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FTR #675 Interview with Lucy Komisar: No Such Thing as a Free Lunch

MP3: Side 1 [1] | Side 2 [2]
REALAUDIO [3]

The title of the pro­gram refers to Lucy’s In These Times [4] arti­cle about Sodexo [5], one of the largest food facil­i­ty con­trac­tors in the world. Lucy’s [6] research begins with analy­sis of Sodexo’s cost to school lunch pro­grams, made much more expen­sive by Sodexo’s kick­back or “rebate” struc­ture.

When “friend­ly per­sua­sion” fails, Sodexo has alleged­ly resort­ed to pro­fes­sion­al arm-twist­ing, includ­ing (alleged­ly) dimin­ish­ing the rep­u­ta­tions of dis­si­dents. It is for­tu­nate that the gov­ern­ment, many of whose agen­cies have con­tract­ed with Sodexo, is aware of the prob­lem. It remains to be seen if Uncle Sam is will­ing to pur­sue the issue.

Return­ing to a pri­ma­ry focus of Ms. Komisar’s work over the years–offshore finan­cial havens–Lucy details the oper­a­tions of Swiss-based Julius Baer Invest­ment Bank [7], the author of an intri­cate arrange­ment where­by much of its prof­it wound up in the Cay­man Islands (one of the pri­ma­ry finan­cial havens). Worth not­ing is the fact that these types of gam­bits typ­i­fy the “now you see it, now you don’t” finance that pre­cip­i­tat­ed the glob­al col­lapse.

Revis­it­ing anoth­er of the sub­jects Lucy’s cov­ered, we note that the U.S. tax­pay­ers now own (in effect) AIG. This is a sit­u­a­tion that should result in an inves­ti­ga­tion [8] of the mas­sive “off­shoring” gam­bits through which AIG was able to dis­guise the pre­car­i­ous nature lf its oper­a­tions. As with Sodexo, it remains to be seen if Uncle Sam decides to inves­ti­gate “off­shore” in its queries con­cern­ing AIG [9].

The prospects for a seri­ous inquiry into, and bring­ing to heel of, AIG appear to be cloud­ed by the track record [10] of Tim­o­thy Gei­th­n­er [11]. While serv­ing with the Fed­er­al Reserve Bank of New York, Gei­th­n­er remained appar­ent­ly indif­fer­ent to a “naked” short-sell­ing scheme involv­ing U.S. Trea­sury bonds. This gam­bit cost the Unit­ed States a lot of mon­ey.

Con­clud­ing the inter­view on a high­ly iron­ic note, Lucy chron­i­cles the fact that the Vat­i­can pub­licly denounced “off­shore.” [12] This from an insti­tu­tion deeply involved with “off­shore” finan­cial machi­na­tions, many of which ulti­mate­ly result­ed in loss of life. (Pope Bene­dict [13] is shown as a Hitler Youth and a young priest in the accom­pa­ny­ing pic­tures.)

Pro­gram High­lights Include: Lucy’s review of terms and con­cepts from the world of finance such short-sell­ing, naked short-sell­ing, hedge funds, etc.; review of the Vat­i­can [14] bank­ing scan­dals; review of AIG’s off­shore gam­bits.

1. The title of the pro­gram refers to Lucy’s In These Times arti­cle about Sodexo. Lucy’s research begins with analy­sis of Sodexo’s cost to school lunch pro­grams, made much more expen­sive by Sodexo’s kick­back or “rebate” struc­ture. In addi­tion to dri­ving small ven­dors and com­peti­tors out of busi­ness, Sodexo’s oper­a­tions add to the cost of pro­vid­ing cafe­te­ria food and dimin­ish the qual­i­ty.

At the end of the 2006 school year, children’s nutri­tion advo­cate Dorothy Bray­ley had a dis­turb­ing con­ver­sa­tion with a local dairy rep­re­sen­ta­tive. He had come to her office to dis­cuss par­tic­i­pa­tion in the sum­mer trade show of food providers she runs as direc­tor of Kids First Rhode Island.

At the time, the state’s schools were buy­ing 100,000 con­tain­ers of milk each week. The sales­man for Gare­lick Farms, New England’s largest dairy, told Bray­ley that Sodexo‑a food and facil­i­ty man­age­ment cor­po­ra­tion that man­aged most of the state’s school lunch pro­grams-was pay­ing Gare­lick more than com­peti­tors in order to get a big­ger rebate.

State Edu­ca­tion Depart­ment records, which are required to chart milk prices, showed that Sodexo passed on the price hike, billing schools 24 cents to 27 cents a half-pint, while milk was avail­able from Ara­mark, a com­pet­ing com­pa­ny, for 18 cents to 21 cents a half-pint — a loss to schools and fam­i­lies of more than $100,000 a year.

That’s just a taste of the hun­dreds of mil­lions of dol­lars of “rebates”-or kick­backs from sup­pli­ers-that Sodexo, a $20 bil­lion-a-year glob­al leader in the food and facil­i­ty man­age­ment indus­try, has tak­en while oper­at­ing cafe­te­rias and oth­er facil­i­ties for schools, hos­pi­tals, uni­ver­si­ties, gov­ern­ment agen­cies, the mil­i­tary and pri­vate com­pa­nies across the coun­try, accord­ing to evi­dence pro­vid­ed by whistle­blow­ers and inter­nal com­pa­ny doc­u­ments.

In some cas­es, such rebates vio­late the con­tract­ing poli­cies of fed­er­al agen­cies. In oth­ers, undis­closed rebates may con­sti­tute fraud.

Sodexo’s deputy coun­sel Tom Morse declined to reveal the size of Sodexo’s rebate from Gare­lick Farms, and he reject­ed the notion that rebates are abu­sive. Dean Foods, which owns the dairy, declined to com­ment. . . .

“Cafe­te­ria Kick­backs” by Lucy Komis­ar; In These Times; March/2009. [4]

2. Lucy details the pre­cise mech­a­nisms involved in the Sodexo scam:

Sodexo, found­ed in France in the ’60s to do mar­itime cater­ing, now has more than 30,500 oper­at­ing sites and 355,000 employ­ees in 80 coun­tries. It report­ed rev­enues last year of $20.4 bil­lion, and prof­its of more than $1 bil­lion. It ranks sec­ond in food ser­vices world­wide, after U.K.-based Com­pass Group.

The rebate sys­tem, endem­ic to the indus­try, works like this: A food man­age­ment com­pa­ny like Sodexo signs con­tracts to run a client’s cafe­te­ria. The com­pa­ny buys sup­plies from ven­dors such as Coke, Kellogg’s or Tyson. Then, cho­sen ven­dors send the man­age­ment com­pa­ny rebates based on a per­cent­age of sales.

Tom Mac­Der­mott, a New Hamp­shire indus­try con­sul­tant who nego­ti­ates for clients with Sodexo and oth­ers, says kick­backs date back half a cen­tu­ry.

“In the ’50s, it was cash in an enve­lope slipped to the chef,” says Mac­Der­mott. “As com­pa­nies grew, they were get­ting back 5 per­cent from the pro­duce ven­dor, 2 per­cent from the meat guy, 2 or 3 per­cent from dry goods and dairy.”

In the Unit­ed States, Mac­Der­mott esti­mates that man­age­ment com­pa­nies such as Sodexo, Com­pass and Ara­mark pro­vide meals, cater­ing and vend­ing machines to vir­tu­al­ly every fed­er­al agency, 95 per­cent of cor­po­ra­tions with food ser­vice, 90 per­cent of uni­ver­si­ties, 40 per­cent of health­care facil­i­ties, and 30 per­cent of schools. If you’ve eat­en at a pub­lic cafe­te­ria, you’ve prob­a­bly eat­en food sourced by one of these com­pa­nies.

As major cor­po­ra­tions and gov­ern­ment insti­tu­tions increas­ing­ly out­sourced pur­chas­ing, kick­backs to mega­cor­po­ra­tions like Sodexo became rife — mak­ing up at least 10 per­cent of sales.

Con­tracts are typ­i­cal­ly cost-plus, mean­ing clients pay the cost set by the sup­pli­er, plus a per­cent­age of that as a fee set by the food-ser­vice firm. There are gen­er­al­ly no cost caps, so rebates-which are not deduct­ed from what the food-ser­vice com­pa­ny charges clients-mean high­er meal prices. They also lim­it food choice and qual­i­ty: food-ser­vice com­pa­nies buy prod­ucts from ven­dors that pay big­ger rebates rather than those that offer cheap­er, local­ly grown, or high­er qual­i­ty food.

Sev­er­al man­agers at small com­pa­nies described the impact of Sodexo’s demand for rebates, but declined to speak for attri­bu­tion out of fear that Sodexo would lock them out of future buys.

A man­ag­er for a small New Eng­land pro­duce sup­pli­er describes the sys­tem this way: “Say you’re sell­ing a case of apples at $20 and you have to pay 15 per­cent shel­tered income (or rebate) to Sodexo. So now you have a $23 case that should be going at $20,” he says. The price increase push­es the item off the menu. “Now the food-ser­vice direc­tors in the schools will use a frozen item to sub­sti­tute the fresh pro­duce.”

Accord­ing to the man­ag­er, “They (Sodexo) squeezed hun­dreds of thou­sands of dol­lars away from us.” But he adds that his com­pa­ny had no choice but to pay Sodexo rebates: “They own a lion’s share of the mar­ket place. If we were to give up the busi­ness, some­one would be dying to jump in and take it.”

In anoth­er case, an East Coast ice cream man­u­fac­tur­er says he stopped work­ing with Sodexo because the 10 per­cent kick­backs the com­pa­ny demand­ed cut prof­its so much that it wasn’t worth the busi­ness.

“The school busi­ness in win­ter keeps us going,” he says. “Ini­tial­ly any school in the sys­tem that want­ed ice cream prod­ucts would just call us up, so we could sup­ply them. Then Sodexo comes in. You want to deal with Sodexo facil­i­ties, you have to sign a con­tract. (And Sodexo) off the record says you have to send us a rebate check.

“They try to intim­i­date you,” he adds. “They have such a grasp on the mar­ket. They force you to work on low mar­gin, 20 per­cent. If you give them a 10 per­cent kick­back, you’re pret­ty much work­ing for noth­ing. We lost about $30-to-$40,000 a year, which is a lot for a small busi­ness­man.”

He con­tin­ues, “We had been in busi­ness since 1930, so we were entrenched in most of the schools. The PTAs would run it. They used the mon­ey to buy school equip­ment. When Sodexo got involved, there was no mon­ey for the PTAs, the kids, they took it all.”

Idem. [4]

3. Those who do not will­ing­ly go along with Sodexo are ulti­mate­ly coerced.

. . . Jay Carciero, 35, a stocky, intense man, lives with his wife and three chil­dren in a small Amer­i­can-flag-fly­ing blue clap­board home in Woburn, Mass. His soft-spo­ken broth­er John, 37, divorced with one child, lives a few miles away in Read­ing, in a white clap­board A‑frame.

The broth­ers worked for Sodexo for years: Jay as Sodexo’s man­ag­er of food and facil­i­ties for the Lahey Clin­ic hos­pi­tal, Peabody, Mass., and John at Mass­a­chu­setts’ Mel­rose-Wake­field Hos­pi­tal, and then at Low­ell Gen­er­al Hos­pi­tal.

In 2005, they sound­ed alarms about Sodexo demand­ing kick­backs. Both were even­tu­al­ly fired.

In April 2005, John filed a com­plaint with a busi­ness abuse hot­line Sodexo set up to com­ply with the Sar­banes-Oxley Act. He said the com­pa­ny was using “strong-arm tech­niques” to get rebates from ven­dors.

Sodexo attor­ney Tom Morse claims that John Carciero is a dis­grun­tled employ­ee who filed his com­plaint only after Sodexo began an inves­ti­ga­tion of Jay for expense-account irreg­u­lar­i­ties (about which Morse declined to sup­ply details).

The expla­na­tion lacks cred­i­bil­i­ty because, months lat­er, in Jan­u­ary 2006, Jay was pro­posed by a super­vi­sor for man­ag­er of the year. More impor­tant­ly, the Carcieros sup­plied In These Times with stacks of inter­nal Sodexo doc­u­ments that bol­ster their claims.

Accord­ing to the Sodexo con­tract, the company’s rebate sys­tem at Lahey Clin­ic worked like this: Sodexo got a man­age­ment fee from the clin­ic that amount­ed to 0.9 per­cent of invoic­es from region­al and nation­al sup­pli­ers. The con­tract with Lahey lim­it­ed pur­chas­es to Sodexo-approved ven­dors, which in prac­tice, elim­i­nat­ed most local mer­chants, so Sodexo’s fees were effec­tive­ly cal­cu­lat­ed to include all rebates. The rebates were not report­ed to the hos­pi­tal.

“We weren’t aware of Sodexo get­ting rebates that just went to Sodexo when they should have been com­ing in part to us,” says Phillips Axten, the hospital’s attor­ney.

Jay Carciero claims that the hos­pi­tal should have been aware; he said he tried to show evi­dence of rebates to Lahey CEO Dr. David Bar­rett, but he “did not want to look at doc­u­ments I was giv­ing to him.”

Sodexo, as the hospital’s agent, had a fidu­cia­ry duty to get the best prod­uct at the best price. Instead, Jay Carciero says the com­pa­ny direct­ed man­agers to buy food that sup­plied the high­est rebates. He says he felt “betrayed by a com­pa­ny” and “felt anger at their rip­ping off the most vul­ner­a­ble cit­i­zens of our soci­ety — chil­dren, the elder­ly, the sick and dying.”

In These Times sent Sodexo coun­sel Morse copies of key inter­nal Sodexo e‑mails and doc­u­ments that back up the Carcieros’ charges, ask­ing Morse if any appeared not gen­uine. He raised no chal­lenge. In the doc­u­ments, Sodexo uses a euphemism for rebates, call­ing them “vol­ume dis­count allowances” (VDAs). It asks for bills “off invoice,” mean­ing one invoice it can give clients and keep anoth­er for itself—a sys­tem that can dis­guise rebates. “Com­pli­ant” refers to ven­dors who sup­ply rebates.

Doc­u­ments show that demand­ing rebates is at the heart of Sodexo’s busi­ness plan. Tony Alib­rio, then Sodexo USA Health­care Ser­vices pres­i­dent, wrote in a July 21, 2000 memo addressed to “Health Care Food Ser­vice Accounts” that “man­u­fac­tur­er and dis­trib­u­tor rebates sup­port our entire Pur­chas­ing & Pro­cure­ment Depart­ment and net­work.”

Man­agers were told to avoid cheap­er prod­ucts in favor of those that pro­duced rebates. Direc­tor of Pro­cure­ment Bob Sulick, in a Sodexho’s Bul­letin dat­ed March 22, 2004, wrote, “A man­ag­er told me today how he saves mon­ey by buy­ing cans of toma­to prod­ucts from his fruit and pro­duce ven­dor. Please don’t let this hap­pen. Peo­ple should buy the com­pli­ant prod­ucts through their prime ven­dors. That is where the high­est return is.” (Sodexo dropped the “h” from its name last year.)

Anoth­er doc­u­ment shows top com­pa­ny lead­er­ship enforc­ing the rule that only ven­dors offer­ing rebates should get Sodexo busi­ness. Accord­ing to the doc­u­ment, Richard Mace­do­nia, then CEO of Sodexo USA, told employ­ees at a Feb. 19, 2004 meet­ing at City of Hope Nation­al Med­ical Cen­ter in Los Ange­les, “We want to have a com­pli­ant pro­gram, because it is bet­ter for the com­pa­ny as a whole. So, we intend to make it hard­er to buy out­side of the pro­gram unless our client wants a spe­cif­ic brand.”

In addi­tion to pres­sure from the top, the com­pa­ny set up bureau­crat­ic road­blocks to order­ing from non-pre­ferred ven­dors, accord­ing to Jay Carciero. “When you go into a unit, you are giv­en a com­put­er,” he says. “When you need to order food or sup­plies, you order it through a por­tal con­trolled by the com­pa­ny. If you want to use the farm down the street sell­ing green beans, you couldn’t do it with­out spe­cial approvals and lots of headaches.”

Accord­ing to anoth­er doc­u­ment, Sodexo USA Pres­i­dent Michel Lan­del was asked at a 2004 man­agers’ meet­ing in Ver­mont, “Will units (clients) ever see rebate mon­ey for being prod­uct com­pli­ant?” Lan­del respond­ed instead by say­ing, “We have set up goals for both prod­uct and ven­dor com­pli­ance for each of our accounts and our suc­cess relies heav­i­ly on this.”

Sodexo attor­ney Morse argues that work­ing only with “com­pli­ant” ven­dors is nec­es­sary to assure health and safe­ty and to guar­an­tee sup­plies in case of short­ages.

“When we buy from a ven­dor, we make a com­mit­ment to that ven­dor that they will be a pre­ferred ven­dor or we will buy a spe­cif­ic quan­ti­ty from them or will buy over a peri­od of time,” he says. He adds that “the first thing we vet our ven­dors for is safe­ty” against food-borne ill­ness­es and the sec­ond con­sid­er­a­tion is “if there’s a food short­age, we want to be at top of their list to make sure we get it.”

How­ev­er, Morse could offer no evi­dence that either prob­lem had occurred. . . .

Idem. [4]

4. The scale of Sodexo’s gov­ern­ment con­tract­ing (and con­se­quent kick­backs) is con­sid­er­able:

Sodexo’s U.S. gov­ern­ment pro­cure­ment pro­gram amounts to more than hun­dreds of mil­lions a year. A 2005 Sodexo spread­sheet tracked rebate increas­es from sales to 13 region­al Fed­er­al Reserve banks, the FBI Acad­e­my, the IRS, the Trea­sury Depart­ment, the Library of Con­gress, the Cen­ter for Medicare/Medicaid Ser­vices, NASA and the Gen­er­al Ser­vices Admin­is­tra­tion (GSA), which han­dles con­tracts for itself and for most oth­er fed­er­al agen­cies. The spread­sheet showed rebate points from sales to CBS, CNN and CNBC.

The GSA declined to detail how its con­tracts address rebates. But lit­tle evi­dence exists that the agency is watch-dog­ging the prob­lem. In May 2008, an inves­ti­ga­tion out­sourced to the Post Office Inspec­tor Gen­er­al con­clud­ed that the GSA’s “Fed­er­al Acqui­si­tion Ser­vice was dysfunctional…that GSA lead­er­ship appeared to be sig­nal­ing its employ­ees to favor the com­mer­cial inter­ests of cer­tain large ven­dors.”

When asked about rebates received from gov­ern­ment agen­cies, Morse says they would be passed on to the fed­er­al gov­ern­ment, but he did not pro­vide evi­dence that this had occurred.

A 1997 direc­tive from the fed­er­al Office of Man­age­ment and Bud­get (OMB), Cir­cu­lar A‑87, requires that rebates to con­trac­tors that reduce costs have to be cred­it­ed to fed­er­al awards. How­ev­er, Wash­ing­ton has been lax in enforc­ing it.

The Bush administration’s OMB Deputy Comp­trol­ler Daniel Wer­fel told In These Times by e‑mail, “We are not aware of any oth­er agen­cies who took the step of clar­i­fy­ing their pro­gram rules with respect to rebates, as USDA did.” Nev­er­the­less, he added, “At this time, we do not believe it nec­es­sary that all agen­cies ini­ti­ate a rule­mak­ing sim­i­lar to the USDA rule.”

The Defense Depart­ment may have issued new, more demand­ing con­tract­ing guide­lines, but indi­vid­ual ser­vices oper­ate under their own rules, which have allowed rebates, some­times by ignor­ing them. The Marine Corps has a fixed price-per-meal con­tract with Sodexo, so rebates are not at issue. The Air Force says it has no pol­i­cy on rebates, while the Navy says its pol­i­cy is under review. The Army declined to respond to queries.

The USDA 2002 schools audit shows that even when pro­cure­ment doc­u­ments required return of rebates earned through pur­chas­es, food-ser­vice man­age­ment com­pa­nies dis­re­gard­ed the rule and rou­tine­ly kept them.

Morse says rebates were passed on to schools and cit­ed the exam­ple of Rhode Island. How­ev­er, busi­ness man­agers from the New­port and Coven­try school dis­tricts explain that while Sodexo said it used rebates to can­cel out fees the schools might have to pay, account­ing was inad­e­quate.

“It’s dif­fi­cult to police,” says Antho­ny Fer­ruc­ci, busi­ness man­ag­er of the Coven­try Dis­trict. “We don’t get invoic­es per item.”

East Green­wich School Dis­trict busi­ness man­ag­er Mar­i­anne Craw­ford says she, too, was aware of rebates but nev­er got dol­lar fig­ures.

A Sodexo rep­re­sen­ta­tive told Karen Works, who man­ages food-ser­vice con­tracts for the Kansas Edu­ca­tion Depart­ment, that account­ing dif­fi­cul­ties made it too hard for the com­pa­ny to return rebates to Kansas schools.

“His exam­ple was if we buy $1 mil­lion worth of chick­en from Tyson, we get $10,000 back, spread out among all the Sodexo con­tracts,” she says. “How will they iden­ti­fy it?”

How­ev­er, as the Sodexo spread­sheet shows, and as Morse acknowl­edges, Sodexo has a sophis­ti­cat­ed com­put­er sys­tem for track­ing rebates. It knows exact­ly what per­cent­age of Tyson’s rebate to Sodexo per­tains to each client.

Idem. [4]

5. As to whether Sodexo’s sheer size and com­mer­cial vol­ume helps it escape judi­cial ret­ri­bu­tion for its machi­na­tions remains to be seen. Is is “too big to fail?”

. . . The rebate sys­tem rais­es issues that could end up in court. For exam­ple, Sodexo serves some 1,800 hos­pi­tals, many of which fill out cost reports for fed­er­al Medicare and Med­ic­aid reim­burse­ments.

“Their cost is what Sodexo charges them,” Morse says. “So they can fill out their reports based on the amounts Sodexo charges them. It’s dis­closed to the clients that we get allowances. There real­ly isn’t an issue here.”

How­ev­er, Jim Shee­han, New York State’s Med­ic­aid Inspec­tor Gen­er­al, points out that this may vio­late the Medicare-Med­ic­aid Anti-Kick­back Act that man­dates, as Shee­han explains, that no ven­dor can give “any­thing of val­ue in whole or part in cash or kind in return for refer­ral of ser­vice paid for by gov­ern­ment.” A com­pa­ny like Sodexo “can get a dis­count,” says Shee­han, “so long as it’s accu­rate­ly report­ed on the cost report.” But “a secret rebate would not meet that stan­dard.”

Robert Vogel, a Wash­ing­ton attor­ney who rep­re­sents whistle­blow­ers, says that if a con­tract calls for reim­burse­ment of actu­al costs and the com­pa­ny is hid­ing a rebate, then that could con­sti­tute fraud.

‘If the pur­chas­ing agent’—for exam­ple, the Sodexo staffer in a hos­pi­tal or school—’is get­ting rebates from the sell­er of the prod­uct and not dis­clos­ing the rebates, it may be affect­ing the pur­chas­ing agent’s deci­sion on what prod­uct to buy,’ Vogel says. ‘That would be a kick­back.’

Law enforcers, take note.

Idem. [4]

6. Deal­ing with a pri­ma­ry focus of Ms. Komisar’s work over the years–offshore finan­cial havens–Lucy details the oper­a­tions of Julius Baer Invest­ment Bank. The com­plex machi­na­tions of this insti­tu­tion and its sub­sidiary insti­tu­tions are not easy to follow–they were meant to be opaque! Worth not­ing also is the fact that these types of gam­bits typ­i­fy the “now you see it, now you don’t” finance that pre­cip­i­tat­ed the glob­al col­lapse.

Pres­i­dent Barack Oba­ma said he would crack down on firms that use off­shore cen­tres to evade tax­es. He could begin with a New York sub­sidiary of one of the world’s largest pri­vate banks, which used a Cay­man Islands com­pa­ny to shift its prof­its.

Why would a New York fund man­ag­er run oper­a­tions through an office in the Cay­mans? “This type of struc­ture is for opti­mis­ing tax­es,” explained Max Obrist, a Cay­man Islands offi­cial of the glob­al Julius Baer Group (Zurich).

He told IPS that “gen­er­at­ing” the income where a com­pa­ny was actu­al­ly based, “you would pay much more tax­es”. Obrist was describ­ing a com­pa­ny shift­ing claimed earn­ings to tax havens to evade home tax­es. He alleged­ly helped Julius Baer Invest­ment Man­age­ment (JBIM) New York do just that.

Obrist is a direc­tor of Baer Select Man­age­ment (BSM), a Cay­man Islands com­pa­ny. Accord­ing to a whistle­blow­er who used to work with him in the Cay­mans, BSM is a fake firm cre­at­ed by Julius Baer to sign agree­ments with JBIM and oth­er sub­sidiaries so they could evade tax­es.

The whistle­blow­er, Rudolf Elmer, 53, a Ger­man, was chief oper­at­ing offi­cer of Julius Baer Bank & Trust Com­pa­ny (JBBT), Cay­mans, at 212,000 dol­lars a year and served on the BSM board from 1999 to Novem­ber 2002. JBIM paid fees to BSM to “man­age” its invest­ments. Elmer told IPS that JBIM moved to BSM prof­its it should have report­ed to the U.S. Inter­nal Rev­enue Ser­vice.

JBIM is now called Artio Glob­al Investors. It man­ages 72 bil­lion dol­lars in assets. It has some 900 insti­tu­tion­al clients, includ­ing cor­po­ra­tions, pen­sion funds, endow­ments and foun­da­tions and major finan­cial insti­tu­tions as well as more than 700,000 mutu­al fund share­hold­ers.

Its chief exec­u­tive and chief invest­ment offi­cer Richard Pell and head of inter­na­tion­al equi­ty Rudolph-Riad Younes were paid 120 mil­lion dol­lars dur­ing the first nine months of 2007, leav­ing the com­pa­ny with income of 48.6 mil­lion dol­lars.

Artio is a sub­sidiary of Julius Baer Group, Switzerland’s largest pri­vate bank­ing group with over 300 bil­lion dol­lars in assets invest­ed on behalf of insti­tu­tions and very wealthy indi­vid­u­als. Julius Baer’s report­ed prof­its in 2007 were more than 1.1 bil­lion dol­lars. It has 30 offices in world finan­cial cen­tres, from New York and Lon­don to Dubai and Tokyo. BSM is a Julius Baer sub­sidiary.

Elmer said, “There was a strate­gic plan adopt­ed in 1996 to utilise Baer Select Man­age­ment, JBIM New York and JBIM Lon­don to ben­e­fit from the off­shore sys­tem.” He said that JBIM assigned man­age­ment func­tions to BSM in order to award it a per­for­mance fee. He pro­vid­ed back­up doc­u­men­ta­tion to IPS, includ­ing finan­cial spread­sheets.

He said that Obrist in the name of BSM rat­i­fied a few deci­sions, but real­ly worked for JBBT. He said that con­trol was exer­cised and deci­sions tak­en by JBIM New York or Julius Baer Invest­ment Funds Ser­vices Ltd, Zürich, which were part of Bank Julius Baer & Co, Zürich.

Accord­ing to Elmer, JBIM made a pro­pos­al to Julius Baer Invest­ment Man­age­ment, Zürich, to launch a fund, and Zürich approved. JBIM did the paper­work and oth­er organ­i­sa­tion­al tasks with the help of JB Zürich and Cay­mans lawyers.

The offer­ing mem­o­ran­dum said that Baer Select Man­age­ment was appoint­ed invest­ment man­ag­er, Elmer said, and BSM appoint­ed JBIM invest­ment advi­sor.

JBIM was gen­er­al­ly list­ed as a fund “advi­sor”, though some pub­lic doc­u­ments said that JBIM man­aged funds. Eliz­a­beth Nesvold, founder of the New York invest­ment-bank­ing bou­tique Sil­ver Lane Advi­sors LLC, not­ed that though invest­ment man­agers make most of their mon­ey from per­for­mance fees, most of the JBIM’s rev­enue was claimed from advi­so­ry fees.

A call to the Grand Cay­mans phone num­ber for BSM was picked up by a recep­tion­ist for Julius Baer Bank and Trust Co Ltd (JBBT). “Is this the num­ber for Baer Select Man­age­ment?” she was asked. “Yes,” she replied, and passed the call to Max Obrist. He iden­ti­fied him­self as BSM’s direc­tor. He had a few oth­er jobs. The Jan. 13, 2000 min­utes of the JBBT man­age­ment com­mit­tee said, “Direct Mon­ey Mar­ket deal­ing has start­ed. Max Obrist has assumed respon­si­bil­i­ty for this activ­i­ty.”

He was also list­ed as a direc­tor of Direc­torate Inc., British Vir­gin Islands, the cor­po­rate direc­tor of some Julius Baer funds.

Describ­ing BSM’s tasks, Obrist explained, “We have to fol­low stocks, mon­i­tor their invest­ment poli­cies, we mon­i­tor the risk reports we receive from the invest­ment advi­sor and check if there are per­for­mance fee cal­cu­la­tions involved if they are exe­cut­ed prop­er­ly, all mon­i­tor­ing duties. We are in con­tact with the exter­nal audi­tors and the reg­u­la­to­ry author­i­ties and Cay­man Islands mon­i­tor­ing author­i­ty.”

He said BSM’s fee was “a per­cent­age of prof­its, and it depends on what type of duties we have to do here from Cay­man.”

Why was BSM need­ed? He replied, “That’s an inter­est­ing ques­tion. I don’t always know when they start some­thing. They decid­ed on a much high­er lev­el. I wasn’t involved. We were told: ‘You act as invest­ment man­ag­er for these new funds’.” But he didn’t man­age, he “mon­i­tored”.

Fees paid to BSM result­ed in low­er com­pa­ny prof­its and tax­es for JBIM. Fund man­agers gen­er­al­ly take prof­its of 1 or 2 per­cent of assets plus 10 to 20 per­cent of invest­ment gains. As the funds had high val­ues, that involved sub­stan­tial amounts. Accord­ing to Elmer, BSM, act­ing through a board whose mem­bers worked for JBBT, trans­ferred prof­its via sev­er­al off­shore com­pa­nies to Julius Baer Hold­ing Ltd, Zürich.

Obrist denied that BSM is a shell com­pa­ny. He said, “We are phys­i­cal­ly here in the Cay­man Islands, not just a post office box like some com­pa­nies try­ing to save tax­es with­out doing any­thing phys­i­cal­ly.”

He insist­ed, “BSM is to give ser­vice from an off­shore place and at the same time we can with­in Julius Baer opti­mise tax­es, yes. But we are phys­i­cal­ly here. We do our job as invest­ment man­ag­er. If Baer Select would be here just as a post office box com­pa­ny and gen­er­ate the mil­lions in Cay­man as income instead of in the U.S. or the U.K. or Switzer­land, then that would not be a very smart thing.”

Obrist said BSM stopped work­ing for JBIM New York four or five years ago after it closed some hedge funds. How­ev­er, JBIM/Artio would still be poten­tial­ly liable for unpaid tax­es, as the U.S. has no statute of lim­i­ta­tions for tax fraud.

Artio CEO Richard Pell did not reply to numer­ous phone mes­sages and emails describ­ing this sto­ry and request­ing an inter­view. Mar­tin Som­o­gyi, spokesper­son for Julius Baer, Zurich, emailed that the com­pa­ny always adhered to applic­a­ble reg­u­la­tions and was reg­u­lar­ly audit­ed, but that it would not agree to an inter­view. (Its glob­al audi­tor is KPMG.)

Julius Baer Amer­i­c­as Inc. (now Artio Glob­al Investors) which owns JBIM/Artio, in Feb­ru­ary 2008 filed with the SEC that it would go pub­lic with an ini­tial pub­lic offer­ing (IPO) to sell up to 1 bil­lion dol­lars of com­mon stock on the New York Stock Exchange. The offer­ing would be han­dled by Gold­man, Sachs and Mer­rill Lynch. The IPO has been post­poned.

“How One Fund’s Prof­its End­ed up in the Cay­mans” by Lucy Komis­ar; ipsnews.net; 2/5/2009. [7]

7. Return­ing to a sub­ject Lucy dealt with in FTR #’s 531 [15]and 650 [16], Lucy sets forth AIG’s off­shore prob­lems and their impact on the U.S. tax­pay­er, now a major share­hold­er in AIG. It remains to be seen if the fact that AIG has now become “a ward of the state” will impact its seem­ing immu­ni­ty to real inves­ti­ga­tion. Mr. Emory is not opti­mistic.

The U.S. will invest 40 bil­lion dol­lars in Amer­i­can Inter­na­tion­al Group (AIG), and will pro­vide cred­it lines that could bring fed­er­al fund­ing up to 144 bil­lion dol­lars. It’s the largest sub­sidy that a U.S. cor­po­ra­tion has ever received. In exchange, the U.S. gets near­ly 80 per­cent of AIG stock.

This puts the U.S. in a unique posi­tion to inves­ti­gate the inter­nal oper­a­tions of a giant cor­po­ra­tion with a rep­u­ta­tion for using the off­shore sys­tem for tax eva­sion.

What accoun­tants could learn would help U.S. Pres­i­dent-elect Barack Oba­ma — who has denounced off­shore tax eva­sion — stop scams run by AIG and draft laws to pre­vent oth­er insur­ance com­pa­nies from doing the same.

U.S. author­i­ties could begin their inves­ti­ga­tions with a look into a very curi­ous prac­tice that was revealed 15 years ago in a case that was nev­er exposed by the main­stream press and which insur­ance insid­ers say is endem­ic.

In 1993, Ter­ry Mills, who worked for a large insur­ance agency in Wilm­ing­ton, Delaware, was tasked to get to the bot­tom of a messy insur­ance prob­lem. The NVF Cor­po­ra­tion, a Delaware hold­ing com­pa­ny which owned a vul­can­ised fibre fac­to­ry, was being reor­gan­ised after a fed­er­al court order stripped con­trol of the com­pa­ny from its own­er Vic­tor Pos­ner, a noto­ri­ous crook.

Pos­ner was a U.S. “cor­po­rate raider,” famed for engi­neer­ing hos­tile takeovers of com­pa­nies, loot­ing them and fir­ing work­ers.

He had been charged by the U.S. Secu­ri­ties and Exchange Com­mis­sion (SEC) in 1988 for par­tic­i­pat­ing in a fraud­u­lent takeover scheme con­coct­ed with Wall Street crooks Michael Milken and Ivan Boesky. The SEC banned him from serv­ing as offi­cer or direc­tor of any pub­licly-held com­pa­ny.

It wasn’t the first time he’d bro­ken the law. In 1977, the SEC had filed a com­plaint against Pos­ner and his com­pa­nies for over­stat­ing earn­ings and treat­ing assets of pub­lic cor­po­ra­tions as pri­vate prop­er­ty, charg­ing the com­pa­nies for hous­es, ser­vants, vaca­tions and even gro­ceries.

In 1987, he had been fined 7 mil­lion dol­lars for evad­ing more than 1.2 mil­lion dol­lars in tax­es. A year lat­er, he was a defen­dant in an SEC com­plaint about a “stock park­ing” scheme to gain con­trol of a cor­po­ra­tion, that cheat­ed investors of about 4 mil­lion dol­lars.

So Pos­ner was noto­ri­ous. Even so, Mills was aston­ished when he exam­ined the insur­ance books. He dis­cov­ered that NVF had been pay­ing Nation­al Union Fire of Pitts­burgh, a sub­sidiary of the insur­ance giant AIG, sub­stan­tial­ly over mar­ket for workmen’s com­pen­sa­tion insur­ance.

Mills told the direc­tor of the Delaware Insur­ance Department’s bureau of exam­i­na­tion that when he went to buy a pol­i­cy for NVG from anoth­er insur­ance firm, he found the price was only half what the com­pa­ny had paid the year before.

Mills told IPS, “The fronting com­pa­ny was AIG. And the bro­ker on the deal was Alexan­der and Alexan­der… one of the biggest bro­kers in the world.” He said, “The senior man­age­ment real­ly didn’t have a han­dle on what the costs were.” Pos­ner, who died in 2002, had ordered the deal, and the man­agers went along.

This is how the scam worked. Insur­ance com­pa­nies nor­mal­ly insure them­selves by lay­ing off part of their risk to rein­sur­ance com­pa­nies, so if a claim comes in above a cer­tain amount, the rein­sur­ance com­pa­ny will pay it.

AIG had rein­sured the NVF pol­i­cy through Chesa­peake Insur­ance, a rein­sur­ance com­pa­ny Pos­ner owned in Bermu­da — an off­shore tax and secre­cy haven whose books were safe from the eyes of U.S. reg­u­la­tors and tax author­i­ties.

AIG would keep a por­tion of the inflat­ed NVF pre­mi­um and send the rest to Chesa­peake. AIG would have a high­er com­mis­sion. Pos­ner would write off the entire amount as a busi­ness expense and enjoy the extra cash in Bermu­da, tax free.

A for­mer insur­ance reg­u­la­tor told IPS, “Say the nor­mal pre­mi­um was 1 mil­lion dollars.(If I ran the com­pa­ny,) AIG could charge me 2 mil­lion dol­lars and then send a pre­mi­um of 900,000 dol­lars over to a rein­sur­ance com­pa­ny that it has set up for me in Bermu­da. I nev­er have to pay any claims, so I get to keep the 900,000 dol­lars tax-free off­shore.”

The com­pa­ny and bank records are pri­vate, so there is no way for out­siders to know how much tax mon­ey was actu­al­ly divert­ed.

“AIG’s Past Could Return to Haunt” by Lucy Komis­ar; ipsnews.net; 12/19/2008. [8]

8. Trea­sury Sec­re­tary Tim­o­thy Geithner’s past con­duct while serv­ing with the Fed­er­al Reserve Bank of New York is not encour­ag­ing. Fuel­ing Mr. Emory’s pessimism–expressed in the above dis­cus­sion of AIG–is the fact that Gei­th­n­er tol­er­at­ed short-sell­ing on U.S. Trea­surys.

U.S. sen­a­tors at Tim­o­thy Geithner’s con­fir­ma­tion hear­ing for Trea­sury Sec­re­tary Wednes­day may want to ask him about a fail­ure to act that is cost­ing the U.S. a lot more than the amount he evad­ed on tax­es.
The Fed­er­al Reserve Bank of New York, which he has led since 2003, con­ducts the oper­a­tions on Wall Street of the Fed­er­al Reserve Bank in Wash­ing­ton, the country’s cen­tral bank. The New York Fed under Geithner’s pres­i­den­cy has failed to stop mas­sive naked short sell­ing of U.S. Trea­sury bonds that threat­ens the sta­bil­i­ty of the mar­ket and sale of the bonds.

Iron­i­cal­ly, the scam, enabled by a lack of reg­u­la­tion at the behest of Wall Street bro­ker­age hous­es, makes it more expen­sive for the U.S. to bail out those same finan­cial insti­tu­tions.

It hap­pens this way: an indi­vid­ual or fund is allowed to sell bonds with­out own­ing them. This is called short sell­ing. The sell­er, whose bro­ker has gen­er­al­ly “bor­rowed” bonds from anoth­er bro­ker, is sup­posed to sub­se­quent­ly buy them on the mar­ket, and return them to the lender. The sell­er does this because he believes that the bond is going down, and he will buy them at a cheap­er price than he sold them for.

Naked short sell­ing occurs when a sell­er does not bor­row the bonds for deliv­ery at set­tle­ment, and there­fore nev­er has to buy them. This is called a fail­ure to deliv­er, or FTD.

Mean­while, the buy­er thinks he or she has the bonds but has just an IOU. The result is a dis­tor­tion of the mar­ket. Sell­ers sell bonds they nev­er own or bor­row, so there are more secu­ri­ties sold than issued by the gov­ern­ment. These phan­tom bonds don’t rep­re­sent mon­ey paid to the U.S. Trea­sury or gen­uine secu­ri­ties for buy­ers.

The major bro­ker-deal­ers who han­dle bond trades like the sys­tem. They prof­it from fails by using clients’ mon­ey for oth­er pur­pos­es.

The econ­o­mist who has done the key work on this issue is Dr. Susanne Trim­bath, who heads STP Advi­so­ry Ser­vices in Oma­ha, Nebras­ka. She pre­vi­ous­ly worked for the Depos­i­to­ry Trust Co, a sub­sidiary of Depos­i­to­ry Trust and Clear­ing Corp, the U.S. clear­ing house for stocks and bonds.

Dr. Trim­bath said, “In fall of 2008, about two tril­lion dol­lars in Trea­sury bonds were sold but unde­liv­ered for six weeks, more than 20 per­cent of the dai­ly trad­ing vol­ume, up from 8.6 per­cent in the first five months of 2008.” It was a spike from 1.2 per­cent in the first five months of 2007.

“There was excess demand for the Trea­suries,” she said. “Rather than allow this to push the price up, the Fed­er­al Reserve Bank of New York and the DTCC allowed fail­ures to deliv­er to depress the price.” This affects the val­ue of bonds held by indi­vid­u­als, funds and major investors such as Chi­na.

The lat­est fig­ures on fail­ures to deliv­er are 600–800 bil­lion dol­lars. Dr. Trim­bath said, “The num­bers look bet­ter now because the Fed threw two tril­lion at the mar­ket, which was used to cov­er these fails.”

She said that Gei­th­n­er failed to heed the warn­ings of econ­o­mists at the New York Fed who in 2002 and again in 2005 analysed fail­ures to deliv­er of Trea­suries and rec­om­mend­ed fines for the bro­kers respon­si­ble. A New York Fed white paper in April 2006 called for stricter enforce­ment of deliv­ery and penal­ties for vio­la­tions. The Bond Mar­ket Asso­ci­a­tion opposed reforms, and again Gei­th­n­er failed to act.

Even the cur­rent finan­cial cri­sis has pro­voked only a faint reac­tion from the New York Fed. On Jan. 5, it acknowl­edged that, “Since Novem­ber, short-term inter­est rates have declined to unprece­dent­ed lev­els.” It pro­pos­es a reg­u­la­tion to allow the buy­er and sell­er to agree that if the buy­er doesn’t receive the secu­ri­ties by five days after sale, the buy­er could sub­mit a claim against the sell­er for pay­ment. But this can be done now and could have been done in 2002.

This is how the bond sys­tem works. The U.S. Con­gress autho­ris­es the fed­er­al gov­ern­ment to issue bonds to cov­er the nation­al debt. Indi­vid­u­als and insti­tu­tions, even coun­tries, can buy the bonds direct­ly or through bro­kers. If a pur­chas­er buys through a bro­ker, the bonds remain in the broker’s name or the name of a cen­tral depos­i­to­ry such as DTCC. The Trea­sury pays the bond’s inter­est to the bro­ker, who cred­its the client’s account.

Since reg­u­la­tors don’t require the bonds to be deliv­ered to the buy­er, the bro­ker gives clients an elec­tron­ic IOU for the bond and for the inter­est pay­ments as well. But if the bonds aren’t deliv­ered by the sell­er, the elec­tron­ic IOUs rep­re­sent phan­toms. Dr. Trim­bath points out that, “The sig­nif­i­cant result of the IOU sys­tem is that bro­kers are able to sell many more bonds than the Con­gress has autho­rised. The trans­ac­tions are called ’set­tle­ment fail­ures’ or ‘failed to deliv­er’ events, since the bro­ker report­ed bond pur­chas­es beyond what the sell­ers deliv­ered.” She said, “There is no lim­it on the num­ber of IOUs the bro­ker can hand out…and there are usu­al­ly more IOUs in cir­cu­la­tion than there are bonds.”

This arti­fi­cial­ly inflates the sup­ply and forces bond prices down. Investors who want to buy Trea­suries — to lend mon­ey to the U.S. — may instead be lend­ing mon­ey to their bro­kers. Bro­kers get not only the com­mis­sion charges for the trade, but the use of the client’s cash for the bond that was nev­er deliv­ered and there­fore nev­er paid for. Dr. Trim­bath cal­cu­lates this “loss of use of funds to investors at sev­en bil­lion dol­lars per year, con­ser­v­a­tive­ly.”

If the bro­ker goes out of busi­ness, clients don’t have the Trea­suries, only the broker’s elec­tron­ic IOUs. Dr. Trim­bath, said, “Who is going to get the chair when the music stops? It’s not the indi­vid­ual investor. I’ve seen posi­tions just delet­ed from people’s state­ments with­out investors even know­ing as the secu­ri­ty they sup­pos­ed­ly owned turns out to not exist.”

This inse­cu­ri­ty could dis­cour­age buy­ers of Trea­suries, her­ald­ed as ultra-safe invest­ments. “And for the bond buy­ers, bro­ker­age hous­es, and banks, it’s yet anoth­er crash-and-burn to come,” said Dr. Trim­bath.

Her solu­tion: “If reg­u­la­tors and the cen­tral clear­ing cor­po­ra­tion would only enforce deliv­ery of Trea­sury bonds for trade set­tle­ment — pay­ment — at some­thing approach­ing the promised, stat­ed, con­tract­ed and agreed upon T+1 (one day after the trade), there would be an imme­di­ate surge in the price of U.S. Trea­sury secu­ri­ties.”

“As the prices of bonds rise, the yield falls. This falling yield then trans­lates into a low­er inter­est rate that the U.S. gov­ern­ment has to pay in order to bor­row the mon­ey it needs to fund the bud­get deficit and to refi­nance the exist­ing nation­al debt.”

Bro­kers would have to buy real bonds to deliv­er to buy­ers. She said, “That’s when the music stops.”

Gei­th­n­er might explain to sen­a­tors why he has not stopped the bil­lion-dol­lar phan­tom Trea­sury bonds scam.

“Trea­sury Nom­i­nee Failed to Halt Bond Scam” by Lucy Komis­ar; ipsnews.net; 1/19/2009. [10]

9. Lucy con­cludes the inter­view by dis­cussing the high­ly iron­ic sit­u­a­tion of the Vat­i­can pub­licly denounc­ing “off­shore.” The Vat­i­can [14] and its bank­ing scan­dals [17] are dis­cussed in numer­ous For The Record pro­grams, as well as var­i­ous Archive Shows, espe­cial­ly AFA #’s 17–21 [18].

The finan­cial cri­sis has the U.S. swirling with charges about the immoral greed of some cor­po­rate exec­u­tives who reck­less­ly bet their com­pa­nies’ futures to line their own pock­ets. The pop­u­lar fix for this inter­na­tion­al calami­ty stops at the nation’s bor­ders: decou­ple top-line salaries and bonus­es from stock prices and insti­tute more trans­paren­cy and reg­u­la­tion.
How­ev­er, last month, the Vat­i­can, in a ground­break­ing state­ment, linked the finan­cial cri­sis to a much deep­er prob­lem large­ly ignored in dis­cus­sions of the cri­sis here. It under­lined the need to con­sid­er care­ful­ly “the hid­den but cru­cial role of the off­shore finan­cial sys­tem in light of the emer­gence of the glob­al finan­cial cri­sis”.

The Nov. 18 state­ment, draft­ed by the Papal Coun­cil for Jus­tice and Peace and endorsed by the Vat­i­can Sec­re­tari­at of State which speaks for the Pope on for­eign affairs, called off­shore mar­kets “an impor­tant link, both in the trans­mis­sion of the present finan­cial cri­sis, as well as in main­tain­ing a host of mad eco­nom­ic and finan­cial prac­tices.”

Among them it said were the move­ment of mon­ey to evade tax­es and recy­cle prof­its from ille­gal activ­i­ties and also gigan­tic cap­i­tal flight.

The Holy See issued its “note” on the caus­es and con­se­quences of the world finan­cial cri­sis on the eve of the Unit­ed Nations Gen­er­al Assem­bly Con­fer­ence on finance and devel­op­ment in Doha. Its pre­scrip­tion: “a dras­tic reduc­tion of off­shore finan­cial prac­tices”.

Dr. Flaminia Gio­vanel­li of the Papal Coun­cil in Rome told IPS that this is the first time it has made such a state­ment.

She explained that the Coun­cil had been study­ing the prob­lem of financ­ing for devel­op­ment at the moment that the finan­cial cri­sis occurred. She said the state­ment talked about tax havens because the Council’s study con­nect­ed the fact “that many com­pa­nies don’t pay tax­es” to both financ­ing for devel­op­ment and the finan­cial cri­sis.

The Papal state­ment was pub­lished in Obser­va­tore Romano, the Vat­i­can news­pa­per. Dr. Gio­vanel­li said there have been “pos­i­tive reac­tions from Catholic devel­op­ment organ­i­sa­tions” around the world.

The state­ment asked, “How have we arrived at this dis­as­trous sit­u­a­tion, after a decade in which speech­es have mul­ti­plied on the ethics of busi­ness and finance, and in which the adop­tion of eth­i­cal codes has spread?”

A few weeks lat­er, on Dec. 8, in iron­ic coun­ter­point, 17 major U.S. cor­po­ra­tions signed on to a list of eth­i­cal prac­tices. Their state­ment, which appeared aimed at assuag­ing pub­lic dis­plea­sure at cor­po­rate mis­be­hav­iour, was built on non-con­tro­ver­sial hot-but­ton issues — in essence, “we won’t bribe, we won’t despoil the envi­ron­ment”. The issue of off­shore mon­ey flows and tax eva­sion was nowhere to be seen.

The Vat­i­can came to its knowl­edge of off­shore painful­ly. Italy’s Ban­co Ambrosiano, of which the Vat­i­can was the main share­hold­er, col­lapsed in 1982. Its CEO Rober­to Calvi, in col­lab­o­ra­tion with Bish­op Paul Marcinkus, the U.S. nation­al who head­ed IOR, the Vat­i­can Bank, had siphoned off mul­ti-mil­lions of dol­lars to off­shore accounts.

Ambrosiano lost 3.5 bil­lion dol­lars of cus­tomers’ deposits. Calvi, who fled Italy, was mur­dered and found hang­ing from Black­fri­ars Bridge in Lon­don. Marcinkus was pro­tect­ed from Ital­ian indict­ment by the Church and lat­er returned to the U.S. where he lived until his death in 2006.

A few years lat­er, in a 1985 essay on moral­i­ty and eco­nom­ics, Car­di­nal Ratzinger — the future Pope Bene­dict XVI — warned that the decline of ethics “can actu­al­ly cause the laws of the mar­ket to col­lapse”.

Ethics and off­shore. The Vat­i­can now gets it, but U.S. cor­po­ra­tions don’t. The U.S.-based multi­na­tion­als that signed on to yet anoth­er ethics pledge includ­ed Gen­er­al Elec­tric, The Hart­ford, Pep­si, Wal-Mart, Accen­ture, Dell, and Unit­ed Air­lines. Their pre­scrip­tion: com­ply with laws against fraud, cor­rup­tion, and bribery; prac­tice trans­paren­cy; avoid con­flicts of inter­est; be account­able to cus­tomers and pro­tect the envi­ron­ment.

Ethics, accord­ing to the 17, does not include reject­ing the use of the off­shore sys­tem to evade reg­u­la­tion as well as tax­es. Like the Vat­i­can, U.S. cor­po­ra­tions have expe­ri­ence with off­shore. It’s under­stand­ably a sen­si­tive issue.

Gen­er­al Elec­tric cuts its tax­es dras­ti­cal­ly by sell­ing its exports to off­shore sub­sidiaries which then sell them to the real cus­tomers. That’s called “trans­fer pric­ing”. The cor­po­ra­tion trans­fers prof­its off­shore. GE spokesper­son Gary Shef­fer declined to com­ment on ethics and tax­es or on the ethics of GE trans­fer pric­ing.

Dell, the com­put­er com­pa­ny, has moved patents on intel­lec­tu­al prop­er­ty devel­oped in the U.S. to sub­sidiaries in Ire­land where no tax­es are charged on roy­al­ties. Regard­ing Dell’s view of ethics and tax­es or the ethics of avoid­ing tax­es on patents, Michele Glaze, spokesper­son for Dell on cor­po­rate social respon­si­bil­i­ty, said, “I don’t know the answer.” She didn’t obtain it.

Pep­si­Co, the glob­al soft drink com­pa­ny, has 10 sub­sidiaries in Lux­em­bourg, a noto­ri­ous tax haven. How­ev­er much soda Lux­em­bourg­ers drink, that mar­ket would not seem to require ten Pep­si com­pa­nies to serve it. Such com­pa­nies are rou­tine­ly used for finan­cial trans­ac­tions that laun­der prof­its. Pep­si­Co declined to dis­cuss the pur­pose of its Lux­em­bourg sub­sidiaries or the degree to which using off­shore com­pa­nies to reduce tax­es is con­sis­tent with an ethics pledge. Pub­lic rela­tions spokesper­son Dave DeCec­co pro­vid­ed a writ­ten state­ment: “Pep­si­Co man­ages its tax affairs in a pru­dent and law­ful man­ner.”

The ethics pledge was organ­ised by Alex Brigham, founder and head of the Busi­ness Ethics Lead­er­ship Alliance of the Ethi­sphere Insti­tute. He said that pay­ing fair tax­es “wasn’t an issue that we brought up with these com­pa­nies in large part because we’re focus­ing on a lot of non-finan­cial items.”

He explained, “We’re look­ing at the con­flicts of inter­est; that’s a huge prob­lem for com­pa­nies.” He added, “I agree that off bal­ance sheets assets are a major prob­lem in the finan­cial ser­vices sec­tor. I know Cit­i­group moved mas­sive amounts of assets off their bal­ance sheet, but I don’t know if it was off­shore.”

He said that the busi­ness ethics project did not antic­i­pate tak­ing on tax issues “either now or in the fore­see­able future”. The Ethi­sphere approach to off­shore tax eva­sion is typ­i­cal of U.S. cor­po­rate-financed “cor­po­rate social account­abil­i­ty”: they ignore it.

How­ev­er, the issue may get some atten­tion when U.S. Pres­i­dent-elect Barack Oba­ma takes office. The amounts at play are huge. The Vat­i­can cit­ed esti­mates of the tax­es evad­ed from wealth held in off­shore cen­ters as close to 255 bil­lion dol­lars. U.S. tax loss­es from cor­po­ra­tions are said by Sen­a­tor Carl Levin, co-spon­sor with Oba­ma of the Stop Tax Haven Abuse Act, to be 50 bil­lion dol­lars a year.

In his cam­paign, Oba­ma spoke out fre­quent­ly against cor­po­ra­tions who don’t pay their fair share of tax­es. He said he would deny tax ben­e­fits to for­mer U.S. com­pa­nies that rein­cor­po­rate off­shore to avoid pay­ing tax­es. He said he would crack down on com­pa­nies that use oper­a­tions in off­shore juris­dic­tions to evade tax­es.

“Cri­sis Pits Vat­i­can Against Off­shore” by Lucy Komis­ar”; ipsnews.net; 12/22/2008. [12]