Explosive Revelation$

In the tax haven of Luxembourg, a little-known outfit called Clearstream handles billions of dollars a year in stock and bond transfers for banks, investment companies and multinational corporations. But a former top official of this ​“clearinghouse” says Clearstream operates a secret bookkeeping system that allows its clients to hide the money that moves through their accounts.

In these days of global markets, individuals and companies may be buying stocks, bonds or derivatives from a seller who is halfway across the world. Clearinghouses like Clearstream keep track of the ​“paperwork” for the transactions. Banks with accounts in the clearinghouse use a debit and credit system and, at the end of the day, the accounts (minus ​“handling fees,” of course) are totaled up. The clearinghouse doesn’t actually send money anywhere, it just debits and credits its members’ accounts. It’s all very efficient. But the money involved is massive. Clearstream handles more than 80 million transactions a year, and claims to have securities on deposit valued at $6.5 trillion.

It’s also an excellent mechanism for laundering drug money or hiding income from the tax collector. Banks are supposed to be subject to local government oversight. But many of Clearstream’s members have real or ​“virtual” subsidiaries in offshore tax havens, where records are secret and investigators can’t trace transactions. And Clearstream, which keeps the central records of financial trades, doesn’t get even the cursory regulation that applies to offshore banks. On top of that, it deliberately has put in place a system to hide many of its clients’ transactions from any authorities who might come looking.

According to former insiders:

• Clearstream has a double system of accounting, with secret, non-published accounts that banks and big corporations use to make transfers they don’t want listed on the official books.
  
• Though it is legally limited to dealing with financial institutions, Clearstream gives secret accounts to multinational corporations so they can move stocks and money free from outside scrutiny.
  
• Clearstream carried an account for a notoriously criminal Russian bank for several years after the bank had officially ​“collapsed,” and clearinghouse accounts camouflaged the destinations of transfers to Colombian banks.
  
• Clearstream operates a computer program that erases the traces of trades on request from its members.
  
• Clearstream was used to try to hide a dubious arms deal between French authorities and the Taiwanese military.
  

Many of these charges were first made in a controversial book called Révélation$, written by Denis Robert, a French journalist, and Ernest Backes, a former top official at the clearinghouse who helped design and install the computer system that facilitated the undisclosed accounts. The book’s impact was explosive. Six European judges called it ​“the black box” of illicit international financial flows. Top Clearstream officials were fired. The scandal made headlines in big European newspapers; TV networks broadcast specials; the French National Assembly’s financial crimes committee held a hearing. Luxembourg authorities ordered an investigation, and then they effected a cover-up. Yet Révélation$ remains unpublished and relatively unknown in the United States.

A bearded, heavyset man in his mid-fifties, Backes spoke with In These Times in Neuchâtel, Switzerland, where he’d gone to attend a conference on international crime, and explained how he’d started fighting ​“organized crime in banking.”

Ernest Backes was born in 1946 in Trier, Germany. (As he likes to joke, ​“There were two important people born in Trier; the other is Karl Marx.”) His father was a Luxembourg metal worker, his mother a German nurse. From 14, he worked on an assembly line to pay for school and joined the Young Catholic Workers. After a job in the Luxembourg civil service, he was hired in 1971 by Clearstream’s predecessor Cedel (short for ​“central delivery” office), set up the year before by a consortium of 66 international banks. Backes helped design and install Cedel’s computerized accounting system in the ​’70s.

Cedel and its main competitor, Brussels-based Euroclear, were started to manage transfers of ​“eurodollars,” U.S. currency kept in banks outside the United States. According to Barbara Garson’s book Money Makes the World Go Around, eurodollars were invented in the ​’50s by the Chinese and the Soviets so they would not have to put their assets in banks where the U.S. government could seize them. But others saw value in eurodollars, and they began to be traded for other currencies. Some banks attracted eurodollars with higher interest than was being paid in America, and U.S. corporations and individuals began using the accounts to avoid laws on domestic banks. The euromoney market was born. (By the ​’90s, the Federal Reserve estimated that about two-thirds of U.S. currency was held abroad as eurodollars.)

Cedel and Euroclear eventually expanded into handling transfers of stock titles and other financial instruments. Their clients needed a system that would guarantee the creditworthiness of their trading partners and keep records of the trades. The clearinghouses provided speed, discretion, and a system that didn’t make the records of their deals and profits readily accessible to outsiders. Every few months, a list of members’ codes was distributed. For transfers, members just entered the codes, and Clearstream handled the deals with no further inquiries.

In 1975, several big Italian and German banks wanted to centralize their accounting and didn’t want other members of Cedel to send transfers through their numerous individual branches. The Cedel council of administration — its board of directors — authorized banks with multiple subsidiaries not to put all their accounts on the lists. Backes and Gerard Soisson, then Cedel’s general manager, set up a system of non-published accounts. A bank would send a transfer to the code of the headquarters bank, which would send it on to the non-published account of its subsidiary. The bank would regulate this operation internally.

Soisson authorized each non-published account, which would be known only by some insiders, including the auditors and members of the council of administration. As Cedel’s literature to clients explained: ​“As a general rule, the principal account of each client is published: the existence of the account, as well as its name and number, are published. … On demand, and at the discretion of Cedel Bank, the client can open a non-published account. The non-published accounts don’t figure in any printed document and their name is not mentioned in any report.”

Requests for non-published accounts came from some banks that weren’t eligible, but Soisson turned them down.

By 1980, Backes had become Cedel’s No. 3 official, in charge of relations with clients. But he was fired in May 1983. Backes says the reason given for his sacking was an argument with an English banker, a friend of the CEO. ​“I think I was fired was because I knew too much about the Ambrosiano scandal,” Backes says.

Banco Ambrosiano was once the second most important private bank in Italy, with the Vatican as a principal shareholder and loan recipient. The bank laundered drug- and arms-trafficking money for the Italian and American mafias and, in the ​’80s, channeled Vatican money to the Contras in Nicaragua and Solidarity in Poland. The corrupt managers also siphoned off funds via fictitious banks to personal shell company accounts in Switzerland, the Bahamas, Panama and other offshore havens. Banco Ambrosiano collapsed in 1982 with a deficit of more than $1 billion. (Unknown to many moviegoers, Banco Ambrosiano inspired a subplot of The Godfather Part III.)

Several of those behind the swindle have met untimely ends. Bank chairman Roberto Calvi was found hanged under Blackfriars Bridge in London. Michele Sindona, convicted in 1980 on 65 counts of fraud in the United States, was extradited to Italy in 1984 and sentenced to life in prison; in 1986, he was found dead in his cell, poisoned by cyanide-laced coffee. (Another suspect, Archbishop Paul Marcinkus, the head of the Vatican Bank, now lives in Sun City, Arizona with a Vatican passport; U.S. authorities have ignored a Milan arrest warrant for him.)

Just two months after Backes’ dismissal in 1983, Soisson, 48 and healthy, was found dead in Corsica, where he’d gone on vacation. Top Cedel officials had the body returned immediately and buried, with no autopsy, announcing that he had died of a heart attack. His family now suspects he was murdered. ​“If Soisson was murdered, it was also related to what he knew about Ambrosiano,” Backes says. ​“When Soisson died, the Ambrosiano affair wasn’t yet known as a scandal. [After it was revealed] I realized that Soisson and I had been at the crossroads. We moved all those transactions known later in the scandal to Lima and other branches. Nobody even knew there was a Banco Ambrosiano branch in Lima and other South American countries.”

After leaving Cedel, Backes got a job in the Luxembourg stock market, and later became manager of a butchers’ cooperative. But he kept friends inside the clearinghouse and began to collect information and records about Cedel’s operations.

With Soisson out of the way, there was nothing to stop the abuse of the system. Whereas Soisson had refused numerous requests to open non-published accounts (from such institutions as Chase Manhattan in New York, Chemical Bank of London and numerous subsidiaries of Citibank), Cedel opened hundreds of non-published accounts in total irregularity — especially after the arrival of CEO André Lussi in 1990. No longer were they just sub-accounts of officially listed accounts, Backes charges. Some were for banks that weren’t subsidiaries or even official members of Cedel. At the start of 1995, Cedel had more than 2,200 published accounts. But in reality, according to documents obtained by Backes, Cedel that year managed more than 4,200 accounts, for more than 2,000 clients from 73 countries.

Clearstream was formed in 1999 out of the merger of Cedel and the compensation company of Deustche Börse (the German stock exchange). ​“No accounts are secret,” insists spokesman Graham Cope. ​“We are controlled by the local authorities … who have access to information on all accounts. The term ​‘secret’ is misused again and again. Our customers choose to have unpublished accounts, which simply means — like a telephone number — they choose not to display the name and number in our publications. Customers often have many unpublished accounts, which they use for their own internal management purposes to ensure there is no confusion between their accounts.”

But Backes thinks otherwise. ​“I discovered an increasing number of unpublished accounts,” he says. ​“There were more unpublished than published accounts, and a [large] proportion were not sub-accounts of a principal account, which is what the system was supposedly for. The owners of these accounts were not inscribed on the official list of the clients of the firm.”

How does the system work? Backes explains, for example, that a bank with a published account could open an unpublished account for a branch in the Cayman Islands, an offshore tax haven. A drug trafficker easily could have the Cayman branch debit cash from his personal account to buy stocks on Wall Street. The transaction would be handled by Clearstream, which would transfer the money electronically to a New York bank that had its own clearinghouse account. Soon the shares could be sold to buy real estate in Chicago with ​“clean” money. But regulators or investigators, depending only on published accounts, would find it nearly impossible to trace the money. Backes says Clearstream employees joke that the company name means ​“the river that washes.”

While clearinghouse clients may want to keep transactions secret, detailed information on every transfer, including those via non-published accounts, is listed on daily ​“security statements” — records to prove that the stock or cash has been sent. These statements are stored on microfiche and, under Luxembourg law, must be kept 10 years’ for commercial enterprises and 15 years for banks. A Clearstream insider gave Backes 10 years worth of these records. ​“The documents are a mine of information for any financial inquiry,” Backes says. ​“The archives of the clearinghouses can contribute to retracing where funds have gone. The knowledge of the list and the codes relative to non-published accounts, until now guarded secrets, offer immense possibilities.”

Backes notes that similar records exist for the other big clearinghouses, Euroclear and Swift, also based in Brussels. ​“It is possible,” he explains, ​“when one knows the date of an operation and the bank of entry, to reconstitute inside the clearing companies the voyage of the money and stocks or bonds — to follow the tracks.”

Révélation$ charges that Cedel/​Clearstream further violated its own statutes by setting up unpublished accounts for industrial and commercial companies. With accounts in their own names, companies could avoid passing through banks or exchange agents to use the clearinghouse. They thus skirted mandated due diligence and record-keeping. When Siemens was proposed for membership, Backes says, some Cedel employees protested that this violated Luxembourg law. However, management told them that Siemens’ admission had been negotiated at the highest level.

Among the major companies with secret accounts, Backes discovered the Shell Petroleum Group and the Dutch agricultural multinational Unilever, one of whose accounts was associated with Goldman Sachs. On the French TV broadcast ​“Les dissimulateurs” (“The Deceivers”) in March 2000, Clearstream President Lussi simply denied the accounts existed. ​“Only banks and brokers are eligible for membership,” he said, ​“as it has always been the case. No private company accounts, no commercial or industrial companies.”

But his own spokesman contradicts this claim. ​“Customers of Clearstream can be banks or, exceptionally, corporate clients who have their own treasury departments the size of banks,” Cope wrote in an e-mail to In These Times. ​“We cannot accept CEOs of multinationals or terrorists and have strict account-opening procedures to prevent such problems.”