Madoff Probe Focuses on Tax Havens
By Staff News & Analysis - December 30, 2008

The hunt for funds allegedly cheated out of investors by Bernard Madoff, who faces fraud charges in New York, has turned to offshore tax havens where investigators believe he may have salted away hundreds of millions of dollars. Stephen Harbeck, chief executive of America's Securities Investor Protection Corporation (SIPC) and official receiver of Madoff's now defunct brokerage business, said the hunt for funds was likely to spread all over the world. "We will trace funds wherever the trail goes," he said on the steps of the US Bankruptcy Court for the Southern District of New York. Sources close to the investigation said forensic accountants examining Madoff's books believed he had regularly sent large sums of money to offshore accounts in the Caribbean and Europe. "There are accounts at New York Mellon Bank that we have been looking at that appear to have sent and received money from offshore locations," a senior source said. Tracking down the money investors entrusted to Madoff is likely to be one of the longest and most complicated financial investigations on record. – Guardian

Dominant Social Theme: The regulators are in the hunt and on the job.

Free-Market Analysis: Of course this seems a bit like barring the barn door a bit too late. How refreshing it would be to hear a regulator or Wall Street denizen admit that the entire financial-regulatory structure of 20th century securities enforcement is a bit flawed. Let's not hold our breath.

The logic seems flawed as well, however. Having failed to snuff a fraud, American regulators are now prepared to turn the entire world upside down to compensate. If it were an honest investigation, then one could have no gripe. But when the American congress can sling US$700 billion around on the front end – and trillions on the back end via Federal Reserve money creation in reaction to the current economic crisis – while complaining that tax fraud may cost billions a year, or even tens of billions, then you likely have the makings of a fairly troublesome disconnect.

In our opinion, the bigger problems should be solved first. The American national debt of some US$12 trillion should be seriously addressed. And how about the tens of billions that country owes its senior citizens in the form of Social Security payments – cash that does not exist. Finally, there is the monetary mechanism itself. Central banks including the Federal Reserve can print any amount of money that their bankers and legislators decide to print. Too much money, of course, and inflation results. But if you can print what you want, why tax at all?

No, it seems there are other reasons for the current focus on tax-havens, and these mostly have to do with control of citizens assets. As states, even large and sophisticated and powerful Western states, begin to fail, the leaders of such entities become more not less controlling as a way of compensating. Wealth is a key to the dissemination of messages that might run counter to the accepted wisdom. Such wealth, and the dissenting views it can pay for, is not to be feared in the good times, only in the bad. This is not to say, that funds captured via fraud should not be tracked down and returned to victims. Only that the purported reasons for doing so are probably not the whole story.

There are several additional points to make in this regard. First of all, regulators, specifically the Securities and Exchange Commission had plenty of warning that Madoff's returns were not exactly on the up and up. Were the SEC in fact what it is purported to be, then this information might have been acted upon. But in reality, the SEC is not an investigative body. Instead, its regulatory mission is to ensure that proper public disclosure is observed. If you are an entity that is not disclosing properly, the SEC is apt to catch and discipline you. But if you are an entity intent on hiding the truth, well, the SEC's legion of lawyers are not apt to catch you because they are regulators not investigators. Thus, it would be helpful, in addition to ferreting out money overseas, to have an adult conversation about the role of securities regulators and what their capabilities might be.

Second, if the regulatory apparatus is so concerned with the Madoff fraud, why not simply provide ample compensation to victims? Not that we are in favor of ANY bailouts, because we are not. Coincidentally, prior to the economic crisis, such a question might too have seemed rather naïve. But with central banks handing out trillions and corporate debtors lining up for tax bailouts, one questions why individuals and families that have lost as much as US$7billion are left out in the cold. Here's a startling communiqué on what they can actually expect as of last week: A New York judge ruled that Madoff's investors would receive no more than $100,000 in cash compensation, no matter how much they lost. The ruling was included in a series of court orders made on 23 December by US bankruptcy judge Burton Lifland. (Guardian)

Wow. Not very much. If indeed investors are only entitled to $100,000 apiece, then who gets the money that is allegedly going to be disgorged from the tax havens? Again, we return to what we believe is a more accurate reading of the "facts on the ground." Any kind of financial scandal these days is going to lead to more pressure on tax havens because there is a political imperative at work, not a financial one.

After Thoughts

It remains to be seen if the regulatory changes that are made as a result of the Madoff fraud will be good ones. Most government regulation, especially white-collar financial regulation, is easily circumvented by those who are determined to do bad things. The impact that regulation has is on law-abiding individuals who strain to navigate an increasingly complex and expensive system. Markets suffer when unworkable and unwieldy regulations are put in place. Increasingly, then, they fail to perform their functions. As far as tax havens go, those who want to place their money legally or otherwise overseas will doubtless find it harder to do. And the tax havens available shall probably dwindle as well. For those who wish to pursue legal overseas transactions, it will pay to become increasingly selective. Switzerland comes to mind despite what the IRS does about UBS. Here in Switzerland we have a funny document we actually take seriously, it's called our Constitution. Perhaps American politicos should take a look at theirs. An honest examination would reveal that their present dismal circumstances have an awful lot to do with a total deviation from the principles set forth by that country's founding fathers – especially the "only gold and silver coin is legal money" part.

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