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The Wall Street Journal

June 6, 2001

Money & Investing:
Offshore Banking Arrives in U.S.,
With Traditional Baggage in Tow

By Paul Beckett and Russell Gold
Staff Reporters of The Wall Street Journal

For readers of John Grisham novels, "offshore banking" conjures up images of fedora-clad men in white suits doing discreet business by a Caribbean beach. For some government officials, it suggests shady financial institutions from remote locales that are hellbent on corrupting the U.S. financial system.

But for a small group of executives in Denver, it means a suite on the 31st floor of a downtown high rise that is home to First Colorado Depository Corp., which they claim is the first traditional offshore bank on U.S. soil.

Amid plans to begin serving clients early next month, the bank's founders have dreams of creating Swiss-style private banking in Colorado by pulling in client money from all over the world -- except, of course, from the U.S.

Offshore banks are attractive -- but also controversial -- because they're often used by investors as a way to avoid income taxes in their home country, move assets from potentially unstable regions and, in some cases, to launder money from criminal activity.

As far-fetched as it may sound, FCDC and its allies in Colorado state government weren't even the first to dream. The idea to pass legislation to allow offshore banking -- and charge a small annual fee on deposits to fatten up the state treasury -- came from Montana. While Colorado offers modern international airports, Montana is relying on its commitment to privacy to woo banks.

"We like to look at Montana as the Switzerland of the Rocky Mountains," says state Sen. Mike Sprague, a Republican who championed the legislation beginning in 1995. "There is more privacy in Montana." An early effort to get a charter for an offshore bank in Montana fell apart, but the investors have another application in the works. The group, which includes the King of Tonga as a potential backer, is racing to open an offshore bank called First Montana Depository.

The similar Colorado and Montana laws prevent offshore banks from accepting money from customers who are residents or citizens of the places where they are based; in return, they are not subject to as much regulation as local banks, and their activities are limited. FCDC, for instance, can't make loans or issue credit cards.

The prospect of having a booming offshore-banking business on U.S. soil creates shivers among some federal banking regulators and law-enforcement officials. Critics say countries that allow offshore banking look the other way in return for enjoying the financial benefits of attracting stashes of offshore bank deposits that they would never otherwise get.

Indeed, the formation of FCDC comes just as the U.S. has been lambasting other jurisdictions for not doing enough to cut down on the risks that offshore banks represent. Last summer, the multilateral Financial Action Task Force, which includes the U.S., cited 15 countries such as Nauru and Panama for being lackluster in their efforts to combat money laundering. The move was part of an unprecedented effort to crack down on the offshore financial world.

The prospect of offshore banks starting up in the U.S. bothers federal regulators, though they decline to say so publicly.

"It is supremely ironic that U.S. authorities are blacklisting other countries, when this proposal will put us in the same position as those other countries that are trying to attract offshore money," says Jerome Walker, a former senior attorney at the Office of the Comptroller of the Currency, and now a partner at international law firm Salans Hertzfeld & Heilbronn. "This absolutely will make [the regulators] nervous."

In its quest to become the first such bank in the U.S., FCDC has attracted some high-profile supporters. Its former legal counsel is Gale Norton, former Colorado attorney general and now U.S. interior secretary. (A spokesman for Ms. Norton referred calls to her former law firm, Brownstein, Hyatt & Farber in Denver. Steven Farber, a principal in the firm, says the firm was comfortable that state laws prevented the bank from getting involved in anything illegal.) Directors include a member of Colorado's State Banking Board and the president of the Colorado Bankers Association.

This roster has made it easier for FCDC to get its charter approved by state officials, contend unhappy offshore-banking boosters from Montana. FCDC was the first to receive a charter in either state, despite the fact that Colorado passed its law in 1999, two years after Montana.

FCDC officials say their due-diligence standards will be superior, and they will take all safeguards to ensure a clean operation. John Landgraf, the bank's director of risk management and international relations, says the company has hired a security firm, which he declined to name, to vet clients wherever they are in the world. FCDC Chairman Pierre Boisse, a 47-year-old native of Montreal, says he has gathered 200 potential clients from overseas who have pledged $2 billion in deposits already. Of the prospective clients so far, about half are from Hong Kong and Taiwan, with the rest coming from Europe, South America and Arab countries, Mr. Boisse says. Clients will need $200,000 to open accounts at the bank, but must maintain $1 million a year.

The bank's primary regulator will be the Colorado Division of Banking, where Superintendent Richard Fulkerson says he stands ready to keep a close eye on the business. "It is my responsibility, and it falls squarely on my shoulders to put in an effective regulatory program to police this," he says.

Mr. Landgraf also insists that the bank doesn't want to deal with the types of characters and funds that have given offshore banking its sometimes-unsavory reputation, though the bank's Web site does promote some characteristics that appear designed to appeal to people seeking to shield their assets.

"Foreign judgments against depositors are not recognized in Colorado, excluding criminal activities," the bank's Web site says. It adds, "The IRS will not enforce any indictment by foreign tax authorities. While the U.S. enforces collection of U.S. tax dollars around the world, it categorically refuses to pursue the tax problems of foreign governments inside the U.S."

That's not exactly the way tax authorities see it. "The statement is inaccurate because it suggests that the IRS is indifferent to foreign tax evasion that may occur through the U.S.," an Internal Revenue Service spokeswoman responds. "In fact, the U.S. has over 60 tax treaties and tax-information exchange agreements with other countries."

Some European bankers note that building a successful private-banking business takes coddling of wealthy and picky clients, who already have many options. "The world is not short of offshore jurisdictions. Why put your money there instead of the Caymans, Jersey or Liechtenstein?" says Fred Goodwin, chief executive of Royal Bank of Scotland PLC, the big United Kingdom bank that owns Coutts & Co., the venerable London private bank.

David Owen, a Republican state senator who sponsored the Colorado legislation, and the FCDC management speak with Chamber-of-Commerce-like zeal about why Colorado will attract foreign assets.

"A lot of Europeans will come over here to ski at Vail and Aspen, and if their deposits are here, they can come over here and see their money," says Mr. Owen. "Denver International Airport is up and running and is a global attraction, and many Europeans know who the Denver Broncos are."

Montana may not have that, but its officials claim that, despite Colorado's greater name recognition, they do have an advantage: an even deeper culture of privacy. The state has a penalty of 10 years imprisonment and a $10,000 fine for knowingly disclosing financial information about an offshore bank depositor.

With competition brewing, the two states are trying to outdo each other in creating a friendly environment. Last year, Montana reduced the percentage of assets such banks will pay annually to the state to 0.75% from 1.5%. Colorado responded earlier this year, amending its law to reduce the annual fee to 0.5%, though the change has yet to be signed into law.

Mr. Sprague, the Montana lawmaker who first hit upon the idea, says that even though FCDC in Colorado was the first offshore bank to get a charter, he feels vindicated after his idea initially provoked snickers. "They have proved that my idea was not nuts," he says.

rite to Paul Beckett at paul.beckett@wsj.com and Russell Gold at russell.gold@wsj.com

 

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