Chapter Eleven

 

SORTING OUT THE SINKS

 

 

 

 

"It's not our business to inquire into our client's morals."

 

Banker in Hong Kong

 

 

 

 

 

 

Ready-made companies, registered in places that many people have never heard of, can be bought from formation agents, who sell them the same way that A&P sells baked beans.

 

A stock is always available for purchase "off-the-shelf." Ownership is shifted in the time it takes to fill out a form. And for the convenience of their customers, just like A&P, most company formation agents these days happily accept credit cards.

 

Legally speaking, a company is a separate entity recognized by statute for the purpose of carrying out certain objectives which are often, but not exclusively, the running of a business. Other objectives might include owning assets, entering into contracts and incurring liabilities. A limited company is one where those liabilities are assumed by the company and not passed along to the management, shareholders or beneficial owners. Although every company must have a registered office, that is not necessarily the place where the company trades. Instead, it is the required address for the service of writs, notices and other legal communications.

 

Every company must also list the names of its directors. But directors do not have to be shareholders. In many cases, they are merely residents of the offshore jurisdiction, who are paid a fee for putting a brass plaque with the company name on their door and for filing the company's annual report. Directors do not necessarily know who beneficially owns the company. As shares in companies can, at times, be issued in "bearer" form, it's the person who holds the share certificates who therefore owns the company.

 

When forming a company, authorized capital is declared. That's the nominal value of the shares, multiplied by the number of the shares the company is permitted to issue, in keeping with its own Memorandum of Association. In other words, a company can authorize itself to issue one million shares at a nominal value of $10 each, and thereby claim that the authorized share capital of the company is $10 million. It looks impressive on the bottom of the company letterhead but is otherwise meaningless. A company boasting $10 million of authorized capital might have issued only a couple of shares for a total amount of $2.

 

Off-the-shelf companies can come with names that are totally innocuous, like Acme Trading and Ajax Holdings. Or they might have an ever-so-slightly familiar ring: T-Warner Trading is not necessarily associated in anyway with Time-Warner; Belltelecom does not necessarily have anything to do with Bell Telephone; Hilton Properties is not necessarily associated with the hotel chain of the same name. The New York-London Financial Exchange SA, registered in the British Virgin Islands, does not necessarily have anything to do with a financial market operating between New York and London. Palm Beach Properties Ltd.(Panama) does not necessarily have anything to do with real estate in Florida. A "trading company" need not trade, a "finance company" need not be in finance, a "holding company" need not be holding anything. The letters "RE" on the end of an offshore company name do not automatically mean it is in the reinsurance business; the words "fund management" do not automatically mean the company is a fund manager; nor do the words "trust company" mean the company is a bank.

 

Ready-mades are often inexorably linked to tax havens. Scattered around the world, there are about 50 firmly established jurisdictions where, to varying degrees, you can successfully hide your business activities and the money those activities generates --- from Liechtenstein, Luxembourg and Monaco in Europe, through the Caribbean which is teeming with the, then half way around the globe to Nauru and Vanuatu, lost in the middle of the Pacific Ocean.

 

For many Europeans, offshore havens are as easily accessible as the Channel Islands of Jersey and Guernsey, and the Isle of Man in the Irish Sea. Dependencies of the Crown, the territories are locally governed according to their own constitutions. The authorities are proud to say that money laundering laws have been tightened over the past few years and that, even if they were once famous for providing laundrymen with sinks, no washing is done there anymore. What they really mean is, anyone arriving with a suitcase filled with used $20 bills will have to satisfy his banker that the money isn't of suspicious origins.

 

Banks are domestically regulated, off-the-shelf companies are cheap and nominee directors are readily available. Buying a Channel Islands company is no more difficult than dialing an 800 number to place the order through a company formation agent who takes credit cards. Because a nominee director doesn’t necessarily know the source of any money controlled by the company he represents, it might be fair to suggest that when he wires funds in and out of offshore banks, deliberately layering them on the instructions of someone he has never met, he could be aiding and abetting a laundryman. Legally, it matters only to a judge whether or not someone does it wittingly. But there is sufficient evidence to say that plenty of laundered money comes through these jurisdictions.

 

Once upon a time, some of it belonged to Jean-Claude "Baby Doc" Duvalier.

 

In September 1986, eight months after Haiti's President for Life was forced into exile on the French Riviera, attorneys acting for him put $41.8 million in Canadian Treasury Bills in their client account at a Toronto branch of the Royal Bank of Montreal. Within a matter of days, the T-bills were moved to a Jersey account held at the Hongkong and Shanghai Bank in Montreal. Duvalier's representatives then separated the ownership records from the money, a common ruse to complicate the paper trail, sending the records for safe keeping to a bank in London while taking the T-bills to yet another bank in Montreal.

 

Two months later those T-Bills were moved to an account of the Royal Trust Bank of Jersey, which is a subsidiary of Canada's Royal Trust Company. Complicating matters even further, that particular account was part of a larger one held by Manufacturers Hanover Bank of Canada at an office in Toronto used by the Royal Bank of Montreal. Shortly thereafter, the money was wired into a pair of accounts at the Royal Trust Bank in Jersey owned by a locally registered shell company called Boncardo Ltd.

 

As the virtually invisible owner of Boncardo Ltd, Duvalier was issued with bearer checks on Boncardo's accounts. The scheme worked for more than a year, until February 1988 when French police, acting on embezzlement charges lodged by the Haitian government, raided Duvalier's villa and confiscated private papers that led to the discovery of the two Jersey company accounts.

 

Duvalier's agents promptly hustled the money out of Jersey, nesting it in the Swiss accounts of two Panamanian shell companies, Minoka Investments and Modinest Investments. A week or so later, $30.8 million was wired from Credit Suisse in Geneva to the Royal Bank of Montreal. Canadian Treasury bills were purchased and a Duvalier agent took possession of them. For anyone hoping to trace the funds, the trail ended right there. The T-bills were left at two nearby banks, but not for long. As the case in France intensified against Duvalier, it was felt his money would be safer elsewhere and it was subsequently wired to Luxembourg. That's when fate stepped in to save Duvalier's bacon. The government that succeeded him had located assets and frozen them, but that government was overthrown in a September 1988 coup by General Prosper Avril, a Duvalier compatriot. Avril allowed the case against Baby Doc to disintegrate, along with all traces of what remains of that original $41.8 million.

 

Back in Jersey, the island's authorities shrug and wonder, has anyone actually broken any laws? Money laundering statutes at the time applied only to drug or terrorist money. Besides that, there are no current laws that they're aware of which prohibit the movement of money from one jurisdiction to another, even if the sole motive for moving that money is to keep it out of the hands of a third party. They're keen to emphasize that they don't want laundrymen as clients, but in the end they admit there's no sure way of telling who's laundering what for whom.

 

You get a similar response in next door Guernsey. They even wince at the term "offshore." It seems they're trying to clean up their image with the shinier designation, "finance centre." Yet, over 14,000 companies are registered there, which is more than ten times the per capita equivalent of Britain. The only information Guernsey will supply about a company is the names of directors and shareholders. They do not furnish annual accounts. Nor do they release the names of the beneficial owners. Clearly they must be doing something right, as banks on an island once famous for nothing more than a breed of cows currently sit on assets of £27 billion. But then, one man's sink is another man's full-service financial institution.

*****

 

 

Towards the end of February 1993, police in Colombia announced that they'd seized $5.9 million and arrested 250 people during a 15-month crackdown on drug trafficking and money laundering. The money turned out to be a drop in the bucket and the arrests, while perhaps significant in number, didn't touch any of the major players in either of the major cartels. However, by getting inside 900 accounts at the nation's five largest banks, the authorities were able to trace drug money through fictitious import/export companies and exchange houses in 16 countries. Significant among them were Yugoslavia, Pakistan, Russia, Czechoslovakia, Hungary and Bulgaria.

 

Private banking still operates in what used to be Yugoslavia, offering incredibly high interest rates. At times, during the height of the war it reached 10-15 percent per month, figures way out of line with the rest of Europe. One of those banks, Jugoskandic, was estimated to be holding $2 billion in hard currency. Paying that kind of interest on that kind of money is an expensive proposition. While this is not to suggest that Jugoskandic was involved with anything illegal, there have been private banks in the region that were known to be using hard currency deposits to finance drug deals --- half of Bosnia is said to be covered with fields of cannabis and ethnic Albanians have establish a firm reign over the heroin market --- which in turn financed weapons.

 

It worked through a typical triangular trade route. An Austrian shell company, whose beneficial owners are unknown, bought arms from Bulgaria for delivery to Albanians arming the underground for an anti-Serb revolt. The Bulgarians used the money to pay for raw opium in the Middle East which it sold to the Albanians. In turn, the Albanians refined the opium into heroin and spent their profits buying arms from the Austrian shell. Disguised as a legal business deal and protected by strict banking secrecy, no one caught them breaking UN sanctions.

 

Nor were the proprietors of the Austrian shell company the only ones who saw opportunity in that part of the world. Arms traffickers operating out of the Czech Republic tried to furnish the Bosnians with $21 million worth of weapons, including 26,800 machine guns, 128,000 magazines, 5000 pistols and 17 million bullets. They used Panama as the third side of their triangle. In this case the weapons never got shipped, but the route through which the money was being washed carbon copied a whole series of deals that the same Czech group is known to have successfully concluded.

 

In Pakistan, banks happily accept large cash deposits. When foreign exchange controls were removed in 1991, permitting banks to offer accounts in foreign currencies, a presidential decree guaranteed banking secrecy on an unprecedented scale. The central bank actually instructed Pakistan's bankers not to ask any questions about the origin of foreign cash deposits. Since then, literally billions of dollars have flooded into that country.

 

The situation is further exasperated by the fact that Pakistan is the most fecund part of the "Golden Crescent", the opium poppy region that stretches from Pakistan, through Afghanistan and into Iran. Nearly 70 percent of the world's highest-grade heroin moves into Europe from Pakistan. Opium poppy has been the main crop of the Mahaban Mountains along the North-West Frontier Province since the 19th century, when British colonials planted it because they could legally export the drug. An ideally suited location, with thin soil, steep slopes and optimum rainfall, the locals around the village of Pushton place great value on land ownership, especially since there are very few opportunities for non-agricultural incomes. Drug traffickers in the nearby village of Gandaf, Pakistan's version of Cali, have little trouble encouraging the peasants to devote their tiny plots to opium poppy as it nets those farmers more than ten times per acre what they could otherwise expect with tobacco or fruit. By growing the raw materials, providing the laboratories to refine them and offering banking facilities for the traffickers, Pakistan is on the verge of becoming the most dangerous power in an already unstable part of the world.

 

But it has been the breakdown of draconian control, coupled with food shortages, hyper-inflation and the resulting general despair that has led to a massive increase in all kinds of law breaking in the former Communist bloc.

 

Hard currency is seen by the people as the only antidote for their understandably pessimistic view of the future. It's not simply the passport to the black markets, it's the key to the world's free markets. And here is one instance when Gresham's Law proves wrong. In this case, good money has driven out bad. Throughout the former Communist world, local currencies are almost worthless. No one wants roubles, korunas, forints, lev or zlotys when they can have dollars. So Eastern Europe has turned itself into one giant sink.

 

Publicly, the Poles are trying to turn themselves into the Spain of Eastern Europe, offering western manufacturers a large, inexpensive work force with an economic infrastructure relying on manufacturing and farming. Privately, the Poles are desperate for hard currency. The economy’s thriving "gray sector," those sums earned without telling the tax man, produces a mountain of cash which needs to be laundered. And as state-owned companies are privatized, opportunities abound up for laundrymen representing international crime syndicates. For the past few years, Poland’s Central Bank has been encouraging the financial industry to report suspicious transactions. Although money laundering is now a punishable crime, the law only applies to funds derived from a small range of criminal activity. Businessmen walk around carrying suitcases filled with cash. Credit cards and checks are still rare. While Poland enjoys a relatively stable political environment, the national currency is convertible and an infrastructure exists for transferring money abroad, it remains a nation shackled by an obsolete financial system. It is estimated that as much as one-third of all business is conducted through the alternate economy. Bankers are inexperienced and naive and financial law enforcement is impotent.

 

In short, Poland today is a laundryman's wish come true.

 

Many of Poland's most important financial institutions happily open their doors to laundrymen because they lack capital, are unable to collect on bad debts and find this the surest route to solvency. The banks have welcomed the Colombian drug cartels, reportedly to the tune of $3 billion. They've welcomed the Turkish drug barons. And they've welcomed the Palestine Liberation Organization. A few years ago, $75 million of PLO funds were deposited in the Bank of Warsaw and have not been seen since.

 

Under Lech Walesa, the government tried to put a stop to it, and in 1992 passed a law requiring banks to register the identity of all customers depositing more than $12,500. Chides one Warsaw banker, "They might as well have asked the entire population to whistle Paderewski." Hungary is just as bad, if not worse, because it has been at it longer. Bank secrecy is iron-clad, without any way for anyone to obtain any information, under any condition whatsoever.

 

There are laws against money laundering in the Czech Republic. But there are 50 Cambios within a five minute walk of Wenceslaus Square and not all of the employees there, many of whom are not Czech, bother to remind customers about the law. Organized crime is also a thriving sector of the local economy, thanks almost entirely to Russians who were stationed there as an occupying power in the good old days of Communism and stayed because capitalism turned out to be even more fun.

 

Just across the border, in the other half of what used to be Czechoslovakia and is now just Slovakia, capitalism hasn’t reaped the same fruits and they’re even more desperate for hard currency. One local attraction is that from the capital Bratislava there’s a good road across a lax border for the 40 minute drive to secret banking in Austria.

 

And then there is Bulgaria.

 

The UN embargo in the former-Yugoslavia turned Bulgaria’s organized gangs into the nation’s most successful entrepreneurs. Sanction busting was rife and with it came money laundering. According to the Ministry of the Interior, Bulgaria is today in the throes of its worst crime epidemic this century.

 

When the government in Sofia announced that it would sell off 1600 previously state owned industries, it explained that, unlike similar sales in other former Communist countries, they would not be accepting scrip or vouchers, they would be selling everything for cash. Informed by European and American advisers that such a sell-off would be a field day for money launderers, the Bulgarians said they would prevent anyone from doing that by asking all investors to declare the origin of their funds, as if a Colombian drug dealer would admit that he was buying Balkan Airlines with $50 million worth of crack receipts!

 

For the record, the Bulgarians were one of the first Eastern bloc countries to comprehend the advantages of money laundering. Under 35 year regime of Todor Zhivkov, from 1954 to 1989, the government dealt drugs, washed the profits through shell companies that had access to Swiss banks, and then used that money to finance a major international illicit arms business.

 

Zhivkov's trading outlet was the state-owned import-export company, Kintex. Set up in 1968, it was operated exclusively by the KDS, the Bulgarian Security Service. It sold heroin and morphine base to Turkish drug traffickers and with that money was able to build up its gun running. Kintex became so adept at converting drugs into weapons that it furnished the Nigerians with guns to put down the Biafra civil war in the 1960s; it furnished various Christian militias with guns to escalate the civil war in Lebanon in 1975; it furnished South Africa with guns in direct violation of various embargoes; and, for more than 20 years, it was the primary outfitter of guns to the PLO. For their efforts, the Bulgarians reputedly earned up to $2 billion a year in much-needed hard currency.

 

The extent of Kintex's connections with organized crime in the West came to light only in the early 1980s. Italian police raided a Mafia drug refinery in Trapani Province, on the western tip of Sicily, and uncovered a laboratory that, to their surprise, was stocked with Bulgarian machinery and Bulgarian-supplied morphine base. This one lab alone was capable of producing a staggering 4.5 tons of refined heroin per year. At wholesale prices, in those days, that represented $1.125 billion. Over the next few years, no fewer than 15 refineries were uncovered in Sicily and on the Italian mainland, most of them with Bulgarian supplies.

 

By this time, the CIA had plenty of evidence to prove Kintex's role in international drug trafficking. When the Reagan administration formally protested, Zhivkov cracked down on every amateur drug dealer in the country. Largely to placate Washington, tons of marijuana were seized and assurances were given that the business had been ended. But Kintex continued to trade. Five years later, as a result of continued American protests, Kintex finally became too much of an embarrassment. So, for all intents and purposes, Zhivkov put Kintex out of business. In its place he installed son-of-Kintex, a state-owned import-export company called Globus. But the KDS was still in charge and its primary mission was still drug trafficking, arms dealing and money laundering. In effect, the only change was the company stationery.

*****

 

 

The Principality of Monaco came under a great deal of criticism for allowing money launders to use the local banking system. A French parliamentary report concluded that the Mafia's presence in France was steadily growing and singled out Monaco as a major European sink. They said that it's proximity to Italy --- only 20 minutes from the border which since January 1993 is wide open --- together with its secret banking system and the presence of casino gambling had combined to give the Mafia a unique opportunity to launder funds through real estate, golf courses and gambling.

 

A French newspaper then accused the casino at Monte Carlo of being a prime launderette for Italian crime gangs. The Societe des Bains de Mer, the company who runs the casino, instantly denied the charges. But Prince Rainier III openly admitted that an inquiry into SBM was already underway.

 

Having very little patience for such charges the Prince, who has always taken a strict no nonsense approach to crime in his country, insisted that measures be taken to crack down on money laundering. He moved to tighten legislation which obliged banks, insurance companies and stockbrokers to report suspicious transactions, and to disclose the identity of those involved. In line with French law, he required the casino’s management to report payments for chips that were suspected to come from drug trafficking or organized crime and set stiff prison sentences for anyone using illegal gains to buy property. He agreed that the Principality would work with the French police where drug money laundering was involved, but drew the line on how much information could be passed along by explicitly forbidding any financial information being handed on to French tax authorities. It gets back to not killing the goose. There are, reportedly, in excess of $13 billion on deposit in 40 banks in Monaco, a country with a population of just 30,000.

 

As Monaco tightened it’s rules, real estate began to boom in the tiny Republic of San Marino, hidden inside Italy, where banking is completely secret, almost exactly the way Switzerland was years ago.

*****

 

 

In 1989, the US State Department went public with its wrath, damning three of the world's banking centers for having sold out. Under the heading of the "International Narcotics Control Strategy Report," the Bush administration named the Bahamas as the major transit country for cocaine and marijuana entering the United States, and condemned it for having allowed itself to become such an important money laundering center. It named Hong Kong as the money laundering heart of the Pacific Rim, and condemned it for having become the major transit center of Southeast Asian heroin. And it named Panama for continuing to be the principal money laundering haven for the South American cocaine trade.

 

That report made the papers.

 

A more revealing document, which didn't make the papers, was circulated around the US Drug Enforcement Agency. Specifically not for public release, this greatly widened the picture, singling out 18 "major conduits and repositories" for illicit drug funds. The list of the world's greatest sinks consisted of Hong Kong, Liechtenstein, Luxembourg, the Channel Islands, Andorra, Switzerland, Singapore, the United Arab Emirates, the Cayman Islands, Mexico and Panama. Four American cities were also named: New York, Los Angeles, Miami and Houston. And then the DEA pointed an accusing finger north to Montreal, Toronto and Vancouver.

 

Hong Kong is an obvious nominee. Ever since the mainland territory and offshore islands that are Hong Kong were ceded to Britain as retribution after the Opium War of 1842, the Crown Colony has been one of the world's major trading and smuggling ports. Today, it is a designer money center, born out of jet travel, electronic communications and the mystique of the East. It's a gold market and a diamond market and a stock market that looks more like Las Vegas than Wall Street. It's a Portobello Road for shell companies, a formation agents' paradise where nominee directors forsake wallpaper for brass plaques. Arms smugglers, black marketeers and organized gangs have always used Hong Kong to wash their funds. So have the Chinese, since Mao's Great March. But Hong Kong had never seen anything like the kind of action the heroin traffickers brought to town. Just as banking secrecy laws tightened and Hong Kong's regulatory infrastructure loosened, the drug trade exploded, creating an unprecedented level of prosperity. From 1978 to 1981, real estate prices quadrupled. Banks were awash in liquidity.

 

It was Disneyland with dim sum!

 

The bubble might easily have burst the day the British agreed to return Hong Kong to the Chinese. And some people contend that it did. The money men in Hong Kong took fright. No one knew what the world would look like 15 years down the line. 1997 seemed uncomfortably close. Capital headed west, in haste, most of it finding its way into US and Canadian real estate. Over the next few years the situation worsened. People with money bought their way out. People without money tried selling what they had to raise a ransom. Prices hit rock bottom.

 

That's when the law of supply and demand changed gears. Having moved into the Colony to cater to people wishing to get their money out, western banks had inadvertently established the infrastructure that would now give birth to a second coming. With prices way down and black money still readily available, business opportunities reappeared. Beijing made enough of the right noises to encourage western bankers that business under the Communists would be as glorious as it was under the capitalists. So those western bankers revised their view of 1997. They suddenly decided they were in the right place at the right time, and that it was indeed time to gamble on a prosperous future. Now, as native money poured out, foreign money poured in. Especially drug money.

 

When Law Kin-man, one of the world’s most successful laundrymen, pleaded guilty in the US in 1994 to a host of federal charges, he confessed to using 362 bogus bank accounts in Hong Kong to wash an estimated $93 million of Golden Triangle drugs through the Crown Colony. A further eight in the States were private brokerage accounts so that he wash funds through the Hong Kong stock market.

 

The phoenix that rose from the ashes of the 1982 crash is today the world's third financial center, after New York and London. Shell companies generally cost less in Hong Kong than they do in Europe or the Caribbean. Bankers are supposed to ask questions, but tend not to bother. Why should they? The Colony is crammed with more than 400 banks. It's clear that this is a buyer's market, so much so that the volume of small-denomination American bank notes circulating around Hong Kong today far exceeds the total volume of all currency transactions within any single European country.

 

Just across the Pearl River delta is Hong Kong's little bad brother, Macao. This is what Las Vegas would have looked like had Genghis Khan beaten Chris Columbus to the New World.

 

Nearly 80 percent of Macao's annual revenue comes from the $1 billion a year, Hong Kong controlled, gambling monopoly, through which hundreds of millions of dollars are washed every year. Not only do the Chinese gangs have a marked presence in Macao, but the government of North Korea maintains a consular office there brazenly taking advantage of the colony's easy, and highly secretive, westernized banking system.

 

Now under Chinese rule, nothing seems to have cooled down. Banks in Macao must identify people involved with "significant transactions," and that "involuntary involvement with money laundering or with any criminal activity must be carefully avoided." But that's as far as they go.

 

As most of the money laundered through Hong Kong and Macao is foreign, it's clearly in China's interest to keep the coffers full. That's why, when they took over, they were smart enough not to do to the West what Fidel Castro did to Meyer Lansky and his comrades in 1959.

 

 

 

*****