Treasure Islands - Nicholas Shaxson [60]
At first, Cornfeld took deposits mostly from U.S. military personnel stationed in Germany. He soon began looking further afield: first targeting an estimated 2.5 million U.S. expatriates around the world, then the British postimperial expatriate networks, then traders in Hong Kong, settlers in Kenya, French rubber-planters in Laos and Vietnam, Belgian miners in Congo, the Lebanese in West Africa, the overseas Chinese, and so on. He took money with no questions asked and an assurance that depositors’ secrets would be safe. When he bought his first airline, a joke went around inside IOS that he was starting up “Capital Flight Airlines,” and its couriers, according to Tom Naylor’s book Hot Money, spirited huge sums out of developing countries. “As civil war raged in Nigeria and international relief for the traumatised civilian population rolled in, “ Naylor wrote, “IOS was on the scene to help: the international aid funds often wound up in the safe in Geneva.” Even bigger sums were being bled from Latin America.
This, remember, is the company that was being held up as a model for turning the City of London into a tax haven. Even worse, by the time Raw’s article emerged, IOS was already enmeshed in high-profile scandals, including illegal operations discovered in a Brazilian police raid in 1966 and a high-profile Life magazine exposé of a joint IOS-Lansky courier operation in 1967. What was Raw thinking?
Naylor notes another curiosity about illegal offshore money, of which Cornfeld’s story is a perfect example. Banks take in deposits (which are liabilities of the bank) and make loans (which are its assets), but they also hold capital, which is the safety buffer that investors put in. If loans go bad this capital serves as a shock absorber: It is the investor capital, not the deposits, that take the hit (though if more and more loans go bad and the capital is exhausted, then the bank runs into real trouble, as happened to banks in the latest financial crisis). Prudent bankers will restrict their loans up to a multiple of, say, ten times the capital buffer.
Capital is far more valuable to bankers than deposits: The more capital you have, the more you may multiply your balance sheet. And this helps us understand why banks like secret offshore deposits so much. Investigators who probed IOS said it operated under an assumption that 10 to 20 percent of its deposits were, effectively, permanent capital—that is, the owners could not withdraw it, either because it was too risky for them to do so or because they were dead. It is no wonder that Swiss bankers were so reluctant to hand over the deposits of Jews who died in Hitler’s concentration camps: The deposits had essentially, the Swiss believed, become permanent reserves of bank capital. Not only that, but depositors willingly accept below-market interest rates in exchange for secrecy—boosting the profits to offshore banking.
By 1970 Cornfeld’s IOS was tottering under ever more scandals. Some of IOS’s Swiss employees had started complaining that Cornfeld owed them money, and an insider accountant, quietly picking through IOS’s international labyrinth, realized that it was a house of cards. The company fell into the hands of a big-time criminal named Robert Vesco, whom one partner called “a sonofabitch who hurt, denigrated or corrupted everyone he had contact with.” Another associate said Vesco “could talk you right out of your socks, or blast you out of them, or you would find somebody else owned your socks.” Vesco had been a major supporter of the Bahamian leader Lynden Pindling but was forced out in 1973 under