"Money laundering is the handmaiden of international corruption ... Those who take bribes must find safe international financial channels through which they can bank their ill-gotten gains. Those who provide the bribes may well assist the bribe takers to establish safe financial channels and launder the cash."

Frank Vogl, Transparency International

"America cannot have it both ways. We cannot condemn corruption abroad, be it officials taking bribes or looting their treasuries, and then tolerate American banks making fortunes off that corruption."

US Senator Carl Levin

Private banking services and offshore financial centres are the major conduits and repositories for bribes and corrupt gains. An estimated US$40 billion from poor and former communist economies finds its way into US or European banks every year, much of it illegitimately gained.

Some $30 billion of Western aid "used as part of the Cold War game of winning friends" has ended up in Swiss bank accounts alone. Leaders from some African countries have collectively had up to $20 billion on deposit in Switzerland's banks. Haiti's "Baby Doc" Duvalier is known to have kept $300-900 million in offshore banks, while Philippine President Marcos salted away well over $2 billion in Western banks.

Private Banking

Today, private banking -- increasingly used for confidential services to international elites -- is believed to be worth as much as $17 trillion worldwide, and is experiencing phenomenal growth. Globally, private banking is predicted to grow two to three times as fast as ordinary consumer banking in the next few years.

The private banking boom has its origins in the debt crisis and is a major reason for the continued indebtedness of many poor countries. Because of the debt crisis in the late 1980s onwards, Western banks had fewer opportunities to lend to Third World countries and thus started to pursue wealthy individuals in the Third World to encourage them to place their wealth in private bank accounts.

The result was a revolving door. International loans to developing countries were creamed off by those in power and "transferred into banks ... ironically often to 'private banking' branches of the very same international banks that had issued the international loan ... in the first place." This has been at least as profitable for the banks as for the individuals making the deposits. The average rate of return to banks for private banking accounts is over 20 per cent.

An estimated 80 per cent of loans made by commercial banks during the 1980s never reached their destined countries, remaining instead in Northern bank accounts. In Latin America, two-thirds of total debt is thought to have been deposited in Northern banks.

Although the private banking boom is a global phenomenon (in Latin America, for example, the market is already estimated at $450 billion), the biggest beneficiaries have been US banks. According to Raymond Baker, a financial specialist at the Brookings Institute, the US "has, according to all credible estimates, become the largest repository of ill-gotten gains in the world," not least because of lax or inadequate oversight.

A 1999 US Senate inquiry revealed that 350 of Citibank's 40,000 clients were senior foreign government officials or their relatives, including:

• President Omar Bongo of Gabon, who transferred $100 million through personal accounts in Citibank's New York branches. Bongo had two private accounts in the name of shell (or dummy) corporations as well as a special account to receive payments from oil companies (which included alleged bribes or "donations" from the French government's oil company Elf-Aquitaine). Citibank made more than $1 million a year net from Bongo's accounts.
• Asif Ali Zardari, the husband of former Pakistan prime minister, Benazir Bhutto, who transferred some $40 million through Citibank accounts, of which $10 million is believed to be from kickbacks on a gold importing contract.
• The three sons of Nigeria's General Sani Abacha, who held some $110 million in Citibank accounts, including some in the name of shell corporations set up by Citibank. The bank lent two sons $39 million to deposit in another bank account in Switzerland after the new Nigerian government began investigations into corruption in 1998.
• Raul Salinas, the brother of former Mexican President Carlos Salinas, who transferred $80 to 100 million in alleged drug money out of Mexico between 1992 and 1994 through Citibank's accounts.

In Switzerland, too, private banks still hide the assets of Bongo's and Abacha's families, as well as those of Mali's Moussa Traore and Zaire's Mobutu Sese Seko. The private-banking department at UBS, meanwhile, handles accounts for the family of Kenyan President Daniel Arap Moi.

Offshore Banks and Companies

"There is no honest reason for being offshore. Bank secrecy and the offshore money industry have no place in a globalized economy." Jack Blum, Offshore expert & UN consultant.

Offshore banks and companies are another part of the system through which money is siphoned out of poor countries and hidden well away from its citizens. Offshore financial centres became prominent in the 1960s with bank deposits in tax havens increasing from $11 billion in 1968 to $385 billion in 1978.

By 1989, there was an estimated $1.5 trillion offshore; by 1998, $5 trillion. In 1999, accounts in some 61 offshore centres around the world held $8 trillion. In the Caribbean and South Pacific Islands alone, the OECD found that deposits had increased five-fold betweeen 1985 and 1994, to $200 billion.

Since the 1980s, offshore finance centres or tax havens have been a magnet for money from Third World countries, both clean and dirty. In the mid-1980s, a Morgan Guaranty Trust study of "capital flight" from developing countries found that, in one year alone, a total of $198 billion disappeared off-shore from 18 developing countries. Offshore centres impose little or no taxes, offer themselves to non-residents to escape taxation in their own country, do not exchange information, lack transparency, and attract shell companies -- businesses "with no substantial activities".

Because of the secrecy with which they operate, offshore centres have become excellent places to launder the proceeds of crime and corruption. They have been implicated in almost all money-laundering schemes. In 1996, the IMF estimated that $500 billion -- between 2-5 per cent of global GDP -- is laundered offshore every year. Three years later, the IMF put the figure at anywhere between $590 and $1,500 billion. A 1997 UN report likewise calculated that laundered global revenues from corruption, fraud, pornography and prostitution stood at between $500 billion and $1,000 billion. Arms dealers also often use offshore bank accounts to hide their tracks.

When dirty money disappears offshore, it becomes more difficult for governments to tackle corruption. The power of crime mafias grows, bringing yet more corruption in its train and helping to "mafianize the state".

In some offshore havens, new companies can be set up for as little as £100. Such companies, which can be set up in as little as 24 hours, are not required to file annual returns or accounts, or to disclose ownership. In fact, in some offshore centres, it is a crime to divulge any information about the ownership of banks, depositors or shareholders of an offshore business.

Not surprisingly, wealthy criminals hold much of their money in such companies rather than as individuals. Who these companies really represent becomes even more difficult to trace when they are owned by yet other offshore companies in different jurisdictions.

UK Offshore Tax havens and Banking Secrecy

Most offshore financial centres are located in UK Overseas Territories and British Crown Dependencies. Some £400 billion, for instance -- more than half Britain's GDP -- is held in the country's tiny offshore islands. In 1997, bank deposits in Jersey alone stood at £100 billion -- up from £8 billion in 1980. Some 90,000 anonymously owned companies are registered on the islands.

Between 1972 and 1988, Channel Island firms helped launder $1.2 billion that Prince Mohammed of Saudi Arabia received in bribes channeled through former UK Minister Jonathan Aitken . Island branches of Barclays Bank were used by arms dealer Rudolph Wollenhaupt to sell millions of pounds worth of arms to the former president of Congo-Brazzaville, Pascal Lissouba, which were then deployed in a civil war.

Even more money -- fully one-third of the world's offshore wealth -- is held in 17 Caribbean offshore centres, most of which are UK Overseas Territories. Some estimates suggest that between one-third and one-half of this money consists of the proceeds of crime. Caribbean havens are becoming increasingly important as other banking countries such as Switzerland, Luxemboug and Liechtenstein are being forced by international pressure to open up their books.

Within the UK, at the same time, non-residents have deposited an estimated £1,000 billion. In fact, the UK "mainland" is such a magnet for criminal funds and money launderers that the US State Department ranks Britain ahead of many offshore centres as vulnerable to money-laundering by criminals because of the country's banking secrecy. Although the British government disputes this, the fact that millions of dollars of IMF loans to Russia were laundered through the London branch of the Bank of New York under UK regulations suggests otherwise.

Closing The Loopholes

More sweeping attempts to recover stolen money will require both promulgating an international convention and closing loopholes that allow ill-gotten gains to leave countries in the first place.

Closing down offshore centres is vital to stopping the laundering of corrupt money and the draining of resources from the Third World. In poorer countries, however, the process will have to be gradual, in order to provide time to build up other local industries. Many small Caribbean and other islands and small states set up offshore centres in the first place only because they needed to diversify out of tourism and agriculture. In the meantime, public disclosure of offshore corporate ownership, as well as filing of company accounts, is an urgent necessity.

The West also needs to clean up its own banking act by regulating private banking and ending banking secrecy. Stronger "Know Your Customer" laws aimed at bank clients making large deposits, as well as at their paymasters, should be put on the books. Banking secrecy -- as opposed to customer confidentiality -- should meanwhile be abolished. This would enable Southern countries to investigate accounts in Northern banks held by people suspected of corruption, as well as make it harder for public officials to deposit ill-gotten gains in Western banks.

The Corner House