Secrecy World Page 6

That March, he traveled to Costa Rica, where he did business with José Maria Pla Horrit, a local lawyer with a crooked clientele. A few years earlier, when the U.S. government wanted to serve an indictment on the fugitive financier Robert Vesco for looting a mutual fund of hundreds of millions of dollars, the U.S. embassy suggested they deliver the papers to Pla Horrit, one of Vesco’s attorneys. In the early days, Mossack provided Panamanian companies to Pla Horrit and several other Vesco associates.

  On April 4, Costa Rican authorities arrested Caro Quintero for criminal acts related to narcotics trafficking. During his time in the Central American nation, he alternated among the four properties he owned, dined at the best restaurants, and traveled around in a limousine. Despite the publicity surrounding the arrest, Pla Horrit managed to stay in the background. About a week after Caro Quintero’s extradition to Mexico, Pla Horrit registered the first of two Panamanian companies on the drug lord’s behalf with Jürgen Mossack. Wanting maximum secrecy, he paid Mossack to act as a director of the company. Mossack appears not to have known the real identity of the beneficial owner. At least one of the companies held a sprawling mansion on the outskirts of the Costa Rican capital, San José.

  In 1989, a Mexican judge sentenced Caro Quintero to forty years in prison, the country’s then maximum. U.S. authorities later accused the drug kingpin of continuing his business while behind bars. The Treasury Department sanctioned Caro Quintero’s friends and relatives for investing his considerable fortune in legitimate businesses. With his client in prison and the properties confiscated, Pla Horrit stopped paying Mossfon. The companies fell into limbo. Pla Horrit died on Christmas Eve in 2004.

  A year later, a Mossfon lawyer sent an email to the partners. The president and the secretary-general of the Costa Rican National Olympic Committee had visited the office with a thorny problem. The Costa Rican government had given the committee Caro Quintero’s mansion for its new headquarters, but the committee couldn’t acquire legal title because the drug lord technically still held it through Mossfon’s Panamanian company.

  The Olympic Committee wanted Mossack, as a director of the company, “to donate” the property to the committee to avoid a complicated judicial process. Giving away property that still technically belonged to one of the world’s most fearsome drug traffickers seemed ill-advised to Mossack. The firm decided that the Mossfon directors would resign their positions. The Costa Ricans would have to solve their legal issues on their own.

  “Pablo Escobar was a child nursing at his mother’s breast compared to R. Caro Quintero!” Mossack explained in Spanish in an email, referring to the notorious Colombian drug kingpin. “I don’t want to be among those he will visit after he leaves prison.”

  Mossack’s instincts for self-preservation proved prescient. On August 9, 2013, a judge in Guadalajara unexpectedly released Caro Quintero on a technicality, with twelve years remaining on his sentence. Before the United States could extradite him, he disappeared.As of this writing, his name sits atop the DEA’s list of fugitives.

  4

  RISE OF THE GLOBAL BANKSTERS

  An offshore company without a bank account is of limited utility. A bank is necessary for any significant financial activity to take place. For more than a century the gold standard for secrecy in banking was Switzerland, where bankers could be counted upon not to reveal an account holder’s identity or expose a customer’s transgressions. In fact, it was against Swiss law for a banker to reveal private information about his clients. The Swiss banks did not care if the origin of the money was legitimate or nefarious. Account holders bore the responsibility for paying their taxes and obeying the law, not the bankers who hid their money. But if Swiss account holders wanted to spend large sums while keeping their money secret, an anonymous company was the way to go. Flexible Swiss bankers created offshore companies for their account holders. They were among Mossfon’s best customers and contributed to making Geneva the firm’s most profitable office.

  Among Mossfon’s best banker clients, HSBC stood out. The bank and the law firm grew together symbiotically, riding a wave of financial globalization, both legal and illegal. They shared a casual approach to customer vetting and a profit-first mind-set. HSBC ordered more than twenty-three hundred companies from Mossfon over the lifetime of the law firm. It bought inactive shelf companies in bulk. When a customer needed one, the banker alerted Mossfon to transfer control.

  Their collaboration began in the early 1980s, before Jürgen Mossack and Ramón Fonseca joined forces, through Antoni Guerrero, a Geneva-based South American businessman. Despite having no legal training, Guerrero recognized the value of being a middleman. He acquired companies from Ramón Fonseca for Geneva’s bankers and lawyers. After the partners formed Mossfon, the firm became Guerrero’s main conduit to anonymous companies.

  Guerrero’s top banking client was Luxembourg-based Safra Republic Holdings, which operated a successful Swiss private bank. Republic’s thirty thousand high-net-worth clients included bagmen for corrupt African leaders, Chinese princelings, Middle Eastern royalty, the Russian mafia, crooked diamond merchants, and money launderers. Most wanted the secrecy afforded by offshore companies. Republic specialized in absolute discretion, minimal questions, and concierge service—the kind of hands-on tight-lipped Swiss banking caricatured in a thousand spy novels.

  Guerrero was a great salesman and a terrible businessman. He had a habit of collecting the registration renewal fees from customers but not actually renewing the companies. Only when the customer needed the company to act would Guerrero pay up. His cavalier approach to customer affairs may have been a factor in his abrupt departure from Geneva. After an unexpected trip to Panama in 1998, Guerrero returned to the office in Switzerland and told his assistant Adrian Simon that he had sold the business to Mossfon. Simon was not entirely surprised by the spur-of-the-moment decision. Guerrero had half-joked that he was so nervous about customers coming after him, he slept with his passport under his pillow.

  Fonseca traveled to Geneva to clean up the mess Guerrero left behind. He put Simon, a former translator and schoolteacher from Spain, in charge. The Spaniard solidified relationships with prized clients like Republic, which was going through its own transformation.

  Republic’s founder, Edmond Safra, was in the process of selling his financial empire to HSBC. The billionaire scion of a Syrian banking dynasty, Safra referred to Republic Holdings and its twin, Republic National Bank of New York, the third-largest retail bank in the New York metropolitan area, as his children. They were big boys, with a combined $56 billion in assets under management and clients in eighty countries.

  Safra was one of the last connections to old-school relationship banking. His forefathers had financed camel caravans in the Ottoman Empire. His bankers kept the secrets of dangerous men. He frequently traveled with an entourage of well-armed Israeli bodyguards. Superstitious, paranoid, and suffering from Parkinson’s disease, Safra was reluctantly ceding the field to a corporation that was more machine than flesh and blood.

  On December 3, 1999, before Safra could complete Republic’s sale to HSBC, one of his nurses, a former U.S. Army medic and Green Beret, set a fire inside a waste basket in his Monte Carlo penthouse. The nurse then yelled a warning that armed assailants were loose inside the home. According to police, it was a misguided stunt to impress Safra by rescuing him from a fictitious attack. Instead, the alarm sent the sixty-seven-year-old banking tycoon and another nurse fleeing into a steel-reinforced lavatory that doubled as a safe room. As the fire spread inside the penthouse, police banged on the walls, urging Safra to come out. Not even the cell phone pleas of his wife, Lily, could coax the terrified mogul to open the door. When the rescuers finally breached the bunker bathroom, they found Safra and a Filipina nurse dead of smoke inhalation, their bodies blackened by soot.

  Safra’s bizarre death cast a pall over the $10 billion HSBC deal under way, but did not stop it. As mourners eulogized Safra at a Geneva synagogue, the U.S. Federal Reserve app
roved the sale.

  Republic’s culture had deep roots in Switzerland, where willful blindness was both tradition and law. Switzerland’s bank secrecy dates at least to the early years of the twentieth century. After surrounding countries raised taxes, wealthy French and German citizens rushed to hide money in neighboring Switzerland. Swiss banks then feasted on the turmoil afflicting Europe around World War I. As the financial services industry grew more powerful, it strengthened its grip. Initially, it was a civil offense for bank officials and others to divulge information about account holders. In 1934, Switzerland made it a crime, punishable by three years in jail. Tax evasion, on the other hand, remained a civil infraction.

  True to its colonial roots, HSBC changed little about the manner in which Republic operated, lest reform hinder profits. The Hongkong and Shanghai Banking Corporation had opened for business in 1865, five years after Anglo-French forces looted and burned the Summer Palace and defeated the Xianfeng Emperor in the Second Opium War. British merchants created the bank to fund foreign trade and based it in Hong Kong, itself wrested from China in the First Opium War. HSBC earned a reputation as excessively conservative, secretive, and arrogant. The bank could ignore its negative image in Hong Kong thanks to cozy government relations, nonexistent disclosure requirements, and a malleable press.

  In 1993, HSBC moved its headquarters to London and tried to shake its conservatism by binge buying other banks. HSBC hoped the Republic acquisition would vault it to the top of the bank rankings, known as the league tables. The view at the time was that bigger was better, and many banks grew through a feeding frenzy of mergers and acquisitions. How to mesh disparate banking cultures or manage the sprawling multinationals that resulted received insufficient attention.

  HSBC’s executives saw an emerging class of global rich as the bank’s path to prosperity. The superwealthy were increasingly stateless. They banked in Geneva. Lived in London and New York. Shopped in Paris and Milan. And they held their assets through offshore companies registered in places like the British Virgin Islands. HSBC executives were reading the telltale signs of a new age of inequality, even if they didn’t recognize it as such. Governments were retreating from providing their citizens pension and health obligations, an HSBC strategy report observed. The stateless rich balked at paying taxes in their home countries, to which they felt little allegiance. It made sense to them to base their operations inside tax havens and to bank in Switzerland, where discretion was woven into the country’s DNA. These trends represented an opportunity for the wealth management industry.

  HSBC recognized but ignored the dangers inherent in the Republic acquisition. Rumors that the bank served the criminal class had long dogged Republic. The accusations went beyond the normal reputation of Swiss bankers as handmaidens to the unscrupulous. By the end of the 1990s, there were plenty of facts in the public domain. Republic actively dealt in murky commodity businesses such as diamonds and gold favored by the underworld. Republic was implicated in Manuel Noriega’s money-laundering activities in Panama. It had voluntarily disclosed to the U.S. Department of Justice that the Russian mafia was using its correspondent banking services. While a number of these scandals involved multiple banks, Republic’s name kept resurfacing.

  HSBC code-named its plan to buy Republic “Project Gold.” Rather than look inside Republic directly, it opted to perform initial due diligence via public filings. HSBC feared takeover talk would alarm Republic’s executive management team, which it wanted to capture intact. After green-lighting the acquisition, HSBC likely did a standard prepurchase audit. If the review exists, its contents have never been made public.

  Stephen Green, Baron Green of Hurstpierpoint, an HSBC board member at the time, admitted while testifying before a committee of the House of Lords in 2015 that the bank had been aware that there were going to be issues with Republic. Those tasked with the mechanics of merging the two institutions noted that Republic’s executives had a troubling habit of disregarding written directives from regulators.

  Still, HSBC made few changes. Dedicating the resources needed to fix Republic immediately would have washed away the short-term benefits of the acquisition. Transforming institutional culture is costly. It requires new procedures and personnel.

  The deal was finalized a month after Safra’s funeral. HSBC’s $9.84 billion purchase of Republic doubled its private banking business overnight, increasing assets under management to $122 billion. Prior to his death, Safra had shaved $450 million off the asking price when HSBC discovered that Republic had known about a Japanese Ponzi scheme run through its trading accounts but failed to promptly notify regulators. U.S. regulators eventually slapped the bank with a $700 million fine.

  Even with the fine, the deal quickly produced the money pot HSBC envisioned. In 1999, its global private banking operation had earned pretax profits of $180 million. A year after the Safra banks came online (along with another smaller acquisition, Crédit Commercial de France), profits soared to $440 million.

  Mossfon turned out to be an ideal partner for HSBC. Adrian Simon didn’t pester bankers with questions, he simply filled their orders. “The banks knew why they wanted to buy companies and for whom,” Simon says.

  Mossfon was interwoven with Republic/HSBC at every level, from clients to customer relations to top executives. Underpinning Safra’s private banking empire were the relationship managers, who brought in the customers and kept them happy. Their importance was such that Safra had given them ample space to operate. The relationship managers helped their clients acquire Mossfon companies.

  Under Safra, and even more so after HSBC acquired Republic, the bank’s relationship managers became de facto Mossfon salesmen. They knew when a client needed an offshore company. The relationship managers didn’t just juggle figures, the Swiss newspaper Le Temps observed, the good ones acted as “therapist, lightning rod, friend.” With discretion came access. As the guardians of secret money, the bankers maintained an intimate relationship with their clients, hopping on trains or planes when beckoned, even vacationing together. While a multimillionaire and his Swiss banker discussed the client’s financial affairs over espresso in say, Saint Moritz, their wives shopped together.

  Sexism was the norm, a form of male intimacy that bonded banker and client. One relationship manager wrote in a private note in his client’s file that the account holder’s wife was in Cyprus, and “she is not up to date with the account,” so communicate only by his cell phone. Swiss journalists found that customers were often more afraid of their wives finding their money than tax authorities. If the wife did manage to collect from a divorce, the client could count on the sympathetic ear and helping hand of his banker. In one case, a Belgian diamond merchant informed his relationship manager he now owed his wife $700,000 from an amicable divorce. He then asked if the banker could set up an offshore company for her.

  Republic’s Swiss private bank was housed in the former Grand Hôtel Bellevue, a majestic edifice constructed at the beginning of the twentieth century, located in an exclusive shopping district on Geneva’s tony lakefront drive. The building boasted spectacular views of the lake’s famous Jet d’Eau. Inside, among the marble, wood paneling, and staircases with finely wrought iron railings were four departments or “desks” that covered different parts of the world and, in some cases, distinct business lines. The most notorious desk among the four was MEDIS, short for Mediterranean, Europe, and Israel. “The MEDIS accounts were disproportionately more often the subjects of requests from Swiss authorities in relation to criminal charges,” noted David Garrido, the head of the Swiss bank’s legal compliance department. Captained by Judah Elmaleh, a charming Moroccan Jew, MEDIS handled the diamond trade.

  Mossfon and the bank shared a collection of wealthy Jewish diamond merchants as customers. These were men who had grown rich plundering African resources while fending off prosecution. Among them was the Israeli billionaire Daniel Gertler, whose involvement with blood diamonds through his close friendship
with the Democratic Republic of Congo’s corrupt and bloodthirsty president, Joseph Kabila, made him the subject of multiple government inquiries.

  The Mossfon files show at least 130 companies controlled or connected to another Israeli billionaire, Benjamin “Beny” Steinmetz. His relationship with Republic/HSBC dated to at least 1997. Steinmetz has courted controversy from Sierra Leone to Washington, DC. In 2016, he was arrested in Israel over a bribery allegation that involved a Mossfon company and a contract to mine iron ore in the West African country of Guinea.

  Another diamond client of HSBC and Mossfon, Mozes Victor Konig, fled his native Belgium in 1999, before he could be arrested. Konig was part of an organized criminal group that used a hotel investment to launder money from criminal activities. He had multiple companies with Mossfon that in turn maintained bank accounts with Republic/HSBC. One of them, Front Trading Consultants, kept $114 million in its account at one point. Interpol issued an alert for his arrest for unlawful circulation of precious metals, among other crimes.

  HSBC executives themselves were Mossfon customers. Michael Geoghegan began his HSBC career in 1973 as a teenager and became its go-to guy on foreign operations—and later, the bank’s CEO. In 1997, Geoghegan created three companies with Mossfon, through a Jersey subsidiary of Midland Bank, another HSBC acquisition. Midland didn’t usually create companies, a Mossfon lawyer explained, but “this was a special case for their senior executive.” One of the companies, BVI-based Shireburn Limited, held a house in London’s posh Kensington neighborhood, near the Royal Albert Hall. The Michael Geoghegan Settlement Trust, of which Geoghegan was the beneficiary, owned Shireburn. The trust owned the company. The company owned the house, which in turn leased it to, among others, Geoghegan himself.

  Stuart Gulliver succeeded Geoghegan as HSBC’s chief executive officer in 2010. Gulliver had started his career as a relationship manager in 1981, before quickly becoming HSBC’s head of trading. He owned a Panama-based Mossfon company, Worcester Equities. Initially he held the company through bearer shares. Then Gulliver canceled the shares and made the shareholder the Worcester Foundation. The British newspaper the Guardian reported that until 2003, Gulliver used the company to receive his HSBC bonuses. Gulliver claimed he paid all his taxes on the money but needed the secrecy to hide the size of his compensation from his colleagues.