U.S. Attorney Morgenthau on Money Laundering
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. _________________________________________________________ DO YOU YAHOO!? Get your free @yahoo.com address at http://mail.yahoo.com
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David Watts