Council on Foreign Relations
New York, NY
LESLIE GELB: It's the glare of these things will get me.
Good evening. Welcome to the Council this evening for what I consider a real treat listening to Moises Naim. The rules of the road are what they always are except this evening is on the record, as I think most things should be. If Moises wants to say anything particularly juicy about his criminal associates he might want to put it off the record; it's up to him -- (laughter) -- but otherwise the evening is on the record. We'll talk for the first 20 minutes or so and then we'll open the floor to some conversation between you all and Moises.
We're here about Moises's book "Illicit," which is about the increasing criminal trade, and Moises is the right guy to write this or almost any other book I can think of dealing with international economics. Moises was born in a log cabin in Venezuela. (Laughter.)
MOISES NAIM: (Inaudible.) (Laughter.)
GELB: At a very early age, he became minister of trade and industry in that country. Then he left to become a managing director at the World Bank. And then on to the editorship of Foreign Policy magazine, a magazine which he has led to many awards for excellence -- I mean, the most important awards in the magazine business. I have a particular warm spot in my heart for Foreign Policy magazine because I was at -- I actually wrote my first piece ever got published in Foreign Policy magazine.
NAIM: (Inaudible.) (Laughter.)
GELB: That was a few years ago, and it was in the first -- it was the first article in the first issue of that magazine, so I've always felt particularly warm toward that place, and especially now that Moises is running it.
You have to read the book. We're not going to try to summarize it all here; it's too complicated. You get a pretty good summary if you take a look at the current issue of Newsweek magazine. There's a long article about what Moises has to say because it's so important. And Moises, you say, how would he get all these information about crime, international trade. Well, he got most of it from his uncle, Meyer Lansky. (Laughter.) Explain right off to get -- to give people their bearings -
GELB: -- why criminal trade -- international criminal trade is a whole order of magnitude or more different than the kind of international criminality we all grew up with.
NAIM: Sure. Before -- thank you, Les.
NAIM: Well, it is a quite privilege to have Les as a presenter. Quite a privilege to be here with all of you. Thanks to Richard Haass, my dear friend. He and I many, many years ago shared almost a -- (inaudible) -- together and I remember those were some of the most productive conversations I have had. And thank you all, good friends, many familiar faces here.
The first question is what's new? Why should one care? Smuggling, crime, international criminal activity is as old as the Bible. Smuggling started with the Phoenicians or even before that, so why now? Why worry? And the answer is that smugglers went global and crime went global. And crime used to be local, used to be regional, used to be by country -- in between countries. And the '90s came and the '90s changed the world in ways that you all know, from the Internet to economic reforms that deregulated currency transactions, from very cheap flour to economic reforms that tightened the budgets of countries, and normally when you tighten the budgets of countries, the first thing to go is budgets for law enforcement. From very, very cheap telephone communications and one of the calling card, you know. People think of the Internet as a very powerful transformational technology of the '90s and that's certainly true. And even more transformational or as transformational as technology tool is a calling card -- is a prepaid calling card. And the ATM card, very convenient that we all use, but what a wonderful tool if you want to move money across borders. A paradise for people that want to move goods from A to B, especially when moving goods from A to B is prohibited, which means that the price in B is much higher than the price A.
So the '90s changed the world and also changed illegal activities. And what happened is that these traders became huge, became global and became very wealthy, very successful businesses. When business gets to be very wealthy and very successful, businesses do three things: the first thing you do when you have money is you diversify. So the first thing that these illicit traders did was diversify from the illicit to the legal. Just -- and therefore confounding the obvious divisions that we always dealt with -- you know, these are legal, above-board companies and these are illicit criminal companies. Well, now it's not so easy.
The second thing that companies that are successful do, especially if you are in a regulated sector, is that you politicize. First thing you do, you diversify. Second thing you do, you politicize. What does that mean? Is that you get very close -- very close to your regulators. You get very close to the politicians that manage the laws, to the legislators that define what are the rules of the game, and all companies do that. All companies that are in regulated businesses invest in corporate relations, invest in having very friendly relationships with the governmental politicians, so on and so on.
GELB: Moises, forgive me for a moment. Is what you're talking about a lot more of the same? That is, there is always international trafficking in arms and drugs, children, women -- all these horrible things -- money laundering. Is it just a lot more of everything we've seen or is it qualitatively different?
NAIM: Yeah. That's a good question. That -- that's the question and I think my point or the point that I try to make in the book is that it's -- is that it mutated in the '90s. Is that in the '90s, we're dealing with a different kind of things that is no longer about crime. It's no longer about something that is an irritant, that is a problem, but is something that I think is having consequences for the way we understand the world.
And it has to do with what I was talking about. They became huge. They became global. They became wealthy. They became political. They became very influential in government. You cannot understand what is going on in the Balkans today without understanding crime. You cannot understand some of the decisions that go on in Russia today. If you just look at Russia and you think about Russia in traditional ways, you're not getting it. You have to factor in -- I'm not saying that this is the beginning and the end of it all; I'm just saying that if you want to understand what is going on in Russia or in China, you have to factor in this trade. If any -- my point is, if any government in China try to stamp out the illicit trade in counterfeit, that government will have huge instability.
GELB: Well, you say -
NAIM: And therefore, that's my point of why it had acquired a different hue.
GELB: Okay. But let's -- let's take it from there and say, all right, it's a lot more and it's having qualitative effects particularly with respect to government policy. Correct?
NAIM: I --
GELB: I don't want to put words in your mouth.
NAIM: It's government policy, gut it's also the way we think about reconstruction. Think about reconstructing countries. If you talk to the Iraqis today -- last week I spoke with Ali Alawi, the minister of finance of Iraq. Ali Alawi will tell you that one of his biggest problems is insurrection. The second biggest problem he has is smuggling and crime. If you think about proliferation -- think about proliferation, you know, of course, there are all these countries that are trying to get their hands in nuclear weapons and weapons of mass destruction. If you think about that just in terms of nations and nation-states and government policies, you're not getting the whole picture.
GELB: So were you able, in the book, to make the links between the vast amount of loose money that these criminals have and the exact kind of impact that they have been having on government policies or government activities? Can you make that connection?
NAIM: Yes, there is plenty of evidence and the book has plenty of instances where you can discover accidents, places, situations in which the national interests of a country and government policies of a country were driven by the calculations -- the profit-oriented calculations -
GELB: Give us some examples of that.
NAIM: Start with the most obvious one, which is A.Q. Khan, the very famous well-known father of Pakistan's nuclear program. What -- while we were riveted watching what was going on with the United States invading Iraq and everything because it had weapons of mass destruction, but never found, A. Q. Khan -- based in Pakistan with operations in Malaysia, South Africa, the Gulf region, Switzerland, and Germany -- was selling and proliferating nuclear technology to whomever who wanted to buy; among others, Libya, but then decided not to pursue an -- (inaudible).
Last year, the president of Lithuania was impeached because he was caught, essentially being captured by some traffickers -- some Russian traffickers and there are conversations in which these Russian traffickers were telling the president of Lithuania that he better do A, B and C, or otherwise he will be gone.
A third example: Vladimiro Montesino ran the security policy of Peru for a decade. He was the point person in security. He was the point person in drug trafficking. He was a counterpart to a -- the Drug Enforcement Administration. He was the person that was at the forefront of Peruvian security policy and with a lot of consequences with that region with -- (inaudible) -- was just -- you know, is very problematic. It has links with Columbia. It has links with all sorts of strange things.
Well, it turned out Vladimiro Montesino for a decade was -- and he was doing this and running the country's security policy. Having been very influential, he was also leading a very active ring that traded in weapons, drugs, and counterfeit -- and money -- money laundering, which is your point about -- (inaudible) -- and on and on and on.
There are, you know, talk about Nigeria. What went on there? Talk about Russia. Think about China, as I told you. There -- and I don't know, I don't want to be long-winded but I want to give you another example about China. Imagine what it takes. If you go two blocks down here, in the streets on the corner you can buy wonderful watches that are counterfeit or bags -- Gucci, Prada -- or anything else. So think about this, Les. Very often those goods are there almost at the same time that you can find it in the stores of the official stores. Very often they are there before. So for those of you that are in business and logistics, think about what it takes. First, you have to steal the design in Milan, Zurich, or Geneva or where the watches are designed or Paris -- steal the design before it goes out, from companies that by now have learned how to take care of not being (stole ?)). After you stole the design, you fly to -- you have to take it to China where you have to manufacture it with parts and raw materials that are almost identical and very often they are the same parts -
NAIM: -- of their original (part ?). You have to manufacture it in very large volumes. Then you have to take those (clothes ?) and move them around the world, and you have them simultaneously in the corners in Manhattan, Milan and Madrid by individuals that are themselves as illicit as the goods they sell. Because they are illicit traders -- they -- they are very often -- they are West Africans. So that shows a very complex operation that is a logistical nightmare; that, moreover, is not done only globally with just-in-time inventory, but also is illegal. And there is a complex connection between the people that do this with counterfeits and the people who traffic in West African illegal immigrants.
GELB: Moises, your -- your -- I think these specifics are very good to give people a sense how this criminal trade touches their daily life. Just step back -- before we get into the issue of what you do about it all, step back and give us the sense of proportion of this beast. Compared -- what percentage of all international trade do we think it is? What are the major elements of it in terms of arms trafficking, drugs, and the like? Just paint the broad picture in for everyone and then we'll talk about how governments attack it.
NAIM: First, a caveat. These are numbers about secret, illegal activities, so nobody really knows. So the best you can do is to rely on the best estimates of government, law enforcement organizations, international organizations, Interpol and the like and get (a proxies ?). The IMF has a proxy for money laundering that is about 10 percent of the global GDP. That's a lot of -- that's huge. There is a professor -- a German professor, who is the president of a German Economic Association, who specializes in developing econometric models to measure this. His model gets to be about 30 percent of the global GDP. Okay? So -- and then the numbers are huge and the most -- there is consensus -- there is somewhat of a consensus that the illegal trade in people is about $10 billion per year. Drugs is about $900 million. Industry estimates counterfeits at losses of $630 billion.
Assume that all of these numbers are exaggerated because there are -- we don't know them because the people who are putting out these numbers have an interest. Even if they're double, you still have a problem because the volumes -- when you compare -- listen to the numbers I gave you. They're all measured in billions. You know what was the budget for Interpol last year? Fifty million -- with M. $50 million is one of these traders, you know, in a good day to celebrate a deal, you know, they throw out 50 -- one of the boats -- one of these fast boats, fast ships, or airplanes that they use to do their transactions and that they use once and then they dispose may cost $30 million. So you don't need to really have an extremely precise number to conclude that the situation is complicated and different than -- in this case, the orders of magnitude have consequences for the nature of the beast.
GELB: Let's talk about what to do. You've described the problems. That's just enormous and way out of control. With so much money sloshing around, it's very easy to bribe people. With so many smart people doing so many different things, it's hard for government to begin to catch up with it all. Is this a totally uneven fight that really can't be won? I know you have a whole bunch of suggestions at the end of the book, but when I got finished reading them, you know, I thought it was almost a hopeless task. Am I wrong?
NAIM: Yeah. No, I do think there is hope, and there better be hope because otherwise it gets complicated. The book has two final chapters: one is called "What to Do," and the final, final chapter is called "The World Ahead," in which I describe a world and how the world evolves. It's either nothing -- this is more of the same. You know, if you do nothing, where do we -- what happens? And there in that final chapter, I talk about geopolitical black holes being in crash with bright spots. A geopolitical black hole is -- in astrophysics, a black hole is a place where the traditional laws of physics do not apply. A geopolitical black hole is a place on the planet where the traditional laws and expectations of international law, international politics, sovereignty, and all of these concepts are suspended.
GELB: So a black hole in the United States would be something like the White House? (Laughter.)
NAIM: No. A black hole, in fact, in the United States is the border area between Mexico and the United States where when you scratch the surface, you discover that the least of the problems are their -- that exist there is the illegal immigration and the legal -- it's huge. It's complicated. It's out of control. And the whole idea of just fencing it off and putting -- today, in the newspapers there is a whole initiative to put on, you know, electric fences and technology and airplanes and more policing which -
GELB: All borders are black holes, in a way.
NAIM: Not all borders. But that are some borders, especially borders where the price differentials between A and B are very high. And where you have a very, very uneven governance where the rule of law in one of the two is -- when there are asymmetries in terms of political development, governance and so on.
But you asked me about what to do and how. One of the things about the book, in writing the book and thinking about these issues is the huge hypocrisy that surrounds this conversation. The national -- international conversation about this subject is rife with hypocrisy. It is based on assumptions that are highly hypocritical in which one example is, of course, the whole notion that in order to deal with counterfeiting, you have to go to China and stop them. Have you ever heard of anybody talking about going to Manhattan and stopping the people who are selling the things, or the buyers? You see, using counterfeit has become part of the lifestyle not only of college children or kids that download for free stolen music and videos. It is a lifestyle in which, you know, everybody has something that is counterfeit -- a tie, a watch. And it's funny, you know. And people joke about it. Right? And -- and the same with illegal immigrants. You know, everybody wants to get those brown, yellow, black foreigners out of here.
And what about the whole industries in this country that depend on them? What about the millions of professional women that could never have achieved their professional standing without the help of an illegal nanny at home? What about the fact that if you ask most children in our high schools today in the United States, how hard is it for them to get a joint of marijuana, they would tell you -- a 15-year-old is likely to tell you that he or she have a harder time getting a pack of cigarettes or a bottle of liquor than a joint of marijuana.
GELB: Look. That's my point. Isn't it too hard for government to deal with it then? If you can't get to the rip-off artists on the streets off the streets -- all a policemen have to still drop by everyday and close them up -- what the devil can you do?
NAIM: In the book -
GELB: It's a simple task.
NAIM: In the book I propose several things. The first one and the reason why I had this long-winded diatribe on hypocrisy is that unless you start talking about these things in a more frank -- unless you start injecting into the conversation more sincerity, you're -- you're lost. And the lack of sincerity is what explains the collective societal learning disability we have had about these issues. We have been learning-disabled for -- the war on drugs -- Les, you know this better than I -- started with Richard Nixon. This country spent $40 billion a year on the war on drugs. Am I suggesting that therefore everything should be deregulated and left to -- and, you know, and heroin should be widely available? No, of course not.
Am I suggesting that it kind of crazy to have people -- half of the population -- of incarcerated population of this country is incarcerated because they were in possession of marijuana that is still widely available? Yes.
GELB: Yeah. But you would take the Nancy Reagan approach: just say no. I mean, let's deal with the demand side of it. Let's legalized maybe something like marijuana. But you also concede -- you're a realistic guy -- that our government -- our government in particular is unlikely to deal realistically with the demand side.
NAIM: Unless --
GELB: That's one of your major proposals.
NAIM: Unless the government and society -- this is not one to be solved by government unless governments and politicians are pressured by people like us into realizing that this is larger than kids smoking pot. And, again, I don't have a silver bullet and this is not amenable -- this is not a conversation or a problem that is amenable to a silver bullet and a five point -- you know, a PowerPoint presentation where I'm going to give you seven ideas on what to do. This is not like that.
NAIM: It starts with having a more intelligent and a more frank conversation. After you have that, you have to recognize the book I offer several ideas. First is to recognize the good news that technology is available and is becoming more available, in the same way that we have a technology shock in the '90s that made life easier for traffickers, after September 11th there has been a huge investment in new technologies that are of all kinds, that are going to make life easier for people trying to contain this traffic. The problem there is that technology is a tool, and a tool is only as good as the person using the tool.
NAIM: And in this case, the tools are being used by government.
GELB: That's a two-way tool too. It's been used by the criminals.
NAIM: In some are, some aren't, you know. But yes. The government has the following things. First of all, we have burdened governments with trying to do -- we have given mandates that are too many, too widespread, too uneven, and too impossible and unrealistic. It may be that we don't want government really to spend millions of dollars and thousands of people containing the illicit trade in CDs. It may be that we don't want really government to go after the illicit trade in software. Perhaps we should ask Microsoft to do that. Let's recognize that it's Microsoft's problem. Yes. And that deals with a very basic fundamental pillar of the global economy or economy, which is intellectual property. I have to give you the incentive that you would own whatever you invent.
NAIM: But you know what's happening is that who's giving you that exclusivity is a government that can no longer enforce that promise. So if I'm government and you're Microsoft, I'd rather tell you, you know, Les, I'm going to try and help you but why don't you -- instead of spending money in lobbying and lawyers, why don't you get yourself some good engineers that would make copying your software harder? It's not going to solve the problem, but in my mind in 10 years, 15 years from now, intellectual property is going to be more protected by technology than by lawyers.
GELB: I like that. I think that's a good idea. But I'm surprised business --
NAIM: But you cannot do that, you know. You cannot do it -- (inaudible).
GELB: I'm surprised business hasn't been on to that even more than it has.
NAIM: Well, business has been -- this Maria Livanos -- until recently used to be the secretary general of the International Chamber of Commerce -- launched an initiative called Barca (ph) which is an aggregation of the largest -- the CEOs of the largest companies in the world of all kinds. Because what's very interesting here is that is not longer music and it's not Gucci and Microsoft. We're also talking GlaxoSmithKline.
GELB: Oh, right.
NAIM: We're also talking all sorts of companies, right?
GELB: Moises, if I may, let me just conclude our part of the evening with this question. When senior fellows here used to be finished with their books -- the drafts of their books, I always asked them a question that they hated me for, which was: if what you're saying is so smart, then how come we're not doing it? You make this persuasive case in, you know, 800 pages.
NAIM: No. No. (Laughter.)
GELB: I don't mean you.
NAIM: No. No.
GELB: I mean -- (inaudible) -- ideas, you know. It takes a long time to write books. And I'm trying to replicate their performance. (Laughter.) If what you're saying is so compelling, you know, why aren't they doing anything about it?
For example -- let me make the question very specific to you -- I know you talk to people in the government about what you've been writing as part of the research for you to write a book. What do they say when you describe this problem and you tell them about your solutions? And why haven't they done anything?
NAIM: I think two reasons. One, they had been very busy with other threats, and rightly so. Terrorism and all that threats have occupied their minds. The other thing that was quite surprising to me is how fragmented these government agencies are and how bad they are at talking to each other, and how integrated and agile are the criminals. Let me explain. The organization in charge of containing the international trade in counterfeit is housed in the Department of Commerce and at the U.S. Trade Representative. The organization that is in charge of dealing with drugs is the Drugs Enforcement Agency which is a different thing -- agency. The organization in charge of countering money laundering is at the Justice Department.
GELB: That's what's called government. It is.
NAIM: Not only that.
GELB: That's what it is.
NAIM: That's what it is, but you know what else government is? Government is an animal who's natural habitat is inside borders. For a government to operate outside its borders is as artificial as us working underwater. Governments working across borders require a lot of artificial support. Governments are not good in working in other jurisdictions. Criminals thrive in working across borders. Their habitat is not inside a jurisdiction. Their habitat is among jurisdictions, and that's what they exploit. They exploit the price differences and they exploit the shield that having different jurisdictions provide them.
GELB: When you say this to them, is this a revelation to them -- these problems?
NAIM: No. They know. They know, but they are -- you know, you have been in government -- not recently -
GELB: Thank -- thank heavens. (Laughter.) I made my mistakes a long time ago, so they're forgotten. (Laughter.)
NAIM: You -- you know how easy -- how easy it is to get obsessed about your very specific task and trying to do it right. And the person, the assistant secretary at Justice or at Treasury or at State or at Defense or the person of the CIA in charge of this, they have -- there is a lot of tunnel vision about this. They need some structure that forces them to be more integrated.
GELB: How do you -- how do you make that happen, Moises?
NAIM: Well, then -- then -- first, you recognize that. Then you say, well, if you do that you end up with a dysfunctional monster that does everything; namely, an example is Homeland Security. 170,000 people and a wasteful, inefficient -
GELB: It's integrated and hopeless.
NAIM: Exactly. So the first thing you have to do is to defragment the (activity ?). The second thing you have to do is to unburden them. I don't know that I want government to spend all their resources going after fake DVDs. I'd rather have them really go after the traffickers in children. I would rather have their spending their time instead of pursuing every marijuana dealer in the street, I would rather have them go after the proliferators of weapons of mass destruction. So be selective. Unburden. Realize. Have -- be more sincere. Realize that there are some of these things that you have not stopped, you are not stopping, and you are not likely to stop even if you spend $40 billion a year. So let's be realistic and so let's be more selective. And let's pick our fights and let's pick fights on those that are most threatening to us.
GELB: Thank you. Let me stop monopolizing Moises and ask you to join the conversation. The usual drill: wait to be recognized, wait for the microphone, stand, identify yourself. You can ask your question or make a comment as long as you get right to the point because there'll be a lot of people who want to talk.
Lucy, go ahead.
QUESTIONER: Lucy Komisar. I'm a journalist. You indicated to me when we spoke earlier in the reception that you have a chapter in your book about the function of the off-shore bank and corporate secrecy system in moving the money. Can you say something about that, and can you say whether or not you have any recommendations about what the U.S. and the world's financial powers ought to do about that?
GELB: Okay. Thank you.
NAIM: Quickly. One study and one anecdote. The study is a study by a very distinguished economist called Ted Truman and Peter Laufer (ph), I think, about money laundering. They studied for the last four years the anti-money laundering system in effect. Very detailed, very comprehensive, and they concluded that it's not working, that it's expensive, that it's wasteful, and that if you're a money launderer, you face about -- they estimate 5 percent the probability of being caught. That's the study.
The anecdote is that being part of the research, I was once in Zurich and I talked to a private banker and asked him: how far more complicated it is now for you to help one of your high net worth clients to hide and move $50 million around the world? And he smiled and said the only difference is that now we charge more. (Laughter.)
QUESTIONER: All right. Yes.
GELB: Identify yourself first.
QUESTIONER: Maria Livanos Cattaoui. You just referred, Moises, to what we have been doing. One of the questions I would have for you and a comment to it is that the estimates, such as they are, look at luxury goods only as about two to three percent of the trade in illicit goods. Most of it are in the areas that are very, very fundamental like 15 percent of all car parts and airplane parts, things like this -- very fundamental things.
And a lot of us are wondering if really in the -- all the illicit areas you're talking about, some big chunks can't be taken care of by changing some business models as to how things are done and distributed. It is so big -- what the industries around the world are facing, it's so big that it is out of the possibilities of any government. And governments do not work well across borders as business does -- not as well. And I was just wondering among the many solutions you have, the latest experiences of people in changing basic business models has not proved to be interesting, particularly for instance in the medicine field.
NAIM: Yeah. Again, there is no doubt in my mind that that's the future. That companies that are operating in areas that are vulnerable to counterfeit and that is now, as you said, almost all will have to think this through and change their business model. And as they say, moving from hoping for the perfection of governments and patents and lawyers to finding ways, tools, technologies that protect them.
I was fascinated one -- one of the good examples I got was from the movie industry. They are, for example, moving to a new model in which the DVDs that the movies that we now watch at home are going to be a commodity which they have no hope of containing. And they're developing different technologies to change the experience of watching a movie that you can only get at their theatres under their circumstances. And one of the ways in which they are changing is that there will not be a physical product with the movie. There is going to be beamed through very encrypted and very complicated ways from certain centers to movie houses that are going to then project what they call 'project an experience,' which is not only a movie but is a, you know, the whole experience. You would go there because it's the only way of getting something that you cannot get at home by playing your DVDs, and there are plenty of examples of initiatives the industries is taking to protect themselves.
GELB: Well, you think the industry would have the technological advantage over the crook? It'd be -- it's easier to encrypt it, make duplication. It's more -- easier to do that than it is to decrypt it or overcome the obstacles (for duplication ?).
NAIM: We'll always -- Your point is well taken. There will always be leakage and there will always be stealing and there will always be -
GELB: But you can make it a lot harder.
NAIM: And there is, you know, there is a life cycle to all products. All products will go through a life cycle in which is you'll make a lot of money, you have very positive cash flow because you are the only one that has it. As time goes by, everything gets imitated or replicated and so you have a cash flow model in which inevitably there's a life cycle. And that will happen. What have happened now is that the life cycles have shrunk immensely because of thievery.
QUESTIONER: Moises, my name is James Tunkey. I'm with Eye on Asia. Thank you for speaking today. You mentioned hypocrisy today and the fact that this problem really is a result of globalization. I was wondering if you could make one specific U.S. policy recommendation which could be put forward at the United Nations which would allow the United Nations both to extricate itself from the oil for food hypocrisy, and to move -- to set an example for regulating or combating some of this -- some of these problems that you mentioned.
NAIM: The oil for food scandal -- it has very many dimensions of which international crime is not the only one. It has -- and I -- there are connections, but it's not absolutely central to the point. And, again, I am very hesitant to give one liners about these things. You know, I'm reluctant to give, you know -- I don't have silver bullets. I would be -- those that buy the book looking for my autobiography are going to be disappointed. And those who are looking for a handbook are also going to be disappointed and/or one-liners too.
GELB: Over here?
QUESTIONER: Fred Kempe, Wall Street Journal. I was interested in what you were saying about a possible technology tipping point where the bad guys have the technological edge and the good guys perhaps now. I wonder if you could talk about that a little bit more, specifically when it comes to banking. It seems as though the Treasury seems to have made some breakthroughs and specifically toward North Korea recently.
MR. KEMP: I'm wondering how much of that is more cooperation from other countries? How much of that may have to do with technology?
GELB: Fred, could you take a minute to explain what happened to North Korea. I think people would be interested.
MR. KEMP: I mean I -- there was a -- there's a -
NAIM: A bank in Macau. Delta Bank.
MR. KEMP: Bank in Macau where they actually let Macau take the action but the action emerged from U.S. Treasury. And it's an interesting model that Treasury thinks that they can repeat elsewhere. And I think they're actually in the process of repeating elsewhere. And then there was this interesting indictment at the moment of the leader of the IRA's Worker's Party, who was going off to Eastern Europe to get bucket loads of North Korean counterfeit money which is some of the best counterfeit money in the world -- counterfeit dollars in the world. And they're starting to unravel some of these things now. I don't know whether it's new technology, better contacts or just time.
NAIM: That's a great question and those are great examples. And yes, this is a bank called The Delta Bank that was operating in Macau and in fact was the financial -- it was a bank deeply linked with the North Korean government which, by the way, is a wonderful example, again, of your initial question about crime. The North Korean government is deeply involved and its regime's survival is deeply linked with all sorts of illicit activities from the production and distribution of drugs to the production of some of the best counterfeit currency in the world, to the trafficking in women, to all sorts of things. And it's a lifeline. The North Koreans -- you cannot understand the geopolitics of North Korea if you don't factor in their deep association with illicit trade. So that's a very good point. Your point is well taken.
One of the things that I say in the book is that -- and I invite you to do this exercise -- pick a newspaper any day -- any day, anywhere in the world and you will find examples above, you know. Last week was there's a bank in Macau. Yesterday was an accident in the border in Mexico. There are busts constantly. Today, some American military personnel was indicted in Arizona for having -- for being deeply involved in the trafficking of cocaine from Mexico. Every day. And I invite tomorrow, try. Try to read the newspapers tomorrow using this optic and you will find that there are these examples.
And the international corporation and the financial front has moved very well, especially after 9/11. After 9/11, the whole idea was follow the money and you will find a better path towards discovering and uncovering terrorist activities.
GELB: Thank you. (Inaudible.) Please.
NAIM: But the bottom line is despite all these efforts and despite all these frequent busts, their activities continue to be very, very, very profitable. And therefore, one of the constant things that I say in the book is that this is not about low morals; this is about high profits and incentives.
GELB: I've recognized the 19 or 20 people at this point. Whoever has the microphone, go next.
QUESTIONER: Ron Shelp. There's one consequence I didn't hear you mention, I don't think. My wife used to be in the brand protection business and she'd worry about clients like Rolex or Gucci or whatever, but she's also worried about more serious clients like airplane parts makers. They were convinced that large amounts of the money were being used to finance terrorism. I just wondered if you agree with that.
NAIM: Not only I agree with that, but I have specific examples in the book. That terrorists that blew up the Atocha train station in Madrid were funding their activities with bootleg CDs and DVDs. Some of the Islamic terrorist groups in Indonesia and in Asia are closely linked to the trafficking drugs, so the connections are there.
QUESTIONER: Ralph Buultjens, New York University. Moises, I'm trying to bring into conjunction two of your statements. One is that I got the impression that this business is largely generated in non-Western countries and that the United States, Western Europe, (perhaps Japan ?) are the markets -- principal markets of this. You also said that there's a considerable politicization -- buying of government officials and so on. Have you any suspicions or do you see any tendencies that the confusion in dealing with this in Western countries comes as a result of these government officials being suborned by the various -- (inaudible)? In other words, is the standard of probity in government agencies in the West also declining and also purchasable?
NAIM: What a great question -- two questions. First, let me correct the impression that I think or say that this is all happening in Third World countries, in failed states or in rogue countries that are exporting instability and stolen goods to the wealthy, well-governed countries. There is an editorial of the Financial Times published in the city of London that argues that London is one of the best places in the world to launder money.
One of the -- Morris Nigel Cattrell (sp), who is an expert in money laundering, argues that if he was trying to launder, the best place where he would try to do that is in Manhattan. That's hiding in plain sight, and given the volumes this is one of the best things. So if this not just a Third World, failed state kind of phenomena. This is larger.
As for the politicization of the capture of public officials or regulators in this country -- in developed democracies, industrial democracies, it is happening all the time. It happened today in which a guy -- as they said, some military personnel was detained. The difference is that you go to a place like Belarus or Transdniester -- everyone is in the take and everyone depends on a daily basis. These are organizations, even governments that are geared and live and depend on illicit trades. They're structurally so.
In these other countries, what you have is the bad apples. The question is: are the bad apples proliferating? Well, I don't know. I would suspect that the larger the money, you will have bad apples. But you also have a lot of antibodies in these countries. You have more free press. You have more vigilance. You have more competent government. You have more committed government. You have more honest government. I mean, government of the United States, by and large, the U.K. is more honest on average than the government of Belarus.
GELB: Over here. There's somebody over there with their hand raised. Where is the other hand? Over here.
QUESTIONER: Yeah. Yves Istel at Rothschild. You mentioned the changes in the business model and I know of a case, for example, where New Balance's shoes were being counterfeited in China and they couldn't tell the difference themselves because it was out of the same factory. (Laughter.) But there've been -
MS. ESTELLE: There were ways -- that's true. But there were ways since then to mark covertly the product and protect it much better than it was. Would it be useful for those kinds of methods to be made mandatory by governments as a condition of enforcement? In other words, a hand-in-hand approach or at least saying, "if you do this which makes it much more difficult for pharmaceuticals or sneakers, we will then be willing to devote more resources because it will be more efficient." Is that a path that is useful at all?
NAIM: Absolutely. Absolutely. The chapter on what to do starts with the whole technology -- new technology. One of the new technologies that is helped along the way and is already here is these very tiny identifiers. Essentially, as a result of 9/11, you have a huge investment in research and development to make anonymity more difficult -- anonymity of individuals and anonymity of products. So you have little tags that have -- even you can go more sophisticated or less sophisticated. You can have GPS systems in containers and so on. The technologies are available.
What I don't know is we should or -- if I was a company, I don't know that I would hope for the government to take the initiatives. I would take half of the budget that I spend in lobbying and spend it in these technologies. I think it's going to -- the rate of return is going to be higher. And I predict that 10 years from now, that is the pattern of expenditures that you would see.
GELB: Over here.
QUESTIONER: Jeff Matsu, Morgan Stanley. The question I had is couldn't the argument also be made that too many rules and regulations by government further served/encouraged these types of illicit activities and that perhaps more attention should be spent toward increasing standards of living, and introducing more robust, market-economy mechanisms in these Third World countries to kind of curb the activity rather than just introducing more and more layers of these regulations that clearly aren't working?
NAIM: Yes and no. Yes, the notion that these things happen because of disparities in incomes is obvious and is a very important source also of (other ?) differentials. (Inaudible) -- differentials -- I'm sorry, price differentials are the core of this conversation. This conversation would not be taking place were not for price differentials. Price differentials are man-made, government made, and geography and transportation costs play a role. But the more you have intervention, the more price differentials exist and therefore that's what happened.
The notion that then you have to wait for changing conditions in order to deal with this is a dangerous one because it may take generations. And by then, you would have a transformed world with all sorts of repercussions that are now very hard to imagine.
GELB: Thank you. Last question over here.
QUESTIONER: Thank you, Rob. Lester Wigler, CitiGroup. In your research for this book, did you get a sense that rather than criminal enterprises influencing the government, was there any tendency for the government actually to be encouraging this with an eye towards increasing the revenues that the government realizes?
NAIM: Absolutely. That's the case of Transdniester. That's the case of North Korea. You can find examples of that in Cuba. There are a whole set of Cuban companies that are organized to break the embargo, but in effect are very active in this trade. In the Balkans -- again, as I said before there is no way of understanding what's going on in the Balkans if you don't (factor it ?), and a lot of countries in Africa.
GELB: Thank you. Forgive me. I have a commitment on the other side of town to give a speech. I'm going to end the meeting a few minutes early. And before I thank Moises profusely, I want to do something else.
Nancy Bodurtha, will you stand please? Nancy Bodurtha is the new vice president for meetings at the Council and I'm taking the liberty of being the president emeritus of telling you about Nancy and I hope you all will get to meet her, to all the members that Nancy has become the vice president for meetings. Anne Luzzatto retired a couple of weeks ago. Anne was superb. She ran a terrific program. Nancy has been her deputy for many years. Before that, Nancy was here as a research associate. She knows the place inside out. She also will be superb. Richard Haass named her to this job a couple of weeks ago. If I had been here, I would have done exactly same. Congratulations, Nancy and stand so those people can see you. (Applause.)
Moises Naim has written, as you can see from this discussion, a very important book. We've scratched the surface. You know, a lot of books that's all there is to do is to scratch that surface -- there's nothing more. There's a lot more in here, and it's interesting and very well written. I commend it to you very, very highly. And I thank Moises very much for this evening.
NAIM: Thank you, Les. Thanks a lot. (Applause.)
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