The GAO’s Director of Acquisition, Ann Calvaresi-Barr is quoted, (in an article by William Matthews), as saying,“Defense Security Service (DSS) agents also lacked basic understanding of complex transactions, such as the security implications of foreign hedge funds buying interests in U.S. defense firms.   That is increasingly common, and it is difficult to know where the money is coming from and who the players are.” 

See the Matthews article:  http://www.owlcti.com/pdfs/Swiss_Cheese_and_DSS.pdf

The whole financial arena is fraught with danger, from a security and oversight perspective, as the tools used by financial fraudsters and criminals are extremely complex and their activities are multi-layered.  With the advent and rapid development of a global technological world, our government oversight employees are hard pressed to keep up with the needed expertise in technology as well as current financial business practices. (We’ve come along way from security merely being physical security.)  DSS is not alone in the struggle; this challenge is shared by all oversight agencies.  The modus operandi of the criminals has become very sophisticated.  It is hard and sometimes impossible to detect where money is coming from and going to.  And many things maybe hidden, such as true owners, stockholders, and recipients of pay-offs for services rendered, as well as the money itself. 

Threads to any particular example of such crime may lead all over the world in multinational webs of secret contracts and accounts.  One such type of secret account, which is gaining in popularity rapidly in corporate circles, is the Hidden Treuhand, (pronounced troy-hawnd).  Although illegal in the US, this type of financial instrument is legally protected in certain countries and marketed by many of those countries throughout the world.  It is necessary to understand what a Hidden Treuhand is and how many ways it may be effectively used to evade accountability to U.S. law and oversight authorities in order to understand the challenges our oversight field people are up against. 

The term Treuhand is often translated over to “Trust” for English speakers.  Author, Shelley Stark, Hidden Treuhand:  How  Corporations and Individuals Hide Assets and Money, states this is not entirely accurate.   If you use your search engine and type in “treuhand,” you will get a great number of pages of links to companies, many in the German language who offer Treuhands, (the open and visible kind). 

Hidden Treuhands are a different kind of trust and may only be accessed in certain countries that have laws, which allow them, or do not have laws that prohibit them, and all the invisibility and secrecy that goes with them.  Ms. Stark discusses this very succinctly in her book.  Her book makes it possible to understand how the Hidden Treuhand, which few in the U.S. know anything about, is used as a financial manipulation tool to accomplish many things, legal and illegal.  Because of the impact and increasing use of Hidden Treuhand accounts by Americans and American/Multinational Corporations, including defense contractors, this book should be required reading for all federal oversight employees. 

Due to growing problems with tax evasion, money laundering, and financing of drug cartels and terrorism, many governments are beginning to try to investigate this arena.  How would a financial instrument that has created problems with tax evasion, money laundering and with connections to drug cartels, organized crime, and terrorists have anything to do with oversight of defense and other contractors?

Hidden Treuhands are not only being used for notorious crime in arenas of violence and intrigue, but are also being accessed quietly by seemingly normal upper income citizens and corporations with seemingly bland missions.  Some European countries have suffered great tax losses due to Hidden Treuhands, which that country’s citizens have set up in neighboring nations who offer them.  But loss of tax monies is really the least of the problems these secret accounts may create in Europe or here in the United States.   

This concern has now become publicly acknowledged in the United States as well.  If individuals, families, or corporations can access Hidden Treuhands, they can not only evade paying taxes here in the US, but can also hide a great variety of things, such as money, property, and other assets, as well as hide people or beneficiaries, specific stock holders or consultants who are paid or are benefitting some other way financially (boats, cars, houses, etc.).  Recently a large number of Americans were discovered to have secret accounts in certain European countries and were using them as illegal tax shelters.  And were it not for an insider (Bradley Birkenfeld) coming forward with testimony and paperwork, in the UBS tax haven scandal, the U.S. government would never have been able to prevail in prosecuting the financial crimes and recovering millions of dollars.  In fact, they probably would not have even been able to recognize the problem.  

The use of a Hidden Treuhand is illegal in America, but that does not stop a person or corporation determined to find a way to hide money, stockholders, or the true owner of an asset from obtaining and using one.  People can be paid through arrangements invisible to an outsider using a Hidden Treuhand.  Payments may be made for services rendered as a consultant or other relationship.  People who may have reasons they cannot maintain a public business relationship because of ‘conflict of interest’ concerns or laws, can be hidden and still profit, using a Hidden Treuhand with no one on the outside being the wiser.

If a corporation has a subsidiary in one of the countries that offer Hidden Treuhands, then they are well on their way to setting up such an account.  Some corporations set up what appear to be subsidiaries, but which conduct no business, do not produce or sell a product and simply are used to transfer money in and out to other locations.  If a corporation has a number of subsidiaries in multiple countries with either Hidden Treuhands, or with banking secrecy, they may devise a complicated pathway for moving funds about, making it more difficult for anyone to follow the trail, even if they could get the proof of the existence of such accounts.   And consider the amplification of this movement of funds using computers and technology and it becomes a momentary twinkle over the Internet. 

Stark clarifies, “A Hidden Treuhand is completely non-transparent, only somewhat legal and operates covertly by owning the asset through a corporate structure, where real shareholder identity remains anonymous in all business dealings.”  She goes on to say that “lawyers are often called upon to act as a ‘trustee’ in a hidden ‘Treuhand.’  There is no law regulating hidden ‘Treuhand,’ only law specifying that the lawyer cannot divulge any secrets pertaining to the client.”

In Austria, the Austrian Lawyers Chamber and its associated lawyers have control over this type of contract.  Stark states that, “This kind of trust is not so much protected by law as protected by lawyers.  If questioned, the lawyer will simply evoke attorney-client privilege.”   The contracts themselves are kept under lock and key with perfect invisibility.  The only way to even be able to investigate such a situation to find out where money is, where it came from or where it went, or in the case of assets, who the real owner is, would be to obtain copies of the original contract or other paperwork proving the existence of such an agreement.  And even then there would be a long battle in court to try to prevail.  Without the insider paperwork, you will most likely have a judge or attorney blandly ask you to show the paperwork to prove that it exists.   Since normal investigations will not turn up the paperwork, you will be quite effectively routed. 

This is possibly one of our biggest challenges in being able to detect and prosecute fraud, and other criminal behavior revolving around ownership, partnerships, stockholders of defense contractors, and others who profit from contracting with the U.S. Government.  It is also potentially an issue from the standpoint of controlling who has access to government proprietary or secret information or technology. 

Streamlining and reducing the number of competently trained security specialists who are experts in this type of oversight is exactly the wrong thing to do if the goal is truly to get a handle on the complex tools criminal individuals and contractor corporations are using to hide money as well as people or other business relationships who might cause them trouble in the contracting oversight world if the U.S. oversight authorities knew of them.  The types of violations occurring now are much more complicated and take even more time to work as cases, even if the oversight employee is fully trained and knowledgeable about the modus operandi of the criminals 

So, you perhaps can see why enforcing our laws about foreign ownership and the movement of money to invisible foreign owners, stockholders, consultants, or those whose primary interest may be espionage, might be quite problematic.  It would in fact be problematic in the best of circumstances where our oversight field people had sufficient levels of employees in fully staffed offices, appropriate and useful training offered all along the journey from neophyte to senior level agent, and solid support and assistance from upper managers and resource specialists in the regional and Washington DC offices. 

Despite what may be officially said by DSS directors and managers, the historical and current practice of crippling offices with lack of sufficient number of well qualified and trained agents, backbreaking workloads, and extreme pressure to turn the numbers (statistics) and not spend the time necessary to fully develop and work the cases is the main problem.  Since the business environment has been changing so rapidly, if the Agency sincerely had the goal of competently overseeing defense contractors, a commitment of resources and adjustment of employees work loads to allow for ongoing training and education in areas of useful purpose that would prepare them to become ever more skillful at finding and identifying fraud, waste, abuse, and other crimes, would be what we should be seeing.  Leaving people essentially with 20th century understanding and skills to deal with 21rst century criminal modus operandi will not be successful.  DSS and other agencies facing the same challenges must wake up and jolt themselves into reality.

All the previous statements apply in the case that there is no corruption or compromise of authority figures within the government and federal oversight agencies.  Consider for a moment, that may not be the case. 

Think about what might happen if industry, with it’s profit driven motives and values were to gain untoward influence and perhaps even control of government oversight, including many of those in positions of power or authority in elected, appointed, or career civil service positions. 

What if people were encouraged to use the revolving door to more effectively serve the interests of their corporate affiliations to the detriment of the American taxpayer and our national security?  

What if this was happening by design and not by accident and some thoroughly corrupted forces within our government and within industry were cooperatively directing the dysfunction? 

Consider human nature, and what would happen if the greed we’ve seen take such a devastating toll on our economic world, should co-opt some federal managers and employees?   What if managers in a federal agency are compromised through their past and present relationships with contractors, or other compromised and corrupted federal employees who’ve worked themselves into positions of authority and power at high levels in our government? 

What if those managers do not really want their field people empowered?  What if they want to be sure the problems are not found, or recognized and take steps to hobble their employees to be sure the work is not accomplished?  What if they want to be sure none of the criminals are brought to justice?  What if the disintegration we’ve been seeing in DSS and other oversight agencies are just that, the malfeasance of upper and middle managers in order to service the wishes of their industry confederates?

What if in this age of corruption and greed, corporations were pressuring our elected politicians and even placing them in their positions through effective campaign and election manipulation in order to make convenient use of their job authority?  (Follow the money, and take a look at the recent Supreme Court case, which now unleashes corporate ability to donate to candidates and campaigns.)

All of these ‘what if’s” must be considered and investigated by someone higher in authority who can audit with integrity, all of our oversight agencies who supervise defense and other contractors.  The chaos that DSS and other federal oversight agencies have been going through with all of the technology and globalization issues, combined with the trend toward outsourcing, and laissez-faire policies pushed by elected leaders, and various ‘Think Tanks,’ advisory groups, and the much discussed culture of corruption and greed could very well lead to the mess we are currently experiencing.  This would be replete with honest employees who are trying to ethically do their jobs, being called non team-players, labeled whistleblowers, and made targets of every type of retribution by the wrongdoers in order to drive them out of their jobs or to an early grave, which ever comes first.  Presently, honest oversight employees are a threat to the corrupted activities that are going on and to those who protect and cover up those activities. 

With these beleaguered federal agents goes the “corporate memory” and expertise of the oversight agency, leaving neophyte employees who will not be up to dealing with the contractors, particularly if the useful and necessary training and education are withheld, and heavy handed negative managers assure an environment of anxiety, fear and utter frustration are the daily environment our federal oversight employees must endure.   So, the extreme dysfunction within our oversight agencies appears to this observer, to be a combination of lack of vision and understanding by management of the current critical issues at hand combined with some systemic problems with corruption, and cover-ups of waste fraud and abuse, sometimes it appears in collusion with contractors.  It is not a pretty thought, but one we must consider upon studying the history of the past few decades which have created a perfect storm of sorts that government oversight has not been prepared to overcome. 

For those of you interested in learning more about Hidden Truehands, what they can do and how they function, read Ms. Stark’s book and also visit the Financial Action Task Force (FATF), that the United States and many other countries have joined, in order to try to successfully deal with these kinds of financial liabilities.  The first is the link to the portion about the FATF:

 http://www.fatf-gafi.org/pages/0,3417,en_32250379_32236836_1_1_1_1_1,00.html

The next is the link to the FATF’s full Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism, Austria, 26 June 2009. 

This report is 358 pages long.  Hidden Treuhand information may be found throughout, but there are some key issues discussed pages 218-225.  For those of you with knowledge in this area, you will want to read this report.  If this appears to be daunting to you, please read Ms. Stark’s book which has been written to make it an easier read for the average non-career-financial-professional person to absorb. 

http://www.fatf-gafi.org/dataoecd/22/50/44146250.pdf

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