Lucy Komisar

The Story of 500 Years of Global Greed and Misery

To end poverty, you have to know how it began -- with globalization. No, not the 20th century variety engendered by multinationals and their friends at the IMF, World Bank and WTO. They just codified practices that kept developing countries poor.

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How Tax Cheats Are Using Your Money to Fund Republicans

Every year, just before Tax Day, the Internal Revenue Service conducts a dog and pony show to demonstrate how it is cracking down on tax cheats.

Routinely, the IRS focuses on stories that involve crooked tax preparers and small-time taxpayers who try to erase a few hundred and occasionally even a few thousand dollars from their bills.

This year was no exception. At a press conference on April 3, IRS Commissioner Mark Everson announced civil injunction suits against five corporations in Atlanta, Detroit, Chicago and Raleigh that are franchises of Jackson-Hewitt, the nation's second-largest tax preparation firm, which the IRS accused of routinely faking returns for some of its 100,000 clients.

Jackson-Hewitt is a quickie, low-fee operation. The IRS says stores accepted false W-2s and faked data to get clients the earned-income credit for the poor. The amount underpaid through returns prepared by 125 stores was estimated at $70 million.

While the story made national headlines, the government targeted an operation that catered to little guys, the poor and lower middle class. However, they failed to focus on some big-time tax cheats whose fraud was much greater, but who happen to be top-tier Republican contributors. What the press conference should have announced was: "Swift Boat" financier Sam Wyly cheated the U.S. of at least $300 million in taxes." And, "The money that paid for the "Swift Boat" campaign was your money!"

How does someone cheat the government out of that much money and -- until now -- get away with it?

Megabucks Sam didn't pull into a mall with a Jackson-Hewitt franchise store. He had expensive help from his bankers and accountants. The scam is detailed in a report issued Aug. 1 by the Senate Subcommittee on Investigations, the result of a lengthy probe by the staff of Sen. Carl Levin, D-Mich.

Everson knows about it because he testified at the hearing that presented the report.

Wyly did his cheating through an offshore scheme that hid $1 billion in profits via Isle of Man "shell companies" that existed only on paper, were registered under front men to hide the Wylys' names, and were used to carry out transactions and launder money. And that's only the hidden income that was found. The Dallas mogul, with a $1 billion admitted net worth, may be guilty of the biggest personal tax fraud in U.S. history.

Wyly used a system popular with megarich corporate executives. In 2000, Bank of America, the country's second-largest commercial bank, began offering a tax shelter called STARS, which the IRS has ruled illegal. Among the happy clients were Wyly and his brother Charles, who controlled the $5 billion Michaels Stores, the arts-and-crafts retailer with 900 shops.

The idea was to evade taxes by giving themselves stock options and transferring them to offshore corporations controlled by secret trusts in the Isle of Man, that famous British tax haven in the Irish Sea. "Manx" companies are routinely fakes; one of the front men on the boards of all the Wyly entities is a sheepherder, who picks up cash for use of his name.

U.S. law requires major stockholders to report their holdings to the Securities and Exchange Commission. Company officials from Michaels Stores admitted that the Wylys had transferred company securities to offshore trusts and subsidiaries, and that the company and the Wylys had not reported it.

If you want to know how they did it, read the following paragraph. If your eyes glaze over, skip to the next.

How the scam works: A public company grants stock options to a top executive. The executive transfers the options to a trust or partnership controlled by his or her family. The transfer is called a "sale" and the trust "pays" for the options with a note due in 20 or 30 years. After the options are transferred, the trust exercises the option to buy stocks which it sells on the market. The executive plays out the fiction that tax is not owed until the deferred payment date, although in fact he controls the profit stashed offshore in a secret account where the IRS can't find it.

Wyly dumped profits into two hedge funds in the offshore Cayman Islands and laundered that into an investment in an annuity in offshore Bermuda. The annuity was written by a Bermuda reinsurance company he set up himself and which had one client, Sam.

He and brother Charles used some of the tax-evading profits for loans, homes and ranches (two ranches worth $54 million near Aspen, Colo.; condominiums worth $13 million in downtown Aspen; a 95-acre ranch worth $12 million near Dallas; and an oceanfront property worth $8 million in Malibu). He also bought jewelry and art (a Rockwell painting). Why did Bush's IRS commissioner forget to mention Wyly? He might say it's because the IRS is investigating the case but hasn't taken definitive action.

However, there could be two other reasons. One is that Wyly was not only the financier of the Swift Boats fraud to discredit John Kerry during the 2004 presidential campaign, but the Wylys were Bush's ninth greatest career contributors, "Bush Pioneers," who collected $100,000 for the 2000 and 2004 presidential campaigns. (Your money.)

They also funded other leading Republicans. Sam Wyly, since 1997 has given Republicans more than $1 million and his brother Charles and wife have donated more than $1.3 million. Among the beneficiaries were William H. Frist, Wilbert J. Tauzin, Thomas Delay, John D. Ashcroft, Richard J. Santorum, John S. McCain, Mitch McConnell, Dick Armey, Elizabeth H. Dole, Christine Todd Whitman, Orrin G. Hatch, Phil Gramm, Alfonse M. D'Amato, Rudolph W. Giuliani and Arnold Schwarzenegger. They also funded the ironically named Good Government Fund, Freedom Works Pac and Straight Talk America.

But there's another reason why the Bush administration doesn't like highlighting Wyly-style tax cheating. The Wylys have a lot of company. Every major private banking department offers a product called the "private placement offshore of variable annuities."

According to the IRS, business executives have used such shelters to evade taxes on $8 billion in income. Assume that means "at least." And that's just one swindle in the panoply of tax cheating which the IRS says contributes to the loss of $40 billion to $70 billion a year from individual use and $30 billion from corporate use of tax havens.

Compare $100 billion of offshore cheating to the $70 million headlined by Everson this month.

Those numbers are probably low: According to a Tax Justice Network report quoted by the Senate investigation and based on statistics from Merrill Lynch/Cap Gemini's "World Wealth Report" and the Boston Consulting Group's "Global Wealth Report," 16.2 percent of the private wealth of North Americans, $1.6 trillion, is held offshore. The overwhelming reason for that is tax evasion.

The Wylys' fraud tells us what we ought to be focusing on in order to stop the mega-tax cheats. Think "offshore" and "tax haven," the parallel international financial system run by the world's big banks. It is built on a network of more than 70 jurisdictions that in various combinations sell secret shell companies -- fake paper fronts -- and anonymous bank accounts.

The big time cheaters -- individuals and corporations -- who evade taxes in the millions don't go to the mall, they go offshore. The multinational banks run the secret accounts and accept as legitimate the paper shells that "own" them and that serve the world's crooks, terrorists, dictators, arms and drug traffickers -- and tax cheats. Banks such as Citibank set up shell companies themselves for clients' convenience and sometimes have their own employees serve as front men, i.e., "directors."

Everson indicated concern at the April press conference about "the increasing complexity associated with structured entities and transactions in the international arena and then the offshore area."

But, at the same press conference, when Eileen O'Connor, assistant attorney general for the Tax Division, mentioned the nine-year prison term awarded tax cheat Walter Anderson, who started his fortune with Mid-Atlantic Telecom in Washington, D.C., she didn't explain that he had evaded more than $200 million in taxes through schemes based in the offshore British Virgin Islands and Panama. The investigation started in the Clinton administration.

The Bush Administration from its first year, when Treasury Secretary Paul O'Neill torpedoed an OECD (Organization for Economic Cooperation and Development) attempt to crack down on tax havens, has shown itself a friend of the shadowy system.

Now, Congress has a chance to act against the offshore tax-cheating Wylys of America. Carl Levin and Norm Coleman, a Minnesota Republican who is savvy about the issue because he was a prosecutor, along with Barak Obama, have sponsored The Stop Tax Haven Abuse Act (S-681). It would:

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The Fall of a Titan

Given his economic and political power, the fall of Maurice "Hank" Greenberg, the 59th richest man in America and CEO of the American International Group (AIG), the world's second-largest financial conglomerate (after Citigroup), is stunning.

Greenberg's net worth is $3.2 billion; he is the ninth-largest holder of AIG stock, with a $2.7 billion stake. Greenberg is a director and honorary vice chairman of the Council on Foreign Relations, where his portrait hangs in the elegant "Rockefeller Room." A deep-pocketed Republican, he was on the short list for CIA director in 1995 after James Woolsey resigned in the wake of the Ames scandal.

Balding and short, Greenberg, 79, looks more like a munchkin than a spy chief. Perhaps in quest of a different image, in his youth he adopted the nickname "Hank," after the baseball player. But he conjures up Napoleon more than the other Hank: the only relation to his namesake is a reputation for playing hardball.

Greenberg was elected AIG President in 1962, CEO in 1967 and Chairman in 1989. Henry Kissinger is chair of AIG's international advisory committee, and board members include Barber Conable, former congressman and president of the World Bank, Carla Hills, former trade representative, and Richard Holbrooke, former UN ambassador.

AIG is the largest U.S. underwriter of commercial and industrial insurance, with over $500 billion in assets, a market value of $190 billion, $40 billion in revenue and $5.8 billion in annual profits. For years, AIG earnings have beat the analysts by a penny a share, and that has been rewarded in the market place. Some people were skeptical, wondering how the company could fine-tune earnings so that they came out exactly one penny more. It was done using the offshore financial system.

AIG used offshore entities to escape even the lax enforcement of U.S. insurance regulators and the Securities and Exchange Commission (SEC). It used offshore tax havens such as Barbados and Bermuda to hide insider connections in supposedly "arms-length" deals and to move profits away from U.S. taxes. Regulators discovered some of these activities a decade or more ago, but Greenberg — famous for political muscle and bullying – easily stone-walled and evaded punishment.

This week, Greenberg's power evaporated. He resigned his CEO post, forced out by his board in an apparent effort to reduce the negative fallout they expect when New York Attorney General Eliot Spitzer and the SEC reveal findings into yet another Greenberg "cook-the-books" episode.

They are investigating a transaction Greenberg organized with Cologne Re, a reinsurance company, which increased AIG's reserves by $500 million in late 2000 and early 2001, making its financial position appear better than it was. AIG used insurance to limit liability in the leases of its aircraft leasing unit – the International Lease Finance Corporation – and so reduce on the books the amount of debt used to finance some aircraft. It was a phony contract, because it guaranteed Cologne Re against losses.

Post-Enron, the SEC has punished AIG for helping other companies play fast and loose with accounting practices.

In 2003, the SEC sued AIG for fraud for helping Brightpoint Inc., an Indiana distributor of cell phones, hide $11.9 million in losses. AIG concocted a $15-million "retroactive" insurance policy for which Brightpoint paid $15 million in premiums. AIG refunded $11.8 million as phony claims payments that Brightpoint could claim as assets, allowing it to overstate its 1998 income by 61 percent. AIG paid $10 million to settle the suit.

In 2004, the SEC sued AIG for fraud for an Enron-style "structured finance product" it sold to PNC Financial Services, a Pennsylvania bank holding company. The scheme shifted $762 million in bad loans from PNC's financial statements to special purpose entities, increasing its 2001 income by 27 percent. AIG paid $126 million to settle the case.

And four AIG executives have pleaded guilty to complicity in a big-rigging scheme organized by Greenberg's son, Jeffrey, who was fired in October as CEO of Marsh & McLennan, the world's biggest insurance broker.

Now, regulators are investigating other deals that AIG may have used to shine up financial statements for itself and its clients. There are at least two cases, one in each category, that were detailed in AlterNet in November and December, but never reported by the major mainstream press. They were early warnings of Greenberg's lawbreaking that regulators chose to ignore.

Learning The Shell Game

In the late-80s, AIG set up Coral Re, an allegedly independent offshore reinsurance company, to allow it to illegally move debt off its books and violate rules about maintaining minimum levels of reserves required to pay off claims.

In the mid-80s, two of AIG's reinsurers failed. AIG would have had to curtail writing new business, since rules require a certain ratio of assets to risk. Trevor Jones, an insurance investigator who runs Insurance Security Services in London, explained, "Hank decided to set up Coral Re, move the debts he couldn't claim as assets into this other company and say this new company owes this money. No other real company would play ball, because you are fiddling the accounts, moving your bad debts off your books."

AIG set up the shell company in Barbados, where capital requirements and regulation are minimal, where American regulators couldn't readily discover AIG's involvement and where, as an added incentive, it could evade U.S. taxes.

Coral Re was launched with a private sale of shares organized by Goldman Sachs, then headed by Robert Rubin, who would become President Clinton's Treasury Secretary and is now chairman of the executive committee of Citigroup. In the Dec. 1, 1987 stock placement memorandum, Goldman Sachs was quite to the point about the reason for setting up Coral Reinsurance Co. Ltd: “AIG's interest in creating the Company is to create a reinsurance facility which will permit its U.S. companies to write more U.S. premiums. For a U.S.-domiciled company, a high level of surplus is required to support insurance premiums in accordance with U.S. statutory requirements. The statutory requirements in Barbados are less restrictive."

Goldman Sachs said recipients had to keep the information confidential, make no copies of the memo and return it on request. A no-risk deal was offered to the selected investors: L. Donald Horne, chairman of Mennen Co.; Charles Locke, chairman of Morton Thiokol; Kenneth Pontikes, former chairman of Comdisco; David Reynolds, chairman of Reynolds Metals; John Richman, former chairman of Kraft; and Samuel Zell, chairman of ltel Corp.

The Arkansas Finance and Development Authority (ADFA) — under Gov. Bill Clinton — was the lead investor with 84 of the 1,000 Coral Re shares. The deal violated the state's constitutional ban on a state agency holding stock. Stock was also bought by AIG-affiliated insurance companies.

The stock cost $4 million per unit, but investors didn't have to use their own money. They were loaned the amount by the Chicago branch of the Sanwa bank of Japan, with the stock invested in bank CDs as collateral. In case of default or desire to sell shares, Goldman Sachs guaranteed to take the stock or find a buyer. The "investors" could never make a profit or loss, but were guaranteed a fixed gain of $25,125 the first year and $45,225 each subsequent year, not bad for the use of their names. The directors never made any decisions and Coral Re never had an office: it was managed by American International Management Co, Ltd., a subsidiary of AIG.

AIG gave Coral Re $1.6 billion in premiums, much of which was deposited in Uberseebank, a private bank owned by AIG in the tax-haven of Switzerland.

AIG really paid all losses, using the bookkeeping device of increased premiums to Coral Re to take care of claims it had "paid out." Everything about the deal said "banking," not "insurance."

Eventually, the scheme unraveled. "In 1992 Delaware examiners auditing Lexington [an AIG subsidiary] smelled a rat," a former insurance regulator told me. AIG initially refused to provide examiners documents about Coral Re, and it took them a couple of years to nail the connection.

The Delaware report, finally issued in October 1996, suggested that Coral Re "may be an affiliate" of AIG. It described how AIG played an integral role in the creation of Coral Re; that its purpose was to reinsure risks for AIG companies; that virtually all Coral Re's business originated from AIG units; and that Coral Re was managed by an AIG subsidiary. It concluded that the arrangement did not transfer risk and had to come off the books.

The regulator told me, "Delaware should have suspended them, but did nothing." Insurance departments in Delaware, New York, Pennsylvania, and California met in 1996 to coordinate their reports. The regulator recalled, "Nobody had any guts; they wanted Delaware to say Coral Re is affiliated and use that to go after them. Delaware reported what it found but didn't rule they were affiliated. That would have meant hearings, endless hassles." And real punishment for AIG.

The Securities and Exchange Commission was also looking into Coral Re. "The SEC was going to jump all over them," said the regulator. "The SEC came to me, they wanted to know if we were going to rule they were affiliated. Then there would be penalties, because if AIG was affiliated with Coral and they hadn't disclosed it in 10K filings, that's a 'no-no' with the SEC."

It also would have been an issue for the IRS. If Coral Re was an AIG affiliate, it would have to pay taxes on its income. If it was "independent," that money came tax-free.

But the federal and state agencies refused to take decisive action or order penalties. The delays and stonewalling allowed AIG to use Coral Re for more than eight years. Greenberg learned he was untouchable.

The Offshore Insurance Deal

Another shady AIG deal benefited one of the aompany’s clients. AIG helped Victor Posner, a notorious crook, set up an offshore reinsurance company so that Posner could evade U.S. taxes. This was discovered in the early 90s, after the SEC prosecuted Posner for a fraudulent takeover scheme concocted with Wall Street thieves Michael Milkin and Ivan Boesky, ordered him to pay $4 million to fraud victims and banned him from serving as officer or director of any publicly-held company. (Posner died in 2002.)

New managers took over Posner's NVF Corp., which ran a Delaware vulcanized rubber plant. Insurance agent Terry Mills, charged with examining company policies, discovered that NVF was paying AIG's National Union Fire of Pittsburgh substantially over market for workmen's compensation insurance.

AIG insured the NVF policy through Chesapeake Insurance, an offshore reinsurance company Posner owned in Bermuda. That meant AIG took its commission on the inflated NVF premium and sent the rest to Chesapeake. Posner wrote off the amount as a business expense and enjoyed the cash in Bermuda, tax free. Mills moved the NVF policy out of AIG. The Delaware Insurance Department learned of the scam, but did nothing.

Perhaps if regulators had cracked down a decade or more ago, and if AIG board members had put the brakes on, Greenberg might have been chastened and obeyed the law. Now, he has hired Martha Stewart's criminal defense lawyer, Robert G. Morvillo, and been fired in disgrace.

AIG announced in corporate-speak that "the Board of Directors has implemented its management succession plan" with the removal of Greenberg "in the best interest of AIG's shareholders, customers and employees" and announced a delay in the filing of its annual report to the SEC, "the result of the management changes described above as well as the Company's ongoing internal review of the accounting for certain transactions, which review was commenced in connection with previously announced regulatory inquiries."

Greenberg may be gone, but his legacy of shady deals won’t be forgotten.

Take The Money And Run Offshore

Terry Mills was working in Wilmington, DE, for J. Montgomery, one of the largest insurance agencies in the region, when in 1993 he was called in to get to the bottom of a messy insurance problem. Little did he know that he would uncover a story – as yet unreported – about tax evasion through offshore firms, but with a twist. The scheme Mills came across seemed to be taking place with the aid of AIG, a major U.S. insurance giant.

The case Mills was sent to look into had to do with a Delaware holding company named NVF Corp., which owned a vulcanized fiber factory, and which was being reorganized. The reorganization was prompted by a federal court order which enjoined its owner, Victor Posner, from acting as officer or director of any public company.

Posner, who died in 2002, long had a reputation as the original "corporate raider," famed for engineering hostile takeovers of companies and looting them. He had a history of corrupt dealings.

For instance, Posner and his son Steven, along with Drexel Burnham Lambert, Inc., had been defendants in a 1988 SEC complaint about a "stock parking" scheme to gain control of the Fischbach Corporation that the SEC said cheated investors of about $4 million.

But more relevant to what Mills was dealing with in 1993, it turns out that Victor Posner and NVF had a relationship going back at least to 1977. That was the year when the SEC had filed a complaint against Sharon Steel Corporation, its holding company NVF, and several individuals, including Victor Posner, for a litany of corporate and individual misdeeds, including treating assets of public corporations as their private property.

In 1987, Victor Posner pleaded no contest to evading more than $1.2 million in taxes and was ordered to pay $7 million in fines and back taxes.

Even so, Mills was astonished when he examined the NVF insurance books. "The company I was with [J. Montgomery] had the opportunity to write the insurance for NVF in the period after the SEC gave Posner the cease and desist," Mills told me. He said he found that, "The senior management really didn't have a handle on what the costs were."

Mills found a curious pattern: NVF had been paying National Union Fire of Pittsburgh, an AIG company, substantially over market for workmen's compensation insurance. He told Catherine Mulholland, director of the Delaware Insurance Department's bureau of examination, that when he went to buy workers comp, he found it was only half as much as the year before.

Mills told me, "The fronting company was AIG. And the broker on the deal was Alexander. It was one of the biggest brokers in the world."

Here's how the deal worked: Insurance companies normally insure themselves by laying off part of their risk to reinsurance companies, so if a claim comes in above a certain amount, the reinsurance company will pay it. AIG had reinsured the NVF policy through a company named Chesapeake Insurance, a reinsurance company based in Bermuda. It turned out that Chesapeake was owned by Posner.

In essence, NVF, owned by Posner, was buying insurance from an AIG company – which was buying reinsurance for the policy from an offshore company owned by Posner. And Bermuda provided the tax and secrecy haven, so Chesapeake's books were safe from the eyes of American regulators and tax authorities.

The transaction meant all the parties came out ahead: AIG would keep a portion of the allegedly inflated NVF premium before sending the rest to Chesapeake, which meant AIG would have a higher commission. Posner would write off the entire amount as a business expense and enjoy the extra cash in Bermuda, tax free. Reduced profits might also mean smaller dividends and share prices.

A former insurance department regulator, using hypothetical numbers, explains, "Say the normal premium was $1 million. [If I ran the company,] AIG could charge me $2 million and then send a premium of $900,000 over to a reinsurance company that it has set up for me in Bermuda. I never have to pay any claims, so I get to keep the $900,000 tax-free offshore."

"This was not an isolated case with Vulcan. AIG did that a lot," he claims, speaking under condition of anonymity. "AIG helped companies set up offshore captive reinsurance companies." AIG, he alleges, "would then overcharge on insurance and pay reinsurance premiums to the captives, giving the captive owners tax-free offshore income." He adds, "Doug McLeod [editor of Business Insurance] told me that there were captives that hardly ever paid any claims."

McLeod told me, "Looking at the schedule F, the reinsurance schedule, of one of the AIG companies, they had a captive. They reported a pretty large amount of premiums ceded, sent to that captive, but very little in claims payments coming back. That is unusual. Why would a captive of a large company collect that amount of premium and not pay any claims? They could have gone through a loss-free year, but it doesn't seem likely."

The "captive" scheme is a variant of transfer pricing or "profit laundering," whereby companies inflate the cost of purchases or services from tax havens in order to boost their home country expenses and move profits to tax-free jurisdictions. It might also hurt shareholders, since dividends could be reduced by the company's cost of inflated premiums.

Mills cancelled the NVF policy with AIG. "We were able to find them coverage in the standard market," he says. "We started a new policy in late 1993."

However, it seems the Delaware Insurance Department took no action against the insurer.

Provided the details of what AIG allegedly did, company spokesman Andrew Silver says simply, "We don't have any comment on that."

AIG declares on its website that it "pioneered the formation of captives almost 60 years ago," and it offers management facilities to run the captives in offshore Barbados, Bermuda, Cayman Islands, Gibraltar, Guernsey, Isle of Man, and Luxembourg – all places where corporate and accounting records are secret and taxes minimal or nonexistent.

There is reason to suspect the pattern discovered by Mills is being duplicated elsewhere. For instance, Marsh, the insurance brokerage recently charged by New York Attorney General Eliot Spitzer with bid-rigging, also runs the Marsh Captive Management Group to help corporate customers set up reinsurance companies in offshore Barbados. There is a link between Marsh and AIG: Maurice (Hank) Greenberg runs AIG, while Marsh was being run by his son, Jeffrey, until he was fired after the bid-rigging charge was made.

"There are more captive insurance companies in Bermuda than any place else," says David Schiff, editor of Schiff's Insurance Observer. "The whole purpose is that it's not regulated by the U.S. Rates are not supposed to be too high or low, but [regulators] are usually looking to protect consumers. How do they tell us Microsoft is paying too much for workers comp? There's no way for a regulator to know that."

"Fraud is hard to find unless you get tipped off," he adds.

An insurance broker and risk management consultant says, of the "captive" arrangement, "It's common; that's the way it's done." He adds that "oil companies all have offshore captives." And McLeod says that several oil companies were joint shareholders of the Oil Insurance Ltd, an oil company group captive.

There are more than 1,800 captive insurance companies based in Bermuda with over 60 percent owned by American interests.

"A majority of fortune 500 companies have captives," says McLeod. He pulls out a copy of the Tillinghast Captive Directory and ticks off U.S. companies with Bermuda captives: Levi Strauss: Majestic Insurance International; Caterpillar Tractor: Caterpillar Insurance Co. Ltd., FMC Corp (tractors): Financial Reassurance Co and Transcon Insurance, Carnival Corp.: Trident Insurance, all managed by Marsh. Other big firms with captives were Schlumberger (oil field services): Harrington Sound Insurance and Castle Harbour Insurance, managed by JLT, and United Van Lines: Vanliner Reinsurance managed by Codan Management.

"Reinsurance has always been a traditional way of moving money," the broker says. "You can do a 'rent-a-captive' where you don't even have to set up your own captive, you just run the funds through a bookkeeping system: it's even cheaper. The question is whether the IRS lets you get away with it."

In 2002, the IRS and the Treasury department required transactions with captives to trigger disclosure, list-maintenance, and registration requirements "based on information that many of these arrangements were being used to shift income improperly to PORCs [Producer-Owned Reinsurance Companies] for purposes of avoiding income tax."

However, in September 2004, the administration abolished that rule. IRS Commissioner Mark W. Everson explained that, "Based on disclosures by taxpayers and examination of tax returns, we have determined problems associated with these transactions are not as prevalent as initially believed."

Of course, fraudulent use of offshore captives is hardly likely to be disclosed by taxpayers or noted on tax returns. Spokesmen at Treasury and the IRS declined to discuss the issue.

Following indictments for alleged bid-rigging against Marsh insurance company officials brought by Spitzer, officials in other states are looking more broadly into insurance practices. Asked about whether Spitzer was checking into the abuse of offshore captives, his spokesman declines to comment.

It's an area that should be examined by state and federal investigators.

Shell Games

In October, New York Attorney General Eliot Spitzer filed suit against the world's largest insurance broker, Marsh, accusing it of rigging bids and receiving kickbacks in order to defraud clients such as other corporations, city governments, school districts and individuals of billions of dollars through inflated premiums.

"Greedy trial lawyers were the usual excuse for premium increases. Now we know that greedy corporations also have a starring role," Spitzer said, accusing several insurance companies as co-conspirators in making phony or inflated bids and paying kickbacks to the brokerage to get business.

Spitzer also announced that two executives from the insurance conglomerate American International Group (AIG) had already confessed to related criminal charges. But his investigations into AIG may have only scratched the surface. A paper trail stretching back a decade reveals that AIG used offshore shell companies to skirt the law.

The current scam which Spitzer has uncovered works like this: Marsh, an insurance broker, is supposed to find the best insurance policies for its clients from a wide range of companies. Instead it steered the policies to companies such as AIG that agreed to pay kickbacks. It solicited phony competitive bids for insurance contracts to deceive customers into thinking there was real competition for their business. Marsh made $800 million on kickbacks in 2003 alone – over half its $1.5 billion profit. With a 40 percent share of the global insurance brokerage market, its fraud drove up prices for everyone.

AIG announced that its senior managers were not aware of the bid-rigging. But the family ties of three of the alleged co-conspirators make the claim hard to believe. The head of the Marsh brokerage was Jeffrey Greenberg, 53; the head of AIG is his father Maurice (Hank) Greenberg. A former AIG staffer told CorpWatch, "Greenberg is legendary as a hands-on person. Nothing happens in the company without him dealing with it. He knows the names of the elevator operators."

Another accused collaborator is Hank's other son, Evan, 49 who just happens to run ACE Ltd., another of the companies allegedly involved in the complex scam.

Jeffrey has resigned in disgrace, but so far the family patriarch is holding onto his executive seat. During a conference call with investors, he said, "I have never discussed business with Jeff or with Evan. ... We get together on a very rare occasion. But we never discuss business. We play tennis occasionally." Still, fallout from the scandal has already cut $24 billion from AIG's $150 billion market capitalization and knocked 12 percent off its stock price.

Lax Regulators Give AIG a Free Pass

At Spitzer's press conference, New York State Insurance Superintendent Gregory V. Serio said: "This has gone from an inquiry into failure to disclose compensation to an active investigation of bid rigging and improper steering. This certainly proves the adage that where there is smoke, there is fire." But AIG's comportment could not have been much of a surprise to Serio, who was New York's deputy insurance superintendent in the late 1990s. That's when New York and three other states gave the powerful company a pass on some very questionable practices. If they had paid attention to the smoke then, perhaps this billion-dollar fire wouldn't have ignited.

In the late 1990s, four state insurance departments New York, Delaware, Pennsylvania and California were aware that AIG was moving debt off its books via the use of an offshore shell company it secretly set up and controlled. But despite clear evidence of wrongdoing, no sanctions were ordered.

Insurance companies normally insure themselves by laying off part of their risk to reinsurance companies, so if a claim comes in above a certain amount, the reinsurance company will pay it. Insurance companies use re-insurers to reduce some of their risk and because state laws require them to keep a certain amount of capital available to pay out claims. If they have reinsurance, that amount can drop. If they have enough good reinsurance, they get a credit for that against their losses. The reinsurer, of course, has to be an independent company; the risk isn't reduced if it's just moved to another division of the same company.

In the mid-1980s, two of AIG's reinsurers failed. The bankruptcy liquidators paid creditors, including AIG, over several years but meanwhile the amount owed was liable to show up as unacceptably high levels of debt on the AIG books.

Trevor Jones, an insurance investigator who for 20 years has run Insurance Security Services in London, explained, "Hank [Greenberg] decided to set up Coral Re [a reinsurance company] to move the debts he couldn't claim as assets into this other company ... No other real company would play ball, because you are fiddling the accounts, moving your bad debts off your books."

So AIG went to elaborate lengths to set up a shell company in Barbados, where capital requirements and regulation was minimal compared to the U.S., where American regulators couldn't readily discover AIG's involvement and where, as an added incentive, it could move money out of reach of U.S. taxes. Some high-level corporate executives were persuaded to front for a company into which AIG could "cede" insurance.

Goldman Sachs and Robert Rubin

Coral Re, a Barbados reinsurance company, was launched with a private sale of shares organized by Goldman Sachs, then headed by Robert Rubin, who would become President Clinton's Treasury Secretary and is now chairman of the executive committee of Citigroup. A confidential memorandum, (which Goldman Sachs ordered investors not to copy and to return on demand) told why the company was formed. "AIG's interest in creating the Company is to create a reinsurance facility which will permit its U.S. companies to write more U.S. premiums. For a U.S.-domiciled company, a high level of surplus is required to support insurance premiums in accordance with U.S. statutory requirements. The statutory requirements in Barbados are less restrictive."

A no-risk deal was offered by Goldman Sachs to selected investors who lent their names and credibility in exchange for guaranteed return of $25,125 in the first year and $45,225 each subsequent year. They were L. Donald Horne, chairman of Mennen Company; Charles Locke, chairman of Morton Thiokol; Kenneth Pontikes, former chairman of Comdisco; David Reynolds, chairman of Reynolds Metals; John Richman, former chairman of Kraft; and Samuel Zell, chairman of Itel Corporation. They didn't have to put up any money: they got financing from Sanwa Bank of Chicago secured by the Coral Re shares, a guarantee of enough dividends from Coral Re to cover the interest, and agreement they could hand off the shares and debt whenever they chose.

Rubin buddy Bill Clinton, then governor of Arkansas, may also have thrown his weight behind the project. The Arkansas Finance and Development Authority (ADFA), headed by a man who went to work in the Clinton White House, became lead investor, although state law banned it from buying stocks.

The new company was not a legitimately independent business. For investors, there was no money at risk; the board of directors never made a decision; and Coral Re had no office of its own but was managed by American International Management, a subsidiary of none other than AIG.

Eventually, the scheme unraveled. State insurance examiners look at company books every five years. "In 1992, Delaware examiners auditing Lexington [an AIG subsidiary] smelled a rat," a former regulator from one of the four investigating insurance departments told CorpWatch.

AIG initially refused to provide Coral Re documents to the examiners, and it took them a couple of years to nail the connection. When AIG finally supplied Coral Re's financial papers, the regulator was incredulous. He said, "The books were definitely cooked. I remember three years in a row [in the early 1990s] their pretax income came out to an even number. It was like somebody said 'show $250,000 pretax income.' I've been looking at financials for 35 years and have never seen pretax numbers come out even." The figures were 1987 $1.1 million; 1988 $1.555 million; 1989 $0.8 million.

The Regulatory Record

The Delaware report on AIG, finally issued in October 1996, suggested that Coral Re "may be an affiliate" of AIG. It described how AIG played an integral role in the creation of Coral Re; that the purpose for creating Coral Re was to reinsure risks for AIG companies; that virtually all of Coral Re's business originated from AIG units; and that Coral Re was managed by AIG subsidiary American International Management Co. Ltd. It concluded that the arrangement with Coral Re did not transfer risk, and it had to come off the books.

AIG insisted, in the face of overwhelming evidence, that Coral was independent. The regulator told CorpWatch, "It's clear AIG formed that company. They denied it, because if they owned it, it would be affiliated and they would not be able to take credit for reinsurance. Delaware should have suspended them, but did nothing."

New York and Pennsylvania also investigated, had similar experiences with AIG stonewalling, and reached similar conclusions.

The New York report on three AIG companies said the deal with Coral Re was "window dressing" and didn't "transfer underwriting risk," so AIG shouldn't take credit for it. New York described an accounting slight-of-hand which mirrors what indicted Enron officials did to change loans into earnings. In 1991, AIG insurance companies borrowed $190 million from an affiliate, AIG Funding Inc., but reported the loan as a sale to AIG Funding of their accounts receivable, i.e., the money owed them by Coral Re. Presto, a loan became revenue, and balance sheets showed no loss.

The Pennsylvania insurance department investigation also concluded, "There was no transfer of insurance risk."

The four states – Delaware, New York, Pennsylvania, and California – met in 1996 to coordinate their reports on AIG.

The Securities & Exchange Commission (SEC) also looked into the matter. The regulator said, "The SEC came to me; they wanted to know if we were going to rule they were affiliated. Then there would be penalties, because if AIG was affiliated with Coral and they hadn't disclosed it in 10k filings, that's a 'no-no' with the SEC."

It also would have been an issue for the Internal Revenue Service. If Coral Re was an AIG affiliate, it would have to pay taxes on its income. If it was "independent," that money came tax-free.

"But nobody had any guts; they wanted Delaware to say Coral Re is affiliated and use that to go after them. None of the agencies had the gumption to do it on their own," said the regulator. And AIG wasn't shy about its tactics. He said, "In 1996, AIG hired a private investigator to check into the background of the chief examiner in Delaware. The investigator actually told the department he was looking at the chief examiner at the request of AIG. It was intimidation. And Delaware officials allowed it to happen."

A Delaware examiner told the regulator. "When you do something with this company, they make it so difficult for you, so people just let it go."

Delaware reported what it found but didn't rule the companies were affiliated. "That would have meant hearings, endless hassles," the regulator concluded. And real punishment for AIG.

The New York Insurance Department said the violations of New York law were not serious enough to warrant a fine. Besides, an official said, it was hard to prove "control" of an offshore company – which, of course, is the reason for going offshore. The delays and stonewalling allowed AIG to use Coral Re for more than eight years. By the time it had to shut it down, it didn't need it anymore.

Things have gotten tougher for the company since the Enron affair caused the SEC to look more serious about corporate corruption. In the current climate, these regulatory agency findings would probably prompt investigations by state Attorneys General, perhaps they still could. Last year, AIG paid a $10 million fine to the SEC for helping the Indiana wireless telecom company Brightpoint commit accounting fraud. AIG marketed a "non-traditional" insurance product aimed at "income statement smoothing," spreading a loss over future reporting periods. The SEC called such financial products "just vehicles to commit financial fraud" and said the insurance giant refused to give it subpoenaed documents, compounding its misconduct. The U.S. Justice department is currently investigating but has yet to file criminal charges.

Business Insurance, a trade publication, editorialized on the timidity of regulators for giving AIG "little more than a tap on the wrist" in exchange for "a promise not to do it again." "The message delivered here is that a company of AIG's power and complexity can afford to be openly hostile to state oversight and, in the end, have things pretty much its own way. That is a disheartening message, indeed," wrote the magazine's editors.

AIG spokesman Andrew Silver told CorpWatch that "AIG was not involved in the offer and sale of Coral Re's shares. That was done by Goldman Sachs, which approached potential investors with which it had relationships. AIG did not control or have an equity interest in Coral Re. The issue raised by the regulators was whether these transactions should be booked as a deposit account or an insurance account. The regulators concluded that real risk was transferred and that these transactions should be accounted for as insurance. AIG insurance subsidiaries eventually commuted their Coral Re reinsurance."

Goldman Sachs failed to respond to inquiries about its role in setting up Coral Re.

Asked how AIG could say the regulators concluded that real risk was transferred when Pennsylvania stated clearly, "There was no transfer of insurance risk," Silver declined to reply.

The Case That Kerry Cracked

One gets an eerie sense of déjà vu watching John Kerry battle the Bush clan. He’s done it once before, against the old man, President Bush’s father, though many voters have probably forgotten. That battle involved the first Bush administration’s attempt to put the lid on an investigation that connected a worldwide criminal bank to narco-traffickers, terrorists, and to Middle East money men who helped the Bush family make piles of cash. Those links connect to people now on the U.S. post-9/11 terrorist list.

In the late 1980s and early 1990s, Kerry fought to expose an international criminal bank, BCCI — the Bank of Credit and Commerce International. The bank was run by a Pakistani, working with Persian Gulf managers who operated through a network of secret offshore centers to hide their operations from the world’s bank examiners. They weren’t, however, hidden from the CIA, which not only knew what the bank was doing, but used the bank to funnel cash through its Islamabad and other Pakistani branches to CIA client Osama bin Laden, part of the $2 billion Washington sent to the Afghani mujahideen. The operation gave bin Laden an education in black finance. CIA director William Casey himself met with BCCI founder Agha Hasan Abedi. The CIA also paid its own agents through the bank and used BCCI to fund black ops all over the world.

Kerry took on not only the Bush clan and its friends, but the CIA, and members of Congress on both sides of the aisle. This is not irrelevant history, but important to examine, because it reveals a lot about Kerry and how he might respond to terrorism or other global criminal enterprises. Kerry’s record shows that he took on powerful political and bureaucratic interests, was a tenacious investigator, and savvy about international crime and money flows, which is crucial in the fight against terrorism.

Against the opposition of powerful Republicans and Democrats, and in light of a lack of cooperation from a very politicized Justice Department and stonewalling by the CIA, Kerry worked with investigators and ran Senate hearings that exposed the bank’s shadowy multi-billion-dollar scams and precipitated its end.

The Bank and the CIA

BCCI was founded in 1972 by Pakistani banker Agha Hasan Abedi and initially capitalized by Sheik Zayed of Abu Dhabi. It incorporated in the bank secrecy jurisdiction of Luxembourg but operated out of London. During two decades, it expanded to 73 countries worldwide, with nearly a million depositors with accounts totaling more than $10 billion. When the bank was finally shut down nearly 20 years later, between $9.5 and $15 billion — the analysts differ — had been lost or stolen, making this the biggest bank fraud in the world.

The bank had carved out a niche: it was the banker to the bad guys. One U.S. indictment would say that money laundering was BCCI's "corporate strategy." BCCI survived for two decades because it floated on the waves of the offshore system, with key booking operations in Luxembourg and the Cayman Islands, where bank regulators couldn’t go. Its Grand Cayman "bank-within-a-bank" was just a post office box. The bank also had friends in high places in the U.S. and, of course, the wink and nod of the CIA and the Reagan-Bush administration, which depended on its services. Over the years, BCCI was involved with:

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Kerry Family Values

John Kerry's sister Peggy Kerry has been a political and social activist for almost 40 years. From the anti-apartheid movement in England to the anti-Vietnam War movement in the U.S., she has been involved in cutting-edge foreign policy political movements. Peggy was involved in the United Farmworkers' grape boycott and later in promoting social welfare policies. She persuaded Convention Chair Bill Richardson, when he was Bill Clinton's ambassador to the UN, to invent a new job – liaison to the world's non-governmental organizations – a job that she still holds.

Both you and your brother John were social activists in your youths. We know about his activism in the Vietnam Veterans Against the War. I'd like to talk about your social activism. First, what is it about your family background, your family's beliefs and values that led you and your brother to take an active part in political and social causes?

It's my mother. My mother was an incredible person dedicated to public service. She would have been a nurse if she had finished her nursing degree which she started to get in France before the war, but she would up evacuating. She actually escaped with her sister and brother in law and an English friend on bicycle from Paris (but that's a whole other story), so she didn't finish her nursing degree, but she was a hospital volunteer and a girl scouts leader, a cub scout leader, she was John's den mother. She was an incredible environmentalist, a recycler of newspapers long before it was ever fashionable to do so. People wondered why we had the Washington Post stacked up in our garage in Washington in the 50s. She was a silver-haired legislator in Massachusetts when she was older. Her whole life was one of public service.

What did she tell you and your brother and your other siblings about what your responsibilities were as citizens? How did that affect your values?

It's more do as I do rather than do as I say. She was an example for us.

Can you talk more specifically about the political and social activities you've been involved in through the years, beginning in the 60s, if that's when it began?

Actually, yes. I graduated from college in 1963. I taught English as a foreign language, first in Cambridge, England. I got involved in Cambridge University in the United Nations Association. I became the vice-chair of the Anti-Apartheid Committee, and after Nelson Mandela was jailed, in the late 60s, about a year after he was jailed, we held the first demonstration ever at Cambridge University – it was my first demonstration – to free Nelson Mandela.

When I came back to America in 1967, I got involved in the anti-war movement in Cambridge, Massachusetts and continued my anti-apartheid work. When I moved to New York, I decided to concentrate on working against the Vietnam War. I got involved in the Vietnam Moratorium. I then worked at the ACLU Roger Baldwin Foundation, and later at the New York Civil Liberties Union.

And I got involved in politics. I was a volunteer in the McCarthy campaign, and I learned there was something in New York City called "clubs," and I didn't have to go all the way up to the headquarters in Columbus Circle, where Harold Ickes and Sarah Kovner were, but I could actually volunteer in Sheridan Square at the Village Independent Democrats. [Ickes and Kovner were both at the convention.]

During this time, your job choices were reflective of your political interests. Can you say more specifically what you did in the jobs you just mentioned?

The Roger Baldwin Foundation gave grants to projects around the country. The one that I remember the most was funding the United Farmworkers, and I personally was involved with Gloria Steinem in New York with the United Farmworkers and the boycott of grapes in New York City. [Steinem was at the convention.] Of course it was a much wider boycott, but I was specifically involved with the one in New York City.

Then I recall you went to work representing one of the social work agencies as a legislative rep in Albany. Am I missing a lot in between?

Not really. I took my first leave of absence when I was at the NYCLU to work in a political campaign for Ellie Guggeheimer when she ran for president – I think that's when we met – I worked for her when she ran for president of the City Council on Herman Badillo's team. He ran for mayor and Jay Golden ran for comptroller. [Lucy Komisar was Guggenheimer's press secretary for that 1969 campaign.]

And then you went to work for the social work agency?

In 1979, I went to work for the Community Service Society and I was their lobbyist, mostly at the state level, although we did a little at the city and the federal level. I worked for better housing, better health care, welfare reform, that sort of thing. Actually in those days homelessness had come to hit the front pages, and we worked to get the first state money for homeless programs.

You created a new job at the U.S. Mission to the UN. Can you talk about how you thought of this job and what it involves?

I was a consultant to Planned Parenthood for two UN conferences, in 1994 a conference on population, and in 1995 the conference on women. The UN had outreach to NGOs [non-governmental organizations] and the U.S. mission used to sporadically meet with NGOs. When Ambassador Richardson became the UN ambassador, I lobbied him to create a position to do more outreach to NGOs. It later became a civil service position to which the State Department appointed me and I am now a civil servant and I still do the outreach. There are many NGOs who are interested in following the work of the Economic and Social Council as well as the Security Council at the UN. Under the Economic and Social Council comes the follow-up to the many conferences, from the Women's Conference to the Environmental Conference to the Social Summit and so on. There are a myriad of NGOs who follow up as well as a group of humanitarian and human rights NGOs who follow the work of the Security Council and right now are particularly concerned with the Sudan. I might say that the U.S. government is in the forefront of trying to get the Security Council to take action on the Sudan.

Did you communicate with your brother John through the years about your mutual political and social concerns and activism?

Absolutely. In fact it was when I was working on the Vietnam War Moratorium and John was stationed at the Brooklyn Naval Base that we needed somebody to fly a plane so that one of our speakers, Adam Walinsky, who happened to have been Bobby Kennedy's speechwriter, could get around the state and make all of his speech commitments. And I asked my brother, who'd learned to fly when he was at Yale, to take the day off, and he did, and he and Adam have become – it was the beginning of a long friendship.

John also met Vietnam Veterans Against the War because we happened to share an office with them. And then of course in 1971, because Vietnam veterans who came back to speak out against the war were not being heard, John organized the march in Washington, raised money for it, and spoke at the Senate Foreign Relations Committee for which he became an instant hero for many of us and a Nixon enemy and a White House enemy.

Teresa Heinz Kerry said recently that she had marched against apartheid in the 50s. So she was on the other side of the world, and she was doing what you were doing here.

I was actually marching against apartheid and actually going up with some friends to lobby parliament. I remember one of the other people lobbying parliament at the same time – I can remember exactly what she was wearing – was Vanessa Redgrave. She was lobbying parliament, and she wore, I remember, a bright red suit!

There must be values that Teresa shares: here she comes together with John, and her whole history seems to have inexorably brought her to this place.

She [has] mentioned ... about caring for justice and caring for the rights of people. Caring for them even if you were in a small minority. Yes, I guess it is amazing that we all did seem to have the very same deep values.

Are your other brother and sister, are they activists in the same way, or was this basically a John and Peggy branch?

Oh, no. Diana and Cam – it's a Kerry value system. Cam and Kathy and their daughters do a lot of outreach through their synagogue. [Cameron Kerry's wife Cathy is Jewish, and he converted 21 years ago.]

My sister was the expatriate. She says that she's a recovered expatriate. Until my parents were very sick, my sister lived abroad. She taught high school English, social studies and drama at international schools. She taught for many years in Indonesia, she taught in Thailand, she taught in Iran. She was on the last civilian plane out of Iran.

She has been active in involving Americans who are abroad and care deeply about their country and who want to make sure that America is respected and has the same reputation that Teresa [has spoken of]. What do you think of as the face of America? Do you think of a Peace Corps volunteer?

In your personal life, you married a man, George, who was a social worker. Again, is it about values?

I guess it is. It is indeed. George was a social worker and we met at a coalition to create more single-room occupancy housing. The two ministers who directed it, a Catholic priest and a Lutheran minister, were the people who officiated at our wedding. We were working to create more single-room occupancy housing. George worked for a settlement house in New York.

When did you get married?

In 1984, when John was running for the Senate.

You and George decided to adopt a baby girl [Iris]. Tell me about that and how you chose where you would find this baby girl.

We chose China, and the reason we chose China is that most of the children adopted, at least in Asia, are abandoned and don't know who their parents are. And so many kids from China are adopted in America that we really thought it was wonderful for her – since she would never know who her parents were – that she would have a lot of very close friends who were in a similar situation. So that she would feel that she wasn't alone in not having real parents.

Are you concerned about Iris keeping her Chinese culture as well as growing up American?

Actually, Iris is keeping her Chinese culture. She spoke a little Mandarin when we adopted her. [She was 3.] We sent her to a private Mandarin nursery school, Red Apple Child Development Center. She now goes to the only bilingual public school [in New York City]. They teach Mandarin and English, and the wonderful thing about Shuang Wen is that it is multi-racial. There are kids who are African-American and Caucasian, and that's because the curriculum is so good that people from around the city want their children to go there. And there they are, these African-American and Caucasian kids with the Chinese learning Mandarin. And it's really wonderful.

In all your life experiences, professional, personal, political – are we talking about the Kerry brand of family values?

I think the Kerry brand of family values is an American brand of family values. ... It's standing up for what is so deeply American which is reaching out and helping other people. It's what America has been known for for so long. It's reaching out and helping people who are less well off. It's ingrained in us, and John and I both have found spouses who believe in the same values. I believe it's so important that you find someone to share your life with who has the same deep commitment to the same values.

How Big Business Evades Taxes

Were you stunned by the revelation, days before your taxes were due, that nearly two-thirds of companies operating in America reported owing no taxes from 1996 through 2000? That over 90 percent of large corporations -- with at least $250 million in assets or $50 million in gross receipts -- reported owing taxes of only 5 percent or less?

The law requires firms to pay 35 percent tax on U.S. profits. Had big business complied, corporate income taxes in 2002 would have been $308 billion instead of only an estimated $136 billion. Do you wish you knew the corporate secret?

Is your town or state suffering from service cutbacks because tax revenues are down? Would you like to cut your tax bite from the current 15 to 35 percent to 5 percent or zero? How do corporations do it?

The General Accounting Office report, commissioned by Senators Carl Levin (D-MI) and Byron Dorgan (D-ND) and released April 5, gave a clue to how. It's called "transfer pricing," or improperly shifting income to lower-tax countries.

Firms set up offshore "subsidiaries" which, on their books, perform functions that let them cut onshore taxes. They may sell their own "logo" to the subsidiary and then pay a high price to "rent" it back, deducting "rent" as expense. They may move money to the subsidiary and "borrow" it back, deducting interest payments. If several of their subsidiaries are involved in a deal, the firms may grossly inflate profits assigned to those in offshore tax havens, which levy no or minimal taxes on "profits" claimed there.

The U.S. firm may "trade" with an offshore "shell" it owns -- a phony company set up in a tax haven -- pretending it's buying goods or services at a high price or selling its product low, to create deductions. Because the tax haven keeps owners' names secret, the IRS won't know the company is "trading" with itself.

Professors Simon J. Pak (Penn State University) and John S. Zdanowicz (Florida International University) examined the impact of over-invoiced imports and under-invoiced exports on 2001 U.S. tax revenues. Would you buy multiple vitamins bought from China at $850 a pound, plastic buckets from the Czech Republic for $973 each, tissues from China at $1,874 a pound, a cotton dishtowel from Pakistan for $154, and tweezers from Japan at $4,896 each?

By contrast, U.S. companies, on paper, were getting very little for their exports. If you were in business, would you sell multiple vitamins to Finland at 61 cents a pound, bus and truck tires to Britain for $11.74 each, color video monitors to Pakistan for $21.90, missile and rocket launchers to Israel for $52.03 and prefabricated buildings to Trinidad for $1.20 a unit?

Comparing claimed export and import prices to real world prices, the professors figured the 2001 U.S. tax loss at $53.1 billion.

We all know that Enron cheated investors by using offshore firms to pretend that money it borrowed was money it earned. We later found it also used shells to hide income from the IRS. Enron had 881 offshore subsidiaries: 692 in the Cayman Islands; 119 in the Turks and Caicos; 43 in Mauritius and 8 in Bermuda. Enron had no office in the Cayman's, but Box 1350 there received mail for 500 affiliates. Enron's 1996 through 2000 pretax U.S. profits were $1.8 billion, but it paid no tax in four of those five years. It even got a rebate! Because of fancy paperwork that invented tax losses even while it was boasting of profits to investors, Enron got back $381 million from the IRS.

Bob McIntyre, who heads the Washington-based Citizens for Tax Justice, says that in 1996-2000, Goodyear's profits were $442 million, but it paid no taxes and got a $23-million rebate. Colgate-Palmolive made $1.6 billion and got back $21 million. Other companies that got rebates in 1998 included Texaco, Chevron, PepsiCo, Pfizer, J.P. Morgan, MCI WorldCom, General Motors, Phillips Petroleum and Northrop Grumman. Microsoft, run by the world's richest man, reported $12.3 billion U.S income in 1999 and paid zero federal taxes. In the past two years, Microsoft paid only 1.8 percent on $21.9 billion pretax U.S. profits.

There are some 55 "offshore" zones, including legendary Switzerland; the Caribbean with money-laundries Grand Cayman, Antigua, Aruba and the British Virgin Islands; European favorites Luxembourg, Liechtenstein, Monaco, Austria, Cyprus; and British Channel Islands Jersey, Guernsey, Isle of Man. Many banks in "offshore" centers are subsidiaries of major international banks, including Citibank, Bank of New York and Credit Suisse.

Why does Washington tolerate the offshore tax evasion system? Because powerful people benefit. With President Bush on its board, Harken Energy set up an offshore network that cut its taxes. White House spokesman Dan Bartlett defended Harken for seeking "tax competitiveness," the preferred euphemism. When Vice President Cheney ran Halliburton, it increased its offshore subsidiaries from 9 to at least 44.

Lucy Komisar is a freelance journalist who is writing a book about the offshore bank and corporate secrecy system.

HBO Recycles the Incubator Hoax

Remember the phony story about the Kuwaiti woman who testified in 1990 that Iraqi soldiers were throwing Kuwaiti babies out of incubators? It was later exposed as a public relations fabrication -- but now it's back on HBO.

"Live From Baghdad," made by HBO, purports to tell how CNN covered the 1991 Gulf war. It is based on a memoir by Robert Wiener, then a CNN field producer, who wrote the script with three others. Airing Dec. 7, this "fiction" based on "fact" propagates the famous Kuwaiti government incubator hoax. As the United States stands at the brink of war with Iraq, such fabrications may invite other, more dangerous hoaxes.

Midway through the movie, an actor playing CNN anchor Bernard Shaw informs viewers that "more allegations of Iraqi brutality emerged today as Kuwaiti refugees testified before a congressional committee." He segues to a tearful young woman declaring, "They took the babies out of the incubators, took the incubators and left the babies to die on the cold floor!" It is a real clip of the 15-year-old Kuwaiti, identified at the time as Nayirah "to protect her from reprisals," who in August 1990 said those words to an ersatz "congressional committee" operating out of Hill and Knowlton headquarters.

The intrepid CNN crew (featuring Michael Keaton as Wiener and Helena Bonham Carter as his associate producer, Ingrid Formanek) goes off to Kuwait with their Iraqi handler to investigate. They manage to interview one hospital director who nervously asserts, "All the incubators are here and none of our babies are missing."

CNN correspondent: You are aware of the allegations, doctor?

Doctor: I have heard these stories.

Formanek (sotto voce): He's scared.

Wiener (sotto voce): Yeah, this is bad.

Doctor: I can tell you, nothing has happened at this hospital (pause) that I know.

CNN: But in other hospitals?

Doctor: I cannot tell about other hospitals.

Iraqi handler: Finish! Finish! We go now!

Formanek: To the other hospitals?

Handler: No, back to Baghdad!

Wiener: Hey, hey, that was part of the deal!

Handler: Not this story.

The implication is that the Iraqis are hiding the unspeakable crime that occurred in hospitals the reporters couldn't see. Except that it didn't. The incubator story was a fabrication, first invented for the London Daily Telegraph by an exiled Kuwaiti housing minister, picked up by Reuters, and then propagated by the international PR firm Hill and Knowlton, which received $10.7 million from the Kuwaiti government for this and other services.

The October 1990 hearing was held by California Democrat Tom Lantos and Illinois Republican John Porter, co-chairs of the self-styled "Human Rights Foundation," lodged in Hill and Knowlton's Washington, D.C., office. Craig Fuller, chief of staff for George Bush when he was vice-president, ran the PR firm. Nayirah was coached by the firm's vice-president, Lauri Fitz-Pegado, who later got a job in the Clinton Commerce Department.

The story was repeated by the Americans to the U.N. Security Council and by President George Bush in a January 1991 speech before he ordered the bombing of Iraq.

The incubator tale was a lie from start to finish -- exposed after the war by ABC's John Martin and denounced by the respected rights group Middle East Watch as "a complete hoax." Nayirah was a member of the Kuwaiti Royal Family, daughter of Kuwait's Ambassador to Washington.

A recent "Live From Baghdad" screening, sponsored by HBO and the Council on Foreign Relations, included a panel discussion. Present were: Wiener; moderator Garrick Utley (formerly with NBC, now with CNN); Deborah Amos, correspondent with ABC News; Tom Johnson, former president of CNN; and Eason Jordan, chief news executive at CNN. None of the eminent journalists mentioned the incubator story.

At question time, two people in the audience shot up their hands to ask why the film had perpetrated the phony incubator story. Jordan evaded the first question by relating how Saddam Hussein had ordered a Kuwaiti oppositionist cut up in pieces. A follow-up query pointed out that Jordan hadn't answered the question, and that the film perpetuated rather than corrected the phony incubator story. The film ends with text over the close telling what happened to some of the characters; surely, it was suggested, the film could easily run lines telling the truth about the hoax.

Some on the panel agreed that was a good idea, but Jordan of CNN explained that they had nothing to do with the movie. (He might easily phone the suggestion to HBO, which, like CNN, is a Time-Warner company.) Wiener, the ex-CNN producer who co-authored the script, said nothing.

A few days after the screening, Wiener was interviewed on CNN and, disputing that the network had promoted Iraqi propaganda, pointed out the trip to investigate the incubator charge. He admitted that the incubator allegations "turned out to be false" because those accusations were made by the daughter of the Kuwaiti minister of information and were never proven. "That was my regret in one instance," he said.

He didn't regret it enough to tell the truth in the film.

Global Greenwashers

Along with environmentalists and community activists, big business has descended upon Johannesburg, South Africa, to tout its own "green" growth strategies in the summit on Earth-friendly development. But if the environmental record of one key corporate player is any indication, the overtures are pure "greenwash."

Stephan Schmidheiny, a Swiss, has fought environmental regulation of business since the 1992 Earth Summit in Rio de Janeiro, when he founded the Business Council for Sustainable Development, a coalition of 160 international companies including AOL Time Warner, AT&T, Bayer, BP, Coca-Cola and Dow Chemical.

The council, attending this week's World Summit on Sustainable Development in Johannesburg, insists on voluntary self-regulation, a strategy supported by the Bush administration.

But the Schmidheiny family-controlled international cement conglomerate Holcim has done more than fail at self-regulation. Even while its U.S. plants have been fined repeatedly for environmental violations, it has worked to weaken restrictions on cement production emissions internationally.

Holcim (formerly Holderbank Financiere Glaris Ltd., based in Switzerland) owns 15 U.S. cement factories that do $1.2 billion in business per year. In August, Holcim's Midlothian, TX, plant was fined $223,125 by state regulators for violating limits on pollution, including toxic carbon monoxide, lung-damaging soot and smog-causing compounds.

A 1993 Environmental Protection Agency study reported that people living near cement plants may inhale harmful airborne dioxins, arsenic, cadmium, chromium, thallium, and lead at levels that might cause cancer or other diseases. Such emissions are especially dangerous to children, the elderly and people with heart and lung conditions.

Holcim had promised in 1997 that despite the expansion of the Texas plant, new technology would result in cleaner air. It was granted permits to double production.

But emissions went up, not down. Residents near the plant reported a high incidence of cancer as well as illnesses among farm animals. The pollution affected the entire Dallas-Ft. Worth region.

Local regulators said the plant had not installed equipment promised in the permit application, made changes that increased air pollution, and then lied in emissions reports for nine years.

They called Holcim a "high priority violator/significant non-complier."

Now, St. Lawrence Cement, a Canadian company controlled by Holcim, is seeking permission to build what may be the largest cement factory in the United States on the Hudson River in New York. Environmentalists say the plant's 404-foot stack would discharge respiratory disease-causing soot over a large part of the Hudson Valley.

The Schmidheiny family's concrete factories have a long history of environmental violations:

• In 1993, the Environmental Protection Agency (EPA) fined the Holnam Holly Hill Plant in South Carolina $838,850 for failing to comply with air emission standards. (Holcim's U.S. operation formerly was called Holnam, for Holderbank North America.)

• Also in 1993, the Texas Air Control Board fined the Midlothian plant $135,000 after discovering emissions were about 50 percent higher than allowable.

• In 1994, the company's Clarksville, Missouri, plant, which began burning hazardous waste in 1986, paid a $100,874 fine for violations ranging from failing to analyze waste to keeping waste in open containers.

• In 1999, Iowa state officials found that the company failed to report excess emissions.

• Also in 1999, the Michigan Department of Environmental Quality fined the Holnam plant in Dundee $576,500 for emissions 7.5 times the allowable limits.

• In 2000, the company was fined because a coal mill and dryer stack at its LaPorte, Colorado, plant was releasing twice as much pollution as permitted. Its Florence plant had failed air-pollution tests three times since 1996.

Holcim spokesman Tom Chizmadia the violations were not "willful" and that the company's "intent is to comply with all standards." Asked about the violations on record, Chizmadia said, "limits are set with an intention of protecting environment and health, and those limits are set very low."

Cement production air pollution became more dangerous after the EPA banned certain hazardous waste from landfills in 1985 and allowed it to be burned in cement kilns. Marti Sinclair, co-chair of environmental quality strategy for the Sierra Club, said that to avoid problems in cities with political influence and access to the media, Congress set a low population limit on places where waste could be burned. "Holnam went to the Deep South and started burning hazardous waste in Black communities in Alabama, Mississippi and South Carolina," she said.

Environmentalists say that the burning process releases into the air deadly dioxins and PCBs, carcinogenic chemicals that may cause birth defects, including mental and physical retardation.

The Business Council for Sustainable Development has picked the Johannesburg summit to argue its self-regulation position in a new book, "Walking the Talk," by Schmidheiny, Charles O. Holliday Jr., CEO of DuPont, and Philip Watts, chairman of the Royal Dutch Shell Group. Set for launching at the summit, the book maintains that multinationals have kept the commitments made in Rio.

Lucy Komisar is a freelance investigative reporter based in New York City.

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