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Western Financial Structures Enable Russia's Dirty Money Flows, Experts Say

July 10, 2006

(Washington, DC--July 10, 2006) Global financial structures built in the 1960s to facilitate the movement of capital have enabled Russia's elite to drain financial resources out of the country, according to two transnational crime and corruption experts who spoke to a recent RFE/RL audience. Raymond Baker, Senior Fellow, Center for International Policy and author of "Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System" was joined by Ethan Burger, Scholar-in-Residence at American University's School of International Service in a review of current Western law and practices that have allowed, by their estimate, "$200 billion to $500 billion in 15 years" to be siphoned from Russia into the West.

"Russia has experienced the greatest theft of resources in the shortest period," Baker said, asserting that "almost all [of this theft] was accomplished by falsified pricing of exports" including "oil, gas, diamonds, tin, zinc, pulp, and other resources." Falsified pricing, or "mispricing," is "the most frequently-used component to move money out of Russia," Baker said, because it requires no legal scrutiny by Western officials. Other "elements" of western financial structures have also allowed "dirty money" -- which Baker defines as "money that breaks laws in its origin, movement, or use" -- to move from Russia. These include "70 tax havens [world-wide], which allow 1 million to 3 million corporations" to operate in secrecy with "'flee clauses' in the papers of these disguised corporations," as well as anonymous trust accounts and fake foundations.

Burger suggested that real estate, particularly in London and Moscow, "may have replaced falsified pricing" as the primary tool of money laundering for Russia's elite. He noted that there are "western facilitators of the process," such as tax consultants who address the question of "when does tax minimalization become tax avoidance;" lawyers who "may be facilitating crimes;" and real estate brokers whose goal is to "maximize a profit," and "don't ask questions." Burger questioned whether current reporting and policing structures are "anachronistic" due to their mostly "national" nature, while "corporations" and "crimes" are becoming increasingly "transnational."

Both Baker and Berger agreed that new policies are needed to hold governments and institutions accountable, and to better "curtail" illegal money flows. Loopholes in Western laws have been exploited by international drug dealers since the 1960s, racketeers since the 1980s, and terrorists and Russians since the 1990s, according to Baker. He suggested that, since "shell banks are now off the table" for U.S. companies, the government should take the next step and not allow "any secret entity" at all for financial institutions. Baker noted that U.S. Senator Charles Grassley (R-Iowa) had recently introduced legislation, S.2402, which addresses the new challenges posed by illegal money flows from Russia, as well as terrorist financing.