By Lucy Komisar
San Diego Union, Jan 23, 2002

How did top executives of Enron do it? How did they cause the world’s biggest bankruptcy while making off with millions of dollars?

They used the same financial tools as Osama bin Laden.

To attack the Osama bin Laden financial network, the Bush administration knew right where to look – in offshore secrecy havens, including the Bahamas, Switzerland, Luxembourg, Dubai and Panama.

Investigators know that the world’s bank and corporate secrecy system was set up to move money for people with something to hide. Sometimes they are terrorists. Sometimes they are financial swindlers. They are welcomed in offshore centers that promise to keep their ownership of companies and bank accounts secret, even from law enforcement.

U.S. investigators had to use muscle. When a Nassau bank refused to open records, the United States had it cut off from the world’s wire transfer systems. The bank changed its mind in two hours.

The U.S. investigators and the lawyers suing Enron’s executives are also turning offshore. Before they finish, their revelations should make the public and policy-makers question the existence of the world’s financial services system for criminals.

We know a lot about how Osama bin Laden used the system. This is how Enron used it.

Andrew Fastow, the company’s chief financial officer until October 2001, was known as a master of international offshore banking laws. The key to the Enron swindle was its offshore partnerships. Enron had over 3,000 corporate subsidiaries and partnerships, and a fourth of them were registered in Grand Cayman or Turks and Caicos, two notorious offshore centers.

What’s the purpose of putting company ownership records in secrecy jurisdictions?

It’s so regulatory authorities, investment analysts and stockholders can’t know if there’s self-dealing or other improper activities going on. If they don’t know who the owners are, they can’t know if a partnership is secretly owned by Enron managers or associates. They can’t check the books to see if the offshore company is dealing with another insider-owned company which is siphoning off its wealth. That’s how Russian oligarchs looted their country.

The offshore system was central to Enron’s collapse. A lawyer working on a suit against the top executives explained, They set up offshore partnerships and used them to borrow billions from banks, $20 billion or $30 billion. Enron guaranteed these loans with its own stock. They traded with themselves and reported the money from the banks as income – as revenue and profit. Two offshore partnerships were set up in 1999 just to move debt off Enron’s balance sheet and hide losses. Enron officials also used the offshore system to hide their own exorbitant pay. The lawyer said, We hear of middle-level executives making $10 million or $20 million. If shareholders knew this . . .

Records of accounting firm Andersen’s contribution to this offshore system are very likely in the files the accounting firm shredded. Firms talk about aggressive accounting, a euphemism for using offshore companies to juggle the books and evade taxes. They get consulting fees to set up the systems and then audit them. Enron was not the only satisfied client.

The Clinton administration was working with European allies to rein in the offshore system, but it was blocked in the Senate by Republican Phil Gramm, whose wife Wendy is an Enron director, and by Republican House leader Dick Armey. Bush Treasury Secretary Paul O’Neill weakened a strategy by the Organization for Cooperation and Development against tax havens. But Sept. 11 compelled the administration to support reforms.

Legislation adopted in October bans American banks from opening accounts for shell banks with no physical presence and thus no clear purpose but money-laundering. It requires banks, securities and insurance firms to verify the identities of customers. But U.S. banks lobbied successfully against requiring additional due diligence rules for American banks dealing with offshore banks, whose raison d’ªtre everyone also knows.

Now is the time for another step forward. Congress should ban U.S. institutions from dealing with banks that don’t list owners’ real names on accounts or cooperate with international law enforcement. The OECD is developing proposals for dealing with shell companies. The United States should support an agreement to end recognition for companies registered in secrecy jurisdictions where they don’t do business.

Imagine if Enron subsidiaries had been forced to reveal their owners and to keep their books where they operated and where they could be examined. Imagine if U.S. law enforcement officers could demand to see bank accounts of Enron partnerships and top officials, rather than tracking them through the murky swamp of offshore secrecy. U.S. lawmakers and officials should work to plug up the offshore financial black hole.

  Enron