[Senate Hearing 106-428]
[From the U.S. Government Publishing Office]
S. Hrg. 106-428
PRIVATE BANKING AND MONEY LAUNDERING: A CASE STUDY OF OPPORTUNITIES AND
VULNERABILITIES
=======================================================================
HEARINGS
before the
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
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
COMMITTEE ON GOVERNMENTAL AFFAIRS
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
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
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:
Page
Senator Collins.............................................. 1, 71
Senator Levin................................................ 4, 72
Senator Specter.............................................. 8
Senator Cochran.............................................. 9
WITNESSES
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
Exhibits
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
[CB15410];
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
[CB11909];
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
[CB15398-400]
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/
95);
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.
[CB24579];
GRegister of Directors and Officers of Trocca, Ltd.
[CB23446];
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.
[CB23976]
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-
8];
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,
2454];
GNew York PBG profile, prepared before or on 2/13/97
[X4328];
GNew York PBG ``Full Profile'' prepared after 10/31/97
[X6695-98];
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
[739];
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
[770];
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-
52];
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-
44];
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
[X7059-60];
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
[X7056];
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
[X7065];
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
[X7045];
G12/24/98 e-mail to Salim Raza from Christopher L. Rogers
[X7048];
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
[CS2156-57];
G8/99 e-mails on closing accounts and Bongo nephew
[CS2158];
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
Library);
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
Library);
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
[CS2733-38]
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,
3215-17]
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
[CS1985];
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
[CS1900]
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
[CS3371];
G9/18/98 Margin System, Detailed Assets document
describing time deposits used in $39 million transfer
[CS3373];
G9/98 Account Statement showing $39 million transfer
[CS2995-96];
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
[CS3130];
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/
99;
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
(10/14/99);
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
Lusinchi:
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
Suharto:
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
Gomez:
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
hearings:
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)
[X7216];
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
[X7290];
GTransaction journal, including incoming funds transfer
on 7/30/96 [X7289];
G7/31/96 e-mail to Donnelle Knowles from Alain Ober
[X7293];
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
[X7526];
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
[X7565]
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
[X7625];
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
Subcommittee)
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................................................ *
PRIVATE BANKING AND MONEY LAUNDERING: A CASE STUDY OF OPPORTUNITIES AND
VULNERABILITIES
----------
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).
OPENING STATEMENT OF SENATOR COLLINS
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
laundering.
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.
OPENING STATEMENT OF 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.
law.
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
accounts.
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:]
PREPARED OPENING STATEMENT OF SENATOR LEVIN
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
reprimanded.
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
Indonesia;
--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''
way.
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.
OPENING STATEMENT OF SENATOR SPECTER
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
action.
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
today.
OPENING STATEMENT OF SENATOR COCHRAN
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\
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\1\ The three GAO statements appear as Exhibits 21-23 in the
Appendix on pages 159-197.
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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.
TESTIMONY OF ROBERT L. ROACH, COUNSEL TO THE MINORITY,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
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
record.\1\
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\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.
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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\
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\2\ See Exhibit No. 1 which appears in the Appendix on page 111.
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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\
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\1\ See Exhibit No. 2 which appears in the Appendix on page 112.
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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\
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\2\ See Exhibit No. 3 which appears in the Appendix on page 113.
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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
directive.
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
earlier.
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.
TESTIMONY OF ELISE J. BEAN, DEPUTY CHIEF COUNSEL TO THE
MINORITY, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
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
companies.''
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
criminals.''
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
asked.
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
Chair.
[Recess.]
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
hearings.\1\
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\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
supervisor.
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.
TESTIMONY OF AMY C. ELLIOTT,\1\ VICE PRESIDENT, CITIBANK
PRIVATE BANK, NEW YORK, NEW YORK
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
responsibility.
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.
ALBERT MISAN,\1\ VICE PRESIDENT, CITIBANK PRIVATE BANK, NEW
YORK, NEW YORK
Mr. Misan. Senator Collins, Senator Levin, Members of the
Subcommittee, and members of the Subcommittee staff, good
morning.
---------------------------------------------------------------------------
\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
materially.
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
Bank.
At this point I have completed my prepared remarks and
would be pleased to take questions from the Subcommittee. Thank
you.
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.
Salinas?
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
references.
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
jurisdiction?
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
confidential.
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\
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\1\ See Exhibit No. 4 which appears in the Appendix on page 114.
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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,
1992?
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?
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\1\ See Exhibit No. 5 which appears in the Appendix on page 123.
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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,
right?
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
accurate?
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.''
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\1\ See Exhibit No. 6 which appears in the Appendix on page 127.
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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
accordingly.''
Were you familiar with that document, the Client Acceptance
Policy?
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
thereafter.''
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
time.
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?
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\1\ See Exhibit No. 4 which appears in the Appendix on page 114.
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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
file?
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
leader.
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
covered.
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\
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\1\ See Exhibit No. 7 which appears in the Appendix on page 133.
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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.
Misan?
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
period?
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
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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
that?
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\
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\2\ See Exhibit No. 11a. and 11b. which appear in the Appendix on
pages 141 and 142.
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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.''
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\1\ See Exhibit No. 11a. which appears in the Appendix on page 141.
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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
person?
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?
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\2\ See Exhibit No. 11b. which appears in the Appendix on page 142.
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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.
TESTIMONY OF ALAIN OBER,\1\ VICE PRESIDENT, CITIBANK PRIVATE
BANK, NEW YORK, NEW YORK
Mr. Ober. Thank you, Senator.
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\1\ The prepared statement of Mr. Ober appears in the Appendix on
page 950.
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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
accounts.
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
clients.
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.
TESTIMONY OF G. EDWARD MONTERO,\1\ SENIOR EXECUTIVE, CITIBANK
PRIVATE BANK, NEW YORK, NEW YORK
Mr. Montero. Thank you.
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\1\ The prepared statement of Mr. Montero appears in the Appendix
on page 953.
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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
world.
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
prospects.
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
Bank.
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
client.
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.
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\1\ See Exhibit No. 7 which appears in the Appendix on page 133.
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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?
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\2\ See Exhibit No. 12 which appears in the Appendix on page 143.
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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.
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\3\ See Exhibit No. 4 which appears in the Appendix on page 114.
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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,
September.
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\1\ See Exhibit No. 6 which appears in the Appendix on page 127.
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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
statement?
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
correct.
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
1996.
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
sons.\1\
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\1\ See Exhibit No. 13 which appears in the Appendix on page 144.
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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
that.
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
differently?
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
Rogers.
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\1\ See Exhibit No. 14 which appears in the Appendix on page 145.
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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.
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\1\ See Exhibit No. 15 which appears in the Appendix on page 147.
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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.
Montero?
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
Levin?
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
withdrawal.
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
helpful.
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
due.
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\1\ See Exhibit No. 16 which appears in the Appendix on page 148.
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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.
TESTIMONY OF JOHN REED,\1\ CHAIRMAN AND CO-CHIEF EXECUTIVE
OFFICER, CITIGROUP, NEW YORK, NEW YORK, ACCOMPANIED BY TODD
THOMSON, CHIEF EXECUTIVE OFFICER, CITIBANK PRIVATE BANK, NEW
YORK, NEW YORK; AND MARK MUSI, CHIEF COMPLIANCE AND CONTROL
OFFICER, CITIBANK PRIVATE BANK, NEW YORK, NEW YORK
Mr. Reed. Thank you very much, Madam Chairman, Senators.
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\1\ The prepared statement of Mr. Reed appears in the Appendix on
page 957.
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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
comments.
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
activities.
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
standard.
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
standard.
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-
laundering?
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
to.
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
practice.''
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
action.
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
assigned.
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-
laundering.
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
worlds.''\1\
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\1\ See Exhibit No. 17 which appears in the Appendix on page 149.
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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
it.
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
job.
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
questions.
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
transmitted.
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
purposes.\1\
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\1\ See Exhibit No. 18 which appears in the Appendix on page 151.
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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
Switzerland.''
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
appropriately.
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
customers.
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
knowledge?
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
disadvantage.
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
session.
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\
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\1\ See Exhibit No. 18 which appears in the Appendix on page 151.
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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
supposition.
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
effectively.
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
noted.
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
behavior.
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\
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\1\ See Exhibit No. 16 which appears in the Appendix on page 148.
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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
give.
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
along.
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
indicates.
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?
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\1\ See Exhibit No. 15 which appears in the Appendix on page 147.
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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
that.
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
question----
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
folks.
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.]
PRIVATE BANKING AND MONEY LAUNDERING: A CASE STUDY OF OPPORTUNITIES AND
VULNERABILITIES
----------
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).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. The Subcommittee will please come to
order.
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
money.
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.
OPENING STATEMENT OF 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
clients.
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
secrecy.
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
so.
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
apply.
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.
TESTIMONY OF ANTONIO GIRALDI,\2\ FORMER PRIVATE BANKER,
CURRENTLY IN FEDERAL PRISON FOR MONEY LAUNDERING
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
respectability.
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
identity.
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
banking.
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
funds?
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
sufficient?
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
area?
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
relationships.
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
governments.
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.
[Recess.]
Senator Collins. The Subcommittee will come to order.
At this time I would like to call on Senator Levin for his
questions.
Senator Levin. Thank you, Madam Chairman, and welcome, Mr.
Giraldi.
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
reprimanded.
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
institutions.
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
structure.
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
vehicles.
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
correct?
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
culture.''
`` `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
client.''
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.
TESTIMONY OF RAYMOND W. BAKER,\1\ GUEST SCHOLAR IN ECONOMIC
STUDIES, THE BROOKINGS INSTITUTION, WASHINGTON, DC.
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.
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\1\ The prepared statement of Mr. Baker appears in the Appendix on
page 1053.
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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
fraud.
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
economies.
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
interests.
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
money.
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
point.
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
it.
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
withdrawals.
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
findings.
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
evasion.
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
economies.
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
correct.
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
elsewhere.
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?
TESTIMONY OF RALPH E. SHARPE,\1\ DEPUTY COMPTROLLER FOR
COMMUNITY AND CONSUMER POLICY, OFFICE OF THE COMPTROLLER OF THE
CURRENCY, DEPARTMENT OF THE TREASURY, WASHINGTON, DC.
Mr. Sharpe. Thank you, Madam Chairman.
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\1\ The prepared statement of Mr. Sharpe appears in the Appendix on
page 1079.
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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
banking.
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
accounts.
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
program.
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
requirements.
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
internationally.
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
questions.
Senator Collins. Thank you, Mr. Sharpe.
Mr. Small.
TESTIMONY OF RICHARD A. SMALL,\1\ ASSISTANT DIRECTOR, DIVISION
OF BANKING SUPERVISION AND REGULATION, FEDERAL RESERVE SYSTEM,
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
process.
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
activities.
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
Caribbean.
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
transactions.
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
activity.
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
available.
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
information.
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
now.
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.
Sharpe.
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
done.
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
jurisdictions?
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
it?
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
countries.
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.
Sharpe.
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
conclusion.
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.
CLOSING REMARKS OF SENATOR COLLINS
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.]
A P P E N D I X
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