Tuesday, July 01, 2008

Florida finance and Swiss Secrecy

"There is very little evidence that the reports banks are required to submit have been a deterrent to illegal activity or a method of identifying criminal behavior."

This is what the Florida Bankers Association had to say about the U.S. Patriot Act (which was passed after the terror attacks of Sept. 11, 2001) and the U.S. Bank Secrecy Act (which is supposed to help fight money laundering.)

We agree with the statement, although we question their motives for saying it: the news reports about their statement suggest that what they really want is laxer regulation letting them hoover up more cash from muckier customers without asking too many questions. This is simply mistaken, for as the same story points out:

"Government agencies have insisted that the information gathered by banks has played a key role in monitoring, uncovering and prosecuting both criminal and terrorist activity."

From the bankers' point of view, the UBS case (which we blogged recently) could not be more embarrassing. New developments are emerging. As the New York Times reports:

"(U.S.) Federal authorities asked a federal court on Monday to force UBS, the Swiss banking giant, to turn over the names of wealthy American clients suspected of evading taxes through secret offshore accounts."


As the NYT continues:
"Prosecutors suspect that UBS helped American clients stash $20 billion overseas in secret offshore accounts, evading $300 million or more in taxes."

All this shows (once again) how right the Florida Bankers are about the rules not deterring criminal behaviour. Britain's Observer newspaper put in this context:

To many, the UBS tax evasion allegations present more compelling evidence of the destabilising role that secretive tax havens play in the global financial system. It is a system that connects Wall Street and the City to Liechtenstein, Panama and the British Virgin Islands - all places where Birkenfeld parked the cash of his wealthy clients. This week MPs on the powerful (UK) Treasury Select Committee will launch a probe into tax havens.

Another piece of history essential to know for anyone interested in these matters concerns the Patriot Act, which Raymond Baker, a world authority on dirty money, described as

"the ugliest period ever in the history of anti-money laundering legislative efforts."

Forward-thinking U.S. Senators had been pushing for years to introduce tougher legislation against dirty money, but again and again their bills were thwarted by ferocious lobbying from ideological foes in the Senate Banking Committee. When the New York attacks happened on September 11, 2001, the crime-fighting senators insisted that their provisions against dirty money be included in the Patriot Act. The American Bankers' Association, and particularly its largest New York members such as Citigroup and J.P. Morgan Chase, fought to water down the efforts to clean up. As Baker said in his book Capitalism's Achilles Heel, the bankers sought to:
  • Uncouple the anti-money laundering proposals from the Patriot Act, so that anti-money laundering could be fought separately and hopefully killed
  • Reduced the strengthened "due diligence" requirement on banks, lessening their obligatoins to know their customers' sources of money.
  • Avoid restrictions on correspondent accounts with overseas banks
  • Continue doing business with foreign shell banks.
  • Shift as much discretionary authority as possible to the Secretary of the Treasury, where further lobbying could limit requirements even more.
Baker added:

"How the biggest banks in New York, following the city's most tragic event, a shattering experience for the whole of America, could go to Washington and argue against tougher anti-money laundering provisions directed in good part at terrorists is to me unfathomable. . . They should have gone to Washington to say: it's the security of our nation first, and it's our bottom line second. We're here to help in every conceivable way.
(There is much more detail on this in the book - well worth reading.)

So the Florida Bankers' statement appears to be the latest in a long line of such lobbying efforts against transparency. What they were reported as saying, in effect, is this: "policing these crimes is not working very well. The answer is less policing."

A final note to end on. We have written much here about terrorist financing and money laundering. It is esssential to note that these are just relatively small parts of the problem. The broader tax evasion problem is much, much bigger. The answer is straightforward. We simply need much, much greater transparency in international finance.

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