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

TEXT: LEGAL EXPERT DENOUNCES USE OF 'INTERNATIONAL BUSINESS CORPORATIONS'

(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.

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(1) An International Business Corporation is a corporation with
anonymous ownership which cannot do business in its country of
incorporation.

(end text)