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March 15, 2002
The worlds biggest banks and multinational corporations have set up a shadowy system to secretly move trillions of dollarsa system that can be exploited by tax evaders, drug runners and even terrorists.
Ernest Backes exposed this dubious system and has launched a personal crusade for international oversightearning him some high-powered and dangerous enemies.
n 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 doesnt actually send money anywhere,
it just debits and credits its members accounts. Its 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 $6.5
Its also an excellent mechanism for laundering drug money or hiding income
from the tax collector. Banks are supposed to be subject to local government
oversight. But many of Clearstreams members have real or virtual
subsidiaries in offshore tax havens, where records are secret and investigators
cant trace transactions. And Clearstream, which keeps the central records
of financial trades, doesnt get even the cursory regulation that applies
to offshore banks. On top of that, it deliberately has put in place a system
to hide many of its clients transactions from any authorities who might
According to former insiders:
Many of these charges were first made in a controversial book called Révélation$,
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 books 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
Assemblys 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.
bearded, heavyset man in his mid-fifties, Backes spoke with In These Times
in Neuchâtel, Switzerland, where hed gone to attend a conference
on international crime, and explained how hed 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 Clearstreams
predecessor Cedel (short for central delivery office), set up the
year before by a consortium of 66 international banks. Backes helped design
and install Cedels 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 Garsons 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 didnt
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
In 1975, several big Italian and German banks wanted to centralize their accounting
and didnt want other members of Cedel to send transfers through their
numerous individual branches. The Cedel council of administrationits board
of directorsauthorized banks with multiple subsidiaries not to put all
their accounts on the lists. Backes and Gerard Soisson, then Cedels 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 Cedels 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 dont figure in any printed document and their name is not mentioned
in any report.
Requests for non-published accounts came from some banks that werent
eligible, but Soisson turned them down.
y 1980, Backes had become Cedels 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,
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
Just two months after Backes dismissal in 1983, Soisson, 48 and healthy,
was found dead in Corsica, where hed 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 wasnt 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.
fter 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 Cedels
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 irregularityespecially 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 werent 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 meanslike a telephone numberthey
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 statementsrecords 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
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 bondsto
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.
Part two of the investigation >>>>>>>