When Treasury Secretary Paul O'Neill said after the February meeting of the top industrialized countries, known as the G-7, that a European initiative to clamp down on money laundering "is not about dictating to any country what should be the appropriate level of tax rates," it was clear that the game was over. For about eighteen months the United States had signaled that it was serious about joining the Europeans in modest efforts to deal with the tide of illicit money that washes around the world. Now, the Bush Administration was saying that it was backing off the US commitment to reform the offshore banking system. Instead, the "tough on crime" Republicans would stand shoulder to shoulder with the shady characters in Nauru, Aruba, Liechtenstein and elsewhere who offer state-of-the-art financial services for crooks.

The immediate issue was an initiative by the Organization for Economic Cooperation and Development to stop tax evaders from hiding money in offshore havens. The OECD last July named thirty-five jurisdictions that offered foreigners secrecy, low or no taxes and protection from inquiries by home-country legal and tax authorities. It said it would take "defensive measures" against countries that didn't change those policies, and it began negotiating with such worried targets as the Cayman Islands.

In April, O'Neill rebuffed pressure from France, Japan and Italy to reiterate US support for the initiative. Then in May, without prior consultations or negotiations with allies (à la Kyoto), he announced in a newspaper Op-Ed that the OECD demands were "too broad" and withdrew US support. French Minister of Finance Laurent Fabius publicly expressed his concern, saying that "until now, the United States and France were at the forefront of this fight." Le Monde editorialized, "After dirty air, dirty money."

The Bush Administration's actions represent a continuation of policies--interrupted only by the brief Clinton moves--that go back to the Reagan era, and that in the past have been defended as based on US opposition to impeding the free flow of capital or decreasing other countries' reliance on the dollar. "Treasury was looking to free up economies, not regulate them," says Jonathan Winer, a former high-level crime-policy official in the Clinton State Department.

Others take a darker view of US motives. Jack Blum, a Washington lawyer who co-wrote a 1998 report for the United Nations on the offshore phenomenon, says US policy has been influenced by the fact that "the hot money from the rest of world [fueled] one of the greatest booms in the stock market" and the fact that big brokerage firms "find it profitable to run private banking operations for rich people all over the world who don't want to pay taxes." He estimates that at least $70 billion in US taxes is evaded annually through offshore accounts. That is just above the $65 billion in the projected federal budget for education, training, employment and social services. Elsewhere, Oxfam International calculates that money sucked out of developing countries to tax havens is $50 billion a year, nearly the size of the $57 billion annual global aid budget.

Says Joseph Stiglitz, former chief economist of the World Bank, "You ask why, if you believe there's an important role for a regulated banking system, do you allow a nonregulated banking system to continue? The answer is, it's in the interests of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time."

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