Foreword

In 2005, Raymond Baker published a seminal book, Capitalism’s Achilles Heel, documenting the problem of dirty, illicit money and what it was doing to our systems of democracy and free market capitalism. The book, based on a decade of research and over 300 interviews in nearly two dozen countries, had a profound impact in demonstrating how global capitalism was going off the rails due to pervasive corruption and illicit capital flows, facilitated and protected by secrecy provisions, scant regulation, and the unfortunate human tendency toward greed. The book gave rise to a movement for “global financial integrity” and an organization of that name that Baker founded the subsequent year. Despite these efforts by a dedicated band of analysts, journalists, and activists, the problem has only mushroomed in scale. Now, we can no longer talk of tens or hundreds of billions of dollars stolen, skimmed, and transferred through illicit or fraudulent activity. Rather, as Baker makes clear in this urgently important new book, kleptocrats, criminals, corporations, and crony capitalists now send invisible trillions coursing through the opaque arteries of global finance. And democracies—not least the United States—are as eager to receive, conceal, and legitimize this diverted wealth as the venal and cunning are to launder and park it.

The result has been an alarming corrosion of democracy and capitalism. Each system—or more to the point, each half of the intertwined system of democratic capitalism—is being dragged down by the relentless pursuit of profit maximization, even when it is immoral (evading the most minimal civic duty to pay taxes on gushing revenues) and frequently when it is blatantly illegal. A complex global industry of lawyers, bankers, consultants, accountants, lobbyists, agents, brokers, and fixers has arisen for one common purpose: to help place trillions of dollars of wealth beyond the reach of public accountability, regulation, and taxation. By making these trillions invisible, untaxable, and (if they are stolen from impoverished publics) unrecoverable, global financial secrecy is dramatically increasing inequality of wealth and income within nations. Worse, as Baker makes clear, economic development is stunted, and inequality is further aggravated by the wasteful, unproductive dispensation of this cornered wealth, most of which is hoarded in various stores of cash or luxury real estate or squandered in obscene displays of conspicuous consumption. As Baker puts it, “the mature megarich are hiding, saving, and playing with their money, while the youthful poor are underchallenged and restless.” This mounting inequality is now one of the biggest contributors to the declining functionality of and public support for both democracy and capitalism. As Baker shows and as generations of research on democracy have demonstrated, there is a strong inverse relationship between inequality and democracy.

But the global system of financial secrecy is eroding democracy in another way as well by ravaging the rule of law and, really, any sense of a shared public purpose. As Baker makes clear in this devastating portrait, the current system of global financial and corporate capitalism—as it is increasingly distorted and degraded by the vast inscrutable web of tax havens, secrecy jurisdictions, shell corporations, shadowy corporate subsidiaries, anonymous trust accounts, fake foundations, and falsified trades—is unsustainable. As it moves more and more wealth beyond the reach of public scrutiny and accountability, it is also transferring that wealth from the poor to the rich and from the global South to the North while cleansing much of it of any taint of criminality or corruption. Inequality deepens. Ethics evaporate. Institutions decay. And democracy recedes.

The last 15 years have witnessed a persistent and now accelerating global democratic recession. Since Baker published his first book in 2005 (at what would prove to be the high-water mark for global democracy), levels of political rights, civil liberties, and the rule of law have steadily receded in the world.¹ As the annual data of Freedom House show, the steady post–Cold War progress of freedom in the world came to a screeching halt in 2006, and for every year since many more countries have declined in freedom than have gained (exactly reversing the pattern following the fall of the Soviet Union in 1991). In each decade since the miraculous 1980s, the rate of democratic breakdown (that is, the percentage of the world’s democracies that expire) has been increasing, and the first two decades of this century have also seen a marked slowing in the rate at which autocracies make transitions to democracy. As a result, the decade of the 2010s was the first since the third wave of global democratization began in 1974 in which more countries abandoned democracy than adopted it.² More countries are also losing rather than gaining ground in control of corruption. My research has shown that deterioration in the rule of law—including transparency, accountability, and control of corruption—has been the leading edge of the broader decline in freedom and democracy.

Paralleling these aggregate trends in freedom and democracy have been alarming shifts in global values, perceptions, and narratives. Democracy remains the preferred form of government around the world, but discontent is mounting with the way democracy is working. A 2020 report by Cambridge University on “Global Satisfaction with Democracy” found that “across the globe, democracy is in a state of malaise.”³ Not surprisingly, countries where rising inequality, political corruption, or corporate malfeasance have been major issues—such as the United States, the United Kingdom, Brazil, Mexico, Colombia, Nigeria, and South Africa—have led the downward trend in public confidence in democracy. All of these countries are deeply, in fact shockingly, implicated in the pernicious system of global financial secrecy that Baker describes in this book.

At about the same time (2019), the Pew Research Center released a survey of public opinion in 27 prominent democracies around the world. It showed not only high and growing levels of dissatisfaction with democracy in most of the countries surveyed but also, like other research, identified weak rule of law as a prominent factor: “Most [people surveyed] believe elections bring little change, that politicians are corrupt and out of touch and that courts do not treat people fairly.”⁴ Precisely because the trillions of dollars that are being raked, expropriated, laundered, and hoarded across their economies are invisible, ordinary citizens do not see exactly what is happening. But they see the consequences in declining economic performance, rising inequality and elite arrogance, and increasingly corrupt politics. All of these drive democratic disenchantment, political polarization, and rising support for antisystem, illiberal, and authoritarian populists, who then destroy democracy and govern even more corruptly.

Only radical improvements across the globe in financial transparency and accountability and in regulatory capacity and integrity can break this cycle of political decay and despair. Fortunately, Raymond Baker offers a path forward to rekindle a sense of shared public purpose and thereby renew democratic capitalism. The essential starting place is to implement sweeping new provisions for transparency and accountability in a wide range of national and international financial transactions. The ability of corporations to disguise their true beneficial owners must be ended (as it was in the United States for shell banks). Multinational corporations should also have to disclose how they reconcile their tax filings across jurisdictions and how they justify the pricing of their internal corporate trade across borders. Falsified trading across company units to evade taxes should be a crime that is detected and punished. Banks should face closer regulation and stronger anti–money laundering and transparency laws. The auditing functions of modern accounting companies should be strictly separated from the consulting ones to avoid obvious conflicts of interest. The auditing and enforcement capacities of the Internal Revenue Service should be strengthened after a long period of deliberate atrophy. And some reforms of the tax code will be needed (for example through a modest financial transaction tax) to help diminish inequality. Finally, to repeat the core message of this book, no reform strategy can succeed unless it squarely confronts the systemic secrecy that cordons off so much wealth from visibility, accountability, and productive and humane use.

—Larry Diamond