REVIEW: Invisible Trillions by Raymond Baker

Laurence Cockcroft reviews Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy and the Way to Renew Our Broken System by Raymond Baker, writing that Baker offers a comprehensive overview of the danger that global financial secrecy poses to the capitalist-democratic system, even if he doesn’t provide perfect solutions: “an important book for anyone interested in the the cause and effect of the lack of transparency, the continuing role of secrecy in the modern world, and, above all, the consequent challenge to democracy itself.”

The various forms of secrecy which have come to characterise global capitalism have created threats to democracy in both high and low income countries. This secrecy hides numerous forms of corrupt behaviour by companies, banks and political parties, sustains inequality between and within nations  and is a major threat to existing and potential democratic systems. Raymond Baker’s Invisible Trillions maps out this theme, showing that western political systems are failing to address it, and proposes a set of measures which are feasible at both the national and international level without undermining the basic principles of capitalism. 

Baker has honed his argument over several decades. As a business practitioner in Nigeria in the early 1960s he quickly became knowledgable about the false invoicing which characterised the country’s international trade. He came to see that this would prove a fatal flaw in Nigeria’s economic development, transferring profits overseas and depriving the country’s exchequer of the revenue it would need, with ominous portent for the future of the oil industry. He spent several decades researching this phenomenon globally and in 2005 published Capitalism’s Achilles Heel : Dirty Money and How to Renew the Free Market System. In 2006, Baker was able to set up Global Financial Integrity (GFI) in Washington DC to carry out both further analysis and (more importantly for Baker) to campaign on this and related issues of transparency and corporate integrity. As such, he has been a key member of the informal coalition of NGOs active on this issue in the US and Europe. There are very few in this coalition who have his level of detailed knowledge of the mechanisms by which corruption, broadly defined, can flourish in a world of corporate secrecy.  

Baker fears that the phenomena which he described in Achilles Heel has exploded and is now a many-headed hydra. The starting point of Invisible Trillions is the gargantuan sum of illicit funds that flow through what he labels “capitalism’s financial secrecy system” from both the medium- and low-income countries of Latin America, Africa and Asia, as well as from Russia and China as the successful rich seek to deposit their funds in alleged safe havens – often via the world of the secrecy jurisdictions so actively supported by western governments, notably those of the US and the UK.

The mechanisms for this have been exposed in a series of leaks by the Investigative Consortium of Independent Journalists (ICIJ), amongst which the Pandora Papers showed that fifteen US states house more than two hundred trusts which in turn provide an anonymous home whose secrecy rivals that of more notorious places in the Caribbean. The vast gap between the flow and control of funds seeking a safe haven in the US is demonstrated by the fact that 99.9% of laundered funds are ultimately successful in finding a formal and authorised account in a US financial institution or legitimate property. It is this transition from illegal status to legal status which also lies at the heart of the phenomenon of illegally-sourced goods, such as oil ‘bunkered’ off Nigeria or timber illegally felled in Amazonia or DRC, which become legal as they reach the higher levels of the supply chain. 

While the phenomena described by Baker have long been recognized, his central argument is that illicit financial flows, tax evasion, tax avoidance, and schemes by corporations to hide revenues and profits all combine, “driving inequality, impoverishing billions, empowering criminals, enriching despots.” And, for good measure, he adds that the secret financial system leads to misallocations of finance to the point where the “trillions” are not invested productively, thus undermining potential economic growth. 

Baker offers a useful analysis of why there has been so little progress in fighting the financial secrecy system. Key issues are the lack of uniformity in collaboration between the various regulatory authorities fighting money laundering in Europe and the US; weaknesses in the new legislation addressing beneficial ownership; the ‘golden visa’ schemes which enable the corruptly rich to easily acquire citizenship in a range of tax havens; political party funding rules which are if anything increasingly loose – as was the defining case of Citizens United in the US  – allowing foreign donors to fund their target candidates; and the repeal of the US Glass-Steagall Act in 1999, which since 1933 had separated investment banking from commercial banking.  

Baker’s focus is more positive at the international level, highlighting the OECD, the World Trade Organisation and parts of the United Nations as being well ahead of the World Bank and the International Monetary Fund in trying to establish improved practice both within and between states.  

The alarm bell ringing loud and clear in this book is that the financial secrecy system has become so large and promotes such great inequalities of income and wealth that capitalism in this form now poses a core challenge to the survival of democracy. As he bluntly states: “The democratic-capitalist system is at risk.” 

Building on his analysis, Baker offers a roll call of activities for future action. The common theme is the imperative for an end to secrecy and an opening to transparency, with a direct impact on the quality of democracy. High on this list are corporate transparency (ending the practice by which companies can disguise even the existence of a subsidiary in a foreign jurisdiction), a convergence of trade and audit reports which would make trade mispricing (by invoice manipulation) impossible, an end to the defining characteristics of tax havens (perhaps now heralded by the new fifteen per cent minimum global corporation tax). Corporate governance with much stronger employee stakeholder role is also on the agenda. In the world of international finance, he calls for an end to financial products representing no real world assets (notably a range of derivatives) and a much more rigorous policing of auditors too long complicit in the behaviour of both multinationals and banks. Further, the book reverts to the broad theme of transparency trade and shows how the World Bank couid easily produce an annual report of progress in this area.  

Today, while there are greater efforts by governments on both sides of the Atlantic to develop approaches to reveal the true beneficial owners of the shell companies, no government has yet advocated closing down these entities. But then, as Baker argues on p.140, the complex structures that support the financial secrecy system are supported by Western governments and advocated for by powerful individuals and corporations who most benefit from the system. His overall synthesis is that: “A more equitable world cannot be realised while widespread secrecy pervades operations in one of the components of the democratic-capitalist equation, while the other component strives to operate with transparency.” 

The book’s strength, in addition to its warning of the risks to democracy and to capitalism, is its very comprehensive overview of the failure of reform to date of the trade, finance and banking sectors. Its roll call of actions is strong on conviction but the practical steps which are a condition for successful reform don’t always tie in with the analysis of why so little has been achieved in a meaningful way in the last twenty years. This is, however, an important book for anyone interested in the the cause and effect of the lack of transparency, the continuing role of secrecy in the modern world, and, above all, the consequent challenge to democracy itself.  

Frank Vogl, author of The Enablers: How the West Supports Kleptocrats and Corruption – Endangering Our Democracy, kindly commented on this draft

Laurence Cockroft is the author of Global Capitalism : Money Power and Ethics in the Modern World and (with Anne-Christine Wegener) Unmasked : Corruption in the West 

Raymond Baker’s Invisible Trillions is published by Berrett-Koehler (USA) and available via Amazon (Hardcover, Audio and Kindle). 

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