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He later rescinded this last bit of disinformation.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.