An invitation to launder money

Introduction

HAMBURG, Germany, November 8, 1999 — Whoever wishes to hide funds from the grips of tax authorities will find willing assistants in the Principality of Liechtenstein. Bank managers assert that they are working within legal means, but the files of the Bundesnachrichtendienst [German intelligence] present a differing version of the story: Mafia organizations, drug cartels, and major Russian criminals are virtually invited to do business in the diminutive country.

Help came from the very top: Liechtenstein’s head of state Mario Frick used an investment convention in the principality to polish the country’s financial reputation. “Diligence” would become of highest importance in accepting deposits. Revisions of banking laws, the new dedication to diligence, and a departure from criminal legislation against money laundering and insider trading were to have taken the necessary steps towards the prevention of financial crimes in his country. Finance Minister Michael Ritter also contradicted his international critics who see the diminutive state not only as a place of refuge for the funds of successful businessmen, but also as a playground for moneyed criminals. Liechtenstein, according to Ritter, has use of a “handy, European standard-corresponding legislation against misuse.”

German officials can only force smiles in regard to the alleged purity of financial transactions of reputed money-launderers in this tax haven—for they know better.

A dossier delivered last April by Bundesnachrichtendienst (BND) president, August Hanning, is stored in the top secret safes of the respective ministries of the [German chancellor Gerhard] Schroeder cabinet. The chancellery, Joschka Fischer’s diplomats, Hans Eichel’s financial experts, and Otto Schily’s crime fighters are informed about crooked affairs of state in the 30-page file. The secret documents read as if the worst fears of all serious governments have already become a reality: A whole country, in the middle of Europe, is said to be serving as a handyman for worldwide criminals: the Principality of Liechtenstein.

Liechtenstein’s formal clients, the BND noted squeamishly, include “Latin American narco gangs, Italian Mafia clans, and Russian organized crime groups.” And they had not just tolerated these groups as investors, but had attracted them with “specifically tailored financial services” set up to launder money. And all of this was risk-free: According to the German Aussengeheimdienst [the foreign intelligence service], such transactions are protected through “a network of connections among high-ranking government officials, judges, politicians, bank directors, and investment consultants, who support each other in their illegal financial services for international criminals.”

These official findings further ruin the already tattered reputation of the mini-state. Hidden between Austria and Switzerland, the principality exists on just 160 square kilometers with approximately 32,000 inhabitants and more than twice as many foundations into which at least 200 million Swiss franks have disappeared without a trace.

This usually happens within a few hours. The investor chooses among the 120 trustees, who are sworn to secrecy, who can set up names and address for foundations, and transform them into P.O. Box companies. Upon receipt of a foundation certificate, the group can open bank accounts and pay money into them. To the outside, these straw-man groups are seen as the owners of the fortunes, while the true owners stay anonymous and sheltered from their home countries’ taxes.

This hide-and-seek game nurtures the country’s inhabitants well. Every second employed citizen of Liechtenstein works in the financial sector or for the trusts. They work from early until late to secure their reputation for discretion and as a shelter for secret funds. Bank secrecy is the doctrine of the state. Additionally, lawyer-client privilege and trust and tax secrecy laws exist to protect investors.

It’s all a seemingly perfect shield. But the barrier of secrecy was first broken by Der Spiegel (51/1997), when, with the help of an computer disk obtained by Der Spiegel, was able to unmask a slew of shady funders, leading to a tidal wave of tax litigation

Now the BND has succeeded in another coup. After the end of the Cold War, the German federal government assigned new priorities to the secret service— money laundering and the drug trade. The dealings of international criminal syndicates were to be targeted.

Liechtenstein’s discretion was doomed by modern communications and the country’s proximity to the German border. On the edges of the Black Forest, the BND operates its most extensive listening station. The station is specialized to listen in on what are called Intelsat-Satellite Systems. In addition to telephone and fax communications, banks around the world also conduct their information exchanges over satellites.

Since 1996 the BND has targeted the nightly data exchange of banks—as long as no German customers or German institutions are involved or affected. There are practically no other restrictions. One hit led to another, and the crooked clients of the principality and their helpers were sorted out.

In what the BND termed the “World Center of the P.O. Box Companies,” numerous lawyers and consultants looked at first glance like they were engaging in legitimate business. But a large proportion of the approximately 120 trusts were at the same time “a very fruitful pillar of illegality.” The clients included South American drug baron Pablo Escobar of the Medellin cartel, and the Cali cartel.

Previously, only rare cases were similar: In August 1996, the American drug police (DEA) arrested the Swiss financier Karl G. Burkhardt in the lobby of the luxurious Ritz-Carlton Hotel in Alexandria near Washington. This “world-class money-launderer” (according to the DEA) was described to the U.S. agents as a specialist for the legalization of large sums of drug money.

An agent set the trap: After Burkhardt had handled three smaller transactions, the agent handed him a suitcase stuffed with two million US dollars. According to the indictment, Burkhardt enthusiastically spoke of the possibilities of laundering the money through offshore and Liechtenstein banks. After all, Liechtenstein had never given foreign governments information about bank accounts.

And when—in exceptional instances—such cases did develop, said the BND dossier, the trusts would “develop a special ability to have memory lapses at just the right times and in the right places.”

Was it like this in the Burkhardt case? David Vogt, identified by court documents as Burkhardt’s trustee in Leichtenstein, explained that he had been approached by Burkhart to set up a foundation for a South American client, so the client could set up a numbered account. Vogt claimed to have no knowledge about drug money. Vogt then resigned his post from the advisory board of the foundation.

The special ability of Liechtensteiners to protect even their most bizarre clients is legendary among German law enforcers. Just about every financial mystery story ends in the principality. It was so in the case of the export of a chemical weapons factory to Rabita in Libya, and it is so today in the search for backroom dealers in bribery deals in the German automobile industry.

Even cases of extraordinary importance do not induce cooperation. In 1994, the state attorney’s office in Stuttgart suspected a Schwabian businessman of being involved in the delivery of materials important to the Pakistani atomic weapons program, but was blocked in its investigation by a judge in Vaduz. In financial matters no legal assistance would be provided. Even the most absurd reasons were presented to preserve the system of silence. Most recently, the German federal government had to experience this stonewalling in their search for the hidden fortunes of the German Democratic Republic.

German financial crimes law enforcers found 66 million marks in one Liechtenstein foundation. Two of the trustees who allegedly facilitated the financial deposits were Swiss nationals living in the principality. After careful examination, the extradition requests appeared to have nothing left standing in their way.

But the higher court of the Principality of Liechtenstein put a special spin on the question. “From the standpoint of the dignity of man,” the court determined in July of last year, the extraditions could “not be complied with.” The two fugitives “had already lived in Liechtenstein for many years, have their professional existence here, and their kids go to school here.” The arrest of fathers would be a violation of Article 8 of the European Human Rights Convention.

Judge Wolfgang Schomburg at the German federal court described the decision as “unbearable.” The German federal government lodged a protest, but their colleagues in Vaduz reacted coolly. Division of power prevented any change in policies. Being caught red-handed in the money-fortress at the foot of the Alps, evidently, is a temporary problem. Once it came to an actual arrest, the BND could only write it off as a “work-related accident.” BND reports had shown that “a newly installed young judge who had not been on the payment list of the community, and presumably did not know the ingrained connections, was the one who had signed the arrest warrants for the two suspects.”

The BND is so confident that it has listed page upon page of names of people engaging in the illegal deals of entangled trusts, and their companies and foundations. Prominent names are listed among them, who can claim to be friendly with both the Prince’s family, as well as with German politicians. For legal reasons, Der Spiegel is not reprinting the list of names gathered through secret service methods.

Professor Herbert Batliner, one of the most prominent trustees in Liechtenstein, explains that his trade toils legitimately: “We don’t take any clients out of the former Soviet Union, and we don’t take unannounced clients, or those that show up with suitcases full of cash. These types of people don’t even make it from the entrance to the second floor.”

The BND is dubious about such declarations. While Liechtensteiner trustees have given preferential treatment and had “close contacts” with the Cosa-Nostra Cuntrera-Curuana family for the past 15 years, another has spent the last three years “specializing on the Russian clientele.” For new clientele, the money manger would “also be prepared to take large sums of cash without asking the origin of the funds,” and then personally deposit sums at the bank.

This cavalier game with the illegal foundation only functions because the “Masters of Money” do not have to overly fear the state. Much to the contrary: the BND claims that there are willing helpers among the principality’s government authorities.

The dossier also accuses a former member of government of being involved in “illegal monetary transactions in the services of international criminals.” For a number of years, he is said to have “organized meetings with the finance managers of South American drug clans.” While in office, the now-retired politician had organized a “network of connections between high-ranking government officials, judges, politicians, bank directors, and investment consultants,” that is so typical for this tax oasis, and that seems immune to all attempts to break it.

Even Switzerland, which has long engaged in a symbiotic relationship with Liechtenstein — a large portion of money managed by Liechtenstein is deposited in Swiss bank accounts — has not been able to hide behind its discretionary practices after pressure by Europeans and Americans. Investigative judges are involved in determining the origin of dubious funds there. The once mild climate has changed. But Swiss trustees are now allowed to make their transactions in Liechtenstein.

That the whole country is only as large as a small city in Germany creates a familiar feel. Family members of the trusts are employed in key positions with the police, justice, and banks. Nothing can go wrong there. Should a foreign law enforcement agency request land in one of these offices, the first to be queried are the banks — which is the preferred operating procedure of the Liechtenstein law. And in other matters, the tricksters’ teamwork works just as well.

When officers of the Bundeskriminalamt [BKA, the German federal justice department] recently participated in a witness hearing requested by German authorities, it was hailed as a milestone for police cooperation with Liechtenstein. Once they arrived in the principality, the BKA men were invited to a friendly lunch at the cafeteria. Barely done with their meals, the hosts told the German officials that it was now too late to become involved, as the hearing had just come to a close.

The EU countries are helpless against such practices. To this day, Liechtenstein is not a member of the OECD “Financial Action Task Force,” which oversees global monetary affairs. The principality thus makes itself exempt from international control.

The insights of the BND listening station hardly helped the Schroeder administration’s fight against tax-sheltering Liechtenstein. “We can not even bring England and Luxembourg in line within the EU,” said one highly placed official in the German Foreign Ministry, “how can we be successful with a country that is not even in the Union?”

Those chances are close to nil, and the banks moving to Liechtenstein obviously know this — in the last four years, the number of financial institutions there has tripled. Banker Bruno Gehrig, a member of the directorate of the Swiss National Bank argues that the secret world of capital in the principality is still beneficial: “The financial success of Liechtenstein is the fruit of the development, unperturbed by the fashions-of-the-day, of a niche concept of a small market that optimally relates to the requirements of that country.”