The Komisar Scoop Reports & Analysis by Investigative Journalist Lucy Komisar

Tuesday, December 7, 1999

Russian Cons and New York Banks

Filed under: offshore,Russia,Scoops — Lucy Komisar @ 10:56 pm

By Lucy Komisar
The Village Voice, Dec 7, 1999

After it was revealed in August that $7 billion to $15 billion had been siphoned out of Russia through the Bank of New York, the nation’s influentials were shocked, shocked. America’s most sophisticated financiers were vulnerable to tawdry Russian fraudsters? The press gasped at the scale, congressional committees mobilized, and the Clinton administration trumpeted an anti-money-laundering strategy.

But the scandal was no surprise to federal immigration agent Thomas D. O’Connell. Nor was it the first time a New York bank had been soiled by money believed stolen by Russian con men. Though it has not been reported until now, the Bank of New York and other New York banks—including Chemical, Chase Manhattan, and Citibank— were and most likely still are conduits for the proceeds of a still-to-be-tallied series of crimes, with at least a thousand shell company bank accounts laundering dirty cash. Indeed, O’Connell suspects that hundreds of millions of tainted dollars have passed through the New York banks into offshore havens.

O’Connell described one scam in detail after this reporter discovered the court record last year. O’Connell was then heading an inter-agency federal investigation of money laundering and other international crimes. The FBI, IRS, Customs, and O’Connell’s agency, the Immigration and Naturalization Service, had monitored two Russians with unusual banking habits. In 1993 and ’94, the pair used Chemical and Chase (now merged), Citibank, and the Bank of New York to launder almost $2 million embezzled from a St. Petersburg TV station. That case was among the many that calls into question the melodramatically proclaimed surprise of Bank of New York CEO Thomas Renyi, who told the House Banking Committee in September “how dismayed I have been by the suggestions in the press that the Bank of New York has been involved in, or been used as a vehicle for, money laundering or other illicit activities.”

Another big New York bank also moved funds on a grand scale. O’Connell said investigations into the activities of one of the men in the St. Petersburg swindle revealed roughly a thousand bank accounts used by Russian crooks. “Most [of the accounts] were out of the Chemical Bank in Dag Hammarskjold Plaza in New York City. The first four or five bank statements I saw had hundreds of thousands of dollars going through them,” he said. “The money would be wired in from Russia and then go out [offshore] to the Cayman Islands or the Isle of Man or Switzerland in two or three days. There’s at least a thousand of them, and in each one there’s money being wired into the U.S., hundreds of thousands of dollars.” He said the total of the money moving through all the accounts investigators examined ran into “hundreds of millions.”

This story underscores dangerous failures in U.S. bank practices and federal and state policies. Banks routinely establish accounts for phony companies without doing effective “due diligence” to check out their customers. Law enforcement agents are hamstrung by state corporation recording procedures that make it hard to ferret out bogus companies set up by crooks. Once money moves through offshore secrecy havens such as the Cayman Islands, it’s generally impossible to locate or recover, because those jurisdictions won’t open bank records to law enforcers.

O’Connell believes dozens of the owners of the targeted accounts were linked to Russian organized crime. He says one customer was Vyacheslav Kirillovich Ivankov, at the time the most powerful Russian organized crime leader in the United States. Ivankov was convicted of extortion in Brooklyn in 1996 and sentenced to 10 years in federal prison at Raybrook, New York.

The bank accounts were discovered because investigators were tapping the fax of a Russian immigrant, Alexandr Yegmenov, who’d provoked the attention of law enforcement authorities from almost the moment he set foot in this country. The St. Petersburg fraud that brought Yegmenov down offers a fascinating glimpse into the money-laundering process. The details were obtained from court records and interviews with government investigators.

All the banks discussed in this piece were given several opportunities over the past several weeks to respond. A Bank of New York spokesperson declined to comment on any of the cases. PR officials at Citibank and the now-merged Chase and Chemical banks promised to look into the issues. Follow-up queries brought the reply that they were still looking.

Alexandr Yegmenov arrived in the U.S. more than 10 years ago, when he was in his early thirties. Thomas O’Connell arrested him in 1990 as an “overstay” when he was living at a fraternity house at Rensselaer Polytechnic Institute in Troy. Seeking to block deportation, in 1990 Yegmenov filed a political asylum application. He claimed he had been an economist in the dissident organization Sintez and had been detained in a psychiatric facility for a month. Actually, the court records said, he had been convicted in Russia in 1984 on weapons and unlawful sale of goods charges and had served three years. That wasn’t known by Immigration then, and Yegmenov got asylum.

A good capitalist, Yegmenov went into the corporate services business, setting up shell companies—paper corporations that don’t actually operate, but are often covers to evade taxes or disguise transactions. He established New York companies through his All American Corporate Service, Inc., in Albany and filed for Delaware corporations with help from Delaware Business Incorporators in Wilmington.

“He would create a company in New York and subsidiaries outside the U.S., typically in the Caribbean,” explained New York State police captain David L. McNulty of the Bureau of Criminal Investigations, who helped collect evidence. “Sometimes he was creating a couple of hundred corporations a week all over the country. People came to him and said, ‘I need four companies outside the U.S. that the IRS can’t get access to.’ “

To incorporate U.S. “subsidiaries,” Yegmenov would dummy up supporting documents to show that companies existed in Russia. O’Connell said, “I have 16 boxes and filing cabinets of his papers. I have two boxes full of Russian stamps and seals he made for every Russian entity, from federal police agencies to universities to hospitals. They bought a modem for the stamping company and were modeming them images of the stamps they wanted. We seized a Russian typewriter. They use thin paper and bind it with white string. He had all that stuff.” The Grand Jury indictment called Yegmenov “a master forger.”

He promised fast service. O’Connell said, “He was buying people at the New York State Department of State drinks and dinner to expedite the incorporation process. At one time he had a box of blank New York State certificates of incorporation that an employee at the Department of State gave him. They had a watermark and seal. (Two state clerks were disciplined.)

Yet Yegmenov was sloppy. Some clients wanted to use the companies to back up requests for business visas, claiming that the “American subsidiaries” of their “companies” needed them to work here. The INS got suspicious about the large number of applications Yegmenov was filing. Investigators discovered that he had printed business cards for many of the companies at the same two addresses, Columbia Place and 283 State Street in Albany.

They tapped his fax machines and hit pay dirt. They learned that he had set up thousands of shell companies. They would find 4000 in New York, a thousand in Delaware, a few hundred in Pennsylvania, Massachusetts, Ohio, and other states, and a couple of dozen in havens such as the Isle of Man and the Cayman Islands.

The faxes led authorities to a Yegmenov client named Mikhail Syroejine and the $2 million embezzlement case. Syroejine was 28 in 1993 and had just been appointed deputy director of St. Petersburg’s GTRK Channel 5, a government television station. He was responsible for company purchases.

Prosecutors charged that Yegmenov helped Syroejine set up TV & Radio of St. Petersburg, Inc., which was registered in August 1993 in Albany in the name of Syroejine’s wife, Anna Potyomkina. Syroejine was secretary, and his real boss, TV station director Bella Kurkova, and her deputy chief, Victor Pravdyuk, were listed as shareholders. Yegmenov that day also established several other shell corporations to use in the scheme. And Syroejine opened an account for TV & Radio of St. Petersburg at Chase Manhattan Bank in Manhasset, New York, with a $200 deposit. Then, Syroejine arranged to “purchase” new Sony TV equipment from TV & Radio of St. Petersburg. Channel 5 paid $2 million into the account of the phony company between December 1993 and February 1994.

St. Petersburg TV officials would later insist that Syroejine had persuaded them that the cheapest way to buy the Sony equipment was via a three-way contract between GTRK, V.N. Express (one of the New York shell companies), and Jojan Consultants, Ltd., a company registered in Dublin. (Dublin offers corporate secrecy, hiding owners’ names from government investigators and courts.)

But as it often does in these cases, some of the money ended up fueling the U.S. economy. In April 1993, Syroejine had gotten a nonimmigrant visa from the U.S. consulate in Vienna, and in March 1994, he disappeared from St. Petersburg and showed up in America to micromanage the scam. On March 18, 1994, half a million dollars was wired from a Liechtenstein account to a New York Citibank account he controlled, and between March and May, checks drawn on Citibank paid for a $20,000 Rolex watch, a 1994 Jeep Grand Cherokee, and a Chris Craft 380 Continental pleasure boat.

Money launderers move cash through multiple accounts to obfuscate paper trails. Between August 1993 and May 1994, Syroejine opened accounts at Chase, Chemical, Citibank, and the Bank of New York, and shifted hundreds of thousands of dollars between them until he sent nearly $2 million out of the country. Some $430,000 went to Barclay’s Bank in Limassol, Cyprus. Another $400,000 was sent to an account called Mand Stifftung, opened in the name of Valeri Martioukhine at Verwaltung Und Privatbank Vaduz in Liechtenstein. More than a million dollars went to Jojan Consultants at Lloyd’s Bank in the U.K.

By May 1994, close to delivery time for the illusory Sony TV equipment, V.N. Express had replaced the now defunct TV & Radio of St. Petersburg as the “supplier” and taken over its $600,000 banked assets. Syroejine sent a fax from V.N. Express stating that because of the “provocative behavior” of one of Channel 5’s representatives, V.N. Express refused to deal with it anymore. Channel 5 never got more of an explanation or the equipment, nor could it get in touch with V.N. Express or Syroejine.

Meanwhile, U.S investigators learned through Interpol of Yegmenov’s 1984 Russian convictions and jail term. The Justice Department’s Office of International Affairs passed the information to the Russians, and in 1995, Russian prosecutors began looking into the disappearance of $1.87 million from Channel 5.

On November 13, 1995, the FBI arrested Yegmenov in Brooklyn. Agents seized Syroejine at his Santa Monica condominium. The two men were indicted in November 1995 for money laundering. Yegmenov was also charged with visa fraud. The U.S. calculated the total theft of the Channel 5 case at $1,949,460.66. Authorities would not say whether any money was recovered.

O’Connell had the INS run a computer search to pull all the visa applications Yegmenov had filed. It found about a thousand. “They were for the Brighton Beach crowd,” he said. “Ninety-eight percent of the companies were out of Brooklyn.” Brighton Beach in Brooklyn is a center for Russian criminals.

Then U.S. agents used the applications to lead them to the bank accounts of the phony companies. O’Connell explained, “Each company that petitions for an alien has a file, a lot of supporting documents. I had at one time a thousand of those files, each for different companies, all sent to our service center in St. Albans, Vermont. We had the center start asking the petitioners for additional documents, including bank statements. Most were out of the Chemical Bank in Dag Hammarskjold Plaza in New York City. Some were from the Bank of New York, a couple from Citibank.” He said the Russian Mafiya was using many of the bank accounts to bring in large sums by pretending that they were paying for contracts in the U.S.

When investigators sought to locate other shell companies Yegmenov had incorporated, they were stymied by state corporation department practices. There was no way to run a computer search to locate corporations by filer. New York State Police agents had to search by hand the papers of every corporation filed with the state over a period of time and pull folders with recognizable names such as Yegmenov or someone from his office. Sensing the surveillance, he started using other petitioners’ names. Limited to tagging files that bore names they knew, investigators still discovered roughly 4000 New York State shell companies Yegmenov set up.

But investigators could get banking information only from corporations sponsoring people to get visas, not from those set up just to launder money. O’Connell explained, “The only reason we know about the bank accounts is because of the supporting documents. If Alex incorporated 3000 companies that didn’t apply for visas, where do you start looking? Do you search every bank to see if it has accounts from those corporations? It’s an impossible task.”

Examining each company would have been useful. Yegmenov’s enterprises dealt in more than visas and money laundering. Officials said some Delaware companies he set up appear to have been used for exportation of stolen cars, weapons trafficking, and motor oil excise tax fraud, in which crooks import diesel and call it home heating oil to avoid paying taxes. Other Yegmenov firms specialized in bilking medicare and medicaid with phony invoices, say for fictitious wheelchairs. Yet others provided fake documents for manicurists’ licenses. Authorities suspected that certain auto body shops he incorporated in New York were used by car-theft rings that changed plates and shipped cars to Russia.

Yegmenov pleaded guilty in 1995 to money laundering and visa fraud. He served about a year in prison or in INS detention, and was deported. In Russia, he was jailed for a year on the St. Petersburg TV station charge, then released. A source said that Syroejine had been freed on bond, but from January 18, 1996, most court records in his case were sealed, including any indicating its disposition. None of the other station officials in Russia were charged with crimes.

The Justice Department and U.S. attorneys who handled the case declined to provide information on grounds that aspects of it are still being investigated. There are thousands of Yegmenov companies suspected of being used for illegal purposes.

“I get calls all the time on the companies he opened,” O’Connell said. “It created a lot of awareness in the U.S. State Department. Every once in a while, I’ll get a call from the Office of International Affairs. The legate to Moscow or St. Petersburg has one of Yegmenov’s companies on his desk and what should he do about that. I tell them, ‘Don’t give the guy the visa.’ ” He added, “I’m sure somebody by now has taken Yegmenov’s place.”

The money-laundering scandals reported here and in recent months are probably the tip of the iceberg. Putting together Russian government estimates, about $50 billion leaves that country illegally each year. Nobody knows how much is capital flight, or how much is the proceeds of embezzlement or other crimes. But U.S. government officials say that Russian organized crime is developing importance on a par with the Italian Mafiosi, Colombian drug traffickers, Japanese gangsters, and Chinese triads. Internationally, estimates are that $500 billion to $1 trillion in criminal money from all sources ends up in U.S. and European banks each year.

The major economic powers, led by the United States, have failed to challenge the structures that facilitate money laundering by Russians and others. They have refused to act to end the corporate and bank secrecy that lets crooks hide behind shell companies and anonymous offshore accounts. On the contrary, major American and international banks have subsidiaries offshore where they assiduously help clients evade the laws of their own countries.

Congress shares the blame. Yegmenov’s clients might not have moved their illicit money undetected so easily had Congress not killed the “Know Your Customer” rule proposed by U.S. bank regulators last December. The law already requires banks to perform “due diligence” on their big customers and report “suspicious transactions.” The proposed rule would have made them spell out their procedures—to identify the owners of accounts, to determine big-money customers’ sources of funds, to monitor large transactions, and to flag those that were not normal.

Now, the scandals have put anti-money-laundering legislation back on the agenda. House Banking Committee Chairman Jim Leach (Republican of Iowa) and senators Charles E. Schumer (Democrat of New York), Paul D. Coverdell (Republican of Georgia), and Carl Levin (Democrat of Michigan) have introduced measures requiring banks to keep records of account owners’ identities and to ban correspondent or concentration accounts that commingle funds of an institution’s customers without identifying them, a way offshore banks commonly move clients’ money. The bills would make it a crime for banks in the U.S. to knowingly handle money traceable to foreign government corruption, and they would expand the list of crimes that trigger money-laundering charges.

The Clinton administration, with a Treasury Department strongly influenced by banks and investment companies and a traditional policy of welcoming capital no matter what its origins, has introduced a much weaker bill that would merely expand the list of money-laundering crimes to include theft of public funds by officials, arms trafficking, and crimes of violence, and would give U.S. courts jurisdiction over foreign banks that violate U.S. money-laundering laws. It would not address offshore bank and corporate secrecy or the need for clear identification of U.S. company owners and bank customers.

The American Bankers Association, which fiercely lobbied against the Know Your Customer regulation, is now opposing new laws to flush out dirty money. John J. Byrne, ABA senior counsel, worries about “pressure from examiners and media and the public that may force the bank to report possible criminal activity more frequently than they would have in the past.” He said international clients would say, “I don’t think it’s anybody’s business in the U.S. how I do my business. I’m going to go to a country where they’re not going to ask all these penetrating questions and take my business elsewhere.”

For now, in other words, no effective law forces a bank to screen out the likes of Yegmenov and his clients.


Hiding the Money

Lax state regulations make it easy for crooks to hide their connections to shell companies and bank accounts.

Neither New York nor Delaware, for example, demands that owners and officers be listed on incorporation filings. Company directors are supposed to be listed on the annual Delaware franchise tax filing, but lawyers often name themselves or leave a blank. A clerk at the New York State Division of Corporations said a requirement for biannual filings signed by the chairman of the board was not enforced, because the legislature hadn’t passed an implementing law. A Delaware corporation division clerk said when papers come through with directors not listed, the lack of data is ignored.

Immigration agent Thomas O’Connell and Anthony Russo, the IRS agent on the Alexandr Yegmenov investigation, agreed that company owners and officers should be named in incorporation papers and that state incorporation computers should be configured to facilitate searches of owners, officers, and filers. Then, Russo said, “If we had an allegation against a suspect, we could go there right away and see that he formed 5000 corporations,” instead of having to hunt for them by hand.

Article on Village Voice Site

Wednesday, December 1, 1999

Fool Me Twice

Filed under: offshore,Offshore Overviews,Russia,Scoops — Lucy Komisar @ 5:00 pm

By Lucy Komisar
The Progressive, Dec 1999

The Russian banking scandal should have been no surprise to Western financial experts. The Bank of New York laundered some $7 billion in Russian money through the offshore system.

The sudden attention by U.S. government officials and the mainstream media to the $7 billion or more of Russian money laundered through the Bank of New York might make you think this is the first time that multimillions have been stolen from Russia-or elsewhere-and washed through the international offshore system. In fact, it’s not even the first time for the Bank of New York.

Several years ago, the Bank of New York, Chemical Bank, Citibank, and Chase Manhattan Bank were used by money launderers in a case that has not received press coverage until now. A Russian named Alexander Yegmenov set up eight phony New York state companies, opened accounts in the banks, and helped officials of a government TV station in St. Petersburg steal $2 million. Mikhail Syroejine, a station procurement official, allegedly used Yegmenov’s shell companies to receive a payment of $2 million for Sony equipment. Syroejine, who was living in St. Petersburg, was supposed to buy some equipment for the TV station. He allegedly put through a fake order to a phony company Yegmenov set up in New York, sent $2 million to the company, and moved to the United States, living first in New York and then Santa Monica. The station never received its equipment or its money.

On January 26, 1994, according to a grand jury indictment, Syroejine opened an account at Chase Manhattan Bank in Manhasset, New York, and transferred $1 million into it. On January 29 of that year, he allegedly opened an account at Citibank in Huntington, New York, with a deposit of $600,000 from Chase. In early February, a Citibank check for $500,000 was deposited in a Chemical Bank account.

Then the money began to move offshore. On March 2,1994, more than $1 million was wired from the Chase account to the Lloyd’s Bank, U.K., account of Jojan Consultants Ltd., registered in Dublin, a city that guarantees corporate secrecy. The rest moved from one shell company account to another, including $238,000 wire-transferred from the VN. Express account at Chemical Bank to Priority Assets at the Bank of New York on April 26, and then more than $207,000 wiretransferred on May 10 from Priority Assets at the Bank of New York to Palmira Technologies at Chemical Bank. An additional $430,000 went to Barclay’s Bank in Limassol, Cyprus, and another $400,000 was sent to an account called Mand Stifftung at Verwaltung und Privatbank Vaduz in Liechtenstein. Cyprus and Liechtenstein are both offshore secrecy havens.

That was just small change for Yegmenov. Between 1993 and 1995, he set up thousands of companies for Russian criminals. The criminals used these accounts to launder millions of dollars to offshore banks, according to Tom O’Connell, an INS agent on the case.

“The first four or five bank statements I saw had hundreds of thousands of dollars going through them,” says O’Connell, who saw the bank statements of hundreds of the shell companies. “Most were out of the Chemical Bank in Dag Hammarskjold Plaza in New York City. The money would be wired in from Russia and then go out to the Cayman Islands or the Isle of Man or Switzerland in two or three days. There’s at least 1,000 of them, and in each one there’s money being wired into the U.S.-hundreds of thousands of dollars.”

According to O’Connell, one of Yegmenov’s clients was Vyacheslav Kirillovich Ivankov, at that time the most powerful Russian organized crime leader in the United States. Ivankov was convicted of extortion in Brooklyn in 1996 and sent to federal prison for ten years.

Yegmenov got caught in 1995 when the INS became suspicious about the large number of visa applications he was handling as an agent for Russians who, already in the United States, claimed that their companies needed them to remain to work for U.S. subsidiaries (that is, the shell companies Yegmenov had set up). Investigators tapped his fax machines and learned that Yegmenov had set up thousands of shell companies-4,000 in New York State, 1,000 in Delaware, a few hundred in Pennsylvania, Massachusetts, Ohio, and other states, and a couple of dozen in such secrecy havens as the Isle of Man and the Cayman Islands.

Yegmenov pleaded guilty to money laundering and visa fraud, served a year in jail, and was deported. Syroejine was arrested but beginning January 18, 1996, most court records in his case were sealed, including any that might indicate the disposition of his case.

The Russian scams are a window onto the seedy world of offshore banking. One-third of the wealth of the world’s richest individuals-nearly $6 trillion out of $17.5 trillion-may be held in offshore accounts, according to Merrill Lynch & Gemini Consulting’s World Wealth Report. There are about sixty offshore banking centers.

Some offshore practices are considered legitimate. U.S. financial services companies have offshore components as part of money management to avoid taxation on short-term holdings, to provide customers with interest-bearing overnight sweep accounts, and for Euro currency lending and deposit taking.

But the legitimate reasons for offshore banks provide a useful cover. The major US. and foreign banks have offshore subsidiaries for clients and companies that want to avoid the laws and scrutiny of their own countries. Offshore havens allow rich people and businesses to evade taxes. They also facilitate international financial fraud, market manipulation, theft of intellectual property, illegal arms dealing, and drug smuggling. Court records show how offshore accounts were used by the Bank of Credit and Commerce International (BCCI) to steal billions of dollars of depositors’ money from the mid-1970s until 1991. (As the result of secrecy laws, bank regulators failed to recognize that BCCI was lending to itself.) Offshore banking also facilitated the frauds involving Daiwa and Barings banks and the Sumitomo trading company in the mid-1990s, which led to jail terms for the employees involved. It figured in the multimillion-dollar scam operated by alleged insurance fraudster Martin Frankel.

At least $200 billion a year of the world’s drug money is laundered offshore, according to the 1998 U.N. report “Financial Havens, Banking Secrecy, and Money Laundering.” Raul Salinas, the brother of Mexico’s former president, used offshore shell companies to hide the movement of more than $100 million in drug payoffs through a private investment company named Trocca, according to the October 30,1998, General Accounting Office report “Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering.” Trocca was set up at Cititrust, Grand Cayman, by a Citibank vice president in New York, according to the GAO report.

Offshore is home to nearly a third of all hedge funds, such as Longterm Capital Management, which was licensed in the Caymans, where U.S. regulators could not know its excessive leverage of $1.25 trillion-1,000 times its capital-or see the losses it was taking until they put at risk some of America’s most significant financial institutions. These losses prompted the Federal Reserve in 1998 to intervene to prevent massive default.

Offshore accounts helped dictators Mobutu, Suharto, Marcos, and Duvalier to hide their loot and keep it after their overthrow. It is where criminals have washed money to buy political power and threaten democracy from Mexico and Colombia all the way to Russia.

Jack Blum, a Senate Foreign Relations Committee counsel in the BCCI investigation and co-author of the 1998 U.N. report, calls tax havens the biggest threat to the integrity of a country’s tax base. “The very rich use sophisticated offshore structures, which include foreign trusts, shell corporations, and bank accounts in countries with bank secrecy laws. Data about an individual’s bank dealings is often available to the individual in the US. on a computer screen. When the government wants it, however, the information is ‘not in the United States.’ It is on a main frame computer subject to foreign secrecy laws.”

In the banking world, there is a crucial difference between confidentiality and secrecy. Confidentiality means your neighbor or competitor can’t walk into a bank and see your account. Secrecy means that law enforcement authorities with evidence you’ve committed a crime can’t see your account–even if they have a court order. Sometimes even bank regulators don’t know the identity of depositors and their account balances.

A few dozen offshore tax havens have laws permitting corporate secrecy. And there are more than three million anonymous corporations-which are designed to conceal the origin and destination of goods in trade and to evade taxes by hiding profits and assets.

Offshore trusts give control to unidentified “trust protectors.” The local courts can’t hear claims against trusts, and many have “flee clauses” requiring trustees to transfer assets in case of law enforcement inquiries or legal writs. This puts them beyond reach of creditors, estranged spouses, tax authorities, police, customs, prosecutors, and courts.

Such offshore operations often use a gimmick called layering-moving the money through multiple venues-to prevent a paper trail, says one international investigator. “Money launderers set up a British Virgin Islands corporation, open a bank account in Curacao, airfreight the money to Aruba, have that wire-transferred. It goes through three jurisdictions; there are no records,” he says. “You can convert profits to losses, put money in phony loans, buy businesses without people knowing who you are, and evade all laws regulating money. If authorities investigating a loan to the company ask about owners, lawyers say, ‘That’s protected by secrecy law.’ “

In October 1998, I attended the IMFWorld Bank annual meeting in Washington, D.C., and went to a panel on “Strengthening Banking Systems.” I’d just read a news report that then-Deputy Treasury Secretary Lawrence Summers had remarked that a $4.8 billion IMF loan to Russia might have ended up offshore. So I asked the experts, “Why don’t you end the bank secrecy system that hides and launders illicit funds? Why don’t you abolish secrecy havens by disallowing international transfers of money from such jurisdictions?”

Howard Davies, head of the British Financial Services Authority, replied, “If there could be a way of extending the reach of principles and anti-money laundering networks to cover all offshore . . .” He left the sentence unfinished, then said it was difficult to achieve, that there was not much leverage, and ended, “I have sympathy with the spirit of your spirited question.”

Stanley Fischer, deputy director of the IMF, declared, “Obviously, these are tax avoidance and regulation avoidance devices. It must be possible to strengthen regulatory frameworks, perhaps the way you mention. . . . The idea that there shouldn’t be unregulated banking for tax avoidance and regulation avoidance is correct.”

Six months later, the Group of Seventhe leading industrial nations-met and considered how to deal with the dangers posed by offshore accounts. “We are very worried about offshore havens,” said thenTreasury Secretary Robert Rubin. It is “in the interest of sound international tax policy that there not be offshore havens that people can use to evade taxes.”

But when, at the same meeting, France’s Finance Minister, Dominique StraussKahn, urged that offshore centers that fail to properly regulate accounts or cooperate with law enforcement be cut off from financial contact with the world, he did not get a positive response from Rubin or the other Americans. “I don’t see the thing moving,” Strauss-Kahn told me later. “I’m afraid it will be a long time. Maybe I’m wrong.”

Then the Bank of New York scandal broke. It should have come as no surprise to officials in Washington, since the scam of offshore banking was known to all of them. Only the particulars were different. Since at least the 1970s, wealthy tax evaders, drug dealers, and other criminals have been using these havens. It is because U.S. political leaders were afraid to take on powerful corporate interests, especially those on Wall Street, that the Russians found a system to facilitate their theft.

Once the Russian scandal with the Bank of New York broke, the Treasury Department sat up and took notice. By late September, the Treasury announced, as part of its new anti-moneylaundering strategy, that it wanted to make it more costly for American banks to lend to entities in offshore centers that were badly regulated and didn’t cooperate with law enforcement. For instance, U.S. banks would have to put aside reserves for loans made to such entities. “The impact on international finance and banking would be revolutionary” if such reserves were required, says Jonathan Winer, who until November was Deputy Assistant Secretary of State for International Narcotics and Law Enforcement Affairs. Since banks would have to keep more of their money as reserves, they couldn’t lend as much elsewhere, so they would charge more for such loans.

Other Administration proposals would prosecute foreign officials who embezzle money and launder it through U.S. banks, make it illegal for people in the United States to launder criminal proceeds through foreign banks, give prosecutors greater access to records in bank secrecy jurisdictions by sanctioning individuals who hide behind such laws, and give U.S. courts jurisdiction over foreign banks that violate U.S. money-laundering laws if the banks have accounts in the United States.

Two days before the Administration announcement, James Leach, Republican of Iowa, head of the House Banking Committee, proposed with bipartisan support much stronger legislation attacking offshore havens. US. banks could not open accounts for foreign companies or individuals unless they knew the owners’ identities, and they couldn’t open accounts for “brass plate” banks that didn’t operate where they were registered or that didn’t identify customers moving money through their correspondent accounts, which are devices for anonymously bundling and transferring funds.

France continues to be outspoken on the issue. At this year’s IMF-World Bank meeting, France proposed, in effect, to ban offshore bank and corporate secrecy.

Such radical measures are unlikely to be readily adopted. The banks, investment companies, and rich people who benefit from offshore secrecy are exerting power to keep the system generally intact. Klaus Engelen, a correspondent for the German financial paper Handelsblatt, wrote in Emerging Markets in September that a German official told him, “The major Wall Street houses again are muzzling the reformers in the U.S. Treasury.”

John Byrne, senior counsel at the American Bankers Association, says the Leach proposals “put us in a competitive disadvantage; if our procedures are tougher than international procedures, we will lose accounts.” Forcing U.S. banks to report possible criminal activity more frequently than they would have in the past is not going to work, Byrne says. He’s afraid clients would tell him, “I’m going to go to a country where they’re not going to ask all these penetrating questions and take my business elsewhere.”

Byrne says a working group of the banks will meet with Treasury officials to discuss the implications of the proposed legislation.

When Treasury Secretary Summers testified before the House Banking Committee in September, it was clear he wanted to target some renegades but preserve the system. His colloquy with Representative Maxine Waters, Democrat of California, went like this:

Representative Waters: “One of my pet peeves is the fact that our respectable banks wire-transfer money to the banking centers in Antigua and other places. And we know why they are establishing what they are doing. What leadership are you going to provide to stop that practice?”

Secretary Summers: “With respect to the general issue of offshore financial centers-sometimes referred to as ‘havens’-l expect us to provide, in the context of the money laundering strategy, a set of proposals, and I think that it will also indicate-“

Waters: “Do you want to see it stopped?”

Summers: “Yeah, we-“

Waters: “Do you want to see the practice of wire-transferring to money laundering centers that we know about stopped, period?”

Summers: “Congresswoman, we want to see abuses stopped.”

But focusing on the “abuses” is disingenuous. Hiding illicit money is the raison d’etre of offshore bank and corporate secrecy. Offshore banks catering to crooks can live with Summers’s mild reform proposals. Criminals don’t need loans from U.S. banks; they need a place to stash their loot. Summers refuses to cut to the heart of the offshore scheme: the anonymity of account and company owners. There will be more massive money-laundering scandals until the United States says no to dirty money and works to abolish offshore bank and corporate secrecy.

Powered by WordPress