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Cleaning up the murky waters of offshore banking

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By Lucy Komisar
Global Finance, Nov 1999

The US government is making its boldest move yet to combat international money laundering via offshore bank secrecy havens. Officials who once insisted “capital should flow to wherever the market says to flow” now want to make it more costly for American banks to lend to entities in “bad jurisdictions.” The American crackdown depends on the passing of new law that require banks to set aside reserves for the loans they have made to high-risk jurisdictions. The strategy, announced in September, is undergoing a 90-day US interagency review. It targets offshore centers that hide the beneficial owners of companies and bank accountants and refuse to cooperate with international law enforcers on the trail of illicit funds.

The US government is making its boldest move yet to combat international money laundering via offshore bank secrecy havens. Officials who once insisted “capital should flow to wherever the market says to flow” now want to make it more costly for American banks to lend to entities in “bad jurisdictions.”

The American crackdown depends on the passing of new laws that require banks to set aside reserves for loans they have made to high-risk jurisdictions. The strategy, announced in September, is undergoing a 90day US interagency review. It targets offshore centers that hide the beneficial owners of companies and bank accounts and refuse to cooperate with international law enforcers on the trail of illicit funds.

Jonathan Winer, US deputy secretary of state for international narcotics and law enforcement, explains the motivation behind the strategy. “In the same way that corporate rating services rate the quality of government debt, regulatory and law enforcement organizations-such as the G-7, its Financial Action Task Force, and the Bureau of International Settlements-would rate the quality of government regulation and law enforcement. The national regulators would weigh them in against their own domestic supervision.”

The new rules will force a rethink of global banking techniques, says Winer. “The impact on international finance and banking would be revolutionary. It would make it unprofitable for hedge funds or others to incorporate in jurisdictions that, due to their regulatory and enforcement regimes, are vulnerable to unrecognized financial risk.” He offers the example of Long-Term Capital Management based in the Caymans. “They don’t have enough data for US regulators; they’re going to pay the US lenders more. it’s a tremendous disincentive for Long-Term Capital to locate in the Caymans.”

The powerful Basel Committee on Banking Supervision is moving in the same direction. The committee recently drafted recommendations for a new capital adequacy framework. Winer says the recommendations include a “remarkable” requirement that banks set aside greater reserves for credit risks if they lend to institutions in countries that have not taken sufficient steps to provide for transparency and integrity.

James Leach, the Republican head of the US House Banking Committee, has taken the recommendations a step further. He proposes tough new banking legislation that would ban:

* US accounts for foreign entities unless the bank has a record of the identity of each beneficial owner or the shares of the entity are publicly traded

* Correspondent accounts for banks that don’t offer services to residents where they are registered and are not properly regulated or affiliated with depository institutions

* Payable-through accounts for foreign banks unless they identify each customer using the account in the same way account holders in US banks are identified.

US administration and congressional alarm about illegal offshore banking activity predates recent reports of the laundering of billions of dollars through US banks. The revelations of widespread Russian money laundering through the Bank of New York, however, appear to have strengthened the administration’s resolve. In late September the United States unveiled new rules with teeth for check cashers and money transmitters (including companies such as Money Gram and Western Union, owned by First Data) that require them-as well as casinos and security brokers-to report any suspicious transactions.

Other administration proposals would:

* Add arms trafficking, public corruption, fraud, and crimes of violence to the predicate crimes for money laundering

* Subject to prosecution a foreign official who embezzles money and launders it through a US bank

* Make it illegal for people in the United States to launder criminal proceeds through foreign banks

* Allow US prosecutors greater access to records in bank secrecy jurisdictions by sanctioning individuals who hide behind such laws

* Give US courts jurisdiction over foreign banks that violate US money laundering laws if the banks have accounts in the United States.

The US will also urge G-7 nations to adopt rules requiring identification of the originators of internal funds transfers.

Thomas A. Renyi, chairman and chief executive officer of the Bank of New York, says international cooperation is crucial. “Heightened domestic surveillance in any one country may simply drive would-be wrongdoers to less stringent points of entry into the system” and have the effect of moving trade flows into currencies other than the US dollar and their respective payments systems.

Outside the United States, movement on offshore activity is slowly gathering momentum. The European Union has issued a directive to toughen money-laundering preventative measures. Manuel Lezertua, head of the Economic and Organized Crime Section of the Council of Europe, says the union proposes to extend monitoring and reporting requirements to real estate agents, accountants, auditors, and notaries, as well as company formation and management agents, investment managers, lawyers, and dealers in high-value goods such as precious stones or metals. A threshold is set for clients of casinos purchasing gambling chips.

The new EU directive would widen the ban on money laundering to embrace not only drug trafficking but all organized crime, though reporting would be limited to organized transnational crime affecting the financial interests of the community.

The strongest proposal on regulating offshore centers, made by France to the G-7 in Washington in

September, calls for:

* A ban on underregulated legal entities such as international business corporations, shell companies, and opaque trusts

* The extension of money-laundering laws to cover all serious crimes

* Suspicious transactions to be reported by all relevant players, including nonfinancial agents such as lawyers, real estate agencies, and casinos

* The setting up of international alert mechanisms to enable simultaneous freezing of suspects’ accounts

* A ban on offshore centers as a condition for multilateral support

* Restriction of capital movements with noncooperative and underregulated offshore centers.

Earlier this year French finance minister Dominique Strauss-Kahn received a negative response to his suggestion that the G-7 should cut recalcitrant offshore centers out of the international financial system. Now it seems his proposals are being given credence. Jean-Claude Milleron, the French executive director at the International Monetary Fund, is tight-lipped but confirms things are “moving forward” and that there is “a positive echo.” The French are working closely with the United States on the issue: a French judge sits in the US Justice Department as liaison with the French Justice Ministry.

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