Issue 2 Mapping Conversations Spring 2001

The "Offshore" Phenomenon: Dirty Banking in a Brave New World

Mark Lombardi

A number of recent trends and developments, from the Internet to NAFTA to a single European currency, appear to portend a future "borderless" world culture. National boundaries, some of which have existed unchanged for centuries, were initially erected to separate and enclose people, places, and societies. But in the age of information they have become, or so the argument goes, utterly obsolete; an impediment to fair trade and an inconvenience to travelers, a barrier to cooperation and understanding among peoples, a tool in the hands of despots preaching everything from xenophobia to outright homicidal racism. Perhaps we would be better off, as the multilateralists would have it, in a world without political boundaries. Then again the absence of border controls and international frontiers can have other, perhaps unforeseen, consequences as well, a good example of which is the growth of offshore banking and the black money industry.

Black money can be defined as ready cash or any liquid asset whose origins and ownership have been intentionally obscured from view. It is money that has been cleansed and sterilized; laundered through a vast international labyrinth of telex rooms, coded bank accounts, anonymous trusts, and corporate shells. Once it has found safe haven in, say, Switzerland, Hong Kong, or Panama, the assets are supposedly (but not always) sheltered from the prying eyes of foreign tax officials, police, and courts, and anyone else who might claim a percentage or interest in the funds.

There are many reasons why someone would want to avail themselves of such services. Perhaps the oldest is the fear of seizure or confiscation in times of war, civil unrest, or political instability; what's known as "fright capital." Quite often when a country is invaded, under threat of invasion, or in the grip of a civil war or reign of terror, there is an attendant rush to ship assets out of the country. A classic case is the struggle of thousands of European Jews to transfer their property (most of which was never recovered) out of Nazi-controlled areas and into Switzerland and beyond.

But far and away the most common reason is tax evasion. The first truly modern multinational tax evaders arose in the United States in the 1920s. They were men like Joseph P. Kennedy, father of the late president, a stock manipulator and liquor importer who ordered his foreign suppliers and attorneys to submit fraudulent and inflated bills which he then promptly paid in order to move otherwise taxable profits overseas. Another was Meyer Lansky, the infamous longtime chief financial officer of the American mob. Lansky and his associates, whose revenues came primarily from bootlegging, illegal gambling, loansharking and prostitution, employed couriers and bagmen to carry their ill-gotten loot to banks overseas, primarily in Canada, Switzerland, and the Bahamas. By the mid-l930s many large US-based corporations had also begun to get in on the act by setting up foreign subsidiaries and affiliates, particularly in the United Kingdom and Bermuda, as vehicles for various kinds of financial gimmickry.

Since those early days the "stateless" money industry has experienced a phenomenal rate of growth. Hundreds of international banks, financial companies, tax advisors, attorneys, agents, couriers, and brokers (some based in the US, some overseas) now cater to the ever-expanding trade. The traditional havens (besides those already mentioned above) would also include Luxembourg (where fees from the financial services sector account for a fifth of all government revenues), Monaco, Liechtenstein, Costa Rica, Uruguay, Singapore, Beirut, and Bahrain. They must now compete with an assortment of new and far-flung "offshore banking centers" touting state-of-the-art services and secrecy controls in places like the Netherlands Antilles and the Cayman Islands. In the Caymans, for instance, there are no personal, corporate, or inheritance taxes and it is illegal for an employee or officer of any bank or corporation to disclose any information about its assets, financing, or ownership. Not surprisingly over 20,000 corporations, including 550 international banks and trusts, are currently registered to do business in the Caymans, which recently reported over $400 billion in "offshore" bank deposits for only 30,000 full-time inhabitants, an average of $14 million per citizen!

Most of this growth is attributable, naturally, to the dirty money generated by the $200 billion a year worldwide market in illegal drugs. Of this amount, at least half receives some kind of laundering every year before resurfacing once again in "legitimate" investments. But the same financial channels used to process drug money can also be used to commit other types of crimes. Offshore entities have by now become a sort of "honeyhole" for an increasingly brazen crop of white-collar techno-bandits who work the system to plunder corporate assets and embezzle bank funds, commit securities fraud, launder commercial kickbacks and facilitate bribery, conceal assets from creditors, establish bogus tax shelters, and alter accounts to improve their financial statements in advance of a sale. In other words, they cook the books and engage in every kind of imaginable scheme intended to defraud or mislead if not a tax collector or bank regulator then, depending upon the circumstances, perhaps one's own partners, shareholders, auditor, spouse, or relatives. The most notorious con men and flim-flam artists of recent times, everyone from Robert Vesco to Marc Rich to Nick Leeson, operated from behind similar veils of secrecy provided by foreign banks, trusts, and shell companies and could never have succeeded without them.

Likewise Dennis Levine, the Wall Street broker convicted of insider trading in league with Ivan Boesky and Michael Milken, booked all his deals through fronts established in the Bahamas. Then there is Charles Keating, the "banker" whose folly at Lincoln Savings cost the taxpayers $2 billion. In April 1989, just hours before the Feds had planned to seize his empire, Keating wire-transferred over $300 million to mysterious bank accounts in Europe (part of which was later recovered). Another example would be the two Colorado developers who defaulted on over $100 million in loans from Neil Bush's Silverado Savings of Denver while at the same time pouring tens of millions into multiple offshore trusts they had set up in the English Channel isles and elsewhere (for the benefit of family and friends). In 1988 Silverado collapsed and US taxpayers were left to pick up a $1.2 billion tab.

The offshore centers have also become a kind of home away from home for an increasingly nomadic cast of semi-legitimate predatory capitalists, currency raiders, and futures speculators who, especially when acting in concert, can and have done some serious macro-economic damage. The standard example of this would be the Hunt brothers of Dallas who, together with a group of agents fronting for members of the Iranian and Saudi royal families (including Ghaith Pharaon, a leading figure in BCCI), tried to corner the silver market some 20 years ago. When the scheme finally imploded in March 1980, the ensuing financial turbulence nearly took down the entire commodity futures market along with several leading American banks.

Currency raiders mounting a faceless collective assault on a weakened central bank (most recently those of Indonesia, Russia, and Brazil) can have a crippling impact on a local economy and on the ability of the targeted nation to service its external debt. Anonymous predatory "entrepreneurs" intent on pillaging their way to maximum yields can and have caused long-term (if not irreversible) environmental damage, particularly of late in the tropical rain forests.

It has even been suggested that the torrent of hot money that fueled the US economy in the early years of the Reagan administration led not to real sustainable growth and job creation but to excessive speculation in the real estate and securities markets, which resulted in an inevitable crash, that of November 1987, in which nearly a trillion dollars worth of investments were literally wiped out overnight.

All things considered, the economic, social, and political repercussions of all this shuffling to and fro have been nothing short of staggering. To continue the rundown, it is estimated that nearly half of the $375 billion in new debt taken on by Latin American borrowers between 1975 and 1985 vanished forever through offshore pipelines. Perhaps another $100 billion or so flowed out of the rest of the Third World. In Italy, Mexico, and India, where tax evasion has been elevated to a national sport, the revenue loss has at times been serious enough to virtually cripple the central government. Meanwhile in Colombia, Bolivia, Paraguay, and Panama, where drug money reigns supreme, the drug lords have recently succeeded in converting their overwhelming financial advantage into unchallenged political power.

One would think that the "democratic" governments of the world, especially those in the West, would have the will and muscle to impose some type of order to this monumental loophole. Through this loophole private citizens and companies alike can avoid paying taxes, criminals can launder their profits, profiteers can manipulate markets, and con men fleece their prey, all without serious fear of prosecution. Nor would it take much to force these offshore dens of thieves into compliance with international financial norms; American citizens have, for instance, been prohibited from traveling to or doing business in Cuba, Iran, and North Korea for years. A concerted, Western-led multilateral travel and financial embargo of the Bahamas, Caymans, Bermuda, Panama, and Singapore, among others, would quickly bring these flags of convenience into line.

But so far, Western political elites have not seen fit to put even the most egregious operators out of business. This is because the politicos and their leading supporters and constituents, sadly enough, have occasional need of such services themselves. In this post-Watergate era of alleged "transparency" and "full disclosure," ambitious politicians who still want to "get theirs" now routinely employ indirect channels to receive and coordinate contrib.-utions, bribes, and payoffs which at times, for added security, means going offshore.

The established powers may also wish to retain the capability, even though it is sometimes a nuisance, because offshore money centers can also be mobilized into a potent political weapon in service of one's foreign policy goals. There are times when a government, say that of the United States, might consider it useful to encourage flight capital from an unfriendly country, say that of Chile after the election of Allende or that of Nicaragua after the Sandinista revolution. The consequent loss of hard currency can have a destabilizing effect on any new government. Capital flight tends to deplete a country's foreign reserves, which can lead to devaluation, spiraling inflation, and loss of confidence in a new and untested regime.

Along those same geopolitical lines, the offshore centers can play a key role in strengthening an alliance by facilitating what is known in diplomatic circles as "Grand Corruption." Grand Corruption refers to the diversion of "state-owned" funds and resources into the pockets of various heads of state, their relatives, cronies, designated subordinates, and bagmen. Given the proper conditions, the practice can take root anywhere. But it is most prevalent today in the already-impoverished Third World.

There are a number of ways a kleptocrat can loot his or her own country, three of which especially stand out: through the seizure and sale of "state-owned" commodities such as gold, diamonds, oil, timber, and so on; by obtaining enormous "commissions" from multinational corporations in exchange for contracts to sell products, provide services, or construct large projects in their country; and by diverting or skimming loans granted by foreign donor governments and international aid organizations. Combine these with what the leader and his surrogates might be collecting in the way of local petty grafts, bribes, and payoffs and you have what could amount to a fairly hefty sum.

The attitude of most Western governments to this activity is simple; they deplore it in countries considered unfriendly while condoning or even encouraging it among clients and allies. The purpose is to concentrate money and power in the hands of loyal local elites. Thus, unlike hot investment capital flowing in from other tainted offshore sources, "politically-packaged" black money often receives special red carpet treatment because it is controlled by a corrupt ally.

Though fully aware of the source of the plunder, officials of even the most "law-abiding" Western countries rarely interfere in the process, citing "mutual cooperation," "national security interests," or "healthy export markets" as a pretext. Thus former Ethiopian emperor Haile Selassie was able to amass a fortune worth around $15 billion over the course of his reign, most of which was banked and invested in Europe; ex-Zairean president Mobutu Sese Seko was believed at the time of his ouster to control bank accounts and assets in Belgium, the former colonial power, worth several billion dollars at a minimum; and Saddam Hussein's personal and family fortune was at one time estimated at between $10 and $15 billion, some of which was invested in major French companies. Much the same applies to the Marcoses of the Philippines, the Shah of Iran, the Duvaliers of Haiti, Noh Tae Wu of South Korea, Suharto of Indonesia, Somoza of Nicaragua, the Salinas brothers of Mexico, ad infinitum. In some cases the level of cooperation offered by a patron state can go beyond "noninterference" to the actual provision of advisors and access to financial entities capable of performing whatever services the lucky ally or client might require. It is thought that Castle Bank and Trust (founded in the Bahamas in 1964), Nugan Hand Limited (chartered in Australia in l973), and World Finance Corporation (which operated out of Miami in the middle to late 1970s) provided such services at the behest of several successive American administrations.

The offshore pipeline can also be utilized by governments to carry out secret military, political, and intelligence-related activities. Virtually every nation on earth possesses some kind of intelligence service or capacity that it uses, among other things, to conduct clandestine and sometimes illegal activities in various parts of the world. Covert operations, as they are known, encompass acts of sabotage, intimidation and assassination, arms trafficking, embargo-busting and the formation of insurgent guerrilla armies, the acquisition or theft of classified documents, the bribery of foreign officials, academics, business-men, and journalists, the surreptitious funding of political parties and front groups, and so on. They are a nation's "invisible hand," intended in one way or another to influence events and attitudes in a foreign country. All of this takes money, hopefully clean money, so the great powers resort to the same mechanisms, if not the same banks and experts, as everyone else. For example, in the 1980s BCCI, an Arab bank headquartered in London, was used not only by drug dealers and con men but also by the governments of the US, UK, Saudi Arabia, and the Gulf Arab states to funnel support to Afghan guerrillas fighting Soviet occupation; to pay off friends and adversaries alike; and to conduct secret arms sales to Iran. Meanwhile BNL, a state-owned Italian bank, was used by some of the same parties to finance the arming of Iraq. At one time the Soviets had their own network as well, operating primarily from Switzerland, Liechtenstein, and Panama.

To many people this is all just a big game; a rather high-stakes, grown-up version of Peekaboo or Find-the-Flag. But it is also an exceedingly dysfunctional game whose continued existence poses a serious challenge to the rule of law, to political and corporate accountability at home, and to economic development abroad. Offshore banking is one sector of the international economy over which some kind of control must be asserted and soon, lest we find ourselves in even further hock and political hot water.

Mark Lombardi lived and worked in New York. His estate is represented by Pierogi Gallery, New York.

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