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Tax Officials Investigate Euro Pacific Bank in Puerto Rico

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Tax authorities from the United States and four other countries have joined forces to stop shadowy global money networks that use international borders to stymie local investigations.

Their first coordinated move against a target is not in some far-flung country. It is on U.S. soil.

A team of international investigators is scrutinizing Euro Pacific Bank, a boutique financial firm based in Puerto Rico, a joint collaboration by The Age, an Australian newspaper, the Australian version of “60 Minutes” and The New York Times found. A number of people accused or suspected of tax evasion and money laundering kept accounts at the bank, according to officials involved in the investigation. They want to know what role it may have played in helping them move money illegally.

While obscure, Euro Pacific has ties to some famous names in the financial world. It was founded by Peter Schiff, a well-known libertarian economist with a deep-seated animosity to paying taxes who earned the name Dr. Doom after correctly predicting the 2007-2008 financial collapse. It also has a financial relationship with the Federal Reserve Bank of New York, which is uncommon for its type of financial firm, and links to big institutions in several countries, including Australia, Britain and Canada.

Neither Euro Pacific Bank nor its personnel have been charged with wrongdoing. Daniel Kramer, its spokesman, declined to answer questions about the investigation. Based on the conclusions they make, the agencies can bring criminal charges, civil complaints or other actions in their home countries against their investigative targets.

This is not the first time that global authorities battling dirty money have focused on Puerto Rico. The U.S. territory has long used tax breaks, favorable regulations and other inducements to build up its small financial industry.

ImagePeter Schiff, the libertarian economist and the founder and co-owner of Euro Pacific Bank.
Credit…Joe Buglewicz/Bloomberg, via Getty Images

Easy regulations have led to standards that sometimes lag those elsewhere, according to some regulators. Last year European Union officials included the U.S. territories of Puerto Rico, the Virgin Islands, Guam and American Samoa on a list of places with “strategic deficiencies” in anti-money-laundering laws, along with countries like Iraq and Libya. The Trump administration objected, and a later version excluded the American territories.

Puerto Rico has also encouraged the creation of boutique banks that cater to international investors, called international finance entities, or I.F.E.s, like Euro Pacific Bank. Last year, the New York Fed grew concerned about how I.F.E.s in Puerto Rico and the Virgin Islands scrutinize their customers. It stopped allowing the firms to open accounts with the Fed, which made it easier for them to send and receive money around the world.

The New York Fed restarted approvals this year after strengthening compliance requirements and “know your customer” rules. Firms that already had accounts with the Fed have until March to comply.

Puerto Rico requires that I.F.E.s hire at least four local employees. That low threshold thwarts the government’s intention to create jobs and makes it difficult for the firms to follow money laundering laws, said George Joyner, former chief of the territory’s financial regulator.

“The purpose was to build out a robust international financial sector,” Mr. Joyner said. “But it really hasn’t done that. You can’t have a robust anti-money-laundering program or know your customer program with just four people.”

Credit…Gabriella N. Baez for The New York Times

The investigation into Euro Pacific Bank is being conducted by tax officials in the United States, Australia, Britain, Canada and the Netherlands. They formed the Joint Chiefs of Global Tax Enforcement, or J5, two years ago to swap information. They were inspired by the disclosure of the Panama Papers, the leaked documents that detailed how the rich hide their money.

Agents with the Internal Revenue Service have interviewed Mr. Schiff and the bank’s president, Mark Anderson, for the investigation, nicknamed Operation Atlantis.

Officials involved with the investigation declined to discuss details, but evidence circulating among the agencies suggests they are raising questions about Euro Pacific and its clients.

Its client list has included Michael Wilson, who pleaded guilty to wire fraud in 2017 in federal court in Buffalo, N.Y. The authorities seized $750,000 he held in four Euro Pacific accounts.

It also included Simon Antequil, the founder of an Australian payroll services company where employees illegally funneled more than $75 million that should have gone to taxes or retirement funds into shell companies. In July, Mr. Antequil was sentenced to at least five years in prison. An Australian judge called his crime “one of the most serious offenses of its kind to come before a court in this country.”

Though small compared with international banks, Euro Pacific is sizable for a Puerto Rico I.F.E. It has about 8,000 depositors, according to the company. It holds about $140 million in deposits, a decline of nearly $30 million since 2017.

Credit…Gabriella N. Baez for The New York Times

Euro Pacific is majority-owned by its chief executive, Mr. Anderson. Mr. Schiff holds a 45 percent stake, according to regulatory filings. Both declined repeated requests for interviews from The Times.

In an appearance with Australia’s “60 Minutes” at his home outside New York last month, Mr. Schiff said that “there have been some allegations” but that “all of the allegations are unfounded, and there’s no basis, in fact, for any of them.”

Through a spokesman, Mr. Schiff later said that the interview was “clearly designed to take the information I provided and use it out of context.”

Silver-haired and loquacious, Mr. Schiff, 57, runs several investment funds and has been a commentator on cable news shows for more than a decade, along with hosting a podcast. He is the son of Irwin A. Schiff, who spent more than a decade in jail for evading taxes and died five years ago while in federal custody.

Mr. Schiff founded Euro Pacific in 2011 in the lush Caribbean outpost of St. Vincent and the Grenadines. He promoted it as an alternative to the established banking system. In one 2011 interview, he promised to issue debit cards backed by individual holdings of gold and silver. In another, from 2014, he said that he had chosen St. Vincent because “you have secrecy, privacy and you have no tax.”

In its early years, Euro Pacific had poorly protected email and file storage programs, said John Ogilvie, the company’s former information technology director, who started in 2014. Mr. Anderson insisted on putting all personal and company passwords in a directory labeled “passwords” on his computer, in a file with “master password” in the title, he said.

“He was just not very careful,” Mr. Ogilvie said.

Mr. Ogilvie, 49, left the company in 2016. In an email to Mr. Schiff that August, he called Euro Pacific “the most unprofessional working environment I have ever had the displeasure in participating.”

By 2017, Mr. Schiff had relocated the firm, his $783 million asset management business and his own official residence to Puerto Rico, taking advantage of a law that permits Americans who move their companies there to reduce tax liability. Mr. Schiff said he wanted to relocate to Puerto Rico in part to make it easier for Euro Pacific to set up an account with the New York Fed.

Euro Pacific also reached deals with Bank of Montreal, NatWest of Britain and Perth Mint, an Australian precious metals dealer, to allow customers to easily transfer funds to it.

Credit…Hannah Mckay/Reuters

Oversight in Puerto Rico was light. The New York Fed does not regulate I.F.E.s, even ones that keep accounts with it. The Fed, a spokeswoman said, does not comment on individual account holders but requires them to provide an independent assessment of their compliance program and an updated know-your-customer questionnaire.

The firm’s day-to-day regulator is the Puerto Rico Office of the Commissioner of Financial Institutions. The office, which has just a handful of bank examiners, said it had yet to complete an examination of Euro Pacific.

Puerto Rico “has a robust legal and regulatory framework to prevent, detect and combat money laundering, terrorist financing and other illicit financial transactions,” said Víctor M. Rodríguez Bonilla, the office’s commissioner.

Puerto Rico also is not a signatory to the “common reporting standard,” which requires banks from more than 150 nations to report big deposits to the depositor’s home country to stop tax fraud and other crimes.

One company that markets Euro Pacific’s services to potential customers detailed those advantages explicitly.

That company, Amanda J. Molyneux & Company in London, which helps clients open offshore companies, wrote online a year ago about the benefits of Puerto Rico’s nonparticipation in the common reporting standard. In essence, said Richard Scott Carnell, a former Treasury Department official, Molyneux was selling Euro Pacific as a firm that will not tattle to tax authorities.

“They said the quiet part out loud,” said Mr. Carnell, adding, “it is unsavory.”

Credit…Hiroko Masuike/The New York Times

Mr. Kramer, the Euro Pacific spokesman, said the bank “did not endorse” the message from Molyneux. Third-party marketers like Molyneux, he said, receive $25 from Euro Pacific for every new customer they bring to the bank.

Charles Farran, a Molyneux managing director who had posted the message, said he properly vetted all his customers and the message to clients “was not made for any marketing process.” He added in a statement that the post was “merely a statement of fact and a matter of public record.”

After learning of the J5 investigation from a Times reporter, Mr. Farran said he “will now suspend any client application referrals to the bank.”

Others found the customer vetting process at Euro Pacific to be surprisingly light.

In 2017, a group of artists called the Demystification Committee began a project to show how easily money could be moved offshore anonymously. They set up a swimsuit line emblazoned with the logos of the companies they used to set up their offshore project — including Euro Pacific.

Francesco Tacchini, a member of the group, said he filled out a form in July 2017 to set up an account with Euro Pacific as part of the project. He had to state he was not a U.S. citizen and provide a copy of his passport identification page. But the follow-up phone interview with a Euro Pacific bank representative, he said, “felt like it was a formality.”

Credit…Demystification Committee

Even before the investigation, business has not always gone smoothly for Euro Pacific. It has been unable to strike deals with major credit card brands to issue cards that would allow customers to withdraw their money.

Today it emphasizes the security and technology it provides. Despite his popularity among tax opponents, Mr. Schiff is not mentioned in a 14-page presentation posted to the company’s website.

Four pages are dedicated to explaining how the bank “seeks to obtain a in-depth knowledge of each and every client.”

Alejandra Rosa contributed reporting from San Juan, Puerto Rico.

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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