Banking on Secrecy


Monday, Oct. 22, 2001
Banking On Secrecy
Terrorists oppose scrutiny of offshore accounts. And so do many U.S. bankers and lawmakers

The U.S. was all set to join a global crackdown on criminal and terrorist money havens earlier this year. Thirty industrial nations were ready to tighten the screws on offshore financial centers like Liechtenstein and Antigua, whose banks have the potential to hide and often help launder billions of dollars for drug cartels, global crime syndicates--and groups like Osama bin Laden's al-Qaeda organization. Then the Bush Administration took office.

Officials from the banking-industry-friendly Center for Freedom and Prosperity sat down with top Bush economic advisers Larry Lindsey and R. Glenn Hubbard and urged them to keep the U.S. out of the coalition and firmly support the status quo in many tax havens. The group's pitch: Americans should be free to seek out lower tax rates anywhere in the world; competition from tax havens helps keep tax rates in the U.S. down. The conservative Heritage Foundation met with Treasury Secretary Paul O'Neill and presented a similar argument. And the C.F.P. helped Don Nickles of Oklahoma, the No. 2 Republican in the Senate, draft a letter to O'Neill applying still more pressure.

By June, the lobbyists got what they wanted. O'Neill told the Organization for Economic Cooperation and Development (OECD), which was leading the campaign against tax havens, that the U.S. was out. And without the world's financial superpower, the biggest effort in years to rid the world's financial system of dirty money was short-circuited. America's European allies "will be very upset," the Heritage Foundation's point man on the issue declared in the Washington Post, but the global war on offshore banking was "dead, and thank goodness for that."

Since the Sept. 11 attacks, the anti-money-laundering cause has sprung back to life. The Bush Administration, which is trying to hunt down Osama bin Laden's cash in tax havens and secret bank accounts, has suddenly got religion about tracking down terrorists' assets, know-your-customer laws for banks and an array of other tools on law enforcement's wish list. The antiterrorism bill the Bush Administration sponsored, augmented by tough money-laundering provisions proposed by Democrats, sailed through the Senate. But late last week House Republican leaders Dick Armey and Tom Delay thwarted efforts to include an anti-money-laundering bill in the chamber's antiterrorism legislation, sources tell TIME, endangering the entire banking reform effort.

In this national crisis, who could be opposed to anti-money-laundering laws? The same people who opposed them before the crisis: influential bankers who are concerned about taking on added administrative burdens--and who are worried that they might have to turn down lucrative business from people evading taxes or law enforcement. The bankers get support from conservative policy advocates, who in turn thrive on contributions from financial institutions and other corporations. The conservatives argue that the new rules would in effect raise taxes and create a shadowy "global tax police."

For most of this year the Bush Administration was not part of the crusade against money laundering. Pointing out this U-turn, supporters of those rules say, isn't about playing gotcha. It's about continuing to press for anti-money-laundering regulations.

Tax havens are one of the world's great growth industries. There are more of them than ever, from Liechtenstein to Panama to Vanuatu, a tiny rock sticking out of the Pacific, well-wired into the world financial system. And the amount of money they harbor around the globe is staggering--as much as $5 trillion, according to the U.S. State Department. The Cayman Islands (pop. 35,000) has more than $800 billion on deposit--fully one-fifth as much as the entire U.S. banking system. And those Cayman deposits are swelling by an estimated $120 billion a year. Not all offshore money is linked to crime or terrorism. Much of it belongs to wealthy people who are avoiding taxes in ways that often are legal under current law or--as the ads for "asset protection lawyers" on CNBC make blatantly clear--are shielding money from business partners and spouses.

The Internal Revenue Service estimates these deposits are costing the U.S. alone $70 billion a year in uncollected taxes. But tax havens, with their anonymity and lax oversight, aren't just for tax cheats. They're also an ideal financial way station for terrorists, who want to park money out of sight until they need it to pay for training camps or to pull off an attack.

This dirty money isn't hard to retrieve and spend, even in the U.S. In a report this year, Senate Democrats described how it was finding its way in through a practice known as correspondent banking, in which U.S. banks provide banking services to overseas banks. U.S. banks sometimes don't seem to mind that the banks they're helping--from whom they are hauling in large fees--traffic in crime money. Or that these banks are, in some cases, mere shells with no physical presence anywhere beyond perhaps a post-office box or a fax.

The typical U.S. bank has dozens, even thousands, of correspondent banking relationships with high-risk banks, Senate investigators found. In many cases, banks are not bothering to perform due-diligence reviews to see if the money they are handling is linked to drugs or terrorism. Making matters worse, the banks taking out correspondent accounts are, in some cases, doing so for other banks that they know little about. The upshot: it might not be hard for bin Laden, who controls a Sudanese bank, to wire money to a friendly neighborhood bank branch in any U.S. city. Or for members of terrorist cells to make withdrawals.

Long before the Sept. 11 attacks, the U.S. government tried to declare war on tax havens and dirty money. After the 1998 attacks on two U.S. embassies in Africa--attacks blamed on bin Laden's network--the Clinton Administration began drafting legislation designed to "strategically change the environment that allowed the money of criminals and terrorists to flow freely," says William Wechsler, a special adviser to Clinton Treasury Secretary Lawrence Summers. And the Administration began sounding out the banking industry.

In Treasury and Capitol Hill meetings, bank representatives argued against new reporting requirements intended to identify the foreign owners of suspicious accounts. Former Treasury officials say that among the most vociferous critics were officials from Texas banks that, because of their proximity to the Mexican border, finance many cross-border projects, and are believed to be a favorite repository for Mexican fortunes whose owners sometimes don't welcome scrutiny. Among the most outspoken were representatives of the International Bank of Commerce of Laredo, Laredo National Bank and Stanford Financial Group, a Houston-based broker-dealer with offshore banks in Antigua. But that's not the way the bankers see it. Says Gary Jacobs, who heads Laredo National Bank: "Compliance is a top priority with us and has been for years."

The Texas bankers did not have much pull with the Clinton Administration, and Summers forged ahead. In March 2000 he worked with Congress to introduce a tough money-laundering bill. High on the Administration's list: know-your-customer rules that require banks to confirm a depositor's identity and determine the source of his money. And that June, Summers cheered the OECD's listing of 35 nations and territories as tax havens and potential money-laundering venues. An ally of Vice President Al Gore's, Summers might have stayed at Treasury and continued his drive in a new Democratic Administration.

Just days prior to Summers' announcement that he was cracking down on the OECD's tax havens, Dennis Nixon, chairman of the International Bank of Commerce in Laredo, gave $20,000 to the Republican National Committee. Already a Bush Pioneer, who had raised at least $100,000 for the primaries, Nixon gave the R.N.C. another $100,000 as the post-election contest for Florida ballots began. Summers' bill passed the House Banking Committee 31 to 1 in July 2000, but it got no further. Republican Senator Phil Gramm of Texas, chairman of the Senate Banking Committee, refused to let it come up for a vote in his committee. In August, Stanford Financial gave $40,000 to the Republican Senate campaign committee. Gramm lost his post this summer, when the Democrats retook the Senate.

Texas bankers have kept Republican campaign money flowing in Bush's first year--$65,000 from Nixon, $40,000 from Stanford Financial, and $12,500 from Jacobs of Laredo National. They deny trying to influence the Administration's money-laundering policies. "We're supportive of any effort our government takes to track down terrorists," Yolanda Suarez, Stanford Financial's chief of staff, told TIME.

Conservative groups have not been bashful. The C.F.P., the most prominent of them, argues that by clamping down on tax havens--by, for example, pressuring such countries not to charge lower taxes to American investors than they do to their own people--the proposed laws could amount to higher taxes, albeit overseas, something many conservatives do not want to encourage anywhere. The center refuses to divulge its contributors, but its lobbyists often work in concert with the financial industry.

Until last month, O'Neill recommended delays in Clinton-era money-laundering regulations that had not yet been implemented so that cost-benefit analyses could be run--a classic Beltway ploy for slowing down and killing rules. And O'Neill's Treasury Department has called for a "top-to-bottom" review of anti-money-laundering resources and programs, which would have brought in the Office of Management and Budget to bean-count the costs of money-laundering enforcement.It took the worst terrorist attacks in U.S. history to turn the Bush Administration around. Top officials, including Attorney General John Ashcroft and even O'Neill, were suddenly declaring that tough new anti-money-laundering laws were needed. And the Administration dropped its resistance to tough new reporting and record requirements in the anti-money-laundering legislation pending in Congress last week.If the anti-money-laundering forces prevail, law-enforcement experts say, steps can be taken to crack down on terrorists' use of financial institutions. Among the most important:

GIVE THE TREASURY SECRETARY MORE POWER TO TRACK OVERSEAS MONEY. The Senate antiterrorism bill would help close a key loophole in the U.S. financial system by authorizing the Treasury Department to identify and scrutinize foreign money entering via correspondent bank accounts.

IMPROVE THE EFFICIENCY OF THE FEDERAL AGENCIES CHARGED WITH ADMINISTERING ANTI-MONEY-LAUNDERING LAWS. Right now, critics say, the 150,000 suspicious-activity alerts filed with the irs are reviewed at a plodding pace. How plodding? Some of the filings are reportedly transcribed at a Chippewa Reservation in North Dakota onto magnetic tape, which is then used on the obsolete data-entry equipment the IRS has dedicated to the project. The turnaround can take nine days--more than enough time for a terrorist who has done something suspicious to have spent the money and moved on.

FORCE THE RESPONSIBLE AGENCIES TO ISSUE CRITICAL REGULATIONS MORE QUICKLY. The Treasury Department's Financial Crimes Enforcement Network recently announced that, despite having had 28 months to impose reporting requirements on money service businesses, including check-cashing operations, it would not have regulations ready until the summer of 2002. Investigators say the Sept. 11 hijackers used check-cashing firms to transfer money used in the attacks.

GO AFTER NATIONS THAT FAIL TO DO THEIR PART TO HELP IN THE CRACKDOWN. Charles Intriago, publisher of Money Laundering Alert and a former federal prosecutor, argues that just as the Bush Administration has threatened to go to war not just on terrorists but on the nations that sponsor them, the U.S. may need to go after countries that permit their banks to safeguard money for terrorists. Given the centrality of the U.S. financial system in the world economy, no nation could easily survive being told that it could not clear its transactions in American banks. "We can eliminate them from our financial map," says Intriago. "It's the ultimate bloodless weapon, as lethal as anything we drop on Afghanistan."But if the Bush Administration is going to take a hard line, it will have to stand up to a number of recalcitrant forces. To get at terrorists' assets, they have to apply more pressure on Saudi leaders who have been dragging their feet about identifying and freezing bin Laden's linked funds. The Administration believes that there is terrorist money to be got in Saudi Arabia. Late last week the U.S. announced it would freeze the accounts of Yasin al-Qadi, a prominent Saudi businessman, for alleged financial support of al-Qaeda. He is affiliated with a charitable foundation administered by some of Saudi Arabia's wealthiest and esteemed men, one that U.S. officials say funnels millions to bin Laden. To make larger reforms in anti-money-laundering law, the Administration will have to stand up to the politicians and lobbyists who still want to go easy on offshore tax havens. Even after the President declared "financial war" on terrorists, the C.F.P. posted a "strategic memorandum" on its website last week arguing that the Bush Administration-backed bills contained "language designed to hinder international tax competition" and should be scaled back or defeated.

Reported by Michael Weisskopf and Adam Zagorin/Washington, Donald L. Barlett and James B. Steele/New York