Offshore Banking: The Secret Threat to America

By Lucy Komisar
Dissent Magazine, Spring 2003

In November 1932, deputy Fabien Albertin took the floor of the National Assembly in Paris to denounce tax evasion by eminent French personalities-politicians, judges, industrialists, church dignitaries, and directors of newspapers-who were hiding their money in Switzerland.

The minister of finance knows very well that for ten years, the concern of all his predecessors has been to track down this fraud . . . he declared. However, till now, the information one has gotten has been extremely vague. When documents arrive, they are formless notebooks in which holders of accounts are represented only as numbers. Employees of the banks don’t know the names of account holders. These names are known only to the director of the bank, who the clients forbid to correspond with them, so anxious are they to preserve anonymity.

He said, If one reads the Swiss newspapers this morning, one sees that public opinion in Switzerland dreads the massive shrinking of sums that have been deposited in its banks-of which it enjoys exclusive profit.

There had been a raid on a building on the rue de la Trémoille in the aristocratic district of the Champs-‰lysées, where officials of a Swiss bank had a five-room apartment. Police had passed through a crowd of impatient clients in the waiting room, entered the office, and seized all available documents.

Albertin argued that the operation should have occurred earlier, as the business had gone on without interruption for ten days. Even so, the police collected 245,000 French francs, 2,000 Swiss francs, and even more important, an index, a cashbook, a file, and ten large notebooks with two thousand names.

A parliamentarian shouted, We want to know them!

Albertin answered, The minister knows . . .

But the finance minister declared, Ah! No! Mr. Albertin, I don’t know this list at all.

And Albertin replied, I am going to satisfy your curiosity. Some will say, ‘Ah! You socialists are happy to dishonor political adversaries and show that there are classes in society!’ Yes, there are classes. And in this scandal, the ruling elite of society shows its selfishness and unwillingness to obey French law!

His list included deputies, senators, and judges, whose role, he pointed out, was to make and apply the laws. He called them men of a particularly ticklish patriotism who, he noted with irony, probably are unaware that the money they deposit abroad is lent by Switzerland to Germany. That Switzerland was Hitler’s banker was already known. Albertin noted sardonically that such people never made loans to the French defense effort. He added that the list included a dozen generals, even the comptroller of the army.

He began to name the names of the tax evader elite, including two bishops, who he said, though the kingdom isn’t of this world, were able to reconcile their oaths of poverty with the desire to shelter their fortunes. There were also manufacturers of automobiles and furniture.

Names! cried a deputy.

The Peugeot brothers, Albertin replied. The furniture maker was Lévitan.

He moved on to Henriette Francois Coty, of the famous perfume family, who ran a newspaper, L’Ami du people (Friend of the People), and a M. Sapotre, whom Albertin took for the publisher of Le Matin (Morning). Albertin declared, There is nothing more painful, saddening, and tragic, nothing that can discourage the mass of French workers more deeply than to see every day the men who direct and inspire French opinion in the columns of their big dailies call for the nation’s financial patriotism, tell of sacrifices to be asked of civil servants and war victims . . . and on their own part, cheat.

Swiss bankers were stunned by the revelations of their clients’ names. They feared that unless they could block future exposure, they might lose the deposits people had stashed with them to avoid paying their own countries’ taxes.

To make sure that account owners’ names could never be made public again, in 1934, the Swiss Confederation made it a crime for a bank employee to violate the secrecy of clients’ identities. Bank secrecy was born; even law enforcement on the track of thieves could not pierce it. The elites of France and elsewhere could rest easy. Taxes would burden only the poor and middle classes.

When I read that story, I realized I had solved a mystery that had perplexed me for years. As a journalist, I hadn’t initially worked at trying to figure out financial puzzles. A child of the sixties–of the civil rights and then the feminist movements–I’d focused on the plight of the third world, which was, it seemed, condemned to poverty and dictators. Beginning in the 1980s, when I visited places such as Haiti, the Philippines, and Zaire, I was struck by the fact that local opponents of the dictators invariably told me that the plundered loot was in Switzerland. Switzerland? The country of the International Red Cross, of chocolate and cuckoo clocks and good deportment, often held up as a model for developing countries?

It was also the Switzerland of banks-banks run by men who mixed with the best of company and, by the way, were accessories to the theft and laundering of billions of dollars stolen from people in every country of the world-the repository of booty amassed by tyrants from Hitler to Mobutu. I vowed to find out how the system operated, who supported it, how it could continue in the face of clear evidence that it facilitated criminal acts and caused appalling suffering.

I discovered that in the decades that followed Albertin’s protest at the National Assembly, dozens of countries in search of foreign capital had copied the system. Bank secrecy became a vital financial service-for drug traffickers beginning in the 1960s, and then for other criminal syndicates from the 1980s, for dictators and corrupt politicians looting their countries, for business fraudsters, for bribe-givers and takers, for arms and people traffickers, for evaders of court judgments, and of course for tax cheats.

It was a system that operated only half in the shadows. People made jokes about Swiss bank accounts. The writers of thrillers sent their heroes and villains to Grand Cayman. Money laundering was a phrase that everyone knew, even if they didn’t quite know its significance.

Then, in the 1990s, Swiss bankers came under attack from the victims of the Nazis and their heirs, who complained that the accounts generously hidden by Swiss bankers had been not-so-generously appropriated by them. Officials of the United States and Western Europe complained that the Swiss were holding the money of drug traffickers and tax cheats and refusing to give information to law enforcement agencies. Governments of developing countries complained that the Swiss had concealed the money stolen by their former dictators and refused to give it back.

In 2001, the United States learned that the Swiss had protected the bank that handled finances for Osama bin Laden.

In each case, the money was shielded by the bank secrecy that the Swiss invented after Albertin embarrassed their corrupt clients. In each case, those bankers were accessories to crime. But now Americans and others throughout the world recognized that this sub-rosa system was a threat to their security. And the people whose ill-gotten profits were at stake organized to protect the system, in the United States and internationally.

Bank secrecy has been a hidden issue-buried in plain sight as key political leaders, major media, and even citizen groups ignored glaring lessons: in the 1980s, the collapse of the Vatican-linked Ambrosiano Bank and the illegal sale of arms to Iran and diversion of funds to the Contras; in the 1990s, the Bank of Credit and Commercial International (BCCI) swindle; and for decades, the burgeoning international narcotics and illicit arms trades-all dependent on secret bank accounts. U. S. political leaders, with a few exceptions, were loath to challenge big banks and brokerages that wanted no barriers to the influx of customers’ funds. The same was true abroad.

When U.S. bank regulators wanted to strengthen existing rules to detect illicit funds, the banks resorted to scare tactics. In 1999, to sink a know your customer regulation proposed by the Federal Deposit Insurance Corporation, they orchestrated a successful e-mail campaign to Congress. Constituents protested that the regulation compromised their right to keep their accounts free from government surveillance. That was a fiction; U.S. law enforcement agents with court orders could already see any bank records they wanted. Other government officials could not. The regulation set guidelines to help banks carry out the existing requirement of due diligence, that is, that they make sure that their customers were who they said they were and that banks report suspicious transactions.

The rules were aimed at people and companies moving very large sums through accounts-millions of dollars, not thousands. It aimed to make life more difficult for people who supplied phony identities or companies that lied about true owners. One official suggested it should have been called know your criminal. In the face of 225,000 e-mail messages and letters and the opposition of the banks, the rule was withdrawn.

The ordinary citizens who sent those message probably had no idea what is meant by real bank secrecy-the kind that exists in Switzerland and other tax havens, that prevents anyone, even law enforcement agents, from finding out the owners or seeing the records of an account. In some countries, anyone who releases owner information can be jailed. Sometimes accounts are numbered or coded (the famous numbered Swiss bank accounts), and only key officials of the bank know the beneficiaries. Or the accounts are opened in the names of lawyers or accountants, so even bank officials don’t know.

Is a Colombia drug cartel buying Chicago real estate? Is a Muslim terrorist group acquiring a flight training school? If the money went through Grand Cayman, law enforcement officials won’t know. The procedures for finding out drag on for months and years, by which time the account is closed, all traces erased.

There was one weak link in the secrecy system. In countries such as the United States, banks were supposed to obtain stated reasons for direct transfers of large amounts of money. That might mean a claim for sale or purchase of stocks, merchandise, or real estate, or the receipt or repayment of a loan. If true names were attached to the companies involved in transactions, they might be traced. Or fraudulent activities undertaken in a company’s name might lead investigators to follow its trail.

So, corporate secrecy was invented. Shell companies-front companies, mailbox companies, sometimes called International Business Corporations (IBCs) or Personal Investment Companies (PICs)-were set up to own bank accounts and effect phony transactions to hide or launder funds. They didn’t produce goods or services; they existed for bookkeeping, to receive, hold, and transfer money so as to hide the real people involved. Banks and accounting firms marketed shell and even ready-made off-the-shelf companies, the latter already registered with local governments, picked up by clients like merchandise in a store.

Offshore networks popularly come in series of three. It’s called layering, or laddering. Throw in Cayman and Panama; sprinkle with Aruba or Curacao, says the Miami official of an international investigation firm that hunts fraudsters. Money launderers set up a British Virgin Islands corporation, open a bank account in Curacao, airfreight the money to Aruba, have it wire transferred. In days, it’s been through three jurisdictions, and there are no records.

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 looking into a loan to the company want to find out who owns it, lawyers say, That’s protected by secrecy law. Sometimes, for greater obfuscation a shell company is owned by another shell from a second jurisdiction. At the end, there is integration: the individual buys a big hotel or invests in the stock market.

Many offshore centers offer another advantage to customers. They levy low or no taxes on owners of investment funds or registered companies. Of course, they don’t apply such rules to themselves, only to nonresidents and companies not doing business in their countries.

There are some fifty-five offshore zones-legendary Switzerland, Grand Cayman, and colorful islands such as Nauru in the South Pacific. The world’s second-largest tax haven just behind the Cayman Islands, Nauru has ten thousand residents and four hundred offshore banks-all registered at a single mailbox. The Caribbean also has the money laundries of Antigua, Aruba, and the British Virgin Islands. European favorites include Luxembourg, Austria, Liechtenstein, Monaco, Cyprus, and the British Channel Islands-with strong links to London. Dubai and Israel are important in the Middle East.

The money involved is monumental. Secrecy havens have 1.2 percent of the world’s population and hold 26 percent of the world’s wealth, including 31 percent of the net profits of U.S. multinationals. According to Merrill Lynch & Gemini Consulting’s World Wealth Report for 2000, one third of the wealth of the world’s high net-worth individuals (as banks like to call them), nearly $6 trillion out of $17.5 trillion, may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by IBCs and trusts.

Experts believe that as much as half the world’s capital flows through offshore centers. The International Monetary Fund (IMF) says that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2 percent to 5 percent of global economic output. These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption.

In America, the system made a big hit with the gangsters of Chicago. After Al Capone was convicted of tax evasion in 1931, organized crime groups realized they had to hide or launder their money so they could show legal origins and pay taxes. In 1932, mobster Meyer Lansky took money from New Orleans slot machines and shifted it to accounts overseas. The Swiss secrecy law two years later assured him of G-man-proof banking. Later, he bought a Swiss bank and for years deposited his Havana casino take in Miami accounts, then wired the funds to Switzerland via a network of shell and holding companies and offshore accounts, some of them in banks whose officials knew very well they were working for criminals. By the 1950s, Lansky was using the system for cash from the heroin trade.

Today, offshore is where most of the world’s drug money is laundered, estimated at up to $500 billion a year, more than the total income of the world’s poorest 20 percent. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption.

Lansky laundered money so he could pay taxes and legitimate his spoils. About half the users of offshore have opposite goals. As hotel owner and tax cheat Leona Helmsley said — according to her former housekeeper during Helmsley’s trial for tax evasion — Only the little people pay taxes. Rich individuals and corporations avoid taxes through complex, accountant-aided schemes that routinely use offshore accounts and companies to hide income and manufacture deductions.

The impact is massive. The IRS estimates that taxpayers fail to pay in excess of $100 billion in taxes annually due on income from legal sources. The General Accounting Office says that American wage-earners report 97 percent of their wages, while self-employed persons report just 11 percent of theirs. Each year between 1989 and 1995, a majority of corporations, both foreign- and U.S.-controlled, paid no U.S. income tax. European governments are fighting the same problem. The situation is even worse in developing countries.

The issue surfaces in the press when an accounting scam is so outrageous that it strains credulity. Take the case of Stanley Works, which announced a move of its headquarters-on paper-from New Britain, Connecticut, to Bermuda and of its imaginary management to Barbados. Though its building and staff would actually stay put, manufacturing hammers and wrenches, Stanley Works would no longer pay taxes on profits from international trade. The Securities and Exchange Commission, run by Harvey Pitt-an attorney who for more than twenty years represented the top accounting and Wall Street firms he was regulating-accepted the pretense as legal.

The whole business is a sham, fumed New York District Attorney Robert Morgenthau, who more than any other U.S. law enforcer has attacked the offshore system. The headquarters will be in a country where that company is not permitted to do business. They’re saying a company is managed in Barbados when there’s one meeting there a year. In the prospectus, they say legally controlled and managed in Barbados. If they took out the word legally, it would be a fraud. But Barbadian law says it’s legal, so it’s legal. The conceit apparently also persuaded the Securities and Exchange Commission.

Stanley Works’s accountants, the global firm Ernst & Young, and its lawyers, the prominent Skadden Arps Slate Meagher & Flom, presumably advised their client that this was a good way to keep from paying $30 million in U.S. taxes. But it turns out that Stanley was planning to save on more than the taxes on business done outside the United States. Even though it only paid $7 million in U.S. tax on foreign income in 2001, Stanley indicated that the move would save it at least $25 million in 2002. The immediate effect would be to increase the salaries of Stanley executives, who were already being paid millions; American taxpayers would make up the loss.

That scam hit the headlines, and in the face of a threatened lawsuit by the attorney general of Connecticut, Stanley Works backed down. The AFL-CIO and unions such as UNITE and AFSCME are using pension stock votes to try to bring runaway companies back onshore. They say the moves deprive the United States of taxes and also reduce shareholders’ control, including the right to examine books or sue management.

But Stanley Works’s ploy is only one of myriad ways companies use the offshore system to cheat on taxes. Companies in international trade routinely use shell accounts. According to a Miami private investigator, If I have a Colombian company that imports Mercedes trucks from Germany, the company ordering the trucks will be registered in the British Virgin Islands or Curacao; no Colombian firm will handle invoices; Colombian tax authorities won’t know how much business they’re doing.

These practices are endemic in third world countries. Oxfam International calculates the money sucked out of developing countries and deposited in tax havens at $50 billion a year, nearly the size of the $57 billion annual global aid budget, six times the annual cost of achieving universal primary education, and almost three times the cost of universal primary health care.

Oxfam figures that $35 billion of the missing money is taxes evaded by foreign corporations, often through transfer pricing-buying and selling through tax haven shell companies to hide profits.

When I was in Moscow, an employee for a major American company told me how its auto rental subsidiary booked its Moscow cars to clients via an offshore office so it could cheat on reporting income in Russia.

Some of the money is stolen outright. World Bank-financed roads in Indonesia cost an extra 30 percent to account for corruption. That’s loan money Indonesian citizens must repay. Developing countries owe more than $2 trillion to rich nations and international financial institutions such as the World Bank and the IMF.

The dirty little secret of third world debt is that a substantial part of the money given for political reasons to pro-Western dictators was laundered in offshore centers and funneled back to Western stock markets and real estate. It’s estimated that for every dollar the West gives, or more likely, lends the third world, ten dollars in dirty money funnels back to it. This drains hard currency reserves needed to buy imports, takes away funds for investment, and beggars education and health programs.

At the Africa-Europe summit in Cairo in 2000, when the Europeans accused the Africans of corruption, the Africans riposted, You’re the ones that take the funds; give us our money back! European banks have fought attempts to retrieve the money stashed by dictators.

Attempts to find laundered funds are usually dismal failures. According to Interpol, $3 billion in dirty money has been seized in twenty years of struggle against money laundering-about the amount laundered in three days. U.S. Treasury officials say 99.9 percent of the foreign criminal and terrorist money presented for deposit in the United States gets into secure accounts. That means anti-money-laundering efforts fail 99.9 percent of the time.

Bank secrecy is not about preventing your neighbor or a government official from casually inquiring about your account balance or to whom you wrote your last check. It means that a prosecutor or plaintiff with a court order can’t see the financial records of someone who has just walked off with the company funds, or failed to pay child support, or has been caught divvying a kilo of heroin to a teenage sales force or running a scam that wiped out thousands of people’s savings, or paid no taxes while flying around in a private jet.

It means Osama bin Laden can move money through a financial network centered around the Al Taqwa (Fear of God) bank, registered in the offshore haven of the Bahamas and operated from the secrecy jurisdiction of Switzerland.

Corporate secrecy is what let Enron set up 780 shell companies in Grand Cayman and another eighty in the Turks & Caicos islands to hide insider trading, stage-manage financial records, deceive investors and creditors, and avoid U.S. taxes. The offshore system let Arthur Andersen do its creative accounting, manipulating its client’s books with handy secret companies and accounts.

These beneficiaries want to keep the system. So do the big banks, which make substantial commissions on their offshore services. Offshore is not a fly-by-night operation run by unknown shady dealers. It is a blue chip industry operated by multi-billion dollar international banks and major investment, law, and accountancy firms.

International banks have special private banking departments to help big-money clients establish offshore networks to hide their money. The worldwide total for assets managed by private banks is an estimated $15.5 trillion. Private banking profits are over 20 percent, twice as high as in many other departments. Another dirty little secret (known to all but the general public) is that private banking exists largely to manage money clients are hiding from their own countries’ tax collectors. The banks’ advertisements make that clear when they promote their discretion-a code word for secrecy. Brokerages benefit when hot money fuels the stock markets. Some $300 billion to $500 billion of dirty money enters the international capital markets every year.

Joseph Stiglitz, the 2001 Nobel laureate for economics, told me, You ask why, if there’s an important role for a regulated banking system, do you allow a non-regulated banking system to continue? 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. If you said the U.S., the UK, 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 only exist because they can engage in transactions with standard banks. The G-7 are the top industrialized countries.

Why is it now becoming an issue? Some American political leaders have been pushing to reform the offshore system for years. Democratic Senator John Kerry of Massachusetts, who ran the Iran-Contra and BCCI hearings in the 1980s and 1990s, called for changes then: he even wrote a book about it. Republican member of Congress Jim Leach of Iowa, head of the House Banking Committee in the late 1990s, held hearings on money laundering by Citibank and pressed for legislation. Democratic senator Carl Levin of Michigan ran hearings and oversaw reports on offshore banking and also wrote reform bills. Congress and succeeding Republican and Democratic administrations weren’t interested.

Meanwhile, during the 1990s, American anti-narcotics officials began focusing on the offshore connection. And European countries became worried about huge tax losses. With advances in technology, not just the enormously wealthy but even the moderately rich could set up secret offshore companies and accounts. They didn’t have to travel to tax havens; they could bank by fax or e-mail. An Internet search using offshore or tax haven turns up dozens of hits. So do the pages of the Economist, airline magazines, and publications for the moderately rich.

When I first started writing on the subject in 1997, most people I spoke to needed an explanation of offshore. An assistant opinion-page editor of a major American newspaper asked me, Just what is a numbered Swiss bank account?-and then decided the issue was too arcane and complex to present to readers, especially since she didn’t understand it herself. The editor of a major foreign policy organization’s journal asked for an article, then panicked when it turned out to be a call for the end of bank secrecy. Lacking the courage to air a challenge to the status quo (his organization’s banker and broker members), or even to confront the author, he turned it down through his secretary. No wonder the American public does not understand this issue. The mainstream media refuse to confront it.

It took the discovery that Osama bin Laden used a financial network based offshore and that Enron set up affiliates in secrecy havens to make U.S. political leaders, editors, and the public begin to pay serious attention. Now, the banks are working on damage control, trying to limit the scope of domestic legislation and international agreements. In Europe, citizens groups seeking global economic reform call offshore secrecy pernicious and want to end it. In America, however, there’s no lobby to challenge the banks. And on neither side of the Atlantic are governments seeking radical reforms. Who are the moneyed interests who keep in place the international financial services system for criminals? One might, with the French deputies seventy years ago, cry, names!

Today, the names include the corporate and wealthy interests represented by the Bush administration. Paul O’Neill, then treasury secretary, announced at the February 2001 meeting of the G-7 that the Organization for Economic Cooperation and Development-which had developed an initiative to stop tax havens from hiding the money of tax cheats-shouldn’t be dictating to any country . . . the appropriate level of tax rates. In May, he announced that the OECD demands were too broad and withdrew U.S. support. The OECD softened its demands. An OECD team was investigating how to reform the shell company system. It has made no public proposals.

Now, key Republican officials are attempting to block a Clinton-era IRS regulation to collect information on interest paid to nonresident aliens so this can be shared with other countries-especially the European Union, which has developed its own tax-information sharing policy to catch money in flight to Luxembourg, Austria, Switzerland, and elsewhere.

I spoke about the Bush policy at a seminar run by the new European Network Against Tax Havens and Tax Evasion at the World Social Summit in Porto Alegre, Brazil, in January. No representatives of U.S. groups attended; alas, this issue is not yet on the agenda of the American left.

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