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Profits of doom
(Filed: 23/09/2001)
Grant Ringshaw finds the terrorists made millions by sophisticated trading before they attacked ONE
option trader recalls: "The market had been dead. Then all of a sudden
there was a huge spike in trading in certain options - it just came out
of nowhere. You have to think that there was something suspicious going
on." Last week the financial world realised that the Islamic terror groups behind the devastating attacks on America could have made millions by short-selling shares and derivatives
through a secret financial network before the attack took place - the
largest and most chilling piece of insider dealing in history. In
the past seven days, international intelligence agencies, worldwide
financial regulators and the world's biggest financial institutions
have been sifting through millions of records in a bid to find who
perpetrated the rogue deals. The investigation is part of a wider probe into the financial network of Osama bin Laden, the Islamic radical who the United States believes masterminded the attacks. Investigators
are seeking to freeze bank accounts and other assets belonging to bin
Laden, who is thought to have a personal fortune of $300m, his
associates and Afghanistan's Taliban government. So
far the focus of the international probe into suspicious trading has
centred on an extraordinary surge in trading in certain airlines and
insurance companies in the days immediately ahead of the attacks on
September 11. Liffe, the London futures and
options market, is understood to be particularly concerned about a huge
spike in trading in options based on British Airways' shares. On
September 7 - the Friday before the attacks - 2,184 "put" contracts
were traded. This was almost five times the normal daily trading volume. Buyers
of put options seek to make profits from an anticipated fall in a
company's share price by selling borrowed shares and later buying them
back at a lower price. According to figures from
the London Stock Exchange, there was also a massive spike in trading of
BA shares on September 6 with around 32m shares changing hands - almost
three times the normal level. Traders at the
Chicago Board Options Exchange, the world's biggest options market,
were also perplexed by surges in other airlines including United
Airlines and American Airlines, which each had two planes hijacked and
used as weapons by the terrorists. Three trading
days before the attack, the volume of puts in United rocketed to 2,000
contracts - an astonishing 285 times the average trading level. The day
before two American Airlines' planes were hijacked and crashed, the
number of put options bought in the airline rose to reach 60 times the
daily average. In Amsterdam, traders and
regulators were also astonished to see a huge rise in put options in
KLM, the Dutch airline. For weeks, only around a dozen puts had been
bought in the airline each day, but on the two trading days before the
attacks on the World Trade Centre an incredible 1,800 contracts were
bought. International investigators also believe
there may have been suspicious trading in insurance companies such as
Munich Re and Swiss Re, the world's two biggest reinsurers. On
September 6 and 7, trading was almost double the normal level in Munich
Re, which has estimated its losses on the disaster at £1.2bn. The
company's shares fell by 12 per cent in the four days before the
September 11 attacks and 15 per cent on the day of the strike. Trading
in the shares of Swiss Re, which has estimated its losses at £835m, was
more than double average daily volumes on September 7 with regulators
particularly concerned about a number of large block trades. The
international probe is also understood to be investigating options
trades in some of the world's biggest financial institutions including
Axa, the French insurer, Citigroup, the financial services company
which has a $500m liability to the disaster through its Travellers
insurance subsidiary, and investment banks such as Merrill Lynch and
Morgan Stanley. Italian regulators are understood
to be probing trades amid allegations that bin Laden has channelled
money through a number of Italian brokerages in the past, while
authorities in Tokyo, where bin Laden associates are known to have
operated, are probing trades in options between September 3 and 14. Swiss authorities are also understood to be focusing on an investment bank in Lugano called Al Taqwa. "I
saw put-call numbers higher than I have ever seen in 10 years of
following the markets. When you see this type of activity, the first
thing you do is ask yourself: 'What is the explanation? What are people
worried about?' " says John Kinnucan, the principal of Broadband
Research, an independent American research firm. Though
some analysts claim volatile stockmarkets and fears of a global
recession could have been behind the extraordinary short-selling, the
suspicion remains that someone, somewhere had inside knowledge of the
attacks and sought to reap profits by dumping the shares of airlines
and insurance companies. True, the airline
industry was already in trouble, but the short-selling of reinsurers is
far more perplexing. Insurance stocks had been one of the brightest
spots in a difficult market as rates hardened to their best level in
years. The army of investigators face a mammoth
task in piecing together who was behind the suspicious trades. But
tantalisingly, the paper trail could lead to new revelations about the
obscure financial network of Osama bin Laden and his Al Qaeda
organisation. "It is very hard to pull something off like this and not leave some sort of paper trail," says one senior financial regulator. Options
market experts point out that trading records are transparent and that
there should be a clear trail for investigators to follow, since no one
can trade in options without opening a brokerage account. This is no
easy task and can take months. "The fact of the
matter is that if an international bank in London is dealing on behalf
of a bank in the Far East who is dealing for an Arabic client in the
Middle East through an introducing broker, that such a trade in all its
levels would be traceable," says one trader. What
is certain is if the terrorists or their associates did try to profit
by short-selling they will have attempted to cover their tracks - this
could have included using an executing broker, often small brokers
which parcel together trades on behalf of a number of clients, to place
the trades through a long network of different banks. "We
are dealing with intelligent operatives who will be trying to find the
weakest link in the chain," says one options market expert. That weak link could be the use of shadowy trusts in offshore financial centres such as the Cayman Islands and Bermuda. These
trusts may be owned by legitimate front companies. Though
money-laundering regulations have been tightened in the past decade,
international investigators still do not have the armoury of weapons to
block the movement of terrorist and organised crime funds. Bankers
say that until the 1990s it was relatively easy to move illicit finds
through the international financial system. One key new move has been
the introduction of "Know Your Customer" rules which require banks to
know the true identity of their customers including companies even in
tax havens such as the British Virgin Islands. But
as bankers point out, these rules are not always strictly applied,
especially in offshore centres. Ironically, the US Congress refused to
tighten the Know Your Customer Rules in 1999, claiming it was a threat
to civil liberties. In normal circumstances these
tax havens would protect the identity of their clients at all costs
from outside regulators. But in these times, it is likely that any tax
haven, no matter how secretive, would hand over any information about
accomplices of bin Laden, or face the wrath of the US. Even
if investigators do track the trail to offshore financial centres,
there will still be difficulties in unravelling a web of front
companies which are commonly used by secret financial organisations. According
to testimony by Jamal Ahmed al-Fadl, effectively bin Laden's former
chief financial officer, the bin Laden network used 80 front companies
to conceal its activities. These are thought to include Wadi al-Aqiq, a
corporate shell in Sudan, Taba Investment, a currency trading firm, and
Laden International Company, an import-export business. A
web of secret numbered Swiss bank accounts are thought to have been
used as well as accounts in Sudan, Hong Kong, Monaco, Pakistan,
Malaysia and London. Last week Barclays Bank
confirmed that it had frozen one account which is believed to have been
in the name of Khalid al-Fawwaz, a Saudi Arabian who is on remand in
Britain's Bellmarsh prison and is fighting extradition to the US. The
United States has been attempting to throttle bin Laden's finances
since 1998, but has so far struggled to pin down the movement of his
assets around the world. One of the biggest
problems is thought to be the group's use of a secure network of
financial brokers operating an informal money transfer system known by
the Hindi name hawala. The network transfers
money through a complicated barter system, relies on personal contacts
and allows payments to be made in one place in return for cash being
provided in another location. No one doubts that
the investigation, which is headed by the the US Treasury, is the
biggest ever attempt to hunt down and smash apart a secretive financial
network. If it succeeds it may reveal just whether
bin Laden and his associates not only had the audacity to pull off the
world's worst terrorist atrocity, but also make unbelievable profits by
short-selling the markets.
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