Secrecy World

by Jake Bernstein

  Mossfon’s Ramsés Owens was a frequent guest speaker at the Sovereign Society’s gatherings. A 2008 brochure for a conference in Panama City announced a talk by Owens on the wonders of Panamanian companies: “Secure your wealth with an 82-year-old, proven, virtually 100% courtroom-proof structure. This fascinating structure has managed to evade the slickest attorneys’ tricks and protect the wealth of individuals worldwide for the last eight decades. Find out how this surprisingly affordable and accessible structure can save you from embarrassing, life-changing lawsuits—and protect your family’s life savings.”

  The following year, the Sovereign Society held a four-day conference at a swank resort in Bermuda. The location raised concerns at MAMSA, Mossfon’s asset management company. Its staffers wanted to bring pamphlets to the conference advertising its services, which happened to include illegally hiding money from the U.S. Internal Revenue Service. A MAMSA staffer contacted Owens for advice. If the vast majority of those attending came from the United States, would it be illegal to bring the pamphlets? she asked.

  Owens assured her that there were usually at least three European banks doing the same.

  “But beware!!!” he cautioned. “We have to travel via the USA.”

  If U.S. Customs discovered printed material describing how to break U.S. law, it could be problematic for the traveler carrying such documents. Owens explained that the trick was to send it to the Bermuda hotel in advance of the conference rather than carry it through U.S. Customs.

  Owens himself was not always so careful. An American real estate tycoon who was a Mossfon client complained about having been contacted by U.S. authorities after names and addresses were found in Owens’s carry-on luggage. A team of Mossfon lawyers assured the secretive American that the firm’s policy was not to carry documents while traveling lest they put confidential information about clients in jeopardy.

  The Sovereign Society’s referrals included those who wanted into the secrecy world for purposes beyond tax avoidance or civil lawsuit protection. One such person was the Alaskan real estate agent and investor Lance Lockard, whom the group recommended to Mossfon in 2006. Lockard asked the Panamanians for a full complement of secrecy. A Mossfon staffer wrote in client notes that Lockard’s “main concern is confidentiality.” The firm set Lockard up with a company registered in the Seychelles, which acted as “a consultant” to a Panamanian foundation he controlled. It also created a secure email drop and recommended a bank, for an additional fee.

  In a 2007 email, Lockard notified the firm that he expected to be making as many as fifty money transfers a year to Switzerland, Australia, and the United States. The transfers could be as high as $500,000 each. The money was from investment proceeds and would be used for currency trading. In actuality, some of Lockard’s money derived from the largest case of mortgage fraud in Alaska’s history.

  In December of that year, federal prosecutors indicted Lockard for bank fraud and conspiracy. Prosecutors charged that he and his coconspirators had falsified documents, inflated appraisals, faked down payments, and fabricated nominee borrowers and purchasers in a scheme that had gone on for nearly five years. In all, the group had defrauded thirteen Alaskan mortgage lenders of more than $2.5 million, according to the indictment.

  After his arrest, Lockard’s lawyer contacted Mossfon. He asked the firm to certify that it had never helped open a Panamanian bank account for him. The request immediately went to the partners. “I want to know the entire history of this client,” wrote Jürgen Mossack. “How is it possible that nobody but nobody in compliance couldn’t smell something rotten the moment they interviewed the client?”

  Mossfon compliance reviewed the case. After the Sovereign Society referral, Lockard had sent the standard documentation of a passport, utility bill, and bank account statement. No in-person interview had occurred. Lockard had seemed legitimate until the onset of the financial crisis flushed him out. In response, Mossfon resigned from the company and foundation it had set up for Lockard. The firm then sent a letter to Lockard’s lawyer. To the best of its knowledge, Mossfon stated, Lockard had no bank accounts in Panama, although he did have accounts in Switzerland. It also asked for back fees of $14,354, which included a charge for the bank account information search.

  Lockard pleaded guilty and was sentenced to six years in prison. Prosecutors recovered only $116,000 of his illicit money. Owens suggested to the partners that they not worry about recouping its own fees. “Even if we don’t receive a single cent for the due diligence, it’s worth it to save our reputation,” he emailed.

  * * *

  IN REYKJAVÍK, THE boisterous crowds gathering in the small square in front of the Icelandic parliament sprayed the building with catsup and yogurt. Geir Haarde, the Reagan-quoting finance minister who had overseen the bank privatization a decade earlier, had risen to prime minister when the financial crisis hit. With demonstrators demanding his head and minority parties calling for early elections, Haarde resigned, citing health concerns.

  Sigmundur Gunnlaugsson, a young television journalist turned politician, seized the moment to begin his own ascent to power. Gunnlaugsson led opposition to a proposal that Iceland bail out the international creditors who had lost billions of dollars to its banks. He excoriated the vultures who were buying Icelandic debt in the hopes of a quick score, playing to the island’s nationalism. Icelandic voters listened. They rejected the foreign creditor bailout. As leader of the Progressive Party, Gunnlaugsson threw his weight behind the winning electoral coalition that assumed power from Haarde.

  Gunnlaugsson entered parliament triumphant. Unbeknownst to his fellow Icelanders, he had millions of dollars shielded offshore from public view. In December 2007, Landsbanki Luxembourg had sold Gunnlaugsson and his wealthy heiress wife, Anna Sigurlaug Pálsdóttir, a Mossfon company called Wintris Inc. Its address was that temple of secrecy in the British Virgin Islands, the sky blue Akara Building. The couple used Wintris to invest Pálsdóttir’s inheritance in, among other things, Icelandic bank bonds. After the financial crisis, it sold the bonds to the same vultures Gunnlaugsson had criticized.

  A charismatic populist, Gunnlaugsson yearned to be more than a member of parliament. He coveted the office of prime minister. Despite the anonymity afforded by the Akara Building, Gunnlaugsson put even more distance between himself and Wintris. On the last day of 2009, he sold his half of the company to his wife for one dollar.

  10

  COMBING THE MONSTER

  In 2009, the U.S. government punched a hole in Switzerland’s tradition of bank secrecy. The Swiss bank UBS was the battering ram. Tax authorities and prosecutors from around the world rushed through the breach looking for the hidden assets of crooked politicians and tax dodgers. Since secret bank accounts are often paired with anonymous companies, the scrutiny on tax havens also increased. In response, Swiss bankers scrambled to distance themselves from their offshore business, and Western governments upped their demands for information from intermediaries like Mossfon.

  For Ramón Fonseca, the UBS scandal was the moment Mossfon’s business changed. “That’s where the real pressure began, with the exchange of information,” he says. “We had created a monster and then we were handed a comb and told to brush it.”

  A former employee named Bradley Birkenfeld was the key to the UBS case. Birkenfeld worked at the UBS Swiss private bank in Geneva for almost five years in the early 2000s, but he became disenchanted after he realized that UBS was setting up its bankers to take the fall for its own illegal activities. Birkenfeld found a compliance document hidden on the bank’s server that explicitly forbade the very practices his bosses encouraged. When he brought the document to the attention of UBS executives, he was told to ignore it. Instead, he quit. A year after leaving the bank, Birkenfeld approached the U.S. Department of Justice, seeking immunity in exchange for information. He claimed that roughly nineteen thousand high-end American customers had hidden almost $20 billion with UBS.

  The UBS Swiss pr
ivate bank called its American business “toxic waste,” in a nod to its danger. The nickname became self-fulfilling. Its bankers were not licensed to operate in the United States, but Birkenfeld and his colleagues had often traveled to America to meet with account holders and troll high-dollar events for new customers. In 2004 alone, UBS bankers visited around thirty-eight hundred American clients. The bankers kept account information encrypted on laptops. They even smuggled assets. Birkenfeld himself transported diamonds for a customer in a tube of toothpaste.

  The IRS attorney John McDougal, who worked with Joe West on the credit card project, was among the federal officials who interviewed Birkenfeld. The Swiss private bankers were already on the radar of U.S. authorities, but Birkenfeld provided the kind of hard facts needed to convince a judge to allow them to pursue the case. Unlike other Swiss banks, UBS was particularly vulnerable to American justice, as it conducted its business through American branches rather than a subsidiary. This meant the IRS could serve a subpoena for information in the United States for material held by the private bank in Geneva. McDougal recognized that the John Doe summonses pioneered by West offered the legal means to pry out the bank’s American account holders.

  Swiss finance minister Hans-Rudolf Merz had defiantly stood before the Swiss parliament and declared to “everyone who is attacking Swiss bank secrecy, I can tell them on this bank secrecy, you will break your teeth.” The IRS filed a John Doe summons anyway. A federal judge approved it. Then the IRS waited for the Justice Department to do its work. In February 2009, the Swiss government, fearful that its leading bank could be criminally indicted, allowed UBS to settle with the U.S. government for a then record $780 million. Soon after, Merz suffered a severe heart attack, which he attributed to the stress of dealing with the UBS issue. UBS also broke with tradition by giving up the names of 280 American account holders. The Swiss government rationalized the disclosure as falling within an exception to its bank secrecy law for fraud and other illicit activities, even though tax evasion was not a criminal offense in Switzerland. (In 2016, the Swiss changed their law to create a “serious tax offense,” one involving more than $300,000, a predicate for a charge of money laundering.)

  The day after the settlement was announced, the IRS asked a federal district judge in Miami to enforce the John Doe summons. The Swiss resisted at first but changed course upon realizing that UBS might lose its license to operate in the United States. Without the license, the bank would be incapable of conducting international business, because most major dollar transactions are routed through New York. In August 2009, UBS turned over an additional 4,450 names to the IRS. The age of absolute Swiss bank secrecy had come to an end—an achievement initiated by a stubborn Japanese African American IRS agent named Joe West.

  * * *

  BOWING TO INTERNATIONAL pressure, the BVI toughened its anti-money-laundering laws in 2008, adding new record-keeping and Know Your Customer requirements for offshore providers like Mossfon. But having laws on the books and enforcing them were separate matters. For the first few years, Mossfon slow-walked its compliance, to minimal protest from the BVI.

  What the firm could not flout was a change in the BVI’s approach to bearer shares. These certificates of ownership acted as a constant point of tension between tax havens and Western governments. Once the shares were issued, it was almost impossible to determine who owned the company, since it depended on whoever held the paper. Bearer shares made tracking assets a nightmare for taxation agencies or prosecutors. To those who wanted secrecy, for legitimate reasons of privacy or to engage in illicit activities, there was no better instrument than bearer shares. Their use was widespread.

  Vladimir Putin’s billionaire pal Gennady Timchenko had bearer shares for his companies. The Belgian diamond fugitive Mozes Victor Konig did as well. Jeffrey Tesler’s companies started with bearer shares before switching to foundations, as did the South Africans behind the Fidentia fraud. In 2009, the U.S. Treasury Department sanctioned another Mossfon customer, Kassim Tajideen, for being a financial contributor to Hizballah. Tajideen held ownership of his companies through bearer shares.

  Ian Cameron, the father of the future British prime minister David Cameron, ran his investment fund via a Panama-based Mossfon company, Blairmore Holdings, which was owned through bearer shares. Hundreds of investors in the fund received these share certificates, but Cameron opted to keep the certificates together, locked away in an office in the Bahamas, where the fund was based. Each year, Cameron and his associates laboriously counted them to ensure they were all present. The secrecy was apparently worth it. Through its adroit use of tax havens, the fund paid no UK taxes during thirty years of operation, despite being top-heavy with British investors.

  In 2000, the Bahamas outlawed bearer shares. Blairmore was unaffected because the company was registered in Panama, which continued to allow the certificates. But Mossfon saw an immediate and dramatic drop in its Bahamas business. Mossfon incorporated 1,217 companies in the Bahamas in 2000. One year later, Mossfon’s production had fallen by 82 percent.

  When the BVI contemplated taking similar action in 2002, Jürgen Mossack wrote to the country’s Financial Services Commission beseeching it to reconsider. Mossack detailed what had occurred in the Bahamas. “The decline in the offshore industry seriously weakened The Bahamas economy,” he wrote. He also noted that at least the Bahamas had other industries to fall back on. This was not the case in the BVI. “If BVI were to suddenly lose 50% or more of the income produced by the Registry (as happened in the Bahamas), what would replace it?” he asked.

  The BVI was not contemplating outlawing bearer shares outright. Rather, it proposed doing what Ian Cameron did, forcing fiduciaries or registered agents like Mossfon to be custodians of the shares. Mossack tried to talk the BVI commission out of the idea. “We feel that many clients will believe, as we do, that restricting/controlling their bearer shares is effectively the same as eliminating them,” he wrote. And he was forthright in detailing the value of bearer shares, not only to the BVI economy but also to users and registered agents: “Confidentiality is a client magnet and bearer shares provide much desired confidentiality.”

  Mossack’s pleas failed to sway the BVI, which passed the law two years later. As of January 1, 2005, it forbade the free movement of bearer shares for the companies registered there. The BVI Financial Services Commission gave the tens of thousands of companies that already had bearer shares until the end of 2009 to convert them into registered shares or put them under the control of custodians.

  Mossfon’s BVI company incorporations decreased 35 percent between 2007 and 2009. While the financial crisis and new regulations had much to do with the drop, the restrictions on bearer shares were likely a factor as well. As Mossack predicted, those who wanted bearer shares went elsewhere. The biggest beneficiary was Panama, which continued to allow them. The firm saw the number of Panamanian companies requesting bearer shares increase by more than ten times in just a few years. Another winner was the Seychelles, which also offered bearer shares.

  Meanwhile, Mossfon needed to deal with all of the BVI bearer share companies it had released into the world: 3,417 active companies created on behalf of 760 different clients. By June 2008, the firm reminded the clients who hadn’t already converted their bearer shares that they needed to comply with the change in the law. The firm would goad clients for information about their bearer share companies for the next several years, with mixed success.

  Some of the biggest holdouts were the banks. Société Générale switched the shareholders of the companies it had created for bearer share clients to Panamanian foundations in a bid to maintain a similar level of secrecy. Other clients simply resisted turning over information. In April 2010, in a bid to convince HSBC to provide information on its clients who had bearer shares with BVI companies, Mossfon promised it wasn’t asking who actually owned the company, “we just need to know names and addresses of the holders of the bearer shares (and not the name of th
e ultimate beneficial owner).”

  * * *

  BY THE BEGINNING of 2010, the BVI had begun to implement fully the new anti-money-laundering law. The Financial Services Commission informed Mossfon that it planned to audit the firm. After a review of its files, Mossfon realized that some of the information the commission expected to see was missing. The firm sent a request to its intermediaries asking for basic details about the companies they had created for their customers: the names of directors and shareholders, and some kind of acknowledgment that someone knew the identity of the beneficial owner.

  Mossfon had long operated under the assumption that the intermediaries with which it did business maintained basic information such as who actually owned the company. For years, it was a convenient fiction that allowed Mossfon to avoid responsibility for the companies it sold. Now the firm could no longer pretend. What Mossfon learned as it tried to collect the necessary information was that when it came to the relationship between itself and its clients, the power lay with the clients.

  In September 2010, the head of global wealth management and business for UBS asked for a meeting with Dieter Buchholz, Mossfon’s Zurich representative. Buchholz expected another awkward discussion about bearer shares. (At least twenty-two BVI companies created by UBS for its account holders still had outstanding bearer shares.) Buchholz and Christoph Zollinger had already met with UBS executives in April over the bearer shares issue. At that meeting, the UBS executives seemed to be looking for a way around the new rule. They asked Zollinger and Buchholz for the legal basis of the BVI’s threat to fine companies $20,000 for not complying with the law.

  After arriving at UBS, Buchholz quickly learned this new meeting was not about bearer shares. Instead, the bank executive was furious over Mossfon’s request for information about its BVI companies. He insisted that Mossfon should be asking the beneficial owners of the companies directly for the material, rather than UBS. The conversation, as described by Buchholz to the partners in an email, quickly took on an Abbott-and-Costello upside-down feel.