As the matter crawled forward, Michigan Democratic senator Carl Levin picked up Roth’s banner in Washington, DC, as chair of the Senate Permanent Subcommittee on Investigations. Levin held hearings and issued reports on private banking, tax evasion, and money laundering. In one hearing, Levin estimated that $70 billion in tax revenue was lost each year because it was hidden offshore. Levin noted wryly that if the IRS collected even half of that money, it could pay for a prescription drug benefit “without raising anyone’s taxes or cutting anyone’s budget.” In another report, the subcommittee concluded that sixteen tax havens had licensed about four thousand offshore banks, which controlled an estimated $5 trillion in assets.
Levin filed a sweeping legislative fix for what his committee uncovered. The Money Laundering Abatement Act proposed forcing banks to change the way they had conducted business for two centuries. In the past, what customers did with their money was mostly their own concern. Financial institutions only had to report suspicious activities, large cash transactions, and cash purchases of negotiable instruments such as bearer bonds. Levin went farther by turning banks into agents of regulators and law enforcement. Under Levin’s bill, U.S. banks needed to create due diligence procedures to constantly monitor private banking customer accounts. They had to identify foreigners who owned accounts in banks in the United States and respond within forty-eight hours to requests for anti-money-laundering information from federal banking regulators. For two years, antiregulatory Republicans stalled Levin’s bill.
Then on September 11, 2001, hijackers piloted planes into the Twin Towers and the Pentagon. Fonseca was in Luxembourg at the time. After hearing the news, he looked out his hotel window. His face blanched. The room overlooked the headquarters of the European Atomic Energy Community, a prime terrorism target in his estimation. Little did he know that the fallout from the attacks would prove radioactive for his business.
Even though terrorist financing represented but a sliver of private banking and offshore activity, the federal government now desperately wanted more insight into how foreigners and offshore companies used the banking system. Levin’s anti-money-laundering bill provided the template for what became Title III of the Patriot Act, which was passed a month after the attack. Among its requirements, it forced U.S. financial institutions to enact comprehensive anti-money-laundering procedures. Now, before a bank did business with a foreign financial institution, it needed to ascertain the identities of the owners. The law empowered the Treasury Department to issue further Know Your Customer rules for banks. And it promoted the kind of international cooperation that the George W. Bush administration had previously abhorred.
In March 2002, West’s credit card data finally started to flow. IRS commissioner Charles Rossotti was now giddy with excitement over the project. “Simply put, the guarantee of secrecy associated with offshore banking is evaporating,” he crowed to Newsday. “If people use these illegal offshore methods to hide their income, we will find out who they are.”
West did not get to partake fully in the celebration. To participate in the offshore effort, he had temporarily left the international company division to work for the individual taxpayer part of the agency. His battles to push the project forward had not endeared him to many in its bureaucracy. One of his managers told him to run, not walk, back to his old division. Once he successfully launched the credit card project, he moved to a research division; the effort continued with West’s colleagues, special trial attorney John McDougal and IRS revenue agent Dan Reeves, who had a background in data and money-laundering investigations.
Commissioner Rossotti ordered the agency to use the data to get 350 audits into the pipeline straightaway. But the hard work was only beginning. The IRS needed to look for patterns that pointed to individuals using the cards for noncommercial purposes. It then had to go to the merchants where the charges occurred to get names of possible tax evaders. This work was done by field agents whose main experience was checking boxes on audits. Their job experience did not include thinking creatively. Despite training sessions, working with this kind of data was new and threatening. Since Rossotti had prioritized volume and speed rather than quality, the first catches were duds, revealing mostly harmless foreign credit card users like exchange students. Field agents who had quotas to fill looked at the poor results and shied away from pursuing more.
Rossotti’s claim of victory over offshore tax evasion proved premature. Nonetheless, publicity around the credit card project drove thousands of U.S. taxpayers to amend their returns or seek amnesty for offshore accounts. The mere threat of being caught was sufficient to dissuade those who were greedy but cautious. The joke around the agency was that West, McDougal, and Reeves had enriched many a tax lawyer hired to get their clients out of jeopardy over offshore holdings. The John Doe summons became an important IRS tool, eventually bringing billions in hidden tax revenue back to the United States.
However, West’s career never quite recovered. The battles with the bureaucracy had worn him down. He retired young, proud of his accomplishments but embittered by the experience. Soon after leaving the IRS, West went into his backyard and made a pile of his redundant material from the credit card project. Laughing maniacally, he poured lighter fluid on the documents and lit the bonfire.
6
FULL SPEED
The March 2003 edition of Mossfon’s company newsletter struck a triumphant note. The OECD had threatened “the financial privacy of our customers,” but the offshore world forced it to retreat.
The OECD had demanded that tax havens eliminate low tax rates and provide international access to secret banking and corporate information. Panama led the resistance. It accused the OECD of imposing requirements on tax havens its own members refused to accept. An opportunity to highlight Western hypocrisy came when the European Union announced what it called a “savings directive,” a treaty that required EU members to share information and collect taxes from the interest generated by foreign bank accounts held by EU citizens. Luxembourg, its economy based in part on financial secrecy, declined to participate but suffered no consequence for its defiance. Panama cried foul.
The tax havens had powerful ideological allies in Washington. Congressional Republicans and the Bush administration attacked the savings directive and refused to cooperate with the OECD. While the United States was happy to promote international cooperation to pursue terrorists, the administration didn’t like forcing people to pay taxes. Well-funded think tanks lobbied Congress to eliminate the U.S. contribution to the OECD—about 25 percent of its budget. The pressure forced the OECD to all but abandon its blacklist and tax reform efforts.
The victory, Mossfon’s newsletter reported, ensured that “we have before us a very positive outlook.”
Mossfon was entering the most profitable period of its existence. At the same time, new global standards increasingly required it to identify and jettison its worst customers. In the contest between growth and compliance, the profit motive proved the stronger. Mossfon continued to collect crooked clients and sidestep any scandals they brought.
* * *
IN SEPTEMBER 2003, the partners sent Mossfon’s chief operating officer, Christoph Zollinger, to Samoa to inquire about incorporating companies there. Jürgen Mossack and Ramón Fonseca had met Zollinger in Panama City six years earlier, at the local helicopter club. All three were pilots. The partners were quite taken with the handsome young Swiss lawyer’s combination of boyish charm and technological know-how. After graduating law school in Switzerland, Zollinger had followed his future wife, Darlina, to Panama. Her father, a wealthy plastic surgeon, helped him secure a job with the country’s first Internet provider. Mossack hired Zollinger as an assistant in 1997. He quickly made himself invaluable computerizing the firm’s work flow. The two partners soon promoted Zollinger to COO and put him in charge of overseeing the technical work of the firm. After he successfully negotiated the license with Samoa, Mossack and Fonseca offered Zollinger a junior partne
rship in the firm, giving him a 10 percent stake in its profits.
Within weeks of his promotion, Zollinger faced one of his first ethical quandaries, courtesy of John Gordon’s USA Corporate Services. In February 2004, Mossfon received a request from the Attorney General’s Office of the Bahamas. Two officers from England’s Merseyside Police Financial Investigation Unit were making inquiries into a Mossfon company called FRO Inc., which had connections to a drug trafficker sentenced to twenty-five years in prison. The police officers did not have a judicial order but the Bahamas wanted Mossfon’s assistance anyway.
Mossfon had two women in charge of handling these kinds of requests, attorney Ana Escobar, a devout Christian described by one colleague as “tender but tough,” and Sandra de Cornejo, who had a degree in marketing. Neither had a background in financial compliance.
Gordon had registered FRO Inc. while at Shorex in 1997. Escobar wrote to him asking for information. He responded that due to the age of FRO, whose registration had lapsed, any records had been long since destroyed.
“We have noticed that too many clients of yours have come to our attention due to investigations started by the authorities of several countries,” responded Cornejo, who identified herself on the email chain as “Customer Care.” She reminded Gordon that Mossfon Group, its clients, and its representatives needed to follow the Know Your Customer requirements of the jurisdictions in which they operated. It seemed that Gordon refused to heed instructions in this regard, she noted. For this reason, the firm was contemplating cutting off USA Corporate’s access to future Mossfon companies.
The due diligence demands at the time varied by locale. Panama required Mossfon to do some basic checking on the professionals on whose behalf it registered companies but not the actual owners. Mossfon asked these professionals for a reference letter, a certified copy of a passport, and some details about their business. It advised the attorneys, accountants, and bankers to keep records on the end users of the companies. If Mossfon requested this information, it was supposed to be available. In return, Mossfon promised not to hand such information over to authorities without a government order forcing it to do so—a prohibition it was soon to disregard in the FRO Inc. case.
Gordon reacted to Cornejo’s email with bewilderment. “I have read your message and find it very odd,” he responded, adding that FRO had been formed before the current standards existed. USA Corporate Services now followed all the requirements Mossfon demanded, wrote Gordon. Perhaps recalling the Bahamas Software case, he continued: “It has become obvious to us, as well as to you, that lax standards are expensive in terms of legal fees and time lost rummaging through old files on behalf of unsavory clients.” If Mossfon wanted to force USA Corporate to find another provider over mistakes that had occurred more than five years earlier, that was its prerogative, Gordon wrote.
His response circulated among the partners. Zollinger noted that USA Corporate had sixty-nine active companies with Mossfon, a significant number. If Gordon said USA Corporate was performing the necessary checks, that was good enough for Zollinger.
What concerned Cornejo were all the companies USA Corporate had created before it started reviewing its clients. She noted that USA Corporate had 494 inactive companies with Mossfon, in addition to the 69 active ones. Escobar rejoined the email chain to add that she, too, was worried about the dangers lurking in the old companies. Zollinger, telegraphing his impatience with exaggerated politeness, asked what “the esteemed lawyer” proposed. Escobar suggested that Mossfon request USA Corporate’s due diligence on all its active clients. The partners agreed. Gordon assented but said it would have to wait for a staffer to return from maternity leave.
Most of the information never made it to Panama. “MF had a tendency to be demanding for stuff then drop it for quite a while, then suddenly be demanding again,” remembers Gordon.
The implications of the USA Corporate discussion for Mossfon’s company-creation factory were staggering. USA Corporate was only one of Mossfon’s clients, and not nearly the biggest. There were hundreds of others. A 2004 list of all the clients and the companies they created ran 454 pages. How many banks, lawyers, accountants, and other intermediaries with whom Mossfon worked had created companies for criminals, money launderers, or even terrorists? What other scandals lurked in the tens of thousands of companies, active and inactive, the firm had registered? The partners did not seem particularly curious to find out. They reassured themselves that the intermediaries were doing the required reviews of their customers. Problems would be addressed as they emerged.
* * *
MEANWHILE, MOSSFON WAS moving forward at full speed. In 2002, the firm had incorporated more than seven thousand companies. Two years later, that number nearly doubled. The growth was attributable in part to the very action Panama had maligned, the European Savings Directive. The directive required European Union banks to monitor European account holders and, if they were not nationals of the country where the account existed, to collect taxes on savings interest, initially up to 15 percent. Europeans who secretly hoarded cash in foreign banks suddenly faced having to pay tax on it. However, the law—announced in 2003 but implemented in July 2005—had a significant loophole. It applied only to individuals, not companies.
By early 2004, many Mossfon clients, particularly banks, began to approach the firm to create companies so that their customers could escape the directive. It was a volume business. Ramsés Owens met with executives from the Denmark-based Jyske Bank, who told him the bank had created two thousand companies for customers as a result of the European Savings Directive, most in Panama or Gibraltar. HSBC marketed the strategy to its European customers hiding cash in its Swiss private bank. The Swedish-based Nordea Bank also helped customers circumvent the rule through Mossfon, as did many others.
Avoiding the savings directive was so easy, even the merely well-off took advantage. An HSBC banker described the attitude of one client, a Belgian cotton exporter. “We also discussed the impending ESD and despite the very modest benefit in saved tax, he has decided to form a company through Mossack and to transfer all assets across,” wrote the banker in the client’s file.
In the second week of August 2004, Mossfon hit a speed bump in this incorporation bonanza. The firm sent out a mass email to its clients and franchisees that its own personal tax haven, Niue, had decided to shutter its public registry. Mossfon had more than nine thousand companies registered on the island, about 4.5 companies per inhabitant, but the bad publicity had finally been too much for New Zealand. It agreed to pay Niue the amount Mossfon was contributing to the island’s budget, in order for Niue to abandon the offshore business. Still, a small island has to survive. Even after it ceased creating companies, Niue maintained a lucrative trade in “900” sex telephone numbers. Meanwhile, those nine thousand companies had to find new homes in another friendly country.
The day after the Niue announcement, Mossfon lawyer Ana Escobar sent a note to the partners, informing them that the firm’s due diligence procedures for its BVI office were out of date. The Road Town office lacked a compliance and money-laundering reporting officer and its anti-money-laundering compliance manual needed updating. She noted that the partners had been discussing some of these issues with Rosemarie Flax, the head of the BVI office, for several years, and Zollinger had assured the partners that he had spoken with Flax and that the BVI government was unconcerned.
Around the same time, the head of Mossfon’s Luxembourg office emailed the partners describing a “really scary” phone conversation he had recently had with a client. The customer sent a follow-up fax, typing on the cover sheet, “Kindly treat this information with the utmost confidentiality, as the individuals involved are very dangerous and usually escorted by ex-Stasi [East German secret police] bodyguards.”
The fax included a newspaper story about Francisco Paesa Sánchez, an infamous Spanish intelligence agent and world-class opportunist. Paesa did business with the dictator of the West African co
untry of Equatorial Guinea. He sold missiles to Basque terrorists but installed secret tracking chips that enabled their capture—to win favor with Spanish officials. In 1994, Paesa helped the former director of Spain’s national guard hide bribe money, siphoning millions of dollars for himself in the process. Then Paesa engineered his greatest feat of all by faking his own death. The obituaries reported he died of a heart attack in Thailand. The body was cremated. A forged death certificate helped dispel any doubts. Grieving relatives held a Catholic Mass in his honor.
In early 2004, a private detective working with a Spanish journalist discovered that Paesa was alive and living in Luxembourg. Paesa traveled on an Argentinian passport under the name Francisco Sánchez. Ever vain, the newspaper reported, Paesa had shaved fourteen years off his age through his new identity. In Luxembourg, Paesa worked with his niece creating offshore companies, and under his new name he served as a director of seven Mossfon companies. The newspaper article alleged that the Spaniard had incorporated companies for arms traffickers and Russian mafia. Paesa later blamed the death notice on an innocent mistake and denied any connection to organized crime.
“Investigate and Act. Urgently!!” Fonseca responded to the fax.
However, the compliance gears moved much more slowly at Mossfon than the company creation ones did. It took more than a year before Mossfon fully broke off the relationship with Paesa, citing fears that the notorious Spanish spy might tarnish its image. The fears were unfounded. Mossfon remained in the background.
* * *
ANA ESCOBAR TRIED yet again, in September 2005, to get the partners to focus on compliance. There had been still another scare. Once more the firm inadvertently discovered troubling details about an owner of several of its companies. This time the person fit a relatively new category of concern. The ultimate beneficial owner was a politically exposed person, or PEP. The phrase, shorthand for a government official or a relative of one, came into vogue in the late 1990s, after Nigeria tried to recover billions of dollars stolen by its former ruler Sani Abacha. Notoriously corrupt, Abacha had funneled some of his illicit money through Swiss banks and offshore companies. In order to fight this kind of high-level political corruption, the United Nations and the European Community demanded that banks and offshore providers review their customers to determine if they were PEPs. If the answer was yes, the banks and company providers needed to collect additional details about the source of the wealth.
Secrecy World Page 9