The sun goes down in tax-free paradise

A clampdown on money laundering may force some havens out of business. But will it hurt the terrorists?
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The Independent Online

For terrorists, the dictum "money makes the world go round" is true. Illegal organisations need to be able to get money to their agents in different corners of the globe to pay for arms. But for outlawed groups, simply transferring cash from one bank account to another is not enough to avoid detection by the police or intelligence agencies. A variety of money-laundering scams are used to keep the links between the networks untraceable.

A simple method is to push the money through accounts in "tax havens". These offshore centres are useful to terrorists because banking laws are practically non-existent or not enforced; when they are, the records of those who own the accounts are unreliable or inaccessible. But now international pressure could force the private havens out of business, as the secrecy surrounding them is thought to be blocking efforts to dig out the terrorists behind the attacks on the US.

"In reality the fight against money laundering doesn't have a hope of succeeding as long as tax havens continue to exist. They are the ones that provide the anonymity behind the offshore trusts and accounts," says Raj Bairoliya, the managing director of Forensic Accounting, a specialist in fraud and money-laundering issues.

Offshore centres are often used to avoid paying tax, leading to the image of retiring businessmen enjoying the sunshine in the Channel Islands or the Caribbean, safe in the knowledge that their millions are out of reach of the taxman. But this luxury could soon end. Sir Howard Davies, the chairman of the Financial Services Authority, which regulates banking in the UK, last week warned that offshore centres face a "bleak future" unless they improve money-laundering regulations. "The political temperature of the offshore centre question has risen sharply in recent months," he says. "Political leaders in the G7 economies, in particular, are very concerned by what they see as dangerous gaps in the world's defences."

Those most commonly thought of as tax havens, like the Channel Islands and the Isle of Man, claim their regulation is tough and they should not be targeted. The Bahamas' attorney general, Carl Bethel, last week promised that the country will eradicate money laundering and flush out any terrorists in its midst.

Other regions remain attractive to the underworld. "The nature of money laun- dering involves moving money around between sham companies in various jurisdictions in order to disguise its origin," says David Marchant, publisher of the Miami-based Offshore Alert newsletter. "If I wanted to launder money, the three domiciles that I would consider using are Panama, Nevis and Grenada.

"Panama is extremely corrupt, does not enforce its financial laws and has a legal system that is essentially worthless. 'Justice' is bought, not dispensed," he adds. "Nevis, meanwhile, does not even have a regulator, and one of its offshore companies was headed by a man with an outstanding arrest warrant against him in South Africa, while Grenada welcomed crooks with open arms after passing its Offshore Banking Act in 1996."

It is hoped that clamping down on such places will make it easier to track the trail of dirty money around the world. Until now this has proved difficult, especially in the case of the world's most wanted man, Osama bin Laden. Since his days studying economics and finance at King Abdul Aziz University in Jeddah, Saudi Arabia, he has shown an ability to transfer money across the globe secretly.

The long-standing US investigation of Mr bin Laden's network has proved frustrating. "No assets have been firmly linked to Bin Laden, in the United States or elsewhere, and hence none are frozen at this time," states a report on terrorism by the research arm of the US Congress, published a day before the suicide attacks.

But the attacks have intensified demands for action. The US is now threatening to come down hard on countries that don't comply with international standards.

Last week President Bush ordered the freezing of assets of 27 organisations and individuals said to have links to the terrorist attacks. He also said words to the tax havens of the world that will have frozen the bones of some operators: "If you do business with terrorists ... you will not do business with the United States."

One factor in the tax havens' defence is that they are not alone in handling dirty money. Russia, Egypt, Israel and Lebanon are considered by the Financial Action Task Force, which is charged with clamping down on money laundering, to have poor regulations. "It must also be said that the money-laundering problem is not an offshore one but an international one, and it is almost certainly the case that more laundering is carried out in London and New York than offshore," says Mr Marchant at Offshore Alert.

"It is all about money, and many, many financial institutions and financial services companies either know they are laundering money but don't care, or don't want to know so they don't carry out any credible background checks into clients."

A US Senate Committee report earlier this year highlighted several big US banks which, through the practice of correspondent banking, unwittingly helped dubious offshore banks get dirty money onshore. In 1998, Citibank was severely criticised after $300m (£204m) believed to have belonged to drug dealers in Mexico was passed through its accounts. The revelation came after a massive undercover money-laundering investigation. US federal agents seized $1.8m from Citibank accounts held by a mysterious Cayman Islands bank with no offices anywhere in the world, although the US Justice Department also made it clear that there was no suggestion of dishonesty on the part of Citibank.

And the UK is not immune to dirty money. Recently, 15 London banks were said to have had handled $1.3bn of cash allegedly stolen from Nigeria by General Abacha, the former dictator.

To combat this threat, the European Parliament is discussing legislation to clamp down on money laundering. Lawyers, accountants and even casinos will have to report the movement of large amounts of cash to the authorities. But although these proposals could hit drug networks hard, they may prove to be of less use in hunting down terrorists, as the cash sums involved are smaller.

While estimates of Mr bin Laden's fortune have been put as high as $300m, it takes surprisingly little money to fund a terrorist operation. The FBI has estimated that the 1993 bombing of the World Trade Centre cost not much more than $20,000. The cost of the 11 September operation may be only a few hundred thousand dollars, with flight training the most expensive item.

As prevention is difficult, detection becomes a priority. But even if the smaller islands shut down for business because of increased regulation, banking secrecy could live on in other onshore tax havens. "A likely outcome is that a number of small but well-known offshore centres could fade away," says Bob Harland, a partner at PricewaterhouseCoopers who specialises in offshore financial issues, "though large and well-regulated areas like Switzerland may benefit."

Fact File: The Financial Action Task Force

The Financial Action Task Force was set up in 1989 by the G7 countries to monitor money-laundering practices and develop recommendations for eradicating them.

Two years ago the FATF set up a blacklist of some 15 offshore and onshore tax havens, backed up by the threat of international sanctions.

Currently the blacklist includes the Cook Islands, Dominica, Egypt, Guatemala, Grenada, Hungary, Indonesia, Israel, Lebanon, the Marshall Islands, Myanmar, Nauru, Nigeria, Niue, the Philippines, Russia, St Kitts and Nevis, St Vincent and the Grenadines and Ukraine.

According to one recent estimate, money-laundering activity is worth roughly $1,000bn (£680bn) per year worldwide, with $300bn-$500bn of that representing laundering related to drug trafficking. A former managing director of the International Monetary Fund (IMF) has estimated worldwide money laundering at 2 to 5 per cent of the world's gross domestic product ­ some $800bn at the low end of the range and perhaps as high as $2,000bn.