Funds in the Sun

"When a man knows he is to be hanged in a fortnight," quipped the English essayist Samuel Johnson, "it concentrates his mind wonderfully." For Liechtenstein, a postage stamp-sized "offshore" banking haven snuggled in the landlocked mountains on Switzerland's eastern border, it must have seemed such a moment last month, when the world's richest nations placed the principality on a blacklist of countries that have failed to cooperate on money laundering. Banking and related services account for 40% of Liechtenstein's economy and the prospect of financial sanctions promised a bleak future. "It was a real crisis for us," recalls Gerhard Mislik, one of the country's senior judges. "We are only a small country."

Now, Liechtenstein is scrambling to set matters right. After years of stalling, the country's parliament last week hurried through a bundle of new laws making it a crime for bankers or financial intermediaries to fail to report suspicious financial activity and providing for international cooperation to fight money laundering. Parliament also approved plans to hire new judges, prosecutors and police officers with special knowledge of economic crimes. "We see there is more criminality in the financial sector than we thought," Prime Minister Mario Frick acknowledged in an interview with Time last week.

Liechtenstein was the only European country among the 15 jurisdictions listed as "non-cooperative" in a report on money laundering released June 22 by the Financial Action Task Force on Money Laundering (FATF), a group established by the world's seven richest nations in 1989. But it is not the only nation on the Continent coming under scrutiny for failing to do enough to stop dirty money. Last month, a French parliamentary committee investigating financial crime in Europe lambasted Monaco, another tiny principality famed for its tax-haven status, for imposing so few financial controls that "money laundering can thrive." Austria just narrowly escaped being booted out of the FATF by agreeing not to permit any more anonymous savings accounts to be opened. Even Israel, not generally considered to be a financial services hub, was scolded for not doing enough to stop hot money from sloshing through its banks.

The U.S. investment bank Merrill Lynch estimated in 1998 that more than $5 trillion, representing a third of the savings of wealthy people worldwide, was held offshore. While only a small percentage may involve money laundering the act of taking illegally obtained money and making it appear legitimate the recent crackdown appears likely to finally make money laundering more difficult, at least in Europe.

The FATF report said that while Liechtenstein had improved its vigilance recently, the system for reporting suspicious transactions was inadequate, there were no laws in place for exchanging information about money laundering and resources devoted to tackling it were too paltry. Indeed, Liechtenstein had figured prominently in allegations earlier this year that German politicians had used bank accounts there to receive bribe money paid by the French oil giant Elf Aquitaine. Two working days after the FATF report appeared, the parliament in the capital of Vaduz roused itself out of complacency and passed the requisite laws on a first reading. In addition to adopting the laundering legislation, the government has independently begun to crack down on economic crimes in the principality.

In May, the nation of 32,000 people was shaken to learn that a special team of Austrian police called in by the government had detained four men on suspicion of fraud, misuse of funds and money laundering, according to Judge Mislik. The four, who by the end of June had not been formally charged, included Gabriel Marxer, a member of the country's 25-member parliament, and Rudolf Ritter, the brother of the Deputy Prime Minister. Parliament agreed to lift Marxer's parliamentary immunity to allow him to be detained.

In an apparently separate case, police searched and carted away documents from two banks, including the Liechtenstein Global Trust, which is controlled by Liechtenstein's ruler, Prince Hans-Adam II, and his family. A spokeswoman for the government said that the Prince was not in Liechtenstein at the time, but had supported a thorough investigation of money laundering activities there. Prime Minister Frick said the newly adopted legislation will finally allow the authorities to lift the veil of banking secrecy in suspected money laundering cases, but he noted that the laws would still not apply in tax cases. "I deny that we have been uncooperative," Frick said in response to the FATF report. "If you read these accusations, you'd think we are a country of evil."

Even blunter than the FATF report was the study published by the French National Assembly concerning Monaco, whose government and civil service are filled with officials seconded from Paris. With 49 banks and 70 financial institutions for about 32,035 inhabitants, the principality attracts some of the world's wealthiest celebrities and sports people by conferring no taxes on income, capital gains or dividends.

Monaco is a playground for the fabulously wealthy with their yachts and the principality's famed casino, and the French report charged that offshore companies and trusts have plentiful opportunities to move money for individuals whose identities remain hidden. For Monaco, the report said, "nothing could be worse than a [money laundering] case coming to light and tarnishing the principality's reassuring image." In response, Minister of State Patrick Leclercq accused the French of presenting a "clearly biased overall view of the Principality of Monaco." Leclercq reiterated the Principality's desire to participate in international efforts to stamp out money laundering, and noted that the country was not included among those named as "non-cooperating" by the FATF.

Austria came under fire at the FATF for its system of anonymous savings passbooks, which could be used for money laundering by concealing the true identity of the owner of an account. There are 24 million such accounts in Austria. That is about three times the population, a clear indication they are used by foreigners as well. After finally threatening to kick Austria out of the FATF by June 15 unless the system was changed, the new Austrian government finally relented on March 20. New banking laws now require any new passbook accounts opened after Nov. 1 to identify the owner. After June 30, 2002, no deposits or withdrawals can be made from any accounts without identifying the owner. "Anonymous passbook savings accounts have been a major problem and a critical loophole in the international consensus to combat money laundering," said Stuart Eizenstat, Deputy U.S. Treasury Secretary, after the decision to identify the account owners. "This victory represents a clear demonstration of FATF resolve and credibility."

Other havens in europe are also feeling the heat to crack down. On the Greek side of the divided island of Cyprus, already a favorite haunt for Russian Mafia and East European wheeler-dealers, the Central Bank in early May revoked the licence of Beogradska Bank, the oldest offshore banking company in the country, because its "liabilities outweighed its assets." Beogradska Bank is believed to be controlled by Yugoslav President Slobodan Milosevic, and was one of 950 offshore companies whose licenses were revoked in the past year.

Switzerland, which for generations has been a watchword for banking secrecy, two years ago had already begun to allow the financial curtains to be parted when evidence suggested a criminal offense. In just two of the more recent high-profile cases, authorities are investigating nearly $500 million deposited in 17 banks by former Nigerian dictator Sani Abacha, and an undisclosed sum frozen in nine bank accounts controlled by the Ivory Coast's former leader, Henri Konan Bedie. James Nason, head of international affairs at the Swiss Bankers Association, says that since a new money laundering law went into effect in April, 1998, the number of suspicious cases being reported by banks has jumped from 30 a year to 370 this year.

While the FATF report lauded the major achievements of the past year, it cited a new and disturbing channel through which money launderers may escape attention: the Internet. "It is the potential for conducting financial transactions online that presents one of the most significant vulnerabilities to money laundering at present," the report said. "The potential money laundering risks arise from the extreme difficulty for banks offering such capabilities to positively establish the identity of a particular transactor or even determine the location from which the transaction is made." So far, there have been no cases of money laundering detected on the Net. But as sure as the sun shines in Monaco and the snows fall in Liechtenstein, it can only be a matter of time before a criminal with a pile of cash and a laptop gives it a click.


With reporting by Helena Bachmann/Geneva, Anthee Carassava/Athens, Nicholas Le Quesne/Paris, J.F.O. McAllister/London and Andrew Purvis/Vienna