Panel Urges Tough Sanctions Against Foreign Tax Havens

A Senate subcommittee, concluding a three-year investigation of money laundering, recommended unanimously Wednesday that Congress and the Administration impose tough sanctions, including limits on direct airline flights, against foreign tax havens that refuse to cooperate with U.S. law enforcement authorities.

The guarantees of secrecy provided to investors by those offshore havens, which include Panama, Hong Kong and more than a dozen other nations, enable drug traffickers and other criminals to hide “enormous amounts of illegal profits” from the Internal Revenue Service, the Government Affairs permanent subcommittee on investigations said in a report.

Without disclosure agreements with such nations, the report said, U.S. authorities are unable to trace the source of about $20 billion in U.S. currency that they suspect is laundered overseas each year.

Drug Traffic Suspected

For example, even after a Treasury Department investigation of Crocker Bank disclosed that $3.4 billion in cash had been shipped since 1980 from six Hong Kong banks to Crocker’s cash vaults in San Francisco, U.S. officials are having difficulty determining how that currency made its way to Hong Kong--and whether it was indeed part of large-scale money laundering by international heroin traffickers, as Treasury officials suspect.

Most likely to be penalized, a subcommittee staff member said, would be Panama, which has blocked U.S. efforts to trace the large sums of American currency in small denominations that its banks handle each year and is described in the report as “one of the best havens for criminal monies in the world.”

Hong Kong, which has shown interest in developing an information-sharing agreement with the United States, probably would not be subject to the proposed sanctions, which would alter the U.S. tax code to discourage investments in the tax havens, require banks to report all financial transactions involving the havens and limit direct airline flights to and from such countries.

Enticements Rejected

But other tax havens, mostly in the Caribbean, could be affected. Because they rely heavily on the foreign investment that is attracted by their low taxes and guarantees of secrecy, they have rejected U.S. enticements in return for disclosure agreements. The proposed sanctions would ensure cooperation, the staff member said.

“It’s time to get tough with the tax havens that insist on playing Pontius Pilate while the drug pushers and other criminals exploit their banking systems to the detriment of our citizens,” said Sen. William V. Roth (R-Del.), the subcommittee chairman, alluding to the biblical account of Pilate’s attempt to evade responsibility for the trial of Christ.

In addition, the subcommittee report criticized the Treasury Department for failing for five years to enforce the Bank Secrecy Act of 1980, which requires banks and other financial institutions to report transactions of more than $10,000 to the Internal Revenue Service.

Six Banks Fined

A Treasury Department investigation begun this year already has resulted in fines for six banks, including Crocker, whose record $2.25 million penalty was announced Tuesday, for failing to disclose large-scale cash transactions. About 140 banks are being investigated, 60 of which voluntarily have admitted “inadvertent” violations of the reporting law. More fines are expected.

“The United States government must ensure that its own house is in order if it is to expect the cooperation of offshore financial institutions and haven governments,” the report said.