Cleanup Time

By Charles P. Wallace/Vaduz

When a man knows he is to be hanged in a fortnight," quipped essayist Samuel Johnson, "it concentrates his mind wonderfully." For Liechtenstein, the tiny banking haven snuggled on Switzerland's eastern border, concentration seemed in order last June. After years of cajoling, the world's richest nations had placed the principality on a blacklist of countries that failed to adopt sufficiently tight rules to deter money laundering. Although no specific misdeeds were mentioned, the designation by the Financial Action Task Force on Money Laundering would have made dealings with those countries difficult for major foreign banks. Banking and related services account for 40% of Liechtenstein's economy, and the sanctions promised a bleak future. "It was a real crisis for us," recalls Gerhard Mislik, one of Liechtenstein's senior judges.

Suddenly, Liechtenstein scrambled to set matters right. Within two working days, the parliament hurried through a bundle of new laws making it a crime for bankers or financial intermediaries to fail to report suspicious activity, and allowing Liechtenstein authorities to cooperate with foreign authorities to fight money laundering. The legislature 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," admits Prime Minister Mario Frick. He added that the newly adopted legislation will lift the veil of banking secrecy in suspected money-laundering cases, but would not apply in tax cases.

The FATF was established by the world's seven richest nations in 1989. The principality is not alone in being prodded for failing to do enough to stop the flow of dirty money. In June this year, a French parliamentary committee lambasted Monaco, another tiny kingdom-cum-tax-haven, for imposing so few financial controls that "money laundering can thrive." Last February Austria narrowly escaped being booted out of the FATF, which has grown to 26 member governments and two regional organizations, by agreeing not to permit any more anonymous savings accounts to be opened. Even Israel was scolded for not doing enough to stop hot money from sloshing through its banks.

The FATF report epitomized the tough new stance being adopted by industrial nations to stamp out money laundering, the process of taking illegally obtained funds such as drug money and making them appear to come from legitimate business. Pressure has focused on tax havens because they attract money fleeing tax collectors and often employ bank-secrecy rules that make it hard to identify illegal cash. Money hidden from tax collectors is considered illegal in many countries, but not in places like Liechtenstein.

Almost by definition, it is impossible to know how much illicit cash is siphoned into havens far from the eyes of legal authorities. The U.S. stockbroking giant Merrill Lynch estimated in 1998 that more than $5 trillion, equal to a third of the savings of wealthy people worldwide, was held in offshore accounts. While only a small percentage of that is laundered cash, it's still a huge sum.

Europe's tax havens have historically been prone to abuse. The FATF report said that Liechtenstein's system for reporting suspicious transactions had long been inadequate, that there were no laws for exchanging information with international authorities about money laundering and that the resources devoted to tackling the problem were paltry. The country's laxity was underscored earlier this year during major political scandals in Germany. Investigators found that German politicians used Liechtenstein bank accounts to receive bribe money paid by the French oil giant Elf Aquitaine.

FATF was not the first group to home in on Liechtenstein's peccadillos. Last May the nation of 32,000 people was shaken to learn that Austrian police called in by the government had detained four men on suspicion of fraud, misuse of funds and money laundering. The four, who were subsequently released from jail uncharged, included Gabriel Marxer, a legislator in the 25-member parliament, and Rudolf Ritter, brother of Deputy Prime Minister Michael Ritter. Legislators agreed to lift Marxer's parliamentary immunity to allow him to be detained. In a separate action, police searched and carted away documents from two banks, the Hypo Investment Bank and the Liechtenstein Global Trust, which is controlled by Liechtenstein's ruler, Prince Hans-Adam II, and his family. Police did not disclose why they searched the banks. A spokeswoman for the government said the Prince had supported a thorough investigation of laundering activities.

Monaco offers an even more complex case for French authorities looking to clean up international financial dealings. The tiny country, ruled by the Grimaldi family, has a government and civil service 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 by levying no taxes on income, capital gains or dividends. This has long made Monaco a playground for the fabulously wealthy, of whatever background. The recent French report charged that offshore companies and trusts have bountiful opportunities to move funds for individuals whose identities remain hidden. Monagasque Minister of State Patrick Leclercq accused the French of presenting a "clearly biased overall view of the principality of Monaco," reaffirmed Monaco's desire to participate in international efforts to stamp out laundering and noted that the country was not included among those named as "noncooperating" by the FATF.

Austria came under fire at the FATF for its anonymous savings-account 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 at Austrian banks, about three times the number of the entire population, a clear indication the bankbooks are used by foreigners as well. After a threat to kick Austria out of the FATF by June 15 unless the system was changed, a newly elected Austrian government relented--sort of. Amended laws require any passbook accounts opened after Nov. 1, 2000, to identify the owner. After June 30, 2002, deposits to or withdrawals from any accounts will be banned unless the owner is identified. "Anonymous passbook-savings accounts have been a critical loophole in the international consensus to combat money laundering," said Stuart Eizenstat, Deputy U.S. Treasury Secretary. "This victory represents a clear demonstration of FATF resolve and credibility."

Other havens in Europe are also feeling pressure. Switzerland, for generations a watchword for banking secrecy, two years ago began to allow the financial curtains to be parted in investigation of possible criminal offenses. In two of the more recent high-profile cases, authorities investigated nearly $500 million deposited in 19 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, a Swiss Bankers Association official, says that since a new money-laundering law went into effect in April 1998, the number of cases of suspected laundering being reported by banks has jumped from 30 a year to 370 this year.

Is banking finally freeing itself from the money-laundering blight? Maybe not. The FATF report cited a new and disturbing channel through which money launderers can escape attention: the Internet. So far there have been no cases of money laundering detected on the Net. But that may only mean that criminals are very good at it already.

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

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