Letter to Paul H. O'Neill, Secretary of the Treasury
January 18, 2002
Paul H. O'Neill
Dear Secretary O’Neill,
In a new report, Public Citizen has researched Enron’s Securities and Exchange Commission 10-k filings and found that the company has 874 subsidiaries—more than 30 percent of the company’s total 2,832 —registered in the Cayman Islands and other nations with weak bank disclosure laws. These offshore subsidiaries have enabled Enron to hide potentially billions of dollars from American government officials, shareholders and credit rating companies at a time when Enron is being sued by shareholders and investigated for possible fraudulent accounting practices.
Public Citizen is deeply concerned that your office, shortly after the Bush administration assumed power, initiated actions which aided Enron’s ability to hide assets (and losses) in the company’s bank accounts registered in off-shore subsidiaries by delaying a new international agreement negotiated between the OECD and the United States.
In April 1998, the Organization for Economic Cooperation and Development (OECD) released Harmful Tax Competition: An Emerging Global Issue that discussed strategies for how OECD member nations (of which the United States is one) could deal with "harmful preferential regimes" such as the Cayman Islands. In response to this report, President Clinton directed the United States to co-chair an OECD body called the Forum on Harmful Tax Practices, which the U.S. headed for two years beginning in October 1998.
Led by Clinton Treasury Secretary Lawrence Summers, the administration focused on first "naming and shaming" countries with little or no banking regulations, and then working on multilateral agreements to bring nations into compliance with acceptable standards of disclosure.
The Clinton Administration was also motivated to crack down on tax havens after Osama bin Laden’s August 7, 1998, terrorist attack on U.S. embassies in Kenya and Tanzania. The Clinton administration knew that bin Laden used al Qaeda to funnel money, possibly through nations with lax banking regulations. Clinton’s anti-terrorism initiative culminated with the December 2000 publication of the International Crime Threat Assessment, which blamed nations with "weak financial regulatory systems [and] lax enforcement measures" for facilitating international crime networks like al Qaeda. In addition, the 1995 Mexican peso crash and 1997 Asian financial collapse were blamed partly on the lack of adequate transparency involving financial deals in the Cayman Islands and other tax havens.
Prior to the July 2000 G-7 summit, the Clinton administration negotiated a deal with six nations—including the Cayman Islands—extracting nonbinding commitments from the countries to work with the U.S. to improve transparency of the nations’ banking laws. In exchange for this commitment, the OECD did not include them in the June 2000 list of "pariah" nations with banking systems that encouraged criminal behavior. At the July 2000 G-7 summit, the Clinton administration took the lead on a plan threatening strict economic sanctions on all nations identified by the OECD, including the Cayman Islands, unless the countries cleaned up their lax banking laws by July 2001. The threat of these sanctions alone would have helped enforce a global trend towards increased financial transparency.
But on February 17, 2001, you announced at another G-7 press conference that the Bush Administration was placing this multilateral agreeement and its threat of sanctions under review, effectively delaying it. As a result, your announcement helped allow Enron and other companies to continue to hide money in Cayman Island bank accounts. Your responsibility as Secretary of the Treasury is to collect properly owed and due taxes, not to facilitate tax avoidance. If Enron and other companies are using the Cayman Islands to hide income, then you have an obligation to end that abuse.
On November 27, 2001, a few days before Enron declared bankruptcy, your office announced an agreement with the Cayman Islands that does not force that nation to tighten its tax or banking laws until 2004—giving companies like Enron twenty-four months to move their assets to another tax haven and destroy the records of their cheating from scrutiny.
Since your efforts—whether intentional or not—have allowed Enron to hide potentially billions of dollars that rightfully belongs to shareholders and company employees, your action must be viewed in the context of the more than $1.1 million Enron contributed to George Bush’s presidential efforts and inauguration, and the close, personal relationship between the President and Enron CEO Ken Lay.
To remove the appearance of impropriety, Public Citizen requests that you immediately provide documentation and personally respond to the following questions and statements:
1. When did you first learn about the Clinton Administration’s OECD-inspired agreement with suspected tax haven nations on transparency of their banking laws? Who brought this to your attention? When did you decide to delay the agreement and why?
2. Who oversaw and staffed this at the Treasury Department and who at Treasury and other U.S. government agencies approved (or disagreed) with this decision?
3. Did you or other Treasury employees discuss this issue with Ken Lay, any other Enron employees, board members, or agents operating on behalf of Enron since President Bush assumed office? If yes, what was the substance of each such conversation?
4. Were you told by the President or Vice President to postpone the agreement orally or in writing? Did you have any conversations with or receive any documents from any White House staff or non-Treasury government officials (including members of Congress) regarding concerns about or the decision to delay the agreement on tax havens? If yes, please describe each one.
5. Did you or any other government officials to your knowledge realize or discuss that these tax havens provided opportunities for terrorists to hide money?
4. Why did you decide on November 27, 2001 to reestablish an agreement with the Cayman Islands? Why did you select the effective date of 2004, two and one-half years after the Clinton Administration agreement date of July 1, 2001? Did you realize that this delay would protect Enron from disclosure and give it time to destroy documents and records related to its involvement there before the effective date?
5. Were you asked or told by anyone to renegotiate the agreement with the Cayman Islands? If yes, who did so and in what form? Why did you exclude the other nations from the new agreement?
6. Are you aware of any other companies that are potentially in financial trouble that have investments hidden in the Cayman Islands or other tax havens? If yes, please list them.
Thank you for your prompt attention to this matter.
Joan Claybrook, President