Banking
Money Launderers Told To Come Clean
Islands React to OECD Blacklisting, Deadline for Action
It may well have been one of the longest executions in history - and what is surprising is that the Pacific Island nations involved have not stepped out of the firing line all this time. Instead small Pacific nations have continued to plunder the tax bases of nations they often depend on for aid and have provided the mechanics for assisting international crime. And in the case of Nauru they have been instrumental in bringing down a superpower.
For nearly three years Pacific tax-haven operators have been warned to clean up their acts by July 31 this year, or else. Nauru and Niue are discovering late in the day that the 29-nation Organization for Economic Cooperation and Development (OECD) was not bluffing.
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And the light is going on too that Pacific countries are more vulnerable to international counter-measures than other errant nations. In a globalization age, tax haven banking is an anomaly that the OECD and its linked Financial Action Task Force (FATF) has tried to regularize. Some of the tax havens have a long if ignoble history; places like Switzerland, which has aided dictators from Hitler to Marcos, Hong Kong and the Bahamas. Some tax havens have even existed within national boundaries; Delaware in the United States, the Channel Islands within Britain. The bottom line of all of them has been the evasion of taxation in the country the money was made.
They are also crucial in hiding illicit money or, more recently, laundering money. Illicit wealth has to be made to appear legitimate — before those who possess it can reinvest it in the legal economy. Places like Nauru and the Cook Islands offer venues where dirty funds can be deposited into an untraceable bank account, often in the name of a shell company whose owners cannot be identified. Sometimes, for further security, the money is reinvested in other shell companies in other financial centers. Either way, the funds are easily made to appear to come from legitimate business transactions.
What OECD-FATF do not say, and which tax haven critics overlook, is that the money itself — the actual cash — seldom, if ever, actually goes to places like Nauru. Mostly the money is processed through banks in developed countries — such as the Bank of New York in Manhattan — that have opened bank accounts for customers with strange company names. When authorities investigate who owns the accounts they are, of course, led back to companies registered in Nauru or Niue.
U.S. Congressional investigators two years ago revealed that Citibank, the largest bank in the United States, helped several corrupt foreign clients hide fortunes through accounts at its private banking division. Citibank earned a fortune in commissions.
Experts peg the flow of money from crime, corruption, and tax evasion at $500 billion to $1 trillion a year, much of it from poorer countries. Once laundered, virtually all of it ends up in the United States and Western Europe, whose bankers often turn a blind eye to suspicious money.
And in the last five years the Internet made it easier for many more people to use tax havens in places many have never heard of. "It’s one of the dark sides of globalization," says US Deputy Treasury Secretary Stuart Eizenstat, who says that money laundering and the large-scale criminal activities it serves are "direct threats to our national security."
OECD-FATF have tried for four years to bring some order to the system, primarily in a bid to fight drug money laundering. Most of the countries involved have acted, to some degree or another, to clean up but finally OECD-FATF last year published a list of 15 countries they designated as non-cooperating.
In the Pacific these included the Cook Islands, Marshall Islands, Nauru and Niue. Also on the block are the Bahamas, Cayman Islands, Dominica, Israel, Lebanon, Liechtenstein, Panama, Philippines, Russia, St Kitts and Nevis and St Vincent and the Grenadines.
If by July 31 they have not taken specific actions that will satisfy OECD-FATF a range of counter-measures will come into effect. But already it is clear that countries like Niue and Nauru are feeling far more heat than they will be able to bare.
Premier Sani Lakatani of Niue, for example, cried out that his country’s throat was being cut by new measures American banks took in late January to prevent the transfer of money to Niue. Lakatani said the sanctions imposed by the Bank of New York and Chase Manhattan was cutting off a "lifeline" to Niue’s economy.
Cook Islands Prime Minister Terepai Maoate expressed concern that his country too would be hit, while the bigger tax havens like Switzerland and Hong Kong would not. "Why not? We are just chicken feed, we are easy prey," he said.
Maoate says the Cooks is about "asset protection" and not tax avoidance. "As far as the Cook Islands are concerned we are squeaky clean. Our product is asset protection, we are not a tax haven."
The Suva-based Pacific Forum Secretariat in February noted that the OECD-FATF action was of "critical importance" to the four Pacific states as well as Samoa, Tonga and Vanuatu which are also involved in tax haven operations. The Secretariat says the July deadline "has placed a dark cloud over the future operations of the offshore financial centers, including those in the Pacific (which) contribute as much as 8-10 percent of GDP to those small, developing Pacific nations."
Niue has given the Panama City law firm of Mossack Fonseca and Co., the exclusive right to register "international business companies (IBC)" in Niue and it pays Niue around US$1.6 million a year, which is a nearly half of Niue’s government budget, projected this year to be around NZ $3.75 million.
In March last year, Panamanian lawyer Jurgen Mossack, who reperesents Niue, was in New Zealand seeking recognition for his operation, and denying he was involved in crime. "Money is laundered mainly on shore in the big countries. I would say in the United States, that is where the big numbers can be played because that is where they do not cause so much attention. That is where the real money laundering is done."
He agreed that the money laundering in countries like the U.S. did involve IBC names, but it was done "with the knowledge and connivance of the American banks."
Computer programs meant banks knew exactly what was happening and if organizations like the OECD and FATF were serious about laundering, then they had to hit big cities.
"It always goes back to the banks. I have been telling people that offshore companies cannot launder money, you need to have the banking system. Without the banking system it is impossible to launder money."
