Transcript
PETER SCHOETTLE: As you can tell from our questions in the last session, there's a lot of talent in the room and a lot of experience, so we want to keep that going.
Frequently in the last hour we've heard the comments that, well, why doesn't the Treasury do this, why doesn't the State Department do that, why don't we go to our allies and do this and that, so now we've got the chance to really hear from a senior official with the U.S. Treasury Department and some of their perspectives on this.
Richard Newcomb is going to take over now for this next session. He is the director of the Office of Foreign Assets Control in the Treasury Department, and his bio has been circulated. Let me just say this is the key unit within the Treasury that's responsible for much of this. And after 9/11 they really are the forefront of much of the financial chasing of the perpetrators of these money flows so it's wonderful to have Richard Newcomb share some of his insights with us.
He's had a long career at the Treasury, along with a number of other significant positions there that I won't go into, but it's great to have him.
RICHARD NEWCOMB: Thank you.
MR. SCHOETTLE: Thanks very much for coming. And folks—one last, this is a personal request—if you can't hear in the back of the room questions because of the mike, please wave and so on because we can adjust the volume. Please.
RICHARD NEWCOMB: Thank you. I'm very pleased to be here this morning and have the opportunity to talk with all of you about foreign assets control and what we're doing in the war on terrorism.
And I might just say—as a personal note—I'm particularly flattered to on the same program with Bob Morgenthau—someone that for years we've known and respected—and to be here today with him is certainly an added treat for me.
I've been asked to spend a few minutes this morning talking about terrorist financing. What are the problems? What, from our perspective, needs to be done to address those problems? And what steps must be taken to identify the financial infrastructure of these terrorist organizations so that we are able to disrupt and dismantle their fundraising activities and insure, to the greatest extent possible, that they do not have access to the international banking system?
To attain these goals, we—that is the U.S. Treasury Department, the Office of Foreign Asset Control—have taken steps to improve coordination and information sharing among our own U.S. government agencies and deepen and broaden the already strong cooperation of friendly governments throughout the world.
To cut the financial lifeblood of folks like Osama bin Laden and terrorist group al Qaeda and its broad support coalition of like-minded individuals and organizations, from our perspective, we must identify and take action against individuals in the so-called charitable organizations who contribute to these organizations. We have, and will continue, to target businesses, fund companies, banks and underground money transfer systems that participate in the financial scheme of these terrorist individuals and organizations. The dismantling of the al Qaeda financial network is one of the most critical elements of our policy to detour and prevent future terrorist attacks.
Unfortunately, information indicates that some charitable organizations have been penetrated, exploited in one form or another, and are now, at least to some extent, controlled by terrorists involved with al Qaeda and other terrorist groups. These charitable organizations, which have elements associated with al Qaeda, include multi-national organizations operating worldwide with multimillion-dollar budgets at one end of the spectrum and small, tightly organized fund cells at the other. These charitable organizations serving as cover for terrorists groups adopt innocuous enough sounding names and can co-opt otherwise very legitimate causes. Often, well-intentioned individuals seeking make contributions to provide relief for refugees from disaster are defrauded and their funds end up diverted to finance terrorism.
Shutting down or reconfiguring these corrupted charities, as well as the entire fundraising and financial structure, is a critical component of the war against the bin Laden al Qaeda financial empire and one that requires intense domestic and international coordination and cooperation. In this regard, we are working closely with foreign governments and other entities to encourage reliable oversight and controls on the regulation and use of charitable funds.
But make no mistake, terrorist groups, like al Qaeda, also use banks, legal businesses, front companies and underground financial systems to finance and move funds for their activities. Some operatives engage in petty theft to support theirselves (sic); others profit from the drug trade; and they use checks, credit cards, ATM cards and wire transfer systems and brokerage accounts and hawaladars throughout the world, including the U.S. Often accounts are maintained in names unknown to us.
Detecting and disrupting the financing of terrorist groups is a complex process involving the input of many domestic and international agencies and organizations. At its core, the process involves several primary steps: first, the investigation and identification of targets and an understanding of how it works and fits into a larger context; second, identification of assets for potential blocking, seizure, law-enforcement action or use as a future leverage point; third, identification of methodologies used to move funds for operational support and developing our own strategies to thwart this activity; fourth, identification of gaps in law enforcement and regulatory processes that make the movement of funds possible and taking steps to address that problem; fifth, the sharing of information with appropriate law enforcement agencies—bilaterally, with allies and with other appropriate multilateral organizations around the world; and finally, application of regulatory tools and law-enforcement initiatives to deprive terrorists access to their funds. In short, the goal is to identify international terrorist groups and their sponsors, to develop strategies to deny these groups access to the international financial system, impair their fund raising, disrupt their money movements and funds placement abilities, isolate their financial holdings, and work closely with other governments to take similar measures on a global scale.
Of course, central to this process is the ability to obtain accurate, reliable and timely information and then to make the effective use of it. In the U.S., International Emergency Economic Powers Act, that statute that OFAC administers, is the principle tool for stopping at least—or at least significantly disrupting—terrorist financing. It provides broad authority to impose comprehensive trade and financial sanctions against international terrorist groups.
In response to the events of September 11th, President Bush declared an executive order—that's 13224—, on September 23rd, under the authority of the International Emergency Economic Powers Act, declaring a national emergency with respect to the acts of terrorism and threats of terrorism committed by foreign terrorists against the United States. This executive order blocked all property and interest in property of individuals and entities names in the executive order's annex or as subsequently designated by the secretary of the Treasury or the secretary of State under that order. But most important, it also prohibits all transactions, including charitable donations by U.S. persons or any individual or entity named in the annex to the executive order or designated pursuant to that order.
At the time, the annex named the name of 27 entities and individuals associated with Osama bin Laden, and additional entities and individuals have been added since that time. This is consistent and part and parcel of the U.N. Security Council resolutions, 1267,1333 & 1373, where the U.N. has adopted the list of the al Qaeda targets named under that executive order. We're working bilaterally with allies in the E.U. to name other terrorist organizations.
As the third annex to that executive order, President Bush incorporated all previously designated 28 terrorist-supporting organizations that, on a biannual basis, the secretary of the Treasury, the secretary of State and the attorney general determine those terrorist organizations operating worldwide and by so designating, with current information that is available, not only does that create a prima facie case for prohibiting and criminalizing terrorist fundraising, but it also blocks their funds in the United States. By this act, the third annex, all of these terrorist organizations running the broad spectrum around the world have been incorporated under the authority of the executive order and the names of individuals and entities acting for or on their behalf, providing material—technological support for, owned or controlled by or otherwise associated with—can be designated by the secretary of the Treasury or the State Department. Under that authority, then, there is a broad comprehensive net laid out to isolate these organizations, individuals and entities from being part and parcel of the U.S. financial system.
To date, also, we've also named names under this executive order. For example, last fall we named the names of IRA supporters. Recently we named the names of two individuals linked to a Basque separatists organization operating in Spain—the so-called ETA or the Basque Homeland Liberty Organization. To date we've named 13 lists of individuals—or names as part of the September 24th order, bringing a total of 210 names listed—approximately 150 of these are related to al Qaeda—and adopted by the U.N. under the Security Council resolutions I've cited. Many others have been adopted bilaterally or with E.U. member states. Many tens of millions of dollars have been blocked, to date, under this program. This truly is a global assault—by the architecture I've just described—on all terrorist groups, not just al Qaeda, and their ability to raise funds and move money.
I want to spend just a few more minutes now talking about the special recommendations of the terrorist—on terrorist financing of the Financial Action Task Force on money laundering, which has come up with eight new recommendations on the matters to supplement original 40 recommendations of the FATF money laundering. These call for ratification and implementation of U.N. instruments to implement fully the 1999 U.N. international convention for the suppression of support of financing of terrorism. Second, it recommends criminalizing the financing of terrorism and associated money laundering. Third, freezing and confiscating terrorist assets is required under the U.N. Security Council Resolutions. Fourth, reporting suspicious transactions relating to terrorism. Fifth, enhance international cooperation through mutual legal assistance. Sixth, regulation of alternative remittance systems such as hawala. Seventh, requiring additional information to be included in wire transfers. And finally, provision relating to nonprofit organizations; that is, charities or NGOs where countries are asked to review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. This effort is currently underway and success is—progress is being made in this regard.
That's the extent of my prepared remarks, but I hope I've laid out enough issues that we can have now—for the next 10 or 15, 20 minutes that I have available—opportunity for dialogue on this and on the issues we've raised—if I can answer your questions.
MR NEWCOMB: Okay. Thanks very much. Sir.
I'm sorry. Could you stand up, please, so we could hear you better?
Q: (Off mike)—but also with the appropriate money and trained individuals to actually do the job—(off mike)—
MR. NEWCOMB: Let me say this: Your question cuts across competencies that extend beyond what the Office of Foreign Assets Control does. We have directly been involved in a number of these issues that I've just mentioned, including, especially, the work on charities. But I can tell you, just from my experience in working with others that are involved in this from the Treasury Department, from the State Department and from other venues—yes, there is a very active initiative at the FATF. There was a special meeting of the FATF convened in October of this year where these recommendations were adopted and there is considerable effort being made to work on all of these issues on various different fronts—depending on the venues and depending on the individuals and organizations that are directly affected in the U.S. government to work to determine what other roadblocks from effectively adopting and administering these laws. Let me give you one example.
There is a world of difference between merely adopting anti-money-laundering procedures and having them on the books, from actually have an enforcement—an uncorrupted enforcement program that's effectively stopping the money laundering activities. So though there may be recommendations, there still has to be the kind of dialogue, bilaterally through various agencies, to ensure that these steps are effectively being taken. And those initiatives—depending on what it is—are in various states of progress. So, yes, the answer to your question is a yes.
MR NEWCOMB: Way in the back, sir. Yes. Please. Ambassador.
Q: Hi. Robert Ward, formerly of the State Department, worked on money-laundering and areas in which—(inaudible). You talked about the executive order and you talked about the tens of billions of dollars that have been seized. Now you talk about some 250 of these individuals — (inaudible). How does this relate to how much do you think—what percentage of this might be of what there is that's out there? Is this what you hope to be able to do? Are you ahead of the curve? Below the curve? Are there a lot more organizations? A lot more money that—(inaudible)?
MR NEWCOMB: The answer to your question — are there a lot more organizations? A lot more money? The answer is yes. I think what is so important about the use of IEEPA and the use of how we're proceeding in this regard is to demonstrate that we have an effective tool and we're prepared to use it in an effective manner. That requires a diplomatic strategy to work with foreign governments, to understand not only what we're doing, but what we're doing in conjunction with the U.N. and bilaterally with other countries. The extent to which we can define a problem and get a government to take action, without a need to move forward in identifying names—or designate names—is, in many respects, just as effective—if not more effective—than designating names.
So the evaluation never can be made just in terms of how much money was blocked. It's what other strategies have you employed? How have you worked with such and such a government to get them to take effective and appropriate regulatory and law enforcement action at the local level to thwart this activity. But all of these are what I would describe—are arrows in the quiver of tools that are available in a foreign policy context to launch and mount and to implement an effective program.
I want to answer your question and I want to make sure that does it. Okay.
MR NEWCOMB: Sean?
Q: Sean — (inaudible) — about many of the formal ways of controlling closed money. How is the government going to deal with the informal closed money, such as are mentioned in many foreign countries to sort of undercover or non-formal channels of very closed money sometimes with terrorism? How is it expecting that?
MR. NEWCOMB: Well, one example that I think you may be referring to are the use of hawalas. They've flourished. The UAE just—within the last 30 days has held a conference on hawalas—it was attended by some 400 or 500 people. I did not attend, but people who work for me were there and have briefed me that it was a very effective method of bringing people from different countries that have used hawaladars as a means of moving money for decades, even centuries. It's a time-honored system. One of the recommendations in the FATF is getting on top of the use of these organizations. It is an issue that is being effectively discussed, both in the United States—about effective regulation of hawalas—as well as with the foreign governments. But merely the establishment of hawalas and the use of hawalas is not, per say—you can't make the leap to the fact that all of them are used for terrorist purposes. Many are used for very legitimate purposes—emigre communities moving monies back and forth.
We, at the Office of Foreign Assets Control, regulate a form — these are money transfer services as it relates to the Cuba program. Remittances to Cuba are heavily regulated. We regulate to ensure the amounts—that they're proper on a quarterly basis annualized and that they go to the intended recipient. So these are the kind of regulatory schemes that might be effective and more effectively used—regulating without destroying them.
MR NEWCOMB: In the black suit there, sir. Please, go ahead.
Q: (Off mike).
MR. NEWCOMB: Thank you. I always appreciate questions like that. First, I think you very effectively and adequately described the process leading up to the passage of the Foreign Kingpin Designation Act, but also the question of resources.
This is very resource-intensive type activity so that the information that comes to us is able to be effectively exploited and deployed in a strategy, that's able to effectively — for whatever ways it's used — you have an impact on the problem. I think the good news is that we have received increases in staff and we're in the budget process right now, and we've certainly made the points that you have made in terms of the need — this is very resource-intensive type work — the need to have more people effectively analyzing the information and having an understanding, developing a theory of the case, articulating what's really going on here and what are the pressure points. That would be the goal in the terrorism area.
I'm glad you raised the narcotics program because — let me just relate a bit of how IEEPA had effectively been utilized and where it moved from the say early 90s until now.
In 1995 then-President Clinton made a determination that we needed to use extraordinary tools to fight the war on international narcotics trafficking, organized crime and money laundering. And he made several announcements at the 50th anniversary of the U.N., which is a very nice occasion to highlight our program. Among the things that began at that time was a way to isolate non-cooperating countries on the FATF recommendations and there was something on that.
But from our perspective, even more important, he announced the Colombia program where, in Colombia, to use IEEPA targeting Cali Cartel members, that a national emergency was declared targeting narcotics trafficking in Colombia as being a — under the standard of the statute as being a threat from outside of the United States to national security, foreign policy or economy. Clearly, it met all of those three tests; it only needs to meet one. It met all of those three, a national emergency was declared, and very extraordinary powers were then conferred upon the Treasury Department to identify those individuals and entities that are under control or acting for or in behalf of the cartel.
We were very fortunate in that situation to have very good information about how the Cali Cartel leaders were repatriating money and — rather than investing it into drugs — they would invest into commercial ventures. And by naming the names of the commercial ventures, such as a drugstore chain or an automobile showroom or chemical companies or pharmaceuticals and what have you — they were making these kinds of investments — and by identifying the names of these individuals and entities, we — it prohibits U.S. persons from having any kind of an economic transaction whatsoever.
The information was so good that the Colombian government itself, then-prosecutor Valdivieso, who is now the Colombian ambassador to the U.N., was supportive and helpful with us. The Bankers Association, Asobancaria, adopted the names that we'd named in Colombia and we had a very effective bilateral program in Colombia — often challenged in U.S. Federal Court about our authority to name the names of these individuals and to prohibit this activity; always successful in sustaining the designations.
It was a very effective program. The drug cartels were isolated in Colombia, and the Congress recognized this — and I do recall working together with you on this — where then the late Senator Coverdell and Senator Feinstein — the so-called Coverdell-Feinstein legislation — expanded that into the Foreign Narcotics Kingpin Designation Act. And I'm very pleased to report that, to date, under that act, which was signed, I believe, something like December 4, 1999, on three occasions: first time by President Clinton, 12 international kingpins were named — first by President Clinton — then another 12, June 1 of 2001 — another 12 names were named. This year seven names were named. So we have a total of 31 foreign narcotics kingpins giving Foreign Assets Control the ability to name the names of derivatives, individuals owned or controlled or acting for/on their behalf.
So in essence, what we have is a comprehensive international narcotics kingpin program. We've named the names of Tier Twos, or the derivative names — we came out with an announcement something like January 31st of this year — naming the names of Tier Two kingpins worldwide. That will continue, as well, and as we staff and as we're able to perfect these names, in essence what we're doing is prohibiting U.S. persons from having any economic relationship whatever with the named entities — and it has an effect of isolating them, especially when there is a dependence on the U.S. financial system, the U.S. banking system, credit cards, travel, banks of any nature whatsoever. So it has been very effective in that regard.
I will say, that was somewhat put on hold post-9/11, but we are back and moving that forward effectively now. But it's this same idea that has been taken and used in executive order 13224 and what I've described just now.
The one thing I don't want to leave — in talking about IEEPA — is we currently administer 24 separate programs. The basis of our programs are usually the discrete economic sanctions or embargo program, which for foreign policy, national security or U.S. economic reasons are, in some way, embargoed by the United States. There is a list of them in that resume that was passed out that I've been involved in.
But what happens is the president has extraordinary powers under the International Emergency Economic Powers Act to declare a threat from outside of the United States to the national security foreign policy or economy of the United States and by doing so — certain things attached that he must do — provides on himself certain extraordinary ability to regulate economic transactions of U.S. persons wherever in the world they're located, and on this authority most of these programs are built.
MR NEWCOMB: We've got time for maybe one more short question. Sir, in the white jacket there, please.
Q: (Off mike).
MR. NEWCOMB: Let me just say I don't think I am the right person to be talking about arms and corruption. I think there might be other agencies such as the Justice Department, the Bureau of Alcohol, Tobacco and Fire Arms, the State Department, and other entities that are more directly related to arms shipment and arms transfer.
However, I can say that in terms of some of these key figures, these kinds of opportunist salesmen who will take the opportunity to sell arms and make deals either through the use of diamonds, the use of currency or other kinds of means of trading these commodities, there are steps we can take by identifying them. In addition to having the effect of blocking — which is a synonym for the prohibition of transactions applying to all U.S. persons, which we do — it takes on a certain notoriety and status. No longer are they able to operate sub-rosa or subterranean—they're identified, they're out, and assuming the information is of the quality that we've always tried to maintain, we have a very good case. You know, we've made a statement, we've gone out, we've prohibited transactions by U.S. persons, we're subject to lawsuit. So it is a very effective way of communicating to the world — isolating, identifying and incapacitating, if you will — the ability of these people to continue that activity.
And finally, let me say, we have done work on some of these international arms traffickers — not so far as designation, but as certainly trying to understand more of their M.O. and who they do business with, how they deal in currencies and diamonds and other things.
Richard, thanks very much.
(Applause.)
MR. NEWCOMB: Thank you.
(Applause.)
(END)
PETER SCHOETTLE: What we're doing now is shifting to our keynote speaker, and I think it's a real honor and privilege to have one of the giants in the field share some of his insights, experiences and thoughts on this significant issue. And it's great that Robert Morgenthau is going to open our session today with some of his words.
Robert Morgenthau is the district attorney for the County of New York. And for those of you that haven?t lived in New York, that's not just some obscure town someplace in the state, it's the Island of Manhattan. So he is the top attorney for the financial center of the world, and he's had that position for the last 26 years. He really has been at the forefront of many of these issues in a legal way: How are these measures that Ray Baker has described fought in the courts? How are they handled? What things should be done about it? And he has been at the forefront of all this.
And before his present position of district attorney for Manhattan, he was the United States attorney for the Southern District of New York, which is also, obviously, the key judicial component for the financial center of the globe. And I won't go through all the honors that Robert Morgenthau has had, but there's a whole string of them.
It's really a pleasure to welcome him here this morning. Please join me in welcoming him.
(Applause.)
ROBERT MORGENTHAU: Good morning, and thank you for asking me to participate in this program. I'm a little bit intimidated being in the presence of so many academics and experts. And what I?d really like to do is to adopt virtually everything that Mr. Baker said, and sit down. I think that was a wonderful exposition on the problems of dirty money. Incidentally, Baker is a famous name. Are you a descendent of — (inaudible) — Baker by any chance?
MR. BAKER: No, I'm not. (Laughter.)
MR. MORGENTHAU: I agree with everything that Mr. Baker said, except perhaps the size of the problems. Of course, prosecutors are always being accused of exaggerating, so I intend to exaggerate also, but I'm not sure that it reaches a trillion dollars. But, as Mr. Baker said, whether it's $500 billion or a trillion doesn?t really make that much difference. But, as I say, coming in at the end instead of starting at the beginning — I mean, I think what we have to do is to put the problem on the table and deal with it openly, and that's what we haven?t done over the years.
Let me give you some of the cases that we have dealt with to give you an idea of what our perspective is on these cases. Some of you may have noticed that yesterday we returned an indictment against the head of Tyco for tax evasion; for failure to pay the New York State sales tax in the amount of over a million dollars. That was a significant case to us because, as in these offshore accounts, so many people look the other way on what's considered, oh, that's just sales tax. But this was a particularly flagrant example. I mean, there were documents prepared to support the shipment — the alleged shipment to New Hampshire. The — (inaudible) — manager instructs the trucker to put the empty cartons in the truck and then puts in parenthesis, wink, wink.
And that really to me is symptomatic of what's been going on, you know, whether it's setting up a headquarters of a company like Tyco, alleged headquarters, in Bermuda, or saying that a company is controlled and managed in Barbados — legally controlled and managed in Barbados even though there's one meeting there a year. I mean, those are fictions. In the prospectus, in one that was recently issued it says, "legally managed and controlled in Barbados." If they took the word "legally" out it would be a fraud, but because they say legally, then they say, well, Barbadian law says it's legal so therefore it's legal.
Our concern of course is that not only the money is used for drug money laundering, for terrorist activities, for undermining the capital system, but also for undermining the whole tax system. People basically have to pay their taxes voluntarily in a democracy. And we're going to catch less than 1/10th of 1 percent of people who don't pay. But as government fails to deal with this problem, it's going to grow and grow and grow, and that's what concerns me. I mean, in the United States — I mean, your money is going to pay for education and libraries and police and fireman and armed services. If you're headquartered in Bermuda, none of your tax money is going to go for those purposes. And Bermuda doesn't have a navy because it knows it's going to be protected by the United States; it's going to be paid for by New York and U.S. tax dollars.
We got interested in the Caymens initially because BCCI was headquartered there, and the money to bribe foreign governments was paid out of BCCI Overseas in the Cayman Islands. And we identified bribes paid to 14 government officials in 13 different countries. The only case that we were able to turn an indictment was in Peru where the Central Bank officials were paid. The money was directed from BCCI London, BCCI Overseas to Swiss Credit Bank — well, the Security Pacific New York, Swiss Credit Bank New York, Swiss Credit Bank Panama, and then to the senior officials of the National Bank. I mean, that's one aspect these jurisdictions — corporate bank, tax secrecy are used to cover up illegal transactions, and they're used to corrupt third-world countries. I mean, I got a letter from the head of a native bank in Africa saying, you know, thank god somebody has exposed what's going on. I can't come out publicly, but people in my country are being bribed to put money into BCCI and for a whole slew of other purposes.
As you know, the $700 billion on deposit in the Cayman Islands alone, that's more than twice as much money as is on deposit in all of the banks in the New York City area. And, you know, what's the money doing down there, because they brag that, you know, we have no regulations of any kind, we have no supervision of any kind and we have no taxes of any kind. I saw that the ranking member of the Cayman legislature said, the only people who pay taxes in the Caymans are the poor people because there's a substantial tax on food.
We've been winking at all of this stuff. They brag on their website that 47 of the biggest — 50 biggest banks in the world have branches or subsidiaries in the Cayman Islands. That's everybody, you know, whether it's Nat West or Bank America or — so everybody is down there; all the Swiss banks are down there. What are they doing down there? There's $20 million on deposit for every citizen of the Cayman Islands. In fact, all of these secrecy jurisdictions, they have two kinds of corporations, an A and a B. The B corporations are for foreign companies which are not permitted to do business in that jurisdiction, so those banks cannot even do business in the Cayman Islands. And the most recent prospectus out on the move to Bermuda, the headquarters is going to be in a country where that company is not permitted to do business in Bermuda.
So, I mean, the whole business is a sham. I think it's a sham. That company also is managed — legally managed and controlled in Barbados. What does that mean? That means one board meeting a year. If they were to say it was managed and controlled in Barbados, that would be a false statement, but when they say legally, well, we can argue that that's true because Bardadian law says it's true. But I say we've got to stop winking at all of these transactions. And, as the previous speaker said, let's put the problem on the table. If our taxes are too high, let's discuss it. If they should be reduced, let's reduce them for everybody and not for the people who have the most aggressive accountants and the most aggressive lawyers.
I saw an analysis in the Times of the new fraud people, and so forth. There were all kinds of theories, age and so forth. There is one thing that's motivating everybody I think, and I hate to say it, it's greed, and in a period of rising markets that appetite is fed. The greedy get greedier and they take more risk, and then they cross the line. And it's our job to—I think people in law enforcement, people in think tanks, people in the academic world — to say to the Congress and the executive branch of the government, hey, it's time to stop this and not look the other way. There are two bills that are pending in the Congress by the chairman of the Senate Finance Committee and the ranking Democrat. There are things that the IRS can do; there are things that the SEC can do. It's time that we say, let's get it done and let's not keep looking the other way.
I'll give you a few cases that we've handled just to give you an example of the problem from our perspective. AR Baron & Co., which was a brokerage firm, and 13 of its former employees and officers were indicted for running a criminal enterprise. It was what's known as a bucket shop. It was pushing questionable stocks, specializing in market manipulation, running its trade activities to shell companies in the Channel Islands. They took their investors for $75 million, which in some of these other cases is small potatoes, but still, $75 million is a lot of money to some people. They were violating Regulation S of the securities laws. The chief executive officer of that company had some of his profits in a Cook Island Trust. The Cook Islands? a protectorate of New Zealand. The papers were drawn up in New York for Midocean Trust Company in Rarotonga. I'm sure you're all familiar with Rarotonga in the Cook Islands. It was managed in New York by a protector who happened to be the principle stockholder's father. It was done through the second-largest bank in Australia, which had a branch in New York and London, and also one in Rarotonga, where I think you could be confident they were not servicing any of the natives.
And what are we doing? We're teaching people in the emerging countries that crime pays; that, hey, if you paid the lawyer, the lawyer is going to get rich. And so, it's not a lesson that we should be teaching. I'm happy to say that in that case we convicted the corporation and all of the principle officers and sent them to prison, but not all of these cases have a happy outcome, or happy from our standpoint, because it's so difficult to get the evidence.
More recently we indicted and convicted a brokerage firm called Meyers Pollock, and 41 individual defendants for enterprise corruption and securities fraud. And, again, in this case they were using shell companies and offshore bank accounts to promote their stock and run it up. And in this case, investors lost almost $400 million.
Another recent case which is still open involves a company called Evergreen Securities Limited: chartered in the British Virgin Islands, offices in the Bahamas, run out of Orlando, Florida. They were guaranteeing their investors 9 to 10 percent return on their funds, no taxes paid. Initially they were doing that, but it was a Ponzi scheme, and the first investors were being paid by the proceeds from the second investors. Well, that company went bankrupt and those investors lost over $200 million. On the one hand, you can say, well, they deserved it for being such suckers, but the fact is it's our job to protect people from their own ignorance and, perhaps, greed. Last month the man who ran that fund pled guilty in Manhattan, and a lawyer was brought in subsequently to help bail him out. He was indicted for stealing $27.7 million from that company and another $2 million from a Panamanian company, and he also has pled guilty.
We had another case involving bank officers, one a major United States bank, a major Netherlands bank, where the bank officers were being bribed to sell third-world debt — Brazilian debt at below cost. It was a little easier to do that than lift the debt, because you couldn?t pick up the Wall Street Journal and see where the Brazilian debt was selling. So we got lucky in that case, and we found a computer disk in Westchester, and so forth, and we convicted all of those people. But, again, it's just symptomatic of what is going on. U.S. bank officers, Netherlands bank officers — and incidentally they were very reluctant to cooperate with us; it took a long time. They're being used to manipulate the debt of a third-world country.
And I want to make it clear that, you know, for every case that we make there are 100 that we don?t know anything about and maybe 10 that we know something about in which we fail. But again, this money was routed through a shell company in Antigua, set up by one of the Big 5 accounting firms. The officers and directors were provided by that firm. When we served a subpoena on them, they said, we're not—even though we represent this firm, we're not authorized to accept subpoenas, but we'll let the people who might be interested know about it. (Laughter.)
These big accounting firms, a lot them, they set up a separate subsidiary in the Caribbean, so you serve the parent company — not the parent company, I take that back — you serve the company with the same name and the same logo in the United States, and they say, hey, we don?t have any control over this other company which bears our name and has our logo. We told them, hey, McDonald's has more control over its franchisees than you have over companies bearing your name.
We indicted three Venezuelan bankers and convicted them, who used more than 3,500 offshore corporations to loot a couple of banks that they controlled. And this was part of a large-scale looting of Venezuelan banks by their owners which resulted in the collapse of one-half of the banks in that country. You may remember that; that was in 1997. And that was a major disaster for the Venezuelan economy when all of those banks became involved in serious financial problems. And, again, they were using offshore corporations in Aruba or Curacao to loot those banks.
And it's not just tax secrecy; it's corporate secrecy. There's no transparency in transactions in these countries. I mean, you can't find out what's being done or who's doing it. And if law enforcement and regulators can't follow the money, then there's nothing that you can do to stop this kind of business. And Mr. Baker mentioned, I mean, this method of operation which was set up initially by drug dealers and then used by people of means. Generally, it was also used by terrorists, and this was one of the major sources of their funds which have not been traced, which once again creates this very serious national problem which needs to be dealt with.
A lot of people say, well, why don?t you use the mutual law enforcement assistance treaties, the so-called MLATs? Well, one of the interesting things is that some of those countries take the position that the MLAT does not cover state and local officials, so the United States government can make a request of the mutual assistance treaty but they are not permitted to turn it over to state and local prosecutors. And I must say that certainly in the past the State Department and the Department of Justice have not been unhappy about that limitation on their authority because some of them view state and local prosecutors as — I guess to put it in the vernacular — pains in the neck.
But if we're going to be successful in getting the whole business of money-laundering secrecy out in the open, the whole business of how MLATs are administered and negotiated has got to be changed. One example was — you know, with the Caymans and with BCCI, when we made a request for records to serve subpoenas they said, you've got to go through the mutual assistance treaty. We go through the mutual assistance treaty and they say, sorry, the Department of Justice can?t turn those records over to you under the treaty. And the other thing of course is that even the way you get the records, it may be a couple of years. In a couple of years money can go through a lot of jurisdictions; it can go through a lot of jurisdictions in 48 hours. In two years that money is gone. Not only is the horse stolen and the barn door locked, but the barn door has been burned down. So that's something that has to be dealt with.
And finally, the tax treaties that have been negotiated are often very limited and require that you show intent and so on so that — and they don?t become effective for several years. So I'm very skeptical about the new tax treaties as to whether they're going to really—as presently drafted and administered, whether they're really going to mean anything.
I'll give you another example. Last year my office secured indictments on a $6 million fraud on the export of chicken legs to the Soviet Union. They're very popular in the Soviet Union, and processors here like to do this business because people in the United States like white meat and in Russia they like the legs. But that Russian-owned company was incorporated in the island of Niue. Maybe you're not familiar with that. If a big wave came along—(laughter)—it wouldn't be there. It's an atoll, which is a—well, as they say on the Internet, "It's a self-governing territory in free association with New Zealand." So, anyway, I hope I'm—I hope there's nobody from Niue here that I'm offending. (Laughter.)
And it's not only the banks that are involved. I mean, we did a money-laundering sting last year involving — we set up a dummy brokerage firm, and a lot of that money was going to an insurance company in the Isle of Man, Fiedlsta (ph). It's a big company, and a wholly owned subsidiary of Zurich, and the money was being invested by Scudder, which at that time was also a subsidiary of Zurich. So I mean, that's, again, an example of the way these jurisdictions are used to hide illegal funds. In that case we found — we were collecting money and "investing" it for these drug dealers, and we found that money went to 300 different accounts.
We've also been involved in looking at the people who set up these illegal companies. We've indicted a British judge who made the mistake of having a home in Florida. He was arrested while he was visiting Queens Council in Canada. And some of that correspondence is pretty humorous, I mean where they're saying, if your person is a real person send us a photograph, but otherwise any photograph will do. These were photographs for passport applications that authorized setting up companies in the Channel Islands. There was also a solicitor involved, and we've had a lot of trouble getting the British government to agree to extradite him.
We've also found—I mean, there's an awful lot of lawyers and accountants that are involved in setting up these corporations. In one case we went to a prominent law firm and we said, would you try to get your client to give us information about this corporation down in the British Virgin Islands? And the law firm said, sure, we'll be glad to talk to him. About a week later they called back up and they said, could you tell us who our client is? So that shows you the level of diligence that's being—(laughter)—that's being used.
I don?t know if any of you subscribe or read the International Herald Tribune when you're on the plane or at the dentist — the Financial Times. I mean, these people are advertising all the time, you know, we'll set up an account for you in one of these bank secrecy jurisdictions. There's a popular book out by a leading trusts and estates lawyer called "How to Die Richer." It touts the advantage of offshore protection trusts known as APTs. It gives the best ones at the moment, structured to permit a foreign trustee to ignore U.S. court orders and to simply transfer the trust to another jurisdiction in the face of legal action. So these, again, are things that are now in common use, and just all part of the wink-wink business. I mean, we know this is going on; it's published in a book by a well-known lawyer who represents a very prominent financier, but I don?t want to mention that at this point.
But we're looking the other way. And, again, to get back to previously, we've got to put these issues on the table. If our taxes are too high, let's do something about it, but let's not have these constant diversions which are bad for us and bad for the countries involved. I mean, I think we've got to ask the Congress to look at the laws that permit this sort of thing; we've got to ask the SEC not to recognize these sham transactions. I mean, a country puts out a prospectus saying, you know, we're going to be headquartered in Bermuda. They're not going to be headquartered in Bermuda; they're going to have an office and a bank in Bermuda. They're not going to be managed and controlled from Barbados; they're going to have one directors? meeting a year. Yet the SEC says, that's all right, we'll look the other way. I think we've got to demand that agencies take a more realistic and practical view of what's going on.
Then everybody's got to work together. Last night we — that's the second meeting — we had a meeting with the general counsel of the Treasury Department, and we're going to work with them on some of these offshore credit card arrangements. In New York we do have a very good money-laundering statute. We had the advantage of seeing the weakness in the federal statute, and the further advantage that nobody in the legislature understood the bill that we proposed. (Laughter.) So, where tax evasion is not a predicate for the federal statute, it is for the New York statute. And we're working closely with the Internal Revenue Service, both in New Jersey and Brooklyn. We've worked with the commissioner of Taxation and Finance in the state, the commissioner of the city, and we're trying to close a lot of these loopholes. But nobody in law enforcement can do this thing. I think we've all got to work together, and we want to take a more progressive stand.
I'll just end up by saying, you know, when I was a young lawyer I was working for Robert P. Patterson, who had been a judge of the United States Court of Appeals with the Second Circuit, and then was an assistant secretary of War, and the secretary of War, and then went into private practice. And he was a general counselor of a major firm and the general attorney came in to see him and said, look, the son of the chairman of the board—and he's also the brother of the president, and he's also vice president of the company — is being investigated by the Internal Revenue Service, and there may be a criminal reference, but it's all a mistake, it's all a misunderstanding, and the chairman of the board and the president would like you to represent him. And Judge Patterson looked him in the eye and said — and remember, he was the general counsel and was getting, in those days, a big retainer — he said, "Look, if what you say is true, you don?t need me. If what you say isn?t true, I don?t want to represent him." And then he said to me afterwards, "Democracy is an obligation. People have to pay their taxes." And that's a message that we've got to get across.
Thank you.
(Applause.)
MR. SCHOETTLE: Thank you very much.
Let's open it up to some questions, thoughts, reactions. Anybody here from Niue Island? (Laughter.) There, please, in the back.
(Pause to rearrange seating.)
MR. SCHOETTLE: Sir, in the back. And could I ask you, please, just to give us your name and your affiliation?
Q: (Off mike.)
MR. MORGENTHAU: Well, I don?t think the recommendation is to lower taxes. If the tax rate is too high, you ought to discuss it; or if it's too low, you ought to raise it. They ought to be the same for everybody and not have loopholes for the well connected to avoid it.
Q: (Off mike.) What happens when you go to Treasury, COJ, State Department and you say, can?t you talk to our closest allies and get them to do something about this?
MR. MORGENTHAU: I would say generally they may listen politely and, at least in the past, have done nothing, although I think that that may be changing, at least as far as we've established a relationship with the general counsel of the Treasury Department, and I think we're going to get some help there.
Q: Could I follow up on that? Why haven?t they done something? We didn?t push hard enough or what?
MR. MORGENTHAU: I think it's always a matter of the State Department getting involved and saying, look, they're friends.
Let me give you one example. We were investigating, along with the Federal Insured Bank of New York, Sheik A.R. Kahlil (sp), who was a director and investor in BCCI, and he had sold his stock but did not disclose that he was no longer a stockholder. He was one of the early ones out. So a subpoena was prepared for him to appear. It was given to Justice Department, State Department, went to the embassy in Riyadh, and the word came back, no such person can be located in Riyadh or in Saudi Arabia. About two weeks later, his lawyer — a very fine lawyer and very capable — came in to see me and said, look, I?d like to get free passage for Sheik Kahlil to go to the Mayo Clinic, but I?d like to be assured that he won't be arrested. And I said, well, that's very interesting. And I told him the story about how the embassy — the Marshals Service reported they couldn?t locate him, because he had told me that his client would never steal. He said, he's got the biggest palace in Riyadh, it covers two square blocks. He's got a museum that covers a square block. He's got a palace in Cairo and another one in Casablanca. So there's a man who isn?t going to steal. So I said, how come the Marshals Service couldn?t find him? He said, well, kind of like the sheriffs in Oklahoma, sometimes they're not as diligent as they might be.
So anyway, why don?t we get these things done? I think your guess is as good as mine, but I think the intervening —
MR.: (Off mike.)
Q: Mr. Morgenthau, and gentlemen, could you comment further on the New York State law, which is somewhat more encompassing than the federal statute concerning money laundering? And in particular, have you yet brought cases under that law, and what has been the reaction of New York banks to the law?
MR. MORGENTHAU: I would say that cooperation has been pretty good, and we're optimistic. We have a number of investigations pending, but I don?t think — we had one conviction, didn?t we?
MR.: We've indicted the Colombian money brokers who sent the money to—(inaudible)—were indicted. We've tried other cases—
MR. MORGENTHAU: But they haven?t been convicted yet.
MR.: They have not been convicted yet.
MR.: Just to focus, I think, on the question, the New York State money laundering law focuses on people who use money transmission facilities in the state to move what they know or believe to be dirty money. It does not focus on the institutions themselves. If the institutions know it's dirty money, they can be the targets. But the statute is designed to go after the people who are in the business of moving dirty money, so the banks don?t object to this statute at all. I mean, they have their programs in place to try to keep their employees from being corrupt, and it's not a situation where the bankers are predominantly targeted, but rather the people in the business.
MR. MORGENTHAU: I'm quite encouraged by the level of cooperation. I mean, the matter involving Tyco was referred to us by the state commission of banking. So I think the level of cooperation is pretty good, and we get excellent cooperation from the Federal Reserve Bank of New York.
Q: (Off mike.)
MR. MORGENTHAU: The answer is you can?t. If the bankers don?t do it, you can?t do it once the money is in the system. It doesn?t seem inappropriate to say that people handling other people's money should keep honest records of whose money they're handling and what they do with it. This doesn?t seem to be too sophisticated an approach, and yet in much of the world that concept is not accepted.
To the extent that we get transparency — or if not transparency at least the creation of honest records throughout and then transparency to law enforcement when needed — that is one of the key steps in fighting all forms of dirty money because the flow of money will create the evidentiary trail. When the banks take money and move it without saying who they got it from, without keeping a record, that trail is broken. Now, when they send the money—you're talking about the Friday night transactions. I assume you mean shipping the money somewhere where it'll collect interest over the weekend and then bringing it back, but they don?t bring it all back. Is that correct?
Q: (Off mike.)
MR. MORGENTHAU: One of the major problems we have with Cayman is that there is a regulation in the United States which forbids banks from paying interest on overnight deposits. If we change that regulation, U.S. banks would not then have an economic reason for doing the sweep accounts, which they do, and sending the money to Grand Cayman overnight, which they do.
Now, some of the banks have spent a lot of money developing software programs where they can get every spare dollar into that account and ship it down to Grand Cayman, and they don?t really want to change because they have a competitive edge over others. Most of the banks, however, if we level the playing field and simply say, yes, you can pay interest, would give up Cayman for that purpose. And it's something which we should be doing, a change in the regulation.
But they're two separate areas. And I understand that the problems of the banks in the Chechnyan area are immense. Whether they will be able to continue to do business under the Patriot Act is going to be an interesting question because they're going to have to change their practices, and I just don?t know if that's going to work.
Q: (Off mike.)
MR. MORGENTHAU: That's a familiar name.
Q: I wonder if you could elaborate on the problems with mutual legal assistance treaties, particularly the problems in getting the time to do responses, and then the problems on the other side when foreign governments make requests of the United States, and what we should do to replace those kind of — (off mike) — ancient way of doing business with something — (off mike).
MR. MORGENTHAU: I'm going to answer the last part first, and that is, we certainly ought to replace it. I don?t know quite how to do that. You probably know more about that than I do. But, I mean, it's very unsatisfactory — from our standpoint, very unsatisfactory. You know, we have to go through the Office of International Operations, Justice, State Department and so on, and just getting it through the U.S. government takes a long time, and then go through the whole foreign bureaucracy. And, as I say, some of the foreign countries maintain that it's not available to the state and local people anyway, and that should be changed.
And we understand, from talking to foreign countries that are—jurisdictions that are cooperative with us, that they have great difficulty getting material also. So I think it's got to be a priority matter to simplify that whole procedure. And, number one, I would like to see where we could request directly without going through Justice, State and so on.
MR.: In a U.S. investigation — in a criminal investigation, we issue a Grand Jury subpoena in New York, and then we want the records and we want them as soon as they can assemble them, and we get them in a matter of weeks or days. But, as mutual assistance treaties, you can wait as long as a year, you know, and somewhere along the way you'll get a copy from the police in the foreign jurisdiction, occasionally, saying, well, you can?t use this; you can?t actually introduce this in evidence, but for your guidance, here it is, and the real records are coming. It's just impossible to do criminal investigations. In an age of instant communication, why should it take longer? We should just get people to get their act together.
MR. MORGENTHAU: Now, I don?t know whether this has changed or not, but certainly under the prior administration, the United States attorneys were not permitted to issue subpoenas for records of foreigners; they had to go through Justice and so on, and the United States attorneys throughout the 50 states were very frustrated by that rule. I don?t know whether that's still in effect or not.
Q: (Off mike.)
MR. MORGENTHAU: That is a problem, but we certainly don?t want to get records when we don?t have a reasonable basis, just as a subpoena to a domestic company is subject to suppression if there's not a reasonable basis for issuing it. And we certainly want to protect the integrity of foreign banking institutions, and I think that should be implicit in any legislation.
MR.: Let me just add that we have — these are not just businesses that do business abroad; we have trouble getting records that are kept abroad from institutions that do business in New York. They won?t accept a subpoena first for those records. It's outrageous. I mean, why do we have to go through the MLAT? If you want to come to New York and do business and the company is here, why can?t we just go down the street and give you a subpoena for it? I mean, if they think the subpoena is an improper one and we have no basis for it, they obviously have access to the courts and can make a proper application to the court in confidence and fight the subpoena. And the fact is they don?t have a basis to avoid it other than that the law provides them with what I think is an unreasonable venue.
MR.: Just one more thing on that. The USA Patriot Act requires all banks abroad that clear through U.S. banks to appoint an agent to receive legal process in the United States. The boys have barely begun to awaken up to the fact they have to appoint an agent. They have not begun to focus on the fact that service is going to be made and then compliance is going to be required. So in the next year or so, you're going to be hearing some caterwauling from bankers such as you have never heard when they realize that prosecutors in the United States are serving subpoenas on the agents who were assigned for that purpose, calling for the production in the U.S. of records that were never made here from banks that are not, in fact, doing business here except as correspondent accounts very broadly defined. So the change is going to be coming. I don?t know how the decisions will be on those, I'm just saying that this is going to be a very, very interesting and challenging area in the next year or so.
MR. SCHOETTLE: Question way in the back, please.
Q: (Off mike.) I?d like to hear your observations on a case of non-cooperation by the U.S. government — (off mike) — money-laundering case. (Off mike.)
MR. MORGENTHAU: I'm generally familiar with that. I don?t know what the reason for it is, but I think the fact that the United States government did not take action is really disgraceful. We were going to try to work out something with the Drug Enforcement Administration to bring a case and then to talk to them about it, and then the then-head of the Drug Enforcement Administration was told by the Justice Department not to cooperate with the Manhattan District Attorney's Office.
Q: (Off mike.) How do you fight them?
MR.: You don?t, okay? In New York we have about $2.7 trillion a day clearing electronically in Manhattan. That's Fedwire; Clearing House Interbank Payments System, or CHIPS; it's the securities exchanges and the clearing firms for the securities exchanges. And that's a large number — it is an impossibly large number, and I say that with precision. We can ask that records be kept so that if we detect a situation we can go back and look for the evidence to prove a crime, but at the moment there is no computer program and no set of human beings who can look at money moving that fast and detect anything. You can look at patterns; you can see some kinds of patterns. If it's a war on terrorism you can structure some kinds of functioning on certain kinds of transfers, but generally you do not detect "illegal flows of funds."
Take the simplest case where the Central Bank of Nigeria directs the transfer of money from the Central Bank out. Well, they're giving the money to Abacha, but who's going to ask the Central Bank — when the bankers are authorized to move the money, who can say, by what right are you moving it? It's the bank's money. Now, he may be stealing it, but all you can do is to hope the records are accurately created so it can be traced later on. At the moment there is nothing you can do.
MR. MORGENTHAU: When I first got that figure from the Federal Reserve Bank in New York, I said that's—because I was going to testify before a congressional committee, and I said $2.7 trillion, that can?t be right. And I talked to the general counsel, he said, "That's on a quiet day."
Q: (Off mike.)
MR.: Yes, unless you have undercovers, but that's the same thing, in effect.
Q: (Off mike.) You made some references to Citibank, and there was a reference made to the—(off mike)—case. In both the Citibank case and the Bank of New York case, there's been extensive investigation and reporting, even, in the Citibank case, memos from some of their officials talking about how they're going to hide this money, and yet you don?t see any prosecutions of any U.S. bankers. Do you think that this is a problem in this country?(off mike)?in Citibank and/or in the Bank of New York case, to get some of the people who are responsible?
MR. MORGENTHAU: I don?t like to give advisory opinions where I don?t know all the facts. I mean, I think there were some serious problems there, and I'm not sure that those cases were as thoroughly investigated as they should be, but I really don?t have access to all the facts so I don?t want to express an opinion.
MR. SCHOETTLE: Let's make it the last question way in the back, please.
Q: (Off mike.)
MR.: The United States dollar is the currency of choice. So, to a large extent—if two-thirds of the world's trade is in dollars, a lot of money laundering is going to be in dollars. The United States, with its cocaine consumption and heroin consumption, has funded the drug dealers for many years. There are other countries that have major money-laundering problems. Switzerland is now actively fighting them, but not getting much support from this country. The United Kingdom has some agencies which are fighting it. The City of London is against fighting money laundering, and that's a battle that's being waged right now.
If you look at places like France, where there was money apparently going from a French-owned oil company to affect the German election, that was done by governmental fiat, and it's going to be somewhat more difficult to get prosecutors reporting to the same government to investigate money laundering.
This happens a lot. In terms of dollar volume, in terms of value volume, the United States is clearly going to be the biggest player.
MR.: Peter, if I could have one brief anecdote on this very point. After Ray made his presentation at our Global Dialogue in London, I was in Singapore reporting on this to one of our supporters and members, and he is the chair of one of the big banks in Singapore. And I was sort of running through Ray's ideas and sort of putting it in local context: Singapore, banking center, Indonesia, Malaysia, Vietnam, Burma, Cambodia. I mean, where's the strong currency in the region? And he starts nodding; he gets the picture. And he sort of says, oh, yeah, well, we track; we know a lot of it and we report it. And then I could just see in his face sort of the light bulb go off and the political problems emerge.
In other words, what I took from that conversation is the government of Singapore knows a tremendous amount about corruption and corrupt individuals throughout Southeast Asia, and they sit on it and they just don?t do anything.
MR. SCHOETTLE: Well, we've gone way over time, but I?d like to thank everyone.
(Applause.)
(END)