While the leaders of the world’s largest economies debate stimulus and regulation in London, let us hope they do not forget the compelling questions of crime and punishment. Rooted in the most massive swindles in financial history, the global crisis offers an unprecedented opportunity to prosecute the criminals whose machinations steered us toward disaster—and to deter them in the future.
Unfolding on the very doorstep of the G-20 meeting in London and in Washington is the instructive story of Joseph Cassano, former head of American International Group’s Financial Products Group, whose role in his company’s crash—which triggered the ruin of world money markets—may soon lead to criminal charges against him. What the Cassano story points up once more is how the existence of tax and regulatory havens across the world encourage nefarious conduct, lack of transparency, evasion of taxes and corporate criminality.
According to a new investigative report from ABC News, Mr. Cassano is the subject of a criminal fraud investigation by the F.B.I. that is examining how he and his colleagues in AIG’s financial products division set up the scheme to insure more than a trillion dollars of junk mortgage paper held by major banks. He walked away from those bad deals with over $300 million in personal profit. Aside from the fascinating matter of how he managed to commit these catastrophic bets without interference from his superiors, the most pertinent question is how he gamed the gaping loopholes in the international regulatory and legal systems.
Evidently Mr. Cassano established dozens of separate companies, including many that were located offshore, to handle the allegedly fraudulent transactions—a maneuver that was designed to keep the deals effectively off the books of AIG and to mislead regulators in the United States and Britain. The crooks at Enron Corporation used the same techniques, essentially, to conceal what should have been reported on their corporate balance sheets—and they too used offshore locations as instruments of fraud.
Jack Blum, a former Senate staffer who helped to lead the investigation of the Bank of Credit and Commerce International more than a decade ago, told ABC reporters that the abuse of tax havens “is the other very important issue underneath the AIG scandal. All of these contracts were moved offshore for the express purpose of getting out from under regulation and tax evasion.”
Massive fraud has been at the center of this crisis from bottom to top, as everyone paying attention must know. The criminal mind-set extended from the bankers and mortgage agents who made loans to unqualified borrowers and sometimes tricked them into signing agreements they could not fulfill. (Among the most industrious marketers were many with actual criminal records, whose entry into the mortgage industry was not blocked by the state regulators.) They marketed those same bad loans with false assurances of their soundness to convince investors to buy them—and somehow induced rating agencies to offer hollow testaments to their creditworthiness. Investors then resold the toxic packages to other investors both here and abroad. At every step, the inflation of the bubble was hastened by fraud, forgery and deception.
At the highest levels, those fraudulent transactions were aided by the existence of “secrecy spaces” in nice quaint places from Switzerland to Anguilla, where the malefactors could rely upon local authorities to collude in their conspiracies. Not only do the governments in the tax and regulatory havens pretend not to see what their corporate visitors are doing, but they actively shut out the scrutiny of anyone who might take action.
The costs imposed on the world by those selfish little entities are too great to ignore any longer. Vast amounts of taxable wealth, last estimated to exceed $12 trillion, are hidden in the protected banks of tax-haven principalities, with annual losses to the U.S. Treasury that may well be greater than $100 billion. But those same places appear to have provided a regulatory twilight zone where financiers like Joseph Cassano could run wild and ruin the rest of the world for profit. The urge to cheat on taxes and the desire to evade regulation represent the same destructive impulse, which governments around the world should now take steps to suppress.