Fool Me Twice - Russian money laundering scheme

Progressive, The, Dec, 1999 by Lucy Komisar

A few dozen offshore tax havens have laws permitting corporate secrecy. And there are more than three million anonymous corporations--which are designed to conceal the origin and destination of goods in trade and to evade taxes by hiding profits and assets.

Offshore trusts give control to unidentified "trust protectors." The local courts can't hear claims against trusts, and many have "flee clauses" requiring trustees to transfer assets in case of law enforcement inquiries or legal writs. This puts them beyond reach of creditors, estranged spouses, tax authorities, police, customs, prosecutors, and courts.

Such offshore operations often use a gimmick called layering--moving the money through multiple venues--to prevent a paper trail, says one international investigator. "Money launderers set up a British Virgin Islands corporation, open a bank account in Curacao, airfreight the money to Aruba, have that wire-transferred. It goes through three jurisdictions; there are no records," he says. "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 investigating a loan to the company ask about owners, lawyers say, `That's protected by secrecy law.'"

In October 1998, I attended the IMF-World Bank annual meeting in Washington, D.C., and went to a panel on "Strengthening Banking Systems." I'd just read a news report that then-Deputy Treasury Secretary Lawrence Summers had remarked that a $4.8 billion IMF loan to Russia might have ended up offshore. So I asked the experts, "Why don't you end the bank secrecy system that hides and launders illicit funds? Why don't you abolish secrecy havens by disallowing international transfers of money from such jurisdictions?"

Howard Davies, head of the British Financial Services Authority, replied, "If there could be a way of extending the reach of principles and anti-money laundering networks to cover all offshore...." He left the sentence unfinished, then said it was difficult to achieve, that there was not much leverage, and ended, "I have sympathy with the spirit of your spirited question."

Stanley Fischer, deputy director of the IMF, declared, "Obviously, these are tax avoidance and regulation avoidance devices. It must be possible to strengthen regulatory frameworks, perhaps the way you mention.... The idea that there shouldn't be unregulated banking for tax avoidance and regulation avoidance is correct."

Six months later, the Group of Seven-- the leading industrial nations--met and considered how to deal with the dangers posed by offshore accounts. "We are very worried about offshore havens," said then-Treasury Secretary Robert Rubin. It is "in the interest of sound international tax policy that there not be offshore havens that people can use to evade taxes."

But when, at the same meeting, France's Finance Minister, Dominique Strauss-Kahn, urged that offshore centers that fail to properly regulate accounts or cooperate with law enforcement be cut off from financial contact with the world, he did not get a positive response from Rubin or the other Americans. "I don't see the thing moving," Strauss-Kahn told me later. "I'm afraid it will be a long time. Maybe I'm wrong."