Banking On Secrecy

The U.S. was all set to join a global crackdown on criminal and terrorist money havens earlier this year. Thirty industrial nations were ready to tighten the screws on offshore financial centers like Liechtenstein and Antigua, whose banks have the potential to hide and often help launder billions of dollars for drug cartels, global crime syndicates--and groups like Osama bin Laden's al-Qaeda organization. Then the Bush Administration took office.

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Officials from the banking-industry-friendly Center for Freedom and Prosperity sat down with top Bush economic advisers Larry Lindsey and R. Glenn Hubbard and urged them to keep the U.S. out of the coalition and firmly support the status quo in many tax havens. The group's pitch: Americans should be free to seek out lower tax rates anywhere in the world; competition from tax havens helps keep tax rates in the U.S. down. The conservative Heritage Foundation met with Treasury Secretary Paul O'Neill and presented a similar argument. And the C.F.P. helped Don Nickles of Oklahoma, the No. 2 Republican in the Senate, draft a letter to O'Neill applying still more pressure.

By June, the lobbyists got what they wanted. O'Neill told the Organization for Economic Cooperation and Development (OECD), which was leading the campaign against tax havens, that the U.S. was out. And without the world's financial superpower, the biggest effort in years to rid the world's financial system of dirty money was short-circuited. America's European allies "will be very upset," the Heritage Foundation's point man on the issue declared in the Washington Post, but the global war on offshore banking was "dead, and thank goodness for that."

Since the Sept. 11 attacks, the anti-money-laundering cause has sprung back to life. The Bush Administration, which is trying to hunt down Osama bin Laden's cash in tax havens and secret bank accounts, has suddenly got religion about tracking down terrorists' assets, know-your-customer laws for banks and an array of other tools on law enforcement's wish list. The antiterrorism bill the Bush Administration sponsored, augmented by tough money-laundering provisions proposed by Democrats, sailed through the Senate. But late last week House Republican leaders Dick Armey and Tom Delay thwarted efforts to include an anti-money-laundering bill in the chamber's antiterrorism legislation, sources tell TIME, endangering the entire banking reform effort.

In this national crisis, who could be opposed to anti-money-laundering laws? The same people who opposed them before the crisis: influential bankers who are concerned about taking on added administrative burdens--and who are worried that they might have to turn down lucrative business from people evading taxes or law enforcement. The bankers get support from conservative policy advocates, who in turn thrive on contributions from financial institutions and other corporations. The conservatives argue that the new rules would in effect raise taxes and create a shadowy "global tax police."

For most of this year the Bush Administration was not part of the crusade against money laundering. Pointing out this U-turn, supporters of those rules say, isn't about playing gotcha. It's about continuing to press for anti-money-laundering regulations.

Tax havens are one of the world's great growth industries. There are more of them than ever, from Liechtenstein to Panama to Vanuatu, a tiny rock sticking out of the Pacific, well-wired into the world financial system. And the amount of money they harbor around the globe is staggering--as much as $5 trillion, according to the U.S. State Department. The Cayman Islands (pop. 35,000) has more than $800 billion on deposit--fully one-fifth as much as the entire U.S. banking system. And those Cayman deposits are swelling by an estimated $120 billion a year. Not all offshore money is linked to crime or terrorism. Much of it belongs to wealthy people who are avoiding taxes in ways that often are legal under current law or--as the ads for "asset protection lawyers" on CNBC make blatantly clear--are shielding money from business partners and spouses.

The Internal Revenue Service estimates these deposits are costing the U.S. alone $70 billion a year in uncollected taxes. But tax havens, with their anonymity and lax oversight, aren't just for tax cheats. They're also an ideal financial way station for terrorists, who want to park money out of sight until they need it to pay for training camps or to pull off an attack.

This dirty money isn't hard to retrieve and spend, even in the U.S. In a report this year, Senate Democrats described how it was finding its way in through a practice known as correspondent banking, in which U.S. banks provide banking services to overseas banks. U.S. banks sometimes don't seem to mind that the banks they're helping--from whom they are hauling in large fees--traffic in crime money. Or that these banks are, in some cases, mere shells with no physical presence anywhere beyond perhaps a post-office box or a fax.