The North Coast times-eagle., October 01, 2002, Page 2, Image 2

PAGE 2
THE BACK DOOR TO
BY DAN ARMSTRONG
Congress’ recent accounting reform legislation appears
to be all show and no go. Amid the cheers for stricter criminal
penalties for white-collar crime, 20-year jail terms, the creation
of an independent board to oversee accounting firms, and the
placing of corporate accountability squarely on the shoulders
of the executives that run the businesses, we see the same kind
of political circus approach to business reform that we do in the
war against drugs.
The sensational Adelphia arrests the morning of July 24
certainly sparked the stock market, but in reality had about as
much effect on accounting reform as a big Coast Guard cocaine
seizure does on Colombian drug cartels. Like action shots of
cropdusters spreading Paraquat on marijuana fields in Mexico,
it makes a great news clip to see pinstriped executives hurried
from their offices into unmarked police cars. But if we really
want to restore investor confidence and some measure of
integrity to American business operations, why didn’t Congress'
legislation address the accounting procedures used for stock
options? Why was there no mention of new laws regarding
offshore bank accounts? Why didn’t we see more force applied
to the fight against money laundering?
Though several of the recent business scandals have
been the result of outright fraud, in the bigger picture too many
corporate accounting practices are only slightly more ethical
than embezzlement and will remain legal under present laws.
The collapse of Enron and subsequent congressional
investigations provided us with a unique insight into the workings
of a large corporation. Throughout the Senate subcommittee
hearings the questioning of Enron executives necessitated the
assistance of armies of lawyers and accounting experts in order
to unwind the labyrinth of subsidiaries, shell corporations, off­
shore accounts, and trading schemes that Enron had become.
All judgment of wrongdoing aside, one must marvel at
the depth and complexity of the legal machinations that are truly
the financial skeleton of the beast. Essential to understanding
this x-ray is that Enron is the model not the exception to the
rule. With little amendment, what we see in Enron verges on
commonplace in Fortune 500 corporations. The continuing
cascade of like-bankruptcies, outright fraud, and incestuous
accounting firm relationships that have followed in the after­
math of the initial Enron revelations prove this out. Everyone’s
scrambling to get their books in order. And some of them can’t.
Of course, none of this complication came overnight.
The last 20 years have witnessed a radical evolution
of business management and finance technique. Nixon's floating
the dollar in the 1970s, Reagan’s deregulation of the banking
industry in the 1980s, and advent of the computer have
completely transformed the world market environment,
particularly the financial markets. Trading at warp speeds,
money has the potential to be anywhere and everywhere at
the touch of a key. It can’t stay still. Every dollar must be doing
something. Billions of trades are carried out every day seeking
a quarter-cent margin here, a half-cent there. The simplest
measure of the extent of this revolution is on Wall Street. In
1980 the Dow Jones Average hovered at 800. It is a hundred
times that now.
Thirty years ago, trade was primarily in commodities —
com, soybeans, pork bellies; physical, deliverable items. Today,
95% of all exchanges is fiscal entities, contracts and paper.
Financial instruments are the primary substance of trade. Every
business of size, regardless of its name or its industry, is also a
financial trader or investment service. Most offer their own credit
cards. They are radically different business animals than what
existed a quarter century ago. They are as complex and diversi­
fied as higher math. They shield themselves in thick legal webs
of interlocking subsidiaries and shell corporations. Accounting
practices are compartmentalized and revealed only on a need
to know basis. They make widespread political contributions
instead of paying taxes. This is what we see over and over again
in corporation after corporation as evidence of this new age
business paradigm. Again, with all this considered, Enron was
more than business as usual — if, perhaps, extreme in size and
extent.
Of particular interest in the x-ray of Enron is the use of
offshore banking —totaling some 881 accounts and subsidiaries.
The offshore account is arguably the "aggressive’’ account’s
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most important tool in this creative finance design. The offshore
account is a well known method of tax shelter, but when used
in conjunction with dummy subsidiaries, shell corporations and
correspondent banking through large and compliant U.S. banks,
as Enron did with J.P. Morgan-Chase and Citigroup, it is an
excellent way of disguising the true nature, source, location,
disposition, movement or ownership of financial proceeds.
In more vulgar terms, we are talking about money laundering.
Dollar for dollar, money laundering is the third largest
industry in the world. United States congressional investigations
estimate that anywhere from $500 billion to $1 trillion of criminal
proceeds, possibly a third of that drug profits, are laundered
annually worldwide. Half of that sum filters through America’s
most prestigious banks and Wall Street with an impact rivaling
that of the petroleum industry. In other words, this is one of the
biggest games in town.
In the case of Enron, creative accounting methods
allowed them to hide losses, disguise insider trading profits and
evade taxes. In fact, this 2001 top ten Fortune company paid
absolutely no U.S. taxes in four of the last five years. This
narrowly legal practice of using offshore tax shelters is so
common that the Center for Public Integrity estimates that U.S.
businesses launder nearly $200 billion annually of tax liability.
In spite of the tremendous loss to U.S. revenue, this gigantic tax
loophole provided by offshore banking techniques is not part of
Congress’ present business reform package.
Even though offshore accounts are absolutely essential
to laundering top-end drug profits and the hiding of terrorist
finance, these banking havens are protected like the back door
to Fort Knox by the 'Devil Dogs' of commerce and are simply
off limits to anything but token corrective legislation and modest
penalty. They are just too important to big money of all kinds.
(As an exercise, run a search of "offshore banking” on
the internet. All you get is offers — advertisements from little
countries you never heard of before pushing tax shelter and
private banking services. Search legislation against. You might
get a hit or two. A search of legislation forgets a full thousand.
What money wants, money gets.)
That President Bush’s failed economic stimulus package
included a $254million tax rebate for Enron reveals the revolting
extent of this kind of corporate/political irreverence. In this day
and age, when the word "Patriot" is tossed around like religious
testimony, the worst offenders of its use are America’s business
giants — who in the name of smart business bow out of the
annual payment for the cost of running the country. While
waving Old Glory with one hand, they take their profits offshore
with the other. They are not truly American business entities at
all. They are expatriate transnationals beholden to no country
and deserve no special fare.
In the end, these kinds of quasi-legal money laundering
operations, particularly at the level and quantity that corporate
America participates, have enabled two critical and equally
egregious insults against the United States and the world in
general. The present Wall Street “correction" is a direct result of
unethical and evasive accounting procedures born of the “go-go"
deregulated financial world virus of the 1980s. The huge and
delusory investment bubble of the 1990s was to some extent
a construct of juggled profit statements and wholesale money
laundering. Additionally, and sadly, world drug sales, primarily
of cocaine and heroin, have advanced hand in hand as a silent
partner in Wall Street’s fandango.
The size of drug profits, literally hundreds of billions
of dollars annually, could not have passed into legitimate U.S.
banking systems without the smoke screen of an equal amount
of corporate laundering. When offshore banking is linked to large
U.S. banks through correspondent relationships, white-collar graft
dollars are intermingled with drug money coming from banks in
places like the Cayman Islands, the Bahamas or the Dominican
Republic. No matter how you tell the story, all the dirty money
ends up in the same sinking barrel.
Think about it.
Drug sales persist because they are so profitable.When
the money becomes harder to move, so will the drugs. Until
Congress takes a serious look as the use of offshore banking
and the relationship between offshore financial services and
U.S. bank giants, there can be no real reform in the business
world and the war on drugs will remain a sham.
If we really want to bring integrity to American business,
if we really want to stop the proliferation of drugs in our society,
we close down the money laundry. We get right to work on tough
legislation against offshore banking and big bank compliance.
Dan Armstrong transplanted back to Eugene from
Astoria four years ago. He has worked on books, traveled to
China and occasionally writes an article for old time's sake for
the Times Eagle, which regularly exploited his talent for political
and economic synthesis the six years he lived here.
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