Drug barons bankroll Third World

Richard Dowden reports on how `narco-dollars' laundered by racketeers a re providing more income than Western aid

Drug barons are offering billions of dollars to poor countries to launder their profits - undermining Western attempts to persuade governments to make economic reforms. The sums far exceed funds available from foreign aid and the scale of launder ing makes it a viable alternative to aid for poor countries.

"For years we have been telling these countries that there is no alternative to structural adjustment programmes for their economies, but now there may be an alternative - narco-dollars,'' a Western diplomat said.

One country being targeted is Madagascar and revelations of the offers in the local press - prompting a speech in response by President Albert Zafy - give an insight into the temptations in many finance ministries.

The impoverished Indian Ocean island owes $4.5bn (£2.8bn), repaid $69m in 1993 and received $309m in aid. The government is being pressed to sign an economic reform programme with the International Monetary Fund and the World Bank. But the government hasbeen offered millions of dollars from dubious sources which diplomats in Madagascar say are certainly narco-dollars.

What has particularly alarmed diplomats is President Zafy's attitude. In a recent address to the nation the president said how he was astonished that rich countries criticised small nations in economic difficulties if they sought financial help from "non-institutional sources when they knew the budget deficits of the big states of the world were financed by narco-dollars".

In recent weeks local newspapers in the capital, Atananarivo, have revealed at least four instances of the government being offered millions of dollars by individuals or by grandly titled institutions which have only fax or telephone numbers. In the latest case the Mutual Security and Guarantee Trust of Boerne, Texas and Marbella in Spain wrote to Raoul Ravelomanana, the governor of the Madagascar central bank, offering $500m and saying that the money would be paid from the National Westminster Bank in Singapore. NatWest confirmed that it had never heard of the company.

Last year, the government was offered $2bn by a company supposedly based in Dublin with a fictitious address and another offer was made by a Lebanese man based in Liechtenstein.

A Western diplomat said: "The Indian Ocean is awash with drug money. The Seychelles are already well infiltrated, and the Comores have been targeted. Offers such as these are very attractive for a country like Madagascar."

According to official estimates the illicit drug business produces $500bn a year, of which $85bn to $100bn is laundered into the global financial system.

Drug profits, usually in the form of cash, are becoming increasingly difficult to legitimise through opening bank accounts or spending. More and more countries are introducing laws compelling banks and financial institutions to report to the police any attempts to deposit large sums of cash from unknown sources.

According to the World Bank total global aid to poor countries stands at about $60bn a year while total investment was $174bn last year, most targeted at Far East countries regarded as "taking off" - so $100bn of narco-dollars is a real alternative source of finance. The British National Criminal Intelligence Service says drug rings are willing to accept a 50 per cent loss in laundering money.

"Even with that discount they are still making a profit," said one official. To be able to filter narco-dollars through a friendly government was "like a hole-in-one for the drug barons". A government would accept the cash and issue government bonds, a gold-plated and unquestionable credit note anywhere in the world.

Western countries, including Britain, have told poor countries that if they want aid they must agree a "reform" programme with the IMF and the World Bank.

Implementing such "reforms" - floating currencies, cutting deficits and privatising state industries - have been difficult and painful but until now there has been no alternative.

The IMF, which is responsible for global financial stability, refused to discuss the issue. Francisco Baker, a spokesman, said the IMF had no information about offers of drug money to Third World governments.