'After Dirty Air, Dirty Money' | The Nation


'After Dirty Air, Dirty Money'

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

Research support provided by the Investigative Fund of the Nation Institute.

About the Author

Lucy Komisar
Lucy Komisar is a New York journalist who writes on international affairs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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