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Terrorism and Money Laundering

©Charles Epping, 2006

Contact: CharlesEpping@aol.com

Terrorist attacks are usually not expensive endeavors.The recent plot to bomb flights from the UK to the United States involved nothing more than smuggling liquid explosives onto the aircraft in passengers' hand luggage. On September 11, 2001, the Al Qaeda only needed a few box-cutters and some airline tickets to bring down the World Trade Center.

But what lies behind these and other attacks is usually a vast network of terrorist cells and training camps that somehow need to be paid for.

The Hezbollah, for example, not only has to fund a well-trained and well-armed militia, but it has to pay for a whole range of "charitable" activities such as clinics, schools, even a television station which help to ingratiate them with the local population in Southern Lebanon

How do they get the money to pay for all this?Some of the Hezbollah's money comes from contributions from individuals and governments: it was recently disclosed that Iran is paying Hezbollah up to $300 million to support them in their war against Israel.But a big part of Hezbollah's funding still has to come from other sources-and many of them are illegal.

In 2002, for example, two Hezbollah operatives in North Carolina were convicted of running a cigarette smuggling operation, shipping cigarettes from low-tax states like North Carolina to states with high cigarette taxes like Michigan.This generated millions of dollars in profit--much of which was sent to Lebanon to support the Hezbollah's activities.The two operatives are now serving prison terms for "aiding and abetting" terrorist activities in the Middle East.

And how do these terrorists get their illegally-earned money to where it's needed?The men in North Carolina simply packed it into suitcases and brought it to Lebanon by hand.But when you have large amounts to send-millions, if not billions of dollars-you need to use the banking system.And banks in countries with lax laws and minimal oversight are the most logical alternatives.But most off-shore banks, especially those in the Caribbean, have become associated with illegal money-primarily drug money.

So the key for terrorists is to get their illegally-earned money into more respectable banks so it can be sent to where it's needed without arousing suspicion from the local authorities.Ideally, they want the money to end up in respected banking centers, such as Switzerland.But the authorities there have greatly increased their efforts to close loopholes such as Trustee accounts, which allow people to open accounts in someone else's name.Which makes the Swiss banks, in fact, even more sought after as part of the chain used to launder money.

Unfortunately, removing one money-laundering loophole is not going to solve the problem-especially when other financial centers, such as those in Cyprus and the Caribbean, are not so strict at accepting illegal money.It's a bit like hitting a pillow with your fist: you hit one area and the money goes somewhere else.Any solution to the problem of terrorist groups laundering funds, therefore, has to involve a comprehensive plan to go after the source of funding-as well as its use.

By going after Hezbollah rockets and bunkers, Israel may think it's removing a major menace to its security.But any weekend gardener knows that if you cut off a weed above the ground it's just a matter of time until it grows back.The financial roots that nourish terrorist activities have to be dealt with as well.And that means that all the players in the international banking system need to find a way control the flow of illegal money-and stop it from getting into terrorist hands.

Charles Epping, a Swiss-based financier and financial writer is the author A Beginner's Guide to the World Economy (Vintage Books) and Trust, a new novel published by Greenleaf Book Group Press which explores the use of a Swiss trustee account by the Hezbollah and other groups to move illicit money through the international financial system.



The Lost Swiss Trustee Accounts

An Article by Charles Epping
© R. Charles Epping
e-mail: charlesepping@aol.com

What would you do if you found out that the 10 thousand dollars that your parents or grandparents put into a Swiss bank before World War II had become 10 million dollars today?  Or if the hundred thousand dollars they had deposited had become a hundred million?

It's not so implausible.  A simple investment in the Standard & Poor's 500 stocks, assuming you reinvested the dividends, would have gone up a thousand times in the years from World War II to today.  The key is that the money was kept invested.

The thousands of "dormant accounts" that the Swiss banks disclosed several years ago surprised people by the small amount they contained.  Most of them had less than 10 thousand dollars in them.  But that makes sense because those accounts were, in fact, dormant all these years.  When the owners didn't show up after the World War II, many having perished in the holocaust, the banks simply set the accounts aside paying little or no interest and debiting commissions from time to time, making them even smaller.  Ten thousand dollars deposited in 1938 would have remained ten thousand dollars-or less.

But a managed account, invested in a diversified portfolio of stocks and bonds all thee years, would in all probability be worth hundreds if not thousands of times what the original owners had invested.  A simple fact of exponential growth is money re-invested becomes the base for even more growth.  When you double a penny and then double that, after a month you have more than a million dollars.

When Hitler invaded Austria in 1938, one of the first things his henchmen did was go to the banks and demand to see a list of all accounts with Jewish names.  Then, using the "Enteignung Gesetz" laws, they seized those accounts, saying that the Jewish owners were enemies of the Reich-of which Austria had just become an integral part.  This led many wealthy Jews-from Central and Eastern Europe especially-to change the status of their accounts in Switzerland.

Even with the bank secrecy laws passed in the early 1930's making it a crime for Swiss bankers to disclose the name of an account holder to anyone outside the bank, it would have been impossible to keep Jewish accounts a secret in the event Switzerland were invaded by Germany-a not unlikely scenario, given the Nazi's dream of creating a grand "Deutsches Reich" including the German-speaking Swiss.

Consequently, many wealthy Jewish families turned to trusted Swiss lawyers or fiduciaries to open fiduciary accounts in their own names, for the benefit of the family and any eventual heirs.  By opening these accounts in the name of a Swiss trustee, they made sure the banks would never have to report them to Nazi invaders.  These trustee accounts would remain intact, waiting for the day when the family could come and reclaim them.

But what happened to these accounts after the war?  When the families didn't come to claim them, many trustees, it can be assumed, simply pocketed the assets.  This pessimistic scenario was outlined by Senator Alphonse d'Amato when testifying before a House Committee Hearing in 1997 investigating Swiss accounts opened by Jews during World War II:

"Many of these accounts were opened by middlemen, by lawyers on behalf of the various families.  Not only Jews, Jews and non-Jews who saw the Nazi killing machine coming across Europe.  So their lawyers opened them; their accountants opened them; and after they did not hear from these people for a period of time, what do you think they did, some in collusion with bankers, some on their own?  Many of them obviously withdrew those monies.  No more client.  No more accountability."

But what about the honest trustees?  What about the Swiss who didn't just pocket the money entrusted to them?  Some of them may have actually gone to Prague or Budapest or Warsaw looking for their clients, looking for the lost families.  Or maybe they didn't.  But an honest trustee would, in any event, have kept the accounts invested, kept the accounts alive-waiting for the day that someone come and reclaim them.

Two things the Swiss are particularly good at are waiting patiently and investing conservatively.  It would be safe to assume that hundreds, if not thousands, of these accounts still exist today-and they are certainly worth a lot more than what was originally invested.

When the Swiss banks paid $1.25 billion dollars to settle a class-action suit concerning the dormant accounts in 1998, they were careful to point out that they could take no responsibility for the trustee a accounts because they were never told about them.  Which is true.  Since these accounts were opened in the name of Swiss trustees, they said, it was up to the trustees to make sure that the money was returned to the rightful owners-or declared to the authorities.

But what if the trustees didn't feel that it was the right thing to disclose their clients' assets to the authorities?  What if they, like good Swiss lawyers and fiduciary agents, kept the accounts invested all these years, just waiting for someone to show up?  It's a not unlikely scenario.  What if the money your grandparents had put in Switzerland for safekeeping were still there, having been safely and conservatively invested all these years-waiting for someone to come and claim it?

The Author of this article, Charles Epping, is the author of A Beginner's Guide to the World Economy (Vintage Books), and Trust (Greenleaf Bookgroup Press), a novel based on the scenario of a lost trustee account discovered in a Zurich bank after 60 years of exponential growth.