G-8 puts spotlight on hidden money trade

A bill before Congress would limit bank ties to lax countries. Offshore centers complain of bullying by rich states.

When leaders of the Group of Eight top industrialized nations meet in Okinawa, Japan, for their annual summit later this month, they will be congratulating themselves on a flurry of punches they landed recently in the fight against money laundering and tax evasion. The topic will be on the agenda this weekend, when finance ministers from seven of the G-8 states hold preparatory talks in the southern city of Fukuoka.

But there are worrying signs that despite the stepped-up activity, they are losing the battle.

"It's not working," says Prof. Fletcher Baldwin of the University of Florida, a leading international authority on financial crime.

Economists estimate that as much as one-quarter of all the currency in circulation around the globe is "dirty" money, the ill-gotten gains of drug dealers, other organized-crime rackets, and corrupt officials. In the new global economy, high-speed planetwide transfers make it increasingly easy to launder money. "It is so easy to move money internationally that if you lose the capacity to trace money, the fight against money laundering will be lost," said Gil Galvao, the head of an international task force set up to organize that fight.

Mr. Galvao's panel, the Financial Action Task Force, a group linked to the Organization for Economic Cooperation and Development (OECD), has just published a list of 15 countries and territories whose banking and financial regulations are so lax, it says, that they facilitate money laundering. The places named - and accused of being "noncooperative" - range from the Cayman Islands and the Philippines to Liechtenstein and Panama.

The "name and shame" report followed a similar list published by a panel set up by the G-8 in 1999, in the wake of the Asian financial crisis. The Paris-based OECD followed up with a list of offshore "tax havens" offering to hide money from other countries' tax authorities that named many of the same countries in the Caribbean and South Pacific.

In fact, European and US officials admit that most dirty money is laundered in established financial centers New York, London, and Zurich, Switzerland. And even the United States, which has taken the lead in the global crusade, is still closing legal loopholes 16 years after it first criminalized money laundering.

But as industrial countries pass laws to combat money laundering, they have realized this is not enough. "It doesn't really help if the US or Britain have strong reporting requirements" regarding suspicious transactions, says John Byrne, senior counsel for the American Bankers Association. "So long as you have countries that are loose entry points, if you have one point on the border that is not guarded, everybody goes there."

Such a point might be the South Pacific island of Nauru. Money laundering is not a crime there, and the law guarantees bank secrecy. Of the $74 billion that left Russia for offshore centers in 1998, according to the Russian Central Bank, $70 billion went through Nauru.

If the battle against money laundering demands international cooperation, "most cooperation is based on arm twisting - you do it through economic sanctions," explains Professor Baldwin.

The Financial Action Task Force, for example, warned that big money centers might take "defensive countermeasures" unless the small offshore centers tighten up their rules. That is the threat contained in legislation currently before the US Congress, which would authorize the Treasury Secretary to ban US banks from handling money sent from foreign countries or banks that he had classed as "primary money-laundering concerns." If many other industrialized countries follow this tack, "the big guys can wipe out the little guys any time they want," says Baldwin.

Since so much of the world's dirty money is actually cleansed in places such as New York and London, the "little guys" complain that they are being unfairly targeted. And they have strong suspicions that the complaints are actually a pretext for a campaign against their low tax- and bank- secrecy laws, which attract tax evaders.

"The big countries say that they want their money, that they are powerful, and that everyone must do things their way or suffer sanctions," says Mario Frick, prime minister of Liechtenstein, a tiny Alpine principality named as a tax haven and a money laundering center in recent reports. "That is not right." Liechtensteiners are convinced that the German secret service leaked a report accusing the principality of money laundering late last year as part of Berlin's campaign against rich Germans who hide their money in Liechtenstein.

But it seems clear that the pressure on small offshore financial centers will not be relaxed until reforms are made. That, financial experts say, means that the South Pacific and Caribbean islands that have little to recommend them but lax regulations could be forced out of business. To survive, they will have to attract business by the quality of their financial services - a challenge only a few can meet.

"We have to find a strategic answer to the pressure over tax questions," says Hans-Martin Uehlinger, deputy managing director of the LGT Bank in Liechtenstein, the principality's largest. "We will have to be excellent without our special conditions."

'Noncooperative' in the fight against money laundering

Bahamas

Cayman Islands

Cook Islands

Dominica

Israel

Lebanon

Liechtenstein

Marshall Islands

Nauru

Niue

Panama

Philippines

Russia

St. Kitts and Nevis

St. Vincent and the Grenadines

Source: Financial Action Task Force

(c) Copyright 2000. The Christian Science Publishing Society