The Unlikely Beneficiaries of Developing World Corruption

Recently, the Washington Post wrote about a multi-million dollar real estate purchase made by -- of all people -- an 11-year-old boy.

Of course, this was no ordinary 11-year-old. Instead, young Heydar Aliyev -- who now owns nine waterfront luxury homes in Dubai's Palm Jumeirah -- is the son of the president of Azerbaijan.

At $44 million, the sum involved in the transaction is equivalent to what the average Azerbaijan citizen would make after working for 10,000 years. True to its authoritarian nature, when the story of the first son's shopping spree broke, the Caucasus nation's government was quick to block its citizens' access to the website that posted the findings.

We hear a lot about (PDF) the high costs of corruption, especially in developing countries. It chases away potential investors, reduces market efficiency, and erodes people's faith in public institutions.

But what doesn't get discussed as much is who else stands to benefit from ill-gotten wealth -- that is, apart from the usual suspects (thieving government officials). What about people who support them in the industrialized world?

It's common for corrupt ruling elite to squirrel their money away far from their homelands, where (in the event they lose power) it's less vulnerable to seizure. Swiss banks -- with their famed secrecy laws -- have, in particular, proven to be a safe bet. Glitzy real estate purchases and other large investments (mostly in the West) are another haven for those hiding their money.

So while the industrialized world denounces corruption, oddly enough, its businesses -- especially in finance and real estate -- enormously benefit from it. Not nearly enough has been done to address the issue.

The sums involved are vast. Likewise, examples are plentiful. A report compiled by the Corner House reveals that financial institutions in the West habitually pursue powerful individuals in developing countries and encourage them to use their private banking services. As a strategy, it's paid off handsomely for the banks, which charge up to 20% of deposits for their services.

The U.K.-based NGO also estimates that some $40 billion a year belonging to former communist countries -- a majority of which is illegally acquired -- ends up in Western banks. The total amount of Swiss deposits by African leaders, for example, adds up to some $20 billion. Haiti's Jean-Claude Duvalier was able to stash $300-$900 million outside of his country, while Philippine's Marcos managed to launder even more -- over $2 billion. Similarly, in 1999, one U.S. Senate investigation revealed that the former president of Gabon set up dummy accounts and transferred $100 million through Citibank's branch in New York City.

The responsibility of quashing corruption shouldn't just rest on the shoulders of developing nations. Rich countries must help by stemming the flow of dirty cash into their borders and pressuring others to do the same.

As long as there are rotten government officials, corruption will thrive. But if they are forced to keep stolen money within their nations, it could at least put a stop to a major portion of capital flight -- and minimize a major poor-country headache. If that was the case, thieving officials might even be inclined to invest the money in their own economy. There just wouldn't be a big enough mattress in which to stuff all their loot.

Photo Credit: 1suisse