Global Policy Forum

By Miren Gutiérrez*

The U.S. Financial Crimes Enforcement Network (FinCEN) estimates that up to 1.5 trillion dollars is laundered annually around the world; much of this is laundered by rich institutions in rich countries, rather than by tropical offshore centres.

In the world of high finance, PEP is not a stimulant to keep you awake on the trading floor; it means "politically exposed person." Handling a PEP bank account is big, though risky business. Ask Riggs. The bank based in Washington has recently been punished by federal bank regulators with a record 25 million dollar fine for handling PEPs improperly and for managing accounts of questionable origin held by foreigners.

The U.S. Financial Crimes Enforcement Network (FinCEN) estimates that up to 1.5 trillion (1,500 billion) dollars is laundered annually around the world. Much of this is laundered by rich institutions in rich countries, rather than by tropical offshore centres. Where does it come from? Money laundering is widely defined as inserting money of illegal origin into the legal financial system. The origins can include drug dealing, illegal arms trafficking and bribery.

The suspicious transactions at Riggs were exposed by a report last month from the U.S. Senate permanent subcommittee on investigations. The reported transactions included dealings with fat cats from poor or developing countries such as oil-rich Equatorial Guinea's Teodoro Obiang Nguema who heads one of the most corrupt states, and former Chilean dictator Augusto Pinochet. The Securities and Exchange Commission (SEC) in the United States launched an investigation this month into the payment of millions of dollars by five U.S. oil companies including giant ExxonMobil into accounts controlled by Obiang Nguema or his associates. The inquiry was based on the Senate report. ExxonMobil has denied any wrongdoing.

The report says that these accounts which contained as much as 700 million dollars were kept open from 1995 to earlier this year with little concern that money flows seemed inappropriate. "Riggs was clearly aware of the corruption concerns associated with Equatorial Guinea," says the Senate report. The Senate report quotes a Riggs analysis prepared for a 2002 loan request as saying: "Allegations of human rights abuses following the announcement of the coup in March have been well documented, and have elicited international condemnation. However, any hesitancy on the part of the U.S. or European countries towards Equatorial Guinea will be temporary, due to the rising importance of the oil sector."

In the case of Pinochet, the evidence obtained by the Senate shows that "from 1994 until 2002 Riggs Bank opened at least six accounts and issued several certificates of deposit for Augusto Pinochet…while he was under house arrest in the United Kingdom. The aggregate deposits in the Pinochet accounts at Riggs ranged from four to eight million dollars at a time." As commander-in-chief of the Chilean army, Pinochet's annual salary in 1997 was reported by The Observer in London to be 16,000 dollars. Pinochet has been investigated mainly for human rights violations.

The Bank of Credit and Commerce International (BCCI) collapse in 1991 is regarded as the biggest bank fraud in history, involving billions of dollars in dirty money. The bank had its head office in Luxembourg and was run from London, but its 1.2 billion dollar liquidation involved court proceedings around the world. In 2001, the House of Lords allowed the case against the bank to proceed. Hearings began this year in London. Banker Agha Hasan Abedi founded BCCI in 1972 with an intricate structure of multiplying layers designed to evade control by authorities in the more than 70 countries in which it operated.

The bank ownership and management has been charged with crimes including money laundering, bribery of PEPs, supporting terrorism, and arms and drugs trafficking. Legitimate depositors lost millions of dollars when the bank was closed down after it was discovered that BCCI, which at its height was shown to hold assets of 20 billion dollars, had disguised huge losses and was insolvent.

The liquidators who have recovered 75 percent of the lost assets blame the Bank of England for doing nothing despite knowing BCCI was poorly managed. The problems at the bank dated at least as far back as 1985 when Price Waterhouse investigated BCCI losses. In 1988 a branch of the BCCI in Tampa in Florida in the United States was closed after being accused of money-laundering. BCCI records and the testimony of former BCCI officials document its systematic securing of central bank deposits of developing countries, its favours to PEPs, and its reliance on them for pulling strings. "While they are undoubtedly neck-deep in money laundering, it is nevertheless a common misconception that most money is laundered in offshore financial centres and developing countries, an impression that is cultivated by governments of major countries seeking to put the blame somewhere other than on their own doorsteps," says David Marchant, editor of Offshore Alert, an investigative publication based in Miami.

More money is laundered in New York and London than anywhere else in the world, says Marchant in a written interview. "Also, much of the money that is laundered in poorer countries is done by banks which are branches, subsidiaries or affiliates of banks in major countries such as the U.S. and the UK." A BBC report published March 2002 says "London, New York, Tokyo, Paris, Frankfurt and of course Switzerland have their own thriving offshore businesses. And many crooks prefer dealing with the big places, where the sheer volume of money changing hands covers their tracks."

The island territories often point out that "the 1.6 billion dollars found to have been looted from Nigeria by the family of the late dictator Sani Abacha was found, not in the Caribbean or the Pacific, but in reputable banks in the UK and Switzerland," the report says. "And as for Raul Salinas, brother to the ex-president of Mexico (Carlos Salinas), his looted cash ended up in the world's then largest banking group, Citibank." In 1999 a U.S. Senate investigative committee concluded in the Raul Salinas case that although there was no evidence that Citibank knowingly helped him conceal the true source of up to 100 million dollars of suspicious funds, the bank failed to implement procedures that would have avoided the dirty money.

Raul Salinas was accused of funnelling dirty money from bribes and drug deals out of Mexico using U.S. Citigroup affiliates in Switzerland and Britain from 1992 to 1994. The charges were dropped after he was arrested in Mexico in 1995 and sentenced to 50 years in prison for masterminding the killing of a top ruling party official. Asif Ali Zardari, husband of former Pakistani prime minister Benazir Bhutto, former president of Gabon Omar Bongo, and the sons of late Nigerian dictator Sani Abacha, Mohammed and Ibrahim, were other PEPs cited in the 1999 Senate report.

Also in 1999 The Bank of New York (BoNY) was involved in an investigation into the source of billions of dollars that moved from accounts in Russia to London and New York. It has been alleged that some of the money was connected to the Russian mafia. A BBC report said at the time: "Many economists believe that far more money has been transferred out of Russia to overseas accounts than has been paid by Western institutions in aid and loans. U.S. investigators believe that up 15 billion dollars in hot money was laundered through the Bank of New York."

In August 1999 The New York Times published a front-page article under the title 'Activity at Bank Raises Suspicions of Russia Mob Tie'. The article reported that billions of dollars "have been channelled through the Bank of New York in the last year in what is believed to be a major money laundering operation by Russian organised crime." Testifying before the House banking committee in September 1999, BoNY chairman Thomas A. Renyi admitted: "Allowing these accounts to remain open and active without sufficient questioning was a lapse on the part of the bank. I have taken personal responsibility for implementing remedial actions."

BoNY's directors formed an anti-money laundering oversight committee in September 1999. In February 2000 Lucy Edwards, a former BoNY executive in London, and her husband Peter Berlin pleaded guilty in a New York court to money laundering charges; they admitted accepting 1.8 million dollars to set up a scheme to funnel Russian money through the bank. The Federal Reserve Bank of New York, which regulates banking activity in the state "formally sanctioned the Bank of New York for deficiencies in its anti-money- laundering practices," according to a New York Times report. "The move, known as an enforcement action, does not include monetary penalties against the bank and falls short of a more serious cease and desist order that regulators could have imposed."

Marchant who has investigated cases of money laundering in the Caribbean says "it is my experience that the biggest financial institutions have become exactly that in part because of their willingness to do business with, and accept money from, virtually anyone if they think there's a profit in it. As a rule of thumb the bigger the bank, the bigger its money laundering problem, and by no means all of it is done unknowingly." But the current list of non-cooperative countries and territories prepared by the Financial Action Task Force (FATF) on money laundering (last updated Jul. 2) includes only poor countries such as Cook Islands, Indonesia, Myanmar, Nauru, Nigeria and the Philippines. "Some small and emerging countries have felt bullied by the world's major countries and there is a lingering suspicion that FATF's measures, in conjunction with a global 'tax harmonisation' drive by the Organisation for Economic Cooperation and Development (OECD, which set up the FATF), are as much designed to help major countries collect more taxes as they are to stamp out major crime that is not tax- related," says Marchant.

Fifty-nine of the 100 largest contractors with the U.S. federal government report having a subsidiary incorporated in a tax haven, according to a report by the General Accounting Office (GAO), the investigative arm of the U.S. Congress, published in February this year. Enron, for example, incorporated hundreds of subsidiaries in the Cayman Islands but did not have a single local office. "These offshore subsidiaries have enabled Enron to hide potentially billions of dollars from American government officials, shareholders and credit rating companies at a time when Enron is being sued by shareholders and investigated for possible fraudulent accounting practices," says Joan Claybrook of Public Citizen in a letter to Paul H. O'Neill, Secretary of the Treasury, dated January 2002. Public Citizen is a non- profit consumer advocacy organisation.

Parmalat, the Italian food company that collapsed in 2003 after telling investors it had lied about its finances, used three Cayman subsidiaries to misrepresent assets, according to Italian prosecutors. J.P. Morgan Chase & Co. estimates that 650 billion dollars of profit earned abroad by U.S. companies over decades has never been taxed in the United States. The estimate was cited in a study by the international accounting and auditing firm Ernst & Young. Anti-laundering initiatives seem not to have had a deterring effect in some cases.

In its groundbreaking 'Report on Correspondent Banking: A Gateway for Money Laundering' the U.S. Senate's permanent subcommittee on investigations concluded in February 2001 that "U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system." Correspondent banking allows a bank in one country to move funds, exchange currencies, or carry out other financial transactions in another country through a second bank based there. Up to the publication of the Senate report, these transactions were subject to few controls. Many of the largest international banks located in the major financial centres of the world serve as correspondents for thousands of other foreign banks in smaller places.

The report said: "Correspondent accounts in U.S. banks give the owners and clients of poorly regulated, poorly managed, sometimes corrupt, foreign banks with weak or no anti-money laundering controls direct access to the U.S. financial system and the freedom to move money within the United States and around the world." "Some of these foreign banks were engaged in crimes, some had clients who are engaged in crimes, and some have such poor anti-money laundering controls that they do not know whether or not their clients are engaged in criminal behaviour," it said.

U.S. correspondent banks found to have "weak due diligence practices and inadequate anti-money laundering controls" included Security Bank N.A. in Miami, The Bank of New York, Bank of America, Amtrade Bank in Miami, Bank of America, Citibank, First Union, and Harris Bank International. A few months after this report came out, the terrorist attacks against the World Trade Centre and the Pentagon happened. The Pentagon estimated that the attacks cost less than a million dollars, channelled through cracks in the system.

The sums required for terrorism are often relatively small compared to the multi- billion dollar laundering industry, and legitimate businesses have often been used to fund terrorist operations. However, in October 2001 the U.S. Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (PATRIOT) Act. Among other things, the PATRIOT Act, much criticised by civil liberties groups who say it weakens checks on the powers of law enforcement groups, pays special attention to PEPs and "senior foreign political figures."

The Act focuses on correspondent and private banking, and requires spotting accounts associated with PEPs, and making sure that funds do not originate from corruption. One of the best-known use of the PATRIOT Act was against Byron Jerez, who was right-hand man of former Nicaraguan president Arnoldo Alemán. Jerez and Alemán were accused of siphoning off as much as 100 million dollars in public funds. U.S. prosecutors accused Alemán and his associates last year of keeping more than 800,000 dollars at Terrabank in Miami, and dozens of millions of dollars in Panamanian banks. In December Alemán was sentenced in Nicaragua to 20 years imprisonment for embezzlement.

U.S. investigators then turned their attention to the foreign bank accounts of two other Latin American leaders, both of whom fled their countries soon after leaving office: Gustavo Noboa of Ecuador and Alfonso Portillo of Guatemala. Officials and bank executives from the Dominican Republic implicated in the 2003 collapse of Banco Intercontinental, known as Baninter, are also under scrutiny. The Dominican Republic government filed a racketeering lawsuit in Miami against banker Luis í?lvarez Renta as part of a worldwide effort to recover more than two billion dollars. According to the lawsuit Alvarez and three foreign companies he controlled -- BankInvest, Interduty Free and Wadeville Investments -- drained millions of dollars from Baninter using banks in Miami. í?lvarez Renta denied any wrongdoing.

The lawsuit alleges that he hid the stolen money in BankAtlantic, the International Bank of Miami and the now-shuttered Hamilton Bank in Florida (which are not directly charged in the lawsuit), and that there was a suspicious pattern of activity between Baninter and the Miami banks involving numerous loans to Miami companies that were not guaranteed. International Bank president Alberto Valdes was quoted by Tew Cardenas, a law firm based in Miami, as saying he could not comment on the case. The other two banks have made no public statements. "One would think that after all the recent corruption scandals involving deposits from top Latin American officials in U.S., European and Caribbean banks, the bankers would have learned their lesson," says columnist Andrés Oppenheimer in a recent article in The Herald Tribune on the Riggs case. Obviously, they did not.

About the Author: J. Miren Gutiérrez is IPS Editor-in-Chief; she also writes a monthly column on corruption for Offshore Alert.