By Demba Moussa Dembele, Lucy Komisar, and - -
DAKAR, Jul 20 2010 (IPS)

Since 2002, African countries have been negotiating with the European Union (EU) a new framework of cooperation called Economic Partnership Agreements (EPAs). These are supposed to replace the Cotonou Agreement, which is the current basis of the relationships between African, Caribbean, and Pacific (ACP) countries and the EU. However, instead of negotiating with the ACP countries as a group, as had been the case in all previous agreements, the EU decided that the EPAs would be negotiated with each of the three regions of the ACP group individually.

In Africa, the EU went even further and imposed negotiations with the sub-regions of the continent. Initially, the European Commission (EC) had set December 2007 as a deadline for the signature of the EPAs with African countries, but all African heads of state rejected it.

In the different regions, some countries had signed what the EC called “interim EPAs”, mostly on trade in goods. So far, not a single African region has signed a full partnership agreement. However, civil society organisations (CSOs) as well as some intergovernmental organisations, such as the South Centre, are questioning the legality of these interim EPAs under the World Trade Organisation (WTO) law.

The EC had pinned its hopes on the East African Community (EAC) – Burundi, Kenya, Rwanda, Tanzania, and Uganda- which had given indications that it might sign before the end of June 2010. However, under pressure from civil society organisations and public opinion, EAC leaders backtracked at the last minute and the signing was postponed.

In Central Africa, Cameroon had initialled the interim EPA in 2007 and signed it in January 2009. However, its implementation has been postponed twice. Recently, the sub-region has expressed its willingness to continue the negotiations with the view to reaching a full EPA. But in the other sub-regions, there is still a big gap between both parties.

Southern Africa initialled the interim EPA at the end of 2007. Since then, Botswana, Lesotho, and Swaziland have accepted to sign interim EPAs but have not implemented them. This leaves other countries of the sub-region under pressure from the EC. This is especially the case for Namibia, which is the most vocal opponent of signing. Recently, Southern African countries have pledged to sign a much scaled-down EPA before the end of 2010. The announcement was issued following concessions made by both parties in an attempt to bridge the gap between them.

In West Africa, Cote d’Ivoire and Ghana initialled the interim EPA but all other countries there, including Nigeria, refused. In November 2008, Cote d’Ivoire went a step further by signing an interim EPA. Negotiations have been going on at the sub-regional level. However, the Cote d’Ivoire interim EPA has obviously weakened the negotiating position of the sub-region.

The sub-regional roundup shows that two and half years after the December 2007 deadline, the EC has not been able to convince African countries that the EPAs are “beneficial” to them. African countries and the EU have divergent positions on such issues as the content of the EPAs, the level of compensation for fiscal losses, the scope of trade liberalisation in goods, the Most Favoured Nation (MFN) clause, liberalisation of the services sector, export taxation, the period of transition to full liberalisation, etc.

For African countries, the EPAs should be development-oriented whereas the EC seems to focus on trade and financial liberalisation. In the African view, a development-oriented agreement should have the following objectives: 1) develop domestic productive capacities; 2) remove supply bottlenecks; 3) contribute to export diversification; and 4) strengthen regional integration.

But the EC seems more interested in opening up African markets to European goods and services and securing guaranties for European investments. Moreover, the EC is insisting that African countries liberalise their services so that European multinationals might be in a position to control a big chunk of that market.

Regarding specific issues associated with the implementation of the EPAs, African countries have raised the issue of financial compensation for fiscal losses that would result from trade liberalisation. For many developing countries, especially in Africa, import taxes constitute a big part of fiscal revenues. For instance, it is projected that by 2015 Senegal would lose more than 175 million euros. Yet, the vague promises made by the EC are not reassuring.

The EC is pressuring African countries to open up their services markets to European multinationals. However, all African sub-regions have so far rejected this demand and want the negotiations to focus only on trade in goods. In view of this fierce opposition, the EC has agreed to postpone discussions on this issue until later.

African countries are demanding a longer transition period during which asymmetrical trade would be in place, while the EU is calling for a shorter period, except for the so-called “least developed countries” (LDCs).

The MFN clause is another contentious issue. The EC is insisting that African countries grant the EU MFN status, whereas African countries see this as limiting their freedom in their relations with other Southern countries, especially China. The EC wants to have European countries granted the same privileges as would be granted to China or any other “emerging” country. African countries have resisted this demand and made it clear that their relations with these countries should be seen as part of South-South relations.

The current economic and financial crisis has exposed the utter failure of the neoliberal system and discredited the IMF, the World Bank, and the WTO, which have been among the most vocal promoters of market fundamentalism. The crisis reflects the structural flaws of “free trade” policies and unregulated capital flows and should therefore be interpreted by African policy makers as a warning sign of what is in store for their countries if they enter into a “free trade” agreement with the EU. (END/COPYRIGHT IPS)

(*) Demba Moussa Dembele is Director of the African Forum on Alternatives (Dakar).

Excerpt:

Robert Moses, 75, a legendary leader and organiser in the 1960s U.S. civil rights movement, was huddled with a dozen people discussing plans for a campaign to make quality education a constitutional right. On one side was his son Omowale, 38. Next to Omo was John Doar, 89, head of the civil rights division of the U.S. Justice Department in 1960-67 and prosecutor of the major civil rights cases of that era.

Chuck McDew (left), a chair of SNCC, with prominent activist and politician Julian Bond. Credit: Lucy Komisar/IPS

The age differences were noticeable at the conference they attended this month in Raleigh, North Carolina, to commemorate the 50th anniversary of the founding of the Student Nonviolent Coordinating Committee. It was a moment for the “elders” – as high school and college students at the conference called them – to pass the torch to a new generation of activists.

SNCC, or “snick”, as it was known, was founded on the campus of a black college, Shaw University in Raleigh, to coordinate the Southern student civil rights movement. A few months earlier, four black students had “sat-in” and demanded service at a lunch counter at a Greensboro, NC Woolworth’s department store that reserved stools for whites. The management refused.

On succeeding days, more students joined them. As word spread, other college students staged “sit-ins” around the South.

SNCC took the movement further, evolving from a coordinating committee to an office that sent “field secretaries” to most Southern states. By 1963, there were 181 young staff and volunteers who lived and worked with local leaders to register and educate black voters and wage economic campaigns to gain their rights.

The next year, 1,000 young people, mostly whites, came to Mississippi for a SNCC campaign to register voters and run 28 political “freedom schools”. Two of the whites and a Southern black youth were murdered by racists.

In 1964, SNCC organised a Mississippi Freedom Democratic Party challenge to the all-white state delegation to the Democratic Party Convention in Atlantic City. In 1965, it challenged the seating of Mississippi’s congressional delegation in Washington. It supported black candidates for Congress and local office; black elected officials in the southern states increased from 72 in 1965 to 388 in 1968.

SNCC actions led to a ban on segregated Democratic Party organisations and ultimately prompted Southern racists to quit and join the Republican Party. The awareness SNCC created played a role in Congressional passage of the anti-segregation Civil Rights Act of 1964 and the Voting Rights Act of 1965.

SNCC made foreign policy issues part of the black agenda. Staffer Julian Bond won election to the Georgia legislature in 1965, but the body refused to seat him because he endorsed SNCC’s criticism of the U.S. war in Vietnam. A year later, his admission was ordered by the U.S. Supreme Court. He served for 20 years.

Bond told the conference that, “What began 50 years ago is not history. It was a part of a mighty movement that started many years ago and that continues to this day – ordinary women and men proving they can perform extraordinary tasks in the pursuit of freedom.”

That resonated with the young people. Abeni Nazer, 18, a freshman at the University of Baltimore, said, “I’ve never met Dr. [Martin Luther] King, I’ve never met Malcolm X [a Black Muslim leader assassinated in 1965]. But Bob Moses and a lot of people here, I actually get to meet them and I feel like, when you have first-hand experience and you’re sitting face to face with these people, it’s totally different than reading it in a book or seeing it on television. It inspires me more; it puts the passion back.”

Robert Moses is a bridge to the modern movement. A former high school math teacher, in 1982, he started the Algebra Project, to develop methods to teach math to low income and minority students. That led to the Young People’s Project, headed by his son Omowale, which trains high school and college students to work with students on math and to promote reform of math education. They follow SNCC’s strategy.

Albert Sykes, 26, a Jackson, Mississippi YPP leader told IPS that SNCC’s lesson was “start local and think local”. He explained, “The initial sit-in was four guys sitting at a lunch counter. It was a single action but had a ripple effect. The message from the elders is to stay local and do small incremental steps, which for YPP is quality education as a constitutional right.”

Later, addressing conference participants in Shaw’s gymnasium, he said, “We transition from Feb. 1, 1960 and the sit-in movement to the ‘stand up’ movement. Young people in Jackson, Mississippi have to stand up, young people from Chicago, Illinois, from Minnesota, Georgia, have to stand up…” And the young people stood up to applause from the “elders”.

He complained that, “Some of the challenges come from the torch not being properly passed between the SNCC generation and our parents and our parents’ generation not handing the work to us.”

Other SNCC leaders also seek to pass the torch. Ivanhoe Donaldson, who organised for SNCC in Mississippi and Selma, Alabama and Bernard Lafayette, who worked on a Selma voting rights campaign, joined singer and civil rights supporter Harry Belafonte in 2005 to found The Gathering for Justice.

Carmen Perez, 33, a worker for the group, said for her the challenge was “a criminal justice system that incarcerates children”.

Javier Maisonet, 25, who works in Chicago for YPP, said the sit-ins put everything in perspective. He explained that one SNCC activist said, “Once you come to terms with the worst thing that can happen to you, you can do whatever needs to be done.”

*Lucy Komisar attended the founding conference of SNCC in 1960. She was editor of the Mississippi Free Press, a civil rights newspaper, in 1962-63. Her website is http://thekomisarscoop.com/.

The global bank HSBC may be running offshore accounts for central banks. According to a U.S. Senate investigation, an HSBC subsidiary in London called HSBC Equator Bank had a sister bank in the Bahamas.

According to an internal e-mail, the bank told HSBC USA it had been providing offshore accounts to central banks for 20 years, because the banks wanted to avoid “Mareva” injunctions, legally enforceable orders to freeze funds.

This was revealed by a report to be released Thursday by the Senate Subcommittee on Investigations. A subcommittee staff member who worked on the investigation said, “You have a central bank saying to their banker, I don’t want to have to comply with a legally enforceable order so put me offshore. So they did.”

HSBC declined to confirm or deny the charge. HSBC told IPS, “HSBC takes compliance matters very seriously. HSBC’s record demonstrates a commitment to vigorous enforcement and continuous enhancement of anti-money laundering policies and practices.” It would not comment further.

The committee’s 350-page report of an investigation that lasted two years focuses on how U.S. banks, lawyers, real estate and escrow agents hide the origins of funds belonging to foreign government officials and other “politically exposed persons” (PEPS) who might be moving illicit cash.

Only banks are required under U.S. law to know their customers and reject dirty money. Subcommittee head Sen. Carl Levin will chair a hearing Thursday on how U.S. agents help launder funds into the U.S. banking system.

In the HSBC case, the committee was looking into money transfers from the National Bank of Angola. Other case studies in the report involve Equatorial Guinea, Nigeria and Gabon.

From 2004 to 2008, Teodoro Nguema Obiang Mangue, son of the president of Equatorial Guinea, employed two lawyers, Michael Berger and George Nagler, to set up U.S. shell companies – Beautiful Vision Inc., Unlimited Horizon, Inc., Sweetwater Malibu LLC, Sweetwater Management Inc., and Sweet Pink Inc. – with no employees or places of business, to open bank accounts and move money. Berger and Nagler will testify at the hearing.

The lawyers used their attorney client and law office accounts to hide the origin of the money and transfer it to an account in Citibank, which would never see a wire transfer from Equatorial Guinea. At this time Obiang was the subject of criminal investigations and complaints in the U.S. and France.

The lawyers moved nearly 30 million dollars in wire transfers to buy a 30-million-dollar residence in Malibu, on the coast of California. An escrow agent, the Sidley Austin law firm, sent 900,000 dollars to help purchase the Malibu mansion.

When the law firm inquired of the Justice Department if it was okay to accept the funds, part of a 21-million-dollar transfer that initially was to buy a Gulfstream jet, the department replied it had no basis for seizing the funds, the report said.

Money moved from Obiang’s bank in Equatorial Guinea to a correspondent account at Wachovia Bank which then transferred the funds to Bank of America in Oklahoma City. In a six-month period, about 73 million dollars went through the Wachovia account. Another 37 million dollars went through Citibank.

Committee staff discussed this with the banks. The aide said, “Wachovia said they’ve decided to add Mr. Obiang’s name to the interdiction software just because they don’t want to handle his funds. Citibank has declined to take the same step, because they said they’re afraid they would get so many hits from Obiang that it would require their staff to take an awful lot of time to research those wire transfers.”

A Citibank spokesperson told IPS, “Were not commenting. We were only mentioned a couple of times, so we’ll leave it to the report and decline.”

In the case of BAI, Banco Africano de Investimentos, a seven-billion-dollar private bank whose largest stockholder is Sonangol, the state oil company, the report shows how HSBC ignored basic anti-money laundering rules.

Aside from Sonangol, the banks’ major shareholders are the oil company’s top executives, and the bank’s clients are people in the oil and diamond industry. “We have a PEP bank,” the committee aide said.

BAI opened a correspondent account with HSBC in New York. HSBC tried to find out who owned the bank, which is required by the 2002 U.S. Patriot Act. But 19 percent of the stock was owned by shell companies. And they were being “held” by the bank’s president until purchasers could be found.

After it could not determine the true owners, HSBC dropped the matter, said the report. BAI used HSBC to gain access to its wire transfer system so clients could send and receive U.S. dollar transfers across U.S. borders.

In a Nigeria case, the report described how Jennifer Douglas, the fourth wife of Atiku Abubakar, who was vice-president of that country, helped him bring 40 million dollars in suspect funds into the U.S. Some of it was bribe payments made by Siemens, the German electronics company that paid some two billion dollars in global bribes.

Edward Weidenfeld, Douglas’s lawyer, received funds from offshore accounts and told the committee that he assumed that it was Abubakar’s money. Under the law, he was not required to inquire further.

The late president of Gabon, Omar Bongo, hired a U.S. lobbyist, Jeffrey Birrell, to arrange to buy an armoured car from a Utah company and to purchase a U.S.-made C130 transport aircraft from Saudi Arabia.

He got U.S. permission for the aircraft deal – required because U.S. military sales require permission for resales – and had no trouble moving money from shell companies for the deal. Along the way Birrell was sending out wire transfers directed by Bongo and his advisors, some to accounts in Brussels, Paris and Malta.

The committee aide said after the plane deal fell through, “President Bongo asked him to send 9.2 million dollars to an account in his name not in Gabon but in Malta. The lobbyist says okay. That was money from Ayira in Gabon and he sent 9.2 million dollars to the president in Malta. If that isn’t a suspicious transaction, I don’t know what is.”

Birrell, who used his own accounts as conduits for the funds and would not tell the committee what Ayira was, will testify before the committee.

Sen. Levin, who has been investigating and holding hearings on offshore corruption for at least a dozen years, said at a press briefing Tuesday that corruption “corrodes the rule of law, undermines economic development, it eats away at the fabric of civil society, it destabilises communities, it helps lead to failed states.”

He said that even though banks have become more vigilant, “Foreign officials still get access to our financial system at times because U.S. professionals aid and abet their actions.”

He said the U.S. Treasury Department should revoke exceptions granted in the Patriot Act in that exempted escrow agents and real estate from knowing their customers and turning away suspect clients.

He noted that the American Bar Association had promised eight years ago that it would take action to require attorneys to adhere to anti-money laundering standards. He said, “It’s time they did.”

He endorsed World Bank proposals for controls on accepting funds from politically exposed and powerful persons.

*Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at www. thekomisarscoop.com.

To end poverty, you have to know how it began – with globalisation. No, not the 20th century variety engendered by multinationals and their friends at the IMF, World Bank and WTO. They just codified practices that kept developing countries poor.

A Maasai community explains their fights for their traditional land. Credit: Image from "The End of Poverty?"

French Filmmaker Philippe Diaz, in an illuminating documentary opening in New York Friday, traces globalisation back 500 years to the Spanish and Portuguese conquests of the Americas. Diaz shows how the colonial North used the South’s resources to build its industrial base and how its continued control over resources, global trade and debt rules prevents developing countries from ending poverty.

Diaz had produced French feature films such as “Bad Blood” and “The Man Inside” before turning to documentaries. He made “The Empire in Africa” about Sierra Leone. The drama of the new film, “The End of Poverty?”, is as startling as anything he could invent.

The title is a play on a book by economist Jeffrey Sachs – without the question mark – who, Diaz told IPS, “runs all around the world with Bono and these guys claiming that if we bring mosquito nets and fertilisers, it will end poverty.”

For example, Diaz is incredulous that Sachs’s book ascribes Bolivia’s economic failure to high altitude. He points out that 30 years ago, Sachs advised the Bolivian government to privatise everything, and today the country is essentially owned by foreign corporations.

The filmmaker says that the year “1500 is when everything started, the time where Europe expands outside its borders and takes everything it can from Latin America, Africa, Asia – the land and all the other resources. The moment you take the land away, the only way people can survive is to sell their work for food. You take resources away, you create slavery, poverty.”

The film shows how European industrial development was not, as widely asserted, based on the Protestant ethic but on riches accumulated via colonialism.

“How do you think countries [like] Belgium, small countries with no resources, built empires? Existing industries were destroyed, even those of better quality, and colonies were forced to buy manufactured goods and equipment from colonial masters,” Diaz told IPS.

Eric Toussaint, head of the Committee for Cancellation of Third World Debt in Belgium, describes in the film how “The Dutch destroyed the Indonesian textile industry and built a textile industry in Holland. Same for ceramics. The textiles and ceramics that we are told are Dutch are in fact made with techniques they took from Indonesia and specifically from Java, brought them back to Holland and built a wealthy industry.”

He adds, “In the 18th century the Indian textiles were of a much better quality than those of the British. The British destroyed the Indian textile industry and prevented merchants within the British Empire from importing fabrics and other manufactured products from the colonies.”

Diaz takes us inside Bolivian mines. He says, “In the early days, miners had to work inside mines for six months without ever going out; many died.”

“Sixty to 80 million still live in slave-like conditions all over the world on plantations and in mines,” he explains. “It was the same system, we just changed the tools. We don’t have the guns to keep slavery; we have the programmes of the IMF and World Bank, the unfair trade system.”

He says ex-colonial powers assured the new countries would be weak and forced to heed the North’s demands by saddling them with debt. When countries won independence, debts of colonial powers used to exploit stolen resources were transferred to new governments – though they had never incurred or benefitted from them. This was enforced by the North via the IMF and World Bank.

Toussaint says that the World Bank, in the guise of helping, increased the debt: “Take more loans to build big infrastructure to export your riches.” Weakened, countries couldn’t escape the colonial trading system.

Take Kenyan coffee. Diaz points out, “The minister of agriculture, Kipruto Arap Kirwa, says in the film that Kenya doesn’t have the right to roast its coffee. They are forced to sell their coffee to the North which refines and packages it. It’s in the trade agreement with the former colonial power. Today, Germany is the biggest coffee exporter, and it doesn’t have a single bush of coffee.”

Diaz says, “People never got their land and resources back. We interviewed a general of the Mau Mau rebellion in Kenya that threw the British out. He said, ‘We were naïve. We thought we would get our land back. The British were better organised, they transferred the land from a white minority to a black minority.'” Liberation leader Jomo Kenyatta became the biggest landowner in Kenya.

Kenyan villagers tell how the Dominion Group of Companies in the U.S., which exports vegetables to the United States, destroyed their livelihoods and health. The company built a dam that overflowed and flooded homes and farms.

A woman reports an increase of mosquitoes, malaria, and typhoid. The company does aerial spraying over people working, and a man says that, “when you go to nearby public health centres, quite a number of children has been reported dead.” He adds, “We are now subjected to a life of servitude in our own ancestral land.”

The film shows the popular uprising in Cochabamba, Bolivia, after the multinational Bechtel privatised water and doubled prices. A farmer protester says, “It didn’t affect only the water cooperatives and water-wells… but rainwater was included in that as well.”

Countries that could ignore neo-liberalism did better. Clifford Cobb, an author and historian and executive producer of the film, points out that East Asian economies developed largely behind tariffs. Now, the North prevents the South from imposing such levies while setting tariffs themselves to prevent the import of the finished goods from Third World countries.

This economic model, the film says, has created a global situation in which today, less than 25 percent of the world’s population uses more than 80 percent of the planet’s resources.

Diaz told IPS that “for us in the North to maintain this lifestyle, we have to plunge more people below the poverty line in the South.” But if the South had cartels to raise the prices of their minerals and agricultural products, the economy of the North would collapse.

Aside from seeing solutions in agrarian reform, tax system changes, and an end to natural resources monopolies, Diaz calls for de-growth. That’s not just eating or driving less, but creating another way of living to avoid what he predicts as the coming resource war when the poor rise up against their repression.

By Lucy Komisar
MIAMI, Florida, Jul 14 2009 (IPS)

At a recent conference in Miami organised by Offshore Alert, a specialised media organisation focused on financial crime, IPS correspondent Lucy Komisar sat down with veteran investigator Bob Roach to discuss the hurdles facing regulators trying to crack down on tax havens, which cost the U.S. alone an estimated 100 billion dollars annually.

Bob Roach Credit: Lucy Komisar/IPS

Worldwide, financial centres with bank secrecy laws are blamed by the Organisation for Economic Cooperation and Development (OECD), which represents 30 developed economies, for hiding some 5 to 7 trillion dollars offshore so the profits they produce evade taxes.

The Miami conference dealt with these offshore financial centres, and the significance and global impact of the myriad of business transactions that is conducted in and through them.”

Excerpts of the interview follow. He is speaking not on behalf of the committee, but rather expressing his own views.

IPS: You said at the conference that information received by the Permanent Subcommittee of Investigations of the Senate about the activities of some institutions pointed to structures that were created for one reason: to avoid tax liability. What institutions were you talking about? BOB ROACH: I was specifically referencing the hearings that took place in July last year and lasted until this year, which focused on activities of UBS in Switzerland and the LGT Group, an asset management company in Lichtenstein.

IPS: One of the issues raised by the G20 in April was the need to have country-country agreements to deal with tax-information sharing about clients of banks and companies set up in offshore jurisdictions. How effective are they? BR: The fact that you have agreements in place doesn’t really mean or help a lot if jurisdictions won’t comply with them. And this is a problem in a country when we try to seek information. Often the government (that requests the information) has to prove the case before it gets the information it needs to prove the case.

So while countries can say they have exchange agreements, it’s about the details. Agreements are written in such nebulous language, there are such strict requirements (to comply with in order to get information), that it’s impossible. These really are not effective agreements that increase transparency.

IPS: Most people don’t know that the U.S. has its own tax havens: Delaware, Nevada and Wyoming. How serious is this problem and what are the U.S. agencies doing about them? BR: It is a very serious problem. Certain investigations as early as 2000-01 (showed that) the incorporation procedures in those states are very weak. Most states will incorporate entities without really having any kind of understanding of who the true controlling persons or beneficial owners are. This is a weakness that has become exploited by many interests, particularly overseas, to facilitate the kind of activity that we worry about. And it is something that really has to be ended.

On a couple of occasions now, Senator (Carl) Levin has introduced legislation to stop this type of activity by requiring states to collect more information on the ownership, on who is behind entities that are being incorporated in these states.

Recently, Senator Levin, Senator (Charles) Grassley, and Senator (Claire) McCaskill introduced the incorporation transparency and law enforcement act that requires states to collect the kind of information that will allow the identification of true parties behind the entities that are established in these states.

IPS: How are these states different from offshore tax havens? BR: One way to look at it is that in many offshore tax havens the jurisdictions will collect a lot of information on the entities and who is behind them and who the beneficiaries are. In the U.S. these jurisdictions don’t necessarily prevent the release of the information; they just don’t collect any information, so there is nothing to release.

IPS: When we are talking about these states, the problem of incorporation makes them havens of some sort. But we are not talking about banking secrecy, which the U.S. does not have. Is that correct? BR: The U.S. prohibits the release of personal information on individuals. But it doesn’t have the kind of laws that criminalise the release of information of accounts simply to protect the secrecy of the accounts.

IPS: Do you that think the offshore banking secrecy has contributed to the worldwide financial crisis? BR: I’m not sure if it’s the secrecy as much as it is the regulatory mechanisms that go along with these jurisdictions. And that has to do with the understanding and approval of types of financial products that allow engaging in various transactions. And what we see is that some of these structures and financial products are more and more complex, to the point of where some of the people who design and some of the institutions that implement them don’t fully understand their impact, risks, and liabilities downstream.

We begin to face really troubled situations because if we begin to have a collapse of these corporations, that quickly spreads through the system because so many parties can be affected by these relationships. And suddenly the system becomes relevant because no one understands who else might be tied in and who else may be affected.

Many experts need to say that a big factor in the financial crisis goes back to the lack of strong regulatory regimes and a strong oversight in reviewing and monitoring this kind of transactions before they are allowed into the market place.

IPS: At the conference, people referred frequently to the “Stop Tax Haven Abuse Act”, which Senator Levin introduced (and has been co-sponsored by President Barack Obama when he was a senator). Can you tell us what that would do if it was passed? BR: Some of the provisions in the Act are tools aimed at the enforcement of our laws against those who want to exploit the existing tax laws by enacting a set of presumptions against people who would try to set up and hide their assets and tax obligations. It would strengthen various penalties against enablers. It would increase the amount of time that the IRS has to conduct offshore investigations.

It would try to stop abusive practices that take place under the current law with respect to residing structures to payments of taxes in certain transactions by utilising different financial instruments. So there are a number of provisions in there that would both enhance enforcement making it more difficult for parties to hide assets offshore and also increase penalties for those trying to help others abuse the system. It would give more power to the IRS to pursue its investigations.

IPS: Are the hearings set yet for this bill? BR: That would be referred to the finance committee, and that has not been scheduled. It is not something the Permanent Subcommittee of Investigations or (chairman of the Permanent Subcommittee on Investigations) Senator Levin would have control over. However, as everyone has recognised, there has been a lot of talk from the administration and leadership in congress about the hope that there will be legislation to address a variety of these offshore issues.

*After this interview was conducted, the Swiss reached an agreement over a double taxation treaty with the United States in what was seen as a key step towards removal from the Paris-based OECD “grey list” of uncooperative tax havens.

And on Monday, Jul. 13, the legal action against Swiss banking giant UBS by U.S. authorities seeking access to records of some 52,000 of UBS’s U.S. clients was delayed, and the sides were given until Aug. 3 to find a settlement.

Excerpt:

Jeffrey Owens, the tax “point person” of the Organisation for Economic Cooperation and Development (OECD), was stung by activist critics of the OECD standards under which countries will be put on a tax haven blacklist and targeted for sanctions.

The blacklist was announced last month at the London meeting of the G20, which said in a communiqué that it would “take action against non-cooperative jurisdictions, including tax havens…to deploy sanctions to protect our public finances and financial systems.”

Owens made the comment to IPS when he stopped to chat on his way to the podium to deliver the keynote address at the Financial Due Diligence Conference organised last week in Miami Beach by the industry newsletter “Offshore Alert.”

The OECD is composed of 30 of the world’s major economic powers, mostly from Europe. The G20 includes major western countries as well as Brazil, Russia, India, and China.

Key civil society criticisms are that the OECD standards require bilateral agreements for information on request, not automatic multilateral tax information exchange; that they call for only 12 such agreements to be signed by each tax haven; and that getting off the blacklist entails only promises, which have not been kept by tax havens in the past.

Oxfam International, the development organisation, said, “There is no reference to an automatic multilateral tax information exchange system. Anything less is unlikely to benefit poor countries, since they lack the information to prove their case before gaining access to tax information, or the administrative capacity to enter into negotiations on a case by case basis.”

What tax havens call “fishing expeditions” are not allowed, though often the information that could make a case resides only in the offshore centres – estimated at 50-70 depending on who is defining them.

Oxfam said, “Even for rich countries, it is incredibly difficult to make an information request under these agreements, and the tax haven can quite easily refuse the request. Jersey, for example, a well known tax haven, has had such an agreement with the USA since 2001, yet has only delivered just five pieces of data in all that time.”

Owens, director of the OECD’s Centre for Tax Policy and Administration, told the conference audience that automatic information exchange would not work, because, “For developing countries, it would be very hard for them to manage an enormous flow of information.”

IPS pressed Owens to explain why the EU had insisted on automatic information sharing for its own European Union Tax Savings Directive effected in 2005, but those countries, who dominate the OECD, appeared to think it was not good for the rest of the world. (The OECD did fix a flaw in the EU standard by requiring information sharing about accounts of companies as well as individuals).

He replied, “There is nothing stopping developing countries in its treaties from using automatic information sharing, but you have to be sure you can use the information.” He said he had visited the office of an unnamed tax commissioner and noticed boxes marked “IRS” [the U.S. Internal Revenue Service] stacked against the wall. He explained that the commissioner said “he got all this information and didn’t know what to do with it.”

Owens said, “Targeted information is the key thing.”

“If I am a UK resident and think about evading taxes, does the country I want to use have an agreement for exchange of information on request? Don’t underestimate deterrent effect,” he added. “You’re taking a bigger risk when you put your money into a country that signed up to the standard.”

However, that deterrent effect hasn’t worked very well to date. The U.S. tax information exchange agreement with the Cayman Islands, established in 2002, has not perceptively reduced U.S. nationals’ extensive use of that tax haven, which is the world’s fifth largest financial centre by deposits.

Beyond that, how can 12 bilateral agreements be enough in a world with more than 190 countries? Action Aid UK, a development organisation, said, “Substantial implementation of the OECD standards is taken to mean signing 12 bilateral agreements. This sets too low a number to likely include developing countries.”

Owens countered that, “Twelve agreements between tax havens aren’t going to count. If a country gets 12 and then closes the door, no. We expect countries to continue to negotiate after they reach the 12.”

Will the OECD really put countries that finesse the rules on the blacklist? Oxfam wasn’t encouraged on the day of the G20 meeting when the OECD’s announced blacklist of “non-cooperative” tax havens included only Costa Rica, Malaysia, Philippines and Uruguay – none among the world’s major offshore centres. (Uruguay was almost immediately removed from the list after it formally endorsed the OECD standards).

Perhaps the four had been too naïve or inefficient to pledge to go with the programme, but the blacklist shrunk to zero when they hurriedly signed on. Were there really then no tax havens anywhere in the world still committed to impregnable bank and corporate secrecy?

Action Aid UK noted that “a number of major tax havens managed to jump through the hoops in time to escape even the grey list.” Oxfam agreed that, “Tax havens like Jersey and the Isle of Man appear on the white list, rather than the ‘grey list’ of jurisdictions that have committed to the internationally agreed tax standard but have not yet substantially implemented it. These lists reflect promises (rather than actions) from uncooperative jurisdictions to sign up to OECD standards.”

Maintaining that concern about tax havens’ impact on developing countries was indeed a factor in the decision by major financial powers to deal with them, Owens pointed out that discussions at the U.N. conference in Doha in November 2008 had focused on how secrecy jurisdictions deprive developing countries of the financial resources needed for development.

He said, “A link is being made between development, the Monterey commitments, and the impact on developing countries of tax havens. It changed the dynamics of the debate, broadening it beyond OECD countries.”

A key issue now is what happens to countries that don’t keep their promises. Owens said that sanctions – called “defensive measures” – would be extensive. Countries could deny the tax deductibility of certain expenses. They could reconsider existing tax treaties with those countries. They could demand that aid recipients commit to the standards. International institutions such as the European Bank for Reconstruction and Development Bank and the Asian Development Bank could reflect the standards in the investment policies. However, sanctions are up to each country and institution to apply.

Action Aid UK noted that there was no commitment to implement sanctions, but looked favourably at the fact that, “Sanctions must be ‘agreed’, implying a multilateral process of sanctions rather than a bilateral one that depends on a country’s economic might.”

The G8 in July will get the OECD’s report on how the process is going, and G20 finance ministers will consider the advances against offshore secrecy at their meeting in November.

*Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at http://thekomisarscoop.com/.

The U.S. Internal Revenue Service (IRS) is hitting pay dirt with a novel legal tactic designed to catch tax evaders. And it’s going to use it to force international banks to give up the names of tax cheats.

It’s called the “John Doe” summons. Using “John Doe” means the IRS doesn’t know the names of the suspected tax evaders. So it sends a summons to a bank or credit card company that says, “Give us the names and account information of all your U.S. clients with secret offshore accounts.”

Daniel Reeves, an IRS agent in charge of the tax agency’s offshore compliance initiative, afforded an unusual look into the broad swath of projects that seek tax-cheating “John Doe’s” every place from accounts of the giant Swiss bank UBS to the records of Pay Pal.

Reeves detailed the IRS initiative at the Financial Due Diligence Conference organised by the industry newsletter “Offshore Alert” in Miami Beach, Florida, earlier this week. He commented privately to IPS that it was the first time he and other members of the compliance team had appeared at such a meeting and credited the openness of his bosses.

“Offshore” refers to tax havens – countries and jurisdictions that allow clients to set up bank accounts and sham companies with fake owners, and that deflect attempts by outside law enforcers on the trail of tax evaders as well as drug and arms traffickers, corrupt business people, terrorists, looting dictators and bribe-taking officials.

In July 2008, the IRS filed a “John Doe” legal action against UBS, seeking the names of 52,000 U.S. citizens who ignored the requirement to report those accounts on their tax returns. It’s the first time it has used that tactic against such a large financial institution. UBS, which acknowledged having 47,000 accounts belonging to U.S. nationals, turned over 300 names but is fighting in U.S. federal court the IRS demand for the rest of the accounts.

Private banks such as UBS handle and hide the money of very wealthy individuals. Often the minimum deposit is 5 million dollars. The legal action directed at UBS is part of the IRS’s private-bank initiative.

Reeves, a key agent in the UBS case, said, “We have identified other offshore banks that promote tax avoidance.” He noted, “We are developing additional John Doe summonses on some of those banks.” The IRS must receive approval for the summonses from a federal judge.

He declined to name the new targets, but one might imagine that UBS’s giant Swiss competitor, Credit Suisse, is among them. Swiss banks will provide information about drug traffickers and other criminals, but not tax evaders, because the Swiss don’t consider tax evasion a crime. The IRS list could also include U.S. banks such as Citi, which has 427 tax haven subsidiaries, including 91 in Luxembourg and 90 in the Cayman Islands.

The UBS “John Doe” initiative and others to follow ratchet up the use of a tactic that has proved successful on a smaller scale over this decade, targeting tax evaders through credit cards and other electronic payments.

The tax agency knew that tax cheaters who hid money offshore needed to get access to it. A favourite method was via credit and debit cards linked to bank accounts in tax havens such as the Cayman Islands. The IRS started with the premise that the international electronic systems that cheaters used to move and hide their money could be turned around to catch them.

In 2000, it got an order from a federal judge in Miami authorising the IRS to serve John Doe summonses on American Express and MasterCard for names of U.S. citizens with cards linked to banks in offshore Antigua and Barbuda, the Bahamas, and the Cayman Islands.

Similar orders aimed at other companies followed, and the number of tax havens investigated was increased. More recently, the order was directed at Pay Pal, the web-based electronic payments system.

Reeves said the result has been “tens of thousands of U.S. citizens” identified as having offshore accounts they didn’t report and as moving and accessing money in tax havens. He said that had led to “hundreds of criminal prosecutions” and “hundreds of millions [of dollars] in taxes, interest and penalties.”

Reeves said, “Nearly half the cases involved failure to report foreign accounts.” And they often made use of “International Business Companies” (IBCs) – fake companies formed offshore. He said a large percentage were business accounts. Merchants are supposed to have accounts where they are incorporated and do their business. Shady companies get around this by setting up IBCs in offshore financial centers.

The IRS discovered that merchants were diverting credit card and other electronic payments to offshore accounts. It was a ploy that grew with e-commerce. So the IRS demanded that the U.S. processing companies that handled credit card transactions supply information about their “John Doe” clients who sent money offshore.

The IRS has built a searchable database so that any individual or company that comes to its attention can be cross-checked. Reeves said its staff continues to analyse the records to develop new cases.

Another scam targeted by the offshore compliance initiative was U.S. taxpayers’ use of sham companies formed in tax havens to disguise ownership of brokerage accounts. Reeves explained, “The U.S. taxpayer establishes an IBC in an offshore financial system, then opens a brokerage account in the name of the IBC. The brokerage account claims foreign status. The brokerage account, money, and bank accounts are all in the U.S. But by claiming foreign status, it claims to be exempt from capital gains tax in the U.S.”

Furthermore, he explained that the accounts were often funded with unreported income.

Reeves said the IRS is investigating brokers to identify U.S. owners of accounts claiming foreign status. And it is targeting brokers who market sham companies to help clients cheat on taxes.

The new IRS “John Doe” strategy represents a shift toward systemically targeting large numbers of unknown tax cheaters rather than individuals whose returns look suspicious or who are turned in by enemies. The returns have been impressive, and promise to grow apace.

*Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at http://thekomisarscoop.com/.

This could be the moment when a fatal blow is delivered to the world’s tax havens. Or it could be another largely cosmetic change that allows offshore financial centres such as Switzerland, the Cayman Islands and Liechtenstein to deflect attacks on the system by sacrificing the few tax miscreants that governments catch in their nets.

Decisions at the G20 government leaders meeting in London Apr. 2 will set the direction.

Financial centres with bank secrecy laws are blamed by the Organisation for Economic Cooperation and Development, which represents 30 developed economies, for hiding some 5 to 7 trillion dollars offshore so the profits they produce evade taxes. This costs the U.S. 100 billion dollars in taxes annually, says Michigan Senator Carl Levin, who has introduced legislation to combat offshore tax evasion. The numbers are guesses, as bank secrecy masks the figures.

Officials in Germany and France, the two western countries that have pressed hardest for reform, believe the offshore system not only deprives them of taxes, but helped cause the financial crisis. Germany’s Finance Minister Peer Steinbrueck said, “These tax havens are also places where unregulated financial market deals are made.” A leaked French government paper agrees that “Uncooperative jurisdictions may threaten the global financial stability by creating regulatory loopholes and opacity.”

Offshore centres, worried what may happen in London, are falling all over themselves promising to cooperate with the major powers on the trail of tax cheats. But the holes in the tax havens’ promises are as big as those in Switzerland’s famous cheese.

The issue is dramatised by the case of UBS. The bank, to settle a charge that it promoted tax fraud, agreed to turn over the names of some 300 clients to the U.S. Treasury. But it has balked at turning over another 47,000 names of U.S. account holders suspected of tax evasion.

And that’s the point. Tax havens, including the aforementioned as well as Singapore, Hong Kong, Andorra, the Cayman Islands, Monaco and others, are agreeing to sign bilateral tax information exchange agreements. OECD spokesman Nicholas Bray told IPS on Thursday, “The situation is changing daily, with new announcements from jurisdictions around the world that they are ready to commit to the international standards.”

But the OECD’s tax standards call only for cooperation with foreign tax authorities if there is a particular and justifiable case. Bray said that means “Inquiries by tax authorities based on reasonable and justified suspicion of tax evasion, individuals and companies – no fishing expeditions, no automatic exchange of information.”

The section on companies opens many possibilities. Not only could governments go after individuals using shell companies to carry out fake transactions to cheat on taxes, but they could pursue real companies who move their profits offshore via transfer pricing to evade home country levies.

Transfer pricing occurs when a company sells to an offshore intermediary at a fake low price (paying low taxes on low profits) and then sells from the intermediary into the market at the real higher price, assigning the true profits to the tax haven – which levies no tax. Or if a company assigns excessive profits to an offshore sales or service subsidiary.

Grace Perez-Navarro, head of OECD’s International Cooperation and Tax Competition Division, said that if France, for example, had a tax haven subsidiary that the government suspected was used for transfer pricing, it could request information about the subsidiary’s offshore accounts.

That could have impact in developing countries Trade between companies, often done for transfer pricing to evade taxes, is at least half of global trade. Grand Cayman is Brazil’s second largest trading partner – obviously a transfer-pricing way station. Brazil this year amended its transfer-pricing regulations and expanded the legal definition of tax havens. Christian Aid in London says that tax evasion costs developing countries estimated 160 billion dollars in tax a year, a lot more than they get from global aid.

However, under the agreements signed, governments have to go after suspects about which they already have evidence – and that evidence may be in the accounts. The Swiss Bankers’ Association said in a statement that “the privacy of foreign clients not under suspicion will continue to be protected by Swiss bank-client confidentiality.” And, “An automatic exchange of information is excluded.”

It’s impossible even for rich governments to investigate and provide evidence to tax havens about more than a very small number of their tax cheating citizens and companies. Requests for administrative assistance take money, staff, legal expertise and time. Many believe that automatic exchange of information is the only really effective way to end pandemic tax evasion.

And where do such bilateral agreements leave developing countries with limited resources or bargaining strength? The Isle of Man has signed 14 agreements, of which only two are with non-OECD countries. Will such arrangements be acceptable to G20 members Brazil and India?

Bray said, “This is an ongoing issue, which will have to be resolved by more diplomacy. The UK is trying to encourage the idea of multilateral agreements, I believe.”

The other part of the equation the G20 must deal with is how tough the sanctions are that it endorses.

The leaked French working paper makes the strongest proposals. They include that G20 members punish countries deemed to be “uncooperative” by breaking off bilateral tax conventions. This would discourage corporations from using those financial centres.

Equally important, the French would put some onus on a G20 country’s own financial institutions. They would require those banks to spell out in their annual reports if they worked with non-cooperative financial centres and would make supervisory authorities take this extra risk into account in the capital requirements for the banks.

The paper says, “Clear reporting mechanisms should be put in place in order to increase the accountability of the management in business decisions leading to operations located in non cooperative jurisdictions.” It says banks should be required to report accounts of their customers located in tax havens and the related capital flows.

The French suggest refusing to allow payments to a blacklisted haven to be deducted from taxable income. They propose requiring international financial institutions to end their activities in blacklisted havens. Finally, they suggest restriction or ban of money flows to and from that offshore centre – which would essentially end G20 banks and company operations offshore.

The British are an unknown factor. About a third of the world’s tax havens are British dependences. It is currently reviewing the policies of what it acknowledges are “British offshore financial centres.” So when Prime Minister Gordon Brown told the U.S. Congress recently, “How much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?” the question was why hasn’t he dealt with British tax havens.

The answer sits in London, where financial institutions exist in a seamless web with the offshore centres.

Other key G20 members also have tax haven concerns: China has attempted to crack down on tax evasion, India loses a great deal of tax money through Mauritius, and Russian officials are intimately aware of how the oligarchs moved assets and cheated on taxes through Cyprus, Switzerland, Jersey and the Isle of Man.

As for the Americans, U.S. banks already inform tax authorities about how much interest they are paying on clients’ accounts. Barack Obama co-sponsored the Stop Tax Haven Abuse Act as a senator and has endorsed it as president. It would allow the U.S. to bar its own banks from doing business with foreign banks that refused to cooperate with U.S. tax authorities.

Treasury Secretary Timothy Geithner told Congress Thursday that the U.S. would “launch a new, initiative to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions.” He said, “President Obama will underscore in London on Apr. 2 at the Leaders’ Summit the imperative of raising standards across the globe and encouraging a race to the top rather than a race to the bottom.”

However, the U.S. has provided no specifics about where it stands on the key issues.

*Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at http://thekomisarscoop.com/.

President Barack Obama said he would crack down on firms that use offshore centres to evade taxes. He could begin with a New York subsidiary of one of the world’s largest private banks, which used a Cayman Islands company to shift its profits.

Why would a New York fund manager run operations through an office in the Caymans? “This type of structure is for optimising taxes,” explained Max Obrist, a Cayman Islands official of the global Julius Baer Group (Zurich).

He told IPS that “generating” the income where a company was actually based, “you would pay much more taxes”. Obrist was describing a company shifting claimed earnings to tax havens to evade home taxes. He allegedly helped Julius Baer Investment Management (JBIM) New York do just that.

Obrist is a director of Baer Select Management (BSM), a Cayman Islands company. According to a whistleblower who used to work with him in the Caymans, BSM is a fake firm created by Julius Baer to sign agreements with JBIM and other subsidiaries so they could evade taxes.

The whistleblower, Rudolf Elmer, 53, a German, was chief operating officer of Julius Baer Bank & Trust Company (JBBT), Caymans, at 212,000 dollars a year and served on the BSM board from 1999 to November 2002. JBIM paid fees to BSM to “manage” its investments. Elmer told IPS that JBIM moved to BSM profits it should have reported to the U.S. Internal Revenue Service.

JBIM is now called Artio Global Investors. It manages 72 billion dollars in assets. It has some 900 institutional clients, including corporations, pension funds, endowments and foundations and major financial institutions as well as more than 700,000 mutual fund shareholders.

Its chief executive and chief investment officer Richard Pell and head of international equity Rudolph-Riad Younes were paid 120 million dollars during the first nine months of 2007, leaving the company with income of 48.6 million dollars.

Artio is a subsidiary of Julius Baer Group, Switzerland’s largest private banking group with over 300 billion dollars in assets invested on behalf of institutions and very wealthy individuals. Julius Baer’s reported profits in 2007 were more than 1.1 billion dollars. It has 30 offices in world financial centres, from New York and London to Dubai and Tokyo. BSM is a Julius Baer subsidiary.

Elmer said, “There was a strategic plan adopted in 1996 to utilise Baer Select Management, JBIM New York and JBIM London to benefit from the offshore system.” He said that JBIM assigned management functions to BSM in order to award it a performance fee. He provided backup documentation to IPS, including financial spreadsheets.

He said that Obrist in the name of BSM ratified a few decisions, but really worked for JBBT. He said that control was exercised and decisions taken by JBIM New York or Julius Baer Investment Funds Services Ltd, Zürich, which were part of Bank Julius Baer & Co, Zürich.

According to Elmer, JBIM made a proposal to Julius Baer Investment Management, Zürich, to launch a fund, and Zürich approved. JBIM did the paperwork and other organisational tasks with the help of JB Zürich and Caymans lawyers.

The offering memorandum said that Baer Select Management was appointed investment manager, Elmer said, and BSM appointed JBIM investment advisor.

JBIM was generally listed as a fund “advisor”, though some public documents said that JBIM managed funds. Elizabeth Nesvold, founder of the New York investment-banking boutique Silver Lane Advisors LLC, noted that though investment managers make most of their money from performance fees, most of the JBIM’s revenue was claimed from advisory fees.

A call to the Grand Caymans phone number for BSM was picked up by a receptionist for Julius Baer Bank and Trust Co Ltd (JBBT). “Is this the number for Baer Select Management?” she was asked. “Yes,” she replied, and passed the call to Max Obrist. He identified himself as BSM’s director. He had a few other jobs. The Jan. 13, 2000 minutes of the JBBT management committee said, “Direct Money Market dealing has started. Max Obrist has assumed responsibility for this activity.”

He was also listed as a director of Directorate Inc., British Virgin Islands, the corporate director of some Julius Baer funds.

Describing BSM’s tasks, Obrist explained, “We have to follow stocks, monitor their investment policies, we monitor the risk reports we receive from the investment advisor and check if there are performance fee calculations involved if they are executed properly, all monitoring duties. We are in contact with the external auditors and the regulatory authorities and Cayman Islands monitoring authority.”

He said BSM’s fee was “a percentage of profits, and it depends on what type of duties we have to do here from Cayman.”

Why was BSM needed? He replied, “That’s an interesting question. I don’t always know when they start something. They decided on a much higher level. I wasn’t involved. We were told: ‘You act as investment manager for these new funds’.” But he didn’t manage, he “monitored”.

Fees paid to BSM resulted in lower company profits and taxes for JBIM. Fund managers generally take profits of 1 or 2 percent of assets plus 10 to 20 percent of investment gains. As the funds had high values, that involved substantial amounts. According to Elmer, BSM, acting through a board whose members worked for JBBT, transferred profits via several offshore companies to Julius Baer Holding Ltd, Zürich.

Obrist denied that BSM is a shell company. He said, “We are physically here in the Cayman Islands, not just a post office box like some companies trying to save taxes without doing anything physically.”

He insisted, “BSM is to give service from an offshore place and at the same time we can within Julius Baer optimise taxes, yes. But we are physically here. We do our job as investment manager. If Baer Select would be here just as a post office box company and generate the millions in Cayman as income instead of in the U.S. or the U.K. or Switzerland, then that would not be a very smart thing.”

Obrist said BSM stopped working for JBIM New York four or five years ago after it closed some hedge funds. However, JBIM/Artio would still be potentially liable for unpaid taxes, as the U.S. has no statute of limitations for tax fraud.

Artio CEO Richard Pell did not reply to numerous phone messages and emails describing this story and requesting an interview. Martin Somogyi, spokesperson for Julius Baer, Zurich, emailed that the company always adhered to applicable regulations and was regularly audited, but that it would not agree to an interview. (Its global auditor is KPMG.)

Julius Baer Americas Inc. (now Artio Global Investors) which owns JBIM/Artio, in February 2008 filed with the SEC that it would go public with an initial public offering (IPO) to sell up to 1 billion dollars of common stock on the New York Stock Exchange. The offering would be handled by Goldman, Sachs and Merrill Lynch. The IPO has been postponed.

Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at http://thekomisarscoop.com/.

U.S. senators at Timothy Geithner’s confirmation hearing for Treasury Secretary Wednesday may want to ask him about a failure to act that is costing the U.S. a lot more than the amount he evaded on taxes.

The Federal Reserve Bank of New York, which he has led since 2003, conducts the operations on Wall Street of the Federal Reserve Bank in Washington, the country’s central bank. The New York Fed under Geithner’s presidency has failed to stop massive naked short selling of U.S. Treasury bonds that threatens the stability of the market and sale of the bonds.

Ironically, the scam, enabled by a lack of regulation at the behest of Wall Street brokerage houses, makes it more expensive for the U.S. to bail out those same financial institutions.

It happens this way: an individual or fund is allowed to sell bonds without owning them. This is called short selling. The seller, whose broker has generally “borrowed” bonds from another broker, is supposed to subsequently buy them on the market, and return them to the lender. The seller does this because he believes that the bond is going down, and he will buy them at a cheaper price than he sold them for.

Naked short selling occurs when a seller does not borrow the bonds for delivery at settlement, and therefore never has to buy them. This is called a failure to deliver, or FTD.

Meanwhile, the buyer thinks he or she has the bonds but has just an IOU. The result is a distortion of the market. Sellers sell bonds they never own or borrow, so there are more securities sold than issued by the government. These phantom bonds don’t represent money paid to the U.S. Treasury or genuine securities for buyers.

The major broker-dealers who handle bond trades like the system. They profit from fails by using clients’ money for other purposes.

The economist who has done the key work on this issue is Dr. Susanne Trimbath, who heads STP Advisory Services in Omaha, Nebraska. She previously worked for the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp, the U.S. clearing house for stocks and bonds.

Dr. Trimbath said, “In fall of 2008, about two trillion dollars in Treasury bonds were sold but undelivered for six weeks, more than 20 percent of the daily trading volume, up from 8.6 percent in the first five months of 2008.” It was a spike from 1.2 percent in the first five months of 2007.

“There was excess demand for the Treasuries,” she said. “Rather than allow this to push the price up, the Federal Reserve Bank of New York and the DTCC allowed failures to deliver to depress the price.” This affects the value of bonds held by individuals, funds and major investors such as China.

The latest figures on failures to deliver are 600-800 billion dollars. Dr. Trimbath said, “The numbers look better now because the Fed threw two trillion at the market, which was used to cover these fails.”

She said that Geithner failed to heed the warnings of economists at the New York Fed who in 2002 and again in 2005 analysed failures to deliver of Treasuries and recommended fines for the brokers responsible. A New York Fed white paper in April 2006 called for stricter enforcement of delivery and penalties for violations. The Bond Market Association opposed reforms, and again Geithner failed to act.

Even the current financial crisis has provoked only a faint reaction from the New York Fed. On Jan. 5, it acknowledged that, “Since November, short-term interest rates have declined to unprecedented levels.” It proposes a regulation to allow the buyer and seller to agree that if the buyer doesn’t receive the securities by five days after sale, the buyer could submit a claim against the seller for payment. But this can be done now and could have been done in 2002.

This is how the bond system works. The U.S. Congress authorises the federal government to issue bonds to cover the national debt. Individuals and institutions, even countries, can buy the bonds directly or through brokers. If a purchaser buys through a broker, the bonds remain in the broker’s name or the name of a central depository such as DTCC. The Treasury pays the bond’s interest to the broker, who credits the client’s account.

Since regulators don’t require the bonds to be delivered to the buyer, the broker gives clients an electronic IOU for the bond and for the interest payments as well. But if the bonds aren’t delivered by the seller, the electronic IOUs represent phantoms. Dr. Trimbath points out that, “The significant result of the IOU system is that brokers are able to sell many more bonds than the Congress has authorised. The transactions are called ‘settlement failures’ or ‘failed to deliver’ events, since the broker reported bond purchases beyond what the sellers delivered.” She said, “There is no limit on the number of IOUs the broker can hand out…and there are usually more IOUs in circulation than there are bonds.”

This artificially inflates the supply and forces bond prices down. Investors who want to buy Treasuries – to lend money to the U.S. – may instead be lending money to their brokers. Brokers get not only the commission charges for the trade, but the use of the client’s cash for the bond that was never delivered and therefore never paid for. Dr. Trimbath calculates this “loss of use of funds to investors at seven billion dollars per year, conservatively.”

If the broker goes out of business, clients don’t have the Treasuries, only the broker’s electronic IOUs. Dr. Trimbath, said, “Who is going to get the chair when the music stops? It’s not the individual investor. I’ve seen positions just deleted from people’s statements without investors even knowing as the security they supposedly owned turns out to not exist.”

This insecurity could discourage buyers of Treasuries, heralded as ultra-safe investments. “And for the bond buyers, brokerage houses, and banks, it’s yet another crash-and-burn to come,” said Dr. Trimbath.

Her solution: “If regulators and the central clearing corporation would only enforce delivery of Treasury bonds for trade settlement – payment – at something approaching the promised, stated, contracted and agreed upon T+1 (one day after the trade), there would be an immediate surge in the price of U.S. Treasury securities.”

“As the prices of bonds rise, the yield falls. This falling yield then translates into a lower interest rate that the U.S. government has to pay in order to borrow the money it needs to fund the budget deficit and to refinance the existing national debt.”

Brokers would have to buy real bonds to deliver to buyers. She said, “That’s when the music stops.”

Geithner might explain to senators why he has not stopped the billion-dollar phantom Treasury bonds scam.

*Lucy Komisar is an investigative journalist who writes about the financial system. Her articles appear on thekomisarscoop.com/.