Thursday, February 21, 2008

The Proposed Iranian Oil Bourse

Economics of Empires
A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.

Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society.

Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.

In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil. The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist.

Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.

The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar, ergo the American Empire. It was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished.

Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.
History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs.

Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.

Iranian Oil Bourse
The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system:

· The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.

· The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with Euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.

· The Russians have inherent economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.

· The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.

Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner.

At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter—those of Europeans, Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation’s exchange:

· Sabotaging the Exchange—this could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities.

· Coup d’├ętat—this is by far the best long-term strategy available to the Americans.

· Negotiating Acceptable Terms & Limitations—this is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup d’etat fails, then negotiation is clearly the second-best available option.

· Joint U.N. War Resolution—this will be, no doubt, hard to secure given the interests of all other member-states of the Security Council. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action.

· Unilateral Nuclear Strike—this is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The Americans will likely use Israel to do their dirty nuclear job.

· Unilateral Total War—this is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will further alienate other powerful nations. Third, major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate pact with Syria.

Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate U.S. inflation and will pressure upward U.S. long-term interest rates. At this point, the Fed will find itself between Scylla and Charybdis—between deflation and hyperinflation—it will be forced fast either to take its “classical medicine” by deflating, whereby it raises interest rates, thus inducing a major economic depression, a collapse in real estate, and an implosion in bond, stock, and derivative markets, with a total financial collapse, or alternatively, to take the Weimar way out by inflating, whereby it pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy.

The Austrian theory of money, credit, and business cycles teaches us that there is no in-between Scylla and Charybdis. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression and an adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s Great Depression, has nonetheless mastered the lessons of the Great Depression and the annihilating power of deflations. The Maestro has taught him the panacea of every single financial problem—to inflate, come hell or high water. He has even taught the Japanese his own ingenious unconventional ways to battle the deflationary liquidity trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To avoid deflation, he will resort to the printing presses; he will recall all helicopters from the 800 overseas U.S. military bases; and, if necessary, he will monetize everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will rise the next reserve currency of the world—that barbarous relic called gold.@
by Krassimir Petrov

The Story of the Fed Is a Story of a Crime

“The magnitude by which [the reality of the Federal Reserve] deviates from the accepted myth,” writes G. Edward Griffin, “is so great that, for most people, it simply is beyond credibility.” But as he makes abundantly clear in his landmark book, The Creature From Jekyll Island, now in its fourth edition, the case against the Fed is overwhelming. Creature, as Griffin explains, is four books in one: a crash-course in money and banking; a history of central banking in America; a discussion of the Fed itself and its role in American and world affairs; and finally, a detailed look at how the Fed and other central banks become “catalysts for war.”

Without central banking, much of the carnage of the past 90 years would not have been possible. In November 1910, seven men representing roughly one-fourth of the world’s wealth took a clandestine train ride from New Jersey to a resort on Jekyll Island, Georgia, ostensibly to hunt ducks. But instead of shooting birds, they shot us the bird and drew up plans for a cartel, which served as the blueprint for the Federal Reserve Act of 1913.

For years, most people left the Jekyll Island tale for the fringe that loves conspiracy theories. But gradually the story leaked out, beginning with an article by B. C. Forbes, the future founder of Forbes magazine, in Leslie’s Weekly in 1916. Following discussions with Paul Warburg, the Fed’s chief architect and one of the Jekyll attendees, Forbes confirmed the trip in his opening paragraphs. Later writers, including some of those in attendance at Jekyll Island, corroborated Forbes’ story.

Why did they want a cartel? So they could practice fractional reserve banking with impunity, while shifting the negative consequences to the public.

The American people, of course, have been handed a thoroughly scrubbed version of the Fed: It exists to stabilize the economy and protect the public. Never mind the crashes in ’21 and ’29, the Great Depression from ’29 to ’39, recessions in ’53, ’57, ’69, ’75 and ’81, another crash in ’87, a bear market in 2000 that wiped out $7 trillion in stock market wealth by 2003, and constant inflation eating away 95% of the buying power of the dollar.As economist Antony Sutton noted, “Warburg’s revolutionary plan to get American society to go to work for Wall Street was astonishingly simple . . . . The Federal Reserve System is a legal private monopoly of the money supply operated for the benefit of the few under the guise of protecting and promoting the public interest.”

Griffin is detailed and clear about how the Fed works. In the old days, when governments wanted more money but were afraid to increase taxes, they printed it and forced citizens to accept it by making it legal tender. It was too crude a scheme to fool most people, but now, with modern central banking, the theft is virtually imperceptible.

First, government doesn’t create money directly; its central bank does.

Second, the bank rarely needs to turn to the printing presses. Instead, it often buys government debt, such as bonds, by writing a check. “There is no money to back up this check,” Griffin explains. “By calling those bonds ‘reserves,’ the Fed then uses them as the base for creating nine additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation’s businesses and individuals . . . .“The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing . . . . Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raised through the process of inflation.”What might government do with such “unlimited funding”?

As Murray Rothbard has noted, the country had been in recession during 1913 and 1914 – high unemployment, with many factories operating at only 60% capacity. The Morgan empire in particular had been losing money in railroads and had lost out to Kuhn-Loeb in the market for industrial finance.  The Morgans had always been closely connected to the Rothschild financial empire in Europe. When war in Europe broke out, the House of Morgan, in partnership with the Rothschilds, became the American sales agent for English and French war bonds. When the money came back to the States to acquire war-related materials, it was funneled through Morgan as the U.S. purchase agent. From 1915 to 1917, J. P. Morgan arranged for $3 billion in exports to France and England, earning a commission of $30 million. 

As historian Thomas Fleming has dryly noted, the U.S. became a branch of the British armament industry during the first 32 months of its neutrality.  But it was a precarious feast. If the Allies should lose, American investors would sustain huge losses and Morgan’s business would nosedive. Getting the U.S. into the war would extend the financial windfall, but the American public opposed involvement by ten to one.In May 1915, the British passenger ship Lusitania gave war hopefuls a much-needed boost. Nearly 1,200 passengers, including 128 Americans, lost their lives when a German U-boat torpedoed it off the coast of Ireland. With its hold stuffed with U.S. munitions contraband, the Lusitania exploded a second time and sank in less than 18 minutes. As Griffin documents meticulously, British and American officials did everything in their power to make Lusitania a sitting duck.

With Morgan-controlled newspapers beating the drums for American participation, Wilson finally got his war on April 16, 1917. Eight days later, Congress extended $1 billion in credit to the Allies. The British took their initial advance of $200 million and paid it to Morgan. When they ran up an overdraft of $400 million three months later, Morgan turned to the U.S. Treasury for help. Treasury Secretary William McAdoo stalled until Benjamin Strong, the Fed’s main man, came to his rescue and paid Morgan piecemeal during 1917 - 1918. Where did Strong get the money? He simply created it.

The income tax, also enacted in 1913, raised $1 billion during World War I.  But 70% of the cost of the war came from inflation, through a doubling of the money supply. As Rothbard understates, “For those who believe that U.S. entry into World War I was one of the most disastrous events . . . in the Twentieth Century, the facilitating of U.S. entry into the war is scarcely a major point in favor of the Federal Reserve.”

In addition to grabbing wealth through direct taxes, government, in collusion with the Fed, took roughly one-half of the people’s savings from 1915 – 1920. It also took the lives of nearly a half-million Americans for a war they never wanted.

In his 1919 book, The Economic Consequences of the Peace, John Maynard Keynes wrote that by “a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens . . . and, while the process impoverishes many, it actually enriches some . . . . The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Griffin lifts the curtain on the Fed’s operations and exposes it for what it is: a counterfeiting cartel in partnership with government soaking the blood and treasure of our country

by George F. Smith


by Dr. Edwin Vieira, Jr.

Dr. Edwin Vieira, Jr., has condensed into this Monograph the substance of addresses he has given to small groups that represent a cross-section of American citizens concerned with fundamental monetary and banking reform.
Dr. Vieira's purpose is to present an analysis of the Federal Reserve System, its fiat paper currency, and "fractional-reserve" banking that infrequently, if ever, appears in the popular press, in the media, in the discourse of legislators or political candidates, or (worse yet) in the nation's schools. This analysis, however, is crucial to popular understanding of what the Federal Reserve System is, what it does, and the dangers it poses to America's economy and republican institutions of government. And such an understanding is crucial to sweeping legislative or judicial reform of the monetary and banking systems - hopefully, before the Federal Reserve System causes an economic and social catastrophe; but, if not, at least after such a catastrophe makes painfully clear to every thinking man and woman the urgent necessity of such reform along constitutional lines.

Dr. Vieira's central theme is that today's scheme of Federal-Reserve-System fiat currency and fractional-reserve banking is plainly unconstitutional, inherently fraudulent, economically unworkable in the long run, and subversive of America's political traditions of individual liberty and private property. This may appear, at first blush, a harsh indictment of a system in existence since 1913, and which the vast majority of Americans apparently accepts (albeit on next to no real knowledge). But, harsh or not, it is an indictment substantial political-economic theory and historical evidence support. Hopefully, Dr. Vieira's message will prove to be a warning that comes, if none too soon, at least not too late.

Richard L. Solyom, Chairman
Sound Dollar Committee

Although the press, the media, and major political figures never mention it the major cause of the financial dangers facing America today is the incestuous relationship between the national government and the quasi-public, but largely private banking cartel deceptively called the Federal Reserve System (FRS). Although historians can state with little difficulty when various stages in the establishment and evolution of the FRS took place, understanding what the FRS has done to America's money, and how and why the FRS has done it, is not quite so easy. Rather, it requires careful attention to certain critical details of American monetary and banking theory and history that are usually forgotten in discussions of the problems the FRS has caused.

I. Most contemporary debate on the FRS focuses on whether what people call the "dollar" should, in some way, be "linked to" or "backed by" gold or another valuable commodity. The fundamental, unexamined, and utterly fallacious assumption in this debate is that the paper currency the FRS generates, the Federal Reserve Note (FRN), is, as a matter of fact and a matter of law, a "dollar" at all. As American constitutional law and history show, the FRN is not a "dollar", has never been declared by Congress to be a "dollar'; and could never be an actual "dollar" notwithstanding all the statutes or resolutions Congress might enact. Rather, as cited in the Constitution and as historically defined in the Coinage Act of 1792, a "dollar" is a specific coin containing 371-1/4 grains of fine silver. Very simply put, the Constitution fixes the monetary unit of the United States as this (silver) "dollar", empowers Congress to coin silver and gold coins the values of which are to be "regulate[d]" in relation to the "dollar", prohibits any government from issuing what the Founding Fathers denominated "Bills of Credit" (and what we today would understand as paper currency redeemable in silver or gold), and outlaws any form of "legal tender" except silver and gold coins. Thus, from the constitutional perspective, it is literally senseless to talk about making the "dollar" redeemable, or adopting a "silver-" or "gold-backed" "dollar". And that such debate as occurs on the FRS and the FRN fixes on this senseless point demonstrates how confused the American people are concerning their own monetary system.

II. Defining the "dollar" constitutionally, however, is only the first step in explaining the real problem the FRS poses. Three other matters require careful consideration:
First, the evolution of the FRS exemplifies the typical historical devolution - or corruption - of monetary systems throughout the world in the last two centuries from commodity money, to fiduciary money, to fiat money. Here, accurate definitions of various forms of money are useful.

A commodity money is a medium of exchange the units of which are fixed amounts of an actual commodity that has value other than as money alone. Historically, silver and gold coins of known, standard weights and designs have emerged as the preferred commodity monies of the entire civilized world. In the case of a commodity money, the actual commodity - silver or gold - is both the medium of exchange and the standard of value (that is, the unit in which prices are stated in the marketplace). The supply of commodity money is self-limited by the costs of mining, refining, and coining silver and gold. New supplies of commodity money will be coined only to the extent that coinage is economically profitable in comparison to alternative investments of the capital needed to mine the precious metals.

A fiduciary money is a medium of exchange composed of some intrinsically valueless substance (such as paper) which the issuer promises to redeem on demand in a commodity money (such as silver or gold coin) or in a monetary commodity (such as silver or gold bullion). Historically, private bank notes and government treasury notes were fiduciary monies in general circulation prior to the 1930s. In the case of a fiduciary money, the paper promise to pay is the medium of day-to-day exchange, but the actual money and the ultimate standard of value remains the promised medium of payment, the silver or gold coin with which the note is to be redeemed. The supply of a fiduciary money is also self limited by the requirement of redemption. In a free market system, new supplies of a fiduciary money will be issued only to the extent the issuer is confident it can satisfy demands for redemption of its notes in a commodity money. The condition "in a free-market system" is crucial, because the self-limiting aspect of fiduciary money historically has failed in an economic regime in which the government or powerful private interests license the issuers of fiduciary monies to suspend or repudiate entirely their promises to redeem those monies on demand in coin.

Finally, a fiat money is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money. Because a fiat money has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting; and the value of a fiat money is always largely a matter of public confidence in the economic or political stability of the issuer. For these reasons, historically every major fiat money have self-destructed in what is popularly called "hyperinflation" (that is, extreme decreases in purchasing-power) caused by either unlimited increases in the supply of that fiat money by the issuer or accelerating loss of public confidence in the continued value of the money or the economic or political fortunes of its issuer, or both.

Second, the theory and history of fiduciary money (which is also largely the theory and history of banking) must always focus on the ever-present problem of redemption. Emphasis on the noun "problem" is warranted, because a fiduciary money is, by definition, a promise to pay the real, commodity money of the country. A piece of commodity money - typically, a silver or gold coin - is itself payment because it contains a fixed weight of precious metal. But a unit of fiduciary money - typically, a bank or government-treasury note - is only a contingent and uncertain payment that depends upon the ability or the willingness of the issuer to redeem. And there always exists a temptation for issuers to renege on their promises to redeem. Thus, fiduciary money always threatens to become fraudulent money. Not surprisingly, therefore, the history of fiduciary money has been more or less the history of monetary fraud, both economic and political.
Third, the danger of fraud in the issuance of fiduciary money becomes particularly acute in the case of modern "fractional-reserve banking". Under fractional-reserve banking, the bank always issues more units of fiduciary money, supposedly "payable on demand", than it has units of commodity money available for redemption, counting on the unlikelihood that the majority of its customers will ever seek redemption at one time. Thus, modern fractional-reserve banking is inherently fraudulent, because:

For the bank simultaneously to fulfill all its promises to redeem its outstanding notes "on demand" is impossible.

The bank's managers know that complete redemption "on demand" is impossible, and therefore that the bank's promises to pay are false. And,

The bank's customers, by and large, are ignorant of how the fractional-reserve scheme works, and the dangers it poses to them.

III. Fully to comprehend the significance of the FRS also requires recognition that no such thing as "politically neutral" or "politically independent" money exists. For, ultimately, money is a medium both for storing wealth and for exchanging wealth. Thus, money is both itself a form of property and a mechanism for implementing contracts that transfer other kinds of property from one party to another. So, even in a free-market economy with a limited government, money exhibits a necessarily political character, inasmuch as the degree to which the government protects the monetary system from private fraud and public looting reflects the degree to which the government respects and protects private property and the right of private contract. A free-market economy will have one kind of money; a "mixed" or "fascist" economy, another kind of money; a "socialist" economy, yet another kind; and so on - but in each case, the monetary system will accurately reflect the values of the political system.

Thus once again, the contemporary debate over whether and to what degree the FRS should be "politically independent" of Congress and the United States Treasury is badly misdirected. Originally, the Constitution made Americans' money independent of electoral politics, by fixing the monetary unit as the (silver) "dollar", outlawing "Bills of Credit", and allowing only silver and gold coin to operate as "legal tender" in the payment of debts. But the Constitution is itself the basic political charter of the country - so, far from making money "politically independent" or "politically neutral", the Constitution actually settled on one, very specific political formula for money: namely, a commodity money of historically proven intrinsic value, the supply of which the political authorities could not manipulate at will.

Creation of the FRS in 1913 did not render FRNs "politically independent" or "politically neutral", but merely changed the political character of the monetary system by empowering a small, unelected clique of self-professed "experts" and self-interested bankers and politicians to control the supply of FRNs, interest rates, and other monetary and banking phenomena. Thus, as contrasted with the constitutional system, the FRS actually politicized money, by enabling politicians, administrators, and a few selected special-interest groups to exercise the very influence over this country's monetary and banking systems that the Constitution had originally disallowed.

Americans tend to accept the description of the FRS as "politically independent" because, although control of the monetary and banking systems has serious political significance, the apologists for the FRS have been successful, over the years, in removing monetary and banking issues from the agenda of political parties and candidates and stifling public discussion of those issues. Yet,

It is of vital political importance that no major political movement now advocates the immediate restoration of America's original constitutional monetary system of silver and gold coinage.
It is of vital political importance that no major political movement demands that all the paper currencies of private banks be true fiduciary monies - that is, be redeemable in silver or gold, or some other commodity with intrinsic value.

It is of vital political importance that no major political movement attacks inherently fraudulent fractional-reserve banking.

It is of vital political importance that no major political movement denounces the incestuous and corrupt relationship between the national government and the banking industry through the FRS, the Federal Deposit Insurance Corporation, and so on.

It is of vital political importance that no major political movement challenges the government's use of the monetary and banking systems to "regulate" the economy and to impose pervasive police-state surveillance on individuals.

It is of vital political significance that the short-run effects of the FRS's monetary and banking policies are very unclear to the average American, and that identifying in the long run who gains and who loses, what is gained and lost, and why all this happens is also very difficult for even economists and political scientists.

It is of vital political significance that members of Congress apparently lack incentives - or actually labor under disincentives - to investigate, let alone to correct, the misguided and harmful policies of the FRS. And,

It is of vital political significance that the general public is simply unable to devise effective strategies for dealing with the FRS as a supposed "agency of the government".

Obviously, a group that could completely excise these matters from political discourse in the United States, without complaint by any significant part of the public, must be powerful indeed. Now, how the apologists for the FRS have been successful since 1913 in stifling political debate on money and banking the history books do not satisfactorily explain. What is clear enough, nonetheless, is that the FRS was established to remove the Constitution as the arbiter of national monetary policy on behalf of all Americans, and to guarantee instead that certain special-interest groups are disproportionately (indeed, monopolistically) represented in the determination of that policy, for the peculiar benefit of those groups and at everyone else's expense. Here, more than one level of analysis is pertinent.

A. At the first level, the FRS appears as primarily a mechanism to "stabilize" the inherently fraudulent fractional-reserve banking system. From this perspective, the purpose of the FRS is not necessarily to do what the bankers want, but always to do what they need. Consider the devolution of the monetary system from a regime of commodity money to one of fiat money:
Under a regime of commodity money, the bankers employ the inherently fraudulent fractional-reserve system to expand the supply of fiduciary money (that is, bank-notes and deposit-currency) beyond the supply of commodity money (that is, gold and silver coin) available for redemption. This has two effects.

1. The bankers can loan more "money" than otherwise, thereby increasing their profits. And
2. The holders of the fiduciary money become unknowing (and presumably unwilling) "partners" with the bankers in these excessive loans, thereby spreading the risk of those loans throughout society and indirectly "insuring" the bankers at the expense of the general public.

Because the expansion of the supply of this inherently fraudulent fiduciary money is limited by the possibility of widespread demands for redemption (so-called "bank runs"), followed by bankruptcy of the issuing banks, the bankers as a class support a series of steps designed to insulate the fractional-reserve scheme from collapse.

First, they use every available means of propaganda, agitation, and disinformation to instill unjustified confidence in the holders of fiduciary money, so as to minimize redemption and thereby facilitate ever-greater expansion of the supply of that money. Underfunded "deposit-insurance" schemes (either private or public) typify this deceptive tactic.

Second, if "bank runs" do occur, the bankers importune the government to authorize "suspensions of specie payments": temporary refusals on the part of the issuers of the fiduciary money to redeem their notes with commodity money. This permits the bankers to remain in business even though they are bankrupt. "Suspensions of specie payments" are a key indicator of the breakdown of the free-market economy, because they are a governmentally protected repudiation of contracts - in effect, governmentally licensed theft.

Third, to prevent "bank runs" altogether, the bankers lobby for governmental permission to repudiate their fiduciary money totally and permanently - that is, to transform their fiduciary money into fiat money. This generally requires that the government activate some mechanism for the "forced circulation" of the fiat money, such as

by making that money the unit for payment of taxes and for public expenditures;
by declaring that money "legal tender" for all debts; or
by outlawing contracts payable in any other form of money, especially commodity money.

These steps substitute the government - actually, the taxpayers - for the banks and their shareholders as the ultimate guarantors of the fiat money, in return for which the banks agree to two requirements:

1. They "monetize" the public debt, in effect enabling the government to use the fiat-money system as an instrument of taxation. And,
2. They cooperate in a cartel or other self-regulatory scheme to control their expansion of the supply of fiat currency within limits that maintain public confidence in the banking system and the government.

In short, the government and the banks agree to divide the amount that can be looted from the general public by manipulation of the money supply, and to moderate that looting so that the public never catches on.

The FRS is simply an elaborate device set up to accomplish these rather simple ends in a highly convoluted, and thereby deceptive, way. The FRS was the response of bankers and their political cronies to decades of failures in the fractional-reserve banking system at the local and regional levels throughout the United States. The FRS was an attempt to maintain that system in perpetuity - first, at the national level with the Federal Reserve Act in 1913, and then at the international level with the Bretton Woods Agreement in 1944. "Was" is the appropriate verb, because the Bretton Woods Agreement collapsed in 1971, with President Nixon's repudiation of redemption of FRNs in gold internationally; and mounting strains in the system have been appearing domestically since the 1970s.

The key dates in the devolution of the FRS are as follows:
1913 - Congress creates the FRS; permits the emission of FRNs, redeemable in "lawful money"; and declares FRNs to be "obligations of the United States", but not "legal tender". In practice, the Federal Reserve Banks and the United States Treasury redeem FRNs for gold coin on demand. FRNs are a fiduciary currency.

1933 - Congress repudiates redemption of FRNs in gold for United States citizens, and declares that FRNs shall be "legal tender". The government continues to redeem FRNs in gold for foreigners; and United States citizens can redeem FRNs for "lawful money" (such as United States Treasury Notes and silver certificates), which is redeemable in silver coins. Therefore, FRNs remain a fiduciary currency, redeemable directly in gold internationally and indirectly in silver domestically.

1968 - Congress repudiates redemption of all forms of "lawful money" in silver, thus turning FRNs into a fiat currency domestically for the first time.

1971 - President Nixon repudiates redemption of FRNs in gold, thus turning FRNs into a fiat currency internationally for the first time.

So, today, Americans suffer under a regime of fiat money and unlimited fractional-reserve banking. In this system, the FRS plays a very simple, but vital role: When public confidence in the monetary and banking systems weakens, the FRS acts to "restore confidence". The FRS may use what the public considers "drastic means" in this alleged "fight", but never means so drastic that they precipitate genuine economic collapse or seriously endanger the long-term interests of the banking cartel, its satellite industries, and its political cronies.

The unavoidable problem, of course, is that any system of fractional-reserve banking suffers from inherent instability that increases over time, because at base fractional-reserve banking is a kind of "Ponzi" or "pyramid" scheme. For that reason, fractional-reserve banking is a "confidence game" in both senses of that term. The FRS, the banking cartel, and the politicians of the American one-party system operate on the theory that "You can fool all of the people some of the time, and some of the people all of the time - and that's good enough!" But they forget that, as Lincoln concluded, "You can't fool all of the people all of the time." Over time, some people - often large numbers of them - do learn. And people who have learned tend to act on their knowledge. So the remaining lifetime of the FRS "confidence game" may, and likely will, be relatively short.

B. On a higher level of analysis, the FRS is not simply a control-mechanism for the national banking cartel, but also one of the most important mechanisms in a pervasive system of fascistic "economic regulation" that has been set up in this country, slowly but surely, since the turn of the century. This explains the "political independence" of the FRS in a way more logical than the idea that money and banking are no longer politically important, divisive, or even interesting subjects. If a fascistic state is to "regulate" the economy with relative autonomy from the electoral public and most special-interest groups, then its monetary agency must claim "political independence". (Actually, in a fascistic state, all of the regulatory agencies must claim "political independence" to some degree - which claim, not surprisingly, is advanced by essentially every administrative agency of the national government today. But the degree of "political independence" will vary with the importance of the agency to the overall scheme of centralized regulation of society.) Thus, the "political independence" the FRS claims is precisely expectable were it part of an anti-democratic mechanism of economic and political control. And that no constitutional branch of the national government - not the Congress, not the President, and not the Judiciary - disputes the FRS's supposed "independence" proves that those branches, too, have been co-opted as agencies of the fascistic state.

In sum, contemporary political money and the politicized banking system that generates it have five major consequences:

First, modern political money is the prime means by which the government operates a scheme of OPPRESSIVE, HIDDEN TAXATION through increases in the supply of money that generate systematic increases in the prices of goods and services (what the public calls "inflation").

Second, by operating as a system of hidden taxation, modern political money licenses the dominant financial and political oligarchy of this country to "REDISTRIBUTE" THE NATION'S WEALTH from one group to another - more than $6 trillion since World War II, according to the American Institute for Economic Research.

Third, by functioning as a mechanism for "redistributing" wealth, modern political money SYSTEMATICALLY CORRUPTS THE ELECTORAL PROCESS, enabling politicians to buy votes with promises of new or expanded governmental spending-programs made possible only by the banking system's ability to "monetize" the public debt.

Fourth, by linking the banking system to the public debt, modern political money licenses the banks to LOOT THE PUBLIC TREASURY, initially by guaranteeing FRNs as "obligations of the United States" and specially privileging those notes as "legal tender", and ultimately by providing taxpayer-funded "bail outs" of the bankers when the scheme of inherently fraudulent fractional-reserve banking collapses.

Fifth and last, modern political money and political banking function as key mechanisms in the scheme of FASCISTIC CENTRAL ECONOMIC PLANNING that misdirects and wastes resources and thereby lowers the standard of living of the vast mass of Americans for the benefit of a privileged few.

IV. Although long a powerful - and today still a politically untouchable - institution, the FRS faces a dismal future. This can be assessed by considering the contemporary political-economic conditions that have given rise to the problem of collapsing domestic banks.

A. The first of these conditions is the essentially fictional and fraudulent nature of modern paper money and fractional-reserve banking.
The fictional and fraudulent character of contemporary paper money is a demerit additional to the inescapable economic disparity between all paper money and real money (that is, silver and gold coins). Paper money can never be economically equivalent to real money because:

A transfer of real money between two persons immediately transfers a real asset: the silver or gold that comprises the coins.

Unlike real money (which is itself the monetary substance), paper money is merely a promise to pay real money at some future date, subject to various contingencies, and always uncertain.

For that reason, a transfer of paper money between two persons does not and cannot transfer the underlying monetary asset immediately, only the promise to pay - that is, the liability of the maker of the promise. And,

In as much as the promise may be more or less secure due to the credit-worthiness or -unworthiness of its maker, a transfer of paper money transfers not only a claim to the underlying real monetary asset but also a risk of loss should the promise of payment (redemption) not be honored, in whole or in part.

In short, even when paper money is actually a promise to pay - and potentially fully redeemable in silver or gold - it remains an asset to its holder only to the extent that the issuer of the promise ultimately makes good on his liability to redeem, or that other people are themselves sufficiently confident of the promisor's solvency to accept the paper money at its face value in exchange for nonmonetary goods and services. In the final analysis, paper money is an asset only if it can be cashed or passed without loss in purchasing power as against real money - which the holder of paper money can determine only when he actually cashes or passes it.

In the United States, for example, today's fiat paper currency is neither itself a valuable commodity nor even a credible promise to pay a valuable commodity in redemption. No holder of FRNs has any legal right to require that the Federal Reserve Banks or the United States Treasury redeem them for any amount of any commodity. And no holder of these notes has any legal right to compel any other ordinary person to exchange a fixed amount of any good or service for some known nominal value of this currency proportional to some weight of silver or gold. Indeed, notwithstanding the statutory mumbo-jumbo mandating their redemption "in lawful money", guaranteeing them as "obligations of the United States", and declaring them "legal tender" for all debts, the most a holder of FRNs can demand as a matter of law is that the national government receive them in discharge of tax-liabilities. Thus FRNs are largely fictional money: for they are, in fact and law, a medium of exchange certain exchanges of which are absolutely refused by their issuers and conditionally refused by everyone else in the marketplace, and which the government accepts only to set off antecedent tax-claims the size of which it unilaterally determines in the first instance. FRNs are, really, just tax-anticipation coupons masquerading as money.

Similarly, contemporary "reserve" banking is, not merely "fractional", but rather inherently fictional. For no bank in the FRS maintains any real "reserves" of money, only paper notes or bookkeeping-entries that the system can "create out of nothing", at any moment and in any amount - but the purchasing power of which in real money (silver or gold) or in any valuable commodity the system cannot guarantee at any time or to any degree.

Moreover, the essentially fictional character of contemporary fiat paper currency and "reserve" banking is the source of their inherent fraudulence - because the fiction is unknown to (indeed, carefully hidden from) the general public. The special privilege of the FRS to emit unlimited amounts of irredeemable, "legal-tender" paper currency, and to loan that currency at interest through the system's commercial member-banks, amounts to a veritable license to steal - because the general public is unaware of the economic significance of the currency's irredeemability, and ignorantly assumes that its designation as "legal tender" compels its use as a medium of exchange to the exclusion of all other forms of money.

The abjectly fictional nature of modern paper currency and fractional-reserve banking encourages the question: why do fiat FRNs continue to circulate, and banks without any real monetary reserves continue to function? Those who accept the theory that "money" is whatever the government decrees would answer that FRNs (or bank-deposits denominated in FRNs) have value as media of exchange in the marketplace because people must acquire them in order to pay their taxes. The obvious fallacy here, though, is that the government accepts payment of taxes in FRNs precisely because those notes have a finite purchasing-power in the market, and therefore are usable as "money" by the government. It is not the present and future taxability of the notes that gives them their market exchange-value, but their residual market exchange-value that renders them viable as a medium of taxation. One must recall that FRNs were originally redeemable, directly or indirectly, in gold coins, silver coins, or both. For that reason, FRNs had a real exchange-value in the market that reflected their underlying redemption-values in gold or silver, and depended not at all on their use as a medium of taxation but indeed made them valuable for that purpose. When FRNs became wholly irredeemable after 1968/1971, they lost any fixed or predictable market exchange-value in terms of real money, and therefore became of increasingly uncertain value as a medium of taxation, too (at least to the extent they continue to depreciate in market exchange-value, as they have, steadily, since then).

A more realistic explanation for the continued circulation of FRNs (or bank-deposits denominated in FRNs) as "money" is that the general public is the victim of a confidence-game, in which the government and the banks have foisted off paper liabilities in the place of real monetary assets in an inverted pyramid of monetary fraud. At the tip of this upside-down pyramid are real "dollars": silver and gold coins that are themselves monetary assets and no one's liabilities, and circulate among those knowledgeable about the differences between real money and paper money. Next in amount in circulation - and at the first level of the institutionalized fraud - are the base-metallic token (or "clad") coins of cupro-nickel alloy. These are monetary assets to the extent of their salvageable metallic content - which is worth about 2% or less of their face values - , but otherwise are liabilities of the government which at one time were redeemable in silver, but are today wholly irredeemable. The next largest fraudulent circulating medium consists of actual FRNs, today "redeemable" only in "clad" coins. Finally, the greatest portion of the so-called "money supply" consists of bank demand-deposits, most of which have been loaned at interest to persons other than the depositors. Revealingly, not only are these purported deposits not actually on deposit in the banks at all, but also the deposits are not even formally "redeemable", because the deposits themselves are not the depositors' "money", but the banks'! The deposits are loans of money the depositors (many of them unknowingly) have made to the banks, and which the banks have then further loaned to third parties.

But how many people are aware of this situation? Why do the government and the banks not educate those who are unaware of what is really going on - other than because the government and the banks knowingly profit from public ignorance and therefore intentionally promote it? And how long can such a swindle continue?

B. This question highlights the second of the contemporary political-economic conditions that underlie the problem of collapsing domestic banks: namely, the inability of the banks to continue indefinitely to increase the supply of money within the domestic economy, that is (as the saying goes), to "expand credit" (because the supply of new money derives from the extension of bank-credit to borrowers). The answer to the question "How long can this confidence-game last?" is "Not forever!". If, on the one hand, the banks overly expand credit, hyperinflation occurs (that is, the purchasing-power of the monetary unit falls exponentially). If, on the other hand, the banks overly restrict the expansion of credit in order to avoid hyperinflation, recession and then depression occurs (that is, people borrow less, and then existing borrowers in massive numbers default on loans). The bankers' "trick" (and dilemma) is to continue to expand credit within an expanding, and therefore essentially noninflationary, economy. The insoluble problem inherent in credit-expansion through fractional-reserve banking, however, is that expansion of a fiat money supply inevitably misdirects and wastes real economic resources, resulting in an increasingly nonrational economy - that is an economy that does not expand in real terms. In short, credit-expansion by fractional-reserve banking in the long run guarantees economic collapse, with resultant social chaos and political crisis.

No crystal ball is necessary to predict that a turning-point in the history of money and banking in the United States is drawing nigh. The burden of governmental debt - much of it made possible only by central-bank "monetization" - has approached levels unsustainable in real terms even with drastically increased confiscation of Americans' earnings through explicit taxation. But Americans seem reluctant to accept more taxation to fund the never-ending follies of a spendthrift welfare state. Thus, repudiation of the debt (in whole or in part) through extreme depreciation of FRNs and bank-deposits denominated therein appears likely, if not certain.

For this looming debacle, Americans can thank the FRS, the "experts" who administered it since 1913, the politicians who wed it as a "cover" to finance their own careers, the bankers who profited from their monopoly over the emission of "legal-tender" paper currency, and the "intellectuals" in academia, the press, and the media who (quite unlike their counterparts in the last century) remained strangely silent on the issue of money and banking. That is, Americans can properly thank these people if Americans become aware of what the FRS is, what it does, and why it is responsible for having undermined to the point of collapse the nation's once proudly prosperous economy and staunchly republican political process.

Hopefully that day of a new national awareness will soon be at hand.

Freeport McMoran's

You know Halliburton. You’ve probably heard of Bechtel. But until today, I’ll bet most of you had never heard of Freeport McMoRan, formerly Freeport Sulphur. Today, the New York Times printed a massive story on Freeport McMoRan, the American-owned New Orleans-based corporation that mines the world’s largest gold reserve. The article charges Freeport with spying on environmental organizers, making large payoffs to individuals in the Indonesian security forces, and polluting groundwater supplies. And that’s just the tip of the iceberg.I’ve written extensively about the sordid history of this company both in Cuba and Indonesia.

Freeport ran a huge nickel mining operation at Moa Bay in Cuba when Castro came to power. Castro offered to buy the plant from its owners for the price the owners had valued it on their taxes. Say what you want about his politics, but Castro is a damn smart man. Of course the owners had undervalued their property for years, and couldn’t bear to sell for such a low price when it was worth much more. They refused to sell, so Castro appropriated it. And a VP of the company started talking about Castro assassination plots. In addition, the company ended up providing a link in the chain between David Atlee Phillips, long suspected, with a good amount of evidence, of being Lee Harvey Oswald’s CIA handler, and Clay Shaw, the man New Orleans District Attorney Jim Garrison prosecuted as a conspirator in the assassination of President Kennedy.

Do you remember the downing of the “Brothers to the Rescue” plane in 1996? How the Cubans supposedly shot a bunch of innocent Cubans out of the sky over international waters? That was a deliberate provocation led by longtime CIA operative Jose Basulto. Basulto had leafleted Havana just prior to the incident. The Cuban security forces worried that if he could drop leaflets, he could drop bombs, and they weren’t about to give him a second chance. And Basulto was really taunting them. He issued a challenge by radio to the MIG pilots to give to Castro, whom he had already tried to kill before while working for the CIA. He admonished them to “Tell him [Castro] Basulto is coming.” I took Barbara Crosette to task for her inaccurate reporting of this incident in the New York Times and pointed out it was not the first time she had misinformed the public to aid the government.

At the time of the incident, Clinton had been threatening to veto the Helms-Burton Act, an act which, among other provisions, enabled American corporations to sue foreign companies over formerly owned properties. The result? Clinton signed the Helms-Burton act into law. Many at home and abroad considered a step in the wrong direction for America. Guess who acted immediately when the act became law? Freeport McMoRan. This was a clear example of how CIA employees run covert operations to benefit the interests of private corporations. There are many more such examples.

Robert Bryce of the Austin Chronicle has written extensively about Freeport McMoRan’s actions in Indonesia for years. If you’ve never heard of this company, start reading. What they’ve done to West Papua, previously known as Irian Jaya, is devastating. Freeport McMoRan is “infamous for its alleged desecration of Papuan sacred sites, environmental and human rights abuses.” (Source)Freeport turned a lovely mountain, the Grasberg -- called "Copper Mountain" because of its rich copper vein -- into a pit so large it shows on satellite photos. As they mined for copper, they found an incredible bounty of gold. In 1997, the mine produced a million a day in profits. Goodness knows how much it produces now.

This company is linked to a larger chain of events that caused the overthrow of the popular Sukarno and the installation of the murderous Suharto in Indonesia, a move that as a side effect resulted in Indonesia’s bloody invasion of East Timor. Freeport has what can only be described as an incestuous relationship with the security forces in Indonesia in order to protect the mine’s riches from the natives to whom the riches should belong. Instead, shareholders and a select few in the military profit wildly, even as the mining operation is leaching acid into the groundwater serving the island containing the nations of West Papua and Papua New Guinea.

Political activists put a lot of time into learning about Bush, Rumsfeld, Rove, Cheney. But we should look a little further to see whom these people really serve. Freeport is a much bigger player in international politics than most people know. Board members have included Henry Kissinger and Admiral Arleigh Burke, as well as several prominent members of the Rockefeller clan.I understand that a Frontline special on this company is in the works as well. Heads up. These companies are the real government. Until we understand who they are and what they do, we’ll never be able to control them. And we must control them, before they destroy whole portions of our planet

Wednesday, February 20, 2008

Offshore banking

In these days of global markets, individuals and companies may be buying stocks, bonds or derivatives from a seller who is halfway across the world. Clearinghouses like Clearstream keep track of the "paperwork" for the transactions. Banks with accounts in the clearinghouse use a debit and credit system and, at the end of the day, the accounts (minus handling fees, of course) are totaled up. The clearinghouse doesn't actually send money anywhere, it just debits and credits its members' accounts. The money involved is massive. Clearstream handles more than 100 million transactions a year, and claims to have securities on deposit valued at $10 trillion.

It's also an excellent mechanism for laundering drug money or hiding income from the tax collector. Banks are supposed to be subject to local government oversight. But many of Clearstream's members have real or "virtual" subsidiaries in offshore tax havens, where records are secret and investigators can't trace transactions. And Clearstream, which keeps the central records of financial trades, doesn't get even the cursory regulation that applies to offshore banks. On top of that, it deliberately has put in place a system to hide many of its clients' transactions from any authorities who might come looking.

According to former insiders: Clearstream has a double system of accounting, with secret, non-published accounts that banks and big corporations use to make transfers they don't want listed on the official books. Though it is legally limited to dealing with financial institutions, Clearstream gives secret accounts to multinational corporations so they can move stocks and money free from outside scrutiny. Clearstream carried an account for a notoriously criminal Russian bank for several years after the bank had officially "collapsed," and clearinghouse accounts camouflaged the destinations of transfers to Colombian banks.

Clearstream operates a computer program that erases the traces of trades on request from its members. Clearstream was used to try to hide a dubious arms deal between French weapons manufacturers and the Taiwanese military. Many of these charges were first made in a controversial book called "Revelation$," written by Denis Robert, a French journalist, and Ernest Backes, a former top official at the clearinghouse who helped design and install the computer system that facilitated the undisclosed accounts. The book's impact was explosive. Six European judges called it "the black box" of illicit international financial flows.

Top Clearstream officials were fired.
The scandal made headlines in big European newspapers; TV network specials; the French National Assembly's financial crimes committee held a hearing. Luxembourg authorities ordered an investigation and in October 2003, the examining magistrate brought charges against Lussi for money-laundering, tax fraud, forgery, false balance-sheets and other infringements of the financial law. Yet "Revelation$" remains unpublished and relatively unknown in the United States, and this issue is not yet on the agenda of America.

A bearded, heavyset man in his mid-fifties, Backes spoke with me in Neuchatel, Switzerland, where he'd gone to attend a conference on international crime, and explained how he'd started fighting "organized crime in banking." Ernest Backes was born in 1946 in Trier, Germany. (As he likes to joke, "There were two important people born in Trier; the other is Karl Marx.") His father was a Luxembourg metal worker, his mother a German nurse. From 14, he worked on an assembly line to pay for school and joined the Young Catholic Workers. After a job in the Luxembourg civil service, he was hired in 1971 by Clearstream's predecessor Cedel (short for "central delivery" office), set up the year before by a consortium of 66 international banks. Backes helped design and install Cedel's computerized accounting system in the '70s.

The birth of Eurodollars.
Cedel and its main competitor, Brussels-based Euroclear, were started to manage transfers of "eurodollars," U.S. currency kept in banks outside the United States. The Chinese and the Soviets invented Eurodollars in the '50s so they would not have to put their assets in banks where the U.S. government could seize them. But others saw value in eurodollars, and they began to be traded for other currencies. Some banks attracted eurodollars with higher interest than was being paid in America, and U.S. corporations and individuals began using the accounts to avoid laws on domestic banks. The euro money market was born. (By the '90s, the Federal Reserve estimated that about two-thirds of U.S. currency was held abroad as eurodollars.) Cedel and Euroclear eventually expanded into handling transfers of stock titles and other financial instruments. Their clients needed a system that would guarantee the creditworthiness of their trading partners and keep records of the trades. The clearinghouses provided speed, discretion, and a system that didn't make the records of their deals and profits readily accessible to outsiders. Every few months, a list of members' codes was distributed. For transfers, members just entered the codes, and Clearstream handled the deals with no further inquiries.

In 1975, several big Italian and German banks wanted to centralize their accounting and didn't want other members of Cedel to send transfers through their numerous individual branches. The Cedel council of administration - its board of directors - authorized banks with multiple subsidiaries not to put all their accounts on the lists. Backes and Gerard Soisson, then Cedel's general manager, set up a system of non-published accounts.

A bank would send a transfer to the code of the headquarters bank, which would send it on to the non-published account of its subsidiary. The bank would regulate this operation internally. Soisson authorized each non-published account, which would be known only by some insiders, including the auditors and members of the council of administration.

As Cedel's literature to clients explained: "As a general rule, the principal account of each client is published: the existence of the account, as well as its name and number, are published. On demand, and at the discretion of Cedel, the client can open a non-published account. The non-published accounts don't figure in any printed document and their name is not mentioned in any report." Requests for non-published accounts came from some banks that weren't eligible, but Soisson turned them down. By 1980, Backes had become Cedel's No. 3 official, in charge of relations with clients. But he was fired in May 1983. Backes says the reason given for his sacking was an argument with an English banker, a friend of the CEO. "I think I was fired was because I knew too much about the Ambrosiano scandal," Backes says.

Banco Ambrosiano was once the second most important private bank in Italy, with the Vatican as a principal shareholder and loan recipient. The bank laundered drug- and arms-trafficking money for the Italian and American mafias and, in the '80s, channeled Vatican money to the Contras in Nicaragua and Solidarity in Poland. The corrupt managers also siphoned off funds via fictitious banks to personal shell company accounts in Switzerland, the Bahamas, Panama and other offshore havens. Banco Ambrosiano collapsed in 1982 with a deficit of more than $1 billion. (Unknown to many moviegoers, Banco Ambrosiano inspired a subplot of The Godfather Part III.)

Several of those behind the swindle have met untimely ends. Bank chairman Roberto Calvi was found hanged under BlackfriarsBridge in London. Michele Sindona, convicted in 1980 on 65 counts of fraud in the United States, was extradited to Italy in 1984 and sentenced to life in prison; in 1986, he was found dead in his cell, poisoned by cyanide-laced coffee. (Another suspect, Archbishop Paul Marcinkus, the head of the Vatican Bank, now lives in Sun City, Arizona with a Vatican passport; U.S. authorities have ignored a Milan arrest warrant for him.) Just two months after Backes' dismissal in 1983, Soisson, 48 and healthy, was found dead in Corsica, where he'd gone on vacation. Top Cedel officials had the body returned immediately and buried, with no autopsy, announcing that he had died of a heart attack. His family now suspects he was murdered. "If Soisson was murdered, it was also related to what he knew about Ambrosiano," Backes says. "When Soisson died, the Ambrosiano affair wasn't yet known as a scandal. [After it was revealed] I realized that Soisson and I had been at the crossroads. We moved all those transactions known later in the scandal to Lima and other branches. Nobody even knew there was a Banco Ambrosiano branch in Lima and other South American countries."

An Italian judge recently reopened the Calvi case, and Backes was asked to collaborate in the inquiry. He said, "I was told that the questions around Soisson's death would be a part of the new investigation."

After leaving Cedel, Backes got a job in the Luxembourg stock market, and later became manager of a butchers' cooperative. But he kept friends inside the clearinghouse and began to collect information and records about Cedel's operations.

With Soisson out of the way, there was nothing to stop the abuse of the system. Whereas Soisson had refused numerous requests to open non-published accounts (from such institutions as Chase Manhattan in New York, Chemical Bank of London and numerous subsidiaries of Citibank), Cedel opened hundreds of non-published accounts in total irregularity-especially after the arrival of CEO Andre Lussi in 1990. No longer were they just sub-accounts of officially listed accounts, Backes charges. Some were for banks that weren't subsidiaries or even official members of Cedel.

At the start of 1995, Cedel had more than 2,200 published accounts. But in reality, according to documents obtained by Backes, Cedel that year managed more than 4,200 accounts.

"No accounts are secret," insists spokesperson Graham Cope. "We are controlled by the local authorities ... who have access to information on all accounts. The term 'secret' is misused again and again. Our customers choose to have unpublished accounts, which simply mean-like a telephone number-they choose not to display the name and number in our publications. Customers often have many unpublished accounts, which they use for their own internal management purposes to ensure there is no confusion between their accounts.

" But Backes thinks otherwise. "I discovered an increasing number of unpublished accounts," he says. "There were more unpublished than published accounts, and a [large] proportion were not sub-accounts of a principal account, which is what the system was supposedly for. The owners of these accounts were not inscribed on the official list of the clients of the firm."

Secret Accounts
Among the major companies with secret accounts, Backes discovered the Shell Petroleum Group and the Dutch agricultural multinational Unilever, one of whose accounts was associated with Goldman Sachs. On the French TV broadcast "Les dissimulateurs" ("The Deceivers") in March 2000, Clearstream President Lussi simply denied the accounts existed. "Only banks and brokers are eligible for membership," he said, "as it has always been the case. No private company accounts, no commercial or industrial companies." But his own spokesman contradicts this claim. "Customers of Clearstream can be banks or, exceptionally, corporate clients who have their own treasury departments the size of banks," Cope wrote in an e-mail to me, "We cannot accept CEOs of multinationals or terrorists and have strict account-opening procedures to prevent such problems."

Clearstream was formed in 1999 out of the merger of Cedel and the compensation company of Deustche Borse (the German stock exchange). By 2000, according to Backes, Clearstream managed about 15,000 accounts (of which half were non-published) for 2,500 clients in 105 countries; most of the investment companies, banks and their subsidiaries are from Western Europe and the United States. Most of the new non-published accounts were in offshore tax havens. The banks with the most non-published accounts are Banque Internationale de Luxembourg (309), Citibank (271) and Barclays (200).

Backes found numerous discrepancies in the lists he obtained of the secret accounts. For example, code No. 70287 on the published list belongs to Citibank NA-Colombia AC in Nassau, and code No. 70292 is that of the Banco Internacional de Colombia Nassau Ltd. But on the non-published list, the numbers both belong to Banco Internacional de Colombia in Bogota. There's no mention of Citibank. Based on the published list, members may think they are dealing with two banks in the Bahamas, one of which is a subsidiary of Citibank, but anything sent to these establishments goes directly to the country of cocaine cartels. On the April 2000 Clearstream list, there are 37 Colombian accounts, of which only three are published. The spokesman for Citigroup in New York, declined repeated requests for comment. Cope declined to talk about any individual customers or accounts, citing Luxembourg banking secrecy laws.)

Clearstream's dealings with Russian banks are another area of concern.
Menatep Bank, which had been bought in a rigged auction of Soviet assets and has been linked to numerous international scams, opened its Cedel account (No. 81738) on May 15, 1997, after Lussi visited the bank's president in Moscow and invited him to use the system. It was a non-published account that didn't correspond to any published account, a breach of Clearstream's rules. Menatep further violated the rules because many transfers were of cash, not for settlement of securities. "For the three months in 1997 for which I hold microfiches," Backes says, "only cash transfers were channeled through the Menatep account."

"There were a lot of transfers between Menatep and the Bank of New York," Backes adds. Natasha Gurfinkel Kagalovsky, a former Bank of New York official and the wife of a Menatep vice president, was accused of helping launder at least $7 billion from Russia. U.S. investigators have attempted to find out if some of the laundered money originated with Menatep, which they believed had looted Russian assets. (The Justice Department declined to comment on the investigation.)

Mikhail Khodorkovsky
Menatep bank was founded by Russian "oligarch" Mikhail Khodorkovsky, now the richest man in Russia, reportedly worth some $10 billion. Add: Khodorkovsky has been in a Russian jail since October on myriad charges of fraud and tax evasion. On, Nov. 26, 2003, Backes and another ex-banker, Swiss citizen Andre Strebel, filed a criminal complaint with the Swiss attorney general against Khodorkovsky and his colleagues Platon Lebedev, and Alexei Golubovich, accusing them of money laundering and supporting a criminal organization. The Yukos press office did not respond to requests for comments on the complaint.

The former bankers requested the Swiss officials to open an investigation into the charges and to search the records of the Swiss offices of Menatep SA, Menatep Finances SA and Valmet (which set up offshore companies and bank accounts) and of Bank Leu in Geneva related to investigate claims of fraud against the Russian company Avisma and money laundering by Menatep in Switzerland.

The complaint was filed with Attorney General Valentin Roschacher in Bern; the Swiss anti-money laundering law allows such private actions. Strebel, who formerly worked for Union Bank of Switzerland (UBS), The Arab Bank, Societe Generale and National Westminster Bank, all in Switzerland, and Backes brought the action through their new Institute for Commercial Research, in Saarbrucken, Germany.

The complaint alleges that Khodorkovsky, Lebedev, and Golubovich are or were owners in Switzerland of the Swiss companies Menatep SA, Freiburg, Menatep Finances SA, Geneva and Valmet SA, Geneva. It claims that since its creation, "the Bank Menatep SA has been mixed with the affairs of members of the Russian oligarchy and criminal organizations, such as Mikhail Khodorkovsky and Alexander Konanykhine. (Konanykhine got asylum in the U.S. in 1999, was ordered deported last fall to face charges in Russia, then had the order stayed and will have a new asylim hearing. American and Russian law enforcement officials believe he was in charge of moving billions of dollars out of Russia for the KGB; Konanykhin denies it.) It is also related to another mafia figure, Semyon Mogilvich, called the godfather of organized crime in Russia."

The complaint cites the Avisma case which it says involved fraud and money laundering whereby tens of millions of dollars were diverted from the Russian company, a manufacturer of titanium, a substance used in airplanes. In the mid-90s, Menatep was the majority owner of Avisma.

The document says that the scheme involved selling titanium at a low price to TMC, a shell company set up by Valmet, which resold the product at a higher price on the international market. This practice, called transfer pricing, is widely used internationally to cheat tax authorities and minority shareholders. The document stated, "Barclays Bank opened secret accounts for TMC, Valmet and other connected companies in tax havens such as the Isle of Man, Ireland, Cyprus and Switzerland." It noted that a Valmet subsidiary in Switzerland was used as "a nominee owner" of the raked-off profits while the shareholders of Bank Menatep SA were designated as its "beneficial owner". In offshore scams, a fake or "nominee" owner is listed on corporate papers to hide the identities of the "beneficial" or real owners.

Finally, it cites the testimony of Elena Collongues-Popova "that more than $300 million were transferred in 1998 by several companies related to Alexei Golubovich, director of Menatep SA, mainly to accounts in Switzerland at the Bank Leu, Geneva."

Detailing a case of apparent insider trading, the complaint looks at a Bank Leu account in the name of Solin AG which Collongues-Popova says she set up for Golubovich. It notes that the account shows credits of $9,511,912 from Creditanstalt Bank and $22,978,000 from CIS Emerging Growth fund, both on December 2, 1997, and transfers of the same total, $15,956,735, to Transworld Holding Comp. Ltd. and $16,240,00 to Hannaville Ltd., the very next day. It notes that all were offshore companies controlled by Khodorkovsky, Lebedev, and Golubovich and it says that "securities purchase agreements" indicate the transfers from Hannaville and Transworld were for purchase of Avisma stocks that the three owners were actually buying from themselves, with money paid to the Menatep account at the National Republic Bank of New York. If proven, the transactions, according to Swiss law experts could be seen as money laundering.

The complaint remarks that "the American billionaire Kenneth Dart and two other American citizens on Sept. 17, 1997, bought the stocks of Avisma for the sum of $85,640,000 of which $74 million was then transferred to the Leu Bank on the accounts managed by Elena Collongues-Popova." It would appear that the December trades could have affected the value of the Americans' stocks. Collongues-Popova is a key witness in the case against Menatep and Yukos.

Strebel said the suit was filed because, "This activity by Lebedev and Khodorkovsky must be stopped. There are thousands of Lebedevs and Khodorkovskys. If we stop them, maybe the other 900 Khodorkovskys will think a little about it. If we don't start with one or two or three, there is no reason to do anything."

Why Khodorkovsky? As Strebel explained, "he is one of the significant examples of this criminal activity, because he was able to make $8 billion in three years."
Strebel said he expected that a Swiss government seizure of records from Menatep and the related companies would show that "there was illegal activity, money laundering and tax evasion."

Even though Menatep officially failed in 1998, it oddly remained on the non-published list of Clearstream accounts for 2000. (Clearstream also lists 36 other Russian accounts, more non-published than published.) Kathleen Hawk, a U.S. spokeswoman for Clearstream, said that was "a mistake." But Cope contradicted her: "Closed accounts remain on our files and systems even though they're non-active because we don't reuse numbers. We keep the records for many years so there is no future confusion from reused numbers." But Backes explains that there's no systematic rule about delisting canceled accounts. He found that "some that didn't exist any longer were on the list. Others were delisted when they didn't exist. And still other accounts were delisted, when we knew they existed, though the numbers no longer appeared."

Regis Hempel, a computer programmer who worked for Clearstream, says some dormant accounts were activated for special transactions. "Such an account can be opened in the morning, used for a transaction, and closed to appear as delisted in the evening," Backes explains. "Only the guy who gave the order to open it in the morning knows about the transaction. An investigator or auditor would not look at such an account because it doesn't appear on the accounts list."

Financial Records Deleted
Hempel also claims that Clearstream erased the records of some transfers. In testimony before the French National Assembly's financial crimes committee, he explained that a computer system had been developed to wipe out the traces of transactions in non-published accounts. When a bank wanted to carry out such a transaction, Hempel testified, it simply contacted a Cedel staff person. "We made a 'hard coding' in the program and corrected the instruction that was going to come," he explained. "[An instruction could be] a purchase, a sale, a movement of funds or a security. We made it disappear, or we put it on another account. Then, when all was finished, we put back the old program and removed the exception. It was not seen or known."

He said such requests came every two or three days. Hempel volunteered to help Luxembourg prosecutor Carlos Zeyen investigate Clearstream. But Hempel said local authorities seemed more interested in blocking an investigation than in exercising oversight. Zeyen responded that the inquiry into Hempel's charges hadn't produced any evidence and dismissed claims that Hempel had been prevented from seeing relevant files as "rubbish."

Luxembourg sources said Zeyen was looking into how Menatep used the system and also into improper ways Andre Lussi might have gained personally. A French judge took depositions about Menatep corruption. According to Luxembourg journalist Marc Gerges, writing in the local newspaper Land, the FBI and its German counterpart, the BKA, were interested in what might be revealed about the role of Menatep in the diversion of $4.8 billion in IMF funds lent to Russia in 1998. Gerges said investigators were also looking to implicate Lussi in suspected financial swindles conducted through holding companies and trusts in the offshore financial havens of Guernsey or Jersey. (Lussi could not be located; his attorney did not respond to phone and e-mail requests for comment.) Zeyen, at some stage, was taken off the case. Backes thinks this happened in September 2001, because that is when Zeyen cut his contacts with him. He thinks Zeyen wanted to carry out the investigation but "was put under tremendous pressure by Luxembourg banks he had formerly served as a top company lawyer. His law office had set up Cedel structures in other financial centers, for example the Channel Islands." He said Swiss authorities had told him that before he became a magistrate, Zeyen has set up Andre Lussi's connections in the Channel Islands. "The Jersey [Channel Islands] link appears to lead to what our new Institute in Saarbrucken detected in early 2003: the existence of a "black box" of Cedel (now Clearstream) in Geneva," he said. )

Backes explained that a company called Cedel International had been inscribed in the Swiss register of commerce but not included in the books of the mother company, Cedel International in Luxembourg. He commented, "This non-consolidated 'branch,' whose president is Robert Douglass of New York, the former private secretary of Governor Nelson Rockefeller, is now vice chairman of the Chase Manhattan Corporation [now J.P. Morgan Chase], had apparently not raised too many questions for Swiss federal magistrates." Douglass, vice chairman of the Chase Manhattan Corporation , is an attorney at the New York law firm Milbank, Tweed, Hadley & McCloy, with offices at 1 Chase Manhattan Plaza. Milbank, Tweed is the law firm for Chase, the bank founded by the Rockefellers. Douglass declined to comment. (The same Milbank Tweed, for its client Citibank, worked with the Cayman Islands agent Maples and Calder to set up the "Delta Corp" to do phony commodity swaps and disguise Citibank loans to Enron as trades. Maples and Calder also set up the Cayman Islands shell company that helped the owners of the Italian conglomerate Parmalat embezzle billions of dollars and swindle investors.)

The Swiss federal prosecutor told him that this Geneva "branch" served "only for tax evasion!" Backes called that "institutionalized tax evasion at highest level of world finance" and noted that tax evasion was even "more or less expressed in the objectives of the company as filed in the Swiss register of commerce." However, the prosecutor reminded him that tax evasion is not a crime in Switzerland.

Backes noted, "The 'branch' has been resold to another Luxembourg holding company, with the people in the backyard remaining mostly the same."

Local officials' attempts to defend financial secrecy are not surprising. Luxembourg's multi-billion-dollar financial sector brings in 35 percent of GNP and gives the inhabitants a per capita income of more than $44,000, the highest in the world. (Next on the list are Liechtenstein, Switzerland and Bermuda, all money-laundering centers, with the United States fifth.) For years, local officials have refused to provide bank information to other countries. But instead of cleaning up Clearstream, Luxembourg authorities turned their sights on Backes. Using a March 2001 judicial order based on a complaint made by Lussi before he was fired, police raided Backes' house in search of records. He says they seized unimportant documents and diskettes; he keeps the microfiches outside the country as "life insurance." "The raid was organized to impress [others] not to repeat what this dangerous guy Ernest Backes has done," he says. "Those who know me well know I am not at all impressed by such a raid." The publication of "Revelation$" brought forward others with stories about how Cedel/Clearstream had facilitated corruption. Joel Bucher, former deputy general director of the Taiwan branch of the bank Societe Generale, wrote Zeyen volunteering to testify that SG used the clearinghouse to hide bribes and to launder money. In his deposition for Zeyen, Bucher said he had worked for the bank for 20 years, but quit in 1995 out of disgust at its rampant money-laundering. He said much of that occurred though a Luxembourg affiliate working through non-published accounts at Cedel. "Cedel didn't ask any questions about the origin of funds that would have appeared suspect to any beginner," he told "Revelation$" coaouthor Denis Robert. "[As a result] we directed our clientele with funds of doubtful origin to Luxembourg."

In the early '90s, Bucher contends, Cedel was used to launder $350 million in illegal "commissions" on a contract for the sale by Thomson-CSF, a French government arms company, of six French frigates to Taiwan. He said that the money, handled by an SG subsidiary, was paid as a registered securities transfer to a "nominee"-a stand-in for the real beneficiary-and that Thomson (now known as Thales) didn't appear in the transaction except in the Cedel archives. He said SG used two non-published Cedel accounts.

Another Murder
The kickbacks were exposed after the 1993 murder of a naval captain named Yin Ching-feng, who had written a critical report on the purchase and its inflated $2.8 billion price. Bucher told Taipei authorities that a third of the kickbacks went to Taiwanese generals and politicians, while the rest was pocketed by French officials. Taiwan courts sentenced 13 military officers and 15 arms dealers to between eight months and life in prison for bribery and leaking military secrets.

Bucher testified before a French court examining French complicity. "SG is very much implicated," he told me. "Taipei police searches found many records of transfers of commissions" relating to the frigates and also to the sale of French Mirage fighter planes. In New York, SG spokesman Jim Galvin denied that the bank had any involvement in the arms deal.

When Bucher told the Luxembourg prosecutor how Cedel non-published accounts had been used, he was informed, "Yes, that may have been money laundering back in 1991, but money-laundering was not a crime in Luxembourg until 1992." There has been no legal action by the Luxembourg prosecutor based on any of the investigations of his office. However, Clearstream Banking, Lussi and others filed ten lawsuits for libel in Luxembourg, France, Belgium and Switzerland against Backes, Robert and their publisher, Les Arenes. The plaintiffs lost every case that went to trial. With no sense of irony, the liquidator of Russia's notorious Menatep Bank also sued the authors and publishers for damage to its reputation. (Khodorkovsky, the Russian oligarch who controlled Menatep, did not respond to a request for comment before he was jailed.)

Ernest Backes' knowledge and records make him a valuable investigative partner, and he cooperates with numerous authorities, though he prefers not to say in which countries. But his agenda is larger than that. Backes is lobbying for oversight by an international public body. Unlike banks, Clearstream has no effective outside surveillance. It is audited by KPMG, one of the global accounting firms, which either has been ignorant of or has overlooked the non-published accounts system. KPMG announced it found "no evidence" to support the allegations made in "Revelation$," though its report was not made public.

Bank secrecy is alive and well not only in Luxembourg but 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, in addition to Luxembourg, Austria, Liechtenstein, Monaco, Cyprus, and the British Channel Islands-with strong links to London. Dubai and Israel are important in the Middle East.

Global History of Money Laundering
The story of money laundering starts at least as early as the 1930s, in Switzerland. Back 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 . . . " Albertin 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."

Albertin continued, "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 Tremoille in the aristocratic district of the Champs-Elysees, 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 Levitan. 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. Sapetre, 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. 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 citizens 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. Thesame 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 made sure that their customers were who they said they were and that banks reported 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," said 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.

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) said 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 said 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 accepts 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 said it's legal, so it's legal." The conceit apparently also persuaded the SEC.

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 (clothing & textile workers) and AFSCME (government workers) 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' 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 disguise true profits. When I was in Moscow, an employee for a major American company told me how its auto rental subsidiary booked its cars to Moscow 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. A major reason is the offshore bank and corporate secrecy system. Bank secrecy 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. Special Bank Departments 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 major 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 (and 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. The Tax Justice Network ( was organized in 2003, largely by European NGO's seeking to end massive tax cheating by corporations and the rich. In America, however, there are only a few groups that lobby to challenge the banks.One is the Nader-connected group Citizen Works (

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 private wealth 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 strategy was "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. Key Republican officials have watered down 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.

In the U.S., the "names" are familiar. While the current President Bush was on its board, Harken Energy of Texas set up an offshore tax evasion scheme, and when Vice-President Cheney ran Halliburton, it increased its offshore subsidiaries from nine to at least forty-four