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Monday, Feb 11, 2002

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US' war on funding of terrorism -- Trailing the dirty money

Pratap Ravindran

THE Bush Administration, as part of its campaign against the funding of terrorism, has, with much publicity, initiated a series of measures to check the clandestine transfer of funds, and so on — but those in the know are inclined to be extremely sceptical about the eventual outcome of this campaign, as US and European banks are integral to global money laundering.

Thus, Senator Carl Levin has gone on record saying: "Estimates are that $500 billion to $1 trillion of international criminal proceeds are moved internationally and deposited into bank accounts annually. It is estimated that half of the money comes to the United States..." The other half is laundered through European banks.

It is important to note here that the "estimates" referred to by Senator Levin cover only the proceeds of criminal activities as defined under US laws. They do not take into account illegal transfers and capital flows related to corruption, especially in Third World countries and transitional economies. These, according to guesstimates, work out to $20-40 billion a year. Add another $80 billion or so representing flows from mis-priced trade — and you begin to get the picture.

There is extreme reluctance on the part of the US Government to take cognisance of these flows, as they are essential to sustain the US economy. According to a paper — Dirty Money - Foundation of US Growth and Empire: Size and Scope of Money Laundering by US Banks — by Mr James Petras, Professor of Sociology, Binghamton University — published in La Jornada, Mexico, on May 19, 2001, and subsequently posted on the Web by the Centre for Research on Globalisation on August 29, 2001 — it is clear that the combined laundered and dirty money flows cover part of the US deficit in its balance of merchandise trade which ranges in the hundreds of billions annually.

"As it stands, the US trade deficit is close to $300 billion. Without the `dirty money,' the US economy's external accounts would be totally unsustainable, living standards would plummet, the dollar would weaken, the available investment and loan capital would shrink and Washington would not be able to sustain its global empire.

Mr Petras adds: "Washington and the mass media have portrayed the US as being in the forefront of the struggle against narco trafficking, drug laundering and political corruption: the image is of clean white hands fighting dirty money. The truth is exactly the opposite. US banks have developed a highly elaborate set of policies for transferring illicit funds to the US, investing those funds in legitimate businesses or US government bonds and legitimising them."

Basically, US banks use two entities to launder money — private banks and correspondent banking.

Strictly speaking, private banks are those which are not incorporated. The entirety of their partners' assets are, therefore, available to meet the liabilities of these banks. While these private banks, especially those in Switzerland, have been primarily associated with portfolio management for private clients, the term "private banking" has now come to be used somewhat loosely to cover all banking services provided to clients in portfolio and other wealth management services.

That is the official position. In practice though, many private banks (PBs), quite simply, sell secrecy to their dirty-money clients. They usually use code names for accounts and concentration accounts (which co-mingle bank funds with client funds to cut off wire transfer trails) and off-shore private investment corporations (PICs) in countries such as the Cayman Islands, the Bahamas, and so on, which have strict secrecy laws.

A well-documented instance of the use of a PB for money-laundering is the one involving Raul Salinas de Gortari — the older brother of Mexico's former President, Mr Carlos Santinas — and Citibank.

The 1998 story, as reconstructed by the US General Accounting Office (GAO) over eight months and subsequently made public through a Congressional report, is extremely interesting and edifying. It is all about how Citibank, then the second largest US bank, helped Raul Salinas make roughly $100 million disappear by shifting the funds from accounts in Mexico to untraceable shell companies in the Cayman Islands.

The GAO report, in essence, criticised Citibank on the grounds that it neglected to establish the source of Salinas' wealth and that one of its private bankers showed him how to create a complex system of dummy corporations and international wire transfers that concealed his identity as the man behind the accounts. The report added that Citibank's actions were "inconsistent" with the bank's stated policy of knowing its customers and the source of their money.

As for correspondent banking, it allows overseas banks to conduct business and provide services for their customers (including drug dealers and those involved in other criminal activities) in jurisdictions such as the US where they have no physical presence.

Mr Petras writes: "A bank that is licensed in a foreign country and has no office in the US for its customers attracts and retains wealthy criminal clients interested in laundering money in the US. Instead of exposing itself to US controls and incurring the high costs of locating in the US, the bank will open a correspondent account with an existing US bank. By establishing such a relationship, the foreign bank (called a respondent), and through it, its criminal customers, receive many or all of the services offered by the US big banks called the correspondent."

Going by rough estimates, big banks in the US specialising in international fund transfers — they're called money centre banks — process up to $1 trillion a day.

Coming back to the difficulties in the fight against the funding of terrorism, a section of the media has published various investigative reports which, in conjunction, indicate that certain transactions were carried out in the US financial markets that are strongly suggestive of specific, possibly criminal, foreknowledge of the September 11 attacks.

This appalling possibility was first raised by the Israeli Herzliyya International Policy Institute for Counterterrorism, which, in a September 21 report titled Black Tuesday: The World's Largest Insider Trading Scam?, documented the following trades:

* Between September 6 and 7, the Chicago Board Options Exchange saw purchases of 4,744 put options on United Airlines, but only 396 call options. Assuming that 4,000 of the options were bought by people with advance knowledge of the imminent attacks, these `insiders' would have profited by roughly $5 million.

* On September 10, 4,516 put options on American Airlines were bought on the Chicago exchange as against only 748 calls. Here again, at the relevant point of time, there was no news in the market to justify this mismatch. Further, if one were to once again assume that 4,000 of these options trades had been effected by `insiders,' they would have made about $4 million.

* The above put option purchases were more than six times higher than normal. No similar trading in other airlines occurred on the Chicago exchange in the days immediately preceding September 11.

* Morgan Stanley Dean Witter & Co, which occupied 22 floors of the World Trade Centre, saw 2,157 of its October $45 put options bought in the three trading days before September 11. This is against an average of 27 contracts per day before September 6. Morgan Stanley's share price fell from $48.90 to $42.50 after the attacks. Assuming that 2,000 of these options contracts had been bought based on knowledge of the impending attacks, their purchasers could have profited by at least $1.2 million.

* Merrill Lynch & Co, which also occupied 22 floors of the World Trade Centre, saw 12,215 October series $45 put option bought in the four trading days before attacks — a 1,200 per cent jump from the average trade volume of about 250 contracts a day! When trading resumed, Merrill's shares fell from $46.88 to $41.50. Assuming that 11,000 option contracts had been bought by `insiders,' their profit would have been $5.5 million.

On September 29, 2001, The San Fransisco Chronicle reported that investors had yet to collect more than $2.5 million in profits they had made trading options in the stock of United Airlines — before the September 11 attacks. The newspaper said: "The uncollected money raises suspicions that the investors — whose identities and nationalities have not been made public — had advance knowledge of the strikes. They don't dare to show up now.

The suspension of trading for four days after the attacks made it impossible to cash-out quickly and claim the prize before investigators started looking."

"...October series options for UAL Corp were purchased in highly unusual volumes for three trading days before the terrorist attacks for a total outlay of $2,070; investors bought the options contracts, each representing 100 shares, for 90 cents each. (This represents 2,30,000 shares.) These options are now selling at more than $12 each.

There are still 2,313 so-called `put' options outstanding (valued at $2.77 million and representing 2,31,000 shares), according to the Options Clearinghouse Corp."

"The source familiar with the United trades identified Deutsche Bank Alex Brown, the American investment banking arm of German giant Deutsche Bank, as the investment bank used to purchase at least some of these options."

Things get pretty murky at this point. Because, as the investigative writer, Mr Tom Flocco, has pointed out, Deutsche Bank Alex Brown was once headed by a gentleman called A. B. `Buzzy' Krongard who is currently Executive Director of the Central Intelligence Agency (CIA).

This fact may not be significant. And then again, it may. After all, there has traditionally been a close link between the CIA, big banks and the brokerage business.

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