Are they laundering money?

Suspicions offshore banks in Montenegro

While the U.S. Congress investigates offshore banks in Montenegro on suspicion that they are laundering money, the Montenegrin government is trying to hush up the matter by preventing the opening of new such financial institutions

AIM Podgorica, July 27, 2001

Although the "tobacco scandal" is still attracting public attention Montenegro has once more come under fire from the international public. This time around, the U.S. Congress is launching an investigation into the operations of U.S. offshore banks in Montenegro after reports alleging that one of the biggest U.S. banks -- Citibank -- is laundering some of its funds through its offshore branches, some of which are located in Montenegro.

It turned out, however, that the Americans were not the only ones to come up with the idea of tax evasion. According to unofficial reports, Russians also launder money through Montenegro, syphoned out of Russia via offshore banks, and deposited mostly in Western Europe. Reports that the Montenegrin government has stopped further registration of this type of financial institutions have practically confirmed suspicions that something illegal is indeed afoot.

All this, however, appears only to be a part of a major operation involving large sums of money. According to data provided by the Institute for Strategic Studies and Forecasts, some 500 offshore banks have been registered in Montenegro so far. Unofficial sources say that they have handled hundreds of millions of German marks. How much Montenegro has profited from this is not known.

The decision to stop registering new offshore banks, however, has not hindered existing ones. A fierce debate followed on the legality of their operations, but the government was also berated for having allowed their registration.

And while some claim that their registration was illegal to begin with, and allowed for an unhindered flow of money of unknown origin, others regret the project is about to collapse because the government is not interested in keeping these banks functional. In the view of the latter, this could be a nice source of budget revenues. "Offshore banks shouldn't have been registered in Montenegro at all," says Nebojsa Medojevic, director of the Center for Transition, and adds that a 1996 law on special companies does not allow for the founding of such banks, but only offshore companies.

Vladimir Popovic, chairman of the managing committee of the Montenegrin Offshore Business Center, blames top state officials. "As early as the end of 1999, we brought up the issue of the investigation launched by the Americans. Then, we said that Finance Minister Miroslav Ivanisevic and Legislation Secretary Rajko Milovic were planning to facilitate the founding of offshore banks without there being any provision for that in the law," Popovic claims.

How do offshore banks operate?

It's not very complicated, really: any foreign physical or legal entity may open an offshore bank in Montenegro with DM10,000 in starting capital, which, after registration, can be withdrawn! The next step is opening of an account with one of the Montenegrin banks.

After that, money from abroad can be transferred through fictitious accounts and transfers to an offshore bank's account with a Montenegrin bank. These funds can then be either withdrawn as cash or transferred to another foreign destination. This makes the money hard to trace and tax.

"The profit Montenegro makes from such deals is smaller than the damage created by the fact that a country harboring such institutions is considered a money laundering center," says Medojevic. He adds that a certain amount indeed remains in Montenegro, but that "only a few people can profit from that." "Whenever a civil servant makes an arbitrary decision instead of strictly abiding by the law, there is room for corruption. When the fact that there was no control or transparency is taken into account, it is clear that there was also plenty of room for various shams," explains Medojevic.

It is impossible to determine, even unofficially, who in Montenegro actually profited from such financial transactions. No one wants to mention any names, but many say that it must have been state officials who know how the business works.

Knowledgeable sources say that this is not a usual procedure elsewhere in the world, and that Montenegro has become a safe haven for foreigners who can do whatever they want with their money by paying a low, 2.5 percent tax. They add that this offers good opportunities for profit for "domestic clients," who arrange such deals for the foreigners.

Due to EU and U.S. pressure on the Montenegrin government, it has been rumored that a cancellation of all offshore deals is to follow. The Montenegrin law which facilitated the creation of such institutions says that the state will guarantee their operations for 15 years. The law, however, is only five years old.

Lawyers representing the owners of offshore companies and banks say Montenegro would be making a big mistake if it repealed the law. They say that lawsuits could follow, first at home and then abroad, if the former fail to produce results. It should not be even doubted that Montenegro would end up by being obliged to pay huge sums in damages.

The offshore bank situation is getting more complicated by the day. The fact that no new offshore banks are being registered does not prevent existing ones from operating and continuing to use Montenegro for transactions. Thus, say well-informed sources, a new black market for offshore operating licenses has emerged. Licenses there are now more expensive than what the Finance Ministry used to charge -- the price is said to be up to DM30,000.

Advocates of the idea of Montenegro as an offshore center quote the example of Cyprus which has DM400 million in budget revenues from offshore business deals. "Since Cyprus wishes to become a member of the EU, which does not allow offshore deals, there is a chance for Montenegro to take over a part of its business," says lawyer Sasa Vujacic, whose office represents owners of offshore companies and banks.

Opponents of the offshore project, however, believe that the potential profit is much lower than what Montenegro stands to lose by being labelled a money laundering center.

Everybody, however, agrees on one point. If Montenegro wants to get closer to the European Union, it will have to forget offshore business. The question remains: could Montenegro, waiting in uncertainty for EU membership, have come by much needed budget revenues in some other way or, by sinking deeper in the offshore project, would it have only shown the full extent of the numbness of its system and further alienated itself from the EU.

Marijana Kadic (AIM)