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 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He later rescinded this last bit of disinformation.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, 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 last 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, 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 ago 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 2-year old bill requires disclosure of donors to such
funds but the House is busy loosening its provisions. "The
Economist" listed lately 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 last September 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, 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.