CLEARSTREAM: EXPLOSIVE REVELATION$ - MONEY MAKES THE WORLD GO AROUND - FINANCIAL MECHANICS OF GLOBAL CRIMINALITY

Source: The Komisar Scoop

Lucy Komisar is a New York City-based investigative journalist. She writes about offshore banking, corporate secrecy, international money-laundering, and how they relate to corporate fraud; international corruption; the looting by dictators; financing of terrorism; international crime including arms, drug and people trafficking; and tax evasion.

She investigates frequently offshore banks and corporate secrecy and their links to corporate crime; tax evasion by the rich and powerful; empowerment of dictators and oligarchs; bribery and corruption; pay-to-play politics; drug, arms and people trafficking; and terrorism.

Her articles are archived at thekomisarscoop.com.

On March 15, 2002, In These Times released an exclusive two part series investigated by Lucy Komisar, entitled 'Explosive Revelation$'. We are presenting it on the Abel Danger blog:

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Explosive Revelation$

The world’s biggest banks and multinational corporations have set up a shadowy system to secretly move trillions of dollars—a system that can be exploited by tax evaders, drug runners and even terrorists

By Lucy Komisar

In the tax haven of Luxembourg, a little-known outfit called Clearstream handles billions of dollars a year in stock and bond transfers for banks, investment companies and multinational corporations. But a former top official of this “clearinghouse” says Clearstream operates a secret bookkeeping system that allows its clients to hide the money that moves through their accounts.

In these days of global markets, individuals and companies may be buying stocks, bonds or derivatives from a seller who is halfway across the world. Clearinghouses like Clearstream keep track of the “paperwork” for the transactions. Banks with accounts in the clearinghouse use a debit and credit system and, at the end of the day, the accounts (minus “handling fees,” of course) are totaled up. The clearinghouse doesn’t actually send money anywhere, it just debits and credits its members’ accounts. It’s all very efficient. But the money involved is massive. Clearstream handles more than 80 million transactions a year, and claims to have securities on deposit valued at $6.5 trillion.

It’s also an excellent mechanism for laundering drug money or hiding income from the tax collector. Banks are supposed to be subject to local government oversight. But many of Clearstream’s members have real or “virtual” subsidiaries in offshore tax havens, where records are secret and investigators can’t trace transactions. And Clearstream, which keeps the central records of financial trades, doesn’t get even the cursory regulation that applies to offshore banks. On top of that, it deliberately has put in place a system to hide many of its clients’ transactions from any authorities who might come looking.


According to former insiders:

* Clearstream has a double system of accounting, with secret, non-published accounts that banks and big corporations use to make transfers they don’t want listed on the official books.
* Though it is legally limited to dealing with financial institutions, Clearstream gives secret accounts to multinational corporations so they can move stocks and money free from outside scrutiny.
* Clearstream carried an account for a notoriously criminal Russian bank for several years after the bank had officially “collapsed,” and clearinghouse accounts camouflaged the destinations of transfers to Colombian banks.
* Clearstream operates a computer program that erases the traces of trades on request from its members.
* Clearstream was used to try to hide a dubious arms deal between French authorities and the Taiwanese military.

Many of these charges were first made in a controversial book called Révélation$, written by Denis Robert, a French journalist, and Ernest Backes, a former top official at the clearinghouse who helped design and install the computer system that facilitated the undisclosed accounts. The book’s impact was explosive. Six European judges called it “the black box” of illicit international financial flows. Top Clearstream officials were fired. The scandal made headlines in big European newspapers; TV networks broadcast specials; the French National Assembly’s financial crimes committee held a hearing. Luxembourg authorities ordered an investigation, and then they effected a cover-up. Yet Révélation$ remains unpublished and relatively unknown in the United States.

A bearded, heavyset man in his mid-fifties, Backes spoke with In These Times in Neuchâtel, Switzerland, where he’d gone to attend a conference on international crime, and explained how he’d started fighting “organized crime in banking.”

Read about Clearstream's connection to the October Surprise.

Ernest Backes was born in 1946 in Trier, Germany. (As he likes to joke, “There were two important people born in Trier; the other is Karl Marx.”) His father was a Luxembourg metal worker, his mother a German nurse. From 14, he worked on an assembly line to pay for school and joined the Young Catholic Workers. After a job in the Luxembourg civil service, he was hired in 1971 by Clearstream’s predecessor Cedel (short for “central delivery” office), set up the year before by a consortium of 66 international banks. Backes helped design and install Cedel’s computerized accounting system in the ’70s.

Cedel and its main competitor, Brussels-based Euroclear, were started to manage transfers of “eurodollars,” U.S. currency kept in banks outside the United States. According to Barbara Garson’s book Money Makes the World Go Around, eurodollars were invented in the ’50s by the Chinese and the Soviets so they would not have to put their assets in banks where the U.S. government could seize them. But others saw value in eurodollars, and they began to be traded for other currencies. Some banks attracted eurodollars with higher interest than was being paid in America, and U.S. corporations and individuals began using the accounts to avoid laws on domestic banks. The euromoney market was born. (By the ’90s, the Federal Reserve estimated that about two-thirds of U.S. currency was held abroad as eurodollars.)

Cedel and Euroclear eventually expanded into handling transfers of stock titles and other financial instruments. Their clients needed a system that would guarantee the creditworthiness of their trading partners and keep records of the trades. The clearinghouses provided speed, discretion, and a system that didn’t make the records of their deals and profits readily accessible to outsiders. Every few months, a list of members’ codes was distributed. For transfers, members just entered the codes, and Clearstream handled the deals with no further inquiries.

In 1975, several big Italian and German banks wanted to centralize their accounting and didn’t want other members of Cedel to send transfers through their numerous individual branches. The Cedel council of administration—its board of directors—authorized banks with multiple subsidiaries not to put all their accounts on the lists. Backes and Gerard Soisson, then Cedel’s general manager, set up a system of non-published accounts. A bank would send a transfer to the code of the headquarters bank, which would send it on to the non-published account of its subsidiary. The bank would regulate this operation internally.

Just two months after Backes’ dismissal in 1983, Soisson, 48 and healthy, was found dead in Corsica, where he’d gone on vacation. Top Cedel officials had the body returned immediately and buried, with no autopsy, announcing that he had died of a heart attack. His family now suspects he was murdered.

“If Soisson was murdered, it was also related to what he knew about Ambrosiano,” Backes says. “When Soisson died, the Ambrosiano affair wasn’t yet known as a scandal. [After it was revealed] I realized that Soisson and I had been at the crossroads. We moved all those transactions known later in the scandal to Lima and other branches. Nobody even knew there was a Banco Ambrosiano branch in Lima and other South American countries.”

Soisson authorized each non-published account, which would be known only by some insiders, including the auditors and members of the council of administration. As Cedel’s literature to clients explained: “As a general rule, the principal account of each client is published: the existence of the account, as well as its name and number, are published. … On demand, and at the discretion of Cedel Bank, the client can open a non-published account. The non-published accounts don’t figure in any printed document and their name is not mentioned in any report.”

Requests for non-published accounts came from some banks that weren’t eligible, but Soisson turned them down.

By 1980, Backes had become Cedel’s No. 3 official, in charge of relations with clients. But he was fired in May 1983. Backes says the reason given for his sacking was an argument with an English banker, a friend of the CEO. “I think I was fired because I knew too much about the Ambrosiano scandal,” Backes says.

Banco Ambrosiano was once the second most important private bank in Italy, with the Vatican as a principal shareholder and loan recipient. The bank laundered drug- and arms-trafficking money for the Italian and American mafias and, in the ’80s, channeled Vatican money to the Contras in Nicaragua and Solidarity in Poland. The corrupt managers also siphoned off funds via fictitious banks to personal shell company accounts in Switzerland, the Bahamas, Panama and other offshore havens. Banco Ambrosiano collapsed in 1982 with a deficit of more than $1 billion. (Unknown to many moviegoers, Banco Ambrosiano inspired a subplot of The Godfather Part III.)

Several of those behind the swindle have met untimely ends. Bank chairman Roberto Calvi was found hanged under Blackfriars Bridge in London. Michele Sindona, convicted in 1980 on 65 counts of fraud in the United States, was extradited to Italy in 1984 and sentenced to life in prison; in 1986, he was found dead in his cell, poisoned by cyanide-laced coffee. (Another suspect, Archbishop Paul Marcinkus, the head of the Vatican Bank, now lives in Sun City, Arizona with a Vatican passport; U.S. authorities have ignored a Milan arrest warrant for him.)

Just two months after Backes’ dismissal in 1983, Soisson, 48 and healthy, was found dead in Corsica, where he’d gone on vacation. Top Cedel officials had the body returned immediately and buried, with no autopsy, announcing that he had died of a heart attack. His family now suspects he was murdered. “If Soisson was murdered, it was also related to what he knew about Ambrosiano,” Backes says. “When Soisson died, the Ambrosiano affair wasn’t yet known as a scandal. [After it was revealed] I realized that Soisson and I had been at the crossroads. We moved all those transactions known later in the scandal to Lima and other branches. Nobody even knew there was a Banco Ambrosiano branch in Lima and other South American countries.”

After leaving Cedel, Backes got a job in the Luxembourg stock market, and later became manager of a butchers’ cooperative. But he kept friends inside the clearinghouse and began to collect information and records about Cedel’s operations.

With Soisson out of the way, there was nothing to stop the abuse of the system. Whereas Soisson had refused numerous requests to open non-published accounts (from such institutions as Chase Manhattan in New York, Chemical Bank of London and numerous subsidiaries of Citibank), Cedel opened hundreds of non-published accounts in total irregularity—especially after the arrival of CEO André Lussi in 1990. No longer were they just sub-accounts of officially listed accounts, Backes charges. Some were for banks that weren’t subsidiaries or even official members of Cedel. At the start of 1995, Cedel had more than 2,200 published accounts. But in reality, according to documents obtained by Backes, Cedel that year managed more than 4,200 accounts, for more than 2,000 clients from 73 countries.

Clearstream was formed in 1999 out of the merger of Cedel and the compensation company of Deutsche Börse (the German stock exchange). “No accounts are secret,” insists spokesman Graham Cope. “We are controlled by the local authorities … who have access to information on all accounts. The term ‘secret’ is misused again and again. Our customers choose to have unpublished accounts, which simply means—like a telephone number—they choose not to display the name and number in our publications. Customers often have many unpublished accounts, which they use for their own internal management purposes to ensure there is no confusion between their accounts.”

But Backes thinks otherwise. “I discovered an increasing number of unpublished accounts,” he says. “There were more unpublished than published accounts, and a [large] proportion were not sub-accounts of a principal account, which is what the system was supposedly for. The owners of these accounts were not inscribed on the official list of the clients of the firm.”

View a flow chart of how this money laundering scheme works.

How does the system work? Backes explains, for example, that a bank with a published account could open an unpublished account for a branch in the Cayman Islands, an offshore tax haven. A drug trafficker easily could have the Cayman branch debit cash from his personal account to buy stocks on Wall Street. The transaction would be handled by Clearstream, which would transfer the money electronically to a New York bank that had its own clearinghouse account. Soon the shares could be sold to buy real estate in Chicago with “clean” money. But regulators or investigators, depending only on published accounts, would find it nearly impossible to trace the money. Backes says Clearstream employees joke that the company name means “the river that washes.”

While clearinghouse clients may want to keep transactions secret, detailed information on every transfer, including those via non-published accounts, is listed on daily “security statements”—records to prove that the stock or cash has been sent. These statements are stored on microfiche and, under Luxembourg law, must be kept 10 years for commercial enterprises and 15 years for banks. A Clearstream insider gave Backes 10 years' worth of these records. “The documents are a mine of information for any financial inquiry,” Backes says. “The archives of the clearinghouses can contribute to retracing where funds have gone. The knowledge of the list and the codes relative to non-published accounts, until now guarded secrets, offer immense possibilities.”

Backes notes that similar records exist for the other big clearinghouses, Euroclear and Swift, also based in Brussels. “It is possible,” he explains, “when one knows the date of an operation and the bank of entry, to reconstitute inside the clearing companies the voyage of the money and stocks or bonds—to follow the tracks.”

Révélation$ charges that Cedel/Clearstream further violated its own statutes by setting up unpublished accounts for industrial and commercial companies. With accounts in their own names, companies could avoid passing through banks or exchange agents to use the clearinghouse. They thus skirted mandated due diligence and record-keeping. When Siemens was proposed for membership, Backes says, some Cedel employees protested that this violated Luxembourg law. However, management told them that Siemens’ admission had been negotiated at the highest level.

Among the major companies with secret accounts, Backes discovered the Shell Petroleum Group and the Dutch agricultural multinational Unilever, one of whose accounts was associated with Goldman Sachs. On the French TV broadcast “Les dissimulateurs” (“The Deceivers”) in March 2000, Clearstream President Lussi simply denied the accounts existed. “Only banks and brokers are eligible for membership,” he said, “as it has always been the case. No private company accounts, no commercial or industrial companies.”

But his own spokesman contradicts this claim. “Customers of Clearstream can be banks or, exceptionally, corporate clients who have their own treasury departments the size of banks,” Cope wrote in an e-mail to In These Times. “We cannot accept CEOs of multinationals or terrorists and have strict account-opening procedures to prevent such problems.”




Part Two

Explosive Revelation$ (cont’d)

By 2000, according to Backes, Clearstream managed about 15,000 accounts (of which half were non-published) for 2,500 clients in 105 countries; most of the investment companies, banks and their subsidiaries are from Western Europe and the United States. Most of the new non-published accounts were in offshore tax havens. The banks with the most non-published accounts are Banque Internationale de Luxembourg (309), Citibank (271) and Barclays (200).

Backes found numerous discrepancies in the lists he obtained of the secret accounts. For example, code No. 70287 on the published list belongs to Citibank NA-Colombia AC in Nassau, and code No. 70292 is that of the Banco Internacional de Colombia Nassau Ltd. But on the non-published list, the numbers both belong to Banco Internacional de Colombia in Bogota. There’s no mention of Citibank. Based on the published list, members may think they are dealing with two banks in the Bahamas, one of which is a subsidiary of Citibank, but anything sent to these establishments goes directly to the country of cocaine cartels. On the April 2000 Clearstream list, there are 37 Colombian accounts, of which only three are published. (Richard Howe, spokesman for Citicorp in New York, declined repeated requests for comment. Cope declined to talk about any individual customers or accounts, citing Luxembourg banking secrecy laws.)

Clearstream’s dealings with Russian banks are another area of concern. Menatep Bank, which had been bought in a rigged auction of Soviet assets and has been linked to numerous international scams, opened its Cedel account (No. 81738) on May 15, 1997, after Lussi visited the bank’s president in Moscow and invited him to use the system. It was a non-published account that didn’t correspond to any published account, a breach of Clearstream’s rules. Menatep further violated the rules because many transfers were of cash, not for settlement of securities. “For the three months in 1997 for which I hold microfiches,” Backes says, “only cash transfers were channeled through the Menatep account.”

“There were a lot of transfers between Menatep and the Bank of New York,” Backes adds. Natasha Gurfinkel Kagalovsky, a former Bank of New York official and the wife of a Menatep vice president, stands accused of helping launder at least $7 billion from Russia. U.S. investigators have attempted to find out if some of the laundered money originated with Menatep, which they believed had looted Russian assets. (The Justice Department declined to comment on the investigation.)

Even though Menatep officially failed in 1998, it oddly remained on the non-published list of accounts for 2000. (Clearstream also lists 36 other Russian accounts, more non-published than published.) Kathleen Hawk, a U.S. spokeswoman for Clearstream, says that was “a mistake.” But Cope contradicts her: “Closed accounts remain on our files and systems even though they’re non-active because we don’t reuse numbers. We keep the records for many years so there is no future confusion from reused numbers.”

But Backes explains that there’s no systematic rule about delisting canceled accounts. He found that “some that didn’t exist any longer were on the list. Others were delisted when they didn’t exist. And still other accounts were delisted, when we knew they existed, though the numbers no longer appeared.”

Régis Hempel, a computer programmer who worked for Clearstream, says some dormant accounts were activated for special transactions. “Such an account can be opened in the morning, used for a transaction, and closed to appear as delisted in the evening,” Backes explains. “Only the guy who gave the order to open it in the morning knows about the transaction. An investigator or auditor would not look at such an account because it doesn’t appear on the accounts list.”

Hempel also claims that Clearstream erased the records of some transfers. In testimony before the French National Assembly’s financial crimes committee last year, he explained that a computer system had been developed to wipe out the traces of transactions in non-published accounts. When a bank wanted to carry out such a transaction, Hempel testified, it simply contacted a Cedel staff person. “We made a ‘hard coding’ in the program and corrected the instruction that was going to come,” he explained. “[An instruction could be] a purchase, a sale, a movement of funds or a security. We made it disappear, or we put it on another account. Then, when all was finished, we put back the old program and removed the exception. It was not seen or known.”

He said such requests came every two or three days.

Hempel volunteered to help Luxembourg prosecutor Carlos Zeyen investigate Clearstream. But Hempel says local authorities seem more interested in blocking an investigation than in exercising oversight. Zeyen responded that the inquiry into Hempel’s charges hadn’t produced any evidence and dismissed claims that Hempel had been prevented from seeing relevant files as “rubbish.” In a July 2001 public statement, Zeyen said the investigation would continue.

Luxembourg sources say Zeyen was looking into how Menatep used the system and also into improper ways André Lussi might have gained personally. In January, a French judge took depositions about Menatep corruption. According to Luxembourg journalist Marc Gerges, writing in the local newspaper Land, the FBI and the German BKA are also interested in what might be revealed about the role of Menatep in the diversion of IMF funds. Gerges says investigators are also looking to implicate Lussi in suspected financial swindles conducted through holding companies and trusts in the offshore financial havens of Guernsey or Jersey. (Lussi could not be located; his attorney did not respond to phone and e-mail requests for comment.)

Read about Clearstream’s connection with Bin Laden and al-Qaeda.

The publication of Révélation$ brought forward others with stories about how Cedel/Clearstream had facilitated corruption. Joël Bûcher, former deputy general director of the Taiwan branch of the bank Société Générale, wrote Zeyen volunteering to testify that SG used the clearinghouse to hide bribes and to launder money. In his deposition for Zeyen—which is cited in Denis Robert’s new book on the Clearstream saga, The Black Box—Bûcher said he had worked for the bank for 20 years, but quit in 1995 out of disgust at its rampant money-laundering. He said much of that occurred though a Luxembourg affiliate working through non-published accounts at Cedel. “Cedel didn’t ask any questions about the origin of funds that would have appeared suspect to any beginner,” he told Robert. “[As a result] we directed our clientele with funds of doubtful origin to Luxembourg.”

In the early ’90s, Bûcher contends, Cedel was used to launder $350 million in illegal “commissions” on a contract for the sale by Thomson-CSF, a French government arms company, of six French frigates to Taiwan. He said that the money, handled by an SG subsidiary, was paid as a registered securities transfer to a “nominee”—a stand-in for the real beneficiary—and that Thomson (now known as Thales) didn’t appear in the transaction except in the Cedel archives.

The kickbacks were exposed after the 1993 murder of a naval captain named Yin Ching-feng, who had written a critical report on the purchase and its inflated $2.8 billion price. Bûcher told Taipei authorities that a third of the kickbacks went to Taiwanese generals and politicians, while the rest was pocketed by French officials. Taiwan courts sentenced 13 military officers and 15 arms dealers to between eight months and life in prison for bribery and leaking military secrets.

In March, Bûcher will testify before a French court examining French complicity. “SG is very much implicated,” he told In These Times. “Taipei police searches found many records of transfers of commissions” relating to the frigates and also to the sale of French Mirage fighter planes. In New York, SG spokesman Jim Galvin denies that the bank had any involvement in the arms deal.

There has been no legal action by the Luxembourg prosecutor based on any of his investigations. However, Clearstream Banking, Lussi and others have filed 10 lawsuits for libel in Luxembourg, France, Belgium and Switzerland against Backes, Robert and their publisher, Les Arenes. The first case, Clearstream v. Backes went to court in March in Luxembourg. Another case began its first hearings in Paris a few days later. With no sense of irony, the liquidator of Russia’s notorious Menatep Bank is also suing the authors and publishers for damage to its reputation. (Mikhail Khodorkovsky, the Russian oligarch who controlled Menatep, did not respond to a request for comment.)

Backes’ knowledge and records make him a valuable investigative partner, and he cooperates with numerous authorities, though he prefers not to say in which countries. But his agenda is larger than that. Backes is lobbying for oversight by an international public body. Unlike banks, Clearstream has no effective outside surveillance. It is audited by KPMG, one of the “big five” international accounting firms, which either has been ignorant of or has overlooked the non-published accounts system. KPMG announced last year it found “no evidence” to support the allegations made in Révélation$, though its report was not made public.

Local officials’ attempts to defend financial secrecy are not surprising. Luxembourg’s multi-billion-dollar financial sector brings in 35 percent of GNP and gives the inhabitants a per capita income of more than $44,000, the highest in the world. (Next on the list are Liechtenstein, Switzerland and Bermuda, all money-laundering centers, with the United States fifth.) For years, local officials have refused to provide bank information to other countries.

But Luxembourg authorities have turned their sights on Backes. Using a March 2001 judicial order based on a complaint made by Lussi before he was fired, police raided Backes’ house on September 19 in search of records. He says they seized unimportant documents and diskettes; he keeps the microfiches outside the country as “life insurance.” “The raid was organized to impress [others] not to repeat what this dangerous guy Ernest Backes has done,” he says. “Those who know me well know I am not at all impressed by such a raid.”