Montana - banker to the world?

The Treasure State has come up with unique legislation to encourage an influx of foreign assets.

The stark contrasts between vast and windy Montana, where a 500-acre cattle ranch is considered small potatoes, and the sun-drenched Cayman Islands, whose sandy shores are a welcome refuge for some of the richest people in the world, are so great as to be obvious.

But that has not stopped journalists from pointing them out.

In recent months everyone from the Wall Street Journal to Forbes magazine and the San Francisco Chronicle has taken pains to mention that Montana is no warm Caribbean getaway, nor for that matter does it bear even a passing resemblance to Switzerland, another nation the press compares to Montana.

But there is in fact a thread that connects all three places, thanks to an unusual bill passed overwhelmingly by the Montana Legislature last year that hopes to expand the Big Sky country into something far wider and entirely international.

Senate Bill 83, sponsored by Senator Mike Sprague and signed into law last April by Governor Marc Racicot (Roscoe), allows rich foreigners seeking privacy and protection to stash their money and other precious assets in a series of depositories overseen and regulated by the state. As far as anyone knows, Montana's Foreign Capital Depository Act is the first of its kind in the nation. It's the only time a state has sought to offer financial services normally associated with the banking infrastructure of foreign nations. The legislation could bring into Montana not just millions in anticipated revenue, but hundreds of millions and perhaps even billions.

Foreign capital depository fans say this idea is not as farfetched as it might seem. There aren't a lot of safe sanctuaries for wealthy foreigners seeking privacy and protection for their money. To the question of "why Montana?" supporters answer that the very improbability of the proposal is its attraction. Montana could be an ideal place to stash billions simply because of its improbability as a major international finance center. It is far away from the same global depository haunts that attract layers of lawyers, international criminals and professional money launderers. And at the same time, it is smack in the middle of an extremely stable state in an extremely stable country. And it has the strictest privacy and confidentiality laws of any state.

As the legislative subcommittee report studying the potential of a depository noted: "Montana is securely ensconced in the most stable political space on the planet. As far as we know, nobody is plotting a palace coup or planning to nationalize the banks, mines and railroads." That the state also is a source of abundant precious metals, which could be purchased by wealthy foreigners, makes the case for Montana on the world market practically irresistible, advocates say.

THE ALLURE OF RICHES

Inspiration for the bill came from Robert Svoboda, a native of Lewistown, who built a local insurance agency into a $400 million empire, moved to southern California, and became convinced that Montana stood to make big money through fees from foreign dollars deposited in the state. Svoboda first broached the idea to Kenneth Byerly, the 89-year-old long-time publisher of the Lewistown News-Argus, who liked the concept so much he began to editorialize about it regularly in his paper. "I am like everyone else," confesses Byerly. "At first I thought it was kind of a crazy idea, but the more I learned about it, the more I thought Montana had everything to gain and nothing to lose."

Svoboda's idea eventually made its way to Governor Racicot's office where an assistant passed it along to Senator Sprague. Was the freshman lawmaker interested in studying the potential of foreign capital depositories in Montana and helping to draft a bill? Sprague said he was. "I didn't know if I was being led to the slaughter," Sprague now says, "but I thought it was worth looking into.

"It is a tremendous opportunity for the state," says Sprague, who contends that even though the legislation is important and historic in terms of its potential financial significance, it is still in harmony with his philosophy of keeping government as small and efficient as possible.

"The government's role here is only as a facilitator," he continues. "The government sets up the rules, monitors your progress and ensures compliance. Otherwise it is all private enterprise. We created it with the idea of letting you do it your way; we have no set definition of what a depository is supposed to be."

Yet, conversely, the way the act is written, state government is omniscient. "The depository as it is passed will be the most heavily regulated depository of its kind in the world," says Representative Jon Ellingson, one of the bill's sponsors in the House. He adds that there may be even more regulations and rules formulated as time goes by. "If this thing works, but we find that we need more regulatory tuning, that's fine. We can and probably would do that in the next Legislature in 1999."

THE BIGGEST WORRY

The reason for this seeming dichotomy is simple: Montana lawmakers, as well as members of the state's banking and law enforcement communities, are worried that the same depository act that could turn out to be one of the best things that ever happened to the state, could also be transformed into one of the worst.

That's because most similar depositories currently operating in more than two dozen countries across the globe have had to contend with the question of the unseemly character of the people who need to hide their money away, and how that money was acquired in the first place.

"That has been a big fear all along," admits Stephen Maly, research analyst with the Montana legislative services division, who spent most of the past two years delving into the arcane laws of depository regulation around the world while he also studied the seemingly miraculous universe of fluid capital in the 1990s where billions flow from place to place every day, oftentimes for illegal purposes.

"As soon as this idea was floated, we heard about how it was only going to attract criminals from all over the world, not just bad rich people, but real crooks," continues Maly.

Representative Ray Peck, who served on the subcommittee assigned to study the idea, originally numbered himself among the skeptics for the above reasons. "I just thought it was a pretty harebrained scheme. Nobody else was doing it. Do we really want to get involved with something like this where there may be a great element of risk? ... I was concerned about drug dealers making use of this."

Other lawmakers openly worried about money laundering and crime, a concern reflected in a column published in the Billings Gazette, which warned about the historic uses of similar depositories in Switzerland. "Since the days of 'Bugsy' Siegel, criminals, drug dealers, arms merchants, swindlers, blackmailers, dictators, tax dodgers/ corrupt leaders and businessmen worldwide have stashed away their ill-gotten gains in Swiss banks," the article noted.

And even after extensive research and the drafting of legislation that seems to close every possible depository loophole, some lawmakers (a distinct minority, as the bill passed unanimously in the Senate and was opposed by only six members of the House) are still wary.

"They talk about all of the safeguards they have taken, but this kind of a setup is only as good as the ongoing effort it is going to require to keep on top of things, to truly trace the source of these big deposits we're supposed to get," complains Representative Rick Jore. "How will we ever be certain where this kind of money originates from? What if it came from slave or child labor? How far back can we really trace these things?"

Even one lawmaker who ultimately supported the bill, Representative David Ewer, still has his doubts. "My residual worry is on the question of dirty money. I am comfortable with all of the work people have done on this question, but it still makes me nervous," Ewer says, adding: "Montana has an uneven record as far as regulating business activities. We have an uneven record on regulating environmental protection, so I really hope they are serious when they promise that they will stringently regulate this activity."

SAFEGUARDS IN PLACE

Most of Montana's lawmakers, however, believe that such concerns have been addressed by the exhaustive work of the subcommittee on the foreign investment depository, which met for more than 18 months on the matter and drew up a bill emphasizing safeguards and rigorous state oversight. "We found out going into this thing that we did not really have in place the kind of law that would allow us to just kind of flop into it," recalls Representative Royal Johnson, who ultimately voted against the depository act largely because it prevents the participation of American citizens. "That was my prime objection. But on the really big question of can we control this thing or regulate it properly, I really believe we have done everything we can to make it work. I am not sure how we can possibly make it tighter."

Even Don Hutchinson, Montana's commissioner of banking, is satisfied. "The subcommittee talked to just about everyone they could talk to, dozens of experts in law enforcement and banking, people from the federal government, and elsewhere. They helped them put together the kind of bill that addresses every type of potential problem that could arise when you start something like this."

As structured by the subcommittee, Montana's foreign depositories will be regulated by the state's Department of Commerce and its division of banking and financial institutions. The depositories will be required to comply with a wide array of federal and state laws, including the Money Laundering Control Act of 1986 and the Annunzio-Wylie Anti-Money-Laundering Act. No depository is allowed to accept a deposit of any kind from a person or a business of which a controlling official has been convicted of a felony.

Hutchinson notes that because the new law also requires that money be on deposit for long periods of time and in great amounts, "it will act as a natural deterrent to money laundering."

Says researcher Maly: "There are significant penalties on early withdrawals from certain kinds of accounts. Anyone who wants to launder money, which means you have to have your money remain liquid in order to get in and out quickly, is going to be deterred by Montana's system."

In addition, Montana officials setting up the Foreign Capital Depository have been assisted with the grudging help of a wide array of federal agencies, including the U.S. Treasury Department, which, at the very least, have been willing to instruct the state in what it should not do.

"The Federal Reserve people out of Minnesota came in, and they were very reluctant about the whole thing initially," recalls Representative Peck. "But they did give us off-the-record guidance about where they might have some concerns, and we tried to meet those concerns."

"The federal guys were a very cagey bunch on this whole thing," adds Representative Ellingson. "We wanted someone who was a federal authority to put a stamp of approval on this depository. We wanted to draft it in such a way that it would meet their concerns, and that once their concerns were met they would give us a public OK. They were never willing to go that far."

But Charles Klingman, analyst with the U.S. Treasury's Financial Crimes Enforcement Network, says his agency isn't in the business of endorsing state endeavors. "We were not in a position to endorse it or not," he explains. "It is an experiment, it is not something that should or needs to be endorsed." Instead, Klingman contends, the federal government's primary role was to serve in an advisory capacity, hoping that Montana was not about to jump into something it will later regret.

"Our concerns centered on the vulnerability for financial crimes and money laundering," Klingman continues. "It was all centered on the fact that we did not want to have these new entities abused or misused by criminals."

PLATINUM-PLATED SAFETY

Giving people solace is Montana's geological potential - the state is one of the continent's largest producers of platinum. The Stillwater Mine on Montana's Beartooth Plateau is the Western Hemishere's only producer of platinum group metals, whose value on the world market in many respects exceeds gold. And rich people, notes Senator Sprague, are inclined to purchase precious metals as an investment on its way to secure storage a foreign capital depository.

The availability of such a valued mineral, explains Sprague, offers foreign depositors alternatives in determining what to do with their money. "It is all part of our overall plan to allow people to design their own concept of what a deposit should be," Sprague says. "Let's say you are a foreigner with $3 million. You may want to put $1 million of that in American currency, $1 million into the marketplace in securities and bonds, and the final million in platinum."

For such deposits, Montana has the potential of earning vast sums of riches in fees. To begin with, a would-be depository owner must first pay the state $50,000 for a basic license to run the depository. Then there's a $10,000 yearly charter renewal fee, which also goes to the Montana Department of Commerce. And finally, there's a 1.5 percent annual fee to be charged depositors for the privilege of hiding their money. Only deposits of more than $200,000 will be accepted.

"It is a given that with trillions of dollars in motion every day throughout the world [in these kinds of accounts], we can reasonably expect to attract within a few years a sufficient amount to generate at least $1 billion in revenue for Montana," says Maly. "Which means we are talking about $100 billion in deposits, and that may actually be an underestimate. Either way, the selling point was that we have a chance to get a billion dollars in revenue from fees, which to the taxpayers and a fiscally conservative Legislature sounded pretty good."

The allure of such riches, says Representative Ellingsen, is what finally put the depository bill over. "I think after all of the endless studying and tightening of the regulations, a lot of us just started to ask ourselves, 'How can we go wrong?' It is not something that has much of a downside, but if it works we will receive millions of dollars in revenue from an entirely new source that we are not getting today."

Says Senator Sprague: "I know something about what sunrise industries are and the importance of selling conceptual ideas in the marketplace. We have set up the regulatory structure for this to happen. Now it is going to be up to the entrepreneur and the marketplace to determine what is out there."

So far, reports Vivian Manuel, public information officer with the Montana Department of Commerce, there have been more than 75 inquiries from both potential depositors and the agents who, by law, would be required to handle such transactions. And those queries, she says, have come from everywhere: Europe, Asia, Latin America. "The word is getting out. People who are interested in opportunities like this, say, the financial advisers, they have their own groups that they represent, and I can tell you for sure that a great number of those advisers have been calling us."

The response has been so good that the state's Department of Commerce currently has no plans to launch an advertising campaign telling the world about Montana's foreign capital depository law. "Obviously so far, we haven't needed any kind of advertising at all," says Manuel.

A POTENTIAL PROBLEM?

But that lack of any coordinated public relations campaign troubles some lawmakers, including Representative Betty Lou Kasten, who thinks the possible return on the depositories has been overstated. "My goodness, Montana is such a big part of the international scene! Why should we have to market anything?" remarks Kasten.

Kasten says the failure of the Department of Commerce to advertise the state's depositories is a sign that the state is relying too much on outside factors and failing in the all-important job of follow-up. "I have seen this happen many times before," she says. "We initiate a program with great fanfare and then fail to fund it, even if we think it is going to pay us back in the long run."

In Washington, D.C., Klingman says that although Montana's foreign capital depository law is fine, the Treasury Department will be watching to see how serious Montana is about implementing the regulations the lawmakers drafted. "If it is not funded properly, then it just becomes words on paper ... if tens of thousands of foreign capital depositories end up becoming established, but the appropriate resources are not dedicated to examining these new institutions, that could be a sign of something very .seriously going wrong."

Even the backers of the law admit the budgetary outlay for getting the program up and running is minimal: $2 million for the first two years. But if the program works, netting what the most optimistic projections say could be a regular $1 billion a year, that budget may only naturally be expected to grow. "That is something, too, that we may have to look at again in the 1999 Legislature - how much money should the state spend on the administration, on the costs, of regulating these depositories," says Representative Ewer. "A lot remains to be seen."

For Sprague, what happens next is important, but he remains inspired by the fact that the Legislature was willing to wrestle with such a complex, arcane issue that was initially greeted with some derision. "I just would have felt terrible if we weren't willing to even give this a try," Sprague says. "Even if it doesn't work, no one can say we are not trying to come up with new and interesting ways to bring money into the state and make Montana more prosperous. To me, it was just worth the try."

RELATED ARTICLE: ANOTHER UNUSUAL INSTITUTION

Montana isn't the only northern plains state with an unusual financial institution. North Dakota has owned and operated a bank since 1919, the Bank of North Dakota, a uniquely successful example of a state-owned bank.

Its establishment in 1919 was one of the planks of the Nonpartisan League, a farmers' party designed to cultivate the middle ground between the North Dakota Socialist and Republican parties. The bank was intended to extend credit to farmers and develop the state economy. It was part of a far-reaching design to keep capital in the state by forcing all governments to deposit funds in the Bank of North Dakota instead of sending them to Minneapolis or St. Paul. The Nonpartisan League envisioned state ownership of grain elevators, packing houses and flour mills, as well as local banks, crop insurance and exemption of farm improvements from property taxes.

Born at the beginning of a 20-year agricultural depression, the bank sank its initial capital, raised by a state bond issue, into almost unrecoverable farm loans. The bank survived the 1930s only by selling its farm mortgages to the new Federal Land Bank and closing its farm loan department. By 1940, the bank owned 1.6 million acres of foreclosed North Dakota farmland.

The bank survived to become central to the state economy. It is controlled by the State Industrial Commission, made up of the governor, the attorney general and the commissioner of agriculture, advised by a board of bankers and financial experts. The bank is the depository for state funds and local governments that wish to make use of it; it also acts as a commercial bank and accepts private deposits. Its assets exceed $1 billion. Its loan program focuses on North Dakota, where the bank makes a wide variety of agricultural, residential and business development loans.

One of the important differences between the Bank of North Dakota and other banks is that as a state government agency it is not subject to state or federal taxation. Another difference is that BND is not a member of the Federal Deposit Insurance Corporation. Its deposits are guaranteed by the state of North Dakota. A third significant point is that the state government receives significant dividends from the bank, currently around $50 million per biennium. The bank is the medium through which the state operates special loan programs, such as a community water facility revolving loan fund, a program to provide money for facilities for the developmentally disabled and a wide range of student loans. In the aftermath of North Dakota's disastrous floods in 1997, the bank moved fast to provide loans to local governments and state agencies to bridge the period until Federal Emergency Management Administration relief funds became available.

North Dakota's flirtation with socialism has been over for a long time; it's a fairly solidly Republican state these days. How does it put up with state ownership of a bank, the very cornerstone of capitalism? "It's always been a struggle to keep the bank out of private enterprise," says Representative John Dorso of North Dakota, "but it works. I could recommend it." - Ronald K. Snell, NCSL 

Garry Boulard, a New Orleans free-lancer, is a frequent contributor to State Legislatures magazine.