Offshore Banking, Fraud, and the Crisis

Sara Hsu

The global financial crisis that began in 2008 in the United States had roots in offshore banking, some of which have been revealed: the Bear Stearns’ 2007 Cayman Island hedge fund bankruptcy, in which the company attempted to file offshore to protect U.S. assets, Goldman Sachs’ off balance sheet Cayman deals in shaky asset-backed securities (ABSs), and Citigroup’s creation of structured investment vehicles in London to hide the sales of ABSs.  These offshore banking centers, which include locations such as Luxembourg, the Netherlands, and Bermuda, were safe havens for large American banks that wished to move collateralized debt obligations (CDOs) and other asset backed securities off their balance sheets, and away from the scrutiny of auditors and shareholders.

Many of the large financial corporations were engaged in these dealings and created structured investment vehicles, many of which were held offshore.  While we may never know about all of these dealings, some rough calculations performed using the SEC’s Edgar database and offshore classification from the Tax Justice Network reveals interesting statistics on offshore entities held by major financial corporations.

In the table below, we present the number of offshore subsidiaries by company and year.

Offshore Subsidiaries by Company and Year

American Express Bank of America Citigroup JP Morgan Chase Goldman Sachs Morgan Stanley Wells Fargo AIG
2005 98 154 805 207 41 558 304 28
2006 91 197 908 229 73 707 301 28
2007 89 187 1237 229 72 903 285 24
2008 25 369 1277 185 76 1013 1165 77
2009 50 1287 76 323 60 982 1172 107
2010 49 1359 71 344 83 935 1173 83
2011 71 1255 103 371 65 708 1006 81

Source: SEC Edgar Database and authors’ calculations

What we see is that even after accounting for mergers after the crisis began (comparing with subsidiaries of merged entities), the number of offshore subsidiaries grew substantially for Bank of America and Wells Fargo between 2007 and 2008, and sharply contracted for Citigroup between 2008 and 2009.  Companies with the most offshore subsidiaries before 2009 were Bank of America, Morgan Stanley, Wells Fargo, and Citigroup.

From reports, we know that Citigroup was the most fully engaged in investing in new types of shadow banking assets.  The clear decline in its offshore subsidiaries after the crisis hit is in line with this observation.  However, the reason for a sharp increase in subsidiaries in Bank of America and Wells Fargo is not clear.  The question that crosses my mind is, did they move assets offshore in preparation for the crisis?  To help answer this, we look at the amount of money that went offshore.

Examining cross-border holdings for companies that are divulged as part of 10-K reports, we find that not all of the companies have reported cross-border holdings.  We present what has been reported below.  Notably missing are data for Wells Fargo, which has a significant number of offshore subsidiaries.  It is possible, although unclear, that the total dollar amount of cross-border holdings was below the minimum required for tax reporting.

If we calculate total cross-border holdings in tax havens, we get the following.

Total cross-border holdings (over certain percentage of holdings) listed in 10-Ks. (in millions)

American Express Bank of America Citigroup JP Morgan Chase Goldman Sachs Morgan Stanley AIG
2005 N/A 21,186 36,600 75,940 N/A N/A N/A
2006 1,352 17,284 38,500 88,055 N/A N/A N/A
2007 3,686 N/A 56,800 90,685 N/A N/A N/A
2008 4,801 N/A 66,100 74,109 76,113 N/A N/A
2009 2760 60,715 55,400 113,992 67,929 101,034 N/A
2010 2,957 43,764 69,500 138,059 58,127 94,314 N/A
2011 2,539 35,141 84,200 180,557 63,445 155,581 14,363

Source: SEC Edgar and Authors’ Calculations

When we look at the offshore holdings for Bank of America by dollar amount, the explosion in offshore entities becomes less of a concern, since the cross-border holdings decline after the crisis.  If data on Wells Fargo was not reported because the dollar amount of cross border holdings was too low to report, then this also eliminates Wells Fargo as a fraud concern.

However, Citigroup, JP Morgan, Goldman Sachs, and Morgan Stanley do cross-border business in the double- and triple-digit billions, and for Citigroup and JP Morgan Chase, this business appears to have mainly grown over the crisis period.  Because of this, I have flagged JP Morgan Chase and Citigroup for further investigation.  We know that both JP Morgan and Citigroup have previously been involved in shady offshore dealings; JP Morgan was allegedly involved in both the Enron and Madoff scandals, while Citigroup helped launder money for the family of Augusto Pinochet, an infamous Chilean dictator—not very good precedents.

We also know that both companies have participated in dubious activity in the lead-up to the financial crisis, and have been accused of fraud in knowingly selling bad assets.  So what happened?  Perhaps they were participating in something illegal but didn’t want to attract attention by increasing the number of offshore entities as much as Bank of America and Wells Fargo did, since that is what fraud investigators were looking at.  How they enriched themselves during the ongoing crisis, I really cannot say.  Detailed offshore records cannot be obtained, so perhaps we will never know.  Something to further shake one’s confidence in the U.S. financial system.

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