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'After Dirty Air, Dirty Money' | The Nation

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'After Dirty Air, Dirty Money'

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When Treasury Secretary Paul O'Neill said after the February meeting of the top industrialized countries, known as the G-7, that a European initiative to clamp down on money laundering "is not about dictating to any country what should be the appropriate level of tax rates," it was clear that the game was over. For about eighteen months the United States had signaled that it was serious about joining the Europeans in modest efforts to deal with the tide of illicit money that washes around the world. Now, the Bush Administration was saying that it was backing off the US commitment to reform the offshore banking system. Instead, the "tough on crime" Republicans would stand shoulder to shoulder with the shady characters in Nauru, Aruba, Liechtenstein and elsewhere who offer state-of-the-art financial services for crooks.

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.

Also by the Author

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
crash.

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.

The immediate issue was an initiative by the Organization for Economic Cooperation and Development to stop tax evaders from hiding money in offshore havens. The OECD last July named thirty-five jurisdictions that offered foreigners secrecy, low or no taxes and protection from inquiries by home-country legal and tax authorities. It said it would take "defensive measures" against countries that didn't change those policies, and it began negotiating with such worried targets as the Cayman Islands.

In April, O'Neill rebuffed pressure from France, Japan and Italy to reiterate US support for the initiative. Then in May, without prior consultations or negotiations with allies (à la Kyoto), he announced in a newspaper Op-Ed that the OECD demands were "too broad" and withdrew US support. French Minister of Finance Laurent Fabius publicly expressed his concern, saying that "until now, the United States and France were at the forefront of this fight." Le Monde editorialized, "After dirty air, dirty money."

The Bush Administration's actions represent a continuation of policies--interrupted only by the brief Clinton moves--that go back to the Reagan era, and that in the past have been defended as based on US opposition to impeding the free flow of capital or decreasing other countries' reliance on the dollar. "Treasury was looking to free up economies, not regulate them," says Jonathan Winer, a former high-level crime-policy official in the Clinton State Department.

Others take a darker view of US motives. Jack Blum, a Washington lawyer who co-wrote a 1998 report for the United Nations on the offshore phenomenon, says US policy has been influenced by the fact that "the hot money from the rest of world [fueled] one of the greatest booms in the stock market" and the fact that big brokerage firms "find it profitable to run private banking operations for rich people all over the world who don't want to pay taxes." He estimates that at least $70 billion in US taxes is evaded annually through offshore accounts. That is just above the $65 billion in the projected federal budget for education, training, employment and social services. Elsewhere, Oxfam International calculates that money sucked out of developing countries to tax havens is $50 billion a year, nearly the size of the $57 billion annual global aid budget.

Says Joseph Stiglitz, former chief economist of the World Bank, "You ask why, if you believe there's an important role for a regulated banking system, do you allow a nonregulated banking system to continue? The answer is, 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."

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