Swiss-style 'banks' bring scant return

Foreign capital depositories approved by lawmakers in 1999 operate in secret

David Milstead, Rocky Mountain News

Friday, February 23, 2007

The idea was to make Colorado a home for Swiss-style private banks that would attract millions, if not billions, of dollars from outside the United States.

The state would get a piece of the action in the form of an assessment on the money these "foreign capital depositories" took in.

It's been eight years since that legislation passed. Colorado has chartered two of the private banks since 2003 - American International Depository & Trust and Tuus Financial.

But American International is now battling an enforcement action brought by banking regulators. At the same time, regulators are trying to tighten the requirements on the industry through new rules and new laws.

The state's take, after all this time and energy? Through June, not a dime. As of last summer, the two depositories had taken in no money.

"Foreign Capital Depositories have failed to produce anticipated state revenues . . . and there are questions as to the whether the basic business model is practicable," Banking Commissioner Richard Fulkerson wrote in a memo to the state's Legislative Audit Committee in August.

Yet Jerry James, the founder and chairman of American International, says the idea remains viable. He says his company took in its first deposits and paid the state an assessment in December.

"Everyone I talk to understands that this will be a very significant industry for Colorado," he said Wednesday. "It's destined for that, as long as we have the support to grow the business."

Rocky beginnings

Colorado got the idea for foreign capital depositories from Montana, which passed its law in 1995. Colorado followed in 1999, and two years later, Liberte International Corp. received a preliminary charter.

But a series of missteps followed, from misleading statements on its Web site to a failure to get audited financial statements. The terrorist attacks of Sept. 11, 2001, and the increased focus on international money laundering, made Liberte's job even more difficult.

After a series of extensions from the banking board, Liberte failed to raise its initial capital, and the charter was revoked in December 2002.

In a way, American International rose from the ashes of Liberte. The Liberte executives brought on James, a local money manager for wealthy families, as an adviser.

After Liberte's collapse, James started work on American International and incorporated it in April 2003. By year's end, it had received its charter and had become Colorado's first foreign capital depository.

Two years later, Colorado chartered Tuus Financial, founded by local money manager Dave Prokupek of Geronimo Partners.

Since then, little has been known about the depositories, since virtually all information about them is shielded from disclosure.

Commercial banks must file publicly available quarterly financial reports with federal regulators as a condition of getting deposit insurance. No such requirement exists for the depositories.

Fulkerson's August memo was the first acknowledgement that the depositories had yielded no deposits.

"If we underestimated anything, it was the time, the money and the energy it would take to inform the world what we're doing," James said. "We spent the first year of our lives traveling and educating. The next year we spent 'operationalizing' the bank. We had the power to take deposits from the beginning, but we didn't because we weren't ready. The last thing you want to do is start off and misfire."

James said the depository is now showing "phenomenal" growth and is expected to be profitable by the end of this year. It has five managers, 10 additional employees and 75 independent consultants around the world, he said.

Yet American International has run afoul of the regulators, who are pursuing an enforcement action against the depository in Colorado's Office of Administrative Courts.

The charges, however, are not public at this time. American International filed a motion to seal the entire case, which was denied by Administrative Law Judge Robert N. Spencer after opposition by the Rocky Mountain News.

American International appealed to Denver District Court, where Judge Martin Egelhoff granted the motion to seal the proceeding. The Rocky has filed a motion to intervene in the matter.

At the Jan. 25 Administrative Court hearing, Assistant Attorney General Stephen Smith said the purpose of the hearing was "to suspend or revoke" American International's charter.

Melvin Sabey, the attorney representing American International, argued that the hearing needed to be sealed because disclosure of the charges against the depository could be "deadly" and prompt a "run on the bank."

"The industry may be dead, depending on the ruling today," Sabey said.

James declined to address the enforcement action in an interview Wednesday.

Tougher requirements

While Colorado banking regulators are moving against American International, they also are working to beef up the regulatory requirements for the industry.

The Banking Board passed a resolution Feb. 15 increasing the capital requirements for both new applicants and the existing depositories.

An initial proposal drew the opposition of both depositories. Tuus Financial's Prokupek told the banking board on Jan. 16 "the beauty of the asset-management business is it doesn't need any capital. . . . If the rules say I've got to put up five to 10 times the capital than Merrill Lynch to be successful, it's over for me before it's started."

Fulkerson modified the capital requirements before bringing them back to the board in February, a move that he said assuaged Tuus Financial. (Prokupek is out of the office this week, a spokesman said, and is unreachable.)

But American International still opposed the requirements, which raised minimum capital to $3 million from $2 million and added a sliding scale that increased capital as a depository took in more deposits.

The depository's attorney, Robert Roth, called the new standard "anti-competitive and excessive. . . . We don't lend. We don't have the same kind of risk a bank has."

The banking board, however, adjusted Fulkerson's proposal to give him the power to take action against a failing depository more quickly.

"I'd like to not restrain (Fulkerson) if there are those kind of red flags that go up," said board member Brent Anderson.

While the board is setting new rules, the Division of Banking is seeking changes to the depository law. The bill, which cleared a Senate committee last week, clarifies the powers of the commissioner and the board, and allows Colorado to share information about the depositories, but not their customers, with other regulators. Financial reports for the depositories also will be available to potential investors or customers.

"The legislation should have been to abolish foreign capital depositories, but at least they're going in the direction of ensuring financial strength," said Barbara Walker, executive director of the Independent Bankers of Colorado.

Her group has opposed the law from the beginning and has been vocal in demanding the depositories not use the word bank in their names because they do not have federal deposit insurance.

"The fact that it hasn't taken off as the legislature originally contemplated tells me there is not a market for this."

But American International has hired lobbyists Bill Artist and Ruben Valdez, both former legislators, to defend itself this year - and educate Colorado politicians before next year's session.

"We have a lot to sell," James said. "The biggest issue is to get the message out and convince people Colorado wants the business, and we have the proper rules and proper system."

Depositories protect funds of noncitizens

• What is a "foreign capital depository"?

Colorado passed a law in 1999 creating these companies, designed to bring millions in tax revenue to the state. Nonresident noncitizens could put money in the depository, and it would be protected from foreign civil disputes. Colorado courts could honor the judgments only if the results would have been the same had the laws of Colorado been applied in the proceedings.

• How many are there in Colorado?

Two. The first attempt, Liberte International Corp., failed in 2003. American International Depository & Trust started in 2003, and Banque Tuus started in 2005 .

• Does any other state have these?

No. Montana, which passed its law before Colorado did, repealed it last year. The only applicant was allegedly funded in part by proceeds embezzled from an elderly woman. Montana State Sen. Larry Jent, who sponsored the bill killing the law, said, "We spent a bunch of money setting it up and never made a plug nickel."

• How's it going?

Not well. Colorado has yet to collect a single dollar from assessments on deposits, and American International is now the subject of an enforcement action. A weak economy, combined with greater scrutiny of international money movement in the post-Sept. 11, 2001, world, makes it difficult to raise money for a domestic "offshore bank."

David Milstead is finance editor of the Rocky Mountain News. He can be reached at milstead@RockyMountainNews.com or 303-954-2648.