iPleaders

When Need Manifests into Greed

July 03, 2019
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This article is written by Yogesh Palekar, here he has discussed on the Undoing of the World’s Richest and the Least populated Island Nation, which was sanctioned stricter than rogue nations like North Korea & Iran.

When we think about sanctioned nations, names of North Korea, Syria, Iran, Sudan instantaneously come to our mind, these nations have been constantly marred by threatening dictatorship, terrorism, illegal weapon trade, and related bloodshed thus becoming global enemies and thereby getting themselves sanctioned by the Western powers.

However, Can we ever imagine a scenic island nation full of coconut trees lining its dazzling beaches, glowing blue sea water, and undersea coral marvels adorning its coast, topping the league of such rogue nations to become the strictest sanctioned nation at one point of time?

As you momentarily scratch your head over- ‘Why an ideal holiday destination was meted out with such harsh treatment?’ Let me tell you, they deservedly got it.

The nation we are talking about here is, Republic of Nauru “Nauru” a tiny peaceful island nation located in Central Pacific in Micronesia. This island was first discovered by a Brit John Fearn who called it “Pleasant Island”. Since then it has gyrated from the colonial rule of one western power to another and back, to finally gain its independence in 1968, so how did Pleasant Island become so unpleasant?

Aerial view of Nauru

It helped money launderers launder their ill-gotten gains thus earning the rare distinction of an entire nation being designated as a supporter of Money Laundering.

However, Nauru wasn’t always an outlaw nation. After its independence, the period of 1970s to early 1990s was economically very fulfilling for Nauruans. It was the country with the highest per capita GDP in the world during those times.

In 1975, Nauru’s economy earned approximately $2.5 billion having done quite well with a singular export derived from its geographical isolation. For millions of years, migrating birds took a bathroom break on this coral sanctuary, leaving the island’s interior hummock composting rich veins of dense phosphate. However, due to intense exploitation by the local government, the phosphate reserves got depleted too fast too soon and thus the nation started fretting over new and alternate sources of income.

That is when Nauru’s finest minds decided to turn to the heady riches of international banking, specifically, opting for offshore banking, whereby a country registers new banks with loose rules and permits them to operate anywhere in the world except onshore in the country of registry. Anyone could set up a licensed bank account in the country for only $25,000. As a matter of fact, during those times the Nauruan registration website advertised its jurisdiction as being the easiest in the world to obtain a banking license. 

The loose banking laws were complemented by very strict privacy protection offered to customers of the bank by the Nauruan law. The privacy protection was,     in fact, stronger than those in notorious offshore money havens like Switzerland and the Cayman Islands, thus the tiny nation became all the more attractive to criminals looking to conceal cash.

But how exactly did the money laundering scheme operate and who laundered money through it?

The scheme was designed by Russian bankers but was run by a married couple in New York – Peter Berlin and Lucy Edwards, a vice president of the Bank of New York. (Edwards was born as Ludmilla Pritsker in Leningrad). Beginning in Moscow, two established banks, Sobinbank and MDM, opened two separate banks — Depozitarno-Kliringovy Bank “DKB” and Flamingo Bank to serve as the conduits for fleeing funds.

Funds from Flamingo and DKB were then funnelled to a shell bank registered in Nauru called Sinex ( Can you imagine this to be a name of the bank, however, it was real). Sinex was founded in the early 1990s by several Russians, one of whom, Aleksey Volkov, who eventually worked directly with Berlin and Edwards out of their New York office. Sinex opened a correspondent account with the Commercial Bank of San Francisco, which permitted it to operate in the United States. Payments from Sinex were generally made to several shell firms, companies that did no business other than to receive these funds and who had running accounts with the Bank of New York. To avoid suspicion, Berlin and Edwards continuously created new names for these shell firms: Benex International, General Forex, Torfinex, Lowland Inc., Becs International, etc. From there, money was dispatched to numerous offshore locations, where it rested as clean corporate funds, easily accessible. One Russian suspected in participating in this scheme is Semyon Mogilevich, the notorious mafia head known as the Red Don.

Indeed, much of a shell bank’s activity takes place not in Nauru but in correspondent accounts in other countries. A correspondent account is just like a checking account except that it’s for an entire bank.

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Once your dirty funds have moved through a bank registered in Nauru, they are essentially liberated. No investigator can subpoena “records” to trace the flow of money — because there simply aren’t any. A Nauru bank is a firewall for any investigating official. What, exactly, was the transaction? Where did the money come from? In Nauru, the buck stops there.

Victor Melnikov, deputy chairman of the Russian Central Bank, claimed that $70 billion was transferred from Russian banks and laundered primarily by the Russian Mafia with the help of offshore banks in Nauru, to evade taxes, causing immense financial loss to Russia.

It is purportedly stated that during those times the nation had over four hundred registered shell banks which only existed on paper and were all registered on a common address of The Nauru Agency Corporation “NAC”.

A New York Times journalist Jack Hitt who visited Nauru to report on the news, stated to have been filled with weird terror when he stood in front of the building of NAC which was only half a shack and the only visible presence the offshore banks had in Nauru were, the wall display in a hallway of NAC where their names are engraved in plastic.

Indeed a riveting tale of how half a shack crippled one of the world’s largest superpower.

Finally, the Financial Action Task Force “FATF” the premiere body fighting terrorist financing and money laundering globally took Nauru to the task and declared it as a non-cooperative nation.

US sanctions also followed and were imposed by the US Treasury and Financial Crimes Enforcement Network “FinCEN”, harsher than those imposed on Iran, North Korea and other such rogue nations.

( As a matter of fact the then Nauruan President wrote a letter to the US trying to extort $ 10 million in exchange for a change in the laws. The letter claimed that the money was simply compensation for Nauru’s losses due to “unsubstantiated allegations” of money laundering).

The harsh sanctions resulted in foreign banks refusing to trade in dollar-denominated transactions with Nauru thereby eventually stopping all the trade and thus rendering the business of generating income from operations of offshore banks useless.

Since 2001, however, Nauru worked to clean up its act by introducing and implementing anti-money laundering laws and abolishing the shell banks.

The positive steps that the nation took to fight money laundering resulted in the non-cooperative label and sanctions being finally lifted in 2005.

Currently, Nauru is one of the poorest countries in the world having a GDP of around      $140 million (that amount of money cannot buy 2 quality strikers for a top European football club). It’s finest minds, however, are always looking at new avenues of money making, even exploiting its membership in the UN General Assembly to recognize and help legitimize the unrecognized nations, such as the breakaway republics Abkhazia and South Ossetia in exchange of money.

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