Tuesday, March 11, 2008

Robert Morgenthau speaks

Robert Morgenthau is an inspirational figure in U.S. politics: one of the legendary figures in international crime-fighting. His own history, and that of his family, is quite fascinating: take a look at this Wikipedia entry, for example. Or look at his testimony to the US Senate Permanent Subcommittee on Investigations in July 2001, looking into Liberian shell companies and accounts in Jersey - and much more besides.

A few days ago Morgenthau wrote a letter to the New York Times. Please read the whole letter. Here are a few highlights - and we hope the New York Times will forgive us for quoting such a long section from its letters page:

In the world of tax havens, Liechtenstein is a relatively minor player.

On its Web site, Liechtenstein reports having 161 billion in Swiss francs (equal to 155 billion United States dollars at current rates) on deposit in 15 banks in 2006. By contrast, the Cayman Islands boasts that it has 1.9 trillion United States dollars on deposit in 281 banks, including 40 of the world’s top 50 banks. Bank deposits in the Caymans have increased by $500 billion in the last 18 months and now amount to four times the total deposits in all the banks in New York City.

The Caymans, notorious for their bank secrecy laws and lack of supervision over financial markets, have figured in many major financial scandals. For example, they were the nominal home of Long Term Capital, the giant hedge fund that collapsed in 1998. Enron Corporation used 441 Cayman affiliates to hide $2.9 billion in losses. Parmalat Finanziaria used Cayman subsidiaries to falsely claim $4.9 billion in bank deposits that it did not have. Last year, two Bear Stearns hedge funds that were incorporated in the Caymans collapsed, following the devaluation of its subprime mortgage-backed investments — the implosion cost investors $1.6 billion in losses.

Morgenthau should know about these things. He is the U.S. attorney who decided to go after the enormously corrupt BCCI bank. As this older New York Times story indicates:

Mr. Morganthau, who will be 72 years old tomorrow, got involved in the case as the result of the frustration of a Congressional investigator, Jack A. Blum (who is currently a senior adviser to TJN), now a lawyer in private practice, who in the spring of 1989 believed the Justice Department had no interest in following information he had developed for the Senate Foreign Relations Subcommittee on Terrorism, Narcotics and International Operations.

And Morgenthau finishes this week's letter like this:

The economically developed countries need to impose severe sanctions on the tax havens and those who use them to unfair advantage. As recent history confirms, totally unsupervised markets will eventually have serious problems, with ripple effects for markets worldwide. And offshore tax evasion alone costs the United States government more than $70 billion annually. Left unchecked, these rogue jurisdictions have the potential to do a great deal of harm to the world’s truly productive economies.

He is dead right. The scandal of tax havens is not just about narrowly defined issues like drug money laundering or terrorist financing, as we have recently noted. This is also about the integrity of world markets: not only their ability to deliver prosperity, but also their ability to justify people's faith in them. Depending on how the global credit crunch progresses, this faith may be severely tested in the months and years to come.

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