draining development.pdf - Khazar University

Illicit Capital Flows and Money Laundering in Colombia 159because drug money was flooding the black market with cash. Also, thenet mispricing of international trade changed so that, on average,imports were underinvoiced and exports overinvoiced to bring foreignexchange revenues into the country (Thoumi 1995). The exception tothis was 1982–83, when high interest rates in the United States apparentlyinduced Colombian traffickers to purchase U.S. Treasury Bills andother interest-bearing papers abroad. This was a time of high cocaineprices in the United States and a sharp decline of illegal capital inflows inColombia (Thoumi 1995). Similarly, in 1982 and 1983, worker remittancescollapsed, but, “after 1984 Colombian expatriate workers appearto have been a lot more ‘generous’ with their Colombian brethren”(Thoumi 1995, 191).After the exchange control regime was eliminated in 1991, the parallelmarket in foreign exchange remained alongside the official one, althoughit has declined in Bogotá and other large cities in the last few years, and,today, it is only a couple of percentage points below the official one. Sellingforeign exchange in the official market requires that sellers accountfor the origin of their funds. The gap between the two exchange rateshas, at times, been explained by the taxes and fees charged in the officialmarket. The gap has varied not only over time, but also according togeography. In coca-growing regions, for example, peasants are frequentlypaid in U.S. dollars brought in the same small planes used to exportcocaine. In these cases, the peasants sell the dollars at up to a 30 percentdiscount relative to the official rate. The close current gap between thetwo exchange rates suggests that there is little if any questioning of suspicioustransactions and that the risks associated with money launderingin the country are low.In the period before 1991, the year the economy was opened and foreignexchange controls were eliminated, capital outflows were associatedwith the incentives generated by the exchange control regime and politicalrisks. During the 1990s, illegal armed groups gained strength relativeto the government, and the illicit drug industry’s control shifted fromthe old Cali and Medellín cartels to armed groups, guerrillas, and paramilitarygroups. The increased political uncertainty and the growing riskwere clearly reflected in the outflow of legal capital.Colombian investments abroad are a recent phenomenon. Before1990, outward foreign direct investment (outward FDI) was rare, and