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."
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.)
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.
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 (www.taxjustice.net) 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 (ww.citizenworks.org).
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
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