[Senate Hearing 106-428]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-428



                               before the


                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                        NOVEMBER 9 AND 10, 1999


      Printed for the use of the Committee on Governmental Affairs

                     U.S. GOVERNMENT PRINTING OFFICE
61-699                       WASHINGTON : 2000
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402


                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                 Darla D. Cassell, Administrative Clerk



                   SUSAN M. COLLINS, Maine, Chairman
WILLIAM V. ROTH, Jr., Delaware       CARL LEVIN, Michigan
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         MAX CLELAND, Georgia
THAD COCHRAN, Mississippi            JOHN EDWARDS, North Carolina
ARLEN SPECTER, Pennsylvania
          K. Lee Blalack, II, Chief Counsel and Staff Director
      Linda J. Gustitus, Minority Chief Counsel and Staff Director
                     Mary D. Robertson, Chief Clerk

                            C O N T E N T S

Opening statements:
    Senator Collins.............................................. 1, 71
    Senator Levin................................................ 4, 72
    Senator Specter..............................................     8
    Senator Cochran..............................................     9

                       Tuesday, November 9, 1999

Robert L. Roach, Counsel to the Minority, Permanent Subcommittee 
  on Investigations..............................................    10
Elise J. Bean, Deputy Chief Counsel to the Minority, Permanent 
  Subcommittee on Investigations.................................    13
Amy C. Elliott, Vice President, Citibank Private Bank, New York..    18
Albert Misan, Vice President, Citibank Private Bank, New York....    20
Alain Ober, Vice President, Citibank Private Bank, New York......    36
G. Edward Montero, Senior Executive, Citibank Private Bank, New 
  York...........................................................    37
John Reed, Chairman and Co-Chief Executive Officer, Citigroup, 
  New York, accompanied by Todd Thomson, Chief Executive Officer, 
  Citibank Private Bank, New York, and Mark Musi, Chief 
  Compliance and Control Officer, Citibank Private Bank, New York    50

                      Wednesday, November 10, 1999

Antonio Giraldi, Former Private Banker, currently in Federal 
  Prison for Money Laundering....................................    74
Raymond W. Baker, Guest Scholar in Economic Studies, The 
  Brookings Institution, Washington, DC..........................    84
Ralph E. Sharpe, Deputy Comptroller for Community and Consumer 
  Policy, Office of the Comptroller of the Currency, Department 
  of the Treasury, Washington, DC................................    92
Richard A. Small, Assistant Director, Division of Banking 
  Supervision and Regulation, Federal Reserve System, Washington, 
  DC.............................................................    96

                     Alphabetical List of Witnesses

Baker, Raymond W.:
    Testimony....................................................    84
    Prepared statement with an attachment........................  1053
Bean, Elise J.:
    Testimony....................................................    13
    Prepared statement (Minority Staff Report on Private Banking 
      and Money Laundering: A Case Study of Opportunities and 
      Vulnerabilities)...........................................   872
Elliott, Amy
    Testimony....................................................    18
    Prepared statement...........................................   940
Giraldi, Antonio:
    Testimony....................................................    74
    Prepared statement...........................................  1003
Misan, Albert:
    Testimony....................................................    20
    Prepared statement...........................................   946
Montero, G. Edward:
    Testimony....................................................    37
    Prepared statement...........................................   953
Ober, Alain:
    Testimony....................................................    36
    Prepared statement...........................................   950
Reed, John:
    Testimony....................................................    50
    Prepared statement with attachments..........................   957
Roach, Robert L.
    Testimony....................................................    10
    Prepared statement (Minority Staff Report on Private Banking 
      and Money Laundering: A Case Study of Opportunities and 
      Vulnerabilities)...........................................   872
Sharpe, Ralph E.:
    Testimony....................................................    92
    Prepared statement...........................................  1079
Small, Richard A.:
    Testimony....................................................    96
    Prepared statement...........................................  1101


Note: ``Citibank PBG'' refers to Citibank Private Bank Group, an 
  organizational unit within Citigroup

 1. GChart: Structure of Trocca, Ltd.............................   111

 2. GChart: Flow of the Salinas Funds............................   112

 3. GChart: Salinas Cashiers Checks Through Citicorp Mexico......   113

 4. G4/92 Citibank documentation policy..........................   114

 5. G5/92 Salinas account opening documentation..................   123

 6. G9/91 Citibank client acceptance policy......................   127

 7. GExcerpt from 3/1/95 Salinas client profile..................   133

 8. G9/15/92 e-mail from Reynaldo Figueiredo on ``Client 
  Information--Policy and Procedures''...........................   134

 9. G12/8/93 e-mail from G. Edward Montero on ``Client Profile/
  Suitability/Sales Practices''..................................   136

10. G``Rumors of Corruption Besiege Mexico's President,'' 
  Sacramento Bee, (8/11/93)......................................   138

11. a. GExcerpts from transcript of 3/1/95 telephone 
  conversations among Citibank Private Bank personnel (Amy C. 
  Elliott, Pedro Homen, and Sarah Bevan).........................   141

    b. GExcerpts from transcript of 3/1/95 telephone 
      conversations between Citibank Private Bank personnel 
      (Pedro Homen and Amy C. Elliott)...........................   142

12. G1996 President Bongo's client profile.......................   143

13. G6/25/97 KYC [Know Your Client] Deficiencies review of Abacha 
  sons' client profile...........................................   144

14. G4/28/97 e-mail to Alain Ober and others from Christopher L. 
  Rogers on President Bongo's press clippings....................   145

15. G11/6/98 e-mail to Salim Raza from Christopher L. Rogers on 
  closing President Bongo's accounts.............................   147

16. G9/15/98 Citibank Private Bank memorandum from Belma Kusoglu 
  to Credit Committee regarding $39.1 million overdraw...........   148

17. GExcerpts from Citibank Private Bank brochure................   149

18. GExcerpts from transcript of 3/1/95 telephone conversations 
  among Citibank Private Bank personnel (Hubertus Rukavina, Pedro 
  Homen, Tom Salmon, Sarah Bevan, Joanne Sciortino)..............   151

19. G4/14/97 Citibank Private Bank memorandum to File from Alain 
  Ober regarding source of funds in President Bongo's accounts...   154

20. G6/18/97 OCC memorandum to Bank File from Steven D. Lindsey, 
  OCC National Bank Examiner regarding ``Related files of El Hadj 
  Omar Bongo, President of Gabon (Africa)''......................   155

21. GU.S. General Accounting Office Report to the Ranking 
  Minority Member, Permanent Subcommittee on Investigations, 
  Committee on Governmental Affairs, U.S. Senate, Private 
  Banking: Raul Salinas, Citibank, and Alleged Money Laundering, 
  October 1998...................................................   159

22. GStatement for the Record of Robert H. Hast, Acting Assistant 
  Comptroller General for Investigations, Office of Special 
  Investigation, U.S. General Accounting Office, Private Banking: 
  Paul Salinas, Citibank, and Alleged Money Laundering, November 
  9, 1999........................................................   171

23. GStatement for the Record of Thomas J. McCool, Director, 
  Financial Institutions and Markets Issues, General Government 
  Division, U.S. General Accounting Office, Money Laundering: 
  Observations on Private Banking and Related Oversight of 
  Selected Offshore Jurisdictions................................   182

24. GStatement for the Record of Stuart E. Eizenstat, Treasury 
  Deputy Secretary...............................................   198

25. GSupplemental questions and answers for the record of the 
  Permanent Subcommittee on Investigations' Minority Staff.......   204

26. GSupplemental questions and answers for the record of John 
  Reed, Chairman, Citigroup, Inc.................................   206

27. GSupplemental questions and answers for the record of Ralph 
  Sharpe, Deputy Comptroller, Community and Consumer Policy, 
  Office of the Comptroller of the Currency......................   216

28. GSupplemental questions and answers for the record of Richard 
  A. Small, Assistant Director, Division of Banking Supervision 
  and Regulation, Board of Governors of the Federal Reserve 
  System.........................................................   224

29. GCitibank comments on the Permanent Subcommittee on 
  Investigations' Minority Staff Report on Private Banking and 
  Money Laundering...............................................   231

30. GDocuments relating to Raul Salinas:

   a. GCitibank summary of Salinas account totals and client net 
  revenue [CB21344]..............................................   238

   b. G6/92 monthly business letter projecting Salinas account of 
  $15-$20 million [CB24979-82]...................................   239

   c. G6/16/92 memorandum from Jim Parker [CB24610-12]...........   243

   d. G1992 client acceptance checklists with public figure 
  designations [CB24613-14; CB24572].............................   246

   e. GReview memorandum for Trocca, Ltd. account [CB24483-84]...   249

   f. G8/17/93 document on lunch with Salinas, Rhodes, Montero, 
  Elliott [CB9453]...............................................   251

   g. G7/11/94 memorandum from Ariana Fleischmann on meeting 
  between Confidas personnel and Mr. and Mrs. Salinas [CB24617-
  18]............................................................   252

   h. GMemorandum from Amy C. Elliott on revealing client name 
  [CB24907-8]....................................................   254

   i. G3/1/95 memorandum from Sara Bevan regarding Salinas 
  ``Public Figure'' classification and origin of wealth [CB23250]   256

   j. G3/3/95 memorandum from Amy C. Elliott on accepting Mr. 
  Salinas as a client [CB7178-79]................................   257

   k. G11/14/95 memorandum from Clark Kall on Swiss meeting with 
  Mrs. Salinas [CB24607].........................................   259

   l. G9/18/95 memorandum from Clark Kall and Ariana Fleischmann 
  on closing accounts [CB24978]..................................   260

   m. G11/21/94 memorandum from Robert D. Agosti on documents for 
  requesting parties [CB9449]....................................   261

   n. GMinutes of Citibank Board of Directors meetings 
  summarizing discussions of the Salinas matter:.................   262

        11/21/95 [CB21345];

        12/19/95 [CB21347-8]

   o. G11/18/97 communication from John Reed to Citibank Board, 
  including discussion of the Salinas matter [CS7462-63].........   265
   p. GTape transcripts of Citibank employee conversations 
  regarding management and status of Salinas' accounts:..........   267

        3/1/95 11:07 AM [CB22428-54];

        3/1/95 1:59 PM [CB22319-27];

        3/1/95 2:38 PM [CB22328-32];

        3/1/95 2:47 PM [CB22079-81];

        3/1/95 2:51 PM [CB22467-72];

        3/1/95 3:02 PM [CB22456-57];

        3/1/95 3:11 PM [CB22458-60];

        3/1/95 4:31 PM [CB24655-64];

        3/2/95 11:41 AM [CB22336-40];

        11/14/95 3:08 PM [CB24640-41]

   q. GUndated memorandum from Bob Fox on management of Salinas' 
  accounts in Mexico City [CB4584-85]............................   339

   r. GChart entitled, ``Preliminary list of FX and Funds 
  Transfers,'' describing transfers of Salinas' funds from 
  Citibank's Mexico City branch to a concentration account in New 
  York [CB25018].................................................   341

   s. GDocuments related to cash flows and balances in Salinas' 
  accounts:......................................................   342

        GTwo 1-page memoranda on 1993 and 1994 cash flows 
      [CB23079, CB1128];

        G6/29/93 memorandum from Amy C. Elliott [CB22908];

        G1/95 documents on sending Salinas' funds through another 
      bank [CB23412-14];

        G11/15/95 memorandum from Amy C. Elliott detailing 
      certain fund transfers from Salinas' accounts [CB7180-83];

        G2/2/96 document prepared by Scotland Yard on 
      transactions in Salinas' accounts

   t. GDocuments related to due diligence policies and 
  implementation:................................................   355

        G1992 concentration account memos [CB24896-903];

        G9/25/92 memorandum from Edward J. Kowalcyk on client 
      profiles [CB14628-30];

        G1/22/93 memorandum from Albert Misan on due diligence 

        G3/11/93 memorandum from Edward J. Kowalcyk on BR&C 
      review [CB15836-39];

        G12/8/93 memorandum from G. Edward Montero on client 
      profiles [CB14626-27];

        GOne page summary of deadlines and required reviews 
      established in 12/8/93 memorandum [CB11455];

        G1/94 review of Mexico team client profiles in New York 
      [CB24909-49; CB7236];

        G5/6/94 memorandum from Albert Misan on client profile 
      audit [CB18311-21];

        G2/21/95 memorandum from Albert Misan with 9/30/94 memo 
      on profiles [CB14631-39];

        G6/1/95 memorandum from G. Edward Montero on client 
      profiles [CB16534-36];

        G9/7/95 memorandum from Albert Misan on cash deposits 

        G12/22/95 memorandum from Edward J. Kowalcyk on Mexico-
      New York team BR&C review [CB24904];

        G4/10/96 memorandum from Albert Misan with 4/9/96 
      memorandum from G. Edward Montero on client profiles 

   u. GCitibank Client Account Management System [CAMS] Screen 
  profiles of Raul Salinas:......................................   416

        3/1/95 [CB17293];

        3/8/95 [CB17286];

        3/15/95 [CB17281];

        11/22/95--includes handwritten edits [CB21433];

        11/29/95 [CB7196]

   v. GList of meetings that Citibank personnel had with Mr. and 
  Mrs. Salinas, prepared by Citibank [CB23814-16A]...............   421

   w. GDocuments related to corruption allegations involving Raul 
  Salinas:.......................................................   425

        G``Rumors of Corruption Besiege Mexico's President,'' 
      Sacramento Bee (8/11/93);

        G``Raul's Shady Business at CONASUPO,'' Proceso (12/4/

        GEste Pais excerpts (8/1/92);

        G``Agricultural trade--big business for U.S. and 
      Mexico,'' U.S. Dept. of Agriculture (3/92)

   x. GDocuments related to the structure of Salinas' Trust and 
  PICs:..........................................................   435

        GDiagram of Trust-PIC structure [CB2418];

        GUK Non-Residence Declaration Form for Trocca, Ltd. 

        GRegister of Directors and Officers of Trocca, Ltd. 

        G7/22/92 Declaration of Trust, Brennan Ltd. [CB23686];

        G6/30/93 Declaration of Trust, Brennan Ltd. [CB23677];

        G11/24/92 memorandum from Carlos Gomez forwarding a 
      request from Amy C. Elliott for documentation confirming to 
      Raul Salinas that he is the beneficial owner of Trocca, 
      Ltd. [CB23361];

        G2/16/95 memorandum from Arthur Vogt regarding another 
      Salinas PIC, Birchwood Heights Ltd. [CB23901];

        GRegister of Shareholders of Birchwood Heights Ltd. 

   y. G6/5/96 memorandum from Alvaro de Souza on Citibank's 
  position on a Salinas matter [CB16996-97]......................   443

31. GDocuments relating to Asif Ali Zardari:

   a. G2/27/95 Swiss Form A identifying Asif Ali Zardari as the 
  beneficial owner of the Capricorn Trading S.A. account in the 
  Citibank Private Bank in Switzerland [600].....................   445

   b. GWire transfer records documenting transfers of $18 million 
  into Mr. Zardari's Capricorn Trading S.A. account in Dubai and 
  transfers of $18.3 million out of the Dubai account into the 
  Capricorn Trading S.A. account in Citibank Private Bank in 
  Switzerland:...................................................   446

        G10/5/94 transfer of $5 million from A.R.Y. International 
      Exchange into the Capricorn Trading S.A. account in 
      Citibank in Dubai [X6903-4];

        G10/6/94 transfer of $5 million from A.R.Y. International 
      Exchange into the Capricorn Trading S.A. account in 
      Citibank in Dubai [X6900-2];

        G2/24/95 transfer of $8 million from Morgan NYC into the 
      Capricorn Trading S.A. account in Citibank in Dubai [X6905-

        G3/6/95 transfer of $8.1 million from the Capricorn 
      Trading S.A. account in Citibank in Dubai into the 
      Capricorn Trading S.A. account in Citibank Private Bank in 
      Switzerland [X6894-99];

        G5/3/95 transfer of $10.2 million from the Capricorn 
      Trading S.A. account in Citibank in Dubai into the 
      Capricorn Trading S.A. account in Citibank Private Bank in 
      Switzerland [X6890-93];

        G5/4/94 record of Citibank Private Bank in Switzerland 
      credit of $10.2 million to account of Capricorn Trading 
      S.A. [599]

   c. GMandate Agreement between Asif Ali Zardari and Jens 
  Schlegelmilch concerning Bomer Finance, Inc. [601-2]...........   466

   d. GMandate Agreement between Begum Nusrat Bhutto and Jens 
  Schlegelmilch concerning Mariston Securities, Inc. [603-4].....   468

   e. GBritish Virgin Islands Certificate of Incorporation for 
  Capricorn Trading S.A. [605]...................................   470

   f. G6/29/94 letter from Cotecna Inspection S.A., stating that 
  if it receives a contract from the government of Pakistan for 
  the inspection and price verification of imported goods, it 
  will pay Mariston Securities, Inc., 6 percent of the payments 
  made under the contract [597]..................................   471

   g. G12/11/97 communication from John Reed to Citibank Board, 
  including a discussion of the Zardari matter [CS7464-5]........   472

   h. GList of meetings between Mr. Zardari and Citibank 
  personnel, provided by Citibank................................   474

32. GDocuments relating to El Hadj Omar Bongo:

   a. GAttachment A to 9/23/99 letter to Subcommittee from 
  Citibank legal counsel, summarizing accounts related to Omar 
  Bongo, President of Gadon, referred to as ``Client 1a,'' and 
  his offshore corporation, Tendin Investments, Ltd., referred to 
  as ``Client 1b''...............................................   478

   b. G15-year record, 1985-1999, of Tendin account funds, 
  prepared by Citibank Private Bank [X2557]......................   479

   c. G5/95 Tendin Investments Ltd. 1-page document [X4318]......   480

   d. GExcerpts from client profiles prepared by Citibank PBG for 
  President Bongo's accounts:....................................   481

        GNew York PBG profile, 1996 [X2444, 2448, 2450, 2451, 

        GNew York PBG profile, prepared before or on 2/13/97 

        GNew York PBG ``Full Profile'' prepared after 10/31/97 

        GLondon PBG KYC Client Acceptance Checklist, 1998 [X6320-
      21, 6326];

        GLondon PBG ``Extended Entity Profile,'' 1999 [X6301-3]

   e. GExcerpts from OS account documentation:...................   497

        GNew York PBG ``Client File'' [X3340-43];

        G10/24/95 OS account opening documentation [X3353-56, 
      3358, 3360-61];

        G2/9/96 letter from President Bongo to New York PBG 

        G2/9/96 Security Agreement [737-38];

        G2/12/96 memorandum to ``Credit'' from Luella A. Gentles, 
      senior account officer [736]

   f. G3/9/95 memorandum to Donnelle Knowles from Alain Ober on 
  using codes [X2374]............................................   512

   g. G6/92 documents on $100,000 cash withdrawal [734]..........   513

   h. G5/94 documents on $69,035 check [714].....................   514

   i. GExcerpts from documentation related to extensions of 
  credit to President Bongo, 1986-1998:..........................   515

        G1986 credit approval recommendation [851];

        G1/9/90 e-mail to William Owen from C.O. Grant [769];

        G8/30/90 e-mail to Christopher L. Rogers from Len Maestra 

        G7/92 credit approval document for $24.4 million [757];

        G8/92 credit approval document for $27.5 million [756];

        G2/16/93 e-mail to Angelica De Robien from Rudolph 
      Thomson on overdraft facility [847];

        G2/17/93 letter to Angelica De Robien from Tendin 
      Investments, Ltd., on overdraft facility [848];

        G2/18/93 document by William P. Owen on Tendin overdraft 
      facilities and loans [755];

        G11/93 credit approval document for $47.7 million [751-

        G2/94 credit approval document for $50.1 million [750];

        G4/94 credit approval/annual review [X2536-37];

        G4/95 credit approval/annual review [X2528, 2530];

        G4/95 facility renewal recommendation, Paris PBG [X7043-

        G6/20/95 e-mail to Salim Raza from Alain Ober on Product 
      Suitability [X2286];

        G2/96 facility memorandum [X2525];

        G4/96 credit approval/annual review [X2522, 2524];

        G6/96 and 7/96 e-mails related to overdraft facilities 

        G10/97 credit approval/annual review [X2504];

        G10/98 credit approval/annual review [X2418]
   j. GExcerpts from documents related to internal Citibank PBG 
  inquiries into President Bongo's accounts:.....................   540

        G1996 Sensitivity Hot Sheet [X6887];

        G10/21/96 memorandum to Alain Ober from Angelo Fusaro 
      regarding Tendin accounts, with an attachment [835-43];

        G12/4/96 handwritten reply from Alain Ober with an 
      attachment [X6874, 6876];

        G6/12/98 PBG call report from Alain Ober with reference 
      to attempted fraud [X2479]

   k. GDocuments related to Federal Examiners review of President 
  Bongo's accounts:..............................................   553

        G12/10/96 memorandum to Christopher L. Rogers from Alain 
      Ober on $52 million [X2283];

        G12/11/96 reply from Christopher L. Rogers to Alain Ober 

        G2/26/97 memorandum to Nuhad Saliba from Alain Ober on 
      credit extensions [X7066]

   l. GDocuments related to 1996 and 1997 deposits into President 
  Bongo's accounts:..............................................   556

        G12/96 e-mails on transfer from Gabon treasury to Tendin 
      accounts [X7063];

        G1/7/97 e-mail to Donnelle Knowles from Alain Ober on 
      Gabon treasury funds deposit [X7064];

        G2/97 e-mails on deposits into President Bongo's accounts 

        G2/25/97 facsimile to Donnelle Knowles from Alain Ober on 
      failure to invest deposited funds [X7067-68];

        G2/26/97 e-mail to Donnelle Knowles from Alain Ober on 
      deposits to ``OS'' and Tendin accounts [X4314]

   m. GDocuments related to OCC review of President Bongo's 
  accounts:......................................................   562

        G4/9/97 memorandum to Alain Ober from Christopher L. 
      Rogers on source of funds [X4315-17];

        G4/11/97 memorandum to File from Alain Ober on source of 
      funds [X6694];

        G4/14/97 memorandum to File from Alain Ober on source of 
      funds [693];

        G4/28/97 e-mail to Alain Ober from Christopher L. Rogers 
      on France-Gabon Paris Press Clippings [X7054-55];

        G6/18/97 memorandum to Bank File from OCC National Bank 
      Examiner Steven D. Lindsey on President Bongo's accounts 
      [689-92] (Also printed above in Exhibit 20.)

   n. G1998 Quality Assurance--KYC Scorecards:...................   573

        GTendin accounts [X2477-78];

        GOS accounts [X3414-15]

   o. GDocuments related to closing President Bongo's accounts:..   577

        G11/6/98 e-mail to Salim Raza from Christopher L. Rogers 

        G12/24/98 e-mail to Salim Raza from Christopher L. Rogers 

        G1/15/99 e-mail to Anjum Z. Iqbal from Christopher L. 
      Rogers [X7049];

        G2/1/99 e-mails on closing accounts [X7051];

        G3/1/99 e-mail to Salim Raza and Anjum Z. Iqbal from 
      Christopher L. Rogers [X7052];

        G6/99 Transaction monitoring report, London PBG, on 
      Tendin withdrawal [X6284];

        G7/27/99 letter from President Bongo to Citibank PBG, 
      Paris on closing Leontine Ltd. account [CS2150];

        G8/99 e-mails on closing President Bongo's accounts 

        G8/99 e-mails on closing accounts and Bongo nephew 

        G8/99 document with figures related to President Bongo's 
      accounts [CS2149]
   p. GDocuments related to French criminal investigation of Elf 
  Aquitaine and Elf Gabon:.......................................   588

        G``Brief History and Current Status of the French 
      Investigation of the Elf Money Laundering Scheme,'' The 
      Library of Congress Law Library (No. 99-7539, 10/99);

        G``Relations Between France and Gabon Worsened over the 
      Elf Affair,'' Le Monde (4/2/97, translated by The Library 
      of Congress Law Library);

        G``Gabon Chief Threatens Oil Deals After Fraud Charges,'' 
      The Guardian (London) (4/8/97);

        G``Omar Bongo Could Be Implicated in the Elf Affair,'' Le 
      Monde (4/8/97), translated by The Library of Congress Law 

        G``Pas si joli,'' Africa Confidential (5/9/97);

        G``The Swiss Justice Refuses to Unfreeze the Bank Account 
      of President Bongo, Jacques Verges Becomes the Attorney of 
      Omar Bongo in the Elf Affair,'' Le Monde (8/6/97, 
      translated by The Library of Congress Law Library);

        G``Swiss Investigators Seize Gabon President's Bank 
      Account,'' AFX News (8/27/98);

        G``President of Gabon's Appeal Against Account Block 
      Rejected,'' AP Worldstream (11/2/98);

        G``A Swiss Account,'' La Lettre du Continent (11/19/98, 
      translated by The Library of Congress Law Library);

        G``No Immunity in Switzerland,'' La Lettre du Continent 
      (4/15/99, translated by The Library of Congress Law 

        G``Judge Perraudin's Investigation Uncovers ELF's Secret 
      African Affairs,'' Le Monde (10/25/99, translated by The 
      Library of Congress Law Library)

33. GDocuments relating to Abacha sons:

   a. GAttachment D to 8/9/99 letter to Subcommittee from 
  Citibank legal counsel summarizing accounts related to Mohammed 
  and Ibrahim Sani Abacha, referred to as the ``first and second 
  individuals identified in Item 2(l)''..........................   610

   b. G9/27/99 letter to Subcommittee from Citibank legal counsel 
  on Abacha sons' accounts.......................................   611

   c. GExcerpts from client profiles prepared by Citibank PBG for 
  Abacha sons' accounts:.........................................   612

        GNew York PBG profile, 1997, Gelsobella account [CS7178, 
      7182-83, 7185, 7189];

        GNew York PBG profile, 1997, Chinquinto account [CS7159, 
      7163-65, 7170];

        GLondon PBG ``Combined Client Profile/Account Plan,'' 
      1998 [CS3250, 3252-53];

        GLondon PBG ``Existing Client KYC Approvals,'' 1998 

   d. GKYC Deficiencies, 6/25/97 [CS3281]........................   631

   e. GExcerpts from account documentation:......................   632

        G2/28/92 Call Plan/Call Report from Alain Ober on opening 
      New York accounts [CS2064];

        G3/3/92 e-mail to Alain Ober from Michael Mathews 
      providing client reference [CS2071];

        G7/29/93 Call Plan/Report from Michael Mathews [CS2937];

        G11/11/94 Numbered Account Opening Form for London 
      account [CS3285];

        G1995 documents on using codes for Abacha sons' accounts 
      [CS1970-71, 1967, 3157];

        G1997 documents on cash purchase of London apartment 
      [CS3189, 3179, 3171];

        G5/1/96 statement for Navarrio account showing $10 
      million transfer on the order of Morgan Procurement Corp. 
      through Citibank New York [CS2955];
        G5/1/97 statement for Navarrio account showing $4.5 
      million transfer through Citibank New York [CS2969];

        G4/97 and 6/97 documents related to Abacha sons' requests 
      and Citibank PBG London's providing them with a bank 
      reference to Goldman Sachs International [CS3277, 3169-70, 

   f. GDocuments related to Citibank PBG inquiries into 
  suspicious activity in Abacha sons' accounts:..................   651

        G1/18/95 InterOffice Memo to Files from Luella Gentles on 
      Chinquinto account [CS1953];

        G1/20/95 Account Summary for Chinquinto account [CS1955];

        G12/22/94 Account Summary for Gelsobella account, and 
      particular account transactions [CS1904-11];

        G8/95 e-mails, facsimiles, and draft documents related to 
      request by Abacha sons for Advanced Payment Guarantee 
      [CS3211-12, 3190-96]

   g. GDocuments related to closing Abacha sons' accounts in New 
  York:..........................................................   670

        G8/21/96 letter to Yaya Abubakar from Citibank PBG, New 
      York [CS1986];

        G11/15/96 letter to Mohammed Sani from Alain Ober 

        G11/24/96 letter to Alain Ober from Mohammed Sani and 
      Yaya Abubakar [CS1975];

        G9/13/96 memorandum to D. Terry from Alain Ober [CS7491];

        G3/5/97 e-mail to Carl Brome from Alain Ober [CS7488];

        G10/3/97 memorandum to Linda Schuster from Alain Ober 

   h. GDocuments related to 1998 transfer of $39.1 million:......   676

        G9/15/98 memorandum to Credit Committee from Belma 
      Kusoglu [CS3360];

        G10/7/98 memorandum to Claude Poppe from David Oxford 

        G9/18/98 Margin System, Detailed Assets document 
      describing time deposits used in $39 million transfer 

        G9/98 Account Statement showing $39 million transfer 

        G10/98 Transaction Monitoring inquiry regarding $39 
      million transfer [CS3136]

   i. GDocuments related to 1999 freezing of Abacha sons' 
  accounts in London:............................................   682

        G3/19/99 amended civil complaint filed in High Court of 
      Justice, Queen's Bench Division, Commercial Court, in 
      London, freezing Abacha accounts in London;

        GTransaction Monitoring inquiry regarding $2.5 million 
      withdrawal, containing dates ranging from 11/98 until 6/99 

        G6/99 Transaction Monitoring inquiry on $298,600 
      withdrawal from Abacha sons' account;

        G6/3/99 e-mail to Salim Raza from Michel Accad on High 
      Court freeze order [CS7474]

   j. GDocuments related to Nigerian government actions taken 
  with respect to Abacha family:.................................   696

        G7/99 e-mails among Citibank Private Bank personnel in 
      New York on Nigerian government efforts to seize 
      misappropriated funds from Abacha family and requesting 
      information on existence of Abacha accounts [CS2153];

        G``How the grand lootocracy beggared Nigeria's people,'' 
      The Observer (11/22/98);

        G``London court freezes accounts of late Nigerian 
      ruler,'' Agence France Presse (6/3/99);

        G``Nigeria seeks help in tracing billions `taken' by 
      former military leaders,'' FinancialTimes (London) (7/23/

        G``Abacha's accounts frozen as provisional measure,'' 
      press release from Federal Office for Police Matters, 
      Switzerland (10/14/99);
        G``Swiss freeze accounts of Nigeria's Abacha,'' Reuters 

        G``Abacha son on trial for Mrs. Abiola's murder,'' 
      Reuters (10/14/99);

        G``Switzerland provides mutual legal assistance in the 
      Abacha case,'' press release from Federal Office for Police 
      Matters, Switzerland (1/21/2000);

        G``One billion Swiss Francs involved: The subject of 
      stolen Nigerian funds takes gigantic amplitude,'' Le Temps 
      (1/22/2000) (with translation from French)

34. GDocuments relating to Citibank Private Bank accounts of 
  public figures:

   a. GCitibank Private Bank's 6/98 Public Figure Policy 
  [CB21476-80]...................................................   716

   b. G6/98 memorandum from Shaukat Aziz, Citibank PBG head, on 
  new Public Figure Policy [973].................................   721

   c. G1999 KYC Annual review standards at Citibank Private Bank 
  [CB14922-23]...................................................   722

   d. G6/20/95 memorandum to Marcelo Mendoza from Alan Robinson 
  on ``Public Figure'' Policy [CB24678]..........................   724

   e. GExcerpts from Public Figure annual reviews in Europe, 
  Middle East, Africa (EMEA) Division:...........................   725

        G5/96 reviews [CS1895-97];

        G10/96 reviews [CS1891-94, 3254-55];

        G3/97 reviews [X4319, 7070-73];

        G10/97 reviews [CS1888-90];

        G1/99 reviews [CS1882-87, 2135-38, 2140-41];

        G2/99 reviews [CS2144-46, 2148];

        G8/99 reviews [CS2154-55]

   f. GExcerpts from ``The Private Banking Group--Western 
  Hemisphere Public Figure Review Recommended Action List as of 
  May 17, 1999'' [CB24972-73] (Reprinted below in Exhibit 35i.)..   760

35. GMaterials relating to former Venezuelan President Jaime 

   a. GAttachment A to 8/9/99 letter to Subcommittee from 
  Citibank legal counsel, summarizing accounts related to former 
  President Lusinchi, referred to as ``Client 1g,'' and his wife, 
  referred to as ``Client 1h''...................................   762

   b. G2/22/94 memorandum from Nicolas Yanes describing review of 
  Mr. Lusinchi's account [X4279].................................   763

   c. G4/6/94 memorandum from Rodrigo K. Alvarez placing 
  conditions on the Lusinchi account [X4278].....................   764

   d. G4/7/99 memorandum from Jose Luis Daly concurring with 
  Rodrigo K. Alverez 4/6/94 memorandum [X4280]...................   765

   e. G``Venezuela Mulls Extradition of Ex-President's Wife,'' 
  Reuters North American Wire (7/14/94)..........................   766

   f. G8/31/97 Sensitivity Hot Sheet listings, indicating Mr. 
  Lusinchi had been listed on the sheet since 4/94 [X6887].......   768

   g. GOctober 1998 Business Background/Source of Wealth Update 
  for Mr. Lusinchi [X4276-77]....................................   769

   h. G10/26/98 Public Figure Sheet indicating decision had been 
  made to retain Mr. Lusinchi as a client [CB24977]..............   771

   i. GThe Private Banking Group--Western Hemisphere Public 
  Figure Review Recommended Action List as of May 17, 1999, 
  recommending closing account of Mr. Lusinchi [CB24972-73]......   772

   j. GPublic Figure Annual Approval Form, 5/99, recommending 
  terminating the relationship with Mr. Lusinchi [CB24974-75]....   774

   k. G6/16/99 letter from Thomas M. Lahiff requesting that Mr. 
  Lusinchi transfer his accounts to another financial institution 
  [X3779]........................................................   776

36. GMaterials relating to former Indonesian President Raden 

   a. GAttachment C to 9/7/99 letter from Citibank legal counsel 
  to the Subcommittee, summarizing accounts related to two 
  daughters of former President Suharto, referred to as ``Client 
  2(h)'' and ``Client 2(j)''.....................................   777

   b. GExcerpts from 2/15/00 letter from Citibank legal counsel 
  to Senator Levin, summarizing accounts related to two daughters 
  and one son of former President Suharto, referred to as 
  ``Clients 2e, 2g, and 2h''.....................................   778

37. GMaterials relating to former Citibank private banker Carlos 

   a. G1998 Carlos Gomez Fraud Summary and Action Plan, prepared 
  by Citibank PBG [607-10].......................................   779

   b. G1998 Federal criminal indictment of Carlos Gomez (Case No. 
  1:98CR00195-001, United States District Court, Southern 
  District of New York)..........................................   783

   c. G1998 Judgment In A Criminal Case, based upon guilty plea 
  to bank fraud..................................................   788

   d. G1998 Judgment for $23,226,661.00 in Citibank v. Gomez 
  (Index No. 600401/98, Supreme Court of the State of New York, 
  County of New York)............................................   793

38. GMaterials relating to foreign secrecy laws:

   a. GCitibank Private Bank form requiring employee 
  acknowledgment of Swiss bank secrecy laws......................   797

   b. GJ.P. Morgan Private Bank form requiring employee 
  acknowledgment of Swiss bank secrecy laws......................   798

   c. G1998 exchange of letters between Bankers Trust Private 
  Bank and Federal Reserve Bank of New York regarding disclosing 
  information on beneficial owners of private investment 
  companies that are clients of the Bankers Trust Private Bank...   799

   d. G10/27/99 The Library of Congress Law Library reports on 
  corporate secrecy laws in the Bahamas, the Cayman Islands, the 
  Channel Islands, Hong Kong, the Netherlands Antilles, Panama, 
  Singapore and Switzerland [LL File No. 99-7799]................   812

39. G4/9/98 Shaukat Aziz and Philippe G. Holderbeke memos on 
  Citibank Private Bank's KYC efforts [CB21635-41]...............   843

40. GSelected documents from 545 pages of documents produced by 
  Citibank on 1/26/00, more than 2 months after the November 

   a. G1/26/00 letter from Citibank Private Bank's legal counsel 
  producing 545 pages of documents...............................   850

   b. GDocuments related to $1.9 million transfer on 2/22/95 from 
  Gabon treasury to Citibank Private Bank accounts controlled by 
  President Bongo:...............................................   851

        G2/22/95 e-mail to Alain Ober (at Citibank Private Bank 
      in New York) from Kayembe Nzongola (at Citibank Gabon) 

        G3/1/95 e-mail to Donnelle Knowles and others from Alain 
      Ober [X7208];

   c. GDocuments related to $2.9 million transfer on 7/30/96 from 
  Gabon treasury to Citibank Private Bank accounts controlled by 
  President Bongo:...............................................   853

        GTransaction record of incoming funds transfer on 7/30/96 

        GTransaction journal, including incoming funds transfer 
      on 7/30/96 [X7289];

        G7/31/96 e-mail to Donnelle Knowles from Alain Ober 

        G7/31/96 handwritten notes of Alain Ober regarding 
      telephone conversation with Laure Gondjout, assistant to 
      President Bongo [X7308];

        G7/31/96 e-mail to Salim Raza from Alain Ober [X7295];

        G8/1/96 e-mail to Alain Ober from Salim Raza [X7296]

   d. GDocuments related to $1.891 million transfer on 12/24/96 
  from Gabon treasury to Citibank Private Bank accounts 
  controlled by President Bongo:.................................   859

        GTransaction record of incoming funds transfer on 12/24/
      96 [X7541];

        GTransaction journal, including incoming funds transfer 
      on 12/24/96 [X7540]
   e. GDocuments related to $20 million deposit of funds into 
  President Bongo's accounts:....................................   861

        G3/20/97 e-mail to Christopher L. Rogers from Alain Ober 

        G3/21/97 handwritten notes of Alain Ober [X7482];

        G3/24/97 memorandum to Alain Ober and others from 
      Christopher L. Rogers [X7486];

        G3/25/97 e-mail to Alain Ober and others from Christopher 
      L. Rogers [X7482]

   f. GDocuments related to due diligence review of President 
  Bongo's accounts, status of Elf criminal investigation, and 
  possible termination of President Bongo's relationship:........   865

        G2/21/97 memorandum to Tony Nzongola and others from 
      Nuhad Saliba [X7481];

        G7/29/98 e-mail to Alain Ober from Michael Mathews (at 
      Citibank Private Bank in London) [X7568];

        G7/29/98 e-mail response to Michael Mathews from Alain 
      Ober and 7/30/98 e-mail reply to Alain Ober from Mathews 

   g. GMiscellaneous documents:..................................   868

        G8/19/99 handwritten notes regarding President Bongo's 
      accounts [X7615-16];

        G1/8/99 letter to Alain Ober from President Bongo 

        G3/13/95 e-mail to Alain Ober and others from Donnelle 
      Knowles (at Cititrust in the Bahamas) about proposed coding 
      system for President Bongo's accounts [X7202]

41. GSEALED EXHIBITS: (* Retained in the files of the 

   a. GExcerpts from Citicorp Internal Audits and Reviews of the 
  Citicorp Private Bank, 1995-1998...............................     *

   b. GExcerpts from Federal Reserve Analysis of Citicorp Private 
  Bank, 1996-1998................................................     *



                       TUESDAY, NOVEMBER 9, 1999

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins, Cochran, Specter, and Levin.
    Staff present: K. Lee Blalack, II, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Kirk E. Walder, 
Investigator; Brian C. Jones, Investigator; Linda Gustitus, 
Minority Staff Director and Chief Counsel; Elise J. Bean, 
Minority Deputy Chief Counsel; Robert L. Roach, Counsel to the 
Minority; Claire Barnard, Detailee/HHS; Leo Wisniewski, 
Detailee/Secret Service; Carl Gold, Congressional Fellow; 
Robert Slama, Detailee/Secret Service; Regina Keskes, Intern; 
Ryan Blalack, Intern; Justin Tatham, Intern; Morgan Frankel, 
Senate Legal Counsel; Brian Benczkowski (Senator Domenici); 
Michael Loesch (Senator Cochran); Frank Brown (Senator 
Specter); Anne Bradford (Senator Thompson); Julie Vincent 
(Senator Voinovich); Nanci Langley (Senator Akaka); Marianne 
Upton (Senator Durbin) Jonathan Gill, GAO Detailee (Senator 
Lieberman); and Shelly O'Neill (Senator Akaka).


    Senator Collins. Good morning. This Subcommittee will come 
to order.
    During the next 2 days, the Permanent Subcommittee on 
Investigations will examine the confidential, complex world of 
private banking and whether private banks are--by their very 
nature--particularly susceptible to money laundering. At the 
outset, I should note that this is not the first time that this 
Subcommittee has investigated money laundering. Our colleague, 
Senator Roth, in the mid-1980's, chaired a series of 
Subcommittee hearings which exposed how criminals used offshore 
banks to launder their dirty money. The Subcommittee's findings 
prompted passage of the Money Laundering Control Act of 1986, 
which defined money laundering as a freestanding criminal 
offense for the first time.
    More recently, Congressman Leach in the House of 
Representatives has held a series of hearings on money 
    These hearings, which were initiated by the Ranking 
Minority Member, Senator Levin, are very timely. Our banking 
system's vulnerability to money laundering is once again a 
focal point of debate in the wake of recent disclosures that 
billions of dollars were siphoned out of Russia into accounts 
at the Bank of New York and, within a few days or even a few 
hours, rerouted to multiple accounts all over the world.
    What happened at the Bank of New York, as well as the cases 
that we will highlight today, should be a cautionary tale for 
the rest of the banking industry, law enforcement, and 
Congress. We cannot allow the integrity of our banking system 
to be sullied by the dirty money that fuels the engine of 
criminal enterprises both here at home and abroad. Our banks 
must be vigilant in their efforts to detect and report criminal 
activity and avoid acting as conduits for money laundering. 
Stop money laundering, and you dry up much of the seed capital 
criminal organizations need for their operations.
    Today's hearing will focus on one aspect of our banking 
system--private banking--that may be particularly attractive to 
criminals who want to launder money. Private banking is 
probably unfamiliar to most Americans since, by and large, 
private banks cater to extremely wealthy clients. Indeed, most 
of the private banks examined by the Subcommittee require their 
clients to deposit assets in excess of $1 million. The banks 
charge their customers a fee for managing those assets and for 
providing the specialized services of the private banks.
    Some of those services include traditional banking services 
such as checking and savings accounts. But private banks go far 
beyond providing routine banking services. They market 
themselves to clients by offering services to meet the special 
needs of the very wealthy, including providing investment 
guidance, estate planning, tax assistance, offshore accounts, 
and, in some cases, complicated schemes designed to ensure the 
confidentiality of financial transactions.
    The private banker coordinates the management of the 
client's wealth and acts as the client's personal advocate to 
the rest of the bank. If a client needs to set up an offshore 
trust, for example, the private banker takes care of it. He 
serves as a liaison between the client and the bank's trust 
managers, investment specialists, and accountants. In short, 
private bankers are expected to provide personalized can-do 
service for their wealthy clientele.
    Historically, private banking was a specialty business 
dominated by Swiss banks. In the last 30 years, however, large 
banks in the United States have aggressively pursued private 
banking business and sought to increase their market share. 
Private banking is profitable, competitive, and a growing 
business in the United States, and private banking services are 
now an established line of business in many American banks.
    Private banks offer their wealthy clients not only first-
class service but confidentiality as well. While the average 
passbook savings depositor at a community bank in Maine has 
very little, if any, need for Swiss bank accounts, some wealthy 
and prominent people seek the anonymity of the financial 
services offered by private banks. And, it is fair to say that 
private banks sell secrecy to their customers.
    The Subcommittee's investigation found that private banks 
routinely use code names for accounts, concentration accounts 
that disguise the movement of client funds, and offshore 
private investment corporations located in countries with 
strict secrecy laws--so strict, in fact, that there are 
criminal penalties in those jurisdictions for disclosing 
information about the client's account to banking regulators in 
the United States.
    These private banking services--which are designed to 
ensure confidentiality for the client's account--present 
difficult oversight problems for banking regulators and even 
law enforcement. For instance, in one of the cases examined by 
the Subcommittee, the private bank opened special accounts for 
the client using the fictitious name ``Bonaparte.''
    The difficulties associated with identifying clients to 
account activity worsen when private banks use concentration 
accounts to transfer their clients' funds. In one case examined 
by the Subcommittee, the private banker's use of a 
concentration account, which commingles bank funds with client 
funds, cut off any paper trail for millions of dollars of wire 
transfers. The concentration account became the source of funds 
wired from Mexico, and investment accounts in Switzerland and 
London became the destination.
    I want to emphasize that private banking is a legitimate 
business. There can be bona fide reasons why private banks 
offer products designed to ensure anonymity and 
confidentiality. The problem, however, is that what makes 
private banking appealing to legitimate customers also makes it 
particularly inviting to criminals.
    The Subcommittee found that criminals can easily employ 
private banking services to move huge sums of money. In one of 
the cases examined by the Subcommittee involving Raul Salinas--
the brother of the former President of Mexico--the General 
Accounting Office determined that private banking personnel at 
Citibank helped Mr. Salinas transfer between $90 and $100 
million out of Mexico in a manner that ``effectively disguised 
the funds' source and destination, thus breaking the funds' 
paper trail.''
    Mr. Salinas received first class service from Citibank's 
private bank. My concern is that this gold-plated service 
included disguising the source, flow, and destination of funds 
that may have been the proceeds of the illegal activity.
    Now, I want to emphasize that the Subcommittee has 
uncovered no evidence that Citibank or any other private bank 
knowingly helped Mr. Salinas or other criminals launder dirty 
money. We have, however, found that some private banks 
neglected their own internal procedures designed to detect and 
report suspicious activity as they are required to do by law.
    For example, too often Citibank's private bank essentially 
paid lip service to its own procedures. Moreover, and even more 
troubling, it continued to do so even in the face of highly 
critical internal audits and warnings from banking regulators 
that there was a risk of exposure to money laundering.
    One of the purposes of these hearings is to determine why 
those internal policies were neglected and why it took Citibank 
so long to correct the problem. A second goal of these hearings 
is to examine whether our banking regulators have done and are 
doing enough to ensure that banks--especially private banks--
take seriously their obligation to implement internal 
procedures designed to report potential money laundering. 
Finally, these hearings will examine whether Congress needs to 
do more to combat this problem.
    At this time, I would like to call upon the distinguished 
Ranking Minority Member, Senator Levin, for his opening 
statement. Before doing so, however, I want to once again 
commend Senator Levin and his staff for the fine in-depth work 
that they have done on this investigation and for initiating 
these hearings.
    Senator Levin.


    Senator Levin. Thank you, Madam Chairman.
    Thirteen years ago, with the passage of the first money 
laundering statute in 1986, Congress made clear its desire not 
to allow U.S. banks to function as conduits for dirty money. 
Since that time, the world has experienced an enormous growth 
in the accumulation of wealth by individuals around the globe, 
and wealthy individuals have turned in growing numbers to a 
category of banking called ``private banking'' as the mechanism 
for managing their money.
    Estimates are that $500 billion to $1 trillion of 
international criminal proceeds are moved internationally and 
deposited into bank accounts annually. It is estimated that 
half of that money comes to the United States.
    Today we are looking at how private banking can provide 
management not only for legal money, but also for the wealth of 
international criminals and corrupt government officials.
    Private banking is a very competitive and very profitable 
business, often bringing in a 20 to 25 percent return to a 
bank. Private bankers are marketers and promoters who are 
expected to attract wealthy clients to the bank. Once a person 
becomes a client of a private bank, the bank's primary goal 
generally has been to service that client, and servicing a 
private bank client almost always means using services that are 
also the tools of money laundering: secret trusts, offshore 
accounts, secret name accounts, and shell companies called 
private investment corporations.
    These private investment corporations, or PICs, are 
designed for the purpose of holding and hiding a person's 
assets. The assets could be real property, money, stock, art, 
or other valuables. The nominal officers, trustees, and 
shareholders of these shell corporations are often themselves 
shell corporations controlled by the private bank.
    The PIC then becomes the holder of the various bank and 
investment accounts, and the ownership of the private bank's 
client is buried in the records of so-called secrecy 
jurisdictions, such as the Cayman Islands.
    Private banks keep prepackaged PICs on the shelf, awaiting 
activation when a private bank client wants one. Shell 
companies in secrecy jurisdictions managed by shell 
corporations which serve as directors, officers, and 
shareholders--shells within shells within shells, like Russian 
Matryoshka dolls, which in the end can become impenetrable to 
legal process.
    Private bankers specialize in secrecy. Even if a client 
doesn't ask for secrecy, a private banker often encourages it. 
In the brochure for Citibank's Private Bank on their 
international trust services, in the table of contents, it 
lists the attractiveness of secrecy jurisdictions this way: 
``The Bahamas, the Cayman Islands, Jersey, and Switzerland, the 
best of all worlds.''
    This brochure also advertises the advantages of using a 
PIC. One advantage it lists is this one: ``PIC assets are 
registered in the name of the PIC, and your ownership of the 
PIC need not appear in any public registry.''
    Secrecy is such a priority that private bankers have at 
times been told by their superiors not to keep any record in 
the United States disclosing who owns the offshore PIC 
established by the private bank.
    One former private banker told us that he and his fellow 
bankers had to hide cheat sheets in their desks because they 
weren't allowed to keep names of the offshore accounts that 
they were managing. Since they couldn't remember the names and 
the numbers of all those accounts when they needed them, they 
would keep a secret list in their desks or with a secretary to 
help them remember. When the list was discovered, the banker 
was reprimanded.
    American banks aren't allowed to maintain secret accounts 
in the United States that are not subject to legal process, so 
U.S. private bankers often establish secret accounts and secret 
corporations in countries that do allow them. Then they manage 
the money in those accounts and the assets in those 
corporations from their offices in the United States. In short, 
American banks help wealthy customers do abroad what the 
customer and the bank can't do in the United States under U.S. 
    Today we are looking at the Private Bank of Citibank. 
Citibank is the largest bank in the United States. It has one 
of the largest private bank operations. It has the most 
extensive global presence of all U.S. banks, and it has had a 
rogue gallery of private bank clients.
    Citibank, for instance, has been private banker to Raul 
Salinas, brother of the former President of Mexico, now in 
prison in Mexico for murder and under investigation in Mexico 
for illicit enrichment; Asif Ali Zardari, husband of the former 
Prime Minister of Pakistan, now in prison in Pakistan for 
kickbacks and under indictment in Switzerland for money 
laundering; Omar Bongo, President of Gabon, and subject of a 
French criminal investigation into bribery; sons of General 
Sani Abacha, former military leader of Nigeria, one of whom is 
now in prison in Nigeria on charges of murder and under 
investigation in Switzerland and Nigeria for money laundering; 
and Jaime Lusinchi, the former President of Venezuela, indicted 
for money laundering in Venezuela.
    Other private banks have similar accounts. The Bankers 
Trust counsel, when describing one of its clients, told our 
staff words to the effect that ``these are bad people.'' Well 
if the bank thinks they are bad people, why are they accepting 
them as customers of the private bank?
    In the Bankers Trust case, it appears that the bank did 
know its client. But what it knew was that the client was bad, 
and it continued to do business with him.
    Today we are going to look at some of the cases in greater 
detail to learn how these individuals became clients of 
Citibank, what efforts Citibank made to implement its due 
diligence policies and ascertain the source of the client's 
wealth, and what Citibank did to help disguise the client's 
    America cannot have it both ways. We cannot condemn 
corruption abroad, be it officials taking bribes or looting 
their treasuries, and then tolerate American banks making 
profits off that corruption.
    Private banking has a legitimate function, but it has too 
often been used to manage dirty money. We must end the use of 
private banking by the criminals and by the corrupt.
    I want to thank our Chairman for her support of these 
hearings and this investigation, and her staff for their hard 
work in helping to bring these about. And I particularly want 
to thank my Minority staff for their work, which can only be 
described as Herculean.
    Thank you, Madam Chairman.
    [The prepared opening statement of Senator Levin follows:]

    Thirteen years ago, with the passage of the first money laundering 
statute, Congress made clear its desire not to allow U.S. banks to 
function as conduits for dirty money. This Subcommittee, through a 
series of hearings and reports in the 1980's on money laundering and 
off-shore secrecy jurisdictions, contributed significantly to the 
enactment of that law. Money laundering is now a Federal crime and our 
banks and financial institutions are required by law to establish and 
implement anti-money laundering programs.
    Since that time the world has experienced an enormous growth in the 
accumulation of wealth by individuals around the globe, and wealthy 
individuals have turned in growing numbers to a category of banking 
called ``private banking'' as the mechanism for managing their money.
    Raymond Baker, a Guest Scholar in Economic Studies at Brookings and 
a witness at tomorrow's hearing, estimates that $500 billion to $1 
trillion of international criminal proceeds and hundreds of millions of 
dollars from tax evasion are moved internationally and deposited into 
bank accounts annually. He estimates that half of this money comes to 
the United States. Today we are looking at how private banking can 
provide management not only for legal money but also for the wealth of 
international criminals and corrupt government officials.
    We need to first understand what private banking is. Most private 
banks are a bank within a larger bank, distinguished by the size of the 
accounts they hold and the presence of a one-on-one private banker or 
relationship manager assigned to manage the assets of each client. To 
open an account in a private bank, prospective clients--and we estimate 
that there are over 200,000 private bank clients at U.S. banks today--
must deposit a substantial sum, usually $1 million or more. In return 
for this deposit, the private bank assigns a private banker to act as a 
liaison between the client and the bank and to facilitate the client's 
use of a wide range of services offered by the bank. The client pays 
either a flat fee, a fee based on a percentage of the assets under 
management or both.
    Private banking is a very competitive and very profitable business, 
often bringing in a 20 to 25 percent return to a bank. Private bankers 
are marketers and promoters who are expected to attract wealthy clients 
to the bank. Once a person becomes a client of a private bank, the 
bank's primary goal is to service that client, and servicing a client 
almost always means using services that are also the tools of money 
laundering--secret trusts, offshore accounts, secret name accounts, and 
shell companies called private investment corporations.
    These private investment corporations or PICs are designed for the 
purpose of holding--and hiding--one person's assets. The assets can be 
real property, money, stock, art or other valuables. The nominal 
officers, trustees, and shareholders of these shell corporations are, 
in turn, often shell corporations controlled by the private bank. The 
PIC then becomes the holder of the various bank and investment 
accounts, and the ownership of the private bank's client is buried in 
the records of so-called secrecy jurisdictions, such as the Cayman 
Islands. Private banks keep pre-packaged PICs ``on-the-shelf,'' 
awaiting activation when a private bank client wants one. They have 
shell companies in secrecy jurisdictions managed by shell corporations 
which serve as directors, officers and shareholders. There are shells 
within shells within shells--like Russian Matyoshka Dolls--which in the 
end can become impenetrable to legal process.
    Private bankers specialize in secrecy. Even if a client doesn't ask 
for secrecy, the private banker encourages it. Look at this brochure 
for Citibank's private bank on their international trust services. In 
the table of contents it lists the attractiveness of secrecy 
jurisdictions this way: ``The Bahamas, the Cayman Islands, Jersey and 
Switzerland: The best of all worlds.'' This brochure also advertises 
the advantages of using a PIC. One advantage it lists is this one:

          ``PIC assets are registered in the name of the PIC and your 
        ownership of the PIC need not appear in any public registry.''

    Secrecy is such a priority that private bankers are often told by 
their superiors not to keep any record in the United States disclosing 
who owns the offshore PICs established by the private bank. One former 
private banker told us he and his fellow bankers had to hide cheat 
sheets in their desks, because they weren't allowed to keep names of 
the offshore accounts they were managing. Since they couldn't remember 
the names and numbers of all those accounts when they needed them, they 
would keep a secret list in their desks or with a secretary to help 
them remember. When the list was discovered, the banker was 
    Secrecy is so important that private bankers sometimes speak in 
code to each other in phone calls across the Atlantic to disguise the 
beneficial owner of the account they are talking about, so other bank 
employees won't know the beneficial owners of the very accounts they 
are working on. One private banker in Citicorp London had worked for 
years on the Salinas account and never knew Raul Salinas was the 
beneficial owner. Raul Salinas was always referred to by a code, CC2, 
or the name of his PIC, Trocca, Ltd. The private banker said she was 
surprised when she learned Raul Salinas owned one of her accounts.
    American banks aren't allowed to maintain secret accounts in the 
United States, so U.S. private bankers establish secret accounts and 
secret corporations in countries that do allow them. Then they manage 
those accounts from their offices in the United States. In short, 
American banks help wealthy customers do abroad what the customer and 
the bank can't do within the boundaries of the United States.
    Today we are looking at the private bank of Citibank. It is the 
largest bank in the United States, and it has one of the largest 
private bank operations. It has the most extensive global presence of 
all U.S. banks, and it has had a rogues' gallery of private bank 
clients. Citibank has been private banker to:

        --LRaul Salinas, brother to the former President of Mexico; now 
        in prison in Mexico for murder and under investigation in 
        Mexico for illicit enrichment;
        --LAsif Ali Zardari, husband to the former Prime Minister of 
        Pakistan; now in prison in Pakistan for kickbacks and under 
        indictment in Switzerland for money laundering;
        --LOmar Bongo, President of Gabon; subject of a French criminal 
        investigation into bribery;
        --Lsons of General Sani Abacha, former military leader of 
        Nigeria; one of whom is now in prison in Nigeria on charges of 
        murder and under investigation in Switzerland and Nigeria for 
        money laundering;
        --LJaime Lusinchi, former President of Venezuela; charged with 
        misappropriation of government funds;
        --Ltwo daughers of Radon Suharto, former President of Indonesia 
        who has been alleged to have looted billions of dollars from 
        --Land, it appears General Albert Stroessner, former President 
        of Paraguay and notorious for decades for a dictatorship based 
        on terror and profiteering.

    And these are just the clients we know.
    Other banks have similar accounts. The legal counsel for Bankers 
Trust private bank asked the Subcommittee not to make public any 
information about an account of a certain Latin American client because 
the private banker was concerned that the banker's life would be in 
danger if the information were revealed. The Bankers Trust counsel, 
when describing one of its clients, told our staff words to the effect 
that, ``These are bad people.'' If the bank thinks they're ``bad 
people,'' why are they accepting them as customers of the private bank? 
In the Bankers Trust case it appears the bank does know its client; but 
what it knows is that its client is ``bad.''
    Today we're going to look at some of these cases in greater detail 
to learn how these individuals became clients of Citibank, what effort 
Citibank made to implement its due diligence policies and ascertain the 
source of the client's wealth, and what Citibank did to help disguise 
the clients' accounts.
    No one is suggesting that private banking is an improper banking 
activity or that banks should not be making a profit on the services 
they offer their clients. As several of Citibank's top managers said to 
us, the question is how you conduct private banking in an ``honorable'' 
    The key factor to banking in an ``honorable way'' is the exercise 
of due diligence in learning who a client is and the source of the 
client's wealth and then taking appropriate action. This is a 
fundamental requirement for a strong anti-money laundering program.
    America can't have it both ways. We can't condemn corruption 
abroad, be it officials taking bribes or looting their treasuries, and 
then tolerate American banks making fortunes off that corruption.
    The Federal Reserve, the Office of the Comptroller of the Currency, 
the State Department, and the General Accounting Office all have 
concluded that private banking is vulnerable to money laundering. We 
will ask today's witnesses, private bankers from Citibank, about some 
specific cases showing us how and why that's true. At tomorrow's 
hearing we will look at generic private banking practices, the role of 
the Federal regulators, and the significance of private banking in the 
global movement of money.
    Private banking has a legitimate function, but it has too often 
been used to manage dirty money. We must end the use of private banking 
by the criminals and the corrupt.
    I thank the Chairman for her support for these hearings and her 
staff for their hard work in helping us to bring these about. I also 
thank my Minority staff for their excellent work.

    Senator Collins. Senator Specter, we are pleased to have 
you here with us today, and I would call upon you for any 
opening remarks you might have.


    Senator Specter. Well, thank you very much, Madam 
Chairwoman. I shall be brief.
    First, I compliment you for scheduling these hearings in 
the tradition of this very important Subcommittee, and I 
compliment Senator Levin for the extraordinary Minority report, 
some 63 pages, and I have not seen hearings start with such a 
comprehensive analysis in advance. It gets these hearings off 
to a running start.
    They are certainly extremely important because money 
laundering is instrumental on drug trafficking and organized 
crime, and they are also extremely important from the point of 
view that the United States is making very substantial 
financial contributions to many countries where individuals 
have access to U.S. funds for their own private purposes.
    The information about money laundering on Russian officials 
suggests a direct conduit for the very substantial funds which 
the United States is advancing to Russia, and with the Salinas 
case in Mexico, the bailout, while you can't trace the specific 
dollars, there is a very strong inference that U.S. taxpayers' 
dollars are going into private pockets aided and abetted by 
these private banks.
    Where you have provisions such as Dubai law that the bank 
is not required to know the beneficial owner but only the 
signatory party, it is just an open invitation to the kind of 
secrecy which both Senator Collins and Senator Levin have 
outlined here.
    As Senator Levin identifies it, shells within shells, it is 
the quintessential shell game. And I believe on the basis of 
what is of record and in this Minority report, there is very 
substantial evidence at this time of wrongdoing. And these 
hearings will give the public notice as to what is going on 
and, I think, set the stage for some very important remedial 
    My Subcommittee on Labor, Health, Human Services is going 
to be negotiating with White House officials a little later 
this morning, so I am going to have to study the record as 
opposed to being here. But I wanted to come and commend what 
you are doing here today and give you my support. Thank you.
    Senator Collins. Thank you very much.
    Senator Cochran, we are also delighted to have you with us 


    Senator Cochran. Thank you very much, Madam Chairman.
    Our Subcommittee staff has done an enormous amount of work 
to obtain information about the effectiveness of U.S. laws and 
regulations to combat money laundering. I look forward to 
hearing the report of our staff and to the consideration of the 
results of this investigation and the issues that have been 
raised by the staff in this important review.
    Thank you very much.
    Senator Collins. Thank you.
    Due to time constraints, the Subcommittee was unable to 
invite all the parties affected by this issue to present oral 
testimony. We have received a written statement from the 
General Accounting Office. We expect to receive one from Stuart 
Eizenstat, Treasury Deputy Secretary, as well as from other 
interested officials. The hearing record will remain open for 
14 days for the inclusion of such statements, and the ones we 
have received, without objection, will be included in the 
printed hearing record.\1\
    \1\ The three GAO statements appear as Exhibits 21-23 in the 
Appendix on pages 159-197.
    At this time I would like to welcome our first panel of 
witnesses. We have with us two members of the Subcommittee's 
Minority staff who will present an overview of the 
Subcommittee's investigation of the private banking industry 
and its vulnerabilities to money laundering. We will first hear 
from Robert Roach, who is the Minority Counsel. Mr. Roach will 
be followed by Elise Bean, who is the Deputy Chief Counsel.
    Pursuant to Rule VI, all witnesses who testify must be 
sworn in, so at this point, I would ask that you stand. Do you 
swear that the testimony you are about to give to the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Roach. I do.
    Ms. Bean. I do.
    Senator Collins. Thank you.
    Mr. Roach, you may proceed. As you know better than most 
witnesses who appear before us, we ask that you limit your oral 
testimony to no more than 10 minutes.
    Mr. Roach. I will watch for the light.


    Mr. Roach. Senator Collins, Senator Levin, and Members of 
the Subcommittee, good morning. We appreciate the opportunity 
to appear before the Subcommittee today to summarize the staff 
investigation to date into the private banking industry and its 
vulnerability to money laundering.
    Private banks provide financial services to wealthy 
individuals who usually must deposit $1 million or more to open 
an account. All U.S. banks are required by law to have an 
active anti-money laundering program. Regulators and banks have 
interpreted this requirement to include due diligence reviews 
of bank clients and their transactions, including understanding 
the source of large deposits into a client's account, and 
reporting any suspicious activity.
    This responsibility with respect to private banking is 
significantly greater than retail accounts because clients have 
high net worth, transactions routinely involve large amounts of 
funds often crossing international jurisdictions, and private 
bankers become personally involved with clients and in-house 
advocates for their interests.
    We have prepared a report which describes the private 
banking industry in the United States, explains why certain 
private banking features and services increase money-laundering 
opportunities, and details four case histories taken from the 
Citibank Private Bank illustrating a number of anti-money-
laundering issues. We ask that that report be made part of the 
    \1\ The Minority Staff Report entitled ``Private Banking and Money 
Laundering: A Case Study of Opportunities and Vulnerabilities,'' 
appears in the Appendix on page 872.
    Senator Collins. Without objection.
    Mr. Roach. In the interest of time, our oral presentation 
will be limited to three case histories to be reviewed at 
today's hearing: Raul Salinas; El Hadj Omar Bongo, President of 
Gabon; and the sons of General Sani Abacha, former military 
leader of Nigeria.
    First, the Raul Salinas case. Citibank's management of the 
Salinas account raises three major issues: Lack of due 
diligence, the bank's willingness to satisfy a client's demand 
for extreme secrecy, and the tension that exists between a 
bank's desire to please its clients and its legal obligation to 
combat money laundering.
    First, secrecy. The private bank, through the direction of 
Amy Elliott, private banker to Mr. Salinas, established a shell 
company for Mr. Salinas with layers of disguised ownership. It 
permitted a third party using an alias to deposit funds into 
the accounts, and it moved the funds out of Mexico through a 
Citibank concentration account that aided in the obfuscation of 
the audit trail.
    Cititrust in the Cayman Islands activated a Cayman Island 
shell corporation called a PIC, or private investment 
corporation, called Trocca, Ltd., to serve as the owner of 
record for the Salinas private bank accounts. We tried to 
provide somewhat of a graphic description of how Trocca, Ltd. 
was structured.\2\
    \2\ See Exhibit No. 1 which appears in the Appendix on page 111.
    Cititrust used three Panamanian shell companies to function 
as Trocca's Board of Directors. Cititrust also used three 
Cayman Island shell companies to serve as Trocca's officers and 
principal shareholders.
    Cititrust controls all six of these shell companies and 
routinely uses them to function as directors and officers of 
PICs that it makes available to private clients.
    Later, Citibank established a trust, identified only by a 
number, to serve as the owner of Trocca, Ltd. Raul Salinas was 
the secret beneficiary of the trust.
    The result of this elaborate structure was that the Salinas 
name did not appear anywhere on Trocca's incorporation papers.
    The Trocca, Ltd. accounts were established in London and 
Switzerland. The private bank did not disclose the identity of 
Trocca's owner to any private bank personnel other than the 
personnel who administered the company and personnel required 
by Swiss law to know the beneficial owner. And Ms. Elliott, who 
knew Mr. Salinas was a client, did not know the name of his 
shell corporation. The private bank did not use Mr. Salinas' 
name in bank communications, but instead referred to him as 
``Confidential Client No. 2,'' or ``CC-2.''
    To accommodate Mr. Salinas' desire to conceal the fact that 
he was moving money out of Mexico, Ms. Elliott introduced Mr. 
Salinas' then-fiancee Paulina Castanon as Patricia Rios to a 
service officer at the Mexico City branch of Citibank. 
Operating under that alias, Ms. Castanon would deliver cashiers 
checks to the branch where they would be converted into dollars 
and wired into a concentration account in New York.
    The concentration account is a business account established 
by Citibank to hold funds from various destinations prior to 
depositing them into the proper accounts. Transferring funds 
through this account enables a client's name and account number 
to be removed from the transaction, thereby clouding the audit 
trail. From there, the money would be transferred to the 
Trocca, Ltd. accounts in London and Switzerland.\1\
    \1\ See Exhibit No. 2 which appears in the Appendix on page 112.
    Between October 1992 and October 1994, more than $67 
million was moved from Mexico to New York and then on to London 
and Switzerland by way of this system.\2\
    \2\ See Exhibit No. 3 which appears in the Appendix on page 113.
    Second, lack of due diligence. A private bank is obligated 
by law to take steps to ensure that it does not facilitate 
money laundering. All bankers are required to conduct due 
diligence on clients in opening and managing accounts. However, 
the private bank accepted Mr. Salinas as a client without any 
specific review of his background and without determining the 
source of funds that would be deposited into his account.
    Ms. Elliott acknowledged to us that she relied on the 
verbal reference provided by Carlos Hank Rhon, a long-time 
private bank client, and her general knowledge of the 
reputation and wealth of the Salinas family. She acknowledged 
that she did not investigate Mr. Salinas' employment, financial 
background, or assets, despite Citibank's written policy to 
obtain all relevant client information and account 
documentation in writing. In fact, in 1995, after Mr. Salinas 
was arrested, Ms. Elliott reviewed the Salinas profile, and it 
was blank.
    The failure to perform due diligence when opening the 
Salinas accounts was compounded when Mr. Salinas began 
depositing tens of millions of dollars into Trocca's offshore 
accounts. In just 2 years, Mr. Salinas deposited an aggregate 
of $67 million, well over the $15 to $20 million that Ms. 
Elliott had projected in 1992. Yet no one questioned Mr. 
Salinas about the origin of these funds. Far from inquiring 
about the sources of the funds, Ms. Elliott wrote to her 
colleagues in June 1993 that the Salinas account ``is turning 
into an exciting, profitable one for us all. Many thanks for 
making me look good.''
    After Mr. Salinas was arrested, Mrs. Salinas told Ms. 
Elliott that some of the funds had come from other individuals.
    When questioned about his lack of intervention in this 
matter, Mr. Misan, then the private bank's Mexico country head 
and Ms. Elliott's superior, stated that when he took his 
position as Mexico country head, his superiors in the bank, Mr. 
Figueiredo and Mr. Montero, informed him that there were some 
accounts that he should not supervise. Mr. Misan told us that 
he did not supervise the Salinas accounts as a result of that 
    Finally, the desire to please the client versus 
responsibilities under the law. After Mr. Salinas was arrested, 
Hubertus Rukavina, the head of Citibank Private Bank at the 
time, suggested that the Salinas accounts in London be 
transferred back to Switzerland because they would be afforded 
more secrecy there.
    Also, according to Mrs. Salinas, Ms. Elliott advised her 
that it might be wise to move the Trocca, Ltd. account out of 
Citibank because it might be more difficult for Mexican 
authorities to obtain account information from a non-U.S. bank.
    After Mr. Salinas' arrest in February 1995, private bank 
attorneys and officials had restricted the activities in the 
Trocca, Ltd. account, put it under the control of the legal 
department, made a decision to terminate the relationship, and 
secured repayment of an outstanding loan because they were 
concerned that the bank's funds would be at risk if a 
government froze the assets in the accounts. Yet no criminal 
referral form was filed until 6 months later, after Mrs. 
Salinas was arrested. And that referral made no mention of the 
Trocca, Ltd. accounts, even though it was Trocca, Ltd. that 
held almost all of the clients' assets and was the account that 
was the subject of all the actions Citibank took 6 months 
    It is one thing for a private bank to provide reasonable 
levels of confidentiality. It is another for a private bank to 
provide the means for an individual to deposit tens of millions 
of dollars in Swiss accounts in ways that even an auditor would 
find difficult to detect.
    When products and services are structured to satisfy a 
client's demand for secrecy, they become much more vulnerable 
to money laundering.
    Now my colleague, Ms. Bean, will address the two other 
cases. Thank you.


    Ms. Bean. The second case history involves El Hadj Omar 
Bongo, the President of Gabon for the past 30 years and a long-
time private bank client of Citibank. The Bongo accounts also 
raise due diligence and secrecy issues, including the extent to 
which a private bank should service personal accounts belonging 
to a senior government official when government funds appear to 
be a major source of large deposits into the official's 
personal accounts.
    The Bongo relationship includes consumer and private bank 
accounts in Gabon, London, New York, Paris, and Switzerland. 
The largest accounts are held in the name of Tendin 
Investments, a Bahamian PIC established by Citibank for 
President Bongo in 1985. Over 14 years, the Tendin accounts 
have held more than $130 million. The private bank has also 
issued President Bongo loans exceeding $50 million, secured by 
his deposits.
    Citibank has accommodated President Bongo's desire for 
secrecy through using code names, setting up PICs in secrecy 
jurisdictions, using special credit arrangements, and opening a 
special name account for him in New York called simply ``OS.''
    These and other arrangements kept knowledge of the Bongo 
accounts within a small circle in the private bank until a 1996 
inquiry by the Federal Reserve. The Federal Reserve became 
concerned about how little information Citibank had about the 
source of funds in the Bongo accounts. The client profile in 
August 1996 contained only this explanation of President 
Bongo's background: ``Head of State for over 25 years. . . . 
Self-made as a result of position. Country is oil producer.''
    The private banker who managed the account, Alain Ober, his 
immediate supervisor at the time, Sal Mollica, and a division 
head, Edward Montero, have all acknowledged that this client 
profile was wholly inadequate.
    The Federal Reserve became so concerned about the Bongo 
accounts that in February 1997 it asked Citibank's regular bank 
examiner, the Office of the Comptroller of the Currency, or 
OCC, to take a closer look. The OCC was given a revised client 
profile which stated that the President's funds were ``created 
as a result of [his] position and connection to French oil 
    Like the Federal Reserve, the OCC found no documentation 
explaining how the President's position led to the funds in his 
personal account or what oil interests produced them. The OCC 
also found that the source of over $20 million in deposits made 
in 1997, the largest deposits to the Bongo accounts in 10 
years, was unexplained.
    When the OCC examiner pressed Citibank for specific 
documentation of the source of the funds in the Bongo accounts, 
Mr. Ober wrote an April 1997 memorandum which his superiors 
gave to the OCC. It identified just one source for the Bongo 
funds: The Gabon budget.
    The memo stated that in 1995 the Gabon budget authorized 
$111 million for President Bongo's use, and similar amounts 
were set aside in 1996 and 1997. The OCC examiner told the 
Subcommittee staff that he accepted the memo as a sufficient 
explanation for the funds in President Bongo's personal 
accounts, because he assumed President Bongo had ``carte 
blanche authority'' over his government's funds. He did not 
attempt to double-check the information.
    The Subcommittee staff did double-check the information 
with Gabon budget experts from the IMF and the World Bank. They 
were unanimous in their rejection of the Citibank memo, 
explaining that no Gabon budget during the 1990's had set aside 
funds for the President's personal use.
    The Gabon budget experts indicated that anyone attempting 
to verify the budget items could easily have determined that 
the 1995 Gabon budget did not authorize a $111 million set-
aside for the President's personal use and that such a set-
aside was plainly contrary to Gabon's budget policy. The IMF 
also noted, however, that Gabon was spending money in ways not 
specified in its official budget and that $62 million of these 
``extrabudgetary expenditures'' in 1997 and 1998 had caused the 
IMF to cut off further loans to the country pending an 
independent review of its spending.
    At the same time Citibank was preparing the April 1997 memo 
for the OCC, a new set of red flags went up about the Bongo 
accounts. Articles began appearing in major papers raising 
questions about President Bongo's role in an unfolding scandal 
involving bribes paid to government officials by the French oil 
company, Elf Aquitaine, and its subsidiary, Elf Gabon. Among 
other allegations, the articles reported that two Swiss bank 
accounts containing millions of dollars in allegedly improper 
payments by Elf had been frozen by Swiss authorities at the 
request of French criminal investigators. These accounts, a PIC 
and a special name account at banks other than Citibank, were 
both linked to President Bongo.
    Mr. Ober told the Subcommittee staff that he was aware of 
the press articles and the allegations against President Bongo, 
but did not attempt to find out more and did not discuss the 
matter with his supervisors. After his interview, however, 
Citibank provided a copy of an e-mail dated April 28, 1997, in 
which the private bank's African marketing head, Christopher 
Rogers, urged Mr. Ober and others not to make judgments based 
on the press reports and to ``be extremely careful about 
sharing such information with regulatory authorities because we 
can't answer for it.''
    On August 6, 1997, Le Monde, a major French newspaper, 
reported that a Swiss prosecutor had declared in open court 
that President Bongo was ``the head of an association of 
    Two months later, in October 1997, President Bongo's 
accounts came up for formal review as part of the private 
bank's annual examination of its public figure accounts. The 
papers prepared for this review state in the entry for 
President Bongo ``newspaper reports 4/1997 claim he has 
accepted bribes from ELF-Aquitaine.''
    But the decision made in October 1997 was to leave the 
accounts open. This decision was made despite the private 
bank's awareness of the criminal probe and the Swiss court 
orders freezing bank accounts linked to President Bongo. In 
addition, apparently no one connected with the 1997 review 
asked Mr. Ober to explain or document the source of the $20 
million in 1997 deposits even though they were the largest 
deposits into the Bongo accounts in 10 years.
    In addition to these due diligence issues, the Bongo case 
history raises an issue unique to private banks managing 
personal accounts for senior government officials with 
influence over bank operations.
    The Private Bank's legal counsel informed Federal 
regulators that in the summer of 1996, Citibank considered 
terminating the relationship with President Bongo, but did not, 
because it was concerned for the safety of its bank personnel 
in Gabon. As late as November 1998, when Citibank was again 
considering terminating the Bongo accounts, their top manager 
in Africa, Mr. Rogers, wrote the following warning about 
closing the Bongo accounts:

        ``We ought to insure that we face this issue and its 
        possible implications with our eyes wide open. Whatever 
        internal considerations we satisfy, the marketing 
        fallout is likely to be serious. . . . [President 
        Bongo's] family and friends extend far. . . . The 
        impact on [the Private Bank's] marketing in 
        Francophone, Africa will be serious.''

    In January 1999, the Private Bank decided to close the 
accounts. As of October 1999, however, millions of dollars are 
still in the Bongo accounts, which are not expected to close 
completely until sometime in the year 2000.
    The third case history involves Mohammed, Ibrahim, and Abba 
Sani Abacha, three sons of General Sani Abacha, former military 
leader of Nigeria from 1993 until his death in 1998. General 
Abacha has been widely condemned as responsible for one of the 
most corrupt and brutal regimes in Africa. During his regime, 
the State Department and Citibank identified Nigeria as a high-
risk country for money laundering.
    General Abacha's sons, Mohammed and Ibrahim, first became 
clients of Citibank Private Bank in 1988. They began by opening 
accounts in London and later opened accounts in New York. Over 
time they required, and the Private Bank agreed to provide, a 
number of secrecy measures, including three special name 
accounts, an offshore shell corporation, and the use of two 
sets of codes to refer to funds transfers. The London accounts 
held as much as $60 million at one time. The New York accounts 
generally stayed under $2 million, but in one 6-month period 
saw deposits and withdrawals of almost $47 million.
    A few weeks after General Abacha's death in June 1998, and 
the initiation of a Nigerian Government investigation into bank 
accounts held by him, his family and associates, the General's 
wife was stopped at a Lagos airport with 38 suitcases full of 
cash, and his son was found with $100 million in cash. These 
and other funds were seized by the Government of Nigeria.
    Mr. Ober, one of the private bankers managing the Abacha 
accounts, told the Subcommittee that he was aware of these 
events, but did not discuss them with his colleagues or 
supervisors. Mr. Ober also told the Subcommittee staff that he 
had stopped traveling to Nigeria due to the corruption there.
    In September 1998, while the Nigerian Government 
investigation was ongoing, the Abacha sons made an urgent 
request to Citibank to transfer $39 million out of their London 
accounts. The funds were then in a time deposit that would not 
mature until the end of September, and which, if the deposits 
were withdrawn prematurely, would result in a hefty penalty. 
The Abacha sons asked, and the Private Bank agreed, to approve 
an overdraft, a loan in the amount of $39 million, which the 
sons used to immediately transfer their funds to Swiss banks 
and elsewhere. Citibank then satisfied the loan when the time 
deposit matured 2 weeks later. In this way Citibank assisted 
the Abacha sons in moving $39 million out of their Citibank 
accounts in the face of an ongoing Nigerian Government 
investigation into their funds, without even incurring a 
financial penalty.
    The primary private banker in London who opened and managed 
the accounts was Michael Matthews; in New York it was Alain 
Ober. Both Mr. Matthews and Mr. Ober were required to perform 
due diligence reviews of the Abacha sons prior to accepting 
them as clients and while managing their accounts. Mr. Ober has 
indicated, however, that he was unaware for 3 years, from 1993 
until 1996, that the sons' father had become the military 
leader of Nigeria, until a Citibank colleague mentioned it to 
him by chance in January 1996. The documents suggest that Mr. 
Matthews was also uninformed of General Abacha's status.
    Beginning in 1996, large additional deposits were made to 
the London accounts. The funds almost tripled from $18 million 
to $60 million. The account documentation contains little 
information about the source of these new funds.
    At the same time the funds were increasing, the client 
profiles for the London accounts twice failed reviews by 
Citibank quality assurance personnel. A review conducted in 
June 1997 found the London client profile deficient in every 
category tested, from source of wealth, to business background, 
to source of funds used to open the account. A 1998 review 
states: ``Lack of detail in Source of Wealth on these profiles. 
. . . [A]greed to pass [quality assurance review] on basis that 
we are exiting these relationships.''
    In New York, no client profiles were provided for the 
accounts during 1994 and 1995, when $47 million passed through 
the accounts in a 6-month period. Mr. Ober told the 
Subcommittee staff he could not recall the source of the $47 
million, and no account documentation explains the sudden 
influx in funds.
    Sometime in the first quarter of 1999, the Private Bank 
decided to close the accounts. None of the persons interviewed 
provided a specific rationale. Before the accounts were 
actually closed, a London Court issued an order in a civil suit 
in March 1999, freezing all funds in Citibank's London office 
related to General Abacha and his family. In October 1999, the 
Swiss Government issued an order freezing all Swiss bank 
accounts related to General Abacha, his family and certain 
associates. Citibank has told us, however, it has no Abacha-
related accounts in Switzerland. The Swiss have also, at the 
request of the Nigerian Government, opened an investigation 
into money laundering.
    In conclusion, like the Salinas and Bongo case histories, 
the Abacha sons' accounts raise issues of due diligence, 
secrecy and anti-money laundering controls. The private banker 
handling the accounts in New York was unaware for 3 years that 
his clients were the sons of the Nigerian dictator, never 
discussed press reports that one of the account holders was 
caught with $100 million in cash amid allegations of 
corruption, never asked questions about a 6-month influx of $47 
million. His London counterparts helped the sons move $39 
million to other banks in September 1998, amid a Nigerian 
Government investigation. Altogether, the Private Bank allowed 
these accounts to operate for 10 years with few questions 
    These case histories are three of hundreds of public figure 
accounts at Citibank Private Bank. On paper, they were supposed 
to be subject to the highest level of scrutiny provided by the 
Private Bank. In practice, the public figure accounts reviewed 
by the Subcommittee staff were characterized more by customer 
deference than due diligence.
    Thank you very much. We are happy to answer questions.
    Senator Collins. I want to thank you both for your 
excellent and very detailed testimony.
    We are now in the middle of a series of votes, and I am 
going to suggest that we recess the hearing for 15 minutes. 
Whoever gets back first will reconvene the hearing, so you can 
be assured we will be quick.
    Senator Levin. Madam Chairman, could I just note the 
presence of Maxine Waters, Congresswoman from California, who 
has been a pioneer in the area of anti-money laundering. She 
has got a very important bill and initiative in the House of 
Representatives, and it is going to help us a great deal in our 
thought processes and analysis, and I want to just note her 
presence here.
    Senator Collins. We welcome the Congresswoman to the 
hearing, and again, I want to add my thanks to that of Senator 
Levin for her work in this important area.
    The Subcommittee will be recessed upon the call of the 
    Senator Collins. The Subcommittee will come to order.
    Pursuant to Rule 14 of the Permanent Subcommittee on 
Investigations Rules of Procedure, Citibank has requested, 
through its counsel, that a series of questions be directed to 
the two staff witnesses on its behalf.
    After reviewing Citibank's request and the questions, I 
have decided to submit the questions for the record, and to 
require the staff to respond within 24 hours. The questions and 
the answers will be made public at the start of tomorrow's 
    \1\ See Exhibit No. 25 which appears in the Appendix on page 204.
    I now would like to call upon Senator Levin to see if he 
has any questions for these witnesses.
    Senator Levin. Madam Chairman, I did have some questions, 
but given the hour, I would be happy to pass on questions, ask 
some also for the record, whatever is your wish on that. Given 
the time though, perhaps we should move to the next panel.
    Senator Collins. Thank you.
    I again want to thank our two staff witnesses for their 
excellent testimony. I appreciate your hard work.
    Our next panel of witnesses will please come forward: Amy 
Elliott, who is a private banker for Citicorp, and Albert 
Misan, the Mexico Country Head for Citibank's Private Bank.
    Ms. Elliott has been with Citibank's Private Bank in New 
York for 16 years and was a private banker for Raul Salinas and 
his wife. Ms. Elliott will testify about her involvement with 
Mr. Salinas' Private Bank account.
    Mr. Misan began his career with Citibank in 1972, and in 
1985 he was posted to Mexico City, where he first became 
involved with private banking. Mr. Misan was the Country Head 
in Mexico for Citibank's Private Bank, and was Ms. Elliott's 
    Pursuant to Rule 6, all witnesses are required to be sworn 
in. I would ask that you stand and raise your right hand.
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Ms. Elliott. I do.
    Mr. Misan. I do.
    Senator Collins. Thank you. We would ask that you limit 
your oral testimony to 10 minutes. Your written testimony will, 
however, be printed in the record in its entirety, and Ms. 
Elliott, I would ask that you proceed.


    Ms. Elliott. Good morning, Madam Chairman, Senator Levin, 
Members of the Permanent Subcommittee on Investigations.
    \1\ The prepared statement of Ms. Elliott appears in the Appendix 
on page 940.
    My name is Amy Elliott. I work at Citibank's Private Bank, 
and have been an employee of the bank for the last 32 years.
    This hearing will explore how banks might be vulnerable to 
money laundering and what banks can do to avoid unknowingly 
accepting money from drug dealers and other criminals. I view 
this as a very important topic. I share the Subcommittee's 
concern about money laundering, and I appreciate my 
responsibilities in this matter as a citizen and my fiduciary 
    As a banker I have always tried to be alert to the risks of 
money laundering and to the possibility that a client might be 
trying to deposit tainted money.
    Before discussing Mr. Salinas' account, I would like to 
provide a little personal background. I was not born in the 
United States. I was born in Cuba, and emigrated alone to this 
country in 1961, when I was 17 years old. My parents were not 
able to leave Cuba until a few years later. My grandparents 
were never able to leave Cuba, and their property and wealth 
were confiscated by the Castro Government. When I came to 
America, I ended up in Nebraska, where I went to college.
    I joined Citibank in 1967 and worked in a variety of 
positions until 1983, when I joined the Private Bank. In 1992, 
when Raul Salinas became a client of Citibank and I became his 
relationship manager, I was the Mexico Team Leader in New York.
    When I first met Raul Salinas in early 1992, his brother, 
Carlos Salinas, was the President of Mexico. President Salinas 
was a hero, both in his own country and abroad. President 
Salinas was a Harvard-educated reformer who had pledged to 
revive Mexico's economy, combat drug dealing, and stamp out 
corruption. He was a guest of President Bush at the White 
House, and both Presidents Bush and Clinton worked with him in 
passing NAFTA to increase trade between Mexico and the United 
States. In Mexico in the early 1990's the Salinas' were known 
as an old, distinguished family that had wealth going back 
generations. By 1992, I had been working with Mexican clients 
for about 8 years, and my clients spoke glowingly about the 
Salinas family.
    Raul Salinas was referred to me by one of our most valued 
clients, who personally brought him to the bank in New York. At 
the time, the referring client had maintained accounts at 
Citibank for at least 10 years, and I had been managing those 
accounts for almost 4 years. Long before referring Raul Salinas 
to Citibank, the client had told me that he had been close 
friends with Raul Salinas since childhood, and that he had 
worked with him on business projects.
    My supervisor in New York and I met with them and discussed 
the possibility of Mr. Salinas opening an account. Mr. Salinas 
confirmed to us at that time some of the background information 
the referring client had previously given me. Mr. Salinas 
requested that his accounts be structured in the same manner as 
the accounts of the client who referred him to the bank. Mr. 
Salinas established a personal investment company, or PIC, to 
hold his investments, and the shares of that corporation were 
owned by a trust. This was a very standard account structure in 
the international private banking industry, including Citibank. 
Such an account structure provides for confidentiality and also 
allows for efficient tax and estate planning. Many wealthy 
Mexicans have a heightened sensitivity to confidentiality of 
financial information because they are frequently the targets 
of kidnappings and other violent crimes in their country.
    Mr. Salinas initially deposited $2 million, money in fact 
that was being returned to him by the referring client as a 
result of a joint venture that had not gone through. In mid-
1993, Mr. Salinas started to deposit larger amounts of money at 
Citibank. By this time I believed that his wealth had grown 
from a number of sources. First, I believed he had sold his 
construction company. Second, I knew that Mr. Salinas was a 
member of one of Mexico's wealthy families, and in Mexico 
children often receive their inheritance--or patrimonio--while 
their parents are still alive. Third, I knew that the Mexican 
stock market had done very well, and I believed that his 
investments and the patrimonio had grown considerably. Fourth, 
Mr. Salinas married Paulina Castanon in June 1993, and I 
learned that she had received a substantial divorce settlement 
from a prior marriage.
    For all these reasons, I felt completely comfortable 
accepting his additional deposits in mid-1993 and thereafter. 
Mr. Salinas' deposits also made sense because Citibank's 
investment managers had done a good job investing the money he 
had deposited with us up to that point. It is for this reason 
that he had decided to deposit a larger percentage of his total 
assets with Citibank. The activity in the account never 
appeared suspicious to me at any time; in fact, quite the 
opposite. It seemed entirely consistent with what I knew about 
Raul Salinas and his family.
    The public's perception of the Salinas name today, however, 
is very different than it was when I first met Raul Salinas. In 
1992, when I accepted Raul Salinas as a client of Citibank, 
there were simply no questions about the integrity of Raul 
Salinas or the Salinas' family name. Now, Carlos Salinas is in 
self-imposed exile. After he left office at the end of 1994, 
his successor devalued the peso, and that was the beginning of 
the end of his sterling reputation.
    There is more context. The account relationship with Raul 
Salinas was one of seven or eight that I personally managed. 
Today the spotlight shines on this account, but at the time, 
however, Raul Salinas' account was not the largest, not the 
most profitable, and not the most important account I managed. 
In fact, it was one of the smallest accounts and one of the 
least active. As large as the amounts seem to us in personal 
terms, they were not unusual in the context of the wealthy 
Mexican businesspeople who are clients of the Private Banks.
    Finally, Mr. Salinas' decision to transfer money out of 
Mexico and from Mexican pesos and into U.S. dollars in 1993--
which was the year before the Mexican Presidential election--is 
exactly what many other wealthy Mexicans, including my clients, 
were doing at the time. This is, sadly, a tradition in Mexico 
because of the political and economic instability that occurs 
in that country around Presidential elections. The value of the 
peso and the Mexican stock market usually drop preceding 
Presidential elections. And there seems to be a fear that with 
political transition, one could suddenly find oneself under 
enormous political attack. So there were large amounts of money 
leaving Mexico in the 1993-1994 time frame, including the funds 
of Raul Salinas. That, in the context of Mexican politics, was 
not surprising, and it was certainly not illegal; rather, it 
was prudent and happened like clockwork every Presidential 
election year.
    Of course, this idea is quite foreign to many Americans, 
who since birth have enjoyed living in this very stable country 
of ours.
    It is easy to ignore the context I have described and 
instead to focus on isolated details in this matter and make 
them seen questionable. The world in which I operated as a 
relationship manager in the early 1990's was different from the 
private banking environment today. Procedures, technologies and 
safeguards are very different today at Citibank. Today, more 
than 7 years later, given all the changes that have taken place 
at the bank and in the regulatory and legal environments, there 
is much more I would be required to do to accept a new private 
banking client such as Raul Salinas.
    I am ready to answer your questions. I only ask you, with 
all due respect, to keep in mind the broader picture I have 
described as you frame your inquiry to me.
    Thank you.
    Senator Collins. Mr. Misan.

                         YORK, NEW YORK

    Mr. Misan. Senator Collins, Senator Levin, Members of the 
Subcommittee, and members of the Subcommittee staff, good 
    \1\ The prepared statement of Mr. Misan appears in the Appendix on 
page 946.
    My name is Albert Misan, and I have been a banker for 
almost all my professional life.
    I was born in 1949 in Alexandria, Egypt. Being of Jewish 
descent, my family was under tremendous pressures, and after 
the Suez War of 1956, my family left--felt compelled to leave 
Egypt. Half of my family emigrated to Australia, while the 
other half, including my immediate family went to Rio de 
Janeiro, Brazil. My father had a successful career in the 
shipping business in Egypt, but he was forced to give it up and 
surrender all of our assets when we left Egypt.
    When we arrived in Brazil we therefore had no money, and 
none of us spoke the language. Fortunately, my father was able 
to get a job working at a private British elementary school, 
where my siblings and I attended for free. I got a scholarship 
at an American High School in Brazil, and later I was able to 
get a partial scholarship to attend a university in the United 
States. In order to pay for college, during the summers I got 
my union card with the AFL-CIO and worked as a union laborer.
    I graduated from college in 1972 and returned to Rio, where 
I got a job in the Human Resources Department of Citibank. I 
successfully completed the training program, and in 1974, I was 
promoted to work for the Consumer Bank, working on accounts of 
high net worth individuals. In 1977, I was transferred to the 
Corporate Bank, where I was first an account manager, and later 
a supervisor in Citibank's Sao Paolo office.
    In 1983, I got my first opportunity to work in New York 
when I was asked to join the Citibank team that was working on 
the restructuring of the Brazilian debt. I worked on this 
project through 1985, when I was named the head of the 
Corporate Bank in Ecuador. In 1987, I was transferred to the 
Corporate Bank in Mexico.
    In early 1988, I was asked to join the Private Bank, and my 
first assignment was to establish what was referred as the 
``onshore'' presence of the Private Bank in Mexico. At the 
outset I was virtually alone, but by the end of the first year 
I had hired a professional staff which included four private 
bankers. In 1990, there were seven bankers reporting to me in 
Mexico City, and at about that time I was given responsibility 
for the private banking offices in San Diego, Los Angeles, and 
Houston. In 1992, I was named the Mexico country head, and in 
that capacity was placed in charge of the Private Bank's Mexico 
business within the Western Hemisphere Division, including the 
business managed out of New York.
    I was not a private banker in the sense that I was not 
responsible for managing any particular relationship. Although 
I did meet with customers on occasion, my principal 
responsibilities were administrative. My immediate supervisor, 
during the early 1990's, was Reynaldo Figueiredo, who was 
headquartered in New York. Mr. Figueiredo, in turn, reported 
directly to G. Edward Montero, who was until recently the 
Private Bank's Division Executive in charge of the Western 
Hemisphere. My colleague, Amy Elliott, was the head of the 
Mexico team in New York and a senior private banker. I 
continued to be the country head for the Private Bank in Mexico 
until 1996, when I moved to New York to manage the Private 
Bank's investment advisory business for the Western Hemisphere. 
My responsibilities have expanded over time, and now include 
the Private Bank's onshore local currency investment business 
throughout Latin America.
    As I indicated in the outset of my statement, I have been a 
banker for virtually all my professional life. Bankers are, by 
and large, conscientious by nature and conservative by training 
and inclination. When I started in banking, one of the 
fundamentals of the business was knowing one's customers. At 
that point, the reasons for doing so were principally credit 
driven. If you loaned money to an individual or a company, you 
wanted to be able to have a degree of confidence that the loan 
would be repaid. Everything you could learn about your client 
added to your ability to evaluate credit risk. If you know your 
customer, the risk of doing business with the customer declines 
    Over time, reasons why it was important to know one's 
customer became more evident, for example, to adequately 
address suitability issues which relate to insuring that a 
customer's risk profile matches the investment selected by the 
customer's portfolio. Another reason that emerged, was the 
growing awareness that a bank had to be vigilant against the 
possibility that its customers might be engaged in money 
laundering. The focus in this regard was at first principally 
on cash transactions, but the component of ``know-your-
customer'' that focused on anti-money laundering procedures was 
clearly taking root.
    At the same time in the early 1990's, management began 
emphasizing the importance not only of a banker knowing his or 
her customer, but that there be adequate documentation of that 
knowledge. From a management perspective--and I was a manager--
this ``know-your-customer'' effort introduced a new issue. How 
do you get relationship managers, who are first and foremost 
interested in marketing efforts, to spend valuable time filling 
out forms? Furthermore, for some, the documentation appeared 
superfluous since the information that was being recorded was 
already known to the private banker in question, and therefore, 
readily available when necessary. We had always expected our 
private bankers to be, in effect, walking sources of ``know-
your-customer'' information, but we were now taking a further 
step and requiring that the information be memorialized. 
Unfortunately, it took longer to bring the know-your-customer 
documentation to the levels we wanted. The documentation of 
know-your-customer was a difficult task, as many of our clients 
had been with the bank for a long time, some for 40 or 50 
years. At times it was difficult for a new private banker to go 
back to these longstanding clients and ask them a series of 
detailed financial questions. We did so, but it took longer 
than we anticipated to get all our questions answered.
    Since the outset, our private bankers were conscientious of 
money laundering. Their awareness and sensitivity to these 
issues has grown over time as we strove to constantly raise the 
bar, and today it has become a routine part of their thought 
processes when dealing with clients.
    In closing, I would like to emphasize that in 1999, 
Citibank Private Banking has evolved from what it was in the 
early and mid-1990's, and that the Private Bank's current 
policies have tightened the procedures and systems to insure 
significant improvement on the overall operation of the Private 
    At this point I have completed my prepared remarks and 
would be pleased to take questions from the Subcommittee. Thank 
    Senator Collins. Thank you for your statement.
    Ms. Elliott, in 1994 you testified at a trial in which 
money laundering charges had been brought against a Citibank 
private banker, and at the trial you described at length 
Citibank guidelines that had been in effect in 1986, 1987, 
1988, which focused on the importance of knowing your customer, 
knowing your client, and the very serious consequences that 
could ensue if a bank did business with a customer who turned 
out to be undesirable or to be involved in criminal activity.
    In your testimony you were also very clear about the need 
for two written bank references because oral references were 
not sufficient. Yet the year before your testimony, you did not 
follow that process in opening accounts for Mr. Salinas.
    Could you explain to us--and obviously, we are very aware 
of the bank's own internal requirements and the problems that 
could result if they were not followed--why you did not follow 
those standard procedures in opening the account for Mr. 
    Ms. Elliott. Yes, Madam Chairman. I did follow the bank's 
policy at the time. The bank's policy, at the time, required 
that we should get two references. They could either be from 
someone within the bank--another area of the bank--from another 
client or another personal source, and/or a financial 
reference, meaning from another bank. And it required two 
    The policy as well, however, allowed for waiving one or 
both of the references by one of the team leaders, and I was a 
team leader at the time. So in fact, I did. Raul Salinas was 
brought to the bank by Carlos Hank, who in fact brought him in, 
so it was not just a personal reference, it was a personal 
reference that was given in person. He came in and gave it to 
us, to me and my boss's boss at the time.
    Senator Collins. According to your deposition, Citibank 
required written bank references. Did you have two written bank 
references before you opened the account?
    Ms. Elliott. I do not have the testimony in front of me, 
but I believe we required, if it is a bank reference, that it 
be written, versus just oral. If it is a bank reference, it 
must be written. In my case, the overall reference was given by 
a client. He came in, and it was not just given to me. I was in 
the presence of my boss's boss.
    Senator Collins. I want to make sure I understand your 
testimony. Are you testifying that in opening up the Salinas 
accounts you followed all of Citibank's internal procedures for 
doing so?
    Ms. Elliott. I am.
    Senator Collins. Ms. Elliott, you have also indicated that 
you were not concerned about the millions of dollars passing 
through the Salinas account because you were under the 
impression that Mr. Salinas' source of wealth derived from 
several different sources. You mentioned an incomplete business 
venture that was the source of his initial deposit; the sale of 
a construction company; his wife's divorce settlement. Did you 
ever know the name of Mr. Salinas' construction company or see 
any financial documentation of its sale?
    Ms. Elliott. No. At the time I was not required to do that, 
and this was not--I was not dealing with the construction 
company as a client. This relationship was--had now matured to 
a point where the client could have brought in his construction 
company as a client as well, and it did not seem material at 
the time.
    Today I would be required to ask for annual reports. I 
would be required to go to the place. I would be required to 
visit it.
    But Mr. Salinas mentioned it. Mr. Hank had told me about it 
before I ever met Mr. Salinas. He repeated it in the first 
meeting, and I felt comfortable that that was sufficient.
    Senator Collins. Were you aware of Mr. Salinas' employment 
as a government official and what his reported salary was?
    Ms. Elliott. I was not at the time.
    Senator Collins. How could you know that the money going 
through the account was legitimate, when in the Mexican press 
reports it was reported that Mr. Salinas had never earned more 
than $190,000 per year?
    Ms. Elliott. I never read any of the Mexican press reports. 
Mr. Salinas was a member of a very prominent, wealthy family in 
Mexico. The Mexican elite is finite. There are five, six 
hundred families that are well known to be very wealthy, and 
the Salinas' are one of them. And quite frankly, had I known 
that he had a job and that he was getting X dollars, it would 
not necessarily have been terribly consequential to my entire 
knowledge of what I knew the Salinas family to be, and I 
believed that that was the source of wealth.
    Senator Collins. Ms. Elliott, the GAO, in looking into the 
Salinas case, found that you waived bank references for Mr. 
Salinas and did not prepare a financial profile on him or 
request a waiver for the profile as then was required by 
Citibank's Know-Your-Customer policy. Is your testimony still 
that you followed all of Citibank's policies in opening the 
Salinas' accounts?
    Ms. Elliott. In the opening of the account, I did not. I 
should have and did not complete the CAMS profile. The CAMS 
system at the time was a system that was not a source of wealth 
system, but rather a system that talked about business 
background. While it is true that this is information that I 
had, it is also true that when he was arrested and I went to 
look at the CAMS screens, they were completely empty. I was 
mortified and dismayed, but it is absolutely true, they were 
completely empty.
    Senator Collins. I am confused by your testimony, because I 
asked you that same question just a moment ago, and you said 
you did comply with all of Citibank's procedures and policies. 
Are you now conceding that you did not comply?
    Ms. Elliott. I apologize. I misunderstood. I thought that 
you had--were referring to the references, and I had complied 
with all the bank's policies. The bank as well required, 
however, that we complete the business background information 
we had into a system that was then called CAMS, and I failed to 
do that or failed to get it done.
    Senator Collins. If Mr. Salinas had not been the brother of 
the President of Mexico, would you have been as willing to 
deviate from the standard policy?
    Ms. Elliott. His being the brother of the President of 
Mexico had nothing to do with how I treated Mr. Salinas. Mr. 
Salinas was not--was actually one of my smallest accounts. And 
I should have caused the CAMS screens to be completed and did 
not. And it is, and continues to be, my responsibility to get 
that done. Regarding the references and how I acted with Mr. 
Salinas, it was totally within policy and it had nothing to do 
with his being President Salinas' brother.
    Senator Collins. One of the services that you provided for 
Mr. Salinas was locating a private investment company for him--
or creating a private investment company, and then locating it 
in a secrecy jurisdiction; is that correct?
    Ms. Elliott. It is--Mr. Salinas had requested a structure 
that I would say--I am not certain, but I would say that at 
least 70 percent of our Mexican clients and most of our Latin 
American clients use. It was a standard structure within the 
International Private Bank, and he wanted the exact structure 
that Carlos Hank had, and Carlos Hank had a trust that held the 
shares of a corporation that was managed by Confidas which is 
our fiduciary subsidiary in Switzerland, and that is what I 
gave Mr. Salinas.
    Senator Collins. Is there a tax benefit to using a PIC 
located in a secrecy jurisdiction versus a non-secrecy 
    Ms. Elliott. I am not well versed. There is a tax benefit 
to having your assets under a corporation because the 
corporation does not die, but I do not know----
    Senator Collins. That is not my question. My question is: 
Is there some tax reason that the PIC would be located in a 
country that has very strict secrecy laws?
    Ms. Elliott. I cannot answer that question. I do not know.
    Senator Collins. Is the primary purpose of using a private 
investment corporation to further insulate the beneficial or 
true owner from disclosure, even within the bank and to banking 
regulators, locating the PIC in a secrecy jurisdiction? Why is 
that done? Let us take as a premise that there is no tax 
advantage to doing so. So why would you set up the PIC in a 
country that is beyond the reach of bank regulators in the 
United States?
    Ms. Elliott. It is not set up so it is beyond the reach 
because I do not believe it is beyond the reach of banking 
regulators in the United States. It is a fact of life that some 
of these clients require confidentiality. It is a fact of life 
that these clients are subject to kidnapping and are subject to 
criminal acts, and it is a fact of life that this is what they 
have to deal with. And so, yes, they do want their information 
    Senator Collins. Senator Levin.
    Senator Levin. If you could take the book of documents that 
appears in front of you, Ms. Elliott, you will see on page 11, 
the documentation policy. Do you see that? \1\
    \1\ See Exhibit No. 4 which appears in the Appendix on page 114.
    Ms. Elliott. Yes.
    Senator Levin. That was issued on April 9, 1992, which was 
before the Salinas account was opened; is that correct?
    Ms. Elliott. I have never seen this document. If that is 
what it says.
    Senator Levin. You have never seen this document?
    Ms. Elliott. No.
    Senator Levin. The memo by Mr. Montero on page 13?
    Ms. Elliott. Yes.
    Senator Levin. It says ``Over the years the Western 
Hemisphere has been successful in opening a growing number of 
very desirable target market accounts and extending a diverse 
product mix to the client base. However, the documentation 
requirements associated with the above have not always been 
complied with in a timely fashion. Given our commitment to 
strong compliance and our desire to enhance our control 
environment, as a rule, no new account should be opened without 
complete documentation.''
    That is not familiar to you?
    Ms. Elliott. No, this is. The memo, yes. I was referring to 
that page that you had.
    Senator Levin. All right. Then let us talk about the memo. 
The memo has the same date, does it not, on page 13, April 9, 
    Ms. Elliott. Correct.
    Senator Levin. And it says there at the bottom of that page 
13, that ``I would like to reemphasize the importance of timely 
and complete documentation at the inception of a new 
relationship or account.'' Do you see that?
    Ms. Elliott. Yes.
    Senator Levin. Do you see on the next page where it says: 
``New accounts should not be opened without complete 
documentation,'' at the top of page 14?
    Ms. Elliott. Correct.
    Senator Levin. Now, if you look at the document at page 
1,\1\ you will see that this is the application of Mr. Salinas, 
and it is almost totally blank. But if you will look at page 2, 
where it says ``Source of funds,'' there is a specific section 
there on source of funds. It says ``Total amount of funds 
deposited to open these accounts,'' and ``Source of these 
funds,'' and they are both blank; is that correct?
    \1\ See Exhibit No. 5 which appears in the Appendix on page 123.
    Ms. Elliott. Source of funds, yes.
    Senator Levin. Both blank?
    Ms. Elliott. Yes.
    Senator Levin. You had just received the month before, had 
you not, this memo from Mr. Montero saying the documentation 
must be complete, and here you have got an application which is 
about 90 percent blank including the section on source; is that 
not correct?
    Ms. Elliott. Yes, Senator. If I may, there are two account 
applications. One begins in page 1 and one begins in page 3. 
The one that begins in page 3 is the one that I was completing 
in Mexico with Raul Salinas. The one that begins in page 1 was 
being completed simultaneously in New York by my assistant. 
``Source of funds'' refers to where the initial deposit is 
coming from, and not source of wealth. That is what it means.
    And at this point I did not know where the funds were 
coming from. He was going to--this was his personal account in 
New York. He told me he was going to transfer $100,000 from a 
Mexican bank, but he did not know which one, so I did not know.
    Senator Levin. You had just received from Mr. Montero a 
statement that it is absolutely essential that documents be 
complete, and yet you want to look at the one that you are 
talking about on pages 3 and 4, you still have almost nothing 
on page 4, and if you want to look at the source of funds 
section and the one that you say you worked on on page 4, that 
is blank, including the first line which says, ``Total amount 
of funds deposited to open these accounts,'' and then it says, 
``Source of these funds.'' Now, that was left blank; is that 
not correct?
    Ms. Elliott. That is correct.
    Senator Levin. And that was left blank within a month after 
you got these strong instructions from the head of the--Mr. 
Montero, what was his position? He was above you, in any event, 
    Ms. Elliott. Absolutely. He was----
    Senator Levin. And you had very clear instructions, which 
you were familiar with, saying, ``The documentation 
requirements have not always been complied with in a timely 
fashion, and as a rule, no new account should be opened without 
complete documentation. I would like to reemphasize the 
importance of timely and complete documentation at the 
inception of a new relationship.'' Despite all of that--and on 
the next page, which is I believe page 14, you will see at the 
top, ``New accounts should not be opened without complete 
documentation.'' He said that three times in one document. And 
yet, the form that you worked with is blank, almost entirely in 
its second page, including on the source of funds; is that 
    Ms. Elliott. Yes, sir.
    Senator Levin. Now, is it not also accurate that there was 
another policy called Client Acceptance Policy, and this one, 
if you would turn to page 20.\1\ There are some excerpts we are 
putting on a board here, but this is dated September 27, 1991, 
which is almost a year before this account was opened, or half 
a year. And this is also Mr. Montero, and if you look on page 
21, it says, ``As all of us know, the international private 
banking business has become increasingly complex over the past 
years. It is critical that we maintain the high standards that 
we have in place in regard to `knowing our customer' and use 
the utmost diligence to screen prospective new clients.''
    \1\ See Exhibit No. 6 which appears in the Appendix on page 127.
    And then it says, ``The attached statement is a detailed 
description of divisional policies in respect to the opening of 
accounts. I expect that each and every one of us will be 
familiar with the contents and to conduct ourselves 
    Were you familiar with that document, the Client Acceptance 
    Ms. Elliott. Yes.
    Senator Levin. If you look on the next page--and this is 
all before you opened the account. This is not something new 
that happened in the late 1990's. These are all policies of the 
bank, at least purported policies, that you were familiar with. 
If you look on page 22,\1\ you will see in the third paragraph, 
``We only accept clients with integrity and good reputation.'' 
And then it says in 2(a) that, ``a clear-eyed assessment''--and 
that is up on the board there for you--``a clear-eyed 
assessment of the integrity of the client, his business 
activities and source of funds at the acceptance stage and 
    Now, did you know the source of his funds? Did you ask him 
the source of his funds? Let us put it that way.
    Ms. Elliott. Source of funds is where the money is coming 
from, and I knew two things. I knew that for his personal 
account the funds were going to be approximately $100,000, and 
it was going to come from one of the Mexican banks. And he told 
me it was going to be either Bancomer or Banca Cremi. He did 
not know which one.
    Senator Levin. All right. Now, when he deposited the money 
later on----
    Ms. Elliott. Excuse me?
    Senator Levin. When he deposited the millions later on, 
because it says here, ``and thereafter,'' did you know the 
source of those millions that he deposited later on?
    Ms. Elliott. I knew they were coming from Mexican Banks.
    Senator Levin. But did you know the source of his funds, 
where he got the funds from?
    Ms. Elliott. I believed at the time, Senator, that we were 
talking about monies that were a combination of things--that 
the Mexican peso was believed to be devalued, and in fact it 
was; the Mexican stock market was believed to suffer some sort 
of deficit, and in fact it did; that clients were all doing the 
same thing at the same time; that they had--the Salinas' had 
investments in Telmex, a company that had doubled in price in 
about a year and a half; and he had just married Paulina 
Castanon. So it was not just one thing; in my mind were a 
number of different things, all of which made sense at the 
    Senator Levin. Did you also believe that he had sold a 
construction company?
    Ms. Elliott. I did.
    Senator Levin. And did you know the name of the 
construction company?
    Ms. Elliott. I do not.
    Senator Levin. Did you ask him?
    Ms. Elliott. I did not.
    Senator Levin. Did you ask him how much he received from 
the construction company?
    Ms. Elliott. I did not, sir.
    Senator Levin. Did you ask him about any projects that that 
alleged construction company had ever undertaken?
    Ms. Elliott. Carlos Hank told me that they had worked on a 
road together; the construction company was involved in 
infrastructure work.
    Senator Levin. And did you ever ask your client what 
projects his alleged, purported construction company had ever 
worked on? Did you ever ask him, Mr. Salinas?
    Ms. Elliott. Well, Carlos Hank told me in front of him on 
that original meeting, and it--this was--I first met him in 
January 1992. He opened the accounts in May 1992. And when I 
met him in San Diego in April 1993--March or April 1993--he 
told me he had sold it, so I really did not have time.
    Senator Levin. Did you ask him how much he sold it for?
    Ms. Elliott. I did not.
    Senator Levin. Now, if you look on page 16, you have 
indicated in your testimony why it was that you did not seek a 
written reference from Mr. Hank.\1\ And you indicated that that 
is only when it is another bank that makes the reference that 
it is in writing, but that Mr. Hank was telling you orally; is 
that correct?
    \1\ See Exhibit No. 4 which appears in the Appendix on page 114.
    Ms. Elliott. In person.
    Senator Levin. In person.
    Ms. Elliott. In person in front of my boss's boss.
    Senator Levin. Right. Now, if you look at paragraph 3 of 
this, and this is still part of this documentation policy which 
you acknowledged receiving before you opened this account, and 
here is what paragraph 3 says: ``Generally, references should 
not be accepted from another client, however, should the 
situation warrant, then a reference can be accepted provided 
the client had a relationship for over a year, we are satisfied 
with his business and potential and we have another positive 
reference on file.''
    Did you have another positive reference on file?
    Ms. Elliott. I did not. I felt that the reference I had was 
strong enough.
    Senator Levin. But you did not have another reference on 
    Ms. Elliott. I did not.
    Senator Levin. And when you answered the Chairman's 
question about whether you complied with the policies of the 
bank, you said that you did relative to references, but in 
fact, you did not comply with that policy then, did you?
    Ms. Elliott. The policy, sir, allowed for a waiving of one 
reference--in fact, of both--by a team leader, and I was a team 
    Senator Levin. All right. That will speak for itself, but 
you acknowledge you did not have another positive reference on 
file; that is correct?
    Ms. Elliott. That is correct.
    Senator Levin. Finally--and this is, it seems to me, the 
key line in this requirement--``The reference''--we are now 
talking about Mr. Hank's reference--``must be in writing.'' Do 
you see that in front of you?
    Ms. Elliott. Yes.
    Senator Levin. Was Hank's reference in writing?
    Ms. Elliott. No, it was not.
    Senator Levin. So you did not comply with that policy 
either, did you?
    Ms. Elliott. Mr. Hank gave a personal reference. He came to 
the bank.
    Senator Levin. I understand, but this says that the 
``reference must be in writing and approved by the Market 
Manager/Unit Head before acceptance.'' And my question is: You 
did not comply with that policy either, did you?
    Ms. Elliott. I believe I did.
    Senator Levin. Did you have a written reference?
    Ms. Elliott. No, I did not have a written reference, but 
the policy--in fact, I, as a team leader, could have waived 
them both. This is the first time that I had a reference that 
was given in person and in front of my boss's boss. The reason 
to have a written reference----
    Senator Levin. Is there any exception in here for a 
reference orally in front of someone's boss? Does it not say, 
``The reference must be in writing and approved by the Market 
Manager/Unit Head?'' Does it not say it must be in writing, is 
my question?
    Ms. Elliott. It does say that.
    Senator Levin. And it was not in writing; is that correct?
    Ms. Elliott. That is correct.
    Senator Levin. You did not comply then with that particular 
policy, did you?
    Ms. Elliott. I believe I did.
    Senator Levin. Thank you.
    Senator Collins. Mr. Misan, it is my understanding that 
from 1987 to 1996, that one of your responsibilities was to 
manage the Citibank Mexico office. Is that accurate?
    Mr. Misan. That is right. From 1988?
    Senator Collins. From 1988 to 1996.
    Mr. Misan. Yes, ma'am.
    Senator Collins. So this was during the period that the 
account for Mr. Salinas was opened. Did you approve the opening 
of that account?
    Mr. Misan. No, I did not, ma'am.
    Senator Collins. Although you supervised Ms. Elliott, you 
did not know about some of the major accounts that she managed 
in a country for which you were ultimately the responsible 
manager; is that correct?
    Mr. Misan. That is correct, Senator. There were a few 
accounts who were managed out of New York, who chose to only 
communicate with New York, and for that reason, they were given 
that privacy.
    Senator Collins. Were you advised by any of your superiors 
that certain of the clients in Mexico did not wish for Mexico-
based bankers to have knowledge of their accounts, and that Mr. 
Salinas fell in that category?
    Mr. Misan. I was advised that there were some accounts that 
I would not be asked to oversee, and that they would be taken 
care of by my supervisors in New York, and, yes, I believe Mr. 
Salinas was one of them.
    Senator Collins. Did that not make it difficult for you to 
carry out your responsibilities as the person ultimately 
responsible for the Mexican Citibank office?
    Mr. Misan. I believe that Mrs. Elliott was an experienced 
private banker. She also benefited from having the supervision 
in New York of my supervisor and his supervisor, so I believe 
that whenever necessary, those accounts were adequately 
    Senator Collins. Were you required to authorize any 
transactions related to the Salinas account?
    Mr. Misan. At some point in the mid--or the second quarter 
of 1993, I believe, I signed on a couple of transfers that he 
made from Mexico as a member of the credit committee, yes.
    Senator Collins. When you did so were you aware that the 
account was for Mr. Salinas or were you approving these 
transactions without knowing who the beneficial owner of the 
account was?
    Mr. Misan. I was informed that Mr. Salinas had an account 
around that time, and I believe I did know at the time the 
remittances were being made, yes.
    Senator Collins. Mr. Misan, after Mr. Salinas was arrested, 
did you comment to Ms. Elliott that she should, ``Lose any 
documents connected with the account?''
    Mr. Misan. I said that in a kidding manner. It was at the 
early stages of this. I did not mean it seriously.
    Senator Collins. What direction did you give Ms. Elliott 
with regard to the account and the information related to it 
after Mr. Salinas was arrested?
    Mr. Misan. I told her that this account now should have the 
direct supervision of legal counsel, and that nothing should 
occur until legal counsel authorized it.
    Senator Collins. Senator Levin.
    Senator Levin. One of the responsibilities I believe that 
you had, Ms. Elliott, was to keep a client profile on a 
computer; is that correct?
    Ms. Elliott. That is correct.
    Senator Levin. And in 1995, after Mr. Salinas was arrested, 
you then went back and made some changes in that client 
profile, did you not?
    Ms. Elliott. I, in fact, completed it after his arrest.
    Senator Levin. You made some changes in the profile?
    Ms. Elliott. Correct.
    Senator Levin. You added some things that were not there 
before the arrest; is that correct?
    Ms. Elliott. That is true.
    Senator Levin. As a matter of fact, before he was 
arrested--if you will look on page 51 of your document book--is 
it not true that there was nothing in the client profile? \1\
    \1\ See Exhibit No. 7 which appears in the Appendix on page 133.
    Ms. Elliott. That is true.
    Senator Levin. It was blank.
    Ms. Elliott. Yes, sir.
    Senator Levin. Was that in keeping with your bank's rules?
    Ms. Elliott. Absolutely not. I thought it had been 
completed. I thought that we had gone back actually a year and 
a half before that, and it was not. I thought that we had 
completed every one of them. So when I went in and saw that it 
was blank, I do not know what to say. I still do not know why 
it is blank.
    Senator Levin. OK. Now, back in September 1992, you had 
received a e-mail, had you not, from Mr. Figueiredo? Am I 
pronouncing his name correctly?
    Ms. Elliott. More or less, Figueiredo.
    Senator Levin. From Mr. Figueiredo, who was Mr. Montero's 
assistant; is that correct?
    Ms. Elliott. He was the head of the marketing for all of 
Latin America under Ed Montero, yes.
    Senator Levin. And is it not true that you were then told 
that this profile, which is called a CAM--is that right?
    Ms. Elliott. Yes.
    Senator Levin. It is the management policy that that 
profile or CAM be ``used as the primary vehicle to store and 
document clients' non-financial data,'' and ``Private Bankers 
be accountable for reviewing, at least once a year, such 
information relevant to their clients and ensure that it is as 
complete and updated as possible.'' Now, that was September 
1992. Had you gone back in any year between September 1992 and 
March 1, 1995 to look at that profile and to update it or to 
fill it in?
    Ms. Elliott. I believed I had, Senator. CAMS was an 
evolving system. It was first a system that basically was to 
record business background information, to have information 
that was non-financial about our clients. It then became a 
system that we used as a suitability vehicle. It was not a 
source of wealth system. And in fact, it was not until much 
later. It should have been completed, however, and I thought I 
had gone at least twice, and it was not until March 1 that I 
realized it had not been completed.
    Senator Levin. So despite the instruction that yearly you 
go and look at that CAM, in fact, the CAM was left vacant or 
blank for 3 years; is that correct? From approximately 
September 1992 to March 1995, so about 2\1/2\ years, that was 
left blank, just the way you see it; is that correct?
    Ms. Elliott. That seems to be the case, yes.
    Senator Levin. Now, Mr. Figueiredo went on to state the 
following: ``I am also asking each Country Manager and/or 
Investment Center Manager to forward to my attention, no later 
than September 30, 1992, a consolidated plan covering their 
entire area of responsibility and indicating the schedule of 
their reviews, i.e what Private Banker will be reviewed by whom 
and when. This exercise should take place once a year 
thereafter. I am taking this matter,'' he said, ``extremely 
seriously,''--these are his quotes, September 1992--``and I am 
asking you, in turn, to exercise your full managerial authority 
in getting this job done.''
    Now, Mr. Misan, you were the country manager, as I 
understand it?
    Mr. Misan. Yes, sir.
    Senator Levin. And, Ms. Elliott, you were the investment 
center head for New York.
    Mr. Misan, first, you were supposed to provide a 
consolidated plan covering your entire area of responsibility 
and indicating a schedule of reviews--which private banker will 
be reviewed by whom and when. Did you provide that plan?
    Mr. Misan. Sir, I do not recall the specific plan referred 
to, so I really could not comment on it.
    Senator Levin. You do not have any recollection of being 
told to file such a plan?
    Mr. Misan. No, I do not remember that.
    Senator Levin. Well, then could you take--well, that is OK. 
The deadline for all accounts to be completed was June 30, 1993 
in that e-mail. My question is: Did you do such a review, Mr. 
    Mr. Misan. Sir, I recall at the time there was a lot of 
frustration regarding the filling out of these CAMS forms. It 
was as I said in my opening statement, it was a very 
frustrating process because there was--it was like trying to 
recreate history. There were many clients who had been with the 
bank for many, many years, and there was an attempt at putting 
financial information, personal information of clients that now 
a new private banker may have been going to these long-
established clients----
    Senator Levin. I understand the complications. But despite 
that, your boss, in December 1993, Mr. Montero, who is head of 
the Western Division, sent another memo on the failure of 
bankers to update these client screens, with new timetables to 
have all client screens completed.\1\ All clients with accounts 
over $1 million had to be completed by December 31, 1993.
    \1\ See Exhibit No. 9 which appears in the Appendix on page 136.
    Here is what he said: ``I have decided to simplify the 
policy and hold you, as the Manager, directly accountable for 
the adherence to policy by your staff. Year-end bonuses for 
each of you will be held for noncompletion of this assignment 
in the required time frame. You must attest to the satisfactory 
completion of the above [timetable] by December 31, [1993].''
    You were one of the people, Mr. Misan, that that memo was 
directed to. Did you lose any bonus?
    Mr. Misan. No, sir, I did not.
    Senator Levin. Did you carry out his direction with all of 
its complications? Did you do what he said you had to do, and 
did it include Mr. Salinas?
    Mr. Misan. Sir, I believe at the time I did what was 
expected of me to do. There were a number of private bankers 
who had filled out the forms, and to their best efforts 
believed that they had completed the forms as needed to be. We 
were having a problem in establishing a standard, and when we 
failed, unfortunately, it was because different private bankers 
had filled out the forms to what they believed was an 
appropriate standard. It was over time that the standard became 
clearer, and, therefore, we got, I think, the levels that we 
needed and I believe are there now.
    Senator Levin. Final question. Did you ever check to see 
whether Amy Elliott had carried out the screen on Salinas?
    Mr. Misan. Sir, the only recollection I have of that is 
after, I believe, his arrest. I had been in New York, and at 
that time, I had seen the CAMS screen, yes.
    Senator Levin. Not before? Not during that 2\1/2\-year 
    Mr. Misan. I do not recall that, sir.
    Senator Levin. Thank you.
    Senator Collins. The hearing is now going to be recessed 
until 2:15 p.m.
    I would ask Ms. Elliott and Mr. Misan to come back at that 
time. We do have a few additional questions for you.
    We are in recess until 2:15 p.m.
    [Whereupon, at 12:17 p.m., a luncheon recess was taken.]

                     AFTERNOON SESSION [2:18 p.m.]

    Senator Collins. The Subcommittee will come to order.
    At this time, we will resume questioning from Senator Levin 
for our witnesses.
    Senator Levin. Thank you, Madam Chairman.
    Ms. Elliott, this morning, you noted that a strong factor 
in your assessment of clients was your knowledge of and 
familiarity with Mexican society, and from that, you knew all 
about the Salinas family and their reputation.
    You told investigators that you had never heard of any 
allegations of impropriety surrounding Mr. Salinas until 1995 
when he was alleged to have been involved in the murder of his 
former brother-in-law. The California newspaper, the Sacramento 
Bee, in August 1993, said the following relative to rumors of 
corruption besieging Mexico's president.\1\ Part of the article 
reads as follows:

    \1\ See Exhibit No. 10 which appears in the Appendix on page 138.

        ``Rumors--all publicly unsubstantiated--are flying in 
        government circles and among the national press that 
        members of the Salinas family, and possibly even 
        Salinas himself, are taking advantage of the 
        president's office to build massive personal fortunes. 
        . . . According to some of the stories, Salinas' 
        siblings are involved in a wide variety of unsavory 
        business deals, peddling their influence, using other 
        people as . . . fronts and generally throwing their 
        weight around in their commercial dealings. Then there 
        are the whispers that Salinas himself has a secret 
        share in the country's telephone monopoly, which was 
        sold off along with hundreds of government-owned 
        businesses to private investors.''

    Given your knowledge of Mexican society as the basis for 
your approval of this account with Mr. Salinas and given the 
fact that your boss, Mr. Reed, told our staff that he 
personally heard from Mexican businessmen as early as 1993 
about possible corruption involving Raul Salinas ``inserting 
himself in local business deals inappropriately,'' how do you 
explain, since you base your approval of this account on your 
knowledge of the Mexican society and its wealthy people, that 
you would have heard nothing? Despite all of those rumors in 
1993, and that even the CEO of your corporation heard those 
rumors in 1993, and yet you heard nothing--how do you explain 
    Ms. Elliott. Senator, my knowledge of the Mexican society 
was one of the things on which I based my acceptance of the 
Raul Salinas account. I did travel to Mexico very frequently 
during the period, and I had never heard anything negative 
about Raul Salinas or the Salinas family.
    Senator Levin. Ms. Elliott, the bank has provided us 
transcripts of phone conversations that took place the day 
after Mr. Salinas was arrested on February 28, 1995, and three 
times in those conversations, you made references to having 
talked to God.
    I want to make sure you have copies of these.\2\
    \2\ See Exhibit No. 11a. and 11b. which appear in the Appendix on 
pages 141 and 142.
    Ms. Elliott. I do.
    Senator Levin. You have copies?
    Ms. Elliott. Yes.
    Senator Levin. In the first conversation, talking now to 
Pedro Homen and to Sarah Bevan, two other Citibank employees 
from Europe, you said the following: ``You know what I mean?'' 
\1\ Now, this is the day after the arrest of Salinas. It is up 
on the board here for you. ``You know what I mean? Um, but 
after the day is over, maybe I will feel different, I am sure I 
am going to be asked to speak to God, Okay?'' Pedro Homen says, 
``I'm sure.'' Then, in that same conversation, you say, ``I 
expect that I will have to go up to God and when I do I will 
let you guys know.''
    \1\ See Exhibit No. 11a. which appears in the Appendix on page 141.
    Later on that day, less than an hour later, you had another 
conversation in which you said the following: ``Okay and we 
thank God that the guy close to God is comfortable as well.'' 
Then Sarah Bevan said, ``His right-hand man is comfortable,'' 
and you said, ``His right-hand man is comfortable? I love it.''
    Now, who was God in that conversation? Who are you 
referring to?
    Ms. Elliott. This conversation took place almost 5 years 
ago. I spoke to a ton of people that day, but if I can shed 
some light so that I can try to explain to you, sitting where I 
am sitting here today, I can say two things. When I feel like I 
have to speak to everyone in the world, today I would say I am 
going to have to speak to God. I had never had--at the time I 
had been in the bank 27 years--it was the first time I had to 
deal with a client having been arrested, for murder no less. 
And I knew that having to go and walk around the floor, I was 
going to be asked by just about everyone if it was true.
    So, to me, sitting here today, I can only believe that that 
is what I meant then as well.
    Senator Levin. Well, if God is the general public, as you 
say, the conversation does not make any sense. [Laughter.] Part 
of that conversation--and this is Sarah Bevan speaking--``Amy 
is OK. She has been in since 6:30. Obviously, she is speaking 
to everybody, God included, and she is speaking to the lawyer 
as well.'' You are saying you are not referring to a specific 
    Ms. Elliott. I am saying I am not. I cannot speak to what 
Sarah Bevan or Pedro Homen--I don't know what they meant. I am 
saying that I am not.
    Senator Levin. On another matter, the day after Mr. Salinas 
was arrested, you said the following: ``Everybody was on board 
on this.'' \2\ Later in the same conversation, you said, ``I 
mean, this goes in the very, very top of the corporation this 
was known, Okay? On the very top.'' Then you said, ``We are 
little pawns in this whole thing, Okay?'' Who were you 
referring to when you said ``this goes in the very top of the 
corporation this was known''? Who are you referring to at the 
very top of the corporation?
    \2\ See Exhibit No. 11b. which appears in the Appendix on page 142.
    Ms. Elliott. Bill Rhodes.
    Senator Levin. When you said ``We are little pawns in this 
whole thing . . . ,'' what did you mean by that?
    Ms. Elliott. I am sitting four or five down from the 
chairman, and Bill Rhodes was and is the vice chairman of the 
bank. To me, that's pretty top.
    Senator Levin. Thank you.
    Senator Collins. Thank you for your testimony. You are 
excused, and we will now ask for the next panel of witnesses to 
come forward.
    Our next witnesses are Alain Ober, who is the head of the 
African Unit for Citibank's Private Bank Office in New York, 
and G. Edward Montero, who serves as the Western Hemisphere 
Division Head for the Private Bank.
    First, we will hear from Mr. Ober who has been with 
Citibank's Private Bank for 8 years. He has served as the 
private banker for President Bongo of Gabon and for Mohamed and 
Ibrahim Abacha, the sons of General Abacha, the former head of 
the State of Nigeria. Mr. Ober will testify about his handling 
of those accounts.
    Mr. Montero has been an employee of Citibank for 34 years 
and has been with the Private Bank for 17 years. Pursuant to 
Rule 6, all witnesses who testify before the Subcommittee are 
required to be sworn.
    Would you please raise your right hand. Do you swear that 
the testimony you are about to give to the Subcommittee will be 
the truth, the whole truth, and nothing but the truth, so help 
you, God?
    Mr. Ober. Yes, I do.
    Mr. Montero. I do.
    Senator Collins. I would ask that you limit your oral 
testimony to 10 minutes. Your written testimony will be printed 
in the record in its entirety.
    Mr. Ober, you may proceed first.

                    BANK, NEW YORK, NEW YORK

    Mr. Ober. Thank you, Senator.
    \1\ The prepared statement of Mr. Ober appears in the Appendix on 
page 950.
    I am Alain Ober. I have prepared a statement that I 
understand the Subcommittee has accepted as part of the record 
of this hearing, which I would like to briefly summarize.
    I am originally from France, but I have lived in the United 
States since 1972, and I enjoy joint citizenship in France and 
in the United States.
    I have worked for Citibank Private Bank as a relationship 
manager for African clients since 1991. I have been the Private 
Bank relationship manager for President Omar Bongo of Gabon 
since 1994, 9 years after he opened his principal New York 
    I also handled the New York Private Bank accounts of 
Ibrahim and Mohamed Sani Abacha, although I was not the 
relationship manager for those clients.
    Although procedures for obtaining information about a 
customer's background and source of wealth have been in place 
since I have been with the Private Bank and I have always 
conducted myself in accordance with the prevailing standards, 
in the past few years, the bank has significantly strengthened 
procedures. Today, in addition to my supervisors who have 
always reviewed my customer profiles, my customer profiles are 
also independently reviewed by quality assurance personnel who 
are not part of the business unit. This has resulted in a 
significant increase in the amount and quality of documentation 
I must provide in connection with each of my clients.
    In addition, the Private Bank has instituted a global 
system of transaction monitoring. As part of this procedure, 
client transactions are independently analyzed by an automated 
system which compares current transactions against historic 
trends and then flags any unusual activity for review by an 
independent transaction monitoring unit.
    As the Subcommittee is aware, I have personally handled 
certain accounts of public figures. Such accounts sometimes 
have been hard to manage because of the difficulty in getting 
information about account transactions directly from the 
    In June 1998, the Private Bank significantly revised its 
public figure policy, setting forth the bank's standards for 
accepting and maintaining accounts of politically prominent 
individuals and their families. Pursuant to the public figure 
policy, we do not target public figures as clients, and a new 
public figure client may be accepted only with approval of the 
Public Figure Review Committee which consists of the head of 
the Private Bank and other senior officials who do not have 
client-relations responsibilities.
    Existing public figure accounts are reviewed annually by 
this committee. As a result of this process, the Private Bank 
has refused or terminated accounts for certain public figures.
    I am pleased to answer any of your questions.
    Senator Collins. Mr. Montero.


    Mr. Montero. Thank you.
    \1\ The prepared statement of Mr. Montero appears in the Appendix 
on page 953.
    Good afternoon, Senator Collins, Senator Levin, and Members 
of the Permanent Subcommittee on Investigations. My name is Ed 
Montero, and I have spent my entire 34-year banking career at 
Citibank. I must say that I have always been extremely proud to 
be part of an organization with such strong leadership, 
integrity, and values.
    I would not and could not have devoted such an important 
part of my life to Citibank if I had not believed this was so.
    I began my career as a banker in the corporate bank and for 
the last 17 years have headed the Western Hemisphere Division 
of the Private Bank. This division focussed primarily on 
clients from Latin America and Canada, but at different times 
had varying responsibilities concerning other regions of the 
    Most recently, I became the Senior Executive for Client 
Relationships in July of this year. Since 1996, one of my top 
priorities has been to make anti-money-laundering policies and 
procedures in the Western Hemisphere Division as strong as we 
could possibly make them. I have also worked very hard to 
assist Mr. Aziz who, until last month, was the head of the 
Private Bank in implementing a state-of-the-art anti-money-
laundering program for the entire private banking group, but 
before I comment on this new program and how it came into 
being, I think it is very important for me to emphasize my 
belief that it has always been Citibank's policy to avoid 
customers who might seek to use the bank for illicit or illegal 
purposes. We want to do business with good people, and we want 
to avoid bad people.
    Now let me focus on the international side of private 
banking, which I believe is your greatest area of interest 
today, and attempt to explain some of the reasons why we have 
considered it appropriate in the past to provide confidential 
services to our clients.
    Many of the clients in Latin America are individuals who 
fled the wars in Europe and feel a heightened need to avoid 
unnecessary dissemination of information concerning their 
wealth. In addition, many countries in Latin America have been 
plagued in recent years by acts of violence against wealthy and 
prominent citizens.
    I have met a great number of our clients in their homes, 
and many have a story to tell about a loved one, about a 
friend, a neighbor, or a business associate who has been the 
victim of a kidnapping or extortion plot.
    I had a wonderful client who was kidnapped and killed just 
last year. Another story of a client who had recently visited 
me, he was kept in a box with a broken leg for over 6 weeks and 
may never walk again unaided. I could give you more examples, 
but the common thread is that a number of our clients have been 
driven by a fear to a heightened desire for privacy, and these 
feelings have been carried over into their banking 
relationships, which they wish to be characterized by as much 
discretion and confidentiality as the law permits. These are 
good law-abiding customers with very serious, legitimate 
privacy concerns.
    Against that background, I want to emphasize that I am 
proud of what we have done in the Western Hemisphere Division 
of the private banking group. From the very beginning, we have 
been quite vigorous in rejecting prospects that were 
questionable in any way and in closing accounts when we learned 
that they were problematic, no matter how profitable.
    In the Western Hemisphere Division, over the last 17 years 
we have had over 50,000 accounts and only very few of which 
have presented any problems. To achieve this, we have relied 
upon the judgment and discretion of our individual bankers. 
However, what we have learned over the past decade is that this 
is just plain not good enough.
    In order for our anti-money-laundering program to be as 
effective as it needs to be to protect the bank, we need 
thorough documentation. We need strict account monitoring 
capabilities, and we need careful independent reviews.
    The lesson was a hard one for me. The crystallizing event 
occurred in 1996 when, for the first time, my unit failed an 
internal Citibank audit. I was shocked and devastated by the 
audit results at the time, but I realize now that it was 
ultimately positive.
    I took the audit result very seriously and regarded it as a 
call to arms. It led me and the management team in the Western 
Hemisphere Division to focus on our anti-money-laundering 
program with a new intensity. As a result, I led a very 
vigorous corrective action plan to address the deficiencies 
identified by the audit, and we have now regained our 
historically favorable ratings.
    We created a full-time task force comprised of eight to ten 
senior staff members to review and revise our procedures. We 
went over each and every existing customer profile, a total of 
19,000 profiles in the Western Hemisphere Division. We 
investigated and corroborated missing information, and we 
assessed the desirability of each customer relationship. By the 
way, all of these revised profiles were reviewed by an 
independent Citibank quality assurance team.
    Moreover, the Private Bank as a whole has made enormous 
progress in recent years as regulatory standards and our own 
audit standards have increased. I know that Mr. Reed has 
delivered to your Subcommittee a statement by Mr. Aziz that 
details our institution's progress in this area. As you will 
see, we now have, among other things, a much more rigorous 
prescreening process for prospective clients, a more rigorous 
documentation and verification requirement for Know-Your-
Customer information, as well as an independent review of all 
such information.
    We also have an automated funds-tracking system to monitor 
all existing accounts and a requirement that multiple bankers 
interact with all accounts.
    We also give special scrutiny to accounts of public figures 
and their families, and last, we have also clarified the 
supervisory structure under our new system of global market 
management so that there are now clearer lines of authority and 
supervision within the Private Bank.
    In conclusion, I am proud of the work my colleagues in the 
Western Hemisphere Division and indeed the entire Private Bank 
have done over the last several years to address these 
important issues.
    I thank you for the opportunity to address your 
Subcommittee. I am now prepared to take questions. Thank you.
    Senator Collins. Thank you, Mr. Montero.
    Mr. Montero, you mentioned in your statement your concerns 
over a negative audit that the bank received in 1996, and you 
described the corrective actions you took in response to that. 
Did you discuss the results of this audit with any of your 
superiors at Citibank?
    Mr. Montero. Most certainly, we did.
    Senator Collins. With whom did you discuss the audit?
    Mr. Montero. We prepared the audit, correction action plan, 
in the spring of 1996, shortly--immediately after the audit was 
received, and we presented it to my then-boss, Albert de Souza 
in the middle of June of that year as a plan. We got his 
blessing, as well as that of our audit organization, 
independent audit organization, and once we had the clear 
signals, we proceeded to execute the plan in the late summer 
and fall of 1996.
    Senator Collins. Were there any other officials at Citibank 
who outranked you with whom you discussed the audit report?
    Mr. Montero. The officials, again, were Mr. de Souza who 
was the EDP in charge of the group, my direct boss--we 
discussed it with the most senior members of the audit team of 
the bank, as well as our own internal audit team, and I believe 
knowledge of the corrective action plan was shared with the top 
management of the institution, certainly the top audit side of 
the institution.
    Senator Collins. Were there other audits prior to the 1996 
audit which were critical or raised concerns about the risk of 
exposure to money-laundering that applied to your group?
    Mr. Montero. There were other audits that raised those 
topics, but I think this was the most critical.
    Senator Collins. The reason I ask the question is that it 
is my understanding there was something like six internal 
audits of various parts of the Private Bank at Citicorp that 
were very critical of the operations and the lack of adherence 
with policies and procedures. What was different about this 
1996 report that caused you to take the corrective action? Were 
the others less serious in your mind, or did they pertain to 
activities that were not under your direct control?
    Mr. Montero. I can't comment on all the--I mean, I'm not 
sure which ones you're referring to, but there were audited--my 
organization that dealt with specific subunits, and they were 
not as critical in my opinion as the one that we are talking 
about here.
    Senator Collins. I guess my concern is that there seems to 
have been a pattern of negative internal audits that failed to 
trigger much reaction, and that is what is of great concern to 
me. I think that a lot of the problems that Citibank 
experienced would have been avoided had the bank's officials 
taken action earlier.
    Mr. Montero. I may comment that this was a very 
comprehensive audit that covers all of the front-end sales 
organization of the Western Hemisphere. So that is part of the 
reason we took it so seriously, but beyond that, I think in the 
earlier part of the 1990's, the bankers and management all felt 
a commitment to get the job done, but at the same time the 
business paradigm of the period was for greater efficiency. All 
of industry was reengineering, reducing staff, and I think we 
misjudged. We misjudged the enormity of the task and the amount 
of resources that were needed to get the job done.
    Senator Collins. Would it be fair to say, to use your 
phrase, that the business paradigm of the period was to grow no 
matter what to open these accounts, to make them profitable, to 
pump up the financial results, even if it meant shortchanging 
some of the procedures and some of the safeguards that have 
been put in place?
    Mr. Montero. No. Senator, I would not characterize it that 
we were shortchanging the desire to have good clients for the 
desirability of having profits.
    I mentioned in my prepared testimony that we have had in 
our division a history of rejecting clients that were 
supposedly good and turned out to be bad or rejecting 
    The problem was the enormity of tasks. There were several 
things that were going on here. One of them was the basic chore 
of the profiles, as has been previously discussed in prior 
testimony by my colleagues. That was one.
    Two, you had a new complexity in the business. The business 
was moving from a banking-oriented business to a securities-
based business that had a lot more suitability requirements, a 
lot more product complexities. So the job of the banker was 
becoming evermore complex, at the same time that we were 
saying, ``Well, we need to be more efficient and really watch 
carefully the addition of staff,'' and that's where I really, 
sincerely, believe we should have taken earlier action in 
staffing up. And once we did, once we put the team together and 
said, ``You guys, full time, we're taking you out of client 
services and we're putting you in charge of getting this job 
done''--and then it got done, and we are there today.
    The environment that we have today, I am convinced and I 
can represent to you that some of the issues that have been 
raised here would not happen today because we have an entirely 
different system and an entirely different support structure.
    Senator Collins. Mr. Ober, did you ask President Bongo what 
the source of the $52 million that he used to open his private 
account was? This was back in 1985.
    Mr. Ober. Senator, no, I did not, and the----
    Senator Collins. Could you tell us why you did not? Don't 
your procedures require you to identify the source of funds?
    Mr. Ober. At the time when I took over the account in 1994, 
I pretty much took the account on a clean-slate basis. The 
account had been open 9 years before my arrival at the Private 
    Senator Collins. I am sorry. I could not understand what 
you said. That you took the account on a----
    Mr. Ober. Clean-slate basis. There was not really 
information available, and the bank may be criticized for lack 
of policies and procedures at the time, but at the time I was 
not under the obligation to gather information of that type.
    However, starting in 1994, one of my goals was to gather 
information about the sources of wealth of our client. Of 
course, as Mr. Montero explained, today the situation will be 
different because this will be an obligation of the KYC 
policies, and an account can only be opened if we have a clear 
understanding of the source of the initial funding of the 
account. And by that, I mean what it represented.
    Senator Collins. Did you ever ask President Bongo directly 
about the sources of the millions of dollars that he was 
depositing in your accounts?
    Mr. Ober. No, I did not.
    Senator Collins. Why didn't you pursue this?
    Mr. Ober. Well, Senator, let me say that it was--it felt 
very awkward to ask information, that kind of information to a 
head of state, while at the same time I was able to gather the 
information that I wished to obtain from reliable sources and I 
was able to develop information about sources of wealth of our 
    Senator Collins. Were you concerned that if you asked what 
you viewed as intrusive questions about the source of President 
Bongo's wealth that you might lose the marketplace in Gabon?
    Mr. Ober. Senator, I don't think so. In today's 
environment, I would like to point out I would not have any 
choice today. In 1994, maybe it was a question of choice. 
Today, there is no choice. I have to ask the questions, and if 
the bank is not satisfied by the answers that are given to me, 
then we will not accept the client.
    Senator Collins. Were you concerned about the millions of 
dollars and that they might be from inappropriate sources? Were 
you concerned at all about the millions of dollars that were 
being deposited in the account? Since you have said that you 
didn't ask directly where is the money coming from because you 
felt somehow it would be seen as inappropriate or a breach of 
protocol, were you at all concerned that you might be handling 
money that did not belong to President Bongo?
    Mr. Ober. If you allow me to put back your question in the 
context of the chronology. In 1994, when I took over the 
account, the initial funding had taken place 9 years prior to 
that, and in that period of time and during most of my role as 
a private banker for President Bongo, there were very few times 
where there were funds coming into the account. When I took 
over the account in 1994, for several years there were no major 
incoming funds into the account.
    Senator Collins. I want next to ask you about testimony 
from the Subcommittee's staff investigators. The staff 
investigators testified that for 3 years, you did not know that 
your clients, Ibrahim and Mohamed Abacha, were the sons of the 
Nigerian dictator. Is that accurate?
    Mr. Ober. Yes, it is, and will you allow me? I see the 
light is orange. It will take a few minutes----
    Senator Collins. Please go ahead.
    Mr. Ober [continuing]. Because of the chronology of events.
    Senator Collins. Let me tell you what I would like you to 
cover in that chronology. What I need to understand is how you 
could handle that account as someone who specialized in African 
accounts, as someone who has Know-Your-Customer regulations to 
follow. How could you not have understood who these two 
individuals were? Please proceed, despite the red light.
    Mr. Ober. I believe back in February 1992, my colleague 
from London, Mr. Matthews, who was the relationship manager for 
the Abacha brothers, told me that they would come--Ibrahim Sani 
Abacha would come to New York to pick up some cash from our 
tellers and--which is one of the things that happens between 
private bank branches.
    I took advantage of Ibrahim Sani Abacha's visit to chat 
with him, and I found out that he was--he told me he was a 
businessman, that he was in the process of establishing an 
airline company that would run flights between Lagos and New 
York and decided that there was a need for an account at the 
Private Bank.
    At that time, there was no reference to the name Abacha. 
Ibrahim Sani--the name that was referred to was Sani. Then I 
asked the following--my colleague, Mr. Matthews, for a 
reference, and the reference was the only time that I saw the 
name Abacha. It referred to Mohamed and Ibrahim, if I remember, 
as the sons of Zachary Abacha, a businessman from the northern 
part of Nigeria. At that time, the name Abacha didn't ring any 
bell because General Abacha at the time was a general in the 
army, but was not president of Nigeria. So what I saw in these 
documents was that the document was a very good reference. What 
mattered to me was that they had been clients of the bank for 3 
years. My colleague, Mr. Matthews, said they are good clients 
of the bank, they are professional individuals. The account had 
been run properly.
    So I put the reference into the file and forgot about that 
I saw the name Abacha. That was not an important item. Then the 
next time I heard about the name Abacha was a few weeks before 
the death of Ibrahim Sani who died in an air crash. I had 
thought of referring Ibrahim Sani and his airline company to my 
colleagues at Citibank in Lagos as corporate prospects for the 
bank, and later on, a few weeks later, my colleagues from Lagos 
called me and told me, ``Do you know that Ibrahim Sani and 
Mohamed are the sons of President Abacha?''
    I have to confess I was embarrassed. I was appalled, and 
that was the second time I heard the name Abacha. And then we 
developed a strategy to close the account.
    Senator Collins. Senator Levin.
    Senator Levin. Thank you, Madam Chair.
    I would like to ask you about some of the client profiles 
that we have been talking about. First, on page 51 of the 
document book that is in front of you is the profile 1995 of 
Raul Salinas.\1\ It is a blank.
    \1\ See Exhibit No. 7 which appears in the Appendix on page 133.
    Now, Mr. Montero, you had sent out very precise 
instructions 3 years earlier saying you wanted these profiles 
brought up to date. You wanted them complete. You wanted 
documentation. You wanted the bank's integrity to be protected, 
and yet, year after year, at least 2\1/2\ years, after the 
account was opened, Mr. Salinas' account was opened, that is 
what the profile looked like. Is that adequate?
    Mr. Montero. No, that is not adequate, Senator.
    Senator Levin. Now, the next profile I want you look at is 
President Bongo's profile, which is page 77 in your book.\2\ 
This is President Bongo's profile. ``Nature of business: head 
of state for over 25 years.'' Then it says, ``Source of wealth: 
Self-Made as a result of position. Country is oil producer.'' 
Would that comply with your current standards of knowing your 
customer and customer profiles?
    \2\ See Exhibit No. 12 which appears in the Appendix on page 143.
    Mr. Montero. No. Under our current standards, Senator, we 
would require substantially more information and corroboration 
of that information and approval of that form by an independent 
area which we call our quality assurance unit. So the banker 
would have to fill in. The banker would have to corroborate, 
and the independent unit would have to approve. So it would be 
entirely different today.
    Senator Levin. Now, you had issued some pretty strong 
policy statements back in 1991 and 1992, and let's first take 
up your documentation policy in 1992. This is pages 11, 12, 13, 
and 14 in your document book.\3\ This is directly from you. 
Page 12, you say ``Profile, Source of Wealth.'' Page 13, 
``documentation requirements . . . have not always been 
complied with in a timely fashion. . . . [A]s a rule, no new 
accounts should be opened without complete documentation.'' 
Then you say at the end of page 13 here, ``I would like to 
reemphasize the importance of timely and complete documentation 
at the inception of a new relationship or account.'' On the 
next page, 14, ``New accounts should not be opened without 
complete documentation.'' You said that about four times in 
that policy of April 9, 1992.
    \3\ See Exhibit No. 4 which appears in the Appendix on page 114.
    Then, in the client acceptance document that you issued on 
September 27, 1991--that is page 21 in the documents, ``It is 
critical that we maintain the high standards that we have in 
place in regard to `knowing our customer' and use the utmost 
diligence to screen prospective new clients. . . . I expect 
each and every one of us to be familiar with the contents and 
to conduct ourselves accordingly.'' \1\ This is 1991 now, 
    \1\ See Exhibit No. 6 which appears in the Appendix on page 127.
    Then, on the next page, ``We only accept clients with 
integrity and good reputation.'' Then, down in Section 2(a), 
you say that ``a clear-eyed assessment of the integrity of the 
client, his business activities and source of funds at the 
acceptance stage and thereafter.''
    Would you say that that policy was not fully implemented in 
cases that we have been discussing this morning, both Salinas 
and Bongo, so far, and Abacha?
    Mr. Montero. I think that the bankers involved did not 
record adequately what they learned, and I regret that.
    Senator Levin. Was this a lack of resources?
    Mr. Montero. I believe it was--let me just back up and say 
that the bankers in question are experienced. They have a high 
sense of integrity, but they had an enormous job. As I tried to 
suggest before, although private banking has been going on for 
years and years, the way we have been practicing at the 
international phase of it, it is a relatively new business, and 
we had not sized up enough the amount of resources that we 
needed to get the job done.
    We have done that now, and I believe we are there in terms 
of what we need to protect the clients, the bank today on anti-
money-laundering issues.
    Senator Levin. Is it fair to say that the policy really is 
not new because you issued that client acceptance policy in 
September 1991 and it was pretty strong, pretty precise, pretty 
repeated--we want documentation, we want it in the file, we 
want to know the source of the revenue, of the source of the 
deposits, we want to know what the business is? I mean, over 
and over again, you told your folks in 1991 and in 1992 what 
the documentation policy was, and yet, I think you would agree 
they fell short in many, many cases. Is it not true, then, that 
the problem in those years after you issued the policy was not 
that the policy was weak as that it was not implemented well by 
your people in the field in many instances? Is that a fair 
    Mr. Montero. Senator, I would say that we as a total 
business system in the company had not figured out what we 
needed to get the job done. The policies were largely there. We 
have tweaked them. What we have done is we have given the 
bankers today some aids, some prompts, and some real support, 
and the combination of the tweaking of the policy and the added 
support and the rededication of actually very significant 
dollars, software--we have spent--Mr. Aziz, I think, will 
testify--as much as $50 million in implementing some of these 
changes. It was that kind of an investment that was needed to 
get the job done, and frankly, we hadn't done it back then.
    Senator Levin. And because you had not done it, the 
policies were not implemented in any full way in all cases. Is 
that a fair statement?
    Mr. Montero. They were not implemented in all cases. That's 
    Senator Levin. What was the year you would say that that 
change came about when the resources were finally put in there 
which could mean that the policies meant more than just paper 
policies, but real policy? What year did that happen?
    Mr. Montero. I can only speak for--well, I speak best for 
the Western Hemisphere, and we really began to tackle that in 
    Senator Levin. All right. Now, in 1997, if you look at page 
91, we have got an account document, and this involves 
deficiencies in Know Your Client and this relates to the Abacha 
    \1\ See Exhibit No. 13 which appears in the Appendix on page 144.
    Know Your Client Deficiencies. Beneficial owner details is 
checked. It is deficient. Source of wealth, deficient. Business 
backgrounds, deficient. Business affiliations, deficient. 
Source of knowledge, deficient. Public figure, investment 
centre head approval, not present. That may mean not 
applicable. I am not sure. Use of account, deficient. I mean, 
every single deficiency is marked. That looks like a zero 
batting average on that chart.
    Mr. Montero. I have to say, Senator, I am not familiar at 
all with the Abacha accounts. I had no involvement.
    Senator Levin. All right. Let me ask Mr. Ober, then, about 
    Could you take a look at that?
    Mr. Ober. Yes, Senator. I did----
    Senator Levin. It is page 91. If this policy was finally--
had some funding behind it starting in 1996--this is a June 
1997 document. It looked like on the Abacha sons' accounts, 
there was 100-percent deficiencies.
    Mr. Ober. Senator, I have never seen this document before. 
I believe this is a document that belongs to our branch in 
London, but not to the account that I managed in New York 
because in----
    Senator Levin. Does it surprise you to see these 
deficiencies checked off this way?
    Mr. Ober. Well, we--there is a similar--I mean, the 
document looks different, but has the same substance that 
exists in New York.
    Senator Levin. Would you agree that these deficiencies 
existed on the Abacha accounts in 1996--1997? Excuse me.
    Mr. Ober. They did not when I handled the account in New 
York, except for mentioning the true identity, which I 
corrected in the profile when I found out.
    Mr. Montero. I would say, Mr. Senator, if I could just 
comment on one area, even though we began to check dollars and 
really fine-tuning of the policy in 1996, you must understand 
making all of this happen involves--it's an enormous amount of 
work, and it also involves a culture change and that took place 
over 1997 and 1998. It didn't happen overnight.
    Just in the Western Hemisphere alone, we completed by year 
end 1998, 19,000 profiles. If you divide that by, let's say, 
100 private bankers that we had in the division, that was 190 
per banker. That is a huge task to get them up to snuff. So I 
think we need to understand that this took time. It couldn't be 
done overnight.
    Senator Levin. Starting with 1996, would you say?
    Mr. Montero. Yes.
    Senator Levin. Thank you.
    Senator Collins. Mr. Ober, I have just one final question 
for you about the Abacha accounts. You have testified that you 
did not realize who the Abachas were. Had you known of their 
close relationship, the fact that they were the sons of the 
Nigerian military dictator, would you have handled the account 
    Mr. Ober. Yes, Senator, and as a matter of fact, when I 
heard about their true identity, I discussed it with my 
supervisor of the time, and we developed an exit strategy from 
that account.
    Of course, today, with the public figure policy that is in 
place at the bank, that could not happen because immediately 
these people becoming public figures will have to be accepted 
by the public committee--Public Figure Committee of the bank.
    Senator Collins. But if you do not identify them as public 
figures, they never get before the Public Figure Committee. 
Wouldn't normal due diligence identify these individuals as 
being closely related to a public figure?
    Mr. Ober. Well, when I found out their true identity, then 
I passed on the information to my supervisor at the bank, and 
it was reflected in the profile of the clients at the bank.
    Senator Collins. And you began to say that you then began 
to develop an exit strategy?
    Mr. Ober. That's correct.
    Senator Collins. Could you expand on that?
    Mr. Ober. Yes. To go back, Ibrahim Sani had just died in an 
air crash, and we had to remove his name from the account. So I 
developed the strategy with my supervisor that we would tell 
the surviving account holder on the account, Mohamed Sani and a 
gentleman called, I believe, Yaya Abubakar, that the account 
could not continue under a special name account. It would have 
to show their true name. The account will have to be under the 
name Mohamed Sani Abacha, which we were convinced would trigger 
the answer from Mohamed, then, ``I don't want a name in my--I 
don't want an account that shows my name.''
    Senator Collins. Because secrecy was an important 
requirement for him?
    Mr. Ober. That's correct.
    Senator Collins. And why is that?
    Mr. Ober. Well, the people that are first originally, 
because they were from Nigeria, which is a country, as we 
mentioned--where corruption exists, but not where everybody is 
corrupted, and also because, then, when they were--when we knew 
their true identity, people that have a well-known name would 
want to have more secrecy about their banking transactions.
    Senator Collins. Would there have been concerns by your 
clients that Citicorp might have asked more questions, that 
Citibank might have asked more questions at that point about 
the source of the millions of dollars of deposits?
    Mr. Ober. I would answer this is possible, yes.
    Senator Collins. Senator Levin.
    Senator Levin. Could you take a look, Mr. Ober, at the 
document on page 69.\1\ This is a memo to you from Christopher 
    \1\ See Exhibit No. 14 which appears in the Appendix on page 145.
    All right. Who is Mr. Rogers, first of all?
    Mr. Ober. Christopher Rogers is one of my supervisors. He 
is the general market manager for Africa and is currently based 
in Johannesburg, South Africa.
    Senator Levin. Now, he wrote you the memo in 1997, April, 
about press allegations relative to Mr. Bongo, and it said here 
that he is ``unable to interpret the current press 
allegations''--in the fourth paragraph--``insofar as they might 
touch upon the Bank but would not be tempted to try because of 
the doubts it could raise in people's minds about our 
relationship with our customer. If this is the case, we ought 
to be extremely careful about sharing such information with 
regulatory authorities, because we can't answer for it.'' He is 
advising you to basically make sure--do whatever we can to make 
sure that this information does not get to the hands of 
regulatory authorities. Then he says also, ``we should stay as 
far away as possible from this mess, unless and until any one 
of us has firm or verifiable evidence which would lead us to 
suspect the Bank's interests are at risk.''
    Should you be staying away from allegations of a mess if 
you want to know your client, or should you be following it 
very closely if you are serious about knowing your client?
    Mr. Ober. Well, Senator, in that particular case, I was 
troubled by the allegation that I read in the French press 
where the name of our client was indicated, and as a result of 
my concern, in spite of what you may infer from Mr. Rogers' 
memo, I contacted the legal department of our bank to 
communicate the information that I had for them to--for counsel 
to look at these allegations.
    Senator Levin. So that you did not follow his advice?
    Mr. Ober. I would agree with you.
    Senator Levin. Pardon?
    Mr. Ober. I agree with you.
    Senator Levin. As far as you are concerned, was the advice 
of his inappropriate advice--that you should stay as far away 
as possible from the allegations?
    Mr. Ober. Well, my conduct by--would indicate that we did 
not agree entirely on that topic.
    Senator Levin. There was another memo which Mr. Rogers 
wrote, and this one is on page 75.\1\ This was in late 1998 
when the Private Bank began discussing closing the Bongo 
accounts, and in response, the Private Bank's top director 
here, Mr. Rogers, warned against closing them because of the 
possible effect on Citibank's franchise in Africa.
    \1\ See Exhibit No. 15 which appears in the Appendix on page 147.
    Here are some of the statements he made, and I will ask 
you, Mr. Montero, to react to this. This is some of the 
statements he made in this e-mail. ``Whatever internal 
considerations we satisfy, the marketing fallout is likely to 
be serious.'' Is that good reason to keep an account open, 
because otherwise there would be marketing fallout, Mr. 
    Mr. Montero. No, it is not, Senator.
    Senator Levin. Then he said that Tendin, which is the Bongo 
operation, had been ``vitally instrumental in our franchise's 
success over the years. . . . Sam''--and he is referring here 
to President Bongo's oil advisor, Samuel Dossou--``helped the 
Branch considerably over the last 2 years to obtain a more 
reasonable and rightful share of public sector deposits,'' with 
President Bongo's ``blessing.''
    Then he said this, ``The probability of this support being 
reversed indefinitely should be weighed seriously.'' Is that a 
good reason for keeping an account open, because the client is 
helping the bank get deposits, Mr. Montero?
    Mr. Montero. Well, I am uncomfortable, as I commented 
before. I know very little about this account.
    Senator Levin. Well, would that be good reason for keeping 
an account open, because the client is helping the bank get 
deposits, if otherwise it should not be kept open?
    Mr. Montero. Well, if the account should not be kept open, 
as a theoretical, that should not be the reason.
    Senator Levin. If it violated your policies----
    Mr. Montero. Yes.
    Senator Levin [continuing]. It should not be kept open?
    Mr. Montero. Should not be.
    Senator Levin. All right. Would you think that the 
judgments expressed by Mr. Rogers is good advice from the 
Bank's top manager in Africa? The Private Bank's top manager in 
Africa now is giving you this advice: ``Keep this stuff from 
regulatory agencies. Keep them away from this mess.''
    Mr. Montero. Not acceptable.
    Senator Levin. And we should be very careful before we 
close accounts because it could have a negative effect on 
deposits. That's not acceptable either?
    Mr. Montero. I'm not familiar----
    Senator Levin. Or is it? Is that acceptable?
    Mr. Montero. No. It's not acceptable. I'm not familiar with 
the circumstances here, but keeping stuff away from regulators 
is not what our policy is at all. I am sure of that.
    Senator Levin. And the second one is if this client does 
not meet the standards of your bank in terms of integrity, 
reliability, source of revenue and so forth, then the fact that 
that person is either making deposits or obtaining deposits for 
the bank would not be a good reason to keep an account open 
which would otherwise be closed. Would you agree with that?
    Mr. Montero. I agree with that.
    Senator Levin. All right.
    Mr. Montero. Yes, Senator. Today, this would not happen. 
Let me assure you, this would--we would not have that today.
    Senator Levin. My time is up. Thank you.
    Senator Collins. Senator Cochran.
    Senator Cochran. No questions at this time.
    Senator Collins. Do you have any further questions, Senator 
    Senator Levin. A few more.
    Senator Collins. Senator Levin, you may proceed.
    Senator Levin. Thank you.
    In September 1998, when the Nigerian government was seizing 
funds from General Abacha's relatives and associates, the 
London Private Bank, Citibank's Private Bank there, helped his 
sons transfer $39 million out of London to Swiss accounts and 
elsewhere. Citibank not only performed the transfer, it 
approved a $39 million overdraft to the sons' accounts so that 
they could transfer the money immediately without having to 
pull funds from a time deposit that carried a penalty for early 
    So, despite now what we know about--or you knew about the 
Abacha sons, the bank actually facilitated not just the 
transfer of money, which was the subject, by the way, of a 
government investigation at the time, a Nigerian government 
investigation, but the bank facilitated the transfer of that 
fund by in effect lending the Abacha sons $39 million for a 
short period of time, allowing an overdraft, and then repaying 
itself that loan when the time deposit became due.
    Was this appropriate conduct for your Private Bank in 
London, in light of the Nigerian government investigation which 
was going on and their seizure of funds from General Abacha's 
relatives and associates?
    Mr. Montero. Senator Levin, I would rather not comment 
because I am not at all familiar--at all--with the Abacha 
account or the transactions that you have suggested.
    My sense would be to involve counsel and to really take a 
deep read on this, but I just can't comment. I can't be 
    Senator Levin. Mr. Ober, under the current regulations of 
the bank as you understand them, as they are now being 
hopefully implemented, would this $39 million loan to the 
Abacha sons to help them transfer $39 million from your Private 
Bank in London to Switzerland be facilitated by you while the 
Nigerian government is investigating them for corruption and 
other crimes? Would that action still be taken?
    Just to be very precise, take a look at the document on 
page 89, September 15, 1998.\1\ Here, the purpose of this memo 
is to seek approval to overdraw the client's call account by 
$39 million. Then it says, ``The client has requested the 
remittance of these funds urgently. The total amount of the 
fixed deposit is $42 million. The breakage of this would prove 
too costly for the client.'' In other words, the client is 
going to have a cost here if he has to wait for his CD to come 
    \1\ See Exhibit No. 16 which appears in the Appendix on page 148.
    Would you under these circumstances, this year, current 
rules, all the resources, all that new software, all that legal 
advice you are now getting, all the care you are now taking 
hopefully relative to clients and private banks--would you be 
lending them $39 million so that they could transfer money out 
of your Private Bank while a Nigerian government investigation 
of corruption is going on?
    Mr. Ober. Senator, I cannot comment on the document that 
comes from Citibank-London, and this is the first time I have 
seen the document.
    However, I can answer your question and say in theory, in 
the course of the new KYC transaction trend monitoring, the 
transaction trend monitoring will pick up the--a debit for $39 
million leaving the account, and that will require a detailed 
explanation. That will be reviewed by our colleagues from the 
transaction trend monitoring--and if you allow me, there is a 
reality to the KYC policy and transaction trend monitoring that 
has been in place for 2 years.
    As a private banker, my life has been made much more 
difficult, much more paperwork, much longer hours as a result 
of complying with that policy, which the bank takes very 
seriously. The idea is to get it right the first time because 
otherwise our colleagues from the KYC unit or the transaction 
trend monitoring are going to come back at me time and time 
over until I get it right.
    Senator Levin. Thank you.
    Mr. Montero. And I may just add, Senator, in terms of the 
theoretical--not theoretical practice, but the practice would 
be, not knowing this name--this name, however, pops up as a 
public figure and it goes to the committee and the committee 
makes an assessment.
    There is a scandal brewing in Nigeria. We want this name 
out. So that would be the--so we wouldn't get as far as what's 
been suggested here of the $39 million today.
    Senator Levin. Thank you.
    Senator Collins. Thank you, gentlemen.
    I would now like to welcome our final witness for this 
afternoon, John Reed, the chairman and co-chief executive 
officer of Citigroup. Mr. Reed will be accompanied by Todd 
Thomson, the newly appointed chief executive officer of the 
Private Bank, and Mark Musi, the chief compliance and control 
officer for the Private Bank.
    Mr. Reed has been an employee of Citicorp since 1965 and 
has been its chairman since 1984. Since Citicorp's 1998 merger 
with Travelers Group, Mr. Reed has been Co-CEO of Citigroup.
    Pursuant to Rule 6, all witnesses are required to be sworn 
in. So I would ask that you please stand and raise your right 
hand. Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Reed. I do.
    Mr. Thomson. I do.
    Mr. Musi. I do.
    Senator Collins. Thank you.
    Mr. Reed, as you know, we have asked that you limit your 
oral presentation to about 10 minutes. We will put your entire 
testimony in the record. You may proceed.


    Mr. Reed. Thank you very much, Madam Chairman, Senators.
    \1\ The prepared statement of Mr. Reed appears in the Appendix on 
page 957.
    My name is John Reed, and as has been indicated, I am 
chairman and Co-CEO of Citigroup. I think for the purposes of 
this session, I also have been chairman and CEO of Citibank for 
the last 15\1/2\ years.
    I am accompanied, as was indicated, by Todd Thomson who is 
now responsible for the Private Bank and by Mark Musi who is 
responsible for compliance and control within the Private Bank.
    As you know, Shaukat Aziz, who had spoken with some of you 
and who has submitted some comments, is no longer running our 
Private Bank because he has been called back and is currently 
the Minister of Finance in his home country of Pakistan and 
therefore is not able to be with us, although he did send some 
    What I would like to do, if I could, Madam Chairman, is 
make a few comments that hopefully will help with the 
discussion that will follow.
    First, I would like to thank you for the opportunity for 
participating. Obviously, some of the transactions that we are 
going to talk about today have their negative aspects, and some 
of the things that we will be talking about won't be fun, but I 
think we should understand that this discussion about money-
laundering, the discussion about private banking is serious. 
And frankly, to have a public discussion is useful and helpful 
because I believe that it is going to be important for all of 
us to see an evolution of a set of global standards with regard 
to the conduct of this kind of business, and I think 
discussions such as these, and hopefully others that will come 
afterwards, will lead to an evolution of a set of standards not 
only for Citibank and U.S. banks, but indeed a set of standards 
that may characterize the business going forward.
    So, to the extent that these hearings help to move that 
ball forward, I would say that it is a very positive thing and 
I appreciate the opportunity to be a part of it.
    If I could for a second talk about Citibank, we are 
somewhat of a singular institution within the United States. We 
have for almost 100 years now, dating back to 1902, had 
operations in virtually all of the emerging markets of the 
world acting not only as a cross-border banking organization, 
but in fact operating as a local bank in each of these emerging 
markets around the world. So, as you and your Subcommittee 
Members know, we today are in the situation where we operate in 
approximately 100 countries around the world, and I think we 
are the only major financial institution in the United States 
that does operate as a local bank in virtually the entire 
world. This obviously means that we are really at the center of 
much of the activity that we are talking about today, and it 
raises particular burdens and particular problems for us. And 
it explains to some degree why it is that it is Citibank here 
and not the First National Bank of Kenosha or some other U.S. 
institution because we really are in the center of these 
    As has been well brought out, there are some real tensions 
in this business. In the last 20 years, we have seen the growth 
of criminal and illegal monies that are in the hands of 
terrorist organizations, that are in the hands of people 
dealing in drugs, that are in the hands of people who are 
involved in corruption. This did not used to be a problem.
    Twenty years ago, there seemed to be less of this kind of 
money around, and I think it is also true that we were living 
in a world of capital controls at that time, most of which have 
been taken away. And the result is we truly have a global 
economy on our hands, one in which legitimate monies move 
around, but one in which illegitimate monies move around in 
ways that were not true 20 years ago. So this raises problems 
to the business that are new to us and raise difficulties that 
are the subject of your discussion now.
    There are also tensions with regard to what is secrecy and 
what is privacy. I believe very strongly that customers of the 
bank have every reason to expect that their personal financial 
life would be respected and privacy would be a characteristic 
of our relationship, and issues of privacy are very topical 
today in the banking industry and that is something where we in 
the industry are held, I think quite correctly, to a very high 
    At the same time, you could go from privacy to secrecy, and 
you could move into an arena where you are trying to obscure 
the movements of money for reasons that don't have legitimacy, 
and there is a tension there. We are not able to erase the 
issues of using secrecy to hide things in part because of 
privacy, and I think Ed Montero in some of his testimony made 
an accurate assessment about that from a customer's point of 
view how important privacy can be and to what extent it could 
be something that is significant in their life and something 
that they expect the bank to maintain.
    So there clearly are tensions in this business. There are 
tensions that come from the world we live in, tensions 
involving secrecy and privacy. There are tensions associated 
with what we consider to be an appropriate source of wealth as 
contrasted to what these feelings might be in other kinds of 
societies. So it is a tough business.
    We will be talking during today's session about four or 
five cases--a few cases that we have been involved in--in the 
Private Bank at Citibank. These are by definition difficult 
cases. I think it is very clear in the testimony you have heard 
to date that in some instances our behavior is legitimately 
open to criticism, and we have acknowledged that this is the 
case and we understand it.
    At the same time, I believe that these cases are full of 
learning. It is learning that we have taken very seriously, and 
I think it is very fair to say that today much of the learning 
from these cases and the discussion that we are having this 
afternoon is embedded in the positioning of the private banking 
business as we run it today and in the policies and the 
practices that we have within that business.
    So, while there is much here about which we are not 
necessarily proud, I think it is fair to say that there is some 
learning here that we have reacted to and is currently embedded 
in our business practice.
    I would say in running a big company--and we are a big 
company. We have over 180,000 people around the world, as I 
indicated, operating in 100 countries around the world. You 
have to rely on people and practices. In order to run a 
business, you must rely on having the right people in the right 
jobs. These people have to have certain skills, certain 
knowledge, certain attitude, and certain behavior which they 
bring to their job, and you have to surround those people with 
a set of practices that provides a matrix within which they do 
their job.
    So the mechanisms that we have for bringing about change 
have to do with having the right people in the right job, the 
wrong person out, and having a set of policies and procedures 
that surrounds the activities of government and individuals, 
and you have heard a lot of testimony today about the necessity 
of having policies and procedures and then the cultural 
difficulties of having those become the real framework within 
which business is conducted.
    We also are going to be talking during this session about 
internal audits. These are internal audits from our own audit 
staff. Starting back in 1990, we made a concerted effort for 
reasons that were compelling at least to me to upgrade the 
quality of our audit, to toughen it, to toughen the standards, 
to change the standards, because we believed back at that time 
that we were facing a set of operational problems that required 
a toughening of internal standards, and this started way back 
as far as 1990.
    The audit reports that you will see have some harsh 
comments in them, and I think they should. We are pleased that 
they do because these were comments from professional auditors 
who found some of the things that we were doing not up to 
    For the purposes of our discussion this afternoon, it would 
appear as if the principal thrust of these audits had to do 
with the private banking and knowing your customer and the 
adequacy of those kind of procedures. The fact of the matter is 
they had a much broader context. They had to do with the 
problems of control and compliance that we had not only in the 
Private Bank, but across the company, where we were seeking 
tougher standards, and I think it is fair to say that during 
this period of time that we are talking about, there was an 
overall emphasis within the company of tightening standards. 
And I think that some of the audit reports that you will be 
talking about this afternoon did in fact have their desired 
effect. They captured the attention of the management. They 
captured my personal attention. They captured the attention of 
the Audit Committee of the board, and they did result in 
corrective actions being taken.
    And I can say to you--I believe you know this, Senator--
that as we speak today, the Private Bank has 100-percent good 
audits, meaning four and five in our rating system, which was 
not the case during the period of time that we are talking 
about, and this change came about because of some of the 
pressures that resulted from these bad audits.
    In summary, I would say that there are some key questions 
that we are really dealing with. The first question is can this 
business, the private banking business--is it legitimate? Can 
it be legitimately part of an American bank's business 
activities, and can we all feel comfortable with that? My 
answer to that question is yes. I have thought about it. I have 
discussed it. I have in some instances in my career been in 
business situations where I was not comfortable with the 
business, and in those circumstances, we have gone out of them, 
out of the business, and we have asked that question about the 
Private Bank. I think it is a good business.
    The second question is, can it be run properly. I think the 
answer to that question is yes, in spite of the difficult 
environment, in spite of the tensions I made reference to. I 
believe it can be run profitably, and the final question you 
have to ask is, hey, what kind of company is Citi, what kind of 
values do we have, what kind of people are we.
    Let me tell you from a personal point of view. Let me tell 
you also as the chairman of this company. We are honest people. 
We do not want to do business with people with whom we are not 
comfortable. There is no need to even get close to any lines in 
order to achieve our business purposes, and I, like some of the 
others who have testified to you, am quite proud of my 
association with this company, and I feel very comfortable 
about the moral quality and the standards that we have 
throughout the company.
    Thank you very much.
    Senator Collins. Thank you, Mr. Reed.
    Mr. Thomson or Mr. Musi, do you have any comments you would 
like to make at this time?
    Mr. Musi. No. We are available for questions.
    Senator Collins. Thank you.
    Mr. Reed, I have read the Subcommittee investigator's 
report. I have listened carefully to the testimony today. I 
have reviewed your internal audits. I have read the GAO report 
on the Salinas case, and I have to tell you that it does not 
paint a pretty picture. And it leaves the basic question in my 
mind, and that is how did a financial institution with all the 
resources that Citibank has, with all of your sophistication, 
with all of your expertise, become vulnerable to money-
    Mr. Reed. Well, Senator, I think I made reference to this. 
We are a human organization. We clearly have had a number of 
instances where we have failed to follow policies and so forth.
    I do think that we are talking about five or six cases out 
of a large number. I have never felt that there was a pattern 
across the company that seriously raised issues about our 
ability as a total enterprise, but as I said to you in the 
beginning, we have here some examples of some transactions 
about which legitimate criticism can be made and I think that 
we simply have to recognize that in some of our activities and 
some of our behavior we have had failures.
    Senator Collins. I could understand the problem occurring 
if it were an isolated case or two, but that is not the results 
of your internal audit. That is not the picture that is drawn 
when you go through the audits.
    Let me take you through some of the audits. In May 1995, 
the internal audit of the Private Bank's Trust and Estates Unit 
noted that the rating for this audit is a ``3''. Now, I believe 
I am correct that it is a ``1 to 5'' rating----
    Mr. Reed. Correct.
    Senator Collins [continuing]. Where I believe one is the 
worst. Is that correct?
    Mr. Reed. That's correct. Yes, ma'am.
    Senator Collins. So this was a ``3''. It noted that it was 
a decline from the previous rating of ``5''.
    The auditors went on to say, ``the unit does not perform 
effective Know-Your-Customer procedures before accepting 
account referrals from private bankers. As a result, customers 
attempting to launder money may not be identified. This exposes 
the bank to civil penalties and criminal charges. 
Administrators rely on private bankers to obtain KYC 
documentation. However, our review of 15 accounts shows that 
this process is ineffective.''
    Were you aware of this particular audit? This is the May 
1995 audit of the Trust and Estates Unit.
    Mr. Reed. I doubt that I read that specific audit.
    Senator Collins. Who would have been aware of this audit?
    Mr. Reed. The people who run the unit that is being 
audited, the immediate supervisors above them, and obviously 
all of the control staff within the Private Bank.
    Senator Collins. What kind of rating would trigger your 
attention? What would cause an audit to be brought to your 
personal attention?
    Mr. Reed. Well, actually what happens is, first of all, I 
have a personal relationship with the chief auditor on an 
informal basis. If there was an element within an audit that 
that person became concerned with, it probably would be 
informally brought to my attention quite independently of what 
rating might be associated with the audit.
    When you begin to have units whose audits are in the ``2'' 
category--we have one instance of a ``1'', but they are highly 
unusual--I would become aware of that.
    If we get audits where the reply to the audit appears not 
to be responsive, because we have had a problem of people not 
responding appropriately to audits, I would get involved. In 
fact, I believe it was in early 1997. I started a process with 
two or three of my senior colleagues to review. We had a 
meeting every 2 weeks, every other week, and I went over the 
reply to audits where the reply didn't seem to us to be 
appropriate and for the purpose of tensing up the system. So 
any sets of audits in the two category where the replies didn't 
look good, I would have seen. Anything that the chief auditor 
thought I should be aware of, I traditionally was aware of.
    I tend not to read audit reports per se, simply because of 
the number of them.
    Senator Collins. Let me ask you about another audit. In 
June 1995, Citicorp audited its European Private Bank, and it 
did assign it a ``2'' in this case. The auditors specifically 
noted that ``Senior Private Bank management does not enforce 
the development and implementation of compliance programs'' and 
says ``this issue requires immediate attention by Senior 
Management.'' Is this an audit that came to your attention?
    Mr. Reed. I don't recall that specific one, but I would 
think the answer would be yes, and I became aware, I would say, 
in--first of all, if you go back in the history, I became quite 
concerned in 1990 that I was not comfortable with some of the 
operating environment of the company. So I made a change to our 
auditor in 1990, and I brought somebody in from Ford Motor 
actually, Dennis Green, who would come in as an outsider with a 
new set of eyes and tighten up the capabilities and 
professionalism of our audit department. I specifically was 
trying to tighten up our operational competence.
    So I started by strengthening the audit department, and it 
was very clear to everybody in the company that I personally 
was putting a lot of time and effort and was maintaining very 
close communication with the auditor.
    I then started making sure that the audit process at the 
most senior level was taken seriously, but to your point, I 
would guess that sometime in the 1994 or 1995 time frame, it 
became quite clear to me that we had two pockets of problems. 
We had a set of audit problems associated with trading 
activities, the back office associated with trading, which, of 
course, is very dangerous because if you get out of control 
there you can get significant losses quite quickly, and we had 
a concentration of problems in the Private Bank, which I think 
stemmed from managerial practices and some of the points that 
have been raised by yourself and some of your colleagues on 
this Subcommittee.
    I started the process of bringing about change. It was 
clear when Alvaro de Souza came into this business, but it was 
true also when Rukavina ran the business before that I had a 
personal requirement. When I put people in jobs, I tend to sit 
them down and say these are my concerns, this is what I am 
looking for you to do, and I think back with Rukavina, which 
dates back to September 1994, with Alvaro de Souza who came 
into the job in January 1996. I made quite clear to them that I 
was concerned about the control environment and I was concerned 
about the audit environment in these areas, and that concern 
had stemmed from some of these reports that you make reference 
    Senator Collins. The next audit I want to mention must have 
rung some alarm bells because, in this audit, which was 
December 1995, Citicorp audited the Swiss Private Bank front 
office and assigned it a ``1''. The auditors noted that the 
rating indicates that the office is operating in a severe [sic] 
deficient manner, and it specifically cited that ``due 
diligence and money-laundering regulations were not being 
observed satisfactorily and that the use of pseudonyms to 
protect client confidentiality is not an acceptable corporate 
    I find this audit to be particularly troubling since the 
head of the entire Private Bank was based in Switzerland and 
his office received an extremely poor score, the lowest 
possible rating. What was your response to this audit? Was this 
one brought to your personal attention?
    Mr. Reed. Yes. I read that audit personally. As I said 
before, I had already identified the problem before that. This 
confirmed it in living technicolor, if you like, and it made 
very clear that we had a significant set of audit problems, and 
they were not, by the way, in any sense limited simply to Know-
Your-Customer procedures. They were far broader than that in 
terms of their scope, and the problem was pervasive and spoke 
to an issue of management.
    So, yes, I did read the audit, and as I say, I took it very 
seriously and we started a process that has led to corrective 
    I would say this. Even though we had audits that showed 
that policies and procedures were not being appropriately 
followed, I had no indication that we were making a bunch of 
bad decisions because of it. Now, that is not an excuse. You 
must operate with policies and procedures, and they either are 
right and you follow them or you change them, but the point is 
if I had reason to believe that the operation of the business 
was putting the company at risk, I would have closed it down 
quite independently of audits or anything else.
    So getting a bad audit says you are not following policies 
and procedures. You obviously have to correct this. You have 
got to check, correct the people and so forth and so on.
    The real question is were we doing things that were going 
to result in severe damage to the company. I did not believe 
that that was the circumstance.
    Senator Collins. What concerns me, Mr. Reed, is this was 
not the last of the bad audits, the bad news. In May 1996, 
there was an internal audit of the Latin American Accounts 
Office. It got a ``2'', and, again, money-laundering was 
specifically noted. In June 1997, there was an audit of the 
Private Bank in Canada. The auditors assigned a score of ``3'' 
and specifically noted major risks related to money-laundering. 
And indeed, as late as September 1997, when Citibank audited 
its Private Bank in Switzerland, the score of a ``3'' was 
    Now, I will grant you, that is a good improvement over a 
``1'', but once again there are specific criticisms about the 
vulnerability to money laundering. So my concern is that this 
is a 3-year period. This is not an isolated audit of one small 
branch. It seems to me to be that systematic pattern of 
deficiencies that allowed Citibank to be vulnerable to money-
    Mr. Reed. I think you are correct. I just checked the 
records here. There was a 3- to 4-year period of time. So that 
is during the period which we had every reason to believe that 
we had a problem in terms of controls and audits and so forth 
and so on.
    Starting in 1993, my general assumption is audits are from 
8 to 15 months, sort of lagging indicators. They describe 
conditions about then. It really wasn't until 1997 that we 
began to see changes; 1998, we saw significant changes; and 
1999, we have 100 percent in the four and five category in the 
Private Bank.
    So, if you look backwards, you would have to say that in 
that period, 1994, 1995, into 1996, there was reason to believe 
that we did not have an acceptable set of standards in place, 
and you and I would agree that it is approximately a 3-year 
time frame.
    Senator Collins. Senator Levin.
    Senator Levin. I want to now start in 1997 when you just 
indicated that you began to see real changes, not just stated 
policy changes, but actual changes in the way the Private Bank 
was operating.
    Yet, in 1998, the Federal Reserve required the Private Bank 
to report every 3 months to the Audit Committee and lifted that 
requirement only about 6 months ago. Were you aware of that?
    Mr. Reed. Yes, sir, I was.
    Senator Levin. What is the need for secrecy in private 
banking? And I do not here mean confidentiality, and I want to 
just spend a minute with you on the difference.
    Should our banks be setting up secret bank accounts in 
secrecy jurisdictions which are not subject to legal process 
for regulatory oversight and possibly civil process? In other 
words, just to give you an example, you have got a brochure 
here which says, in its table of contents, ``The Bahamas, the 
Cayman Islands, Jersey and Switzerland, the best of all 
    \1\ See Exhibit No. 17 which appears in the Appendix on page 149.
    I will ask you in a minute why they are the best of all 
worlds, but why should our banks be setting up accounts in 
secrecy jurisdictions that are not subject to the same legal 
process for regulatory oversight or civil process which a bank 
account would be subject to here in the United States, or 
should banks no longer be doing that?
    Mr. Reed. Senator, my sense of it is this. We have to run a 
business. We have to run a business in the world the way we see 
    We would not do business in an environment where we didn't 
think there were appropriate mechanisms, safeguards, and so 
forth to run a bank, and we do business every place in the 
world. There are some places and some circumstances where you 
simply would not be able to run a bank, and if we find 
ourselves in those circumstances, I think there is a record of 
our simply withdrawing or shrinking down the business to the 
point where it doesn't exist.
    A number of these places characterized by secrecy are 
perfectly respectable places. I think Switzerland would 
generally be described as a well-developed society with a rule 
of law. It happens to have a set of secrecy laws surrounding 
banking that you might find not to your taste.
    I personally believe that if we are going to be in this 
business that we have to operate in the parts of the world 
where business is and where customers would expect you to be, 
and if there was something about the legal structure that 
precluded us as a bank from running our business, we wouldn't 
be there. If there was something about the legal structure that 
precluded our regulators from doing an adequate job of 
regulating us, they wouldn't let us be there. We have to apply 
for permission to open a branch, and if our regulators, the Fed 
or the OCC or whoever, felt that it was a jurisdiction in which 
they couldn't meet their responsibilities, they simply would 
turn us down. So I don't believe that it's a fair comment to 
suggest that because a Nation chooses to have a set of secrecy 
laws that that means it is an environment in which a bank 
should not operate.
    Senator Levin. Would you object if the Federal Reserve or 
the OCC decided that you or no other bank should be allowed to 
open up accounts in any jurisdiction where its process would 
not be able to reach? Would you have any problem with that if 
they then changed their rule on that?
    Mr. Reed. As long as you had a broad description of what 
you just said there.
    If they couldn't effectively do their job, I don't think 
they'd let us be there today. So I'd have no problem 
whatsoever. They obviously have a legal mandate to do their 
    Senator Levin. I do not know how much of this morning's 
testimony you heard, but I will tell you this, that I was 
deeply disturbed by this testimony in a number of ways. What 
struck me perhaps the most is that we had in April 1992 and in 
September 1991 very clear policies of your bank that went out 
to your people who are running the Private Bank. And these 
policies had to do with making sure that there was, in the 
words of the policy, ``a clear-eyed assessment of the integrity 
of the client, his business activities and the source of funds 
at the acceptance stage and thereafter,'' and many other 
provisions about documenting things and having records which 
were obviously ignored in the years after these policies were 
adopted by the bank.
    Did you hear this morning's testimony, by the way?
    Mr. Reed. I heard that portion you are making reference to.
    Senator Levin. Were you troubled by the fact that policies 
of the bank were not implemented in these years until 1997?
    Mr. Reed. Let me be honest in my reply here. Let me say I 
felt good that it was so clear that we had these policies. I 
have been aware that we had these policies and their 
equivalent, frankly, for the 30-some-odd years I have worked in 
the company. We have always wanted to know our customers, 
wanted to know why they were dealing with us, so forth and so 
on. These were very clear, as you point out yourself.
    I was distressed that it would appear that there is no 
record of people having followed these policies from a 
paperwork implementation point of view, and obviously, there 
was not due diligence and so forth and so on.
    I don't believe that at this period of time across the 
business of the company, there was ever any pattern of us being 
a ``easy bank,'' a bank where dirty money comes because they 
know that we won't keep track of it. I don't think there are 
many examples of us taking customers who are clearly on the 
other side of that line.
    There have been errors, but I was not concerned that said, 
hey, were we really running this company poorly at that time, 
and so I had a mixed set of feelings as you were asking your 
    Senator Levin. You told our staff investigators, Mr. Reed, 
that you had heard from Mexican businessmen as early as 1993 
about possible corruption involving Raul Salinas ``inserting 
himself in local business deals inappropriately.'' How is it, 
then, that he became a client of a Private Bank? Apparently, 
what you had heard was never transmitted to the folks who were 
considering him as a client, or was it?
    Mr. Reed. First of all, I never repeated it to anybody 
until asked as a part of this investigation, and so it wasn't 
    Second, I think if you look at the minutes of my talk with 
your staff, I said 1993 or 1994, and frankly, I am trying to 
figure out which it was.
    The other thing is I think you would find in my 
communication with your staff is I didn't use the word 
``corruption.'' I said I had heard, and this is true. I had 
been in Monterrey, Mexico, calling on some customers, played 
some golf. After golf, I was sitting around the table and a 
couple of these people were talking to each other, and they 
made the comment that led me to believe--first time I had heard 
any sense of impropriety on the part of the Salinas family, and 
as you know, I knew the Mexican situation reasonably well--of 
any kind of misbehavior.
    And what was implied in the conversation was that there was 
a brother--I didn't even know his name--of the president in 
Monterrey who was getting himself involved in business deals 
because of the relationship with his brother, and that this 
could embarrass the president.
    I don't believe I used, nor would it have been proper to 
say that there was any sense of corruption. There was a sense 
of possible embarrassment to the president, and I didn't repeat 
it because I don't make generally a sort of policy of repeating 
this type of comment about which I know nothing.
    Senator Levin. When Mr. Salinas was arrested, the head of 
your Private Bank at the time, Mr. Rukavina, suggested that 
Citibank move Mr. Salinas' assets to Switzerland for secrecy 
    \1\ See Exhibit No. 18 which appears in the Appendix on page 151.
    Mr. Reed. I am aware of that comment.
    Senator Levin. Here is the conversation. Mr. Rukavina, 
``Now, the thing is whether that--whether those accounts 
shouldn't be brought to Switzerland.'' ``The ones in London?'' 
``Of course.'' ``They are held under the trust, right?''
    And then this is what then happened. This is the 2:51 
conversation. Mr. Salmon, ``So, Rukavina's question is really, 
from a secrecy standpoint, should we move it out of London back 
to Switzerland?'' Mr. Homen, ``Yes. I mean, what's the best 
structure to''--it is unintelligible there. Mr. Salmon, ``I 
don't think if we move it from London to Switzerland, London 
will be able to destroy its records.'' Ms. Bevan, ``No, that's 
right. You'd see a transfer.'' Mr. Salmon, ``So, I don't know 
what would necessarily be gained by moving everything to 
    Now, does that conversation bother you that the first 
reaction to an arrest is effort made to preserve the secrecy of 
the account rather than what the heck is going on with our----
    Mr. Reed. Sure, it does. I mean, this is simply wrong.
    Senator Levin. In your statement, I believe you said that 
Citibank handled Salinas appropriately, and let me ask you a 
number of questions.
    The private banker here, your private banker, used an alias 
when introducing the client to Citibank in a branch bank; took 
Mr. Salinas' word about a construction company, never learned 
the name of the company, never learned what the business was, 
what his interest was, what the sale price was; took Mr. 
Salinas' cashier's checks by the millions to deposit with 
Citibank without knowing the source of the money, getting any 
references from the bank involved, without knowing whether the 
cashier's checks were obtained from cash deposits.
    And then--I'll just leave it right there. Do those facts 
trouble you?
    Mr. Reed. Yes, the facts trouble me, but what troubles me 
more, Senator, is where did you hear that I said that this was 
handled appropriately.
    Senator Levin. I thought in your statement, you indicated--
and I may have misread your written statement--that Citibank 
handled Mr. Salinas appropriately, and if I misread your 
written statement----
    Mr. Reed. I think----
    Senator Levin [continuing]. I would withdraw that part of 
the comment.
    Mr. Reed. I think that we are on record as saying that 
there were a number of policies that were not followed. It 
would therefore be difficult to say that it was handled 
    Senator Levin. Fine.
    Senator Collins. We will have a second round of questions.
    Senator Cochran.
    Senator Cochran. Thank you, Madam Chairman.
    When the Subcommittee began its hearing today, I made the 
comment that our staff had done an enormous amount of work to 
obtain information about the effectiveness of U.S. laws and 
regulations to combat money-laundering, and I wonder, since we 
have now had the presentation of the full report of the staff 
and other testimony as well, whether or not it has occurred to 
you or others that we have passed a new law relating to 
financial services and whether or not there is anything in that 
new law that strengthens the effectiveness of U.S. laws 
regarding money-laundering or impacts the way financial 
institutions, not just banks, but insurance companies and 
others, should adopt policies like Know Your Customer and other 
good banking practices. What is your reaction to that?
    Mr. Reed. Senator, I am unaware of anything in the law that 
has recently been passed that would specifically require that 
this be extended.
    In the case of Citigroup, as we have testified, we in 
fact--and this is a question of simply taking banking practice 
and spreading it throughout the entire corporate structure--we 
in fact have applied our rules with regard to money-laundering 
across the company, and I think you will find as other 
institutions begin to come together, as ours has, that we will 
have in fact a cultural transfer and it will have the effect 
that you are asking about, but to the best of my knowledge--and 
I can't in honesty say that I have read every line of the 
proposed new law----
    Senator Cochran. Well, we have not either.
    Mr. Reed. But to the best of my knowledge----
    Senator Cochran. I hope somebody has.
    Mr. Reed [continuing]. There is no specific requirement on 
this subject.
    Senator Cochran. I wonder if the change in your policy 
about targeting customers for your private banking business has 
already had an effect. You talked about the fact that you are 
trying to seek out entrepreneurs for your Private Bank, those 
who build wealth, who build businesses, and create jobs. The 
question is whether this strategy, rather than targeting public 
figures, per se, or people because they are famous, is going to 
limit the vulnerability of private banking to money-laundering.
    Mr. Reed. Senator, I think it has already. I think this 
hearing, as I said in the beginning, is going to have the 
effect of beginning to create a de facto set of standards for 
at least the American industry, and I would hope we could 
propagate it beyond that. So I think it has already, and I 
think it will have that effect.
    Senator Cochran. Recently, we heard some talk and there has 
been an administration report about money-laundering in Russia. 
You seem to have avoided any problems in Russia. Do you 
attribute this to the new policies or policies in combination 
with other factors, like the general instability there? Would 
you have any advice for anyone doing business in Russia with 
regard to money-laundering problems?
    Mr. Reed. Senator, we have been fortunate. I have been very 
careful not to say anything because we all live in glass 
houses. This is a tough business.
    I believe in the case of Russia and in the case of some 
other locations that it has been a part of our new policies, 
but more than that, I think it has been an attitude on the part 
of the company. I think that the management of the company 
fully understands that we are serious about this, and there are 
clearly areas of the world that are much more vulnerable from a 
customer point of view.
    It is very difficult to imagine how somebody could have 
legitimately made money in some of these locations until very 
recently, and, therefore, there are large sums of money that 
have come from Russia, from other countries, that while you 
don't want to make general statements, you could certainly be 
leery that this is an area of the world where it is hard to 
imagine how people could be legitimately making money and being 
    So we have been fortunate. I think it reflects policy. I 
think it reflects standards, and I think it reflects a 
seriousness within the company about the difficulties here and 
about the importance of avoiding some of these problems.
    Senator Cochran. Has our investigative staff inquired of 
you or your officials about your experiences in avoiding 
problems in Russia or of any other banking institution to your 
    Mr. Musi. No, they have not.
    Senator Cochran. What about being contacted by the 
administration in the preparation of the Summers-Reno money-
laundering report? Was anyone from the administration in 
contact with Citigroup or any of your officials about your new 
procedures or how you avoided past mistakes?
    Mr. Musi. Not to the best of my knowledge, Senator.
    Senator Cochran. Let me ask you one other thing. We have 
got a lot of laws that apply just to U.S. companies. We do not 
have jurisdiction over foreign companies. There is, of course, 
a problem in international trade. We try to abide by rules 
ourselves, and then when others do not abide by the rules, we 
end up bearing the brunt of those transgressions either from 
economic disadvantage or corruption that we cannot do anything 
about that benefits foreign companies and it puts us at a 
    You are talking about all these countries where you do 
business. In this general area of international businesses, how 
do we get the other banks based in other countries or other 
financial institutions to abide by the same standards?
    I think you have come up with some international 
suggestions or international rules. In your statement, you talk 
about that. How do we go about getting that implemented and 
getting others to recognize the legitimacy of applying these 
rules worldwide?
    Mr. Reed. I think, Senator--first of all, I think it is 
very important for all the reasons that you mentioned.
    I think the mechanisms frankly are hearings of this sort 
which raise to the public's attention these kinds of issues, 
and bankers will read this.
    I think that there is a very good mechanism that ties the 
central banks, the Federal Reserve in our case, with the 
central banks of the more developed countries, at least the G7 
that meets routinely in Basel in Switzerland, and this quite 
legitimately can be a subject of a discussion amongst the 
governors of the central banks, all of whom I think would 
subscribe to the same general set of values that we have with 
regard to this issue.
    Frankly, if you can capture the attention of the banks in 
the major developed countries, you won't have a problem with 
the others because the money that we are talking about ends up 
in Switzerland or in New York or in London or in Tokyo. So, if 
we can get the European banks, the Japanese banks, the American 
banks generally operating within a similar framework of 
values--and this can be fostered by the cooperation of central 
bankers from those countries and this mechanism that already 
exists in Basel, Switzerland, for talking about subjects of 
this sort, plus, very frankly, the helpful comments that have 
come from the World Bank with regard to corruption generally--
and as you know, the World Bank has spoken out with regard to 
corruption and corruption issues--this creates an environment 
where the industry can come together.
    Today, there are, as you know, wildly different practices. 
There are still major players in this industry who would not 
share any of the values that are being discussed today in this 
    Mr. Musi. If I may, Senator, can I add to that?
    Senator Cochran. Yes, sir.
    Mr. Musi. One of the efforts we are trying to coordinate is 
spearheading, if you want to call it that, a private-sector 
initiative, but in conjunction with the regulators, working 
with Transparency International over the last 6 months. We have 
had meetings with major financial institutions who are in the 
private banking business throughout the world trying to bring 
together a set of basic practices that are best practices and 
can be adopted on a uniform level across the world. We believe 
this can only be addressed through a global initiative.
    We have obviously tightened up our standards in the United 
States and we can make sure that the banks follow those 
standards, but to ultimately achieve the goal that everybody is 
setting out to achieve here, this really needs to be addressed 
on an international level, and we think that by spearheading 
this effort--and we have shared what we believe are the best 
practices, taking into consideration the guidelines that have 
been issued by the Fed, taking into consideration the industry 
practices as we talk to our peer-group banks, and we tried to 
put together a best practices paper that we could share with 
all of the major financial institutions who are willing to come 
to the meeting, day one.
    We obviously have gotten more interest over time, and as we 
proceed in this effort, more banks come to the table as they 
recognize that they have to deal with the same kinds of issues 
and are susceptible to the same types of vulnerabilities.
    We have also shared the KYC policy that we have discussed 
that the Private Bank issued in September 1997, and finally, 
the recently issued new anti-money-laundering policy for all of 
Citigroup. It is our expectation that they will then share 
those policies with us as well. We will go forward with the 
presentation of a uniform best practices memo for all of the 
major international private banks and then bring the regulators 
into the process again and make sure that everybody is in line 
with their expectations as well.
    Senator Cochran. Did you find any particularly troubling 
challenges? You merged. For example, I think one of the 
companies that are now part of the Citigroup is Travelers 
Insurance Company.
    Mr. Reed. Yes.
    Senator Cochran. After that transaction, you point out in 
the statement some changes that were made in regulations and 
policies and standards and education and training programs that 
were then extended to this new company. What can you tell us 
about the efficacy of that initiative?
    Mr. Reed. Well, I think what has happened, Senator, is that 
we have applied these standards that we have talked to across 
the entirety of Citigroup.
    Historically, most of the Travelers' organizations were 
domestic United States in their orientation, and to some of 
them, the notion of money-laundering was in fact a new one, 
particularly in the context of the private banking and global 
flows, but, obviously, we are vulnerable there, too, 
particularly through Smith Barney, a brokerage firm that has 
international customers and that maintains offices where there 
are many offshore banking customers and the insurance business.
    So what we have done is we have sort of raised the 
awareness. To most of the people involved, it has been new 
news. It has not been a subject that they had been related to 
before, and I think what it has done is it's created a uniform 
set of policies and procedures across the company and it makes 
sure that our standards are company-wide and not specific to 
one institution or not another.
    Senator Cochran. Thank you.
    Senator Collins. Thank you, Senator Cochran.
    Mr. Reed, I want to go back to the conversation that 
Senator Levin asked you about which occurred the day after Mr. 
Salinas was arrested, and I want to direct your attention to 
part of the discussion about what to do with his accounts.\1\
    \1\ See Exhibit No. 18 which appears in the Appendix on page 151.
    Mr. Salmon says, ``I don't think that if we move it from 
London to Switzerland, London will be able to destroy its 
records.'' Sarah Bevan responds, ``No, that's right. You'd see 
a transfer.'' Mr. Salmon, ``So I don't know what would 
necessarily be gained by moving everything to Switzerland.'' 
Mr. Salmon, ``OK, fine. Then my feeling is this. I don't think 
you're going to be able to wipe out the history of London. . . 
. I personally don't see any benefit in moving it, in moving it 
to Switzerland.''
    Your reaction was the same as mine. You said this is wrong.
    Mr. Reed. Correct.
    Senator Collins. But the conclusion that I draw from this 
conversation is the Citibank officials involved were not 
discussing whether it was right or wrong. They were discussing 
whether it would work or not, whether it was feasible, and they 
only abandoned the idea of transferring the funds from London 
to Switzerland when they realized it would not erase the 
evidence of the transfer. Do you think that is a fair 
conclusion for me to draw?
    Mr. Reed. That is a fair reading. I would like to be 
charitable to think that had they found that it would work, 
that they would have had second thoughts, but that's 
    This is a level of immaturity and judgment that is simply 
not acceptable. I mean, this kind of thought--I mean, when you 
have a problem, you have a problem, and this idea of how can 
you hide the problem and obfuscate the facts is simply 
unacceptable, period. There is no excuse for it.
    Senator Collins. My final question for you is this. In 
retrospect, when you look at the 3 or 4 years of audit reports 
that raised a lot of red flags, some of them giving very poor 
audit reviews, very poor scores, that repeatedly identified a 
risk of money-laundering exposure for the bank, do you think 
that Citibank acted aggressively enough to address the problems 
that were being identified over and over and over again by 
these audits?
    Mr. Reed. Senator, again, 20/20 hindsight, obviously I 
would prefer not to be here talking about this, and so you 
would say obviously I wish we had been more aggressive, cleaned 
it up more quickly, but I have to be honest. As I said in my 
comments at the beginning, the thrust of these bad audits, 
unfortunately, was not limited simply to money-laundering 
problems and failure to follow procedures. We had a more 
generalized set of control problems that involved how we 
managed money and customer accounts and a whole variety of 
things that really was at the core of our ability to operate 
    I think that we can be legitimately criticized that it 
wasn't done maybe a year earlier, but for an organization of 
our size, I think you were always talking about a couple of 
years. So I wouldn't justify three, but given the nature of the 
problem, the number of people involved, the degree to which 
there are going to have to be cultural changes and the 
leadership required, I think it is fair to say that I 
understood even as we got into this that it was going to be a 
multi-year process.
    Mr. Musi. I think another point that needs to be made, 
Senator, is that during that same time period, the regulatory 
guidelines and expectations were evolving as well, as everybody 
tried to get their arms around this issue and define best 
practices. It was during that period, post-Salinas, that the 
Fed ultimately issued their guidelines on private banking. It 
was during that period that the Private Bank working with the 
regulators developed its KYC policy and its overall anti-money-
laundering program. So a lot was happening at that time, and I 
think the point that Mr. Reed made before about audits being a 
lagging indicator, the positive audit results that we achieved 
throughout 1998 are clearly the result of the efforts that we 
took during the latter part of 1996 and throughout 1997.
    Senator Collins. I do want to acknowledge that, clearly, 
there has been significant improvements, and I think in the 
interests of a complete record, it is important that that be 
    Senator Levin.
    Senator Levin. In 1995, that telephone conversation shows 
that the first reaction of your people was how do we continue 
to hide Salinas' money, how do we move Salinas' money, and you 
very forthrightly just indicated that that is unacceptable 
    Yet, in 1998, September, we have the Abacha situation. Now, 
you have Nigeria seizing funds from General Abacha's relatives 
and his associates, and the Private Bank, your Private Bank, 
actually lent his sons $39 million in order to transfer that 
money from London to a Swiss account and elsewhere. That 
represents the approval of that overdraft.\1\
    \1\ See Exhibit No. 16 which appears in the Appendix on page 148.
    It seems to me in principle you have got the same kind of 
reaction. You have got the Nigerian officials saying this money 
is corrupt and we are seizing it from General Abacha, who had, 
I believe, died in an airplane crash a couple years before. You 
have got the Private Bank going out of its way to help those 
sons move $39 million. It is actually lending those sons money 
in order to accomplish that.
    There was a time deposit. It was not yet due. So the bank 
lent the sons the money until the deposit was due and then 
reimbursed themselves. Is that appropriate conduct? Is that 
conduct you believe meets your current standards?
    Mr. Reed. Senator, I don't know. Until I heard this today, 
this afternoon, I had not heard of this particular transaction, 
and you would have to understand the context. I mean, if you 
want to pose it as a strictly theoretical question, taking only 
what you have said as the fact situation, then the answer is 
self-evident. I don't believe that was the circumstances.
    Mark, do you know anything about this?
    Mr. Musi. Yes. Actually----
    Senator Levin. Let me just correct my factual predicate 
here. Apparently, it was not an airplane crash. He had died of 
a heart attack in June 1998, General Abacha, so just to correct 
that part of the premise.
    Mr. Musi. Thank you, Senator.
    Senator Levin. Not that it changes----
    Mr. Musi. That doesn't change the answer I am about to 
    In terms of this situation, we found ourselves in effect 
between the proverbial rock and a hard place. We had already 
made a decision to exit the relationship because of the nature 
of the client, and we had been executing that exit strategy. 
And actually, this movement of funds was in support of that 
exit strategy. Clearly, we wanted to segregate our ties with 
these clients as quickly as possible, and to facilitate that 
process, we allowed the loan to be set up, the money to be 
removed from the bank. Then we had clear ownership of the 
relationship, and it expedited our exit strategy.
    We didn't have a basis at the time from a legal point of 
view in contacting our people to freeze the assets because we 
were not in the position to do so. So, in carrying out the exit 
strategy, this was the transfer of funds to facilitate that.
    Senator Levin. They requested these funds; is that correct?
    Mr. Musi. As part of our exit strategy.
    Senator Levin. Well, according to this, the client had 
requested the remittance of the funds.
    Mr. Musi. Well, that's what----
    Senator Levin. Is that your exit strategy, or is it their 
strategy to hide those funds?
    Mr. Musi. No. It's their exit strategy to remove 
themselves. It's our exit strategy to move them out of the 
bank, and this is the process that we used to move that process 
    Senator Levin. To move to a Swiss bank where it would be 
more secret?
    Mr. Musi. That's their choice as to where they want to take 
their business, Senator.
    Senator Levin. Let me just make sure I understand this. The 
initiative to do this was your initiative or their initiative?
    Mr. Musi. Working with the client, we contacted them and 
told them that we wanted to sever our relationship. As part of 
that process, we allowed this transfer to go through so that we 
could totally sever the relationship as quickly as possible.
    Senator Levin. And whose initiative was it? Who initiated 
it? I know you were working with them, but I mean who initiated 
this transfer?
    Mr. Musi. I don't know who actually spoke to the client.
    Mr. Reed. Senator, if I understood----
    Senator Levin. No. I want to know did you initiate it or 
did the client initiate it.
    Mr. Reed. It sounds--if what I understand--it sounds as if 
we had made a decision that we wanted to exit these 
relationships. We approached the customer telling them that. 
They said--and we had a time deposit which as you point out 
didn't mature, and apparently, in order to get them out of the 
bank, we chose to allow them to break the time deposit. It 
sounds to me as if we initiated it.
    Senator Levin. But the bank still had $17 million in 
deposits after this; is that correct?
    Mr. Reed. I don't know.
    Senator Levin. Do you know, Mr. Musi?
    Mr. Musi. I am aware of that, yes.
    Senator Levin. That is correct; is that right?
    Mr. Musi. Yes.
    Senator Levin. So you were not terminating your 
relationship. You were maintaining----
    Mr. Musi. No.
    Senator Levin [continuing]. Seventeen million dollars.
    Mr. Reed. No. We had made a decision to exit. The process 
by which you do that has to take--depending on the nature of 
the deposits and so forth and so on takes time, but there was 
no ambiguity about the decision.
    Senator Levin. Did they know that, that you had reached----
    Mr. Reed. Obviously so or they wouldn't have been willing 
to make this move.
    Senator Levin. It is not so obvious as to why they made the 
move because Nigeria was grabbing their resources and their 
assets. So, when you say that they initiated or they knew of 
the move, that you were motivating this move, that is very 
different from what the facts were on the ground which was 
their assets in Nigeria were being seized, and they, according 
to this document here, initiated this request for the transfer 
of money and for the overdraft. Now, that is what that 
    Mr. Reed. Mark, did we ask them to move this money?
    Mr. Musi. We had already contacted the clients and informed 
them of our exit strategy.
    Senator Levin. All right. You have also received some 
advice from Mr. Rogers who is in charge of the Bongo accounts. 
Your top manager in Africa said the following, that you should 
be very careful about closing the Bongo accounts in 1998 
because--now, this is 1998, so your 1997 initiative is supposed 
to have been underway--but here is what he says in 1998 in an 
e-mail, November 6, ``Whatever internal considerations we 
satisfy, the marketing fallout is likely to be serious.'' \1\ 
That is what he says will happen if you close the Bongo 
accounts. I do not think your new policy has taken hold of Mr. 
Rogers in November 6, 1998, has it?
    \1\ See Exhibit No. 15 which appears in the Appendix on page 147.
    Mr. Reed. Doesn't sound like it, but, Senator, let me say 
something. I have been in the business 35 years. I have never 
ever encountered a circumstance where our dealings with a 
customer as an individual account had repercussions in terms of 
our franchise.
    Now, I am sure there are junior officers within Citi in the 
field who worry that if you are dealing with a minister of 
finance or a president or somebody in the central bank and that 
we make a decision about their personal account that there 
might be some danger that the banking business of the overall 
company can be impacted, and that is sort of the thrust of what 
is said here. Never have I experienced that. I have dealt with 
ministers of finance, heads of state, so forth and so on around 
the world. I have dealt with franchises that were at risk. I 
have opened. I have closed. I have never in my experience found 
any linkage.
    So the concerns that people might represent as they have 
here in terms of potential linkage between how you handle an 
individual account and the bank's business in the country may 
exist in the minds of some junior people, but it has never in 
my experience been a problem for us.
    Senator Levin. Well, that is not the point of the question, 
though. The point is he is saying do not close these accounts 
or be very careful before you close them because this could 
have an effect on--and these are his words----
    Mr. Reed. On our franchise in the country.
    Senator Levin. And on your marketing.
    Mr. Reed. And I am simply saying I have never experienced 
    Senator Levin. And on your marketing.
    Mr. Reed. Yes.
    Senator Levin. And my question to you is, whatever the 
effect is of closing an account which should not be open, 
shouldn't it be closed?
    Mr. Reed. Obviously so.
    Senator Levin. So then he did not get the point of your 
1997 policy.
    Mr. Reed. He didn't get the point. That's correct.
    Senator Levin. I think I am out of time. I have just a 
couple more questions. My red light is on.
    I think what we have to face is whether or not our banks 
should make money off deposits which are the result of dirty 
money, either corruption, looting a treasury, bribes. Those are 
not specifically identified in our current money-laundering 
laws, but I think you would agree that that is dirty money.
    Mr. Reed. I sure would.
    Senator Levin. And the question that I think we have to 
face is whether or not our banks are going to profit off those 
kinds of deposits, even though other countries' banks might.
    You talked about international standards, and I think it is 
a fair question because we would hope that everybody would in 
the world would be bound by the same rules, but they are not. 
It is not true when we sell weaponry either. There is a lot of 
things we will not sell that other countries will sell, and my 
    Mr. Reed. Senator, I don't think there is any significant 
profit in the American banking system from such funds.
    Senator Levin. My question, though, is this. Would you 
agree that we should treat corrupt money, which comes from 
bribes, or looting a treasury, in the same way that we treat, 
for instance, drug money?
    Mr. Reed. Surely. Obviously so.
    Senator Levin. Good. Because that would require a change in 
the law, and we are considering some changes in laws which I am 
drafting and I have shared with the Majority. They have not had 
an opportunity, because it is still very much in flux, 
obviously to review what that draft is, but I would hope that 
you and your colleagues in the American banking industry will 
take that position that money-laundering is a serious and 
growing problem, that we cannot condemn corruption without 
being sure that our banks do not profit from corruption abroad.
    We thought we had made some progress in 1986. We have a 
long way to go. You folks, I think, thought you had made some 
progress when you issued your regs in 1991 and 1992, which were 
ignored until 1997, and then you have tightened up your 
internal rules, hopefully, now, despite the 1998 review of the 
Federal Reserve. You are on track to making sure that you do 
not profit from accounts which are the result of dirty money or 
money-laundering or corrupt funds.
    I really hope that you will read all of the testimony 
today, the part that you did not see or witness, because I 
think that it will reinforce hopefully some determination to 
end practices where your bank or any bank will profit from 
dirty money. And we need to enlist the support of the American 
banking community in ending this because it is intolerable that 
our banks that we put so much confidence in should profit in 
any way from money which is either illegal drug money or the 
product of looting a national treasury or the product of 
corruption or bribery.
    Mr. Reed. Senator, I think as I indicated in my opening 
statement that we share your interest. I think the regulators 
do, too, and they have been, as apparently you are, working on 
trying to formulate how we can do this.
    I would like to repeat, however, because I just feel I 
should, on behalf of Citi, but on behalf of all the banks in 
the United States, this is a problem. This is a problem that 
must be addressed. I do not believe that either my bank or the 
American banks in general have any significant amount of this 
money with them. That isn't zero, but you would not notice it 
in the third decimal place of their earnings. It simply is not 
a big factor in the banking practice to the best of my 
knowledge of any American institution.
    Senator Levin. I hope that message gets to your people 
because you see in the response to the possible closing of 
accounts that your people who are running your Private Bank are 
saying, ``Whoops, wait a minute. That could affect our 
deposits.'' So I hope that last message gets through to your 
    Mr. Reed. I share your view.
    Senator Collins. Mr. Reed, I want to thank you and the 
other members of Citibank who testified today not only for your 
testimony, but also for your cooperation with this probe. I 
realize that the money-laundering problems that we have 
discussed are not unique to Citibank, and I understand that 
this obviously was not pleasant to have this kind of scrutiny 
on your operations. Nevertheless, I think that the Subcommittee 
has identified some very troubling and serious concerns, and I 
hope that as with the Salinas case, which you described as a 
learning experience, that the testimony before the Subcommittee 
will also further advance that learning experience of all those 
at Citibank.
    Mr. Reed. Madam Chairman, thank you.
    Senator Collins. At this point, the hearing is now recessed 
until 1 p.m. tomorrow afternoon.
    [Whereupon, the hearing was recessed, to reconvene at 1 
p.m., Wednesday, November 10, 1999.]



                      WEDNESDAY, NOVEMBER 10, 1999

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:05 p.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins and Levin.
    Staff Present: K. Lee Blalack, II, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Glynna Parde, Chief 
Investigator and Senior Counsel; Linda Gustitus, Minority Staff 
Director and Chief Counsel; Elise J. Bean, Minority Deputy 
Chief Counsel; Robert L. Roach, Counsel to the Minority; Claire 
Barnard, Detailee/HHS; Carl Gold, Congressional Fellow; Robert 
Slama, Secret Service Detailee; Regina Keskes, Intern; Ryan 
Blalack, Intern; Frank Brown (Senator Specter); Julie Vincent 
(Senator Voinovich); Anne Bradford (Senator Thompson); Marianne 
Upton (Senator Durbin); Jonathan Gill, GAO detailee (Senator 
Lieberman); and Shelly O'Neill (Senator Akaka).


    Senator Collins. The Subcommittee will please come to 
    This afternoon the Subcommittee continues its investigation 
of the complex and confidential world of private banking and 
its vulnerabilities to money laundering. Yesterday we heard 
disturbing testimony which indicated that private banks, 
because of their willingness to ensure secrecy, may be very 
attractive to criminals who want to launder money. Our hearings 
described the nature of private banking and the degree to which 
private banks market secrecy to their very wealthy clients, a 
service that, while beneficial for many legitimate customers, 
is also appealing to criminals who want to hide their dirty 
    Private banks frequently help their clients move enormous 
sums of money in a fashion that obscures the client's 
relationship to the funds, even from the private bank's own 
employees. The Subcommittee's investigation found that private 
banks routinely use code names for accounts, concentration 
accounts that disguise the movement of client funds, and 
offshore private investment corporations located in countries 
with strict secrecy laws, so strict, in fact, that there are 
criminal penalties in these jurisdictions for disclosing 
information about the client's account to banking regulators in 
the United States.
    Yesterday we also received testimony from Citibank private 
bankers, their supervisors, and the bank's chairman about 
Citibank's handling of several private bank accounts. That 
testimony highlighted in striking detail the reputational and 
legal risks that banks can encounter when they fail to collect 
and document information about their client's source of wealth 
and, just as important, when they fail to monitor those 
clients' accounts for suspicious activity.
    Today we turn our attention to some of the broader policy 
issues related to how private bankers do business and the 
implications of those business practices for our banking system 
and for Federal regulators. We will also receive an insider's 
perspective of how private banks operate from a former private 
banker who is now in prison for money laundering. We will also 
hear from a noted scholar who will discuss the problems related 
to the movement and flight of capital, both legal and illegal. 
Finally, we will discuss with banking regulators their growing 
concerns about private banking's susceptibility to money 
laundering and the obstacles that they face in conducting 
effective oversight.
    I look forward to receiving the testimony of our witnesses 
today, and at this time I would like to recognize Senator 
Levin, who initiated this investigation, for any opening 
comments that he might have.
    Senator Levin.


    Senator Levin. Thank you, Madam Chairman, and thank you 
again for your very strong support and the very important 
assistance that your staff has given in this joint effort.
    Yesterday, as you indicated, we looked at a case study of 
Citibank private banking and saw the largest American bank with 
the greatest resources at its disposal and pretty good policies 
in theory find itself the bankers to a rogues' gallery of 
    Citibank had Raul Salinas of Mexico, about whom the bank 
had absolutely no written documentation or verification on the 
source of his wealth, despite Citibank policies to the contrary 
and for whom the bank concocted an elaborate structure of 
    Citibank had Asif Ali Zardari of Pakistan as a client, even 
though John Reed, the CEO of the bank, had been advised by his 
own Citibank staff to stay far away from him because of 
allegations of corruption.
    Citibank had Omar Bongo of Gabon as a client, with a 
private banker who said he never once asked Mr. Bongo about the 
source of his wealth, despite bank policies requiring him to do 
    And Citibank had the sons of Sani Abacha from Nigeria to 
whom the bank, after the country of Nigeria began a public 
corruption investigation into General Abacha, lent $39 million 
so that the sons could remove into a more secret place $39 
million from a certificate of deposit without penalty.
    Those are the deeply troubling stories that we heard 
yesterday. Citibank argues that was then and this is now, and 
the operation of the Private Bank has changed considerably in 
the last few years. But the actions with respect to Mr. Bongo 
and the Abacha sons occurred in 1998, and it was just last year 
when the Federal Reserve told Citibank board members that the 
Private Bank had ``significant weaknesses in internal controls 
that exposed Citibank to excessive legal and reputational 
risk.'' It also conveyed concern about the ``length of time,'' 
in their words, that the Private Bank was taking to correct 
deficiencies and the ``relative slowness of progress,'' again, 
in the words of the Federal Reserve.
    Because it was only 6 months ago that the Federal Reserve 
lifted the requirement that the board's Audit Committee review 
Private Bank issues on a quarterly basis, the best that I am 
able to say is that not only is the jury still out, it just 
went out on the changes that have occurred at Citibank with 
respect to private banking.
    I hope the changes take hold and become a model for all 
banks worldwide. But given the track record, strong policies in 
1991 and 1992 in Citibank which didn't take hold, and no action 
taken to enforce those policies with resources and 
determination until 1997, and given the sad state of affairs in 
case after case that we reviewed in this investigation, it will 
take a large and steady dose of due diligence with respect to 
enforcing their own policies in all corners of the Private Bank 
to change the actual conduct of Citibank's Private Bank.
    Our investigation has taught us that through the private 
banking system U.S. banks are too often conduits for dirty 
money. That is because due diligence has not been effective, 
and I believe that is in part because there is no specific 
requirement for due diligence in law; because predicate crimes 
for money laundering are insufficient since they don't 
explicitly include foreign corruption or bribes; and because 
private banks have secrecy tools made available to the wealthy 
to operate secret accounts in secret corporations and secret 
jurisdictions. I will be introducing legislation later today 
that addresses these and other issues raised during the course 
of the investigation.
    Among some provisions of the legislation would be 
prohibiting the opening or maintenance of an account by U.S. 
banks for a foreign entity unless the owner of the account is 
identified on a form or record maintained in the United States. 
This will make sure that there will be documentation in the 
United States of the beneficial owner of any account managed in 
the United States, just as there is now for U.S. companies and 
entities. It will include a prohibition on the use of 
concentration accounts for individual accounts without 
earmarking the funds to the client. It would include a 
statutory requirement for banks to conduct due diligence, and 
add crimes of bribery, kickbacks, fraud, and corruption in 
foreign countries as crimes for which money laundering applies. 
I was pleased yesterday to hear that Mr. Reed will support a 
legislative change to make foreign corruption and bribes 
criminal offenses for which U.S. money-laundering laws would 
    Today we will be hearing, as our Chairman indicated, from 
Antonio Giraldi, a former private banker to American Express, 
Bankers Trust, and Citibank. Mr. Giraldi was the subject of a 
landmark case in the private banking industry in which he was 
convicted of money laundering or engaging in similar practices 
that we talked about yesterday with respect to Citibank. 
Giraldi's private bank client, however, turned out to be a drug 
trafficker, and a jury found him guilty of willful blindness 
with respect to that fact. He is now serving 10 years in 
Federal prison.
    We will also hear from Raymond Baker, an economic scholar 
at Brookings, who has traveled the globe talking to bankers, 
business people, and financiers, learning about how dirty money 
moves around the globe. And, finally, we have representatives 
from the Federal Reserve and the Office of the Comptroller of 
the Currency, the regulators of the private banks which are the 
subject of this investigation.
    Again, I want to thank you, Madam Chairman, for your 
support and your leadership.
    Senator Collins. Thank you, Senator Levin.
    Pursuant to Rule XIV of the Permanent Subcommittee on 
Investigations Rules of Procedure, the Citibank requested 
yesterday through its counsel that a series of questions be 
directed by the Chairman or other members to the Subcommittee's 
investigative staff. At my direction, the Subcommittee staff 
has answered these questions in writing, and without objection, 
the questions and answers will be made available to the public 
as well as included in the printed hearing record.\1\
    \1\ See Exhibit No. 25 which appears in the Appendix on page 204.
    At this point I would like to swear in our first witness 
today. He is Antonio Giraldi. He was a private banker before he 
was convicted of money laundering in 1994. Mr. Giraldi joined 
Citibank as a private banker in 1986 where he was supervised by 
Amy Elliott, who testified before the Subcommittee yesterday. 
In 1988, he joined Bankers Trust and later became senior vice 
president for American Express Bank International.
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Giraldi. I do.
    Senator Collins. Thank you. Mr. Giraldi, you may proceed.


    Mr. Giraldi. Madam Chairman, Senator Levin, and Members of 
the Subcommittee, good afternoon. My name is Tony Giraldi, and 
I am here today to talk with you about the international 
private banking culture and its vulnerabilities to money 
laundering. I would like to share my personal experiences 
during my career as a private banker at three financial 
institutions and the experiences of my many colleagues and 
friends within the industry.
    \2\ The prepared statement of Mr. Giraldi appears in the Appendix 
on page 1003.
    I was born in Japan and raised in Latin America, as my 
father was a senior executive with Bank of America until his 
retirement when he became the CEO of the Latin American Export 
Bank. As Americans, my parents were very proud of their country 
and sent me back here for my schooling at Culver Military 
Academy, Baylor University, and Georgetown University Graduate 
School. I began my banking career in 1981. I became a private 
banker in 1986 with Citibank and later worked as a private 
banker at Bankers Trust and American Express.
    For decades, U.S. financial institutions have catered to 
wealthy non-residents following closely the patterns of their 
counterparts abroad in this lucrative field. Forecasters 
estimate that wealthy individuals will have tens of trillions 
of dollars to invest by next year, representing billions of 
dollars in potential revenues for financial institutions 
worldwide. The forecasters also predict the amount of funds 
laundered in the trillions of dollars and growing 
disproportionately to legitimate funds.
    For generations, this highly competitive international 
private banking industry has managed the assets of the world's 
wealthiest individuals, many of whom earned their wealth 
legitimately and made legitimate use of the system. 
Unfortunately, with recent growth of criminal enterprises, 
political corruption, and narcotics trafficking over the past 
several years, the culture and services provided by financial 
institutions has become extremely vulnerable to illegal 
activity. Unless these vulnerabilities are corrected, private 
banking systems will become increasing targets of opportunity 
for tainted funds.
    I have personally experienced the culture which our 
financial institutions apply in recruiting international 
assets. I would characterize this culture as ``don't ask, don't 
tell.'' This has allowed money launderers to significantly 
penetrate banks and brokerage firms. Money launderers have 
become more sophisticated and have learned to use private 
banking products to their advantage. They no longer need to 
carry Samsonite suitcases of cash into our U.S. banks here and 
abroad. Instead, they utilize financially savvy representatives 
who take advantage of the products and services that private 
banks aggressively market. These products and services can be 
used to legitimize them and their businesses and to often gain 
    In my experience and the experience of many of my 
colleagues, private bankers are encouraged by managers at many 
levels to promote lucrative products and services. There is 
little, if any, regard for the evaluation of where the business 
is coming from or where it has been.
    There were many ways to pursue clients. At one 
organization, I witnessed private bankers making cold calls on 
prospects whose names were taken from a target list compiled by 
managers with little or no verification of source of funds. For 
many private bankers, the fact that this list was supplied by 
upper management was understood to mean that these prospects 
had the approval of the organization and should be signed up.
    Although it only happened infrequently and is even less 
likely today, relationships were sometimes established through 
walk-ins. This is a term that refers to foreign individuals not 
known to the bank who appear or call at the private bank 
seeking its services.
    At one institution, on two different occasions my superiors 
were willing to accept walk-in prospects who proposed to fund 
new relationships with $50 million.
    A referral was considered as validating the acceptability 
of a new relationship, even though the integrity of the 
referral source was seldom questioned. The source of funds in 
most cases is taken at face value as presented by the prospects 
and not verified.
    The training and guidance by senior managers that I 
experienced was minimal and focused primarily on cash 
transactions. Over the years, wire transfers between financial 
institutions have become the most commonly used vehicles to 
move tainted funds. Financial institutions contribute to this 
process by transferring funds through concentration accounts 
which contribute to the road blocks presented in money-
laundering investigations by separating funds from a client's 
    The foundation and selling point of the international 
private banking culture is secrecy. Overseas units of banks 
domiciled in countries where bank secrecy laws prevail stress 
secrecy to local and foreign clients in order to maintain a 
competitive position. They offer products and employ practices 
that facilitate secrecy.
    While legitimate clients utilize these services, they can 
also be utilized by criminal elements. For example, two 
products which promote secrecy are private investment companies 
and trusts. These entities create layers that obscure the 
identity of the beneficial owner of the funds through the use 
of shell corporation and secrecy laws. By layering, I mean the 
use of multiple offshore companies. The use of these products 
can be an impediment to law enforcement.
    It has been common practice for private bankers to employ 
practices in their daily activities that promote secrecy. For 
example, sometimes they talk to their clients in codes when 
discussing transactions. Most of the time private bankers 
travel as tourists so the authorities will not know that they 
are visiting clients on business.
    One reason offered for that practice is to protect the 
clients' identities from criminals who might do them harm. 
However, another possible result is that they do not want the 
authorities to discover that their clients are participating in 
capital flight.
    In addition to the fiduciary vehicles managed by bank trust 
companies, some of the more common products developed by 
private banks, which vary from bank to bank, are portfolio 
management, credit, and real estate. The courting and marketing 
of political figures, government officials, military leaders 
and their families, and close associates has been common in the 
past with some financial institutions. These types of clients 
are the most difficult in determining the source of funds.
    In the past, relationship managers were far more concerned 
with appearance than with substance when it came to issues of 
due diligence and what would later become the Know-Your-Client 
doctrine. If an acceptable level of due diligence could be 
fashioned with the guidance and encouragement of senior 
management, then the relationship managers would have done his 
or her job.
    To the best of my knowledge, no relationship managers known 
to me consciously attempted to legitimize what was known or 
believed to be proceeds of specified unlawful activity. 
However, no one seriously attempted to determine the actual 
origin of a client's funds. Our world, the international 
private banking culture, was all about playing the new deposits 
game the way that our senior management insisted we play it, 
about being rewarded by them when we succeeded and about being 
too naive to realize how dangerous a game we were playing.
    A money launderer can utilize the products and services 
described above to conceal his true identity and his funds. 
This fact, coupled with the demise of the recently proposed 
Know-Your-Client regulations, and the arrival of a whole new 
generation of cyber-savvy money launderers has compounded the 
difficulties faced by Federal law enforcement agencies and the 
Justice Department and bodes ill for their efforts to combat to 
evils associated with money launderers and their activities.
    If the issue of money laundering is to be addressed 
effectively, U.S. financial institutions at every level must 
interface with Federal law enforcement agencies. U.S. financial 
institutions must effect fundamental changes in their 
prevailing international private banking culture and product 
base. Senior bank managers must implement supervisory 
procedures designed to identify rogue relationships and 
relationship managers who manipulate international financial 
resources and activities for their own personal gains.
    Unless U.S. financial institutions move to make corrections 
in their vulnerabilities, the managers of international 
criminal enterprises will continue to use a highly imaginative 
and flexible banking system along with its products to handle 
the proceeds of their illicit operations and to legitimize 
themselves in the eyes of the international business community.
    U.S. financial institutions should no longer succumb to the 
established yardstick, ``If we don't accept this account, our 
competitors will.'' Thank you.
    Senator Collins. Thank you very much.
    We received comments from some banking officials, 
particularly at Citibank, that suggested that private banking 
really wasn't any more vulnerable to money laundering than 
other kinds of banking, than retail banking, than correspondent 
    Based on your experience being involved in private banks in 
three different institutions, do you believe that private 
banking is particularly susceptible to money laundering?
    Mr. Giraldi. I think it is more vulnerable than other 
banking services in that the main focus is one of secrecy and 
confidentiality, and the primary establishment of the 
relationship is done offshore. Although many of the investments 
can be done here in the United States, the actual foundation 
for the relationship is kept offshore. And the way that the 
marketing effort is done in many cases is one of promoting 
secrecy. So I do believe it is more vulnerable because those 
individuals who are looking for a secrecy element in their 
banking relationship will go to a private banker versus going 
to correspondent banking or regular banking services.
    Senator Collins. One of the striking aspects of the 
Subcommittee's investigation into this area is that Citibank 
had a lot of procedures, regulations, policies in place that 
should have prevented the problems with the case studies that 
we highlighted yesterday. And yet what seemed to be taking 
place was a culture that, in fact, encouraged non-compliance 
with all those regulations, with all those policies.
    And as you described the culture as a ``don't ask, don't 
tell'' culture in which there was little, if any, regard for 
the evaluation of where the business was coming from, it seems 
to me that what we have in too many situations is a policy of 
deliberate ignorance, of not wanting to go behind where the 
money was coming from, of not wanting to ask the hard questions 
because of concerns that the business would be lost or would 
have to be turned down.
    Is that an accurate impression?
    Mr. Giraldi. I believe they would--most private bankers are 
not deliberately not trying to locate the source of funds, but 
following a culture that is already in place. So I don't think 
that their purpose is to go out and look for clients regardless 
if the funds are tainted. I mean, I believe that most private 
bankers that work with reputable institutions would not accept 
a client that they had signs of bringing assets to the 
institutions that were from illegal sources.
    But I do believe that they don't go a step further because 
that is the way that the culture has always been. It is not 
necessarily because they are afraid that they will find 
something they don't want to look for, but that their practices 
have been to acquire deposits and to acquire investments and to 
maintain accounts and relationships for many, many years, and 
sometimes for generations. And so they follow the culture, 
which is just ``do as much as you can so that on the surface it 
appears like you are asking the right questions,'' but don't go 
a step further than that.
    Senator Collins. In the three financial institutions for 
which you worked, how much emphasis was placed on following 
Know-Your-Customer regulations and of finding out the source of 
    Mr. Giraldi. Well, there was very little training on Know-
Your-Customer regulations. Most of the training that we had was 
based on cash transactions and being aware and sensitive to 
individuals who might deposit large amounts of cash in the 
bank. And in the world of private banking, we have very little 
of that. Most of our accounts and our business is conducted 
through wire transfers and transfers from other institutions.
    I believe that there was very little training at the 
institutions where I worked, and especially when it came to 
money laundering. The only training that we had was related to 
what is set by the Bank Secrecy Act, which involved cash 
transactions, but no training on how to identify an individual 
that might be suspicious or to go beyond asking the 
individual--if a prospective client gives information relating 
to their businesses, that was generally enough, and nothing in 
the training to say, ``go beyond that, do more investigations, 
go research where the businesses are.'' I mean, it was just--it 
stopped at the questioning level, which obviously is not 
    Senator Collins. Did your supervisors at any of the three 
institutions ever emphasize to you or to your colleagues any 
concerns that they might have about the bank being used to 
launder money?
    Mr. Giraldi. [Nodding head up and down.]
    Senator Collins. The reason I ask this is part of the way 
you influence the culture of a bank is when the high-level 
executives make very clear that it's a priority for the bank to 
avoid being exposed to the risk of money laundering. And if 
there isn't training going on and if there aren't repeated 
directives, then the culture doesn't change.
    So I am curious, in your time as a private banker at the 
three institutions for which you worked, whether there was a 
priority put by your supervisors, by other executives in the 
bank, directed towards minimizing the bank's risks in this 
    Mr. Giraldi. I believe that the supervisors followed the 
culture as much, if not more than, the relationship managers. 
Those individuals were the ones who gave the guidance and the 
encouragement to the more junior officers on how to establish 
    My experience has been that many senior managers would take 
greater risks than the junior individuals on the team.
    Senator Collins. You mentioned in your testimony that at 
times private bankers posed as tourists in order to avoid 
saying that they were going into a country for the purpose of 
meeting with wealthy clients.
    Were you ever instructed to pose as a tourist to undertake 
that kind of deception?
    Mr. Giraldi. It was more than posing as a tourist. It was 
the standard procedure or the standard understanding for 
private bankers when traveling abroad in most countries, and in 
most cases with at least my experience in the financial 
institutions where I worked and friends and former colleagues 
that work at other financial institutions, is that they 
traveled as tourists, and when filling out the document at the 
customs area, they would mark the tourist square instead of the 
business square.
    And, as I mentioned, there are different reasons that could 
be that we--the possibilities of why we were trained to do that 
and why the culture called for that, and one was to protect the 
client in a country where he or she may be exposed to criminal 
activity or extortion or kidnapping because maybe our documents 
would get lost or the client accounts would get lost.
    And another possibility was that in some countries capital 
flight is not viewed favorably, and private bankers go to 
foreign countries to recruit capital flight and to meet with 
the clients who have taken billions of dollars out of the 
countries many times without the knowledge of their 
    Senator Collins. Senator Levin has mentioned that in some 
of the cases we have looked at, the proceeds that have been 
deposited into these accounts appear to be the result of 
corruption by government officials. Did your supervisors ever 
express any concerns to you about your obligation as a private 
banker to ensure that your foreign clients were complying with 
the laws of their countries or was it the opposite?
    Mr. Giraldi. When I asked about--when I initially began my 
career in private banking and asked the questions regarding the 
tax issues and the laws in the foreign country, we were told 
that it is best not to ask those questions of the client 
because it is not our responsibility as to if the client is 
complying with the tax issues or with any laws within their 
country. And this was standard at all the private banks and 
goes on today from my understanding with recent conversations 
with private bankers. Basically it is that we don't want to 
know, and the feeling that I got was that we really didn't want 
to know if the clients were complying with those issues.
    Senator Collins. Thank you.
    Senator Levin, it is my understanding that we have about 8 
minutes left on the first vote that is going to be followed by 
two more. I don't know whether you would like to start your 
questioning now or--that sounds fine.
    We will be in recess subject to the call of the Chair, but 
it will probably be a half-hour. We unfortunately have three 
consecutive roll call votes.
    Senator Collins. The Subcommittee will come to order.
    At this time I would like to call on Senator Levin for his 
    Senator Levin. Thank you, Madam Chairman, and welcome, Mr. 
    Mr. Giraldi. Thank you.
    Senator Levin. Roughly how many clients would a private 
banker such as you handle at any one time, typically?
    Mr. Giraldi. Well, it depended on the size of the 
individual unit in each institution. At one point I was part of 
a team that handled thousands of clients with assets in the 
billions of dollars, and in another institution it was somewhat 
smaller, with maybe a thousand clients and $500 million, and in 
another institution it was in a couple of hundred clients. So 
it varies from institution to institution.
    Senator Levin. Private banks have had concerns about 
keeping files or records in the United States of a client's 
offshore accounts. Is that true?
    Mr. Giraldi. Yes.
    Senator Levin. Tell us about that. What was the basis of 
that concern? And how strongly did they enforce that concern by 
trying to avoid having that kind of a paper trail?
    Mr. Giraldi. It was primarily a concern with the fiduciary 
vehicle product, such as the private investment companies and 
the trusts that were established offshore within each 
individual institution's offshore companies or trust companies. 
And when an individual had established what we call a PIC, or a 
private investment company, and a trust, the policy was not to 
have any linkage of the beneficial owner's name to the offshore 
company or the trust in the United States.
    If you had a file that belonged to an individual PIC, that 
file would have only the PIC name and the transactions related 
to that private investment company or that trust. And there 
were trust officers that were part of the trust company located 
in the United States in the major cities, in New York and in 
Miami, where there was a substantial amount of private banking 
business. And those trust officers would from time to time go 
into the files and review what they call compliance as to any 
linkage of beneficial owners. And if there was something in 
there, if there was a memorandum that somehow escaped a private 
banker or relationship manager that slipped into the file that 
had the offshore structure name on it, then they would get 
    Senator Levin. Are you telling us, then, that if there was 
any evidence of what the reality was relative to beneficial 
ownership, the people in the trust department of these private 
banks would reprimand the person working in the bank who 
allowed that to happen? Is that what you are saying?
    Mr. Giraldi. Yes, Senator. If there was evidence of the 
true identity of the beneficial owner in that file that would 
link that individual to his or her offshore structure, that 
would call for a reprimand by the trust----
    Senator Levin. And that was the reality.
    Mr. Giraldi. Yes.
    Senator Levin. The reprimand, then, of the private bank's 
employee would be for what was true. Is that right?
    Mr. Giraldi. Would be----
    Senator Levin. In other words, what was in the file and 
what someone would be reprimanded for was true.
    Mr. Giraldi. Yes.
    Senator Levin. And it was accurate.
    Mr. Giraldi. Yes.
    Senator Levin. But it wasn't supposed to be there in order 
to protect secrecy. Is that correct?
    Mr. Giraldi. Yes, Senator.
    Senator Levin. And private banks tout their secrecy, do 
they not?
    Mr. Giraldi. Yes.
    Senator Levin. It is not just something they respond to due 
to inquiries on the part of clients. They actually go out 
seeking clients or advertising for clients claiming that they 
have got the ability to keep secret the connection of that 
client to the account and thereby defeat legal process for that 
information. Is that correct?
    Mr. Giraldi. Yes. Secrecy is the fundamental element in 
most major private banking relationships with financial 
    Senator Levin. And private banks push the secrecy aspects 
of their accounts, do they not?
    Mr. Giraldi. Many times a fiduciary vehicle is bank-driven 
rather than client-driven, and the establishment of the vehicle 
or of the offshore structure is done after a conversation where 
a client--for legitimate purposes, such as estate planning, 
their needs are determined, and then, therefore, the private 
banker or the trust officer, if they are meeting with the 
client and the trust officer, structures the offshore 
    My experience has been that many clients are not familiar 
with the highly sophisticated offshore capabilities that 
financial institutions have, and so that the bankers, in 
essence, educate the clients on how to structure these 
    Senator Levin. Tell us about collateralized loans. How are 
they used? How are they vulnerable to money laundering?
    Mr. Giraldi. Well, credit facilities and the credit 
products are important products at many financial institutions 
for their private banking clients. One example, if a client 
comes to a relationship manager and needs his or her funds out 
of the portfolio for whatever investment in their home country, 
rather than to liquidate the assets, the bankers and senior 
management encourage relationships managers to do this, will 
set up financial--will set up credit facilities where the 
client can receive whatever amount, up to a certain percentage 
of their portfolio which is used as collateral and pay a lesser 
interest rate on the loan than they are generating on their 
portfolio. And it is a way that the bank benefits because it is 
a revenue-generating product, and it is a way that the client 
benefits in that they are--rather than to use their funds, 
their portfolio funds, they borrow funds from the bank.
    Senator Levin. And how does that help a client launder 
money? Is that cleaner money when you are using a loan from the 
bank than if you are using your own funds?
    Mr. Giraldi. Well, one thing that I have learned in the 
last few years is that--which I didn't realize at the time that 
I was a private banker, is that potentially it can be very 
dangerous for a banking institution when someone is taking 
advantage of the culture and of the products in that an 
individual who somehow gets into the banking system and wants 
to take advantage of that system as a money launderer can 
develop these products for their own benefit. And when it comes 
to credit, if a bank encourages a client to establish credit 
facilities, the money launderer will have come to the bank 
initially with one deposit, for example, let's say, $10 
million, and then they will borrow back--they will borrow $9 
million, so all of a sudden they have an additional $9 million 
from the bank, which allows them to establish a business in 
their home country and sometimes to gain credibility and 
respectability in their communities. They may not have had that 
before the bank had offered this product to them. So they 
borrowed several million dollars. They buy a business in their 
home town, and then rather than to repay the loan with proceeds 
that are legitimate--usually the proceeds were not verified 
because it was 100 percent secured credit. They could use 
additional laundered assets to repay the loan back to the bank, 
and so this individual who came to the bank with $10 million 
has just laundered $30 or $40 million and can say I have a 
relationship with this bank, I have a credit facility, I have 
established a business in my home country, I am known now 
within the community as a business person that owns a 
legitimate business that might even be doing business with U.S. 
companies. And we as bankers have helped them in their 
metamorphosis of becoming more legitimate.
    Senator Levin. Of turning dirty into clean.
    Mr. Giraldi. Yes.
    Senator Levin. The way that happens, to summarize, the way 
you just described it, is $10 million in your example comes in 
in dirty money, is in the bank, the bank is making a fee off 
that. Is that correct?
    Mr. Giraldi. Yes.
    Senator Levin. Then they will lend money to that client, 
say $9 million. They are making interest off that. Is that 
    Mr. Giraldi. Yes.
    Senator Levin. And the client then takes that $9 million 
and says, hey, I got a loan from X bank, which is a reputable 
bank, and the loan sounds clean because I have borrowed money 
from a bank, and then establish a business or whatever in his 
or her own country with that loan, so that now they are 
established with clean money.
    Mr. Giraldi. Yes.
    Senator Levin. What you are saying is that a fully 
collateralized loan advantages the private bank because now 
they are making money both on the original asset as well as on 
the loan, and it is used by money launderers to clean dirty 
money. Is that correct?
    Mr. Giraldi. Yes.
    Senator Levin. I think that this is one of the clearest 
examples of where a tool of a private bank which can be used 
legitimately can also be used illegitimately.
    Mr. Giraldi. Yes.
    Senator Levin. It is a very good example of how that is 
done, and it is something we are going to try to stop.
    Experts at your trial in the American Express case 
testified that everything you did with respect to the 
management of the Ricardo Aguirre account, which was the 
account for which you have been convicted of money laundering, 
was legal in the private banking world. Every specific action 
that you took, the testimony was, was legal.
    The only issue was whether or not you knew the source of 
Mr. Aguirre's money was drug trafficking. Is that correct?
    Mr. Giraldi. Yes.
    Senator Levin. The jury decided based on circumstantial 
evidence that you had willful blindness with respect to Mr. 
Aguirre and the source of his funds, and as a result of that, 
you are now serving a Federal prison sentence.
    Now, Amy Elliott testified at your 1994 trial as an expert 
on private banking practices, and this is what she said: ``The 
`Know Your Client,' at least in our bank, is part of the 
    `` `Know Your Client' . . . is part of the culture,'' she 
said. ``It's part of . . . the way you do things. It's part of 
the way you conduct yourself.''
    When asked about Citibank's private banking policy, she 
said in that same trial, your trial, ``I think the primary gist 
of this procedure--it wasn't really a procedure, but more of 
the way that one conducts themself, is that you must know your 
    That is what the testimony was at your trial, but at our 
hearing yesterday, Ms. Elliott and her fellow private banker, 
Mr. Ober, testified about a host of Know Your Client failures 
or failure to obtain Know Your Client information on Mr. 
Salinas, Mr. Ober's failure to obtain Know Your Client 
information on President Bongo and the sons of General Abacha. 
And Mr. Reed, the co-chairman of Citibank, testified about the 
Know Your Client failures of the Citibank Private Bank as a 
whole. And here is what he said, first in this exchange with 
Senator Collins. ``So my concern is that this is a 3-year 
period. This is not an isolated audit of one small branch,'' 
this is Senator Collins talking, ``It seems to me to be that 
systematic pattern of deficiencies that allowed Citibank to be 
vulnerable to money laundering.'' And Mr. Reed responded, ``I 
think you are correct.''
    And later on, Mr. Reed said, ``So, if you look backwards, 
you would have to say that in that period, 1994, 1995, into 
1996, there was reason to believe that we did not have an 
acceptable set of standards in place, and you and I would agree 
that it is approximately a 3-year time frame.''
    So I have got to say that this is a very, very disturbing 
picture indeed, because what Ms. Elliott presented was a 
picture of due diligence by private bankers as an expert at a 
criminal trial, and that description simply does not match up 
to the reality, as she testified to here and as her CEO 
testified to yesterday as well. So I simply want to express 
that, because I find that to be very disturbing, indeed, and 
very disquieting.
    I don't have any further questions of Mr. Giraldi other 
than to thank him for making a very significant contribution to 
this investigation, and his cooperation with this investigation 
advanced it a great deal.
    Senator Collins. Thank you, Mr. Giraldi. You are excused.
    Mr. Giraldi. Thank you.
    Senator Collins. I would now like to welcome our second 
witness this afternoon, Raymond Baker. Mr. Baker is the guest 
scholar at the Brookings Institution here in Washington. He is 
a recognized authority on international private banking and has 
written extensively on money laundering and capital flight.
    Pursuant to Rule VI, all witnesses who testify before the 
Subcommittee must be sworn in. Do you swear that the testimony 
you are about to give will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Baker. I do.
    Senator Collins. Thank you. We would ask that you limit 
your oral testimony to no more than 10 minutes, but your 
written testimony will be included in its entirety, and we are 
very pleased to have you here with us today. You may proceed.


    Mr. Baker. Good afternoon, Madam Chairman and Senator 
Levin. I am Raymond Baker, and after an international career in 
the private sector, I am a guest scholar at the Brookings 
Institution. Thank you for the opportunity to appear before you 
to talk about one of our larger but least visible problems.
    \1\ The prepared statement of Mr. Baker appears in the Appendix on 
page 1053.
    I found some of yesterday's revelations not surprising but, 
nevertheless, chilling. I noted particularly the role of 
private bankers in providing their secretive services to Sani 
Abacha, the late dictator of Nigeria, and the biggest single 
thief in the world in the decade of the 1990's helping him with 
his stolen wealth out of Nigeria. And I contrasted this with 
the situation of my longest-term colleague and partner in 
business, who has been lying desperately ill and hospitalized 
in Nigeria, a nation and its medical services having been 
brought near to collapse. Catering to the corrupt has severe 
consequences for others who live their lives with integrity.
    I have been asked to frame the issues of money laundering 
and flight capital and corruption in the context of our larger 
domestic and foreign interest and to discuss the impact of 
private banking on these concerns.
    Corruption by foreign government officials is omitted, as 
you know, from the 170 or so crimes and malpractices that 
establish a predicate offense, that is, a basis for legal 
prosecution in U.S. anti-money-laundering legislation. What 
this means is that so long as funds in the hands of a foreign 
official are not derived from drugs, bank fraud, or violence, 
then, as the last speaker also said, a ``don't ask, don't 
tell'' policy largely guides the banking community.
    While not laundered, corrupt money is certainly a principal 
component of illegal flight capital. This is stolen or tax-
evading money that passes illegally out of developing and 
transitional economies, but legally more often than not into 
the United States, Europe, and tax havens around the world. 
Other components include the mispricing of overseas trade to 
generate foreign kickbacks, illegal shifts of real estate and 
securities titles abroad, and the growing problem of wire 
    I have studied in particular the first two of these--
corrupt money and mispriced trade--because both are dependent 
on international cooperation to facilitate their movement.
    I estimate the flow of corrupt money out of developing and 
transitional economies into Western coffers at $20 to $40 
billion a year and the flow stemming from mispriced trade at 
$80 billion a year or more. My lowest estimate is $100 billion 
per year by these two means which we facilitate, a trillion 
dollars in the decade of the 1990's, at least half to the 
United States. Including other elements of illegal flight 
capital would produce much higher figures.
    Let me focus just on this $100 billion a year from 
corruption and trade mispricing that we, the United States and 
Europe, facilitate. What are the benefits and costs of this? 
The benefit is that it brings this sum of money, $100 billion a 
year, into our Western economies, at least $50 billion a year 
to the United States. The cost can be seen in both our domestic 
and foreign interests.
    First, domestic. One hundred billion dollars a year in 
illegal flight capital coming in provides cover for a far 
larger amount of criminal money laundering, estimated at $500 
billion to $1 trillion a year--again, half to the United 
States. These are two rails on the same tracks through the 
international financial system.
    The Treasury Department estimated to me that 99.9 percent 
of the criminal money that is presented for deposit in the 
United States gets into secure accounts. Anti-money-laundering 
efforts are a failure. The easiest thing for criminals to do is 
to make their criminal money look like it is merely corrupt or 
tax-evading money, and then it passes freely into our 
    The domestic cost of illegal flight capital is that it 
removes anti-money laundering as an effective instrument in the 
fight against drugs, crimes, and terrorism.
    Senators when I read or hear stories about drug busts, 
drive-by shootings, prison overcrowding, my reaction is, 
``there's our flight capital dollars at work for us.'' There in 
part are the consequences of the dirty money coming in that 
enables the criminal money to flow alongside.
    Now, let me turn briefly to the foreign cost. Illegal 
flight capital has an equally severe impact on our overseas 
    Russia, of strategic importance, has suffered the worst 
case of disappearing resources out of any country in a short 
period of time, $200 billion to $500 billion in a decade.
    In Nigeria, corruption has devastated the economy, meaning 
that 70 million of its people are living on an average of 20 
cents a day.
    Pakistan, a nuclear state in a volatile subcontinent, 
reacted to corruption, tax evasion, and a depressed economy 
with a coup d'etat, upsetting democracy.
    From Mexico, the flow of drugs and aliens across borders 
presents a major foreign policy challenge.
    China, with semi-official estimates pegging flight capital 
at $10 billion a year, perhaps more, could potentially repeat 
the Russian scenario.
    The foreign cost of illegal flight capital is that it 
erodes U.S. strategic objectives in transitional economies and 
undermines progress and stability in developing countries.
    I have used the word ``facilitate'' several times. There 
are many examples of ambiguities and contradictions in our 
policies and practices that facilitate the flow of illegal 
flight capital. Let me mention two that focus specifically on 
corruption and private banking.
    The Foreign Corrupt Practices Act makes it illegal for 
Americans to bribe foreign government officials. Yet it is not 
illegal for private bankers to meet with foreign government 
officials, including those perceived to be corrupt, and offer 
to assist them in moving, consolidating, and managing ill-
gotten gains in foreign bank accounts.
    What U.S. law conveys, in effect, to our business people 
and bankers is: Don't bribe, but if you encounter wealthy, even 
corrupt foreign officials, then the United States wants their 
    Again, we often have officials from Treasury, Justice, and 
State Departments, the FBI and DEA and USAID meeting with 
foreign leaders and officials to address drugs, crime, 
corruption, and terrorism. But these efforts are undercut when 
private bankers initiate or respond to the desires of corrupt 
foreign officials to move funds into the United States.
    The perception is widespread abroad that the United States 
is not serious about reducing corruption, instead preferring to 
profit from the accumulation and management of its proceeds.
    The United States has become the largest repository of ill-
gotten gains in the world. U.S. private bankers have honed 
their products and services, taking advantage of porosities in 
regulations in this and other nations. In this pursuit, more 
secrecy is often accorded to corrupt foreign interests than is 
normally available to U.S. citizens.
    The combination of criminal money laundering and illegal 
flight capital constitutes the biggest loophole in the free 
market system. Drug kingpins and global thugs thrive because 
money laundering is easy, and money laundering is easy because 
illegal flight capital is solicited and maintained.
    The ``N'' word is appropriate here: Never. We will never 
effectively curtail criminal money laundering while at the same 
time cultivating illegal flight capital.
    Success in fighting dirty money will be achieved only when 
the United States addresses all three parts of the problem: 
Criminal, corrupt, and commercial.
    We are now allowing banking, securities, and insurance 
functions to be combined. This greatly magnifies the importance 
of upholding high standards of fiduciary trust in our financial 
institutions. What is required in these enlarged institutions 
is a sense of responsibility across the broad range of this 
Nation's vital interests. In this regard, I am very gratified 
that Robert Rubin, former Secretary of the Treasury, is coming 
into the pinnacle of American banking, and I am optimistic that 
Mr. Rubin will add a level of fiduciary responsibility that has 
frequently been lacking.
    At bedrock, it is the notion that we can have clean hands 
while moving dirty money that needs to change. It needs to 
change immediately in the American banking system.
    Senator Collins. Thank you very much, Mr. Baker.
    You have made several very strong statements. You have said 
that our anti-money-laundering efforts are a failure, that the 
United States is facilitating the illegal flight of capital, 
that money laundering is easy because illegal flight capital is 
cultivated and maintained. That is a serious indictment of our 
banking system.
    Let's say we accept your premise. What specific 
recommendations would you have for us? Do we need tougher laws? 
Do we need more aggressive oversight by the bank regulators? Do 
we need a change in culture in American banks? Do we need all 
of the above? Have you looked at possible solutions?
    Mr. Baker. Madam Chairman, I am certainly hopeful that 
Congress will pass bills that have been presented which add 
corruption to the list of predicate offenses that will 
constitute grounds for a charge of money laundering in the 
United States. I think that is extremely critical. And I am 
limiting my remarks to the question of corruption at this 
    In addition to that, I would certainly hope that bankers 
would either adopt or regulations would require two additional 
steps. One is that at least two bank officers' signatures have 
to be recorded on documentation as to knowledge of the source 
of funds of their foreign clients in private banking 
departments. I would like to see two signatures of officers 
attesting that they have made the necessary inquiries to 
confirm that they are satisfied that the source of funds is 
legal, has been legally earned and legally transferred.
    Then the second thing that I would like to see is for the 
customer to sign a declaration to the same purpose, a 
declaration that says that his banking activity is money that 
has been legally earned and legally transferred.
    I was struck in reading Citibank's money-laundering 
policies and guidelines that nowhere in those guidelines was 
the customer asked to confirm that he understands that legal 
money is what is being sought here. That point is not required 
to be put forward to the customer. It seems to me that a 
private bank that wanted to eliminate corrupt money from its 
coffers would make that very clear from the outset, that we 
want to deal with money that has been legally earned and 
legally transferred, and we want to be certain that you 
understand that that is our purpose and we ask you to sign your 
recognition of that and your own confirmation that that will be 
the activity in the account.
    Senator Collins. Thank you. Senator Levin.
    Senator Levin. Your first suggestion in terms of 
strengthening our laws would be to add corruption as one of the 
predicate crimes for money laundering.
    Mr. Baker. Yes, sir.
    Senator Levin. How would you define that--corruption? Give 
us a shot at a definition. Or has it been defined in another 
law in a way which you think would be adequate? Because I 
happen to fully agree with you, by the way, that without adding 
these crimes of corruption, accepting bribes, looting the 
treasury--which is a shorthand example of corruption--without 
adding those, money-laundering laws are really full of 
loopholes. But we also have a definitional issue there, and I 
am wondering if you could give us a hint as to how you define 
    Mr. Baker. My own definition, Senator, is money that has 
been derived illegally by a foreign government official. Of 
course, it could be a domestic official, but we are talking 
here about foreign government officials. Money that has been 
either stolen from the treasury, pilfered from a parastatal 
corporation, taken as a kickback on a contract--that sort of 
money by a government official is what I refer to as corrupt.
    Senator Levin. Illegal under his own law?
    Mr. Baker. Yes.
    Senator Levin. Yesterday Mr. Reed stated that he believed 
that funds from corruption likely represent only an 
infinitesimal portion of a private bank's deposits. I have two 
questions. One, do you agree with that characterization or 
estimate? And, two, is it just the raw numbers in any event 
that count or the country's deposits which result when their 
leaders are given access to a private bank and the good will 
which that engenders?
    Mr. Baker. If you take the three elements--criminal, 
corrupt, and commercial--as being the principal components of 
dirty money, I would agree with the assessment that the corrupt 
component out of those three is the smallest. My estimate was 
$20 to $40 billion a year.
    However, that component has by far the largest multiplier 
effect on the other two components because of its impact on 
corrupting the society as a whole.
    In those countries where corruption is most evident at the 
top of a government, it is quite common to see also high levels 
of criminal and commercial tax evasion, criminal money 
laundering and commercial tax evasion. The corrupt component 
has the largest multiplier effect on the other two.
    Senator Levin. On the basis of your own experience and the 
hundreds of interviews that you have conducted on this topic, 
have you heard from private bankers that they had concern about 
the impact on their franchise if they go about strongly asking 
questions about source of money, for instance?
    Mr. Baker. Senator, I am aware that that is a concern to a 
number of private bankers. I can't be much more specific than 
my knowledge that that is of concern to them. Whether that is a 
legitimate concern depends on what the private bank deems as 
being its purpose, its underlying goals.
    I would suggest that private banking can easily be 
conducted with wealth creators who conduct their business 
honestly, without having to take the step of catering to the 
corrupt and the tax-evading money.
    Senator Levin. Along the same lines, some U.S. banks oppose 
changes in our laws to prohibit the managing of dirty money or 
corrupt money, using the argument that this law will only hurt 
U.S. competitiveness because the business will simply move to 
banks in other countries. What is your response to that?
    Mr. Baker. Senator, that is exactly what I would like to 
see happen. I would like to see that money driven from U.S. 
shores and make it go elsewhere; then, after we have succeeded 
in purging that kind of money from our own society, working to 
eliminate it as well from other countries, from Europe or other 
tax havens that may take it. But in exactly the same way that 
we addressed the Foreign Corrupt Practices Act, which was to 
take a position years before other countries came along in the 
same direction, I would like to see us divert that money from 
U.S. shores in the first instance, work to clean it up 
internationally in the second instance.
    Senator Levin. You have indicated a number of suggestions 
in terms of tightening up our own law. You gave us two. What 
would be your reaction to the following additional changes? One 
is to make a requirement of due diligence part of our law and 
not just something that is voluntary.
    Mr. Baker. I would support that, Senator. I think that if 
these hearings demonstrate anything, it is that bank policies 
are not followed, much less regulations that have been laid 
down. So I would certainly support strengthening the 
regulations and strengthening the regulatory environment that 
insists on the following of those regulations in private banks.
    Senator Levin. What about adding a requirement that there 
be a record of the beneficial owner? I am not sure if you 
mentioned that. You may have and I may have missed it.
    Mr. Baker. I didn't mention it. Of course, the beneficial 
owner should be indicated. There should be no place for secret 
bank accounts in the U.S. banking industry.
    Senator Levin. Or in operations if they went overseas?
    Mr. Baker. Precisely, Senator.
    Senator Levin. We heard yesterday that the Citibank private 
bankers who handled the accounts for General Abacha's sons did 
not know for 3 years, from 1993 to 1996, that their father was 
indeed General Abacha, who was the head of the country. What is 
your reaction to that?
    Mr. Baker. If I had been in that position, I would have 
known. I don't see how it is possible not to know who you were 
dealing with.
    Senator Levin. Then we also heard yesterday that in 
September 1998--that is just last year--in the middle of a 
widely known, widely publicized Nigerian effort to locate and 
to seize the funds that General Abacha and his family and 
associates had taken from the treasury in the country, in the 
middle of all that, Citibank approved a $39 million loan to the 
sons so that they could immediately transfer the funds from 
London to a more secret Swiss bank account. Citibank issued the 
loan so that the sons would not have to pull the $39 million 
out of a time deposit with hefty penalties for early 
    What is your reaction to that?
    Mr. Baker. I suspect that they broke no laws in doing that. 
So far as I am aware, they broke no laws in doing that. 
Nevertheless, I find it appalling that such services would 
continue to be given in a situation where a sovereign nation 
was doing all that it could to trace the sources of Abacha's 
ill-gotten gains.
    Senator Levin. Our staff report indicates how Citibank told 
U.S. bank regulators in April 1997 in a memo that a primary 
source of the funds in the personal bank accounts belonging to 
President Bongo of Gabon was the Gabon budget. In particular, 
this memo said that he had $111 million in that budget for his 
unrestricted use.
    The regulators then accepted the memo as an adequate 
explanation of the source of the funds in the accounts without 
checking to see whether or not Gabon law or budget provisions 
had any such authority.
    What is your response to that or comment?
    Mr. Baker. It certainly suggests that both the banks--both 
the private bankers and the regulators failed to examine this 
matter with sufficient care. I know of perhaps two or three 
countries where substantial budget allocations are made to the 
Office of the President openly in the budget. I don't know of 
any country that allocates $111 million, if that was the figure 
as I recall.
    I think that would have been fairly easy to determine the 
veracity of that statement had any reasonable level of effort 
been made to do so.
    Senator Levin. Now, in conducting your research, I 
understand that you spoke with literally hundreds of business 
people, academics, regulators, and others. Did you hear any 
information about private bankers soliciting government 
officials or others for deposits?
    Mr. Baker. I didn't ask those questions in the work that I 
have done at Brookings, Senator. I didn't ask those specific 
questions. But I have certainly been aware over the years of 
private bankers making their services known to the Marcoses, 
the Mobutus, the Abachas of this world.
    Senator Levin. Thank you. Thank you, Madam Chair.
    Senator Collins. Mr. Baker, I just have one more question 
for you. Senator Levin has done an able job, as he always does, 
of identifying possible loopholes in our current laws that need 
to be plugged, such as the issue of covering corruption, money 
that results from corruption.
    I must say, however, I am somewhat skeptical about whether 
or not we can solve this problem through tougher laws. In 1986, 
we passed the Money Laundering Control Act for the first time 
and made money laundering a free-standing criminal offense. 
Just last year, we passed the Money Laundering and Financial 
Crime Act of 1998 in which we called upon the Department of 
Treasury and Department of Justice to issue annual strategies 
for fighting money laundering. That strategy has been issued. 
It doesn't seem to have been very effective based on your 
    Are more laws going to solve this problem?
    Mr. Baker. Madam Chairman, I think they will certainly 
help. The gaping loopholes in our laws in my opinion have been 
that we have addressed only one part of the problem, the 
criminal part. We have said that if you are a drug dealer, that 
is beyond the pale and we will not accept that. If there is 
bank fraud involved, we will not accept that.
    We have not addressed the corrupt and the commercial tax 
evasion components. Adding the corrupt component to what 
constitutes money laundering will certainly have a strong 
effect on ameliorating this problem. But ultimately we will 
have to go the third step and address the commercial tax 
    As long as avenues exist for criminals to mix their money 
with other private or what seem to be innocuous flows, they 
will do so. We can only address this problem by addressing all 
three components. It may take us time to get there. The 
corruption component certainly should be put on the table. 
Eventually this Nation will have to address the question of 
pulling tax-evading money out of developing and transitional 
    Senator Collins. The reason I raise the issue is we had 
testimony yesterday that suggested very strongly that some of 
the money in the private account that Citibank had for the 
Salinas family may well have been the proceeds from illegal 
drug activity. So that is already covered by the current law, 
and yet it seemed to have little or no impact on how Citibank 
acted in this particular case.
    That suggests to me that, in addition to strengthening our 
laws to plug the loopholes that you have identified, we also 
need far more aggressive enforcement of the laws that we have 
on the books. And in that regard, I am troubled by a soon-to-
be-released report from the inspector general of the Department 
of Treasury which indicates that the banking regulators' 
efforts to identify and curtail money laundering have been lax.
    So I guess my question to you is: Again, if we toughen the 
laws, is that really going to do it? I understand what you are 
saying about adding corruption and tax evasion to the current 
laws, but it is not working very well with preventing the 
laundering of drug money, which is already illegal. So don't we 
need a three-pronged approach? Don't we need--in addition 
perhaps to tougher laws, we need better enforcement and we also 
need the banks to take it seriously. We need a change in 
culture in the banking system.
    Mr. Baker. We need a change of culture in the banking 
system. We need also a change in our national consciousness 
about the flow of dirty money into our society. For too long, 
we have thought--we have done an implicit cost/benefit analysis 
that says this is good for America, people investing in the 
United States. And I am all for investment provided it is 
legal. I am not in favor of it if it represents illegal money.
    But we haven't made that distinction adequately in the 
past, and we have to do so, and it does require improved 
oversight of the laws that we do pass. You are entirely 
    Senator Collins. I think there is also the concern that you 
alluded to that if our banks don't take it, it is going to go 
    Mr. Baker. As I answered to Senator Levin, that is 
precisely what I want to occur, is for that money to go 
elsewhere in the first instance; then we work to clean it up in 
the rest of the world as well.
    Senator Collins. Thank you very much, Mr. Baker.
    I am now pleased to welcome our last panel of witnesses 
this morning. Ralph E. Sharpe is the Deputy Comptroller for 
Community and Consumer Policy at the Office of the Comptroller 
of the Currency. Richard A. Small is the Assistant Director for 
the Division of Banking Supervision and Regulation at the 
Federal Reserve.
    If you gentlemen would remain standing so that I can swear 
you in? If you would raise your right hand, do you swear that 
the testimony you are about to give to the Subcommittee will be 
the truth, the whole truth, and nothing but the truth, so help 
you, God?
    Mr. Sharpe. I do.
    Mr. Small. I do.
    Senator Collins. Thank you.
    Again, we would ask that you each limit your oral testimony 
to no more than 10 minutes, and we will include your entire 
written statements in the record.
    Mr. Sharpe, why don't we start with you?


    Mr. Sharpe. Thank you, Madam Chairman.
    \1\ The prepared statement of Mr. Sharpe appears in the Appendix on 
page 1079.
    Madam Chairman, Senator Levin, and Members of the 
Subcommittee, I am Ralph Sharpe, the Deputy Comptroller for 
Community and Consumer Policy at the Office of the Comptroller 
of the Currency, also known as the OCC. We appreciate this 
opportunity to testify on private banking activities and the 
vulnerability of private banking to money laundering. Money 
laundering is a serious domestic and international law 
enforcement problem. We commend the Subcommittee for focusing 
attention on the problem it poses and share the Subcommittee's 
belief in the importance of preventing U.S. financial 
institutions from being used, wittingly or unwittingly, to aid 
in money laundering.
    We have submitted a detailed written statement addressing 
the issues identified in your invitation letter, and I will 
summarize that statement this afternoon.
    I will begin by briefly describing private banking's 
vulnerability to money laundering and what banks can and should 
do to protect themselves from those vulnerabilities.
    If a bank does not adequately maintain due diligence and 
compliance standards with associated internal controls, audit, 
and management information systems, it may be exposed to money 
laundering. Specific vulnerabilities associated with private 
banking operations include:
    First, the challenges inherent in determining the identity 
of high net worth private banking customers. This can be 
especially challenging when the customer is a foreign national 
and the source of funds comes from outside the country.
    Next, the high-dollar volume of private banking and 
resulting earnings for the bank and account officers. This 
combination often creates pressure for increased income from 
new business. Compensation programs based solely on 
quantitative factors can cause bank officers to ignore or 
short-cut established controls and procedures designed to 
protect banks from money laundering.
    Finally, limits on access to account information. Some 
accounts are opened domestically, but supporting documentation 
relating to ownership and background information may be 
maintained in one or more foreign jurisdictions with stringent 
secrecy laws. Other accounts may be opened and maintained in 
such jurisdictions from the outset. In either case, such 
accounts can present significant barriers to access to 
information needed to fully determine the source of funds 
flowing into the account or the identity of beneficial owners.
    Banks must be the first line of defense in protecting 
themselves against these vulnerabilities, and there are a 
number of fundamental safeguards that they should employ. For 
example, effective account-opening policies and procedures are 
fundamental risk controls for private banking relationships. 
Bank management should have specific policies for employees who 
approve, accept, and document new private banking accounts, 
including those in jurisdictions with strong secrecy regimes. 
Banks should also ensure that they will have access to 
information during the life of an account so it can be 
appropriately monitored.
    Second, banks should monitor high-risk customer activity to 
detect and report suspicious activity in a timely manner. Banks 
should also design compensation programs that balance 
quantitative and qualitative factors and that provide 
measurement tools to assess employee performance in both areas. 
They should ensure that account relationship managers are 
subject to the same or higher degree of oversight and control 
as managers of other areas of operation that may expose the 
bank to risk.
    Banks must also have an independent testing or audit 
function for BSA compliance, including suspicious activity 
reporting. Audit programs should focus on high-risk accounts 
and should include comprehensive transaction testing.
    And, finally, banks must train all appropriate personnel 
with respect to their responsibility to comply with the 
requirements of the BSA.
    I will now turn briefly to the steps the OCC takes to 
address actions that national banks should take to protect 
themselves from money laundering.
    The OCC requires national banks to establish and maintain 
adequate internal controls and independent testing, to 
designate an individual or individuals to coordinate and to 
monitor day-to-day compliance with the Bank Secrecy Act, and to 
train responsible personnel. In addition, our regulations 
require banks to report suspicious transactions and violations 
of law or regulation. An adequate BSA program must also enable 
a bank to detect and report suspicious activity, including any 
such activity in its private banking department.
    The OCC conducts regular BSA exams of national banks, 
branches and agencies of foreign banks in the United States, 
covering all aspects of each institution's operations, 
including foreign offices. Our examinations include reviews for 
compliance with the BSA and reviews of anti-money-laundering 
efforts in various divisions of the banks, including private 
    Specifically, OCC conducts exams to ensure that national 
banks have adequate systems in place to detect and report 
suspicious activity, comply with BSA requirements, establish 
account opening and monitoring standards, understand the source 
of funds for customers opening accounts, verify the legal 
status of customers, and identify beneficial owners of 
    The OCC recently developed and will soon test expanded-
scope BSA/anti-money-laundering exam procedures for private 
banking. These procedures specifically address employee 
compensation programs, account-opening standards, risk 
management reports, and suspicious activity monitoring of 
private banking activities. These procedures also focus 
attention on high-risk accounts, such as import/export 
businesses, private investment companies, accounts of foreign 
government officials from high-risk countries, high fee income 
accounts, concentration accounts, and nominee name accounts.
    In your invitation letter, you also specifically asked that 
we address OCC's supervision of Citibank.
    The OCC's examination of Citibank's private banking 
operations commenced with a 1994 Bank Secrecy Act examination 
that included a focus on the bank's private banking program. 
The 1994 exam identified the need to improve the bank's 
compliance program in the Private Bank and also found 
weaknesses in the bank's training program and the processes it 
employs to supervise its private banking account officers and 
ensure that they were following the bank's Know-Your-Client 
standards. The OCC recommended that the bank establish 
procedures to monitor the activities of relationship managers 
to ensure that the unique client/banker relationship did not 
compromise the bank's standards.
    During an examination of Citibank's private banking 
operation conducted in 1996, OCC examiners noted Citibank's 
progress in correcting previously identified deficiencies. The 
bank had upgraded its training program and was in the process 
of implementing global policies regarding customer 
identification and source of wealth information.
    In early 1998, as part of an overall assessment of the 
bank's 1997 performance, OCC included comments relating to the 
need to improve the bank's control environment in the private 
bank. While progress in many areas was noted, we informed the 
bank that there was still a need for increased attention to the 
control environment. We also pointed out that our examiners had 
identified a number of audit and control failures in the 
Private Bank that required attention.
    During several domestic and overseas examinations in 1998, 
the OCC noted that the long process of documenting the bank's 
existing private banking customers was nearing completion. The 
bank had created a new quality control unit to ensure 
compliance with the bank's policies, and management was 
effectively responding to issues identified by the unit and the 
OCC. During these examinations, we found improved internal 
controls and adequate documentation regarding client source of 
wealth. However, OCC also recommended that management implement 
the bank's global Know-Your-Client policy within established 
time frames, improve information regarding clients' expected 
transaction volumes, and formalize and implement a monitoring 
program for all private banking clients, in addition to the 
high-risk client monitoring program.
    In early 1999, the OCC communicated to the board that the 
control environment in the Private Bank, which had led to 
adverse publicity, had improved. The OCC acknowledged the 
attention this had received from senior management and the 
board. In addition, during several overseas examinations of 
Citibank offices in 1999, examiners continued to note progress 
in the bank's global compliance and anti-money-laundering 
    I will now turn to a brief description of OCC's experiences 
in obtaining information from foreign jurisdictions.
    In most instances, the OCC has not encountered problems in 
obtaining from the banks that we supervise routine supervisory 
information domiciled in foreign jurisdictions relating to the 
safety and soundness of the bank's operations in those 
jurisdictions. The OCC often obtains such information directly 
from national banks through requests, on-site inspections of 
their offices in a host foreign jurisdiction, or through a 
request to a foreign supervisory authority.
    However, obtaining account-specific information from some 
foreign jurisdictions has been significantly more difficult. 
Most foreign jurisdictions with stringent bank secrecy laws do 
not consider account-specific records to be routine supervisory 
information. As a result, those jurisdictions typically 
prohibit foreign supervisory authorities from accessing 
customer records.
    The OCC addresses problems raised by secrecy laws in 
foreign jurisdictions in a number of ways. For example, the OCC 
expects national banks to implement internal controls, 
monitoring systems, and processes to reduce money-laundering 
risk on a company-wide basis, including in its foreign offices. 
When on-site reviews are not possible because of bank secrecy 
and financial privacy laws, the OCC reviews the corporate 
policy and audit functions of the bank. When we have concerns, 
we require the bank to address those concerns. This may also 
include requiring external audits or enhanced reporting 
    These difficulties are also being addressed through the 
many initiatives on the international front that are focused on 
the concerns surrounding the misuse of offshore accounts for 
financial crime purposes. International groups such as the 
Financial Action Task Force and the Caribbean Financial Action 
Task Force and the Basel Committee on Banking Supervision have 
all developed guidance, and the OCC has been directly involved 
in that guidance.
    My written statement also describes in detail a number of 
other anti-money-laundering initiatives, and these include the 
work of our internal Task Force on Money Laundering, the 
National Anti-Money Laundering Group, our work with the 
Financial Crimes Enforcement Network to further enhance our 
ability to identify banks at risk for money laundering and 
targeted exams we have conducted on law enforcement leads.
    As part of the administration's recently issued National 
Money Laundering Strategy for 1999, the OCC will also be 
participating in a number of interagency projects, including a 
high-level working group of regulators and law enforcement 
officials to develop ways to better detect potential money 
laundering occurring through banks both domestically and 
    In conclusion, the OCC is committed to preventing national 
banks from being used to launder the proceeds of the drug trade 
and other illegal activities. We recognize the potential 
vulnerability of private banking to money laundering, and our 
supervisor efforts are aimed at ensuring that banks employ 
control procedures to reduce that vulnerability. We stand ready 
to work with the Congress, the other financial institution 
regulatory agencies, law enforcement agencies, and the banking 
industry to continue to develop and implement a coordinated and 
comprehensive response to the threat posed to the Nation's 
financial system by money laundering.
    Thank you, and I will be happy to answer any of your 
    Senator Collins. Thank you, Mr. Sharpe.
    Mr. Small.

                        WASHINGTON, DC.

    Mr. Small. Thank you, Chairman Collins, Senator Levin, 
Members of the Subcommittee. I am pleased to appear before this 
Subcommittee to discuss the Federal Reserve's role in the 
government's effort to detect and deter money laundering and 
other financial crimes, particularly as these issues relate to 
the private banking operations of financial institutions.
    \1\ The prepared statement of Mr. Small appears in the Appendix on 
page 1101.
    You have asked the Federal Reserve to address several 
matters, which I intended to address. As well, you have asked 
us to comment on the operations of a specific banking 
organization. I regret that I am not at liberty to discuss the 
activities of any one organization because of the importance we 
attach to maintaining the confidentiality of examination 
findings in order to protect the integrity of the examination 
    In order to better understand the money-laundering issues 
related to private banking, it would be useful to first provide 
you with some background information on what we consider to be 
private banking and the way in which private banks operate. 
But, first, let me start by stating that as a bank supervisor, 
of primary interest to the Federal Reserve is the need to 
assure that banking organizations operate in a safe and sound 
manner and have proper internal control and audit 
infrastructures to support effective compliance with necessary 
laws and regulations.
    A key component of internal controls and procedures is 
effective anti-money-laundering procedures. Moreover, as part 
of our examination process, we review the anti-money-laundering 
policies and procedures adopted by financial institutions to 
ensure their continued adequacy.
    The Federal Reserve places a high priority on participating 
in the government's efforts designed to attack the laundering 
of proceeds of illegal activities through our Nation's 
financial institutions. Over the past several years, the 
Federal Reserve has been actively engaged in these efforts by, 
among other things, redesigning the Bank Secrecy Act 
examination process, which became the standard of the industry 
at the time, developing anti-money-laundering guidance, 
regularly examining the institutions we supervise for 
compliance with the Bank Secrecy Act and relevant regulations, 
conducting money-laundering investigations, providing expertise 
to the U.S. law enforcement community for investigation and 
training initiatives, and providing training to various foreign 
central banks and government agencies.
    As more fully described in my written statement, private 
banking offers the personal and discreet delivery of a wide 
variety of financial services and products to the affluent 
market, primarily high net worth individuals or their corporate 
interests. Customers most often seek out the services of a 
private bank for issues related to privacy, such as security 
concerns related to public prominence or family considerations 
or, in some instances, tax considerations.
    Private banking services almost always involve a high level 
of confidentiality regarding customer account information. 
Consequently, it is not unusual for private bankers to assist 
their customers in achieving their financial planning, estate 
planning, and confidentiality goals through offshore vehicles 
such as personal investment corporations, trusts, or more 
exotic arrangements, such as mutual funds. Through a financial 
organization's global network of affiliated entities, private 
banks often form the offshore vehicles for their customers. 
These shell companies, which are incorporated in offshore 
jurisdictions, are formed to hold the customer's assets, as 
well as offer confidentiality, because the company rather than 
the beneficial owner of the assets becomes the account holder 
at the private bank.
    Historically, clients sought discretion, confidentiality, 
and asset preservation. This emphasis has shifted as capital 
restraints have been dismantled, and in some countries, 
autocratic regimes have been replaced with free market 
economies. Today, while confidentiality is still important, 
investment performance has taken precedence.
    The Federal Reserve has long recognized that private 
banking facilities, while providing necessary services for a 
specified group of customers, can, without careful scrutiny, be 
susceptible to money laundering. In our continuing effort to 
provide relevant information and guidance in the area of 
effective anti-money-laundering policies and procedures for 
private banking, in 1997 the Federal Reserve published guidance 
on sound risk management practices for private banking 
activities. Besides distributing the guidance to all banking 
organizations supervised by the Federal Reserve, the guidance 
was made publicly available through the Federal Reserve's 
website. More recently, the Federal Reserve developed enhanced 
examination procedures and guidelines specifically designed to 
assist examiners in understanding and reviewing private banking 
    Since 1996, the Federal Reserve has undertaken two 
significant reviews of private banking in an even greater 
effort to understand risks associated with private banking. In 
the fall of 1996, the Federal Reserve Bank of New York began a 
year-long cycle of on-site examinations of risk management 
practices of approximately 40 banking organizations engaged in 
private banking activities. Last year, a Private Banking 
Coordinated Supervisory Exercise by several Reserve Banks and 
Board staff was undertaken to better understand and assess the 
current state of risk management practices at private banks 
throughout the Federal Reserve System.
    The examinations by the Federal Reserve Bank of New York 
focused principally on assessing each organization's ability to 
recognize and manage the potential risks, such as credit, 
market, legal, reputational or operational, that may be 
associated with an inadequate knowledge and understanding of 
its customers' personal and business backgrounds, sources of 
wealth, and uses of private banking accounts.
    We recognized, for example, that some private banking 
operations may not have been conducting adequate due diligence 
with regard to their international customers. While all 
organizations had anti-money-laundering policies and 
procedures, the implementation and effectiveness of those 
policies and procedures ranged from exceptional to those that 
were clearly in need of improvement.
    As a result of these examinations, certain essential 
elements associated with sound private banking activities were 
identified. These elements include the need for: Senior 
management oversight of private banking activities and the 
creation of an appropriate corporate culture that embraces a 
sound risk management and control environment; due diligence 
policies and procedures that require banking organizations to 
obtain identification and basic information from their 
customers, understand sources of funds and lines of business, 
and identify suspicious activity; management information 
systems that provide timely information necessary to analyze 
and effectively manage the private banking business and to 
monitor for and report suspicious activity; and adequate 
segregation of duties to deter and prevent insider misconduct.
    During the course of the examinations, a number of banking 
organizations were reluctant to release information on the 
beneficial ownership of personal investment corporations 
established in recognized secrecy jurisdictions that maintained 
accounts at the banks. The banks raised concerns regarding the 
prohibition on disclosure imposed by the laws of the countries 
in which the personal investment corporations were formed, as 
well as concerns that such disclosures would lead to customer 
backlash. However, as the result of continued persistence by 
Federal Reserve examiners, all banks eventually provided the 
requested information. Very few customers closed their accounts 
even after being asked to waive any confidentiality protections 
that they may have had under foreign law so that the beneficial 
ownership information could be made available to examiners.
    In last year's Coordinated Supervisory Exercise, a sample 
consisting of the private banking activities of seven banking 
organizations was reviewed by a system-wide team, as I stated. 
As a result of the examinations, we concluded that the 
strongest risk management practices existed at private banks 
with high-end domestic customers.
    We found that among private banks with primarily 
international customers, stronger risk management practices 
were in place at those organizations that had a prior history 
of problems in this area but, as a result of regulatory 
pressure, had successfully corrected those problems.
    The weakest risk management practices were identified at 
organizations whose private banking activities were only 
marginally profitable and who were attempting to build a 
customer base by targeting customers in Latin America and the 
    Rest assured that the Federal Reserves is committed to 
attacking money laundering in the financial sector. We believe 
that our long-standing programs and our assistance to the 
overall government efforts are unrivaled in both scope and 
depth. We have been at the forefront of developing new tools to 
enhance our ability to ensure that banking organizations 
establish adequate policies and procedures, and as you are 
aware, we have advocated for quite some time the need for 
increased due diligence with regard to certain banking 
    The Federal Reserve has addressed and continues to address 
perceived vulnerabilities to money laundering in private 
banking by issuing the private banking sound practices guidance 
and developing targeted examination procedures specifically 
designed for private banking, as well as our regular on-site 
examination of private banking operations, as I previously 
stated. There are some practices within private banking 
operations that we believe pose unique vulnerabilities to money 
laundering and, therefore, require a commitment by the banking 
organizations to increased awareness and due diligence.
    Personal investment corporations that are incorporated 
primarily in offshore secrecy or tax haven jurisdictions and 
are easily formed and generally free of tax or government 
regulation are routinely used to maintain the confidentiality 
of the beneficial owner of accounts at private banks. Moreover, 
and of primary interest to the beneficial owners, are the 
apparent protections afforded the account holders by the 
secrecy laws of the incorporating jurisdictions. Private 
banking organizations have at times interpreted the secrecy 
laws of the foreign jurisdictions in which the personal 
investment corporations are located as a complete prohibition 
to disclosing beneficial ownership information. The Federal 
Reserve, however, has continually insisted that for those 
accounts that are maintained within the United States, banking 
organizations must be able to evidence that they have 
sufficient information regarding the beneficial owners of the 
accounts to appropriately apply sound risk management and due 
diligence procedures.
    The use of omnibus or concentration accounts by private 
banking customers that seek confidentiality for their 
transactions poses an increased vulnerability to banking 
organizations that the transactions could be the movement of 
illicit proceeds. Omnibus or concentration accounts are a 
variety of suspense accounts and are legitimately used by 
banks, among other things, to hold funds temporarily until they 
can be credited to the proper account. However, such accounts 
can be used to purposefully break or confuse an audit trail by 
separating the source of funds from the intended destination of 
the funds. This practice effectively prevents the association 
of the customer's name and account numbers with specific 
account activity and easily masks unusual transactions and 
flows that would otherwise be identified for further review.
    There has been much said about the use of correspondent 
accounts in facilitating money-laundering transactions. 
Admittedly, correspondent accounts may raise money-laundering 
concerns because the interbank flow of funds may mask the 
illicit activities of customers of banks that use the 
correspondent services. However, it is our belief that 
respondent banking relationships, if subject to appropriate 
controls, play an integral role in the financial marketplace by 
allowing banks to hold deposits and perform banking services, 
such as check clearing, for other banks.
    A primary obstacle to our supervision of offshore private 
banking activities by U.S. banking organizations, not only with 
regard to beneficial ownership information but with regard to 
safety and soundness of the operations, is our inability to 
conduct on-site examinations in many offshore jurisdictions. 
While it appears that nearly all institutions that we supervise 
have adequate anti-money-laundering policies and procedures, 
our examination process is most effective when we have the 
ability to review and test an organization's policies and 
procedures. Secrecy laws in some jurisdictions limit or 
restrict our ability to conduct these on-site reviews or to 
obtain pertinent information. In such instances, practically 
our only alternative is to rely on a bank's internal auditors.
    The Federal Reserve has been contemplating, in cooperation 
with the banking industry, developing guidance to assist 
banking organizations in implementing money-laundering risk 
assessments of their customer base. These risk assessments 
would be used to determine the appropriate due diligence 
required to identify and, when necessary, report suspicious 
    For example, because of the increased concern that private 
banking accounts could be used for money laundering, we would 
expect that guidance in this area would suggest that it may be 
necessary to engage in a more in-depth analysis of the 
customer's intended use of the account coupled with a 
heightened ongoing review of account activity to determine if, 
in fact, the customer has acted in accordance with the 
expectations developed at the inception of the relationship. We 
believe that such policies and procedures will be an effective 
tool against potential money laundering.
    The banking system has a significant interest in protecting 
itself from being used by criminal elements. Individual banking 
organizations have committed substantial resources and achieved 
noticeable success in creating operational environments that 
are designed to protect their institutions from unknowingly 
doing business with unsavory characters and money launderers. 
Clearly, these efforts need to continue and the momentum needs 
to be maintained.
    I want to emphasize that the Federal Reserve actively 
supports these efforts. Consequently, we will continue our 
cooperative efforts with other bank supervisors and the law 
enforcement community to develop and implement effective anti-
money-laundering programs addressing the ever-changing 
strategies of criminals who attempt to launder their illicit 
funds through private banking operations, as well as through 
other components of the banking organizations here and abroad.
    Thank you.
    Senator Collins. Thank you, Mr. Small.
    Mr. Small, yesterday I asked Citicorp's Chairman, John 
Reed, a series of questions involving the six or seven internal 
audits that Citibank had conducted of the Private Bank, all of 
which identified severe deficiencies in Citibank's procedures. 
It is my understanding that in 1996 the Federal Reserve Bank of 
New York conducted an examination of Citibank's Private Bank.
    Is it correct that the Federal Reserve Bank concluded that 
as part of that examination Citicorp's internal audits of the 
Private Bank were not being taken seriously?
    Mr. Small. Yes.
    Senator Collins. In response to that finding, what did the 
Federal Reserve do?
    Mr. Small. Well, as I stated, Madam Chairman, I am a little 
concerned about talking about the specifics of our examination 
process. As you are aware, we conducted these reviews as a part 
of a global study that we conducted on private banking. The 
organization itself, the Private Bank, as well as the national 
bank, primarily fall under the responsibility of the 
Comptroller, but we coordinated our review because we wanted to 
get an understanding of how private banking operations work in 
the industry as a whole.
    As a result of the 1996 review, we made suggestions and 
recommendations for changes which we then looked at in 1997 and 
again in 1998 in terms of whether or not those recommendations 
that we had made had been dealt with, whether they were moving 
forward. And as you are aware, in the most recent review that 
we did we found that the bank had begun to put the policies and 
procedures in place.
    Senator Collins. I would like to direct this question to 
both of you. During this period of time, there weren't just the 
six or seven internal audits that criticized Citibank's private 
banking operations, but also both of your regulatory 
examinations identified problems.
    Do you feel that in response to the examinations conducted 
by your agencies that Citicorp's senior management responded in 
a timely and aggressive manner to the findings or the problems 
that your examinations identified? Mr. Sharpe, I will start 
with you.
    Mr. Sharpe. Well, Madam Chairman, as you know, we really 
started our examination process into the private banking 
operation in 1994, where we identified some deficiencies, and 
continued that process through examinations in 1996, 1997, 
1998, and 1999. And throughout that process, as we looked at 
various aspects of the private banking operation, we raised a 
number of criticisms, and we talked in our examination reports 
and we talked to the senior management and the board about our 
concerns with respect to correcting deficiencies that we had 
identified in terms of their program to identify high-risk 
clients and client profiling and to set up appropriate 
monitoring systems.
    These were continual issues that we tracked and talked with 
them about, not only during our examination process but we also 
kept track of in between examinations by looking at audit 
reports and other information available to us.
    Had we wished they had responded more quickly? Yes. These 
were important considerations, and the profiling system that 
they had designed and put in place struck us as a very good 
thing, as something that would provide the bank with the kind 
of information it needed in order to better understand the 
source of wealth and other information regarding the clients in 
its private banking operation.
    We also recognized that Citibank is a far-flung 
organizations, operating in 100 countries and is a large 
operation. So we tried to be mindful of that, but obviously, we 
would have preferred to have seen quicker progress.
    Senator Collins. Mr. Small, were you satisfied with the 
timeliness of the response by Citicorp?
    Mr. Small. The easiest answer for me is that I agree with 
everything that Mr. Sharpe said. I will add that obviously we 
still had criticisms in 1997 and 1998, and as Mr. Sharpe has 
said, we certainly wish that they would have moved along and 
implemented the suggestions that we made and had taken 
corrective action at a pace that would not result in continued 
criticism over the following years.
    Senator Collins. And I think it is important to note that 
both of you have found much better compliance more recently, so 
I do want to be fair to Citibank and get that on the record.
    But what troubles me is there seems to have been a period 
of about 5 years when internal audit after internal audit, bank 
exam after bank exam, identified over and over again serious 
deficiencies that exposed the bank to risk of money laundering.
    My question for you, Mr. Small, is that it is my 
understanding that, in response to that pattern, the Federal 
Reserve was sufficiently concerned about the vulnerabilities of 
the Private Bank that it required the Private Bank to report 
quarterly to the board of directors. Was that requirement 
imposed because of the concern that Citibank's executives were 
not aggressively handling the problem?
    Mr. Small. It was imposed because we wanted to make sure 
that the senior management of the bank was quite aware of the 
problems not only that we found but that their own internal 
auditors had identified as deficiencies. And, yes, that is 
exactly why we imposed that requirement.
    And as you know, we lifted that requirement recently 
because we were satisfied that senior management had begun to 
address the issue.
    Senator Collins. Is that an unusual requirement or have you 
found similar problems that warranted a quarterly report from 
the private bank division of other multinational banks?
    Mr. Small. We have in the past required banks to make 
reports directly to the senior management and audit committee 
when we felt that that information wasn't getting addressed 
properly and needed to be done.
    Senator Collins. Finally, Mr. Small, in your testimony in 
particular, but also, Mr. Sharpe, in your statement, each of 
you identified a number of barriers or obstacles to your 
ability to effectively conduct examinations. Mr. Small, I was 
concerned in your statement when you talked about the 
difficulty that your bank regulators had in getting beneficial 
ownership information, and you said that, fortunately, as a 
result of continued persistence by Federal Reserve examiners, 
the banks provided the requested information.
    Should it require that kind of extra effort and 
persistence? Isn't this something that banks should be required 
to have in their files, information on the beneficial owner? 
And should you have to go through these obstacles?
    Mr. Small. Well, our concern is clearly that we need to be 
able to assure ourselves that the banks are conducting 
appropriate due diligence on who their customers are and that 
they know who they are doing business with. And our concern was 
that when we looked at particular customer files to do a 
sampling, that beneficial ownership information was not 
    Now, the history has been that when the beneficial owner is 
an offshore corporation or entity that has perceived privacy 
protections in the offshore jurisdiction, that the banking 
organizations believe that they will violate the laws of that 
foreign jurisdiction by allowing that information to be 
disclosed in the United States. We have taken the position that 
there needs to be a way for the bank to figure out how to make 
sure that they know who the beneficial owner is. They need to 
be able to tell us how they do that, and one of the ways that 
we can do that is by the sampling of these accounts and the 
    I think that while in the early 1990's we began to push 
this idea, we really had not been strongly or--I should say we 
had not been strongly pushing it as hard as we did when we did 
this private banking review in 1996. And I think that is when 
it really came to light for the banks that we were really 
serious about this.
    I think the environment has changed a lot since then and 
that banks are providing the information. They are asking for 
waivers from their customers in case there is a perceived 
problem in the foreign jurisdiction with confidentiality laws.
    So I think there has been a change, and I would agree with 
you that we shouldn't have to push that. But as everything we 
do, when we first raise it as an issue, we have to bring it to 
the forefront and make sure that it is understood what our 
concerns are, and then make the industry understand it and get 
cooperation from the industry. And I think that is where we are 
    Senator Collins. It just seems to me that the tangled web 
that you have described of having to deal with anonymous 
accounts, fictitious names, concentration accounts, offshore 
accounts, and secrecy jurisdiction makes it virtually 
impossible for you to conduct a thorough examination. Mr. 
    Mr. Sharpe. Well, I would certainly agree with Mr. Small 
that it presents issues and barriers and it makes it difficult. 
And I guess the only thing I would add to what he has already 
said is that in many respects this is an international problem 
which will likely require some kind of international solution. 
Just as banks that operate in the United States are subject to 
U.S. laws, banks that operate overseas are subject to the host 
country laws, and sometimes those laws are quite restrictive. 
And we do have to find creative ways and we do have to put some 
burden on our banks to make sure that they are doing everything 
they can under the circumstances to know their customer and to 
know the beneficial owners and to provide whatever protections 
are needed to do the kind of due diligence that needs to be 
    But it is an international issue, and we eagerly look 
forward to working with others, other regulators here in the 
United States and internationally, to address that problem.
    Senator Collins. Are there efforts underway to come up with 
an international approach or some sort of standards that would 
make this global problem easier?
    Mr. Sharpe. There are a number of initiatives underway. We 
have referred to those in our testimony, through the Financial 
Action Task Force and the Basel Committee and other 
organizations that are all working vigorously. And I think also 
there are aspects of the National Money Laundering Strategy 
that will very likely end up addressing that issue from the 
domestic perspective but also through participation with those 
international groups.
    Senator Collins. Thank you. Senator Levin.
    Senator Levin. Thank you, Madam Chairman.
    I am not satisfied with that answer, frankly, because 
yesterday Mr. Reed told us that if their operation in a secrecy 
jurisdiction were a problem for our regulators, the regulators 
would have told us.
    Now, they are a problem for you. You both testified to that 
today. Your testimony, Mr. Small: ``Secrecy laws in some 
jurisdictions limit or restrict our ability to conduct these 
on-site reviews or obtain pertinent information. In such 
instances, practically our only alternative is to rely on a 
bank's internal auditors.''
    Your testimony is the same. You have got problems. You rely 
on voluntary waivers and this kind of activity. You are looking 
for an international solution. I think we all want to have an 
international solution, but I think if we wait for it, we are 
going to continue to see that our banks are making profit off 
dirty money. We should not tolerate it, and you should not 
tolerate it as the people who regulate our banks.
    Now, Citibank says these restrictions in these offshore 
jurisdictions don't seem to be a problem for our regulators or 
for us in Congress or you wouldn't allow us to operate in a 
secrecy jurisdiction, he tells us.
    So my question is: Why do we? Why do you? Why don't we 
simply tell our banks you can't operate in a secrecy 
jurisdiction unless we have the same access to those records--
and here I am talking about legal process access to those 
records--as we do to your records here in the United States? 
Why don't we just simply decide that?
    That is what Citibank told us yesterday. You guys don't 
want us to do it? Tell us. Why don't we tell them? Why don't we 
just simply cut that knot and say we either have to have access 
through legal process to records in secrecy jurisdictions or we 
are not going to permit you to operate in those secrecy 
    Mr. Small.
    Mr. Small. Well, Senator Levin, we actually attempted to do 
that in a proposal that we had last year in terms----
    Senator Levin. But that wasn't a private bank proposal, was 
    Mr. Small. That was all bank proposals. That would have 
certainly covered private banking as well as anything else.
    Senator Levin. No, but I want to just focus on private 
banks, because these are the banks that are used by folks that 
have great wealth, that are able to do things that regular 
folks can't do and don't do. So I just want to talk about 
private banks. Why do we not then tell them at a minimum--
because we know there is a confidentiality issue that will 
obviously disturb regular small depositors, and we don't have 
the answer to that question. But until we do have the answer to 
that question, why not tell the private banks, which are 
handling huge amounts of money and which are the recipients of 
dirty money--that is not the case with small depositors. I am 
talking about private banks which are used to launder money and 
receive either illegal money here or illegal money in those 
    Why not start by telling those banks you cannot use secrecy 
jurisdictions unless we are going to have the same access 
through legal process to those records as we would in this 
country using legal process to those records?
    Mr. Small. I understand that, and I just want to come back 
to say that the proposal would have certainly covered private 
banks. As a matter of fact, it specifically discussed private 
banking operations.
    Senator Levin. But it went way beyond that, correct?
    Mr. Small. Oh, absolutely.
    Senator Levin. I just want to talk about private banks.
    Mr. Small. I understand that. I just want to say, when you 
are asking what we should do about it, there was a proposal 
that dealt with that issue.
    I also think that we have been very diligent and vigilant 
in looking at private banking operations as a result of the 
study we did in 1996 and going forward and that we don't see--
while we still see some problems, we don't see the problems 
that we saw in the past. And so we are getting access to 
information. The banks are bringing the information onshore 
when requested, and I would make the assumption that there 
would be an uproar from the banking community that we would be 
shutting down competition, we would be putting our banks at a 
competitive disadvantage if we completely shut off all offshore 
access because it has legitimate purposes.
    Now, I assume if Congress would like to regulate that, then 
that would be the law of the day.
    Senator Levin. Yes. But I want to now ask you for what your 
recommendation is. These restrictions that exist on your access 
to accounts in offshore banks or offshore countries, which you 
have here but you don't have offshore, is there any reason why 
you should not give us a recommendation, straightforward, that 
says we want access? We don't want to rely on internal audits, 
we want the same access to those accounts, at least in private 
banks that run these offshore operations, as we do to those 
operations here domestically? Is there any reason why you 
shouldn't give us just a flat-out recommendation? Because that 
is what they tell us.
    Mr. Reed told us yesterday, if we have a problem with that, 
let us know; apparently you guys don't have a problem, or else 
you would let us know. That is a very fair comment on his part, 
as far as I am concerned. Now, why not do it? Why not give us 
that recommendation?
    Mr. Small. I don't know. We would obviously have to 
evaluate it and come back to you.
    Senator Levin. I would appreciate your doing that.
    In February 1997, the Federal Reserve asked, and the OCC 
agreed, to review accounts at the Citibank Private Bank 
associated with President Bongo of Gabon. Now, one of the 
concerns was the lack of file information about the source of 
the funds in the account.
    Mr. Ober testified under oath yesterday that in the 7 years 
that he handled the Bongo accounts, he never asked President 
Bongo about the source of the funds. Never once.
    What is your reaction to that? Let's start with you, Mr. 
    Mr. Sharpe. Well, when the Federal Reserve brought that 
matter to our attention, we assigned one of our most senior 
examiners who has experience in bank secrecy matters and anti-
money laundering to look into that matter, and he did. He 
spent, off and on over a 4-month period, a great deal of time 
looking at bank files, bank records. He looked at cash in, cash 
out. He looked not only at Mr. Bongo's accounts, but the 
accounts of relatives and associates. He also talked with the 
bank about their reasons for concluding on source of funds 
issues and did not accept the initial answer that he got but, 
in fact, told the bank that he needed more. The bank went to 
its Paris operation where an analysis was done of the source of 
wealth and provided back to our examiner. That, together with 
the information that he had assembled, suggested to him that 
this was, in fact--this was a situation that did not rise to a 
level that justified the filing of an SAR.
    I would note that the particular customer here had an 
account relationship with the bank dating back to 1970, and the 
private banking account relationship dated back to 1985. And it 
was not common, I think, certainly not in the 1970s and 
probably not even in the 1980s, to have that kind of 
information in the file. So it was an appropriate inquiry, and 
we are satisfied that our examiner did what he could to look 
behind the bank's explanation and to draw the conclusion that 
he did.
    Senator Levin. Now, was it your understanding that this 
memo meant that President Bongo received $111 million each year 
in government funds which he could use in an unrestricted way, 
including putting the money in his personal bank deposits? \1\ 
Is that what your understanding was?
    \1\ See Exhibit No. 19 which appears in the Appendix on page 154.
    Mr. Sharpe. That was the information that was provided by 
the bank.
    Senator Levin. And did you check with the IMF or the World 
Bank or anybody else to see whether that was true?
    Mr. Sharpe. No. We accepted the analysis that was done by 
their Paris office.
    Senator Levin. Looking back, wouldn't it have been better 
to check with the IMF or the World Bank or any other entity 
that would have knowledge of the budget of Gabon to see whether 
or not, in fact, that president was given under Gabon law the 
unrestricted use of $111 million a year?
    Mr. Sharpe. There are always additional steps, I think, 
that people could identify, that you could go back knowing 
today what we didn't know then, to suggest that additional or 
further inquiry might have been appropriate. We are satisfied 
that the examiner presented with the facts that he was 
presented with made an appropriate inquiry, looked into the 
matter, spent a great deal of time on it, and had to draw a 
    The only other point I would make on that, Senator, is that 
his conclusion was not a conclusion that the account was 
absolutely okay. He didn't approve anything. It simply was a 
conclusion that there wasn't sufficient evidence to justify the 
filing of a suspicious activity report.\1\
    \1\ See Exhibit No. 20 which appears in the Appendix on page 155.
    One of the things he clearly communicated to the bank was 
that it was their responsibility to continue to monitor the 
account, and if they gathered additional information that 
suggested that something more needed to be done, it was the 
bank's responsibility to act on that.
    Senator Levin. Well, it seems to me if that is the level of 
the oversight we are going to be providing, it is just 
inadequate, because it is such a glaring statement in an 
explanation that it just cries out for an in-depth inquiry. Is 
the president of a country handed $111 million in a budget for 
his own personal use? Any inquiry with any of the world banking 
operations, World Bank, any of the world banks, would have 
indicated, no, there is no such provision in Gabon law which 
gives the president $111 million.
    So I would hope that this would be, frankly, a lesson to 
our regulators that we just have got to look beneath the most 
superficial kind of an explanation. That is not knowing your 
customer. That is the opposite, it seems to me. That is just 
accepting any explanation.
    It is a little bit like Salinas. The explanation is he sold 
a construction company. No one asked what construction company, 
what did he get for it. There were rumors floating around 
Mexico at the time about source of corrupt money, and there is 
not even a question? What do you mean he was in the 
construction business and he sold his company? What was the 
name of it? Never asked. What was it sold for? Never asked. 
What kind of construction projects? Never asked.
    And so it seems to me we have got to be a lot tougher on 
the regulatory side here with whatever authority you have.
    Now, I don't think, frankly, you've got enough authority. 
That is what I pressed you on before, Mr. Small. You are 
stymied in terms of getting information about who the 
beneficial owners are and what the source of wealth is, because 
of secrecy laws in other countries that our banks are allowed 
to bank in offshore. And yet we are kind of silent about that 
and, therefore, complicit, I believe.
    We cannot complain about corruption in foreign countries 
and then allow our own banks to profit from that corruption 
without doing our best to eliminate that inconsistency, because 
I think it is just wrong. But we need your help, not just in 
regulating with the powers you have, but giving us 
recommendations, looking at these bills that are pending and 
will be introduced to tighten up these laws on money 
laundering, and we welcome very much your response to those.
    I have a number of other questions, but my time is up.
    Senator Collins. Go ahead.
    Senator Levin. Thank you very much, Madam Chairman.
    I want to go back to Mr. Sharpe. Is it fair to say, given 
the 1994 review of the Citibank operations and your 
dissatisfaction with their Know Your Customer policies, that 
from your perspective, at least, know your client was not an 
effective part of the culture of that bank in that year?
    Mr. Sharpe. Well, that process had not yet really taken 
root in the bank in that year, and that is what was being 
developed, and that is one of the things that we tracked the 
progress of over the subsequent exams.
    As I said before, we were interested in seeing that 
particular process come to fruition because we felt it was a 
process that was worth following through. It had a lot of very 
attractive features to it.
    Senator Levin. My question is, though, at least from your 
review of it in that year, the Know Your Client culture had not 
taken at that bank. Is that a fair statement?
    Mr. Sharpe. I think that is a fair statement. I would point 
out that this was really our first hard look at private banking 
in 1994. In fact, I would venture to say in 1994 that a lot of 
folks weren't looking at private banking, period. It was 
considered a sleepy backwater, and our examiner looked at it in 
terms of the potential risk that it might present and thought 
an examination was appropriate.
    Senator Levin. I think it was, too. But I am saying, when 
you did examine in that year, it is fair to say that the Know 
Your Client Culture had not taken hold at Citibank at that time 
yet. Is that fair or not?
    Mr. Sharpe. I think that is a fair statement.
    Senator Levin. All right. Let me just close, and I very 
much appreciate the additional minutes that the Chairman has 
squeezed in here for me. I know, for instance, Mr. Small, that 
you have been taking the lead in your agency on trying to 
correct some of these problems, and we very much appreciate 
both you and Mr. Sharpe in terms of the work that you have 
done. And while we are pressing your agencies to take stronger 
action and to help us close loopholes, in your cases, I know 
that as individuals you have been in a leadership role trying 
to do exactly that. And I just want to end by thanking you. I 
know I have been pressing you pretty hard here today, but I 
wouldn't want the hearing to end without a thank you for your 
cooperation with this investigation and for your work at the 
agencies. You have been in the advance part of your agency on 
these areas. Thank you both.
    Mr. Small. Thank you.
    Mr. Sharpe. Thank you.
    Senator Collins. I am sure that our witnesses are delighted 
to learn that we have another series of votes so that we are 
going to end the hearing.
    We may have some additional questions which we will submit 
for the record from both Senator Levin and from myself.
    Because the vote has begun, I am going to submit my closing 
statement for the record.

    I want to thank all of the witnesses for their testimony today. The 
peculiarities of private banking and its vulnerabilities to money 
laundering must remain a focus of our banking system and, particularly, 
our banking regulators. These hearings have demonstrated--I think 
conclusively--that private banking is by its very design vulnerable to 
criminals who wish to launder dirty money. As a consequence, we must 
depend on our banks to implement internal procedures and controls that 
will allow the detection and reporting of suspicious activity.
    And, it's not enough that our banks have written policies and 
procedures in place. They must create a corporate culture that places a 
priority on fulfilling a bank's legal obligation to report money 
laundering. That means banks must ensure that their employees 
understand that, while servicing the client is always important, such 
service cannot include turning a blind-eye to activities that may be 
related to money laundering. Setting such a tone and culture starts at 
the top and, as I noted yesterday, I am glad to hear that Citibank's 
CEO, Mr. Reed, is taking steps to make that culture a reality at 
Citibank's Private Bank.
    Today's testimony also makes clear that our banking regulators have 
a big job ahead of them to make sure that American banks take seriously 
their legal obligations to detect and report suspicious activity. All 
in all, I believe the OCC and the FED have done a good job, and I am 
glad to see that private banking has been given greater scrutiny in 
recent years. There is much to do, however, and I hope that the 
regulators remain vigilant and take the steps necessary to keep our 
banks clean of the dirty money that is circulating in the international 
banking system.
    Again, I want to thank the witnesses for their testimony over the 
last 2 days, and I want to thank my staff for their work on this 
investigation and preparing for this hearing, Claire Barnhard, Leo 
Wisneski, Ryan Blalack, and Justin Tatham. As I noted yesterday, this 
investigation was commenced at the request of Senator Levin and I want 
to commend him and, particularly, his staff for their hard work in 
preparing these hearings. This hearing is now adjourned.

    Senator Collins. I did want to again commend Senator Levin 
and his staff for outstanding work in this area, and I also 
want to thank my own staff, which also has worked extremely 
hard on these hearings. I think they have been very interesting 
and very valuable, and I look forward to continuing to work 
with Senator Levin on this issue.
    Senator Levin, if you would like to make any final 
comments, I would give you 1 minute.
    Senator Levin. Yes, thank you very much, Madam Chairman, 
again, for these hearings, for you and your staff's strong 
support and the great work. Your staff has worked very closely 
with our staff here.
    We are hoping, frankly, to tighten up these laws. There is 
too much dirty money that is moving through American banks. It 
is not healthy for us. It is not healthy for the world. And we 
are going to do what we can to change it. As the Chairman says 
it, we need to do it on the regulatory side. Surely we have got 
to enforce what laws we have on the books. But there are some 
pretty gaping holes in those laws. With your help we will be 
able to close those holes.
    Again, thank you for your work in your agencies and for 
your appearance and cooperation with our staffs.
    Senator Collins. I want to thank all of our witnesses both 
from yesterday and today, and the hearings are now adjourned.
    [Whereupon, at 4:14 p.m., the Subcommittee was adjourned.]

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