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Features

Banks, blood and chocolate

Khadija Sharife

2010-08-12, Issue 494

http://pambazuka.org/en/category/features/66650

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Rudolf Elmer, whistleblower and former CEO of Swiss bank Julius Baer’s Cayman Island operations, reveals the secrets of the murky world of offshore banking to Khadija Sharife. ‘Mauritius is in many ways the Switzerland of Africa,’ says Elmer, but there is another African nation vying to be the ‘golden’ financial gateway: Ghana.

At one point during our conversation, the phone goes dead. Much later, Rudolf Elmer, one of the world's most infamous whistleblowers and the former chief executive officer of private Swiss bank Julius Baer's Cayman Islands operations, would rattle off to me a list of possible intelligence services that might have been involved.

In Elmer's native land – Switzerland – blowing the whistle on banking secrecy is a crime. Elmer was imprisoned, his family harassed by private detectives, his daughter stalked at school by men who waited in parking lots, and his wife almost driven off a highway.[1]

‘They offered her chocolate with one hand, and terrorised her with the other,’ he tells me. ‘My wife was followed. My secretary, scared to go to the post office. They put on so much pressure. And, as I discovered, the police, the media – they are all part of the systemic corruption,’ he said. ‘It is just like the mafia, only it’s respectable.’

Through Elmer’s attorney, Swiss bank Julius Baer allegedly offered to pay Elmer over a series of instalments (‘to silence me,’ Elmer says) after he was sacked in 2003 for attempting to change the system from within by demanding that clients cease their tax evasion activities. Julius Baer maintained he was acting out of revenge. Later, to protect his family, and after considering and canning suicide (‘these are the things you think about seriously when your life is falling apart, but it would not be good for my daughter, she needed me,’) Elmer publicly blew the whistle via Wikileaks.org, among other foreign sources of media. Elmer disclosed the names of accounts of companies, hedge funds, trusts and more than 1,300 individuals with whom he dealt between 1997-2002.

’As a compliance officer,’ he explained, ‘you’re on the frontline, you’re sitting on a barrel of powder and you’re not really sure when it’s going to go off.’ Because he revealed the inner workings of Julius Baer, Elmer has justification to be fearful. He knows, and was told, of some accountants and bankers in Panama, the Cayman Islands and other regions, who have mysteriously disappeared, were threatened or worse, such as Swiss banker Frederick Bise, who was killed and burnt in his car.’

‘The dirty boys, they’re not sitting in the Caymans where people don’t really get a great deal of information. They are “onshore” at the financial institutions, the accounting firms like KPMG, the banks.’ Julius Baer is not the only bank that Elmer has blown the whistle on. Between 2006-2008, Elmer set up the offshore business of one of Africa’s most important financial entities – Standard Bank – transferring 1,400 trusts and hundreds of companies to Mauritius in order to administer and prepare the accounts and services of these entities. Elmer claimed that he was trained up for Mauritius in Jersey and the Isle of Man, and that major banks like Barclays and HSBC built up major operations in Cyber City south of Port Louis, the capital. Whereas six years ago there were only five, today Elmer estimates about 40. 

‘Standard Bank Africa has an offshore group in Jersey which controls the Isle of Man and Mauritius [operations],’ Elmer continues. ‘In this offshore group only offshore business is performed. There were African, UK, Russian and other clients holding offshore entities as well as private accounts,’ he said. ‘Each large bank has offshore units... I call this ‘prostitution’ due to the fact that they do the kind of business which ordinary banks cannot perform. They have created a specific register accounting for the Politically Exposed People (PEP) who hold accounts. It is really strange that such well-known individuals have offshore accounts, for various reasons, including secrecy services which the Bank provides.’

Elmer explains in detail how PEPs are protected. Typical of the ‘notices’ remitted to the bank by clients instructing the bank on how to communicate with them include such statements as: ‘Very sensitive information, do not contact him. One fax line only. No correspondence to be sent to address directly. Do not send any doc by post without prior consent. When contacted, please mention the password ”xxxxxx”. Do not send anything through ”xxxxxxxx”. A password must be obtained from ”Name Surname” if he calls prior to any discussion. Do not contact ”Name Surname” via email unless you speak to him first. No correspondence to the principal beneficiary,’ etc.[2]

Some examples of the bank’s monthly PEPs disclosed for the month of October 2007 include a former political heavyweight in the Russian government; deputy chairman of Russia’s Policy and Tax Commission and family members; the current prime minister of a major economy and CEO of a major corporate chain; the latter’s special assistant; multiple members of the Gulf royal families; and other politically connected persons.[3] Reading through the assessments, it is clear that beyond the usual legal and financial services provided by the bank to PEPs, the secrecy vehicle – more than any form of tax evasion – was paramount.

Take a certain Jordanian-American described as a ‘long-time friend and business partner of Mr Ahmed Chalabi, member of the US-Iraqi Council with close ties to the Pentagon.’ This particular PEP, founder of several corporations in the information, finance, technology and private security sector, in the words of the document, ‘won lucrative Iraqi reconstruction contracts in exchange for kickbacks to Chalabi... The [company] employs members of Chalabi’s private militia for guarding oil. Chalabi’s nephew serves as the firm’s Counsel.’

The same PEP, the document goes on to reveal, ‘has ties to several companies backed or owned by Winston Partner,’ the private investment firm of Marvin Bush, brother of former US president George W Bush. The PEP’s company was incorporated in the secrecy jurisdiction of the British Virgin Islands, with operating headquarters in Dubai and branches in London and other major hubs, and lists ‘oil and gas, mineral extraction and infrastructure development’ as major markets. In 2003, for instance, the company was granted a contract to train ‘Oil Protection Forces’ (OPF) for Iraq’s ministry of oil. Such secrecy vehicles are apparently rather popular, as the above-mentioned PEP’s wife and attorney were also listed and connected to many of the same entities.

As a typical offshore entity, Standard Bank’s Mauritius operations offer not only the usual services of ‘alternate directors, secretaries, and nominee shareholders,’ but also handles, among other services, ‘company correspondence and day to day work.’ Moreover, although the tax rate for companies is officially 15 per cent, Standard Bank touts the offer that this can be reduced to zero by opting for the Global Business Company Category II (GBCCII). Alternately, ‘it is possible for the company to claim foreign deemed foreign tax credits of 80% via Global Business (GBC Category I) of the Mauritius tax chargeable on the foreign source of income, which results in an effective tax rate of 3%.’ Naturally, senior officials of Standard Bank are ‘permitted to act as directors of the company (GBCC II)’.

’Mauritius is in many ways the Switzerland of Africa, isn’t it?,’ says Elmer. ‘It turned out to be more of the same.’

But there is another African nation vying to be the ‘golden’ financial gateway: Ghana.

Though Ghana is perceived as West Africa’s poster child of political stability after hosting five democratic elections, following a June 2005 Memorandum of Understanding (MoU) with Barclays Bank – one of the world’s leading ‘wealth managers’ based in multiple secrecy jurisdictions such as the Cayman Islands, Switzerland and Mauritius – the Ghanaian government has aggressively restructured Ghana’s capital Accra as an offshore centre via the International Financial Services Centre (IFSC).

‘The Barclays Offshore Banking Unit, the first of its kind in Ghana and indeed in Africa south of the Sahara, continues to offer world-class banking service to non-resident private clients and corporates,’ boasted Barclays, the architect behind the IFSCs design.[3] And yes, of course, as a Barclays official based in an African secrecy jurisdiction informed me, ‘We are bound by our confidentiality agreement with our clients. No other branches can access our client details.’

The Bank of Ghana, well aware of the implications of ‘supply-side’ corruption on a continent experiencing between US$200-$400 billion in illicit flight each year, nonetheless confirmed in a report that IFSCs ‘should operate with a minimum of regulation,’ but that the operation of IFSCs, ‘has implications for the Central bank’s work on good governance because it can reduce transparency including the exploitation of complex ownership structures.’

Concerned about the impact of Ghana’s offshore centre, Jeffrey Owens, head of the Organisation for Economic Co-operation and Development’s (OECD’s) tax centre stated, ‘The last thing Africa needs is a tax haven in the centre of the African continent.’[4] But Ghana itself may soon be the victim of ‘demand-side’ corruption, facilitating revenue leakage via a consortium of oil corporations.

In June 2007, a consortium of oil corporations, including UK-based Tullow Oil and US-based Kosmos Energy, struck offshore oil in Ghana’s Jubilee oil field, which is estimated to hold recoverable reserves of 800 million barrels, and the potential for a further billion barrels. Regarded as one of Africa’s biggest offshore finds in the last decade, Ghana’s oil will catapult the country from one with an oil import bill of US$1.3 billion annually (2009) to that of Africa’s fifth largest oil-producing nation. An estimated 200 billion cubic feet of gas will allegedly be provided free of charge to Ghana’s state-owned petroleum company, the Ghana National Petroleum Corporation.

But the Jubilee Ghana MV 21 BV – a special purpose company[5] comprised of energy corporations – is incorporated in the Netherlands, one of the world’s leading tax havens that provides specific loopholes for corporate activities. The consortium owns the Kwame Nkrumah MV 21 – the Floating Production Storage and Offloading (FPSO) facility that will be used to exploit Ghana’s offshore oil during the first phase of development.

Commenting on the Jubilee Ghana special purpose vehicle (SPV), Elmer explains that the intent is manifold: Protecting secrecy and providing legal, tax and regulatory relaxation. ‘In this case,’ he says, ‘there is a strong suspicion that the SPV [will] charge certain services to the company, therefore reducing the profit and the taxable profit. Another option is that certain currency or derivative deals with the company [will be] made with the same effect that the taxable profit is reduced in Ghana.’

The use of the Netherland’s opaque legal and financial vehicles are likely to facilitate revenue leakage, diminishing Ghana’s projected oil revenue, estimated to inject US$800 million into the economy from 2011 and 2029 (beginning with US$20 per person in 2011 before increasing to US$75 per person by 2017, if revenues are directly remitted to citizens). The jurisdiction, host to more than 20,000 ‘mailbox companies’ (of which 43 per cent have a ‘parent’ in secrecy jurisdictions such as the Cayman Islands, the British Virgin Islands, the Netherlands Antilles and Cyprus),[6] specialises as a ‘pass-through’ conduit for financial flows including ‘dividends, royalties and interest payments’ via ‘special financial institutions’ (SFIs).

The Dutch Central Bank, not entirely pleased with this situation, defines ring-fenced SFIs as ‘institutions (that) are subsidiaries of foreign parent companies used to channel capital through our country that has really nothing at all to do with the Dutch economy.’[7] The statistics are stark. In a report titled ‘The Netherlands: A tax haven?’ (2006), the Dutch-based Centre for Research on Multinational Corporations stated: ‘Gross SFI flows through the Netherlands amounted to €3,600 billion or over eight times Dutch GNP. Most SFIs are managed by one of the 132 specialised trust offices. However, the majority of SFI transactions can be attributed to a small group of multinationals that control about 100 to 125 SFIs, and have offices of their own.’ These offices, representing about 80 per cent of SFIs, provide ‘substance’ to profits laundered from, for instance, developing countries by supplying the components of ‘economic activity’ defined as an address and management. Like the Netherlands Antilles, the jurisdiction does not place details of trusts on public record, nor does it require that company accounts or beneficial ownership be made available for public record.[8]

But the Dutch – ranked by the Washington-based Centre for Global Development as the world’s third best donor country[9] – vehemently deny this. In 2009, for instance, the Netherlands, via the Royal Netherlands Embassy in Washington, acted quickly to remove a bullet point contained in a White House briefing about tax havens, revealing the jurisdiction as a corporate favourite: ‘Nearly one-third of all foreign profits reported by US corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.’

Ironically, though corporate mispricing accounts for 60 per cent of illicit flight from resource-rich developing nations, specifically those in oil and-mineral rich West Africa, Ghana vies to become the Netherlands of Africa. ‘Under the IFSC, Barclays Bank has been given the license to operate the first Offshore Bank in the sub region.’[10] Cumulatively, US$13 trillion in private wealth is stashed by tax evaders and avoiders in secrecy jurisdictions. If taxed at a moderate 7.5 per cent rate of return, these funds would yield US$865 billion dollars annually.

The Ghanaian government is eager to realise the World Bank’s predictions of Ghana graduating from being a low-income member, such as Chad, through increased GDP. But neither the government nor the Ghana National Petroleum Corporation, headed by Nana Boakye Asafu-Adjaye, former country head for oil corporation Vanco Ghana Limited, appear to have a problem with the current state of arrangements, just six months shy of exploitation.

The paradox? Even as Ghana potentially stands to lose development revenue to ‘onshore’ tax havens like the Netherlands and multinationals, it is aggressively vying to become the Netherlands of Africa.’

Have you seen John Grisham’s The Firm? It’s just like that; except it’s not a few lawyers but the whole political system,’ Elmer warns before our conversation comes to an end.

BROUGHT TO YOU BY PAMBAZUKA NEWS

* This article first appeared in The Thinker (Volume 18/2010).
* Khadija Sharife is a journalist, visiting scholar at the Center for Civil Society (CCS) based in South Africa, and contributor to the Tax Justice Network.

NOTES

[1] All quotes attributed to Rudolf Elmer are based on a series of telephonic interviews with the author.
[2] Document on file with author.
[3] Barclays Bank (2010), ‘Ghana: Country Overview.’
[4] Guardian (19 January 2010), ‘Tax Havens Risks Corruption, OECD Warns Ghana.’
[5] World Bank/Multilateral Investment Guarantee Agency (2010), ‘FPSO Kwame Nkrumah MV 21.’
[6] Centre for Research on Multinational Corporations (2006), ‘The Netherlands: A Tax Haven.’
[7] The Netherlands Bank (2010), ‘Balance of payments and international investment position.’
[8] Tax Justice Network (2009), ‘Netherlands and Netherlands Antilles Country Reports.’
[9] Centre for Global Development (2009), ‘Netherlands Score.’
[10] Ghana Investment Promotion Centre (2010), ‘Financial Services.’


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