Slush Funds
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Written April 2002
Updated November 2005
According to David McClintick ("Swordfish: A True Story of
Ambition, Savagery, and Betrayal"), in the late 1980's, the FBI and DEA set up
dummy corporations to deal in drugs. They funneled into these corporate fronts
money from drug-related asset seizures.
The idea was to infiltrate global crime networks but a lot of
the money in "Operation Swordfish" may have ended up in the wrong pockets.
Government agents and sheriffs got mysteriously and filthily rich and the whole
sorry affair was wound down. The GAO reported more than $3.6 billion missing.
This bit of history gave rise to at least one blockbuster with Oscar-winner
Halle Berry.
Alas, slush funds are much less glamorous in reality. They
usually involve grubby politicians, pawky bankers, and philistine businessmen -
rather than glamorous hackers and James Bondean secret agents.
The Kazakh prime minister, Imanghaliy Tasmaghambetov, freely
admitted on April 4, 2002 to his country's rubber-stamp parliament the existence
of a $1 billion slush fund. The money was apparently skimmed off the proceeds of
the opaque sale of the Tengiz oilfield. Remitting it to Kazakhstan - he
expostulated with a poker face - would have fostered inflation. So, the
country's president, Nazarbaev, kept the funds abroad "for use in the event of
either an economic crisis or a threat to Kazakhstan's security".
The money was used to pay off pension arrears in 1997 and to
offset the pernicious effects of the 1998 devaluation of the Russian ruble. What
was left was duly transferred to the $1.5 billion National Fund, the PM
insisted. Alas, the original money in the Fund came entirely from another sale
of oil assets to Chevron, thus casting in doubt the official version.
The National Fund was, indeed, augmented by a transfer or two
from the slush fund - but at least one of these transfers occurred only 11 days
after the damning revelations. Moreover, despite incontrovertible evidence to
the contrary, the unfazed premier denied that his president possesses
multi-million dollar bank accounts abroad.
He later rescinded this last bit of disinformation. The
president, he said, has no bank accounts abroad but will promptly return all the
money in these non-existent accounts to Kazakhstan. These vehemently denied
accounts, he speculated, were set up by the president's adversaries "for the
purpose of compromising his name".
On April 15, 2002 even the docile opposition had enough of this
fuzzy logic. They established a People Oil's Fund to monitor, henceforth, the
regime's financial shenanigans. By their calculations less than 7 percent of the
income from the sale of hydrocarbon fuels (c. $4-5 billion annually) make it to
the national budget.
Slush funds infect every corner of the globe, not only the more
obscure and venal ones. Every secret service - from the Mossad to the CIA -
operates outside the stated state budget. Slush funds are used to launder money,
shower cronies with patronage, and bribe decision makers. In some countries,
setting them up is a criminal offense, as per the 1990 Convention on Laundering,
Search, Seizure, and Confiscation of the Proceeds from Crime. Other
jurisdictions are more forgiving.
The Catholic Bishops Conference of Papua New Guinea and the
Solomon Islands issued a press release November 2001 in which it welcomed the
government's plans to abolish slush funds. They described the poisonous effect
of this practice:
"With a few notable exceptions, the practice of directing
funds through politicians to district projects has been disastrous. It has
created an atmosphere in which corruption is thought to have flourished. It has
reduced the responsibility of public servants, without reducing their numbers or
costs. It has been used to confuse people into believing public funds are the
'property' of individual members rather than the property of the people,
honestly and fairly administered by the servants of the people.
The concept of 'slush-funds' has resulted in
well-documented inefficiencies and failures. There were even accusations made
that funds were withheld from certain members as a way of forcing them into
submission. It seems that the era of the 'slush funds' has been a shameful
period."
But even is the most orderly and lawful administration, funds
are liable to be mislaid. "The Economist" reported recently about a $10 billion
class-action suit filed by native-Americans against the US government. The
funds, supposed to be managed in trust since 1880 on behalf of half a million
beneficiaries, were "either lost or stolen" according to officials.
Rob Gordon, the Director of the National Wilderness Institute
accused "The US Interior Department (of) looting the special funds that were
established to pay for wildlife conservation and squandering the money instead
on questionable administrative expenses, slush funds and employee moving
expenses".
Charles Griffin, the Deputy Director of the Heritage
Foundation's Government Integrity Project, charges:
"The federal budget provides numerous slush funds that can
be used to subsidize the lobbying and political activities of special-interest
groups."
On his list of "Top Ten Federal Programs That Actively Subsidize
Politics and Lobbying" are: AmeriCorps, Senior Community Service Employment
Program, Legal Services Corporation, Title X Family Planning, National Endowment
for the Humanities, Market Promotion Program, Senior Environmental Employment
Program, Superfund Worker Training, HHS Discretionary Aging Projects, Telecomm.
& Info. Infrastructure Assistance. These federal funds alone total $1.8 billion.
"Next" and "China Times" - later joined by "The Washington Post"
- accused the former Taiwanese president, Lee Teng-hui, of forming a $100
million overseas slush fund intended to finance the gathering of information,
influence-peddling, and propaganda operations. Taiwan footed the bills trips by
Congressional aides and funded academic research and think tank conferences.
High ranking Japanese officials, among others, may have received
payments through this stealthy venue. Lee is alleged to have drawn $100,000 from
the secret account in February 1999. The money was used to pay for the studies
of a former Japanese Vice-Defense Minister Masahiro Akiyama's at Harvard.
Ryutaro Hashimoto, the former Japanese prime minister, was
implicated as a beneficiary of the fund. So were the prestigious lobbying firm,
Cassidy and Associates and assorted assistant secretaries in the Bush
administration.
Carl Ford, Jr., currently assistant secretary of state for
intelligence and research, worked for Cassidy during the relevant period and
often visited Taiwan. James Kelly, assistant secretary of state for East Asian
and Pacific Affairs enjoyed the Taiwanese largesse as well. Both are in charge
of crafting America's policy on Taiwan.
John Bolton, erstwhile undersecretary of state for arms control
and international security, admitted, during his confirmation hearings, to
having received $30,000 to cover the costs of writing 3 research papers.
The Taiwanese government has yet to deny the news stories.
A Japanese foreign ministry official used slush fund money to
finance the extra-marital activities of himself and many of his colleagues -
often in posh hotel suites. But this was no exception. According to Asahi
Shimbun, more than half of the 60 divisions of the ministry maintained similar
funds. The police and the ministry are investigating. One arrest has been made.
The ministry's accounting division has discovered these corrupt practices twenty
years before but kept mum.
Even low-level prefectural bureaucrats and teachers in Japan
build up slush funds by faking business trips or padding invoices and receipts.
Japanese citizens' groups conservatively estimated that $20 million in travel
and entertainment expenses in the prefectures in 1994 were faked, a practice
known as "kara shutcho" (i.e., empty business trip).
Officials of the Hokkaido Board of Education admitted to the
existence of a 100 million yen secret fund. In a resulting probe, 200 out of 286
schools were found to maintain their own slush funds. Some of the money was used
to support friendly politicians.
But slush funds are not a sovereign prerogative. Multinationals,
banks, corporation, religious organizations, political parties, and even NGO's
salt away some of their revenues and profits in undisclosed accounts, usually in
off-shore havens.
Secret election campaign slush funds are a fixture in American
politics. A 5-year old bill requires disclosure of donors to such funds but the
House is busy loosening its provisions. "The Economist" listed in 2002 the
tsunami of scandals that engulfs Germany, both its major political parties, many
of the Lander and numerous highly placed and mid-level bureaucrats. Secret,
mainly party, funds seem to be involved in the majority of these lurid affairs.
Italian firms made donations to political parties through slush
funds, though corporate donations - providing they are transparent - are
perfectly legal in Italy. Both the right and, to a lesser extent, the left in
France are said to have managed enormous political slush funds.
President Chirac is accused of having abused for his personal
pleasure, one such municipal fund in Paris, when he was its mayor. But the funds
were mostly used to provide party activists with mock jobs. Corporations paid
kickbacks to obtain public works or local building permits. Ostensibly, they
were paying for sham "consultancy services".
The epidemic hasn't skipped even staid Ottawa. Its Chief
Electoral Officer told Sun Media in September 2001 that he is "concerned" about
millions stashed away by Liberal candidates. Sundry ministers who coveted the
prime minister's job, have raised funds covertly and probably illegally.
On April 11, 2002 UPI reported that Spain's second-largest bank,
Banco Bilbao Vizcaya Argentaria (BBVA), held nearly $200 million hidden in
secret offshore accounts, "which were allegedly used to manipulate politicians,
pay off the 'revolutionary tax' to ETA - the Basque terrorist organization - and
open the door for business deals, according to news reports."
The money may have gone to luminaries such as Venezuela's Hugo
Chavez, Peru's Alberto Fujomori and Vladimiro Montesinos. The bank's board
members received fat, tax-free, "pensions" from the illegal accounts opened in
1987 - a total of more than $20 million.
Latin American drug money launderers - from Puerto Rico to
Colombia - may have worked through these funds and the bank's clandestine
entities in the Cayman Islands and Jersey. The current Spanish Secretary of
State for the Treasury has been the bank's tax advisor between 1992-7.
The "Financial Times" reported in June 2000 that, in
anticipation of new international measures to curb corruption, "leading European
arms manufacturers" resorted to the creation of off-shore slush funds. The money
is intended to bribe foreign officials to win tenders and contracts.
Kim Woo-chung, Daewoo's former chairman, is at the center of a
massive scandal involving dozens of his company's executive, some of whom ended
up in prison. He stands accused of diverting a whopping $20 billion to an
overseas slush fund.
A mind boggling $10 billion were alleged to have been used to
bribe Korean government officials and politicians. But his conduct and even the
scale of the fraud he perpetrated may have been typical to Korea's post-war
incestuous relationship between politics and business.
In his paper "The Role of Slush Funds in the Preparation of
Corruption Mechanisms", reprinted by Transparency International, Gherardo
Colombo defines corporate slush funds thus:
"Slush funds are obtained from a joint stock company's
finances, carefully managed so that the amounts involved do not appear on the
balance sheet. They do not necessarily have to consist of money, but can also
take the form of stocks and shares or other economically valuable goods (works
of art, jewels, yachts, etc.) It is enough that they can be used without any
particular difficulty or that they can be transferred to a third party.
If a fund is in the form of money, it is not even
necessary to refer to it outside the company accounts, since it can appear in
them in disguised form (the 'accruals and deferrals' heads are often resorted to
for the purpose of hiding slush money). In light of this, it is not always
correct to regard it as a reserve fund that is not accounted for in the books.
Deception, trickery or forgery of various kinds are often resorted to for the
purpose of setting up a slush fund."
He mentions padded invoices, sham contracts, fictitious loans,
interest accruing on holding accounts, back to back transactions with related
entities (Enron) - all used to funnel money to the slush funds. Such funds are
often set up to cover for illicit and illegal self-enrichment, embezzlement, or
tax evasion.
Less known is the role of these furtive vehicles in financing
unfair competitive practices, such as dumping. Clients, suppliers, and partners
receive hidden rebates and subsidies that much increase the - unreported - real
cost of production.
BBVA's payments to ETA may have been a typical payment of protection fees. Both
terrorists and organized crime put slush funds to bad use. They get paid from
such funds - and maintain their own. Ransom payments to kidnappers often flow
through these channels.
But slush funds are overwhelmingly used to bribe corrupt
politicians. The fight against corruption has been titled against the recipients
of illicit corporate largesse. But to succeed, well-meaning international
bodies, such as the OECD's FATF, must attack with equal zeal those who bribe.
Every corrupt transaction is between a venal politician and an avaricious
businessman. Pursuing the one while ignoring the other is self-defeating.
Note - The Psychology of Corruption
Most politicians bend the laws of the land and steal money or
solicit bribes because they need the funds to support networks of patronage.
Others do it in order to reward their nearest and dearest or to maintain a
lavish lifestyle when their political lives are over.
But these mundane reasons fail to explain why some officeholders
go on a rampage and binge on endless quantities of lucre. All rationales crumble
in the face of a Mobutu Sese Seko or a Saddam Hussein or a Ferdinand Marcos who
absconded with billions of US dollars from the coffers of Zaire, Iraq, and the
Philippines, respectively.
These inconceivable dollops of hard cash and valuables often
remain stashed and untouched, moldering in bank accounts and safes in Western
banks. They serve no purpose, either political or economic. But they do fulfill
a psychological need. These hoards are not the megalomaniacal equivalents of
savings accounts. Rather they are of the nature of compulsive collections.
Erstwhile president of Sierra Leone, Momoh, amassed hundreds of
video players and other consumer goods in vast rooms in his mansion. As
electricity supply was intermittent at best, his was a curious choice. He used
to sit among these relics of his cupidity, fondling and counting them
insatiably.
While Momoh relished things with shiny buttons, people like Sese
Seko, Hussein, and Marcos drooled over money. The ever-heightening mountains of
greenbacks in their vaults soothed them, filled them with confidence, regulated
their sense of self-worth, and served as a love substitute. The balances in
their bulging bank accounts were of no practical import or intent. They merely
catered to their psychopathology.
These politicos were not only crooks but also kleptomaniacs.
They could no more stop thieving than Hitler could stop murdering. Venality was
an integral part of their psychological makeup.
Kleptomania is about acting out. It is a compensatory act.
Politics is a drab, uninspiring, unintelligent, and, often humiliating business.
It is also risky and rather arbitrary. It involves enormous stress and unceasing
conflict. Politicians with mental health disorders (for instance, narcissists or
psychopaths) react by decompensation. They rob the state and coerce businessmen
to grease their palms because it makes them feel better, it helps them to
repress their mounting fears and frustrations, and to restore their
psychodynamic equilibrium. These politicians and bureaucrats "let off steam" by
looting.
Kleptomaniacs fail to resist or control the impulse to steal,
even if they have no use for the booty. According to the Diagnostic and
Statistical Manual IV-TR (2000), the bible of psychiatry, kleptomaniacs feel
"pleasure, gratification, or relief when committing the theft." The good book
proceeds to say that " ... (T)he individual may hoard the stolen objects ...".
As most kleptomaniac politicians are also psychopaths, they
rarely feel remorse or fear the consequences of their misdeeds. But this only
makes them more culpable and dangerous.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site:
http://samvak.tripod.com
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Article Published/Sorted/Amended on Scopulus 2007-11-03 23:11:24 in Economic Articles
