After an intense investigation by the IRS, the United States Department of Justice (DOJ) pursued both criminal and civil charges against the giant Swiss bank. Federal prosecutors dropped criminal charges eighteen months later, however, after the bank admitted to fraud and conspiracy, paid a $780 million fine, and satisfied DOJ prosecutors that it had dismantled its offshore banking operations.

In August 2009, UBS agreed to a settlement with DOJ on the civil charges and as part of the deal, offered to hand over the names of 4,450 tax evading Americans to the IRS. For a moment, it looked like the Swiss government—in a grasping act of self-preservation—would step in and forbid UBS from handing over the names. But at the last minute, the two houses of Swiss Parliament agreed to stick to the deal.

The historic vote laid the groundwork for more legal action by the United States against several other Swiss banks—likely what the Swiss had feared.  These included Credit Suisse, Switzerland’s second largest bank, and HSBC, which is based in London, but has extensive Swiss operations under its Private Bank. There are now at least eleven Swiss banks under criminal investigation by the Justice Department’s tax division.

But DOJ’s approach and tone has shifted in recent months. Early last week, for the first time ever, “U.S. authorities have charged a bank rather than individuals with helping Americans evade taxes.” The bank was Wegelin & Co.; it is Switzerland’s oldest private bank.  According to the indictment filed last week, Wegelin helped Americans evade U.S. taxes on more than $1.2 billion in assets and after DOJ’s prosecution of UBS, “deliberately set out” to capture its counterpart’s lost cross-boarder illegal banking business.

Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York, noted the indictment ”shows the [United States] is willing to go after Swiss banks themselves if they don’t turn over names of U.S. taxpayers who are account holders.” It also puts pressure on the Swiss government to agree to a settlement involving all Swiss banks.

In many ways, Swiss banks have born the largest share of DOJ scrutiny on tax evasion. The reason for that is relatively clear—Switzerland holds nearly one-third of the estimated $7 trillion in global wealth kept offshore.

But what about the other two-thirds? Switzerland is not the only place in the world to hide tax-evading money.  Some spooked depositors are sending it somewhere even more secretive, like Singapore, Hong Kong, and the United Arab Emirates. So should—and by extension—when should the DOJ pursue banks in other jurisdictions as aggressively as it has in Switzerland?

Prosecutors are already investigating banks in Asian jurisdictions. None have seen the level of DOJ involvement with Switzerland, but that doesn’t mean they’re safe. Nor should they be. As long as these banks continue to aid American citizens violate American laws, they should be held accountable. While Switzerland may hold a bulk of the world’s offshore tax-evading deposits, if DOJ pursues only the Swiss, they risk pushing the deposits to other, more secretive havens. So the answer is yes: DOJ should pursue tax evaders in other countries. And they should probably do it soon.

Global Financial Integrity

WASHINGTON, DC – Global Financial Integrity welcomed efforts by the U.S. Department of Justice (DOJ), to seize over $70.8 million in corrupt wealth from Teodorin Obiang, the infamous son of the President of Equatorial Guinea.

Yesterday, the DOJ unveiled asset forfeiture complaints accusing Mr. Obiang of amassing over $100 million in wealth despite earning an official annual salary of less than $100,000.  The DOJ alleges that Mr. Obiang “used intermediaries and corporate entities to acquire numerous assets in the United States, including more than $1.8 million worth of Michael Jackson memorabilia, a $38.5 million Gulfstream G-V jet, a $30 million house in Malibu, Calif., and a 2011 Ferrari automobile valued at more than $530,000.”

“This is a very welcome move by the United States,” said Raymond Baker, director of Global Financial Integrity. “Finally, the United States is sending the message that it will no longer harbor the illicit assets of corrupt foreign officials.”

Global Financial Integrity, Global Witness, the Caux Round Table, Senator Carl Levin (D-MI) and Lord Daniel Brennan, among others, have for years supported the filing of in rem motions like this one as a potent legal weapon in the global fight against corruption.

“I am delighted to see the Department of Justice commencing in rem proceedings against assets wrongfully acquired,” said Lord Daniel Brennan, QC, co-chair of the GFI Advisory Board.  “Going after the assets, bringing them under the jurisdiction of a court, and then returning their value to the countries in which the wealth originated is a major step in deterring future corruption, and something that we have been advocating the use of for several years.”

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Contact:

Clark Gascoigne
+1.202.293.0740 ext.222
cgascoigne@gfintegrity.org

Monique Perry Danziger
+1.202.904.3113
mdanziger@gfintegrity.org

Notes for Editors:

1. Click here to read the U.S. Department of Justice’s press release on the civil forfeiture actions filed against Teodoro Obiang
2. Click here to read Sen. Carl Levin’s statement on the civil forfeiture actions filed against Teodoro Obiang
3. Click here to read Global Witness’ statement on the civil forfeiture actions filed against Teodoro Obiang

Global Financial Integrity

WASHINGTON, DC – The past twenty-four hours has seen the publication of two reports and the disclosure of an asset forfeiture complaint which, collectively, lay bare the size and seriousness of a global money laundering epidemic—underscoring the need for better incorporation transparency measures.

The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, published yesterday by the Stolen Asset Recovery Initiative (StAR)—a partnership between the World Bank and the UNODC, calls on world leaders to require the disclosure of the names of the beneficial owners of corporations, trusts and foundations upon formation, in addition to conducting a review of the effectiveness of anti-money laundering enforcement.

A civil forfeiture complaint, filed today by the U.S. Department of Justice (DOJ) against Teodorin Obiang, accuses the infamous son of Equatorial Guinea’s president of amassing over $70 million in ill-gotten gains, which he used to purchase “a Gulfstream jet, a Malibu mansion and nearly $2 million in Michael Jackson memorabilia.”

 A separate report, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crime, released this afternoon by the United Nations Office on Drugs and Crime (UNODC), estimates roughly $1.6 trillion was laundered globally by criminals in 2009.

The reports underscore the need for legislation like the bi-partisan Levin-Grassley Incorporation Transparency and Law Enforcement Assistance Act in the United States, which would help prevent criminals and tax evaders from laundering illicit money through U.S. financial institutions.

“Criminals, tax evaders, and kleptocrats from around the world like Teodorin Obiang are taking advantage of corporate secrecy structures in the U.S. to hide and launder illicit money here,” said Global Financial Integrity’s Legal Counsel & Director of Government Affairs, Heather Lowe. “This financial opacity puts law enforcement at a major disadvantage. Too often cases are dropped, or investigations are closed, due to a lack of evidence connecting the illicit funds held in accounts owned by anonymous corporations to the criminal owners of those companies.”

“The U.S. financial system is a playground for corrupt, criminal, tax evading individuals from other countries,” said Ms. Lowe. “It is far too easy to gain access to financial services in the U.S. through anonymous U.S. corporations, while it is far too difficult for law enforcement groups to figure out who is really behind those corporations.”

Moreover, The Puppet Masters validates calls by the Financial Accountability and Corporate Transparency Coalition (FACT Coalition), of which GFI is a member, for the U.S. to perform a regulatory review to determine the extent to which American banks are complying with anti-money laundering laws designed to keep criminal money, including the proceeds of corruption, out of U.S. banks.

###

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext. 222

Monique Perry Danziger
mdanziger@gfintegrity.org
+1 202 904 3113

Notes for Editors:

1. Click here for more information on the StAR Initiatve, and to download the new report, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It.
2. Click here for more information on/to download the new report from the UN Office on Drugs and Crime, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crime.
3. Click here for more information on the Incorporation Transparency and Law Enforcement Assistance Act.
4. Click here to read Global Financial Integrity’s statement on the Incorporation Transparency and Law Enforcement Assistance Act
5. Click here to read Sen. Carl Levin’s statement on the civil forfeiture actions filed against Teodoro Obiang
6. Click here to read Global Witness’ statement on the civil forfeiture actions filed against Teodoro Obiang
7. Click here to download the FACT Coalition’s letter to U.S. bank regulators calling on them to conduct a review of U.S. anti-money laundering compliance.

WASHINGTON, DC – Today the U.S. Department of Justice (DoJ) unsealed an asset forfeiture claim against a $30m Malibu house, a $38.5 million Gulfstream jet and other assets owned by the son of the President of Equatorial Guinea, claiming that they were bought with the proceeds of corruption. Global Witness, which in 2006 first revealed that Teodorin Obiang owned the Malibu mansion, welcomes this action after several years of investigations.

Teodorin is the Minister of Agriculture and Forestry in his father’s government, earning a salary of $6,799 a month, yet despite this relatively modest official income he leads an exceptionally extravagant way of life.

In 2009 Global Witness reported that he had moved $75m into the U.S. between 2005 and 2007, some of which was used to buy the Malibu mansion and the jet. At the time we published this information Teodorin was still being allowed into the U.S., despite the fact that the State Department is legally obliged to keep a list of foreign officials against whom there is credible evidence of corruption, who should be denied visas. Global Witness was concerned that law enforcement efforts against him appeared to have ground to a halt.

“By taking action to seize this house, the U.S. is finally starting to send a strong message that it does not want to be a safe haven for ill-gotten loot and vast, unexplained wealth,” said Robert Palmer, a campaigner with Global Witness. “This should keep suspected kleptocrats with assets in the US awake at night.”

The DoJ filing claims that the $70.8m worth of assets were derived from “the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official”. Teodorin is accused of using his position as Minister of Forestry and his ownership of two logging companies to “enrich himself through corrupt schemes in the timber industry”.

Two weeks ago the DoJ filed a “lis pendens” – a written notice that a lawsuit concerning the ownership of property had been filed. It included the Malibu mansion, seven cars, and “one white crystal-covered ‘Bad Tour’ glove and other Michael Jackson memorabilia”.

Teodorin, who is being groomed to succeed his father, has been dogged by corruption allegations. According to a previous DoJ document “it is suspected that a large portion of Teodoro Nguema Obiang’s assets have originated from extortion, theft of public funds, or other corrupt conduct”. In 2006 he admitted to a South African court that it was usual practice for ministers in Equatorial Guinea to end up with a sizeable chunk of any government contract in their bank account.

The action by the DoJ comes only weeks after the French police seized $5m worth of Teodorin’s sports cars in Paris. This was part of a court case brought by French NGOs Sherpa and Transparency International-France, claiming that the wealth of three African leaders, including President Obiang, was illicitly earned.

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Contacts:

Robert Palmer in Washington D.C. +44 (0)7545 645 406 or rpalmer@globalwitness.org.

Notes to editors:

1. In the March 2009 report Undue Diligence: How banks do business with corrupt regimes Global Witness uncovered an extensive shopping list of fast cars that Teodorin had purchased in France, including a number of $1.7m Bugatti Veyrons, one of the fastest cars in the world.

2. In November 2009 Global Witness released The Secret Life of a Shopaholic which detailed some of Teodorin’s U.S. expenditure.

WASHINGTON – The U.S. Department of Justice is seeking records about American clients of HSBC in India who might be evading taxes, broadening the government’s probe of banks suspected of helping tax dodgers.

The government filed the request with a San Francisco federal court on Thursday, seeking permission to get information from the bank about American residents who may be using HSBC India accounts to evade federal income taxes.

Read more…

It’s a question that many in the compliance industry ask: why can’t the Justice Department and the Securities and Exchange Commission give crystal clear guidance on what a proper compliance program should look like?

The U.K. government, having passed and (finally) issued official guidance on the Bribery Act, has endeavored to do just that, promulgating six principles: proportionate procedures, top-level commitment, risk assessment, due diligence, communication and monitoring and review.

Read more…

Rebecca M/Flickr*

NEW YORK – Even as anger over governmental corruption has exploded into protests across the Middle East, the U.S. Chamber of Commerce has been working to weaken the law that bans companies from bribing foreign officials.

That effort, which has been going on for months, recently got ratcheted up when the Chamber hired former U.S. Attorney General Michael Mukasey to lobby specifically on “possible amendments to the Foreign Corrupt Practices Act,” according to Mukasey’s lobbying registration document. The FCPA, passed in 1977, prohibits U.S. companies and foreign companies whose securities are traded on U.S. exchanges from paying bribes to foreign officials.

The U.S. Chamber’s Institute for Legal Reform, in a report last fall [PDF], said that both the Justice Department and the Securities and Exchange Commission had become “increasingly aggressive in their reading of the law” within the last decade, bringing more FCPA enforcement actions than ever, netting higher fines and filing more cases against individual company employees.

That’s something the Justice Department has trumpeted as an achievement: “Our FCPA enforcement is stronger than it’s ever been—and getting stronger,” Lanny Breuer of the Justice Department’s criminal division said at a conference in November. In the 2010 fiscal year, half of all penalties won by his division were from foreign bribery cases. (The Washington Post just last week published a rundown of some recent actions.)

The Chamber of Commerce argues that aggressive enforcement of the anti-bribery law makes U.S. businesses less competitive than their foreign counterparts, though the law also applies to some foreign companies. The Chamber is pushing for Congress to make changes to the law, such as defining “foreign official” and requiring “willfulness” for corporate criminal liability.

Butler University Assistant Professor of Business Law Mike Koehler used to represent clients facing FCPA charges. He told me he agrees with some of the Chamber’s objections, but doesn’t think it needs a legislative fix.

The law is fine, Koehler told me. But the Justice Department and SEC “are continuing to push the envelope” with enforcement, applying the law in ways that Congress didn’t originally intend. One example of that, he said, is that about 60 percent of current FCPA cases involve payments made to employees of state-owned or state-controlled companies. Those people shouldn’t be considered “foreign officials,” he said.

Koehler said his main issue with FCPA enforcement is that the allegations are almost never subject to judicial scrutiny because these cases always settle. Asked why this is, given that most defendants are giant multinational companies with enough resources to take the corruption charges to court, Koehler said that the “the cost of aggressively mounting a legal defense based upon the statutes, elements, and facts of case are too risky.”

However, a few FCPA challenges are currently making their way to court, some accusing the Justice Department of using too broad a definition for “foreign official.”

Mark Mendelsohn—formerly the Justice Department’s chief FCPA enforcer and now in private practice—told the Wall Street Journal earlier this month that he expects current enforcement trends to continue. He cited the Mideast protests as part of a “growing recognition of what people commonly call the corrosive effects of corruption on development and democracy and democratic institutions.”

The U.K. is currently finalizing its own anti-bribery law, which would seem to address the Chamber’s objections about an uneven playing field. The Chamber, however, writes in its report that U.S. authorities may try to apply even more pressure to companies “so as not to be outdone” by Britain in the area of anti-corruption enforcement.

Follow Marian Wang on Twitter: @mariancw

* Image license:  Some rights reserved by : rebecca :

NEW YORK – Despite having clear rules on when not to invoke the state secrets privilege, the Justice Department has been blocking disclosures about a dubious technology that could prove embarrassing for the U.S. government.

As the New York Times reported over the weekend, a computer programmer who claimed his technology could help the U.S. track terrorists received at least $20 million in government contracts [1] for this software, which intelligence officials suspected to be fake even in 2003. While contractor fraud isn’t new [2], what’s unusual here is that the U.S. isn’t trying to recover those funds or penalize the contractor, Dennis Montgomery.

Instead, it’s fighting in court to keep information about the technology secret, arguing that the details could compromise national security. The Times notes that the clampdown in this case started under the Bush administration and continued under Obama’s Justice Department:

The Bush administration declared that some classified details about the use of Mr. Montgomery’s software were a “state secret” that could cause grave harm if disclosed in court. In 2008, the government spent three days “scrubbing” the home computers of Mr. Montgomery’s lawyer of all references to the technology. And this past fall, federal judges in Montana and Nevada who are overseeing several of the lawsuits issued protective orders shielding certain classified material.

A 2009 memo from Attorney General Eric Holder laid out the circumstances in which the state secrets privilege could be invoked [3]. Preventing embarrassment and concealing inefficiency or error were not legitimate reasons, according to the memo:

The Department will not defend an invocation of the privilege in order to: (i) conceal violations of the law, inefficiency, or administrative error; (ii) prevent embarrassment to a person, organization, or agency of the United States government; (iii) restrain competition; or (iv) prevent or delay the release of information the release of which would not reasonably be expected to cause significant harm to national security.

The Justice Department wouldn’t comment to the Times about its dealings with Montgomery. (Montgomery also declined to comment and when asked at a November deposition whether his software was a “complete fraud,” he pleaded the Fifth, the Times noted.)

Use of the technology led to several false starts and dead ends over the years, including a 2003 scare that prompted U.S. officials to order that several international flights be turned around or grounded. It even led to discussion of shooting the planes down, according to the Times:

French officials, upset that their planes were being grounded, commissioned a secret study concluding that the technology was a fabrication. Presented with the findings soon after the 2003 episode, Bush administration officials began to suspect that “we got played,” a former counterterrorism official said.

The C.I.A. never did an assessment to determine how a ruse had turned into a full-blown international incident, officials said, nor was anyone held accountable.

Ferdinand Marcos corruptly ruled over the Phillipines from Dec 30, 1965 – Feb 25, 1986.

On Sunday, US Attorney General Eric Holder delivered a promissory gem to the leaders gathered in Uganda, the pearl of Africa.  It was not a pledge of more foreign aid for the continent – which has tripled since 2000 – but it could bring billions of dollars to Africa:

“ I’m pleased to announce that the U.S. Department of Justice is launching a new Kleptocracy Asset Recovery Initiative aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations. We’re assembling a team of prosecutors who will focus exclusively on this work and build upon efforts already underway to deter corruption, hold offenders accountable, and protect public resources.”

Government promises, as both Americans and Africans know, are often broken, but this announcement calls for (cautious) optimism.

The seizures of assets in recent years of many high-profile, corrupt leaders – Nigeria’s Mr. Abacha, the Philippines’ Mr. Marcos and Peru’s Mr. Fujimori – have all involved assets held in Swiss banks.  In all three cases, a World Bank report points out, official cooperation and the goodwill of the Swiss government was critical for repatriating the assets. Holder’s words, if translated into concrete action could have a huge impact: GFI research estimates that the US banks holds almost nine times the amount of private, non-resident deposits of their Swiss counterparts.  Undoubtedly, Africa’s kleptocrats – the crooked leaders who take advantage of their power to expand their own wealth – have tucked away portions of their stolen loot in America’s banks.

Moreover, there is precedent for sanguinity. After the collapse of Enron and other high-profile corporate scandals, the US dusted off the Foreign Corrupt Practices Act, a little-known law passed in the post Watergate era. The Justice Department began going after multi-national corporations, from Lucent Technologies to German giant Siemens, tied to bribery of foreign officials. Earlier this month, Snamprogetti, a Dutch engineering firm joined American KBR and French Technip in settling with the US Securities and Exchange Commission a two-year long case involving hundreds of millions of dollars in kickbacks to Nigerian officials in a US$6 billion construction project.  Indeed, the US has taken the lead in prosecuting corporations for bribery: analyzing bribery cases in 38 countries, a recent OECD report found that the US accounted for 88 out of the 225 cases where criminal sanctions were imposed. Of the 29 cases brought in civil courts, all but one was prosecuted in the US.

Click here, for more on the history of U.S. policy toward foreign bribery…

If the US can channel a similar amount of energy into seizing the assets of Africa’s kleptocrats, the continent may see a dramatic new stream of revenue for important development projects. The World Bank report notes that the US$500 million repatriated to Nigeria from President Abacha’s stolen assets could be used to build over 1200 km of new paved road or to fully immunize some 20 million children.  Further, confiscating looted assets could deter future politicians from going down the road of corruption and graft.

The Justice Department has not revealed further details on the Kleptocracy Initiative, but Holder’s words, if backed up with tangible action, could be huge.  We’ll have to hold our breaths to see if this hope turns out to be warranted.

U.S. Attorney General Eric Holder | U.S. Dept of Justice

On Sunday U.S. Attorney General Eric Holder announced the Kleptocracy Asset Recovery Initiative at the African Union Summit in Uganda.  The new policy aims to take on public bribes by recovering public money and returning it to its intended use.  While the Obama administration has, so far, shown a greater propensity to tackle the thorny problem of foreign bribery than his recent predecessors, the new policy does not exist in a historical vacuum.  In fact, the U.S. has had one of the world’s longest and strongest histories of action against foreign bribery.  This is an abbreviated story of that history.

1975-1977. Lockheed bribery scandal

In late 1975 a Securities and Exchange Commission (SEC) investigation into Lockheed Corporation revealed that the aircraft manufacturer had paid at least $22 million (about $90 million in current dollars) in bribes to foreign government officials and political organizations.  At the time, this was not illegal. In other such cases, however, it had become customary for the corporation to reveal to the SEC which foreign officials had received the bribes and then to agree not to make more of these types of payments.  This case was different.  Lockheed refused to disclose its beneficiaries or to promise not to make future payments and even stated bribes were normal, necessary and “consistent with practices engaged in by numerous other companies abroad.”

1977. Foreign Corrupt Practices Act (FCPA)

In response to the Lockheed scandal, and the revelation that hundreds of other businesses were routinely involved in this practice, Congress enacted the Foreign Corrupt Practice Act.  In an effort to “bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system,” the FCPA makes it unlawful for persons and entities to “make payments to foreign government officials to assist in obtaining or retaining business.”  Jimmy Carter signed the act into law on December 19, 1977.  It remained unique worldwide for almost 20 years.

1980s and 1990s. U.S. pressure on the OECD

Given concerns from domestic businesses, U.S. lawmakers realized American companies may be at a disadvantage when competing internationally with foreign companies who legally paid bribes and, “in some countries, were permitted to deduct the cost of such bribes as business expenses on their taxes.” In 1988 the U.S. commenced negotiations in the Organization of Economic Cooperation and Development (OECD) seeking agreement from major trading partners to enact legislation similar to the FCPA.

In 1997, almost ten years later, thirty-four countries signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, committing to put in place legislation that criminalizes the act of bribing a public official.

1998. International Anti-Bribery Act

In an effort to implement the anti-bribery conventions of the OECD, the U.S. amended the FCPA with the International Anti-Bribery Act of 1998. Among other changes, this Act made the rules of the FCPA also apply to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States.

2000s. Trends in Sanctions.

According to an OECD study, over the last ten years, the U.S. has sanctioned 40 individuals and 20 companies, which represents almost 30% of the world’s sanctions. But in recent years the U.S. has been more actively pursing criminals under FCPA.  In fact, between 2006 and 2009 the number of FCPA prosecutions rose from 2 to 26

Acknowledging this trend, Mark Mendelsohn, the Justice Department’s lead criminal prosecutor for violations of the FCPA, noted recently he believes the U.S. government “is going to focus on international corruption in a more comprehensive and even more rigorous way than it has in the past.”