'Money (Tax Free) is like Manure'
Its no good unless youspread it around
The Island of Nauru in theSouth Pacific is running a close second to the Cayman Islandsas a Tax Haven
by Kelly Patricia O'Meara - INSIGHT
The recent onslaught against 'Tax Havens'is not just targeted to the Cayman Islands. In this report, thewriter reveals - as it is already known - the G7 clan is not atall happy that their citizens are welcome to the Cayman Islands,Caribbean and other Tax Havens to "manage" their income.
While all of this is going on - including a highly publicizedvisit by US Attorney Janet Reno to the Caribbean, where she isgetting a 'warm' time by Caribbean leaders for the United States"bullying" to try and get Caribbean states like Barbados,Antigua and others to cooperate by opening up the books of banksand trust companies' depositors/investors (see separate story)- the Island of Nauru, located in the South Pacific, has becomethe world's second-largest tax haven just behind the Cayman Islands.Tiny Nauru has only 10,000 residents yet it also is home to 400offshore banks - all registered at a single mailbox.
As the Cayman Islands continue to struggle to find its true identity... and how it will relate to its indigenous and imported population,the rest of the world is perfecting. and maintaining a Tax- FreeFinancial Planning Centre which serves as a model for other emergingTax Havens, the rest of the world is taking our proven successstory and creating their own.
This another of series of serious articles dealing with the impendingthreat by the OECD, the G7 and other world powers to close downTax Havens - including the Cayman Islands:
In the hugely popular theatrical production and film, Hello, Dolly!,the title character Dolly Levi proclaims: "Money is likemanure: It isn't any good unless you spread it around." Whilethe writers of the critically acclaimed musical were making amuch more poignant point, most would be hard-pressed to come upwith a better simile for why and how criminals launder money.
The illegal-drug business, for example - the world's second mostprofitable enterprise - is reported to take in an estimated $500billion to $1 trillion in annual sales. That may sound like goodbusiness, but unfortunately all that take is evidence of criminalityunless it can be made to seem that it has come from some legitimatesource. To make those huge sums disappear requires some supersophisticated sleight of hand called "money laundering."
The U.S. Customs Service, an arm of the Department of the Treasury,provides a lengthy definition of money laundering as "theprocess whereby proceeds, reasonably believed to have been derivedfrom criminal activity, are transported, transferred, transformed,converted or intermingled with legitimate funds for the purposeof concealing or disguising the true nature, source, disposition,movement or ownership of those proceeds. The goal of the money-laundering process is to make funds derived from, or associatedwith, illicit activity appear legitimate."
Others have narrowed the definition to "the process of disguisingand concealing the profits from an illegal activity so that itappears to have originated from a legitimate source." Thedirty money has to be laundered, or cleaned, because so much cashcould be traced to the kingpins or seized and used as part ofan investigation. The question then is how does a trillion dollarsin sales of illegal drugs or other criminal enterprises get movedthrough the banking system without setting off alarms? Much tothe chagrin of the U.S. government and most of the internationalcommunity, the methods are surprisingly simple.
Because the mobster Al Capone used investments in coin-operatedlaundromats to disguise or "wash" the millions he madefrom bootlegging and other illegal enterprises, he most oftenis credited with coining the term "money laundering."But laundering by other names has been practiced a long time.In medieval times, for example, when the Roman Catholic Churchbanned usury (the practice of lending money at interest) as botha crime and a mortal sin, merchants devised methods that stillare in practice to get around the usury laws.
Indeed, a desire for financial privacy often causes legitimatebusinesses such as traders in stocks and bonds, commodities andcurrencies to make transactions opaque. So do international corporations,financial institutions and governments
How does it work?
Money laundering through cooperative banking institutions is athree-step process: placement, layering and integration. The intentis to make sure that the origin and ownership of the money isconcealed while maintaining control. Placement, the first step,is the most vulnerable. The aim is to take a large amount of cashand move it without trace into the financial system, retail economy,or a safe haven outside the country. Because this is the pointat which the booty still may be in criminal hands, the first steppresents the greatest risk of detection.
Layering, the second step in the process, is to dissociate orscreen the monies being moved by a banking or other financialinstitution through a series of complex transactions. This usuallyis accomplished with a series of electronic wire transfers thattake only seconds to move in and out of shell accounts in internationalbanks around the world. Integration is the final step, in whichthe money, now disguised and dissociated from its origin, is movedinto the legitimate business and financial system.
Sounds easy enough, but is it? The chance of success is determinedby the method of laundering, and there are many. Certainly anyoneconsidering taking a briefcase filled with $1 million in $100bills into a bank for deposit may want to rethink the plan. Itis physically impossible to get that much cash into an inconspicuousbriefcase because $1 million in $100 bills stacked on top of oneanother would stand 5 feet high and weigh more than 20 pounds.Cash movement becomes even more absurd when smaller denominationsare involved - especially when one considers that it takes 50,000twenties, weighing more than 100 pounds, to make $1 million.
Those familiar with money laundering tell Insight it is a realfeat to get $1 million in cash even into two large suitcases.Any bank not in on the scheme likely will find it odd for anyoneto arrive in the lobby with heavy suitcases full of cash. Andtaking such a reckless chance is not necessary.
In the simplest play, money might be moved from the country oforigin as cash in hand-held duffels or suitcases. But physicallysmuggling out $500 billion a year may be seen as next to impossiblewhen one realizes that the weight of that much cash exceeds thatof the drugs smuggled. Rather than physically smuggling the currencyout of the country, launderers might create business shells anddeposit the money to the accounts of nonexistent businesses. Thereis one difficulty. Banks are required to file a Cash TransactionReport, or CTR, on any cash deposit greater than $10,000.
To get around the CTR reporting requirements, launderers with$10,000 or more might make deposits in smaller amounts every day.Even in this case it is unlikely that any bank doing businessin the community likely will be fooled into moving very largesums for nonexistent companies over long periods of time withoutbeing a silent accomplice.
If the multideposit scenario doesn't work, the drug traffickersset up an offshore shell company - a business that exists onlyon paper or in cyberspace. It is made to appear to be operatingas a legitimate business to justify the large cash deposits but,in fact, it has no assets and the only business taking place isthe movement of money.
The Cayman Islands, the British Virgin Islands and Panama arefavorite spots for setting up offshore shell corporations. Thesecorporate financial havens are licensed to conduct business onlyoutside the country of incorporation. They are free from encumberingtaxes or regulations and protected by corporate secrecy laws.
Another complicated but highly effective method is for a laundererto own a legitimate cash-intensive business such as a chain ofpizza parlors. Pizzas are sold on a cash basis, customers regularlydine at the establishment and deliveries of goods are coming inand orders going out. General retail businesses such as restaurantsand grocery and liquor stores are not required to report cashdeposits on CTRs.
Financial institutions might be hard-pressed to prove that sucha business sold only $10,000 in pizzas yet made deposits of $15,000.Multiply this amount into a chain of pizza parlors, liquor storesor food wholesalers or retailers and huge sums might be launderedwithout detection. The same might be true with any cash-intensivebusiness.
Another industry that is exempt from the CTRs is the securitiesindustry. For instance, money-market accounts have been availablesince the early 1980s and can accept cash deposits that are notsubject to the CTR $10,000 filing requirements. And these methodsare just the tip of the iceberg. There literally are scores ofothers, some very complex. They are sufficient together to facilitatelaundering hundreds of billions. And, although illegal drug traffickingis said by authorities to be responsible for the lion's shareof money laundering, other tax cheats may launder even more.
Most recently the Bank of New York, or BONY, one of the oldestcommercial banks in the U.S. and founded by Alexander Hamilton,the first secretary of the Treasury, became embroiled in an internationalinvestigation involving allegations that Russian-based organizedcrime, businessmen and government officials laundered in excessof $12 billion through the bank, including funds diverted fromloans by the International Monetary Fund, or IMF.
Lucy Edwards, a former vice president of the bank and her Russian-born husband, Peter Berlin, have pleaded guilty to conspiracyto commit money laundering and aiding and abetting Russian banksin conducting unlawful and unlicensed banking operations. Theyare cooperating with federal investigators.
But in testimony before the House Committee on Banking and FinancialServices, Bank of New York Chairman Thomas A. Renyi said thatdespite the guilty pleas of Edwards and Berlin, "no chargeshave been filed against the Bank of New York. No relevant authoritieshave asserted that the Bank of New York was engaged in money launderingor violated any other law. Neither the bank nor any of its customershave lost any money as a result of the activities in question."
Renyi told the committee that the bank made "$500,000 perannum" on the then-estimated $7.5 billion that flowed throughit. Renyi further explained that the account "was not interest-bearing."However, a review by Insight of BONY's Securities and ExchangeCommission reports suggests otherwise. In fact, the only categorythat reaped huge increases was the foreign deposits interest-bearingaccount.
Insight has just obtained from the Securities and Exchange Commissionkey documents filed by the Bank of New York showing that between1993 and 1999, when the Russian money laundering was active, averageforeign interest-bearing deposits at BONY increased from $7.9billion to $20.2 billion - the only category to show substantialperformance - and Renyi's compensation rose from $1.23 millionto $7.3 million. According to Cary Giacalone, a spokesman forBONY, Renyi's huge bonuses are the result of many things. "It'sbottom- line performance," says Giacalone, "the overallperformance of the bank." Others also were well compensated.During this time, however, only foreign-interest-bearing depositsshowed huge profits.
The BONY investigation is but one in a long line of internationalmoney-laundering scandals, including the Iran/Contra affair intendedto supply weapons to the Contras in Nicaragua through a complexmoney- laundering scheme that included diverting U.S. State Departmentfunds authorized for humanitarian assistance. And, although nearlya decade has passed, few have forgotten the devastating blow tothe financial industry when the Bank for Credit and Commerce International,or BCCI, collapsed in 1991 after revelation of the largest money-
laundering scheme to date.
What these laundering schemes have in common is that someone ina position of power within an international financial institutionfacilitated the crime.
Rachel Ehrenfeld, director of the New York-based Center for theStudy of Corruption and author of Evil Money: Encounters Alongthe Money Trail and Narco-Terrorism, tells Insight that "thereis willful blindness within the banking system." As she explains:"When you look into money laundering you have to follow themoney. The money usually leads to drugs and the drugs lead tocorruption. That's just the way it is.
In the case of the Bank of New York, this is enormous theft ofgovernment loans and money that was stolen from the Russian people.The issue here is where were all the government and internationallending agencies that have oversight. They let this money getaway. It is a difficult issue that comes down to politics. Thereare other political priorities that we mere mortals don't understand."
Rep. Jim Leach of Iowa, chairman of the House Banking and FinancialServices Committee, sees the Bank of New York scandal as a seriousblow to the future of democracy in Russia and held several hearingson the matter during the last year. He tells Insight, "Ifyou take the circumstances surrounding the Bank of New York, we'renot talking about money laundering as a problem outside of ournational interest. We have a vested interest in the Russian peopleand their successful transition to democracy - a transition thatisn't paralyzed by capital flight and money laundering."
Leach says, "The U.S. has a banking system that is surprisinglyhonest. We have laws that are very precise when it comes to moneylaundering. People don't have to bribe a bank officer to get aloan and if they're late on a payment they don't get their kneesshot off."
True, say critics, but Americans also are accustomed to the rightto privacy - including banking privacy. And as the United Statescontinues to lose its nearly 30 years' war on drugs, new and evermore intrusive laws are being rammed through Congress to pickup where the previous failed policies left off. Legislation todate includes the Bank Secrecy Act of 1970, the ComprehensiveCrime Control Act of 1984, the Money Laundering Control Act of1986, the Anti-Drug Abuse Act of 1988, the Annunzio-Wylie Anti-MoneyLaundering Act of 1992 and the Money Laundering Suppression Actof 1994.
On the International front, diplomatic efforts include the U.N.Convention Against Illicit Traffic in Narcotic Drugs and PsychotropicSubstances of 1988; the Basle Committee on Banking Regulationsand Supervisory Practices Statement of Principles of 1988; theFinancial Task Force (FATF) Report of 1990 (including 40 recommendationsfor action); the Council of Europe Convention on Laundering, Search,Seizure and Confiscation of Proceeds of Crime of 1990; the 61recommendations of the Caribbean Drug Money Laundering Conferenceof 1990; the agreement on legislation by the European Community'sMinisters for Economy and Finance of 1990; and the Organizationof American States Model Regulations on Crimes Related to Launderingof Property and Proceeds Related to Drug Trafficking of 1992.
Given that these initiatives are only part of the list, it isn'tdifficult to understand why so many are concerned that antilaunderinglegislation is becoming excessive. Last year's hotly debated andquickly defeated "Know Your Customer" proposal, againstwhich Insight took the lead, was regarded by most Americans asa further intrusion into their personal financial affairs. AlthoughAmericans have made it clear that they don't want Big Brotherspying on their banking habits, several new bank-snooping measuresare pending in Congress.
"I think a lot of the mania about money laundering is createdin the minds of Internal Revenue Service, or IRS, bureaucratsand Treasury officials who want to invade personal privacy,"says Larry Abraham, editor of Insider Report, a monthly newsletterdealing with economics and investments. "The drug trade,"continues Abraham, who also is an investor doing business worldwide,"is cited as the basis for the laundering, but what is thereal motive?
The U.S. attitude is that any time business is done in dollarswe are the primary jurisdiction and you have to comply with ourlaws. Panama requires three times more information to open a checkingaccount than the United States. Their laws are draconian. Lawenforcement defines money laundering as taking huge amounts ofmoney and running it through systems that aren't traceable. Whereis the victim? Is it the IRS and the Drug Enforcement Agency?Is our loss of banking privacy really a result of the war on drugsor the war on our right to be let alone?"
Abraham may be on to something. Although the Virginia-based FinancialCrimes Enforcement Network, or FinCen, was set up in 1990 to tracklaundering with the help of computerized data from nearly everyfederal agency, last month the Clinton-Gore administration announcedthe International Counter Money Laundering Act of 2000. The newproposal would "require banks or other financial institutionsto keep records of transactions and make them available to thegovernment on request; require financial institutions to ascertainthe foreign beneficial owners of accounts in the United Stateswhere they are different from the owners of record; require identificationof those who use a bank's corresponding accounts, as well as itsso- called payable-through accounts, which allow customers ofa foreign bank to conduct banking operations through a U.S. bankas if they were its own customers; and finally, where necessaryin extreme cases, the Secretary would have the authority to imposeconditions upon, or prohibit outright, the opening or maintainingof correspondent or payable-through accounts."
In other words, the administration is proposing is not only greatercontrol over personal financial records in the United States butalso those of any nation that is suspected of participating inmoney laundering. Chairman Leach apparently agrees with this strategy.
"Money laundering," explains Leach, "has to bedealt with on an international basis with comparable regulations.But it's difficult to get foreign banks to work within our bankinglaws. The underlying economic problem is that it's hard to provideincentives that will beat what they make on illegal activities.It is also very difficult to isolate suspicious activity withbillions of transactions going through the system every minuteof the day. Generally we hold financial institutions accountable,but it isn't always the case that they are aware of what may behappening."
In fairness, however, an argument can be made about challengingthe offshore banking and other corporations whose secrecy lawsprotect criminals who hide the profits of their illegal activities.The Island of Nauru, located in the South Pacific, is the world'ssecond-largest tax haven just behind the Cayman Islands. TinyNauru has only 10,000 residents yet it also is home to 400 offshorebanks - all registered at a single mailbox. In this instance,even privacy advocates have difficulty believing that nothingmore than simple customer service is involved.
Although the Bank of New York appeared to be the bank of choicefor the money-laundering needs of Russia's organized crime, actuallythe island paradise of Nauru took the lead, laundering nearly$80 billion. In addition to banking, the leading product of Nauruis manure - bird dung. Yes, "Money is like manure. It isn'tany good unless you spread it around."