Results of a yearlong U.S. government study looking into the relationship between offshore banks and money laundering has drawn some interesting conclusions, some of which involve the online gaming industry.
In the shadow of the Financial Action Task Force on Money Laundering’s annual report on laundering typologies which was released earlier this week, the U.S. Senate Permanent Subcommittee on Investigations released a report of its own.
The report, "Correspondent Banking: A Gateway for Money Laundering," is the result of a yearlong study, which focused on the relationship between correspondent banking, the practice of using offshore banks for wire transfers and other transactions, and fraudulent money.
The bottom line of the study is that the practice, and inability to track transactions, allows for billions of dollars from drug sales, Internet gambling, tax evasion and other illegal activities to be routed into the United States.
Specifically regarding Internet gambling, the report expressed concern over the ease with which money can be laundered through online casinos. It refers to Net betting as "an activity recognized as a growing industry providing new avenues and opportunities for money laundering."
The study looked at 20 U.S. banking institutions and examined a dozen cases where dirty money had flowed through U.S. accounts from suspicious foreign banks. The committee focused on offshore banks or banks which were located in jurisdictions with weak money-laundering laws.
Correspondent banking is a legitimate banking practice, which allows companies to transact business globally for clients. Most U.S. banking institutes have established offshore banks in jurisdictions in the Cayman Islands and Bahamas due to the fewer regulations along with higher interest rates and lower tax rates than the U.S.
The report also shows that the system is attractive not only to the U.S. banking sector, but also to money launders. In addition to the low tax rates and high interest rages which appeal to the banking community, the countries usually have secrecy laws that prevent law-enforcement inquiries into the origin of money and who is behind the accounts.
According to the report, once the dirty money is in accounts at the offshore bank, it can easily be transferred to a U.S. bank that has a correspondent relationship with the offshore bank.
During his tenure as President, Bill Clinton declared money laundering a "national security threat." It is estimated that $1 trillion is laundered each year worldwide. According to the report, half of that, $500 billion, is laundered through the U.S.
The statistics are alarming, but some of the subjects in the report are denying any wrongdoing. One of the cases cited in the report is that of the British Trade and Commerce Bank of Dominica. According to the report, the bank was setup in the Commonwealth of Dominica, a jurisdiction with loose banking laws, and was used to move millions of dollars through its U.S. accounts.
The report states that BTCB was set up in Dominica and had accounts for companies involved in Internet gambling, which is legal in Dominica. The bank was then used for high-yield investment frauds and loan frauds, according to the report.
But the founder of the bank, John G. Long IV, told the Daily Oklahoman newspaper this week that the report had no foundation for the allegations. He said the committee, and one of its chief investigators Elise J. Bean, was on a "witch hunt."
The committee’s ranking Democrat, Sen. Carl Levin, D-Mich., says if the banking industry is going to point the finger at someone, it should look into the mirror.
"Inattention and disinterest by U.S. banks in screening the foreign banks they take in as clients have allowed rogue foreign banks and their criminal clients to carry money laundering and other criminal activity in the United States and to benefit from the protections afforded by the safety and soundness of the U.S. banking industry," he said.
To help cutoff the loophole that many launders have found, the report calls for a handful of actions to be taken:
- Bar U.S. banks from opening correspondent accounts with offshore banks.
- Allow U.S. banks the same money laundering safeguards offered in the U.S. when they are doing business in offshore locations.
- Review correspondent accounts systematically.
- Provide law enforcement efforts to assist banks in identifying high-risk foreign banks.
Levin said the report gave Congress a glimpse of what is going on in the banking industry, and it should be cause for great alarm.
"The investigation was able to get behind closed doors of some of these secretive foreign offshore and shell banks," he said. "We saw how they operate and how they and their clients misuse U.S. banks. It isn’t a pretty picture."
Click here to view the report.