Prompted by Muammar Qaddafi’s brutal military campaign against popular demand for political reforms and access to economic opportunities, the U.S. Treasury recently announced its decision to freeze $32 billion worth of assets held in U.S. banks and other investment outlets on behalf of Qaddafi and his inner circle. Recently, Swiss authorities announced that they had frozen about $1 billion worth of assets belonging to the trio of Qaddafi, Mubarak, and Ben Ali. These decisions provoke the following question: why would financial institutions accept such large sums of capital from well-known dictators? The volume of funds looted from Africa by dictators and accepted overseas are staggering in comparison with economic conditions on the continent. In a 2004 report, the African Union estimates that nearly $148 billion is lost to corruption annually and most of these funds are invested abroad. To put this in context, the figure represents about 25% of Africa’s Gross Domestic Product and many times larger than annual Overseas Development Assistance flows to Africa.
It is arguable that foreign institutions have little or no incentives to refuse looted funds brought to their doorsteps. In fact, the line of defense has been that the responsibility rests on the origin countries to address their problems of corruption and weak governance. Capital is crucial for creating economic opportunities; the more capital grows, the more economic opportunities can be created. Given these benefits, and because stolen funds are typically laundered in ways that make them appear legitimate, financial institutions in the west can be expected to refuse them only when the moral disincentives – the guilt associated with being seen as propping up dictators – outweigh the economic incentives.
The other side of the coin, however, is worth some consideration. When capital is looted from an economy, fewer economic opportunities are available for the local population. Stolen funds retained in the victim economy continue to create economic opportunities both directly and indirectly. Funds deposited in local banks facilitate loans and other bank activities. If the dictator decides to build lavish houses or complete the unfinished tower of Babel, jobs will be created locally. If instead he decides to buy a million pairs of shoes for a pricey wife, jobs will be created along the chain of commerce. In short, opportunities created by stolen funds in the destination economy represent opportunities withdrawn from the origin economy.
There is clear evidence that crime, conflict and instability take root where economic opportunities are limited or restricted. The link is well established in Somalia where pirates are permanently on the sea taking hostages and demanding ransoms. This is also clear in North Africa and the Middle East where unemployed youth and others denied access to opportunities have been at war with their governments. Indeed, the seed of the ongoing revolution was sown in Tunisia where an unemployed graduate set himself on fire because the police confiscated his vegetable cart. Since then, most of the places where the revolution has spread are countries where economic opportunities are scarce while the kings and dictators ruling over these nations have billions of dollars stored away in the capitalist centers of the world.
Conflict, unrest and war pose enormous security threats to capitalist interests. More than anything else, they serve as effective recruiting and training grounds for terrorist organizations including the broad Al-Qaeda network. The costs of keeping these threats at bay run into tens of billions of dollars annually, and are usually borne by taxpayers. For example, it costs the U.S. taxpayers approximately $1 million per day to keep aircraft carriers in the Gulf of Eden to protect commercial vessels from the Somali pirates. The cost of the first day of Operation Odyssey Dawn, aimed at preventing Qaddafi from killing his own people, is estimated at about $100 million in missiles alone. After just one week, Operation Odyssey Dawn had cost U.S. taxpayers an estimated $600 million and some experts suggest that the operation could cost US taxpayers billions as the crisis continues. These costs exclude financial support for rebuilding collapsed economies and overseas development assistance.
In reality, the costs associated with globally policing conflict zones and funding post-conflict reconstruction far outweigh the benefits of keeping the stolen funds, particularly when one takes into consideration the impact on lives and human welfare. The longer dictators are aided in exporting stolen funds, the fewer economic opportunities their citizens have and the more conflicts are likely to erupt in those countries. In response, the U.S. and other havens for stolen funds have to spend public funds to police and protect their interests, resulting in perennially huge defense budgets. Sooner or later, taxpayers must bear the cost of this spending.
Efforts to prevent expatriation and support repatriation of stolen funds are enormously beneficial. For example research shows that if only a quarter of the stock of capital stolen from sub-Saharan Africa is repatriated, the region would transit from trailing to leading other developing regions in terms of domestic investment needed to create economic opportunities. The 2005 United Nations Convention Against Corruption (UNCAC) provides a framework for collective action against expatriation of stolen funds. African countries and other victims of state looting have implemented a number of reforms and have achieved major advances in the fight against corruption on the domestic front. They now require support from the other side of the stolen funds equation.
In 2010, the G-20 agreed on an Anti-Corruption Action Plan which calls on the group to lead by example to fight corruption. Such initiatives are applauded; however, it is time to move beyond rhetoric to actually implement the UNCAC and other anti-corruption measures. After the September 11 attacks, led by the United States, western governments began to work together and have achieved significant success in combating terrorism finance. This proves that with strong political will and effective cooperation it is possible to curb the flow of illicit funds. A similar concerted effort needs to be made to prevent the flow of stolen assets from developing countries to safe havens in the West.
The moral reasons why advanced economies should not accept stolen funds from dictators are obvious but they have not been compelling enough for financial institutions to stop this practice. Nevertheless, when one looks beyond the short term it becomes clear that the gains from holding stolen assets may not exceed the long term security, development and other costs associated with the persistent lack of opportunity in victim countries. Policymakers should consider whether U.S. gains from holding $32 billion worth of Qaddafi’s assets (about 41 percent of Libya’s 2010 GDP) will exceed the security related costs that the United States and its NATO allies are now incurring. Ultimately, it is dime-wise, dollar-foolish to continue to accept stolen assets from dictators.