U.S. Attorney Morgenthau on Money Laundering

[David Watts <davidwatts_98@yahoo.com>]

New York Times 

November 9, 1998, Monday  Editorial Desk 	
On the Trail of Global Capital 
By Robert M. Morgenthau
 
What are the five largest financial centers in the world? Many will
name New York, London, Tokyo and Hong Kong. But how many will guess
the fifth? It's the Cayman Islands -- or so, at least, its Government
claims on its Web site.
 
It's certainly the case that huge companies -- including hedge funds
like Long-Term Capital Management -- have made the Caymans their
nominal home. And bank regulators in the United States have confirmed
that bank deposits on the islands now total about $500 billion, twice
the amount of four years ago and more than the amount on deposit in
the New York Federal Reserve District. That is about $14 million for
every man, woman and child in the Caymans. The financial community
there consists of 575 banks and trust companies. More than 20,000
corporations are chartered on the Caymans.
 
What draws so many capitalists to so unlikely a spot? Secrecy, for one
thing. In the United States, capital markets are regulated by
requiring transparency in financial dealings. The Caymans, by
contrast, have no such openness, no tiresome restrictions on the
pursuit of wealth. With respect to regulation, the Caymans have won
the race to the bottom.
 
Take, for example, Long-Term Capital Management, which had to be
bailed out earlier this year. The fund's basic operations are
conducted in Connecticut, but it is chartered in the Cayman Islands.
The fund kept the details of its borrowings and investments secret --
a result not obtainable where there must be concerns for the curiosity
of regulators. The results were disastrous. No one knew the absurd
extent to which Long-Term Capital's confident superstars were
leveraging their assets -- until the bubble burst.
 
The Caymans' financial secrecy laws make it easy to hide suspect
dealings. It is now well known that the Bank of Credit and Commerce
International, whose collapse in 1991 was the biggest banking scandal
in history, took advantage of those laws. Beyond the assistance they
lend to criminals, secrecy laws aid reckless acts by high-rolling
entrepreneurs.
 
But in fact, most of the ''offshore'' Cayman banks are run not from
the islands, but from New York. Amazingly, the Cayman Government Web
site itself boasts that, of the 575 banks and trust companies
''based'' in the islands, a full 106 actually have a physical presence
there! Resort to these institutions is a simple charade. What would
happen if a determined American bank inspector flew to the islands and
demanded to see the books of one of these institutions? He would be
arrested. It's the law.
 
There is yet another explanation for the remarkable blossoming of
financial institutions in the Cayman Islands. The islands have no
income tax, no capital gains tax, no value added tax, no sales tax, no
inheritance tax and no tax treaties. Sophisticated Americans place
billions in Cayman investment vehicles like Long-Term Capital that are
carefully structured to reduce American tax liability. Citizens of
other countries invest billions there so their incomes will be exempt
from American taxes.
 
Commendably, the Treasury Department recently resolved to study ways
to keep sham transactions from having an impact on tax liabilities,
and the Group of Seven industrialized nations has said that hedge
funds should ''possibly'' be subject to disclosure rules. But those
are only tentative steps.
 
More can be done. The Cayman Islands are a British dependency, and
both the governor and the attorney general are appointed by the
British Government. This means Britain can end the laissez-faire
practices of the islands. And since, from a financial perspective, the
islands are an American dependency, Washington can also stop the
offshore shenanigans -- for instance, by imposing more prudent
oversight of lenders doing business with Cayman entities.
 
The Caymans are only part of the problem. The Isle of Jersey, the
British Virgin Islands, Cyprus, Antigua, Liechtenstein, Panama, the
Netherlands Antilles, the Bahamas, Luxembourg and, of course,
Switzerland all offer ''offshore'' sanctuary. Until action is taken to
eliminate these havens, taxpayers and honest players in the financial
markets will be at a very unfair disadvantage. 





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