Saturday, January 07, 2017
The Curious World of Donald Trump’s Private Russian Connections James S. Henry
Did the American people really know they were putting such a "well-connected" guy in the White House?
Intro by David Cay Johnston
Pulitizer-Prize winning author, The Making of Donald Trump.
Throughout Donald Trump's presidential campaign, he expressed glowing admiration for Russian leader Vladimir Putin. Many of Trump's adoring comments were utterly gratuitous. After his Electoral College victory, Trump continued praising the former head of the KGB while dismissing the finding of all 17 American national security agencies that Putin had directed Russian government interference to help Trump in the 2016 American presidential election.
As veteran investigative economist and journalist Jim Henry shows below, a robust public record helps to explain the fealty of Trump and his family to this murderous autocrat and the network of Russian oligarchs.
Putin and his billionaire friends have plundered the wealth of their own people. They have also run numerous schemes to defraud governments and investors in the United States and Europe. From public records, using his renowned analytical skills, Henry shows what the mainstream news media in United States have failed to report in any meaningful way: for at least three decades Donald Trump has profited from his connections to the Russian oligarchs, whose own fortunes now depend on their continued fealty to Putin.
We don't know the full relationship between Donald Trump, the Trump family and their enterprises with the network of the world– class criminals known as the Russian oligarchs. Henry acknowledges that his article poses more questions than answers, establishes more connections than full explanations. But what Henry does show should prompt every American to rise up in defense of their country, to demand a thorough out in the open Congressional investigation with no holds barred. The national security of United States of America and of peace around the world, especially in Europe, may depend on how thoroughly we understand the rich network of relationships between the 45th president and the Russian oligarchy. When Donald Trump chooses to exercise, or not exercise, his power to restrain Putin's drive to invade independent countries and seize their wealth, as well as to loot countries beyond his control, Americans need to know in whose interest the president 's acting or looking the other way.
“Tell me who you walk with and I’ll tell you who you are.”
“I’ve always been blessed with a kind of intuition about people that allows me to sense who the sleazy guys are, and I stay far away.”
—Donald Trump, Surviving at the Top
Even before the November 8 election, many leading Democrats were vociferously demanding that the FBI disclose the fruits of its investigations into Putin-backed Russian hackers. Instead FBI Director Comey decided to temporarily revive his zombie-like investigation of Hillary’s emails. That decision may well have had an important impact on the election, but it did nothing to resolve the allegations about Putin. Even now, after the CIA has disclosed an abstract of its own still-secret investigation, it is fair to say that we still lack the cyberspace equivalent of a smoking gun.
Fortunately, however, for those of us who are curious about Trump’s Russian connections, there is another readily accessible body of published and other Internet material that has so far received surprisingly little attention. This suggests that whatever the nature of President-elect Donald Trump’s relationship with President Putin, he has certainly managed to accumulate direct and indirect connections with a far-flung private Russian/FSU network of outright mobsters, oligarchs, fraudsters, and kleptocrats.
Any one of these connections might have occurred at random. But the overall pattern is a veritable Star Wars bar scene of unsavory characters, with Donald Trump seated right in the middle. The analytical challenge is to map this network—a task that most journalists and law enforcement agencies, focused on individual cases, have failed to do.
Of course, to label this network “private” may be a stretch, given that in Putin’s Russia, even the toughest mobsters learn the hard way to maintain a respectful relationship with the “New Tsar.” But here the central question pertains to our new Tsar. Did the American people really know they were putting such a “well-connected” guy in the White House?
The Big Picture: Kleptocracy and Capital Flight
A few of Donald Trump’s connections to oligarchs and assorted thugs have already received sporadic press attention -- for example, former Trump campaign manager Paul Manafort’s reported relationship with exiled Ukrainian oligarch Dmytro Firtash. But no one has pulled the connections together, used them to identify still more relationships, and developed an image of the overall patterns.
Nor has anyone related these cases to one of the most central facts about modern Russia: its emergence since the 1990s as a world-class kleptocracy, second only to China as a source of illicit capital and criminal loot, with more than $1.3 trillion of net offshore “flight wealth” as of 2016.
This tidal wave of illicit capital is hardly just Putin’s doing. It is in fact a symptom of one of the most epic failures in modern political economy -- one for which the West bears a great deal of responsibility. This is the failure, in the wake of the Soviet Union’s collapse in the late 1980s, to ensure that Russia acquires the kind of strong, middle-class-centric economic and political base that is required for democratic capitalism, the rule of law, and stable, peaceful relationships with its neighbors.
Instead, from 1992 to the Russian debt crisis of August 1998, the West in general—and the U.S. Treasury, USAID, the State Department, the IMF/World Bank, the ERDB, and many leading economists in particular—actively promoted and, indeed, helped to finance one of the most massive transfers of public wealth into private hands that the world has ever seen.
For example, Russia’s 1992 “voucher privatization” program permitted a tiny elite of former state-owned company managers and party apparatchiks to acquire control over a vast number of public enterprises, often with the help of outright mobsters. A majority of Gazprom, the state energy company that controlled a third of the world’s gas reserves, was sold for $230 million; Russia’s entire national electric grid was privatized for $630 million; ZIL, Russia's largest auto company, went for about $4 million; ports, ships, oil, iron and steel, aluminum, much of the high-tech arms and airlines industries, the world’s largest diamond mines, and most of Russia’s banking system also went for a song.
In 1994–96, under the infamous “loans-for-shares” program, Russia privatized 150 state-owned companies for just $12 billion, most of which was loaned to a handful of well-connected buyers by the state—and indirectly by the World Bank and the IMF. The principal beneficiaries of this “privatization”—actually, cartelization—were initially just 25 or so budding oligarchs with the insider connections to buy these properties and the muscle to hold them. The happy few who made personal fortunes from this feeding frenzy —in a sense, the very first of the new kleptocrats—not only included numerous Russian officials, but also leading gringo investors/advisers, Harvard professors, USAID advisers, and bankers at Credit Suisse First Boston and other Wall Street investment banks. As the renowned development economist Alex Gerschenkron, an authority on Russian development, once said, "If we were in Vienna, we would have said, "We wish we could play it on the piano!"
For the vast majority of ordinary Russian citizens, this extreme re-concentration of wealth coincided with nothing less than a full-scale 1930s-type depression, a sudden “shock therapy”-induced rise in domestic price levels that wiped out the private savings of millions, rampant lawlessness, a public health crisis, and a sharp decline in life expectancy and birth rates.
Sadly, this neoliberal “market reform” policy package that was introduced at a Stalin-like pace from 1992 to late 1998 was not only condoned but partly designed and financed by senior Clinton Administration officials, neoliberal economists, and innumerable USAID, World Bank, and IMF officials. The few dissenting voices included some of the West's best economic brains -- Nobel laureates like James Tobin, Kenneth Arrow, Lawrence Klein, and Joseph Stiglitz. They also included Moscow University’s Sergei Glaziev, who now serves as President Putin’s chief economic advisor. Unfortunately, they were no match for the folks with the cash.
There was also an important intervention in Russian politics. In January 1996 a secret team of professional U.S. political consultants arrived in Moscow to discover that, as CNN put it back then, “The only thing voters like less than Boris Yeltsin is the prospect of upheaval.” The experts' solution was one of earliest "Our brand is crisis" campaign strategies, in which Yeltsin was “spun” as the only alternative to "chaos." To support him, in March 1996 the IMF also pitched in with $10.1 billion of new loans, on top of $17.3 billion of IMF/World Bank loans that had already been made.
With all this outside help, plus ample contributions from Russia’s new elite, Yeltsin went from just 8 percent approval in the January 1996 polls to a 54-41 percent victory over the Communist Party candidate, Gennady Zyuganov, in the second round of the July 1996 election. At the time, mainstream media like Time and the New York Times were delighted. Very few outside Russia questioned the wisdom of this blatant intervention in post-Soviet Russia’s first democratic election, or the West's right to do it in order to protect itself.
By the late 1990s the actual chaos that resulted from Yeltsin's warped policies had laid the foundations for a strong counterrevolution, including the rise of ex-KGB officer Putin and a massive outpouring of oligarchic flight capital that has continued virtually up to the present. For ordinary Russians, as noted, this was disastrous. But for many banks, private bankers, hedge funds, law firms, and accounting firms, for leading oil companies like ExxonMobil and BP, as well as for needy borrowers like the Trump Organization the opportunity to feed on post-Soviet spoils was a godsend. This was vulture capitalism at its worst.
The nine-lived Trump, in particular, had just suffered a string of six successive bankruptcies. So the massive illicit outflows from Russia and oil-rich FSU members like Kazahkstan and Azerbaijan from the mid-1990s provided precisely the kind of undiscriminating investors that he needed. These outflows arrived at just the right time to fund several of Trump's post-2000 high-risk real estate and casino ventures – most of which failed. As Donald Trump, Jr., executive vice president of development and acquisitions for the Trump Organization, told the “Bridging U.S. and Emerging Markets Real Estate” conference in Manhattan in September 2008, on the basis, he said, of his own “half dozen trips to Russia in 18 months”:
"[I]n terms of high-end product influx into the United States, Russians make up a pretty disproportionate cross-section of a lot of our assets; say in Dubai, and certainly with our project in SoHo and anywhere in New York. We see a lot of money pouring in from Russia."
All this helps to explain one of the most intriguing puzzles about Donald Trump’s long, turbulent business career: how he managed to keep financing it, despite a dismal track record of failed projects.
According to the “official story,” this was simply due to a combination of brilliant deal-making, Trump’s gold-plated brand, and raw animal spirits – with $916 million of creative tax dodging as a kicker. But this official story is hokum. The truth is that, since the late 1990s, Trump was also greatly assisted by these abundant new sources of global finance, especially from "submerging markets" like Russia
This suggests that neither Trump nor Putin is an “uncaused cause.” They are not evil twins, exactly, but they are both byproducts of the same neoliberal policy scams that were peddled to Russia’s struggling new democracy.
A Guided Tour of Trump's Russian/FSU Connections
The following roundup of Trump’s Russo-Soviet business connections is based on published sources, interviews with former law enforcement staff and other experts in the United States, the United Kingdom, and Iceland, searches of online corporate registries, and a detailed analysis of offshore company data from the Panama Papers. Given the sheer scope of Trump’s activities, there are undoubtedly other worthy cases, but our interest here is in overall patterns.
Note that none of the activities and business connections related here necessarily involved criminal conduct. While several key players do have criminal records, few of their prolific business dealings have been thoroughly investigated, and of course they all deserve the presumption of innocence. Furthermore, several of these players reside in countries where activities like bribery, tax dodging, and other financial chicanery are either not illegal or are rarely prosecuted. As former British Chancellor of the Exchequer Denis Healey once said, when it comes to financial chicanery, the difference between “legal” and “illegal” is often just “the width of a prison wall.”
So why spend time collecting and reviewing material that may either not point to anything illegal and or in some cases may even be impossible to verify? Because, we submit, the mere fact that such assertions are widely made is of legitimate public interest in its own right. In other words, when it comes to evaluating the probity of senior public officials, the public has the right to know about any material allegations—true, false, or, most commonly, unprovable—about their business partners and associates, so long as this information is clearly labeled as unverified.
Furthermore, the individual case-based approach to investigations employed by most investigative journalists and law enforcement often misses the big picture: the global networks of influence and finance, licit and illicit, that exist among business people, investors, kleptocrats, organized criminals, and politicians, as well as the "enablers" -- banks, accounting firms, law firms, and havens.
Any particular component of these networks might easily disappear without making any difference. But the networks live on. It is these shadowy transnational networks that really deserve scrutiny.
Bayrock Group LLC—Kazakhstan and Tevfik Arif
We’ll begin our tour of Trump's Russian/FSU connections with several business relationships that evolved out of the curious case of Bayrock Group LLC, a spectacularly unsuccessful New York real estate development company that surfaced in the early 2000s and, by 2014, had all but disappeared except for a few lawsuits. As of 2007, Bayrock and its partners reportedly had more than $2 billion of Trump-branded deals in the works. But most of these either never materialized or were miserable failures, for reasons that will soon become obvious.
Bayrock’s “white elephants” included the 46-story Trump SoHo condo-hotel on Spring Street in New York City, for which the principle developer was a partnership formed by Bayrock and FL Group, an Icelandic investment company. Completed in 2010, the SoHo soon became the subject of prolonged civil litigation by disgruntled condo buyers. The building was foreclosed by creditors and resold in 2014 after more than $3 million of customer down payments had to be refunded. Similarly, Bayrock’s Trump International Hotel & Tower in Fort Lauderdale was foreclosed and resold in 2012, while at least three other Trump-branded properties in the United States, plus many other “project concepts” that Bayrock had contemplated, from Istanbul and Kiev to Moscow and Warsaw, also never happened.
Carelessness about due diligence with respect to potential partners and associates is one of Donald Trump’s more predictable qualities. Acting on the seat of the pants, he had hooked up with Bayrock rather quickly in 2005, becoming an 18 percent minority equity partner in the Trump SoHo, and agreeing to license his brand and manage the building.
Exhibit A in the panoply of former Trump business partners is Bayrock’s former Chairman, Tevfik Arif (aka Arifov), an émigré from Kazakhstan who reportedly took up residence in Brooklyn in the 1990s. Trump also had extensive contacts with another key Bayrock Russian-American from Brooklyn, Felix Sater (aka Satter), discussed below. Trump has lately had some difficulty recalling very much about either Arif or Sater. But this is hardly surprising, given what we now know about them. Trump described his introduction to Bayrock in a 2013 deposition for a lawsuit that was brought by investors in the Fort Lauderdale project, one of Trump’s first with Bayrock: “Well, we had a tenant in …Trump Tower called Bayrock, and Bayrock was interested in getting us into deals.”
According to several reports, Tevfik Arif was originally from Kazakhstan, a Soviet republic until 1992. Born in 1950, Arif worked for 17 years in the Soviet Ministry of Commerce and Trade, serving as Deputy Director of Hotel Management by the time of the Soviet Union’s collapse. In the early 1990s he relocated to Turkey, where he reportedly helped to develop properties for the Rixos Hotel chain. Not long thereafter he relocated to Brooklyn, founded Bayrock, opened an office in the Trump Tower, and started to pursue projects with Trump and other investors.
Tevfik Arif was not Bayrock’s only connection to Kazakhstan. A 2007 Bayrock investor presentation refers to Alexander Mashevich’s “Eurasia Group” as a strategic partner for Bayrock’s equity finance. Together with two other prominent Kazakh billionaires, Patokh Chodiev (aka “Shodiyev”) and Alijan Ibragimov, Mashkevich reportedly ran the “Eurasian Natural Resources Cooperation.” In Kazakhstan these three are sometimes referred to as “the Trio.”
The Trio has apparently worked together ever since Gorbachev's late 1980s perestroika in metals and other natural resources. It was during this period that they first acquired a significant degree of control over Kazakhstan’s vast mineral and gas reserves. Naturally they found it useful to become friends with Nursaltan Nazarbayev, Kazakhstan’s long-time ruler. Indeed, State Department cables leaked by Wikileaks in November 2010 describe a close relationship between “the Trio” and the seemingly-perpetual Nazarbayev kleptocracy.
In any case, the Trio has recently attracted the attention of many other investigators and news outlets, including the September 11 Commission Report, the Guardian, Forbes, and the Wall Street Journal. In addition to resource grabbing, the litany of the Trio's alleged activities include money laundering, bribery, and racketeering. In 2005, according to U.S. State Department cables released by Wikileaks, Chodiev (referred to in a State Department cable as “Fatokh Shodiyev”) was recorded on video attending the birthday of reputed Uzbek mob boss Salim Abduvaliyeva and presenting him with a $10,000 “gift” or “tribute.”
According to the Belgian newspaper Le Soir, Chodiev and Mashkevich also became close associates of a curious Russian-Canadian businessman, Boris J. Birshtein. who happens to have been the father-in-law of another key Russian-Canadian business associate of Donald Trump in Toronto. We will return to Birshtein below.
The Trio also turn up in the April 2016 Panama Papers database as the apparent beneficial owners of a Cook Islands company, “International Financial Limited.”  The Belgian newspapers Het Laatste Nieuws, Le Soir, and La Libre Belgique have reported that Chodiev paid €23 million to obtain a “Class B” banking license for this same company, permitting it to make international currency trades. In the words of a leading Belgian financial regulator, that would “make all money laundering undetectable.”
The Panama Papers also indicate that some of Arif’s connections at the Rixos Hotel Group may have ties to Kazakhstan. For example, one offshore company listed in the Panama Papers database, “Group Rixos Hotel,” reportedly acts as an intermediary for four BVI offshore companies. Rixos Hotel’s CEO, Fettah Tamince, is listed as having been a shareholder for two of these companies, while a shareholder in another—“Hazara Asset Management”—had the same name as the son of a recent Kazakhstan Minister for Sports and Tourism. As of 2012, this Kazakh official was described as the third-most influential deputy in the country’s Mazhilis (the lower house of Parliament), in a Forbes-Kazakhstan article.
According to a 2015 lawsuit against Bayrock by Jody Kriss, one of its former employees, Bayrock started to receive millions of dollars in equity contributions in 2004, supposedly by way of Arif’s brother in Russia, who allegedly “had access to cash accounts at a chromium refinery in Kazakhstan.”
This as-yet unproven allegation might well just be an attempt by the plaintiff to extract a more attractive settlement from Bayrock and its original principals. But it is also consistent with fact that chromium is indeed one of the Kazakh natural resources that is reportedly controlled by the Trio.
As for Arif, his most recent visible brush with the law came in 2010, when he and other members of Bayrock’s Eurasian Trio were arrested together in Turkey during a police raid on a suspected prostitution ring, according to the Israeli daily Yediot Ahronot.
At the time, Turkish investigators reportedly asserted that Arif might be the head of a criminal organization that was trafficking in Russian and Ukrainian escorts, allegedly including some as young as 13. According to these assertions, big-ticket clients were making their selections by way of a modeling agency website, with Arif allegedly handling the logistics. Especially galling to Turkish authorities, the preferred venue was reportedly a yacht that had once belonged to the widely-revered Turkish leader Atatürk. It was also alleged that Arif may have also provided lodging for young women at Rixos Group hotels.
According to Russian media, two senior Kazakh officials were also arrested during this incident, although the Turkish Foreign Ministry quickly dismissed this allegation as “groundless.” In the end, all the charges against Arif resulting from this incident were dismissed in 2012 by Turkish courts, and his spokespeople have subsequently denied all involvement.
Finally, despite Bayrock’s demise and these other legal entanglements, Arif has apparently remained active. For example, Bloomberg reports that, as of 2013, he, his son, and Rixos Hotels’ CEO Fettah Tamince had partnered to pursue the rather controversial business of advancing funds to cash-strapped high-profile soccer players, in exchange for a share of their future marketing revenues and team transfer fees. In the case of Arif and his partners, this new-wave form of indentured servitude was reportedly implemented by way of a UK- and Malta-based hedge fund, Doyen Capital LLP. Because this practice is subject to innumerable potential abuses, including the possibility of subjecting athletes or clubs to undue pressure to sign over valuable rights and fees, UEFA, Europe’s governing soccer body, wants to ban it. But FIFA, the notorious global football regulator, has been customarily slow to act. To date, Doyen Capital LLP has reportedly taken financial gambles on several well-known players, including the Brazilian star Neymar.
The Case of Bayrock LLC—Felix Sater
Our second exhibit is Felix Sater, the senior Bayrock executive introduced earlier. This is the fellow who worked at Bayrock from 2002 to 2008 and negotiated several important deals with the Trump Organization and other investors. When Trump was asked who at Bayrock had brought him the Fort Lauderdale project in the 2013 deposition cited above, he replied: “It could have been Felix Sater, it could have been—I really don’t know who it might have been, but somebody from Bayrock.” 
Although Sater left Bayrock in 2008, by 2010 he was reportedly back in Trump Tower as a “senior advisor” to the Trump Organization – at least on his business card -- with his own office in the building.
Sater has also testified under oath that he had escorted Donald Trump, Jr. and Ivanka Trump around Moscow in 2006, had met frequently with Donald over several years, and had once flown with him to Colorado. And although this might easily have been staged, he is also reported to have visited Trump Tower in July 2016 and made a personal $5,400 contribution to Trump’s campaign.
Whatever Felix Sater has been up to recently, the key point is that by 2002, at the latest, Tevfik Arif decided to hire him as Bayrock’s COO and managing director. This was despite the fact that by then Felix had already compiled an astonishing track record as a professional criminal, with multiple felony pleas and convictions, extensive connections to organized crime, and — the ultimate prize —a virtual “get out of jail free card,” based on an informant relationship with the FBI and the CIA that is vaguely reminiscent of Whitey Bulger.
Sater, a Brooklyn resident like Arif, was born in Russia in 1966. He reportedly emigrated with his family to the United States in the mid-1970s and settled in “Little Odessa.” It seems that his father, Mikhael Sheferovsky (aka Michael Sater), may have been engaged in Russian mob activity before he arrived in the United States. According to a certified U.S. Supreme Court petition, Felix Sater’s FBI handler stated that he “was well familiar with the crimes of Sater and his (Sater’s) father, a (Semion) Mogilevich crime syndicate boss.”  A 1998 FBI report reportedly said Mogilevich’s organization had “approximately 250 members,” and was involved in trafficking nuclear materials, weapons and more as well as money laundering. (See below.)
But Michael Sater may have been less ambitious than his son. His only reported U.S. criminal conviction came in 2000, when he pled guilty to two felony counts for extorting Brooklyn restaurants, grocery stores, and clinics. He was released with three years’ probation. Interestingly, the U.S. Attorney for the Eastern District of New York who handled that case at the time was Ms. Loretta Lynch, who succeeded Eric Holder as US Attorney General in 2014. Back in 2000, she was also overseeing a budding informant relationship and a plea bargain with Michael’s son Felix, which may help to explain the father's sentence.
By then young Felix Sater was already well on his way to a career as a prototypical Russian-American mobster. In 1991 he stabbed a commodity trader in the face with a margarita glass stem in a Manhattan bar, severing a nerve. He was convicted of a felony and sent to prison. As Trump tells it, Sater simply “got into a barroom fight, which a lot of people do.” The sentence for this felony conviction could not have been very long, because by 1993 27-year-old Felix was already a trader in a brand new Brooklyn-based commodity firm called “White Rock Partners,” an innovative joint venture among four New York crime families and the Russian mob aimed at bringing state-of-the art financial fraud to Wall Street.
Five years later, in 1998, Felix Sater pled guilty to stock racketeering, as one of 19 U.S.-and Russian mob-connected traders who participated in a $40 million “pump and dump” securities fraud scheme. Facing twenty years in Federal prison, Sater and Gennady Klotsman, a fellow Russian-American who'd been with him on the night of the Manhattan bar fight, turned "snitch" and helped the Department of Justice prosecute their co-conspirators. Reportedly, so did Salvatore Lauria, another "trader” involved in the scheme. According to the Jody Kriss lawsuit, Lauria later joined Bayrock as an off-the-books paid “consultant.” Initially their cooperation, which lasted from 1998 until at least late 2001, was kept secret, until it was inadvertently revealed in a March 2000 press release by U.S. Attorney Lynch.
Unfortunately for Sater, about the same time the NYPD also reportedly discovered that he'd had been running a money-laundering scheme and illicit gun sales out of a Manhattan storage locker. He and Klotsman fled to Russia. However, according to the New York Times, citing Klotsman and Lauria, soon after the events of September 11, 2001 the ever-creative Sater succeeded in brokering information about the black market for Stinger anti-aircraft missiles to the CIA and the FBI. According to Klotsman, this strategy “bought Felix his freedom,” allowing him to return to Brooklyn. It is still not clear precisely what information Sater actually provided, but in 2015 US Attorney General Loretta Lynch publicly commended him for sharing information that she described as “crucial to national security.”
Meanwhile, Sater’s sentence for his financial crimes continued to be deferred even after his official cooperation in that case ceased in late 2001. His files remained sealed, and he managed to avoid any sentencing for those crimes at all until October 23, 2009. When he finally appeared before the Eastern District's Judge I. Leo Glasser, Felix received a $25,000 fine, no jail time, and no probation, in a quiet proceeding that attracted no press attention. Some compared this sentence to Judge Glasser's earlier sentence of Mafia hit man “Sammy the Bull” Gravano to 4.5 years for 19 murders, in exchange for “cooperating against John Gotti.”
In any case, between 2002 and 2008, when Felix Sater finally left Bayrock LLC, and well beyond, his ability to avoid jail and conceal his criminal roots enabled him to enjoy a lucrative new career as Bayrock’s chief operating officer. In that position, he was in charge of negotiating aggressive property deals all over the planet, even while—according to lawsuits by former Bayrock investors — engaging in still more financial fraud. The only apparent difference was that he changed his name from “Sater” to “Satter.” 
As for Sater’s pal Klotsman, the past few years have not been kind. As of December 2016 he is in a Russian penal colony, working off a ten-year sentence for a failed $2.8 million Moscow diamond heist in August 2010. In 2016 Klotsman was reportedly placed on a “top-ten list” of Americans that the Russians were willing to exchange for high-value Russian prisoners in U.S. custody, like the infamous arms dealer Viktor Bout. So far there have been no takers. But with Donald Trump as President, who knows?
The Case of Iceland’s FL Group
One of the most serious frauds alleged in the recent Bayrock lawsuit involves FL Group, an Icelandic private investment fund that is really a saga all its own.
Iceland is not usually thought of as a major offshore financial center. It is a small snowy island in the North Atlantic, closer to Greenland than to the UK or Europe, with only 330,000 citizens and a total GDP of just $17 billion. Twenty years ago, its main exports were cod and aluminum – with the imported bauxite smelted there to take advantage of the island's low electricity costs.
But in the 1990s Iceland’s tiny neoliberal political elite had what they all told themselves was a brilliant idea: "Let's privatize our state-owned banks, deregulate capital markets, and turn them loose on the world!" By the time all three of the resulting privatized banks, as well as FL Group, failed in 2008, the combined bank loan portfolio amounted to more than 12.5 times Iceland’s GDP -- the highest country debt ratio in the entire world.
For purposes of our story, the most interesting thing about Iceland is that, long before this crisis hit and utterly bankrupted FL Group, our two key Russian/FSU/Brooklyn mobster-mavens, Arif and Sater, had somehow stumbled on this obscure Iceland fund. Indeed, in early 2007 they persuaded FL Group to invest $50 million in a project to build the Trump SoHo in mid-town Manhattan.
According to the Kriss lawsuit, at the same time, FL Group and Bayrock’s Felix Sater also agreed in principle to pursue up to an additional $2 billion in other Trump-related deals. The Kriss lawsuit further alleges that FL Group (FLG) also agreed to work with Bayrock to facilitate outright tax fraud on more than $250 million of potential earnings. In particular, it alleges that FLG agreed to provide the $50 million in exchange for a 62 percent stake in the four Bayrock Trump projects, but Bayrock would structure the contract as a “loan.” This meant that Bayrock would not have to pay taxes on the initial proceeds, while FLG’s anticipated $250 million of dividends would be channeled through a Delaware company and characterized as “interest payments,” allowing Bayrock to avoid up to $100 million in taxes. For tax purposes, Bayrock would pretend that their actual partner was a Delaware partnership that it had formed with FLG, “FLG Property I LLC,” rather than FLG itself.
The Trump Organization has denied any involvement with FLG. However, as an equity partner in the Trump SoHo, with a significant 18 percent equity stake in this one deal alone, Donald Trump himself had to sign off on the Bayrock-FLG deal.
This raises many questions. Most of these will have to await the outcome of the Kriss litigation, which might well take years, especially now that Trump is President. But several of these questions just leap off the page.
First, how much did President-elect Trump know about the partners and the inner workings of this deal? After all, he had a significant equity stake in it, unlike many of his “brand-name only” deals, and it was also supposed to finance several of his most important East Coast properties.
Second, how did the FL Group and Bayrock come together to do this dodgy deal in the first place? One former FL Group manager alleges that the deal arrived by accident, a “relatively small deal" was nothing special on either side. The Kriss lawsuit, on the other hand, alleges that FLG was a well-known source of easy money from dodgy sources like Kazakhstan and Russia, and that other Bayrock players with criminal histories— like Salvatore Lauria, for example—were involved in making the introductions.
At this stage the evidence with respect to this second question is incomplete. But there are already some interesting indications that FL Group’s willingness to generously finance Bayrock’s peculiar Russian/FSU/Brooklyn team, its rather poorly-conceived Trump projects, and its purported tax dodging were not simply due to Icelandic backwardness. There is much more for us to know about Iceland’s “special” relationship with Russian finance. In this regard, there are several puzzles to be resolved.
First, it turns out that FL Group, Iceland’s largest private investment fund until it crashed in 2008, had several owners/investors with deep Russian business connections, including several key investors in all three top Iceland banks.
Second, it turns out that FL Group had constructed an incredible maze of cross-shareholding, lending, and cross-derivatives relationships with all these major banks, as illustrated by the following snapshot of cross-shareholding among Iceland’s financial institutions and companies as of 2008.
This thicket of cross-dealing made it almost impossible to regulate “control fraud,” where insiders at leading financial institutions went on a self-serving binge, borrowing and lending to finance risky investments of all kinds. It became difficult to determine which institutions were net borrowers or investors, as the concentration of ownership and self-dealing in the financial system just soared.
Third, FL Group make a variety of peculiar loans to Russian-connected oligarchs as well as to Bayrock. For example, as discussed below, Alex Shnaider, the Russian-Canadian billionaire who later became Donald Trump’s Toronto business partner, secured a €45.8 million loan to buy a yacht from Kaupthing Bank during the same period, while a company
Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008
belonging to another Russian billionaire who reportedly owns an important vodka franchise got an even larger loan.
Fourth, Iceland’s largest banks also made a series of extraordinary loans to Russian interests during the run-up to the 2008 crisis. For example, one of Russia’s wealthiest oligarchs, a close friend of President Putin, nearly managed to secure at least €400 million (or, some say, up to 4 times that much) from Kaupthing, Iceland’s largest bank, in late September 2008, just as the financial crisis was breaking wide open. This bank also had important direct and indirect investments in FL Group. Indeed, until December 2006, it is reported to have employed the FL Group private equity manager who allegedly negotiated Felix Sater’s $50 million deal in early 2007.
Fifth, there are unconfirmed accounts of a secret U.S. Federal Reserve report that unnamed Iceland banks were being used for Russian money laundering. Furthermore, Kaupthing Bank’s repeated requests to open a New York branch in 2007–08 were rejected by the Fed. Similar unconfirmed rumors repeatedly appeared in Danish and German publications, as did allegations about the supposed Kazakh origins of FLG’s cash to be “laundered” in the Kriss lawsuit.
Sixth, there is the peculiar fact is that when Iceland’s banks went belly-up in October 2008, their private banking subsidiaries in Luxembourg, which were managing at least €8 billion of private assets, were suddenly seized by Luxembourg banking authorities and transferred to a new bank, Banque Havilland. This happened so fast that Iceland’s Central Bank was prevented from learning anything about the identities or portfolio sizes of the Iceland banks’ private offshore clients. But again, there were rumors of some important Russian names.
Finally, there is the rather odd phone call that Russia’s Ambassador to Iceland made to Iceland’s Prime Minister at 6:45 a.m. on October 7, 2008, the day after the financial crisis hit Iceland. According to the PM's own account, the Russian Ambassador informed him that then Prime-Minister Putin was willing to consider offering Iceland a €4 billion Russian bailout.
Of course this alleged Putin offer was modified not long thereafter to a willingness to entertain an Icelandic negotiating team in Moscow. By the time the Iceland team got to Moscow later that year, Russia’s willingness to lend had cooled, and Iceland ended up accepting a $2.1 billion IMF "stabilization package" instead. But according to a member of the negotiating team, the reasons for the reversal are still a mystery. Perhaps Putin had reconsidered because he simply decided that Russia had to worry about its own considerable financial problems. Or perhaps he had discovered that Iceland’s banks had indeed been very generous to Russian interests on the lending side, while -- given Luxembourg’s fact actions -- any Russian private wealth invested in Iceland banks was already safe.
On the other hand, there may be a simpler explanation for Iceland’s peculiar generosity to sketchy partners like Bayrock. After all, right up to the last minute before the October 2008 meltdown, the whole world had awarded Iceland AAA ratings – depositors queued up in London to open high-yield Iceland bank accounts, its bank stocks were booming, and the compensation paid to its financiers was off the charts. So why would anyone worry about making a few more dubious deals?
Overall, therefore, with respect to these odd “Russia-Iceland” connections, the proverbial jury is still out. But all these Icelandic puzzles are intriguing and bear further investigation.
The Case of the Trump Toronto Tower and Hotel—Alex Shnaider
Our fourth case study of Trump's business associates concerns the 48-year-old Russian-Canadian billionaire Alex Shnaider, who co-financed the seventy-story Trump Tower and Hotel, Canada’s tallest building. It opened in Toronto in 2012. Unfortunately, like so many of Trump’s other Russia/FSU-financed projects, this massive Toronto condo-hotel project went belly-up this November and has now entered foreclosure.
According to an online profile of Shnaider by a Ukrainian news agency, Alex Shnaider was born in Leningrad in 1968, the son of "Евсей Шнайдер," or "Evsei Shnaider" in Russian. A recent Forbes article says that he and his family emigrated to Israel from Russia when he was four and then relocated to Toronto when he was 13-14. The Ukrainian news agency says that Alex's familly soon established "one of the most successful stories in Toronto's Russian quarter, " and that young Alex, with "an entrepreneurial streak," "helped his father Evsei Shnaider in the business, placing goods on the shelves and wiping floors."
Eventually that proved to be a great decision – Shnaider prospered in the New World. Much of this was no doubt due to raw talent. But it also appears that for a time he got significant helping hand from his (now reportedly x) father-in-law, another colorful Russian-Canadian, Boris J. Birshtein.
Originally from Lithuania, Birshtein, now about 69, has been a Canadian citizen since at least 1982. He resided in Zurich for a time in the early 1990s, but then returned to Toronto and New York. One of his key companies was called Seabeco SA, a "trading" company that was registered in Zurich in December 1982. By the early 1990s Birshtein and his partners had started many other Seabeco-related companies in a wide variety of locations, inclding Antwerp, Toronto, Winnipeg, Moscow, Delaware, Panama,  and Zurich. Several of these are still active. He often staffed them with directors and officers from a far-flung network of Russians, emissaries from other FSU countries like Kirgizstan and Moldova, and recent Russia/FSU emigres to Canada.
According to the Financial Times and the FBI, in addition to running Seabeco, Birshtein was a close business associate of Sergei Mikhaylov, the reputed head of Solntsevskaya Bratva, the Russian mob's largest branch, and the world’s highest-grossing organized crime group as of 2014, according to Fortune.  A 1996 FBI intelligence report cited by the FT claims that Birshtein hosted a meeting in his Tel Aviv office for Mikhaylov, the Ukrainian-born Semion Mogilevich, and several other leaders of the Russo/FSU mafia, in order to discuss “the sharing interests in Ukraine.” A subsequent 1998 FBI Intelligence report on the "Semion Mogilevich Organization" repeated the same charge, and described Mogilevich's successful attempts at gaining control over Ukraine privatization assets. This FT article also described how Birshtein and his associates had acquired extraordinary influence with key Ukraine officials, including President Leonid Kuchma, with the help of up to $5 million of payoffs. Citing Swiss and Belgian investigators, the FT also claimed that Birshtein and Mikhaylov jointly controlled a Belgian company called MAB International in the early 1990s. During that period, those same investigators reportedly observed transfers worth millions of dollars between accounts held by Mikhaylov, Birshtein, and Alexander Volkov, Seabeco's representative in Ukraine.
In 1993, the Yeltsin government reportedly accused Birshtein of illegally exporting seven million tons of Russian oil and laundering the proceeds. Dmytro Iakoubovski, a former associate of Birshtein’s who had also moved to Toronto, was said to be cooperating with the Russian investigation. One night a gunman fired three shots into Iakoubovski’s home, leaving a note warning him to cease his cooperation, according to a New York Times article published that year. As noted above, according to the Belgian newspaper Le Soir, two members of Bayrock’s Eurasian Trio were also involved in Seabeco during this period as well—Patokh Chodiev and Alexander Mashkevich. Chodiev reportedly first met Birshtein through the Soviet Foreign Ministry, and then went on to run Seabeco’s Moscow office before joining its Belgium office in 1991. Le Soir further claims that Mashkevich worked for Seabeco too, and that this was actually how he and Chodiev had first met.
All this is fascinating, but what about the connections between Birshtein and Trump's Toronto business associate, Alex Shnaider? Again, the leads we have are tantalizing.The Toronto Globe and Mail reported that in 1991, while enrolled in law school, young Alex Shnaider started working for Birshtein at Seabeco’s Zurich headquarters, where he was reportedly introduced to steel trading. Evidently this was much more than just a job; the Zurich company registry lists "Alex Shnaider" as a Director of "Seabeco Metals AG" from March 1993 to January 1994. 
In 1994, according to this account, reportedly left Seabeco in January 1994 to start his own trading company in Antwerp, in partnership with a Belgian trader-partner. Curiously, Le Soir also says that Mikhaylov and Birshtein co-founded MAB International in Antwerp in January 1994. Is it far-fetched to suspect that Alex Shnaider and mob boss Mikhaylov might have crossed paths, since they were both in the same city and they were both close to Shnaider’s father-in-law?
According to Forbes, soon after Shnaider moved to Antwerp, he started visiting the factories of his steel trading partners in Ukraine. His favorite client was the Zaporizhstal steel mill, the Ukraine's fourth largest. At the Zaporizhstal mill he reportedly met Eduard Shifrin (aka Shyfrin), a metals trader with a Ph.D. in metallurgical engineering. Together they founded Midland Resource Holdings Ltd. in 1994.
As the Forbes piece argues, with privatization sweeping Eastern Europe, private investors were jockeying to buy up the government’s shares in Zaprozhstal. But most traders lacked the financial backing and political connectons to accumulate large risky positions. Shnaider and Shifrin, in contrast, started buying up shares without limit, as if their pockets and connections were very deep. By 2001 they had purchased 93 percent of the plant for about $70 million, a stake that would be worth much more just five years later, when Shnaider reportedly turned down a $1.2 billion offer.
Today Midland Resources Holdings Ltd. reportedly generates more than $4 billion a year of revenue and has numerous subsidiaries all across Eastern Europe. Shnaider also reportedly owns Talon International Development, the firm that oversaw construction of the Trump hotel-tower in Toronto. All this wealth apparently helped Iceland's FL Group decide that it could afford to extend a €48.5 million loan to Alex Shnaider in 2008 to buy a yacht. 
As of December 2016, a search of the Panama Papers database found no less than 28 offshore companies that have been associated with “Midland Resources Holding Limited.” According to the database, "Midland Resources Holding Limited" was a shareholder in at least two of these companies, alongside an individual named “Oleg Sheykhametov.” The two companies, Olave Equities Limited and Colley International Marketing SA, were both registered and active in the British Virgin Islands from 2007–10. A Russian restaurateur by that same name reportedly runs a sushi franchise owned by two other alleged Solntsevskaya mob associates, Lev Kvetnoy and Andrei Skoch, both of whom are pictured below with Sergei Mikhaylov below. Of course mere inclusion in such a group photo is no evidence of any wrong-doing. (INSERT Picture Link here: https://www.theguardian.com/world/2012/nov/28/man-behind-megafon.) According to Forbes, Kvetnoy is the 55th richest person in Russia and Skoch, now a deputy in the Russian Duma, is the 18th. 
Finally, it is also intriguing to note that Bori Birshtein is also listed as the President of "ME Moldova Enterprises AG," a Zurich-based company" that was founded in November1992, transferred to the canton of Schwyz in September 1994, and liquidated and cancelled in January 1999. Birshstein was a member of the company's board of directors from November 1992 to January 1994, when he became its President. At that point he was succeeded as President in June 1994 by one "Evsei Shnaider, Canadian citizen, resident in Zurich," who was also listed as Director of the company in September 1994. " Evsei Schnaider" is also listed in the Panama registry as a Treasurer and Director of "The Seabeco Group Inc," formed on December 6, 1991, and as Treasurer and Director of Seabeco Security International Inc.," formed on December 10, 1991. As of December 2016, both companies are still in existence. Boris Birstein is listed as President and Director of both companies.
The Case of Paul Manafort’s Ukrainian Oligarchs
Our fifth Trump associate profile concerns the Russo/Ukrainian connections of Paul Manafort, the former Washington lobbyist who served as Donald Trump’s national campaign director from April 2016 to August 2016. Manafort’s partner, Rick Davis, also served as national campaign manager for Senator John McCain in 2008, so this may not just be a Trump association.
One of Manafort’s biggest clients was the dubious pro-Russian Ukrainian billionaire Dmytro Firtash. By his own admission, Firtash maintains strong ties with a recurrent figure on this scene, the reputed Ukrainian/Russian mob boss Semion Mogilevich. His most important other links are almost certainly to Putin. Otherwise it is difficult to explain how this former used-car salesman could gain a lock on trading goods for gas in Turkmenstan and also become a lynchpin investor in the Swiss company RosUrEnergo, which controls Gazprom's gas sales to Europe
In 2008, Manafort teamed up with a former manager of the Trump Organization to purchase the Drake Hotel in New York for up to $850 million, with Firtash agreeing to invest $112 million. According to a lawsuit brought against Manafort and Firtash, the key point of the deal was not to make a carefully-planned investment in real estate, but to simply launder part of the huge profits that Firtash had skimmed while brokering dodgy natural gas deals between Russia and Ukraine, with Mogilevich acting as a “silent partner.”
Ultimately Firtash pulled out of this Drake Hotel deal. The reasons are unclear – it has been suggestd that he needed to focus on the 2015 collapse and nationalization of his Group DF's Bank Nadra back home in the Ukraine. But it certainly doesn't appear to have changed his behiavor. Since 2014 there have been a spate of other Firtash-related prosecutions, with the US try to extradict from Austria in order to stand trial on allegations that his vast spidernet "Group DF" had paid $18.5 million in bribes to Indian officials to secure mining licenses. The Austrian court, knowing Firtash like a brother, required him to put up a record-busting €125 mm bail while he awaits a decision.  And just last month, Spain has also tried to extradite Firtash on a separate money laundering case, involving washing €10 million through Spanish property investments.
After Firtash pulled out of the deal, Manafort reportedly turned to Trump, but he declined to engage. Manafort stepped down as Trump’s campaign manager in August of 2016 in response to press investigations into his ties not only to Firtash, but to the Ukraine's previous pro-Russian Yanukovych government, which had been deposed by a uprising in 2014. However, following the November 8 election, Manafort reportedly returned to advise Trump on staffing his new administration. He got an assist from Putin -- on November 30 a spokeswoman for the Russian Foreign Ministry accused Ukraine of leaking stories about Manafort in an effort to hurt Trump.
The Case of “Well-Connected” Russia/FSU Mobsters
Finally, several other interesting Russo/FSU connections have a more residential flavor, but they are a source of very important leads about the Trump network.
Indeed, partly because it has no prying co-op board, Trump Tower in New York has received press attention for including among its many honest residents tax-dodgers, bribers, arms dealers, convicted cocaine traffickers, and corrupt former FIFA officials. 
One typical example involves the alleged Russian mobster Anatoly Golubchik, who went to prison in 2014 for running an illegal gambling ring out of Trump Tower -- not only the headquarters of the Trump Organization but also the former headquarters of Bayrock Group LLC. This operation reportedly took up the entire 51st floor. Also reportedly involved in it was the alleged mobster Alimzhan Tokhtakhounov,  who has the distinction of making the Forbes 2008 list of the World’s Ten Most Wanted Criminals, and whose organization the FBI believed to be tied to Mogilevich’s. Even as this gambling ring was still operating in Trump Tower, Tokhtakhounov reportedly travelled to Moscow to attend Donald Trump’s 2013 Miss Universe contest as a special VIP.
In the Panama Papers database we do find the name “Anatoly Golubchik.” Interestingly, his particular offshore company, "Lytton Ventures Inc.,"  shares a corporate director, Stanley Williams, with a company that may well be connected to our old friend Semion Mogilevich, the Russian mafia’s alleged “Boss of Bosses” who has appeared so frequently above. Thus Lytton Ventures Inc. shares this particular director with another company that is held under the name of “Galina Telesh.” According to the Organized Crime and Corruption Reporting Project, multiple offshore companies belonging to Semion Mogilevich have been registered under this same name -- which just happens to be that of Mogilevich’s first wife.
A 2003 indictment of Mogilevich also mentions two offshore companies that he is said to have owned, with names that include the terms “Arbat” and “Arigon.” The same corporate director shared by Golubchik and Telesh also happens to be a director of a company called Westix Ltd., which shares its Moscow address with “Arigon Overseas” and “Arbat Capital.” And another company with that same director appears to belong to Dariga Nazarbayeva, the eldest daughter of Nursultan Nazarbayev, the long-lived President of Kazakhstan. Dariga is expected to take his place if he ever decides to leave office or proves to be mortal.
Lastly, Dmytro Firtash—the Mogilevich pal and Manafort client that we met earlier—also turns up in the Panama Papers database, as part of Galina Telesh’s network neighborhood. A director of Telesh’s “Barlow Investing,” Vasliki Andreou, was also a nominee director of a Cyprus company called “Toromont Ltd.,” while another Toromont Ltd. nominee director, Annex Holdings Ltd., a St. Kitts company, is also listed as a shareholder in Firtash’s Group DF Ltd., along with Firtash himself. And Group DF’s CEO, who allegedly worked with Manafort to channel Firtash’s funding into the Drake Hotel venture, is also listed in the Panama Papers database as a Group DF shareholder. Moreover, a 2006 Financial Times investigation identified three other offshore companies that are linked to both Firtash and Telesh.
Of course, all of these curious relationships may just be meaningless coincidences. After all, the director shared by Telesh and Golubchik is also listed in the same role for more than 200 other companies, and more than a thousand companies besides Arbat Capital and Arigon Overseas share Westix’s corporate address. In the burgeoning land of offshore havens and shell-game corporate citizenship, there is no such thing as overcrowding. The appropriate way to view all this evidence is to regard it as "Socratic:" raising important unanswered questions – not providing definite answers.
In any case, returning to Trump's relationships through Trump Tower, another odd one involves the 1990s-vintage fraudulent company YBM Magnex International. YBM, ostensibly a world-class manufacturer of industrial magnets, was founded indirectly in Newtown, Bucks County, Pennsylvania in 1995 by the "boss of bosses," Semion Mogilevich, Moscow’s “brainy Don.”
This is a fellow with an incredible history, even if only one-half of what has been written about him is true.  Unfortunately, we have to focus here only on the bits that are most relevant.. Born in Kiev, and now a citizen of Israel as well as the Ukraine and Russia, Semion, now 70, is a lifelong criminal. But he boasts an undergraduate economics degree from Lviv University, and is reported to take special pride in designing sophisticated, virtually undetectable financial frauds that take years to put in place. To pull them off, he often relies on the human frailties of top bankers, stock brokers, accountants, business magnates, and key politicians.
In YBM’s case, for a mere $2.4 million in bribes, Semion and his henchmen spent years in the 1990s launching a product-free, fictitious company on the still-badly under-regulated Toronto Stock Exchange. Along the way they succeeded in securing the support of several leading Toronto business people and a former Ontario Province Premier to sit on YBM’s board. They also paid the “Big Four” accounting firm Deloitte Touche very handsomely to issue glowing audits. By mid-1998, YBM’s stock price had gone from less than $.10 to $20, and Semion cashed out at least $18 million—a relatively big fraud for its day—before the FBI raid its YBM's corporate headquarters. When it did so, it found piles of bogus invoices for magnets, but no magnets. 
In 2003, Mogilevich was indicted in Philadelphia on 45 felony counts for this $150 million stock fraud. But there is no extradition treaty between the United States and Russia, and no chance that Russia will ever extradite Semion voluntarily; he is arguably a national treasure, especially now. Acknowledging these realities, or perhaps for other reasons, the FBI quietly removed Mogilevich from its Top Ten Most Wanted list in 2015, where he had resided for the previous six years.
For our purposes, one of the most interesting things to note about this YBM Magnex case is that its CEO was a Russian-American named Jacob Bogatin, who was also indicted in the Philadelphia case. His brother David had served in the Soviet Army in a North Vietnamese anti-aircraft unit, helping to shoot down American jet pilots like Senator John McCain. Since the early 1990s, David Bogatin was considered by the FBI to be one of the key members of Semion Mogilevich’s Russian organized crime family in the United States, with a long string of convictions for big-ticket Mogilevich-type offenses like financial fraud and tax dodging.
At one point, David Bogatin owned five separate condos in Trump Tower that Donald Trump had reportedly sold to him personally. And Vyacheslav Ivankov, another key Mogilevich lieutenant in the United States during the 1990s, also resided for a time at Trump Tower, and reportedly had in his personal phone book the private telephone and fax numbers for the Trump Organization’s office in that building.
So what have we learned from this deep dive into the network of Donald Trump's Russian/FSU connections?
¶ First, the President-Elect really is very "well-connected," with an extensive network of unsavory global underground connections that may well be unprecedented in White House history. In choosing his associates, evidently Donald Trump only pays cursory attention to questions of background, character and integrity.
¶ Second, Donald Trump has also literally spent decades cultivating senior relationships of all kinds with Russia and the FSU. And public and private senior Russian figures of all kinds have likewise spent decades cultivating him, not only as a business partner, but as a "useful idiot."
After all, on September 1, 1987 (!), Trump was already willing to spend a $94,801 on full-page ads in the Boston Globe, the Washington Post, and the New York Times, calling for the US to stop spending money to defend Japan, Europe, and the Persian Gulf, "an area of only marginal significance to the US for its oil supplies, but one upon which Japan and others are almost totally dependent.''
This is one key reason why just this week, Robert Gates, a registered Republican who has served Secretary of Defense under Presidents from both parties, as well as Director and Deputy Director of the CIA, critized the response of Congress and the White House to the alleged Putin-backed hacking as far too "laid back." 
¶ Third, even beyond questions of illegality, the public clearly has a right to know much more than it already does about the nature of such global connections. As our opening quote from Cervantes suggests, these relationships are probably a pretty good leading indicator of how Presidents will behave once in office.
Unfortunately, for many reasons, this year American voters never really got the chance to decide whether such low connections and entanglements belong at the world’s high peak of official power. In the waning days of the Obama Administration, with the Electoral College about to ratify Trump's election and Congress in recess, it is too late to establish the kind of bipartisan 9/11-type commission that would be needed to explore these connections in detail.
¶ Finally, the long-run consequence of careless interventions in other countries is that they often come back to haunt us. In Russia's case, it just has.
James S. Henry, Esq. is an investigative economist and lawyer who has written widely about offshore and onshore tax havens, kleptocracy, and pirate banking. He is the author of The Blood Bankers (Basic Books, 2003,2005), a classic investigation of where the money went that was loaned to key debtor countries in the 1970s-1990s. He is a Senior Fellow at the Columbia University's Center on Sustainable Investment, a Global Justice Fellow at Yale, a Senior Advisor at the Tax Justice Network, and a member of the New York Bar. He has pursued frontline investigations of odious debt, flight capital, and corruption in more than 50 developing countries, including Russia, China, South Africa, Brazil, the Philippines, Argentina, Venezuela, Nicaragua, Mexico, and Panama.
 Author’s estimates; see globalhavenindustry.com for more details.
 For an overview and critical discussion, see http://prutland.faculty.wesleyan.edu/files/2015/08/The-role-of-the-IMF-in-Russia.pdf.
 See Lawrence Klein and Marshall Pomer, Russia's Economic Transition Gone Awry (Stanford U. Press, 2002); see also James S. Henry and Marshall Pomer, "A Pile of Ruble," The New Republic, 1998, 219 (10), 20-21.
 See this Washington Post report, which counts just six bankruptcies to the Trump Organization’s credit, but excludes failed projects like the Trump SoHo, the Toronto condo-hotel, the Fort Lauderdale condo-hotel, and many others Trump was a minority investor or had simply licensed his brand.
 “I dealt mostly with Tevfik,” he said in 2007 http://www.thedailybeast.com/articles/2011/05/26/inside-donald-trumps-empire-why-he-wont-run-for-president.html
 Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 15. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.
 See also Salihovic, Elnur, Major Players in the Muslim Business World, p.107
 See also http://www.sahistory.org.za/sites/default/files/file%20uploads%20/alastair_fraser_miles_larmer_zambia_mining_anbook4you.pdf; http://www.brusselstimes.com/belgium/3302/the-belgian-billionaire-georges-forrest-denies-any-involvement-in-kazakhgate; http://archives.lesoir.be/le-parquet-de-bruxelles-enquete-kazakhgate-tractebel-co_t-19991228-Z0HNTZ.html.
 According to the Panama Papers database, "International Financial Limited" was registered on April 3, 1998, but is no longer active today, although no precise deregistration date is available. See https://offshoreleaks.icij.org/nodes/167402.
According to the Panama Papers, “Group Rixos Hotel” is still active company, while three of the four companies it serves were struck off in 2007 and the fourth, Hazara Asset Management, in 2013.
 See also  http://turizmguncel.com/haber/savarona-zanlilari-sorgulanirken-ismailov-adliyeye-gitti-h3325.html;  http://www.legrandsoir.info/Machkevitch-et-ses-complices-blanchis-par-la-justice-turque.html.
 Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 16. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.
The exact date that Sater joined Bayrock is unclear. A New York Times article says 2003, but this appears to be too late. Sater says 1999, but this is much too early. A certified petition filed with the U.S. Supreme Court places the time around 2002, which is more consistent with Sater’s other activities during this period, including his cooperation with the Department of Justice on the Coppa case in 1998–2001, and his foreign travel.
 See https://www.ft.com/content/549ddfaa-5fa5-11e6-b38c-7b39cbb1138a; http://www.nytimes.com/2016/04/06/us/politics/donald-trump-soho-settlement.html; https://www.washingtonpost.com/politics/former-mafia-linked-figure-describes-association-with-trump/2016/05/17/cec6c2c6-16d3-11e6-aa55-670cabef46e0_story.html
;  http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf. Note that previous accounts of Sater's activities have overlooked the role that this very permissive relationship with federal law enforcement, especially the FBI, may have played in encouraging Sater's subsequent risk-taking and financial crimes. See http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf.
 Sater’s 1998 case, never formally sealed, was U.S. v. Sater, 98-CR-1101 (E.D.N.Y.) The case in which Sater secretly informed was U.S. v. Coppa, 00-CR-196 (E.D.N.Y.). See also http://www.thedailybeast.com/articles/2016/11/06/trump-s-russia-towers-he-just-can-t-get-them-up.html.
 http://www.nytimes.com/2007/12/17/nyregion/17trump.html. Sater also may have taken other steps to conceal his criminal past. According to the 2015 lawsuit filed by x Bayrocker Jody Kriss, Arif agreed to pay Sater his $1 million salary under the table, allowing Sater to pretend that he lacked resources to compensate any victims of his prior financial frauds. See Kriss v. Bayrock, pp. 2, 18, at https://assets.documentcloud.org/documents/2638421/Kriss-v-Bayrock-Complaint.pdf The lawsuit also alleges that Sater may have held a majority of Bayrock's ownership, but that Arif, Sater and other Bayrock officers may have conspired to hide this by listing Arif as the sole owner on offering documents.
 See https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n153/mode/2up, 155.
 "Former FL Group manager," interview with London, August 2016. Sigrun Davidsdottir, Iceland journalist.
 See "Report of the Special Investigation Commission on the 2008 Financial Crisis." (April 12, 2010), available at http://www.rna.is/eldri-nefndir/addragandi-og-orsakir-falls-islensku-bankanna-2008/skyrsla-nefndarinnar/english/.
 These loans are disclosed in the Kaupthing Bank's "Corporate Credit – Disclosure of Large Exposures > €40 mm." loan book, September 15, 2008. This document was disclosed by Wikileaks in 2009 See http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5968231/Kaupthing-leak-exposes-loans.html; http://file.wikileaks.info/leak/kaupthing-bank-before-crash-2008.pdf, p.145 (€79.5mm construction yacht loan to Russian vodka magnate Yuri Shefler's Serena Equity Ltd.; p. 208: (€45.8 mm yacht construction loan to Canadian-Russian billionaire Alex Shnaider's Filbert Pacific Ltd..
 Kriss lawsuit, op. cit.; author's analysis of Kaupthing/ FL G employees published career histories.
 Author's interview, "Iceland Economist," Reykjavik, July 2016.
 http://uniad.com.ua/main/940-dose-aleksa-shnajdera-sovladelca-zaporozhstali.html. The passage in Russian, with the father's name underlined, is as follows: "Родители Алекса Шнайдера владели одним из первых успешных русских магазинов в русском квартале Торонто. Алекс помогал в бизнесе отцу – Евсею Шнайдеру, расставляя на полках товар и протирая полы. С юных лет в Алексе зрела предпринимательская жилка. Живя с родителями, он стал занимать деньги у их друзей и торговать тканями и электроникой с разваливающимися в конце 80-х годов советскими предприятиями." "Евсею Шнайде
ру" is the dative case of "Евсей Шнайдер," or "Evsei Shnaider," the father's name in Russian.
 The Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. It entered liquidation on May 5, 1999, in Arth, handled by the Swiss trustee Paul Barth. The Zurich company registry listed "Boris Joseph Birshtein, Canadian citizen, resident in Toronto," as the President of Seabeco Kirgizstan AG in 1992, while "Boris Joseph Birshtein, Canadian citizen, resident in Zurich," was listed as the company's President in 1993. "Boris Birshtein" is also listed as the President and director of a 1991 Panama company, The Seabeco Group, Inc. as of December 6 1991. See below.
 The Zurich company registry reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. According to the registry, it entered liquidation on May 5, 1999. See also https://groups.google.com/forum/#!topic/soc.culture.ukrainian/1mtgIacNtMw. The liquidation was handled by the Swiss trustee Paul Barth, in Arth.
 For Seabeco's Antwerp subsidiary, see http://archives.lesoir.be/mafia-russe-la-justice-suisse-fond-sur-anvers-et-bruxel_t-19970317-Z0DFVX.html.
 "Royal HTM Group, Inc." of Toronto, (Canadian Federal Corporation # 624476-9), owned 50-50 by Birshtein and his nephew. See https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=6244769&V_TOKEN=1481946919835&crpNm=Royal%20HTM%20Group,%20Inc.&crpNmbr=&bsNmbr= .
 Birshtein was a director of Seabeco Capital Inc. (Canadian Federal Incorporatio # 248194-4,) a Winnipeg company created 6/2/1989 and dissolved 12/22/1992 )https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=2481944&V_TOKEN=1481931998238&crpNm=Seabeco&crpNmbr=&bsNmbr=
 Since 1998, Boris Birshtein (Toronto) has also served as Chairman, CEO, and a principle shareholder of "Trimol Group Inc.," a publicly-traded Delaware company that trades over the counter. (Symbol: TMOL). Its product line is supposedly "computerized photo identification and database management system utilized in the production of variety of secure essential government identification documents." See https://www.bloomberg.com/quote/TMOL:US; https://www.sec.gov/Archives/edgar/data/1011733/0000950123-98-005826.txt.
However, according to Trimol's July 2015 10-K (http://www.wikinvest.com/stock/Trimol_Group_Inc_(TMOL)/Filing/10-K/2015/10-K/D20069370) the company has only had one customer, the former FSU member Moldova, with which Trimol's wholly-owned subsidiary Intercomsoft concluded a contract in 1996 for the producton of a National Passport and Population Registration system. That contract was not renewed in 2006, and the subsidiary and Trimol have had no revenues since then. Accordingly, as of 2016 Trimol has only two part time employees, its two principle shareholders, Birshtein and his nephew, who, directly and indirectly account for 79 percent of Trimol's shares outstanding. According to the July 2015 10-K, Birshtein, in particular, owned 54 percent of TMOL's outstanding 78.3 million shares, including 3.9 million by way of "Magnum Associates, Inc.," which the 10-K says only has Birshtein as a shareholder, and 34.7 million by way of yet another Canadian company, "Royal HTM Group, Inc." of Ontario (Canadian Federal Corporation # 624476-9), which is owned 50-50 by Birshtein and a nephew. It is interesting to note according to the Panama Papers database, a Panama company called "Magnum Associates Inc. was incorporated on December 10, 1987, and struck off on March 10, 1989. See https://offshoreleaks.icij.org/nodes/10213728. As of December 2016, TMOL's stock price was zero.
 See the case of Trimol Group Inc above. The Seabeco Group, Inc., a Panama company that was formed in December 1991, apparently still exists. Boris J. Birshtein is listed as this company's Director and President. See "The Seabeco Group Inc." registered in Panama by Morgan Y Morgan, 1991-12.06, with "Numero de Ficha" 254192, http://ohuiginn.net/panama/company/id/254192; https://opencorporates.com/companies/pa/254192.
 As of December 2016, the Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) listed a Zurich company called "Conim Investment AG" (CH-020.3.002.334-7) was originally formed in May 1992, and in January 1995 was transferred to Arth, in the Canton of Schwyz, where it is still in existence. (CHE-102.029.498). This is confirmed by the Schwyz Canton registery: https://sz.chregister.ch/cr-portal/auszug/auszug.xhtml?uid=CHE-102.029.498. According to these registries, Conim Investment AG is the successor company to two other Zurich campanies, "Seabeco Kirgizstan AG,"formed in 1992, and "KD Kirgizstan Development AG," its direct successor. (http://zh.powernet.ch/webservices/net/HRG/HRG.asmx/getHRGHTML?chnr=CH-020.3.002.334-7&amt=020&toBeModified=0&validOnly=0&lang=1&sort=).
The Swiss federal company registry also reports the following Swiss companies in which Boris J.Birshtein has been an officer and or director, all of which are now in liquidation: (1) Seabeco Trade and Finance AG (CH-020.3.002.179-4, 4/3/92-11/30/98 ), ; (2) Seabeco SA (CHE-104.863.207,12/16/82-5/9/99) ; (3) Seabeco Metals AG (4/3/92-6/11/96); (4) BNB Trading AG (CH-020.3.002.181-9, 1/10/92-11/19/98 ); and (5) ME Moldova Enterprises AG (CH-020.3.003.104-1, 11/10/92-9/16/94). All of these liquidations were handled by the same trustee, Paul Barth in Arth.
 As of December 2016, active Birshtein companies include "Conim Investment AG" (CH-020.3.002.334-7) in the Swiss Canton of Schwyz and he Seabeco Group, Inc. in Panama.
 For example, the Zurich and Schwyz company registries indicates that the following have been board members of Birshtein companies: (1) Seabeco Trade and Finance AG: Iouri Orlov (citizen of Russia, resident of Moscow), Alexander Griaznov (citizen of Russia, resident of Basserdorf Switzerland), and Igor Filippov (citizen of Russia, resident of Basel). (2) ME Moldova Enterprises: Andrei Keptein (citizen of FSU/ Moldova; Evsei Shnaider (Russian émigré to Canada); (3) Seabeco Kirigizstan/ Conim Investment AG: Sanjarbek Almatov (citizen of Bishkek, FSU/ Kirgizstan), Toursounbek Tchynguychev (citizen of Bishkek, FSU/Kirgizstan), Evsei Shnaider (Russian émigré to Canada); (4) BNB Trading AG: Yuri Spivak (Russian émigré to Canada; (5) Seabeco Metals AG: Alex Shnaider (Russian émigré to Canada).
 Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html See also Misha Glenny, 2009. McMafia: A Journey Through the Global Criminal Underworld. (New York: Vintage Books), 63-65.
 See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.
 Toronto Star, Aug 28, 1993 “Boris knows everyone,”
 See Zurich corporate registry for "Seabeco Metals AG" (CH-020.3.002.181-9), formed 4/3/92 and liquidated 6/11/96.
 See Kaupthing Bank, "Loan Book, September 2008," wikileaks: https://wikileaks.org/wiki/Financial_collapse:_Confidential_exposure_analysis_of_205_companies_each_owing_above_EUR45M_to_Icelandic_bank_Kaupthing,_26_Sep_2008
The Panama Papers database provides an address for “Midland Resources Holding Limited" (https://offshoreleaks.icij.org/nodes/12085103) that exactly matches the company's corporate address in Guernsey, as noted by Bloomberg's corporate data base. Here are the 28 companies that are associated with Midland in database:
Aligory Business Ltd., https://offshoreleaks.icij.org/nodes/10127460;
Anglesey Business Ltd., https://offshoreleaks.icij.org/nodes/10123508;
Blue Industrial Skies Inc., https://offshoreleaks.icij.org/nodes/10130255;
Cl 850 Aviation Holdings Ltd., https://offshoreleaks.icij.org/nodes/10122735;
Cl 850 Aircraft Investments Ltd., https://offshoreleaks.icij.org/nodes/10122774;
Caray Business Inc., https://offshoreleaks.icij.org/nodes/10131819;
Challenger Aircraft Company Limited, https://offshoreleaks.icij.org/nodes/12155627;
Colley International Marketing S.A., https://offshoreleaks.icij.org/nodes/10123599;
East International Realty Ltd., https://offshoreleaks.icij.org/nodes/10122122;
Filbert Pacific Limited, https://offshoreleaks.icij.org/nodes/10199822;
Gorlane Business Inc., https://offshoreleaks.icij.org/nodes/10210594;
Jabar Incorporated, https://offshoreleaks.icij.org/nodes/10110254;
Jervois Holdings Inc.( https://offshoreleaks.icij.org/nodes/12125131) ,
Kerryhill Investments Corp., https://offshoreleaks.icij.org/nodes/10103732;
Leaterby International Investments Corp., https://offshoreleaks.icij.org/nodes/10202817
Maddocks Equities Ltd.,( https://offshoreleaks.icij.org/nodes/12085103,
Maverfin Holding Inc.( https://offshoreleaks.icij.org/nodes/12130837),
Midland Maritime Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),
Midland River-Sea Holding Ltd. (https://offshoreleaks.icij.org/nodes/12136120),
Midland Drybulk Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),
Midland Fundco Ltd. (https://offshoreleaks.icij.org/nodes/12136120),
Norson Investments Corp.( https://offshoreleaks.icij.org/nodes/12130837),
Orlion Business Incorporated, https://offshoreleaks.icij.org/nodes/12155627
Perseus Global Inc., https://offshoreleaks.icij.org/nodes/10111891;
Sellana Investments Global Corp., https://offshoreleaks.icij.org/nodes/12155627
Stogan Assets Incorporated, https://offshoreleaks.icij.org/nodes/10206109
Toomish Asset Ltd., https://offshoreleaks.icij.org/nodes/10128146.
 With the address "11 First Tverskaya-Yamskaya Street; apt. 42; Moscow; Russia." https://offshoreleaks.icij.org/nodes/10123599;; https://offshoreleaks.icij.org/nodes/12078236; https://offshoreleaks.icij.org/nodes/10125740.
 As for the Midland-related offshore vehicles still listed as active, one shareholder in two of them -- -- Stogan Assets Incorporated and Blue Sky Industries Inc. -- happens to have the same name as Russia’s Deputy Culture Minister Gregory Pirumov, reportedly arrested in March 2016 on embezzlement charges. The “Gregory Pirumov” in the Panama Papers (https://offshoreleaks.icij.org/nodes/250440) has a registered address in Moscow (4 Beregkovskaia Quay; 121059), as do the reported agents of these two companies: "Global Secretary Services Ltd. Mal. Tolmachevskiy pereulok 10 Office No.3 Moscow, Russia 119017 Attention: Katya Skupova)." See https://panamadb.org/entity/stogan-assets-incorporated_189367. A "Georgy Pirumov" is also listed separately in the Panama Papers as having been a shareholder in the same two companies (https://offshoreleaks.icij.org/nodes/10206109; https://offshoreleaks.icij.org/nodes/12111401.) For what it is worth, in September 2016, one "Georgy Pirumov" was convicted in Moscow of "illegally taking over a building in Gogolevsky Boulevard," and sentenced to 20 months in a minimum-security correctional facility. See The Investigative Committee of the Russian Federation, Sept 15, 2016, http://en.sledcom.ru/news/item/1067178/. At this point, however, we need to emphasize that there is still plenty that needs to be investigated -- we cannot yet confirm whether "Georgy" and "Gregory" are the same person, whether they are related, how they might be related to Shnaider's Mineral Resources, or whether they are the same people named in the articles just noted above about criminal prosecutions.
 See Schwyz canton corporate registry, https://sz.chregister.ch/cr-portal/suche/suche.xhtml, ""ME Moldova Enterprises AG," CH-130.0.007.159-5.
 Ibid, footnotes 58 and 59.
 A.K.A. "Tochtachunov." See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf., 1.
According to the Panama Papers, as of December 2016, Lytton Ventures Inc., incorporated in 2006, was still an active company but its registration jurisdiction was listed as "unknown." See https://offshoreleaks.icij.org/nodes/207427.
 For Telesh’s company the director’s name is given as “Stanley Williams,” as compared with “Stanley Edward Williams” in Golubchik’s, but they have the same address. See https://offshoreleaks.icij.org/nodes/196083. Telesh’s company, Barlow Investing, was incorporated in 2004. In the PP database, as of December 2016 its status was “Transferred Out,” although its de-registration date and registration jurisdiction are unknown.
 In the Panama Papers, Telesh’s company and Golubchik’s reportedly have the same director, one Stanley Williams. Williams is also reportedly a director of Westix, which shares its address with two other offshore companies that use corporate names that Mogilevich has reportedly used at least twice each in the past. Arbat Capital, registered in 2003, was still active as of December 2016, as was Arigon Overseas, registered in 2007.
 See the diagram below.
These three offshore companies are not in the Panama Papers data base. https://www.ft.com/content/29f06170-12a2-11db-aecf-0000779e2340. Firtash acknowledged these connections to Telesh but still told FT reporters that he didn’t know her. The three companies identified in the report are (1) Highrock Holdings, which Firtash and Telesh each reportedly owned 1/3rd of, and where Firtash served as director beginning in 2001; (2) Agatheas Holdings, where Firtash apparently replaced Telesh as director in 2003; and (3) Elmstad Trading, a Cyprus company owned by Firtash which in 2002 transferred the shares of a Russian company named Rinvey to Telesh and two other people: one of them Firtash’s lawyer and the other the wife of a reputed Mogilevich business partner. See also http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.
 On Mogilevich, see, for example, http://rumafia.com/en/eksklyuziv/kidala-vseya-strany-pervaya-chast.html.
 See also FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization; Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.
David Cay Johnston, interview with the author, November 2016. Wayne Barrett, Trump: The Greatest Show on Earth: The Deals, the Downfall, the Reinvention (Regan Arts, 2016).
Johnston, interview; see also http://russianmafiagangster.blogspot.com/2012/12/the-superpower-of-crime.html.  In another interesting coincidence, the President of YBM Magnex was also reportedly a financial director of Highrock in the late 1990s, before Manafort-client Dmytro Firtash joined the company as a director in 2001. See note 151. http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.
Friday, August 01, 2014
Understanding Argentina's Pseudo-Debt Crisis
For those who are interested in Argentina's recent troubles with the debt vultures, here is Chapter VII from my book The Blood Bankers. (New York: Basic Books, 2005).
This chapter provides the essential historical background that you need to understand where Argentina's current crisis came from, and its "debt problem" is so deep-rooted.
Here are a few of my recent TV and newspaper interviews on the subject: (1), (2), and (3). And here is the 2012 US Court of Appeals decision that upheld US Federal District Court Judge Thomas P. Griesa's 2011 rulings in favor of the vulture funds.
Friday, February 28, 2014
The Real Wolves of Wall Street
Please click on this image to get a real sense
Wednesday, August 04, 2010
TAX OFFSHORE LOOT! A Modest Proposal for Improving Global Tax Justice NOW James S. Henry
(Note: The following article also recently appeared in Forbes.)
How can we get the world's wealthiest scoundrels – arms dealers, dictators, drug barons, tax evaders – to help us pay for the soaring costs of deficits, disaster relief, climate change, and development?
Simple: levy a modest withholding tax on untaxed private offshore loot
Many above-ground economies around the world are struggling, but the global economic underground is booming. By my estimate, there's $15 to $20 trillion of private wealth sitting offshore in bank accounts, brokerage accounts, and hedge fund portfolios, completely untaxed.
Much of this offshore wealth derives from capital flight and the proceeds of past and present tax evasion. Another key source is crime. At least a third comes from developing countries -- more than their outstanding foreign debt. This wealth is incredible concentrated. Nearly half of it is owned by 91,000 people -- 0.001% of the world's population. Ninety percent is owned by the planet's wealthiest 10 million people.
This "global scofflaw tax" could be used to help pay our own staggering unpaid bills for debt service, retirement insurance, and heath care, as well as the developing world's bills for disaster relief and climate change.
By reducing incentives for capital flight and tax evasion, a tax on illicit, anonymous wealth would also help countries to depend less heavily on debt, inflationary finance, and regressive taxes.
Is it feasible? Yes. The majority of these assets are managed by the top 50 global banks. As of September 2009, these banks accounted for $8.1 trillion of all offshore assets under management -- 72% of the offshore industry's total. The top 10 banks manage 40 percent.
In other words, the real "tax haven" problem is not tiny island havens on the periphery of the system. The real problem is the global "pirate banking" industry, with an assist by the best lawyers, accountants, and lobbyists money can buy. At its core are the world's true tax havens: institutions like JPMorganChase, UBS, Credit Suisse, Citigroup, Morgan Stanley, HSBC, Deutsche Bank, Barclay's, Bank of America, BNP Paribas, Pictet & Cie, Goldman Sachs, and ABN Amro. They are all based, not in picturesque principalities or remote tropical paradises, but in New York, London, Amsterdam, Zurich, Geneva, Frankfurt, Hong Kong, and Singapore. They fall firmly under the jurisdiction of First World government agencies.
Capital may be "mobile," but it rarely travels without an escort. For decades these institutions have operated "Capital Flight Air," recruiting clients and teaching them how to hide wealth offshore, launder it, and access it remotely.
Now they are going to help us tax it.
These highly-visible institutions should be required to withhold a modest 0.5% tax, prorated each quarter, on the value of their clients' assets – which they already track on a daily basis. The proceeds could be turned over to First World tax authorities, with a disproportionate share dedicated to development aid.
Only anonymous wealth should be taxed. If the beneficial owners can show they're paying taxes on their offshore assets back home, they can claim rebates. Most will just pay up.
But that's a long war. The haven system has taken decades to build, and it will probably take decades to dismantle. Right now there's something simple that OECD countries can do to collect badly-needed revenue from the world's wealthiest crooks – no questions asked.
Monday, November 02, 2009
"WHO KNEW?": WILMINGTON NAMED WORLD'S WORST HAVEN
Wild Protests in Geneva, Vaduz, and Guernsey James S. Henry
"WHO KNEW?": WILMINGTON NAMED WORLD'S WORST HAVEN
(Geneva) Thousands of angry private bankers from Switzerland, Liechtenstein, and the Channel Islands have taken to the streets to denounce Delaware's official designation as the world's worst "financial secrecy center" by the heretofore-renowned international critic of tax havens, TJN International.
"Surely this is one contest that we deserved to win," said a leading Geneva private banker. "We feel like Chicago after the Olympics selection."
A Guernsey banker echoed his sentiments. "I smell a rat. Just because the US VP is from Delaware, the fix must have been in. Our assets have been flowing out since 2005. Now we know where they've gone."
"Wilmington. Who'd' a thunk it?"
For the past few years jurisdictions like Switzerland, Liechtenstein, and the Channel Islands have indeed been competing vigorously for the prize of the "world's worst haven."
According to Dubios Pictet von Hentsch, another long-time Swiss banker, "I don't know what they want from us. We have tried everything -- including having many senior bankers from our largest banks get indicted and convicted for helping thousands of wealthy foreigners evade taxes!
"This was supposed to be OUR YEAR!"
"We've also been laundering all those smarmy Euros for decades! This is the thanks we get? Meh! "
"What's happened to "pay-for-performance" in financial services?"
A Vaduz-based private banker from BIL, the legendary Liechtenstein private money-laundering bank owned by the Crown Prince's family, also expressed shock and dismay.
"We're just a tiny developing country (even if we do happen to have the world's highest per capita income.) How's our Crown Prince supposed to feel after this? After all our efforts to help wealthy foreigners all over the planet evade taxes over the last decade, we lose to...Wilmington? Meh!"
"All the really dirty money has been flowing to an even tinier, more obscure place than we are: this place called Wilmington. And we didn't even know about it. We are obviously a little embarrassed."
A Singapore banker commented, "Wilmington? Uh, where is that, exactly? Surely If its number one, it must be packed with non-doms, wealthy sheiks, fancy hotels and shops, and of course lots and lots of ultra-ancient, ultra-discrete private banks, law firms, and accounting firms."
"How is the skiing and the diving, by the way? Not good? Meh!"
Other sources confirm that until it was disclosed by TJN, Wilmington's role in global financial chicanery was one of the world's best kept secrets.
"Apparently all the truly sophisticated dirty money goes there," said a Panama lawyer.
"It's a facade-- purposefully understated, if you will."
"I tell you, you Americans are something else. For years you have been pointing the fingers at the rest of us, while secretly preparing this bid.
Now it turns out to be you who are the real winners. Meh!"
THE WAY THE WORLD WORKS
The Luxembourg private banker agreed to expand a bit on why he thinks the first prize for Wilmington is just so unfair.
"Ok, sure, yeah, everybody has known for some time that First World countries like the US, the UK, Switzerland, Austria, the Netherlands, and Luxembourg are the world's largest ultimate havens -- at least since that book Banqueros Y Lavadolares (1996) laid out the whole story. Foreign money has been flowing out of higher-tax places and developing countries for decades.
"Part of it is just natural risk-diversification. For example, what moron wants to keep all his hard-earned shekels in a place like Mexico? The place is a cesspool of corruption, on the front lines of the drug wars, with lots of kidnappings, and the courts for sale to the highest bidder. You wanna keep all your money there or pay taxes to a government like that? Knock yourself out."
"But it isn't just a question of diversifying away from country risk, because that doesn't explain why all the money gets invested in FIRST WORLD banks.
We First World havens also worked really hard to become the world's top laundromats, so the money would come here."
THE BEST TAX CODE THAT MONEY CAN BUY.......
"First of all, we got the tax laws right, hiring the best lawyers on the planet to design them to attract capital flight and tax evasion, as well as any criminal proceeds that happen to come along for the ride.
None of these rich countries wealthy foreign investors on, say, the interest income they get from, say, bank deposits at UBS or HSBC or Citigroup, or our 200 offshore banks in Luxembourg. And sure we'll respond if the US Department of Justice comes a callin'."
"But we sure as hell don't report this income to, say, the Mexican IRS.
"So all the wealthy foreigners from developing countries investing in First World banks?"
"There are no big customers secrets! The banks know who they are!
"We have to. They are all our private banking clients!"
"So Angel Gurria can keep his lousy foreign accounts in New York and Geneva, we ain't gonna tell nobody."
You see -- even if the US IRS knew the "beneficial owners" of every offshore account in Luxembourg, and New York, and London, and Wilmington, the income these owners earn isn't taxable here. And under the rules we've set, no First World government is going to turn over this information to some no-count Third World country Hey, there's big bucks at stake! "
"It isn't about "secrecy," my friend. It's about tax laws and the people who write them. Or at least that's what we always thought -- until now!"
....WRITTEN BY PRIVATE BANKERS
Number two, we build a vast global pirate banking industry. We put together top fifty most powerful First World Banks, law firms, and accounting firms in the world, and unleashed them on the developing world, where most of this
"Who do you think made all these tax and banking laws, Elwin? Did they just sorta pop up?"
"Naw, this haven stuff is a big business.
"So our lobbyists went to work and designed all these tax laws, plus the banking laws that accomodated them. If we don't get it done with lobbyists, we get a Treasury Secretary or two -- like Robert Rubin, who came from Goldman Sachs and went back to work at Citigroup, or former US Senator Phil Gramm, who was Chairman of the Senate Banking Committee for five years before he left the Senate to become Vice Chairman of UBS.
"Understand one thing: the City of London, Geneva, Zurich, and New York City would barely exist without this offshore banking/ investments businesses. Naturally Singapore and Hong Kong and Dubai now want a piece of action."
THE IRRELEVANCE OF "SECRECY" TO TAX JUSTICE
"You see, my friend -- that's why we're so troubled by Wilmington's victory here.
We don't understand how all the pure "corporate secrecy" in the world has anything necessarily at all to do with being an outstanding tax haven -- or the flip side, with taking money out of poor countries and keeping it outside, tax free. Or with "tax justice."
"We always thought: we take care of the tax laws and have an aggressive private banking industry, then we will win."
On the other hand, you could have all the most perfect information on beneficial owners in the world, and if you can't get First World governments to either (a) tax foreigners on their investments or (b) share the information with developing countries, it won't matter. "
REDOMICILIATION - WAH?
"But now, according to this index, it isn't enough for us havens not to tax foreigners. It isn't enough for us to have the world's most aggressive private bankers."
"Now we gotta get down and compete with Wilmington Delaware on all the 14 technical/legal factors in this stupid index! You look closely at this fancy index, which took two years to complete.
"You find, for example, that Luxembourg lost first place to Delaware just because Delaware corporate law allows redomiciliation and ours doesn't?
"What private banking client ever heard of redomiciliation in Delaware? Of redomiciliation anywhere? Tax rates? Sure. Information exchange? Sure. Great private banking services? Absolutely. Redomiciliation??
Are you shitting me?"
"Any corporate lawyer worth his salt knows you can accomplish the same thing in lots of other ways."But now that CNN is talking about it, you're gonna have every two bit crook in the world running around saying "Redom....redom....Nah nah nah-nah nah...You ain't got it, we're heading to Wilmington!"
Who are they working for, the Delaware Secretary of State?"
A NEW DAY DAWNS IN WILMINGTON
Meanwhile, in Wilmington, the town's 72,000 residents woke up this morning to discover that the world had literally shifted under their feet.
"Our cover has finally been blown," said one local banker. "I'm not sure this is a prize we wanted to win. Certainly it comes as a huge surprise to most of our community -- except for the tiny, carefully selected group that have been in on the secret. "
"The VP was not one of them, so we think he's in the clear. Hopefully."
"TJN really knows their stuff. I think they even sent a small squad of undercover investigators here last summer -- a group of Brits, mainly.
"We immediately suspected them of being up to something, but we didn't know until now just how much sleuthing they were doing. We thought they were here for the nightlife, the boys and girls. It never pays to try and fool those folks."
"After all, after having had a hand in the design of offshore havens in Anguilla, Antigua, Aruba, Bahamas, Barbados, Barbuda, Belize, Bermuda, BVI, the Cayman Islands, the Cook Islands, Cyprus, Gilbraltar, Guernsey, Hong Kong, the Isle of Man, Malaysia, Mauritius, Nauru, Niue, St. Kitts, St. Lucia, St. Vincent, Singapore, the Turks and Caicos, and the UAE, they really know a good haven when they see one."
"Naturally our heart goes out to all the other secretive financial centers in the world. It's never fun to go to bed one night thinking you were number one, and discover that some tiny town that no one has heard of has beaten you to a pulp."
"The downside? Well, it'll probably be much harder to be a secretive financial center, obviously. And now we'll have all those smarmy Euros, plus a lot of Florida cosmetic surgeons coming here with their bags of cash. Meh!"
"Personally I'm already thinking about moving to Wyoming."
(c) JSH 2009
Monday, October 26, 2009
"WHAT MIDDLE CLASS"? Global Wealth Inequality (2007-08 Average) James S. Henry and Brent Blackwelder (Click chart)
Thursday, July 24, 2008
"ATTACK OF THE GLOBAL PIRATE BANKERS!" The Great White Sharks at UBS and LGT James S. Henry
(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)
Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.
Thursday's standing-room-only hearing on tax haven banks and tax compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber
The theatrics included videotaped testimony by Heinrich Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.
There were also several other potential witnesses whose importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.
His lawyer, the renowned Washington fixer Robert S. Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)
Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.
LGT Group declined to follow UBS's contrite example and also failed to appear.
Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.")
While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.
While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.
This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.
UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.
This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.
To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.
Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.
In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.
Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.
With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.
As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.
The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.
LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.
As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.
In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.
So what do we learn from all this? Many will consider these revelations shocking. After all, just as the US government is facing a $500 billion deficit, millions of Americans are fighting to save their homes, cars, and college educations from the consequences of predatory lending, and inequalities of wealth and income are greater than at any time since the late 1920s, we learn that for decades, the world's largest banks have been helping wealthy Americans steal billions in tax revenues from the rest of us. At the very least, this suggests that it may be time to put the issue of big-ticket tax evasion, offshore and on, back on the front burner. But we also need historical perspective. Those who have studied this subject for decades also realize that achieving reform in this arena is not a matter of a few criminal prosecutions. It is a continuous game, requiring persistence and constant adaptations to the opponents, because we are playing against some of the world's most powerful vested interests, with huge fortunes at stake.
After all, offshore tax evasion by wealthy Americans is hardly new. For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr. wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax revenues had failed to meet his expectations despite a sharp rise in tax rates. Some rich folks didn't mind paying up, given the hard times so many Americans were facing during the Depression. As Edward Filene, the Boston department store magnate, famously remarked, "Why shouldn't the American people take half their money from me? I took all of it from them." However, according to Morgenthau, many other rich people busied themselves inventing new ways to dodge taxes, notably by secreting funds offshore in brand new havens like the Bahamas, Panama, and.... Newfoundland!
Scroll forward to the Castle Bank and Trust case of the early 1970s, when another IRS investigation of offshore banking disclosed a list of several hundred wealthy Americans who'd set up trusts in the Bahamas and Cayman Islands. Just as the investigation was picking up steam and the names were about to be publicized, a new IRS Commissioner came in and shut it down--officially because the otherwise-lawless Nixon Administration suddenly got concerned about due process. Few names on the list--a copy of which appears in my forthcoming book, Pirate Bankers, were ever investigated.
Scroll forward now to the late 1990s, when the Organization for Economic Cooperation and Development (OECD), the European Union and the US Treasury once again became excited about offshore tax havens. As the EU launched its "savings tax directive" on cross-border interest, a Cayman banker surfaced to report that more than 95 percent of his nearly 2,000 clients were Americans, and the IRS discovered 1 million to 2 million Americans using credit cards from offshore banks. Meanwhile, the OECD's favorite tool became the "blacklist." A list of thirty-five to forty "havens" was evaluated on the basis of abstract criteria like the quality of anti-money laundering programs and the willingness to negotiate information sharing agreements.
Unfortunately this "name and shame" approach didn't have much success. First, the OECD had no success against jurisdictions like Monaco, Andorra, and Liechtenstein that are basically shameless. Second, the OECD's definition of "haven" was highly selective. It omitted many emerging havens like Dubai, the Malaysian island of Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently increased. As we'll see, it also ignored the role of major onshore havens like London and New York, which have been very attractive to the world's non-resident rich, especially from the developing world.
Third, blacklisting havens focused on the wrong dimension. As Senator Levin's hearing has underscored, the real problem is a global pirate banking industry that cuts across individual havens, and includes many of our largest, most influential commercial and investment banks, hedge funds, law firms, and accounting firms. From their standpoint, it doesn't much matter whether a particular haven survives, so long as others turn up to take their place in providing anonymity, security, and low-tax returns. Up to now, despite blacklisting, the supply of new tax haven vehicles has been very elastic.
On the other hand, as the UBS and LGT cases show, the dominant players in global private banking are relatively stable institutions--which makes sense, given their clients' need for stable sanctuaries. This suggests that it makes more sense to focus on regulating institutions than regulating or blacklisting physical places.
Until the UBS case, this seemed to be much more difficult than, say, beating up on some tiny and distant sultry island for shady people. Even now, after the Birkenfeld case supplied the first private banker prosecution, we have yet to see the first criminal prosecution of a top-tier private bank--apart from BCCI in the early 1990s, which had already failed and was hardly top-tier.
This is not because of a shortage of despicable behavior. For example, UBS, like most of its competitors in global private banking, has a long history of engaging in perfidious behavior, apologizing for it, and then turning back to the future. This includes UBS's involvement in South Africa's apartheid debt and the accounts scandals of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the 1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003 Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers scandal, for which it was fined $100 million by the Federal Reserve; the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld matter. Furthermore, as the Committee report noted, UBS has a history of violating even its own policies. From this angle, unapologetic LGT is at least not hypocritical.
It is also well to remember that UBS and LGT are hardly the only global private banks involved in recruiting wealthy clients to move money offshore. The Committee report indicates a long list of other banks that also provided offshore services to American clients involved in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays (Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of Montreal. In addition, there are dozens of other non-US and US banks that are also active in the offshore US private banking market. This suggests the shortcomings of a case-by-case prosecutorial approach, and the value of designing regulations to improve behavior and provide ongoing feedback about taxpayer compliance.
In principle, one can imagine many such improvements in regulation, assuming a compliant Congress. For example, as proposed in the "Stop Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by Senators Levin, Coleman, and Obama, there would be a rebuttable presumption that offshore shell corporations and trusts are owned by those who establish them. This would eliminate the "Q.I. rule" exception, which allowed hundreds of UBS clients to avoid reporting to the IRS simply by moving their assets to into shell companies.
We could also institute many other changes, including an increase in the painfully short, three-year statute of limitations for investigating and proposing changes in offshore tax liabilities; tightening up on anti-money laundering legislation; levying withholding taxes against hedge funds; raising the penalties for abusive tax shelters, and requiring banks that open offshore entities for US clients to report them to the US Treasury.
However, most of these proposed rule changes have the flavor of stopgaps, technical gimmicks that are still far too focused on individual taxpayers rather than the private banking industry--the advisers, enablers, and systems operators. If we're right that this industry had become an unregulated, untaxed black hole--a multi-billion-dollar global "bad"--we need to focus on two key tasks.
The first is to create appropriate incentives for the global private banking industry to do the right thing. We need to find ways to tax the behavior of tax-evading institutions, their CEOs, senior managers, and even shareholders, to punish them for more misbehavior, and perhaps also reward them for bringing the money home with a brief one-time tax amnesty. In the short run, there have to be more Bradley Birkenfelds, more exposés, and more penalties for banks and bankers alike. Mere apologies, however heartfelt, should not be enough.
The second challenge is to organize a global alliance around this issue. This is more difficult, although steps are already being taken. Global organizations like Tax Justice International, Oxfam GB, Friends of the Earth, Global Witness, and Christian Aid are converging on a new global campaign around the issue of havens and offshore tax evasion. They've been enlisting support for this effort from countries like Norway, Chile, Brazil, Spain, and France, organizations like the UNDP, the World Bank, and even the International Monetary Fund.
This is very exciting, but the organizers face one critical problem--the fact there are serious conflicts of interest among developed and developing countries. The fact is that the United States, the UK and other developed countries not only lose tax revenue to haven banking; they also profit from it, because their own banks are so deeply engaged in it, especially when it involves developing countries.
Back in April 1986, this author broke the story that Citibank was actually taking far more capital out of Latin America and other developing countries than it was lending to them, despite its reputation as the largest Third-World lender. Indeed, the business of helping Third-World elites decapitalize their own countries had become so large and lucrative that Citi's private banking group was the bank's single most profitable division.
To achieve that feat, Citigroup resorted to skullduggery and the flouting of local laws all over the planet. This included repeatedly sending teams of private bankers undercover to countries like Brazil, Argentina, and Venezuela; helping to set up thousands of shell companies and bank accounts in offshore havens and secretly transferring funds to them; teaching its clients money-laundering tricks like mis-invoicing and back-to-back loans; designing ways to communicate with clients that kept their financial secrets safe; and overall, concealing vast sums of flight capital from Third World tax authorities (and their competitors), while lobbying Congress to insure that any foreign capital that arrived in the United States enjoyed near-zero taxes and near-Swiss secrecy. For a time the resulting tax breaks and lax banking rules that applied to "nonresident aliens" from other countries made the United States, in effect, one of the world's largest tax havens.
In short, from the 1970s to the 1990s, banks like Citigroup, BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas and Barclays, etc.) were behaving throughout the Third World just as badly as UBS has recently been behaving here. And their very success laid the foundations for the global, private-haven banking industry with which the IRS is now struggling.
At the time, it seemed that their behavior was hurtful mainly to the developing world, which wasn't strong enough to hold Senate hearings and put Citibankers in jail. But lately it has become clear that the system has grown large enough to consume its creators.
In the last thirty years, fueled by the globalization of financial services, lousy lending, capital flight, and mind-boggling corruption, a relatively small number of major banks, law firms, accounting firms, asset managers, insurance companies, and hedge funds have come to launder and conceal at least $10 trillion to $15 trillion of private untaxed anonymous cross-border wealth.
Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations, and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them--or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it.
Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.
Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks? Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?
Well, in these straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar, private debt at record levels, and rising unemployment, just imagine that every extra dollar for that yacht tender is coming right out of the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay. Meanwhile, $1 spent on a yacht tender goes right to the bottom, while $1 spent on food, salaries, or even roads has a much greater multipler, and benefits a more deserving class.
Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.
About James S. Henry
James S. Henry is a New York-based investigative journalist who has written widely on the problems of tax havens, debt, and development. His most recent book, The Blood Bankers (Basic Books, 2005), examined where the money went that was loaned to eight developing nations. His forthcoming book, Pirate Bankers (2009), examines the history and structure of the global private banking industry.
Tuesday, July 01, 2008
THE EDUCATION OF DR. PHIL GRAMM UBS Role Raises Basic Questions About McCain's Key Economic Adviser James S. Henry
-- Peter Wuffli, x UBS CEO
John McCain has long since admitted that he has a great deal to learn when it comes to economics. But it turns out that his own chief economic advisor, former US Senator Dr. Phil Gramm, has also needed rather extensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven, loophole-ridden) anti-money laundering laws.
Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become one of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.
In the next two decades, Dr. Gramm was perhaps the Senate's leading proponent of financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices, in addition to leading the fight against Hillary Clinton's health insurance reforms. As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s.
Phil was also a determined opponent of tougher IRS tax enforcement, and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. Of course this made sound economic sense. After all, Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.
In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Representative of the Bank of Antigua."
This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate. Naturally enough, he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention embittered family members, ex-lovers and business partners, and each other.
Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank, and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.
Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS from 2004 until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.
In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be ill-timed, for several reasons.
First, this was hardly the moment for even more financial deregulation than the US had already digested in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.
Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any bank. In July 2007, UBS's McKinsey-trained CEO, Peter Wuffli, was forced to resign, and in April 2008 its $24 million -per-year Chairman, Marcel Ospel, was given the toe. Since then its stock price has plummeted more than 70 percent, to its lowest level since 2002.
Meanwhile, the bank also revealed itself to be curiously insensitive to US financial regulations. For example, in May 2004, it was fined $100 million by the US Federal Reserve for violating an embargo on funds transfers to countries like Iran and Cuba.
Finally, it now turns out that Dr.Gramm's colleagues at the bank have also been up to their eyeballs in yet another dubious business: helping up to 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.
Late last month, Bradley Birkenfield, a senior private banker who'd worked with UBS from 2001 until 2006 out of Switzerland, and then continued to service their clients out of Miami, pleaded guilty to helping dozens of his wealthy American clients launder their money. His name had originally surfaced when a Southern California billionaire property developer, Igor M. Olenicoff, had been discovered by the IRS to be paying much less income tax than his status on the Forbes 400 list status warranted.
With the help of Birkenfield and other UBS private bankers, Olenicoff, who'd first established offshore accounts as early as 1992, succeeded in parking at least several hundred million of unreported assets offshore.(Download bankers-indicment-in-florida.pdf)
Ultimately Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history. He also agreed to repatriate $346 million that he had parked in Switzerland and Liechtentstein.
In theory he also faced up to 3 years of jail time, but in practice -- following the standard US practice of going easy on big-ticket tax evaders with no priors -- his maxmum exposure was just six months under standard US sentencing guidelines. Indeed, ultimately Olenicoff only got two years probation and 3 weeks of "community service."
One also gets the sense that this case was a bit like the cat pulling on the sweater yarn. According to Forbes, Olenicoff reported that many of his other foreign accounts were controlled by Sovereign Bancorp Ltd., a Bahamian company that he claimed had been set by former Russian Premier Boris Yeltsin.
In any case, in the process of making up for lost time with the IRS, Olenicoff also gave up his two UBS private bankers, Birkenfield, and According to Birkenfield, he was just one of more than 50 UBS private bankers who visited the US out of Switzerland each quarter. This case, the first US prosecution of a foreign private banker ever, signals that even the Bush Administration has become fed up with the estimated $100 billion per year in lost tax revenues that such practices are costing, and has decided to make an example of Dr. Gramm's employers.
UBS' sin was that it took "you be us" a step too far. Like other major global banks, UBS AG had signed a "qualified intermediary" agreement with the US Treasury in 200(x), giving its corporate word that it would either insure that its clients were not US citizens, or withhold appropriate taxes. But when UBS AG's American clients refused to go along with such arrangements, UBS just caved in and lied to the US Government.
As a result, despite his cooperation, Birkenfield, the former UBS private banker, is likely get serious jail time this August. Meanwhile, the DOJ has just issued a "John Doe" summons to UBS AG, requiring it to turn over the identify of its entire list of wealthy American clients. The head of UBS AG's Global Private Banking business unit has been arrested and detained in the US on "material witness" charges, pending resolution of this dispute. The private banker's wealthy clients are experiencing the tender mercies of the IRS's tax fraud department as we speak -- not only from this US case, but also from the recent scandal involving Liechtenstein's largest bank, where many UBS clients were also channeled. UBS's shareholders all over the globe must be quaking in their boots, fearing the bank could be subject to massive fines or even a corporate indictment that would prevent it from doing business in the US ever again.
QUESTIONS FOR DR. PHIL
The questions for Dr. Gramm arising out of these scandals are many.
- First, was Dr. Gramm completely unaware that UBS AG had organized this massive illicit global campaign to elicit capital flight from the US and other "honest-tax" jurisdictions, conceal it in low-tax havens like Liechtenstein, and completely shelter it from the taxes that ordinary taxpayers have little choice but to pay?
- Second, are any of these 20,000 wealthy tax cheats from Texas? Does Dr. Phil know any of them personally?
- Third, what kind of changes, if any, in laws pertaining to "qualified
intermediaries," offshore havens, private banking, and international
tax havens does Dr. Gramm believe are necessary? Would he, for example,
support the reform bill on foreign havens and "qualified intermediary" rules that Senators Levin and Obama have
co-authored? Precisely when will John McCain sign up to endorse that legislation?
- Fourth, what else has Dr. Phil learned from all these cases? Has he
changed any of his views on the morality of tax dodging, money laundering, and predatory lending? Is all this just a matter of "sauve qui peut" -- of whatever we can all get away with, especially the rich? Does John McCain agree with him on such matters? What then remains, alas, of "patriotism" and "national sacrifice," two of McCain's favorite leitmotifs?
- Finally, given that John McCain really does need sound advice on economic issues like the mortgage crisis, taxation, and money laundering from a "qualified intermediary" of his own, does all this experience really qualify Dr. Phil Gramm to fill the bill?
(c) SubmergingMarkets 2008
Saturday, August 19, 2006
BEYOND DEBT RELIEF The Next Stage In the Fight for Global Social Justice James S. Henry
“Third World debt relief” has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.
At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.
There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good.
This is partly because debt relief tends to reinforce questionable policies and bad habits that get developing countries into hock in the first place. It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental.
Finally, debt relief is also often a very poor substitute for other forms of aid and development finance.
Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.
This is not to suggest that the debt relief campaign has been utterly pointless.
It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It has occasionally reminded us of the persistent problems of global poverty and inequality.
From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."
Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.
“Fact Check, Please”
Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.
It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983, and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996.
On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.
Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).
Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score countries that are eligible.
Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries, the debt burden – as measured by the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.”
By our estimates, as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World banks, bondholders, and multilateral institutions.
That includes $41 billion a year that was paid by the world’s 60 poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.
As discussed below, most heavy debtors also have very little to show for all this debt. So these payments are, in effect, a “shark fee” paid to First World creditors for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.
Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion.
China and India alone now account for about $.5 trillion of this developing country “PV debt.” Both countries were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge. They can easily afford it -- thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.
Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies.
These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.
After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year, more than they spend on education or health, and far more than they receive in foreign aid.
III. Where’s the “Relief”?
These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club, not to mention debt relief activists, been up to all these years? How much debt relief have they actually secured, who received it, and how helpful has it been?
To begin with, it is not easy to measure “debt relief.” The definitions of debt relief employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies. This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.
As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis.
Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.
From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.
The relief ratio for the world’s 60 poorest countries has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received about $161 billion of debt relief – more than half of all the debt relief to date. This is now saving the recipient countries about $15.3 billion per year of debt service.
This is certainly nothing to sneeze at. But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.
It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.
Debt Relief Sources – Low-Income Countries
Our analysis shows that 30 percent of this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was owed by Afghanistan.
Finally, another $65 billion of debt relief for low-income countries was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD. These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects. They are now eager to have the EGCs forgive still more loans, at taxpayer expense, in order to clear the way for another round of project finance.
On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs, Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief, mostly by way of the HIPC program.
In the 1970s and early 1980s, of course, these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible.
Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs. Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.
For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s, these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates. For low-income countries, private bankers were more often called upon to recycle the proceeds of loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs.
Overall, therefore, from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.
We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.
B. Middle-Income Relief
So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding. As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and the Brady Plan.
This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them.
That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned. It was viewed primarily as a ‘crisis’ for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines – except for the countries involved.
Debt Relief Sources – Middle-Income Countries
Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.
The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.) On its own, the Baker Plan actually increased middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.
From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest, and no net impact on “PV debt” levels.
In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.
So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans, often at very high interest rates. Given their reluctance to raise taxes, especially on capital, most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion. In effect, the bailouts actually ended up increasing overall country debt levels, just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.
Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income. Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries. This is another strategic choice that debt relievers may want to reconsider.
The Political Economy of “Debt Relief”
So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have been more effective?
A. The Roots of the “Debt” Crisis
To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.” This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed more than $6.8 trillion of foreign loans, aid, and investment, much more foreign capital than they had ever before received.
A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies and the First World’s most important suppliers, customers, and potential competitors.
Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries. In general, compared with the winners, they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF). For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many, disastrous.
In effect, these countries have conducted a very risky policy experiment for several decades. By now the results are clear. Across country income levels, these countries have paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.
Lousy Regimes and Unproductive Debts
Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004 either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright.
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries. As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand, because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief.
Low-Income Heavy Borrowers
In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s, the real value of these countries’ debts increased by 70 percent in just six years. By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent. Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of this group’s debt increase from 1980 to 1986.
All these top low-income borrowers were not only desperately poor to begin with, but they were also either “weak open states” run by kleptocratic dictators, or were caught up in bloody civil wars – in most cases, both at once. Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.
Extending this analysis to the key middle-income debtors noted above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.
All this suggests that the heaviest debtors got into troubles for reasons that only were only superficially related to the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.” Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement, their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.
From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms, simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!
The Debt/Flight Cycle
Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues, draining funds that were badly needed for health, education, and other forms of public investment, and helping to produce crisis after financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors -- to generate enough foreign exchange to service the loans.
Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.
Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,” and the absence of global income tax enforcement.
But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets.
We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.”
Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place. From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments. It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending.
All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.
Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002, €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.
An even larger amount of capital flight was accounted by private “elite” funds that were spirited to offshore banking havens – often, it turns out, with the clandestine assistance of the very same First World banks, law firms, and accounting firms.
The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000), each year, on average, from 1977 to 2003.
Furthermore, a great deal of this flight capital was permitted to accumulate offshore in tax-free investments, especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt.
Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing -- the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding foreign debts.
For so-called “debtor” countries, therefore, the real problem was never simply a “debt” problem; it was an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot. All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.
Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.
Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries. In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital -- from whatever source derived -- on the other.
Human Capital Flight
This underground river of financial flight was also accompanied by an increased outflow of “human capital” as well, as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006, is $2.5 to $3.0 trillion.
This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.
Summary – Roots of the Crisis
Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating. Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005. While growth has revived since then, especially among commodity exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility.
In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality, environmental degradation, insecurity, crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.
Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico, the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.
All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure, there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by. (continued on page 27)
B. “Can’t Get No Relief!”
Whatever one thinks of neoliberal policies, therefore, it is very hard to make this track record look like an achievement. This perspective should help us to view “debt relief” in a different light.
Given this history, we might well have expected that at least by now, First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial responsibility, pitched in, and offered to share a large portion of the bill.
Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout.
Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service. More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own, Third World debtors as a whole have never been able to marshal the collective will needed to take this step.
Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.
Several key factors are at work here:
• Sticks. Most developing countries believe they are too dependent on the trade finance and aid to risk outright defiance of international creditors.
• Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments. Beyond that, there is a whole range of other incentives, including offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.
• The Banking Cartel. Compared with the debtor countries, the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators have come and gone. Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.”
• Declining Political Competition. After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s. Meanwhile, First World banks completed write-downs of Third World loans, and the BWIs and other official institutions displaced them as the principle source of new low-income loans. With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.
With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.
The Best-Laid Plans…
One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.
Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks, debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.
These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was one of cautious incrementalism -- a series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the saving grace that at least no powerful financial interests would be offended.
A. The Baker Plan
The majority of today’s Third World population was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working. Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.
The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.
By 1989, the Baker had produced a grand total of $32 billion of new loans, mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt, it actually constituted negative debt relief.
Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited, and partly because at that point, the notion of writing down “development loans” was still anathema to the World Bank and the IMF.
B. “Market-Based” Debt Relief
While observers were waiting for the Baker Plan to work in the late 1980s, private banks were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however.
C. The Brady Plan
When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent, and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming.
Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries.
By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan. With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies. To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.
Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment. However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.
Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels.
Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.
D. “Traditional” Bilateral Relief – Low Income Countries
As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding.
These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent a decade earlier. And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level. Finally, from 1985 on, private bank lending to low-countries had only been exceeded by lending by development banks and export credit agencies.
One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce their “debt overhang” – the present value of their expected future debt service payments. This was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again, that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.
Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade, it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets. By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility -- had produced another $95 billion of debt relief.
In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.
Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels, relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent, or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen. On the other hand, it would have also omitted future HIPCs like Malawi, Guyana, and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.
For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered. Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief. When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt -- and just 23 percent of all low-income country residents.
This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions. It is always very concerned about securing its own cash flow and debt rating.
In principle, contributions from the BWI’s First World members could always make up any shortfalls. In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.
Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value. Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs. Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp.
So debt relief turned out to be something that the BWIs had to fund on a “pay as you go” basis, through bond sales and periodic contributions from its First World members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.
As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded.
On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana, a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.
Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club. (continued below)
All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.
Overall, the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.
The Long March
Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.
Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose a long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.
This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports.
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.
However, from the standpoint of delivering debt relief in a timely fashion, the BWI’s strictures clearly went beyond the pal. Many BWI technocrats adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all, the BWIs are substantial creditors. They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive neutral role that, say, a “trustee in bankruptcy” would typically play in bankruptcy proceedings.
Combined with country backwardness, this creditor-cum-neoliberal-reformer mentality had predictable results. Indeed, if HIPC’s true goal was to avoid giving meaningful debt relief, it almost succeeded! By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion of debt relief to these six countries. Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years, and Guyana will still be collecting $1 million per year of debt relief in 2050!
Would that First World creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been about administering debt relief!
In June 1999, following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,” supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.” Of the other original nine, just one was both ready to qualify and interested in participating.
To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline.
All told, compared with the original target group, at the end, HIPC was down to providing debt relief to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.
The HIPC Sweepstakes
Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II, a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99. This sum was divided among for all 27 countries that had reached their completion or decision points.
Some countries did much better than others. For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs – compared with the “HIPC 38’s” average of just $75 per capita. Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens, from all debt relief programs to date.
Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen.
In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground, which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.
In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.
Compared with our original list of “war-torn debt-heavy dictatorships,” there is a huge overlap: The top ten low-income borrowers in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006. On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms.
This per country/ per capita debt relief analysis, presented here for the first time, underscores several of the most serious problems with using debt relief as a substitute for development aid.
Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions) will be applied to worthy causes. (“The Control Problem.”)
Even apart from that, as noted in the accompanying tables, the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)
The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending, and so forth. Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.
But there is nothing that HIPC could do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words, inevitably means that some of the worst-governed, most profligate countries in the world may reap the greatest rewards.
Overall HIPC Results
As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.
However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed, to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!
Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it. So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line.
What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60 billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding.
Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached the “decision point.” The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming. Indeed, the timing and levels of relief are still highly uncertain for half of the 11 “decision point” countries.
Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.
The High Costs of HIPC Relief
Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.
Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings. On closer inspection, this debt relief plan was even less impressive and generous than HIPC.
By 2004, many debtor countries and First World NGOs had finally had it with HIPC. However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.
With HIPC already set to expire, and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts. The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director.
These connections no doubt smoothed the reception for Brown’s proposals in the NGO world, but they ultimately failed to achieve very much incremental debt relief for poor countries.
To begin with, the actual cash value of the debt relief provided by MDRI is far less than the "$40 to $50 billion" that was widely touted in the press.
The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible for cancellation adds up to about $38.2 billion.
But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop. Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.
This may appear to be a modest sum to First World residents who are used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries. But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.
Still, the G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.
It also compares rather unfavorably with the $1.3 billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.
Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan -- may never meet these qualifications.
Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.
Finally, even assuming - optimistically - that MDRI’s 42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.
In fact, from the standpoint of World Bank and African Development Bank bondholders, they may well prefer to have their member countries to take them out of these "dog countries."
Indeed, that might even be a very profitable deal for the World Bank, since its cost of funds is not the 3-3.5 percent paid – if and when they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion to $15 billion of cold hard cash may look like a pretty good deal for the Bank. Certainly it is better than having to play bill collector to all those nasty hell-holes.
And I bet you thought “debt relief” was all about generosity!
VI. Summary – A Modest Proposal
So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?
1. Beyond the BWIs.
As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts.
If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt deserve a chance to wipe the slate clean, once and for all, then our conventional approach to debt relief, as administered by the IMF, World Bank, the US Treasury, and the Paris Club, is a failure. Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of delays, administration, and excessive conditionality.
Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order to avoid having to continue paying for it for the rest of their lives.
In particular, the huge World Bank and IMF bureaucracies have proved to be far better at rationing debt relief than at making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.
Indeed, Russia alone – which is itself still heavily-indebted -- has been far more generous and expeditious with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief.
2. Beyond Narrow Debt Relief.
It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.
What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.
This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.
But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.
To make a real difference, the debt relief movement needs to get much tougher on two closely-related but necessarily more contentious aspects of the “debt” problem:
(1) Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding.
(2) The huge stock of anonymous, untaxed Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions, privatization rip-offs, and other financial chicanery.
Most of this wealth – estimated at $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for the global private banking industry.
Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it. Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.
If the debt relief movement had the will to tackle such problems, there is much that could be done.
For example, we could imagine:
(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;
(2) Revitalization of the “odious debt” doctrine, which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.
(3) Promotion of international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!
(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and tax evasion.
(5) The enactment of a uniform, minimum, multilateral withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief.
Many other ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.
3. The Limits of Debt Relief
Earlier in this essay, we expressed serious doubts about the "more sand, same rat-holes" approach to wiping out debts, increasing aid and "ending poverty."
As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.
The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines, and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and the redistribution of social assets like political power, land, education, and technology. These are concepts that BWI technocrats, let alone film stars and rock stars, may never understand.
On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever. In that spirit, it would be wonderful to see the debt movement, the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief.
As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.
(c) SubmergingMarkets, 2006