18 June 1998
Source:
http://www.usia.gov/current/news/latest/98061826.llt.html?/products/washfile/newsitem.shtml
United States Information Service Washington File
18 June 1998
(Says they've become the "tool" of money launderers) (2620) WASHINGTON -- "International Business Corporations" with secret ownership have become the "central tool" of money launderers and should be a primary target of international anti-crime efforts, says Jack Blum, a U.S.-based attorney and co-author of a recently released money laundering report commissioned by the United Nations International Drug Control Programme (UNDCP). "The International Business Corporation -- a corporation with anonymous ownership which can do no business in its country of incorporation -- has no legitimate place in the international arena," he said in June 11 testimony before the House Banking Committee. "Originally the corporate form was designed to limit liability. Later it had the effect of separating ownership and management. It was never meant to shield the owners of a corporation from responsibility for their actions," Blum said. Blum said that he and the other collaborators on the U.N. report estimate that there are now more than one million International Business Corporations and more than $5,000,000 million in assets are held in the name of offshore entities. "While a substantial portion of this is legitimate -- businesses such as captive insurers and shipping subsidiaries -- a very substantial portion is not. The portion that is not is the bank for the international criminal community. It is where most of the world's drug money is laundered. It is home to the proceeds of crime from around the world," he said. Those crimes, he said, include international financial fraud, market manipulation, illegal arms dealing, people smuggling, and the theft of intellectual property. "Indeed," Blum added, "the amounts concealed in connection with these other crimes far exceed the total amount laundered by the drug trade. The criminals engaged in all of these activities use the facilities of the offshore financial world to hide their profits, and pay their suppliers and employees." Following is the text of his testimony as prepared for delivery: (Note: In the text "billion" means 1,000 million and "trillion" means 1,000,000 million) (begin text) Testimony of Jack A. Blum Committee on Banking and Financial Services U.S. House of Representatives Efforts to Combat Money Laundering June 11, 1998 My name is Jack A. Blum, I am a partner in the Washington, D.C. law firm of Lobel, Novins & Lamont. I am here this morning to share with you some of the conclusions and suggestions of the United Nations experts group on money laundering which were presented to the special session of the General Assembly in New York earlier this week. The experts group included Professor Phil Williams, Director of the Ridgway Center at the University of Pittsburgh, Professor Tom Naylor of McGill University, Professor Michael Levi of the University of Wales at Cardiff, and me. Our study was financed by the United Nations Crime and Drug Control Programme but our conclusions are ours alone and do not reflect the views of the United Nations or of the program's staff. Rather than repeat the text of the report itself, I will briefly summarize the major points and focus on the issues we believe should be addressed by the international community and by individual governments. Offshore banking, the use of offshore financial centers and the use of tools which place money beyond the reach of the civil and criminal justice systems has grown exponentially over the last few years. There are now more than one million anonymous corporations and we estimate more than $5 trillion in assets are held in the name of offshore entities. While a substantial portion of this is legitimate -- businesses such as captive insurers and shipping subsidiaries -- a very substantial portion is not. The portion that is not is the bank for the international criminal community. It is where most of the world's drug money is laundered. It is home to the proceeds of crime from around the world. The data on money laundering and on the use of offshore financial centers is inadequate. We were forced to make estimates because many of the offshore financial centers do not report their activities in a usable form or conceal their data by including it in aggregates. Very little information is available on the holdings of International Business Corporations because these corporations are not required to file financial reports. A serious effort should be made to get the offshore financial centers to report the full scope of the activity they support. Most of the world's money laundering in offshore centers involves tax evasion. Although there are legitimate ways of using offshore entities to minimize taxes, most of the offshore arrangements are designed to avoid income and estate tax by the home country of the owner of the money. Tax evasion should become a predicate offense for the crime of money laundering. All too frequently the professionals who help serious criminals cover their actions by claiming that all they are doing is helping someone "avoid" taxes. Money laundering is an essential element of international financial fraud, market manipulation, illegal arms dealing, people smuggling, and the theft of intellectual property. Indeed, the amounts concealed in connection with these other crimes far exceed the total amount laundered by the drug trade. The criminals engaged in all of these activities use the facilities of the offshore financial world to hide their profits, and pay their suppliers and employees. Money laundering is also an essential component of government corruption. In country after country corrupt heads of state and governments officials have moved tens of billions of dollars into the offshore markets. Presidents Mobutu, Sukarno, Marcos, Duvalier, Bucaram, and Color de Mello are but a few examples of disappearing national wealth. When the money disappears, the IMF and the international community is called upon to replace it. If the money could not be effectively hidden, the problem of corruption could be mitigated. Money laundering is also supporting the explosive growth in international financial fraud. The advance fee for loan schemes, prime bank frauds and dozens of other sophisticated scams depend on the unregulated offshore financial world. Efforts to control money laundering have been largely ineffective because of the inadequate judicial cooperation machinery, the willingness of countries to use their laws to protect launderers, and the wide availability of legal forms and structures which help hide money from police inquiry. Even the best run law enforcement operations touch only a small fraction of the money laundering trade. Operation Casablanca -- dramatic as it was -- barely dented the multi-billion dollar flow of drug funds through Mexico. To control money laundering it is essential to focus on the machinery launderers use and the people who help them use it. We noted that the basic principle of non-intervention should be applied to the machinery of the offshore financial world. Many of the world's "offshore financial center" jurisdictions have gone into the business of providing non-residents and non-citizens with tools designed to defeat the laws of their home countries. These tools include International Business Corporations (1), bank secrecy which blocks inquiries from law enforcement agencies, trust laws which are designed to conceal and protect assets, and unregulated international banks and trust companies. The creation of these tools undermines and degrades the entire international legal system. We consider the action of the countries providing these tools as an intervention in the affairs of their neighbors and, as such, unacceptable. Bank secrecy has a legitimate function. Bank account information must be protected against intrusions by competitors, criminals seeking to identify targets, and curious private citizens. Each of us wants and need to have our affairs private. However, the "bank secrecy" jurisdictions have created the ironic situation in which the data held by the banks is kept safe from legitimate inquiries by foreign police but may not be safe from electronic intrusion or disclosure to third parties. This has come about because bank data is now available globally in computer networks which support bank card operations and related credit cards. The data may be posted in a secrecy jurisdiction but may wind up in the hands of people with access to the system in a place far beyond the reach of the country offering secrecy. If information is disclosed improperly there may be no effective remedy. The issues surrounding information protection and privacy should be the subject of international agreement if the privacy rights of individuals are to be protected. We believe that there should be no bank secrecy with respect to legitimate, court-approved inquiries relating to criminal matters. The only exceptions to this rule should be in cases of political persecution to protect the human right of the individual. The International Business Corporation -- a corporation with anonymous ownership which can do no business in its country of incorporation -- has no legitimate place in the international arena. IBCs are now the central tool of money launderers. These anonymous corporations open bank accounts in bank secrecy countries to hide asset ownership. Originally the corporate form was designed to limit liability. Later it had the effect of separating ownership and management. It was never meant to shield the owners of a corporation from responsibility for their actions. We concluded that, at the very least, the chartering government of a corporation should be able to identify the beneficial owners and hold them accountable for their acts. A number of jurisdictions have passed trust laws which allow the creation of sophisticated grantor trusts which can be used to hide assets and protect them from foreign judgments. These trust instruments do not identify either the grantors or beneficiaries. The real intent of the trust is hidden in side "letters of wishes" and the real control is in the hands of a "trust protector" who is not identified in the trust instrument. All of this is designed to hide the identity of the beneficial owner. In some countries trusts are not subject to foreign judgments and their validity cannot be challenged after a brief initial period. The trusts are often used in conjunction with IBCs to create an impenetrable maze. We concluded that these trusts do not serve a legitimate function and should not be recognized internationally. Those who argue that trusts to protect assets against civil judgment are legitimate, overlook the role civil law plays in controlling fraud. For example, in a recent case the Federal Trade Commission obtained a cease and desist and restitution order against a con-man only to find that his funds were placed in a Cook Islands asset protections trust which is immune from civil claims. The trust has the effect of defeating restitution - an important component of U.S. legal protection against fraud. Lawyers and accountants who use their professional skills to conceal the ownership of money should be legally responsible if the funds are the proceeds of criminal activities. This principle should apply even if the lawyer is not in the same jurisdiction where the crime was committed. Credit card information should be available to the government of the countries where the credit card is used no matter what the secrecy law of the government of the issuing institution provide. Banks in secrecy jurisdiction have been offering cards and telling their depositors that they can be used in their home countries with no danger to exposure. This makes the credit card an ideal vehicle for accessing laundered funds. Free trade zones should be tightly controlled. At one time the zones may have served a legitimate purpose. Today they are for the most part cover for money laundering and smuggling. At the very least, the free trade zones should require that shippers in and out of the zone maintain documentation covering the origin of goods they receive as well as documents covering shipment to the destination. All the transactions and all the documentation should be subject to scrutiny by both the shipping and the receiving country. Currency remains a serious problem. The wide availability and negotiability of the U.S. dollar makes the job of the launderer much easier. The dollar will shortly be joined by the Euro and the European Central Bank is planning to issue what will be the equivalent of a $500 bill. This large denomination Euro will be a money launderer's dream. We recommend that the central bank reconsider the $500 denomination. Further, the periodic recall of all currency would place a serious crimp in the drug trade. Countries should not charter international banks which are not subject to regulation. A number of countries such as Antigua and now Nevis have been chartering "banks". These banks have concealed ownership and are not subject to serious supervision. Because they are "banks," they can open correspondent accounts with banks in major money centers. As banks they have privileged status. For example, under U.S. law, correspondent account funds designated for the benefit of a third party are not subject to seizure. These offshore banks are a perfect gateway for criminals who want to move into the world financial system. Regulation and supervision cannot be limited to banks if money laundering is to be effectively controlled. In today's financial market, money can be laundered through any company with an encrypted switch. That company can be a brokerage firm, a currency exchange house or a factoring company. In addition, trust companies which handle corporate matters have to be subject to supervision. If bank accounts are held in the name of IBCs a trust company can move money by merging companies or through adroit shift in corporate names. Gambling has long been a money launderer's favorite method of hiding cash receipts. The gaming business has globalized and in many parts of the world the ownership and operation of casinos is unsupervised. Substantial international cooperation in the supervision of casinos is indicated. Two of our suggestions were institutional. The first involved training, the second cooperation. The training level of police who work on financial matters needs substantial improvement. Very few police officers around the world have the financial background and skills to follow an international money trail. Even fewer have the ability to identify fraudulent transactions and recognize the difference between legitimate and criminal transactions. We believe that a training institution should be created at the international level to provide a pool of talent capable of meeting the challenges of policing the global economy. We also believe that new methods for gathering and disseminating intelligence regarding financial crime are essential. Until now, major cases have been either sting operations or have involved following and seizing drug money. Systems have to be developed to collate police information from individual cases so that banks and other financial institutions which regularly cooperate with criminals can be identified and targeted. In the BCCI case the GAO found that BCCI had turned up as handling drug funds in more than three hundred cases during the time it operated in the United States. Yet, because the information was never collated, the bank itself was never targeted. This system must be changed. I believe that the international community is beginning to focus on the scope of the money laundering problem for the first time. It was discussed in a substantial way to the G-8 Summit in Birmingham, England, and will be subject of a ministerial meeting. Country after country is discovering that, as long as this unregulated offshore network exists, enforcing domestic laws will be very difficult. I believe that the time has come for major changes and that we should take advantage of the moment to coalesce the international community around workable solutions. ------------------------------------------------------ (1) An International Business Corporation is a corporation with anonymous ownership which cannot do business in its country of incorporation. (end text)