After Dirty Air, Dirty Money

By Lucy Komisar
The Nation, June 18, 2001

When Treasury Secretary Paul O’Neill said after the February meeting of the top industrialized countries, known as the G-7, that a European initiative to clamp down on money laundering is not about dictating to any country what should be the appropriate level of tax rates, it was clear that the game was over.

For about eighteen months the United States had signaled that it was serious about joining the Europeans in modest efforts to deal with the tide of illicit money that washes around the world. Now, the Bush Administration was saying that it was backing off the US commitment to reform the offshore banking system. Instead, the tough on crime Republicans would stand shoulder to shoulder with the shady characters in Nauru, Aruba, Liechtenstein and elsewhere who offer state-of-the-art financial services for crooks.

The immediate issue was an initiative by the Organization for Economic Cooperation and Development to stop tax evaders from hiding money in offshore havens. The OECD last July named thirty-five jurisdictions that offered foreigners secrecy, low or no taxes and protection from inquiries by home-country legal and tax authorities. It said it would take defensive measures against countries that didn’t change those policies, and it began negotiating with such worried targets as the Cayman Islands.

In April, O’Neill rebuffed pressure from France, Japan and Italy to reiterate US support for the initiative. Then in May, without prior consultations or negotiations with allies (  la Kyoto), he announced in a newspaper Op-Ed that the OECD demands were too broad and withdrew US support. French Minister of Finance Laurent Fabius publicly expressed his concern, saying that until now, the United States and France were at the forefront of this fight. Le Monde editorialized, After dirty air, dirty money.

The Bush Administration’s actions represent a continuation of policies–interrupted only by the brief Clinton moves–that go back to the Reagan era, and that in the past have been defended as based on US opposition to impeding the free flow of capital or decreasing other countries’ reliance on the dollar. Treasury was looking to free up economies, not regulate them, says Jonathan Winer, a former high-level crime-policy official in the Clinton State Department.

Others take a darker view of US motives. Jack Blum, a Washington lawyer who co-wrote a 1998 report for the United Nations on the offshore phenomenon, says US policy has been influenced by the fact that the hot money from the rest of world [fueled] one of the greatest booms in the stock market and the fact that big brokerage firms find it profitable to run private banking operations for rich people all over the world who don’t want to pay taxes. He estimates that at least $70 billion in US taxes is evaded annually through offshore accounts. That is just above the $65 billion in the projected federal budget for education, training, employment and social services. Elsewhere, Oxfam International calculates that money sucked out of developing countries to tax havens is $50 billion a year, nearly the size of the $57 billion annual global aid budget.

Says Joseph Stiglitz, former chief economist of the World Bank, You ask why, if you believe there’s an important role for a regulated banking system, do you allow a nonregulated banking system to continue? The answer is, it’s in the interests of some of the moneyed interests to allow this to occur. It’s not an accident; it could have been shut down at any time.

The offshore system started with the Swiss, who in the 1930s opened numbered bank accounts purportedly only to hide the money of victims of the Nazis. People who feared confiscation of their wealth would deposit it in accounts identified by number, not name, so the Germans could not trace and seize funds. The money could be claimed only by someone who knew the number.

From the beginning, reputable uses provided cover for disreputable ones. French elites put money in Switzerland to evade taxes, and in the 1950s, mobster Meyer Lansky, who got worried after US crooks were nabbed on tax evasion, bought a Swiss bank. His operatives would deposit cash in Miami banks as earnings from his Havana casinos, then wire-transfer it to Switzerland, safe from US investigation and seizure. Increasingly, rich people all over the world went offshore to evade taxes.

Big banks discovered that there was profit in helping such people, and they established private banking departments with offices in secrecy jurisdictions such as the Cayman Islands and Switzerland. Private banking profits are generally twice those of most other departments, but clients think they’re getting a bargain. Some open offshore accounts with foreign brokers who handle investment funds free from income and capital gains tax. To access cash, clients get credit cards issued by offshore banks and stock brokerages so that records of accounts and charges are not on file at home.

Corporations use offshore banking to move profits to jurisdictions that tax them less or not at all. Using transfer pricing, a US company that wants to buy widgets in Hong Kong makes the purchase through a trading company in Grand Cayman. The trading company, which it secretly owns, buys the items in Hong Kong, then resells them to the US parent firm at a falsely high price, reducing taxable US profits. Between 1989 and 1995, nearly a third of large corporations operating in the United States with assets of at least $250 million or sales of at least $50 million paid no US income tax.

Criminals of all stripes depend on offshore. In May 1994 the UN embargoed arms to Rwanda, but arms traffickers based in Britain, France and South Africa used offshore financial centers to carry out their transactions. In 1999 the German secret service reported that a Liechtenstein combine using secret foundations, companies and bank accounts served the international drug cartels, and particularly the mafias of Italy, Colombia and Russia.

Today, there are about sixty offshore zones. With 1.2 percent of the world’s population, they hold 26 percent of the world’s assets. According to Merrill Lynch & Gemini Consulting’s World Wealth Report, one-third of the wealth of the world’s high net-worth individuals, or nearly $6 trillion, may be held offshore. Offshore havens also hold an estimated 31 percent of the profits of US multinationals.

As offshore banking has grown, so has an awareness that it harms the public interest. In 1970 Congress voted to require taxpayers to report foreign bank accounts. In 1985 a Senate investigations subcommittee report said offshore thwarted the collection of massive amounts of taxes, guessing at up to $600 billion in unreported income.

In 1989 the G-7 countries created the Financial Action Task Force, largely to deal with drug-money laundering. However, Stiglitz, who served as head of President Clinton’s Council of Economic Advisers before going to the World Bank, says the offshore issue didn’t come up much in the United States until the Asia meltdown in 1997 and subsequent problems.

One of the causes of the Japanese financial crisis was the collapse of Daiwa Bank and Yamaichi Securities, which used offshore accounts to hide losses. Then there was the Russian bank disaster of August 1998, caused by crooked managers lending massive amounts to offshore companies they secretly owned, and the failure a month later of Long-Term Capital Management, which routed its transactions through the Caymans, where they were invisible to US and other countries’ regulators.

Stiglitz recalls, Everybody said you need more transparency. But it has to be comprehensive. People said if you’re going to be comprehensive, you have to include offshore countries and hedge funds. At that point, the United States and Britain began talking about the advantages of nonfull disclosure–that if all the information were made public, you’d have incentives not to gather it. This argument was never used earlier, only when it came to US offshore banks and hedge funds. Stiglitz says that then-Deputy Treasury Secretary Lawrence Summers was the one who voiced the concerns but that behind it were the hedge funds and offshore centers whose advantages lie in secrecy…. He was reflecting those interests. He added, If you said the United States, Britain and the major G-7 banks will not deal with offshore bank centers that don’t comply with G-7 bank regulations, these banks could not exist. They exist because they can engage in transactions with standard banks.

By the time the G-7 met in Washington in April 1999, the Europeans were also raising concerns that the offshore system threatened their own countries’ welfare because it facilitated tax evasion. French Finance Minister Dominique Strauss-Kahn offered a proposal that offshore centers that failed to properly regulate accounts and cooperate with law enforcement be cut off by the world’s financial powers. He proposed that the G-7 require financial institutions to identify their customers; report suspicious transactions of high amounts involving individuals or legal entities with accounts at financial institutions in poorly regulated jurisdictions; and, as a last resort, ban financial transactions with countries or territories whose procedures were unacceptable.

It was not an issue at the top of the agenda for Treasury Secretary Robert Rubin (now co-chairman of Citigroup). When I saw Strauss-Kahn after the April 1999 meeting, he told me that Rubin and other G-7 leaders had turned down his proposals. He also got a negative response from banking leaders in Washington. He said, They didn’t want to hear about it. They all use the offshore centers. Rubin denied this account when I questioned him later at a speech he gave in New York, but he declined repeated requests to clarify what he did say.

After Rubin’s departure from the Treasury, the United States began to show more interest in the subject. Summers had a deputy analyze the connection between offshore and the financial crisis, and the Administration worked with Republican Jim Leach, chairman of the House Banking Committee, to write legislation banning anonymous bank transfers into US banks from abroad. (That bill, and companion ones in the Senate, were blocked by majority leader Dick Armey and Senate Banking Committee chairman Phil Gramm, both of Texas, after the Texas Bankers Association said it would hurt the banks’ business with Mexico. A Clinton official commented, If Texas bankers know their customers, they know whom they’re dealing with, and if they’re dealing with Mexican banks, they know there’s dirty money.) The shift to a Democratic Senate means Carl Levin, now leading the movement to reform offshore, will likely get a hearing for his bank-transfers bill.

In June 2000, after a decade of toothless pronouncements, the Financial Action Task Force, set up by the G-7 in 1989 to fight drug-money laundering, issued a blacklist of fifteen countries that maintained bank secrecy even in the face of criminal investigations: the Bahamas, the Cayman Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. Banks were asked to exercise reinforced vigilance in dealings in those countries. The list, while a move forward, was highly political. Britain refused to allow its notorious offshore dependencies–Guernsey, Jersey, the Isle of Man, the British Virgin Islands and Gibraltar–to be included. France’s protectorate Monaco also evaded the list.

Jean-Fran§ois Thony, until last year program manager of the UN Global Program Against Money Laundering and now a French judge, said, Britain said to France, ‘If you want to include the Channel Islands, we will ask Monaco to be put there as well.’ Now the French government is very tough on Monaco, but France has something to do with the fact that the situation has lasted for so long. French banking authorities oversee Monaco. Antigua was excluded at the insistence of Canada, which represents it on the board of directors of the IMF. Thony added, There’s a lot of hypocrisy, pointing the finger at those countries which are supposed not to comply with international rules when the banks really operating them are the major banks of our countries. That is the heart of the problem.

Following publication of the task force list, a host of countries announced they would adopt laws or regulations to combat money laundering. Winer, the Clinton Administration official, said it would take several years to judge how genuine the reforms were.

In the wake of O’Neill’s recent comments, some tax havens pulled back from negotiating with the OECD, confident that the Americans will keep offshore safe for tax evaders and other crooks. Meanwhile, even among groups concerned about drug crime, the ills of globalization and wealth disparities, there is little pressure for reform. While the Europeans can be expected to continue their modest efforts, not much will change unless the United States decides to participate. Until then, international banks will continue to make it easy for dictators to loot their countries and the rich to evade taxes, while ordinary citizens underwrite ever more of the cost of government.


Russia–Scamming the System

Thefts from other countries pale in relation to the looting of Russia, with the indispensable assistance of the Offshornaya Zona. The 1995 loans for shares scheme transferred state ownership of privatized industries worth billions of dollars to companies whose offshore registrations hid true owners. More billions were stolen around the time of the August 1998 crash.

Insider banks knew about the coming devaluation and shipped billions in assets as loans to offshore companies. The banks’ statements show that their loan portfolios grew after the date when they got loans from the Russian Central Bank, which were supposed to stave off default. After the crash, it was revealed that the top borrowers in all the big bankrupt banks were offshore. For example, the five largest creditors of Rossiisky Credit were shell companies registered in Nauru and in the Caribbean. As the debtors’ ownerships were secret, they could easily disappear. Stuck with uncollectable loans and no assets, the banks announced their own bankruptcies. Swiss officials are investigating leads that some of the $4.8 billion International Monetary Fund tranche to Russia was moved by banks to accounts offshore before the 1998 crash.

The biggest current scam is being effected by a secretly owned Russian company called Itera, which is using offshore shells in Cura§ao and elsewhere to gobble up the assets of Gazprom, the national gas company, which is 38 percent owned by the government. Itera’s owners are widely believed to be Gazprom managers, their relatives and Viktor Chernomyrdin, former chairman of Gazprom’s board of directors and prime minister during much of the privatization. Gazprom, which projected nearly $16 billion in revenues for 2000, uses Itera as its marketing agent and has been selling it gas fields at cut-rate prices. Its 1999 annual report did not account for sales of 13 percent of production. As its taxes supply a quarter of government revenues, this is a devastating loss. Itera has a Florida office, which has been used to register other Florida companies, making it a vehicle for investment in the US economy.

Hank and Citibank–A Case in Point

Citigroup proclaims that its private bankers act as financial architects, designing and coordinating insightful solutions for individual client needs, with an emphasis on personalized, confidential service. That is so colorless. It might better boast, We set up shell companies, secret trusts and bank accounts, and we dispatch anonymous wire transfers so you can launder drug money, hide stolen assets, embezzle, defraud, cheat on your taxes, avoid court judgments, pay and receive bribes, and loot your country. It could solicit testimonials from former clients, including sons of late Nigerian dictator Sani Abacha; Asif Ali Zardari, husband of Benazir Bhutto, former prime minister of Pakistan; El Hadj Omar Bongo, the corrupt president of Gabon; deposed Paraguayan dictator Alfredo Stroessner; and Raul Salinas, jailed brother of the ex-president of Mexico. All stole and laundered millions using Citibank (Citigroup’s previous incarnation) private accounts.

One lesser-known client, Carlos Hank Rhon of Mexico, has been the object of a suit by the Federal Reserve to ban him from the US banking business. Hank belongs to a powerful Mexican clan whose holdings include banks, investment firms, transportation companies and real estate. Hank bought an interest in Laredo National Bank in Texas in 1990. Six years later, when he wanted to merge Laredo with Brownsville’s Mercantile Bank, the Fed found that Citibank had helped him use offshore shell companies in the British Virgin Islands to gain control of his bank by hiding secret partners and engaging in self-dealing, in violation of US law. One of the offshore companies was managed by shell companies that were subsidiaries of Cititrust, owned by Citibank.

The Fed says that in 1993, Hank’s father, Carlos Hank Gonz¡lez, met with his Citibank private banker, Amy Elliott, and said he wanted to buy a $20 million share of the bank with payment from Citibank accounts of his offshore companies, done in a way that hid his involvement. Citibank granted him $20 million in loans and sent the money to his son Hank Rhon’s personal account at Citibank New York and to an investment account in Citibank London in the name of another offshore company.

Citigroup spokesman Richard Howe said, We always cooperate fully with authorities in investigations, but we do not discuss the details of any individual’s account.

At press time, there were reports that Hank had negotiated a settlement with the Fed, which the parties declined to confirm.

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