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Enron and al Qaida share offshore banking tactics

By Lucy Komisar

How did top executives of Enron do it? How did they cause the world's biggest bankruptcy while making off with millions of dollars? Simple: They used the same financial tools as Osama bin Laden.

To attack the Osama bin Laden financial network, the Bush administration knew right where to look--in offshore secrecy havens, including the Bahamas, Switzerland, Luxembourg, Dubayy, and Panama.

Investigators know that the world's bank and corporate secrecy system was set up to move money for people with something to hide. Sometimes they are terrorists. Sometimes they are financial swindlers. They are welcomed in offshore centers that promise to keep ownership of companies and bank accounts secret, even from law enforcement.

To uncover the al Qaida money trail, U.S. investigators had to use muscle. When a Nassau bank refused to open records, the United States had it cut off from the world's wire transfer systems. The bank changed its mind in two hours.

Now, with Enron, U.S. investigators and the lawyers suing the firm's executives are turning offshore again. Before they finish, their revelations should make lawmakers and the public question the continued existence of the world's financial services system for criminals.

We know a lot about how Osama bin Laden used the system. Here is how Enron used it. Andrew Fastow, the company's chief financial officer until October 2001, was known as a master of international offshore banking laws. The key to the Enron swindle was the company's 3,000 corporate subsidiaries and partnerships. A fourth of them were registered in Grand Cayman or Turks and Caicos, two notorious offshore centers.

Why put company ownership records in secrecy jurisdictions? So that regulatory authorities, investment analysts, and stockholders won't know about self-dealing or other improper activities.

If authorities don't know who the owners are, they can't know if Enron managers or associates secretly own a partnership. They can't check the books to see if the offshore company is dealing with another insider-owned company that is siphoning off its wealth. That's how Russian oligarchs looted their country.

The offshore system was central to Enron's collapse. Frank Karam, an attorney at Milberg Weiss Bershad Hynes and Lerach who is working on a suit against top Enron executives, explained that Enron used offshore partnerships "to borrow at least $10 billion from banks. Enron guaranteed these loans with its own stock. They traded with themselves and reported the money as income--as revenue and profit."

Two offshore partnerships were set up in 1999 simply to move debt off Enron's balance sheet and hide losses, Karam said. And Enron moved its "profits" to offshore subsidiaries to avoid paying U.S. taxes in four of the last five years.

Enron officials also used the offshore system to hide their own exorbitant pay. "We hear of middle-level executives making $10 or $20 million," Karam said. "If shareholders knew this. . . ."

Records of Arthur Andersen's contribution to this offshore system were very likely in the files the accounting firm shredded. "Aggressive accounting" is a common euphemism for using offshore companies to juggle the books and evade taxes. Accounting firms get consulting fees to set up such systems and then "audit" them.

The Clinton administration was working with European allies to rein in the offshore system, but was blocked in the Senate by Republican Phil Gramm, whose wife, Wendy, is an Enron director, and by Republican House leader Dick Armey.

At first, the Bush administration also fought reforms. Treasury Secretary Paul O'Neill weakened an Organization for Economic Cooperation and Development strategy against tax havens. But Sept. 11 compelled Washington to change its tune somewhat.

Legislation adopted in October, for example, bans American banks from opening accounts for shell banks with no physical presence and thus no clear purpose but money laundering. It requires banks, securities, and insurance firms to verify the identities of customers.

But U.S. banks lobbied successfully against requiring additional "due diligence" rules for American banks dealing with offshore banks.

What would real reform look like? Congress could ban U.S. institutions from dealing with banks that don't list owners' real names on accounts or cooperate with international law enforcement. The OECD is developing proposals for dealing with shell companies. Washington could support an agreement to end recognition of companies registered in secrecy jurisdictions where they don't do business.

Imagine if Enron subsidiaries had been forced to reveal who their owners were and to keep their books where they operated and where they could be examined. Imagine if U.S. law enforcers could demand to see bank accounts of Enron "partnerships" and top officials, rather than having to track them down through the murky swamp of offshore secrecy.


Lucy Komisar is a New York journalist who investigates international crime and corruption.

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From the January 24-30, 2002 issue of the North Bay Bohemian.

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