
When Federal agents raided the offices of Stanford Financial Group earlier this month, exposing a massive fraud and successfully preventing its perpetrator, Allen Stanford, from lamming it overseas, it was the culmination of more than an investigation into a despicable "mini-Madoff" Ponzi operation. It was also a neat little public relations moment for the beleaguered Financial Industry Regulatory Authority and their former head Mary Schapiro, who now heads up the equally beleaguered Securities and Exchange Commission. Despite what you may have thought about the way FINRA and the SEC seemed to be clueless to the ways of Bernie Madoff -- and those agencies could have made use of both celebrated whistleblower Harry Markopolos and a timely article from Michael Ocrant at MAR Hedge -- this new regulatory regime was serious about bringing scofflaws to justice, and those who were formerly asleep at the switch were going to get regular wake up calls.
Rolling up Stanford Financial would have been an excellent, and subtle way of noting that times have changed. As usual though, reality isn't that simple. It turns out that another forgotten reporter, in this case David Ivanovich of the Houston Chronicle, had raised some serious alarms about Stanford back in 2000. In an article entitled "Houston Banker Tries to Create Caribbean Empire, Runs into Problems with Feds" (July 16, 2000) Ivanovich chronicles Stanford's wheeler-dealing in the nation of Antigua, painting a picture of Stanford that finds him waist deep in shadiness, even downright creepiness.
Back around the turn of the century, Stanford had managed to run afoul of the State Department, who were, at that time, on a "crusade against [offshore] money laundering":
Stanford, a little-known investment banker and real estate developer in Houston, caught the State Department's attention for his leading role in tightening Antigua's already secretive banking laws.
Washington insisted that the changes could hamper international efforts to halt the flow of drug money. The result was a protracted confrontation between the United States and Antigua that is only now being resolved.
Stanford had deep ties to Antigua and their government, and the way Ivanovich describes it, Stanford's conduct comes across more like a cult-leader than a financier:
Holding dual U.S.-Antiguan citizenship, Stanford owns Antigua's largest newspaper, heads a local commercial bank and enjoys access to Prime Minister Lester Bird.
He is the man to whom the islanders have turned to help finance construction of a hospital, build a shelter for single mothers and start up a carrier when airline service to the region was curtailed.
And honestly? This part alone is mindbending enough:
When a Catholic priest stricken with the stigmata (wounds resembling those Jesus suffered in his crucifixion) needed medical treatment in the United States, Stanford flew him on his private plane.
"That was a major personal event in my life," Stanford said. "It was truly an out-of-this-world experience, a supernatural experience." Indeed, Stanford still carries with him congealed fluids that drained from the priest's foot.
You see, where I come from, people who carry around a jar of congealed priest foot-juice? You keep an eye on them. As it turns out, however, Stanford didn't begin to attract attention until he started injecting himself into the formulation of Antigua's banking laws. Ivanovich fleshes out the timeline:
Antigua's offshore sector became more worrisome as individuals believed to have ties to Russian organized crime moved in.
In October 1997, the Antiguan-based European Union Bank collapsed, with its Russian founders suspected of absconding with $ 10 million in depositors' money. In May 1998, the U.S. Customs Service accused the Caribbean American Bank of Antigua and eight individuals of bilking hundreds of investors out of $ 60 million.
Last fall, the Antiguan government accused Pavlo Lazarenko, the former prime minister of Ukraine, of laundering more than $ 80 million through an institution on the island.
As the island's reputation began to deteriorate, Prime Minister Bird asked Stanford in 1996 to spearhead an effort to revise Antigua's banking laws, clean up the offshore sector and expand the industry.
At Stanford's urging, Bird named Stanford's attorney, Carlos Loumiet, an international law and banking expert, to a special advisory board. The panel included former officials from the Drug Enforcement Administration, the Federal Bureau of Investigation and U.S. Customs.
Two other members of Loumiet's firm, including Pat O'Brien, a former U.S. Customs special agent for South Florida, joined the effort.
Stanford was the "driving force" behind the movement, O'Brien said. Stanford Financial's Bank of Antigua, the company's commercial bank serving the local Antiguan population, loaned the government the money to pay for the project.
At the time, Stanford's bank was "Antigua's largest bank serving offshore customers." For some reason, no one seemed to be bothered by the fact that he was the 'driving force" behind a rewriting of the laws that would govern his business. Maybe that's because initially, there seemed to be little reason for concern. Many "of the changes were to the liking of countries such as the United States and Britain," especially the mandate for greater transparency: "Individuals, for instance, could no longer obscure their connections to offshore accounts by depositing funds in the name of an anonymous corporation."
Soon enough, however, a rather substantial conflict of interest emerged:
As part of the changes, the government created an agency to regulate the offshore sector, the International Financial Sector Authority.
Stanford was appointed to what was then a six-person board at the authority, even though his bank was the largest institution to be supervised by it. O'Brien and another offshore banker also were named to the board.
Stanford said his appointment to the board was "an interim step" to help get the program under way.
So what happened in the interim? Well, the International Financial Sector Authority did a bang-up job, kneecapping all of Stanford's competition:
While the United States and Antigua were wrangling over the legal changes, the country's new regulatory authority began cracking down on the offshore sector.
The Financial Sector Authority was empowered to close institutions that were short of capital, had not been properly audited, or that were engaged in fraud or money laundering.
The authority shuttered dozens of institutions, paring the number of offshore banks operating in Antigua from 57 down to 18.
The Financial Sector Authority's regulatory powers were not universally recognized, even on Antigua.
And yet, even though Stanford was clearing the workload of an agency created to regulate banks and prevent wide-spread money-laundering, guess what happened?
Stanford learned his institution had $ 3.1 million in cocaine proceeds from a Mexican drug cartel on deposit. The money had come to Stanford Financial, he said, when a financial consultant from another securities firm came to work for Stanford, bringing with him $80 million to $90 million worth of business.
In this case, Stanford did the right thing:
Despite some reluctance in St. John's, Stanford risked the threat of reprisal by drug traffickers and personally handed over the money to the U.S. Drug Enforcement Administration.
"That was the first time we had a successful seizure and share of drug assets in Antigua," said David Tinsley, head of the Drug Enforcement Administration's Miami office. "He did it because he thought it was the right thing to do."
And yet six weeks later, Stanford was back in dutch with a U.S. regulatory agency, in this case, the Department of the Treasury, who disseminated an "extraordinary advisory, warning banks to take extra precautions when handling transactions routed through Antigua."
In a letter to Bird, James Johnson, the Treasury Department's undersecretary of enforcement, complained that Antigua had compromised its laws against money laundering and created a conflict of interest by allowing Stanford and other banking officials to sit on the regulatory board.
Johnson noted that the Financial Sector Authority's seizure of the bank documents "raises substantial questions as to Antigua and Barbuda's commitment to provide effective supervision of its offshore sector."
Within days, British and French officials voiced similar concerns.
"This public rebuke had a profound effect on Antigua," U.S. Treasury adviser William Wechsler told lawmakers on Capitol Hill last month.
Stanford and other officials associated with the offshore banking sector have stepped down from the Financial Sector Authority. The Antiguan government has amended most of the offending regulations -- Stanford describes it as a "tweak here and tweak there." And Antigua has agreed to separate its promotional campaign for the offshore sector from the bank regulatory arm.
Not long after Stanford stepped down from the FSA, Antigua started showing better results in the area of enforcing money laundering laws. But new problems emerged:
Antigua, however, is still getting unfavorable notices. In June, the Organization for Economic Cooperation and Development published a list of tax havens -- countries whose regulations were deemed designed to help people avoid paying taxes in their home countries. Antigua was on that list.
To address that issue, Antiguan officials are considering allowing U.S. investigators to examine bank records in criminal tax evasion cases, a concession other offshore centers have rejected.
Stanford says he would support such a change if it meets strict guidelines to guard against "fishing expeditions."
Go figure. I'll have you know, however, that Ivanovich had me wanting to bait a hook as soon as I read about that terrifying foot-juice stuff. This forgotten article bears a striking semblance to Ocrant's take on Madoff -- a distant early warning of corruption to come. You'd think that brewing up conflicts of interest, placing yourself in charge of your own regulation, and running afoul of major government agencies would earn you a special red flag with organizations tasked with policing and preserving our financial interests. You'd be wrong!