Sunday, December 23, 2007

Laundering Queries Focus on Corporate Secrecy Haven

Forget about Panama for dirty money. Delaware has appeared as a new haven for Eastern Europeans ...

Laundering Queries Focus on Delaware
September 30, 2004; Page A4
WILMINGTON, Del. -- Delaware's corporate-secrecy laws may be making it a haven for foreign criminal groups, prompting prosecutors in Eastern Europe and Russia to flood the Justice Department with requests for help in probes of Delaware shell companies.

In the past four years, law-enforcement agencies in Russia, Hungary and a dozen other nations have made more than 100 formal requests to the Justice Department to go before the U.S. District Court in Delaware to obtain subpoenas to learn more about the companies. In many cases, foreign prosecutors say in their requests that they believe the companies are controlled by or connected to Eastern European criminals who use them to move money into and out of the U.S.

The cases also have connections to U.S. and foreign banks, and are generating concern among top U.S. regulators and law-enforcement officials that crime groups were able to penetrate the U.S. economy despite warning signs such as a $7-billion money-laundering probe at the Bank of New York in 1999.

The Delaware cases involve a handful of banks that have catered to the region including the Bank of New York, ABN Amro Holding NV, and Bankers Trust, all of which kept correspondent accounts in New York for small Eastern European banks. Correspondent accounts allow foreign banks to conduct dollar-denominated transactions and move funds into the U.S. without setting up a U.S. branch, simply by paying fees to a host bank that has a U.S. banking license. These accounts allow banks to move money around the world without having branches everywhere.

Both the Bank of New York and ABN Amro, of the Netherlands, are the subjects of law-enforcement inquiries related to their ties to companies suspected of fraud and money-laundering in Eastern Europe.

In addition, ABN Amro is the subject of a previously undisclosed fraud suit in New York State Supreme Court over its ties to a bank in Cyprus that the Treasury Department has blacklisted for money-laundering.

That case appears to have played a role in generating a Justice Department money-laundering investigation concerning ABN Amro, documents related to the case show. In February of this year, one letter states, a lawyer with the influential Washington firm Patton Boggs met with the deputy chief of the Justice Department's money-laundering section on behalf of a group of Hong Kong investors claiming they had been defrauded by ABN Amro and provided the prosecutor with numerous documents. A Justice Department spokesman couldn't be reached last night."We are aware of a legal matter to which you refer...and we have filed a motion to dismiss the matter," an ABN Amro spokesman said.

A spokeswoman for the Bank of New York couldn't be reached.

Delaware law allows for creation of limited-liability corporations and other entities without identifying beneficial owners or directors -- one of many company-friendly laws that make the state a favored corporate-headquarters venue. These laws have led to a thriving industry that helps fuel Delaware's economy by bringing business to the state, even though the process now often is done over the Internet.

When the Soviet Union collapsed, officials say organized-crime groups that emerged gravitated to Delaware, prompting warnings from watchdogs such as the U.S. Government Accountability Office that Russian firms could use the state for money-laundering. A vast archive of correspondence from prosecutors in Eastern Europe in U.S. District Court here now indicates criminal groups, corrupt politicians and money-laundering banks in newly liberated Eastern Europe in fact may have become some of the state's best customers.

The GAO, the investigative arm of Congress and then called the General Accounting Office, warned of potential problems in Delaware in an October 2000 report, "Suspicious Banking Activities: Possible Money Laundering by U.S. Corporations Formed by Russian Entities," which found that thousands of companies had been set up in Delaware on behalf of company brokers in Russia. "It is relatively easy for foreign individuals or entities to hide their identities while forming shell corporations that can be used for the purpose of laundering money," the report warned.

Delaware officials say the problem isn't their fault and there is little they can do about it. "The reality is they are using U.S. entities for this purpose, [but] there's nothing particularly unique about Delaware as related to these small privately held shell companies," said Delaware Assistant Secretary of State Rick Geisenberger. Many other states have the same laws, he said. "They're choosing to incorporate in Delaware for the cachet of the fact that Coca-Cola and McDonalds and lots of large multinationals incorporate here. So in many ways, we are sort of victims of our own renown."

The emergence of Delaware as a nexus for money-laundering, tax evasion and financial fraud is a potentially huge embarrassment to the U.S. in the war against transnational financial crime. While launching stinging rhetorical and legal attacks on foreign jurisdictions, U.S. officials long have overlooked Delaware, which also caters to American companies that use the state to reduce state taxes.

Four of the Delaware fraud cases involve Bankers Trust, a unit of Deutsche Bank since June 1999. Last month, a federal judge in Wilmington approved a request by the Justice Department to issue subpoenas to Bankers Trust on behalf of Ukrainian prosecutors seeking to investigate a tax-fraud case. In a nine-page letter, the Ukrainian tax police in Kiev described a complex mechanism to evade value-added taxes on aluminum exports. The deal involved a firm in Rehoboth Beach, Del., called Primeway LLC, which allegedly was a client of Bankers Trust, and a Latvian institution called Parex Bank that is the target of numerous fraud probes in Eastern Europe.

A spokeswoman for Deutsche Bank declined to comment.

Delaware corporate records show Primeway was registered as a Delaware business called Consumer Corporate Agents Corp. Primeway never disclosed any of its officers and directors in state filings, and no longer is registered after failing to pay incorporation taxes for three years. Prosecutors say that shortly before it went out of business, Primeway signed millions of dollars in fictitious contracts with a firm in Ukraine, allowing that company to claim millions of dollars in tax rebates from the Ukrainian government, in a classic organized-crime operation.

ABN Amro is the subject of a lawsuit in New York state court filed June 7 claiming it abetted a $16-million fraud against a group of Hong Kong investors called International Strategies Group Ltd. The architect of the fraud was allegedly First Merchant Bank OSH, based in the rump Turkish Republic of Northern Cyprus, a lawless region that lacks diplomatic relations with the U.S. and almost the rest of the world. The suit contends ABN Amro's office in New York was warned in writing by various banks, regulatory authorities and its own head office in Amsterdam about possible money-laundering by First Merchant in 1999 but failed to cut its ties to the bank immediately.

Write to Glenn R. Simpson at glenn.simpson

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