Confessions of a banker
Following the money trail through
the offshore operations of the world's biggest bank
by Lucy Komisar
New Internationalist magazine,
You may have read how, in 2001, Argentina
defaulted on its national bonds and its economy went into meltdown.
What you might not have heard is that - according to some Argentine
financial critics - their government's inability to pay its debts
resulted from massive evasion of taxes. Tax cheating and corruption
meant that the flight of capital to secret offshore havens over
the previous decade had amounted to billions of dollars. By 2002,
the Investigative Commission on Capital Flight set up by Argentina's
House of Deputies estimated that the amount of Argentine assets
held abroad had reached $127 billion - a figure that approached
the country's total recorded foreign debt. Some represented legitimate
investments, but billions were illicit capital flows.
That year, TV journalist Maximiliano Montenegro
caught a Citibank official in Argentina's capital, Buenos Aires,
offering to help a 'businessman' cheat on taxes. Montenegro had
sent in an actor to see what would happen if he told a Citibanker
that he was an entrepreneur whose wife had just sold a company
and didn't want to report all the profits. The Citibanker, Mr
Mariano, was captured on video enthusiastically talking about
how he could help the couple evade taxes: 'Eighty-five per cent
of clients of the Private Bank have an offshore portfolio. Why'
Because they are fed up with paying [taxes].' The banker described
how he would send the money via a wire in a false name to a transit
account at Citibank New York and move it from there into an International
Personal Banking account. As a non-resident, the client wouldn't
need to pay taxes on foreign soil. And back in Argentina, authorities
would neither know about this account nor the money safely hidden
Not long after the video was aired, Citibank
fired Mr Mariano and - alleges the journalist Montenegro - gave
him a lot of money to keep quiet. The corporation also decided
to transfer its Argentine private banking customers to Chile and
Cooking the hooks
Citigroup is the largest financial services
conglomerate in the world. It operates in 100 countries. It has
$1 trillion in assets. In 2005 it had $120 billion in revenues
and reported nearly $25 billion in net income.
Some of its revenues derive from questionable
sources. For instance, last year Citigroup agreed to pay $2 billion
to investor victims of the Enron collapse. The plaintiffs, led
by the University of California, accused the company of helping
the energy company cook the books. Citigroup had in 1993 set up
a Grand Cayman shell company that pretended to buy future deliveries
of gas from Enron. In practice, this allowed Citigroup to make
loans totalling $4.8 billion to Enron through the shell company:
indebtedness that Enron could keep off its books in order to keep
stock analysts off its back.
Citigroup is also being sued by the trustees
of Parrnalat, the Italian food company that went bankrupt after
massive accounting fraud. One of its banks set up a Grand Cayman
shell company aptly
named 'Buconero' (black hole) to help
Parmalat executives fake their balance sheets and hide their true
The common denominator in these accounting
frauds was Citigroup's use of the offshore system of tax havens,
whose chief financial product is bank and corporate secrecy. These
offshore centres protect their clients from the curiosity of their
countries' law enforcers and tax collectors. They even provide
sham 'directors' for the shell companies that are set up to 'own'
secret accounts. There are more than 70 offshore centres that
hold the money of other countries' citizens. Citigroup has subsidiaries
in 17 of them.
Tax havens are used widely by business,
industry and very rich individuals. This article focuses solely
on Citibank and its operations in Spain. This is because I've
been given exclusive access to inside information about Citibank
Spain. It hasn't been published before. Indeed, were it not for
a disgruntled Citibank executive who sent me a stack of insider
documents after he resigned, the story would still be a secret.
Citigroup, like many banks, offer a range
of offshore accounts to their customers, CitiGold International
Personal Banking (IPB) allows the moderately rich in Spain to
hold hundreds of thousands of dollars in its banks outside Spain.
While CitiGold IPB is used for legitimate purposes, the Argentine
'entrepreneur' described above used it illegitimately to evade
The very rich, with at least $1 million,
but more like $5 million, are invited to open accounts in Citibank
Spain's Private Bank, which moves clients' money offshore to other
Citibank Private Banks or investments.
In this age of computers, the 'movement'
of money offshore is often just an illusion. An account officer
with a computer in Madrid, or London, or New York can manage clients'
money in a place ostensibly 'offshore'. The cash doesn't really
exist there; it's all a matter of allocating it to a virtual 'place'
in the bank's computerized accounts. This is the nature of modern
banking. But it makes it possible for the bank at home to avoid
keeping account records so that there is nothing in writing that
can be used by law enforcers to implicate tax cheaters. It also
offers banks at home a way of not reporting as income all the
commissions they make from offshore accounts - and therefore paying
no tax on these amounts. Is that how Citibank Spain's Private
Bank is operating? Because if it is, then it's illegal.
It's difficult to establish the truth.
There is no assessable paper trail. But information contained
in documents sent to me by a whistleblower means that it's time
to ask some questions... and closely investigate the responses.
That information comes from memos written
in 2001 by José-Miguel Alfayate, reputed then to be Citibank
Spain Private Bank's most successful account salesperson and manager.
According to an official in the bank's human resources department,
the bank reneged on severance payments that it had previously
agreed to pay to Alfayate around the time that he was about to
leave. The official said that Alfayate became angry. So he
wrote several memos that ostensibly provided
departing advice to his colleagues, but which also subtly laid
out how Citibank may be violating the law. These memos apparently
encouraged the bank to pay Alfayate his previously negotiated
One memo - addressed to Javier Herreros
de Tejada, one of the managers of the Private Bank - describes
how his aim was to establish a strategy 'with respect to the offshore
business booked in jersey and Geneva, but obtained and overseen
for many years by bankers located in Spain.' In other words, the
business that Alfayate is discussing was officially located offshore,
but had a continuing relationship to bankers in Spain.
The Alfayate memo says: 'For a long time,
the growth of offshore business has depended to an extraordinarily
high degree on bankers located in Spain.' He says that he understands
and agrees with the idea that the bank should 'take extreme measures
to guarantee the total opacity [meaning lack of transparency]
of said business from the point of view of the client as much
as the bank.'
He writes with enthusiasm that offshore
accounts in the past, present and future would be more profitable
than onshore accounts as they reported twice the profits. Outlining
the reasons why, he explains that customers can buy bank products
in tax havens that for tax reasons could not be offered onshore.
These descriptions seem to be a reference to the main by-product
of all tax havens: the ability for customers to For a avoid paying
taxes. As for the profits that try Alfayate refers to, he recommends
that 'due to the importance of the high profit of these accounts,
I consider that ... 50 per cent of the profits of these accounts
should be included [for Spain] via MIS.'
MIS stands for Management Information
System. It's the bank's internal accounting system. Citibank used
its MIS in a rather creative way 30 years ago when its offices
in dozens of countries (both in Europe and in developing countries
such as the Philippines, India and Mexico) cheated on the tax
liability from their currency trading. Profits made from currency
trading by the Citibank offices in higher-tax countries - including
the UK, France and Germany - were recorded as if they had been
'booked,' or ordered, by employees in offshore Nassau, the Bahamas.
But there were no Citibank currency traders in Nassau. A second
set of books - Citibank's MIS - recorded the true situation. A
whistleblower stationed in Citibank Paris informed the US Securities
and Exchange Commission (SEC) of the scam, which the SEC investigated
for more than a year. There was also a congressional inquiry.
Citibank had to pay millions of dollars in back taxes to some
of the European countries it had cheated. (Interestingly the SEC
didn't document cases in the developing world, so these countries
were unable to make a claim for back taxes.) The scandal made
headlines around the world.
Alfayate's memos beg the question - has
Citibank Spain been pulling the same trick again Is it possible
that profits earned by the Spanish bank from the offshore accounts
are properly allocated to the bank, via the internal 4 0%, at'
\MIS, but are not recorded in the books available to Spanish tax
Keeping up appearances
As if to keep up the pretence that this
'offshore' money has no important connection to 'onshore', Alfayate's
memo says that he wants to avoid communication by existing clients
with the Private Bank in Spain. He recommends assigning accounts
in such a way that clients communicate with Citibank in Switzerland
or Jersey: only offshore interlocutors should receive clients'
communications. He notes that some of his accounts had a 'fantastic
relationship' with their banker in Switzerland. With some satisfaction
he points out that it was 'impossible to detect any kind of anomaly
But even though Alfayate favours cutting
offshore clients' communications with Spanish bankers, he makes
it clear that internally it should be recognized that it's Spanish
bankers like him who generated the profit: 'With respect to the
acknowledgment of revenue, of course it is necessary to maintain
it at 100 per cent since they are accounts that are sought out,
secured and overseen for many years by the banker in question.
To break this concept would lead to causing grave damage to the
bankers since the present situation is nothing more than the shining
achievement of [their] work following the norms and strategies
established by the bank many years ago.'
Knowing the background to Alfayate's situation
and these memos, I wanted to know if Citigroup had a logical explanation
for all this. Their responses were limited. I sent the documents
that I received to top Citigroup officials and asked for their
comments, but they declined to speak. At the invitation of Citibank
public relations officers, I had a preliminary conversation in
New York with a lawyer representing Citibank Spain, but - at Citibank
request - that discussion was 'off the record' and so it cannot
be quoted. However the lawyer provided me with no answers to the
questions raised in this article.
Alfayate also refused to speak with me,
directing me instead to the corporation's public affairs department.
Citigroup's public affairs officer in Madrid is Gabriela Sebastian
de Erice. She said that I should feel free to send questions in
writing. But when I did, she said that agreeing to receive the
questions didn't mean that she would answer them. After declining
an opportunity to register objections or make corrections to specific
items in the text, she instead sent a declaration: 'We operate
a wide range of businesses in 100 countries, and in each of our
businesses we have strict policies and procedures in place to
prevent any unlawful or inappropriate activities. Our customers
come to us for the quality of our products, service and advice,
our global presence and commitment to our customers and communities.
Suggestions that our businesses are based on inappropriate activities
are wrong and irresponsible.'
Are such suggestions and questions wrong
and irresponsible The only, way really to judge is to examine
the books of Citibank Spain and its internal MIS and see if it
is properly reporting profits that Alfayate suggests are being
made from work done by bankers in Spain. I don't have access to
those books. Spanish authorities do. They should examine the books
Balancing the books
Companies pay taxes in the countries where
their subsidiaries make profits. However individuals must pay
taxes where they are resident no matter where income is earned.
And the facilitation by banks of offshore accounts for their clients
has led to massive tax evasion by the rich. In the late 1990s
European Union (EU) law and policy makers started talking about
an accord to end tax evasion by citizens who are not reporting
income from accounts they hold in other countries. This accord
would include the accounts that Citibank Spain set up for its
clients in jersey, Luxembourg and other offshore centres.
The first proposal was to implement a
withholding tax on interest paid to European citizens holding
bank accounts in participating countries. Opposition came from
Britain. The second alternative -
eventually adopted - allows participating
countries to choose either to institute the withholding tax and
send 75 per cent to depositors' home countries, or
to exchange information with other countries
about interest payments made to their citizens. The accord extends
to five non-EU European countries and ten Channel Islands and
Caribbean tax havens. Most pay a withholding tax; a few share
information, The US committed to exchanging information on request,
but not to automatic exchange of information or a withholding
tax. Canada was not invited to be part of the process.
The EU Savings Directive came into effect
in July 2005 and EU countries this year began receiving information
about their citizens' accounts abroad. Switzerland, for example,
reported that Spanish residents have at a minimum $432.6 million
in Swiss bank accounts alone. They also have deposits of $5.2
billion in fiduciary accounts: money invested in the name of Swiss
banks (including the Swiss subsidiaries of Citibank) on behalf
of Spanish clients, [This is just part of the picture. Although
Spanish residents are required to report their accounts abroad,
the very rich still hide their money in shell companies that are
registered offshore so as to cover up the account owners' citizenship
Citibank Switzerland, of course, would
not be the only haven for unreported Spanish wealth. The story
is no doubt repeated worldwide. Figures provided by the vTax Justice
Network show that the result is a potentially mind-boggling shortfall
in taxes hidden from public view. International banking and investment
statistics show that the ultra-rich have $11.5 trillion in assets
offshore. The income from these assets alone would earn $860 billion.
If none of this was declared, the unpaid tax could be as much
as $255 billion a year - much more than the estimated $195 billion
needed to halve world poverty in a decade. In these terms, tax
justice is not just some concept that may make entertaining dinner
conversation amongst progressive accountants. If properly targeted,
it has the very real potential of starting to redress the massive
imbalance between rich and poor around the world, Lucy Komisar
is a New York journalist who is writing a book about how a worldwide
secret banking system can threaten global welfare. She is a member
of the international steering committee of the TaxJustice Network,
Write to her at email@example.com