[PEN-L:4706] E; C. Whalen on Intl. Economy/Money Laundering May/June 96

[D Shniad <shniad@xxxxxx>]

> The G-3 Money Launderers: How Russia, Mexico and, of all countries, Israel
> are cleaning up in a dirty business
>
> The International Economy
> May/June 1996
> By Christopher Whalen
>
> 	At a Capitol Hill luncheon in March, a former Clinton Administration
> official responsible for international law enforcement matters commented
> off-the-record that "when it comes to money laundering, the three most
> problematical countries for the United States are Mexico, Russia, and
> Israel."  Also mentioned as difficult venues were Austria, Argentina China
> and several small island nations that specifically cater to the offshore
> money business.
>
> 	"Mexico is a problem because there are so many other aspects of the
> bilateral relationship," the official opined, "which make it difficult -- if
> not impossible -- to exert sufficient pressure to make anti-laundering
> policies truly effective.  Trade, debt, and the peso rescue make it
> unworkable to press for results when it comes to fighting offshore money
> flows."
>
> 	A current DEA officer puts the case more bluntly: "No American attorney
> general will ever swear out an arrest warrant against a current or former
> official of the Mexican government who is involved in illegal activities,
> even though several former officials of the Salinas government have clear
> narco ties and connections to money laundering."
>
> 	In recent testimony before Congress, Drug Enforcement Administration (DEA)
> Chief of Operations Harold D. Wankel said: "We are now seeing millions of
> dollars laundered by Mexican organizations. The Mexican Federation [of drug
> cartels] is indeed a major player in the drug trade and must find ways to
> launder and conceal the profits from their cocaine sales." Wankel added:
> "DEA sources report that many Mexican traffickers have purchased large
> shares of banks and placed members on boards of directors." He did not name
> any specific institutions.
>
> 	In the same way, Washington's complex relationship with Moscow, including
> strategic issues, arms control and Russia's own burgeoning foreign debt
> problems, makes it impractical to confront the government of Boris Yeltsin.
> Russia is now one of the world's leading offshore money centers, a lawless
> market where armed men and former KGB officials set the rules, and where the
> penalty for even minor transgressions is death.
>
> 	The enormous growth in the illicit money trade is, after all, one of the
> few bright areas of the post-Soviet economic picture and helps explain why
> many Russians have survived so far in an economy that, officially at least,
> has lost half its annual output and production.  Indeed, given the Clinton
> Administration's apparent willingness to provide new multilateral loans and
> make concessions on arms control in order to retain the good will of the
> often inebriated Yeltsin, it is unlikely that the State Department will take
> the tough positions needed to curtail illicit money flows.
>
> 	The inclusion of American ally Israel on this ignominious list along with
> authoritarian Russia and Mexico may shock some people, but a veteran
> investigator who operates in both nations explains that the latter venue has
> become an important home base for criminal organizations based in the former
> Soviet bloc. "Members of the Russian Mafia come to Israel under assumed
> names and attain citizenship through the false claim of being Jewish," says
> the source who, like most people, speaks about money laundering on a
> not-for-attribution basis.
>
> 	Thus while Israeli political leaders may be preoccupied with the domestic
> strife endemic to the region, money launderers have established connections
> in the country.
>
> 	"Look, an Israeli passport is a wonderful thing to have," says the veteran
> global gumshoe. "Once established as citizens in Israel, these unsavory
> criminal elements can travel freely and operate seemingly legitimate
> businesses, using Israel as a base for illegal activities elsewhere. This
> phenomenon represents a direct -- if unwitting, perhaps, on the part of
> Israel -- inter-connection between Israel and the criminal elements that
> predominate inside the former Soviet bloc.  It also adds another layer of
> complexity to the international laundering game in terms of people,
> companies and organizations."
>
> 	The first point to make about underground cross-border financial flows is
> that money laundering is not entirely or even predominantly tied to
> narcotics and other types of criminal activity.  In addition to the tens of
> billions of dollars that flow through the world financial system every year
> from drug transactions, there also are vast flows of capital generated by
> trade in arms, stolen industrial secrets and other illicit goods.  And yet
> all of the illicit transactions world-wide do not comprise even a large
> fraction of the global underground economy.
>
> 	In fact, the single most important and least acknowledged factor in
> promoting money laundering today is the emergence of a sophisticated and
> truly broad-based invisible international economy that operates outside,
> under and around traditional channels.  The visible economy described in
> statistics published by the International Monetary Fund and World Bank is
> roughly two thirds of the total economic activity in the world -- perhaps
> more, perhaps less -- depending on who your ask. In fact, two-thirds is
> probably a high figure and as much as half of all transactions may be hidden
> from official scrutiny.
>
> 	"Tax evasion is the largest single source of illicit transaction in
> offshore venues," according to Washington attorney Jack Blum. "We're talking
> here about hundreds of billions of dollars annually. Next comes capital
> flight from authoritarian or economically mismanaged nations, and then comes
> criminal activity and drugs as a subset of that third category.  Tax evasion
> is easily more than half of the total annual flow."
>
> 	In Mexico, for example, slightly less than a third of working age adults
> toil in the formal economy, a fact not at all reflected in the statistics
> that are utilized by the financial economists who run the IMF.  One third of
> economically active people in Mexico are unemployed or underemployed.  But
> the largest "third" is made up of people who live and work in the informal,
> underground economy, where dollars are the means of payment, no taxes are
> paid and no dollars are remitted to Mexico through the central bank.  In
> this gray market economy, companies and individuals bank in the U.S. and
> only repatriate to Mexico those earnings needed to live.
>
> 	In Russia, the scale of black market activity is even larger, encompassing
> the greatest portion of all economic transactions, according to Russian
> expert Michael Waller. "The Communist Party set up a number of quasi-private
> banks to launder money in the 1989-90 period, when the Soviet bloc was
> breaking up," says Waller. "Today, most Russian enterprises settle their
> transactions offshore beyond the reach of the tax authorities or central
> banks.  Most of the economy is informal and under the control of aggressive
> criminal elements."  His comments are buttressed by recent reports,
> including articles in New York magazine and the Financial Times, that the
> U.S. dollar has become the de facto currency of Russia and that U.S.
> commercial banks, particularly Republic National Bank in New York, are
> providing billions of dollars a week in new physical cash to Russian
> correspondent institutions.
>
> 	"The Russian mob, according to numerous well-placed law-enforcement sources
> interviewed by New York, has been using an unimpeded supply of freshly
> minted Federal Reserve notes to finance a vast and growing international
> crime syndicate," wrote Robert I. Friedman in a stunning article in the
> January 22 issue of New York. "American C-notes are the unofficial currency
> of Russia, of course, and can get things done there that rubles cannot; but
> the hundreds are also being used to fuel the Russian mob's flourishing
> dollar-based global drug trade, as well as to buy the requisite villas in
> Monaco and Cannes. The Russian Mafiya has also used laundered funds to set
> up operations abroad, including its American offshoot in Brooklyn's Brighton
> Beach ('The Organizatsiya,' November 7, 1994) and has begun investing in
> legitimate businesses across Europe and in the United States.
>
> 	"The Russian mob's monstrous growth has been aided considerably by its
> ability to quickly and easily launder its dirty criminal proceeds into
> clean--and now supposedly counterfeit-proof--U.S. hundreds. Russian banks
> have been eager to assist, which is not terribly surprising given that a
> good number are owned outright by Russian mobsters. 'Almost all Russian
> banks are corrupt," Major General Alex Gromov of the Russian tax police told
> a September 1994 international conference on Russian organized crime
> co-sponsored by Financial Crimes Enforcement Network, which tracks money
> laundering for the U.S. Treasury. FINCEN director Stanley Morris is more
> blunt today: 'Russia's banking system is a cesspool.'
>
> 	Waller describes a situation in Russia where all of the commercial banks
> have, in one way or another, been forced to make protective alliances with
> shadowy criminal groups and the successor to the Soviet KGB and internal
> security apparatus, both of which were merged by Boris Yeltsin (an ominous
> sign for democracy in the post-Soviet period).  Former Soviet Army and KGB
> generals sit on the boards of Russian banks or exercise control from the
> background, raising the prospect that an illegal sale of arms or nuclear
> materials might occur with the active assistance of a Russian bank.  Inside
> Russian banks and companies, criminal elements, the state security
> apparatus, and government agencies flow together in a web of corrupt and
> opaque relationships that provide the perfect growth medium for criminality
> and money laundering.
>
> 	The second major point to make is that America itself is the biggest
> illicit laundry in the world.  Recent press reports in the U.S. and abroad
> confirm that the world's largest, most open economy is also the easiest
> place for a person, company or government to hide assets or launder cash.
> The newsletter Drug Enforcement Report reports that the Los Angeles branch
> of the Federal Reserve Bank of San Francisco recorded a $13 billion cash
> surplus last year, meaning that the branch took in that amount of physical
> cash above the money it emitted itself within the 12th Federal Reserve District.
>
> 	"I can't say for sure whether it's drug money or not, but we certainly
> believe there's a strong correlation," said California anti-money laundering
> chief James Dutton told DER. "I think it's the largest increase in cash
> surplus the L.A. branch has ever seen." U.S. Customs agent Jeff Casey
> likewise told DER that "if you're talking about a $5 billion increase in
> surplus cash at the Los Angeles Fed, I don't think it's all from tourist
> dollars."  The increase is reported to be concentrated in $100 dollar bills,
> the vehicle of choice in the global underground economy.
>
> 	A recent example of the use of U.S. banks for laundering activity came with
> revelations that Raul Salinas, the disgraced older brother of Mexico's
> former president and Dow, Jones & Co. director Carlos Salinas, reportedly
> moved tens of millions of dollars through the New York branch of Citibank
> under an assumed name. To open the account, Raulito apparently got a
> reference from fellow Mexican Carlos Hank Rhon, who owns Laredo National Bank.
>
> 	Despite the fact of his activities in numerous American banks, the Clinton
> Administration has made no effort to prosecute Raulito or even investigate
> the case.  Press reports in Mexico claim that the DEA was aware of Raul
> Salinas' alias in 1989, when he worked as a government official and handled
> food imports, primarily from the U.S. Department of Agriculture program also
> abused by Iraq.  Yet neither President George Bush (a long-time personal
> friend of the Salinas brothers) nor Clinton made any move to bloc the
> movement of funds or even investigate beyond an informational request in
> 1991 to Mexico, which naturally failed to cooperate.  Indeed, were it not
> for the persistence of officials in Switzerland, where Salinas' $100 million
> plus illicit cash hoard was first uncovered early in 1996, the offshore
> dealings of the hermano incomodo might have been ignored indefinitely by the
> Clinton Administration.
>
> 	Significantly for the underground cash business, the push for legalized
> gambling in Mexico seems to be gaining speed.  U.S. officials say that
> gambling will eventually be approved with federal legislation mandating a
> gaming "czar" in each state. Carlos Hank Rhon, the son of former Agriculture
> Minister Carlos Hank Gonzalez, will reportedly get the franchise in Baja.
>
> 	Of course, gambling already thrives inside Mexico at secret casinos located
> in several border states, complete with private landing strips and very
> private banking facilities.  Back in the 1980s, there was strong interest
> among the Nevada gaming lobby to establish legal casinos in the Mexican
> state of Baja Norte, which borders California.  The construction of a
> trolley car from downtown San Diego to Tijuana was part of a larger planned
> expansion based upon legalized gambling in Mexico.
>
> 	The trolley was never completed because the required mordida (payoff) was
> considered too high by the U.S. players -- at the time -- but maybe times
> have changed.  When "investing" in a casino is seen by many on Wall Street
> as a legitimate and productive way to deploy capital, building casinos in a
> nation plagued by corruption, drug trafficking and money laundering might
> make good sense.  Indeed, gambling and money laundering are in ethical as
> well as functional terms, closely related activities.
>
> 	The reality is that in much of the world outside of the [G-7] nations,
> money laundering is the rule rather than the exception. As the IMF attempts
> to bolster shrinking formal economies in over-indebted nations such as
> Russia and Mexico, self-interested individuals in these nations and
> elsewhere are secreting capital offshore or refusing to repatriate export
> earnings. This trend, if not reversed, has ominous implications for the
> ability of nation's like Russia and Mexico to maintain stable currencies,
> much less repay (or even service) hundreds of billions of dollars worth of
> foreign debt.
>
> 	Whether one speaks of relative "good guys" seeking to evade confiscatory
> levies in Russia or Mexico, where the tax collector has police powers and
> courts are without effect; a U.S. movie producer or software maker hiding
> royalties in the Cayman Islands (a problem Washington won't even talk
> about); Chinese citizens of Hong Kong fleeing oppression and confiscation at
> the hands of Beijing's dismal tyrants; or real-live criminals cleaning dirty
> drug cash in friendly venues like Vienna, Monaco or Gibraltar, money
> laundering deprives governments of badly needed tax revenues and weakens the
> foundations of already shaky local currencies.
>
> 	As the formal economies in nations such as Russia and Mexico contract while
> the absolute level of foreign debt increases, the multilateral community is
> under rising pressure to increase funding for big debtor nations.  For this
> reason, the IMF director Michel Camdessus says member nations will be asked
> to double their "quota" at the global lending organization this year or
> next.  A reasonable person might ask Camdessus, however, why the G-7 nations
> should continue to support new IMF loans in view of the growth of informal
> economies in these countries and much of the developing world.  If Russians
> and Mexicans are voting with their feet, choosing dollars over local
> currency, should not the IMF take the example to heart?  Where is the
> economic rationale behind supporting a currency that nobody wants?
>
> 	There are any number of reasons that explain the explosive growth in
> offshore capital flows, but perhaps the single largest factor blocking
> progress against illicit money is the inertia within the U.S. government
> itself.  In public, Treasury Secretary Robert Rubin and Attorney general
> Janet Reno talk tough against money laundering, but with little real
> results.  Rubin's predecessor, former Treasury chief Lloyd Bentsen, went so
> far as to describe 12 big money laundering investigations during a trip to
> Mexico late in 1994, just prior to the peso collapse.  A few weeks before
> the December 1994 devaluation, Bentsen resigned.  There has since been no
> further comment from the Administration about the money laundering
> investigations involving Mexico.
>
> 	Part of the rationale used inside the Treasury to blunt more aggressive
> enforcement of tax and money laundering laws is the fear that the very real
> benefits enjoyed by the U.S. might disappear if Washington were to ever get
> serious about reducing underground financial flows.  When American banks
> send dollars to Russia (or, for that matter, Japan or Germany) in return for
> goods and services, the U.S. Treasury essentially borrows money from Russia
> interest free.  Within the domestic finance division of the Treasury, the
> dollarization of local economies from Tijuana to Shanghai is viewed as a
> considerable source of revenue for the U.S. government.
>
> 	Another related concern for the successive Republican and
> Democrat-controlled Treasury chiefs has been the worry that any disruption
> of the international market, for example, by clamping-down on transactions
> between the New York money markets and banks located in the Cayman Islands
> or Moscow, will raise U.S. interest rates and scare skittish investors
> already worried by Washington's spendthrift nature.
>
> 	Thus the fiscal profligacy of the U.S. Treasury has the effect of making
> Washington less aggressive in attacking money laundering.  "The net balance
> in financial terms is favorable to the U.S. over the short-term," says Blum.
> "In benefiting from the rise of the dollar as the currency of choice in
> markets like Mexico or Russia, we are unwittingly supporting criminal
> activity and capital flight."  Ironically, it may be that the remedy for
> symptoms of economic evil like money laudnering lies with getting serious on
> issues such as U.S. deficit spending and international debt reduction.
>
> Christopher Whalen is Treasurer of Legal Research International,
> a Washington-based financial services and due-diligence firm.
> R.C. Whalen
> Legal Research International, Inc.
> 1029 30th Street, N.W.
> Washington DC 20007-3823
>
> Email:              info@xxxxxxxxx
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>
> We all of us are born free.  Staying
> free is the hard part.
>
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