U.S. ranks among top financial secrecy havens | TribLIVE.com
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Semion Mogilevich

Described by the FBI as a “ruthless criminal,” Russian gangster Semion Mogilevich used a tiny magnet firm in Southeastern Pennsylvania to defraud thousands of investors and launder hundreds of millions of dollars through bank accounts around the world.

The 5-foot-6, 280-pound mobster did it in one of the world’s easiest places to set up an anonymous shell corporation and hide wealth in secret banking accounts — the United States.

Even as U.S. regulators cry loudly about other countries operating foreign secrecy havens that allow criminals and tax cheats to stash cash in hidden offshore bank accounts, experts say America does the same thing. Foreign investors, in all, have parked $14.5 trillion here, according to a Treasury Department report.

The United States ranks fifth among the world’s largest money laundering centers, according to Tax Justice Network International, a London-based organization that traces illegal money flows.

Fritz Ermarth, former chairman of the National Intelligence Council, described to Congress how the mobs stole from Russia: “Not much of it stays in Cyprus or other tax havens. Much of it, probably most of it, has come into the biggest, safest, most-accessible and profitable investment target in the world, the United States.”

Yet the United States tends to overlook its penchant for secrecy as regulators try to force other countries to cough up tax cheats, a “do as I say, not as I do” approach.

“I think it is pretty hypocritical,” said Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice in Washington. “It’s kind of bullying to tell the rest of the world they have to help us track down our tax cheats, but we’re not going to help them track down theirs.”

Aware of the United States’ conflicting messages, the Internal Revenue Service intends to drum up information it can trade with foreign secrecy havens to get information about American tax dodgers in return. A regulation taking effect in January requires banks in the United States to report earnings by foreigners with accounts here.

But the rule exempts wide swaths of people, leaving out residents of countries that do not have tax information exchange agreements with the United States and — more significantly — those who hide money through anonymous shell companies, incorporated here or abroad.

The United States’ step toward exchanging info with foreign offshore havens has panicked certain bankers, particularly in South Florida. Miami has grown into a leading financial hub, in part by catering to Latin American customers as a place where they can secretly park cash.

The IRS, focused on American taxpayers, has had little reason to worry about whether foreigners paid taxes in their home countries. Banks have no obligation to know customers’ tax situations, said Grisel Vega, president of the Florida International Bankers Association.

And that’s just as it should be, she says.

“The customers have the responsibility to file whatever returns they have to under their individual country requirements,” Vega told the Tribune-Review. “I don’t think that makes the United States a tax haven. It’s free enterprise. You open it, and you have the responsibility.”

Bankers, investors worried

What concerns Vega and other banking representatives is that with any tightening of U.S. rules, foreigners banking in Florida will be so fearful of identification that they could withdraw half of the $14.2 billion they deposited there, moving it to some Caribbean island nation that employs more discretion.

The banking association estimates foreigners pulled $300 million out of its 70 member banks in the first month after the IRS finalized the rule in April.

The bankers insist that jittery investors don’t fear they’ll be found holding illicit money from frowned-upon activities such as drug dealing. Instead, they are worried about kidnapping and extortion if their wealth becomes known.

Though his salary was well-publicized, they cite the case of Wilson Ramos, a Washington Nationals catcher held for ransom last fall after going home to Venezuela.

Even if the fear of potential kidnapping is a motive, critics have long argued that bank secrecy invites tax cheats.

Home countries “may find the information useful,” acknowledged Francisca Mordi, senior tax counsel for the American Bankers Association, which represents the $13 trillion banking industry. The Washington-based association, however, opposes the new rules as bad for business.

Mordi seems skeptical that the United States might be considered a tax haven.

“I think it’s the other way around,” Mordi said. “We had a meeting with Treasury, and Treasury said, ‘We’re really concerned about tax havens outside the U.S., and we don’t want to be like them.’

“I think the U.S. thinks that they’re not a tax haven.”

Foreigners might see things differently. Nonresident aliens own as much as 90 percent of holdings at some U.S. branches of foreign-owned banks, Florida’s former banking Commissioner J. Thomas Cardwell told IRS officials last year. Banks don’t want to lose the foreign holdings, which generate income and can be loaned out, and some might fail if U.S. rules get tougher, he predicts.

Cardwell concedes that foreign governments might want to know about taxable income here.

“That would be an argument, that these foreign countries need to enforce their own tax regimes,” said Cardwell, a Washington lobbyist.

That’s not our problem, argues Alex Sanchez, president of the Florida Bankers Association. Secrecy was meant “to encourage the flight of capital to the United States. … It’s good for the United States.”

Sanchez contends it’s not the business of the IRS or American banking officials to help other countries catch criminals. “I’m not the world’s policeman,” he said.

A shell game

Discreet foreigners come to the United States because they can set up a corporation without having to disclose ownership, said Theodore Greenberg, a former Justice Department lawyer who headed the agency’s anti-money laundering section. Some states, such as Delaware, Wyoming and Nevada, require little identification.

In a report this year, the Trib disclosed that Chinese businessmen purchased hundreds of American shell companies to raise money on American stock exchanges. Many since have folded and were sued for fraud. CLICK HERE to see previous reports on the shadow economy.

The secret owners of these shell companies can use them to open corporate bank accounts here or abroad. They leave little or no trail, thwarting law enforcement authorities attempting to follow the money.

“It’s like chasing a wisp of smoke,” Greenberg said. “… Ultimately, you can find things, but it’s very difficult.”

It’s easier to set up an anonymous shell corporation in the United States and Britain than in many notorious secrecy havens, said Jason Sharman, a researcher at Australia’s Griffith University. He and other researchers looked at more than 3,700 corporate service providers in 182 countries.

“There has been the problem of a double standard, that the United States has been very forceful toward tax havens,” Sharman said. “There’s been a lot of pressure on tax havens. They’ve improved their act, but there hasn’t been a corresponding amount of pressure on the United States, the United Kingdom, Australia or Canada.”

The amount of money moving through secret accounts is so large it cannot be transferred with bags of cash, said Stefanie Ostfeld, policy adviser at Global Witness, a London-based nonprofit that studies corruption in developing countries.

“You can’t stash it under the bed,” she said. “As long as banks continue to accept proceeds of corruption, and corrupt individuals are able to hide their identity and their money behind shell companies, we see that U.S. laws and actors in the West are part of the problem.”

In a previous Shadow Economy report, the Trib revealed that the Internet is full of firms offering to help Americans move money to offshore tax havens in warm Caribbean countries. Two reporters created a shell company and established an offshore account in Belize for less than $1,000 to demonstrate how easily it can be done.

Prosecutors say Mogilevich, born in Ukraine, used banks in more than 20 countries to hide money he took over several years in the 1990s. The government indicted him in 2003 on multiple fraud and money laundering charges.

Despite Mogilevich’s position on the FBI’s Ten Most Wanted List since 2009 and a $100,000 reward for information leading to his arrest and conviction, the man called “The Brainy Don” remains free. U.S. investigators say he lives in Moscow and is considered armed and dangerous.

Lou Kilzer and Andrew Conte are staff writers for Trib Total Media. Kilzer can be reached at 412-380-5628 or [email protected] Conte can be reached at 412-320-7835 or [email protected]

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