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Spin Cycle
Tim Francis-Wright

7 October 2001

In the last few days, the Senate Banking Committee unanimously approved a bill (S. 1371) that would limit the ability of American banks to do business with foreign banks that cater to money launderers and tax evaders. Some Senators had supported similar bills for years, without real avail. Until terrorist attacks against two American cities, Republicans in Washington had opposed almost any restrictions on offshore banks and the capital that they protect. They reckoned that terrorists were not smart enough to use the same methods that ordinary criminals had used for years.

Osama bin Laden's network of terrorists used a number of banks worldwide to shuttle money from the Middle East to America without detection. But other criminals—embezzlers, promoters of dodgy securities, drug kingpins, and tax evaders—had used the international banking system to hide all sorts of income from governments for years. Money laundering and tax evasion were acceptable in practice, as long as the beneficiaries were American banks and their rich customers.

Hundreds of billions of dollars now officially, but not literally, sit in offshore banks. The money in many cases never leaves the confines or even the control of stateside banks. In a typical case, a client uses an American bank to hold correspondent accounts for banks overseas, often in countries or territories like Nevis or the Cayman Islands. Clever customers will open accounts in the name of a foreign trust or corporation, the beneficiaries of which are shielded by law. Even cleverer customers will open up their own banks in countries like Nauru, which allows almost anyone to open their own bank and operate it without any physical presence in any country. In 1998, Russian deposits in Nauruan banks increased by some $70 billion, as organized crime flourished in Russia. Despite these capital outflows, the banking lobby and its friends on Capitol Hill opposed more transparency in international banking.

Secrecy laws in many countries prevent governments from snooping unnecessarily into the affairs of private businesses. But these laws often go much further than that. They lack even fundamental notions of transparency, the ability to know who is behind a corporate entity. They lack the ability of law enforcement to get information about bank transactions as part of legitimate investigations into criminal behavior. And they lack any real sharing of information between revenue departments. As Senator Carl Levin said in July, "[m]any of the offshore corporations and trusts serve as mere place holders for individuals who want to hide their identity and activities."

Tax evaders love offshore accounts because hiding deposits from the Internal Revenue Service makes it almost impossible to reconstruct a taxpayer's income in the event of an audit. Money launderers love tax havens because their secrecy laws prevent law enforcement inquires from finding assets. The right wing of the Republican Party loves tax havens because they make possible a world where income of any kind is not subject to taxation. Countries like the Cayman Islands do not charge foreign investors any sort of income tax, but they do charge hefty taxes to the unfortunate souls who live there and have to buy food.

The Organization for Economic Security and Development (OECD) has embarked on a quest to end banking practices that encourage money laundering and tax evasion. The OECD is targeting very particular practices—shielding bank information from domestic and international prosecutors, and charging lower tax rates to foreign investors than to a country's own citizens. The OECD countries know full well that tax havens cannot function unless the rest of the world lets them. Money sitting in accounts in Niue or Nauru or Nevis is all but useless if banks in other countries do not accept transfers from those accounts.

In May 2001, however, Treasury Secretary Paul O'Neill announced that the United States would no longer work with the OECD. O'Neill stressed in his statement that his department was foursquare against money laundering and tax evasion, but he objected to the OECD initiative because it "stifl[es] the competition that forces governments — like businesses — to create efficiencies."

The Secretary's protest was a flimsy one. The OECD did not single out low tax rates as a concern, but relatively low tax rates for foreigners. Conservative groups like the Free Congress Foundation loved the new stance. Finally, after years of efforts by Europe and North America to clamp down on offshore tax havens, a Treasury Secretary was finally willing to step up and protect the interests of capital.

Objections to the Bush administration's stance came from a variety of commentators. Mother Jones magazine expressed dismay at the stance of the new administration. Molly Ivins wondered why the government wanted to perpetuate a system that foreign kleptocrats had used for years. Even Business Week scoffed that the lax mindset of the administration hurt honest taxpayers to the benefit of rich crooks. In coddling holders of offshore accounts, the Bush administration missed an easy opportunity to stand for law and order, to stand with honest taxpayers, and to stand (for once) united with most of Europe.

In July, Senator Carl Levin's subcommittee on investigations held a hearing on money laundering. A bill that Levin has sponsored prohibits United States banks from dealing with foreign banks that have no physical presence anywhere. It would require background checks for foreigners who make large deposits (over $1,000,000), for many new correspondent accounts. In his opening statement, the Senator pointed out that $5 trillion in assets now sit in offshore entities like corporations, including $3 trillion in offshore bank accounts. Over $800 billion now resides in the Cayman Islands, where 31 banks offer accounts to residents but almost 600 offer accounts to foreigners. One of the witnesses, New York District Attorney Robert Morgenthau, described how offshore bank secrecy had hampered several investigations of money laundering involving New York banks.

The Bush administration continued to back unfettered capital, despite its benefits for criminals of all types. It did not support Levin's initiatives until the aftermath of the attacks on 11 September. By now, the administration has ordered the freezing of bank ccounts and other assets associated with Osama bin Laden. For years, the lax standards of the banking systems have buoyed all sorts of criminals, from penny stock promoters to international terrorists. The Republican spin cycle is an ironic part of the laundry that banks have run for years.

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