From our overstocked archives
Sam Smith, 2011 - There is no doubt that, as a financial matter, corporations are the greatest abusers of offshore havens. Nichole Tichon, executive director of the Tax Justice Network, notes that "estimates by the Government Accountability Office show at least 83% of the largest 100 companies have created offshore subsidiaries. . . Offshore tax havens cost the Treasury over $100 billion per year.
In a study cited by the World Bank, Raymond Baker's Global Financial Integrity Program found that two thirds of the offshore havens' business came from corporations and only a third from conventional criminal activity. Just three percent was used to launder bribes.
Writes Nicholas Shaxson in his excellent book, Treasure Islands, "This research underlies the point that illicit offshore flows of money are far less about the drug smugglers, Mafiosi, celebrity tax exiles, and fraudsters of the popular imagination and mostly about corporate activity."
Which is fine as long as you're only comparing fiscal impacts. But consider that three percent of $100 billion is $3 billion - and that's just the taxes that aren't being paid on bribes and other funny money. Add to this the fact that these funds are having a political as well as a financial effect. And that it takes a lot less money to buy a politician than it does to make a major corporate tax burden disappear.
I recently came something I had previously written that included this paragraph:
"In the 1930s, Hot Springs represented the western border of organized crime in the U.S with the local syndicate headed by Owney Madden, a New York killer who had taken over the mob's resort in Arkansas. Owney Madden was an English born gang member who had been arrested more than 40 times in New York by the time he was 21. Madden got the assignment from his boss, Myer Lansky. The plan for Arkansas was modeled on an earlier one in which Governor Huey Long opened a Swiss bank account into which the mob would put $3 to $4 million annually for the right to run casinos in the state."
Two things jumped out. First, the use of offshore havens goes back at least 80 years. Second, one of its early manipulators was a politician looking for a place to hide his illegal money.
If Huey Long could use offshore money laundering in 1932 to handle $3-4 million in annual bribes, how many politicians and other public officials are currently using the same techniques and with how much money?
Here's how RT Naylor described it in Hot Money & the Politics of Debt:
The Lansky operation perfected the technique of the 'loan-back.' The first stage involved moving funds out of the U.S. Although couriers carrying cash were the favorite vehicle, money could also be moved abroad in the form of traveler's checks, cashier's checks, stocks with nominee ownership, bearer bonds, and even blank airline tickets. . . .Philip Brewer, in How to Launder Money, gives more details:
Once safely behind the screen of Swiss bank secrecy laws, the money was ready to return home, with its origins and nature in disguise. Sometimes it stopped en route in a Liechtenstein anstalt (an anonymous company with a single secret shareholder). In the final stage, the initiator of the cycle 'borrowed' the funds from the anstalt or directly from the Swiss bank, repaying the 'loan' with interest - to himself - while deducting the interest from his taxable income as a business expense."
First, you need to make the money disappear. Second, you need to make it reappear in some gradual fashion that doesn't bring it to the attention of whoever you're trying to hide it from…Well before concerns about corporate tax havens were being seriously raised, money was flowing to and fro in this fashion. The drug cartels sent cash out of America, writes Shaxson, "in shrink wrapped bills loaded on wooden pallets." And one of the beneficiaries of the system was Richard Nixon whose Committee to Re-Elect The President sent illegal contributions to Mexico, and then sneaked it back through a company in Miami. According to the Solar Navigator website, it was this saga that led the British Guardian newspaper to dub such transactions "laundering."
If you really want to be able to invest the money, get it overseas. . . .There are plenty of fancy, complex ways to get the money overseas, that mostly require an accomplice. The most basic is an invoice scam. Establish a business that imports or exports something. Meet with your customer or supplier and arrange with him to either over-pay or under-bill, and then to have your counterpart deposit (most of) the excess into your foreign bank account.. . .
If you've got the money overseas somewhere, bring it back in some way that makes it legit. The easiest would be to create an overseas company that then hires you to do something. You do whatever it is and send an invoice whenever you want some cash. You can also reverse the invoice scam that let you get the money overseas in the first place--now you under-pay (or over-bill), while making up the difference out of your foreign bank account. A third option is a fake loan where you "borrow" the money and then simply fail to pay the money back.
If you can't wait to reappear the money gradually, and the amount involved isn't too big, you can always use a simple casino scam. Go to a casino and buy some chips. Do a little low-risk gambling. (For example, bet each chip, one at a time, on red. Do that 20 or 30 times and you'll have about the same amount you started with.) Get a few more chips and repeat. Play a few different games (blackjack, craps, slots). Ideally, go to several different casinos and repeat the whole process there. Eventually, cash in all your chips and go home with a story about how you won a bunch of money at roulette. Pay taxes on your winnings.
A 1998 UN report described another example:
Franklin Jurado, a Harvard-educated Colombian economist, pleaded guilty to a single count of money laundering in a New York federal court in April 1996 and was sentenced to seven and a half years in prison. Using the tools he learned at America's top university, he moved $36 million in profits, from US cocaine sales for the late Colombian drug lord Jose Santacruz-Londono, in and out of banks and companies in an effort to make the assets appear to be of legitimate origin.Wikipedia puts some numbers on it all: "Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. . . The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output."
Jurado laundered the $36 million by wiring it out of Panama, through the offices of Merrill Lynch and other financial institutions, to Europe. In three years, he opened more than 100 accounts in 68 banks in nine countries: Austria, Denmark, the United Kingdom, France, Germany, Hungary, Italy, Luxembourg, and Monaco. Some of the accounts were opened in the names of Santacruz's mistresses and relatives, others under assumed European-sounding names.
Keeping balances below $10,000 to avoid investigation, Jurado shifted the funds between the various accounts. He established European front companies with the eventual aim of transferring the "clean" money back to Colombia, to be invested in Santacruz's restaurants, construction companies, pharmacies and real estate holdings.
While the illegal drug trade might not compete in numbers with corporate tax laundering, it is hardly insignificant. Its size has been estimated at $400-$500 billion, roughly that of the legal pharmaceutical industry or twice as large as Saudi Arabia's annual oil exports.
What is astounding about this is that an industry so big would have - at least if you only listen to law enforcement and the media - no lobbyists in Washington, no political agenda and make no contributions to politicians. Based on the way the story is being told to America, the illegal drug trade must be the most politically ethical business in the land.
In fact, of course, the money and its travels are just well hidden and nobody in the establishment really wants you to spend the slightest time worrying about it. Just like nobody in the establishment seems to care that the drug war hasn't worked at all for four decades (money launderer Richard Nixon first used the term in 1971). And just like only a handful seem concerned about offshore tax havens.
If it were otherwise, then there would have been far more interest when an investigator discovered in the 1990s that the Development Financial Authority of the drug-infested state of Arkansas had made an electronic transfer of $50 million to a bank in the Cayman Islands. At the time Grand Cayman had a population of 18,000, 570 commercial banks, one bank regulator and a bank secrecy law. It was a favorite destination spot for laundered drug money.
One of those bringing drugs into Arkansas was Barry Seal, then the biggest drug importer in the country. He was murdered and after his death it was found that among his bank accounts was one in the Cayman Islands branch of the Fuji Bank containing $1.6 million.
There are no culpable names mentioned here, in part because so few in the media or law enforcement have the slightest interest in following the money.
On the other hand, there is simply no logical reason to assume that politicians and law enforcement officers are somehow exempt from the extraordinary temptations involved in offshore money laundering. Every way that the drug cartels are using offshore financing is also available to corrupt politicians.
Consider, for example, the huge fees some American politicians are paid when they speak abroad. What a great way to launder some money. Or what if the purchasers of those endless political memoirs by failed politicians include mass purchases by corrupt interests?
So far, we're certainly far more polite about it all than, say, Mexico. But scrape the surface just a bit and you'll find an illegal system as massive and political corrupt as our neighbor to the south.
And one of the telling signs is that the facts are there but so few in America's establishment or media even want to talk about it.