Raymond Baker is a man on a mission. Following a long career in business that started in Nigeria during the decolonisation period, he published in 2005 Capitalism’s Achilles Heel, a seminal book on illicit financial flows. Nearly two decades later, things are even bleaker. In his new book Invisible Trillions, Baker, 87, argues that financial secrecy has become a main driver of capitalism, bringing the kleptocracy he witnessed in Africa closer to home. Secrecy, he argues, is not a bug but a feature of the system, breaking the link between supply and demand, ownership and control, value and price. Regulating the maze of shell companies and tax havens used by corporations, criminals and corrupt politicians alike is a chimera. He shares with World Finance his thoughts on how hidden money is eroding democracy and what to do about it.

What sparked your lifelong interest in financial crime?
I have lived in the developing world and watched financial crime and corruption. After a long career in business, I decided that I had to say something about this phenomenon. That still drives my will to make a contribution.

You argue that capitalism has adopted a ‘secrecy motivation.’ What is that?
There wasn’t much secrecy in earlier stages of capitalism. Rich Americans built mansions, but you could see these mansions. Today, many rich Americans have money stashed offshore, and you can’t see that. Secrecy enables money to flow from the bottom to the top in ways that governments find extremely difficult to curtail. Inequality has grown in most countries to the highest levels ever. A major contributor to that is financial secrecy: the ability to make, move and shelter money in ways that cannot be controlled.

What role did decolonisation play?
In the 1950s and 1960s, 48 countries gained independence. The colonial powers wanted to keep extracting wealth from former colonies, so they set up mechanisms facilitating the movement of money out of them. People living in these countries didn’t trust their governments and wanted to get money in foreign accounts. That period contributed to the formation of financial secrecy systems facilitating those two processes.

Did you experience that phenomenon while living in Nigeria in the 1960s?
I once met a British ‘old coaster’ living in West Africa for decades. He was the managing director of a company in Nigeria. When I asked about profits, he looked at me with disdain. He said: “Profits? I’m not trying to earn a profit. I’m just remitting money back to the parent company in the UK!” I was startled, because, being just out of Harvard Business School, I had studied all about profits. Here was someone telling me that the price at which he sold goods was insignificant! He only cared about paying the invoices for what was sent by the parent company.

Today ‘trade misinvoicing’ is a much bigger problem, right?
Corporations have kept these issues under the table for a long time, citing the need for free trade and movement of capital. Every multinational corporation uses abusive transfer pricing to move money, either for tax evasion purposes or to convert into hard currency.

Is the EU doing enough to tackle financial secrecy?
It’s a start-and-stop affair. The UK government had said that it would address beneficial ownership by requiring publicly available registries of who were the owners of companies. That has been delayed. The European Court recently ruled that you can’t require publicly available information on ownership because it’s a matter of privacy, although it should be available to governments and some civil society organisations. But this is trying to have your cake and eat it too.

There is a theory that Brexit was partly driven by a desire to avoid EU rules against financial secrecy. What’s your view?
I never understood why the City supported Brexit, given the risks. Why did the City go along with the beneficial ownership agenda? It was getting a lot of criticism about handling dirty money coming into UK real estate. And the City decided that it needed to clean up its act and supported the beneficial ownership effort. Then Brexit came along and complicated that. We started seeing money move out of the UK and into the Netherlands and Switzerland. I’m not clear whether the City wants to be a player in cleaning up the global financial system or wants to continue to profit from secrecy. The jury’s still out.

In the book, you say that the US is the preferred destination for illicit money. Why is that?
Take shell companies. More were created here than anywhere else. The US has come up with a modest beneficial ownership effort, which still has an enormous number of holes. When money comes into a US bank, this is supposed to check whether it arrived from an illegitimate source. When banks see suspicious money, they file a suspicious activity or currency transaction report. 80,000 such reports are filed on average daily. US banks find a reason to take nearly every dollar they can and just file these reports to shift the responsibility to the government. As long as the US continues to have the world’s biggest trade and budget deficits, it will be tough to change that.

You cover a few success stories in tackling financial secrecy, such as post-9/11 legislation against terrorism financing. Could that serve as a guideline for broader action?
In October 2001, the US passed the ‘Patriot Act,’ which stated that no US financial institution could receive money from foreign shell banks. Also, no financial institution could send to the US money it had received from shell banks. This also applied to wire transfers. That was very effective. Shell banks were wiped out. We also pushed other governments to collaborate on curtailing terrorism financing. We forced the SWIFT system to open its books. So we pushed most of terrorism financing out of the legitimate financial system. This shows what you can do if you have the political will.

Is the war in Ukraine a similar shock that could awaken politicians to the dangers of financial secrecy?
We allowed dirty money to come in. The UK and US real estate sector has been a major recipient of dirty money, including from Russian oligarchs. What does that do to the mentality of Putin who looks at the West and concludes that it will always defend its financial interests? He probably thought he could take over Ukraine without being worried about reactions. So maybe we contributed to his megalomania. If you serve criminals for decades, how do you expect them to respect you? I have watched the West blame ‘those corrupt countries over there’ for half a century. In fact, we have been open to receiving the money they have stolen.

You claim in the book that beyond foreign aid we should focus on the money flowing out of the developing world, notably Africa. Why is that a problem?
Africa is a net creditor to the rest of the world. Instead of richer countries supporting Africa, Africa is supporting them. The equation for economic development has two parts: money coming in, money going out.

The World Bank and the IMF have focused on the money they’re shifting into the developing world. I don’t know how a development economist can devote his life to improving the lives of poor people and ignore money coming out of developing countries. It’s time for the World Bank and the IMF to put this issue on the table.

Secrecy enables money to flow from the bottom to the top in ways that governments find extremely difficult to curtail

How can we ensure global collaboration on financial secrecy?
The argument that these issues need to be addressed globally is a deliberate deterrent to addressing these activities. Countries hide behind the need for global consensus, rather than taking measures themselves. The US passed the Foreign Corrupt Practices Act in 1977, years before Europeans. We led virtually every country to adopt anti-corruption measures. Let’s not let the desire for unanimity become a stumbling block toward forthright action.

Has over-financialisation of the economy contributed to financial secrecy?
The financial sector represents around 20 percent of global GDP. It has been a growing part of the US economy and has contributed to the loss of manufacturing jobs. I would like to see more manufacturing in the US and the financial sector have less sway. Banks should get out of the business of owning corporations.

How can you regulate banks when they have so much corporate activity? We should go back to the Glass-Steagall era when commercial and investment banking were separate. That would be a controversial point for the US Congress to take up. Perhaps the reality would come forward if a large US bank found itself in trouble through some of its corporate investments.

Isn’t the financial services sector too big to fail?
We can regulate the banks better. Following the 2007–08 financial crisis, we passed regulations that improved the health of larger banks. The Trump administration weakened those regulations. Silicon Valley Bank was one of the prime advocates for medium-sized banks being too small to regulate. But then it became too big to fail! You can’t have it both ways. I support higher levels of bank capitalisation, regular stress test reporting and stronger anti-money laundering provisions.

Does the financial secrecy system threaten democracy?
There’s no question about it. The intervening link is inequality, driven by financial secrecy. The financial secrecy system is designed to move money from poor to rich, from criminal to legitimate, from corrupt to respectable. It has driven inequality through the roof. When I graduated from Harvard in 1960, the ratio of senior executive pay to workers’ wages was 20:1; today, it’s more than 350:1.

Financial secrecy has contributed to inequality, and is hurting democracy. No democracy can be strong amidst rising inequality. So controlling financial secrecy is a necessary step towards strengthening democracy.