Nothing Flows as Freely as Money

Summary 

• Money, both legal and laundered, moves around the world in monumental amounts. 
• An entire industry has emerged to facilitate the movement of capital globally. 

• Given the amounts of money being shifted, controlling the international flow of capital is virtually impossible. 

Introduction 

The first line Liza Minnelli and Joel Grey sing in ‘Money Money’ from the film Cabaret is ‘money makes the world go around.’ Similarly, John Lennon sang reverentially about cash in the Beatles’ hit ‘Money (That’s What I Want).’ And, not to be outdone, the chorus of Abba’s ‘Money, Money, Money’ contemplates the notion of living ‘in the rich man’s world.’ 

These three random examples from 20^th-century popular culture illustrate how pervasive and universal the theme of money (and wealth) is. This has perhaps never been truer than today. But for all our obsessing over it, few have any idea how (and how much) money moves around the globe.  

Earlier this year, Bilal Hafeez had a fascinating discussion with Jay Newman, who spent 40 years at the centre of international finance with Lehman Brothers and Elliot Management. Most recently, Jay has written a work of fiction, Undermoney, which looks at the opaque world of money, its influence, and how capital is moved around the world.  

The Concept of Undermoney 

Jay defines Undermoney as money that is invisible to the public, but which controls people and events. Undermoney is different from black money in that it does not come solely from ill-gotten gains. Undermoney can include, for example, the cash that is ever-present in the American political system. Money is donated by billionaires to political action committees and makes its way into mainstream politics. The point about Undermoney is that it is hidden, but not necessarily illegal. 

Classic Money-Laundering Practices 

Jay acknowledges that assets such as real estate or art are classic ways for illicit money to be ‘cleaned.’ Beyond this, though, it is critical to get the ill-gotten cash into the system somehow. The key to doing this is to engage with banks where the controls are less sophisticated and rigorous than in many other countries. In some cases, it is possible to deal with smaller central banks to facilitate this – as in Jay’s novel. 

A whole ‘industry’ has emerged to move money – a network of lawyers and bankers working non-stop to hide and protect the assets of global oligarchs. And much of this industry is based in London, hence the concept of the ‘London laundromat.’  

Jay argues that is such a big part of the global economy, that the amounts of money are so large, that shutting it down is virtually impossible. Indeed, the UN estimates that the amount of money laundered globally in one year is 2-5% of global GDP, or $800 billion – $2 trillion in current US dollars! 

Drug Cartels, Sanctions, and How Countries Like Russia Evade Them 

Jay specifically spoke about Mexico, and how the drug cartels essentially control every industry of any importance in the USA’s southern neighbour. This ranges from avocados to tequila – things that people consume every day. As Jay put it – ‘what this means is that anybody who buys an avocado from Mexico is essentially sanction-busting.’ 

Jay maintains that sanctions do not work. Recently, there have been sanctions against North Korea, Cuba, Venezuela, and Nicaragua, and those regimes are still in place. Even with the current sanctions against Russia, only a third of the members of the United Nations endorse them. Not a majority, not a plurality. It is a minority which, according to Jay, means sanctions are a ‘stunt.’ 

They make things inconvenient for the sanctioned, but the goods (e.g., oil, grain, gas, palladium) still flow from the sanctioned countries. Many goods, for example, flow through China (who are notorious sanctions-busters). And, in a time of heightened inflation, sanctions make these goods even more expensive.  

The Untraceable Legal Structure Used to Move Money Around 

Jay describes a Dutch legal structure based on the notion of stichting, which are strange amorphous legal entities that allow a large amount of capital to be held. Yet it is hard to account for who is in control of it, and it gets passed down between generations. These are disconnected vehicles that are not owned by anybody or controlled by people. But they are structured in a way that makes determining who controls them almost impossible. And they have existed in European law for centuries. 

Conclusion 

In Turks & Caicos, the second film in the BBC’s Worricker trilogy, Stirling Rogers, a wealthy and supremely well-connected private equity financier, says ‘money is always happiest when it migrates … There is nothing more beautiful, is there, than money going to work?’ This is an interesting case of art imitating real life, as in the real world, capital truly is mobile and fluid and often seems to find the place where it is ‘happiest.’ 

Money today flows in eye-wateringly large amounts and can emanate from ill-gotten gains or from less unsavoury means. Whether the money is legal or laundered, much of it is hidden and moves around in secret. The amounts are so large, and the structures to keep the money hidden are so arcane, that it is virtually impossible to shut down these structures that facilitate the movement of cash. Sanctions are ineffective.  

Minnelli and Grey’s song about money making the world go around may not be true in the literal sense, but it is certain that money does get around the world quickly and regularly. And it is seemingly an unstoppable force. 

Richard Jones is a Macro Strategist for VDK Capital, a London-based venture capital firm. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side. 

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)