ters of the annual interest owed on Mexico’s foreign debt. The U.S. Treasury polls American banks, security dealers, and other businesses on their financial transactions with foreigners. These data are riddled with imperfections, most of which lead to underestimates. Still, they do show patterns that are consistent with other things we know. They indicate that between 1978 and 1985 Latin Americans and their Caribbean tax-haven proxies increased their short-term deposits with U.S. banks by at least $33 billion. At the same time U.S. banks were increasing their loans to Latin America by about $50 billion. Thus the basic'role played by U.S. banks to Latin America was that of a middleman between the short-term deposits of the countries’ elites and the medium-term loans demanded by their governments. ^ ^ ^ n o t h e r very important category of U.S. assets that Latin Americans have been stocking up on is cash. This is a “ foreign asset” that is often physically kept at home. From a financial standpoint, it represents a net claim that foreigners have on the U.S. There is no direct measure of U.S. cash held abroad, but “ dollarization” is rampant in Argentina, Brazil, and Mexico. It is common practice for people to squirrel away whole suitcases of $100 bills as a hedge against depreciation of the local currency. This helps to account for the curious fact that there are now about three $100 bills in circulation for each man, woman, and child in the United States. A recent U.S. Treasury “ guesstimate” is that perhaps $20 billion worth of them are offshore. Cash is also a preferred method of transferring money from local to foreign accounts. Venezuelans trave ling to Miami reported over two billion dollars of cash in 1981 alone on the Treasury forms that entrants to the U.S. have to fill out. Currency has long poured into the Miami Federal Reserve district because of drug traffic. More recently, though, the El Paso and San Antonio Federal Reserve districts have reported net receipts of currency, reflecting the large cash deposits that Mexicans have been carrying across the border. The explosive growth of San 'Francisco’s receipts during the past two years is apparently a combination of Philippine flight capital and a shift of drug money to the West Coast. - Who owns these assets? The typical Mexican investor with dollars at home or abroad is really pretty middle class. As one writer recently put it, “ Even the Mexican City shoe-shine boys stockpile dollars.” But even if everyone has a bit of it, the key fact about flight capital is that it is highly concentrated. At tthe very top are the bankers’ wet dream, the superrich. These are the people of C itibank ’s “Global Elite,” a list of 5,000 or so people from around the world who are supposed to have individual net worths greater than $100 million. The U.S. supposedly has about 500 to 600 such people, depending on the state of the stock market. In the Latin American context, these people include a lot of names most Americans— and indeed, most of their own countrymen, given their taste for discretion— have never heard of, but they are fabulously rich. These are the happy few that automatically qualify for services like the new American Express “ Black Card,” the ultra VIP credit card that has a credit line of $500,000 and offers services such as private planes, bodyguards, and access to Fifth Avenue stores in the wee hours of the morning for “ solo shopping.” Obviously at this level the key function of the card is not credit, but identity: “ Do you know me? I may look like a twit, but I own Paraguay.” Meanwhile, Mexico’s income per capita averages less than $2,000 a year. And since 1982, the debt problem has made things worse. Imports and domestic spending have been slashed to meet the interest bill. For the lower half of the population, this means that real incomes have fallen further from their already low base. H o w did Third World elites manage to convert all that foreign debt capital into private foreign assets? There are several explanations that are not mutually exclusive. The “ innocent bystander” view holds that the local rich just happened to deploy their own assets abroad at precisely the time their governments chose “ robably two-thirds o r more o f Mexican flight capital has found its way into time deposits. Now some large Mexican depositors have begun to shift their holdings into U.S. government securities, because o f concern about the health o f U.S. banks that have loaned too much money to places like Mexico! to borrow heavily abroad to finance attempts at growth. Of course a more sensible approach would have been to fund public spending with taxes or direct foreign investment in the local economy. But local elites are so powerful that serious income or wealth taxes are almost unheard of, while domestic enterprise is protected by a host of barriers against foreign investment. Furthermore, local elites do not just react passively to the local governments. In many cases they are the local governments, or at least the executive committees. Thus a basic method of taking money out of Mexico has been to exploit overvalued official exchange rates with the help of foreign banks. The preservation of this exchange rate system even in the face of massive capital flight is very hard to understand unless we take into account the profits made from it by people in positions to influence policy. There’s also, of course, plenty of outright graft in converting dollars borrowed by government projects into private wealth. The actual pathways are endless: phony intermediary companies that recontract with foreign suppliers on public projects and take a hefty spread; importers who get permits to purchase foreign exchange for imports that either never get bought or are wildly over-in- voiced; developers who get public loans for projects that don’t exist; local “ consultants” who are paid by U.S. suppliers in New York dollar accounts, and so on. To what extent were American bankers aware of what was going on? It’s a nice question. Some observers feel they must have been knowing, or at least willing, participants, just like the middlemen in phony-asset scams throughout financial history. This suspicion requires an assumption about the intelligence, cunning, and foresight of bankers that, in my experience, is not warranted. What’s indisputable is that when wealthy Mexicans invest their own capital abroad, they are much more cautious than the foreign bankers who financed all their country’s debt. I t ’s also indisputable that leading American banks are as involved in ferrying capital out of Mexico as they were in lending money to the country in the first place. The U.S. banks that are the most active in “ international private banking” to wealthy Mexicans are Citibank, Morgan Guaranty, Bank of America, and Chase, plus several large regional banks in Texas and California. They all serve a key client list of at least several hundred wealthy Mexican customers. They all have very active calling programs designed to recruit new clients. They all play an active role in helping wealthy Mexicans get their money out of the country. They all help such customers design sophisticated offshore trusts and investment companies to shelter income from taxes and political exposure. They all try very hard to keep the identity of their customers a secret. They are all more or less actively involved in lobbying U.S. authorities to preserve policies toward taxation, bank regulation, and bank secrecy that are favorable to their clients. “When we go in there,” one international private banker told me about his trips to the Third World, “we’re not taking any kind of information with us, and when we leave the country we don’t have any papers with us either. You know, I tell [my boss] when I leave on a trip to remember my face if anything happens to me. But he says, don’t worry, the bank will never admit that you were a part of us.” “ Pouch” services or the ir equivalents—helping clients move money secretly—are among the most important services that private bankers provide. If handled discreetly this can be a real competitive advantage, because among other things the bank learns enough about a customer’s “ private parts” to lock him in. The standard image of moneylaundering is a bunch of shady characters trucking suitcases of cash through airports and depositing it in obscure banks in the Caymans, Florida, the Bahamas, or Switzerland. Although some of this obviously goes on, especially at the “ drug-related” end of the business, this is not really first-class money-laundering at all. One banker recently described to me the challenge of helping rich clients to get money out of Mexico without leaving a trail: “You can buy dollars in Mexico from the Central Bank, no problem. The problem is that you are basically registering yourself, exactly what you don’t want. You could go to a local bank, buy a $100,000 check there with pesos, and then send it to the States. But then when you deposit that check, it’s going to show [what account] it went to. So what happens is. . .the customer would go to his own bank, draw a cashier’s check in the name of [XYZ Foreign Bank], and deposit that in an [XYZ Foreign Bank] account. So his name is not on that check at all. Or deposits are made in a customer’s peso account in a Mexican branch of a U.S. bank, and credits are made to the customer’s dollar account in New York.” Since November 1985 the Mexican government has restricted the use of the foreign banks’ “ peso windows” in Mexico in order to curtail such transfers. However, the more aggressive banks have already begun to help their private customers evade even this restriction by setting up parallel foreign exchange swaps that avoid the banking system entirely, leaving virtually no records. Again, the major banks have played a central role in disarming the new restrictions. The really clever private bankers also have devised methods so that Mexicans can use their foreign capital without leaving home, much less being taxed on it by their own governments. The favorite method is the so-called “ back-to-back” loan, whereby the bank “ loans” the client his own money. This not only reduces the client’s taxes even further, but helps him take more money out of the country. These international private bankers are not malevolent or obtuse. They are doing exactly what they get paid to do. Theirs is not a labor of love, but a very profitable business, with returns on equity of 100 percent and more. In an era when most other low-cost sources of bank funds have dried up, private banking to Third World countries looks pretty good. In fact, this was just how lending to Third World governments looked in the 1970s, relative to commercial, retail, or housing lending at home. ^ K i t ib a n k is clearly the most aggressive American bank in international private banking (IP.B). It appears to have over 1,500 people dedicated to this activity worldwide, and over $26 billion in IPB assets. In Latin America, Citibank probably has over 50 direct IPB employees in offices inside Mexico, Argentina, Chile, Venezuela, and Panama, where it also owns banks with local branches. Since discretion is essential, most of these employees are officially connected to other parts of the bank. Because of its nearly four billion dollars of loan exposure to Brazil, Citibank prefers to serve the Brazilian flight-capital market out of an office in Montevideo, Uruguay, where bank secrecy laws are very stiff. Overall, at least half of Citibank’s $26 billion or so in IPB assets probably belongs to Latin Americans. This compares with Citibank’s total loan exposure to the “ Big Four”—Brazil, Mexico, Argentina, and Venezuela—of about $10.3 billion. Thus, even allowing for loans to the rest of Latin America, Citibank probably comes very close to owing more money to Latin Americans than it is owed. Banks are required to report large loans outstanding to individual countries. But there is no requirement to report the country origins of private banking assets. This secrecy is probably no accident. In the case of several major banks and other financial institutions, the truth might be a little embarrassing—they are not really net lenders to these countries at all. The aggregate balance of loans and deposits is a little clearer. Our best estimate is that U.S. banks as a whole probably now manage international private banking assets of roughly $100 billion to $120 billion, 60 to 70 percent of which comes from Latin American private banking assets, compared to total U.S. bank loans outstanding to Latin America of about $83 billion. Not only is the U.S. economy as a whole probably a net debtor of Latin America: our commercial banks alone are close to being net debtors of Latin America. But this is the kind of debtor anyone would love to be. Combining what we know about capital flight and private lending, a reasonable estimate of the banks’ profits on the “ round-trip” for Mexico alone is $2.4 billion in 1984. On an equity base of four billion dollars, that’s a return of 70 percent. One can quibble about the precise assumptions behind such estimates, but the basic findings are robust. U.S. banks have so far reaped a bonanza from their own disastrous international lending policies of the last decade. As Third World leaders and international bankers warm up for another chorus of moaning about the debt crisis, they need a forcible reminder that the solution may lie in their own hands. Countries like Mexico should get no more money until they have enacted reforms to ensure that the dollars we lend them don’t come right back again in the bank accounts of rich private citizens. The United States should take steps of its own to correct policies that encourage capital flight— especially laws that make us a haven for foreigners flouting their own nations’ tax systems. Finally, international banks must take responsibility for the impact that “ international private banking” is having on the poor nations where it operates. The easier it is for these nations’ ruling elites to smuggle assets abroad, the less incentive there is to clean up at home. The capital flight these banks are promoting and facilitating in the 1980s is just as irresponsible as the loans they were peddling in the 1970s. James S. Henry is an economist and writer living in New York. Reprinted by permission of New Republic, ®1986. Artist T. Michael Gardiner is a frequent contributor to CSQ. He lives in Seattle. 10 Clinton St. Quarterly
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