You Can't Address Corruption Without Addressing The Financial System

February 3rd, 2012

W. Heinman Jr, writing for The Atlantic, asks how the U.S. can play a meaningful role in helping countries tackle corruption:

Fighting corruption in emerging markets is surpassingly difficult. It involves displacing those with malign power. It cannot be initiated and led by outsiders. Corruption pervades and distorts society in nations like Russia and China where the U.S. has great interests. It was a primary cause of the popular uprisings in the Middle East and elsewhere. It remains a huge issue in the emerging markets of Africa and Asia and, especially in failed and failing states. It is a pervasive obstacle to legitimate and transparent economic globalization. And it undermines a key goal of current counter-insurgency military strategy — the building of a civil society.

At the core of these problems is bribery of public officials, and officials’ extortion and misappropriation of funds. In the last 20 years, there has been growing recognition that corruption of this sort has a widespread and insidious impact. It distorts markets and competition; breeds anger, cynicism and discontent among citizens; stymies the rule of law; corrodes the integrity of the private sector; and impairs development and poverty reduction. Bribery, extortion, and misappropriation also help perpetuate failed and failing states — and sectors of other states — that are incubators of terrorism, the narcotics trade, money laundering, human trafficking, counterfeiting, piracy and other kind of global crime.

Heinman goes on to list what he says the U.S. can do to help: continue to support international anti-bribery conventions such as the Foreign Corrupt Practices Act, apply contemporary counter-insurgency theories in places like Afghanistan, and promote development in a subtle, auxiliary role that offers support in the form of aid, advise, and limited action.

I take issue with nothing that Heinman writes. He does a great job writing about an important topic Unlike so many mainstream commentators, Heinman sees the importance of the United States in helping to solve problems of corruption in the developing world. Too often, opinion leaders seem to believe that corruption is an unsolvable problem, or that the United States can do very little to change things. What I do believe is that Heinman missed a critical component in the fight against corruption, one that is very much accomplishable by the United States. The U.S. needs to stop actively facilitating corruption by maintaining an opaque, easily-laundered financial system.

Corrupt governance in the developing world is, at it’s heart, a financial problem. Corrupt public officials siphon money away from the state, stash it in bank accounts, and spend it on their own consumption. The U.S. contributes in two ways: by allowing for the creation of anonymous corporations, which are easily used by corrupt officials to hide money and business deals, and by functioning as an offshore tax haven for non-residents. Both represent profitable actions for a small number of Americans and corporations, but are highly counterproductive to U.S. foreign policy.

In many ways, the financial system inside the United States resembles that of secrecy jurisdictions like the Cayman Islands. However, unlike in tax havens such as the Cayman Islands, U.S. banks, accounts, and corporations have an inherent air of credibility — it is a whole lot easier to claim plausibile deniability when dealing with a shady-looking corporation from Delaware or Nevada than when dealing with one from the Cayman Islands or Bermuda. We should eliminate anonymous corporations, and stop allowing our banks to hide illicit non-resident alien deposits with no threat of scrutiny.

Bringing financial transparency to the United States would not eliminate worldwide corruption, nor would it make laundering millions of corrupt, illicit dollars impossible. However, it would raise the cost of corruption. It would force corrupt officials to have to take riskier bets in order to benefit from their crimes. They would have to hire more accountants, jump through more hoops to launder their money, and look over their shoulder more often for the threat of law enforcement. Furthermore, action by the United States on this kind of financial transparency would go a long way toward pushing other powerful nations to do the same, tightening the world’s grip around tax havens, secrecy jurisdictions, and their customers.

As Heinman points out, corruption is an economic and security problem. The United States has a clear national interest in creating a climate where the developing world can establish stable, transparent, and safe economies. As a result, the opaque U.S. financial system clearly undermines our foreign policy goals. However, there is also a moral problem here. By actively facilitating corruption, the United States is complicit in the consequences.

Written by EJ Fagan

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