Shell Game

Issue Date January 2023
Volume 34
Issue 1
Page Numbers 171–74
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Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy—and the Way to Renew Our Broken System. By Raymond W. Baker. Oakland, Calif.: Berrett-Koehler, 2023. 256 pp.

Vladimir Putin may be the world’s richest man, with assets totaling roughly US$200 billion. But the truth is that nobody knows: His ill-gotten wealth is hidden under layers of shell companies, real estate deals, and other assets across the world. He also controls the secret wealth of a network of oligarchs who help to keep him in power. His invasion of Ukraine is only the latest example of the horrifying consequences of kleptocracy and the financial-secrecy system that enables it.

Nearly every authoritarian regime is a kleptocracy, where corrupt, stolen wealth undergirds the repressive apparatus that serves it. The global system of financial secrecy makes this all possible: Without safe havens in the West, autocrats would have to find a new business model. If moving and storing loot outside of their home country were more uncertain, kleptocrats would have to keep their stolen trillions at home, where they would be significantly more vulnerable to appropriation by rivals, and most importantly, to political accountability.

About the Author

Charles G. Davidson is founding executive director of the Hudson Institute’s Kleptocracy Initiative, cofounder of the Global Financial Integrity think tank and the FACT Coalition, executive producer of the Sundance documentary “We’re Not Broke,” and cofounder and publisher of the American Interest magazine.

View all work by Charles G. Davidson

In recent years, an anti-kleptocracy vanguard has emerged that spans government, media, civil society, and think tanks. In the United States alone, all sorts of legislation combating illicit financial flows has passed, such as the Corporate Transparency Act (banning anonymous shell corporations) or is in the works, such as the Crook Act (which establishes the Anti-Corruption Action Fund, among other things).

What is missing from this current anti-kleptocracy fervor is an understanding of how financial secrecy also kills democracy from within. Fortunately, that is the subject of Raymond Baker’s Invisible Trillions. The essence of his argument, and the essence of the challenge we face, is as follows: “Capitalism for the last half century has been building and perfecting secrecy structures that allow the commanding heights of the system to function well beyond effective oversight by representatives of democracy” (p. 206).

The Panama Papers, the Paradise Papers, the Pandora Papers and other heroic efforts by the media have brought these secrecy structures into the public eye. They uncovered how major global law firms, such as Panama’s Mossack Fonesca, have set up arrangements—from trusts in South Dakota to layers of shell companies registered in various island nations—to hide the wealth of criminals, the merely wealthy, and aggressive plutocrats with ambitions to warp politics. Among them were a former prime minister of Iceland, several Mexican drug lords, and the right-hand man of India’s most wanted criminal.

Light has been shone on this system and it is now staring us in the face, flouting the rule of law and the social contract of democracy. The kleptocrats, criminals, and far too many dishonest wealthy people who escape into this system have effectively abdicated from society and from paying the taxes needed to sustain it. What Baker denounces here is part and parcel of democratic decline: The financial-secrecy system has undermined social consensus and public trust, sparking anger and polarization across the West. In the absence of leaders from either the right or left able (or willing) to bridge this social and political chasm, has “populism” arisen to fill the void?

That this problem has progressed largely unnoticed should not be surprising. It is a financial system that was designed to be secret, opaque, and hidden from view. Baker contends that the most pernicious effect of this secrecy system has been the turbocharging of inequality. Across the OECD, a club of mostly rich democracies, more wealth is concentrated in fewer hands than at any point in the last half century. And this statement probably does not account for the more than $32 trillion that economist and investigative journalist James Henry estimates were hidden from global economic statistics in 2013, secreted into the financial-secrecy system. This figure is probably as great as $60 trillion today, if not more. Great concern about inequality is being expressed with figures that are too low.

The consequences of inequality for democracy, Baker argues, are dire: “With this level of financial secrecy now available to and dominating capitalist operations, riches move inexorably upward, accelerating economic inequality. Rising inequality is directly imperiling—weakening, obstructing, and degrading—democracy” (p. 1).

How does financial secrecy increase inequality? A primary way is tax evasion. The effects are dramatic: With an 8 percent tax-free rate of return, you would double your money in less than ten years. But with taxes, you would be getting a dramatically lower return.

Beyond tax evasion, the current financial-secrecy regime enables all manner of shenanigans outside the regulatory framework and the rule of law. There is not only tax avoidance but law avoidance—with impunity. For example, how can we detect insider trading in accounts that are secretly held? The U.S. Securities and Exchange Commission has all sorts of transaction reports it can use to uncover suspicious activity, but law enforcement will hit a secrecy wall if they try to investigate anything.

This is not the capitalism of Adam Smith or Max Weber. Baker—once a teaching assistant to the legendary Georges Doriot (founder of the modern venture-capital industry) while an MBA student at Harvard—has rightful nostalgia for the capitalism he knew as a younger man. He posits that capitalism’s decline began accelerating fifty years ago. The easing of global financial regulations enabled the wealthy, eager to avoid high taxes at home, to stash their cash abroad. In addition, the philosophy of Ayn Rand and the rise of Reaganism provided a popular justification for selfish social behavior.

After business school, Baker went to Africa seeking adventure, and built a series of successful businesses. His first book, Capitalism’s Achilles Heel (2005), details his increasing horror with how so-called developing nations, particularly in Africa, were being plundered by rapacious dictators working with unscrupulous financial people, lawyers, fixers of various ilk, and multinational corporations. Their goal was to extract wealth and hide it away in the global financial-secrecy system, leaving behind increasingly impoverished populations. In Invisible Trillions, Baker has gone beyond African impoverishment to tackle the financial-secrecy system as a whole, with a focus on how it undermines democracy and capitalism in wealthy democracies.

According to former Journal of Democracy coeditor Larry Diamond (who wrote the book’s forward), 2006 marks the start of democracy’s continued decline around the world. We cannot understand, let alone reverse, freedom’s fading fortunes without understanding the immense role financial secrecy has played in the growth of kleptocratic authoritarianism. And the dramatic increase in inequality that Baker underscores may well be the prime explanation for the explosion of “populism” since the 2008 financial crisis. Stagnant wages, the destruction of middle-class wealth, and the exponential growth in tax- and law-avoiding wealth have left many disillusioned and resentful, paving the way for antiestablishment politicians. Financial secrecy has also enabled a flood of “dark money” from unknown donors into U.S. elections and the Kremlin’s foreign disinformation and manipulation campaigns. Autocrats and their ilk are trying to turn democracies into nothing more than their personal piggy banks and playgrounds with mansions and yacht harbors.

Baker concludes his book by addressing culture. The outlaw financial-secrecy system, home to tens of trillions, reeks of the “state capture” of the economic system. In other words, we are subject not only to the predations of authoritarian kleptocracy from the likes of Putin, but to the predations of a rapacious and globalized plutocracy that cares of nothing but its own enrichment. Financial secrecy, a byproduct of the rise in capitalism without transparency or accountability, is undermining liberal democracy by enabling vast swaths of the wealthiest to avoid society, accountability, and the rule of law. This is the “clash of civilizations” that U.S. Senator Sheldon Whitehouse identifies between kleptocracy and plutocracy on one end and democracy on the other.

Baker’s solution is more transparency, the Louis Brandeis solution. He does not go far enough. We have plenty of transparency, thanks to the journalistic heroics of the International Consortium of Investigative Journalists, the Organized Crime and Corruption Reporting Project, the mainstream press (albeit to a distressingly minor degree), and many others. The brazen schemes and billion-dollar yachts financed by unexplained wealth are legion. We need to not only expose the horrors of the financial-secrecy system (as Baker so admirably does), but to dismantle it. For starters, Western countries—the center of the global-financial system—can simply ban the vehicles that have enabled financial secrecy. SWIFT, the main international-banking system, contains lots of valuable data which remain underused. The United States can require that SWIFT transactions disclose beneficial ownership to regulatory bodies and law enforcement. The U.K. government has the authority to eliminate notorious tax havens in British dependencies and territories (such as Bermuda). And longstanding secrecy jurisdictions such as Liechtenstein could simply be barred from SWIFT.

Kleptocracy and financial secrecy are democracy’s multitrillion-dollar problem—we cannot afford to ignore it. That makes Raymond Baker’s Invisible Trillions essential reading for anyone truly interested in saving democracy from the predations of kleptocracy and plutocracy. We know from Martin Luther that a book—one book—can make a difference. This might be one of those.


Copyright © 2023 National Endowment for Democracy and Johns Hopkins University Press