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Monaco Polishing its Image for the Future

The tiny principality of Monaco, sandwiched in the French Riviera, has long been a hub of the very rich and famous. In recent years Monaco earned a less savory reputation as a mecca for tax evaders and money launderers, but from Monaco, Lisa Bryant reports the principality is cleaning up its image.

From its yacht-choked port to its rocky borders, Monaco is a study in concrete and human ingenuity. Just about every square inch is filled with expensive boutiques and high-rise apartment buildings. Bulldozers bite into the earth, creating more for sale at breathtaking prices.

Benjamin Clement is a real-estate agent in Monaco. His apartments can sell for millions of dollars.

"Despite the global economic downturn real estate prices in Monaco remained high," he said. "They may even rise in the coming months."

Those snapping up the property include the movie stars, sports celebrities, and business magnates. But in recent years, Monaco has also attracted more unsavory characters, including alleged members of the Russian and Italian mafia. This sunny principality, ruled for 700 years by the royal Grimaldi family, acquired a reputation as a haven for tax evaders and crooks.

In 2000, the French government issued a pair of tough reports, accusing Monaco of tolerating money laundering and other financial improprieties. Then in 2002, a French judge published a juicy book about money laundering and crooked courts during his 1990s years as a magistrate in Monaco.

Each charge has been angrily denied by Monaco's ruler, Prince Rainier, and by his government. That includes Patrick Leclercq, who is Monaco's state minister - the principality's highest government official.

"We had a system to fight money laundering, which we had set up in 1993, which was similar to what could be found in other countries around," he said. "That anyway our banking system was very much under the control of the French banking system. So we did not see why we should be particularly singled out. If something was wrong, it was not just with us."

France has long had indirect control over Monaco. Most of the principality's police officers and judges are French, as are senior government officials like Mr. Leclercq. Which is why some suggest that France long turned a blind eye on Monaco's financial irregularities.

More recently, however, Monaco has been polishing its reputation. Experts like Transparency International, a non-governmental organization devoted to combating corruption, say the state has strengthened its anti-money laundering efforts. Mr. Leclercq says Monaco has also expelled a number of questionable residents from eastern and southern Europe.

In 2001, the principality was taken off a so-called gray list of countries with possible fraud, compiled by the Paris-based watchdog, the Financial Action Task Force.

At a tiny park overlooking the Mediterranean ocean, Spanish real estate businessman Francisco Escardivol says he believes Monaco is no more corrupt than any other country.

Like more than three-quarters of Monaco's 32,000 residents, Mr. Escardivol is a foreigner. He says he came to Monaco because he liked the weather, and because it was a clean and safe place to live.

But Monaco has another draw: It remains a fiscal paradise for rich foreigners - and on a short list of non-cooperating tax havens drawn up by the Organization for Economic Cooperation and Development. This month Monaco and several other small European states finalized a business-tax agreement with the European Commission. But Mr. Leclercq says the principality has no intention of giving up its tax-free status altogether.

"What about Hong Kong? What about Singapore? Why should we sacrifice something that is very much needed for our own development, while other countries can continue with this system?" he said.

Monaco's future - along with that of other tiny European states - is a question mark. Prince Rainier, who transformed the principality into a moneyed mecca, is 81 and ailing. His 46-year-old son and heir, Prince Albert, is untested.

"It is very interesting that these principalities have managed to survive," said Daniel Keohane, an analyst at the Center for European Reform, a London-based think tank. "These are tiny places and they do not have many natural resources. The question then is - particularly if Albert becomes the ruler - can he find alternative sources of income for Monaco?"

In the past, Monaco has prospered through banking, tourism and gambling at its famous Monte Carlo Casino. But today, commerce is the largest private-income generator. And Mr. Leclercq and other residents here believe the sunny principality, with its cleaned-up image, will be able to compete against its larger European rivals.