Komisar, a New York-based journalist whose articles on international
affairs have appeared in major U.S. and foreign publications, is writing
a book about the offshore bank and corporate secrecy system.]
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 . . .
" he 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."
He said, "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
There had been a raid on a building on the rue de la Tr?moille in the
aristocratic district of the Champs-?lys?es, 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
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
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
He moved on to Henriette Fran?ois Coty, of the famous perfume family, who
ran a newspaper, L'Ami du people (Friend of the People), and a M.
Sap'tre, 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
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. But 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 citizen 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. The
same 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 make sure that their
customers were who they said they were and that banks report suspicious
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
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
'Is a Colombia drug cartel
Chicago real estate". . .'
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," says 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.
There are 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
Luxembourg, Austria, Liechtenstein, Monaco, Cyprus, and the British
Channel Islands---with strong links to London. Dubai and Israel are
important in the Middle East.
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) says 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
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
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
says 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
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, run by
Harvey Pitt---an attorney who for more than twenty years represented the
top accounting and Wall Street firms he was regulating---accepted 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 says
it's legal, so it's legal." The conceit apparently also persuaded the
Securities and Exchange Commission.
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 and AFSCME 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's 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
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
'World Bank-financed roads in
Indonesia cost an extra 30 percent to account for corruption. . .'
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 hide
profits. When I was in Moscow, an employee for a major American company
told me how its auto rental subsidiary booked its Moscow cars to 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.
Bank secrecy is not about preventing your neighbor or a government
official from casually inquiring about your account balance or to whom you
wrote your last check. It 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.
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
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 top 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
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 (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. In America, however, there's no lobby to challenge the banks. And 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 wealthy interests 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 demands were "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. Now, key Republican officials are attempting to
block 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
I spoke about the Bush policy at a seminar run by the new European Network
Against Tax Havens and Tax Evasion at the World Social Summit in Porto
Alegre, Brazil, in January. No representatives of U.S. groups attended;
alas, this issue is not yet on the agenda of the American left. ##