.
That so much money is missing from these poorer nations explains why vast numbers of people live in abject poverty even in countries where economic activity per capita is above the world average. In Equatorial Guinea, for example, the national economy’s output per person comes to 60 cents for each dollar Americans enjoy, measured using what economists call purchasing power equivalents, yet living standards remain abysmal.
The $12.1 trillion estimate—which amounts to two-thirds of America’s annual GDP being taken out of the economies of much poorer nations—is for flight wealth built up since 1970.
Add to that flight wealth from the world’s rich regions, much of it due to tax evasion and criminal activities like drug dealing, and the global figure for hidden offshore wealth totals as much as $36 trillion.
In 2014 the net worth of planet Earth was about $240 trillion, which means about 15 percent of global wealth is in hiding, significantly reducing the capital available to spur world economic growth.
That $12.1 trillion figure for money looted from poorer countries has been hiding in plain sight. It comes from numbers in the global economic data—derived by comparing statistics from the International Monetary Fund and the World Bank, supplemented by some figures from the United Nations and the U.S. Central Intelligence Agency—that do not match up, but which until now no one had bothered to analyze.
You might think that with their vast staffs of economists and analysts the IMF, the World Bank, and other institutions would have run the numbers long ago, but no.
Following the Money
Instead, one determined person combed 45 years of official statistics from around the world to calculate the flight wealth for nearly 200 countries that publish comparable economic data.
That’s Jim Henry, who was a rising corporate star until he gave it all up to document illicit flows of money and the damage they do to billions of people.
Henry has been the chief economist at McKinsey & Co., arguably the world’s most influential business consultancy, and worked directly under Jack Welch at General Electric. A Harvard-educated economist and lawyer, Henry calls himself an investigative economist. His approach is simple: “Just look at the effing data and solve the puzzle” of mismatches between the various official sources.
From his home in Sag Harbor, near the tip of Long Island, Henry has painstakingly built massive spreadsheets to reveal the mismatches that indicate capital flight. He then fleshes out what the data show by interviewing bankers and bank regulators, government economists, law enforcement officials, and even some of the retainers who help kleptocrats loot the countries they rule.
Henry, a consultant on the Panama Papers journalism project, has released some of his findings at a global Tax Justice Network meeting in London. He shared a fuller set of his data with me.
Henry has been ahead of the curve on these issues for decades. In 1976, the year he graduated from Harvard Law School, Henry wrote a cover story for The Washington Monthly urging the elimination of the world’s most popular paper currency, the $100 bill. He argued that large paper bills helped drug dealers, tax evaders, and other criminals while honest people use checks and other bank services.
His proposal was unacknowledged by Larry Summers, the former Treasury secretary, and Harvard economist Kenneth Rogoff, in their recent proposals to ban the large bills, known as Benjamins because they feature Benjamin Franklin.
This week the European Central Bank is expected to vote to eliminate its €500 note, which Henry recommended for years before others took up the cause. No American action is slated to ban Benjamins, more than two-thirds of which are held outside the U.S.
The Cost of the Crime
The 150 poorer nations all have weak tax systems, which means that tax evasion—the driving force for Americans and Europeans hiding wealth offshore—is a minor factor in the levels of flight wealth from those countries.
Collectively the 150 poorer countries whose economic data Henry scrutinized owe $8.1 trillion of foreign debt. Statistically, that means that all of the money these nations borrowed externally, much of it from the United States and Europe, has been sent offshore. In addition, corrupt rulers looted $4 trillion from the national treasuries they control.
Almost a third of the $12.1 trillion of poorer country flight wealth comes from Russia, China, Malaysia, Mexico, and Venezuela. Those countries are all major oil exporters, except for China.
Were all of the flight capital returned and invested smartly it would reduce human misery by raising living standards, especially by reducing child mortality while increasing both health status and life expectancy.
Kleptocrats and their retainers are not the only sources of flight wealth. A small portion belongs to business people who keep some of their wealth offshore for fear it will be confiscated. The weaker the laws to protect property, the greater the share of honest wealth titled offshore.
There are only “inadequate protection of assets in these countries,” Henry said. Those who earned their wealth in business shield some of it from predatory rulers, which has the negative effect of reinforcing poverty.
While lawlessness enables kleptocrats, they put much of their ill-got money in Switzerland, the United States, and British protectorates such as Bermuda and the Cayman Islands “where the rule of law is strong because you don’t want to get deposed and then show up to get your money and discover that it’s been stolen from you.”
Many kleptocrats use shell companies to store wealth in economically unproductive assets. They buy beachfront homes in Honolulu, Malibu, and Miami; sprawling apartments with Central Park views in Manhattan and bay views in San Francisco; and mega-yachts tied up in Monaco and St. Kitts.
Even though some of this flight wealth was stolen decades ago, only a small portion of it represents investments gains. That’s because kleptocrats value secrecy and security far more than market gains. When they want more they can just steal more.
Switzerland, Henry notes, has the highest cost banking services among major countries because many of its customers are indifferent to price. They are willing to pay to ensure their hidden fortunes will ensure a luxurious exile if they are deposed from power.
Flight wealth is mostly stashed with the world’s major banks in accounts paying little to no interest, Henry said. A growing share is also in huge storage vaults, known as freeports, where gold, art, jewelry, and other physical wealth can be kept safe and out of sight.
The purchase of art by kleptocrats who store it in vaults has contributed to the rapid rise in art prices in recent decades, as well as to keeping many of the greatest creations of mankind unavailable for viewing.
Henry identifies numerous big international banks as favored choices of kleptocrats, a subject I’ll return to in future columns.
“We need fundamental reform of banking,” he says, “so the kleptocrats do not sleep well at night.”