by Lucy Komisar
In These Times magazine, April 2002
In the tax haven of Luxembourg, a little-known outfit called
Clearstream handles billions of dollars a year in stock and bond
transfers for banks, investment companies and multinational corporations.
But a former top official of this "clearinghouse" says
Clearstream operates a secret bookkeeping system that allows its
clients to hide the money that moves through their accounts.
In these days of global markets, individuals and companies
may be buying stocks, bonds or derivatives from a seller who is
halfway across the world. Clearinghouses like Clearstream keep
track of the "paperwork" for the transactions. Banks
with accounts in the clearinghouse use a debit and credit system
and, at the end of the day, the accounts (minus "handling
fees," of course) are totaled up. The clearinghouse doesn't
actually send money anywhere, it just debits and credits its members'
accounts. It's all very efficient. But the money involved is massive.
Clearstream handles more than 80 million transactions a year,
and claims to have securities on deposit valued at $6.5 trillion.
It's also an excellent mechanism for laundering drug money
or hiding income from the tax collector. Banks are supposed to
be subject to local government oversight. But many of Clearstream's
members have real or "virtual" subsidiaries in offshore
tax havens, where records are secret and investigators can't trace
transactions. And Clearstream which keeps the central records
of financial trades, doesn't get even the cursory regulation that
applies to offshore banks. On top of that, it deliberately has
put in place a system to hide many of its clients' transactions
from any authorities who might come looking.
According to former insiders:
$ Clearstream has a double system of accounting, with secret,
non-published accounts that banks and big corporations use to
make transfers they don't want listed on the official books.
$ Though it is legally limited to dealing with financial institutions,
Clearstream gives secret accounts to multinational corporations
so they can move stocks and money free from outside scrutiny.
$ Clearstream carried an account for a notoriously criminal
Russian bank for several years after the bank had officially "collapsed,"
and clearinghouse accounts camouflaged the destinations of transfers
to Colombian banks.
$ Clearstream operates a computer program that erases the
traces of trades on request from its members.
$ Clearstream was used to try to hide a dubious arms deal
between French authorities and the Taiwanese military.
Many of these charges were first made in a controversial book
called 'Revelation$', written by Denis Robert, a French journalist,
and Ernest Backes, a former top official at the clearinghouse
who helped design and install the computer system that facilitated
the undisclosed accounts. The book's impact was explosive. Six
European judges called it "the black box" of illicit
international financial flows. Top Clearstream officials were
fired. The scandal made headlines in big European newspapers;
TV networks broadcast specials; the French National Assembly's
financial crimes committee held a hearing. Luxembourg authorities
ordered an investigation, and then they effected a cover-up. Yet
''Revelation$'' remains unpublished and relatively unknown in
the United States.
A bearded, heavyset man in his mid-fifties, Backes spoke with
In These Times in Neuchatel, Switzerland, where he'd gone to attend
a conference on international crime, and explained how he'd started
fighting "organized crime in banking."
Ernest Backes was born in 1946 in Trier, Germany. (As he likes
to joke, "There were two important people born in Trier;
the other is Karl Marx.") His father was a Luxembourg metal
worker, his mother a German nurse. From 14, he worked on an assembly
line to pay for school and joined the Young Catholic Workers.
After a job in the Luxembourg civil service, he was hired in 1971
by Clearstream's predecessor Cedel (short for "central delivery"
office), set up the year before by a consortium of 66 international
banks. Backes helped design and install Cedel's computerized accounting
system in the '70s.
Cedel and its main competitor, Brussels-based Euroclear, were
started to manage transfers of "eurodollars," U.S. currency
kept in banks outside the United States. According to Barbara
Garson's book Money Makes the World Go Around, eurodollars were
invented in the '50s by the Chinese and the Soviets so they would
not have to put their assets in banks where the U.S. government
could seize them. But others saw value in eurodollars, and they
began to be traded for other currencies. Some banks attracted
eurodollars with higher interest than was being paid in America,
and U.S. corporations and individuals began using the accounts
to avoid laws on domestic banks. The euromoney market was born.
(By the '90s, the Federal Reserve estimated that about two-thirds
of U.S. currency was held abroad as eurodollars.)
Cedel and Euroclear eventually expanded into handling transfers
of stock titles and other financial instruments. Their clients
needed a system that would guarantee the creditworthiness of their
trading partners and keep records of the trades. The clearinghouses
provided speed, discretion, and a system that didn't make the
records of their deals and profits readily accessible to outsiders.
Every few months, a list of members' codes was distributed. For
transfers, members just entered the codes, and Clearstream handled
the deals with no further inquiries.
In 1975, several big Italian and German banks wanted to centralize
their accounting and didn't want other members of Cedel to send
transfers through their numerous individual branches. The Cedel
council of administration-its board of directors- authorized banks
with multiple subsidiaries not to put all their accounts on the
lists. Backes and Gerard Soisson, then Cedel's general manager,
set up a system of non-published accounts. A bank would send a
transfer to the code of the headquarters bank, which would send
it on to the non-published account of its subsidiary. The bank
would regulate this operation internally.
Soisson authorized each non-published account, which would
be known only by some insiders, including the auditors and members
of the council of administration. As Cedel's literature to clients
explained: "As a general rule, the principal account of each
client is published: the existence of the account, as well as
its name and number, are published.... On demand, and at the discretion
of Cedel Bank, the client can open a non-published account. The
non-published accounts don't figure in any printed document and
their name is not mentioned in any report."
Requests for non-published accounts came from some banks that
weren't eligible, but Soisson turned them down.
By 1980, Backes had become Cedel's No. 3 official, in charge
of relations with clients. But he was fired in May 1983. Backes
says the reason given for his sacking was an argument with an
English banker, a friend of the CEO. "I think I was fired
was because I knew too much about the Ambrosiano scandal,"
Banco Ambrosiano was once the second most important private
bank in Italy, with the Vatican as a principal shareholder and
loan recipient. The bank laundered drug-and arms-traffficking
money for the Italian and American mafias and, in the '80s, channeled
Vatican money to the Contras in Nicaragua and Solidarity in Poland.
The corrupt managers also siphoned off funds via fictitious banks
to personal shell company accounts in Switzerland, the Bahamas,
Panama and other offshore havens. Banco Ambrosiano collapsed in
1982 with a deficit of more than $1 billion.
Several of those behind the swindle have met untimely ends.
Bank chairman Roberto C'alvi was found hanged under Blackfriars
Bridge in London. Michele Sindona, convicted in 1980 on 65 counts
of fraud in the United States, was extradited to Italy in 1984
and sentenced to life in prison; in 1986, he was found dead in
his cell, poisoned by cyanide-laced coffee. (Another suspect,
Archbishop Paul Marcinkus, the head of the Vatican Bank, now lives
in Sun City, Arizona with a Vatican passport; U.S. authorities
have ignored a Milan arrest warrant for him.)
Just two months after Backes' dismissal in 1983, Soisson,
48 and healthy, was found dead in Corsica, where he'd gone on
vacation. Top Cedel officials had the body returned immediately
and buried, with no autopsy, announcing that he had died of a
heart attack. His family now suspects he was murdered. "If
Soisson was murdered, it was also related to what he knew about
Ambrosiano," Backes says. "When Soisson died, the Ambrosiano
affair wasn't yet known as a scandal. [After it was revealed]
I realized that Soisson and I had been at the crossroads. We moved
all those transactions known later in the scandal to Lima and
other branches. Nobody even knew there was a Banco Ambrosiano
branch in Lima and other South American countries."
After leaving Cedel, Backes got a job in the Luxembourg stock
market, and later became manager of a butchers' cooperative. But
he kept friends inside the clearinghouse and began to collect
information and records about Cedel's operations.
With Soisson out of the way, there was nothing to stop the
abuse of the system. Whereas Soisson had refused numerous requests
to open non-published accounts (from such institutions as Chase
Manhattan in New York, Chemical Bank of London and numerous subsidiaries
of Citibank), Cedel opened hundreds of non-published accounts
in total irregularity-especially after the arrival of CEO Andre
Lussi in 1990. No longer were they just sub-accounts of officially
listed accounts, Backes charges. Some were for banks that weren't
subsidiaries or even official members of Cedel. At the start of
1995, Cedel had more than 2,200 published accounts. But in reality,
according to documents obtained by Backes, Cedel that year managed
more than 4,200 accounts, for more than 2,000 clients from 73
Clearstream was formed in 1999 out of the merger of Cedel
and the compensation company of Deustche Borse (the German stock
exchange). "No accounts are secret," insists spokesman
Graham Cope. "We are controlled by the local authorities
... who have access to information on all accounts. The term 'secret'
is misused again and again. Our customers choose to have unpublished
accounts, which simply means-like a telephone number-they choose
not to display the name and number in our publications. Customers
often have many unpublished accounts, which they use for their
own internal management purposes to ensure there is no confusion
between their accounts."
But Backes thinks otherwise. "I discovered an increasing
number of unpublished accounts," he says. "There were
more unpublished than published accounts, and a [large] proportion
were not sub-accounts of a principal account, which is what the
system was supposedly for. The owners of these accounts were not
inscribed on the official list of the clients of the firm."
How does the system work? Backes explains, for example, that
a bank with a published account could open an unpublished account
for a branch in the Cayman Islands, an offshore tax haven. A drug
trafficker easily could have the Cayman branch debit cash from
his personal account to buy stocks on Wall Street. The transaction
would be handled by Clearstream, which would transfer the money
electronically to a New York bank that had its own clearinghouse
account. Soon the shares could be sold to buy real estate in Chicago
with "clean" money. But regulators or investigators,
depending only on published accounts, would find it nearly impossible
to trace the money. Backes says Clearstream employees joke that
the company name means "the river that washes."
While clearinghouse clients may want to keep transactions
secret, detailed information on every transfer, including those
via non published accounts, is listed on daily "security
statements"- records to prove that the stock or cash has
been sent. These statements are stored on microfiche and, under
Luxembourg law, must be kept 10 years for commercial enterprises
and 15 years for banks. A Clearstream insider gave Backes 10 years
worth of these records. "The documents are a mine of information
for any financial inquiry," Backes says. "The archives
of the clearinghouses can contribute to retracing where funds
have gone. The knowledge of the list and the codes relative to
non-published accounts, until now guarded secrets, offer immense
Backes notes that similar records exist for the other big
clearinghouses, Euroclear and Swift, also based in Brussels. "It
is possible," he explains, "when one knows the date
of an operation and the bank of entry, to reconstitute inside
the clearing companies the voyage of the money and stocks or bonds-to
follow the tracks."
''Revelation$'' charges that Cedel/Clearstream further violated
its own statutes by setting up unpublished accounts for industrial
and commercial companies. With accounts in their own names, companies
could avoid passing through banks or exchange agents to use the
clearinghouse. They thus skirted mandated due diligence and record-keeping.
When Siemens was proposed for membership, Backes says, some Cedel
employees protested that this violated Luxembourg law. However,
management told them that Siemens' admission had been negotiated
at the highest level.
Among the major companies with secret accounts, Backes discovered
the Shell Petroleum Group and the Dutch agricultural multinational
Unilever, one of whose accounts was associated with Goldman Sachs.
On the French TV broadcast "Les dissimulateurs" ("The
Deceivers") in March 2000, Clearstream President Lussi simply
denied the accounts existed. "Only banks and brokers are
eligible for membership," he said, "as it has always
been the case. No private company accounts, no commercial or industrial
But his own spokesman contradicts this claim. "Customers
of Clearstream can be banks or, exceptionally, corporate clients
who have their own treasury departments the size of banks,"
Cope wrote in an e-mail to In These Times. "We cannot accept
CEOs of multinationals or terrorists and have strict account-opening
procedures to prevent such problems."
By 2000, according to Backes, Clearstream managed about 15,000
accounts (of which half were non-published) for 2,500 clients
in 105 countries; most of the investment companies, banks and
their subsidiaries are from Western Europe and the United States.
Most of the new non-published accounts were in offshore tax havens.
The banks with the most non-published accounts are Banque Internationale
de Luxembourg (309), Citibank (271) and Barclays (200).
Backes found numerous discrepancies in the lists he obtained
of the secret accounts. For example, code No.70287 on the published
list belongs to Citibank NA-Colombia AC in Nassau, and code No.
70292 is that of the Banco Internacional de Colombia Nassau Ltd.
But on the non-published list, the numbers both belong to Banco
Internacional de Colombia in Bogota. There's no mention of Citibank.
Based on the published list, members may think they are dealing
with two banks in the Bahamas, one of which is a subsidiary of
Citibank, but anything sent to these establishments goes directly
to the country of cocaine cartels. On the April 2000 Clearstream
list, there are 37 Colombian accounts, of which only three are
published. (Richard Howe, spokesman for Citicorp in New York,
declined repeated requests for comment. Cope declined to talk
about any individual customers or accounts, citing Luxembourg
banking secrecy laws.)
Clearstream's dealings with Russian banks are another area
of concern. Menatep Bank, which had been bought in a rigged auction
of Soviet assets and has been linked to numerous international
scams, opened its Cedel account (No. 81738) on May 15, 1997, after
Lussi visited the bank's president in Moscow and invited him to
use the system. It was a non-published account that didn't correspond
to any published account, a breach of Clearstream's rules. Menatep
further violated the rules because many transfers were of cash,
not for settlement of securities. "For the three months in
1997 for which I hold microfiches," Backes says, "only
cash transfers were channeled through the Menatep account."
"There were a lot of transfers between Menatep and the
Bank of New York," Backes adds. Natasha Gurfinkel Kagalovsky,
a former Bank of New York official and the wife of a Menatep vice
president, stands accused of helping launder at least $7 billion
from Russia. U.S. investigators have attempted to find out if
some of the laundered money originated with Menatep, which they
believed had looted Russian assets. (The Justice Department declined
to comment on the investigation.)
Even though Menatep officially failed in 1998, it oddly remained
on the non-published list of accounts for 2000. (Clearstream also
lists 36 other Russian accounts, more non-published than published.)
Kathleen Hawk, a U.S. spokeswoman for Clearstream, says that was
"a mistake." But Cope contradicts her: "Closed
accounts remain on our files and systems even though they're non-active
because we don't reuse numbers. We keep the records for many years
so there is no future confusion from reused numbers."
But Backes explains that there's no systematic rule about
delisting canceled accounts. He found that "some that didn't
exist any longer were on the list. Others were delisted when they
didn't exist. And still other accounts were delisted, when we
knew they existed, though the numbers no longer appeared."
Regis Hempel, a computer programmer who worked for Clearstream,
says some dormant accounts were activated for special transactions.
"Such an account can be opened in the morning, used for a
transaction, and closed to appear as delisted in the evening,"
Backes explains. "Only the guy who gave the order to open
it in the morning knows about the transaction. An investigator
or auditor would not look at such an account because it doesn't
appear on the accounts list."
Hempel also claims that Clearstream erased the records of
some transfers. In testimony before the French National Assembly's
financial crimes committee last year, he explained that a computer
system had been developed to wipe out the traces of transactions
in non-published accounts. When a bank wanted to carry out such
a transaction, Hempel testified, it simply contacted a Cedel staffperson.
"We made a 'hard coding' in the program and corrected the
instruction that was going to come," he explained. "[An
instruction could be] a purchase, a sale, a movement of funds
or a security. We made it disappear, or we put it on another account.
Then, when all was finished, we put back the old program and removed
the exception. It was not seen or known."
He said such requests came every two or three days.
Hempel volunteered to help Luxembourg prosecutor Carlos Zeyen
investigate Clearstream. But Hempel says local authorities seem
more interested in blocking an investigation than in exercising
oversight. Zeyen responded that the inquiry into Hempel's charges
hadn't produced any evidence and dismissed claims that Hempel
had been prevented from seeing relevant files as "rubbish."
In a July 2001 public statement, Zeyen said the investigation
Luxembourg sources say Zeyen was looking into how Menatep
used the system and also into improper ways Andre Lussi might
have gained personally. In January, a French judge took depositions
about Menatep corruption. According to Luxembourg journalist Marc
Gerges, writing in the local newspaper Land, the FBI and the German
BKA are also interested in what might be revealed about the role
of Menatep in the diversion of IMF funds. Gerges says investigators
are also looking to implicate Lussi in suspected financial swindles
conducted through holding companies and trusts in the offshore
financial havens of Guernsey or Jersey. (Lussi could not be located;
his attorney did not respond to phone and e-mail requests for
The publication of 'Revelation$' brought forward others with
stories about how Cedel/Clearstream had facilitated corruption.
Joel Bucher, former deputy general director of the Taiwan branch
of the bank Societe Generale, wrote Zeyen volunteering to testify
that SG used the clearinghouse to hide bribes and to launder money.
In his deposition for Zeyen-which is cited in Denis Robert's new
book on the Clearstream saga, The Black Box-Bucher said he had
worked for the bank for 20 years, but quit in 1995 out of disgust
at its rampant moneylaundering. He said much of that occurred
though a Luxembourg affiliate working through non-published accounts
at Cedel. "Cedel didn't ask any questions about the origin
of funds that would have appeared suspect to any beginner,"
he told Robert. "[As a result] we directed our clientele
with funds of doubtful origin to Luxembourg."
In the early '90s, Bucher contends, Cedel was used to launder
$350 million in illegal "commissions" on a contract
for the sale by Thomson-CSF, a French government arms company,
of six French frigates to Taiwan. He said that the money, handled
by an SG subsidiary, was paid as a registered securities transfer
to a "nominee"-a stand-in for the real beneficiary-and
that Thomson (now known as Thales) didn't appear in the transaction
except in the Cedel archives.
The kickbacks were exposed after the 1993 murder of a naval
captain named Yin Ching-feng, who had written a critical report
on the purchase and its inflated $2.8 billion price. Bucher told
Taipei authorities that a third of the kickbacks went to Taiwanese
generals and politicians, while the rest was pocketed by French
officials. Taiwan courts sentenced 13 military officers and 15
arms dealers to between eight months and life in prison for bribery
and leaking military secrets.
In March, Bucher will testify before a French court examining
French complicity. "SG is very much implicated," he
told In These Times. "Taipei police searches found many records
of transfers of commissions" relating to the frigates and
also to the sale of French Mirage fighter planes. In New York,
SG spokesman Jim Galvin denies that the bank had any involvement
in the arms deal.
There has been no legal action by the Luxembourg prosecutor
based on any of his investigations. However, Clearstream Banking,
Lussi and others have filed 10 lawsuits for libel in Luxembourg,
France, Belgium and Switzerland against Backes, Robert and their
publisher, Les Arenes. The first case, Clearstream v. Backes went
to court in March in Luxembourg. Another case began its first
hearings in Paris a few days later. With no sense of irony, the
liquidator of Russia's notorious Menatep Bank is also suing the
authors and publishers for damage to its reputation. (Mikhail
Khodorkovsky, the Russian oligarch who controlled Menatep, did
not respond to a request for comment.)
Backes' knowledge and records make him a valuable investigative
partner, and he cooperates with numerous authorities, though he
prefers not to say in which countries. But his agenda is larger
than that. Backes is lobbying for oversight by an international
public body. Unlike banks, Clearstream has no effective outside
surveillance. It is audited by KPMG, one of the "big five"
international accounting firms, which either has been ignorant
of or has overlooked the non-published accounts system. KPMG announced
last year it found "no evidence" to support the allegations
made in 'Revelation$', though its report was not made public.
Local officials' attempts to defend financial secrecy are
not surprising. Luxembourg's multi-billion-dollar financial sector
brings in 35 percent of GNP and gives the inhabitants a per capita
income of more than $44,000, the highest in the world. (Next on
the list are Liechtenstein, Switzerland and Bermuda, all money-laundering
centers, with the United States fifth.) For years, local officials
have refused to provide bank information to other countries.
But Luxembourg authorities have turned their sights on Backes.
Using a March 2001 judicial order based on a complaint made by
Lussi before he was fired, police raided Backes' house on September
19 in search of records. He says they seized unimportant documents
and diskettes; he keeps the microfiches outside the country as
"life insurance." "The raid was organized to impress
[others] not to repeat what this dangerous guy Ernest Backes has
done," he says. "Those who know me well know I am not
at all impressed by such a raid."
Lucy Komisar is a New York journalist who has spent the past
five years investigating the international offshore bank and corporate
secrecy system. To order a copy of 'Revelation$' (in French),