Offshore financial havens are playing a growing role in concealing and "laundering" tens of billions of dollars a year of illegal funds controlled by criminal elements in the United States and elsewhere, according to a study prepared for the Senate Permanent Subcommittee on Investigations.
The study estimates that as much as $43 billion a year in funds may flee from the United States to banking centers such as Antigua, the Bahamas, the Cayman Islands or Switzerland to avoid U.S. tax authorities or conceal the illegal origin of the funds. But it cautions that secrecy laws in most financial havens prevent anything but seat-of-the-pants estimates.
Stanford University law professor Richard Blum prepared the report as a background document for hearings the subcommittee will hold this week on what steps the U.S. government should take to prevent criminals from shielding their funds from authorities or using foreign havens to make illegally derived funds appear to be legitimate.
Blum said there are about 80 offshore havens whose laws differ in enough respects from U.S. laws that funds derived from illegal U.S. activities can be shielded in their banking systems.
However, Blum noted, many so-called havens play important, legitimate roles in the Eurocurrency market -- the international financial arena in which currencies are deposited and loaned outside their home country.
Furthermore, havens differ widely in their laws and the practices they tolerate. While some havens may have created their banking systems to attract shady funds, in many cases a country's qualities as a haven from U.S. law merely reflect differing philosophies about what constitutes illegal behavior.
Swiss law, for example, will protect funds deposited by tax evaders, but not by those actively engaged in tax fraud, and the Swiss will not protect "common criminals whose funds may journey to Switzerland," the study said.
Panama, however, provides complete immunity to almost any type of criminal except one who commits a crime in Panama, the study said. Viewed from the eyes of the Soviet Union, the United States is a financial haven for Soviet traitors. U.S. laws provide political santuary and shield account holders' identities for defecting Soviet citizens declared to be traitors if those defections aid Western intelligence efforts.
As a result of varying laws within tax havens, for example, the Swiss will cooperate with U.S. authorities in criminal matters involving bank and company affairs, but will not provide data relevant to a depositor's tax liabilty to U.S. authorities. "At the other extreme, the Caymans and Panama are almost entirely uncooperative," according to the Blum study.
As a result, an individual seeking to shielf profits from narcotics sales would be unlikely to deposit funds in Switzerland, while a U.S. citizen in a dispute with the Internal Revenue Service would feel comfortable keeping an account in a Swiss bank.
Sometimes local authorities are sympathetic to U.S. prosecutors but are unable to act because banking laws that apply to citizens of the so-called haven countries do not apply to foreigners.
Blum identified more than 100 different cases in which individuals who allegedly violated U.S. laws used foreign financial havens to shield their funds from the reach of U.S. authorities. He said that the cases that were prosecuted successfully demonstrate that U.S. authorities are much more successful in prosecuting criminal activity when information about criminals' banking activities can be obtained from foreign authorities.
"Breaching haven security is central to enforcement," the study said.
Blum said that U.S. authorities first must get their own house in order by increasing coordination among this nation's enforcement agencies, spending money to learn more about criminal techniques, and convincing foreign governments to change their behavior. Many developing countries are havens in large part because authorities there lack sophistication to monitor the banks operating in their jurisdictions. He said U.S. authorities could provide technical assistance and education to those countries.
U.S. authorities also could try to get international institutions to set down voluntary standards of conduct that would help investigators penetrate criminal activities that are being protected by foreign bank laws and customs.
In the most severe circumstances, Blum said, the United States could take unilateral action against uncooperative havens by preventing U.S. airlines from serving them and preventing U.S. banks from wiring funds to banks in those countries or even from doing business there.
If such severe measures were taken, however, there might be unforeseen consequences, the study warned. In addition, it said, because such harsh actions would be likely to anger the havens, they would represent an explicit U.S. policy decision that the national interest in terms of enforcement and tax collection "takes precedence . . . over competing domestic and international interests" such as tourism, diplomacy, commerce or, in some cases, regional security.
Furthermore, Blum cautions, as long as the nation has a serious crime problem -- from organized crime to tax evasion to the underground economy -- one should not expect any government actions will result in "massive elimination of the criminal use of offshore" havens.