Secrecy World

by Jake Bernstein

  In the mid-1980s, West joined a team auditing Wheaton Industries, a century-old glassmaker located in Millville, New Jersey. Wheaton produced bottles for everything from cosmetics to pharmaceuticals. The company transformed southern New Jersey into a commercial glass-manufacturing mecca, becoming one of the area’s largest employers. Millville, population twenty-five thousand, was the quintessential company town. Frank Wheaton Jr., the grandson of the firm’s founder, was its “Glass King.”

  The audit, which took years, revealed a multinational company run like a family business, where relatives were paid off the books through gifts of cars, boats, and other assets. In the end, whatever violations the firm committed paled in comparison to what Frank Wheaton himself was doing. To hide his income, Wheaton operated bank accounts in at least three offshore jurisdictions, including the Bahamas and Panama. He ran an offshore business empire based in multiple tax havens through a network of undeclared trusts and anonymous companies.

  When West found hints of this offshore activity, his superiors at the IRS tried to dissuade him from pursuing the offshore trail. It wasn’t worth the effort, they said, pointing to the challenge all such cases present of proving that the taxpayer controlled the trusts and anonymous offshore companies. West would never find the documentation to establish that Wheaton secretly managed his offshore empire, his superiors warned. It was a classic Catch-22. In order to get the records, you needed the records. To obtain a court order to force Wheaton to produce documents, the IRS had to convince a judge the documents existed. Wheaton denied his control over the companies and trusts, and no public documents existed to the contrary.

  West needed no reminding he was on the clock. The statute of limitations was short, three years at the time, although more if an agent could prove fraud. Not a lot of time to peel back multiple layers of offshore secrecy. Management judged auditors by how fast they worked and how much money they brought in. Failure to complete a case before the statute of limitations expired could damage an auditor’s career. West convinced his direct managers to let him try anyway.

  “They couldn’t walk away because everybody knew this guy was doing it,” West says.

  In his quest to understand the schemes, West traveled to the Bahamas to interview the trust manager at the Royal Bank of Scotland. The manager informed him that Wheaton was not the owner of record of the companies in question. However, West spoke with distributors who ordered bottles from Wheaton’s offshore companies directly from Frank Wheaton. During the audit, West also spent a lot of time in Millville, where he earned a reputation as a straight shooter. Soon folks in town came forward with gossip. With a stenographer in tow, West put Wheaton Industries executives under oath, saving Wheaton’s longtime personal secretary for last. (By this time, the company’s board had grown weary of Wheaton’s rule bending and fired him.)

  In her testimony, the secretary recalled that Wheaton had personally dictated instructions for his offshore companies. West asked her how she’d recorded the information. On steno pads, she answered. It turned out she’d kept them all.

  West finally had enough evidence to issue a summons to Wheaton demanding his books and records. When Wheaton refused to comply, the IRS took the matter to a judge, who upheld the request. By the end of his audit, West had amassed ninety boxes of documents that conclusively proved his case. Armed with the evidence, the IRS eventually levied millions of dollars in fines and back taxes. West’s direct superiors had risked their careers to give him the space he required to complete his audit. Still, not everyone at the IRS was happy over how much time and resources it took.

  As West scored court victories, IRS attorneys with whom he worked commended him; he had essentially created a textbook on how to do an offshore tax exam. His district director recognized the potential. Individual audits wouldn’t catch or deter offshore abuses. An agent needed to identify a multitude of Americans hiding taxable income offshore and expose enough of them to send a signal to the rest. Scared and excited at the same time, West suggested a deep-dive research project into how the offshore industry functioned. His managers in New Jersey agreed.

  “You have to know their industry as well as they know it,” West says. “Once you figure out the techniques, it’s not hard to figure out a class of people who are using them.”

  The U.S. government had not entirely ignored the problem. The Senate Permanent Subcommittee on Investigations under Delaware Republican senator William Roth issued a stinging report in 1985 titled “Crime and Secrecy: The Use of Offshore Banks and Companies.” Its conclusions were stark. Despite overwhelming evidence of dirty money in their banking systems, tax havens chose instead to “systematically obstruct U.S. law enforcement investigations.” The stonewalling eroded public trust in the U.S. justice system and left massive amounts of tax revenue uncollected. The report contributed to the passage in 1986 of legislation that for the first time made money laundering a federal crime.

  West found a guide and kindred spirit in Jack Blum, a Washington lawyer and IRS consultant who had advised on the Wheaton case. Blum had arranged for the PBS documentary program Frontline and the BBC to surreptitiously tape John Mathewson, the chairman of a Cayman Islands bank, Guardian Bank and Trust, as he described the various ways to hide and access offshore money. The broadcasts prompted a Department of Justice investigation.

  Blum connected West with others in the government who recognized the scale of the problem. West made the rounds, including stops at the Federal Reserve Bank of New York, the State Department, the Treasury Department, and even the National Security Agency. These were agencies that seldom spoke to one another, but they all talked with West.

  Blum had also worked on the most explosive scandal involving offshore finance of the period, the investigation into the Bank of Credit and Commerce International (BCCI). Founded by a Pakistani businessman, the Luxembourg-based BCCI grew from $200 million in assets at its inception in 1972 to $2.2 billion in just five years. Huge influxes of cash kept the wheels spinning, with much of the money coming from the Middle East and drug cartels. Government investigations beginning in the late 1980s revealed BCCI’s inner workings, and the media feasted on lurid tales of the bank’s involvement with criminals, terrorists, and the CIA. Not surprisingly, Mossfon counted key BCCI shareholders as clients.

  Kamal Adham, a native of Turkey and the former head of Saudi Arabia’s intelligence service, was a Mossfon customer and a BCCI shareholder. Fortune had smiled on Adham when Saudi king Faisal chose his sister as a wife, bringing him into the kingdom’s inner circle. He was known as the “godfather of Middle East Intelligence,” in part because of his alliance with the CIA—a relationship that continued long after he left office in 1979 to focus on business. Jürgen Mossack’s law office created companies for Adham beginning as early as 1982. He ultimately had at least five Mossfon companies, mostly based in Panama.

  Middle Eastern elites like Adham didn’t need Mossfon’s structures to hide from a local tax collector. Rather, they created companies for cross-border trading, to escape liability and to disguise their activities from jealous relatives and prying foreigners. Adham even inherited a few of his Mossfon companies from others in the Middle East as payment for still-secret deals. The transfers show up in the Mossfon files simply as resolutions changing the power of attorney to Adham.

  The Saudi spymaster received more than $323 million in loans from BCCI and owned about 2.9 percent of the bank. Another large shareholder, Abdul Raouf Khalil, the Saudi intelligence liaison to the United States, was a director of at least two Mossfon companies in the 1980s. The leading shareholder of the bank was the emir of Abu Dhabi, Sheikh Zayed bin Sultan Al Nahyan, whom Mossfon helped buy large swaths of London real estate through multiple anonymous companies registered by the firm.

  After regulators yanked its license in 1991, BCCI went into receivership. Seven years later, Mossfon received correspondence from an English solicitor asking to reactivate several of Adham’s companies, which were claimants
to what was left of the carcass of BCCI. Adham died a year later, in 1999, of a heart attack, but his Mossfon structures outlived him. In 2000, almost a year after his death, the manager of Adham’s office requested the firm shutter another of the spymaster’s companies.

  As Blum familiarized West with BCCI’s offshore machinations, West also met with representatives of the Organisation for Economic Co-operation and Development (OECD), an international body consisting of the world’s leading industrialized nations, which in 1998 had launched a crusade against “harmful tax practices.”

  The OECD identified four behaviors it said defined a country as a tax haven: if the nation had low or no taxation; if it ring-fenced its offshore industry by forbidding the use of its financial products domestically; if its activities lacked transparency; and if it resisted information exchanges with other nations. The OECD identified forty-seven tax havens worldwide that fit its criteria. Those who failed to reform risked being blacklisted with potential economic sanctions to follow.

  The OECD released its first blacklist of thirty-five countries in June 2000. Notably missing from the list were three of the world’s biggest secrecy jurisdictions: Switzerland, Luxembourg, and the United States, where Delaware annually churned out more than a hundred thousand anonymous companies. All three were founding members of the OECD.

  West watched with interest as the OECD blacklisted seven Pacific island countries, including Niue. The islands had gained reputations as money-laundering sink holes. The spread of offshore banks, ostensibly based on sparsely populated atolls, alarmed the major powers. These banks served as conduits for cleaning dirty money and funneling it into the global financial system. Evidence substantiated the concern. A direct line of Russian mafia cash ran from the Pacific islands to the 1990s New York banking scandals involving Republic National Bank, among others.

  A seemingly infinite number of ways existed for an offshore bank to facilitate money laundering. All it took was a basic understanding of the financial system and a flexible bank. The bank could move money between financial institutions and accounts, muddying its trail. Currency trades, particularly if backdated, allowed for large losses or gains. Account holders could place opposing bets on the stock market that canceled each other out. The bets produced no profits but provided a paper trail to legitimize the money.

  For the criminal class and the merely circumspect, offshore banks seemed too good to be true. “Can this Niue bank locate its offices in Niue while it’s being ran [sic] in Hong Kong (remote control)?” asked one Chinese prospective Mossfon client in disbelief.

  The tiny Micronesian island of Nauru was one of the worst offenders. In 1999, the Russian Finance Department claimed that 90 percent of Russian banks maintained sixty-six hundred offshore subsidiaries in Nauru. The island was all of 8.1 square miles, but billions of dollars in Russian capital flowed through it every month. West added Nauru to his list of targets.

  Nauru’s biggest promoter was Jerome Schneider, who advertised books he’d written with titles like Hiding Your Money and How to Own Your Own Private International Bank in airline in-flight magazines and the Wall Street Journal. Even Mossfon recognized Schneider as trouble. The firm advised its offices to “be very careful” with companies that came through Schneider or his associates. “We do not want to be involved in any way with J. Schneider, who has been in several intn’l scandals,” the general comments memo read.

  Schneider ran a lucrative business selling Nauru bank licenses at $60,000 a pop. Eventually the Russians realized if they went to Nauru themselves, they could get the same license for $5,000. An identical problem confronted Mossfon, which charged $25,000 for a Niue bank license. After Niue undercut Mossfon’s price, the Panamanians didn’t sell many banking licenses there.

  Mossfon’s Niue incorporation business hit its peak in 1999, with nearly two thousand companies that year. After that, the OECD blacklist soured the business from a reputational standpoint, making Niue companies less appetizing. Hearings in the U.S. Congress singled out Niue for its Russian activities. Then in January 2001, the Bank of New York and Chase Manhattan embargoed all money transfers to the country. The prime minister of Niue suggested that if the OECD countries really wanted his nation to stop its offshore business, it needed to make up the difference in the island’s annual budget. The $1.6 million Mossfon was paying Niue accounted for 80 percent of the government’s revenue. Jürgen Mossack went to New Zealand to reassure the government that Mossfon’s Niue operations were harmless, but the foreign minister refused to meet him.

  West identified Mossfon as a major player in the offshore business but decided to give the firm a pass. Intermediaries such as Mossfon were not deemed low-hanging fruit. What worried West was the possibility that as a law firm, its activities might be protected by attorney-client privilege. While many inside the U.S. government believe that the privilege does not cover commercial transactions a nonlawyer performs—such as incorporating a company—the failure-averse IRS has long been leery of testing that theory in court. It also faced legal hurdles in getting information from a foreign intermediary like Mossfon without a leak or a whistle-blower.

  West’s research pinpointed four questions to master in order to effectively prosecute offshore tax evasion. The first involved how the taxpayer entered the offshore world. Who was the intermediary who set up the structures and the sales pitch that brought the parties together? Second, how did the taxpayer move his money offshore? As with money laundering, an endless number of variations existed. Businessmen could route transactions via the Bahamas or other tax havens and skim profits into offshore bank accounts. They could falsify invoices to pay their offshore company or associates for services that never occurred. Another tactic involved selling assets to the offshore company at a loss, which not only transferred money but also provided a tax write-off. Third, West had to prove that the taxpayer covertly controlled the secret companies, trusts, and foundations. And finally, how did the taxpayer get the offshore money home? There is no benefit to having tax-free cash if it’s not accessible. West realized you did not need to own something to enjoy it. The title to any asset—a car, a yacht, real estate—could be held offshore and then leased back to the owner.

  West visited John Mathewson, the Guardian Bank chairman exposed by Blum and public television’s hidden cameras. Mathewson had cooperated with the government to avoid a lengthy prison sentence stemming from money laundering, tax evasion, and fraud charges. He told West how Guardian Bank offered a surefire way to repatriate offshore cash. It was a strategy West also saw advertised in the brochures he collected at Shorex.

  Mathewson explained that his bank would issue credit cards to its customers. As long as they had sufficient cash in their account, they could draw down on the now tax-free money anywhere in the world simply by using the cards. Nobody tracked these purchases. Credit cards connected to an offshore bank were standard practice in the industry. When clients asked Mossfon to recommend a bank for their anonymous companies, credit cards were one of the criteria the firm considered.

  West saw an opportunity. The credit cards might be issued by foreign banks but the transaction records went through company servers based in the United States. He visited the credit card companies to learn how the process worked. The companies anonymized the transactions and then stored them, some in more modern formats than others. Visa, for example, kept its records on eight-track tape.

  The IRS agent prepared a report for his managers and presented a lengthy menu of ideas for how to attack offshore abuses, from looking at credit cards to concentrating on the firms that created the companies, like Mossfon. His bosses in New Jersey selected one: credit cards.

  He then laid out a bold plan of action. West chose a tactic the IRS utilized infrequently at the time, the John Doe summons. The Internal Revenue Code gave the agency authority to issue a summons to third parties to investigate unknown individuals, “so-called John Does,” who the agency believed deserved scrutiny. The bar for convincing
a judge to allow such a fishing expedition was understandably high. The IRS needed to show that the information could not be readily obtained from other sources. It also had to make a strong case that the evidence collected would in fact lead to a group of people who had failed to comply with the law.

  West suspected there were tens of thousands of Americans who were using offshore credit cards to avoid taxes. The brass at the IRS told him they could only handle five hundred cases. He filed this information away and tried not to let the lack of enthusiasm from his higher-ups demoralize him.

  He focused on the major credit card companies: Visa, Mastercard, and American Express. The last two had servers on the East Coast. At the time, the agency was bifurcated by geography. West’s management was ready to go forward, but in order to target Visa, he needed the approval of the IRS on the West Coast. It moved more slowly. Despite the delay, the New Jersey–led effort continued.

  On October 18, 2000, the IRS filed John Doe summonses in U.S. District Court in Miami seeking approval to ask for records from Mastercard and American Express. West and Blum provided declarations for the affidavit. The agency’s request was for records from cards issued in three dozen countries, including Panama, the BVI, and Switzerland. A judge approved the request less than two weeks later. Next, the IRS served the companies. That process took months. The companies worried about customer privacy, but the data did not come with names. Company lawyers argued that the information was difficult, if not impossible, to retrieve. West had consulted the technical gurus at the credit card companies; they had already told him it could be done.