Cayman Islands Lifts Veil of Bank Secrecy

Investigators tracing the proceeds of an alleged international credit card fraud unearthed millions of dollars this month after piercing the secrecy laws of the Cayman Islands, long known as “the Switzerland of the Caribbean.”

In a stunning break from tradition, Cayman authorities have turned over records showing that Kenneth H. Taves of Malibu, who is accused of improperly billing up to 900,000 credit card holders, transferred $25.3 million in allegedly illegal profits since mid-1997 to Euro Bank Corp. on Grand Cayman.

Taves’ links to the bank have sparked a scandal on the tiny island territory, which has long wrestled with its reputation as a safe-deposit box for crooks. The British dependency of 37,000 people is home to more than 570 banks with $500 billion in deposits from foreign banks.

Regulators in the Caymans, often derided for lax banking oversight, have seized Euro Bank--one of just 30 licensed in the Caymans to accept foreign and domestic deposits--and arrested two bank officers on suspicion of money laundering, a step one top U.S. Treasury Department official called remarkable.

The seizure of Euro Bank is only the latest twist in the British territory’s effort to shake its soft-on-crime reputation. Embarrassed by revelations that their banks’ clients have included the Medellin cocaine cartel and Iran-Contra figure Oliver L. North, Cayman bank regulators have written strict policies including know-your-customer rules, with an eye toward preventing criminals from laundering drug profits or insider-trading proceeds.

As a result, investigators say, crooks are looking for ever more obscure jurisdictions in which to conceal their ill-gotten gains. (The South Pacific micro-island of Niue has been a fashionable hide-out recently.)

Yet a dubious renown such as the Caymans’ is difficult to shake. Switzerland enacted several U.S.-favored bank reforms a decade ago, but in recent years it has been clobbered by charges that it hid Holocaust victims’ assets for the Nazis during World War II.

For their part, the Caymans win some praise from U.S. federal investigators for recent reforms, including a law allowing the government to seize illicit proceeds. Cayman regulators have shut down three other problem banks since 1993: First Cayman Bank, Guardian Bank & Trust (Cayman) Ltd. and Finsbury Bank & Trust Co.

Michael Anderson, chief of the FBI’s money-laundering section, said “the Caymans have had kind of a change in attitude” over the last decade and now cooperate more readily in criminal investigations.

Based on their review of Euro Bank, Anderson said, Cayman authorities have referred several other depositors to the FBI for investigations unrelated to the Taves credit card case.

Still, reviews of the Caymans’ posture toward U.S. inquiries remain mixed.

Although the Cayman government has agreed to release confidential bank information for use in U.S. criminal investigations under a 1990 treaty, it does so only if the offense is a crime as defined by the laws of both countries.

Until three years ago, there were no criminal penalties for Cayman bank officers who covered up money laundering. And because the Cayman Islands has no direct taxation, it doesn’t deem tax evasion a crime.

Moreover, the Cayman banks’ refusal to provide information in civil cases has prompted such outrage among U.S. regulators that the Securities and Exchange Commission recently blocked the Caymans from joining an international securities organization.

“They and other offshore jurisdictions have been cooperating on criminal issues as a way to avoid pressure on the civil and tax side,” said Joseph Myers, assistant director for international programs with the Treasury Department’s Financial Crimes Enforcement Network. “There’s been a lot of pressure in the international community to see action” similar to the steps taken in the Euro Bank case, Myers said.

Yet the fear of losing their financial services industry has made the Caymans fiercely protective of their status as a tax haven and their traditions of confidentiality.

The Cayman regulators’ decision to seize Euro Bank comes as the territory’s financial system is about to undergo three separate reviews by the United Nations, the Group of Seven’s Financial Stability Forum and Britain’s Foreign & Commonwealth Office.

“We really have nothing to hide here,” said Neville Grant, chief of the Cayman Islands Monetary Authority. “I think we will come out reasonably well. We aren’t perfect. But I don’t know of any jurisdiction that is perfect.”

Spotted by Christopher Columbus’ crew on his last trip to the West Indies in 1503, the Caymans’ coral sands quickly became a way station for mariners and remained a sleepy outpost for centuries. As a recession loomed in the mid-1960s, the islands enacted a series of tax and trust protection laws to attract the financial industry. Multinational banks began opening branches there en masse.

Now major financial services firms such as Merrill Lynch & Co. maintain offices in the Caymans to serve an international clientele. Foreign investors who want to trade U.S. securities, for example, conduct their transactions there without exposure to foreign withholding taxes. And individuals can legally set up trusts to shield their assets from creditors.

Bank Liquidator Sued U.S. Government

But what troubles U.S. law enforcement officials is what they see as the Cayman government’s occasional willingness to put bank clients’ anonymity ahead of justice.

For example, the government-appointed liquidator of another Cayman bank, Guardian Bank & Trust (Cayman) Ltd., unsuccessfully sued the U.S. two years ago to recover encrypted computer files turned over by the bank’s former owner for use in tax and other cases.

A federal prosecutor in New Jersey said this month that those records have since resulted in investigations of more than 1,500 people and that the former bank owner that surrendered the data had provided “the most important [assistance] in the history of tax haven prosecution.”

But Eduardo D’Angelo P. Silva, president of the Cayman Islands Bankers Assn., said the liquidators were justified in trying to block investigators’ access to the records because they “had a duty to protect the integrity of information belonging to the bank. . . . We must expect other countries to respect our laws.”

Traditionally, banking experts say, those policies allowed banks to refuse pleas for information in U.S. civil cases, such as the one the Federal Trade Commission has filed against Taves.

Regulators have accused Taves of defrauding credit card holders around the world by billing them for services they never purchased--namely, entry to pornographic sites on the Internet. Complaints about improper charges--which may run to $45.5 million--have been posted on Web sites originating in the United States, Japan and Australia.

Taves has denied wrongdoing and has said unscrupulous computer users may have entered stolen card numbers into his Web sites, causing the inaccurate billings.

In January, a federal judge in Los Angeles ordered Taves to disclose his assets and repatriate any offshore funds to the U.S. Under the order, which also froze his accounts (except for the purposes of returning offshore funds), Taves’ companies were turned over to a receiver, Robb Evans.

Taves--who obtained U.S. permission to visit the Caymans twice last year while on probation for an earlier financial crime--filed a statement indicating his net worth was about $2.5 million. But copies of checks found by the receiver indicated Taves may have sent millions offshore, including to Euro Bank.

A bank officer, in a departure from the Caymans’ legendary secrecy, filed an affidavit stating that Taves and his wife held accounts containing more than $6.2 million.

Prosecutors charged Taves with filing a false financial statement and had him taken into custody by the FBI. He remains in custody, with a hearing scheduled for Sept. 13.

A week after the case was detailed in The Times in May, Cayman regulators seized the bank and turned it over to two Deloitte & Touche accountants for review and, ultimately, liquidation.

Cayman police filed an order to freeze accounts at Euro Bank, Cayman National Bank and the Bank of Nova Scotia.

While Cayman policy traditionally let banks withhold records in civil cases--such as the FTC complaint--Evans’ talks with the Deloitte liquidators prompted them to make what one investigator called a “pragmatic business decision” amid the fast-spreading scandal. In exchange for a release from legal liability, the liquidators opened their files on accounts linked to Taves.

Opened Files Show Fund Transfers

As outlined in a report Evans filed in federal court in Los Angeles, the bank records showed Taves had transferred about $25.3 million to two Euro Bank accounts he controlled, then scattered it in the Caymans, Liechtenstein and Vanuatu, a South Pacific republic.

Evans said he plans to file legal papers to freeze and recover the approximately $21.2 million that remains in Taves’ newly discovered accounts for potential repayment to credit card holders.

Taves also let a Euro Bank officer, Judi Donegan, stay at his Rum Point beach house on Grand Cayman and transferred $4,000 per month to her account at the Bank of Butterfield there, according to the report.

Cayman Islands police have arrested Donegan and Ivan Burges, another bank officer who handled Taves’ accounts. Euro Bank remains in liquidation proceedings.

Regulators aim to portray the case not as the latest black eye for the offshore financial industry but as a symbol of their scrutiny of banks.

“In any major international financial center, you’re going to have people who from time to time will not operate up to international standards,” said Neville, the chief of the monetary authority. “What we do about them is we put them out of business. I’m not sure there’s anything else you can ask us to do.”