'After Dirty Air, Dirty Money' | The Nation


'After Dirty Air, Dirty Money'

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

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.

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

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

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

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

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

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

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

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