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Saturday, January 07, 2017

The Curious World of Donald Trump’s Private Russian Connections
James S. Henry


Donald Trump, Tevfik Arif, and Felix Sater

 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. Vladimir-putin-judo

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.[1]


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.[2] 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.[3] 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.[4]

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,[5] and a detailed analysis of offshore company data from the Panama Papers.[6] 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.[7]

Donald Trump and Tevfik Arif

 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.[8] 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.”[9]

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.[10] 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.[11]

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.”[12]

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.[13] 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.” [14] 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.[15] 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.[16] 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.[17]

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

06TRUMPSOHOweb2-master675Our 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.” [18]

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,[19] 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.[20]

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.” [21] 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.[22] 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.”

SaterBizCardMeanwhile, 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.” [23]

In the 2013 deposition cited earlier, Trump went on to say “I don’t see Felix as being a member of the Mafia.” Asked if he had any evidence for this claim, Trump conceded “I have none.”[24]

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.

Iceland 2008 - All Cross-Holdings

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.[25] 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.[26]

Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 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.[27]  

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.[28]

Fifth, there are unconfirmed accounts of a secret U.S. Federal Reserve report that unnamed Iceland banks were being used for Russian money laundering.[29] 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.

Donald Trump and Alex Shnaider

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.[30] 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.[31] He resided in Zurich for a time in the early 1990s, but then returned to Toronto and New York.[32] One of his key companies was called Seabeco SA, a "trading" company that was registered in Zurich in December 1982.[33] By the early 1990s Birshtein and his partners had started many other Seabeco-related companies in a wide variety of locations, inclding Antwerp,[34] Toronto,[35] Winnipeg,[36] Moscow, Delaware,[37] Panama, [38] and Zurich.[39] Several of these are still active.[40] 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.[41]

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. [42] 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.”[43] A subsequent 1998 FBI Intelligence report on the "Semion Mogilevich Organization" repeated the same charge,[44] 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.[45] 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.[46] 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.[47] 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. [48]

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.[49] 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.[50]

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.[51] 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. [52]

            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.”[53] According to the database, "Midland Resources Holding Limited" was a shareholder in at least two of these companies, alongside an individual named “Oleg Sheykhametov.”[54] The two companies, Olave Equities Limited and Colley International Marketing SA, were both registered and active in the British Virgin Islands from 2007–10.[55] 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: According to Forbes, Kvetnoy is the 55th richest person in Russia and Skoch, now a deputy in the Russian Duma, is the 18th. [56]           

            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.[57] 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.[58] " Evsei Schnaider" is also listed in the Panama registry as a Treasurer and Director of "The Seabeco Group Inc," formed on December 6, 1991, [59]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.[60] Boris Birstein is listed as President and Director of both companies.[61]

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.


Dymytro Firtash

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[62]

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.[63] 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. [64] 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. [65]

Semion Mogilevich

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, [66] 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.," [67] 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.”[68] 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.,[69] which shares its Moscow address with “Arigon Overseas” and “Arbat Capital.”[70] 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.[71] 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.[72] 

Anatoly Golubchik’s Panama Papers Network Neighborhood

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. [73] 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.[74]

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. [75]

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.[76]

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.[77] 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.[78]


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.''[79]

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." [80]

¶ 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.


[1] Author’s estimates; see for more details.

[2] For an overview and critical discussion, see

[3] 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.

[4] 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.

[5] For example, the Swiss federal and cantonal corporate registries, available at

[6] For ICIJ's April 2016 "Panama Papers" database of offshore companies, see

[7] Trump’s minority equity deal with Bayrock was unlike many others, where he simply licensed his name. See this March 2008 New York Magazine piece.

[8] “I dealt mostly with Tevfik,” he said in 2007

[9] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 15.


[11] Bayrock reported its co-ownership of six Rixos hotels in a 2007 press release.

[12] See also Salihovic, Elnur, Major Players in the Muslim Business World, p.107;

[13] See also;;

[14] 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

[15]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.


[17] See also [17]; [17]

[18] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 16.

[19]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.

[20] See;;

; [20] 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

[21] See, 13.

[22] 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

[23] 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 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.

[24] See, 155.

[25] "Former FL Group manager," interview with London, August 2016. Sigrun Davidsdottir, Iceland journalist.

[26] See "Report of the Special Investigation Commission on the 2008 Financial Crisis." (April 12, 2010), available at

[27] 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;, 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..

[28] Kriss lawsuit, op. cit.; author's analysis of Kaupthing/ FL G employees published career histories.

[29] Author's interview, "Iceland Economist," Reykjavik, July 2016.

[30] 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.

[31] 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. 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.

[32] See

[33] 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!topic/soc.culture.ukrainian/1mtgIacNtMw. The liquidation was handled by the Swiss trustee Paul Barth, in Arth.

[34] For Seabeco's Antwerp subsidiary, see

[35] "Royal HTM Group, Inc." of Toronto, (Canadian Federal Corporation # 624476-9), owned 50-50 by Birshtein and his nephew. See,%20Inc.&crpNmbr=&bsNmbr= .

[36] 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 )

[37] 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;

However, according to Trimol's July 2015 10-K ( 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 As of December 2016, TMOL's stock price was zero.

[38] 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,;

[39] As of December 2016, the Zurich company registry ( listed a Zurich company called "Conim Investment AG" (CH- 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: 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.   (

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-, 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-, 1/10/92-11/19/98 ); and (5) ME Moldova Enterprises AG (CH-, 11/10/92-9/16/94). All of these liquidations were handled by the same trustee, Paul Barth in Arth.

[40] As of December 2016, active Birshtein companies include "Conim Investment AG" (CH- in the Swiss Canton of Schwyz and he Seabeco Group, Inc. in Panama.

[41] 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).

[42] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at See also Misha Glenny, 2009. McMafia: A Journey Through the Global Criminal Underworld. (New York: Vintage Books), 63-65.

[43] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at .

[44] See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at

[45] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at

[46] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at .

[47] Toronto Star, Aug 28, 1993 “Boris knows everyone,”

[48] See Zurich corporate registry for "Seabeco Metals AG" (CH-, formed 4/3/92 and liquidated 6/11/96.




[52] See Kaupthing Bank, "Loan Book, September 2008," wikileaks:,_26_Sep_2008

[53]The Panama Papers database provides an address for “Midland Resources Holding Limited" ( 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.,;

Anglesey Business Ltd.,;

Blue Industrial Skies Inc.,;  

Cl 850 Aviation Holdings Ltd.,;

Cl 850 Aircraft Investments Ltd.,;

Caray Business Inc.,;

Challenger Aircraft Company Limited,;

Colley International Marketing S.A.,;

East International Realty Ltd.,;

Filbert Pacific Limited,;

Gorlane Business Inc.,;

Jabar Incorporated,;

Jervois Holdings Inc.( ,

Kerryhill Investments Corp.,;

Leaterby International Investments Corp.,

Maddocks Equities Ltd.,(,

Maverfin Holding Inc.(,

Midland Maritime Holding Ltd.(,

Midland River-Sea Holding Ltd. (,

Midland Drybulk Holding Ltd.(,

Midland Fundco Ltd. (,

Norson Investments Corp.(,

Olave Equities Limited,;;

Orlion Business Incorporated,

Perseus Global Inc.,;

Sellana Investments Global Corp.,

Stogan Assets Incorporated,

Toomish Asset Ltd.,

[54] With the address "11 First Tverskaya-Yamskaya Street; apt. 42; Moscow; Russia.";;;

[55] 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 ( 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 A "Georgy Pirumov" is also listed separately in the Panama Papers as having been a shareholder in the same two companies (; 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, 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.


[57] See Schwyz canton corporate registry,, ""ME Moldova Enterprises AG," CH-

[58] See Zurich corporate registry,, "ME Moldova Enterprises AG," CH- (11/10/92-9/16/94).

[59] See "Seabeco Group Inc.," Panama Corporate Registry # 254192,, formed 12-6-1991.

[60] See "Seabeco Security Intl Inc." Panama Corporate Registry #254206, formed 12-10-1991,"

[61] Ibid, footnotes 58 and 59.


[63] See


[65] See

[66] A.K.A. "Tochtachunov." See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at, 1.

[67]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

[68] 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 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.

[69] Westix Ltd., registered in 2005, is still active, according to the Panama Papers. See

[70] 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.

[71] See the diagram below.

[72]These three offshore companies are not in the Panama Papers data base. 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

[73] On Mogilevich, see, for example,

[74] See also FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization; Eurasian Organized Crime," available at


[76] See;

[77]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).

[78]Johnston, interview; see also [78] 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.





January 7, 2017 at 11:37 PM | Permalink | Comments (0)

Thursday, July 24, 2008

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.)

"For what is the crime of burgling a bank, compared with the crime of building one?"Nationlogo_5
-- Brecht

The Hearing

Levin_carl060328_2 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 taxPrincehansadamii 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

Images The theatrics included videotaped testimony by Heinrich3030_kieber 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 Martinliechtiubs offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark610x1 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 Cov_lowypeter_032307 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.Srobertbennettsmall 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.

Robertwolfubs 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.") Images2

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.

Small_courter 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.

The Cases

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.

The Implications

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.

Key Tasks

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.

July 24, 2008 at 01:06 AM | Permalink | Comments (0) | TrackBack

Monday, January 01, 2007

Part I: Overview
James S. Henry


I was born a Chilean,  I am a Chilean,
I will die a Chilean.
They, the fascists, were born traitors,
live as traitors, and will be remembered forever as fascist traitors.

-- Orlando Letelier, 1932-76

Both Chile's General AugustoPinocaaaa_1 Pinochet and Saddam Hussein, two formerly US-backed dictators, have at last had to confront Higher Authorities that they were unable to intimidate, compromise, or evade.

Hang31__1However, unlike Saddam, who was hanged in the middle of a night on December 30, 2006, by a nervous Iraqi Government tribunal,  Pinochet managed to escape human justice for his crimes, and died of natural causes at the age of 91. 

How does the General deserve to be remembered? Did he not richly deserve the same fate as Saddam? And how did he manage to avoid it? 

Was he simply a ruthless, corrupt right-wing tyrant, the puppet of foreign interests and their handmaidens, like ITT,  Nixon, Kissinger, the CIA, George H.W. Bush, Margaret Thatcher, and Reagan?   

Giulianipinochet1_2 Or was he, as many of his defenders still maintain,  an essential bulwark against the Leftist Horde in Latin America?

If perhaps not exactly the world's staunchest defender of political liberalism, was he at least -- as Thatcher, some neoliberal  economists, The Wall Street Journal, and even supposedly "liberal" newspapers like The Washington Post now maintain --  a staunch defender of  "free markets" who deserves much of the credit for Chile's economic performance since the 1970s?

As we'll see,  most conventional portraits of General Pinochet are flat-out wrong, not only with respect to his alleged role in combating Soviet expansionism, but also with respect to his regime's alleged beneficial influence on Chile's economy.

First,  Pinochet was at best only a non-essential bit player in the anti-Soviet struggle.  Allende's broad-based social democratic "revolution" was never taken seriously by Moscow or Havana. Nor was it strong enough to mount a Cuban-style revolution, or even to precipitate a civil war. Left to its own devices, Allende's "leftish" alliance would probably have burned itself out by the next election or plebiscite in 1974.

Images10Furthermore, even if Chile's leftists had somehow managed to create a "Soviet Republic of Patagonia," tiny Chile was already completely surrounded by other countries that had much greater strategic importance to the West.

By 1973, they either already had their own right-wing dictatorships (Brazil, Paraguay, and Bolivia), or were well on the way (Argentina and Uruguay).

Images11In short,  killing off Chile's long-standing democracy was gratuitous -- the political equivalent of exaggeratinging Iraq's "slam dunk" WMD threat

All the repression was for nothing.

Fig_74_milton_friedman_5On the economic front, Pinochet's interregnum was also a costly, needless detour. 

Indeed, one key reason why Chile's so-called "economic miracle" has proved to be so successful in the long run -- with great help from human capital finally brought back home by many well-educated returning "Leftists" who were  driven out of country in 1973-90 -- was precisely because Pinochet's first decade of experiments with "Los Chicago economics" proved to be so disastrous. Giving Pinochet credit for the subsequent corrective reforms is like crediting Leonid Brezhnev with last decade's revival of economic growth in Eastern Europe.

(For more details, see Parts II and III...)



January 1, 2007 at 01:52 PM | Permalink | Comments (0) | TrackBack

Friday, December 15, 2006

Blood Diamonds
Part 1: The Empire Strikes Back!
by James S. Henry

"...(O)ne of the great dramas of Africa: extremely rich areas are reduced to theaters of misery...."

-- Rafael Marques, Angolan journalist (July 2006)

"For each $9 of rough diamonds sold abroad, our customers, after cutting them, collect something like $56..." 

-- Sandra Vasconcelos, Endiama (2005)

"We found the Kalahari clean. For years and years the Bushman have lived off the land....thousands of years...We did not buy the Kalahari. God gave it to us. He did not loan it to us. He gave it to us. Forever. I do not speak in anger, because I am not angry. But I want the freedom that we once had."

-- Bushman, Last Voice of an Ancient Tongue, Ulwazi Radio, 1997 


Wdclogo_2 The global diamond industry, led by giants like De Beers, RTZBHP10m_1 Bililton, and Alrosa  Co Ltd., Russia's state-owned diamond company,  a handful of aggressive independents like Israel's Lev LevievBeny Steinmetz's BSG Group, and Daniel Gertier's DGI, a hundred other key "diamantaires" in New York,  Ramat-Gan, Antwerp,  Dubai, Mumbai, and Hong Kong,  and leading "diamond industry banks" like ABN-AMRO, is not exactly renowned for its abiding concern about the welfare of the millions of diamond miners, cutters,  polishers, and their families who live in developing countries.

But the industry -- whose top five corporate members still control more than 80 percent of the 160 million carets that are produced and sold each year into the $70 billlion  world-wide retail diamond jewelry market -- certainly does have an undeniable long-standing concern for its own product's image.


Indeed, for decades, observers of the diamond industry have warned that it was teetering on the brink of a price collapse, because the industry's prosperity has been based on a combination of artificial demand and equally-artificial -- but often more unstable -- control over supply.

Most of the doomsayers have always predicted that the inevitable downfall, when itGlitter_cover came, would arrive from the supply side, in the form of some major new diamond find that produced a flood of raw diamonds onto the global market.

The precise culprits, in turn, were expected to be artificial diamonds (in the 1960s and 1970s), "an avalanche of Australian diamonds" (in the 1980s,) and Russian diamonds (in the 1990s.)

This supply-side pessimism has lately been muted, given the failure of the earlier predictions and the fact that raw diamond prices -- though not, buyers beware,  retail diamond resale prices!! --  have recently increased at a hefty 10-12 percent per year.  There is also some evidence that really big "kimberlite mines" are becoming harder and harder to find.

However, there are still an awful lot of raw diamonds out there waiting to found, and one does still hear warnings about the long-overpredicted Malthusian glut, now from new sources like deep mines in Angola, Namibia's offshore fields, Gabon, Zambia, and the Canadian Northwest.


Meanwhile, the other key threat to the industry's artificial price structure -- where_787698_diamonds300 retail prices are at least 7 to 10 times the cost of raw diamonds -- comes from the demand side. This is the concern that diamonds may lose the patina of glamour, rarity and respectability that the industry has carefully cultivated since the 1940s.

It is therefore not surprising that the industry has been deeply disturbed by the December 8, 2006, release of Blood Diamond, a block-buster Hollywood film that stars Leonard DiCaprio, Jennifer Connelly, and Djinmon Hounsou.

0521686369 While extraordinarily violent and a bit too long, the film is entertaining, mildly informative, and far from "foolish" -- the sniff that it received from one snide NYT reviewer -- who clearly knew nothing about the subject matter, other than, perhaps, the fact that the Times' own Fortunoff- and Tiffany-laden ad department didn't care for  the film. 

Indeed,  this film does provide the most critical big-screen view to date of the diamond industry's sordid global track record, not only in Africa, but also in Brazil, India, Russia, and, indeed, Canada and Australia, where diamonds have often been used to finance civil wars, corruption, and environmental degradation, and  indigenous peoples often been pushed aside to make room for the industry's priorities.

Surely the film is a small offset to decades of the diamond cartel's shameless exploitation of Hollywood films, leading ladies like Marilyn Monroe, Elisabeth Taylor, and Lauren Bacall, and scores of supermodels, rock stars, and impresarios.


Chap1adj240Dismayed at the potential negative impact of the film ever since the industry first learned about Blood Diamond in late 2005, it is reportedly spending at least an extra $15 million on a  PR campaign that responds to the film  -- in addition to the $200 million per year that the World Diamond Council already spends on regular marketing.

For example, if you Google "blood diamonds," for example, you'll see that the industry has purchased top billing for its own version of the "facts" regarding this film. Always eager for a new marketing angle, some diamond merchants have also seized the opportunity to pitch their own product lines as "conflict diamond - free."


This shameless PR campaign has also included a "black wash" effort by the multimillionaire hip hop impresario Russell Simmons, whoRussell_simmons_100x100 launched his own diamond jewelry line by way of the Simmons Jewelry Co. in 2004,  in partnershp with long-time New York diamond dealer M. Fabrikant & Sons.

Simmonslogo Simmons, who admits to "making a lot of money by selling diamonds," rushed back to New York on December 6 from a whirlwind nine-day private jet tour of diamond mines in South Africa and Botswana -- but, admittedly,  not in conflict-ridden Sierre Leone, Angola, the Congo, the Ivory Coast or Chad.

Simmons was originally scheduled to travel with one of his latest flames, the  27-year old Czech supermodel and Fortunoff promoter, Petra Nemcova. But Petra reportedly preferred to stay home and accept a huge diamond engagement ring of her own from British singer/soldier James Blunt, whose 2005 pop hit "You're Beautiful" was recently nominated the "fourth most annoying thing in Britain," next to cold-callers, queue-jumpers, and caravans.

The timing of Simmons' trip, which he filmed for UUtube, just happened to coincide with the December 8 release of the Warner Brothers feature.

Farrakha Upon his return, Simmons held a press conference, accompanied by his estranged wife Kimora Lee Simmons and Dr. Benjamin  F. Chavis Mohammed, a former civil rights activitist and fellow investor in the jewelry company who is perhaps best remembered for being fired as NAACP Director in 1994  after settling a costly sexual harassment suit, and for joining the Rev. Louis Farrakhan's Nation of islam. Simmons' astounding conclusion from his wonder-tour: "Bling isn't so bad."

Whatever the credibility of Simmons and his fellow instant experts, it was  evidently not enough to save M. Fabricant & Sons,  which filed for Chapter 11 in November.


Simmons managed to tour a few major diamond mines on his African safari, but apparently heKalaharibush lacked time to examine the contentious land dispute between the Kalahari  San Bushmen, the members of one of Africa's oldest indigenous groups,  and the Botswana Government -- with the diamond industry's influence lurking right offstage.

In the 1990s, after diamond deposits were reportedly discovered on the Bushmen's traditional lands, the Botwana Government -- which owns 15 percent of De Beers, is a 50-50 partner with De Beers in the Debswana diamond venture, the largest diamond producer in Africa, and derives half its revenue from diamond mining -- has pressured the Bushmen to leave their tribal lands.

The methods used were not subtle. To force the Bushmen into resettlement camps outside the Reserve, the Botswana Government closed schools and clinics, cut off water supplies, and subjected members of the group to threats, beatings, and other forms of intimidation for hunting on their own land -- all of it ordained by F.G. Mogae, Botswana's President,  who declared in February 2005 that he 'could not allow the Bushmen to return to the Kalahari." Those who have been resettled have been living in destitution, without jobs and little to do except drink. (See a recent BBC video on the subject.) 

WeareveryhappyThankfully, on December 13, 2006, Botswana's High Court ruled that in 2002, more than 1000 Bushmen had been illegally evicted by the Botswana Government from the Central Kalahari Game Reserve, where they'd lived for 30,000 years.

The Botswana Attorney General has already attempted to attached strict conditions to the ruling, so this struggle is far from over. But at least the first prolonged legal battle has been won -- thanks to the determination of the Bushmen, public-spirited lawyers like Gordon Bennett, their legal counsel, courageous crusaders like Professor Kenneth Good, and  NGOs like Survival International, which has supported the legal battle.

In the wake of this decision, as usual,  the global diamond industry, led by De Beers, has denied that any responsibility whatsoever for the displacement of the Bushmen.

Images_6However, the fact is that De Beers and other companies has been prospecting actively in the Kalahari Reserve, especially around the Bushman community of Gope (see this video),  where De Beers has falsely claimed that no Bushmen were living when it started mining. It has actively opposed recognizing the rights of indigeneous peoples in Africa. In 2002, at the time of the eviction, Debswana's Managing Director -- appointed by De Beers -- commented that "The government was justified in removing the Basarwa (Bushmen)….’.

De Beers' behavior in Botswana has so outraged activists that they have joinedBoycottdebeerslogo together with prominent actors like Julie Christie and several Nemcova-like supermodels who used to appear in De Beers ads, in an appeal for people to boycott the now-UK-based giant -- which has lately been trying to move downstream into retail diamonds.

However, De Beers is far from alone in this effort.  Indeed, as has often been the case with  "conflict diamonds," less well-known foreign companies have been permitted to do much of the nastier pioneering. 

In Botswana's case, these have included Vancouver-based Motapa Diamonds and Isle of Jersey-based Petra Diamonds Ltd. both of which have have obtained licenses to explore and develop milliions of acres, including CKGR lands. Petra is not unfamiliar with "conflict diamonds;" it is perhaps best known for a failed 2000 attempt to invest in a $1 billion diamond project in the war-torn DR Congo, in which Zimbabwe's corrupt dicator, Robert Mugabe, reportedly held a 40 percent interest.

In the case of Botswana, in September 2005 Petra acquired the country's largest single prospecting license -- covering 30,000 square miles, nearly the size of Austria -- by purchasing Kalahari Diamonds Ltd, a company that was 20 percent owned by BHP Billiton and 10 percent by the World Bank/IFC -- which apparently saw the sponsorship of CKGR mining as somehow consistent with its own financial imperatives, if not its developmental mission. (!!!). Petra has also licensed proprietary explorations technology from BHP Billiton, and offered it development rights, a front-runner for the Australian giant.

Blood_1 Meanwhile, at least 29 of the 239 Bushmen who filed the lawsuit have perished while living in settlement camps, waiting for the case to be decided, and many others are impoverished. 

Perhaps the diamond industry's $15 million might be better spent simply helping these Bushmen return to their homes -- and also settling up with  the Nama people in South Africa, the Intuit and Kree peoples in Canada, and the aborigines in Australia.


Meanwhile, as we'll examine in Part II, despite the "Kimberly Process" that was adopted by many -- but not all -- key diamond producers in 2003, the fact is that diamonds continue to pour out of conflict zones like the Congo, Ghana, and the Ivory Coast, providing the revenues that finance continuing bloodshed.

The industry's vaunted estimate that they account for just "1 percent" of total production is based on thin air -- there are so many loopholes in the current transnational supply chain that there is just no way of knowing. Of course, given the scale of the global industry, and the poverty of the countries involved, even a tiny percent of the global market can make a huge difference on the ground.

Furthermore, in cases like Angola, the Kimberly Process has provided an excuse for corrupt governments to team up with private security firms and diamond traders to crack down on independent alluvial miners.

Finally, the diamond industry still has much work to do on other fronts --  pollution, deforestation, and, most important, the task of creating a fairer division of the spoils, in an industry where the overwhelming share of value-added is still captured by just a handful of First World countries. 

The objective here is not to kill the golden goose. In principal, the diamond industry should be able to reduce world inequality and poverty, since almost all retail buyers are relatively-affluent people in rich countries, while more than 80 percent of all retail diamonds come from poor countries.

But beyond eliminating traffic in "blood diamonds," however,  we should also demand that this industry starts to redress its even more fundamental misbehaviors.


(c) SubmergingMarkets,2006

December 15, 2006 at 12:06 PM | Permalink | Comments (0) | TrackBack

Sunday, February 26, 2006

Twenty Years Later, Near-Martial Law Returns to the Philippines
James S. Henry

PhpypzktpAt first glance, this week's news from the Philippines is even more dismal than usual. But the deepening crisis also discloses some interesting possibilities for fundamental change.

News_1The bad news has arrived in bulk. First, the search for more than 1050 victims of the recent Leyte mudslide has been called off without any progress.

Second,  President Gloria Macapagal-Arroyo has seen fit to declare a state of emergency -- 20 years to the day after "People's Power"/ EDSA I brought an end to the Marcos dictatorship on February 25, 1986.

Officially, Madame Arroyo attributed her "Proclamation 1017" -- an open-ended declaration of a "national emergency" -- to the supposedly imminent but actually rather vague threat of a coup,  purportedly organized by a cabal of dissident officers, politicians and professors -- in alliance, she claimed, with the Communist Party of the Philippines (!).

Fig_38_president_corazon_aquino_2Technically, this was not a full-fledged declaration of martial law.  But for those on the ground the distinction is theoretical.  At Arroyo's direction, the police moved quickly  to round up (without warrants) at least three Congressmen, a university professor, 25 protestors at an anti-Arroyo rally, and a half dozen senior miltary and police officers -- including a West Point graduate and and a former Chief of the National Police. All permits for political rallies were cancelled. A leading opposition newspaper was raided. 

Fig_31_ferdinand_and_imelda_1Meanwhile, Arroyo produced no hard evidence that any members of this disparate group had done anything more serious than join former Presidents Corazon Aquino and Fidel Ramos  in calling for her to resign.

Even if there had been a coup attempt in the offing, that could have been dealt with under existing laws -- as Aquino did with at least seven coup attempts during her years in office, without requiring emergency powers.


In this respect, to long-time Philippines observers,  Arroyo's declaration is reminiscent of President Ferdinand Marcos' 1972 "Proclamation 1081." That was also justified by a fairy tale  -- a bogus assassination attempt against Defense Minister Juan Enrile that, years later, turned out to have been a theatrical production by his own security guards.

Fig_39_people_power_manila_1986_1It is likely that Arroyo's move is a desperate attempt to head off growing popular demands for her ouster.

Left unchecked, those demands might well have culminated in a huge "People Power" rally this weekend, demanding her resignation.

This popular movement is not based on a disgruntled cabal, much less on some left- or right-wing plot.

Rather, it is based on widespread,  rational disgust with President Arroyo's dismal performance since taking office in 2001.

  • Despite rising levels of economic growth -- 3-6 percent per year since 2002 -- the Philippines "oligarchy" remains firmly in control, less than 10 percent of the population perceives that its economic situation has improved under Arroyo, and  more than 71 percent of the population now considers itself poor.
  • In yet another striking parallel to the "conjugal dictatorship" of Ferdinand and Imelda, Arroyo's own husband Mike has been forced to live in exile because of his involvement in several gambling and corruption scandals.
  • Arroyo is widely believed to have stolen more than 1 million votes in the May 2004 Presidential election, a charge that was only strenghtened by the embarrassing "Gloriagate" tapes. Her position has only been preserved by virtue of her party's dominance in Congress, and her control over the 15-member Philippines Supreme Court, which she has managed to pack with 9 appointments.

Fig_314_joseph_estradaEven before the state of emergency, President Arroyo's popularity rating had fallen below that of any of the last four Presidents -- including Joseph Estrada, who was ousted by popular demand at EDSA II in January 2001. Indeed, by January 2006, "net satifaction" with Arroyo (% satisfied minus % dissatisfied)  had reached -30%, a record low. And well over half of the population simply want her to resign -- ala Marcos and Estrada.


In this situation, one might have hoped that the Bush II Administration would have followed in the footseps of Reagan/ Bush I, circa 1985-86,  and strongly "suggested" to Madame Arroyo that she "do the right thing" and board a plane to Hawaii -- not just for the sake of democracy, but also for the sake of the US' long-term relationship with the Philippines people.

Unfortunately,  this kind of intervention is unlikely,  at least for the moment. 

  • President Bush is much more concerned about the Philippines' contribution to the "war on terror" than its domestic  problems. Arroyo has been very accomodating on the "terror war"  front.
  • Indeed, throughout Southeast Asia, Bush and Secretary of Defense Rumsfeld have also been turning the other cheek to mis-democracy  -- resuming arms sales to Indonesia's horrific military, indulging the Prime Minister of Thailand in his offshore companies, and so forth. Arroyo is just another example.  
  • Arroyo has also carefully cultivated key US interest groups. She's Bill Clinton's former classmate at Georgetown, who still looks him up on trips to New York. She's also an outspoken fan of neoliberal policies, who has good relations with US  companies, Congress, and, indeed, President Bush.
  • Unlike 1986 and 2001, the opposition has no clear leader that would be acceptable to the US.
  • President Bush may well sympathize with an unpopular President whose electoral legitimacy is questionable, and who also repeatedly violates the Constitution and hides behind the skirts of a hand-picked Supreme Court and Congress.

In sum, from Manila, Bangkok, Egypt, the West Bank, and Iran, to Palm Beach County, Haiti, Caracas, Peru, Colombia, and Bolivia,  the US Government only finds "people power" as desirable as the results that it produces. The people of the Philippines should not expect any help from GMA's cronies in Washington.


So to rid themselves of this new usurper,  Filipinos will have to depend on yet another round of Manila popular democracy --  perhaps this time in the face of even more repression. 

Are they up to it? 

Some pundits have recently concluded that, having been through EDSA I and II without achieving very much, and now more economically beleaguered, Filipinos no longer have much stomach for mass resistance.

Indeed, according to one fall 2005 poll,  in hindsight, just 36 percent of the population supports EDSA I, 10 percent supports EDSA II,  and 42 percent believe that doing nothing would have been preferrable.

Images_3On the other hand, 6 out 10 Filipinos still reject martial law as the way to solve the country's problems, while at least 58 percent are willing to support another round of mass demonstrations if President Arroyo is clearly shown to have "cheated in the elections" -- e.g., to have violated the law.

Proclaiming a bogus state of emergency and violating civil rights en masse without a "clear and present danger" should surely cross that threshold.

Furthermore, while everyone now recalls "People Power" as a mass movement, in fact i only 7 percent -- 20 percent in Manila -- of Filipinos over the age of 18 actively participated in  it. That is far below the proportion that now says it is still prepared to demonstrate against Presidential illegality.

As usual in revolutionary situations, however, everything comes down to leadership and initiative -- plus a hefty dose of sheer fortuity. The importance of political entrepreneurship is often underestimated by revolutionaries. However, given such decisive opposition leadership, and its ability to avoid being crushed by GMA's supporters,  her newborn "conjugal dictatorshp" could well be headed for history's dustbin. She has just made, as they say, "A mistake the size of her life."  


February 26, 2006 at 12:03 AM | Permalink | Comments (2) | TrackBack

Wednesday, May 18, 2005

George Galloway Kicks Senate Butt

Coleman_before_after_1This week's developments in the so-called Iraq Oil-for-Food scandal  ("OFF") have turned out to be nothing less than a fiasco for the US Senate's Permanent Investigations Subcommittee and its feckless freshman Republican Chairman, Minnesota's Norm Coleman.

In the first place, a newly-released minority staff report by Democrats on the Subcommittee shows that Bayoil USA, a Houston-based oil trading company headed by David B. Chalmers, Jr., now under indictment,  was by far the most important single conduit for the illegal surcharges pocketed by Saddam Hussein under the program. 

The report showed that more than half of Iraq's oil sales that generated surcharges for Saddam were made to US buyers during the period September 2000 to September 2002, most of them right under the nose of the Bush Administration and the US Treasury's rather lackadaisical Office of Foreign Assets Control.

Other US companies that have reportedly received subpoenas in the on-going surcharges investigation include ExxonMobil, ChevronTexaco, and Houston's El Paso Corp, as well as prominent Texas oilman Oscar S. Wyatt Jr., who was also deeply involved in supporting and profiting from oil-for-food. Wya_wyatt_136x155_1

Next,  British MP George Galloway, appearing voluntarily before the Subcommittee, deliverered a feisty denial of allegations that he had personally profited from the oil allocations, as well as a withering assault on the last twenty years of US policies toward Iraq.

Meeting little resistance from the badly-outgunned Senators, Galloway made the points that

  • He met with Saddam no more times than Donald Rumsfeld, who had met with Saddam  to sell arms and provide maps, while Galloway met him to seek peace and encourage arms inspections;

  • He had actually opposed Saddam's policies way back in 1990, while the first Bush Adminstration was still making loans and selling arms to Saddam; 
  • He had always opposed the oil-for-food program as a poor substitute for lifting sanctions, which unfairly punished all Iraqis for the sins of its dicator -- especially its children, up to 1 million of whom may have died because of increased infant mortality;
  • The Subcommittee's investigation was a "smokescreen" that distracted attention from far more serious issues -- such as the disappearance of more than $8.8 billion of Iraqi national funds during the first year after the US invasion. 

The combative Scot's  hard-hitting testimony makes compelling viewing.

Meanwhile, we recall that back in June 2003, J. Bryan Williams III -- ExxonMobil's former head of global crude procurements, and the US'  hand-picked UN overseer on the Iraq Sanctions Committee, in charge of making sure that Saddam did not obtain any illicit income from the oil-for-food program -- pled guilty to evading taxes on $7 million,  including a $2 million kickback to help Mobil win business in Kazakhstan's oil dictatorship.

So there is at least some good news here, Senators --  if you want to find big-time corruption in the international oil trade, you don't have to go looking for it in London, Moscow, or Paris.

Jspades_1These developments also help to put Senator Coleman's continual "head-hunting" of UN Secretary General Kofi Annan in perspective. While there's no evidence that Kofi profited personally from OFF,  his minions were probably not squeeky-clean.  But the enormous profits earned by Saddam's "fellow travelers" in Houston make them seem like pikers.   

Furthermore, while Kofi is certainly not much of an effective manager,  we now know from the Bolton hearings that administrative skill doesn't count for very much with the Bush Administration.060504

Indeed, it appears that Annan's key fault is that he had the temerity to oppose the Iraq invasion, and even to label the War "illegal" -- once the invasion had already occurred.  With Paul Volcker's final report on the oil-for-food scandal due out soon, and US Ambassador to the UN John Bolton (!) likely to arrive as soon as he clears the Senate and adjusts his meds, the outlook for the summer is definitely for more fireworks.


                  (c) SubmergingMarkets.Com, 2005.    

May 18, 2005 at 01:54 PM | Permalink | Comments (1) | TrackBack

Friday, December 03, 2004

Bhopal’s 20th Anniversary

Today marks the twentieth anniversary of the deadly Bhopalunioncarbidefactor December 3, 1984, chemical gas leak at an Indian pesticide plant in the very  center of Bhopal, a city of 90,000 – just a little larger than Danbury, Connecticut -- in the state of Madhya Pradesh, in central India.  At the time the plant was owned by Union Carbide India, Ltd. (UCIL), an Indian company whose majority (50.9%) shareholder was Danbury-based Union Carbide Corporation (UCC) which was acquired by Dow Chemical in 2001.

This anniversary provides us with an opportunity to reflect on “lessons learned” from this disaster – including the need to make sure that the globalization of trade and investment is also accompanied by the globalization of justice for the victims of transnational corporate misbehavior.

Download WhereIsWarren12032004.pdf


As a recent report by Amnesty International details, this industrial accident, perhaps the worst in history, killed more than 7,000 to 10,000 people in the first few days,  including many children. Bhopal01_3

There were also serious long-term injuries to up to 570,000 others who were exposed to the fumes.

At least 15,248 of these survivors have already died because of their injuries – in addition to the 7,000 to 10,000 initial victims.

Up to 570,000 others continue to suffer from a wide range of serious health problems, including birth defects, cancer, swollen joints, lung disease, eye ailments,  neurological damage, and many other painful, long-term illnesses.

Thousands of animals also died, and many people lost their homes, jobs, income, and access to clean water.



nion Carbide’s ultimate “parent authority” for this accident is very clear. In the middle of the night, a cloud of lethal gas caused by the leak of at least 27 tons of “methyl isocyanate” (MIC), a high-toxic odorless poison,  and another 13 tons of “reaction products” began wafting through the city center. The gas spread without warning throughout the town. The leaks continued for more than two hours before any alarms were sounded.

All six of the plant’s alarm systems failed.  It was later shown that the company management had systematically tried to cut corners  on safety and warning equipment – by, for example, failing to equip the plant with adequate safety equipment and trained personnel to handle bulk MIC storage; failing to apply the same safety standards that it used in the US; and failing to insure that there was a comprehensive plan to warn residents of leaks. 

In fact,  company staff and many others were aware of the risks created by this situation. In June 1984, six months before the accident, an Indian journalist had written an article about them: “Bhopal – On the Brink of Disaster.” But nothing was done – partly, according to Amnesty, just to cut costs.    Bhopal_unioncarbide_victim_2

The result was that shortly after midnight on December 3, 1984, Bhopal’s families woke up screaming in the dark, unable to breathe, their eyes and lungs on fire from the poison, choking on their own vomit. By daybreak there were already hundreds of bodies on the ground, with scores of funeral pyres burning brightly.

In addition, long before the 1984 accident, there had been a series of leaks at the site that management was well aware of, and which caused serious pollution – contamination that continues to this day.

All told, as the Amnesty report makes clear, this amounts not only to an health and environmental disaster, but a serious infringement of the human rights of thousands of Indian citizens. 


All this was bad enough.  But the other key part of Bhopal’s injustice has to do with the fact that key actors like Dow Chemical/Union Carbide, the Indian Government, and the individual US and Indian senior executives and other officials who were responsible for the accident have managed to avoid  liability for the full costs of the “accident,” as well as personal accountability. 

This impunity was underscored this week when the BBC fell victim to a hoax perpetrated by someone who pretended to be a Dow Chemical executive. He concocted a false statement that the company was reversing its denial of all responsibility for Bhopal, and was establishing a E12 billion fund for 120,000 victims.   

In fact,

·          Union Carbide (UCC) and Dow Chemical,   UCC's new owner since it purchased the company for $10.3 billion in 2001,  have consistently denied any liability for the disaster.  They have argued, for example, that UCC was a “domestic” US company, with no “operations” in India. Supposedly it was also not responsible for UCIL’ actions, because UCIL was just an “independent” Indian company.

·          In fact, while UCC disposed of its interests in UCIL in 1994, until then, UCC maintained at least 51 percent ownership in UCIL. Furthermore, according to the Amnesty report, UCC played an active role in UCIL’s management and board activities, and was responsible for the detailed design, senior staffing, and on-going operating procedures and safety at the Bhopal plant.

·          Furthermore, as UCC’s CEO at the time, Warren Anderson, bragged before the US Congress in 1984, Union Carbide had 100,000 employees around the world. At the same time, another senior UCC executive, Jackson Browning, said that UCC’s “international operations represented 30 percent of sales,” and that “India was one of three dozen countries where the company has affiliates and business  interests.” 

·          After the spill, according to the Amnesty report, UCC officials (1) tried to minimize MIC’s toxicity, (2) withheld vital information about its toxicity and the reaction products, which they treated as trade secrets; and (3) refused to pay interim relief to the victims.

·          The Indian Government and the State Government of Madhya Pradesh also bear grave responsibility for the disaster itself, and then for striking an irresponsible private settlement with the perpetrators. As the Amnesty report makes clear, environmental regulations were very poorly enforced against UCIL. Then,  having sued for $3 billion in damages in 1988, the Indian Government settled for just $470 million in 1989,  without adequate participation from victims. The Indian Government has also discontinued medical research on the impact of the gas leak, and failed to publish its interim findings.

In October 2003, it was disclosed that  by then, some 15,298 death claims and 554,895 claims for other injuries and disabilities had been awarded by the Madhya Pradesh Gas Relief and Rehabilitation Department – five times the number assumed in the settlement calculations by the Indian Supreme Court.

·          UCC’s insurance paid that paltry amount in full. But then the Indian Government was very slow to pay out the money to victims. As of July 2004, $334.6 million had been paid out, while $327.5 million was still sitting in Indian government custody.  At that point, 20 years after the disaster, the Indian Supreme Court finally ordered that the remaining money be paid out to some 570,000 registered victims – an average of $575 apiece. Even these payments won’t all get to the victims;  a significant portion is reportedly consumed by India’s notorious bribe-ridden state bureaucracy.    20030815007013301_1 

·          Local authorities in Bhopal filed criminal charges against both UCC its former CEO Warren M. Anderson in 1991-2. Anderson was charged with “culpable homicide (manslaughter),” facing a prison term of at least 10 years. He failed to appear, and is still considered an “absconder” by the Bhopal District Court and the Supreme Court of India.

However, despite the existence of a US-India extradition treaty,  the Indian Government has failed to pursue a request for Anderson’s extradition vigorously.

Indiawantsanderson28jun03_1 Diamondlid_3 The 82-year old Anderson, who is still subject to an Indian arrest warrant, has a very nice home with an unlisted number in Bridgehampton, New York, and another in Vero Beach, Florida.

Meanwhile, while the Indian Government has been willing to hold local Indian companies that operate hazardous businesses strictly liable for damages caused by them, it has been reluctant to apply this rule to transnational companies -- perhaps because it is more worried about attracting foreign investment than insuring that foreign investors manage their activities responsibily.


Overall, twenty years after the original incident, Bhopal remains a striking example of transnational corporate misconduct, an incredible case of the negligent mishandling of a true “chemical  weapon of mass destruction.”

This behavior may not have been as culpable, perhaps, as the willful use of toxic weapons against innocent civilians by former dictators like Saddam and Syria's Assad. But it was no less deadly. 

As we saw above, Bhopal was also an example of the incredible loopholes that still apply to leading companies in globalized industries.

Especially in corruption-ridden developing countries like India, they have often been able to take advantages of lax law enforcement, weak safety regulations, clever holding company structures that limit liability, and the sheer expense of bringing them to justice.

Evidently the globalization of investment and trade is not sufficient. Economic globalization needs to be augmented by the globalization of justice. Among other things, that means that it is high time for transnational corporations to be subject to an enforceable code of conduct, back up by an International Court for Corporate Responsibility.   


                        © James S. Henry,  SubmergingMarkets™, 2004

December 3, 2004 at 09:26 PM | Permalink | Comments (1) | TrackBack

Tuesday, November 23, 2004

Monday Nov. 22, 2004
Matthew Maly

(Note:  Matthew Maly is a courageous and astute Russian-American who is based in Kiev, and is a SubmergingMarkets Contributing Editor. He filed the following brief eyewitness report late Saturday night, as demonstrations in the city were mounting.  As journalists who are intimately familiar with so-called "democratic" countries that routinely subvert democratic elections and press freedoms, we wish to express our solidarity with the people of the Ukraine.)
_40554983_kiev_ap Matthewmaly
Kiev is a city of 4 million people. About a million of them today wore
Yushchenko's orange color, and that includes all students, and a fair number of grandmothers, yuppies, businessmen, etc. His opponent is a twice convicted Al Capone, for whom no more than 30% of Ukrainians voted.
There was tremendous electoral abuse. There is a Woodstock
atmosphere in the city which the people will never forget. Half a
million Kievites and "visitors" (some with good military skills)were on the main square today, screaming "Yushchenko" so that I heard it a mile away. _40480639_vik
Nothing like that has ever happened in the CIS, ever. It is not even similar to winning a Superbowl. Ukraine will never be the same, whatever happens, as the young people will never forget.

Tonight the people may storm the Presidential Administration, and there may be lots of blood. I tried to stop the bloodshed all day today by pushing a neat political trick I invented, a certain Open Letter I wrote. They listened, but they already were handing out the guns....

©Matthew Maly, SubmergingMarkets™, 2004


November 23, 2004 at 04:57 PM | Permalink | Comments (1) | TrackBack

Sunday, June 27, 2004

"Letters from the New World:"
Fighting Corruption at Eye Level in Nigeria

About Denis Beckett



Whenever we talk Nigeria, we talk corruption. The two go together. Finland, ice and cellphones. Israel, strife. Australia, complacency and kangeroos. When you talk Nigeria, corruption is the first thing that comes up.
Try it. Tell people “I’m going to Nigeria.” Four out of five responses will give you detail, usually second-hand, about the necessity of spreading your dollars through different pockets in different denominations. From there they’ll go into horror-stories about corruption.

I found my first trip to Nigeria challenging. Scary, too, but that was a different thing. When the captain said: “We’re commencing the descent” I clutched my wallet. The scare starts fading once reality replaces rumour, but the challenge doesn’t fade at all.

Corruption is one of the main reasons why Africa spent its first half-century of liberation heading, on statistical averages, backwards. Another major one is Indigenisation, Transformation, or whatever the name is for shoving wrong people into wrong roles. Indigenisation is tricky to deal with, and the real answer still awaits.
Corruption is not tricky at all. The simple answer is: don’t do it. To me that’s the sole answer. It’s ingrained. I can’t pay a bribe, any more than I can kill an animal or fling a bottle. The neurons are just programmed another way. Which poses a certain fluttering of the pulse when one is landing in Lagos, stocked high with dire warnings. But I remind myself that visitors to Johannesburg, too, are warned direly about our corruption, whilst I who live in Johannesburg remain a virgin after all these years – apart from sandwiches and cold-drinks.

Initially a little teeth-gritting is required, to take the same approach to Lagos, but it settles. By the time the first guy outright demanded a bribe (“because I am the one who is in charge of your baggage, heh, heh, heh…”) I was emboldened. All he got from me was two short traditional words.

I recognise that it’s hollow to sound holy when all you’re risking is a suitcase of used clothes, or the R500 fine for phoning while you drive. I admit I have no bosses to sack me if I fail to secure the contract,
no shareholders to re-deploy me as Deputy Manager of the Jammerdrif depot.

Still, the principle is not much different: Most times that you give the bribe-seeker short words he backs down. The times he doesn’t, it’s better to suffer the consequences than to hammer another nail into the coffin of your continent’s aspirations. In which light, the way that the going-into-Africa discussion usually plays out can be depressing.

It starts well, invariably. “We’re all Africans now, isn’t it wonderful. And you should see how much good we’re doing!”

They are, too. And it is spectacular, often. On Monday the housewives of Ndola are buying scrawny ox-shank, little more than bone with hair, chowed on for a week by 10,000 flies. They’re buying baked beans in rusted tins, a year after sell-by. They’re paying three times the price that their privileged southern sisters pay for first-class merchandise at our fancy Cresta or Cavendish supermarkets.
On Tuesday the new South African supermarket opens its doors. By Friday, Ndola is dancing to a new tune. The city is galvanised. Everybody has to give service, give value, wake up. On a March visit to a provincial capital, the dinner options are a suspicious unnameable stew on a sweltering dusty roadside, or a two-star menu at a five-star hotel with the seven-star tariff designed for the expense accounts of the aid brigade (who keep the aircon on frigid to remind them of home). In April a South African chain introduces middle-class eating at middle class prices. By July the city is holding its head higher.

Similar processes occur in every industry from brick machines to water meters. Good is being done, no two ways. But then the question the question comes up: “and, er, ahem, how do you handle the matter of adaptation to local mores?” There is a common answer to that question: “Oh, no, no, no. No corruption for us. We know that corruption causes ruin and destruction. We have no part in it, except of course when absolutely necessary.”

There is also the increasingly fashionable answer: “You know, we do have to grow into African ways. The time for arrogance is over now. We must mature into an acceptance that our sectional traditions are not universal.”

Then there is the answer that nobody gives unless he’s absolutely certain you are never going to quote him: “Why should I worry? That country is a total stuff-up anyway. If I can give some guy a million rand and make ten million in return, what do you think?”

Finally there is the still small voice that says: “No, on no account do we do it.” You hear that voice not often, and believe it less often. When you do believe it, perhaps because you know the people concerned especially well and repose in them a special faith, it is jolting indeed to find that the rumour factory is thick with alleged inside tales that place your faith under constant question.

The net result is disappointing, especially at the times that I am revelling in the magnificent welcome that tropical Africa addresses to Seffricans of the paler kind. Tropical Africa addresses magnificent welcomes to most people in most circumstances, but they have an added knack of making the whiteys from “South” as they call it, feel like a long lost brother.

You’re taken as a member of the family – a fairly pushy member, perhaps, rich in annoying habits, but in some way one of us, something more than solely a buccaneer on the profit trail. You’re a curiosity factor as well, and you’re assumed to be – potentially, at least – a handily systematic sort of character, the long lost brother who maintained the household inventory and made sure the insurance premiums were paid.

It’s a delightful combination. Not for nothing does every second SA expat go on and on about being wanted, being needed, being befriended, being loved (in the intervals between going on and on about not being robbed).

The prospects are wonderful, moving, emotional. A continent actually moving upward, after fifty years of empty talk about moving upward; moving upward and forward and with us, us, the once untouchable white South Africans, in there and part of it, in the engine room, the galley, the bridge, the lot.

Unfortunately that vista gets harder to glimpse as time goes by. Reality intrudes. I look at the heavy hands that RSA brings into the rescue of this or that failing African mine or plant or factory. I look at the hubris “stand aside, mere locals; we’re very friendly, as you see, calling us Jack and Joe and not ‘Bwana’ any more, but we’re in charge again so keep out of our way.” I look at the sickening crass insensitivity; the pulling of rank, sometimes unwitting; the disinterest in learning the barest syllable of even French or Portuguese, let alone Swahili or Hausa; the fervour to adopt every management fad emanating from New York or LA.

The pioneers carrying business to the tropics could and should be our heroes, our champions. Too often they become embarrassments. The many lesser embarrassments could usefully be discussed.

The one big embarrassment is not susceptible to much discussion. A culture of corruption means a pathetic nation; that is no more arguable than that the sun comes up in the east, and a critical mass of pathetic nations means a continued pathetic continent.

There’s sabotage in there.

Some foreign companies that have recently tried to enter Nigeria, like Shell and Halliburton, have apparently been following this well-trodden road to perdition. But there are signs of hope. A few others, like Vodafone, have recently been told by their shareholders to refuse to play at all unless they can play it straight.
Ironically, behind the closed doors of our cynical business community, it is Vodafone that gets the most ridicule. Indeed, almost wheresoever two or three businesspersons gather together in South Africa these days, one hears: “Look at these wussies, getting their asses whupped in Nigeria; buncha sissies calling themselves an African company, squealing ‘good governance’ because they’ve come short. What business did they have leaving just because they couldn’t play it straight? ”

Somebody’s got this upside-down. The real question we should be asking of is of those who stayed: “Precisely how did you manage to stay on and keep playing it straight?”


© Denis Beckett, SubmergingMarkets™, 2004

June 27, 2004 at 10:20 PM | Permalink | Comments (0) | TrackBack

Tuesday, June 22, 2004

A New Film About Agro-Business, Globalization, and Poor Mexican Farmers

Printable PDF Version.


This week marks the television premier of Farmingville, an outstanding documentary on the devastating impact that a really quite lethal combination of globalization plus First World farm subsidies is having on developing countries like Mexico.

Produced and directed by fellow Long Islanders Carlos Sandoval (Amagansett, NY) and Catherine Tambini (Hampton Bays, NY), Farmingville won this year’s “Special Award for Documentary” at the Sundance Festival, and it has also received many other prestigious awards. (For those of you in Long Island, it will also be shown on Thursday June 24 on Ch. 21, accompanied by a discussion with Sandoval and several of the film’s participants, moderated by OLA’s outstanding local leader, Isabel Spevedula de Scanlon.)

The social crisis described by Farmingville is a striking example of one of neoliberalism’s more disturbing patterns – the combination of “socialism for the rich” with “free trade for the poor.” Each year the US government provides more than $10 billion in subsidies to American corn farmers in politically-influential states like Iowa, Minnesota, Nebraska, and Kansas. From a political standpoint, these subsidies are usually justified in the name of preserving the “American family farm.” In fact the vast bulk of the subsidies goes to a handful of incredibly rich US agro-conglomerates, such as Cargill and Archer Daniels, Midlands (“ADM”).Together, these corporate giants now account for more than 70 percent of domestic US corn production.

These subsidies have not saved America’s family farmers, who continue to disappear at a rapid rate. But the $10 billion a year in subsidies has the giants to overproduce, resulting in surpluses that have been dumped onto world markets at artificially-low prices.

As documented in Farmingville, combined with the “free trade” policies adopted by the US and Mexico in the last decade, these surpluses have devastated family farmers throughout Mexico.

Of course Mexican farmers were the original source of “corn” – they’ve been growing it for at least 10,000 years. Until recently, corn accounted for at least half of the acreage they planted. In fact corn is not just a product in Mexico; it is also at the core of a whole cuisine and culture.

Since the adoption of the North American Free Trade Treaty (NAFTA) in 1993, however, the real price of corn has dropped more than 70% in Mexico. even as domestic non-labor production costs have risen dramatically.

Most of the price declines are due to escalating US corn imports. Recent estimates by an Oxfam study of “The Mexican Corn Crisis,” for example, show that US corn is dumped in Mexico at between $105m to $145m a year less than the cost of US production.

As a result, many campesinos are being forced out of business -- the country has lost the majority of its corn farmers in just the last 10 years. This has caused havoc in the entire rural economy, produced mass unemployment and forcing a mass migration to Mexico’s already overstuffed cities. And that, in turn, has accelerated emigration, with thousands of desperate, hungry people trying to leave Mexico every day, and dozens of them literally dying in the desert wastelands along the border, trying to get to
“El Norte.”

Indeed, according to the latest statistics from the US Bureau of Immigration and Naturalization, illegal immigration along the Mexican border is now at an all-time high.

Meanwhile, US agricultural conglomerates like ADM and Cargill have become more profitable than ever. They are using their fat profits to extend their dominance abroad. For example, Cargill now owns 30 percent of Maseca, the giant Mexican food distributor that dominates the Mexican tortilla market.

As Oxfam’s recent report on this neoliberal debacle concludes,

"The Mexican corn crisis is yet another example of world trade rules that are rigged to help the rich and powerful, while destroying the livelihood of millions of poor people.”

Indeed, the story that Farmingville relates is an especially graphic example of the perverse consequences that neoliberal policies can have once powerful interests get hold of them -- when US corporate giants are able to have their way with free trade, wide-open capital markets, lavish government subsidies, political leaders on both sides of the border, and poor farmers all at once.

Obviously this is tough time for leading US politicians to take on the powerful farm lobby, much less propose policies that might trim US exports at a time of massive trade deficits. But are there no US or Mexican political leaders with longer-term vision, willing to tackle this grossly-inequitable, morally-reprehensible situation?


© James S. Henry, Michael O'Neill, SubmergingMarkets™, 2004

June 22, 2004 at 02:05 PM | Permalink | Comments (0) | TrackBack

Thursday, April 01, 2004

"The Worst April Fool's Joke Ever:"
Brazil's 1964 Coup
The Foundations of Regressive Development

PDF Version
LBJ.jpg dita_mil.jpg

April 1, 2004 is not only April Fools Day in the US and Europe. It is also the fortieth anniversary of the worst April Fools’ joke ever,” as many Brazilians called it, the 1964 US-backed military coup in Brazil that overthrew the constitutional, democratically-mandated government of its populist President, João Goulart.

This coup led directly to 21 years of disastrous rule by Brazil’s military. During that period, the military cracked down sharply on all political opposition, independent trade unions, and critical media. It also piled up one of the world’s largest foreign debts, tried to develop nuclear weapons and intercontinental missiles, and pursued a national development strategy that favored the construction of huge, poorly-planned but highly lucrative hydro dams, Amazonian highways, and nuclear plants over investment in education and other basic human needs.

As described in more detail in the following excerpt from The Blood Bankers, all this proved to be very profitable for the officials, generals, and foreign and domestic bankers that catered to the regime’s needs.

But it also created a legacy of distorted development, poverty, concentrated land and media ownership, deforestation, environmental pollution, high-level corruption, and inequality, as well as a culture of violence and disregard for human rights.

Fortunately, Brazil, a country with 182 million people that accounts for more than two-thirds of South America's entire economy, returned to civilian rule in 1985. But it still struggles with most of these problems to this day.

As the following account makes clear, the US Government was deeply involved in encouraging the coup at the highest levels -- n.b. recently-declassified White House tapes and documents. Once in power, Brazil’s military also played a crucial role in the empowerment of right-wing regimes in several other Latin American countries, including Bolivia and Uruguay. Indeed, top US policymakers viewed Brazil’s military as a very useful agent, which could be used to impart a hard right spin to political development all over the Southern Hemisphere.

The standard apology for all this is that it was the price that had to be paid to contain the global Communist menace. When examined carefully in the bright light of day, this excuse turns out to be a canard. The fact is that Brazil never faced a serious revolutionary threat from the Left; that Goulart and his supporters were at worst populist, nationalistic land-reformers and union supporters; that the generals and their friends in Brazil's elite systematically exaggerated the leftist threat in order to justify their appetite for power, which gave many of them offshore bank accounts; that Presidents Kennedy, Johnson, and, later on, Nixon, were completely spooked by the Castro fiasco into overreacting to such populists all over the Third World; that the Brazilian coup completely undermined the rule of law, labor unions, human rights, and political freedoms for many years; and that it also led to decades of short-sighted economic policies that damaged millions of lives.

In short, if we really want to understand the roots of Latin America's comparative poverty, inequality, violent culture, and distorted development, as well as why many Latin Americans do not necessarily share the gringos' high esteem for their own role in history, the story of Brazil's 1964 military coup is a good place to start.


One long-time Brazilian banker recalled that at that time (the early 1960s) JPMorgan's position in Latin America was “essentially nowhere.” Years earlier, of course, it had been one of the first U.S. banks to do international banking. In the l880s, J.P. Morgan Sr. acquired Morgan et Cie in France and a third of London’s Morgan Grenfell, and in l908 the bank added Guaranty Trust Company, which had French, Belgian, and UK branches. From l890 to l930 Morgan floated more Latin American bonds than any other bank. But from the Depression until the l950s it had largely neglected Latin America. By l964, its entire Mexican exposure was only $15 million, and its Brazilian exposure just $50 million, and Morgan’s Latin American group was run by people who were ”not very aggressive....bright but not out-going.....(the head) would show up in Rio and wait at his hotel for clients to call on him.” Of the group’s five bankers, only Fred Vinton, the son of a long-time Citibank rep in Buenos Aires, had ever lived in Latin America. Citibank, Chase, and Bank of Boston all had local branches in Rio and São Paulo, but not Morgan.
fig. 5.3. Juscelino Kubitschek.jpg


Of course, at the time, Brazil was viewed as quite a risky place to do banking. Juscelino Kubitschek, the country's President from l955 to l961, had embarked on an ambitious ”Fifty Years in Five” program, promoting industrialization and huge projects like Brasilia, the new federal capital in the remote state of Goiás, that was aptly described as “the revenge of a Communist architect against bourgeois society.” Kubitschek’s program produced five years of 7 percent growth, unprecedented corruption, and the Third World's largest debt, $2.54 billion by l960. That may not sound like much now, but it consumed forty percent of Brazil’s export earnings. In l961, Janio da Silva Quadros, Kubitschek's successor condemned this debt in terms that later generations would fully understand:

All this money, spent with so much publicity, we must now raise bitterly, patiently, dollar by dollar and cruzeiro by cruzeiro. We have spent, drawing on our future to a greater extent than the imagination dares to contemplate.
Kubitschek’s excesses provoked a conservative reaction. In 1960, Quadros, a former Governor of São Paulo, ran for President on an anti-corruption platform with a broom as his symbol. He was elected, and took office in January 1961. His Finance Minister, a wealthy banker, quickly signed a tough IMF agreement that agreed to devalue the currency, slash subsidies, and repay the debt. quadros.jpg
Janio Quadros

But Janio Quadros soon proved to be one of Brazil’s weirdest leaders. He also tried to ban horse racing, boxing matches, and bikinis on the beach, and when the U.S. pressured him to embargo Castro, he defiantly journeyed to Havana and awarded Che Guevara the Ordem do Cruzeiro do Sul, Brazil's equivalent of the Legion d'Honeur. At one point early in his term he had been visited by Adolfe Berle, Jr., President Kennedy’s special assistant on Latin America. Kennedy was quietly seeking Quadros’ support for the upcoming Bay of Pigs invasion. According to John M. Cabot, the US Ambassador to Brazil at the time, Berle effectively offered “Brazil” a $300 million bribe in return for cooperation. But Quadros became “visibly irritated” after Berle ignored his third rejection, and sent Berle off to the airport unaccompanied. A few months later, in August 1961, Quadros resigned, complaining of being surrounded by ”terrible forces,” and blamed his downfall on a cabal that included “reactionaries” Berle, Cabot, and US Treasury Secretary C. Douglas Dillon.
fig. 5.4. Goulart and Kennedy.jpg
Goulart and Kennedy

This allowed the succession of João Goulart, Janio’s Vice President, a wealthy populist cattle farmer from Rio Grande do Sul. Goulart visited the US in April 1962, addressed a joint session of Congress, and received a ticker tape parade in New York City. But he immediately proceeded to alienate every key interest group at once, launching an aggressive land reform, boosting taxes on foreign investors, nationalizing utilities and oil refineries, and even encouraging enlisted men in the Army to organize a union. Inflation soared to the unheard-of level of 100 percent, exhausting four Finance Ministers in two years. All this was a splendid recipe for counterrevolution -- Brazil’s usually fractitious military leaders banded together and organized a coup, was supported by business, most of the “middle class,” and the U.S., which spent tens of millions of dollars on a covert ant-Goulart media campaign. In l963, Goulart's second Finance Minister visited Washington and asserted that the left-leaning regime’s social reforms had been inspired by President Kennedy’s so-called "Alliance for Progress" But he received a cold shoulder -- the US aid window closed down until April 1964, after the coup. As early as l962 U.S. intelligence had warned of coup preparations, and was more than sympathetic. As David Rockefeller, who was at that point the President of his family’s bank, Chase Manhattan, told a closed-door conference at West Point in the fall of l964, ”It was decided very early that Goulart was unacceptable....and would have to go.”

fig. 5.5. Amb. Lincoln Gordon.gif

Amb. Gordon

Ball and Johnson

A newly-declassified audio tape, recorded by the White House taping system on March 31, 1964, just as the coup was just beginning to unfold, shows President Lyndon Johnson personally involved in reviewing US support for the coup, and monitoring the latest developments. In a phone conversation with Undersecretary of State George Ball, who was coordinating US activities, Johnson expressed support for aggressive action: "I think we ought to take every step that we can, be prepared to do everything that we need to do, just as we were in Panama if that is at all feasible. I’d put everybody who had any imagination or ingenuity in (Ambassador) Gordon’s outfit or (CIA Director) McCone’s or yours or (Secretary of Defense) McNamara’s. We just can’t take this one, and I’d get right on top of it and stick my neck out a little.” US Undersecretary of State George Ball: That’s our own feeling about it, and we’ve gotten it well organized.”


The April 1, 1964, coup that followed -- ”the worst April Fool's joke ever” -- was led by General Humberto de Alencar Castello Branco, commander of the Fourth Army in Recife. During World War II, he had served with Brazil’s Expeditionary Force, which fought with the Allies in Italy. His “trench buddy” there was Colonel Vernon A. Walters, the U.S. “military attaché” from September 20, l962 to l967, who would later be promoted to Lt. General for his accomplishments in Brazil, and then move on to serve as senior CIA officer, the CIA’s Deputy Director from March 1972 to 1976, and Ronald Reagan’s UN Ambassador in the 1980s. Colonel Walters spoke fluent Portuguese and also very close to General Emílio Garrastazu Médici, head of Brazil’s Black Eagles military school during the 1964 coup, then military attaché to Washington (64-65), head of Brazil’s CIA, the “Serviço Nacional de Informaçoes (SNI)” from 1967 to 1969, and then Brazil’s President, courtesy of the junta.
castello.jpg Castello Branco
fig. 5.7. Gen. Vernon A. Walters.jpg

General Walters

During the coup, Castello kept both General Walters and U.S. Ambassador Lincoln Gordon “very well-informed of pre-coup deliberations,” a US Navy “fast” Carrier Task Group was standing by offshore, and six US Air Force C-135 transport plants with 110 tons of arms and ammunition were standing by, in case there was any resistance. Fortunately, the coup was almost bloodless, although there would be many disappearances, deaths, and cases of political torture during the 21 years that followed.

Castello Branco was supposed to step down after a short period of housecleaning, but Brazil’s military proved to be a better master than a maid -- it stayed in power from l964 to l985. At first, Castello turned the economy over to Octavio Bulhões, an academic-cum-Finance Minister, and Roberto Campos, a U.S.-educated ex-Jesuit and former head of Brazil’s powerful National Development Bank (BNDES), who became Planning Minister. Their reign from April l964 to March l967 was the first in a series of rather disappointing Latin American experiments with monetarism, the notion that controlling the money supply was the sine qua non of economic policy. To fight inflation, they reigned in credit, slashed spending (which they viewed as driving money growth, because the government was financing by selling bonds to the banking system) , and opened the door to imports. They also eased restrictions on foreign investment, eliminated taxes on foreign profits, and outlawed strikes. Dozens of labor leaders were jailed, and wages were frozen, although inflation was still raging at forty percent a year. But the regime was careful to protect investors against inflation by indexing bonds and bank deposits. A new capital markets law also created Brazil’s first investment banks and provided “the most sophisticated company law in Latin America.” In l965, in an attempt to control the money supply, Campos also created Brazil’s first Central Bank and a National Monetary Authority.

All these conservative measures went down rather well with bankers and the U.S. government. Regardless of who staged the coup, it soon became quite clear who would pay for it. From l964 to l970, Brazil got more than $2 billion of U.S. aid, which made it the third largest aid recipient in the world. About $900 million of this arrived in the first six months after the coup -- in l964, after the coup, the U.S. Treasury paid seventy percent of the interest due on Brazil's debt. In July 1964, Brazil also signed another IMF agreement, and in the next three years it got $214 million of IMF loans, which had been zero from l959 to l964. Brazil also suddenly became the World Bank’s largest customer, after getting no loans at all from 1950 to l965, as well as the largest borrower the IDB and from our old friends, the US EX-IM Bank. From l964 to 1970, direct investment by American companies increased fifty percent. In January l967, the IMF held its 22nd convention in Rio, presided over by General Artur Costa e Silva, a former War Minister and Castello Branco's successor.
fig. 5.9. General Golbery.jpg

General Golbery

Unfortunately for the majority of Brazilians living in poverty, most of this aid went to pay for budget deficits, planning exercises, and capital-intensive projects -- original Alliance for Progress objectives like “eliminating illiteracy from Latin America by l970” and “income redistribution” got short shrift. The real value of the minimum wage dropped by one-fourth from l964 to l967, and malnutrition and infant mortality rose dramatically. Domestic industry was hit by foreign competition and a recession at once, even as multinationals were getting cheap finance and lower taxes. Many foreign investors also got ”sweetheart” deals -- Campos was especially generous to Amforp, an American-owned utility, and in l965 the American billionaire Donald Ludwig was allowed to buy an Amazon forest tract twenty percent larger than Connecticut for $3 million. General Artur Golbery Couto e Silva, the military’s “gray eminence,” later became President of Dow Chemical do Brasil and a representative of Dow’s Banco Cidade. A top professor at the Escola Superior de Guerra, Brazil’s version of the National War College, and the author of the seminal Geopolitica do Brasil, in the early 1960s Golbery had used CIA funding to launch the Institute for Research and Social Studies (Instituto de Pesquisas e Estudos Sociais--IPES), the SNI’s precursor. Over the next two decades, the SNI would employ more than 50,000 people to spy on and otherwise deal with “subversives” at home and abroad. Golbery later served as head of the Casa Civil, a key aid to President Ernesto Geisel. Not surprisingly, along the way, Dow Chemical got special permission for a new plant in Bahia.

fig. 5.8. Roberto Campos.JPG

Roberto Campos


Ernesto Geisel

Soon, even nationalist critics started attacking Roberto Campos' program as a ”pastoral plan” designed by Americans to eliminate domestic industry -- he became widely known as ”Bob Fields,” “a full-time entreguista.” In l964, a popular Rio bumper sticker said, “Enough of intermediaries! -- (U.S. Ambassador) Lincoln Gordon for President!” In l966, the U.S. Ambassador complained that American advisors were implicated in ”almost every unpopular decision concerning taxes, salaries and prices.”

In October 1965, in the last free elections until l982, the military’s candidates for state governorships in Rio de Janeiro and Minas Gerais were defeated. Workers, students, and church organizers turned radical, and several civilian leaders who had supported the coup, including Magalhães Pinto and Carlos Lacerda, also pressed for new elections. There was a sharp increase in capital flight -- in 1966 Brazilians sent more money abroad than all the new foreign investment and foreign aid brought in. The nationalists in the military also began to treat the “internationalist” segments of the upper classes harshly -- they unleashed a spy operation to catch wealthy Brazilians who had foreign accounts. In November 1966 the police, assisted by Brazil’s intelligence service, the SNI, under the command of General Fiuza de Castro, raided the offices of Bernie Cornfeld's Swiss-based I.O.S. flight capital operation in seven cities, arrested 13 salesmen, and seized files on 10,000 clients.

Costa e Silva

All this set the stage for a hard-line backlash, led by members of the military who believed that the castellistas were selling out to foreigners and were not tough enough on subversivos. In late l966, Castello Branco gave way to the IMF’s favorite, General Costa e Silva. Political parties were consolidated into a ”majority” party, ARENA, and an official ”opposition” party, the PMB -- as they soon came to be known in the underground, the parties of ”yes” and ”yes sir.” Many opposition politicians, union leaders, and students were stripped of their civil rights. In December 1968, when a federal deputy asked Brazilian women to stop having sex with military officers until political repression ceased, the Army demanded that Congress lift the fellow’s immunity so he could be prosecuted for “insulting the Armed Forces.” When the Congress refused, Costa e Silva closed it, disbanded state assemblies and city councils, suspended habeas corpus, and imposed press censorship. Dictatorial niceties like arrests without warrant and torture now became common, while elections were reduced to ratifications of the military’s “bionic” candidates.

As for Roberto Campos, in March l967 he moved over to the private sector, giving way to a more dirigiste economic team. He never again exercised much power, although he served as Ambassador to England in the mid-1970s. His l982 diary reads like a “Who’s Who” of prominent Brazilians and Americans. Tony Gebauer was one of the friends listed there. But unlike some of his successors, apparently Roberto Campos didn’t do his private banking at Morgan -- the diary lists accounts at Geneva’s Pictet et Cie and Trade Development Bank, whose founder, Edmond Safra, also founded Republic Bank of New York and Safra Bank, and was an old Campos acquaintance.

So by 1967, Brazil was thus well on its way to becoming a marshal law state. With the support and guidance of the US government, a left-leaning, if democratically-elected, government had been vanquished, and a right-wing dictatorship put in its place. Especially after 1968, until the mid 1970s, the level of repression increased, and the number of political opponents who were murdered or “disappeared” reached into the low thousands. This was modest, compared with what went on in Argentina, Chile, and Paraguay, , but Brazil made up for the body count by sharing its early experiences with these countries. (See below.)


While Brazil’s military deserved much of the credit for this new system, the US national security apparatus also played a key role. One of its crucial long-term influences was a variation on the “Mighty Wurlitzer” concept that it had pioneered with great success in France, Italy, Germany, and Japan in the 1940s and 1950s, and continues to use right up to the present in places like post-Soviet Eastern Europe, Southeast Asia, Lebanon, Pakistan, Iraq, and the Philippines.

This was to develop a nation-wide media network that could be used to shape public opinion. In 1964, an energetic, personable young Time-Life executive named Joe Wallach went to work with Roberto Marinho, a Brazilian businessman who at that point was running a newspaper and a local TV station in Rio. Wallach, didn’t speak any Portuguese at the time, but he had a background in TV production and accounting in California. Suddenly he became O Globo’s Executive Director. “Time-Life” also invested $4 million -$6 million in a joint venture with Globo, a great deal of money for that time, which helped Globo buy up concessions and steal a march on its competitors. “Time-Life” and its friends also encouraged multinationals to direct advertising to Globo, which soon came to run a kind of advertising cartel. Meanwhile, Globo also was careful to take a pro-government line in its reporting – cynics came to refer to it as “The Ministry of Information.”

All this, plus the special licenses for satellite broadcasting, radio, and local stations that it received again and again from the government, made Globo prosper. Over the next twenty-five years, under Wallach’s leadership, TV Globo became the world’s fourth largest TV network. The deal was rather simple – Globo provided favorable coverage to its political allies, and they helped it get the TV, satellite broadcasting, radio, and cable concessions that it needed to keep growing. In special cases, the politicians and their families also shared in the ownership of these “goodies,” as we’ll see below.

Over the next three decades, Globo became one of the most politically-influential media empires in the developing world – by 1990 it owned 78 stations in Brazil, with more than 50 million viewers in Brazil alone, ad revenue of $600 million a year, 8,000 employees, more than 30 subsidiaries in Italy, Portugal, Cuba, Japan, and other countries, and it was producing and exporting TV programming to 112 countries. Furthermore, even after Brazil returned to democracy in 1985, Globo continued to exert strong influence over political selection of many key political leaders, including several Presidents. All along, it was a consistent opponent of candidates that it perceived as threats to the system, often using blatant propaganda to influence elections, as in the hard-fought 1989 Presidential race between Lula and Fernando Collor.

Only in 2001-2002, long after Wallach had retired and Roberto Marinho had passed the empire on to his evidently less-able sons, would Globo’s disappointments in Internet and cable investments and crushing foreign debts finally bring it down to earth – not unlike the similar fate that befell its original partners at “Time-Life,” now part of the hapless AOL Time Warner conglomerate. The Marinho family’s estimated wealth on the Forbes’ annual billionaire survey peaked at $6.4 billion in 2000, with the Internet’s peak. By 2002 they were down to their last $1 billion, barely eligible for a mention on the Forbes list.

Even then, however, Globo still would try to use its political influence as currency. In the 2002 Presidential race, in a move that must have made its original partners turn circles in their graves, Globo for the first time threw its support to Lula, the left-wing candidate, who ended up finally winning on this fourth try for office. Evidently, having backed the “system” that, as we’ll soon see, ultimately made Brazil the world’s largest debtor, Globo was hoping for some government relief from its own crushing foreign debts.


In any case, in addition to military action and media support, the top-down development strategy adopted by Brazil’s military and its foreign allies in the 1960s also had a crucial economic component. At first glance – and indeed, at second – this strategy was a little hard to reconcile with free-market principles and democratic rule. But it cleared the way for bankers like Tony to earn huge fortunes. As Auden says, “When there was peace, he was for peace. When there was war, he went.” These bankers joined forces with a corrupt coalition of officials, industrialists, and agro-exporters to support a new debt-intensive strategy that was designed and implemented by a powerful new Minister also named Antonio, who became one of JPMorgan's Tony Gebauer’s closest friends of all.

Antonio Delfim Neto was an extremely fat academic-cum-bureaucrat from a middle-class Italian family in São Paulo. In the l950s, he wrote a brilliant Ph.D. dissertation on the coffee industry and taught macroeconomics at the University of São Paulo (U.S.P.). In the l960s he was a consultant to Ralph Rosenberg, whose Ultra Group was the largest private investor in Petrobras, as well as Antonio Carlos de Almeida Braga, the owner of Bradesco, Brazil's largest bank, and Pedro Conde, another bank owner. From 1963 to l967, Delfim, in his late thirties, advised São Paulo governors Carvalho Pinto and Lauro Natel, who was on leave from Bradesco. Then, from l967 to 1985, Delfim came to wield more influence over the economy than anyone before or since.

He was as quick-witted as Campos, but most of his success was due to a lack of ideology. As Delfim said in l969, “I am not going to sacrifice development only to pass into history as someone who defeated inflation at any cost.” He was the grand master of bureaucratic infighting, inserting his “Delfim boys,” mostly U.S.P.-trained economists, into key positions all over the government, where they operated a kind of Florentine patronage system, keeping a running tally of favors owed to important people. “I was in the office of (an important banker) when Delfim called. He needed $5 million right away,” one banker recalled. “The only argument was how to get it to him. We knew he'd make it up to us.” In a country where most ministers rotated quickly, this network of favors and influence earned Delfim unusual longetivity. He was Finance Minister in l969-74, Ambassador to France in l974-78, Minister of Agriculture in l979, Planning Minister in l979-85, and even after civilian rule returned in l985, an important behind-the-scenes leader in Congress, where he also enjoyed immunity from prosecution. Among those responsible for Brazil's massive debt burden in the 1980s, only Tony Gebauer enjoyed similar continuity.

In August 1969, General Costa e Silva died of a stroke, after learning that his wife had helped deliver Brasilia’s telephone exchange contract to Ericsson, a Swedish company that bribed its way all over Latin America. Vernon Walter’s friend, the even-more hawkish General Emilio Medici (1969-74), then took over, and some of Delfim’s critics seized the opportunity to accuse Delfim of corruption. But he was so popular with all his other “clients” that Delfim was soon reappointed. He promised Medici, echoing the grandiose Kubitschek in the 1950s, “Give me a year and I will give you a decade.”

Medici.jpg General Medici

Meanwhile, from a national security standpoint, Medici was exactly what Brazil’s US allies were looking for – he visited Nixon, Henry Kissinger, and General Walters in December 1971. In the meeting just two weeks later with Secretary of State William Rogers, recorded in a transcript only just released by the National Archives in 2002, Nixon described Medici in glowing terms:

  • Rogers: “Yeah, I think this Médici thing is a good idea. I had a very good time with him at lunch and he…”
  • Nixon: “He’s quite a fellow, isn’t he?”
  • Rogers: “He is. God, I’m glad he’s on our side.”
  • Nixon: “Strong and, uh, you know…(laughs)…you know, I wish he were running the whole continent.”
  • Rogers: “I do, too. We got to help Bolivia. He’s concerned about that. We got to be sure to…”
  • Nixon: “Incidentally, the Uruguayan thing, apparently he helped a bit there…”

The “Uruguayan thing” was clarified in another transcript, recently released, of a Nixon conversation with Britain’s Prime Minister Edward Heath that same month. According to Nixon, “The Brazilians helped rig the Uruguayan election…Our position is supported by Brazil, which is after all the key to the future. ”(emphasis added.) He was referring to the November 28, 1971, elections, in which Uruguay’s Frente Amplio, a coalition of left-leaning political parties not unlike Allende’s Unidad Popular in Chile, had been defeated by the right-wing Colorado Party. The result was indeed unexpected, and evidently Medici had had a key role in it.

In March, 1972, the Colorado’s new right-wing President Bordaberry, gave Uruguay’s security forces a green light to go not only after the Tupamaros, Uruguay’s urban guerillas, but also against its labor unions, student associations, and political opponents. In June 1973 the military made Bordaberry a puppet, and in 1976 took complete power, following in Brazil’s footsteps. The result was a bloodbath that anticipated the thousands of political murders that later occurred in Chile, after Allende’s demise in September 1973, and in Argentina after its military seized power in 1976. By then, Uruguay, a country with just 3 million people that had once been known as “the Switzerland of Latin America,” had become its torture chamber, with more political prisoners per capita than any other country in the world. Like Brazil, once gone, civilian government did not return to Uruguay until 1985.

According to other newly-released documents, General Medici had also assisted with the right-wing in Bolivia in August 1971. More generally, it has recently become clear that Brazil’s military, with US support and coordination from the US, played a key role in training and guiding the repression that went on in Chile, Argentina, Paraguay, and Bolivia in the late 1960s and 1970s. As one scholar noted, “Brazil had a head-start on terror.” Even prominent journalists, like Waldimoro Herzog, who was murdered by the Brazilian regime in 1975, were not safe.

Indeed, one of the victims may even have been former President João “Jango” Goulart himself, who died in 1976 of a curious “heart attack” at the age of 58, at his ranch in Parana. Goulart’s family had long suspected that he’d been murdered by the military. In 2000, Brazil’s Congress finally got around to starting an official investigation of the death. Of course Brazilian Presidents have a history of unfortunate endings – Juscelino Kubitschek, Quadros’ predecessor, also died in 1976, in a car accident, and Tancredo Neves, the first civilian President after military rule ended in 1985, died after three months in office.

In any case, whether or not the “domino theory” really ever applied to Communist revolutions, clearly it worked quite well with respect to these Latin American right-wing regimes. And their US patrons discovered that with only a little nudge, one big domino – “the key to the future” – could wield extraordinary influence.


© James S. Henry, SubmergingMarkets™, 2004

1 The above is an excerpt from James S. Henry, The Blood Bankers. Tales from the Global Underground Economy. (New York: Four Walls, Eight Windows, December 2003, 417 pp.)

April 1, 2004 at 02:30 AM | Permalink | Comments (2) | TrackBack

Wednesday, March 10, 2004

The Theft of Mexico: How the 1988 Mexican Presidential Election Was Rigged

"De la Madrid Finallly Confirms: "Salinas Stole the 1988 Election!"
US Media: "How Did We Miss This STORY?"
WSJ: "NAFTA! - Another Triumph for Electronic Voting!""
Al Gore Comments:"Not Another Stolen Election!""

De la Madrid
Carlos Salinas
The following story is not one that leading US investigative media like The New York Times and The Wall Street Journal should be proud of, because for reasons that are unclear, they basically dropped the ball on covering it back in the 1980s. But it certainly still deserves their attention now. As former Mexican President Miguel de la Madrid has now confirmed in his autobiography, published this week in Mexico City, former Michoacán State Governor and Mexico City Mayor Cuauhtemoc Cardenas would have won Mexico's 1988 Presidential election, if not for the systematic fraud committed by the PRI, de la Madrid's party.

The following article examines this 1988 Mexican electoral fraud, one of the first "computer-assisted" electoral frauds that we know of, in detail. It considers how the fraud was perpetrated, the interests that it served, the corporate and government collaborators who knew about it at the time but kept still, and its far-reaching consequences for Mexico and the rest of Latin America.

Of course Mexico's electoral rigging was not unique. While this case had unusually far-reaching results, similar frauds have occurred in many other developing countries, as well as some "developed" ones. As the technology for organizing and conducting elections becomes more and more digital, some have hoped that we'd able to build in automatic checks and balances that would make traditional "paper ballot-stuffing" more difficult, if not impossible. As we've recently seen in the initial US experiments with electronic voting, however, and as this Mexican case also demonstrates, even sophisticated computer technology is not sufficient to avoid determined fraudsters -- especially high-level ones -- when the stakes are this high.

From the standpoint of First World foreign policy, this is yet another example of the fundamental ambivalence that First World powers like the US, France, and the UK continue to display toward popular movements and democratic choice in developing countries.

Where popular choice favors policies and interests that the First World supports -- as in Iran, Syria, Belarus, North Korea, and perhaps Iraq today -- the First World is all in favor of "democracy." Where popular choice favors policies and interests that it opposes, however -- as in this 1988 Mexican case, Chile in 1973, Venezuela in 2002, South Africa until the fall of apartheid, Nicaragua in 1984, China in 1989 and since, Indonesia until the fall of Suharto, the Philippines under Ferdinand Marcos, Mobutu's Congo, the West Bank/Gaza, Morocco, Haiti in 1991 and perhaps today, and Pakistan -- the First World has little compunction about supporting authoritarian regimes.

We might have hoped that this schizophrenia about authoritarianism was just a Cold War relic, which would have faded along with it. But it continues to this day, and seems to express a much more fundamental, unresolved tension between the First World's desire for "stable conditions and free markets" in these countries, and its desire to see them develop representative political systems.


President Miguel De la Madrid’s anointed successor in 1988 was Carlos Salinas de Gortari, a fortyish Harvard technocrat. Like his mentor, Salinas was a member of the PRI’s quasi-hereditary revolutionary family. His grandfather was a prominent Monterrey businessman, and his father, Raul Salinas Lozano, also a Harvard graduate, had been a minister of commerce in the l960s. Salinas was not only wellborn, but also precocious: At age four, he had picked up a pistol and shot his maid dead. He finished his Harvard Ph.D. in political science in l978 (his dissertation was on the “impact of government spending on elections”), and by l982, he was already minister of planning—the youngest Cabinet member ever at thirty-five.

Like de la Madrid and many other U.S.-educated elite/technocrats in the PRI’s “reform” wing, Salinas believed that Mexico’s main problem was its own bloated government. He favored downsizing the state, deregulating the economy, and actually increasing the role of foreign banks and investors. Despite a complete dearth of new loans, he and de la Madrid continued to pay all of Mexico’s foreign interest bills on time, repeatedly restructured the debt, and experimented with almost every idea on the bankers’ wish list, including debt swaps, securitization, debt conversions, and privatization. Mexico’s debt emissaries spent a fortune on innumerable junkets to Paris, London, Washington, D.C., and New York. Meanwhile, the country staunchly refused to be drawn into a debtors’ coalition with Brazil, Argentina, and Peru.

By the end of de la Madrid’s term in l988, there was precious little to show for his deference to foreign bankers. The debt cost more to service than Mexico earned from oil exports—tantamount to Pemex being handed over lock, stock, and barrel to the banks. From 1982 to l988, Mexico paid over $40 billion in interest and got back only $14 billion in new loans, half of them from the IMF and the World Bank.The country transferred more than a third of its savings abroad each year. In fact, taking flight capital into account, Mexico was a net lender to the outside world—more than $50 billion throughout the l980s. By 1985, the market value of its flight assets already exceeded the value of its entire foreign debt. And most of these flight capital outflows were actually captured by its major “creditors.” One Citibank private banker—operating surreptitiously out of the fourteenth floor of Citi’s office tower in Mexico City—bragged,“We could easily repay our loans to Mexico with the flight capital that we’ve collected here—you know, there really are quite a few fabulously rich Mexicans!”

Given the banks’ unwillingness to provide Mexico’s government with any more loans, the skepticism that foreign investors had toward the country, and the government’s reluctance to get tougher with foreign banks and its own domestic elites, Mexico had little choice but to rely on its own resources to finance investment. Since Salinas and de la Madrid wanted to shrink public spending and budget deficits and were unwilling to tax the elite, they raised interest rates to stimulate private savings. That reduced growth and unemployment, which was anathema to workers, campesinos, and “protected” business sectors. But the de la Madrid-Salinas program was supported enthusiastically by Mexico’s top families, bankers, the bureaucratic elite, union bosses, oil workers, police chiefs, and Army officers. Given the one-party system, these were the only constituencies that really counted. The economic program turned out to be very unpopular, and Salinas’s detractors in the PRI worried that it might be a mistake to bet on an uncharismatic technocrat in a period of rising political ferment. But this argument carried little weight with de la Madrid, who’d once been an uncharismatic planning minister himself. So in September 1987, Salinas was nominated the PRI’s candidate for president.

Almost immediately, the regime’s policies began to misfire. The global stock crash that took place in October 1987 actually started in Mexico City when the Central Bank suddenly lifted restrictions on investments in debt instruments, causing the Mexican stock market to lose three-fourths of its value in one week. Capital flight resumed, the government missed its budget targets, the peso sank like a stone, and by year’s end, inflation was at fifteen percent a month and rising. De la Madrid was forced to implement yet another round of “belt tightening,” squeezing credit and freezing wages and prices. Since 1981, Mexico had experienced seven years of negative growth. Real incomes for everyone but the elite had fallen by a quarter, and there were incipient signs of social unrest all over the country.The country stagnated under the weight of its foreign debt, which totaled $101 billion by l988.


Cuauhtemoc Cardenas

The July l988 presidential elections were the greatest challenge to the PRI’s hegemony in its history—at least until Vicente Fox won in 2000. In the party’s first deep split since 1929, Cuauhtemoc Cardenas, the PRI’s governor of Michoacan State and the son of President Lazaro Cardenas, who nationalized the oil industry in the l930s, joined forces with disenchanted leftists and nationalists to form the “National Democratic Front.” The Front’s radical rhetoric gave voice to widespread discontent. It also claimed to support democracy, but had a few strange bedfellows of its own, including Luis Echeverria Alvarez—Mexico’s president in the 1970s and one of Mexico’s wealth- iest men—and Hernandez Galicia, head of the powerful PEMEX oil workers' union. But at least it supported a popular job creation program, which it intended to pay for with a repudiation, or radical restructuring, of Mexico’s foreign debt.

Just a few weeks before the 1988 election, Cuauhtemoc Cardenas had been doing very well in the polls. Salinas, on the other hand, would have nothing to do with such irresponsible policies. The consummate planning bureaucrat-turned-free marketeer, he saw himself as continuing the tradition of authoritarian top-down reforms begun by Porfirio Diaz—the tough nineteenth- century dictator who ruled Mexico for thirty-five years with the support of the landowning elite—foreign bankers and investors, and his own well-heeled entourage.

Evidently, many Mexicans did not share Salinas’s enthusiasm for Porfirio Diaz or for the neoliberal agenda.To them, he was still just another in a long series of little-known, remote members of the Priista (pertaining to the PRI party), priestlike technocracy who came down from the temple every six years and went through the motions of seeking their mandate. Despite massive advertising on his behalf by the PRI’s machine (with help from Hill and Knowlton, the renowned PR firm whose clients had also included Duvalier and BCCI), as of election eve, non-government polls found that he and Cardenas were still running neck and neck. Of course many voters viewed all Mexican elections with skepticism, because of the PRI’s long history of election fraud. But Salinas and his predecessor, Miguel de la Madrid, had sworn this time it would be different.

Manuel Bartlett
On July 6, 1988, when the polls closed and the government started tallying the count at its central computing office in Mexico City, the country eagerly awaited the results. There was much disappointment when Manual Bartlett, the PRI’s interior minister in charge of administering the vote, announced the next morning that the Federal Election Commission’s computer system, supplied by UNISYS, had crashed and that the results would be delayed. When they finally emerged a week later, Salinas was declared the victor by a wide margin. Officially, the PRI received fifty-two percent of the vote, compared with the PRD’s thirty-one percent, and the business party PAN’s seventeen percent. Opposition leaders have claimed that the computer crash was contrived to buy time for rigging the vote once it became clear that Cardenas was winning. Despite widespread rumors, these claims were not easily confirmed. Many of those on the inside were too scared to talk, and, as noted above, Salinas’s foreign supporters, including leading newspapers like The Wall Street Journal (whose parent company, Dow Jones, added Salinas to its corporate board, and The New York Times did not investigate too deeply. Evidently a compliant, Harvard-educated, technically-competent neoliberal was expected to serve the mutual interests of Mexico and its trading partners better than Cardenas.


In June 1994, before Mexico’s August 1994 Presidential election, Computing, a UK magazine that focuses on technology, became interested in the computer failure aspect of the 1988 elections. It tracked down several data entry operators who had worked on the election and obtained the following eyewitness account of what had actually happened:

We arrived at work on the morning of July 6, election day, at the central computer and statistic official.When we got there we discovered that the rooms were empty and our computers weren’t there. We were ordered into a minibus and taken to the Government House (in Mexico City), to a room with blacked-out windows. Our computers had been set up there, complete with the voter database.We started to enter the data. As the supervisors saw that Salinas was losing, they ordered us to leave aside votes for the PRI and only enter opposition votes. Then, at about 3 A.M. on July 7, the supervisor called a halt, and with tears in his eyes, he told us: ”If you care for your families, your jobs, and your lives, enter all votes from now on in favor of the PRI. I went back to work and did as I was told. I wanted to cry, but I had to do it. They kept us there until five or six in the evening the following day. When I’d finished my work, I called up the voting record for my uncle, and to my astonishment the computer record showed that he, an opposition supporter, had voted for Salinas.That was when I realized why we had been told only to enter opposition votes in the beginning. While we were away from the computers, they had reversed all the data from the first session of data capture so all those votes showed up as Salinas votes.

To the consternation of the Salinas government, these details were confirmed in July 1994 by a former director of Mexico’s Federal Electoral Institute. But when Computing tried to verify them with UNISYS, the U.S.multinational that had supplied the computers used in the election, it responded that the 1988 “fault reports” for its Mexico subsidiary had been destroyed and that Unisys had “not been involved in the electoral process.”

In December 1994, Adolfo Onofre, the courageous computer consultant who had cooperated with the investigation of the Unisys computer “failure,” was arrested and badly beaten by Mexico’s Federal Police when he returned to Mexico City from Britain, where he had sought political asylum.


In the first instance, the 1988 electoral fraud made de la Madrid's successor, Carlos Salinas de Gortari, the President of Mexico, and also made him a very wealthy man. It also supplied him with many honors, including a Wall Street Journal board seat (from the early 1990s until April 1997), a near-nomination by President Bill Clinton in 1995 to head the World Trade Organization, and numerous speaking engagements at leading US universities like Stanford and Harvard, his alma mater.

More important, as discussed in more detail in our new book The Blood Bankers, it also cleared the way for Mexico's neoliberal "reforms" of the early 1990s, which set the pace for the entire rest of Latin America. These measures included the North American Free Trade Agreement (NAFTA); the privatization of Telmex, Mexico's state-owned telephone monopoly, Mexico's entire banking sector, and many other state-owned companies; and the rapid opening and deregulation of Mexico's capital markets that ultimately led to the catastrophic 1995 "Tequila" debt crisis.

At the time, these measures delighted Mexico's elite, foreign banks, and leading multinationals, as well as multilateral financial institutions. Even before his “election,” Salinas was already the favorite son not only of Mexico’s oligarchs and party bosses, but also of leading multinational investors like GE, Allied Signal, Alcoa, and GM, commercial banks like Citibank and JP Morgan, investment banks like Goldman Sachs and Morgan Stanley, and, unofficially, the US Government and its financial acolytes, the IMF and the World Bank. In two years before the l988 elections, these two government institutions alone provided Mexico with $4 billion of new credits, while private banks had helped out by by rescheduling $43 billion of Mexico’s outstanding debt -- huge amounts at the time. Before and after the election, a parade of First World leaders, including George H.W. Bush (who was good friends with Salinas’ father, Raul Sr.), Paul Volcker, Citibank Chairman John Reed, newly-elected World Bank President Lewis B. Preston (formerly of JP Morgan), IMF Director Michel Camdessus, and many lesser officials and bankers descended on Mexico to encourage its new-found passion for free markets. They praised the quality of the PRI’s Ivy-League-trained economists and touted Mexico as a model of stability and growth -- much as they had done with Ferdinand Marcos in the Philippines two decades earlier.

Then, at about 3 A.M. on July 7, the supervisor
called a halt, and with tears in his eyes, he told us: ”If you care for your families,
your jobs, and your lives, enter all votes from now on in favor of the PRI.
I went back to work and did as I was told. I wanted to cry, but I had to do it.

Computer worker,
1988 Mexican elections

After the 1988 election, foreign investors also stepped forward to ratify Salinas’ agenda. From 1988 to l994, Mexico became the darling of the international investment community, attracting more foreign investment than any other developing country except China. It accounted for nearly half of the $175 billion of new foreign direct and portfolio investment that poured into Latin America in this period. In the wake of the debt crisis, “foreign” investors -- including members of the domestic elite who secretly repatriated flight capital to avoid taxes and conceal their investments -- replaced foreign bankers as the leading suppliers of finance to Mexico and other “emerging markets, ” providing more than three-fourths of Mexico’s entire capital budget.

Much of this capital was attracted by Salinas’ privatization program, one of the most aggressive in Latin America. This involved selling off public assets in key sectors like telecommunications, steel, airlines, and banking, including the re-privatization of all the banks that President Lopez Portillo had nationalized in the early 1980s, and using the proceeds to finance the budget. By l994 this firesale had raised $24 billion, more revenue than in any other Latin American country.

As discussed in our book, in late 1994-95, this balloon was punctured -- Mexico experienced a sharp currency devaluation and a foreign debt crisis, with rising unemployment, declining real wages, and growing inequality. By the year 2000, relative to US per capita income levels, Mexico had fallen below where it stood when Salinas took power in 1988. (World Bank data - 2004).

Neoliberal economists have tended to compartmentalize the analysis of these "reforms," and also consider them apart from their political and social effects, including increased corruption and greater regional tensions within Mexico. Even the World Bank now concedes that NAFTA was "not a substitute for a development strategy," that real wages declined, overall unemployment rose, and poverty and inequality remained huge during the 1990s, and that NAFTA's maximum benefit to Mexico was "a rather small one" of +4-5% of GDP over 10 years -- a rounding error, compared with the -6% impact of the Tequila Crisis in 1995-96 alone. Other analysts, such as Carnegie, are even less enthusiastic.
Azcarraga.gif"El Tigre"

Salinas' fraudulent election also helped to facilitate the growth of narco-trafficking and high-level political corruption. The connections included Carlos Salinas' own brother Raul, who is now serving 27.5 years for murder. All told, the concentration of wealth and power produced during Salinas' term from 1989 to 1994 amounted to one of the most regressive wealth transfers in Mexico's history. As Don Emilio Azcarraga ("El Tigre"), one of Salinas' wealthiest supporters, told an audience of the PRI's wealthiest backers at a 1994 fundraiser for Ernesto Zedillo, Salinas' own hand-picked successor,

I, and all of you, have earned so much money over the past six years that I think we have a big debt of gratitude to this government. I'm ready to more than double what has been pledged so far, and I hope that most in this room will join me. We owe it to the president, and to the country.

The Mexican magnates responded to this challenge -- that night the PRI reportedly collected $25 million from each of them for a grand total of $750 million. That established a world record for a single evening’s fund-raising. (President Bush, restrain your envy!) Zedillo, a Ph.D. economist who has subsequently returned to Yale as a professor of international economics and Director of the new “Yale Center for the Study of Globalization,” must have been grateful for this incredible act of selfless generosity.


Padre Zedillo

In 1988, with the complicity of powerful interests at home and abroad, as well as many cheerleaders for the neoliberal orthodoxy in the US Government, multilateral financial institutions, and the Establishment Press alike, the Mexican people simply got robbed.


As we approach the US' own 2004 Presidential elections, with all the debate about "electronic voting," it is also interesting to note that computer fraud played a central role in Mexico's 1988 rigged election. UNISYS, the leading US company that supervised that election, has long refused to comment on what happened. But as we'll see below, its Mexico City employees apparently knew all about what was going on.

All told, the consequences of Mexico's 1988 stolen election have been very far-reaching indeed. Some will argue that the gains may have been "worth it" -- that, like Russia's neoliberal reforms in the 1990s, Mexico's ultimately left the country better off, even though they were very imperfect; furthermore, that Cardenas proved to be a disappointment in Mexico City, and if Salinas is to be believed, perhaps even a bit fallible himself.

But all this is really beside the basic point -- ordinary Mexicans were supposed to be allowed to make such judgments for themselves. In 1988, with the complicity of powerful interests at home and abroad, as well as many cheerleaders for the neoliberal orthodoxy in the US Government, multilateral financial institutions, and the Establishment Press alike, the Mexican people simply got robbed again. But perhaps that was such an old story that the US media did not consider it newsworthy.


(c) James S. Henry, Submerging Markets, 2004. All rights reserved. Not for quotation or other use without express consent.

March 10, 2004 at 03:05 AM | Permalink | Comments (1) | TrackBack

Saturday, March 06, 2004

Regime Change Comes to Haiti - Part II: French Hospitality

"Where's Jean-Bertrand? I Hear He's Locked Himself in his CAR!!!"
"France Exchanges Baby Doc for Titid!"
"Aristide Takes Lessons From Bongo, Bokassa, and Bozize in Bangui!"

Pres. for Life Bongo

Pres. for Life Bozize

Prresident Aristide, ousted from power just a week ago on February 29, has been desperately seeking asylum from his friend Thabo Mbeki, South Africa's President, who probably wishes the whole issue would just go away, but will no doubt grant it -- at least after the upcoming national RSA elections, on April 14. Several other countries in the Caribbean, like Panama and Costa Rica, were also willing to offer asylum. That seems only fair. After all, in the mid-1990s, Panama provided refuge to former Haitian general Raoul Cedras, the instigator of the first coup against Aristide, with his ocean-front apartment paid for by the US Government. In Aristide's case, US asylum was never offered; after all, he had never served in the FRAPH.

Apparently, however, someone decided that it would be more convenient to park Aristide in West Africa, 6200 miles away, rather than in Panama, a country that has regularly scheduled airline flights and is just 800 miles from Port-au-Prince.

Pending South African asylum, then, Aristide was compelled to accept temporary quasi-house arrest in the Central African Republic ("CAR"), a pathetic little submerging market that is even poorer than Haiti. This first-class hospitality was arranged for him by Dominique de Villepin, France's Ministry of Foreign Affairs, and France's favorite West African dictator, Gabon’s Omar Bongo.

As we'll see here, France has a long history of making such "special arrangements" for friends and foes alike -- including, in Haiti's case, a safe haven for "Baby Doc" Duvalier, who ran Haiti from 1971 to 1986, and a nasty, ultimately fatal imprisonment for Toussaint L'Ouverture, Haitii's George Washington, at the hands of a disgruntled Napoleon, who evidently never quite forgave the Haitian for beating his vaunted Army several times over. As Aristide contemplates Bangui's lakes and gardens, at least he can be grateful that he is not freezing to death in a prison cell in the Jura Mountains.


One of those who reportedly helped with Aristide's hastily arranged accomodations in the CAR, Omar Bongo, 67, is Africa's second longest serving "President for Life," and one of France's oldest and closest allies in Francophone Africa. He has ruled his impoverished-though-oil-rich country with an iron hand since 1967, with the help of Moroccan body guards and French security experts. As described in SubmergingMarkets™’ recent article on the Elf scandal, in the process, he developed an incestuous, mutually-lucrative relationship with top officials at Elf-Aquitaine, (formerly France’s leading oil company and now part of Total SA), as well as with leading French politicians like Jacque “The Crook.” He also developed private banking relationshpis with leading French and US banks -- including Citibank-NY, where he has reportedly secreted more than $180 million. No sentimental democrat or populist, Bongo has also arranged his country's political system so that he can remain in power until at least 2012 -- assuming that he lives that long, and that the fickle French don't turn on him.

In Aristides' case, according to one report, Bongo was able to prevail on his good friend Francois Bozize, CAR’s former Army Chief and current dictator, to open the door at least temporarily. According to another report, French Foreign Minister Dominique de Villepin called Bozize directly, with just 20 minutes notice, when the plane was already close to landing in CAR, to tell him that Aristide was about to arrive! France and Bongo had helped Bozize seize power from CAR's previous (elected) leader, Ange-Félix Patassé, in a March 2003 coup. That was CAR’s ninth coup since it became “independent” of France in 1960. Bozize remains utterly dependent on French aid, and is undoubtedly very concerned about his own stability, so the CAR is probably one of the few countries in the world where the arrangements for such a "hot guest" could be made so quickly. He and Aristide may have much to talk about. Minding their masters' voice, however, Aristide’s new hosts in CAR have already cautioned Aristide to curb his criticisms of the US and France.

Between his own stints in power, the CAR’s General Bozize was permitted to take up refuge in France-proper. So was Zaire’s Mobutu Sese Seko. So, too, from 1983 to 1986, in Haudricourt, northwest of Paris, was Jean-Bedel Bokassa, CAR's "Emperor" from 1965 to 1979, who also seized power in a French-backed coup. Bokassa, a French Army veteran and the recipient of the Legion d'Honneur and the Croix de Guerre, was famous not only for his 17 wives, for crowning himself Emperor, and for presenting former French President Giscard d'Estaing frequent gifts of diamonds and hunting trips, but also for slaughtering at least 100 school children who had refused to wear the school uniforms that one of his companies had made for them. He then dined on their flesh. (He was later tried for cannibalism.) This proved too much even for France, which in a rare display of progressive interventionism, removed him from power in September 1979.

While in the CAR’s capital, Bangui, Aristide might ask to visit the prison where the slaughter of these children took place in May 1979, as well as Bokassa's huge refrigerator.

Emperor Bokassa

France also welcomed former Haitian dictator Jean-Claude “Baby” Duvalier with open arms after his 1986 ouster. He and his father had ruled disastrously from 1957 on, helping themselves to a great deal of the country's wealth. So they clearly met France's rigorous admissions standards.

The warm welcome was also facilitated by the expensive villa Baby Doc purchased at Grasse, in the south of France, and the several hundred millions dollars that he diverted to leading French and Swiss banks. After Aristide’s sudden exit, Duvalier, 53, lost no time in voicing interest in returning to Haiti. This led some to suspect that he may have helped to finance the “Haitian contras.” But "Baby Doc" has also gone through an expensive divorce, and may be in poor health, so we will just have to see.

In any case, France has certainly made quite a distinctive contribution to Third World development over the years, by helping to make the world safe for dictators like the Bozizes, Bongos, Bokassas, Mobutus, and Duvaliers -- giving them refuge in continental France until they are ready to return home and, at least in several cases, establish new Life Presidencies. Aristide and his family may never qualify for the kind of hospitality that France reserves for dictators, however. If one is a relatively poor, democratically-elected, populist leader, with no bank accounts and no chateau, but with powerful enemies, one is not welcome in France. After all, what would be the profit in it?......

In Haiti’s case there is also another great French tradtion. This was established by Napoleon's memorable betrayal, seizure, imprisonment, and ultimate murder-by-neglect of Haiti’s national liberator Toussaint L’Ouverture in 1803, in violation of a promise of safe conduct. When questioned about this years later, when Napoleon himself had been imprisoned on St. Helena, he remarked, "What could the death of one wretched Negro mean to me?"

Even now, there is a faint whiff of similar French disdain toward Aristide, as expressed by Foreign Minister de Villepin's haughty criticisms last week. Few Haitians were even aware that France was still so interested in their affairs. We noted the opportunity that this situation affords to Paris for an inexpensive rapprochement with the US. In addition, however, one senses that to this day, there is a special French animus reserved for rebellious Haitian blacks -- the kind who dare to contort the French language beyond recognition, demand reparations for injustices that "Old Europe" can no longer can even remember, and once or twice even soundly trounced its greatest general's army!

Of course, we cannot forget that Colin Powell, Condoleeza Rice, and "Grand Master of the Order of the Sun" Roger Noriega, a Cuban-American, were also involved in these decisions. So there could not possibly be any question of racial prejudice here, at least on the part of the Americans....except perhaps for the mutual contempt that "house Negroes" and "field Negroes" often have for each other.


Aristide now claims that the US, which leased the 757 jet that took him to Africa, never informed him that he would be dropped off in the CAR. There are also reports that on his arrival in the CAR, he was accompanied by a detachment of 60 US Marines. This seems a little excessive for a "voluntary departure." Aristide also claims – like Hugo Chavez did after the attempted April 2002 coup in Venezuela -- that he never resigned voluntarily, but was pressured to flee – or even effectively “kidnapped” -- by US officials.

ProConsul Powell

The US Government and Colin Powell were evidently quite embarrassed by these charges, and annoyed that Aristide's wardens in the CAR did not make it more difficult for him to procure an international phone line. They have dismissed these accusations as “complete nonsense,” and blamed Aristide for the entire crisis.

But Colin and the USG are having more than a few credibility problems these days. What do we expect them to say? Even an outside observer with no particular brief for Aristide may be forgiven for having a few doubts. CARICOM has called for an independent international inquiry to establish just what happened -- but don't hold your breath. However, it may not really matter. Even on the face of it, as we've seen, the US' unwlllingness to defend Aristide was more than pressure enough.

Did the US really have an obligation to save Aristide from the wolves around him? After all, Haiti is not the 51st US state, and many Americans no doubt believe that he got what he deserved, after years of antagonizing his opponents. From this angle, he should be grateful for the rescue and the free ride to to the CAR.

However, this perspective is far too narrow. It is not as if the US has been a neutral bystander with respect to Haiti's development. The US embargoed the country from 1804 to 1862, at first to placate France, and then Southern slave owners, who feared the successful example of an independent nation of blacks. The US intervened repeatedly in Haiti's affairs, including the continuous occupation from 1915 to 1934, when, among other things, Citibank actually exercised complete and very profitable control over Haiti's money supply, national bank and customs house. The US established and trained the Haitian Army, which subsequently caused the country so much grief. We tolerated and supported the Duvaliers during their 29 years in power, as well as the military juntas that held power after they left. As noted above, The CIA was deeply involved with the people who organized the 1991 coup and created the FRAPH.

Only at the end of all this, partly just to contain Haitian immigration but partly out of a justifiable sense of responsibility, did we intervene in 1994 and restore the duly-elected Aristide to the Presidency. Taking this one step toward democratization, however, was not enough to insure democracy's success. And just because we don't like the particular choices that Haitians have made for their leaders, does not justify our walking away from the duty -- in this specific situation -- to see those choices through.

Instead, it now appears that the Bush Administration has decided to put this annoying populist Aristide behind us once and for all. At the same time, it probably also hopes that a quick US intervention, followed up quickly by UN surrogates, will avoid yet another messy immigration crisis in the middle of a US election year. Many Bush I Adminstration veterans no doubt still have nightmares about those troubling days in 1991-92, when Pappy just wanted to win Florida and 40,000 determined Haitian boat people started showing up on Miami's beaches, fleeing the nasty Cedras dictatorship.

The new approach does present an opportunity for self-important-but-increasingly-insecure countries like France, Canada, and Chile, which just volunteered more tha 120 troops, to come skulking back to the “coalition of the willing." I also permit recipients of USAID, IDB and World Bank funding – a high fraction of which actually gets spent in the First World, or on locals who have above-average incomes – to tap these sources again. There will also be many other benefits to the business elites, security forces, local politicians on the "right," "free trade zone" sweat shop employers, and perhaps even M-16 salesmen.

Indeed, the only beneficiaries who may be left out of this picture are ordinary Haitians – the seventy percent that still survives on less than $1 per day, and constitutes the core of Aristide’s supporters. Many of them have suffered directly from all the upheavals, and Aristide as well as his high-minded opponents share responsibility for their inability to settle their differences peaceably.

But it is also clear is that these millions of ordinary Haitians have just been disenfranchised again. However imperfect Aristide was, however discomforting to First World interests, he was their voice, a voice they've now lot. This is a form of political decapitalization that no amount of "economic assistance" can compensate for.

Did I remember to say that, for all its woes, Haiti is a remarkable place, with millions of people eking out a living on the very borders of existence, but also quite often managing to have a good time, creating the most wonderful art, music, humor, and community spirit? Unfortunately, for all its "independence," Haiti's fate has always been heavily influenced by outside forces.

Haitians of all political persuasians now eagerly await the next installment of neoimperialism's grand design for their tiny, impoverished, heart-breaking, "independent" republic.


© James S. Henry, Submerging Markets™2004. Not for quotation or attribution without express consent.

March 6, 2004 at 05:16 PM | Permalink | Comments (0) | TrackBack

Tuesday, February 10, 2004

The Drug Wars. Part One: The CIA Finally Gets One Right! September 2000 Intelligence Report: "PLAN COLOMBIA May Not Work!"

ByJeremy Bigwood and James S. Henry

Printable PDF File

uribeand_bushjpg.JPGUribe and Bush
As noted in Submerging Markets™' recent piece on Intelligence Failures, these are tough times indeed for the CIA and the other 13-14 members of the US intelligence community. Lest the CIA perceive that it gets no respect, however, we have recently surfaced one case where it may have done a much better job -- at least with respect to the Colombian cocaine trade, an arena where some cynics have occasionally accused the Agency of having first-hand experience. Even in this case, however, the Agency's foresight appears to have been largely wasted on its political bosses. Instead, the US Government has embarked on a really quite radical policy of increased intervention that is having profound consequences throughout Latin America.

The case in point is a September 2000 CIA Intelligence Report on "Plan Colombia," the multi-billion dollar drug eradication, counter-narcotics, and counterinsurgency program that was established since then by the Colombian Government, with the help of more than $3.13 billion of US military and economic aid – including $743 million this year alone, and up to $688 million for 2004, more than half of all US total aid to Latin America. Indeed, Colombia now ranks third in world among all US foreign aid recipients, behind only Israel and Egypt.

Clinton and Pastrana

This report, recently obtained by Submerging Markets™' Contributing Editor Jeremy Bigwood under a US Freedom of Information Act (FOIA) request, was prepared by the CIA’s DCI Crime and Narcotics Center for top members of the US government, including President Clinton’s National Security Council, the Secretary of Defense, and the US Drug Czar’s office. These officials and their successors under President Bush have always expressed great confidence in Plan Colombia’s ability to reduce coca production and curb cocaine trafficking, and also to help defeat narco-terrorism and bring peace, economic development, and social justice to Colombia, where an increasing proportion of the population -- up to 60 percent -- dwells in poverty.
This CIA document, "Plan Colombia’s Potential Impact on the Andean Cocaine Trade: An Examination
of Two Scenarios,"
raises serious doubts about all these expectations. It suggests that, even apart from its other harmful side-effects, Plan Colombia may actually just spread coca production and cocaine trafficking, as well as political instability and even guerilla activity, to other parts of Colombia, and to other Andean countries like Ecuador, Peru, Bolivia, and Venezuela.

That conclusion supports those critics who have long maintained that the supply of coca is very elastic, so that it defies any simple “supply-side” cures like eradication or interdiction. As the conservative magazine The Economist noted recently, there may well be a "balloon effect," with increased eradication in one area just expanding production elsewhere – especially in more remote, mountainous, and cloudier regions where crop spraying is harder, or in nearby countries where the police and military are weaker or even more corrupt.

Moreover, as this CIA study notes, wholesale coca eradication may just destroy large amounts of ordinary food crops like cassava, which are much less robust than coca. That, in turn, would alienate thousands of local farmers, creating new recruits for radical movements like the FARC, and helping to spread their influence to new regions of Colombia and other countries.

All told, the study indicates, it is hard to make Plan Colombia out to be anything less than a high-risk gamble with the future of the entire Andean region.


After decades of traditional law enforcement efforts, in the mid-1990s, partly because of US pressure, Colombia began experimenting with eradicating coca by spraying chemicals like Monsanto's "Round-Up" from small, US-provided OV-10 and Turbo Thrush" crop-duster" airplanes, protected by heavily-armed helicopters. The aerial spraying program has been the subject of law suits in both the US and Colombia because of its destruction of food crops, and its potential harm to the environment.roundup_jugs.gif

The CIA report examined two alternative scenarios for the effects of this eradication program. In the first scenario, it assumed that 50 percent of southern Colombia’s coca acreage would be eradicated by the year 2005. According to the report, this degree of eradication:

"(W)ould simply encourage substantial new cultivation elsewhere in Colombia. Farmers probably would be able to compensate for their losses by growing elsewhere in Colombia; therefore, only a limited number of growers in border areas would cross international boundaries to plant new fields."


The second scenario looked at the effects of a 80 percent reduction in coca acreage in southern Colombia:

"…(T)he 80-percent scenario would almost certainly lead to increased cultivation in neighboring countries as traffickers in Colombia faced the prospect of declines in potential cocaine production…..While Colombian traffickers likely will try to make up for declines in domestic production by increasing their importation of cocaine base from neighboring countries, especially Peru, they may choose instead to increase cocaine production outside of Colombia. Successful eradication and interdiction programs combined with Bogota’s aggressive extradition policy would create an increasingly hostile environment for the drug trade and induce many traffickers to take their business into neighboring countries. This would result in a further decentralization of the Andean cocaine trade, with multiple centers of cocaine production and an increasingly complex web of trafficking networks. [REDACTED WORD]

….Significant spillover of coca cultivation and drug trafficking from Colombia into neighboring countries is likely if Plan Colombia achieves levels of eradication approaching our 80-percent scenario…..Peru, and to some extent Bolivia, would face increased market pressures that probably would fuel a resurgence in coca cultivation. Already, Peru’s cocaine trade - dealt a significant blow by a potent combination of interdiction, eradication, and alternative development successes in the late 1990s - is showing signs of recovery; and Colombian traffickers are making increased use of Ecuadorian, Venezuelan, Brazilian, and Panamanian territory to reach the US and European cocaine markets. Although less likely, rising coca prices resulting from Colombian supply shortages could put at risk Bolivia’s significant accomplishment in dramatically reducing its illegal coca supply.”


This September 2000 CIA analysis appears to have been astonishingly accurate. Strictly speaking, of course, it was not really a “forecast” at all – it merely laid out two plausible “what if” scenarios, and didn’t choose between them. However, the potential negatives associated with the spillover effects in both cases should have been enough to put any policy maker on notice that they were playing with fire. Unfortunately, both the Clinton and Bush administrations ignored apparently overlooked, or ran roughshod over, this possiblity.

Indeed, as argued in more detail in our upcoming analysis of overall drug war history, over the long run, the long-run effects of US “supply-side” policies toward drug enforcement and coca eradication have been nothing short of disastrous, especially for the "producer" countries. There have already been several profoundly negative effects:

  • First, the dismantling of the Colombian cocaine cartel in the 1990s opened up coca farming and the entire cocaine industry to thousands of new independent coca growers, dozens of new cocaine producers and many new distributors. Ironically, this “success,” combined with a long-term exogenous reduction in the demand for cocaine that little to do with increased drug enforcement, combined to produce to a dramatic long-term fall in cocaine “street” prices in the US and Europe since the 1980s. This may be good news for cocaine users. But it is just the opposite of the effect we’d like to see, if the aim were really to discourage drug use.
  • colombia_05.jpg

  • Second, US policies helped to actually stimulate coca farming, diverting it from Peru and Bolivia to Colombia, which traditionally had focused on cocaine laboratories and left the production of leaves or “base” to its neighbors. In the late 1990s, this surge in coca farming, in turn, provided an enormous new source of income – by way of the taxes they levied on the farms, as well as direct trafficking -- for Colombia’s armed guerillas, led by the FARC on the left and the AUC on the right.
  • As the CIA predicted, Plan Colombia, backed by US funding and direct military assistance, is indeed encouraging coca farming to spread to other areas inside Colombia, as well as to neighboring countries like Ecuador, Venezuela, and Brazil, as well as back to Bolivia and Peru.
  • Even more important, the resulting militarization of the cocaine trade meant that what had formerly been mainly a law enforcement problem has now became a serious political and national security problem, involving not only for Colombia but all its neighbors. This is having a destabilizing political effects on the whole region. Among the key side-effects:
    • A growing civil war throughout Colombia over coca eradication, and ahumanitarian crisis that has already produced more than 2.6 million refugees.

    • A new populist government in Bolivia that derives a great deal of its momentum from the anti-eradication movement, and mounting pressures on Ecuador’s new populist government, led by Lucio Gutierrez;
    • The revival of left-wing guerillas and the reported appearance of the FARC in Peru; the internationalization of FARC activities in other Andean countries;
    • Growing tensions between Venezuela’s populist leader Chavez, the US, and Colombia, with several clashes recently reported between Venezuela's National Guard and Colombian forces.

    Given all this instability, it now appears likely that Plan Colombia’s “success” will depend on whether it is quickly folowed up by a Plan Ecuador, a Plan Peru, and a Plan Venezuela, and a Plan Bolivia. This is a recipe for endless civil wars, not for peace and the kind of economic development that is the only real solution to the "coca farming problem."

    Would that the senior national security advisors and drug czar bosses who are designed these cleve policy initiatives had paid a little more attention to their long-run effects, as well as to the lowly CIA analysts who seem to understand them. Where is "worst case" analysis when we really need it?


    ©SubmergingMarkets.Com, 2004. All rights reserved. Not for reproduction or other use with express consent.

    February 10, 2004 at 02:30 AM | Permalink | Comments (0) | TrackBack

    Sunday, February 01, 2004

    Third (and First) World Ferry Accidents – “Tragic Misfortunes” or Predictable Consequences?

    Printable PDF Version

    News Flash! - Another Tragic Ferry Accident in the Congo! - Hundreds Missing!
    Ferry Accident on Zambezi Claims 18 Lives!
    Flash! - Ferry Mishap in Bangladesh, 300 Feared Dead!
    Evidently January 31st is not the best day of the year to take a ferry ride. This marks the 50th anniversary of one of the worst ferry disasters in the UK’s history – the 1953 sinking of the Princess Victoria, a British Rail car ferry that was caught out in unusually stormy seas in the Irish Sea, with the loss of 130 lives. And just today (1/31/2004), in northwest Congo, an overloaded ferry caught fire and sank on the Congo with the loss of at least 200 lives.
    Such ferry mishaps have long been a staple item of disaster news all over the globe. With few exceptions, most conventional media coverage presents them -- and of course all the damage done by mudslides, forest fires, and earthquakes as well -- as "tragic accidents," the almost-unavoidable byproducts of happenstantial factors like overcrowding, bad weather, crew mistakes, fires, and collisions that are (ala Les Liason Dangereux)"beyond our control."

    However, a closer look reveals that more systemic factors are also at work, not only in the Third World, but also in the First.


    The Staten Island Ferry, the US’ second most popular, is normally safe and reliable. It carries an average of 70,000 people back and forth each day to Manhattan. So New Yorkers were suitably shocked last October when the 3335-ton ferry plowed into the docks on Staten Island at 17 knots, killing 11 people and injuring at least 42.

    As a result, financially-strapped New York City has already been sued for more than $3 billion in damages, and has had to ask a court to invoke a maritime statute that may limit its liability to the value of the vessel -- a paltry $14.4 million.

    But this limitation could depend on where the blame is ultimately placed. Initially the City tried to place it entirely on individual crew members – for example, a possible medication-induced blackout by the pilot, the alleged absence of the ferry’s captain from the wheelhouse, and the possibility that other crew members may have been playing cards rather than keeping watch.

    However, since Federal prosecutors and the US Department of Transportation’s (DOT’s) National Transportation Safety Board have entered the investigation, it seems that other more systemic contributing factors are emerging. These include the Port Captain’s alleged failure to distribute and enforce safety rules, the absence of state-of-the-art navigational equipment and warning systems that are routinely used, for example, on Seattle’s ferries, and inadequate training programs for crew members. There also appears to be a general pattern of nepotism and corruption in the management of the entire Staten Island ferry system.

    While it is premature to reach final conclusions about the relative influence of these various factors, it is already clear that the "pure accident" theory of this event -- the worst accident in Staten Island Ferry history -- is inadequate.


    The residents of sub-Saharan Africa, as well as countries like Bangladesh, the Philippines, Indonesia, and China, are intimately familiar with all these pathologies. They must have marveled at the attention that was showered on the comparatively small Staten Island accident by the global media. After all, these countries routinely suffer ferry accidents that take hundreds and even thousands of lives.
    We’ve already noted the latest Congo River mishap. A cursory review of other accident reports shows that in 2003 alone, another Congo ferry “accident” claimed 163 lives, one in Bangladesh claimed “hundreds,” and there were others in Tanzania, Somalia, Zambia, and Burundi that took an average of fifty lives each. In 2002, yet another Bangladesh ferry “accident” claimed 300 lives, one in Indonesia took 60, and in Senegal, a ferry loaded with 1800 people, twice its capacity, flipped over, with no survivors. There have been literally hundreds of other such sinkings. The all-time record appears to have been a Philippines sinking in 1987 that claimed 4,341 lives – the greatest number of ocean fatalities in nautical history.

    Of course any one of these incidents, taken in isolation, may be understood as a “tragic mishap.” But from a slight distance, what is most striking is how repetitive they are – not only in terms of the specific countries involved, but also the very same locations in the rivers and oceans, the very same ferry owners, the same regulatory authorities, and in some cases even the same (salvaged) vessels.

    (Indeed, in the case of the Staten Island Ferry, the most recent 2003 incident had similar, though much less costly, precursors in 1998, 1992, 1978, and perhaps others.)

    All this suggests that, as is now coming to light in Staten Island, what we have here are not just random accidents and errors, but recurrent market and regulatory failures.

    In particular, the fact is that, especially (but not exclusively) in the developing world, ferry owners – whether public or private -- almost never face any substantial civil liabilities or criminal sanctions for such mishaps after the fact, and the safety and training regulations that they implement before the fact are often wanting. Furthermore, as in the case of New York City’s efforts to limit liability, lawsuits in these countries may not afford any adequate relief where ferries are state-owned. And pursuing them is also often beyond the means of the victims' families.

    Given this after-the-fact impunity, there is little incentive for ferry owners or managers to enforce restrictions against overcrowding, or to invest in adequate crew screening, training, and drug testing, as well as up-to-date navigational and safety equipment. New Yorkers, be warned….

    The implication is that unless such conditions change, those of us who relish a regular diet of “tragic ferry accidents,” especially from the Third World, are unlikely to be disappointed. “Oh, the horror…..”


    © James S. Henry, 2004. SubmergingMarkets.Com

    February 1, 2004 at 02:15 AM | Permalink | Comments (1) | TrackBack

    Tuesday, December 02, 2003

    Transnational Criminals – Part 4: SGS, Pakistan, and the "Pre-Shipment Inspection" Racket

    Printable PDF Version

    fig. 1.34. Benazir Bhutto.JPG
    Asif Ali Zardari

    Pinky Bhutto

    How’s this for a global racket that most people have probably never even heard of – the “pre-shipment inspection” (PSI) industry?

    This industry’s target market includes the world's most impoverished, corruption-ridden countries – places like Bangladesh, Bolivia, the Congo, Haiti, Kenya, Nigeria, Pakistan, Togo, and Zimbabwe, all of which have per capita incomes below $1000 a year, and also consistently rank in the bottom quarter of Transparency International’s annual corruption ratings.

    The industry is dominated by a tight-knit group of five global “competitors” that generates more than $800 million a year of revenue and $150-$200 million in profit from inspection contracts with 44 of these desperately poor countries.

    These companies’ owners include some of the richest people on the planet, who dwell in premier capitals like Geneva, London, Paris, and Milan, plus a 12th century Swiss castle and a 15th century Tuscan villa or two.

    In addition to its direct costs, the industry has many other harmful side-effects. After forty years, development specialists are finally realizing that it has probably actually discouraged bureaucratic reform, boosted trade barriers, and encouraged even more corruption than it has prevented.

    In fact most of these PSI companies cut their teeth on servicing the world's worst dictatorships, including Mobutu's Zaire, Suharto's Indonesia, Marcos' Philippines, and the current crop of autocrats in Uzbekistan and Kazahkstan.

    They have also recently been convicted of bribing senior Third World officials to secure PSI contracts. For example, as we'll see, in the case of Pakistan, a recent Swiss magistrate's decision in a long-fought court case indicates that SGS and Cotecna Inspection SA, two of the industry’s long-time leaders, really did bribe Benazir Bhutto, the former Prime Minister of Pakistan and leading members of her family throughout the 1990s, with the help of major Swiss, American UK, and French banks and a coterie of Swiss lawyers.

    In effect, all these "Western" institutions helped to undermine Pakistani democracy and its chances for providing a democratic alternative to Islamic fundamentalism and military dictatorship. In these times, when the cause of Islamic democracy has belatedly become a rallying cry for US foreign policy, this is an important missed opportunity for us to understand.

    Despite this dubious track record, the World Bank, the IMF, and the UN have failed to discipline these PSI companies. Indeed, they have often even insisted that developing countries hire them, and have hired several of these companies themselves, to police programs like the World Bank’s “anti-corruption” standards and the UN’s (pre-invasion) Iraqi “food-for-oil” program!

    All told, this is an extraordinary tale. It illustrates the perverse effects of poorly-conceived privatization and outsourcing programs, as required by our leading “development” banks. It shows just how difficult it is for our transnational justice system to keep pace with its arch rival, the global haven industry. And in Pakistan’s case, it shows how vulnerable democratic development can be to corruption -- in this case, as encouraged and facilitated by a coterie of unscrupulous First World bankers, lawyers, and PSI companies. With friends like these.......


    Welcome to the curious world of “pre-shipment inspection (PSI)” services – a First World-based industry that is really a throw-back to the “tax farming” of the Middle Ages, when European governments outsourced tax collection to private agents.

    The PSI industry’s value proposition is quite similar to the medieval one. Because of rampant corruption, many of the world’s poorest countries distrust their own customs bureaucracies and export agencies, so they are willing to hire expensive private firms to backstop them, in effect privatizing” the collection of duties and foreign exchange earnings. As in the case of medieval tax farming, the remedy has often turned out to be worse than the disease.

    Our examination of the PSI industry also revisits the corruption allegations that surrounded Pakistan’s former Prime Minister Benazir (“Pinky”) Bhutto, who held power during two very influential periods in the 1990s. In the late 1990s, there were numerous stories in leading Western papers like The New York Times about her alleged involvement in corruption. As we’ll see below, the substance of these stories has recently been confirmed by developments in several Pakistani and Swiss court cases. Indeed, Bhutto and her husband, Asif Ali Zardari, have recently been convicted in a Swiss court of having profited enormously from bribes that were paid by a wide variety of First World companies, including several in the PSI racket.

    However, our perspective here is a bit different from that of the original newspaper reports on this scandal, which focused on the Bhuttos’ corrupt behavior, with much less attention to the Western companies, banks, and lawyers that facilitated it. Recent court cases have also added greatly to our knowledge of precisely what transpired in this case. If the West is really serious about encouraging “democracy” in Islamic countries like Pakistan, this is a good place to start -- for it shows that "reform" is not only a matter for developing countries.

    As global industries go, the PSI industry is relatively young. It was born in the Congo (formerly “Zaire”) in the mid-1960s, after Joseph Desire Mobutu declared himself President-for-Life in 1965. With backing from the Belgian secret service, the CIA, and the UK, Mobutu, a former journalist and army commander, helped to organize the September 1960 ovethrow of the left-leaning, if duly-elected, nationalist, Patrice Lumumba. With substantial help from the US, by 1965 Mobutu had consolidated power, which he ended up retaining until he died of pancreatic cancer in September 1997. In the process, he turned his country into a private fiefdom for he and his family, and an abattoir of corruption and repression.
    fig. 1.29. Mobuto.jpg

    Mobutu owed his power base and longetivity not only to “foreign friends” in Brussels, Paris, and Washington, but also to his ability to siphon off Zaire’s export earnings from its rich deposits of copper, cobalt, industrial diamonds, uranium, and gold, and carve up the loot with his cronies. So Mobutu was permanently en guarde for the likelihood that his underlings were no less venal than he was. In late 1965 he hired the Swiss firm Sociéte Générale de Surveillance Holding SA (SGS) to help him insure that Zaire’s Customs Bureau, tax authorities, and export companies were not cutting side deals, concealing foreign exchange earnings and evading duties on imports and exports. He also wanted to check that Zaire’s traders were not “over-invoicing” their imports and parking the difference between official and actual import prices in offshore havens like Switzerland, where Mobutu himself had stored much of his wealth. (True to form, after he lost power, Swiss banks were only able to locate about $4.3 million of Mobutu’s fortune. As Imelda Marcos once said, “It’s easy to put money in Switzerland, but it is almost impossible to take it out.”)


    The original concept behind the PSI business was that foreign inspectors employed by companies like SGS would examine exports to Zaire before they left, to verify contents, tariff classification, and price levels, and make sure there was no over-invoicing. SGS compiled the data and share it with the country’s Finance Minister or, in Mobutu’s case, the Life President himself.

    PSI was not SGS’ first business. By the time Mobutu became a client, this Swiss family-owned company was already ninety years old, with a solid customer base in industrial testing and trade certification, and scores of testing facilities all over the world. Its original role had been to certify goods destined for foreign buyers, and it also traded commodities.

    However, with the encouragement of the IMF and the World Bank in the 1980s, SGS’ largest and most profitable activity came to be the provision of PSI services to developing countries like Mobutu’s Zaire, Marcos’ Philippines, Moi's Kenya, and Suharto’s Indonesia, where in 1985 SGS signed its first deal that focused primarily on customs duties. By the mid-1990s, SGS had offices in 140 countries, up to 39,000 staff, and more than $1.2 billion in revenues – a quarter from PSI services for developing countries. By then, several other firms had entered the market, including Intertek, BureauVeritas, BSI Inspectorate , and Cotecna Inspection SA, which SGS acquired in 1991-94, and then sold back to its owners in 1997.(See below.) However, of the 29 developing countries that had signed PSI contacts by 1994, SGS accounted for more than a third.

    All this was very good news for SGS’ shareholders, not only its Swiss founding family, but for three other key investors who had acquired effective control over the company. These included the German mult-billionaire Baron August von Finck, whose family came to control a quarter of SGS’ voting stock; the Agnelli family (owners of the Fiat Group), which controlled at least another quarter of SGS by way of Worms & Cie, a Paris-based private equity firm that the Agnellis had acquired in 1990; and SwissLife, Switzerland’s leading insurance company, which ultimately acquired about ten percent.
    (An irresistible aside: Another troubled SwissLife investment, the Lugano-based private bank Banco del Gottardo, was perhaps even more exotic than SGS – in the 1990s, it reportedly developed extensive connections with senior Russian advisors to President Yeltsin , Argentina’s President Menem, , and a key Swiss/Italian money launderer for Iraq’s Saddam Hussein. SwissLife bought the bank in 1999 and put it up for sale in 2003.)

    Baron von Finck, in particular, was one of Germany’s most influential business people. In 2003, Forbes estimated his net worth at $5.6 billion, which made him the world’s 52nd richest person.

    All this wealth was derived mainly from coming down the right chute. Born in 1930, August was the grandson of Wilhelm von Finck, who had founded the Munich-based private bank Merck, Finck & Co. in 1870, and German’s top insurance company, Allianz AG, in 1890. August and his ancestors did have to be clever enough to hold on to these assets through two World Wars and the dicey Nazi period from 1933 to 1945. Somehow they managed to do so, despite the fact that Allianz AG was one of a handful of leading Germany firms that had collaborated closely with the Nazis. (See the insert. )
    In 1990 the Baron sold the Munich bank to Barclays Bank and moved to Switzerland, where he now resides in Schloss Weinfelden, a twelfth-century Swiss castle. In addition to his SGS holdings, he and his family still own the Swiss restaurant and hotel chain Movenpick, half of the leading German brewery Würzburger Hofbräu, the U.S. gold mining company Homestake Mining, and at least five percent of Allianz AG, which is now a leading global insurance and asset management giant whose ads are now featured prominently on the nightly news in the US. Until 1999 Finck, his brother, and his son also owned Alusuisse-Longa, Switzerland’s only aluminum company, and until October 2003, Spaten, Dinkelacker, the Munich brewery that produces Lowenbrau.


    As Allianz AG itself now admits, its behavior during the Nazi era was execrable. One of its key managers, Kurt Schmidt, served as Hitler’s Economy Minister from 1933-35, and then returned to Allianz as its CEO. The firm cultivated very close relations with leading Nazis like Hermann Göring and Heinrich Himmler in the 1930s, helped the Nazis seize insurance proceeds that belonged to the Jewish victims of the 1938 Kristalnacht pogram and the Holocaust, and even provided insurance to the Nazi SS for Auschwitz’ death camp facilities.
    In 2000, Allianz was one of several Germany companies that contributed to a DM 5 billion ($3 billion) fund for Holocaust victims, including 300 million marks for those who’d been robbed of their iinsurance. Of course no amount of financial aid could compensate victims like James Freudenberg, the former Chairman of Allianz’s Frankfurt subsidiary who was forced to resign in 1934, and ended up being murdered at Auschwitz in 1944 – presumably in the same facilities insured by his former employer.

    Despite all this, after the war, key Allianz shareholders like the von Finck family were permitted to retain their positions – probably with help from Swiss banks and foreign trusts. As noted in the main text, they also regained control of many other Germany and Swiss companies, including SGS. SGS was also accused of holding World War II funds that belonged to Holocaust victims, although it has always denied the charges. (For more details, see Business Week, September 5, 1996, "More evidence of hidden holocaust cash,” p.38; and Reuter European Business Report, September 20, 1996, "SGS defends wartime role, says no Jewish funds.")


    fig. 1.27. James Wolfensohn, World Bank President.jpg

    James Wolfensohn

    From the 1960s on, SGS’s strategic role in developing countries made it a convenient perch for several First World institutions that wanted to monitor global trade and corruption. In the early 1980s, for example, the World Bank and the IMF started to insist that developing countries that received their financial assistance hire outside PSI companies like SGS. In June 1996, the World Bank President, James Wolfensohn, selected SGS as the Bank’s very first global programs auditor, as part of its new “spot audit” program to get tough on project corruption in developing countries. As noted below, in 1992 and again in 1999, the UN also hired Cotecna, an SGS subsidiary from 1991 until 1997, to police its “oil-for-food” program for Iraq.

    R. James Woolsey

    Meanwhile, SGS also acquired some interesting high-level connections in the intelligence community. For example, R. James Woolsey, who served as CIA Director from 1993 to 1995, listed SGS as one of his key clients while he practiced law from 1991 to 1993, during a brief break from government service. When he returned to private practice from the CIA in 1995, he once again listed SGS as one of his key clients at the leading Washington D.C. law firm of Shea & Gardner, until he left the firm to join Booz Allen Hamilton in 2003. (SGS remains on Shea & Gardner's client roster.) As we will see shortly, these must have been instructive times for former CIA Director Woolsey to have been “of counsel” to SGS.


    Of course no global enterprise with thousands of employees in dozens of developing countries can really be expected to be “Snow-White” all the time. But it is ironic that First World companies like SGS, which are supposed to be engaged in the very business of fighting corruption, have sometimes actually turned out to be among the worst offenders. Indeed, like many other Swiss companies and banks, SGS’s corporate culture appears to have tolerated and even encouraged such behavior, with a kind of "its only the wogs" mentality.

    In September 1997, just a year after SGS received its World Bank appointment, the firm was revealed to have been deeply involved in bribing Pakistan’s former President Benazir Bhutto, her husband Asif Ali Zardari, her brother-in-law Nasir Hussain, and several other intermediaries. The payments, which totaled about $15.0 million, were made by way of shell companies in the British Virgin Islands, Swiss lawyers, and several Swiss bank accounts, including severral at the Geneva offices of UBS, Barclays Bank, office, and Banque Pasche. They were intended to help SGS and Cotecna, a competitor that SGS acquired in 1991-94, win lucrative Pakistani government contracts for PSI services.


    Zhulfikar Ali Bhutto

    Such high-level transnational corruption naturally requires “supply” as well as “demand.” In Pakistan’s case, a significant part of the “supply” during the early 1990s was provided by Mohtarma Benazir “Pinky” Bhutto and her husband, Asif Ali Zardari.

    "Pinky" Bhutto was the Harvard- and Oxford-educated daughter of former Pakistan President Zulfikar Ali Bhutto, the scion of one of Pakistan’s richest land-owning families in the Sindh, a rural, semi-feudal southern state where landlessness and debt slavery remain common even today. He founded the Pakistan People’s Party in 1967 and served as the country’s President from 1971 until 1977, when he was overthrown and hung by General Muhammad Zia-ul Haq. In November 1987, 34-year old “Pinky” married the 36-year-old Zardari, a polo aficionado and minor local businessman, and in November 1988, she was elected Pakistan’s Prime Minister, running on the PPP ticket after General Zia died in a mysterious plane crash.

    Pinky’s first election was greeted with very high hopes, both in Pakistan and around the world. Huge crowds had greeted her upon her return to the country from a lengthy period abroad in 1986. Well-educated, bright, articulate, attractive, from a land-owning family that was supposed to be too rich to be bribed, she was Pakistan’s youngest Prime Minister ever, and its only female one, in a country that was 97 percent Muslim. It was widely expected that she would provide her country a moderate, democratic alternative both to military rule and to the incipient fundamentalism that was just then taking root among Pakistan’s Islamic parties.

    Indeed, to this date, this is the image that Pinky and her many followers in Pakistan’s second largest political party like to portray – her lecture agent’s web site describes her as “a living icon of the battle for democracy,” and “one of a handful of female executive leaders who have shaped the global events of the last century. “

    In June 1989, after just six months in office, Pinky gave the Commencement Speech at her alma mater, Harvard University. In a ringing appeal, she called for the formation of an “association of democratic nations,” and warned that “in countries without established traditions of representative government….(a)ll too often, there is the overly ambitious general, the all too determined fanatic, or the all too avaricious politician…” She called for First World democracies countries to support Pakistan’s fledgling democracy, observing that
    ”democracy needs support and the best support for democracy comes from other democracies.”

    Unfortunately, it soon turned out that Pinky’s election had actually opened the door to a host of “avaricious politicians,” including her own husband, mother, brother-in-law, and herself. And the main type of “support” provided by the First World to Pakistan was not for democracy, but corruption.


    One of the key First World players in the SGS scandal was a crafty 40-something Geneva lawyer named Jens Schlegelmilch, the Bhutto family lawyer in Europe. In the early 1980s, according to Swiss prosecutors, he had helped Benazir’s mother, Begum Nusrat Bhutto, establish offshore residency. Before that, he may have also helped the Bhutto family set up offshore accounts, including several at Swiss banks. Schlegelmilch attended Pinky’s wedding to Zardari in 1987, where he reportedly met Zardari for the first time. Schlegelmilch lost no time in deepening this relationship. In early 1990, he allegedly negotiated an arrangement whereby one of SGS’s competitors, Cotecna, agreed to pay Madame Begum Nusrat Bhutto a 6 percent commission on a new PSI contract with Pakistan, by way of Barclays Bank (Suisse) S.A. (Account # 622.902) and Mariston Securities Inc., a BVI company that Schlegelmilch administered on Nusrat’s behalf. By August 1990, Nusrat had reportedly received $1.2 million under this Cotecna arrangement.

    The relationship was briefly interrupted in August 1990, when Pinky was suddenly dismissed on corruption charges by the country’s President, Ghulam Ishaq Khan. In just 18 months in office, she and her husband had provided Khan with enough justification to file six judicial cases against her for corruption and misconduct. Zardari, Pinky’s husband spent the next two years in jail on these charges.

    Nawaz Sharif

    However, Pinky’s successor, the Islamic Democratic Alliance’s Nawaz Sharif, proved to be equally corrupt, and was also dismissed by President Khan on corruption charges in April-July 1993. By then, none of the cases against Pinky had been decided. So in October 1993, when the PPP won another national election, Pinky became Prime Minister again. She acquitted herself of all the charges, released her husband from jail, and he and Schlegelmilch went back to work.

    One of her government’s first acts was to award a new PSI contract. SGS had acquired a controlling interest in Cotecna in 1991, so this time around it was SGS’ turn to exert influence. In March-June 1994, according to the Swiss investigating magistrate’s July 2003 final report on the case, executives reportedly promised to pay commissions totaling 10.25% percent of its contract value to several new BVI shell companies that were controlled by Zardari, Pinky’s brother-in-law Nasir Hussein, and Schlegelmilch himself. According to Schlegelmilch’s deposition in the case, in 1994, two wire transfers for a total of $1.325 million from SGS and Cotecna Inspection S.A., by then an SGS subsidiary, were made to Bomer Finance Inc., a BVI company whose beneficial owners were Zardari and Pinky. In return, on September 29, 1994, SGS/ Cotecna secured an exclusive, non-competed “pre-shipment inspection” contract from the Government of Pakistan.

    By September 1997, when some of these matters came to light, SGS had earned at least $137 million under this 1994 Pakistani contract, and it therefore owed the couple and Schegelmilch about $15 million. Between March 1995 and September 1997, Zardari’s Bomer Finance Inc. received $8.2 million from SGS and Cotecna. Nasir Hussain’s Nassam Overseas Inc. received $3.81 million, and Schlegelmilch himself pocketed $1.53 million from SGS/ Cotecna and another $.5 million from these shell companies.

    According to Swiss trial record, the payments to Bomer Finance were made by SGS to Account # 552343 at UBS in Geneva. The trial court obtained documentary evidence that Zardari and Pinky both had ownership rights over this UBS account – indeed, according to Swiss prosecutors, in August 1997, while her husband was still sitting in jail, Pinky accessed the account from London and used the funds there plus some cash to pay for a $188,000 diamond necklace. Today the necklace remains in Swiss custody, pending the outcome of final appeals in the case. Perhaps it should be held in trust as a memorial to “avaricious politicians.”

    Once again Pinky got caught with her hand in the cookie jar. By late 1996, corruption rumors about Zardari’s sidelines were flying, in the run-up to the election scheduled for February 1997. In September 1996, Pinky’s elder brother Murtaza -- a radical, who was actually one of her key opponents -- was gunned down by the state police in Karachi, and her own mother Nusrat pointed the finger at Pinky and Zardari. On November 5, 1996, Pinky was once again dismissed on charges of corruption and extra-judicial killings by Pakistan’s President – this time by President Farooq Ahmed Leghari, a member of her own party. Nawaz Sharif returned to power, where he remained until he was overthrown by General Pervaz Musharraf in March 1999. In 1996, Zardari headed back to jail, charged with Murtaza’s murder and several others, plus numerous corruption charges. He’s been there ever since. Pinky and Nusrat fled to London and Dubai.

    This second ouster eventually permitted the whole SGS matter to come to the surface. In September 1997 SGS suspended Hans Fischer, a senior manager who had been in charge of SGS’ entire Government Services Division, and in 1998, Fischer, Schlegelmilch, and Robert Massey, the Managing Director of Cotecna Inspection S.A., were all indicted in Switzerland on charges of money laundering. The Swiss magistrate also asked Pakistan to institute money-laundering charges against Bhutto and Zardari.


    Like most high-level transnational bribery and money laundering cases, this one has taken an eternity to be resolved. In the interim, Pinky Bhutto has continued to roam the world, grandstanding about democracy, women’s rights, terrorism, and all the injustices that she and her family have supposedly suffered at the hands of Pakistan’s military rulers. Evidently she really believes that she still represents her country's leading "democratic" alternative, and that all of these scandals will not prevent her from regaining power a third time.

    In fact, however, when one carefully reviews the documentary and testimonial evidence that has accumulated against her and her husband – as several Swiss and Pakistani courts, as well as several independent investigative journalists, have now done -- one comes to the conclusion that Pinky should be grateful that there has been no extradition treaty between Pakistan and the UK or Dubai (the UAE). (Pakistan and the UAE are, however, now in process of negotiating one, but in any case Pinky spends most of her time in the UK, where she owns a plush apartment in Kensington and a £2.5m estate in Surrey, and the US, where she reportedly owns a stud farm in Texas and six houses in Florida. Interestingly, the US has recently asserted that it does have an extradition treaty with Pakistan, by way of a 1931 treaty with the UK, before Pakistan became an independent nation in 1947. But evidently the UK and Pakistan don’t consider that pre-independence treaty binding on them.)

    In April 1999 Pinky and Zardari were both convicted in a lower Pakistani court of accepting at least $9 million in bribes from SGS. They were fined $8.6 million, received five-year jail terms, and were banned from holding seats in parliament for seven years. They appealed, while Benazir remained in London and Zardari sat it out in a Karachi jail. In April 2001 their convictions were reversed and she and Zardari were granted new trials, when tape recorded phone conversations turned up showing that a judge had been instructed on how to rule in the case by senior officials in Nawaz Sharif’s government, in exchange for a diplomatic passport.

    However, in October 2001, a Pakistani appeals court upheld a three-year sentence given to Nusrat Bhutto for understating her assets. In May 2002, Pakistan’s Accountability Court sentenced Pinky to three years in prison for deliberately avoided the court. And in September 2002, an anti-corruption court sentenced Zardari to seven years in prison in another corruption case involving a 40 million rupee commission on a 130 metric ton steel converter at Karachi’s Pakistan Steel Mills. By then he had been in jail seven years, having been tried unsuccessfully in six other criminal cases and seven accountability cases. The judge could have elected to count this time toward his new sentence, but chose not to.

    In September 2002, Pakistan also asked Swiss courts to institute money laundering charges against Zardari, Bhutto, and their helpers, and to accept Pakistan’s claim that it had been damaged by their actions. In February 2003 the Swiss Court of Appeals agreed to hear the case, and in July 2003, a Swiss investigating magistrate ruled that Pinky and her husband were guilty of money laundering, fined them $50,000, awarded them a six-month suspended sentence, and ordered them to return $11.75 million that had been frozen in accounts at UBS and Barclays in Geneva, plus the necklace, to the Pakistani government.

    The case is now wending its way through final appeals, which could take years. But there is little doubt at the end of the day, the Swiss magistrate’s verdict will be upheld. After all, most of the documentary evidence in the case came from the office of Schegelmilch himself. It was further supported by the “hard evidence” of the necklace purchase and the frozen accounts that had financed it – if they did not belong to “BB and AZ,” how did she access them? Even if Pakistani courts were biased against her, as they undoubtedly were, Pinky had years to appear before Swiss courts and answer these charges.

    Separately, Pinky and Ali are still battling at least a half dozen other corruption cases, including a dispute over real estate holdings in the US, the UK, and France, and another $60 million of Swiss deposits that have been located, including $40 million at Citibank in Geneva, and millions more in 61 accounts at more than a dozen other banks, including Credit Suisse, Pictet, BNP (Paris) , Chase Manhattan (NY), Banque le Henin (Paris), and NatWest (UK).

    Zardari, who has been acquitted in three criminal cases, also still faces charges in several others – the government of General Pervez Musharraf seems determined to keep him in jail, in virtual solitary confinement. Pinky's mother Nusrat was also convicted of concealing her assets and sentenced to three years in 2000.

    Among the other corruption cases still pending or on appeal against the Bhuttos:

    ~A $2.4 million bribe allegedly paid by the Polish firm Ursus to the Geneva accounts of Dargal Associated SA, another BVI company reportedly owned by Zardari and Bhutto, in connection with the sale of tractors to Pakistan’s Agricultural Development Bank.

    ~At least $28 million in alleged bribes from ARY International Exchange/ Traders, a company allegedly owned by a Pakistani gold trader in Dubai, Abdul Razzak Yaqub. These payments reportedly flowed by way of Citibank-Dubai (account #342034), American Express Bank, and perhaps JPMorgan (NY). In October 1994, they ended up at Citibank-Geneva, in accounts owned by Zardari’s Bomer Finance, plus two more BVI companies that Schlegelmilch allegedly set up for him -- M.S. Capricorn Trading SA and Marvil Associated Inc. In December 1994, Bhutto’s government allegedly awarded an exclusive two-year import license for gold to Yaqub, which he used to import more than $500 million of gold into Pakistan.

    The prolific Schlegelmilch had reportedly set up all these accounts with the help of a Citibank private banker in Geneva, Kamran Amouzegar. In addition to all the fees he earned from the Bhuttos and SGS/ Cotecna, it turns out that Schegelmilch also struck a lucrative “referral” deal with Citibank, which gave him 20 percent of the first three years of client net revenues from each client he brought to the bank. In essence, he was collecting fees on every side of these transactions.

    It also turned out that key Citibank staff, including the bank's EVP for Worldwide Private Banking at the time, Hubertus Baron Rukavina, were well aware that Zardari and Bhutto were the real owners of these accounts. Yet they permitted the accounts to be opened and to be actively used as “pass-through” accounts. In 1999, a US Senate Banking Sub-Committee investigation concluded that “well over $40 million” had flowed through Zardari’s Citibank-Geneva accounts during this period, though it wasn’t able to pierce the veil of Swiss banking secrecy to learn precisely how much or where it went. In 1999, the indiscriminating Baron Rukavina left Citibank for a leading German private bank, Sal. Oppenheim Jr. & Cie. KGaA , where he remained until 2003.

    In fact Citibank had long since been put on notice that Zardari’s funds might not be clean – after all, he’d already spent two years in prison on corruption charges in 1991-93, and Citibank’s CEO John Reed had been advised by Citibank staffers to avoid him like the plague when Reed visited Pakistan in February 1994. But Citibank only closed the accounts in November 1996, just a few days after Pinky was removed from power for a second time. At that point the bank swiftly transferred $40 million to another Geneva bank, Banque Financière de la Cité, where Pinky apparently had an account.

    In September 1997, at Pakistan’s request, the Swiss government ordered the Zardari and Bhutto accounts at Citibank and three other Swiss banks frozen. Unfortunately, by then the funds had fled. Only in December 1997 did Citibank bother to file a Suspicious Activity Report with the US Treasury’s Financial Crimes Enforcement Network with respect to these Zardari accounts – long after they were empty.

    ~The last two decades have also been rife with arms scandals in Pakistan, as the country pursued an increasing arms race with India, with much of the payola provided by Europe’s leading arms suppliers. All administrations appear to have profited from the traffic, and Bhutto’s was no exception. For example, Admiral Mansur-ul Haq, Pakistan’s top naval officer during the second Bhutto adminstration, fled the country in 1997, was arrested by US authorities in Austin at Pakistan’s request in 2001, charged with receiving bribes in connection with the 1995 purchase of three Agosta submarines million from the French firm DCN, Two of ul Haq’s subordinates were also reportedly convicted of corruption. Admiral Mansur, who reportedly had close ties to Zardari, was also charged with receiving $3.4 million in connection with the purchase of an Edrian minesweeper from France, missles from the French firm Aerospatiale, and naval equipment from Thompson-CSF. The Admiral was ultimately fined $7.5 million.

    ~In 1995, France’s Dassault Aviation was angling to sell Pakistan $4 billion of Mirage jets, after the Clinton Administration held up the sale of F-16s to pressure the Pakistanis on nuclear weapons development. Dassault and its partners in the deal, Thomson-CSF and Snecma, reportedly agreed to pay Zardari a whopping five percent commission ($250 million) on a $4 billion jet fighter deal, by way of Marleton Business SA, another BVI company controlled by him, if Pakistan agreed to buy 32 Mirage fighter planes. The offer was reportedly made by Dassault’s Director of Legal Affairs at the time, Jean-Claude Carrayrou, and Pierre Chouzenoux, its International Sales Manager, by way of Schlegelmilch to Zardari and Amer Lodhi, a Paris-based lawyer and banker who was reported to have previously worked for BCCI. The deal only fell apart when Pinky’s second administration was bounced from power in 1996. Zardari’s five percent commission was apparently a little light – in the case of Iraq in the 1980s, Dassault reportedly paid Saddam’s regime 7.5 percent commisions on its weapons sales.

    ~There have also been a plethora of other charges relating to hanky-panky in purely domestic matters as well, involving alleged kickbacks on rice deals, government land sales, and welfare agencies.

    All told, Pakistani prosecutors believe that the Bhutto/Zardari clan may have made off with more than $1 billion in payoffs and accumulated more than $1.5 billion in net assets during their brief four years in office.

    More important, Pakistan’s 150 million people, and the cause of Islamic democracy, may well have suffered incalculable damage at the hands of this corrupt elitist clan and its First World abettors. Together with Bhutto/Zardari’s licentious successors in Nawaz Sharif’s two failed governments, they clearly helped to undermine the popular association between democracy and the rule of law, and paved the way for the growing polarization between two anti-democratic alternatives -- military dictatorship and Islamic fundamentalism. Long term, it is this damage, and not some economist’s sterile “excess transactions costs, that is the real cost of transnational corruption.


    As for the Zardaris’ Swiss collaborators, there has been a modest amount of justice done, but scarcely enough, when one considers all the damage they may have done to Pakistan’s body politic.

    ~ Schegelmilch.. In July 2003, a Swiss investigating magistrate ordered Jens Schlegelmilch to reimburse Pakistan for the $2 million of compensation that he received under the SGS money laundering arrangement, and was given three years probation. This sentence is still on appeal. The other Pakistani cases involving bribery allegations against Schegelmilch are still under investigation.

    ~SGS. As for SGS and Cotecna, they found their Pakistani contracts cancelled for the second time. SGS was still permitted to operate in Pakistan, and received no criminal or civil penalties.

    In February 2003, SGS asked The International Centre for Settlement of Investment Dispute (ICSID) to consider a $128 million claim for Pakistan’s termination of its PSI contract. In July 2003, the ICSID decided that it had no jurisdiction, forcing SGS to seek an out-of-court settlement. The matter is still unresolved.

    The Pakistani events also triggered a period of embarrassment and internal crisis at SGS. In October 1997 SGS sold Cotecna back to its previous owners, the Massey family, after it was convicted of bribing Bhutto and Zadari. In September 1998, SGS’ entire board of directors and Ms. Elisabeth Salina Amorini, its rather autocratic Chairman since 1989, were forced to resign.

    SGS’ new management instituted numerous face-saving practices, like the appointment of an Ethics Committee, the drafting of an ethics code that was translated into 25 languages, a “Six Sigma” quality program, and a new mandatory “business ethics training course” for senior managers. All these changes reportedly helped SGS to restore the confidence of institutions like the World Bank in its practices.

    In the wake of the Pakistan case, SGS also suffered a string of key contract losses in the Philippines, Angola, the Ivory Coast, Ethiopia, Indonesia, and Paraguay. Most of the cancellations were not directly related to the Pakistani case, but some of them did involve allegations of improprieties and high-level chicanery.
    Juan Carlos Wasmosy

    In the case of Paraguay, for example, a 2001 audit by Paraguay’s Controller General disclosed many “irregularities” in PSI contracts that had been negotiated with SGS and BureauVeritas by the administration of former President Juan Carlos Wasmosy, who governed the country from 1993 to 1998. In 2002, Wasmosy was sentenced to four years in prison in an unrelated bank fraud case.
    fig. 2.14. Joseph Estrada.jpg

    In the case of the Philippines, in 2000 the government of President Joseph Estrada cancelled one of SGS’ most lucrative PSI contracts, claiming that it was not saving the country any money. The real motives may have been much darker. SGS’s contract, reportedly worth more than $100 million a year, had been procured with the help of the “Sultan of Spin,” influential Manila PR consultant Salvador “Bubby” Dacer, who had also served as a PR advisor to President Estrada. In November 2000, Dacer was abducted and murdered in Manila by a group of policemen, including several members of Estrada’s Presidential Anti-Crime Task Force, amid rumors that Dacer had found out more than he needed to know about high-level corruption, including the evasion of import duties. The murder trial is still pending. In January 2001, President Estrada himself was ousted on corruption charges, and SGS is still pursuing a $100 million claim against the Philippines before the ICISD.

    Despite such setbacks, by 2003 SGS’ overall business had recovered nicely, with revenue reaching $1.7 billion – less than 12 percent of it from PSI contracts. SGS still remains one of the leaders in the PSI field, providing such services to about 30 developing countries, including Haiti, Madagascar, Zimbabwe, Mexico, Indonesia, Ethiopia, and Cameroon. But it is now refocused on testing and certification services for private companies, and new business opportunities like the certification of eco-tourism operations , preferring to let even less scrupulous competitors take the lead in PSI.

    ~ Cotecna. One of these may well be SGS’s former subsidiary, Cotecna, (, the original source of the PSI bribery in Pakistan. As of 2003, Robert M. Massey, who signed the original June 1994 commitment letters promising kickbacks in exchange for contracts, is still listed as Cotecna’s CEO. The company claims a workforce of 4,000 employees in 150 offices in 100 countries, with PSI contracts for many of the developing world’s most corrupt hotspots, including Nigeria (since 1987), Ghana, Kenya, Senegal, Venezuela, Colombia, Ecuador, Niger, Peru, Iran, Togo, and Nigeria. But not, of course, Pakistan.

    Interestingly, in 1992, and again in January 1999, Cotecna Inspection S.A. secured a contract to inspect Iraq’s compliance with the “oil for food” program. Are we expected to believe that it was a sheer coincidence that Kojo Annan, UN Secretary General Kofi Annan’s son by his previous marriage to a Nigerian woman, worked at Cotecna S.A. as an “senior staff member” until late 1997, and then became a partner in a Nigerian oil trading company whose clients reportedly include Cotecna?

    The youthful Kojo (now 30) has indeed been a busy beaver. In 1999, when he was just 26, one of his other clients, a Nigerian company called Sutton Investments, won a six-million-British- pound subcontract from Cotecna to help monitor the UN's oil-for-food program in Iraq. And since 1999 he has also served as a Director of Air Harbour Technologies (AHT), an Isle-of-Man company that came out of nowhere to win a 1995 tender to build a controversial new multi-billion dollar airport in Harare, Zimbabwe, from the widely-loathed Government of Zimbabwe’s Robert Mugabe. AHT’s CEO is Hani A.Z. Yamani, the son of Saudi Arabia’s former Oil Minister Sheikh Yamani. Kojo is reportedly helping to develop new hotel projects in Abuja, Nigeria’s capital, and Accra, Ghana.


    During the PSI heyday of the 1980s and early 1990s, the World Bank and the IMF went around encouraging poor countries to “outsource” their customs departments to PSI providers like SGS and Cotecna. Quite a few did so – the number of developing countries mandating pre-shipment inspection increased from 20 in 1990 to 44 in 2003.

    Yet when we step back and examine the track record, including the sordid tales above, as the World Bank itself has finally begun to do, the case for mandatory PSI services is doubtful at best. In particular:

    ~While PSI has had a few short-term “successes,” in terms of increased customs revenues and reduced corruption, there have also been many disasters, like Pakistan and Argentina, or cases where there appears to have been little net benefit, as in Indonesia.

    ~The direct and indirect costs (including kickbacks) of PSI outsourcing are very high – an average of 1 to 1.5% of country imports per year. Yet the information gathered by PSI firms often goes to waste, completely ignored by contracting governments. For example, SGS estimated that it found $650 million of uncollected import duties in Pakistan alone in 1995-96. And a recent World Bank study estimated that 50 percent of potential revenue gains from PSI services were lost because governments simply failed to use the information gathered. In other cases, as in Pakistan, PSI just allowed officials to extract more payoffs from importers.

    ~Even in the Philippines of the early 1990s – a case sometimes cited as a success story -- the benefits of PSI declined sharply over time, as more and more imports were diverted to free trade zones and then smuggled in. Indeed, this increase in “insider” smuggling may have been a key factor in the Estrada/ Dacer scandal noted earlier, and the cancellation of SGS’ Philippines’ contract. Similar effects on smuggling have also been noted in countries like Mozambique and Argentina.

    ~Longer term, there is simply no substitute for countries developing their own tax collection and judicial systems – as, indeed, most First World countries have tried to do, at least for crimes within their own borders. Yet many of the world’s most corrupt countries, like Bangladesh, Nigeria, and Kenya, have now used PSI services for almost two decades, and their customs and tax collection bureaucracies have actually become even more corrupt.

    ~From the standpoint of tax reform, trade barriers and tax collections, PSI services are what economists call “second best” alternatives to true reform. Not only are they costly, but they may actually help to perpetuate import duties, by keeping developing countries hooked on import duties for tax collection. (See below.)


    There are signs that some developing countries may be recognizing some of these lessons about PSI. For example, Argentina and Zambia recently terminated their requirements for mandatory pre-shipment inspections of imports, substituting alternative methods of regulation like minimum import prices and cross-border information exchanges. Especially in Latin American, a growing number of countries are also contracting with with multiple PSI providers at one time, hoping that this will increase the competition among them.

    Indeed, in the perfect-market long run envisioned by neoliberal idealists, the liberalization of exchange rates and the abolition of tariffs and quotas, combined with the free flow of information about prices and products across borders, will eventually eliminate the need for PSI services entirely. In fact there has already been a tendency for the PSI business to slow down, partly because world trade has stagnated since 1999, and partly because levels of customs duties are declining, at least for “middle income” countries in Asia and Latin America. At the same time, PSI industry leaders have seen their other global businesses expand, as ‘non-tariff barriers” like product standards and quality certifications have displaced tariffs as the key obstacles to developing country exports.


    However, the fact is that even today, many of the world’s very poorest countries still have sole-source contracts with PSI providers – including 22 out of 23 African countries that use PSI. And the number of countries using PSI providers has increased from 37 to 44 in just the last four years. Why, despite everything we’ve seen, is this happening?

    The critical point here is “duty addiction” noted earlier. This addiction is grounded in a set of very practical financial realities that are faced by the world’s poorest countries.

    ~First, when wide-open capital markets are combined with offshore havens and our highly-efficient international private banking system, political influence, weak judicial systems, and poor transnational tax enforcement, it is should not be surprising that developing countries find it almost impossible to tax the incomes, profits, or wealth of their private elites and corporations -- much less foreign corporations.

    This helps to explain why the share of taxes accounted for by income and property taxes for developing countries is significantly lower than in high income countries – and, indeed, why this share has declined significantly since the 1970s, while it has actually been stable or even increasing among high-income countries.

    For example, for the 65 developing countries that the World Bank considers “low income countries,” with per capita incomes in 2002 below $735, the median share of all tax revenue derived from taxes on income, profits, and capital gains declined from 19.8% in 1975-79 to 18.1 percent in 1998. For 88 “middle income countries” with gross natiional incomes in 2002 between $735 and $9,075. this share declined slightly, from 18.4% in `1978-81 to 17.8% in 1993-2001. (Data for identical years is not available for the two series.) For 24 “high income OECD countries” with per capita incomes greater than $9075, the median increased slightly, from 27.8% for 1975-79 to 31.2% for 1993-98. Overall taxes as a share of GDP increased for OECD countries from a median of 19.5% in 1975-79 to 25.6% for 1993-97. For the US it rose from 17.1% in 1975-79 to 19.4% in 1998-2002.

    ~Second, domestic markets are often very thin, or are dominated by informal and barter transactions that are hard to tax, especially in countries where the rural sector still accounts for a substantial share of the economy. In practice, this means that sales taxes are difficult to levy in developing countries.

    ~Third, foreign trade, in contrast to private incomes or domestic sales, is relatively easy for developing countries to tax, as a kind of luxury. It is often dominated by a relatively few importers or exporters with relatively high income. Smuggling is always a problem, but in many countries trade flows can be channeled through a handful of entrepots. At the same time, when combined with offshore havens and weak law enforcement, high tariffs also provide juicy corruption opportunities for government officials.

    These harsh realities of Third World finance have been exacerbated by the orthodox approach to liberalization, which demands that developing countries liberalize their “capital accounts” and current accounts” all at once, removing restrictions to the free flow of investment, debt, and capital flight across borders, as well as all tariffs, quotas, and other restrictions that interfere with “free trade.”

    These realities also help to explain why, as shown in Table 1 , Click for Table 1.
    among the top 50 countries that have been the most important customers for PSI services, as well as the world’s most corrupt (according to TI) countries, as a group they still rely on import duties for 24 percent of tax revenues, only a slight reduction from their 1970 levels. And there is huge variation around this median, with countries like Bangladesh, Togo, Madagascar, Benin, Senegal, Uganda, Liberia, the Central African Republic, and Niger relying on import duties for more than 30 percent of their tax revenues. Indeed, hard-pressed countries like the Ivory Coast, Cameroon, the Congo, Ethiopia, and the Sudan even tax their own exports at significant 10-14 percent to raise taxes.

    For OECD countries, in contrast, export duties have long been viritually zero, while import duties have also nearly disappeared as a source of tax revenue – in 2002, they accounted for just 1.2 percent of all tax revenue in Switzerland, 1 percent in the US, and zero in the UK.

    Furthermore, these developing countries are having a difficult time collecting taxes in any form. Indeed, total tax revenues as a share of GDP is also much lower for low-income countries – in 2002, taxes as a share of GDP averaged just 15 percent for them, compared with 25 percent for high-income countries. So much, therefore, for the simpliste version of supply-side economics, according to which excessive taxes are the root of all evil. In fact the tax yield is so low in many countries -- less than 9 percent of GDP in Nigeria, Bangladesh, the Congo, and Haiti -- that public services like health and education are drastically underfunded. So just the opposite is true -- the vast majority of residents of these countries remain poor, in a sense, precisely because their tax systems are so weak and porous.

    It is all very well, therefore, for First World countries to proclaim the need for free trade and wide-open capital markets. But under the prevailing rules of the game, most of the world’s poorest governments have few alternatives to customs duties as a source of public revenue.

    Meanwhile, as we've seen, the same global haven system that compels these countries to rely so heavily on customs duties also provides their officials with the opportunity to abscond with a hefty portion of the revenue to havens like Switzerland, London, and the US, where wealthy foreign nonresidents are permitted to virtually live tax free. It also facilitates the provisioning of services from Swiss companies like SGS, when it comes time to cleaning up the mess back home.

    So the global PSI industry is part of a much larger story. Its barons and bankers are not especially malevolent or cruel. They are, in fact, rather decent chaps, who enjoy the good life and undoubtedly wish no one any harm. The institutions they've built have merely seized on all these contradictions in the system and used them to extract nice annuities for their services, minus the occasional tip to the locals. Is that not a perfectly normal human response to the call of opportunity, advantage, and impunity?


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    (c) James S. Henry, 2003. Not for quotation, reproduction, or any other use with the express consent of the author. All rights reserved.

    December 2, 2003 at 03:09 AM | Permalink | Comments (2) | TrackBack

    Wednesday, November 19, 2003

    First World Criminals, Third World Crimes – A Review of Recent International Corruption Cases – Part 3: High Crimes In Lesotho

    Printable PDF Version Lesotho's Katse Dam fig. 2.32. Katse Dam, Lesotho.jpg lahmeyer.gif Schneiderlogo.gif ABB_Logo.gif dumez-gtm.gif acres_intl.JPG logo_bouygues.gif

    As noted in Part 1 of this series, in the last six months we have seen a flurry of transnational corruption cases that involve misbehavior by leading First World companies in developing countries. All these cases raise basic questions about our current approach to investigating, prosecuting, and penalizing transnational corruption – and our understanding of its roots.

    The following article, Part 3 in this series, takes a close look at another recent case, Lesotho’s Highland Water Project (LHWP), a huge World Bank-financed dam project where a half dozen leading Canadian and European engineering and construction firms are now being prosecuted for bribery by one of southern Africa’s smallest, most poverty-stricken countries.

    This particular case suggests that, in principle, First World development banks and export credit agencies are in a very strong position to curb this kind of behavior, simply by insisting on tight financial controls and penalizing bribery heavily. So far, however, they have been reluctant to do so, apparently because they are reluctant to offend their First World constituents. After all, if politically-influential engineering firms, equipment vendors, and construction companies won’t lobby for their budgets and lending authority, who will?

    THE PROJECT. Next to China’s gargantuan Three Gorges Dam, Lesotho’s Highland Water Project (LHWP) is the world’s second largest water transfer project and Africa’s largest dam project ever. In the finest traditions of hubristic civil engineering, the project’s design contemplates a thirty-year effort to build five big dams and a hydro plant in Lesothu’s Maluti Mountains, eventually diverting nearly half of the water – 2 billion cubic meters a year -- from the Orange River (known in Lesotho as the “Senqunyane River” basin) through 125 miles of tunnels to Johannesburg’s Vaal Dam.
    The basic project concept, which dates back at least to the 1930s, is simple. Lesotho, an otherwise tiny, poor, landlocked, mountainous kingdom, is known as “The Kingdom in the Sky,” the only country in the world that is all above one thousand meters. The country is also entirely surrounded by, and dependent upon, its much wealthier neighbor, South Africa. Most of Lesotho’s 2.2 million people either work as subsistence farmers at home or as migrants in South Africa, which provides jobs for half of Lesotho’s labor force. Aside from these labor exports, one of Lesotho’s few other natural resources is the abundant rainfall that its mountains receive each summer. Johannesburg’s mines and other industries, on the other hand, account for sixty percent of South Africa’s economy, and are always hungry for cheap water and energy, as well as cheap labor.

    In South Africa’s view, all this provided the basis for what appeared to be a “win-win” deal. LHWP was originally designed by South African-retained engineers in the 1970s, and the project agreement was “jointly approved” by the two countries in 1986. Back then -- and of course until 1994 -- South Africa was still an apartheid state, ruled by “whites only,” who accounted for just 14 percent of its population. And Lesotho was ruled by a compliant military regime that South Africa had installed only a few months before the LWHP agreement was signed.

    These anti-democratic roots did not bother the “global development industry” very much at the time. This industry consists of multilateral development banks and aid agencies, private banks, engineering design firms, equipment vendors, and construction firms, mainly from First World countries and a handful of larger Third World countries, like Brazil and China. We’ll review the “private perp” list below, but among the leading development banks and export credit agencies that agreed to fund this multibillion dollar hydro boondoggle concocted by South Africa's apartheid planners were the World Bank, Canada’s EDG, the African Development Bank, the UK’s EGCD, France’s COFACE, Italy’s SACE, and Germany ‘s HERMES. Germany, France, and the UK also provided bilateral foreign aid to the project – an indirect way of channeling subsidies to their own politically-influential contractors.

    All told, this global development industry has constructed more than 45,000 large dams in developing countries since the early 20th century, at a cost of more than $2 trillion, the resettlement of at least 50 million people, and untold environmental damage. Indeed, despite the fact that “large dams” have recently become much more controversial among development planners and environmentalists, this industry still builds about 1500 to 2000 new Third World dams per year.
    See Chart:"Big Dams Per Year"

    In the last decade, with the rise of more democratic regimes in leading developing countries like South Africa, Brazil and Russia, First World governments and development banks were essentially compelled to emit more favorable noises about “democracy” and “transparency” -- except with respect to China, where they continued to look the other way at autocracy. In fact, the reality is that the global development industry and its financial supporters actually do much better in situations where popular concerns like forced resettlement, land ownership, the appropriate pricing of natural resources and electricity, soil erosion, and other environmental concerns are subordinated to the priorities of organized interests. This is one key reason for the strong negative correlation between “big dam projects” and democratic development.

    In any case, in Lesotho’s case, those who designed LHWP and structured its finances back in the 1980s did not worry very much about the fact that, at the time, they were in gross violation of international sanctions against apartheid. Instead, a group of clever merchant bankers at Chartered WestLB, a leading UK international merchant bank, consulted with the World Bank and got its approval to make pint-sized Lesotho the $8 billion project’s official borrower -- with South Africa kicking back debt service and water royalties under the table to a London-based trust.

    This arrangement, in effect, “laundered” LHWP's finances, opening the door to the global pig pile of development funders, private banks, vendors and contractors that we listed earlier. At the time, these players could basically have cared less whether the project served to undermine apartheid or quenched its thirst for water and electricity forever. Meanwhile, Lesotho’s official foreign debt was sent soaring, and the potential contractors started arriving in droves to flog their wares and exert influence any way they could.

    Two decades later, as of 2003, this bevy of contractors has finished the Katse and Muela dams and 53 miles of tunnels, at a total cost of $2.5 billion. Mohale Dam is due in 2004, for an additional $1 billion, followed by the Mashai dam by 2008 and the final Tsoelike dam by 2017. As noted, the total cost is supposed to be $8 billion by then -- though such cost estimates are rarely worth the paper they are printed on.See Chart: "Average Big Dam Cost Overruns"

    Unfortunately KHWP has also hit a few snags. To begin with, the people of Lesotho have been having second thoughts about parting with so much of their water on such one-sided, apartheid era terms. There have also been some nasty side-effects. In January 1996, for example, the sheer weight of Katse Dam’s reservoir helped to cause earthquakes in Lesotho that shook many villages. In September 1996, 2,300 workers at Muela Dam were fired for striking illegally when they protested lousy working conditions and wage discrimination. Contractors, including the UK’s Balfour Beatty, called in the police and 5 workers at their camp were shot dead and 30 injured. In 1998, partly to deter a possible military coup, but also to remind Lesotho that LHWP was, after all, South Africa’s largest infrastructure investment, the “New South Africa” invaded Lesotho, killing 66 people to “restore order.” The Johannesburg Star later reported that protecting the dam had been one of the invasion’s primary concerns. There has also been a long list of environmental, distributional, and social problems associated with KHWP – with complaints from dam critics about some 24,000 people displaced without adequate compensation for resettlement, and increased erosion.

    ANTI-BRIBERY WINDOW-DRESSING. Most interesting for the purposes of this article, LHWP has also turned out to make history in the field of global corruption, and the enforcement – or lack thereof – of “anti-bribery” statutes by First World governments, multilateral lenders, and export credit agencies.

    The roots of these statutes, which have by now been widely adopted by most First World countries, goes back to the US Foreign Corrupt Practices Act (FCPA) of 1977. This statute, which was pushed through Congress during the relatively high-minded Carter Administration, has provided American officials with numerous opportunities to lecture their counterparts in Europe and Asia on the importance of taking a strong stand against Third World corruption. (The Europeans and Asians responded, with some justification, that US firms were hardly sin-free, and besides, that any excessive bribery on their parts just offset the substantial US advantage in industrial espionage provided by global electronic eavesdropping networks like the National Security Agency's Echelon system -- the fruits of which are increasingly shared with the private sector.)

    In reality, the FCPA's actual enforcement has never been a priority for any US administration -- there are few votes in it, since most of the victims are located in distant lands, and most of the perpetrators are major homeland corporations. Since 1977, there has only been one sizeable fine – a $21.8 million charge levied on Lockheed in 1994 for paying bribes to win Egyptian defense contracts. Beyond this, there have only been 34 US criminal prosecutions under the FCPA in 36 years, with the median fine levied on 28 convicted corporations a mere $50,000. Just three out of 12 convicted US foreign bribers have ever done any jail time – a total of 34 months for all three! On top of all this, a federal court ruled in 2002 that the FCPA did not even apply to cases where US companies pay off foreign officials to cut taxes or customs duties – in the case at hand, a Haitian customs official who had been bribed by a major Texas-based rice exporter. According to this ruling, the FCPA only prohibits bribes made to “obtain or retain business.”

    Nevertheless, over the next two decades following the FCPA’s adoption by the US, pressures for the transnationalization of sanctions against corruption grew, propelled in part by the sheer number of abusive projects that came to light all over the world. Organizations like Transparency International, started to publish a “corruption index,” an annual ranking that claimed to identify the world’s “most corrupt” countries, all of which turned out to be developing countries. fig. 2.27. James Wolfensohn, World Bank President.jpg
    The World Bank also adopted new guidelines on corruption that were supposed to crack down on contractor/ vendor bribery. At the Annual World Bank Meetings in Washington, D.C. in October 1996, for example, World Bank President James Wolfensohn declared:

    Let me emphasize that the Bank Group will not tolerate corruption in the programs that we support; and we are taking steps to ensure that our own activities continue to meet the highest standards of probity.

    In 1999, responding in part to complaints from developing countries, as well the US' continuing whining that America’s global competitiveness was suffering because of the failure of other First World countries to adopt similar statutes, all but two OECD countries adopted a new treaty that provided for increased penalties for First World companies that bribe foreign officials.

    Despite these new laws, indices, and declarations, however, the fact is that until the LHWP case exploded in 1999, there had been very little actual enforcement of such rules against bribery, especially against leading First World bribers and their money launderers – major First World construction companies, engineering firms, energy companies, equipment suppliers, banks, and other leading members of the huge global development industry.

    This is partly just because it is hard to follow the money trail through the global thicket of offshore companies, secret trusts and bank accounts, and havens. However, as we’ll see, even tiny Lesotho was able to break through Swiss and Panamanian banking secrecy in less than two years and make a winning case against some of the world’s largest contractors.

    The more important obstacle seems to be the fact that, when push comes to shove, many First World countries, export credit agencies, and multilateral donors appear to be deeply conflicted about how hard they wish to pursue the enforcement of such rules against the bribers, as opposed to the “corrupt” local officials. They appear to be concerned not only about alienating influential allies, but also about disrupting the flow of large projects. They may also be concerned that if they really looked hard at what has been going on around them, some of the revelations might be too hot to handle. (See Part 4 - The SGS Case.)

    THE LESOTHO CASE. In July 1999, tiny Lesotho charged its former CEO for the Lesotho Highlands Project, Masupha Sole, with receiving more than $2.5 million in bribes by way of Swiss accounts, from almost all the key contractors involved in LWHP’s first three dams.

    A Canadian-trained engineer, Sole had been Lesotho’s highest-paid public official when he was put on leave in 1995, pending the outcome of this investigation. He had worked as a director in Lesotho’s Department of Water, Lands, and Energy until October 1986, when he was appointed first CEO of the Lesotho Highlands Development Authority, the contracting agent for the project.

    In that capacity, Sole had overseen all the tenders for the project. Everything had proceeded quietly until a new Minister of Natural Resources decided to hire Ernst and Young to audit LHWP’s account in 1994. The audit turned up discrepancies, and further investigation revealed that Sole had received large transfers to his Johannesburg bank accounts from accounts in his name at three Swiss banksUnion Bancaire Prive and Banque MultiCommercial in Geneva, and UBS in Zurich.

    With the help of Durban lawyers, Lesotho managed to track down precisely who had paid bribes and how the money had flowed. The astonishing indictment listed all those international contractors and provided initial estimates of the amounts they’d paid:

      o Zublin - $444, 466, plus its share of $57,269 paid by LHPC and LHPC-Chantiers’ $63,959
      o Impregilo - $250,000, plus its share of $733,404 paid by the HWV consortium
      o Acres International - $260,000
      o Spie Batignolles - $119,393, plus its share of LHPC’s $57,269 and LHPC-Chantiers’ $63,959
      o Dumez - $82,422
      o ABB - $40, 410
      o Sogreah - $13,578, plus its share of LHPC-Chantiers’ $63,959
      o Lahmeyer/ RWE- $8,674
      o Diwi - $2,439
      o Balfour Beatty – its share of LHPC’s $57,269 and LHPC-Chantiers’ $63,959
      o LTA - its share of LHPC’s $57,269 and LHPC-Chantiers’ $63,959
      o Hochtief - its share of $733,404 paid by the HWV consortium
      o Bouygues - its share of $733,404 paid by the HWV consortium
      o Keir Int’l - its share of $733,404 paid by the HWV consortium
      o Stirling Int’l - its share of $733,404 paid by the HWV consortium
      o Concor - its share of $733,404 paid by the HWV consortium
      o Sir Alex Gibb – its share of the LHPC-Chantiers’ $63,959
      o Coyne & Bellier - its share of the LHPC-Chantiers’ $63,959
      o Knight Piesold - its share of the LHPC-Chantiers’ $63,959

    In August 1999, Lesotho courageously decided to prosecute 14 of these companies, plus three French and South African intermediaries that had helped to provide “safe escort” for the bribes.

    Swiss authorities, who decided to help Lesotho for reasons that may actually include a sudden surge of ethical responsibility, also found that at least 14 companies had made deposits to these accounts by way of two Panama shell companies and other accounts in the Channel Islands, all of which had been set up by one of Panama’s leading law firms, Morgan y Morgan. The haven-neering employed was surprisingly crude – whoever structured the bribe path neglected to add extra layers upstream to conceal the payors’ identities, and had also made the gross error of setting up Swiss accounts in Sole’s name and transferring funds directly to him. The two Panamanian shell companies used as conduits were Universal Development Corp (UDC) and Electro Power Corporation.

    UDC had been created by Morgan y Morgan way back in December 1981, under the control of a French agent, one Max Cohen, who had worked with Spie Batignolles on numerous other projects. It was only dissolved on September 2, 1998, when Cohen got wind of the Lesotho investigation. Its sheer longetivity is just one indication that Lesotho was probably not these contractors' only victim. Electro Power Corporation, also under the control of Les Grand Messieur Cohen, was created in October 1989, and was dissolved on September 2, 1998. UDC and Electro Power had their own accounts at UBS and Union Banque Privee in Jersey and Switzerland. The funds flowed from the contractors’ banks to the bank accounts of these two companies, then on to Sole’s Swiss accounts, and finally to his accounts at Standard Bank in Johannesburg.

    In any case, except for ABB, whose Chairman Goren Lindahl admitted knowing about “the problems” in Lesotho since at least 1987, and agreed to cooperate with authorities, all the contractors vehemently protested their innocence. They were not so worried about the fines that Lesotho might impose. What really caused them sleepness nights was the fear that the World Bank, in particular, might exclude them from the $7 to $10 billion of loans and credits that it still distributes each year to Third World infrastructure projects.

    In May 2002, after a year-long trial, Sole was convicted on 11 counts of bribery and 2 counts of fraud in Lesotho High Court, and sentenced to 18 years in prison. The court concluded that he had taken payments from the international contractors and agreed “to further their private interests.” In March 1991, for example, just one month before a key contract worth more than $250 million dollars was signed with one of the two key consortia in the case, the court found that the consortium had paid him more than $1.2 million by way of the secret accounts.

    THE LINE-UP. Sole’s conviction set the stage for Lesotho's prosecution of the companies, and a frustrating effort to have them blacklisted from bidding on contracts in international development projects.

    In October, 2002, after a seven-month trial, Canada’s Acres International, a leading engineering services firm, was convicted of bribing Sole with $260,000, and fined $2.2 million. 66 As the presiding judge commented, “This is the first time a first world company operating in the third world has been convicted of bribing a public official.” As Lesotho’s Attorney General explained, “The attitude has always been that Africans are corrupt. We want rich world corporations and countries to acknowledge their role. "We are telling them it that it is no longer business as usual.”

    Following the conviction, Acres International continued to deny any involvement in the bribes. But in August 2003, the conviction was affirmed by Lesotho’s highest court, although it did reduce the fine from $2.2 million to $1.5 million. Nevertheless, in November 2003, NGOs around the world were compelled to decry the refusal by Export Development Canada (EDG), that country’s export finance agency, to bar Acres from future contracts.

    In August 2003, Lahmeyer International, another leading construction engineering company that is owned by RWE AG, one of Germany’s top five companies, was convicted and fined in the same Lesotho bribery case. Other German firms involved in the case include Hochtief, another RWE AG company, and Diwi Consulting, an engineering company.

    Many other leading companies are also awaiting trial. So far the “transnational perp walk" in Lesotho includes the following companies:

    ~France’s Schneider Electric, one of the world’s largest electrical distribution companies, has been implicated in the case by way of its acquired company, Spie Batignolles. It is awaiting trial. Other French firms also awaiting trial in the case include Dumez International, another leading engineering firm that is now a subsidiary of Suez-Lyonnaise-Eaux; and Bouygues, a construction and media giant.

    ~Switzerland’s ABB, a giant industrial conglomerate and power equipment supplier, has also been accused of bribery in the case, and is awaiting trial.

    ~Many other firms have been charged indirectly, as members of the project consortium that led the project and allegedly made payoffs. These including Italy’s Impreglio SPa, owned by the Fiat Group; the UK’s Balfour Beatty, Stirling International Civil Engineering Ltd., Mott McDonald, Sir Alexander Gibb and Partners Ltd, Kier International Ltd., Kvaerner Boving Ltd., ABB Generation (UK). and Knight Piesold; Germany’s Hochtief (RWE) and Zublin AG; France’s Coyne et Belier, GEC Alstom, Campenon Bernard, and Sogreah; and South Africa’s own Concor and LTA.

    ~These firms were also assisted by several leading international private banks, including the UK’s merchant banks Chartered WestLB and Hill Samuel, France’s BNP and Credit Lyonnais, Germany’s Dresdner Bank , and all five top South African Banks.

    RECIDIVISTS. Interestingly, quite a few of these firms are recidivists -- Lesotho is not the first time that they’ve been involved in shady Third World construction projects. This is yet another indication of just how inadequate legal sanctions and enforcement with respect to such transnational crimes really are.

    ~In the early 1990s, for example, the UK's Knight Piesold (backed by the ECGD, the UK’s export credit agency, Spie Batignolles, and Sogreah, as well as GE Alsthom and Norconsult, were also involved in Kenya’s notorious Turkwell Gorge dam, later described by Kenya’s press as “the whitest of white elephants” and “a stinking scandal.” Knight Piesold was also the lead designer for Kenya’s poorly-conceived Ewaso Ngiro dam project.

    fig. 2.30. Turkwell Dam, Kenya.jpg

    ~Balfour Beatty was also prime contractor for a corruption-ridden project in Singapore, and the Pergau dam in Malaysia, for which Balfour’s Chairman inadvertently bragged to a British journalist that he had personally handed over the requisite bribes to Malaysian officials.

    ~Impregilo SPa and Dumez were prime contractors, and Lahmeyer a leading member of the consortium responsible for the disastrous $12 billion Yacryeta hydro dam on the Parana River in Paraguay, still unfinished after 20 years -- even former Argentine President Carlos Menem called a “monument to corruption,” with over $6 billion of funds completely missing.
    fig. 2.19. Yacyreta Dam.JPG

    ~Fiat’s Impregilo SPa was also prime contractor on Honduras’ costly El Cajon hydro dam, and Guatemala’s notorious Chixoy Dam, where it was also assisted by Lahmeyer and Hochtief.

    ~ABB has supplied turbines and power generation equipment to numerous Third World dam disasters, including the disastrous Tucurui hydro dam in the Amazon. fig. 2.9. Tucurui Dam.jpg

    THE WORLD BANK’S RESPONSE? One might have thought that the World Bank, for all of its recent rhetoric about “transparency” and “fighting corruption,” would have taken swift action in this case. However, in February 2002, eager to get on with the project, the World Bank reported that its own internal investigation had dismissed the bribery claims against all fourteen contractors charged by Lesotho for “lack of evidence,” and it refused to blacklist any of them from future projects. The World Bank also presented a new, narrower interpretation of its own rules.

    According to this new standard, only if it were shown that bribes actually make use of World Bank money, or are related to a portion of a project directly funded by the Bank, would briber-companies involved be blacklisted. One only has to ponder this for a minute to understand how wide a loophole it creates.

    So, while the World Bank currently lists some 78 contractors on its “Ineligible List,”as of late 2003 this list still contains none of the LHWP contractors, after more than three years of court hearings, and no major international contractors, vendors, or banks at all. Nor, for that matter, have there been any sanctions imposed by any other development banks, or export finance agencies -- indeed, in the case of the US and the UK, there have never been any sanctions imposed by export credit agencies because of allegations, suspicions or evidence of corruption.

    Undoubtedly the World Bank, other development banks, and the export credit agencies all face intense pressures from leading First World countries – the World Bank’s “shareholders” -- to maintain the eligibility of key contractors. Apparently the World Bank also cares a great deal about seeing the big projects that it finances move along as quickly as possible.

    Indeed, in Lesotho’s case, leaked correspondence between the World Bank and Lesotho’s government revealed that the World Bank had known about the Sole investigation as early as 1994. Its reaction? World Bank officials expressed great concern to Lesotho’s authorities that by suspending Sole, they might slow the project down.


    (c) James S. Henry 2003. Not for quotation or reproduction without express consent from the author.

    November 19, 2003 at 05:40 PM | Permalink | Comments (2) | TrackBack

    Monday, November 17, 2003

    First World Criminals, Third World Crimes - Part 2: France's Heart of Darkness: The ELF Story.

    Printable PDF Version


    Loik Le Floch-Prigent

    On November 13-14, 2003, the former CEO Loik Le Floch-Prigent and 22 other former executives of France’s Elf Aquitaine, plus seven other accessories, were sentenced by a French court to a few €millions in fines and no more than 5 years apiece in jail –- 14 of the accused got suspended sentences -- on charges that they had embezzled €300 million ($346.8 million) from the company from 1989 to 1993. These sentences, the culmination of an investigation that started in August 1994, determined that most of these thefts had been skimmed from secret slush funds managed out of Switzerland, Luxembourg, and Liechtenstein.

    From our standpoint, the key fact is that these secret funds had originally been created in order to pay up to $130 million of bribes a year to senior officials in African countries like Gabon, Congo-Brazzaville, Cameroon, Angola, Guinea, and the Congo, as well as in Venezuela, Russia, Taiwan, Central Asia, China, Uzbekistan, and Kazakhstan.

    Significantly, this extraordinary global corruption eventually “blew back” to France itself, where, according to Le Floch-Prigent, Elf paid at least €5 -€20 million in bribes per year to France’s leading politicians, ministers, and political parties -- not only Gaullist parties like Chirac’s RPR/UMP party, and former Interior Minister Charles Pasqua’s RPF, but also the Socialists and other parties.

    Even after this extraordinary 9-year trial, we still lack much of the detail on precisely where all this payola went. However, as usual, some things can be said.


    de Gaulle and Chiraq

    To begin with, it appears that most of Elf's transgressions were committed with the knowledge and tacit or active approval of every French President from Charles de Gaulle on down to Chirac, after de Gaulle created Elf and the original “black box” system in the 1960s.

    In addition to these domestic political subsidies, Elf also paid out an extraordinary amount of personal payola to France’s political elite – including free airfare, sweetheart deals and payoffs for ex-wives and girlfriends, and fancy apartments. For example, when President Mitterrand's weekly golfing partner was threatened with losing his house near their favorite golf course, Elf bought the house and let him continue living there, all expenses paid.

    Francois Mitterand

    Many of the key figures involved with these funds turned out to have top-level connections in the French government. After his stint at Elf ended in 1993, its former CEO, Le Floch-Prigent, was appointed by Mitterand and Jacques Chirac to serve as head of the state-owned utility Gaz de France and SCNF, the French National Railroad. Roland Dumas, President Francois Mitterand’s close friend and Foreign Minister in the 1980s, was convicted in 2001 of receiving Elf bribes in connection with an arms sales to Taiwan – though the conviction was overturned on a technicality in 2003.
    Tarallo.jpegAndre Tarallo was a close friend and former classmate of French President Jacques Chirac (Ecole Nationale d'Administration, class of ’59), and an Elf employee since 1967.

    From our standpoint, Tarallo is an especially important figure. During the course of his long career, he became known as Elf’s “Monsieur Afrique,” the “real boss of Elf-Afrique,” in charge of the company’s relationships with corrupt regimes all over Africa. Meanwhile, he also helped himself to $27 million worth of property, including a mansion in Corsica and one of the largest apartments in Paris. For all these efforts, 74-year old Tarallo received a four-year sentence and a €2 million fine.

    This huge case has been nine years in the making. As it slowly wended its way to a conclusion, many cynics predicted that because the case is one of France’s most sensational corruption scandal ever,few convictions would ever be seen. However, mainly because of the perseverance of a handful of courageous judges and magistrates in France and Switzerland, the embezzlement charges ultimately stuck. But for evidentiary reasons as well as “pour raison d’Etat,” the French court limited the investigation to personal enrichment by Elf’s own officials. When it came to exposing the details of the many bribes paid in the Third World and the First, they drew a complete blank.

    Alfred Sirven

    As noted, because of the sensitive nature of Elf’s payoffs, we are unlikely to ever learn the full story. Nevertheless, it is already clear from many other sources that Elf – France’s largest multinational company at the time, with owned refineries and gas stations throughout Europe, Africa and the West Indies -- became a cornucopia of global corruption. As Alfred Sirven, Elf’s second-in-command in the early 1990s, and the former head of Elf’s Geneva office, said at the trial this year, “I know enough to eliminate the whole French political class.” Or as the former CEO, Loik Le Floch-Prigent, said, “If the money sometimes ended up in an orphanage then I am very happy - but let's say it didn't always end up in an orphanage.”


    Gabon's Bongo

    Among Elf’s many unsavory activities around the globe: (1) Elf developed incestuous, mutually profitable relationships with key African autocrats like Omar Bongo, Gabon’s ruler, the Congo-Brazzaville’s Sassou Nguesso, the Cameroon’s Paul Biya, PaulBiyaCameroon.jpg>

    Cameroon's Biya

    Jonas Savimbi, the Angolan rebel leader; Jose Eduardo dos Santos, Angola’s “Marxist” President; and Nigeria’s Sani Abacha.

    Congo's Nguesso


    Angola's dos Santos

    For example, according to an investigating magistrate, $30-$50 million a year was placed in a secret bank account belonging jointly to Bongo and Tarallo, his close friend, and Bongo’s Presidential Guard was partly paid for by Elf. In Congo-Brazzaville, where Elf has lucrative refineries and other concessions, it supplied helicopters and financed arms supplies for rival leaders. In Nigeria, it reportedly paid bribes to secure a lucrative oil concession in 1995. All told, according to the French magistrate, Elf ran "a vast and opaque system aimed at paying commissions, via intermediaries, to certain African personalities.” saniabacha_and_kofi_annan.jpg

    Kofi and Sani

    fig. 3.1. Carlos Andres Perez.JPG

    Carlos Andres Perez

    (2) Elf allegedly paid $2.5 million in bribes to Venezuela’s President Carlos Andres Perez and other Venezuelan politicians in 1991-92, part of some $20 million in commissions that Elf was alleged to have spent in Venezuela.

    (3) Elf allegedly made still more payoffs in China and Taiwan in connection with a 1991 arms deal – including millions of dollars that were allegedly paid to Zhu Rongii, the former Mayor of Shanghai who served as China’s Premier from 1998 to 2003, and to Foreign Minister Dumas, to secure their tacit approval for the deal. ZhuandClinton.jpg

    Zhu Rongii and Clinton

    These payments were reportedly made by Elf’s network in connection with the sale of six frigates to Taiwan by Thompson-CSF, another French company, in 1991. On this deal alone, the commissions reportedly totaled more than 30 percent of the $2.5 billion purchase price.

    (4) Elf also allegedly made huge payoffs to Nadhmi Auchi, an obscure Iraqi-British billionaire who is reputedly Britain’s seventh wealthiest man, the largest shareholder in BNP Paribas, and – according to some – one of Saddam Hussein’s oldest cronies and private bankers. (They both took part in the attempted assassination of Iraqi leader Abdul Karim Qasim in October 1959.).

    Nadhmi Auchi

    The Elf payoffs to Auchi, which he reportedly passed on to Spanish politicians and partly kicked back to Elf officials, were made in connection with its 1991 purchase of Ertoil, a Kuwaiti-owned oil refinery in Spain. Auchi, one of the 37 people charged by the French court, was given a two-year suspended sentence and fined £1.4 million, after having been found guilty of accepting illegal commissions from Elf worth $84 million.

    (5) Meanwhile, back in the First World, Elf also allegedly paid at least €47 million ($54.8 million) in commissions to senior German ministers and a slush fund for former German Chancellor Helmut Kohl’s Christian Democratic (CDU) Party.

    fig. 2.3. Dr. Dr. Batliner and Helmut Kohl.jpg

    "Kohl and Liechtenstein Money Man"

    These payments were made in connection with a corrupt privatization deal, Elf’s purchase of a chain of gas stations and the Leuna oil refinery in eastern Germany in the early 1990s. Elf received more than €1 billion in German subsidies to help it finance €2.4 billion cost of modernization costs for the refinery. Former Chancellor Kohl denied any involvement in the scandal, and German prosecutors were unable to make a case against him – especially after Kohl’s government destroyed millions of documents and two-thirds of its computer files during the three weeks after the CDU lost the 1998 German elections. However, one of those recently convicted in the November 2003 case in France was Dieter Holzer, a German lobbyist who had handled the refinery. He got 15 months in prison and was ordered to pay a €1.5 million fine and return at least €24 million in commissions.

    Most of the alleged behavior listed above pertained to the period before Elf was privatized in 1994, and then merged with Total/Fina in 2000. So some have argued that the core problem here was that Elf was simply a corrupt state-owned bureaucracy, at the mercy of French politicians, and that privatization would fix the problem.

    However, it turns out that this “neoliberal” view of reform is extraordinarily naive. First, it usually take a long time to change corporate culture and interests. Second, as this recent 9-year Elf prosecution showed, even if senior executives are caught and convicted, the initial “loot” is so large, the investigations are so lengthy and complex, and the ultimate jail sentences and fines for such white collar crimes are so modest under present laws, on a “net present value” basis, crime really does pay quite handsomely.

    So it should not be surprising that misbehavior by Elf and its new parent Total S.A. appears to have continued long after privatization. For example:

    Nazarbaev and Clinton<

    (6) Total S.A. has recently been implicated by the US with participaitng with five other leading oil companies – including ExxonMobil, BP, and Royal Dutch Shell – in a consortium that allegedly paid millions in illegal bribes to Kazahkstan’s President Nazarbaev and former Prime Minister Balgimbaev in the late 1990s, to secure oil concessions.

    (7) Elf and Total S.A. have also compiled an unsavory record of dealing with Burma’s SLORC/SPDC, one of the world’s most repressive military regimes. Together with Unocal and Thailand’s National Oil Company, in July 1992 Total struck a deal with the regime to exploit the Yadana offshore gas field, and to build a $1.4 billion gas pipeline across rebel territory to Thailand – with the help of forced labor. Throughout the 1990s, Total S.A. and Unocal were Burma’s largest foreign investors, with the pipeline and a related railroad accounting for more than a third of all foreign investment in Burma, and will provide the military its largest source of foreign exchange other than heroin. The “clean currency” provided by Total and Unocal to the regime helped Burma source mortars in Portugal and helicopters in Poland.

    All told, then, what we have here is a clear demonstration of just how contagious corporate corruption can be -- and how it interacts with the power of the state to generate a long-term venal alliance that is extremely hard to unravel, once it is in place. From one standpoint, French justice worked -- after all, all these former Elf senior managers have at least been jailed and fined. But it took almost a decade to catch up with them, and apart from social disgrace, the actual fines and sentences they will suffer are relatively minor, compared with all the hundreds of millions still missing. Moreover, out of all the senior French officials who knew about Elf's behavior and tolerated or encouraged it, only one saw any jail time -- and his conviction was overturned on appeal.

    Finally, perhaps the worst damage from this scandal has been suffered by the scores of developing countries where Elf/ Total has long used bribery to wield undue influence. While the names of those Elf bribed are still in many cases secret, we can be sure that this not only tilted public policy unfairly in Elf's favor; it also helped to spread corruption from the First World to the Third, and helped undermine the rule of law in these fragile environments.

    So those who blithely criticize developing countries for having "corrupt governments" -- which many of them no doubt do -- might do well to remember the case of Elf. As this tale indicates, the fact is that for more than forty years -- and quite possibly still to this day -- the Government of France joined together with leading French corporations and banks, plus quite a few friendly bankers in Europe's top havens, and made it national policy to foster corruption throughout the developing world, in order to serve its own perceived national interests, and pocket a few bucks for influential insiders on the side. If this does not constitute "crime against humanity," the term has little meaning.


    (c) James S. Henry 2003. Not for reproduction or other use without express consent from the author.

    November 17, 2003 at 02:42 AM | Permalink | Comments (1) | TrackBack

    Sunday, November 16, 2003

    First World Criminals, Third World Crimes – Recent Transnational Corruption Cases. Part I: Introduction.

    Printable PDF Version unocal.jpg elf_acquitaine.jpg Ever since a series of unprecedented corporate scandals erupted in the US in late 2001, students of corporate corruption and First World media have focused mainly on the misbehavior by First World companies, banks, and investment companies in their own backyards. As indicated by the unfinished prosecutions of Enron, Worldcom, and Tyco, plus the recent US mutual fund trading scandals, this kind of big-ticket corporate crime continues to be an important problem.

    However, from the standpoint of developing countries, there is even more to learn from a recent flurry of transnational corruption cases that all involve serious criminal misconduct by leading First World multinationals in Third World countries.

    The hit parade includes:

    • France’s huge oil company, Elf Aquitaine, formerly France's largest state-owned company, and now part of Total S.A., the world’s fifth largest oil company. Total.gif A French court case that ended just last week has helped to expose a vast network of bribery and corruption that operated throughout Africa, Asia, and Latin America, as well as Europe, for more than four decades -- with the complicity of France's highest officials. (See Part 2.)
    • A half dozen leading Canadian and European engineering and construction firms that are now being prosecuted for briberylahmeyer.gif with respect to a huge World Bank-financed dam project in the tiny African country of Lesotho. As we will see, despite Lesotho's courageous efforts, the World Bank and First World export credit agencies have been reluctant to punish the companies involved. (See Part 3.)
    • The giant Swiss “trade services” SGS, which has recently been shown by a Swiss court to indeed have been deeply indicted in bribing former Pakistan Prime Minister Benazir Bhutto, and leading members of her government, during both of her two administrations in the 1990s. The resulting bribery scandal may have had a profound impact on Pakistan’s efforts to develop democratic institutions. (See Part 4.)

    • The US’ own Halliburton, Enron, ExxonMobil, and Unocal have all been recently implicated in corruption and human rights violations in several developing countries, including Kazahkstan, Nigeria, India, Brazil, Burma, Equitorial Guinea, Guatemala, and the Philippines. Once again, they have been able to do so with impunity (See Part 5.)
    • Leading global defense contractors, which have recently been implicated in bribery schemes that have had a profound impact on several developing countries – and on the First World as well. (See Part 6.)

    This article is the first in a series by Submerging Markets that will examine such cases in detail. One of our objectives is just to tell a few colorful stories. But we believe that there is also a great deal to learn from these cases about the way the world really works. In particular:

    • These cases raise serious questions about the First World’s ability and willingness to prosecute large corporations and banks for bribery, fraud, and other crimes that occur beyond its borders. So long as company managers don't steal from their shareholders (and perhaps even then), they appear to be safe.
    • The cases suggest that existing international mechanisms for prosecuting such corporate crimes are woefully inadequate, and that we need to consider creating the equivalent of an International Criminal Court for transnational corporate crimes. After all, the victims of these crimes are not just relatively-affluent First World investors, but the residents of some of the world’s poorest countries.

    • These cases beg the question of whether the privatization of corruption-ridden state enterprises necessarily reduces corporate misbehavior. They also provide an interesting vantage point from which to assess recent First World criticisms of efforts by countries like Russia and China to crack down on corruption among their own business elites.
    • Most important, these cases suggest that the standard “country by country” approach to understanding international corruption that has been employed by organizations like Transparency International (TI) is inadequate, because it ignores the fact that First World countries - and some leading developing countries -- often exert a profound negative influence on corruption levels far beyond their borders.

    Of course, corruption varies with country income levels -- poorer countries have fewer resources for law enforcement, and they also have often suffered from “exploitative states,” which hardly encourages respect for the law. As for "national culture" explanations for corruption, as Alex Gerschenkron used to say, we start out by being suspicious of such "uncaused causes" -- but then one visits Italy! There is a obviously great deal of “petty-ante” corruption throughout the developing world, from the morditas (“bites”) made famous by Mexican and Costa Rican policemen and Nigeria’s “dash,” to Kenya’s “kitu kidogo and “sodas,” to baksheesh in the Middle East. And, as the examples of Russia, Mexico, Argentina, and China demonstrate, there is no shortage of unscrupulous Third World entrepreneurs.

    However, as the cases examined in this series illustrate, much of the most heinous transnational corruption involves giant development projects, massive bribes, and secret haven bank accounts, where the transgressions are on such a grand, systematic scale that they require the active connivance of First World banks, transnational companies, and governments. This kind of big-ticket corruption requires a transnational system – a global network, not only of willing bribees in “corrupt” developing countries, but of eager corporate bribers, private bankers, First World government officials and spies, as well as “see-no-evil” development bankers at the World Bank and the IMF. Of course all these folks reside in First World countries that get "top-shelf" rankings every year from Transparency International.

    In short, these cases suggest that the standard “neoliberal” approach to corruption and transparency, which emphasizes “institutional reform” at the level of individual countries, may be necessary for political development, but it is certainly not sufficient.


    (c) James S. Henry 2003. Not for reproduction or other use without express consent from the author.

    November 16, 2003 at 07:21 PM | Permalink | Comments (0) | TrackBack