[Senate Hearing 107-84]
[From the U.S. Government Publishing Office]
S. Hrg. 107-84
ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING
=======================================================================
HEARINGS
before the
PERMANENT SUBCOMMITTEE ON
INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 1, 2, AND 6, 2001
__________
VOLUME 1 OF 5
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
71-166 WASHINGTON : 2001
_______________________________________________________________________
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
JOSEPH I. LIEBERMAN, Connecticut, Ranking Democrat
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
JUDD GREGG, New Hampshire THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah JEAN CARNAHAN, Missouri
Hannah S. Sistare, Staff Director and Counsel
Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
Darla D. Cassell, Chief Clerk
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
SUSAN M. COLLINS, Maine, Chairman
CARL LEVIN, Michigan, Ranking Democrat
TED STEVENS, Alaska 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
JUDD GREGG, New Hampshire THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah JEAN CARNAHAN, Missouri
Christopher A. Ford, Chief Counsel and Staff Director
Linda J. Gustitus, Democratic Chief Counsel and Staff Director
Elise J. Bean, Democratic Deputy Chief Counsel
Robert L. Roach, Democratic Counsel and Chief Investigator
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Collins......................................... 1, 51, 101
Senator Levin........................................... 4, 53, 102
Senator Carnahan............................................. 9
WITNESSES
Thursday, March 1, 2001
John M. Mathewson, former owner of Guardian Bank and Trust
(Cayman) Ltd., accompanied by Oscar C. Gonzalez, Esq........... 10
James C. Christie, Senior Vice President, Global Treasury Risk
Management, Bank of America, Oakland, California............... 22
David A. Weisbrod, Senior Vice President, Treasury Services
Division, The Chase Manhattan Bank, New York, New York......... 27
Friday, March 2, 2001
Jack A. Blum, Partner, Lobel, Novins and Lamont, Washington, DC.. 57
Anne Vitale, former Managing Director and Deputy General Counsel,
Republic National Bank of New York, and Current Special
Litigation Counsel, HSBC USA, Inc., New York, New York......... 60
Robb Evans, Managing Partner, Robb Evans and Associates, Sun
Valley, California............................................. 62
Jorge A. Bermudez, Executive Vice President and Head of e-
Business, Citibank, N.A., New York, New York................... 75
Carlos Fedrigotti, President and Country Corporate Officer for
Citibank Argentina, Buenos Aires, Argentina.................... 78
Martin Lopez, Vice President and Citibank Corporate Bank Head,
Republic of South Africa....................................... 80
Tuesday, March 6, 2001
Arthur O. Jacques, Esquire, Jacques Little Barristers and
Solicitors, Toronto, Ontario, Canada........................... 105
Joseph M. Myers, Acting Deputy Assistant Secretary (Enforcement
Policy), U.S. Department of the Treasury, Washington, DC....... 117
Mary Lee Warren, Deputy Assistant Attorney General, Criminal
Division, U.S. Department of Justice, Washington, DC........... 120
Alphabical List of Witnesses
Bermudez, Jorge A.:
Testimony.................................................... 75
Prepared statement with attachments.......................... 180
Blum, Jack A.:
Testimony.................................................... 57
Prepared statement........................................... 162
Christie, James C.:
Testimony.................................................... 22
Prepared statement........................................... 143
Evans, Robb:
Testimony.................................................... 62
Prepared statement........................................... 172
Fedrigotti, Carlos:
Testimony.................................................... 78
Prepared statement........................................... 223
Jacques, Arthur O.:
Testimony.................................................... 105
Prepared statement with attachments.......................... 241
Lopez, Martin:
Testimony.................................................... 80
Prepared statement........................................... 233
Mathewson, John M.:
Testimony.................................................... 10
Prepared statement........................................... 139
Myers, Joseph M.:
Testimony.................................................... 117
Prepared statement........................................... 250
Vitale, Anne:
Testimony.................................................... 60
Prepared statement........................................... 168
Warren, Mary Lee:
Testimony.................................................... 120
Prepared statement........................................... 256
Weisbrod, David A.:
Testimony.................................................... 27
Prepared statement........................................... 156
Appendix
``Correspondent Banking: A Gateway to Money Laundering,'' report
by the Minority Staff Report of the Permanent Subcommittee on
Investigations (see contents for report on page 274)........... 273
Exhibits
* May be found in the files of the Subcommittee
Page
1. Diagrams on correspondent banking........................... 692
2. American International Bank marketing documents............. 694
3. Three nested banks at American International Bank........... 697
4. Bank of America call memo on American International Bank.... 698
5. American International Bank's correspondent account history. 699
6. Internet gambling advertisement naming Bank of America...... 700
7. Fortuna Alliance deposits into Swiss American Bank account
at Chase Manhattan............................................. 702
8. Chase Manhattan Bank e-mail of 9/10/99 concerning Swiss
American/Antigua Bank.......................................... 703
9. Chase Manhattan Bank e-mail of 8/5/98 regarding Swiss
American Bank.................................................. 706
10. Chase Manhattan Bank memo of 11/17/98 regarding Swiss
American Bank.................................................. 707
11. Frauds through Swiss American Bank/Swiss American National
Bank........................................................... 708
12. Chase Manhattan Bank e-mail of 12/6/99 regarding Swiss
American Bank.................................................. 709
13. Internet gambling advertisements naming Chase Manhattan Bank 710
14. Chase Manhattan Bank e-mail of 3/19/93 regarding Swiss
American Bank.................................................. 718
15. Citibank summary of M.A. Bank seizure....................... 719
16. Letter of 9/29/00 from Citibank counsel to the Permanent
Subcommittee on Investigations regarding M.A. Bank............. 721
17. Seizure Warrant of 5/14/98 regarding M.A. Bank.............. 725
18. Subpoena to Citibank New York dated 5/18/98 regarding M.A.
Casa de Cambio................................................. 727
19. Example of an M.A. Bank withdrawal slip..................... 731
20. Citibank e-mail of 12/3/99 regarding anti-money laundering
procedures..................................................... 732
21. Letter of 9/29/00 from Citibank counsel to the Permanent
Subcommittee on Investigations regarding correspondent banking
policy......................................................... 734
22. Report of Citigroup Anti-Money Laundering Unit.............. 740
23. Schedule of wire transfers through Citibank New York and
American Exchange Company...................................... 742
24. Monthly statements of Citibank New York correspondent
accounts for Banco Republica, American Exchange Company, and
Federal Bank................................................... 743
25. Ownership diagram of Grupo Moneta........................... 749
26. Excerpts from Citibank documents regarding relationship with
Grupo Moneta................................................... 751
27. Citibank and Central Bank of Argentina documents regarding
the anti-money laundering program of Federal Bank.............. 752
28. Excerpt from Resolution No. 395/96 of the Central Bank of
Argentina...................................................... 754
29. Excerpt from Citibank memo regarding ownership of Federal
Bank........................................................... 756
30. Citibank account opening steps.............................. 757
31. Excerpts regarding Citibank's policy on opening accounts for
offshore shell banks........................................... 758
32. Series of letters exchanged between the Central Bank of
Argentina and Citibank Argentina regarding ownership of Federal
Bank........................................................... 760
33. British Trade and Commerce Bank certificates of deposit..... 782
34. British Trade and Commerce Bank documents................... 784
35. Internet advertisements for offshore shell banks............ 789
36. Treasury Regulations on Suspicious Activity Reports......... 804
37. 1997 Citibank memo regarding Grupo Moneta................... 805
38. Bank of America and Chase Manhattan Bank comments on Swiss
American Bank.................................................. 807
39. Chase Manhattan Bank e-mail of 10/12/95 regarding Swiss
American Bank.................................................. 809
40. Chase Manhattan Bank call memo of 1/23/96 regarding AIB..... 810
41. Chase Manhattan Bank e-mail of 9/9/99 regarding Swiss
American Bank.................................................. 812
42. Bank of America call memo of 9/4/92 regarding Swiss American
Bank........................................................... 813
43. Letter of 3/12/97 from Chase Manhattan Bank to AIB regarding
account closing................................................ 814
44. Chart entitled ``Gateway to U.S. Banks''.................... 815
45. Summary of Gold Chance Fraud prepared by the Minority Staff
of the Permanent Subcommittee on Investigations, March 6, 2001. 816
46. Guardian Bank and Trust Visa Card produced by John Mathewson
at the March 1, 2001, Permanent Subcommittee on Investigations
hearing........................................................ 823
47. Permanent Subcommittee on Investigations' staff rendition of
a chart entitled ``$3 Million Deposit of Gold Chance Funds
Depleted in Wire Transfers By British Trade & Commerce Bank to
33 Bank Accounts in 45 Days, December 1999-January 2000''
included in the testimony of Arthur Jacques before the
Subcommittee on March 6, 2001.................................. 824
48. Supplemental remarks of Jorge Bermudez...................... 825
49. Supplemental remarks of Carlos Fedrigotti................... 827
50. Supplemental questions and answers of the U.S. Department of
Justice........................................................ 829
51. Supplemental questions and answers of U.S. Department of the
Treasury....................................................... 855
52. Supplemental questions and answers of Citibank.............. 863
53. Supplemental questions and answers of Bank of America....... 867
54. Supplemental questions and answers of J.P. Morgan Chase..... 868
55. Documents from foreign governments relevant to the Permanent
Subcommittee on Investigations staff report or hearings on
money laundering:
a. Government of Antigua and Barbuda letter dated July 14,
2000........................................................... 871
b. Jersey Financial Services Commission letter dated March
13, 2001....................................................... 874
c. Guernsey Financial Services Commission letter dated March
15, 2001....................................................... 876
d. Government of Anguilla Statement of Facts................ 879
e. Press articles on new shell bank prohibitions in the
Bahamas and Cayman Islands..................................... 883
Volume 2
56. Documents related to American International Bank, Caribbean
American Bank or Overseas Development Bank and Trust Company
(Case Studies No. 1-3):
a. American International Bank general documents............ 885
b. Ford/Forum documents..................................... 950
c. Mark Harris bank documents............................... 998
d. Carribean American Bank documents........................ 1024
e. Bank of America documents................................ 1196
f. Toronto Dominion Bank (New York) documents............... 1225
g. Chase Manhattan Bank documents........................... 1234
h. Popular Bank of Florida (now BAC Florida Bank) documents. 1249
i. Overseas Development Bank and Trust documents............ 1297
j. First National Bank of Commerce (now Bank One
Corporation) documents......................................... 1449
k. AmTrade International Bank documents..................... 1481
57. Documents related to British Trade and Commerce Bank (Case
Study No. 4):
a. British Trade and Commerce Bank (BTCB) general documents. 1493
b. BTCB financial documents................................. 1604
c. BTCB management and employee documents................... 1729
Volume 3
d. BTCB high yield investment program documents............. 1823
e. Internet gambling documents.............................. 1842
f. Banco Industrial de Venezuela documents.................. 1908
g. Security Bank documents.................................. 1989
h. First Union National Bank documents...................... 2027
i. Koop fraud documents..................................... 2099
j. Cook fraud documents..................................... 2238
k. Gold Chance fraud documents.............................. 2287
l. $10 million CD interpleader documents.................... 2484
m. Miscellaneous documents relating to BTCB:
1. KPJ Trust/Tiong documents........................... 2621
2. Brett/Bailett documents............................. 2670
3. Vector Medical Technology documents................. 2682
n. Permanent Subcommittee on Investigation Deposition of
John G. Long IV, February 26, 2001............................. *
o. SEALED EXHIBIT: Suspicious Activity Reports.............. *
Volume 4
58. Documents related to Hanover Bank (Case Study No. 5):
a. Hanover Bank general documents........................... 2789
b. Harris Bank International and Standard Bank Jersey Ltd.
documents...................................................... 2857
c. Clerical Medical documents............................... 2907
d. Eric Rawle Samuel documents.............................. 2919
e. Koop fraud documents..................................... 2943
f. Casio Computer fraud documents........................... 2984
g. FSA investigation documents.............................. 3016
h. Unanswered information request to Richard O'Dell Poulden. 3043
59. Documents related to British Bank of Latin America (Case
Study No. 6):
a. British Bank of Latin America general documents.......... 3049
b. Bank of New York documents............................... 3100
c. 1999 and 2000 National Money Laundering Strategy excerpts 3127
d. Operation Casablanca and Operation Juno documents........ 3138
e. SEALED EXHIBIT: Proprietary information on British Bank
of Latin America............................................... *
60. Documents related to European Bank (Case Study No. 7):
a. European Bank general documents.......................... 3182
b. Citibank documents....................................... 3219
c. Taves fraud documents.................................... 3319
d. Benford account documents................................ 3435
e. Internet Processing Corp. account documents.............. 3627
f. Nest Bank documents...................................... 3682
Volume 5
61. Documents related to Swiss American Bank and Swiss American
National Bank (Case Study No. 8):
a. Swiss American Bank and Swiss American National Bank
general documents.............................................. 3703
b. Bank Ownership........................................... 3715
c. Bank Leadership.......................................... 3735
d. Fitzgerald case documents................................ 3814
e. Gherman fraud documents.................................. 3931
f. Debella fraud documents.................................. 3957
g. Fortuna Alliance fraud documents......................... 4035
h. Documents related to other frauds or questionable
accounts....................................................... 4083
i. Bank of New York documents............................... 4122
j. Bank of America documents................................ 4175
k. Chase Manhattan Bank documents........................... 4222
l. InterSafe Global documents............................... 4269
m. Documents related to Peter Herrington..................... 4282
62. Documents related to M.A. Bank (Case Study No. 9):
a. M.A. Bank general documents.............................. 4391
b. Permanent Subcommittee on Investigations correspondence
with M.A. Bank representatives................................. 4411
c. Permanent Subcommittee on Investigations correspondence
with M.A. Bank agents in Uruguay............................... 4422
d. Court filings and U.S. Department of Justice
correspondence................................................. 4434
e. M.A. Bank documents related to Mr. DiTullio.............. 4474
f. U.S. Customs records of interviews....................... 4477
g. Permanent Subcommittee on Investigations correspondence
with Citibank.................................................. 4501
h. Citibank documents related to M.A. Bank.................. 4504
63. Documents related to Federal Bank (Case Study No. 10):
a. Central Bank of the Bahamas documents.................... 4585
b. CEI related documents.................................... 4617
c. Account opening and closing documents.................... 4629
d. Resolution No. 395 of the Central Bank of Argentina...... 4647
e. Analyses of Banco Republica, Federal Bank and other Grupo
Moneta entities in Citibank files.............................. 4665
f. Excerpts from the audits of Banco Republica by the
Central Bank of Argentina...................................... 4793
64. Koop Fraud documents related to Overseas Development Bank
and Trust, British Trade and Commerce Bank, and Hanover Bank... 4835
ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING
----------
THURSDAY, MARCH 1, 2001
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:34 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Subcommittee, presiding.
Present: Senators Collins, Levin, and Carnahan.
Staff Present: Christopher A. Ford, Chief Counsel and Staff
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy
Chief Counsel; Frank Fountain, Senior Counsel; Eileen Fisher,
Investigator; Claire Barnard, Detailee/HHS; Linda Gustitus,
Democratic Staff Director and Chief Counsel; Elise Bean,
Democratic Deputy Chief Counsel; Bob Roach, Democratic Counsel;
Laura Stuber, Democratic Counsel; Ken Saccoccia, Congressional
Fellow; Anne Fisher and Judy White (Senator Cochran); Kathleen
Long (Senator Levin); Marianne Upton and Karla Mitchell
(Senator Durbin); and Sandy Fried (Senator Carnahan).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. The Subcommittee will come to order. Good
morning.
During the next few days, the Permanent Subcommittee on
Investigations will examine the complex world of correspondent
banking and the extent to which the international correspondent
banking system can involve U.S. banks in money laundering,
allowing criminals to exploit our financial system. These
hearings, initiated by the Subcommittee's Ranking Minority
Member Senator Levin, are the culmination of a lengthy
investigation into correspondent banking by his staff and
represent the second phase of the Subcommittee's examination of
money laundering and its effect on our financial system.
Correspondent banking is the means by which one bank, the
correspondent bank, provides financial services to another
bank, often referred to as the respondent bank. Typically, the
respondent bank has no physical presence in the jurisdiction in
which it maintains a correspondent account. Correspondent
banking thus enables the respondent bank to provide services to
its customers that otherwise would be unavailable because of
geographic limitations.
Correspondent banking is an integral part of the domestic
and international banking systems. Without correspondent
banking, in fact, it would often be impossible for banks to
provide comprehensive nationwide and international banking
services--among them, the vital capacity to transfer money by
wire with amazing speed and accuracy across international
boundaries. U.S. banks maintain thousands of correspondent
relationships, through which billions of dollars move every
day.
American banks provide some correspondent clients with fee-
based products only, such as currency exchange services,
interest-bearing and demand-deposit accounts, and wire
transfers to investment services. For other clients, U.S. banks
also offer credit-related products, such as loans, credit
extensions, and lines of credit. This distinction between the
provision of fee-based products and service-based products is
significant because the Minority investigation has shown that
some U.S. banks conducted more due diligence when evaluating
potential correspondent banking clients for credit
relationships--in other words, when their own finances were at
stake--than when only fee-based services were at issue.
Not surprisingly, money launderers have capitalized on this
relative lack of scrutiny for non-credit relationships. They
too often can fly under the radar of the U.S. banks. In other
words, money launderers gamble that the banks will not notice--
or perhaps not scrutinize--the source of funds flowing through
their correspondent accounts.
The Subcommittee investigation has shown that, in some
instances, the gamble has paid off. Through such accounts, the
perpetrators of criminal schemes have succeeded in moving their
ill-gotten gains around the world ahead of law enforcement
officials, in many cases ultimately returning these funds to
the United States in a laundered form that they can enjoy with
impunity.
Regrettably, the source of these monies was often
fraudulent schemes perpetrated by Americans against Americans.
For example, Melvin Ford of Maryland was the central figure in
the Forum, which appears to be a Ponzi-type investment scheme.
Ford targeted low- and middle-income African Americans who
attended his seminars and rallies, promising them
extraordinarily high returns for their investment. The Forum
established a relationship with American International Bank in
1993 and accounted for perhaps as many as 6,000 of American
International Bank's 8,000 customers. By 1997, in fact, more
than half of American International Bank's $110 million in
assets were attributable to the Forum and its investors.
The Subcommittee's investigation has established that three
types of foreign banks are particularly high risk, that is,
prime candidates to harbor the funds of money launderers. They
are: First, ``shell'' banks; second, offshore banks; and,
third, banks in jurisdictions with strong bank secrecy and weak
anti-money laundering laws. ``Shell'' banks do not maintain a
physical presence anywhere, which makes it very difficult for
the licensing jurisdiction to regulate them.
Offshore banks are not able to conduct business with the
residents of their licensing jurisdiction. Because they have no
effect upon local citizens, and because they are often
lucrative profit centers for the licensing jurisdiction, local
government regulators often have very little incentive to
engage in serious oversight.
The third category of high-risk foreign banks consists of
banks in jurisdictions that simply have weak anti-money
laundering laws. The lax regulatory environment obviously
attracts those who wish to launder money. U.S. banks that rely
upon local regulators in such cases to police respondent banks
hang their hopes only upon a shadow.
The investigation revealed troubling gaps in U.S. banks'
oversight of their correspondent relationships with these three
types of banks. Moreover, labyrinthine banking relationships
can also make due diligence more difficult. In several cases,
U.S. banks were actually surprised to learn that they were
conducting transactions for foreign banks with whom they had no
direct correspondent account. These foreign banks had
established correspondent accounts at other foreign banks,
which in turn maintained correspondent accounts at the U.S.
institutions.
Given the intricate nature of the schemes that criminals
use to launder money, there are obviously some practical
limitations upon the intensity of scrutiny that U.S. banks can
give to the customers of their correspondent banking clients,
or to any particular link in the chain of ``nested''
correspondent accounts. A requirement that U.S. banks
thoroughly investigate the business dealings of each and every
customer of a correspondent banking client--in other words,
their customers' customers--might well provide burdensome and
impractical, doing more harm to the financial industry than
good in preventing money laundering.
Nevertheless, the investigation's case studies make it
equally apparent that U.S. banks must do a better job, first,
of initially screening correspondent banking clients and then
of monitoring these clients' accounts once they are opened. For
example, some U.S. banks neglected to verify that their
correspondent banking customers had effective anti-money
laundering procedures in place at the time that they opened
correspondent accounts. Moreover, U.S. banks have sometimes
been far too slow to react to information they receive from
government officials and from the media about suspicious
activity by their correspondent banking customers. There is
clearly much room for improvement here.
I see the goals of these hearings as twofold: First, a
careful examination of the case studies of those who have
successfully manipulated the correspondent banking system to
launder money should shed some light on how these schemes have
worked and point out some weaknesses in current anti-money
laundering procedures and protections. These disclosures should
make it possible for U.S. banks to better understand and act
upon the warning signs of money laundering in correspondent
banking, helping to prevent such abuses in the future.
Second, we must consider whether both banks and regulators
have the tools they need to prevent money laundering through
correspondent banking. I want to emphasize that the banking
industry has made great strides in its efforts to stem money
laundering. For example, the Office of the Comptroller of the
Currency has noted that banks have generally complied
successfully with their obligations under the Bank Secrecy Act
to implement good currency transaction reporting programs.
Nevertheless, gaps in oversight clearly still occur, and they
are serious ones. One way of preventing such gaps is for the
banking community to work more closely with the regulators and
law enforcement officials to exchange information.
I look forward to hearing the testimony of our witnesses
today and in the subsequent 2 days of hearings.
At this time I would like to recognize the distinguished
Ranking Minority Member of the Subcommittee, Senator Levin, for
his opening statement, but before I do so, I first want to
thank him and his staff for their extraordinary and extensive
work on this very complex investigation.
Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you very much, Madam Chairman, for
calling these hearings, for convening them, and for your very
kind remarks.
Today we are going to be taking an insider's look at how
U.S. banks are being used by rogue and high-risk foreign banks
and their criminal clients to launder the proceeds of crimes
such as drug trafficking, financial fraud, Internet gambling,
and tax evasion.
Now, what does it mean to launder money? It means that you
take the dirty money that you get from selling drugs or
accepting a bribe or defrauding someone and you move it through
bank accounts or businesses in order to lose any link between
the money and its source. And then you can spend that money
without anyone asking any questions. One way you can do that is
to move the money through correspondent bank accounts at U.S.
banks.
The U.S. banking system is one of the premier banking
systems in the world. It is also one of the safest and
soundest. Our strong regulatory environment helps to ensure
that. And our dollar is the strongest currency in the world,
which is one of the reasons why U.S. banks are so attractive.
So if criminals can move their money through U.S. banks,
they can not only disguise their money but they can also
acquire the prestige of the U.S banking system and the services
that banking system provides.
Here is a rather simple chart that shows how the proceeds
from criminal activity and corruption can make its way into
U.S. banks.\1\ Ordinarily, the dirty money from criminal
activity cannot get into a U.S. bank directly. It cannot go
directly down to a U.S. bank, as shown on the right-hand side
of that chart. That is because U.S. banks have to report cash
transactions over $10,000, and they keep watch on the
activities of their individual banking clients. But that same
money can get into the same U.S. bank, by using an offshore
bank that has a correspondent account at the U.S. bank. In
other words, instead of going directly into the bank, which it
is frustrated from doing by our regulatory apparatus, if it can
move to an offshore bank and then use that offshore bank's
account at the U.S. bank, it can accomplish very simply what it
cannot do directly. That is what has happened over and over and
over again in the high-risk foreign banks investigated by my
staff.
---------------------------------------------------------------------------
\1\ See Exhibit No. 44 that appears in the Appendix on page 814.
---------------------------------------------------------------------------
For most Americans, a bank conjures up positive images of
respectability and sound fiscal management. We picture a well-
maintained building, a trained staff, a prudent bank president,
all operating under regulations that ensure the bank's safe,
sound and lawful operation. But not all banks fit that image.
Some banks in the world are quite the opposite. They operate
without controls, without regulatory oversight, and even
without physical offices or trained staff. Some of these high-
risk foreign banks are themselves engaged in criminal behavior,
such as financial frauds; some have clients who are engaged in
criminal behavior, such as drug trafficking and political
corruption; and some have such poor anti-money laundering
controls that they don't know--and some don't care--whether or
not their clients are engaged in criminal behavior.
One might suppose that those kinds of foreign banks would
be unable to open accounts at U.S. banks, that U.S. banks would
recognize them as posing such high money laundering risks that
they would not give them entry into the U.S. financial system.
But you would be wrong.
A year-long investigation by my Subcommittee staff has
found that high-risk foreign banks have been able to open
accounts at U.S. banks, and some of these U.S. accounts have
become conduits for criminal proceeds. When one bank opens an
account for and provides banking services to another bank, it
is called correspondent banking. The bank that provides the
banking services is called the correspondent bank. The client
that uses the services is called the respondent bank.
Correspondent banking is essential to the movement of money
around the world for international trade and commerce. But
because many U.S. banks have failed to adequately screen and
monitor foreign banks which open accounts, correspondent
banking has also become a gateway to the U.S. financial system
for criminals and money launderers.
Based on its work over the past year, the staff
investigation identified three categories of foreign banks that
pose high money laundering risks, as outlined by the Chairman:
Shell banks, offshore banks, and banks in foreign jurisdictions
that do not cooperate with international anti-money laundering
efforts.
``Shell bank,'' as we use that term, means a bank that does
not have a fixed physical presence in any country. It is a bank
that does not have a physical office where customers go to
conduct banking transactions or where regulators can go to
inspect records and observe bank operations. Instead, these
shell banks enjoy a shadowy existence, operating out of the
offices of a related company, or from an undisclosed location
that may be hinted at but never named. We found one shell bank
that was operated out of the owner's home.
Due to their lack of visibility and presence, these shell
banks have largely evaded the public spotlight, and U.S. banks
opening accounts for them appear too often not to care how they
operate.
The staff conducted an in-depth investigation of four shell
banks: Caribbean American Bank, Federal Bank, Hanover Bank, and
M.A. Bank. In all four cases, the investigation found the shell
bank to be operating far outside the parameters of normal
banking practice, without basic administrative controls, and
without anti-money laundering safeguards. The investigation
found that the banks had avoided regulatory oversight both in
their licensing jurisdiction and in the countries where they
conducted transactions. All four shell banks used accounts at
U.S. banks to move millions of dollars in suspect funds across
international lines, funds associated with drug trafficking,
financial fraud, bribe money, or other misconduct.
Offshore banks are banks whose licenses bar them from
transacting banking activities with the citizens of their own
home jurisdiction, but empower them to transact business
``offshore'' with the citizens of other countries. In other
words, the countries that create these banks protect their own
citizens from them, but unleash them on the rest of the
international community. One might ask why any U.S. bank would
want to do business with a bank which is not allowed to
transact business in its home jurisdiction, but they do. Major
U.S. banks have opened accounts for hundreds, if not thousands,
of offshore banks.
About 4,000 offshore banks now hold licenses from about 60
countries around the world and control almost $5 trillion in
assets. About half of these offshore banks are thought to be
located in the Caribbean and Latin America, with the rest in
Europe, Asia, Africa, and the Middle East. The offshore banking
sector continues to grow, even as the international outcry over
their association with crime and corruption is also increasing.
One reason that offshore banks pose high money laundering
risks is that the country licensing the bank has less incentive
to police it, since that bank is barred from doing business
with the country's own citizenry. Another reason is that
offshore banking is a money-making enterprise for the
governments of small countries which license them, and the less
demands made by the government on bank owners, the more
attractive the country becomes as a licensing locale. Offshore
banks often rely on these disincentives to minimize regulatory
oversight of their operations, increasing the risk that some
will become vehicles for money laundering, tax evasion, or
other crimes.
The third category of high-risk foreign banks are banks
that are licensed by jurisdictions that do not cooperate with
international anti-money laundering efforts. In June of 2000,
the Financial Action Task Force on Money Laundering, which is
the leading international body fighting money laundering,
issued a list of 15 countries determined to be non-cooperative
with international anti-money laundering efforts. Together,
these 15 jurisdictions have licensed hundreds and perhaps
thousands of banks, all of which introduce money laundering
risks into international correspondent banking. In July of
2000, U.S. banking regulators issued advisories warning U.S.
banks against doing business with banks in the listed
jurisdictions. But if you thought that these advisories caused
U.S. banks to stop doing business with those banks, think
again.
Now, why do U.S. banks open correspondent accounts for
these high-risk banks? For some banks, correspondent accounts
are easy money. When a U.S. bank isn't extending credit,
correspondent accounts carry no monetary risk to the U.S. bank,
they provide income through the fees charged for the services
rendered, and the attitude has been that ``a bank is a bank is
a bank.'' We know, though, that that is not true. Some U.S.
banks are apparently unaware of the money laundering involved;
others seem to assume their systems will catch specific
problems. But too often U.S. banks have failed to conduct the
initial and ongoing due diligence which is needed to get a
clear picture of the foreign banks using their services. And
when negative press reports or information regarding suspicious
activity did come to the attention of U.S. banks, in too many
cases the information did not result in a serious review of the
foreign banks involved or in concrete actions to prevent money
laundering.
The result is that U.S. banks, through their correspondent
account services, become aiders and abetters, unwittingly--but
aiders and abetters, nonetheless--of laundering the proceeds of
drug trafficking or financial fraud or tax evasion or Internet
gambling or other illegal acts. We cannot spend billions of
taxpayer dollars to interdict drugs and eradicate coca farms
and at the same time let drug lords deposit illegal drug
profits in foreign banks with U.S. correspondent accounts. We
cannot be consistent and are not consistent if we condemn
corruption in foreign business practices and make illegal the
payment of bribes by our businesses to foreign government
officials, and then let bribe money be deposited in U.S. bank
accounts earning interest.
We cannot fight for human rights in all parts of the globe
and then let corrupt public officials from other countries
steal from their own people and place corrupt funds in U.S.
bank accounts to enjoy the safety and soundness of the U.S.
banking system. Money laundering not only finances crime, it
pollutes international banking systems, it impedes the
international fight against corruption, it distorts economies,
and it undermines honest government.
The Subcommittee is devoting 3 days of hearings to the
money laundering problems posed by high-risk foreign banks'
opening correspondent accounts at U.S. banks. Again, I want to
thank our Subcommittee Chairman, Senator Collins, for her
support of this investigation and for allocating these 3 days
of hearings to this subject.
Today we are going to look at how high-risk banks work and
how U.S. banks respond to them. Tomorrow's hearing will focus
on the special problems posed by foreign offshore shell banks.
And the third day of hearings, next Tuesday, will focus on what
can and should be done to strengthen anti-money laundering
safeguards in U.S. correspondent banking. Based on the
testimony and recommendations received, I will be introducing
legislation in the near future to try to strengthen U.S. law in
this area in order to close the net around criminals using
accounts of high-risk foreign banks in U.S. banks to launder
money.
Today we are going to hear first from a U.S. citizen, John
Mathewson, who used to own and manage an offshore bank in the
Caribbean called Guardian Bank and Trust. After 10 years at the
bank, Mr. Mathewson was arrested in the United States for tax
evasion and money laundering. He pled guilty to charges and
agreed to cooperate with U.S. law enforcement. One action which
he took, which was the first and so far the only time that I
know of in U.S. law enforcement history that it has happened,
Mr. Mathewson turned over a year's worth of offshore banking
records for inspection and review. These records not only
provided invaluable information about how an offshore bank
operates, but has also enabled U.S. law enforcement to initiate
prosecutions of numerous of his bank's clients for tax evasion
and other misconduct. Mr. Mathewson has since provided valuable
testimony in many of these prosecutions, and today he will
provide testimony about how an offshore bank and its clients
have used U.S. bank accounts to launder funds. He will also
explain how dependent offshore banks are on other banks to
conduct their operations and how U.S. banks hold tremendous
power in their hands to decide which offshore banks will gain
access to the U.S. banking system.
We will then hear from two U.S. banks, Bank of America and
Chase Manhattan Bank, that opened correspondent accounts for
offshore banks. One case involves American International Bank,
an offshore bank that was able to open accounts at these as
well as other U.S. banks, despite having a bad local
reputation, its own correspondent accounts for rogue banks, and
increasing evidence that the bank's accounts held suspect funds
related to major financial frauds. Another offshore bank, Swiss
American Bank, opened accounts at both banks as well. It
maintained these accounts for years, despite mounting evidence
that the Swiss American Bank's accounts were repositories for
funds associated with financial frauds or Internet gambling or
other illicit activities. In the face of repeated evidence of
questionable activities, our U.S. banks kept open the Swiss
American Bank accounts, and today we are going to find out how
that could happen.
Last year, U.S. taxpayers spent $600 million in the fight
against money laundering. U.S. banks are required by law to
join in this fight by operating anti-money laundering programs
designed to detect and stop criminals from washing their dirty
money through U.S. banks. We cannot condemn jurisdictions with
weak anti-money laundering controls, weak banking oversight,
and unregulated offshore sectors, and then tolerate U.S. banks
doing business with the very banks that those jurisdictions
license and unleash on the world.
Since the report was issued last month, we have already
seen some results. With respect to the high-risk foreign banks
that were the subject of the case histories, the governments of
Antigua-Barbuda, the Bahamas, and Dominica have revoked or
suspended the license of four of the banks. The Cayman Islands
also announced that by the end of this year, all of its
offshore banks that are not branches or units of other banks,
of which there are 62, will have to enhance their physical
presence on the island by opening an office with bank records
and a resident manager. In the United States, the New York
Clearing House Association, which is composed of a dozen of the
largest correspondent banks in the United States, has announced
its intention to develop a code of best practices for the
industry. And we have also been told by banks like Chase
Manhattan that they have begun top-to-bottom reviews of their
correspondent accounts. These are encouraging signs, although
obviously much more must be done.
Our banks, our U.S. banks, are the gatekeepers through
which foreign banks and their clients have to pass to get
access to U.S. dollars; U.S. banking services such as wire
transfers, investments, and credit; and the U.S. banking
system, which is surely one of the best in the world. When it
comes to high-risk foreign banks, U.S. banks have too often not
lived up to that gatekeeping role. They need to do a better job
in screening and monitoring the high-risk foreign banks that
want access to our banking system. Only then will we end the
money laundering activities and help to ensure that crime
doesn't pay.
Thank you.
Senator Collins. Senator Carnahan, I want to welcome you as
a new Member of the Subcommittee, and I would call upon you for
any opening comments that you might have.
OPENING STATEMENT OF SENATOR CARNAHAN
Senator Carnahan. Thank you, Senator Collins. I commend you
for calling this hearing, and I look forward to working with
you in the days ahead on future investigative hearings.
Senator Levin, I would like to thank you for your
leadership on this investigation and in developing this very
valuable report.
I am greatly concerned about this issue. I think the
average American would be shocked to learn how easy it is for
drug dealers and scam artists to launder money or evade taxes.
And as a result, we are spending a tremendous amount of money
dealing with the consequences of this illicit activity. I am
pleased that Senator Levin and the Subcommittee have exposed
this problem and made recommendations on how to prevent this
fraud and abuse on American consumers.
Thank you.
Senator Collins. Thank you.
We will be using our timing system today. Each witness will
be asked to limit their oral testimony to 10 minutes. Your
entire written testimony will be submitted in the record. There
is a timing system that we use. When the red light comes on,
you have about 1 minute to conclude your comments. We will also
be doing rounds of questioning that will be 10 minutes in
length also.
Without objection, I am going to make all of the exhibits
that are used today part of the hearing record.
I would now like to introduce our first witness this
morning. He is John Mathewson, who formerly owned Guardian Bank
in the Cayman Islands. Mr. Mathewson's testimony will provide
insider knowledge regarding how an offshore bank can use the
products and services available through its correspondent
accounts to conceal the proceeds of crime. Mr. Mathewson will
be accompanied this morning by his attorney, Oscar Gonzalez.
Pursuant to Rule VI, all witnesses who testify before the
Subcommittee are required to be sworn. At this time I would ask
that the witness please stand and raise his 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. Mathewson. I do.
Senator Collins. Mr. Mathewson, you may proceed with your
statement.
TESTIMONY OF JOHN M. MATHEWSON,\1\ FORMER OWNER OF GUARDIAN
BANK AND TRUST (CAYMAN) LTD., ACCOMPANIED BY OSCAR C. GONZALEZ,
ESQ.
Mr. Mathewson. First, I would like to express my
appreciation and surprise at the amount of knowledge both
Senator Collins and Senator Levin have elicited in their
opening statements. And, also, I should address Senator
Collins, Senator Levin, Senator Carnahan, distinguished
persons. Having spent more than 10 years in the offshore
industry, it is surprising to hear a couple of Americans who
have accumulated the knowledge that the two of you have
accumulated for purposes of protecting the United States from
offshore banking.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Mathewson appears in the Appendix
on page 139.
---------------------------------------------------------------------------
I prepared a written statement, sent it to Elise Bean,
asked her what portion of it I should read to the Committee,
and she told me none of it because if I read it, everyone's
eyes would begin to glaze over. And I said, ``Well, all right.
What should I do?'' And she said, ``Well, wing it.'' So I'm
winging it.
I'm 72 years old. I'm an ex-Marine. I served in China. I'm
one of the few survivors of that era. I'm rather proud of
having been in the Marine Corps. I appreciate the United
States. I thank God I was born in this country, especially
after seeing other countries and what goes on in them.
I have been asked, Why have you cooperated to the extent
that you have with the U.S. Government? And the reasons are
twofold: One, my appreciation for being able to live and also
for having been born in the United States; and, two,
individuals in New Jersey who dealt with me. One was William
Waldie of the FBI. He would erase any thoughts that one might
have about the recent FBI individual who had done work for the
Russians. Waldie is a man of his word. He is very honorable.
And also John Carney, who is the Assistant U.S. Attorney in New
Jersey, who lived up to his word, is honorable. And without
those two, I would not have cooperated to the extent that I
have cooperated.
In addition, there is Judge Lechner in New Jersey, who,
after he had sentenced me to probation, asked me very
pointedly, will you continue your cooperation with the U.S.
authorities? My answer was yes. I have continued it.
Now, I could tell many stories about offshore banking. I
could tell one of my own where I was a successful businessman
in the Chicago area. I learned to fly. I did not learn to fly
in the Marine Corps. I learned as a civilian. Over the years, I
had three aircraft. With an aircraft at your disposal, there is
always a temptation to fly almost anyplace, whether it is
necessary or not. I had read about the Cayman Islands, had read
about the tax advantages pertaining to the Cayman Islands, and
1 day decided it was time that I go down there and find out
about them.
So I flew my aircraft to the Cayman Islands. En route, over
Cuba, in what is called the Hiron Corridor, I had three MiGs
come up, one on either side of the aircraft and one in front. I
was on course with Havana Center. I asked them what was going
on, and they said, Senor, we are identifying your aircraft.
With that, the MiGs peeled off, and I didn't see them again.
They were so close to my aircraft that I could make out the
features of the pilots. I continued to the Cayman Islands,
landed. It was late on a Friday afternoon, got a phone book,
looked up banks, saw the Swiss Bank Corporation, and thought,
well, I've heard of them before, I guess they're legitimate,
and I called them.
I spoke to the managing director, Rodney Bond, and he said
they were closing the bank shortly. I had told him I wanted to
start an account. He said, I'll wait for you. So I took a cab
over there and opened an account with the Swiss Bank
Corporation. That was my first introduction to offshore
banking. I didn't know anything about it before that time.
I continued to go down to the Cayman Islands. I enjoyed the
weather. I enjoyed the beach. I enjoyed the people. And over
the years I got tired of the business I was in in the Chicago
area and decided I would go into semi-retirement. I bought a
home in the Cayman Islands, went down there to live. Two weeks
after I was there, two individuals in the financial community,
Keith High and Rex Rankin, who are still active, propositioned
me to buy 60 percent of the shares of a bank. I thought it over
and thought, well, it's a good idea.
I was then told that I would have to go in to see the
inspector of banks of the Cayman Islands. I did this. He
informed me I would have to undergo a check by the FBI and also
Scotland Yard. I told him to go ahead. Two weeks later, I
received a phone call I had been approved as a 60-percent
shareholder of a bank in the Cayman Islands.
I worked very hard with the bank, giving it American
expertise in advertising and so forth. And after a 10-year
period--or I should say at the end of the 10-year period, our
earnings for the latest year, before the bank was taken over,
were $5 million. I was going from zero to $5 million. We had
applied for an additional bank license in the Bahamas. We were
told that bank license would be approved, all they needed was a
letter from the Cayman Island financial authorities stating
that we were an active business, an active bank in the Cayman
Islands.
That letter was never obtained, and on January 18, the
Cayman Island Government came into Guardian Bank with an order
stating that the bank was not being operated in a manner that
was beneficial to the Cayman Islands and that Ernst and Young,
the accounting firm, was to take over the bank and run it for a
period of 90 days and then report to the governor and council.
We left the bank realizing that there would be no bank
after a 90-day period of a bunch of accountants running it, and
contacted Coopers and Lybrand and put the bank into
liquidation.
After a 10-year period, we had $150 million in footings in
the bank. We had about 2,000 clients. I became a member of the
Cayman Island Rotary Club. In fact, I was president of the club
in 1993. In this club was a nucleus of managing directors and
other employees associated with the financial business in the
Cayman Islands. Everything I ever needed to know about banking
I learned from them in our gab fests after the Rotary meetings.
All of the things that Guardian did was learned from other
banks. I have never had an original thought in my life, but I
have been able to take what other people do and sometimes do a
better job with it. But Guardian was just a run-of-the-mill
bank in the Cayman Islands doing its thing, the same as all of
the others.
The one thing I learned very quickly, after having a bank
in the islands, was that clients opening an offshore account
were doing so for tax evasion; otherwise, they never would have
paid the fees that were charged to them for offshore banking.
There would be no point in it.
Also, considering that all of these services that we
provided offshore were free from U.S. banks in the United
States, it didn't make sense.
Now, the Cayman Islands very proudly claims that they have
US$600 billion on deposit, and they have 600 banks registered
and doing business in the Cayman Islands. My thought is: How
much of the $600 billion in the Cayman Islands is there for tax
evasion?
I will tell one story and then I will cut this off. I knew
Don Stewart of the Royal Bank of Canada reasonably well. He
also was a Rotarian. And he would tell stories about before I
came on the island when things were very wide open, about
planes coming in with boxes of $100 bills and how it would take
all night to count the money. Now, he never said where the
money came from, but this was something that continued for
days. Also, a Rudy Evans, who was the equivalent of a chief of
police in the Cayman Islands, tells about the money he earned
by guarding all of this money when it was being counted at the
Royal Bank of Canada. This was a very common practice.
The firm of attorneys that I used to go over the paperwork
to go into the banking business was a firm called Meyers and
Alberca. They, as far as I know, are still in business. When I
went in with the various papers for them to look over, Daryl
Meyers brought me into his office and apparently thinking that,
well, now I am a member of the financial community, why cover
anything up, he had two suitcases sitting in his office, open,
full with $100 bills. I know a little something about currency,
and I would guess there was at least US$10 million in those two
suitcases. I didn't say anything. He didn't say anything.
Apparently, he had just received this money, and I would assume
it was going into one of the banks on the island.
I believe that is my opening statement.
Senator Collins. Thank you, Mr. Mathewson.
Mr. Mathewson, would you please describe what the assets
and client base were of Guardian Bank at its peak?
Mr. Mathewson. I heard ``the assets.'' What was----
Senator Collins. The client--how many clients and what were
the assets of the bank at its peak?
Mr. Mathewson. Yes, ma'am. The assets of the bank were
approximately $150 million, and there were around 2,000
accounts.
Senator Collins. And since Guardian was an offshore bank,
as I understand it, that means that none of its depositors were
citizens of the Cayman Islands. Is that correct?
Mr. Mathewson. That's correct.
Senator Collins. In your testimony, you estimated that
approximately 95 percent of Guardian's clients were, in fact,
citizens of the United States. Is that accurate?
Mr. Mathewson. That was a guess. However, William Waldie of
the FBI made it a point to check that out, and he verified that
it was 95 percent. So it was a pretty good guess.
Senator Collins. And as I understand it, in your judgment,
virtually all of Guardian's clients were engaged in tax
evasion. Is that an accurate statement?
Mr. Mathewson. That's an accurate statement. However, one
thing I might point out, most of its clients were legitimate
business people and professionals in the United States.
Senator Collins. Legitimate, but engaging in tax evasion?
Mr. Mathewson. Exactly, yes.
Senator Collins. Well, some of us would quarrel with the
word ``legitimate.''
Mr. Mathewson. All right. I understand.
Senator Collins. What leads you to conclude that the
clients of Guardian Bank were overwhelmingly engaged in tax
evasion?
Mr. Mathewson. Every once in a while I would have a
prospective client ask if Guardian Bank sent out 1099's for
earnings.
Senator Collins. And did it?
Mr. Mathewson. No, it did not. And my reply usually was,
well, if you would like one sent, please advise us.
Senator Collins. Did anyone ever take you up on that offer?
Mr. Mathewson. No one ever took me up on it.
Senator Collins. It is not illegal for an American citizen
to maintain offshore accounts, but obviously any income from
that account is supposed to be reported to the IRS. According
to one government estimate, at least $70 billion a year in
personal income tax revenue is lost to tax havens such as the
Cayman Islands.
In your judgment, are there any legitimate reasons why an
American citizen would use the services of an offshore bank?
Mr. Mathewson. Some of the other reasons that an offshore
bank would be used by a U.S. person would be to hide money from
a spouse; in the event of a bankruptcy, to secrete funds
offshore out of the bankruptcy; but this all would be tax
evasion, anyway. No, I don't think so. I think it is almost
ridiculous to think that anyone would establish an offshore
account without the thought of being able to make money with it
by evading taxes.
Senator Collins. Mr. Mathewson, without the correspondent
banking accounts in the United States, would Guardian have been
able to conduct its business and provide the services that its
clients wanted?
Mr. Mathewson. Senator, you have hit on the Achilles heel
of the entire offshore banking industry. Without correspondent
banks to accept U.S.-dollar checks and wire transfers, the
banks would be out of business in the Cayman Islands.
Senator Collins. Did Guardian's U.S. correspondent banks
take any steps to determine the sources of Guardian's deposits?
Was there scrutiny given to the accounts or the sources of
money?
Mr. Mathewson. None that I know of.
Senator Collins. And why do you feel that was the case? Why
wasn't there more scrutiny?
Mr. Mathewson. I'm not certain they really cared, as long
as they were receiving substantial funds. And, remember, there
were millions and millions of dollars involved.
Senator Collins. In fee income to the correspondent banks
in the United States?
Mr. Mathewson. Well, for instance, with the Bank of New
York, we kept very substantial accounts there, and they paid
interest on those accounts.
I think they just didn't really wish to rock the boat, and
they were very happy with the deposits that were going into
their bank and would have liked even more.
Senator Collins. Was it expensive for your American clients
to maintain accounts with Guardian?
Mr. Mathewson. Yes.
Senator Collins. Could you give us some idea of the charges
that were imposed and also explain the idea of corporate
accounts that were used to shield the identities and how much
you charged for those accounts?
Mr. Mathewson. Most of our clients did have Cayman Island
corporations. The cost of establishing a corporation for them
was $5,000. In addition to that, there was a $3,000 annual
management fee payable in advance. So the total cost initially
was $8,000.
There were other charges. For instance, if they wanted a
wire transfer, we charged either $100 or $150. I've forgotten
the exact amount. If there was an incoming wire transfer, we
charged approximately $100 for that.
Anything that we did, there was a charge. If they called,
the cost of the telephone was put onto their account. It was
quite costly, and considering that all of those services could
be provided in the United States for no charge, it made no
sense unless there was tax evasion as the ultimate goal.
Senator Collins. Thank you, Mr. Mathewson.
Senator Levin.
Senator Levin. Thank you, Madam Chairman.
If a U.S. citizen came to the bank and wanted to open up an
account, what would you have advised them on how to do that?
And tell us about the creation of these corporations as well
that you have made reference to.
Mr. Mathewson. All right. Would you repeat the first part?
Senator Levin. Yes. If a U.S. citizen came to your bank and
said he wanted to open a bank account, what would you advise?
Mr. Mathewson. Normally, when they would come in, they
would come in either as a result of some advertising or our
audio-visual presentation at one of the hotels or it was a
recommendation. After a number of years in business, 75 percent
of our clientele was coming in from recommendations of other
clients.
When they would come in, for the most part it had been
explained to them what could be done offshore. The Cayman
Islands has a confidentiality law whereby it is a crime to
divulge account information. Therefore, they should be provided
with complete anonymity relative to the account that they would
establish.
You can take it a step further by having a corporation, and
we provided directors for that corporation so that the
individual account-holder never had to sign anything or have
his name visible to anyone. And the only one who was aware that
this U.S. citizen, in most cases, was the beneficial owner of a
corporation was in the Guardian Bank. It was no place else.
Senator Levin. So by setting up a corporation, there was
another layer of secrecy in effect that would be added to that
account. Is that correct?
Mr. Mathewson. Yes, sir.
Senator Levin. When you indicated before that somebody was
paying $5,000 to set up that corporation and then a $3,000-per-
year management fee, that is $8,000 up front and then an
ongoing $3,000 per year. That is what people were paying for
additional secrecy? Is that fair to say?
Mr. Mathewson. Precisely.
Senator Levin. Isn't that really what this is all about, is
that people are paying here to hide assets from usually the
U.S. Government to which they would owe taxes on that money if
the government knew about it?
Mr. Mathewson. Yes.
Senator Levin. Did any of your clients open accounts in
their own names?
Mr. Mathewson. We had very few, possibly a handful, that
had accounts in their name only.
Senator Levin. In their own name.
Mr. Mathewson. Yes. However----
Senator Levin. You said in their name only, or in their own
name?
Mr. Mathewson. Well, in their name only, which was also in
their name. However, with those few clients that had an
individual account, we referred to it only by the account
number. We did not use the individual's name in any paperwork
pertaining to it.
Senator Levin. All right. The purpose of that being, again,
to keep that client's identity secret. Is that correct?
Mr. Mathewson. Yes, sir. By the way, I knew very well a Sir
Vassal Johnson, who is Caymanian, and he was knighted by Queen
Elizabeth on the island for having established the
confidentiality laws and the financial secrecy of the island
and being responsible for the success of the financial
community.
Senator Levin. That secrecy is one of the things that
attracts people who are trying to evade taxes. Is that fair to
say?
Mr. Mathewson. Without that secrecy, the Cayman Islands
would be a fishing community again.
Senator Levin. Am I correct that the Guardian Bank issued
credit cards also to its clients?
Mr. Mathewson. Yes, sir.
Senator Levin. And isn't that the way clients frequently
got access to those funds, is through that credit card?
Mr. Mathewson. It was another means where they could take
funds or earnings out of their account and spend those funds
either in the U.S. or worldwide.
Senator Levin. And they also did that through wire
transfers?
Mr. Mathewson. Well, they could do it through wire
transfers. However, the card probably was the safest way of
accomplishing it.
Senator Levin. Now, did you send monthly bank statements to
your clients in the United States?
Mr. Mathewson. We did not.
Senator Levin. Again, that was to keep any records out of
the United States. Is that correct?
Mr. Mathewson. That's correct.
Senator Levin. How did the clients generally deposit their
money in that bank?
Mr. Mathewson. Several ways: Cash occasionally, checks that
they brought in with them when they established the account,
and then ongoing, sending checks by regular U.S. mail to the
bank. We instructed the clients to make those checks out to
G.B., which would stand for Guardian Bank, G.B.&T., Guardian
Bank and Trust, or we gave them options to make them out to
Sentinel Limited, Fulcrum Limited, and there was one other, and
I don't recollect that one. It was Tower Limited.
Senator Levin. And then how did the checks get into the
correspondent account?
Mr. Mathewson. We received a number of checks every day.
After we processed them and credited the individual client
account, we batched them, sent them by courier to whoever our
correspondent bank was at the time, whether it would be the
Bank of New York, First Union, or any of the others.
Senator Levin. Now, you have indicated what some of the
services were that the U.S. banks, your correspondent banks,
did for your clients: Clearing checks, receiving and sending
wire transfers, and so forth. And those were services that you
performed as well, and I believe you said that the U.S. banks
were critical to each of those transactions that you performed.
What would have happened if the Guardian Bank had been
unable to open a U.S.-dollar correspondent account at a U.S.
bank? Could you have handled U.S. clients unless you were able
to open those correspondent accounts at U.S. banks?
Mr. Mathewson. Remember, there's always a flanking
movement, Senator. If we were unable to open a U.S.
correspondent banking relationship, we probably would have gone
to another bank that had a correspondent relationship and pay
them a fee for clearing our checks.
Senator Levin. And then would have had an account with
them?
Mr. Mathewson. Yes, sir.
Senator Levin. So that if for any reason you couldn't have
opened a correspondent account at a U.S. bank, you then would
have done it indirectly through opening an account with a bank
that did have a correspondent account at a U.S. bank. Is that
fair to say?
Mr. Mathewson. That's correct.
Senator Levin. But unless you could either open up your own
correspondent account with a U.S. bank or establish an account
with a bank that did have a correspondent account with a U.S.
bank, is it not fair to say that you simply could not have
handled U.S. clients?
Mr. Mathewson. That's exactly right.
Senator Levin. You said in your statement and again this
morning that small offshore banks are fully dependent upon the
more established banks to give them access to banking services
such as wire transfers, check clearing, credit cards, and
investment accounts, and that they couldn't stay in business
without having this access. My question now then is this: Since
these offshore banks are so totally dependent, as you have just
testified, upon having access to those services through that
U.S. bank, either directly by establishing a correspondent
account or establishing an account with another bank that does
have a correspondent account, is it fair to say that U.S. banks
can demand any information and cooperation from a foreign bank
that they need in order to decide to open or maintain an
account for that bank? In other words, they are the ones that
are needed. It is our U.S. banks that are performing the
services and that they can demand information that they want or
else simply say we are not going to open the account. They have
that power, do they not?
Mr. Mathewson. Yes, they do.
Senator Levin. Thank you. My time is up.
Senator Collins. Senator Carnahan.
Senator Carnahan. Thank you.
Mr. Mathewson, thank you for being here today. Your
testimony is certainly quite eye-opening.
In your former bank, Guardian Bank and Trust Limited,
citizens deposited money into your accounts in an attempt to
evade paying U.S. taxes. In your estimation, how widespread is
this activity?
Mr. Mathewson. I can only speak from my own experience. We
had many people come to the Cayman Islands, came into Guardian
Bank very interested in finding a way to secrete funds in some
fashion or another. Taking the Cayman Islands' own publication
of $600 billion U.S. dollars on deposit, I have to think it's
rather widespread.
Senator Carnahan. The Subcommittee's investigation has also
uncovered instances where scam artists convinced average
citizens to invest money in correspondent accounts for high
returns. The banks then refused to return the money to the
defrauded investor. While this situation may not be a part of
your direct experiences, I would like to know if you have any
suggestions on how consumers could protect themselves from
these types of scams.
Mr. Mathewson. I suppose there will always be con artists
out there peddling something that purportedly is going to make
them a great deal of money for very little effort. And there's
a certain intrigue pertaining to the offshore industry that
people are attracted to.
I don't know any way to protect the individual who doesn't
detect the con being perpetrated against himself except that,
for instance, with the publicity that has been and will be
emanating from these hearings, attorneys in the United States
and also worldwide are going to warn their clients to stay away
from the offshore accounts. If someone is affluent and goes
into his attorney and says, hey, I got a million bucks and I'd
like to secrete it someplace, the attorney is probably going to
say, well, don't do anything, the offshore industry is probably
over when it comes to secreting money.
But, again, going back to your question, I have no way of
suggesting a way to eliminate this fraud perpetrated on people.
Senator Carnahan. Thank you very much.
Thank you, Madam Chairman.
Senator Collins. Thank you, Senator.
Mr. Mathewson, in your opening statement, you described
Guardian as a run-of-the-mill bank. By that I assume you mean
that the kinds of services provided, the reason that people had
deposits in Guardian Bank, are similar to those of other banks
in the Cayman Islands. Is that correct? That the kinds of
services you were providing for people who were essentially
hiding assets was commonplace?
Mr. Mathewson. Yes.
Senator Collins. You also stated that you could think of no
legitimate reason why an American citizen would use an offshore
account, particularly since the charges were so high compared
to what an American bank would charge. Is that correct as well?
Mr. Mathewson. That's very correct, yes.
Senator Collins. And yet there is an estimated $600 billion
of American assets on deposit at these banks in the Cayman
Islands?
Mr. Mathewson. That's what the Cayman Island Government
claims.
Senator Collins. Given those facts, shouldn't any
correspondent account request from a Cayman Island bank to an
American bank raise a red flag?
Mr. Mathewson. It should certainly set off the alarm bells,
yes.
Senator Collins. And yet, in your experience, you found it
very easy to open correspondent accounts with American banks,
with virtually no questions asked. Is that correct?
Mr. Mathewson. That's correct. Practically no questions. We
also opened accounts with, for instance, Prudential Bache of
New York and gave them millions of dollars of offshore funds
for investment in everything from shares of Microsoft to U.S.
Treasury bills.
Senator Collins. And yet, in your judgment, every one of
your 2,000 clients at the peak of Guardian Bank's existence,
every one of those individuals was hiding assets. Is that
correct?
Mr. Mathewson. Yes.
Senator Collins. Either from the American Government or
from a bankruptcy court or a divorced spouse or someone else
who was entitled potentially to a share of those assets?
Mr. Mathewson. I agree with that.
Senator Collins. Thank you.
Senator Levin, do you have any further questions?
Senator Levin. Just a few.
In using your correspondent account at American banks, you
didn't then have to be particularly clever or in any way
deceptive--you could just very readily deposit that money, as
the Chairman says, with no questions asked.
Mr. Mathewson. Yes. That's correct. There were no
questions. We sent checks to them. They cleared them and put
them into the Guardian account.
Senator Levin. Did they ever press you for information
about your operations? Did you have a ``know your customer''
person come to you every year and say, hey, we want to see what
is going on here, whether this money is tax evasion money,
whether this is being hidden from creditors in bankruptcy
court? Did you have that kind of scrutiny on a regular basis
from banks?
Mr. Mathewson. Senator Levin, I never had any bank officer
from the United States, from a correspondent bank that we were
using, come in to talk to me, nor have I ever met anyone.
Senator Levin. I just want to comment on one reference you
made to the legitimacy of people who were depositing money in
their accounts in your bank. Tax evasion, as you pointed out,
is not legitimate, but some of the other reasons that you
mentioned as being the reason that legitimate people had for
depositing money are not legitimate either, including trying to
hide assets from creditors in bankruptcy court. I won't get
involved in divorce proceedings because you cannot in a divorce
proceeding either hide assets from your spouse and deceive a
court as to what assets you have. So with that one
qualification relative to your testimony this morning, I think
your testimony has been extraordinarily accurate, powerful, and
right on target. I would just take exception with that one
reference you made relative to the legitimacy of some of the
people who try to evade taxes or try to use your accounts for
other purposes.
I can't think offhand--now, there may be legitimate
reasons, but I haven't heard any this morning, for hiding
money.
Mr. Mathewson. Senator, I hear you loud and clear. When I
said that these people or some of them were quite legitimate,
I'm referring to their businesses, they're paying taxes in the
United States. However, once they crossed the line and started
an account offshore, they were then evading taxes for one
reason or another.
Senator Levin. When the checks came in to you, did you or
your clients put the account numbers on those checks?
Mr. Mathewson. We did not. And occasionally we would have a
client who was so used to putting account numbers on things in
the United States, and they would put their Cayman Island
account number on the check. In some instances, we'd send the
check back to them and tell them to rewrite it and leave the
account number off.
Senator Levin. And put the account number on a separate
piece of paper?
Mr. Mathewson. Correct.
Senator Levin. I have a great deal of difficulty with U.S.
banks doing business with shell banks, period. It seems to me
that all of the problems that those banks create that you have
outlined here this morning are such that there should not be
that kind of acceptance of an account from a shell bank--at
least I can't see offhand the reason why we should allow our
banks to do business with a shell bank.
Now, relative to offshore banks, do you think that the same
kind of restriction should apply to offshore banks? Should we
allow our banks to do business with offshore banks with whom
they have no affiliation?
Mr. Mathewson. I don't think you have to prohibit our banks
from doing business with offshore banks, but I think you can
make it so that the individual client who is planning to evade
taxes just isn't going to take money offshore.
For instance, we'll say--I'll pick on the Bank of New York
since they've been picked on quite a bit recently, anyway. If
the Bank of New York had an officer who would go over all of
the checks received from offshore banks and all of the wire
transfers to see if there was anything in those checks and wire
transfers that would smack of fraud, it would cut way down on
the use of offshore accounts by Americans, because this
publicity would get out.
Senator Levin. How about requiring that the account numbers
be on those checks?
Mr. Mathewson. Yes, right. Well, something on the check.
But I think, with thinking it through, that it would be
possible to cut down on offshore banking considerably.
Senator Levin. The Cayman Islands has strengthened some of
its rules since 1995 when you ended your operation in the
Caymans, and I think we just want to make note of this, that
apparently they have made a number of improvements in the way
that they regulate offshore banks. Just this week--and I am
sure that these hearings have something to do with it, and our
investigation has a lot to do with it--they have made an
announcement that any bank that is in possession of an offshore
license must maintain an office with a manager and keep its
records in the Caymans. That I think would be an improvement,
but the practices that you have described do flourish in other
banks in other jurisdictions, and we will hope that the
Caymans' tightening up will produce some results in the Cayman
Islands themselves. But do you have any comment on that recent
action by the Caymans?
Mr. Mathewson. I am sure that they are attempting to cover
their flanks and to keep their financial business going. When
you're dealing with a Third World country--and no matter
whether they like it or not, the Cayman Islands is Third
World--you're always subject to payoffs and activities that are
outside of the law.
For instance, about 6 months before Guardian was taken
over, I had a political figure come in to see me and ask for
$250,000 in cash and a percentage of the bank's shares. I told
him to shove off, I wasn't interested. He warned me that I
would regret doing this.
Well, hindsight is always great. I would assume it's
possible that if I had gone along with his wishes that Guardian
Bank might very well still be in existence.
That individual is still a member of the legislative
assembly of the Cayman Islands. He is still one who is trying
to wiggle around U.S. rules, and I just thought I'd point this
out, that they are trying to go around any rules or regulations
that are made to impede their financial progress.
Senator Levin. Tax evasion is not a crime in the Caymans.
But it is here, and what you just described, I hope, is a crime
in the Caymans. In any event, if you haven't already reported
that to our FBI so that they can send that information to the
Cayman Government, I would ask that you do that.
Thank you.
Senator Collins. Thank you, Senator Levin.
Senator Carnahan, do you have any further questions?
Senator Carnahan. No further questions.
Senator Collins. Thank you.
Mr. Mathewson, I would like to thank you for your testimony
today. It was extraordinarily helpful to the Subcommittee, and
I appreciate your cooperation.
Mr. Mathewson. Thank you, Senator Collins. I was asked to
bring in one of the Guardian Bank credit cards by Ms. Bean.
Would you like to see that?
Senator Levin. Yes, could you show us the credit card?
Would that be all right, Madam Chair?
Senator Collins. Sure.
Senator Levin. Would you show us that credit card? And do
we have a copy of it? \1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 46 that appears in the Appendix on page 823.
---------------------------------------------------------------------------
Mr. Mathewson. Now, that was my personal credit card.
Senator Collins. What is very interesting about this credit
card is it is made out to Guardian Bank. It does not have your
name on it or any client's name on it. Is that typical of how
the credit card----
Mr. Mathewson. It could have been ABC Corporation also,
backed by a U.S. citizen. And if you look on the back of the
card, you'll see my signature, which is illegible. No one ever
questioned that card, and I made a number of charges on it over
a period of time, as did many of our clients.
Senator Collins. We are putting it on the audio-visual
system so that it can be seen.
Senator Levin.
Senator Levin. Yes. The fact that your signature is
illegible I don't think distinguishes this card from any other
credit card. [Laughter.]
Mr. Mathewson. No.
Senator Levin. In more significant ways, it is very
distinctive. It does not have your name on it.
Mr. Mathewson. Right.
Senator Levin. And what you are saying is that when your
bank issued these credit cards, frequently they would be issued
to a corporation which had been set up in the Caymans to
protect the identity of people so that there would be total
secrecy, but that a person who had set up that corporation in
the Cayman Islands and who had used your bank to hide their
money could walk into a bank here or to an ATM machine and use
that credit card, with only a corporate name on it, not their
own name on it, and have access to their account at your bank.
Is that right?
Mr. Mathewson. Exactly, Senator. And if you recollect,
early on I mentioned that I have never had an original thought
in my life. When I introduced the use of credit cards at
Guardian Bank, I did so because I had learned that Barclay's
and some of the other major banks were also using credit cards,
and I thought, why not, it sounds like a good idea.
Senator Levin. It sure makes hiding money and evading taxes
mighty simple, and that is exactly what is going on in these
kinds of offshore banks. You have come forward, which has been
very helpful, and hopefully after these hearings and after we
tighten up the law, it is going to be a lot more difficult to
hide money that should not be hidden and to evade taxes which
should be paid, like other citizens pay their taxes. And
hopefully the other kind of money laundering activities which
go on at too many of these respondent banks will be reduced
significantly. That will come because of a lot of reasons, but
in part because of your coming forward here and making this
testimony available to us and to other agencies of our Federal
Government.
Thank you.
Mr. Mathewson. Thank you.
Senator Collins. Thank you, Mr. Mathewson. You may be
excused.
Mr. Mathewson, we will get your credit card back to you in
the hall.
Mr. Mathewson. OK.
Senator Collins. Although it looks like any of us could use
it with impunity. Thank you.
I would now like to call forward our second panel of
witnesses this morning. They are representatives of Bank of
America and J.P. Morgan Chase.
I would first like to introduce James Christie, who is
Senior Vice President, Global Treasury Risk Management of Bank
of America. Also testifying this morning is David Weisbrod, the
Senior Vice President of Treasury Services Division of the
Chase Manhattan Bank or J.P. Morgan Chase, I guess it is more
properly called now.
Pursuant to Rule VI, all witnesses who testify before the
Subcommittee are required to be sworn, so at this time I would
ask you both to please stand and raise your right hands. 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. Christie. Yes, I do.
Mr. Weisbrod. Yes, I do.
Senator Collins. Mr. Christie, you may proceed.
TESTIMONY OF JAMES C. CHRISTIE,\1\ SENIOR VICE PRESIDENT,
GLOBAL TREASURY RISK MANAGEMENT, BANK OF AMERICA, OAKLAND,
CALIFORNIA
Mr. Christie. Thank you. Good morning, Chairman Collins,
Senator Levin, and members of the Subcommittee. I am Jim
Christie, a senior officer at Bank of America, and I am pleased
to appear before the Permanent Subcommittee on Investigations
to discuss Bank of America's anti-money laundering efforts.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Christie appears in the Appendix
on page 143.
---------------------------------------------------------------------------
We appreciate the opportunity to meet with you today to
discuss some of the cooperative efforts we have taken in
working with the U.S. Government to detect and deter fraud and
money laundering and also, of course, to answer your questions.
Senator Levin, your staff spent a considerable amount of
time with us to learn about correspondent banking and how it
works. Senator Collins, we were one of the first banks to
volunteer to assist your staff and Senator Levin's staff in
this learning process. And, of course, you know we also
submitted a detailed response to the survey distributed by the
Subcommittee staff members last year.
As we mentioned in our earlier discussions with your staff
members and in our response to the survey, correspondent
banking is indeed vital to the financial industry. The notion
of correspondent banking has been in existence since the
creation of banking. Without correspondent banking, the global
markets could not function. Correspondent banking is the basis
for the settlement of payments and the movement of funds on a
worldwide basis.
According to outside sources, each day, through the use of
two major wire transfer systems--that is, Fedwire and CHIPS--
trillions of dollars of settlements are made. Bank of America
settles approximately 500 billion on a daily basis. However,
the same attributes that make correspondent banking work fast
and efficient for commerce also make it vulnerable to money
laundering.
We take very seriously our role in assisting the United
States and other governmental agencies in the fight against
money laundering. For many years, law enforcement authorities
worldwide have recognized Bank of America as a cooperative
institution in assisting law enforcement in its efforts to
combat money laundering. An example of our willingness to
cooperate, our bank agreed to establish undercover accounts for
the benefit of U.S. law enforcement in its Operation
Casablanca, a controversial operation that has left the Bank of
America brand exposed to adverse media attention. In the past,
we also received an award from the Internal Revenue Service
recognizing our cooperative efforts with that agency.
We believe that our bank has a solid program in place,
including adequate internal controls and practices, to detect
and report suspicious activities related to money laundering.
In the United States, for example, Bank of America is one of
the top filers of currency transaction reports--also known as
CTRs--and also suspicious activity reports--known as SARs.
These reports are useful to law enforcement in investigating
financial crimes and money laundering activities.
In the year 2000, for example, we filed over 1.5 million
CTRs and nearly 12 percent of all the CTRs filed with the U.S.
Government. In addition, we filed nearly 19,000 of the reported
140,000 SARs filed in the United States, or 14 percent of the
total filings.
Our ability to recognize and file reportable activities
does not come without a sizable investment in technology and
human resources. Bank of America has invested heavily in
monitoring systems over the years to capture and report cash
and other activities potentially related to money laundering.
The bank's internally built wire-monitoring systems, for
example, have been reviewed and assessed by numerous regulatory
and law enforcement authorities. Several of these agencies,
including the U.S. Financial Crimes Enforcement Network--or
FinCEN, as it is commonly known--have given our systems high
praise. Still, we have not been complacent in our monitoring
efforts. In fact, we have recently made a further investment
into new technology to enhance our wire monitoring, and we
continue to research other available solutions.
Obviously, at the heart of any monitoring system is the
person who is reviewing the activity and making judgments about
what is suspicious. Here, too, we have increased our staff and
upgraded a number of those positions.
Now, let me speak to the business of correspondent banking
and how it works within Bank of America.
Our correspondent banking function is organized
geographically in four divisions, that is, the United States
and Canada Division, Asia Division, Europe, Middle East, and
Africa Division, and Latin America Division. Each division has
the authority to organize its functional responsibilities in a
way they believe best serves our correspondent bank customers
while still maintaining the use of our corporate policies and
anti-money laundering controls and procedures. Each of the
division managers reports up to the head of our Global
Corporate and Investment Banking Group.
As mentioned in our response to your survey, we offer the
same correspondent banking services and products that other
banks in the industry offer, and you've already listed and
named those in your opening remarks.
There is a great deal of separation of responsibilities and
controls that assures safety and soundness in how we operate.
This functional separation requires a number of staff members
to become familiar with our corresponding bank relationships.
Overall, we believe this type of organization approach provides
outstanding service to our clients and instills proper checks
and balances to guard against fraud. It also fosters an
environment that encourages our associates to truly know our
correspondent customers.
Today we maintain approximately 1,900 foreign correspondent
bank deposit accounts in the United States. As a matter of
policy and practice, we do not maintain accounts for foreign
shell banks. Certainly in the United States, we maintain 1,200
relationships with foreign institutions, including 125
relationships for foreign banks located in the 15 jurisdictions
named by the Financial Action Task Force on Money Laundering.
The relationships are with branches of institutions that
maintain a home base office in one country and have established
a physical presence in the Financial Action Task Force-listed
country or with banks that are licensed by the local
jurisdiction and maintain a physical presence in that country.
Before Bank of America would open a relationship today with
a foreign bank in a high-risk country, or, for that matter,
anywhere else in the world, a rigorous, risk-based due
diligence process would take place. The level of due diligence
would depend upon several factors, including, but not limited
to, whether the bank is a branch of a reputable bank based
somewhere else in the world; whether the bank already maintains
a relationship with Bank of America; who the principals are and
their experiences in operating a bank; whether a letter of
introduction is available from a reputable banking
organization; and other such relevant factors.
As part of our correspondent banking policy and standards,
an account would not be established for any institution that
does not maintain a physical presence in the high-risk country
in which the bank is licensed. As mentioned earlier, we do not
currently maintain, to the best of our knowledge, any
correspondent accounts for foreign shell banks.
Minimum due diligence that typically would be required to
open a correspondent bank account will include a copy of the
bank's incorporation documents and bylaws, the institution's
latest financial statements, a copy of the resolution of the
board of directors authorizing them to proceed with
establishing the relationship, and dealing with those who are
authorized to do so, plus certified copies of the passports of
the principals, a search of the company registry, or
equivalent, or an undertaking from a law firm as to what
documents are held on the registry and any other relevant
documents.
A visit to the institution's physical operation and, where
applicable, to the primary place of business is also required.
We will also want to know what ``know your customer'' standards
the applicant bank has in place; what type of client base the
applicant maintains; whether the correspondent bank will offer
services to other foreign correspondent banks, including any
located in high-risk countries; whether the bank has monitoring
systems in place to detect and investigate unusual or
suspicious activities related to money laundering; and the
typical amounts and volumes of activity the bank anticipates
having with us and whether these volumes seem appropriate.
We might also ask for the results of audits and regulatory
examinations. However, there is no certainty that this
information would be provided to us.
We will also look to other due diligence information such
as search of publicly available data on the applicant or its
principals. Also, we generally have an understanding of most
regulatory environments, especially if Bank of America has a
physical presence in the jurisdiction. If not, we would assess
the regulatory environment as well. In fact, several units
within our bank meet on a constant basis with regulatory
authorities. We would also check the applicant and its
principals against Office of Foreign Asset Control--i.e., the
OFAC list--to see if there were any matches.
It should be noted that our wire-monitoring systems are
used to monitor transactions, not the normal or expected
activities of the foreign bank customers themselves. We look at
certain types of information contained in the wire transaction
fields to determine whether or not the transaction is
suspicious. If we find an issue with a transaction, we refer
the transaction back to the relationship manager and foreign
correspondent bank for further resolution with its own
customer. If the transaction were deemed reportable under U.S.
regulations, we would also file the required suspicious
activity report in the United States.
If the transaction involves a foreign bank customer who
also maintains an account with Bank of America in the United
States, the transaction may have already been identified by the
monitoring systems.
We assess several factors in making the decision to close
out a relationship with a high-risk foreign bank. The factors
might include a change in our business strategy, a downturn in
the foreign country's economy, a credit decision, turnover in
the correspondent bank's management, a loss of confidence in
the principals of the foreign office, or a lack of comfort in
the type of customers that the foreign bank maintains.
As I said before, we send $500 billion through the system
each day; therefore, Bank of America certainly recognizes its
corporate duty to be the leader in trying to fight against
money laundering. In addition to our policies and procedures
and the monitoring systems I mentioned earlier, we have
undertaken many steps to combat money laundering. This includes
especially training of our associates on the importance of
recognizing and reporting unusual and suspicious activity. Bank
of America has been favorably recognized by the law enforcement
community, as I mentioned earlier.
Senators Collins and Levin, you have asked us to discuss
our relationship with Swiss American Bank and American
International Bank. It is generally not our policy to discuss,
particularly in an open forum, our relationship with bank
customers or information about customers. Certainly both of you
can appreciate this.
However, under the circumstances, we shall provide you with
the history of the accounts, and I am prepared to discuss these
relationships with you today to the best of my ability.
I see the red light. I better hurry up.
Senator Collins. Why don't you take a couple more moments
and finish up?
Mr. Christie. OK. Thank you.
I think we'll probably get into the details of American
International Bank and Swiss Bank, so I don't need to refer to
those at the moment. It would be the opening and closing of
those accounts.
Regarding the recommendations, you have asked us to comment
on what more can be done beyond our own continued efforts to
combat money laundering. As I noted earlier, we take seriously
the problem of money laundering. One recommendation we have is
to strengthen communication efforts between the government and
the banking industry. Given our discussions with your staff and
dealings with regulatory and law enforcement staffs throughout
the world, we are aware that many governments have been able to
identify, through their own investigative efforts, the names of
individuals, companies, banks, other organizations, and
countries that continue to facilitate or tolerate other money
laundering activities. In fact, your staff has done a great
job--I have to compliment them--in uncovering a lot of
information about our ex-customers, AIB and Swiss American
Bank, including some of their customers that I am not sure we,
in the banking industry, could have uncovered on our own.
It would be extremely beneficial for the U.S. Government
and foreign governments to provide these names to the banking
industry, these suspicious names. U.S. banks, including Bank of
America, are already required to maintain a system to interdict
funds transfer activity for OFAC. By providing us with the
names of the entities that are engaged in fraud and other
related activities, we could add this information to our
monitoring systems and identify for law enforcement the
activities of these entities. This information would in turn
potentially allow us to identify the accounts of or
relationships with the named entities.
In the past, the U.S. Government has provided us the names
of countries and high-risk areas for drug trafficking and money
laundering, such as the report FinCEN released on Antigua a
couple of years ago. It would be even more beneficial to
provide us with the names of the entities that the U.S.
Government ``knows'' are promoting illegal activities.
In conclusion, I wish to thank the Chairman and Senator
Levin and other Members of the Subcommittee for the opportunity
to voice Bank of America's position on this topic and assure
you that we will continue our efforts worldwide to assist in
the fight against money laundering. Also, again, I wish to
thank the staff members for their investigative efforts. The
resulting report helped to shed light on the need to change and
enhance many of our policies and procedures at Bank of America.
I personally have learned from this exercise, and as a
result, we have already expanded our wire-monitoring process,
established more stringent and formal procedures for both
opening and closing accounts, and we have put processes and
procedures in place to better coordinate suspicious information
with relationship managers, senior managers, and including my
own risk management staff.
Again, thank you for this time on today's agenda, and I
look forward to answering your questions.
Senator Collins. Thank you, Mr. Christie.
Mr. Weisbrod, would you proceed, please?
TESTIMONY OF DAVID A. WEISBROD,\1\ SENIOR VICE PRESIDENT,
TREASURY SERVICES DIVISION, THE CHASE MANHATTAN BANK, NEW YORK,
NEW YORK
Mr. Weisbrod. Thank you, Madam Chairwoman. My name is David
Weisbrod, and I am a Senior Vice President of the Chase
Manhattan Bank in our Treasury Services Division. In such
capacity, I have oversight responsibility for the division's
credit and operating risk management policies, procedures, and
practices attendant to the bank's relationships with
approximately 3,500 correspondents. The Chase Manhattan Bank,
headquartered in New York City, is the largest bank of J.P.
Morgan Chase and Company, a multi-bank holding company with
assets in excess of $700 billion. I appreciate the opportunity
to make this statement on the very important topic before the
Subcommittee today, international correspondent banking and
money laundering.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Weisbrod appears in the Appendix
on page 156.
---------------------------------------------------------------------------
Correspondents maintaining accounts with Chase in New York
sometimes have credit relationships with us, but almost always
require U.S.-dollar funds transfer clearing services. To place
the size, scope, and importance of the clearing business in
perspective, on an average day Chase processes over 220,000
wire payments with a value in excess of $1.2 trillion. On
January 16 of this year, we experienced a record volume day
when 363,000 wire payments for $1.8 trillion were processed.
This translates to $21 million processed nearly every second,
with an average transaction size just under $5 million.
Over 93 percent of these transactions are processed
straight through, which means that the transactions are done
entirely by our automated systems, without any manual
intervention. While we are proud of our funds transfer prowess
and its importance to worldwide commercial interchange and the
global capital markets, we also understand our special
responsibility to guard against the laundering of money and
other criminal abuses in the system.
By way of background, our primary focus in the creation of
a global funds transfer system and the resulting processes
surrounding correspondent bank risk management has been upon
safety and soundness issues, that is, upon the credit risk and
operating problems that might lead to large credit exposures
that could otherwise disrupt the smooth functioning of the
payment system. These are very important public concerns that
must remain in the forefront of an effective risk management
program. In the last 2 years, however, we have witnessed
revelations as to how the Bank of New York was used in
connection with money laundering schemes orchestrated through
several Russian banks. In the wake of that incident, heightened
attention has been given to the need to expand anti-money
laundering programs to protect banks from being exposed to such
illicit funds transfer activities. We, at Chase, have taken a
series of steps to expand our anti-money laundering
initiatives.
First, Chase has significantly enhanced its new account-
opening procedures and ``know your customer'' due diligence. We
are currently conducting, as Senator Levin referred to, a
review of our entire correspondent bank base using these
enhancements. As part of that review, all existing and new
Chase customers will be documented utilizing a new ``know your
customer'' checklist. The checklist covers such items as the
customer's history of doing business with Chase, a detailed
understanding of the customer's ownership structure, whether it
is a publicly owned entity or privately held, understanding of
the customer's cash flows and Chase products to be used. The
checklist also requires responses as to whether the customer
has sustained negative media coverage and the source of
referral for the relationship. In addition, the customer is
requested to provide its most recent audited financial
statements, preferably for the last 3 years. And a first
priority for this review has been placed upon the FATF
countries, Antigua and Barbuda, and the Seychelles. If after
this review we are uncomfortable with the continued maintenance
of any account, we intend to close it.
Second, all Treasury Services' customers will be subject to
periodic reviews in order to assure that the circumstances have
not changed that would significantly affect the manner in which
their accounts are utilized or in such a way as to present an
unacceptable risk of illegal activity. The periodic review
cycle will vary based upon the perceived risk of doing business
with a particular set of clients or jurisdictions.
Third, Chase has enhanced its anti-money laundering
transaction monitoring efforts in several ways. Last year, we
established a Funds Transfer Monitoring Committee, co-chaired
by myself and our chief compliance officer, which meets monthly
to review questionable funds transfers. As part of this
process, we have launched a Web-based monitoring system
designed to review U.S.-dollar funds transfers on an after-the-
fact basis. The system utilizes patterning or watchlist
methodologies to flag potentially suspicious transactions. The
transactions are then evaluated by a dedicated staff set up for
this purpose. All of the FATF countries are included on the
watchlist. Chase has had for some time a monitoring committee
that meets periodically to review questionable strings of money
orders or traveler's checks.
Finally, Chase has intensified its effort to provide anti-
money laundering training to even more of its employees,
recently introducing a new Web-based training and testing
program for employees having desktop Internet access. All 4,400
Treasury Services employees will be required--mandatory--to
take this training and to pass an online test. Not only do they
have to do the training, but they have to pass a test as well.
Chase has always been in the forefront in providing anti-money
laundering training, having trained, through 1999, over 27,000
employees in domestic locations and over 16,000 employees in
foreign locations.
Our Bank Secrecy Act compliance program is specially
focused upon high-risk banks and high-risk products. I have
just mentioned the high-risk countries which have been our
focus. In such countries, and elsewhere, it has been our
practice not to open accounts for shell banks. With offshore
banks, we intend to maintain a heightened sense of vigilance,
for we now better understand some of the ways in which offshore
banks in high-risk jurisdictions can be exploited for money
laundering or other dubious purposes. While these risks are
recognized in its 1999 Working Paper on Offshore Banking, the
International Monetary Fund has identified offshore financial
centers, or OFCs, as ``an important and growing intermediation
channel for emerging economies.'' Moreover, the IMF has
reported that ``a number of legitimate factors continue to
attract financial institutions and investors to OFCs.'' As the
Minority staff's February 5th report points out, there are over
4,000 offshore banks. An important future challenge facing us
will be to determine how we can develop procedures which will
enhance our ability to separate the good banks from the bad
banks, the vigilant from the less vigilant.
In addition to high-risk banks, we well understand the
risks associated with the high-risk products identified in the
Minority staff's report, that is, wire transfers, payable
through accounts and pouch/cash letter activity. I have already
mentioned our automated systems for monitoring wire transfer
activity and monetary instruments. In the case of payable
through accounts, of which we only have two, we follow
judiciously the guidelines of the Federal banking regulators.
Moreover, we have a corporate-wide policy which requires that
any such account be approved by a senior officer and notified
in writing to the bank's chief compliance officer.
Combating money laundering and other illegalities within
the international correspondent banking system is no easy task.
The Minority staff's own report on page 41 recognizes that due
diligence information is often difficult to obtain from foreign
jurisdictions, and that which is obtained may be limited or
difficult to evaluate; that language barriers may impose
additional difficulties; that travel to foreign jurisdictions
by U.S. correspondent bankers is costly and may not produce
immediate or accurate information; and generally that due
diligence, both at account opening and continuing after the
account is opened, is not easy in international correspondent
banking. And we could not agree more.
We recognize that the need to hone our Bank Secrecy Act
compliance program is ongoing, but we do not purport to have
all the answers. For example, the whole notion of ``nesting,''
as it is referred to in the Minority staff's report, is a very,
very difficult problem. It is typical for small banks to
maintain accounts with slightly larger banks, who maintain
accounts with more and larger banks and so forth and so on.
These relationships are necessary and appropriate, in fact,
essential to the conduct of global, commercial, and capital
markets activities. Unfortunately, these tiered relationships
can also hide and make difficult to detect illicit activities.
We need to bring the expertise and experience of the
financial services industry to address these and other
difficult issues, and we need to do it now. An example of how
effective such an effort can be was demonstrated by the recent
Wolfsberg Principles on private banking. In a similar vein,
Chase has enthusiastically joined with its fellow members of
the New York Clearing House in creating a task force to develop
best practice principles for correspondent banking.
We welcome the opportunity to work closely with our State
and Federal banking regulators in areas such as this, although
we do not expect our regulators either to have all the answers.
As cited in the Minority staff's report, for example, it was
not until September of 2000, just a few months ago, that the
Comptroller of the Currency identified international
correspondent banking as a high-risk area. Money laundering
attendant to international correspondent banking is, in fact,
an international problem. We thus support the efforts of the
Financial Action Task Force, the Basel Committee on Banking
Supervision of the Bank for International Settlements, and
other national and international organizations worldwide which
are focused upon this problem. While we believe it to be
impossible to have complete assurance that no bad actors are
slipping through the system, with a renewed vigor on the part
of the private sector, with help from our domestic banking
regulators, and with the cooperation of foreign governments and
international agencies, we all can do better in the future.
Senator Collins. Thank you.
Senator Levin, why don't you lead off questioning this
round?
Senator Levin. Thank you very much, Madam Chairman.
First, let me thank our witnesses and the banks that they
represent for the cooperation which they have shown in this
investigation, and their filling in of the questionnaires. That
is very helpful. We are going to be looking through these
questions into some of the past actions of these banks. But as
far as this investigation is concerned, you have been very
cooperative and your willingness to help us sort through some
of these issues is essential.
First, on the question of shell banks, I think that you
testified just a moment ago, Mr. Weisbrod, that you do not open
a correspondent account with a shell bank. Is that correct?
Mr. Weisbrod. Yes, sir.
Senator Levin. OK. I believe you have also indicated that
for the Bank of America, Mr. Christie?
Mr. Christie. That's true.
Senator Levin. Is there any reason why we should not just
flat out prohibit U.S. banks from opening correspondent
accounts with shell banks?
Mr. Christie. Personally, I think it would be just fine,
but some lawyers would tell you that there might be unique
situations for legitimate transactions. But I don't know what
they would be.
Senator Levin. Mr. Weisbrod.
Mr. Weisbrod. I haven't thought of the need for legislation
in this area. I think that the banks themselves that are
attentive to the issue will unilaterally make the same
decisions that Bank of America and Chase have.
Senator Levin. What about the banks that aren't attentive
to the issue?
Mr. Weisbrod. That is a good question.
Senator Levin. Is there any reason, though, that you can
see why we should not either through regulation or through law
just simply prohibit the opening up of an account with a shell
bank?
Mr. Weisbrod. I can think of no reason offhand why.
Senator Levin. First, Bank of America. You established a
correspondent relationship with Swiss American National Bank in
1987, and then in 1990 and 1991, the relationship manager
raised concerns about the management and operations of the
bank. In June 1991, Swiss American National Bank, which was an
onshore domestic Antiguan bank, wrote to the Bank of America,
canceled its account, and instructed the Bank of America to
open an account for its offshore affiliate, Swiss American
Bank. The relationship manager for the Bank of America at that
time told our staff that it looked like the account was opened
without anyone at the Bank of America making a determination if
they wanted the Swiss American Bank to open an account--in
other words, no vetting, no due diligence by the Bank of
America in that one. The relationship manager said that the
Swiss American National Bank and the Swiss American Bank were
both the same institution.
A similar thing happened with Chase. Swiss American
National Bank had an account with Chase since 1981. In 1995,
Swiss American Bank--that is the offshore bank--opened an
account. The account-opening documentation contained little
more than an annual report, and here is what the sales
representative wrote: ``Given that there is a demand deposit
account already opened in our books in the name of Swiss
American National Bank of Antigua, no further account
justification comments are included.''
But the two banks were different in significant ways. The
National Bank was a domestic commercial bank, which was
regulated by the Eastern Caribbean Central Bank; whereas, the
Swiss American Bank was an offshore bank, catering to
international clients and regulated by a jurisdiction that had
little or no regulation at the time, and that was Antigua at
that time. But the only thing that the two banks had in common
was the management, and Bank of America had concerns about
that.
So I would like to ask both of you: Shouldn't there have
been more due diligence to explore the primary focus of Swiss
American Bank's business and the nature of its clientele to
better understand what Swiss American Bank was going to do
before accepting its account?
Mr. Christie. All right. I'd like to answer this way: I
think if we can look back in history a little bit, a long time
ago, probably when I first started with the Bank of America,
correspondent banking was not deemed to be a risky business. In
fact, it was sort of a boring business for anybody who wanted
to get ahead in a bank. And so not enough attention was paid to
it, and there was no risk, there were no losses, there was no
harm. And this was before we learned about money laundering
related to narcotic drugs and so forth moving through the
banks.
So the account officers grew up in an environment that said
all banks are good, and the more banks we can have in our
portfolio, the better, and this is a good business because we
already have the machinery and mechanisms for clearing checks
and wire transfers and so forth. So if you can think of that as
the environment and for some of the account officers that grew
up in that environment, it was more of a knife-and-fork kind of
business. You went out and you had lunch or dinner with them,
learned what they were doing, and perhaps played golf and came
back and looked at the balances.
Well, obviously, in this case, in 1987, when the account
was opened, that was certainly true with regard to the account
officer at that point in time. That's when we first started the
relationship with the Swiss American National Bank. In fact,
that person happened to be in Antigua and thought he knew
everybody in Antigua and thought he knew the regulations there
and thought that he could do no harm.
But in 1991, the environment was still somewhat the same
except by this time we knew that banks could fail, so we had
greatly enhanced and heightened our concerns and awareness
about the credit quality of banks and any kind of credit risk
we might take with a bank.
So if it was going to be a bank or a transaction that was
going to require credit, a different attitude was present, plus
more sets of eyes would have looked at the bank or the
transaction. But in this case, it was not a credit transaction.
It was not a credit opportunity. It was simply in the account
officer's mind, this existing customer of ours who's been with
us for a number of years now, gee, they're simply rearranging
their banking relationship. I mean, I saw some of the memos
that your staff saw, and, in fact, there's one statement in
there that says, oh, well, they're just opening another
account. And so you're right. No one stopped at that point in
time and took a deep breath and said, what is this new bank
that we're opening the account for?
Had we stopped and done that and had we had the benefit of
all the knowledge we have today, after all of the
investigations and reporting that we now see from your staff,
obviously we should have done something different. But the
environment didn't call for it then.
Also, in that time frame, an account, as long as there was
no credit, could be opened by the authority or the
authorization of the account officer, him- or herself. So I'm
afraid that the environment was different at that point in
time, and that's how the accounts got opened.
Senator Levin. Do you have any comment on that?
Mr. Weisbrod. I would answer your question with one word,
and that is, yes, there should have been more due diligence.
And we have an enhanced program which we're implementing now to
avoid a repetition.
Senator Levin. OK. Mr. Christie, now relative to American
International Bank. The Bank of America established an account
for American International Bank in 1993.
Mr. Christie. Correct.
Senator Levin. The relation manager heavily relied on the
fact that he knew the owner of the bank, Mr. Cooper, from when
Mr. Cooper had been affiliated with other Antiguan banks.
American International Bank was a new bank. It had no
operational history. There was little probing by the
relationship manager into the nature of the bank or its
clientele.
The material which was supplied to your bank by the
American International Bank, however, raised some questions.
First, it indicated that although the American International
Bank was formed in 1990, it did not hold its first
organizational meeting until December 1992 and did not begin
operations until mid-1993. Should that have raised a red flag?
Mr. Christie. It seemed strange to me when I saw the facts,
yes.
Senator Levin. All right. Now, we also have portions of a
brochure of the American International Bank, which was included
in the account-opening documents. So when they opened the
account with you, this was a brochure which was given to you.
It stressed confidentiality, called it a competitive advantage,
stressed that the host country has criminal penalties against
disclosure of client information, except by the order of a
court. It notes that there are no tax treaties or information
exchange treaties between Antigua and foreign countries, other
than England. It touts the advantages of forming an
international business corporation in Antigua, and no reporting
requirements on offshore activities. The books of the
corporation may be kept in any part of the world. Wherever
those books are, if you can figure out where they are, you can
try to get them, but you will never know where they are because
they can be anywhere. They are allowed to be kept anywhere.
They don't have to be kept in Antigua.
Shares of the corporation may be issued in bearer share
form, which means that the owner of the company is whoever has
physical possession of the shares of the corporation. So you
never know who the ownership of your account is when you have
these bearer shares.
Shouldn't this brochure emphasizing those ways to keep
secret this money, shouldn't that have raised some red flags?
Shouldn't that have set off some alarm bells?
Mr. Christie. Absolutely. I can't deny that.
Senator Levin. My final question, and my time on this round
is up, I am just curious about this. Do you know whether or not
it is still the law in Antigua that the books of the
corporation may be kept in any part of the world and that share
certificates can be issued and registered in bearer form?
Mr. Christie. I don't know.
Senator Levin. Do you happen to know, Mr. Weisbrod?
Mr. Weisbrod. I don't.
Senator Levin. Thank you. My time on this round is up.
Thank you.
Senator Collins. Thank you, Senator Levin.
I mentioned in my opening statement that one of the aspects
of this investigation that has troubled me is that American
banks seem to do much more due diligence when they are
extending credit to correspondent accounts than when they are
just providing fee-based services. And there are numerous
examples of that. I would like to ask you, Mr. Christie, about
one. I realize it goes back many years ago, but I think it
amply demonstrates the difference in due diligence that is
applied when a bank has its own funds on the line, and it is
Exhibit 14 \1\ in the book that I am going to be referring to.
---------------------------------------------------------------------------
\1\ See Exhibit No. 14 that appears in the Appendix on page 718.
---------------------------------------------------------------------------
In 1993, 2 years after opening a correspondent account for
Swiss American Bank, the relationship manager sought approval
to establish a line of credit on behalf of Swiss American
Bank's private banking clients. And the request was denied by
Bank of America's credit manager because, in his opinion, the
risk potential was too great for the bank. And he noted that,
``We know little about the parentage of this bank'' and ``its
structure appears designed to isolate the real owners and to
take advantage of tax and regulatory havens.''
He further goes on to say in the exhibit, ``The potential
for being blindsided is quite pronounced, and I'm not in favor
of the presentation. If we knew more about the parentage,
respectability, and integrity of the bank, I would be willing
to consider trade finance, but I would continue to believe that
we should not extend credit to service their private banking
clients.''
This is a pretty serious indictment of this whole account,
isn't it? Here the credit manager is saying that we just don't
know enough about the parentage, respectability, and integrity
of the bank. I don't understand why that finding by the credit
manager didn't trigger a review of the entire relationship that
Bank of America had with Swiss American Bank. If those kinds of
findings were made when Bank of America was considering
extending credit to Swiss American Bank's customers, why didn't
that trigger a review of whether this correspondent bank
account should even exist, whether you should be providing any
services?
Mr. Christie. Excellent question. Obviously being a credit
and risk manager type person, this fellow did a good job. I
would say that. But the problem then was--and I will tell you
it's not the same today. But the problem then was that too much
of this was somewhat compartmentalized, and also because we
didn't give credit to this bank, the full, if you will, control
of what we did with that relationship was left within the hands
of that relationship manager. And so the relationship manager
in this case went to the credit department and said can we have
credit, and the credit department said no; he walks away and
says, well, it's not worth fighting--I believe that's also in
your documentation--but the credit department in those days had
no further obligation to report this up or to report it across
the organization. That probably should not have been that way
at that time. You wouldn't have had this question, and we
probably wouldn't have had the account.
Today, as my friend next to me was saying, today we
wouldn't open the account without someone on my staff, which is
risk management, reviewing the documentation and the due
diligence and making sure we would be comfortable in having
this relationship in our portfolio, and not that we're
necessarily going to give them credit on day one, but if this
sort of request came up, how would we react to it in the
future?
So what you're citing historically is absolutely correct,
and I think it was not well managed at that time. I think today
we've taken steps to correct that.
Senator Collins. Mr. Weisbrod, I want to give you an
example that is more recent, and that is in some ways more
troubling. In the fall of 1999--and I am going to be referring
to Exhibit 41,\1\ if you want to follow along. In the fall of
1999, Swiss American Bank asked Chase to open foreign currency
accounts for Swiss American Bank and Swiss American National
Bank in London. Now, presumably because these accounts, again,
posed a greater risk to Chase than those institutions' existing
accounts, Chase's credit manager conducted another review of
the two banks, and the review included some pretty strong
language.
---------------------------------------------------------------------------
\1\ See Exhibit No. 41 that appears in the Appendix on page 812.
---------------------------------------------------------------------------
The Chase credit manager wrote, ``My own unscientific
grading of certain geographic locations includes the
presumption (biased obviously) that anything from Antigua is
probably diseased and contagious and should be avoided like
mosquitoes in Queens.''
He then goes on to say, ``Meanwhile, my head is going back
into the sand on this one,'' which is a troubling statement.
I find this remarkable in many ways. If, in fact, a credit
manager felt that anything from Antigua should be avoided--and
I think some of the testimony we heard from Mr. Mathewson about
tax havens suggests there may be good reason for that--why
did--well, let me ask, first of all, did Chase go on to open
the foreign currency accounts in London in this case?
Mr. Weisbrod. No, Senator Collins, we did not open the
multi-currency accounts, and just one minor point of
correction. The document that is referenced is really written
by a client manager. This would not be written by a credit
officer. But that's----
Senator Collins. Well, it is still an employee of Chase who
is raising concerns about doing business with this bank.
Mr. Weisbrod. Yes.
Senator Collins. Is that correct?
Mr. Weisbrod. Yes, which is why I said it's a minor
correction, because the fundamental point of your question is
still germane.
I believe what was referenced in this message is an account
being opened elsewhere in the organization. What the client
manager was attempting to say is that this is an area of the
world that is, as Mr. Mathewson described this morning, an
emerging market, one where the standards are not as high--he
does put it in very graphic terms in the message here--not as
high as we're used to in this country; and that anyone who
would be opening accounts or dealing with businesses in that
part of the world should be mindful of that. He was really
referring to another area of the bank that was going to be
opening this particular account and hoping that they were as
mindful of the ``know your customer'' principle as he was. And,
yes, it's written in very colorful language.
Senator Collins. But, in fact, Chase continued to do
business with Swiss American Bank for some time. Is that
correct?
Mr. Weisbrod. Yes.
Senator Collins. And it is my understanding that actually
Chase closed its accounts only in October of last year. Is that
accurate?
Mr. Weisbrod. Well, we initiated the closing of the account
in April, and the account was finally closed in October of last
year.
Senator Collins. One of the things that troubles me--and
our investigation has documented this--is it seems to take an
extraordinarily long time between when information is conveyed
to the bank that there may be suspicious activity, even if that
information comes from a law enforcement official, and when an
account is actually closed, and I would like to have you both
comment on why that is. Mr. Christie, we will start with you.
Mr. Christie. Well, certainly there are good and bad
examples, and, unfortunately, you are seeing a couple bad
examples from us. But part of it is that we are dealing with
what we believe is suspicious information and activity about a
bank's customers. And so if you believe--until someone is
proven guilty, our lawyers have trained us over the years,
many, many years, that you have to be careful in how you handle
your relationship with your customer, either when you deny them
loans or when you close their accounts. Because if you in some
way damage their business or their reputation, they could come
back to you in U.S. courts of law and sue us for that damage.
Especially with a bank, if you were to put them in a
position where they have to--they are scrambling around looking
for other accounts and the word gets out that, well, gee, Bank
of America is closing them out, I wonder what's wrong, and all
of a sudden it gets to their customers and the customers could
come flooding in and draining their deposits out of the
accounts--I mean, that is ``sky is falling,'' I understand, but
that's the worry and concern that we do have on our minds that
we don't do something untoward. But that doesn't excuse us for
some of the long terms that it takes while they are trying to
find another correspondent bank account. And, typically, in my
humble opinion--it depends on your account agreement with the
customer and what it legally says in the account agreement. It
could bind you to 30 days. It could bind you to 60 days. I've
seen some that bind you to 90 days after giving notice. Ninety
to 120 days should be sufficient. And as I say, in our new
process and procedures, we will be tightening that up, and it
will have oversight by people like my risk management staff,
whereas before, as I said earlier, this was allowed to happen
because the relationship manager, with other things on his or
her mind, and the account administration folks with other
things on their mind, once they close down the cash management
products, which they thought was the risk, i.e., the wire
transfer services, cash letter and so forth, letting the
account slowly drain down to nothing was sort of a non-event in
their mind, and, yeah, we'll close it when it gets down to
zero.
Senator Collins. Mr. Weisbrod.
Mr. Weisbrod. Senator Collins, there is one remark that you
made which I would like to make sure we are clear about, and
that is that if a--I think you referred to a law enforcement
officer. I don't believe a law enforcement officer contacted us
during the Swiss American incident, certainly not directly with
anything adverse about the bank.
I certainly endorse everything that my colleague to the
right has just expressed, but I would emphasize, very strongly
emphasize that if we do get communication from a law
enforcement officer about suspicious activities regarding a
bank customer, then we would take action--in fact, I think that
is what happened in the instance of AIB. We were more
forthcoming in terms of closing.
Senator Collins. Thank you.
Senator Levin.
Senator Levin. I want to go back to the American
International Bank for a moment and ask you, Mr. Weisbrod,
about your entering into a relationship with the American
International Bank.
First of all, the Chase sales representative talked to the
American International Bank and described in a memo what the
primary function of that American International Bank was. And
the last line, or second from the last line in that memo--and
this is Exhibit 40 \1\--says, and I am going to paraphrase part
of it, basically that taking in deposits from U.S. nationals is
not a transgression. It becomes a transgression if and when
these nationals end up not reporting the investment. In other
words, that is the transgression of American law; that is the
income tax evasion.
---------------------------------------------------------------------------
\1\ See Exhibit No. 40 that appears in the Appendix on page 810.
---------------------------------------------------------------------------
But then this is what your sales representative was told,
that that is of no legal concern to the offshore depository
institution. That is of no legal concern to American
International. Well, it may not be of legal concern to them,
technically, but it surely ought to be of concern to you in
terms of your knowing your customer--that you were told or your
sales agent was told by this potential customer that is of no
concern to them that their depositors are engaged in income tax
evasion in the United States.
So while maybe technically the person at American
International is correct, it seems to me that is where ``know
your customer'' should be triggered. That is where you folks
should say to yourselves, well, wait a minute, if that is the
view that this potential customer takes, we have got to be very
cautious before we accept that customer as a depositor if he
doesn't care whether that money is dirty money.
Do you agree with that, looking back at that statement of
your account sales representative?
Mr. Weisbrod. The American International account was opened
about 5 years ago. I don't think this account would be opened
today, based upon several factors: Our enhanced due diligence
policy which we are very proud of and implementing very
forcefully, but, moreover, because this account was opened 3
years before the FinCEN advisory alert on Antigua, and years
before the FATF alert on troubled countries, as well as before
the OCC came up with its handbook.
So the issue--as I think Mr. Christie pointed out, the
sensitivity regarding this issue was not as great then as it is
now. So I would give assurance to the Subcommittee that such an
account would not be opened today by us. At the time, I would
say that our sales officer had no evidence of tax evasion,
although--reading between the lines, and as Mr. Mathewson
testified this morning, you could infer it.
Senator Levin. It is not just that you can infer. It is
that when that depositor says it is of no legal concern to us
that this money is dirty back in 1996--should that not have set
an alarm bell about who that customer is?
Mr. Weisbrod. No question, it should----
Senator Levin. I am talking about 1996. Shouldn't that have
triggered an alarm?
Mr. Weisbrod. I don't think that the bank was saying the
money was dirty. I think they were saying that they had no
obligation under the law of Antigua.
Senator Levin. They have no problem accepting dirty money
under Antiguan law, but you have a responsibility as an
American bank to know your customer and not to accept as a
customer somebody who does accept dirty money.
Mr. Weisbrod. We have a responsibility to know our
customer, yes, sir.
Senator Levin. And to accept as a customer, hopefully, a
bank that accepts legal money. Is that not what ``know your
customer'' is all about? If they don't care whether the money
is illegal or not and they have no ``know your customer''
requirements whatsoever at that potential customer bank of
yours, shouldn't that have been a concern of your bank at that
time, even? I know it is a concern now, but even then should
that not have been a concern?
Mr. Christie is shaking his head ``yes,'' so maybe you have
different answers to that question.
Mr. Christie. I am sorry. I don't want to put my colleague
on the spot.
Senator Levin. OK.
Mr. Weisbrod. The only confusion that may be here is that
there is no--I think Mr. Mathewson testified this morning that
there is no law preventing Americans from depositing with that
bank, and that the bank in Antigua has no obligation under its
law to report that income.
Senator Levin. But you are missing my point, I think, which
is your obligation relative to your customer. I hope that would
include that you not accept as a customer a bank which says we
don't care whether that money is dirty, we have no obligation
under our law to do anything about it.
Mr. Weisbrod. I accept the point, Senator. As I said at the
beginning, this is not an account--I emphasize--not an account
we would open today. I accept the point totally.
Senator Levin. I will finish this particular offshore bank,
the American International Bank, questions with just this last
question, and thank you for extending my time, Madam Chairman.
Bank of America terminated its relationship in April 1996
with American International, and this is what a Bank of America
relationship manager who had handled that account wrote in July
1996,\1\ that ``exiting that relationship . . . also seems to
have been prudent, since although no proof is, of course,
available, the reputation in the local market is abysmal.''
Their reputation in the local market is abysmal. That is what
Bank of America said their reputation was.
---------------------------------------------------------------------------
\1\ See Exhibit No. 4 that appears in the Appendix on page 698.
---------------------------------------------------------------------------
``Rumors include money laundering, Russian mafia, etc.,
while management of that bank also now includes the former
manager of SAB, again not a reassuring situation.'' So, that is
what their folks found in terms of that reputation. They were
glad they were out of it and talked about the reputation and
said it was abysmal.
Now, Chase obviously had a different view at that time
because while Bank of America was glad it was out of it because
of the local reputation of that customer, you were opening an
account, presumably because you had a different view of that
customer or else you never would have opened it.
How is it possible that two banks on the same customer had
such divergent views of their reputation?
Mr. Weisbrod. We didn't know that its reputation was
abysmal. Had we known that at the time, we would not have
opened the account. We did make some effort to find out. We
had, I believe, two references from reputable banks before we
opened the account, and had made some exploration about the
management; I believe even obtained a copy of its ``know your
customer'' policy and reviewed that policy with the management.
But had we known that the reputation was abysmal, we would not
have opened the account at the time.
Senator Levin. Thank you.
Senator Collins. Thank you, Senator Levin.
Mr. Christie, you mentioned in your opening statement the
number of changes that Bank of America made in order to improve
its safeguards against money laundering, and you said that the
new organizational approach fosters an environment that
encourages our associates to, ``truly know our correspondent
bank customers.''
You also said that your bank has made a decision, which I
commend you for, to not open correspondent accounts for shell
banks.
Mr. Christie. Right.
Senator Collins. I am trying to reconcile these two
statements because we know that what some shell banks do is
open accounts with other foreign banks, which in turn open
accounts with U.S. banks. As part of your process of opening up
new accounts so that you, ``truly know our correspondent bank
customers,'' do you ask whether the foreign bank is doing
business, or whether you, in effect, will third-hand be doing
business with a shell bank?
Mr. Christie. First of all, again, the investigative staff
did a fantastic job of ferreting all this convolution out for
us, and we appreciate that very much.
Honestly, until a year ago, should you logically have
understood that that might have happened? Sure, you should
have. Did the correspondent bank account officers think about
that at that point in time? Probably not. In fact, I don't
think so. Again, they thought ``I am doing my due diligence on
this bank that I am going to do business with and, gee, I don't
see them doing anything illegal. And, gee, I have looked at
their `know your customer' policies which, they could write
overnight on the back of a napkin if they wanted to. So I am OK
with this bank.''
But I don't think they stopped to think and connect the
dots backwards, as the Senate investigative report has helped
us do now, into this ``nesting'' concept. So as I said in my
opening comments, and I think it is in my testimony, that one
of the new procedures that we have adopted, is to drill deeper
into what that bank does, who its customers are, what its
customer base is.
And one of the questions is, will they be doing business
with other correspondent banks? Who are going to be those
correspondent banks? What is the legitimacy of that? So we have
changed all that dramatically now. Did we do it in the past?
No.
Senator Collins. Is that just going forward or are you
taking a look at the correspondent accounts that you have now,
because I suspect you may well discover you are doing business
indirectly with a shell bank that is in the nesting situation
that we have described?
Mr. Christie. No. You are absolutely right. That is a very
good possibility. And, yes, just like Chase and many other
large banks today, we are doing a thorough review of our
correspondent bank portfolio, and we have a new checklist, just
as they do. We have all these questions we are going to be
reviewing with these correspondent banks and hopefully
ferreting out those issues.
I can tell you that in the last year or two, I don't think
we have opened any new correspondent bank accounts, and I can
tell you we have closed a number of them. So, yes, we are on
the warpath to try and get this cleaned up. I assure you of
that.
Senator Collins. Thank you.
Mr. Weisbrod, in your statement you have an astounding
fact. You say that on an average day, Chase processes over
220,000 wire payments with a value in excess of $1.2 trillion.
The magnitude of that, multiplied by other banks, is really
extraordinary and shows how much money is being moved around
the world every single second.
Senator Levin. We estimated, by the way, $21 million a
minute.
Senator Collins. That is extraordinary, so if this hearing
goes much longer----
Mr. Christie. Is that in a workday or is that in a 24-hour
day? [Laughter.]
Senator Collins. My point is that the magnitude of money
being wired all around this world makes it so much more
important that your initial procedures for opening accounts be
really thorough and sound, because there is no way, as you have
essentially pointed out by giving us that statistic, that Chase
or any other large money center bank is going to be able to
review every single wire transfer that occurs.
I mean, I am sure you have procedures for triggering a
human review if certain criteria are met, but obviously the
magnitude is incredible. Doesn't that mean that if you don't do
a good job up front in verifying who your customers are and
being very careful with whom you do business when it comes to
correspondent bank accounts that inevitably you are going to be
inadvertently fostering an environment where money laundering
is expedited by the services you provide?
Mr. Weisbrod. I wish we had this question on videotape
because I would use it in our anti-money laundering training
program. I could not agree more with that statement. It is at
the very heart of the program of anti-money laundering that a
bank has to deliver. It is the key.
But I would go further, too, to say not only the opening of
the account needs to be scrutinized and we need to do better
than we have, but then the ongoing review, which is something
quite frankly we had not been doing in the past but which we
are doing as part of our enhanced policy, needs also to be
done.
So I think the statement is accurate. I would love to
capture it and use it in our training programs.
Senator Collins. Thank you.
Senator Levin.
Senator Levin. I am sure we would be happy to make that
available to you.
I want to go back to Swiss American Bank and take a look at
Exhibit 38.\1\ These are some of the ongoing concerns that,
first, Bank of America had. I want to pull up their comments
from their records.
---------------------------------------------------------------------------
\1\ See Exhibit No. 38 that appears in the Appendix on page 807.
---------------------------------------------------------------------------
A privately-owned bank with obvious operating problems.
That was back in August 1990.
Then in May 1995, you decided to ask Swiss American to find
another correspondent bank, but since you asked them the month
before, they appeared, if anything, to be worse than they were
the month before; poor management; constantly preyed upon by
con artists. Now, that is May 1995.
Then in July 1996, according to your records, ``It has been
a year since we requested Swiss American to find another
correspondent. . . . We agreed to 90 days for them to notify
remitters and close the account. . . .'' You talked about how
they admitted to problems at audits, including
misclassification and hidden loans. Now, that is July 1996.
In March 1998, the account is still not closed. ``I had
long ago required Swiss American to discontinue their clearing
and wire transfer activities with us, as some transactions
appeared suspect. . . . We now have the January 1998 issue of
Money Laundering Alert describing a possible precedent settling
civil lawsuit by U.S. authorities against Swiss American Bank .
. . involving the Antiguan Government and accusing
collaboration with money launderers.'' Then it says that you
asked them that day to close their account. That is March 1998,
but it was not until June or July of a year later that that
account was closed.
I would just emphasize that not only must you take much
greater precaution in opening up these accounts, but when you
have information that is sufficient to close an account and you
decide to close an account, surely it ought to be done
decisively at that point. I mean, I have got a lot of problems
with the length of time it takes banks to decide to close these
accounts. But here is a case where you decided to close the
account, and year after year after year that account stayed
open.
Would you agree, looking back, that that is not the way
this anti-money laundering effort should be carried out?
Mr. Christie. I absolutely agree.
Senator Levin. Relative to the Chase Bank, if we can put up
their records relative to the same Swiss American Bank.\38\
Back in June 1997, Chase received a subpoena for account
documents. Then in August 1998, records show that Swiss
American had been suspected of money laundering. ``Can you tell
me whether this is an account that Chase will continue to
maintain?''
Then in November 1998, ``Inquiry revealed that the
captioned bank has come to official attention as a suspected
repository of proceeds of con games.'' Further on in that
comment, it says--and this is what I want to focus on--
``Considering the difficulties in determining actual ownership
of the bank, its location, the operating environment of these
offshore banks, and the questions raised above, recommend that
we exercise special caution in dealing with this entity, if a
decision is made to continue our relationship at all.''
Now those are actually the problems with many offshore
banks, are they not?
Mr. Weisbrod. Yes.
Senator Levin. It is difficult to determine actual
ownership. We have seen it with Antigua, all the efforts that
are made to make sure no one can determine actual ownership.
That is true with other jurisdictions as well.
``Considering the difficulties in determining actual
ownership of the bank, its location, the operating environment
of these offshore banks, and the questions raised above,
recommend that we exercise special caution.''
Then a year later, that bank--and this is the last quote on
that exhibit--``Swiss American Bank is getting too much bad
press. It is even used as a case study in our money laundering
training.''
My gosh, you folks were using Swiss American Bank as a case
study in your money laundering training. A case study for what,
for why it ought to stay open or why it ought to be closed?
Mr. Weisbrod. The case study referred to our belief at the
time that this was a conduit, an unwilling, unknowing conduit
for money laundering. In other words, it had been caught in the
middle between the two parties, and we were using it--our
compliance area was using it as a case study to show this could
happen to us. That was really the intent of that.
Senator Levin. That what could happen to you?
Mr. Weisbrod. That, in other words, we ourselves could be
an unwilling conduit between two parties to a money laundering
transaction.
Senator Levin. All right, so that even though in August
1998 you had some evidence that there was suspicion of money
laundering, in November 1998 you had in your records that they
were a suspected repository of the proceeds of con games--
considering that you can't determine ownership, location,
operating environment, you were required yourselves to exercise
special caution. You still treated them as though they were
being just an unwitting victim of some other folks. Is that it,
despite all your own evidence in your own file that they should
have known and perhaps did know what they were being used for?
That is what the case study was?
Mr. Weisbrod. I believe the case study was to show how a
bank could be caught in the middle, yes, but----
Senator Levin. You concluded that they were caught in the
middle, that they were somehow or other an innocent victim of
someone else?
Mr. Weisbrod. Senator, to the best of my knowledge, we had
no knowledge that they were a money laundering institution.
They were not charged, per se, with that. I am not here to
debate because I totally agree with the premise that this is
not an account that we should have done business with. The
reputation issue here was sufficient to not have this account
on our books.
Senator Levin. You did not officially terminate that
account until you got a subpoena from this Subcommittee, is
that correct, in October of the year 2000?
Mr. Weisbrod. Correct.
Senator Levin. Let me just go to the question of offshore
banking because I think this is going to get to the meat of
some potential legislation.
I think it is pretty clear that shell banks should not be
able to open accounts at our banks. I am going to say it is
clear to me, and your two banks do not accept accounts from
shell banks.
The question, though, is, for the reason given in your own
documents, whether there has got to be a heightened sense of
inspection of offshore banks because of the very reasons that
are in that document.
You can't tell who owns them, you don't know where they are
located, you don't know what the operating environment is.
You surely, in my judgment, did not exercise special
caution in that case. That is my own conclusion about one case.
But whether that is accurate or not, we surely as an industry--
you surely, and I think we as a government--have got to require
that there be special caution if we allow correspondent banking
with offshore banks to continue.
I would like to know whether you agree with that and under
what circumstances should we allow offshore banks. These are
banks that are not allowed to deal with the people in the
jurisdiction which licenses them. The jurisdiction says, we are
not going to let that offshore bank deal with our people, but
we will inflict them on the rest of the world.
Under what circumstances is it legitimate for you folks,
legitimate banks, to open an account with an offshore bank? And
if there are such circumstances, in your judgment, what should
be the heightened requirements for ``know your customer'' in
the cases where you do open accounts with an offshore bank?
Mr. Christie, do you want to start?
Mr. Christie. Sure. There are a few legitimate reasons for
an offshore bank, but in my mind that has to do with an
offshore bank for a large, sophisticated, worldwide bank that
has a legitimate business to have--it doesn't have a branch
there, it doesn't want to go through the process of opening a
branch, it doesn't want to deal with the local regulators that
much.
Also, you cast it as if the regulators in that country are
saying, we don't want you to deal with our customers. In my
mind, that is not the way I interpret that. I mean, in their
way of doing business, they have got three ways of doing
business in our country, if you want to. Here is one way, here
is a second way, and here is a third way.
Senator Levin. But the first way, if you want to do
business, requires very careful regulation to make sure that
you follow certain rules, right?
Mr. Christie. Right.
Senator Levin. And that is to protect their own
constituents?
Mr. Christie. I don't know that.
Senator Levin. Isn't that the purpose of regulation?
Mr. Christie. I don't think they think that way.
Senator Levin. Well, that is what should be the purpose of
regulation.
Mr. Christie. Sure.
Senator Levin. Keep going.
Mr. Christie. All right, well, Chase is not a good example
because they have a presence everyplace. But a good
correspondent bank customer of ours might have a reason to have
an offshore bank in that country, and for them, if we have got
a presence or if they want us to act as their correspondent
bank, I would see that as a legitimate thing to do.
What legitimate businesses might come through that--I know
this is only an example, but, for example, they could have a
customer who has a travel business. And, of course, in the
Caribbean a lot of people travel to the Caribbean and there are
a lot of dollars that flow in through traveling. So it could be
that there is a need to clear and exchange either the
traveler's checks or the currency or whatever may come into
that bank.
Senator Levin. Why shouldn't that be done onshore instead
of offshore?
Mr. Christie. Well, because the business is in that island.
So the physical presence of those documents, either the checks
or cash or whatever, is in that island.
Senator Levin. They are offshore?
Mr. Christie. Yes, offshore.
Senator Levin. What percentage of offshore banks would you
say would meet that narrow standard?
Mr. Christie. I said that is only one example and I don't
have all the examples.
Senator Levin. No, but give me an estimate. Would it be the
minority or majority of offshore banks.
Mr. Christie. Of offshore banks?
Senator Levin. Yes.
Mr. Christie. Oh, it is probably the minority. I know where
you are going and I agree with your point.
Senator Levin. Would you agree, then, that the majority of
offshore banks--you are guessing, I know, but--the majority of
offshore banks now would not meet that standard which you feel
should be met before they are allowed to have correspondent
accounts?
Mr. Christie. I think you are right, yes.
Senator Levin. Mr. Weisbrod.
Mr. Weisbrod. I think the issue of the offshore banks is a
complex issue. It is one of the areas that is being addressed
by the New York Clearing House in its best practices paper, and
we are endorsing that and working with the New York Clearing
House.
We recognize special obligations in terms of understanding
the offshore banks, and in evaluating their practices with
regard to the banks that they may be doing business with.
Senator Levin. Do you want to outline first what those
special practices should be? What are the additional safeguards
which should be put in place to make sure that offshore banks
are not laundering money? What are those safeguards?
Mr. Weisbrod. I would say first that with regard to the
FATF jurisdictions, we are particularly looking at whatever
offshore banking arrangements may exist. As Mr. Christie said,
there are major banks that use offshore centers for funding in
capital markets or legitimate regulatory purposes that the Fed
and others are well aware of.
And our practice is only to do business with offshore banks
that are affiliated with such institutions. If there were other
offshore banks that were in other arrangements, we are not
going to want to do business with those. We are taking a very,
very hard look at those, and I don't want to make a blanket
statement because the business is large, but that is our
general approach.
Senator Levin. Finally on this subject, do you think, then,
that for banks unlike yours which are willing to do business
with those offshore banks, the ones you are not willing to do
business with--should we prohibit them from doing so?
Mr. Weisbrod. I think that the right solution is to work
internationally to take their license away because----
Senator Levin. If we can't get that done, should we
prohibit it by regulation or by law?
Mr. Weisbrod. That is a matter for the Congress to decide.
Senator Levin. Thank you.
This is just one final area I want to go into, and that has
to do with Internet gambling. It is illegal to place bets over
the Internet in the United States, and the courts have upheld
that interpretation. Apparently, one person was convicted of it
and others have worked out plea agreements with the government.
Antigua has been a center for Internet gambling, and at
least until recently the Swiss American Bank serviced the
accounts of Internet gambling companies, including accepting
transfers from and making payments to individuals in the United
States. And this was no secret. Some of the Web sites, which
maybe we can put up, are in Exhibit 13 \1\ that is before you
as well.
---------------------------------------------------------------------------
\1\ See Exhibit No. 13 that appears in the Appendix on page 710.
---------------------------------------------------------------------------
Bettors on Internet gambling are instructed to wire
transfer their funds to the Swiss American Bank account at
Chase Manhattan. That was Merlin's Magic Castle. Then the next
one is Gold Nugget. Bettors are instructed to use Swiss
American Bank's correspondent account at Chase. There are
literally hundreds of sites like this, so that Chase became a
big vehicle for the flow of these funds.
If you take a look at a chart, Exhibit 13, of the Swiss
American Bank account at Chase for some months during 1998 and
1999 that we sampled, we can see that a significant percentage
of the deposits for that month were clearly identified as
Internet gambling enterprises, and there were a lot of other
clear instances of what was going on.
For instance, in late 1998 the sales representatives were
advised that Swiss American Bank was servicing Internet
gambling entities and their bettors, but that they didn't
report it to anybody because they thought it was legal. So your
sales reps thought that what was going on there was legal.
Did they ask for a legal opinion from your law department?
Mr. Weisbrod. No, sir.
Senator Levin. They just thought it was legal or assumed it
was legal and kept going.
Then your fraud department took a look into payments that
were made through the Swiss American Bank account which
identified Internet gambling activity at the Swiss American
Bank in 1999. Then in 1999, Chase was advised that Swiss
American Bank's monthly use of checks would expand
significantly due to Internet gambling-related payments.
But the part that I want to focus on occurred in March
1998, when the U.S. Attorney for the Southern District of New
York indicted 21 owners, managers and employees of 11 Internet
sports betting firms for collecting wagers from U.S. citizens
over the Internet. Your records were subpoenaed for the trial
of the owners of one of the firms, and a Chase employee
provided testimony at the trial about check and wire transfer
activity at the Swiss American Bank account at Chase that
involved that firm.
My question is, since there was a criminal charge against
somebody which was based on Internet gambling being illegal in
the United States, at that point was there an opinion requested
from your law department as to whether or not Internet gambling
was legal, and if so, what was that opinion at that time?
Mr. Weisbrod. The date of that, sir, was?
Senator Levin. April 1998.
Mr. Weisbrod. No, there was no legal opinion obtained.
Senator Levin. Or March 1998.
I am curious about that because now you have an employee
testifying in a trial where essential to that charge was an
allegation that there was a criminal activity going on in the
United States. Wouldn't normally some alarm bells go off at an
institution when that happens to say, hey, wait a minute, if
this is illegal and we have somebody testifying in that case,
shouldn't we stop accepting clearly identified proceeds of an
illegal activity?
Mr. Weisbrod. There is no question but that at the time, in
1998, our employees were not aware of the fact that Internet
gambling was illegal. And I think, with some fairness, looking
back, there was some ambiguity, and I think even this
Subcommittee's report references the ambiguity under the law.
For example, last year I believe there was an Internet
Gambling Prohibition Act that was reviewed in Congress, and in
that there was reference to the fact that there was ambiguity.
So the fact is that at that time the whole area of Internet and
e-commerce and the ways it can be used in money laundering was
not well understood, it is an area of growing importance and
emerging concern.
Our major focus in the money laundering area had been in
cash coming into the bank, and we clamped down on that pretty
well, and on drugs. The area of Internet gambling did not have
the same sensitivity that it certainly has now as a result of
the experience that we have had here.
Senator Levin. I guess my point, though, is not whether or
not there was ambiguity, but whether or not there wasn't some
consideration in your law department as to whether or not you
might be then accepting the proceeds of an illegal operation.
Shouldn't that have been at least assessed or analyzed by your
law department at that point?
Mr. Weisbrod. It was not. It was not referred to the law
department at that time.
Senator Levin. On Internet gambling, what is your position
on it, or what has it been at the Bank of America?
Mr. Christie. To be honest with you, until last year, at
least in my mind, it didn't dawn on me that Internet gambling
was truly illegal. I mean, I thought if it had been----
Senator Levin. Distinguished, you mean, from illegal?
Mr. Christie. Sorry?
Senator Levin. That is OK. Go on.
Mr. Christie. Good one.
Anyway, I didn't realize it was illegal, and I think many
of my associates around me didn't really fully understand that
it was illegal. I mean, we have had the creation of so many
gambling establishments throughout the United States over the
last few years, you would wonder what was legal or illegal.
But having read what I have now on the subject and
consulting with my crack attorneys at the bank, I fully do
understand the fact that it is illegal. And, again, it would be
another one of our checkpoints in our due diligence work that
we would be doing on banks. So, yes, it was a revelation to me
last year.
Senator Levin. I think Exhibit 6 \1\ has the Bank of
America on those same Web sites, so we can show this as not at
all limited to one bank. But I would hope that all of our banks
would promptly seek some legal guidance from their counsel and
close down Web sites. Even if there was ambiguity about it, you
would think that you would have a legal opinion saying, hey,
wait a minute, we have got to err on the side of caution; if
this is reasonably, arguably illegal, we cannot be accepting
that kind of money.
---------------------------------------------------------------------------
\1\ See Exhibit No. 6 that appears in the Appendix on page 700.
---------------------------------------------------------------------------
Mr. Christie. Even if it was legal, I wouldn't want our
name associated with them on the Web site.
Senator Levin. Good.
Mr. Weisbrod. And I would add, if I could, Senator, that
the moment we did become aware that our name was being used on
these Web sites without our permission, we took swift action to
issue a cease and desist to have that stopped. We put it on our
OFAC filter, as well, to screen all the payments that were
coming in to make sure there were no illegalities.
Senator Levin. Let me get to the question of nesting
correspondent banks. Going back now to American International
Bank, American International Bank had an account with your
banks. It also was serving as a correspondent bank for other
banks.
Now, Exhibit 3 \2\ here is an exhibit that lists three of
the half dozen or more banks for which American International
Bank served as a correspondent, and this is really quite a
notorious list. As described in the Minority staff report,
these three banks were all heavily involved with financial
fraud.
---------------------------------------------------------------------------
\2\ See Exhibit No. 3 that appears in the Appendix on page 697.
---------------------------------------------------------------------------
Two of them, Caribbean American Bank and Hanover Bank, were
shell banks; they didn't exist anywhere. The Caribbean American
Bank, was nothing but a front for a criminal enterprise. It was
owned by individuals committing a financial fraud, and all of
the accounts at that bank are being investigated for money
laundering.
The relationship manager at Bank of America told our staff
that he never knew that American International Bank was serving
as a correspondent for other banks. One of the salespeople at
Chase didn't know that American International Bank was serving
as a correspondent. The other sales representative knew that
American International Bank was serving as a correspondent and
thought there was no problem with it. But as we can see from
this list, there are some bad actors that are nesting within
the American International Bank and using that bank's
relationship with your banks to access our U.S. financial
system.
Mr. Weisbrod, in your statement you note that the issue of
nesting creates some problems because there are legitimate
reasons for small banks to open relationships with larger
banks, and I think you maybe both have made reference to that
this morning.
However, in the case that we have here, there is a high-
risk bank from a high-risk jurisdiction--two things, high-risk
bank, high-risk jurisdiction--serving as a correspondent for
other higher-risk banks, two of which were shell banks also
from a high-risk jurisdiction.
So I have two questions for both of you. Shouldn't a
correspondent bank at least know if its clients are serving as
correspondents for other banks, and if so, who those other
banks are? That is question one.
Do you want to start off?
Mr. Christie. Yes, I believe we should know that and we
should know who they are.
Senator Levin. Mr. Weisbrod.
Mr. Weisbrod. I think in the instance of AIB, we certainly
made a mistake in letting that bank have a relationship with
us, and we did terminate the relationship within about a year.
I think to make a blanket statement that we need to know
the names of all of the correspondent banks of all of our
correspondents does present some problem. For example, if we
are dealing with Deutsche Bank, obviously a reputable bank, and
they have correspondent relationships with a series of
Landesbanks throughout Germany, I don't think that is the sort
of thing this Subcommittee is interested in.
Certainly, in the instance of high-risk jurisdictions or in
the instance of offshore banks, we do need to understand
whether they have correspondent relationships, especially if
they have them with shell or offshore banks.
Mr. Christie. If I could amend what I said, I assumed when
you asked the question you were talking about high-risk
countries and high-risk banks, and in that context, absolutely.
But as David has said, if it was Chase Manhattan, I wouldn't
ask them for their correspondent bank list.
Senator Levin. Would you agree with Mr. Christie that when
we talk about high-risk banks in high-risk countries that you
should know the names of any banks that your correspondent bank
has accounts for?
Mr. Weisbrod. One of the high-risk countries is Russia.
Russia is a country with 2,000 banks. We do have correspondent
relations with Russian banks. But I am not sure that it would
be where you draw the line. It is something that is being
reviewed by the New York Clearing House. It is a thorny
question and it is being reviewed by the Clearing House as part
of their best practices paper.
Senator Levin. There is an ironic conclusion to this matter
of nested banking that underscores what we are talking about.
Both of your banks terminated their relationship with American
International Bank because you felt that you were just no
longer comfortable doing business with that bank. We will start
with that. We have gone through that. It may have taken too
long, but ultimately at the end you terminated your
relationship with American International Bank.
Based on the information that you have provided us, both of
your banks served as correspondents to another Antiguan bank
called Antigua Overseas Bank. I don't know if you are aware of
that, but I will lay that out before you anyway. Just assume
that.
What I want to let you both know is that a client of
Antigua Overseas Bank was American International Bank. So you
finally terminate your relationship with American International
Bank. You don't want to do business with them, but you are
doing business with them because Antigua Overseas Bank is a
correspondent bank for American International Bank. Therefore,
by using the Antigua Overseas Bank account with you, you are
serving almost the same function as you previously did for
American International Bank.
Now, were either of you aware of that?
Mr. Christie. No, but we will find out more about it
tomorrow, I guarantee you.
Mr. Weisbrod. I am not aware of that, Senator.
Senator Levin. All right. Can you check into that? And if
it is true as I have set forth, and we are comfortable that it
is, let us know what the solution to that problem is. I mean,
it took you long enough to terminate a relationship with a
bank, but now it ends up that that bank, because it is indeed a
respondent bank with the Antigua Overseas Bank--you are, in
effect, because it is a customer of your customer, being used
in the same way essentially.
Mr. Weisbrod. Let me see if I understand. Are you saying
that the Antigua Overseas Bank is a correspondent of ours?
Senator Levin. Right.
Mr. Weisbrod. I have done considerable due diligence before
coming here today and I did not note that that was one of our
correspondents currently, but I will certainly----
Senator Levin. You were a correspondent bank for them----
Mr. Weisbrod. Oh, I see, sir.
Senator Levin [continuing]. After you terminated your
relationship with the American International Bank. I don't know
if that relationship still continues or not, but you did have a
relationship with the Antigua Overseas Bank after you
terminated your relationship with the American International
Bank. And all I am saying is that that relationship continued,
just indirectly. Again, I don't know that you still have that
relationship. The important point is you had that relationship
with them after you terminated the relationship with American
International Bank.
That is the end of my questions. Thank you.
Senator Collins. Thank you, Senator Levin.
I want to thank our witnesses for appearing today. I do
want to make clear that I believe that both Bank of America and
Chase have undertaken considerable efforts to tighten up their
procedures to guard against doing business with foreign banks
that are facilitating money laundering activities, and I do
commend you for those efforts.
I hope you will continue to be diligent, and I believe that
the investigation done by Senator Levin and his staff has shown
that there are still many problems and troubling gaps in the
oversight that American banks give in their correspondent
banking relationships.
I would like to thank all of our witnesses this morning for
their testimony and cooperation. It has been very helpful and
illuminating.
Tomorrow morning, the Subcommittee will hear further
testimony from a panel of expert witnesses knowledgeable about
international efforts to fight money laundering, and from
another bank, Citibank, which unfortunately has also
experienced its share of problems with questionable
correspondent banking customers.
The hearing tomorrow will be in room 106, Dirksen Senate
Office Building. That is a change, so I want to make sure
everyone who is interested in coming tomorrow is aware of the
room change.
Our current witnesses are now excused, and the Subcommittee
will stand in recess until tomorrow morning at 9:30.
[Whereupon, at 12:36 p.m., the Subcommittee was adjourned,
to reconvene at 9:30 a.m., Friday, March 2, 2001.]
ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING
----------
FRIDAY, MARCH 2, 2001
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:37 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Subcommittee, presiding.
Present: Senators Collins and Levin.
Staff Present: Christopher A. Ford, Chief Counsel and Staff
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy
Chief Counsel; Eileen Fisher, Investigator; Claire Barnard,
Detailee/HHS; Linda Gustitus, Democratic Staff Director and
Chief Counsel; Elise Bean, Democratic Deputy Chief Counsel; Bob
Roach, Democratic Counsel; Laura Stuber, Democratic Counsel;
Ken Saccoccia, Congressional Fellow; Susan Price, Intern; Ann
Fisher and Judy White (Senator Cochran); Marianne Upton
(Senator Durbin); Bob Westbrooks (Senator Akaka); and George
Schaubhut (Senator Levin).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Good morning. The Subcommittee will come
to order.
This morning, the Subcommittee continues its examination of
the complex world of correspondent banking and the extent to
which correspondent accounts with foreign banks can expose the
U.S. banking system to money laundering.
As we heard yesterday, correspondent banking is the method
by which a bank provides services and products to another bank.
Without a doubt, correspondent banking is an essential
component of the international financial system. The Office of
the Comptroller of the Currency, however, has identified
international correspondent banking customers as high-risk
accounts requiring more critical evaluation before the accounts
are opened, and requiring continuing monitoring for money
laundering activity thereafter.
The Subcommittee thus has focused its attention on the
correspondent relationships that some U.S. banks have formed
with high-risk international banking customers, such as shell
banks, offshore banks, and banks in jurisdictions with weak
anti-money laundering laws. The investigation found that
although increased due diligence is warranted in dealing with
such institutions, U.S. banks have often faltered in this
regard, particularly when they are not extending credit and
their own funds are not at stake.
The testimony that the Subcommittee heard yesterday
illustrates the reasons for our concern. We first heard from
John Mathewson, the former President of Guardian Bank and
Trust, a now defunct Cayman Islands offshore bank. Mr.
Mathewson, who pleaded guilty to charges of attempted money
laundering and conspiracy to commit international money
laundering, provided an insider's perspective regarding the
relative ease with which offshore banks can manipulate the
products and services that U.S. banks routinely offer, such as
wire transfers, to move their customers' funds through the U.S.
financial system in a manner that makes them exceedingly
difficult to trace.
Mr. Mathewson opined that the vast majority of Guardian's
clients were U.S. citizens seeking to avoid paying income taxes
or to hide assets from their creditors or former spouses. His
testimony made clear that Guardian Bank would not have been
able to offer these clients easy access to their funds while
maintaining the secrecy of their identities without its
correspondent accounts in U.S. banks. Moreover, and very
troubling, he described Guardian Bank as a ``run of the mill''
offshore bank.
The Subcommittee heard additional troubling testimony from
representatives of two major U.S. banks, Bank of America and
J.P. Morgan Chase. Their testimony made clear that banks were
not performing adequate due diligence when opening and
monitoring accounts for international correspondent banking
customers.
I want to emphasize that both Bank of America and Chase
have acknowledged weaknesses in their correspondent
relationships with international correspondent banking clients.
To be sure, it would be unfair to hold these banks accountable
for not knowing, when they opened and maintained correspondent
accounts for shady institutions such as American International
Bank and Swiss American Bank, everything that has subsequently
come to light about these financial institutions.
Nevertheless, both Bank of America and Chase did have some
information prior to opening these correspondent accounts that
should have raised red flags. For example, it appears that
Chase decided to accept American International Bank as a
correspondent banking client despite its awareness that AIB may
well have been sheltering the funds of American tax evaders.
This is precisely the type of lax oversight that criminals who
wish to launder their dirty money are quite literally banking
on.
Today, we will begin by hearing from three authorities on
money laundering who will discuss the ways in which
correspondent accounts can be used to launder the proceeds of
crime, the difficulties that law enforcement officials
encounter in tracking down funds that have passed through
multiple jurisdictions, and measures that U.S. banks might be
able to take to reduce the abuse of their correspondent banking
systems by money launderers without drowning the banks in
unnecessary paperwork or crippling the industry.
We will then hear from Citibank about its own handling of
correspondent accounts with three high-risk clients--M.A. Bank,
Federal Bank, and European Bank. Given some of the questionable
dealings in which each of these three banks were engaged, I
look forward to hearing from our Citibank witnesses regarding
their management of these banks' accounts.
The controversy engendered by one of the Citibank examples
recounted in the Minority's Report, the Federal Bank case,
deserves further comment. A great deal of attention has been
paid to this Subcommittee investigation in the foreign press,
particularly in Argentina.
I want to make clear this morning that the Subcommittee's
investigation has not been an investigation into money
laundering in any foreign government. It is unfortunate that
this Subcommittee's work has acquired such apparent
significance in another country's domestic political disputes,
because the investigation's findings are not aimed at
supporting any charges of high-level money laundering by
specific foreign officials.
Moreover, the amount of laundered money identified in the
Minority Report that relates to Argentina consists of $7.7
million in drug trafficking proceeds passing through M.A. Bank,
and $1 million in bribe money passing through Federal Bank from
an IBM kickback scandal that has been publicly known for some
time. Argentine press reports that this Subcommittee has
identified billions of dollars in dirty money involving these
banks are simply inaccurate.
At any rate, I look forward to hearing the testimony of our
witnesses today. Abuse of the U.S. correspondent banking system
by money launderers and other criminals is a very serious topic
and deserves our full attention.
At this time, I would like to recognize the distinguished
Ranking Minority Member, Senator Levin, who initiated and
conducted this investigation, for his opening comments.
Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Madam Chairman, thank you again for
scheduling these hearings and for your strong support of this
investigation. I also want to thank you for your clarifying
statements relative to the purpose of this investigation, that
we are looking at U.S. banks and we are not carrying on an
investigation of any domestic activities inside Argentina by
specified officials. I think it is important that we point that
out.
Some of the reports that have been printed in Argentina
purporting to quote, as a matter of fact, members of my staff
are made out of whole cloth, literally. Some of those reported
quotations were never made or anything close to it. I emphasize
``some'' because I don't want to label the entire media in
Argentina in that way, but I would say clearly that some of the
comments attributed to my staff were just simply never made, or
anything close to them made.
At yesterday's hearing, we heard from a former offshore
bank owner and from two leading U.S. banks regarding how high-
risk foreign banks are able to open correspondent accounts at
U.S. banks and how those accounts can then be used by rogue
foreign banks and their criminal clients to launder the
proceeds of illegal drugs, financial fraud, Internet gambling,
tax evasion, and other criminal conduct.
Today, we want to shine the spotlight on the decision by
U.S. banks to open accounts for one particular kind of high-
risk foreign bank, offshore shell banks. Some offshore banks
have physical facilities either in the jurisdiction in which
they are licensed or some other country. An offshore shell
bank, however, is a bank that has no fixed physical presence in
the country in which it is licensed or in any other country,
and it is not a branch or a subsidiary of a bank that does have
a physical presence somewhere. Those shell banks, instead, are
banks that have no physical office anywhere where customers
could go to conduct banking transactions or where regulators
could go to inspect records and observe bank operations.
The signature features of a shell bank are its
inaccessibility and its secrecy. These banks are generally not
examined by regulators, and virtually no one but the shell bank
owner really knows where the bank is, how it operates, or who
its customers are. One shell bank owner told us that his bank
existed wherever he was at the moment. These banks do not fit
the profile of the financial institution that most Americans
imagine when they think of a bank. Instead, they exist on the
bottom rung of the banking world.
The low status of these banks is on display in the Internet
advertisements explaining how and where to buy a shell bank
license. These ads stress how quickly a bank can be purchased,
and highlight a jurisdiction's lax due diligence and regulatory
requirements as key selling points.
One government cited in the advertisements, for instance,
is Nauru, a remote island in the South Pacific. Nauru is said
to have issued 400 licenses for shell banks which, if true,
would apparently constitute the largest number of shell banks
established by any one jurisdiction. Nauru is also one of the
15 countries that has been identified by the Financial Action
Task Force in June 2000 for non-cooperation with international
anti-money laundering efforts.
Another oft-mentioned government is Vanuatu, another South
Pacific island, which confirmed to us that it has licensed more
than 50 offshore shell banks. Caribbean governments are also
listed, including Anguilla, which allegedly charges an annual
bank licensing fee of $3,800 for an offshore bank with a
physical presence on the island, and $7,600 for an offshore
bank without one.
Let's take a closer look at Montenegro, in Europe. This is
an excerpt here on the screen from Exhibit 35 in our
exhibits.\1\ This is one of many Internet advertisements for
opening an offshore shell bank in Montenegro. The bank costs--
you can buy it for $9,999, and the advertisement says that it
comes with a correspondent bank account included ``in the
package.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 35 that appears in the Appendix on page 789.
---------------------------------------------------------------------------
As we will see on the succeeding pages of this Internet
advertisement, that means that you buy access with that bank
license to an already existing correspondent account at a U.S.
bank. So for $10,000, minus a dollar, anyone can buy access to
the U.S. banking system in a way which is secret. And the
purposes of those kinds of bank accounts will again be explored
today, as they were yesterday, but substantial sums of money
move through these bank accounts.
Now, the ad also promises ``no intrusive background
checks,'' a ``European jurisdiction,'' and ``fast set-up
time.'' The correspondent account which is advertised is in the
name of the Bank of Montenegro, which in turn allows the new
bank--which they are selling the license for--to use the Bank
of Montenegro's existing correspondent network, which includes
Citibank, Commerzbank, and the Union Bank of Switzerland. Those
are the representations which are made. That is what you are
buying access to, in a way which will be kept totally secret.
Exactly how many Montenegro shell banks are operating today
under this arrangement is not known to me.
The bottom line is that hundreds, if not thousands, of
offshore shell banks are in existence at this moment, and all
of them need to get into the international banking system to do
business.
Of the four shell banks investigated by the Minority staff,
all four were found to be operating far outside the parameters
of normal banking practice, without basic administrative
controls, without anti-money laundering safeguards, and in most
cases without paid staff. All four also escaped regulatory
oversight. They used U.S. bank accounts to transact business
and to move millions of dollars in suspect funds associated
with drug trafficking, financial fraud, bribe money, or other
misconduct.
Today, we are going to first hear from a panel of experts
with many years of experience in dealing with high-risk foreign
banks. Jack Blum, among other accomplishments, is a U.N.
consultant on offshore banking and has more than once crossed
swords with shell banks.
Anne Vitale was the Managing Director of Republic National
Bank of New York, and spent years designing systems and
procedures to help that bank decide which foreign banks ought
to be given U.S. bank accounts.
Robb Evans is a longtime banker and a former head of the
California Bankers Association, and in recent years has begun
assisting Federal and State agencies in recovering funds taken
from fraud victims, becoming in the process all too familiar
with shell banks.
On the second panel will be officials from Citibank, and
they will focus on Citibank's decision to open and maintain
U.S. correspondent accounts for two shell banks--M.A. Bank
which is licensed in the Cayman Islands, and Federal Bank which
was licensed in the Bahamas. As the Chairman has indicated, a
third bank is also covered in some detail in our report.
Federal Bank, by the way, had its license revoked by the
Bahamas just 2 weeks ago, presumably in response to this
investigation.
Far from using the heightened scrutiny that is recommended
by U.S. bank regulators for offshore banks and is supposed to
be required in its own internal policies, Citibank seems to
have done just the opposite. It seems to have relaxed its due
diligence and monitoring requirements for those accounts
because of the confidence and the personal regard that Citibank
officials said that they had for the owners of those offshore
shell banks.
This relaxed scrutiny continued for one of these banks,
M.A. Bank, even after Citibank was served with a seizure
warrant for $7.7 million in alleged drug proceeds that were
deposited into the M.A. Bank account in New York as part of the
Casablanca undercover money laundering sting. Citibank not only
apparently failed for over a year to recognize that the seizure
warrant involved illegal drug proceeds, but it also allowed
M.A. Bank to move an additional $300 million through that
Citibank account.
Citibank also engaged in troubling conduct when it provided
the Central Bank of Argentina with false information about the
ownership of Federal Bank. Citibank knew that the owner of
Federal Bank was Grupo Moneta, a large conglomerate of
companies in Argentina. Yet, when the Central Bank of Argentina
directly asked Citibank for ``all information'' that it had
regarding Federal Bank, ``especially the identity of its
shareholders,'' the President of Citibank Argentina, Carlos
Fedrigotti, represented to the Central Bank of Argentina that
the records of Citibank Argentina ``contain no information that
would enable us to determine the identity of the shareholders
of the referenced bank.'' Again, he gave this response even
though Citibank Argentina was then in possession of numerous
documents related to Federal Bank, including specific documents
that named Grupo Moneta as the owner of Federal Bank.
There are reports that Grupo Moneta is denying ownership of
Federal Bank to this day. That denial, on top of Citibank's
misleading response to the Central Bank of Argentina, makes
this matter a very troubling one. It is one of many reasons
that this matter is a very troubling one, and we hope to get to
the bottom of that this morning as well.
The questions that we hope to address today include not
only Citibank's specific decisions regarding these two shell
banks, but also Citibank's overall policy on shell banks. In
response to our correspondent banking survey, Citibank
initially said that its policy was not to open accounts for
shell banks, but that it would make an exception for ``an
existing customer bank's offshore subsidiaries or affiliates.''
When asked how that exception applied to M.A. Bank and
Federal Bank, whose parent owners are not banks, Citibank
submitted a modified statement of its policy and broadened the
exception, saying a correspondent account could also be opened
for offshore subsidiaries or affiliates of existing customer
``financial institutions.'' While Citibank did not define that
term, Citibank presumably meant to encompass not only banks
within that phrase ``financial institutions,'' but also
security firms like Mercado Abierto, S.A., and commercial
operations like Grupo Moneta, so that M.A. Bank and Federal
Bank would be considered by Citibank as permissible accounts.
Now, one concern that I have with expanding the permissible
affiliation to financial institutions is that financial
institutions are not subject to the same regulatory regime as
banks.
Yesterday, we talked about the legal duty of U.S. banks to
act as a gatekeeper and to take reasonable measures to keep out
of the U.S. banking system foreign banks that pose unacceptably
high money laundering risks. Offshore shell banks pose the
highest money laundering risks in the international
correspondent banking industry today.
Both the Bank of America and Chase Manhattan yesterday told
us that it is their policy not to do business with offshore
shell banks, and that was welcome news. If shell banks were
unable to open correspondent accounts with established banks,
shell banks would have to close. The hearing today, I believe,
will show why these shell banks don't deserve a place in the
U.S. banking system, and why U.S. banks should not extend the
lifeline, which is the correspondent bank account, that keeps
those shell banks in business.
Again, I want to thank you, Madam Chairman, for your
support and your calling of these hearings.
Senator Collins. Thank you, Senator Levin.
As Senator Levin mentioned, our first witnesses today are
experts in money laundering regulations and laws. Since Senator
Levin has already given the background of the three witnesses,
I am just going to welcome Jack Blum, Anne Vitale, and Robb
Evans, and ask that they stand, since pursuant to Rule VI all
witnesses are required to be sworn.
Would you please raise your right hands?
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. Blum. I do.
Ms. Vitale. I do.
Mr. Evans. I do.
Senator Collins. We will be using a timing system today.
Please be aware that when you see the yellow light come on, you
will have one minute to sum up your remarks. You will be given
10 minutes and your full statement will be included in the
hearing record.
Mr. Blum, I would ask that you begin.
TESTIMONY OF JACK A. BLUM,\1\ PARTNER, LOBEL, NOVINS AND
LAMONT, WASHINGTON, DC
Mr. Blum. Thank you, Madam Chairman. Thank you, Senator
Levin, for inviting me here this morning.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Blum appears in the Appendix on
page 162.
---------------------------------------------------------------------------
I think I should get right to the heart of the matter.
Offshore shell banks have no place at all in the world banking
system, unless it is to be used for tax evasion or other
criminal activity.
The shell banking business is a business in which the
promoters and crooks offer these banks for sale, frequently at
medical conventions and at meetings of professionals, and sell
them to the professionals as a vehicle for tax evasion. They
say, look, if you have a shell bank, you can have this
marvelous checking account that isn't reported to the Federal
Government, whose proceeds won't be known by anybody but you
which is not subject to seizure. And here, by the way, is an
elaborate structure of trusts through which you can move your
money to hide it.
Probably the most notorious of these salesmen is a fellow
named Jerome Schneider, who has been at it for more than 15 or
20 years, selling shell banks in places ranging from Vanuatu to
Montserrat. Each time he is caught someplace, he moves on to
the next place, but he continues to advertise seminars around
the world offering these banks for sale.
Two years ago, ABC News sent some undercover people to one
of his seminars and they got the full pitch: Hide your money;
you will have this checking account, in effect, at a Canadian
bank that would be the correspondent account, and nobody will
be able to find out whose it is. He saw that and was taken
aback momentarily, but in a very short space of time was back
advertising in the Wall Street Journal, with the tag line ``as
seen on ABC TV.'' This is the kind of thing that is done with
shell banks.
Now, there are other uses for shell banks, not just buy the
bank to have a privileged checking account, but have the shell
account so that you can hide the proceeds of criminal money or
get the criminal money in the account. So there are various
kinds of frauds--advanced fee for loan fraud, securities frauds
of different kinds, and prime bank instrument fraud. All of
these really rely on some kind of paper from what looks like a
bank saying that we will guarantee or we will give you some
kind of assurance that a bank is involved; if you send us your
money, we will put it in some kind of high-yield trading
program that will give you tremendous returns.
Invariably, what happens is the money goes to this shell
bank in that kind of scheme, the money disappears, and the bank
either evaporates or the bank says, well, we sent the money on
for the further credit of some offshore corporation somewhere
else.
The bank is an essential part of the fraud because it is
what gives the investor the confidence that he is sending the
money to someplace that is real. And typically the instructions
will be to send the money to the correspondent account, send it
to our correspondent account at the Bank of New York. That kind
of thing builds the confidence of the mark in the legitimacy of
the fraud that is going on. I have been involved in any number
of cases where there has been this kind of transmission of
money to an illegitimate institution through a correspondent
account of a legitimate institution.
Then there is the problem of how do you stop the money.
Under the banking rules, if there is a correspondent banking
account for a foreign bank, when fraud money or proceeds of
crime hit that bank account and they are commingled, it becomes
an incredibly difficult matter to stop the money. At that point
the money is considered the property of the offshore bank, and
unless you can prove the whole thing is a fraud and all the
money in the account is proceeds of crime, for all practical
purposes the money is outside the United States and there is
not much that can be done.
I ran into that in a case where we were chasing Nigerian
con men and they wanted to have money wired to a bank in
Beirut, not a shell, but an offshore bank in Beirut, for the
further credit of some corporation, but wired to the
correspondent account in New York City. And we were trying to
figure out how to get the money wired to New York, but held
there with enough time to arrest the Nigerian con men, and it
just wasn't possible to organize it. The money, as soon as it
would have hit the correspondent account, would have for all
practical purposes been out of the country.
I have seen enough of the jurisdictions that regulate these
banks to be able to tell you conclusively that there is no way
a jurisdiction like Nauru or Vanuatu or St. Vincent or Grenada
can possibly regulate a stable of offshore banks.
If you will, just consider the case of a bank in Grenada
that was capitalized with the appraisal of a ruby. Mind you,
the Grenadian bank officials never saw the ruby. They got a
document that said this ruby is worth $30 million. The man who
got the bank license, a Mr. Van Brink, had been traveling under
a different name before he came to Grenada and, after his fraud
with the offshore bank was complete, moved on to Uganda, where
he is known by yet another name.
I was in Grenada not long ago and talked to the chief
regulator of the offshore banking sector, and the conversation
went something like this: What did you do before you took over
as bank regulator? He replaced the prior regulator who had
chartered this ruby-based bank. He said, I sold real estate. Do
you have any experience in banking? No, but I am trying to
learn about banks. And what do you do to vet people who apply
for a bank license? He said, well, we have something of a
problem with that. For a while we thought about hiring Kroll
and Associates, a large private detective firm, but we called
them and they wanted too much money and we couldn't really
charge the people involving that kind of money for the
investigation.
I said, well, you should bill it to them. If they want to
open a bank, they ought to be able to pay for their own
approval process. He said, well, we thought that that would cut
back on the number of applicants we had. Then I said, how about
using the Internet? How about doing some simple checks on
Lexis/Nexis to see if the applicants have been convicted? He
said, well, we have trouble with our Internet connections.
I submit that this jurisdiction has no business in the
offshore banking business. And anybody who tells you, yes, we
are training, there is no way that all the training in the
world is going to get a jurisdiction like this to the point
where its ``banks''--and I use that term in quotes--are going
to be meaningfully regulated. And the same story is true in a
half dozen other places.
I want to stress to you that some of the people involved in
this are people of enormous goodwill. The woman who regulates
the Cook Islands Financial Center is a wonderful person, a very
nice person, and she is regulating not only the banking sector,
the offshore banking sector, but their walking trusts--these
are trusts which disappear if the police come--their various
other financial entities, and she is trying to attend all the
difference conferences and she is trying to learn how bank
regulation ought to be conducted. It is not possible, it is
flat not possible.
It ought to be obvious to everyone involved, the purpose of
these ``financial institutions'' is to provide a black hole and
a window to the American financial markets through
correspondent accounts.
Having said that, I think it is important to add some
things to the discussion as it goes forward. We have been
talking about banks and the vulnerability of correspondent
relationships that come when banks have correspondent accounts,
but there are a wide array of offshore financial businesses,
much like the kind that Senator Levin mentioned in the opening
statement, that are not regulated at all, like trust companies
and certain kinds of financial advisory firms that simply sign
on the dotted line and go into business. And these guys are
also using various windows into the financial system
particularly through brokerage accounts to get their business
done.
In the United States, we can crack down on banks and say,
look, you are regulated, here's the rules, due diligence, know
your customer. In the brokerage business, due diligence
consists of finding out whether the investments you propose to
sell to a particular customer are suitable for that customer.
The due diligence doesn't always include the same level of due
diligence required in the banking industry. And in this world
that we are in today, banking and brokerage are so close to
each other, it is really very, very difficult to distinguish
between the two. I think it is essential to look at these
different windows into the U.S. financial system, and essential
to cut them off.
I see my time is up. I will be happy to answer questions
later.
Senator Collins. Thank you, Mr. Blum.
Ms. Vitale.
TESTIMONY OF ANNE VITALE,\1\ FORMER MANAGING DIRECTOR AND
DEPUTY GENERAL COUNSEL, REPUBLIC NATIONAL BANK OF NEW YORK, AND
CURRENT SPECIAL LITIGATION COUNSEL, HSBC USA, INC., NEW YORK,
NEW YORK
Ms. Vitale. Good morning, Chairman Collins, Ranking Member
Senator Levin. Thank you for inviting me to testify here today.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Vitale appears in the Appendix on
page 168.
---------------------------------------------------------------------------
Having served as an Assistant United States Attorney in the
Southern District of New York, where I prosecuted money
laundering, narcotics and organized crime cases for 7 years,
and then having been Managing Director and Deputy General
Counsel at Republic National Bank of New York for 9 years,
where I headed the global anti-money laundering policy and
procedures for the global corporate network, I have seen money
laundering issues from both the government's perspective and
private industry's perspective.
And in my mind, those two perspectives should not conflict
with each other. No financial institution wants to be in a
position where they have dirty money going through that
institution. So, therefore, I think it is in every financial
institution's interest to cooperate with law enforcement
efforts to prevent money laundering through U.S. banks.
I would like to commend you both for these hearings, also
for the report that the Minority staff prepared. I found it to
be comprehensive, diligent, and fair. I think they were quite
on target in identifying the three areas of vulnerability
through correspondent banking.
As a preliminary matter, I want to stress what Senator
Collins remarked in her opening statement. Correspondent
banking is a legitimate and indispensable component of the
global financial network. The report realized this. In my
experience, all but a small fraction of the payments represent
legitimate business activity. However, because a small fraction
of the transactions are meaningful in terms of quantity of U.S.
dollars, it is incumbent upon banks to establish anti-money
laundering programs specifically in the correspondent banking
area.
This was not always the case, or the realization of this
was not always the case. It wasn't until late 1997 that wire
transfer monitoring through correspondent banking activity
first began to be acknowledged as a high-risk area. I don't
think the OCC or any other Federal regulator had identified
this area, so we are in a relatively recent development.
However, that said, in 1998 and 1999, with the publicity of
specifically the Bank of New York case, this has been the area
that banks should be concentrating on, and there is much a bank
can do to prevent money laundering through correspondent
banking accounts.
Two basic things: one is at the account-opening process,
and the second is at the monitoring of transactions process.
You can't be successful if you have one without the other; you
need both. At the account-opening stage, it is important for a
correspondent bank to obtain information from its respondent
bank, and the information should be the location of the bank;
the license and the regulator of the bank that is applying for
an account; the number of employees, branches, and their
locations.
Why is this important? Why is number of employees, branches
and locations important? Quite frankly, I submit to you that if
a bank doesn't have many employees, if a bank doesn't have
operations, that bank does not have any wherewithal to monitor
transactions and to open accounts. So you need to know the
numbers, or else whatever that bank tells you about its money
laundering policy is not going to be objective reality.
You also need to know the identities of the owners and
managers, the asset size and the financial reports, the
financial products being sought by the client, other
correspondent relationships that bank has, the nature of the
client's business and customers, the due diligence the client
performs on its customers, whether the client is acting as a
correspondent bank for its clients, the country's reputation
for anti-money laundering measures, and a statement from the
relationship manager as to why he or she recommends that the
account should be opened.
And I think that statement cannot rely on this bank is
generally well-known or the management is generally well-known.
You need objective reality. You need to know who audits the
bank, who audits the sub. You need to know the number of
employees, who is doing the monitoring, and where they are
doing it. Those are some of the factors to consider at an
account-opening stage.
As far as monitoring is concerned, you must look at the
flow of funds. Now, you can't do this in real-time; you can't
look at every single wire transfer that passes through your
institution. So you have to use a triage system and identify
what I think is the most effective way, which is patterns of
activity. Set a threshold level and identify what transactions
you are going to look for.
At Republic National Bank, we had the average threshold
level of $500,000 in 1 month passing through a bank if it was
from the same originator to the same beneficiary, or from the
same originator to ten or more beneficiaries, or from ten or
more originators to one beneficiary. There are different
parameters that can be utilized. And you need systems for this,
but once a system identifies the transactions that may be
suspicious, you need to have a staff that is trained to look at
the transactions and to see if they can find, as Jack Blum
said, from databases or from other public information whether
there is any information that will say that these transactions
represent normal business activity. The question is: Is this
legitimate business activity?
Thereafter, if there is no information found or if the
information that is found raises a question, the transactions
that have been identified must be funneled up to a senior
officer, not in the business area but in the anti-money
laundering area, for that person to make a decision on what to
do with the account, what to do with the transactions.
If there is a suspicious activity--and suspicious activity
means that there is no legitimate business reason that is
obvious in the transaction--if that can't be determined, you
must file an SAR, a suspicious activity report. That decision
is best made by anti-money laundering or legal, or some
combination of both.
Thereafter, the senior officer in anti-money laundering
must talk to a senior business manager as to what to do with
the correspondent account. Do you just block transfers of
certain originators and beneficiaries from that account, or is
the pattern so pervasive through that account that you close
the account? These are some of the things you must consider
throughout.
The other factor that I want to stress is the role of
training and the role of audit and the role of the commitment
of senior management. I think it is imperative that training be
ongoing through all areas of the bank, but specifically since
the area of correspondent banking is both new in terms of the
focus, there has to be ongoing training for correspondent
bankers, as well as for analysts and those who are monitoring.
Correspondent banking and the anti-money laundering program
should be evaluated by audit to see whether the controls are in
place.
And finally, and what I think is most important, there has
to be direction from the CEO and the board of directors that
sends a message that anti-money laundering may be as important,
if not more important, than profits. And this is something that
I learned from the former Chairman of Republic.
Thank you.
Senator Collins. Thank you very much, Ms. Vitale. Your
testimony was extremely helpful.
Mr. Evans, would you proceed?
TESTIMONY OF ROBB EVANS,\1\ MANAGING PARTNER, ROBB EVANS AND
ASSOCIATES, SUN VALLEY, CALIFORNIA
Mr. Evans. Thank you. I really do appreciate the invitation
to appear today. I would like to associate myself with the
remarks of my colleagues on the panel, with not quite
everything they have said, but I think they have got almost
everything bang on.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Evans appears in the Appendix on
page 172.
---------------------------------------------------------------------------
I have looked at this issue from a different perspective in
recent years. Up until 10 years ago, I had been a commercial
banker on both sides of the correspondent banking fence, if you
will, both managing correspondent banks and being the
correspondent bank from an offshore location. My view in the
past decade has changed dramatically.
Ten years ago, I was asked to manage the liquidation of
BCCI in the United States, first by the California
Superintendent of Banks, and later by the Department of
Justice. And so I got deeply involved in that for a number of
years, and as a consequence got involved in a number of other
unrelated cases where I was brought into them by the Securities
and Exchange Commission or the Federal Trade Commission or the
Department of Justice to recover funds that had been stolen or
the subject of fraud. That was an eye-opening experience.
In the Minority report, you have talked about one case,
European Bank in Vanuatu. I am the Federal Receiver in that
case, and so that is one I know a great deal about. I learned a
good deal more just reading your report that I did not know
before. The case illustrates a number of points.
First of all, the recommendation regarding the offshore
banks that you focused on in your report, that they should be
driven out of the U.S. banking system, is correct. The shell
banks issue is an absolute a no-brainer. The other offshore
banks, I believe, also should either be barred from the U.S.
correspondent banking system or, if allowed to remain, only
with very stringent requirements. There is simply no benefit
for anyone other than their proprietors, but they are only one
link in a long chain of illegality.
The case that you cite in your report is of a gentleman by
the name of Kenneth Taves, who is now incarcerated and has pled
guilty just in the last few weeks to money laundering, fraud
and other charges, where the flow of the money is quite
important in understanding the fraud. The offshore banks play a
critical role in the movement of stolen funds--they are only a
link in the chain. Breaking that link is very important.
In this case, the Taves-European Bank case, what happened
is this chap was able to open merchant banking accounts for
credit card processing with two small banks in the United
States, banks that specialized in processing credit cards.
Now, the credit card business can be very high volume. By
hook or by crook, this chap was able to get a number of credit
card numbers, and over a 24-month period, managed to steal $40
million at $19.95 at a clip, processing them through these two
banks. The money was transferred regularly, trying to keep it
in not massive amounts, from those two small merchant banks in
the United States, one in California and one in Missouri, to a
major U.S. bank in Nevada, where the funds were concentrated.
From that bank in Nevada, it was transferred to a bank
called Euro Bank in the Cayman Islands. And from that bank, it
was then transferred all around the world, including right back
to the United States, where it bought real estate, had big
accounts with brokerage houses, and so on and so forth. None of
this was cash, by the way; it was all electronic.
In January 1999, the Federal Trade Commission, responding
to a number of consumer complaints, was able to get a freeze
order on the company and I was appointed the receiver of the
company. We walked in unannounced and were able to seize the
company. They put up a vigorous defense. The funds were frozen;
they were under a Federal court injunction not to move any
money and to turn over all records, wherever located.
There were literally no records on the premises and almost
no records anyplace at all. So my colleagues and I spent a
number of weeks basically dumpster-diving to try and figure out
where the money went. But we were able to trace the money, one
way or another, to the Cayman Islands, to Euro Bank.
We went to the Cayman Islands with the documentation of the
theft and the money laundering. The Cayman Islands authorities
promptly closed Euro Bank, which was a major break for us in
that case because by placing Euro Bank into receivership, we
were able to, through court action, get access to the records
of the bank. From there, we were able to find out where the
money went from Euro Bank, which was to many locations, from
Liechtenstein to Vanuatu. And we started the task of tracing it
from one location to another, from one bank to another, item by
item.
We were able to perfect our claims to a large amount of
money in the Cayman Islands, and we are confident that the
funds will be returned to us for repayment to victims. It is a
slow process because the bank there is in liquidation, and so
we have to stand in line with all the other depositors to get
the stolen money back. But we will get the money back, and we
have had good cooperation there.
But tracing the money onward between the offshore banks was
challenging. Ultimately, what we found happened is that after
the freeze order was imposed by the courts and the crook knew
he was caught, he told the bank in the Cayman Islands to open a
new account for him in Vanuatu, which Euro Bank had told him
was a neat place to do business, with secrecy, all the other
good stuff.
The bank in the Cayman Islands had a working relationship
with the bank in Vanuatu; they had referred business before.
They faxed European Bank in Vanuatu and told them to open up an
account in a corporate name. A trust company affiliated to
European Bank in Vanuatu opened a corporate account by
incorporating a new Vanuatu corporation called Benford Ltd.,
which is referred to in your report.
The only information they had to open that account was a
name which they assigned it, the name of an alleged beneficial
owner, which was an acquaintance of the villain, and a copy of
a British passport and a London address. They asked no
questions. The business of the company just said ``business,''
nothing else, nothing beyond that. The bank in the Cayman
Islands transferred $100,000 to European Bank's account in New
York to get the ball rolling. That money was used to open an
account with European Bank in Vanuatu for Benford Ltd. Within
in a matter of weeks, over $7 million flowed into that account.
When we found out about these transfers, the bank in the
Cayman Islands was in the hands of liquidators. So with their
cooperation, we and the liquidators in the Cayman Islands
immediately informed European Bank in Vanuatu that this was
stolen money and they were, in fact, holding it in trust for
the victims and they should return it.
Then commenced a war which goes on to this day to try and
recover those funds. One must remember in a small country like
Vanuatu, $7 million is a very large amount of money. This was
far and away the largest customer of the bank. The victims of
this crime had more money in that bank than the owners of the
bank or any other deposits.
The opportunity for these offshore banks and the incentive
for offshore banks to deal with villains is immense. If you
stop to think about it, if you are going to steal money, who is
the best person to steal it from? Obviously, a thief. If
villains open accounts with offshore banks, which they do with
regularity, the offshore banks hope the bad guys get caught
because guess who gets the money then if it is not properly
traced? So it is a tremendous incentive.
In this case, in Vanuatu, I honestly don't know what was
driving motivations for the offshore bank to try and hang on to
this stolen money. I sent people to Vanuatu without luck. I
went there personally, accompanied by the FBI, with all kinds
of documentation. The bottom line is they just wanted to keep
that money. In a small country like Vanuatu, $7 million is a
lot of money. If they could confiscate the money, keep it, if
the bank could keep it, even freeze it, paying no interest on
it, it would do tremendous things for both the country and the
bank. But the bottom line is it is other people's money.
My point, and I see my time is up, is that I would like to
make a plea to this Subcommittee. First of all, you are on the
right track in terms of banning these accounts. Additionally,
in my view, I think that much better tools can be given to
people like myself whose mission it is to recover stolen funds
from offshore banks. We need better legal standing. That can be
achieved, and I would urge this Subcommittee to consider those
issues to help us recover stolen funds from abroad. I discuss
this point in greater detail in my prepared remarks. I urge the
Subcommittee's consideration.
Thank you very much.
Senator Collins. Thank you, Mr. Evans.
There appears to be widespread agreement that U.S. banks
should not be opening correspondent accounts for shell banks. I
would like to pursue with each of you in further depth the
issue of whether they should be providing services to offshore
banks.
Yesterday, a former owner of an offshore bank in the Cayman
Islands explained to us that at his bank, which he described as
a typical run-of-the-mill Cayman Island bank, 95 percent of the
customers were Americans, and he opined that there was no
legitimate reason for an American citizen to have an account in
an offshore bank, particularly given the very high fees that
the bank assessed for its services and products.
I first want to ask whether you would agree with that
assessment that there is generally no legitimate reason for an
American citizen to have an account in an offshore bank, and
then I want to ask you about the implications if you do agree.
Mr. Blum.
Mr. Blum. I would say there is no legitimate reason. If you
want an account offshore and, for example, you have a vacation
home or you are living in another country, you can do business
with the banks of that country. Remember that the offshore bank
is an institution that only deals with foreigners.
Now, I visited Mr. Mathewson in 1994 in his bank. I had a
hidden camera and tape recorder from Public Broadcasting. The
show was on ``Frontline,'' and he made a very persuasive pitch
about how it was possible to hide my money and all the things
he would do to keep it out of sight for me. His due diligence
consisted of ``you are not a drug dealer, are you?'' And I said
no and the conversation continued, and that tape is available.
Senator Collins. Ms. Vitale.
Ms. Vitale. I am hesitant to say there is no legitimate
reason. I can tell you I don't know of one, but I am always
willing to listen to see if someone can come up with one. That
is for American citizens to have accounts at offshore banks.
I think my answer is different to the second question.
There are legitimate reasons to have offshore banks. I know
Republic had banks in offshore jurisdictions. Offshore
jurisdictions may be high-risk jurisdictions, but that doesn't
mean that legitimate activity can't be conducted there.
I think when you do have an offshore bank either as a
customer or even as your own--part of a sub or an affiliate of
your own bank, you have to have monitoring procedures in place
and use a belt-and-suspender approach to make sure that those
transactions are legitimate transactions.
Senator Collins. Mr. Evans.
Mr. Evans. Well, as far as offshore banks, I think for
these purposes we should define them as not including the
offshore subsidiaries of regulated institutions.
Senator Collins. Correct. I am talking about offshore
banks.
Mr. Evans. OK. With that clarity, I can say there are lots
of good reasons for people to be operating offshore in the
regulated world. In the unregulated world, I can't think of a
reason that is proper for an individual American. I can think
of reasons for citizens of other countries, but not for an
American.
The problem is that the vast majority of Americans who want
to open offshore accounts are doing so for tax evasion. Tax
evasion is not a crime in many countries. The problem exists
that those of us that are trying to recover money of
universally accepted crimes, such as theft, are put in the same
category as those that are trying to recover tax evasion or
divorce settlement or other kind of civil actions. That is part
of the problem.
Senator Collins. To me, a bank in a country that does not
allow its own citizens to deal with that bank or to do business
with that bank is inherently suspect, but I want to make sure
that as we attempt to go forward and devise solutions to this
problem that we do not overreact and, in fact, inhibit
legitimate commerce. I think it is a difficult balance to
strike, but certainly offshore banks appear by their very
nature to be questionable when defined as you and I have
discussed.
Ms. Vitale, I want to go back to an issue that you raised
in your statement. You said, and I think it is a critically
important point, that to be effective, anti-money laundering
procedures must have the support and the commitment of a bank's
senior management.
The testimony that we heard yesterday was very interesting
on that point. I think it was Mr. Christie, of Bank of America,
who testified that correspondent banking used to be a part of
the bank where you knew you weren't going to get ahead if you
were assigned to correspondent banking, that it was considered
a very routine part of the business and not a way to advance
your career.
That implies to me that it didn't receive years ago, at
least, the kind of scrutiny and priority that you suggest is
needed. I think that has changed, to be fair. I think it has
clearly changed in the banks that we have talked about,
including Citibank that we are going to be discussing later
today.
But do you think that was typical, what Mr. Christie told
us, that it just was not an area of the bank that received much
attention from top management, and thus was more vulnerable to
money laundering?
Ms. Vitale. I think it received attention from top
management in terms of profitability in the early 1990's. But
quite frankly, in the early 1990's when I first got to
Republic, I didn't pay much attention to correspondent banking,
the wire transfers through correspondent banking, and that was
because the amount of wire transfers through correspondent
banking is so vast, you can't monitor every one.
It was only in 1997 when two things happened. One was an
account officer came to me, and he was one of the only account
officers who reviewed statements of his accounts, and he said,
Anne, take a look at this. And I looked at the activity and I
said is this common? And then we started, by hand, manually,
looking at different account statements, and I went to the
Chairman, Walter Weiner, and I said we have got a problem, we
can't have this. And then he said, design a system, and I got
the funds and I worked with our systems people and we
identified high-risk.
At the same time, the OCC came to me and they had received
a tip about a certain Russian bank, and we took a look at the
activity in those banks and accelerated our systems
development. And once we developed a system where we could
monitor large transactions or high-risk transactions, we were
then able to make a dent in the correspondent banking area. But
it has been a gradual process. But I think today it should get
the attention of every CEO.
Senator Collins. Thank you.
Mr. Evans, you told us a very interesting case study
involving European Bank, in which you had been very involved in
investigating, and you recounted that when it opened an account
for Benford, which, I think was incorporated as Benford Ltd.,
European Bank knew very, very little about its clients. Indeed,
the occupation listed was simply ``business.''
Given the nearly complete lack of information about the
beneficial owner of Benford, is the only reason that European
Bank opened this account was that it was profitable? I mean, is
it simply a matter of money being the motivation here?
Mr. Evans. I can't imagine what else it could have been,
and I also can't imagine a reason why a bank sitting in Vanuatu
could think that there would be a legitimate reason for that to
happen. I mean, we have an individual who is supposed to be--
lady who is supposed to be living in London. Why would they
open an account in Vanuatu, other than to hide the money?
And maybe there are legitimate reasons to hide money, at
least legitimate in the laws of that country, from a spouse,
from a creditor, from whatever. But the mere act of wanting to
open an account and providing absolutely no information to a
bank who asked absolutely no questions--there can be no
conclusion that I can figure out, other than everybody knew it
was crooked money and there was a good way to make money off of
that.
Senator Collins. Do you have any recommendations on how we
could encourage countries with lax controls to either tighten
their laws or otherwise cooperate with international efforts to
combat money laundering?
Mr. Evans. Well, there are some good precedents I have
heard of in the drug control issue where there has been good
international cooperation. I would like to see that cooperation
extended into not only money laundering, but the recovery of
money laundering. If we have stronger tools to recover money,
it will make it much less profitable for marginal banks to deal
with villains.
You have got to keep in mind that the criminal process
works very slowly, and that is never going to change, in my
view. You have procedures, you have processes to go through
that make getting criminal convictions a slow and tedious
process.
Most recovery of stolen money from abroad is done through a
civil process. It is by actions brought civilly by the
Securities and Exchange Commission or the Federal Trade
Commission or another regulatory agency. We need better tools
to move civilly. I believe those can be negotiated so we have
reciprocal rights with other countries for the return of money
to victims that can enhance that and allow those of us trying
to recover funds to move with much greater speed than we can
now. The money moves too fast. In a heartbeat, the money is
gone. We need to be able to move faster.
Senator Collins. Mr. Blum.
Mr. Blum. I would like to chime in on that. I agree that we
need the tools. At the moment, U.S. citizens who try to take a
U.S. judgment to a foreign court are in a terrible position
because we don't sign on to the international conventions about
enforceability of judgments. Our posture in the international
law setting is really a 19th century posture and we have got to
change that, and change it quickly.
Senator Collins. Ms. Vitale.
Ms. Vitale. I think one of the areas that needs some help
is the ability to freeze certain funds within a correspondent
account. And I am not advocating seizing the entire account,
but if you identify funds within the account that there is
probable cause to believe are the proceeds of a crime, those
funds should be susceptible to seizure.
Senator Collins. Thank you.
Senator Levin.
Senator Levin. Thank you, Madam Chairman.
You have all agreed that you see no legitimate purpose for
shell banks, and I couldn't agree with you more. In our
investigation, we have been unable to find a legitimate purpose
for a shell bank either, but your experience is a lot vaster
than ours and that testimony is extremely helpful. I would
think if we did nothing else, and we hope to do a lot more, but
ban shell banks, or at least correspondent accounts with shell
banks, we would be doing a real service.
We hope to go beyond that, but would you agree if we could
just end the accounts with shell banks that they have with U.S.
banks that we would be performing a service? Do you agree with
that?
Mr. Blum. Absolutely.
Ms. Vitale. Yes, sir.
Mr. Evans. Oh, yes. If that is all you do, you should be
ashamed of yourself.
Senator Levin. I agree with that, too, but it is a good
starting point.
Mr. Evans. Absolutely.
Senator Levin. Now, one of the arguments against it that we
are going to face is that, well, they will just open accounts
in other countries, banks in other countries. What is the
answer to that?
Mr. Blum. The answer is they have to use the U.S. wire
transfer system. They have to have access to U.S. markets. The
second answer is we have to work with the other major countries
that have large banks and are in the bank regulatory system. I
think right now the countries of Europe, the OECD countries,
would agree. And this is an issue which our Treasury should be
tabling in the context of the G-7 and say that, look, these are
what the rules have to be.
Ms. Vitale. I think it is harder to find, but you can find
it, and I am talking about nested correspondents and when the
foreign bank has as one of its correspondents a shell bank. You
can't find that when you open an account for your legitimate
correspondent bank. However, you can see that at least in some
occasions when you do wire transfer monitoring.
I know at Republic I remember quite clearly several
instances, what really is standing out in my mind is where we
had a correspondent bank that had a shell bank in Nauru and
that was the originator of many wire transfers. First, we tried
to do some due diligence to find out what this bank and who
this bank was. We found nothing on the bank. We even contacted
the bank, our correspondent, who couldn't tell us very much.
And then what we did, we used the OFAC filter to block all wire
transfers from the shell bank. So we didn't close the
legitimate correspondent bank, but we blocked all transfers
from then on of the offshore bank.
Senator Levin. Do any of our banks say that we will not
accept an account from a foreign bank if it accepts deposits
from shell banks? Is there any reason why we couldn't just tell
our banks you may not allow this kind of nesting in your
depositors? Why not do it that way?
Ms. Vitale. How do you enforce that?
Senator Levin. It may be tough to enforce.
Ms. Vitale. OK.
Senator Levin. But at least when you are accepting the
deposit, you would be telling the depositor that if they do
that, that is the grounds for ending the account, and indeed
money could be seized if it were illegal money coming through
that, just the way you described just a few moments ago, if we
allow for the seizure of a portion of an account as you
recommend.
But is there any reason why, as part of a reform, we should
not tell U.S. banks you must not accept a deposit from a bank
that you have not informed may not, in turn, accept a deposit
from a shell bank?
Mr. Blum. I think that works.
Mr. Evans. I think you are on the right track there,
Senator. I think the way to do it is probably have some kind of
certification by the correspondent bank that they, in turn,
will not maintain nested accounts that do not meet the
standard. And then they would be subject during routine bank
examination to finding out whether the certifications were done
properly.
Senator Levin. Should we not require that U.S. banks that
accept correspondent accounts require any bank that wants to
open a correspondent account to provide a list of the banks
that they, in turn, have as correspondents? With computers, it
is a fairly quick thing, I think, to do that. Now, if it is
cumbersome and bureaucratic, it may not be doable, but what do
you think, Mr. Blum?
Mr. Blum. I think it is quite feasible and not very
difficult to do.
Ms. Vitale. There is a problem with updating the lists, and
also with what do you do when you have this list, then? I mean,
do you just have a list of all the names or do you then have
more due diligence that you have to do about all these banks
that may be very small? I think that might be asking too much,
unless it appears, of course, on your monitoring transactions
as suspicious activity. Then you have the obligation to do
more.
Senator Levin. If it is combined with that required
certification that they do not accept depositors from shell
banks, then they would be worried because they have to disclose
who their bank depositors are, in turn, and if they have to
certify that they don't accept any deposits from shell banks,
they would be easily caught. Our U.S. bank would then have the
certification from the correspondent bank; we do not accept
deposits from shell banks. They would have the list from the
depositor as to what banks they accept deposits from. And I
think any depositor would be very worried, then, that those two
pieces of paper could be easily put together and see whether or
not the certification is accurate or not.
Mr. Evans, do you have a comment on that?
Mr. Evans. No. I just think that you have got to be so
careful on how that is crafted because we could have unintended
consequences if we don't do it right. The burden should be on
the foreign bank. If it is a major foreign bank that is
maintaining nested accounts, the burden should be on them. They
are subject to examination. The burden should not be on the
U.S. correspondent, other than to require the certification.
Senator Levin. All right. It would be very helpful if you
would give us any further thoughts on that subject for the
record so that we could consider that as I am drafting
legislation. I would like to have all the help we can get.
Now, what about banks that are licensed in jurisdictions
that are known for poor anti-money laundering controls? Should
we treat them differently automatically? Maybe we do already
tell our U.S. banks you may not accept any deposits from banks
which are in the countries that are on that international list.
Are our banks allowed to accept deposits from those countries'
banks?
Mr. Blum. Yes, we do accept those deposits. I think we have
to do business with some banks in these countries. For example,
some of the Caribbean Islands and the Pacific Islands
legitimately need banking connections.
But the way I would put it would be this: If you picked a
small town in Michigan or Maine--let's say South Haven,
Michigan, and suddenly they decided they wanted to be home for
35 banks, you would probably say wait a minute, there is
something wrong here. And even if the law said we are going to
do everything in the world to stop money laundering, you would
know that in a small town you simply don't have the resources
to monitor and do everything that needs to be done.
So I would say that any jurisdiction that obviously hasn't
got the resources to do the job, no matter what laws they pass,
should be put on notice that if they go into any form of
offshore banking center business, we are not going to deal with
them and make them toe the mark. And I think there are a
variety of things underway at the moment. The OECD has begun an
exercise in looking at harmful tax practices. The FATF has
developed a list which is focused on who is and who is not
obeying the ground rules of the game.
I think we have to really consolidate the way we look at
the problems. We should say, wait a minute, this just isn't
going to work no matter what rules we put in place. Let's be
realistic and say we are not going to let you play if this is
the business you choose to be in.
Senator Levin. Let me go back to the question again of
shell banks. This was a letter that we got from the legal
counsel of Citibank.\1\ It says, ``We have been reflecting on
the concerns stated by you and your staff about establishing
relationships with offshore banks that have no physical
presence in the offshore jurisdiction. We remain uncertain
about whether attaching significance to physical presence is
meaningful when one considers the nature of offshore banks. . .
. Offshore affiliates typically service the existing customers
of the parent institution.'' So the affiliates we are not
worried about, but then they go on to say this: ``Their
function is to serve as registries or booking vehicles for
transactions arranged and managed from onshore jurisdictions.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 21 that appears in the Appendix on page 734.
---------------------------------------------------------------------------
Is there a compelling business justification for shell
banks, for example, as registries or booking vehicles?
Mr. Blum. The whole idea of a booking vehicle leads you to
the heart of this problem. When you go offshore, you are
evading some rule, some tax, or some requirement of a
regulatory agent or a government somewhere else. The principle
of international law that has been on the table for many years
is one government won't help enforce the governmental interests
of another government. That principle evolved in the 19th
century, the early 20th century, and it is a principle which I
think needs very careful reexamination as we integrate the
world economy in the 21st century.
This idea of being able to book a transaction outside the
reach of the regulators somewhere else, of the tax authorities
somewhere else, is at the heart of the matter, and it is the
thing that we really have to debate in a coherent way. It is
not just the issue of money laundering. When they say book
somewhere else, they are talking about reserve requirements and
the cost of money.
In the United States, if you are a bank, you have to keep
reserves for liquidity, reserves against various risks. If you
move the money offshore, there are no reserve requirements. You
are on a net/net basis. The cost of money goes down, but they
are evading the basic reserve requirement regulation.
So what we have to do is begin to focus on how this works
internationally and where regulation should be permitted to be
changed so that everything is, in fact, onshore and done in a
straightforward way.
Senator Levin. Ms. Vitale, I think you have testified that
having a physical presence and employees is both meaningful and
important.
Ms. Vitale. Yes.
Senator Levin. So we have that testimony, I think, in
response already to my question. Is there anything further that
you want to add to that?
Ms. Vitale. I think when you have no physical presence
anywhere, you are not a bank. You may be a wire transmitter of
some sort, but you are not a bank.
Mr. Blum. You are a checking account, is what you are.
Senator Levin. Mr. Evans.
Mr. Evans. Well, Senator, I do have to diverge a little bit
here from my colleagues. I think there are very legitimate
reasons to have these offshore booking and registration
centers. Now, maybe that is the vagaries of international law
now, but there is no major international insurance company that
is not operating in that fashion largely through Bermuda. The
same way with ship registries. That is the way the world is.
Now, it shouldn't be that way, mind you, but it is legal,
it is proper, and if you are going to be in that arena, that is
what you have to do to compete. We shouldn't mix that up with
this, in my view. That is a very legitimate business under
today's rules of the game and we shouldn't screw around with
it. I mean, if we want to screw around with it, that is a
different issue than money laundering. Don't cross the two.
Senator Levin. I have further questions, but my time is up.
Senator Collins. Why don't you proceed?
Senator Levin. Thank you.
On the question of seizing suspect funds, Ms. Vitale, I
believe, has already addressed that issue and I don't know if
our other two witnesses have. But the question here is whether
or not we should make it easier for U.S. law enforcement to
seize suspect funds which are deposited in a U.S. correspondent
account belonging to a foreign bank.
Right now, to seize those funds, the U.S. has to show, or
our prosecutors or law enforcement have to show that a foreign
bank was somehow part of the wrongdoing. It is not enough to
show that those assets are there. You have got to show that
somehow or other the bank is part of the wrongdoing, they are a
wrongdoer, and that is not a requirement which applies to
seizures from other types of U.S. bank accounts. So it is just
the correspondent account that we have a very tough standard to
meet, and I don't see that it is a particularly logical way to
approach it any more than it would be with our onshore
accounts.
Now, I think we have had the story from you, Mr. Evans,
about the Taves credit card fraud, but let me ask you briefly,
all of you, if you can, would you agree--I guess, Ms. Vitale,
you have already addressed it--that we ought to allow for the
seizure of funds in a correspondent account in the same way we
would in a regular bank account?
Mr. Blum. I agree. In my prepared statement and in my
remarks, I mentioned the case of Nigerian fraud with the money
that we wanted to try to stop in a New York correspondent
account before it went off to Beirut and couldn't do it. I
think it is ridiculous that a correspondent account from a
shell bank should have privileged status in the sense that it
is in a better position than the account of an ordinary
American bank.
Senator Levin. Thank you. Do you have anything more to add?
Mr. Evans. No. I agree with you.
Senator Levin. Thank you.
I want you to take a look at a description which was
contained in a Citibank document relative to the purpose of an
offshore bank, and this is Exhibit 37.\1\ This memo refers to
Federal Bank, which was an offshore bank licensed in the
Bahamas with no physical location. Citibank calls it a booking
vehicle.
---------------------------------------------------------------------------
\1\ See Exhibit No. 37 that appears in the Appendix on page 805.
---------------------------------------------------------------------------
The memo refers to Banco Republica, which is an offshore
bank located in Argentina, and Federal Bank is supposed to be
its offshore arm for Banco Republica's private banking
customers. I will read this to you. I don't know if you have
the exhibits in front of you. Do you have those exhibits in
front of you?
Mr. Blum. Yes.
Senator Levin. Good. Here is what the memo says about the
purpose or the function of the Federal Bank: ``The existence of
this vehicle is justified in the group's strategy because of
the purpose it serves . . . to channel the private banking
customers of Banco Republica to which they provide back-to-
backs and a vehicle outside Argentina where they can channel
their savings, which are then replaced in Banco Republica by
Federal Bank.'' So what the memo says is the depositors in
Banco Republica send their money to Federal Bank and then
Federal Bank deposits that money back in Banco Republica.
Can any of you see the purpose of that?
Mr. Blum. Well, back-to-back transactions are frequently
used by money launderers. A deposit is made in one place. The
money then becomes collateral for a loan and goes back into the
hands of the person who sent the money originally, and that is
a great way of concealing or making it look like the money came
legitimately from a foreign source.
Senator Levin. Are there other purposes that might be
legitimate purposes for that? Can you offhand see what a
legitimate purpose would be for that? We will give Citibank
obviously an opportunity to testify on that. But just looking
at it with your experience, would that raise an alarm bell if
you saw those kinds of transfers back and forth?
Ms. Vitale. It is probably--if it is legitimate, it is tax
evasion.
Mr. Evans. Yes. I can't think of a reason. It would have to
be a local Argentine thing in which I have no experience, but
that would be the first question I would ask.
Senator Levin. Finally, let's take a look at Exhibit 23,\1\
and I want to just get your reaction to a series of
transactions that occurred among three entities with a common
owner and a correspondent account in Citibank, in New York.
---------------------------------------------------------------------------
\1\ See Exhibit No. 23 that appears in the Appendix on page 742.
---------------------------------------------------------------------------
These three entities now have the same owner, and the
movement of money among three Citibank New York correspondent
accounts are the three entities owned by Grupo Moneta--Banco
Republica, which is the actual bank located onshore in
Argentina, and then American Exchange which is a Panamanian
company apparently operating out of Uruguay, and Federal Bank
which is the offshore bank which is one of the banks that we
are looking at, also owned by that same group, Grupo Moneta.
Now, as you can see, there are numerous same-day transfers
of significant amounts of money from Banco Republica to
American Exchange, to Federal Bank. These are all owned by the
same group. Can you see any particular reason, from your
experience, why money would move like that? Is that movement--
same day, three entities owned by the same group--a normal
business practice from your experience?
Ms. Vitale. I can't answer the question, if it is a normal
business practice, but it raises questions. And I think if you
see a pattern such as this, you should ask some questions and
get answers that will explain it. But the rule is sort of the
mathematical rule, the shortest distance between two points is
a straight line. Here, you have it going a round-robin sort of
transaction, which is an indicia of high-risk activity that may
be suspicious. So I would definitely ask some questions about a
pattern like this.
Senator Levin. Do either of the other witnesses want to
respond?
Mr. Evans. Ask the questions, for sure. I can think of
reasons why that would be quite proper in foreign exchange
markets and the like where you deal in those kind of numbers
and you deal with them on a same-day basis. But the questions
deserve to be asked.
Senator Levin. Among entities which are owned by the same
group?
Mr. Evans. It could be.
Senator Levin. OK.
Mr. Evans. I honestly don't know. I don't know enough about
it, but the questions--it is a legitimate question.
Senator Levin. One other fact. I am informed they are all
U.S. dollar accounts.
Mr. Evans. I could think of reasons why it could be.
Senator Levin. OK, fair enough.
Mr. Blum. I come to the same conclusion. You have to ask
questions, and the question is why. Always, where offshore
banking is involved, there is the question of why have you gone
to this added extra expense. Why are you going through multiple
transfers when you can do it straightforwardly and simply?
Senator Levin. Thank you all. You have been a great help.
Senator Collins. Ms. Vitale, just one final question for
you, since you have helped banks set up anti-money laundering
procedures. You said in looking at the transfers that Senator
Levin just brought to your attention that you can't conclude
anything without asking questions, but that, in fact, they
raise questions.
Would the kinds of money laundering systems that you would
advise a bank to have in place trigger a review of a pattern
that is similar to this?
Ms. Vitale. Yes.
Senator Collins. Thank you. I want to thank all of you for
your testimony today. It was extremely helpful, and we look
forward to continuing to work with you. Thank you.
Mr. Blum. Thank you.
Mr. Evans. Thank you.
Senator Collins. Our second panel of witnesses this morning
consists of three individuals representing Citibank: Jorge
Bermudez, Executive Vice President and Head of e-Business for
Citibank; Carlos Fedrigotti--you can see my Spanish is not very
good here--President and Country Corporate Officer for Citibank
Argentina and Latin American South Region Executive; and Martin
Lopez, who was formerly with Citibank Argentina and is
currently a Vice President and Corporate Bank Head for Citibank
in South Africa.
I appreciate all of these witnesses being here today. At
least I hope they are here. I am a little concerned that they
haven't appeared at the table. I would ask the Chief Clerk to
locate the witnesses and bring them forward.
[Pause.]
Senator Collins. Gentlemen, would you remain standing so
that I can swear you in?
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. Bermudez. I do.
Mr. Fedrigotti. I do.
Mr. Lopez. I do.
Senator Collins. First, I want to express my appreciation
for our witnesses being here today. I know two of you have
traveled a considerable distance to be here.
We will be using a timing system today. You will be given
10 minutes to make your opening statements, but your complete
written statements will be included in the hearing record.
We are going to start with Mr. Bermudez. Please move the
mike close to you so that we can hear you well. Thank you.
TESTIMONY OF JORGE A. BERMUDEZ,\1\ EXECUTIVE VICE PRESIDENT AND
HEAD OF E-BUSINESS, CITIBANK, N.A., NEW YORK, NEW YORK
Mr. Bermudez. Good morning, Madam Chairman and Senator
Levin and Members of the Permanent Subcommittee on
Investigations. My name is Jorge Bermudez. I am an Executive
Vice President of Citibank and Head of e-Business, a business
unit of Citigroup's Global Corporate Investment Bank. E-
Business is the organization responsible for delivering
Internet-based solutions to the corporate marketplace and for
providing cash management and trade services to our global,
regional and local customers.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Bermudez with attachments appears
in the Appendix on page 180.
---------------------------------------------------------------------------
I am pleased to testify before you this morning and share
with you what Citibank is doing to fight the risk of money
laundering in the markets in which we operate, including our
correspondent banking funds transfer services which are so
crucial to the international payment systems. This is an
extremely important topic.
Citibank is a truly global institution providing a broad
range of products and services to corporate and financial
institution customers in more than 100 countries around the
world. We are keenly aware, however, that with this global
presence comes the tremendous responsibility of setting and
following high standards to fight money laundering in each of
the countries in which we operate.
As a leader in the financial services industry, we have
taken, and will continue to take, a prominent role in the fight
against money laundering. That fight is far from over. While we
are constantly working to improve our anti-money laundering
controls, the reality is that it is difficult for the industry,
as well as law enforcement, to keep up with the latest schemes
employed by money launderers.
Citibank welcomes the effort of this Subcommittee to assist
the financial services industry in identifying areas of
vulnerability and developing strategies to avoid the unwitting
facilitation of money laundering. Thanks, in part, to the
Subcommittee's work, the financial services industry has been
able to identify areas of risk that had not been fully
appreciated, which has in turn provoked an industry-wide
reassessment of the adequacy of anti-money laundering controls
for correspondent banking.
As you know, the New York Clearing House Association, of
which Citibank is a member, is undertaking to develop a code of
best practices that will help the industry respond to the
weaknesses identified by your staff. The Federal Reserve has
acknowledged the challenges involved in balancing the
importance of anti-money laundering controls with the
importance of maintaining an effective and efficient
international payment system. The Federal Reserve has indicated
its willingness to consult with the Clearing House in its
effort to develop a code of best practices.
In addition, the Wolfsberg Group, of which Citigroup is
also a participating member, is taking up the issue of money
laundering in correspondent banking. Like the Wolfsberg Anti-
Money Laundering Guidelines for Private Banking issued last
year, the Group intends to develop another set of guidelines
that reflect the Group's recognition that money laundering in
international banking cannot be solved by one institution or by
any one country.
In a 1995 report, the Office of Technology Assessment found
that hundreds of thousands of wire transfers move trillions of
dollars on a daily basis. Citibank, for example, executes
approximately 145,00 wire transfers that permit customers and
third parties to make $700 billion in payments everyday. Any
monitoring program would have to be carefully designed to avoid
impairing the smooth functioning of the national and global
economy, particularly in view of the fact that less than one-
tenth of 1 percent of the total volume of wire transfers is
estimated to involve money laundering.
Citibank's response to this complicated problem has been to
strive continuously to improve an anti-money laundering program
that couples thorough and ongoing due diligence on its own
financial institution customers with the latest technologies
for monitoring transactions between financial intermediaries.
Citibank has always conducted due diligence on its
financial institution customers. Recently, however, we have
implemented an enhanced ``know your customer'' due diligence
procedure applicable to relationships with financial
institutions in the emerging markets. Once an account is opened
for a financial institution, the activity in the account is
monitored in several ways which I have described in my written
statement.
In addition, the investigative analysts in our Tampa Anti-
Money Laundering Unit employ various methods to monitor U.S.
dollar fund transfers for suspicious activity on an ongoing
basis, and we have established a specialized compliance unit to
coordinate and improve communication between the Tampa Anti-
Money Laundering Unit, the country compliance officers, and the
business relationship managers.
As criminals have become increasingly more sophisticated at
laundering money, and as the volume of fund transfers has
continued to grow, we have made efforts to improve our
monitoring techniques. Over the past year, we have also
significantly increased the amount of training resources
dedicated to anti-money laundering education.
Furthermore, we work with local governments and banking
leaders to raise compliance standards and protect against money
laundering risks. To that end, we have led almost monthly anti-
money laundering seminars for foreign bankers and banking
regulators.
Although the pattern monitoring that our Tampa Anti-Money
Laundering Unit undertakes is important to identify unusual
patterns of activity, it is only a limited line of defense. As
the Chief of FinCEN's Systems Development Division has said,
sifting through the volume of wire transfers for suspicious
activity is like looking for a needle in a stack of other
needles.
In our experience, the most effective monitoring comes from
the use of law enforcement tips, press reports, or other
specific information that identifies names of institutions or
possible customers of financial institutions that have come
under suspicion of money laundering. Citibank is developing a
formalized system to gather such information. We feel it would
be particularly useful if U.S. Government agencies could devise
methods of sharing with the banking industry and foreign
regulatory agencies information about institutions that have
been suspected of money laundering.
We also have implemented a centralized system for tracking
all subpoenas and seizure orders Citibank receives on financial
institution accounts. If a subpoena or seizure order relates to
money laundering or similar issues, the matter is referred to
our Tampa analysts for follow-up.
The Minority staff has suggested a number of measures to
assist banks that offer correspondent banking services in
guarding against money laundering, including the identification
of certain types of relationships that warrant greater care
when deciding whether to accept a financial institution as a
correspondent banking customer. Citibank has been studying
these recommendations with great care, and we will be working
with the New York Clearing House Association in the coming
months to formulate an industry code of best practices to
respond to the issues involved.
As one of the world's largest global institutions, Citibank
knows that it plays a unique and important role in the fight
against money laundering. We are dedicated to the fight against
money laundering and to using our global presence to increase
international awareness of the problem. Thanks, in part, to the
Subcommittee's important work, U.S. financial institutions are
now more aware than ever of the vulnerabilities they face when
they establish correspondent relationships with smaller, less
well-known financial institutions that want to participate in
the global economy.
Thank you for the opportunity to testify before you today.
I am pleased to answer any questions you have.
Senator Collins. Thank you.
Mr. Fedrigotti.
TESTIMONY OF CARLOS FEDRIGOTTI,\1\ PRESIDENT AND COUNTRY
CORPORATE OFFICER, CITIBANK ARGENTINA, BUENOS AIRES, ARGENTINA
Mr. Fedrigotti. Good morning, Madam Chairman. I have
submitted a written statement for the record that I would like
to summarize here.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Fedrigotti appears in the
Appendix on page 223.
---------------------------------------------------------------------------
Madam Chairman, Senator Levin, and Members of the Permanent
Subcommittee on Investigations, my name is Carlos Fedrigotti. I
am the President of Citibank Argentina. I have held that
position since April 1996. I have been an employee of Citibank
since I graduated from Columbia University in 1977. As the
President and Country Corporate Officer for Citibank Argentina,
I am the institutional representative for Citibank in the
country. I am responsible for Citibank's corporate banking
operations in Argentina.
Since 1914, Citibank has been an active and important
member of the Argentine business community. In 1999, the U.S.
State Department commended the branch for its outstanding
corporate citizenship, its innovation, and its exemplary
international business practices. Last year, the Argentine
Minister of the Economy praised the constructive role that the
branch played in connection with the passage of anti-money
laundering legislation in Argentina. Citibank has had a long
and distinguished history in Argentina. I am proud to lead this
institution.
Citibank Argentina has long been aware of the need to
scrutinize closely the financial institutions with which it
does business. First, in terms of credit risk, Citibank must
have a complete picture of the financial soundness and
stability of its financial institutions customers. Second, the
branch must perform thorough due diligence to ensure that its
customers have the utmost integrity, and that these customers
fully appreciate their responsibility to prevent and detect
money laundering and other illegal activity.
Citibank has strived to limit its target market to the most
reputable and financially robust institutions. For this reason,
Citibank avoids doing business with offshore banks that are not
affiliated with well-established onshore parent financial
institutions.
In January of last year, Citibank Argentina further limited
its target market. We closed correspondent accounts that we had
maintained for offshore institutions that, although affiliated
with Argentine onshore parents, were not reported to the
Central Bank on the parent institutions' consolidated financial
statements. None of the accounts for these non-consolidated
offshore affiliates was closed because suspicious activity was
detected.
Among the accounts that were closed was a correspondent
account for Federal Bank, which the Minority Staff's Report has
criticized Citibank for opening and which would not have been
opened under the redefined target market criteria.
In 1992, Citibank Argentina's Financial Institutions Unit,
or the FI Unit, as we call it internally, requested that a
correspondent account be opened in New York for Federal Bank
Ltd. It was the understanding of the FI Unit that the Moneta
Group--a group of financial institutions and investment
companies owned by Raul Moneta, his uncle Jaime Lucini, and
their families, owned Federal Bank--and that Federal Bank was
the offshore affiliate of the Group's flagship bank in
Argentina, Banco Republica.
The members of the FI Unit in Argentina who requested the
opening of a correspondent account for Federal Bank felt
comfortable doing so because the branch in Argentina had had a
long banking relationship with its sister institution, Banco
Republica, and its owners which dated to the late 1970's.
In addition to this banking relationship, Citibank and the
Moneta Group were also co-investors in an investment holding
company called CEI, created in the early 1990's to hold equity
in Argentine companies acquired through the Argentine
Government's debt-for-equity swap program.
Although the Buenos Aires branch had no legal documentation
in its files proving as a matter of law that Federal Bank was
owned by the Moneta Group, the FI Unit considered it to be an
affiliate of Banco Republica and treated it as such. As you
have seen from the FI Unit's records, members of the FI Unit
regularly discussed Federal Bank with Banco Republica's
management and analyzed Federal Bank as part of their overall
credit analysis of Banco Republica and its affiliates.
In April 1999, I received a letter from the Central Bank of
Argentina requesting information regarding Federal Bank,
particularly information about the identity of Federal Bank's
shareholders. The Central Bank's request was based on the fact
that Federal Bank maintained a New York account with Citibank.
I passed the request on to my deputy and asked him to prepare a
response in consultation with the bank's general counsel.
Because the files in Buenos Aires contained no records from
which Federal Bank's ownership could be determined as a matter
of law, my deputy and my general counsel prepared a letter for
my signature informing the Central Bank that such information
was not available in the files in Buenos Aires. The letter also
directed the Central Bank to New York, where documentation for
Federal Bank's New York-based account would be maintained, and
offered the branch's assistance in helping the Central Bank to
obtain information in New York.
I later revisited the branch's response to the Central
Bank's inquiry regarding Federal Bank when the Subcommittee
subpoenaed information regarding Banco Republica. In July 2000,
when I was made fully aware that the working materials in the
branch's files for Banco Republica contained informal,
internally-generated information about Federal Bank, I
determined that the Buenos Aires branch should offer that
information to the Central Bank of Argentina. On July 27, I
sent a letter to the Central Bank making this offer, and in
September, at the request of the Central Bank, the branch
provided this material.
While the branch's initial response to the Central Bank was
legally correct under Argentine law, Citigroup's policy is to
do more than comply with the legal requirements of the
jurisdictions in which we operate. It is Citigroup's policy to
cooperate fully with regulators in all circumstances, which
means going beyond our basic legal obligations. Although the
branch's initial response to the Central Bank was correct under
Argentine law, we should have done more and supplied the
additional information which, in fact, we did last year.
This matter has been taken very seriously by me and
Citigroup's management, and I have in turn reemphasized to the
employees under my supervision that full cooperation with
regulators is mandatory in all circumstances, and that full
cooperation may require them to go beyond what is strictly or
legally sufficient to fulfill their obligations.
I can personally assure you that as the senior executive in
the country, I have reinforced the awareness of Citibank
Argentina regarding the policy of having a fully collaborative
relationship with the Central Bank in all respects.
Thank you for the opportunity to testify today. I would be
pleased to answer any questions you might have.
Senator Collins. Thank you.
Mr. Lopez.
TESTIMONY OF MARTIN LOPEZ,\1\ VICE PRESIDENT AND CITIBANK
CORPORATE BANK HEAD FOR CITIBANK, REPUBLIC OF SOUTH AFRICA
Mr. Lopez. Chairman Collins, Senators Levin, and Members of
the Permanent Subcommittee, good morning. My name is Martin
Lopez and I have worked for Citibank since 1985. In 1985, I
became a Relationship Manager in the Financial Institutions
Unit in Buenos Aires, and in 1997 I became the Head of the
Unit. I left Buenos Aires in June 2000, and after a brief
assignment in Malaysia, I have been in charge of the Citibank
Corporate Bank in South Africa since November of last year.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Lopez appears in the Appendix on
page 233.
---------------------------------------------------------------------------
As an employee of Citibank, I want to assure you that I am
committed to doing whatever I can to help Citibank make its
correspondent banking services less vulnerable to money
laundering.
Among the ten cases the Minority staff has examined over
the past year, two cases center on correspondent relationships
with offshore banks that are affiliated with Argentine
financial institutions. I would like to say a few words about
each.
Citibank's decision to open correspondent banking accounts
for Mercado Abierto and its affiliates was based primarily on
our experience with the parent institution, Mercado Abierto.
Although I was never the relationship manager responsible for
this relationship, I can tell you that Mercado Abierto was one
of the largest and most important brokers on the Buenos Aires
Stock Exchange.
The Minority staff has focused most of its attention on
M.A. Bank. M.A. Bank is the Mercado Abierto Group's offshore
affiliate. M.A. Bank provides sophisticated Argentine investors
with access to international financial markets.
The Minority Staff Report refers to M.A. Bank as a shell
bank, but M.A. Bank was affiliated with the Mercado Abierto
Group, which maintained a physical presence in Argentina and
was regulated by the Comision Nacional de Valores, the
Argentine version of the Securities and Exchange Commission in
the United States.
In 1999, I learned that the U.S. Customs Service had
launched an undercover investigation that implicated Mr.
Ducler, one of the owners of Mercado Abierto, and two of
Mercado Abierto's vehicles, M.A. Bank and M.A. Casa de Cambio,
in the laundering of narcotics proceeds.
After I learned of the grounds of the seizure, Citibank
blocked these accounts in December 1999 and formally ended its
relationship with the entire Mercado Abierto Group in February
2000. I have since learned that the U.S. Customs Service
settled its claim against Mercado Abierto, and that neither
Mercado Abierto nor its principals has been found guilty of any
wrongdoing.
The Minority Staff Report concludes that Citibank should
have more promptly realized that the seizure warrant it
received for the Mercado Abierto accounts was related to money
laundering. Unfortunately, this is a well-deserved criticism.
Citibank now has procedures in place to ensure that warrants
like the one Citibank received for Mercado Abierto are properly
handled.
The Minority Staff Report asserts that Citibank permitted
M.A. Bank to engage in highly suspicious activities for more
than 1\1/2\ years after assets in its account were seized for
illegal activity. That is simply not true. What the Minority
staff observed was a significant level of activity among the
various Mercado Abierto vehicles which is, in fact, consistent
with the various securities markets in which the Mercado
Abierto Group traded and the Group's purchase and sale of
securities within and outside Argentina.
I would now like to say a few words about Citibank's
relationship with Banco Republica and Federal Bank. Citibank's
relationship with Banco Republica dates back to 1978, when its
owners, Raul Moneta and his uncle Benito Lucini, established a
financial company that later became Banco Republica, a
wholesale bank located in Buenos Aires. I understand that in
1992, Mr. Moneta and Mr. Lucini incorporated Federal Bank, an
offshore affiliate of Banco Republica. That same year, Citibank
established a New York-based correspondent banking account for
Federal Bank.
The relationship between Banco Republica and Federal Bank
was, I believe, well known in the Argentine financial
community, particularly among those banks that loaned money to
Republica Holdings, the Moneta family's offshore holding
company.
The Subcommittee has noted that $4.5 billion moved through
Federal Bank's correspondent account at Citibank. In my
experience, $4.5 billion in credits, which averages to
approximately $50 million per month, or $2.5 million per day,
over 7\1/2\ years, is consistent with Federal Bank's purposes
and would not be unusual for a bank of this size.
Much of the interest in Banco Republica and Federal Bank
appears to stem from confidential and secret examination
reports for Banco Republica by the Central Bank of Argentina.
When the Minority staff made these reports available to me, I
found two things that concerned me.
First, the reports pointed out that Banco Republica did not
have written anti-money laundering procedures, as required by
the Argentine Central Bank. Given the length of Banco
Republica's relationship with Citibank, the relationship
managers, myself included, relied on oral assurances that Banco
Republica maintained written anti-money laundering procedures
as required by the Argentine Central Bank.
I was therefore surprised to learn that Banco Republica
failed to comply with this requirement. But under Citibank's
enhanced due diligence procedures for U.S. accounts,
relationship managers will be required to assess the anti-money
laundering controls that Citibank's clients have in place. I
understand that Citibank Argentina is now reviewing the anti-
money laundering practices of all of its financial institution
customers.
Second, I was surprised to learn that Pablo Lucini denied
that Federal Bank was affiliated with Banco Republica. As you
can see from our files, although we cannot legally prove that
Federal Bank was affiliated with Banco Republica, we certainly
believe that it was.
In April 1999, the Central Bank of Argentina sent a letter
requesting information about Federal Bank, particularly about
its owners, to the Buenos Aires branch of Citibank. Because I
believed that Federal Bank's affiliation with Banco Republica
was known in the Argentine financial community and I knew that
the Central Bank's examiners had a great deal of expertise in
this market, I thought that they already had grounds to believe
that these entities were affiliated.
I therefore concluded that the Central Bank must have been
looking for legal proof, undeniable evidence that the Moneta
Group owned Federal Bank. And while our files contained a lot
of internally-generated documents that reflected our
understanding of the relationship, we did not have the legal
proof that I thought the Central Bank was looking for.
I was also concerned when I reviewed the Central Bank's
letter that we were being drawn into the middle of a matter
between the Central Bank and one of our customers. When I was
interviewed by the Minority staff, I used an imprecise
expression to describe this situation. When I said that I
believed the Central Bank was playing ``some kind of game,'' I
merely meant to express my concern that we were being put in
this uncomfortable position. I did not intend in any way to
suggest disrespect to the Central Bank, which has done an
excellent job supervising the Argentine financial system, and I
fully appreciate that it is Citibank's policy to cooperate
fully with requests from regulators.
I thank you for the attention that you are giving to
correspondent banking and its vulnerability to money
laundering, and for giving me the opportunity to testify before
you, and I am willing to respond to any questions that you
have.
Senator Collins. Thank you, Mr. Lopez.
Senator Levin, would you like to lead off the questions?
Senator Levin. Madam Chairman, thank you.
We are going to focus today on two shell offshore banks
that Citibank New York has had a correspondent relationship
with, and those are the M.A. Bank and the Federal Bank. Both of
those offshore shell banks were licensed in the Caribbean, but
their customers were in Argentina. They didn't have offices in
the Caribbean countries; all they had was a registered agent.
They were licensed as offshore banks, so they were not
allowed to do business with anyone residing in the
jurisdictions in which they were licensed. Both of these banks
were affiliated with larger commercial entities known to
Citibank. In the case of M.A. Bank, it was owned by Mercado
Abierto, a large securities company in Argentina, and in the
case of Federal Bank, it was owned by Grupo Moneta, which is a
large conglomerate or holding company in Argentina.
As far as we can determine, neither of those banks had a
physical location in any country, no brick-and-mortar location
that a customer of those banks could go to to make deposits or
withdrawals. Neither of those banks were licensed to do
business in Argentina. That means that the bank isn't supposed
to take deposits or allow for withdrawals. But for the
association with larger commercial entities, those banks were
offshore shell banks.
Now, both of those banks kept all of their money
exclusively, as far as we can determine, in correspondent
accounts; in other words, accounts in other banks. So,
basically, these accounts are nothing more than their
correspondent accounts at Citibank New York. I believe it is a
fact--and, Mr. Fedrigotti, you can correct me if I am wrong--
that these banks have never been examined by an independent
bank examiner. And if that is not correct, to your knowledge,
you can just interrupt me at any time.
If those two banks were affiliated with a bank in Argentina
and if the Central Bank of Argentina were well aware of that
fact, the Central Bank would bring the affiliate bank within
their purview and examination. So if these two banks were
affiliated with a bank in Argentina and if your Central Bank,
your regulatory body, were aware of that fact, then the Central
Bank would bring the affiliate bank within their purview and
examination.
First, is that true, Mr. Fedrigotti, and, second, it didn't
happen in this case, did it?
Mr. Fedrigotti. Senator, at some point in time, during the
last few years, the Central Bank requested all Argentine banks
which had affiliated entities to consolidate them in their
reporting, and thus the consolidated entity would fall under
the regulatory environment in Argentina. Neither of these
affiliated entities were ever consolidated in that sense, and
therefore they did not fall within the regulatory environment
of Argentina.
Senator Levin. If the Central Bank of Argentina knew when
you wrote them the letter saying you had nothing in your files
relating to the Federal Bank what they knew later, would they
have then brought that bank within their purview?
Mr. Fedrigotti. What happened when the regulations changed
was that Argentine banks proceeded to start the process of
consolidation, and whenever there was awareness that these
entities were still not being consolidated, there was an action
plan as to by when, by a certain time, this would have taken
place.
In the case of Banco Republica, like with many others, I
take it that there was a plan, an action plan, in place and
there were interactions between people in Banco Republica and
members of the FI Unit staff that addressed that concern and
were working jointly towards that goal. It is also my
understanding that at some point Banco Republica or one of its
entities approached the Central Bank in connection with this
procedure. That is what I have gathered from reading notes in
the files. So at the end of the day, that consolidation never
took place.
Senator Levin. Did the Central Bank of Argentina know at
the time that we are discussing that the Federal Bank was
connected through common ownership to Banco Republica?
Mr. Fedrigotti. It would have taken steps to----
Senator Levin. No. Did it know?
Mr. Fedrigotti. I don't know, Senator.
Senator Levin. Well, it asked you, didn't it?
Mr. Fedrigotti. It asked Citibank for evidence of
ownership, correct.
Senator Levin. And you told them that you had none in your
files?
Mr. Fedrigotti. We told them that we did not have evidence
of ownership in our files.
Senator Levin. And so presumably they didn't know or wanted
to know when they wrote you that letter. But, in fact, Federal
Bank did share common ownership with Banco Republica because
they had common ownership, is that not correct?
Mr. Fedrigotti. Senator, we had our own internal
understanding of the relationship between the principals and
the relationship between these entities. When that first letter
was sent, we should have done more and we should have supplied
the additional information that we had in our files reflecting
that understanding that we had of that relationship.
Then we noticed that while the letter was legally correct
and accurate, it was incomplete from an internal policy
standpoint, and that we should have supplied that information
originally. When I became aware of that when I revisited the
issue and I was made aware of the type of information and the
nature of the working papers that we were dealing with, I made
the decision to then supply that information.
Senator Levin. You say that your letter was accurate but
not complete, and I want to look at that request to you and
your response to it. The request is Exhibit 32b.\1\ This is the
way it reads, and this is from the Central Bank, which is the
regulatory body.
---------------------------------------------------------------------------
\1\ See page 2 of Exhibit No. 32 that appears in the Appendix on
page 760.
---------------------------------------------------------------------------
``This is in reference to a proceeding to determine if
there is any sort of economic link between financial entities
subject to the control of this Superintendence and Federal Bank
Limited, a company established on March 1992, under the laws of
the Commonwealth of the Bahamas. . . .''
``By means of transfers from and to Federal Bank Limited,
the Argentine financial entities receive and pay deposits of
residents abroad. The transfers are made with debits and
credits to the account of Federal Bank Limited in Citibank New
York. . . .''
``In light of the importance of the aforementioned
transfers,'' they are requesting ``all information that Branch
may have about Federal Bank Limited, especially the identity of
its shareholders.'' The superintending bank there is requesting
all information that you may have about Federal Bank Limited,
especially the identity of its shareholders. ``Likewise, we
also request your intercession with the house in New York so
your headquarters will provide the requested information.''
Your response to them, which you said was accurate--and
that is Exhibit 32d.\2\--says that, ``Pursuant to the request
in your letter of April 20, 1999, this is to advise that our
records contain no information that would enable us to
determine the identity of the shareholders of the referenced
bank.''
---------------------------------------------------------------------------
\2\ See page 4 of Exhibit No. 32 that appears in the Appendix on
page 760.
---------------------------------------------------------------------------
Now, in fact, your records contained a lot of information
showing common ownership, did it not?
Mr. Fedrigotti. Yes, they did, sir.
Senator Levin. So how can you say it is accurate to tell
your regulatory body that your records contain ``no
information'' that would enable you to determine the identity
when you had so much information in your files very clearly
showing the identity of the owners and showing that the
identity was exactly the same as Banco Republica? How can you
say that is accurate?
Mr. Fedrigotti. Senator, the whole information in the files
should have been provided at the original request. As I have
been able to reconstruct events and discuss with the people who
participated in the preparation of that response, they focused
on the fact that we could not legally prove ownership, and
therefore that was the nature of the response that was
prepared.
And in addition to that, they were then directing the
Central Bank to New York where the account was, in fact,
domiciled. The information for an account domiciled in New York
would rest in the files pertaining to that account, so the
Central Bank was directed to that location.
Nevertheless, while that was the interpretation of those
who worked in preparing that response, upon the second instance
when I was fully involved and understood the nature, then
looked back at the original request, understood the nature of
the informal internal information, it was my decision that that
information should be provided to the Central Bank in that form
so that then they could themselves reach their own conclusions
as to the relationship between these entities.
Senator Levin. Now, the money laundering case that we were
looking at related to a deposit of bribe money in Federal Bank,
which is an offshore bank which is licensed by one of the
Caribbean islands, is that correct?
Mr. Fedrigotti. Senator----
Senator Levin. Have you read our report?
Mr. Fedrigotti. Yes, I have.
Senator Levin. OK, and you are aware of the fact, then,
that the specific money laundering issue that we were looking
at relative to the offshore bank called Federal Bank, which was
owned by the same folks that owned Banco Republica, was some
money which we believe was identified indeed as bribe money
that was deposited in Federal Bank. Is that correct?
Mr. Fedrigotti. I am aware of that.
Senator Levin. All right.
Mr. Fedrigotti. Senator, you did say that that money was
identified as bribe money. I am not aware of that, but I am
aware of the concern or the investigation surrounding that.
Senator Levin. All right, and the allegation----
Mr. Fedrigotti. Exactly.
Senator Levin [continuing]. Which I believe was
acknowledged, as a matter of fact, at some point. But without
getting into that, nonetheless you were aware of the fact that
that, at least in your eyes, was suspected?
Mr. Fedrigotti. There is controversy around that, correct.
Senator Levin. OK. Now, I just want to go back again to see
if I can understand really what the motivation is here now
because your bank is a partner, is it not, with the same people
who own Banco Republica and Federal Bank? Is that correct?
Mr. Fedrigotti. Senator, the way we work internally in the
bank is that in the branch, in Citibank Argentina, we manage
the relationship with Banco Republica and the bank affiliates.
There is a separate unit in the bank that manages the
relationship with the Grupo Moneta in connection with the
investment in CEI, where indeed the Grupo Moneta is co-
investors with Citibank in that group.
Senator Levin. My question is that Citibank in Argentina is
a partner with Grupo Moneta in another entity, is that correct?
Mr. Fedrigotti. In CEI.
Senator Levin. In CEI?
Mr. Fedrigotti. Correct.
Senator Levin. And that partner of yours, Grupo Moneta,
owns both Banco Republica and Federal Bank, is that correct?
Mr. Fedrigotti. They are part of the same economic group.
Senator Levin. And that information was in your files when
it was requested by your regulatory body that there was common
ownership of Banco Republica and Federal Bank by Grupo Moneta.
Is that correct?
Mr. Fedrigotti. They asked for evidence of ownership
between these entities.
Senator Levin. And you had it in your file?
Mr. Fedrigotti. I already described the nature of the
information.
Senator Levin. Let me show you the exhibits which were in
your file so that we just cut right to the chase. If we could
look at Exhibit 25 \1\ which was in your file at the time, if
you look at the owner's name, it says ``owner''--literally, in
your file you have a document that says ``owner name.'' Raul
Moneta, 33 percent; Benito Lucini, 33 percent; Monfina, 33
percent; and another gentleman, 1 percent. In your file that is
the way it is described, and then it shows that Grupo
Republica, which is the same as Grupo Moneta, owns Banco
Republica and Federal Bank.
---------------------------------------------------------------------------
\1\ See page 2 of Exhibit No. 25 that appears in the Appendix on
page 749.
---------------------------------------------------------------------------
If you look at the furthest box on the left--it is the box
under Grupo Republica or Grupo Moneta--it says ``Federal Bank
Offshore.'' So in your file, you have a document showing the
owners and showing that they, in fact, own what amounts to
Grupo Moneta, renamed, and that that group owns common
ownership of Banco Republica and Federal Bank Offshore.
Now, I am trying to figure out why, when asked--and maybe
we can find out from one of the other gentlemen here--why, when
asked by your regulator--now, this is our bank; this is a U.S.
bank. I want everyone to be real clear about this. We are
looking at a U.S. bank.
Why a U.S. bank, when asked by a regulator if there is
anything in their file which might be information relative to
the owners of a group, because they are looking to see--and you
know it--whether or not there are any links between Banco
Republica and Federal Bank--you then write a letter which is
false. Your bank wrote a letter which is false.
You can say here that it was accurate. It is not accurate.
There is no way that any fair reading of your letter, which
says ``This is to advise that our records contain no
information that would enable us to determine the identity of
the shareholders of the referenced bank''--there is no way that
that can be described as anything other than false. The word
``owner'' is right in your files, ``owner name.''
I am trying to determine--and I think maybe we will have to
just let this go for the moment--but as to why an American bank
would write a regulator a letter like that, and as to whether
or not it has any relationship to the fact that our bank, our
U.S. bank, was a partner with Grupo Moneta in that CEI holding
company.
Now, I don't understand why that would provide a
motivation, but I am trying to figure out how it is possible
that anybody could actually look at that document and say to
themselves that is not legal proof. They didn't ask for legal
proof. They said is there anything in your file, anything which
shows economic links, and they tell you they are interested. It
is a proceeding to determine if there is any sort of economic
link between financial entities. They are looking for that
link.
This superintendent, your regulator, requests ``all
information'' that you may have--all information; it doesn't
say legally provable beyond a reasonable doubt. It says all
information that you may have about that entity and about its
owners. And you consciously reach a conclusion--you look at
those documents, apparently, and decide that that didn't
constitute legal proof. Somebody actually looked at those
documents, then, and said that is not legal proof, that is not
what they are after.
I can't buy it. I don't buy it. I am sorry. I don't know
what the motive is. I don't know that yet. We may never know
it. Maybe down in Argentina it could be determined, but I just
can't buy it.
I don't know if you are aware of the fact that Mr. Moneta
to this day denies ownership of Federal Bank, to this day, at
least according to press reports.
Now, why would he be denying? Do you have any idea why
would Mr. Moneta be denying ownership of that bank? Can you
help us on that? And I will give you a chance to respond to my
comments, also, and then my turn is up here for the time being.
Mr. Fedrigotti. Senator, I do not know why Mr. Moneta would
be denying that ownership. I have no way. In connection with
your comments and, yes, the nature of the documents that you
are pointing out which are working papers which reflect the
work that was being done in analyzing the group as a whole as
part of the routine work that is done in the bank, it was the
interpretation of general counsel who prepared that letter that
that was the appropriate response and that it is legally
correct and it did not violate Argentine laws or regulations,
but----
Senator Levin. Excuse me for interrupting. The question
here is whether or not our U.S. bank responded the way we
expect our banks to respond, which is honestly, to a request of
a regulator. Now, this isn't a legal question. This is a
question of whether our bank has responded honestly to a
regulator, and there is no way that I think I can figure out
any interpretation which would say that that is an honest
response to a regulatory body.
So I interrupted you, but keep going.
Mr. Fedrigotti. Senator, we should have done more. We
should have provided that information in the first instance.
When I reviewed this matter when I became involved, when I
realized that there was an inconsistency with our policy of
full openness and cooperation with the regulatory body, I took
the decision to provide this information to the Central Bank.
Senator Levin. Let me ask you and Mr. Lopez a final
question on this element, if I can ask the indulgence of our
Chair.
Mr. Lopez, do you know, or, Mr. Fedrigotti, do you know
whether or not there was any contact between Mr. Moneta and
Citibank relative to the response, or Grupo Moneta or their
agents, with Citibank relative to how that letter would be
responded to? Can you tell us?
Mr. Lopez. Not to me.
Senator Levin. You don't know of any contact with Grupo
Moneta?
Mr. Lopez. No.
Senator Levin. Mr. Fedrigotti?
Mr. Fedrigotti. I was never contacted by anyone in this
respect.
Senator Levin. Thank you.
Senator Collins. Mr. Bermudez, you mentioned in your
testimony the importance of banks and law enforcement officials
working together to prevent money laundering. You also said
that you welcomed leads from not only the media but law
enforcement officials about any suspicious activity.
In view of that statement, I want to talk to you about
seizure warrants which Citibank received in May 1998 for $7.7
million in M.A. Bank's correspondent account and $3.9 million
in another M.A. account. These seizure warrants made very clear
references to the United States anti-money laundering laws, and
so it seems to me that was a clear lead from law enforcement
that there was suspicious activity involving M.A. Bank.
Could you explain to the Subcommittee why Citibank waited a
year-and-a-half after receiving these seizure warrants before
launching a full-scale investigation of Citibank's relationship
with M.A. Bank?
Mr. Bermudez. Senator Collins, one of the issues that we
have with this particular example is that there was a breakdown
in our communications internally. It is an embarrassment, it is
something that we have since corrected. But the reality is that
when the warrant came into the bank, it was reviewed, it was
analyzed. We took the action of submitting the funds to the
U.S. Customs, as I was directed.
But, unfortunately, there was a breakdown in the
communication between our New York unit that received the
warrant and our business unit in Argentina which should have
taken further action at the time. We have since, however,
corrected our internal processes so that this kind of situation
does not occur again.
We have created a centralized unit in New York that
receives all seizure warrants, all subpoenas that come in, so
that they can be logged into a centralized database. Those that
are of a suspicious nature are then sent to our Anti-Money
Laundering Unit in Tampa for further processing. It is that
Unit's responsibility then to submit those to the compliance
officers, anti-money laundering compliance officers that we
have in-country, and the relationship manager or business
manager in that country for further action.
We feel that given what happened to us and the lesson that
we have learned out of that particular situation, we have now
created a process that is extremely robust and should allow us
to not have a repeat of that embarrassing situation, but it was
an embarrassment.
Senator Collins. So you would certainly agree that those
seizure warrants should have triggered a full review of
Citibank's relationship with M.A. Bank, and you have now
changed your procedures so that kind of review would
automatically be triggered. Is that fair?
Mr. Bermudez. That is correct. That is exactly what has
happened at this point.
Senator Collins. Mr. Lopez, I am puzzled how M.A. Bank came
to be a correspondent customer of Citibank. Could you please
describe for us the ``know your customer'' efforts that you
made before you recommended opening M.A. Bank's correspondent
accounts?
Mr. Lopez. Well, this account was opened many years ago,
and at that time Mercado Abierto was, and thereafter was, a
very important security and brokerage house in Argentina. So
the people that took the decision to open that account--I never
managed that account personally--measured that account against
our target market and measured that relationship against our
target market to try to operate with the top people in the
country.
They also made a review of who are the owners. The owners
are people who have a reputation in Argentina. And they didn't
open the account with M.A. Bank immediately. This account was--
or this relationship started years ago and they opened the
correspondent banking account when the customer was dealing
with other products in the bank and knew very well the
customers. It was not the first day that the customer arrived
to the bank.
Senator Collins. Let me ask you a very specific question.
Mr. Lopez. Yes.
Senator Collins. Did you yourself, or did you direct
another Citibank employee to review M.A. Bank's written anti-
money laundering procedures before opening the account?
Mr. Lopez. The account was opened in the early 1990's, and
I think at that time we were not so strict in looking for that.
Thereafter we looked at those procedures and it seems to be in
line with----
Senator Collins. But at the time, did anyone from Citibank
review M.A. Bank's anti----
Mr. Lopez. I was not there. I was not the one opening it,
so I cannot--but during my management of the unit, yes, they
reviewed it.
Senator Collins. I am sorry. Would you repeat the last----
Mr. Lopez. During my management of the unit that started in
1987, I think that, yes, they reviewed all the policies. They
talked about the policy with the customer, and it seems to be
correct.
Senator Collins. That was many years after the account was
opened?
Mr. Lopez. Yes. I don't have information before my----
Senator Collins. Mr. Fedrigotti, could I have you turn your
attention to Exhibit 19? \1\ I want you to take a look at this.
It appears to be a withdrawal form that is used by M.A. Bank.
Have you found it in the exhibit book?
---------------------------------------------------------------------------
\1\ See Exhibit No. 19 that appears in the Appendix on page 731.
---------------------------------------------------------------------------
Mr. Fedrigotti. I am looking at it.
Senator Collins. I have to say this isn't like any
withdrawal form that I have ever seen--or actually I think it
is a deposit form because it says that ``We have received
today.'' There is no letterhead stating the name and the
address of the bank.
You have been in banking for a very long time, for some 24
years. Does this appear to be the kind of form that a bank
should be using for deposits?
Mr. Fedrigotti. Is this a deposit form? [Laughter.]
Senator Collins. It is. I think your question answers my
question. Does it trouble you that one of Citibank's
correspondent banks was using a form that had this little
information on it?
Mr. Fedrigotti. Senator, if this is all there is--I don't
know what other information they would gather. On the basis of
simply this form, I have to agree with your inference.
Senator Collins. When you stepped in as President of
Citibank Argentina, did you conduct a review or see that a
review was conducted of existing correspondent accounts to make
sure that you were dealing with banks and clients that Citibank
would want to be dealing with?
Mr. Fedrigotti. Yes, Senator. This area of activity has
always been the focus of attention both from a credit
standpoint as well as from the fact that there might be risks
related to money laundering that we would not be willing to
accept or to take.
So the unit constantly focused on trimming down, narrowing
the target market, and working only with those people who the
unit deemed to be of impeccable track record and a good
reputation. That is the essence of understanding who you are
dealing with and feeling comfortable with the fact that they
have policies and procedures that enable them to manage their
own bank the way we manage ours.
Senator Collins. Mr. Bermudez, Citibank has maintained that
it now has corrected a lot of the problems that clearly have
been embarrassing for the bank and have been difficult for the
bank to deal with. I want to show you an E-mail that is from
Citibank Argentina's relationship manager for M.A. Bank, and it
is Exhibit 20 \1\ and it is the latter part of that exhibit.
---------------------------------------------------------------------------
\1\ See Exhibit No. 20 that appears in the Appendix on page 732.
---------------------------------------------------------------------------
What troubles me about this E-mail is that it was sent just
a little over a year ago. In this E-mail, Citibank Argentina's
relationship manager for M.A. Bank inquired about how
Citibank's anti-money laundering procedures were being
implemented, and in part she says, ``What procedures does
Citibank New York have for control of AML? Are these controls
being implemented? Is the AML Unit in Tampa in charge of doing
it, or each division in New York?''
I am troubled by this because if Citibank is doing a good
job on training its employees to be sensitive to money
laundering, shouldn't the relationship manager for M.A. Bank
have known the answers to these questions?
Mr. Bermudez. I would agree with you, Senator Collins, that
the relationship manager at the time should been aware of what
that Anti-Money Laundering Unit in Tampa does and performs. It
is a unit that was in place at the time and it is a unit that
is staffed with over 50 people, 14 of which are just assigned
to the volume through our funds transfer networks. And they
have the analysts necessary to conduct the type of reviews of
the flows that should highlight any kind of suspicious or
incorrect type of volumes that go through it.
There was a confusion here. The relationship manager should
have understood that that took place in Tampa because at that
time we already did have the unit operating. I don't know the
exact situation; I don't know the individual who sent this. We
do spend an incredible amount of time and effort in educating
all of our business managers, all of our relationship managers,
in the anti-money laundering process. This is an ongoing review
that we have, ongoing seminars that we have at local, regional,
and on a global basis.
And why this particular individual might have been
confused, I don't know the reason, but I can assure you that
the education that we bring to our relationship managers is
very real and it is constant. It is not just a one time
introduction when they enter the bank; it is actually refreshed
on an annual basis in every country.
Senator Collins. I have no doubt that Citibank has made a
genuine effort to beef up its compliance units, as well as its
training and education. But that E-mail from a key person
suggests to me that there is still considerable work to be done
because it is so recent; it is the end of 1999.
Mr. Bermudez. If I may--and this is a conjecture in some
ways, but what may have happened here is a confusion that we do
have and did have at the time a servicing unit for
correspondent banking in New York. And there may have been
confusion whether that service unit in New York was also
conducting AML practices as part of the services that they did.
They do not. They refer everything to Tampa, and I am just
assuming, reading this, that that may have been the confusion
that this relationship manager may have had.
Senator Collins. Let me ask you one final question, and I
want to refer to Exhibit 23.\1\ This is an exhibit that Senator
Levin referred to with our previous panel and it is a pattern
of wire transfers. Each of the experts on our previous panel
said that while you couldn't conclude necessarily that these
wire transfers were indicative of money laundering that they
certainly were suspicious, that the pattern is such that it
would warrant a thorough review.
---------------------------------------------------------------------------
\1\ See Exhibit No. 23 that appears in the Appendix on page 742.
---------------------------------------------------------------------------
Under the current procedures that Citibank has in place,
would this pattern of wire transfers trigger an in-depth
review?
Mr. Bermudez. Looking at this, I would say that--and given
the type of bank and the size of bank that Banco Republica was,
this would not necessarily trigger a review for suspicious
action. And the reason for that is that, again, many
institutions, many banks, I believe, in Argentina and other
locations use offshores as a means of managing their liquidity,
and this could be very valid liquidity management between a
treasurer of a bank onshore with its offshore vehicle,
transferring liquidity back and forth. And that doesn't
necessarily trigger a suspicious action, but the one thing
that----
Senator Collins. But you don't know that.
Mr. Bermudez. No, I know that, but the one thing----
Senator Collins. So why wouldn't it trigger you to ask
questions? There may be a legitimate explanation, but there is
also a very real possibility that this suggests money
laundering. So I am troubled by your answer.
Mr. Bermudez. Absolutely, and the one thing that I was
going to mention that causes me in reviewing this to maybe
alert us that we should look into it is the fact that they are
going through an intermediary here.
Senator Collins. Exactly. They are not directly
transferring the funds.
Mr. Bermudez. Exactly, which is why it may very well
trigger that, but I was trying to highlight to you that the
flows are not the ones that may necessarily trigger the
analysis of this, but it is the fact that it does appear to go
through an intermediary which would be the one that would
highlight some action on this.
I haven't been clear?
Senator Collins. Well, the problem is that your first
answer was, no, that it wouldn't trigger a review, and then
after we----
Mr. Bermudez. Based on simply the flows.
Senator Collins. But I have shown you very specific wire
transfers that are large amounts of money over a 6-week period
where in each case the bank is going through an intermediary
rather than transferring the money directly, and it seems to me
that should be a red flag. There may be a reasonable,
legitimate explanation, but if this isn't an automatic red
flag, I don't know what is.
Mr. Bermudez. I am sorry. In my response, I was referring
initially to the flows and I then added on that the one thing
that would raise a flag here is the fact that it is going
through an intermediary. If these are credits that are going
through this particular intermediary, then that should be a
reason for review.
Senator Collins. Senator Levin.
Senator Levin. Just on that last point, you said three
different things--``not necessarily,'' ``maybe''' and ``would''
because of the intermediary. And we are talking here about
triggering a review or not. I just want to ask you a simple
question, which I hope is a simple question.
Shouldn't it trigger a review, given the intermediary?
Mr. Bermudez. Given the intermediary, yes.
Senator Levin. Does your mechanism at your bank trigger a
review?
Mr. Bermudez. It should.
Senator Levin. Does it?
Mr. Bermudez. I would hope so. I mean, you are asking me a
question that I would like----
Senator Levin. You are familiar with your bank mechanisms,
aren't you?
Mr. Bermudez. Absolutely.
Senator Levin. Does it or doesn't it trigger a review? If
you don't know, you can just say you don't know.
Mr. Bermudez. I have to assume that it does, but it would
be up to the analysts looking at this particular situation.
Senator Levin. They wouldn't even see it, would they,
unless it was triggered automatically?
Mr. Bermudez. Oh, no. They would see this.
Senator Levin. So it would be pulled out?
Mr. Bermudez. Yes, it would.
Senator Levin. All right, so at least you know that this
flow would trigger an analysis by somebody under your
methodology, is that correct?
Mr. Bermudez. It should, yes.
Senator Levin. Did it?
Mr. Bermudez. Not at this time.
Senator Levin. All right.
Mr. Bermudez. This is back in, as I see here, 1996.
Senator Levin. Correct.
Back to the Federal Bank. Mr. Lopez, I want to ask you one
question about that. You told our staff that when you heard
about the request from the Central Bank for information on the
ownership of the Federal Bank, you thought that the Central
Bank of Argentina was ``playing games.'' What did you mean by
that? Why would the Central Bank, the regulatory body down
there, be playing games?
Mr. Lopez. Senator Levin, in my opening statement I wanted
to clarify that that was a bad expression that I----
Senator Levin. That was a what?
Mr. Lopez. It was a bad expression. It was not an
expression that I should have used in that interview. What I
meant there was that in my understanding there were a lot of--
Banco Republica had an action plan to change Federal Bank and
to open a new vehicle, called Republica Bank in the Caymans,
and also that the people that were working with Banco Republica
were people that have experience in the market. So my
understanding was that the Central Bank had the knowledge of
the relationship, and what they were looking for was legal
proof.
Senator Levin. Let me ask you a question, Mr. Fedrigotti,
that follows on the request that I made of you about whether
there was any conversation between Citibank and Grupo Moneta
relative to the response to the request from the Central Bank
for information in your files, and you said that there was no
conversation.
Was there any conversation between you or your bank with
anyone at Citibank New York about that response?
Mr. Fedrigotti. Senator, not that I can recall, but could
you be precise as to the point in time you are asking, between
the time----
Senator Levin. Before you responded.
Mr. Fedrigotti. No conversations with New York on this
subject, not personally.
Senator Levin. Can we agree, Mr. Lopez, that, in fact, the
Federal Bank and Banco Republica had no anti-money laundering
program that you said in your records that they did have?
Mr. Lopez. We checked with them and they said they were
complying with the rules of Central Bank in that respect. What
happened there is that then I realized when I saw the
confidential report from the Central Bank during the interview
with your staff that that was not true.
Senator Levin. You agree that they lied to you?
Mr. Lopez. Yes.
Senator Levin. If we could put Exhibit 37 \1\ up there,
this is a memo, Mr. Lopez, where you describe the purpose of
Federal Bank and you say here that the purpose is to channel
the private banking customers of Banco Republica, to which they
provide back-to-backs and the vehicle outside Argentina, where
they can channel their savings which are then re-placed in
Banco Republica by the Federal Bank, which then constitutes one
of the bank's most stable sources of funding.
---------------------------------------------------------------------------
\1\ See Exhibit No. 37 that appears in the Appendix on page 805.
---------------------------------------------------------------------------
Now, wasn't Banco Republica at that time under a
restriction by your Central Bank as to both what it could own
and what it could lend to certain groups?
Mr. Lopez. I was not aware of that restriction.
Senator Levin. All right. The purpose, then, according to
your memo here is to say that liquid assets that Banco
Republica wanted went from Banco Republica to Federal Bank
offshore and then came right back to Banco Republica. And I
don't understand what the legitimate business rationale is for
that movement of money.
Can you explain that to us?
Mr. Lopez. The customers of Federal Bank deposit their
money in Federal Bank, and the risk of that customer is in
Federal Bank's balance sheet and there is no Argentine risk
because Federal Bank is outside the borders of Argentina. Then
what Federal Bank does with the money, they deposit in Banco
Republica, is nothing that the customer decides to do in that.
It is Federal Bank that is deciding, and Federal Bank must
respond with their own net worth to the customer in that case.
Senator Levin. I am trying to figure out what legitimate
business purpose there would be for Banco Republica to take its
deposits, send them to Federal Bank and then have them
immediately come right back to Banco Republica.
You say in your analysis of the bank that that is one of
its purposes. ``The existence of this vehicle is justified in
the group's strategy because of the purpose it serves.'' Can
you give me a legitimate business purpose for that strategy?
Mr. Lopez. Yes. The explanation is that some customers of
Banco Republica want to have their deposits outside Argentina.
Senator Levin. But it comes right back to Banco Republica.
Mr. Lopez. OK, but Federal Bank deposits the money, not the
customers, and even if----
Senator Levin. It is their money.
Mr. Lopez. OK, but----
Senator Levin. You don't say it is Federal Bank. The
depositor in Banco Republica--that money immediately goes to
Federal Bank and immediately comes right back to Banco
Republica. What is the legitimate purpose in that?
Mr. Lopez. I am talking about Federal Bank depositing their
own money.
Senator Levin. No. I am talking about your words, ``to
channel the private banking customers of Banco Republica, to
which they provide back-to-backs and a vehicle outside
Argentina where they can channel their savings''--that is the
depositors--``which are then re-placed in Banco Republica.'' So
the depositors' money ends up in Banco Republica. It goes
outside and then comes back in almost instantaneously.
Can you give us the legitimate business purpose for that?
Mr. Lopez. I am saying that Federal Bank placed money in
Banco Republica. Then even if some of the depositors have a
diversified portfolio of investment in Federal Bank and want to
place some of this in Banco Republica, I see nothing strange in
that.
Senator Levin. I do, but let me go to Mr. Bermudez quickly
on a letter that we received from your counsel, Jane Sherburne,
who describes the benefits and operations of offshore shell
banks, and this is Exhibit 21.\1\ ``Offshore entities that are
primarily booking entities requiring minimal personnel or
physical operations often are managed from a location that is
closer to the jurisdiction of the parent institution than the
offshore jurisdiction. Your staff have indicated skepticism
about the legitimacy of such `back offices' and inquired about
the kinds of activity in which one might expect them to engage.
Indeed, there seems to be some sense that a test of legitimacy
might be whether a back office has the capacity to print and
mail statements. The need to print and mail statements will
depend on the customer base of the off-shore and the nature of
the business, and may defeat the purposes of offshore banking--
confidentiality and tax planning.''
---------------------------------------------------------------------------
\1\ See page 3 of Exhibit No. 21 that appears in the Appendix on
page 734.
---------------------------------------------------------------------------
And this is the line I am intrigued by: ``Mailing
statements for activity in the private bank account of a
customer, for example, risks breaches in the confidentiality as
well as triggering a taxable event.'' Now, I am really
surprised by that sentence, that mailing a statement would
trigger a taxable event.
Mr. Bermudez, this is to you. How does the presence or
absence of a bank statement trigger a taxable event? Don't you
owe the tax even though you conceal it?
Mr. Bermudez. I think that would depend on where the source
of the revenue, the income was coming from for that particular
investment and the tax laws of a given country.
Senator Levin. So that you might not owe the tax, and
having a statement about an account might subject you to a tax
you don't owe?
Mr. Bermudez. The statement itself should not trigger a
taxable event.
Senator Levin. That is just what I said. It is the opposite
of what your counsel says. Your counsel writes this
Subcommittee that the statement may trigger a taxable event.
Mr. Fedrigotti. Senator, may I give it my own try, attempt,
at interpreting this. I believe that if someone were to provide
a service such as mailing statements, that would be a business
activity that would generate--should generate revenues and thus
a taxable event. That is my interpretation of this line.
Senator Levin. We are going to have to ask the counsel to
explain that statement because other counsel that we have
talked to says there is absolutely no basis for that statement
whatsoever. So we will give her an opportunity--she is not
here, I don't believe--to respond to that.
On the M.A. Bank issue--and this goes to the seizure of the
account at Citibank, and the Chairman has referred to this--in
your testimony, Mr. Lopez, you stated to us that the Minority
staff report asserts that Citibank permitted M.A. Bank to
engage in highly suspicious activity for more than a year-and-
a-half after assets in its account were seized for illegal
activity, and that is simply not true. This morning, you have
modified that, is that correct?
Mr. Lopez. Yes.
Senator Levin. You agree that that should have triggered--
--
Mr. Lopez. It should trigger, yes.
Senator Levin. Now, these are some of the other things that
happened. In addition to the seizure of that asset that should
have triggered an investigation by Citibank, these are some of
the other events that occurred that didn't trigger anything.
Exhibit 22a.\1\ This is a memo from an investigator at
Citibank's Anti-Money Laundering Unit in Tampa. ``According to
an article taken from the Miami Herald dated March 1, 2000,
Alejandro Ducler, a former vice minister of finance for
Argentina, allegedly transferred $1.8 million in drug cartel
proceeds. Ducler is one of the owners of the Argentine
financial holding group known as Mercado Abierto, which owns
M.A. Casa de Cambio. . . . All four held accounts with
Citibank. The FTN Team of the AML Unit has reviewed the
transfers. . . . After reviewing the funds transfer activity .
. . from April 1997 through March 2000, a total of $84 million
were transferred to the entities mentioned below. The
consecutive whole dollar amounts transferred and the nature of
the business contributed to the rise in suspicion and ongoing
monitoring.''
---------------------------------------------------------------------------
\1\ See page 1 of Exhibit No. 22 that appears in the Appendix on
page 740.
---------------------------------------------------------------------------
So you got that memo. They had identified, the anti-money
laundering unit, $84 million in suspicious transactions that
moved through the accounts of the four M.A.-related entities.
When we looked at the records associated with that
investigation, over $22 million of those suspicious funds
involved transactions that went through the M.A. Bank, and they
occurred in 1999, after the seizure warrant had been issued.
We also have learned that Citibank did file a suspicious
activity report on the entire $84 million worth of
transactions. Is that correct? Anyone can answer.
Mr. Bermudez. That is correct. But, Senator, if I may just
add something, the Tampa investigator has told the staff that
this figure was not correct.
Senator Levin. The $22 million?
Mr. Bermudez. The $84 million.
Senator Levin. All right, but it is correct that $22
million came after the seizure of those assets. Is that
correct?
Mr. Bermudez. Could you----
Senator Levin. That the $22 million came after the seizure
of the assets.
Mr. Bermudez. I am not aware. I am sorry.
Senator Levin. All right.
Mr. Bermudez. That information I don't have.
Senator Levin. By the way, would you ask your Tampa
investigator to, for the record, let this Subcommittee know why
it is incorrect, if it is, because he or she never told us that
it was incorrect?
Mr. Bermudez. Yes.
Senator Levin. A lot of signals, and I want to go into
those signals, after the seizure, between May 1998 and March
1999, which should have revealed the fact that the seizure was
related to money laundering and drug trafficking. As you have
acknowledged to our Chairman, that should have been known just
by the seizure warrent itself. It cited a number of statutes
that the assets were being seized under, and two of those
statutes were money laundering statutes.
Here are some additional red flags: The press gave
widespread attention to the indictments and warrants that were
served on numerous U.S. and foreign banks as a result of
Operation Casablanca, which was the drug laundering undercover
effort. Citibank was identified as a recipient of some
warrants, so Citibank didn't follow up on that.
In June 1998, M.A. Bank wrote to Citibank and asked that
Citibank ``furnish us a report on the origin, cause, and
authority acting on the attachment order received.'' So you got
from your customer a request, what is the authority for that
attachment order, and asked you to provide them with a copy of
documentary evidence attesting to the existence of such
judicial order and of the transfers or other actions taken by
you as a consequence.
You can find no communication that even responded to M.A.
Bank's inquiry. The preparation of a response to that bank
would likely have informed Citibank that the seizure warrant
was related to money laundering. Nothing there, silence, blank.
The Customs Service subpoenaed records of another M.A.
account for the same drug money laundering matter, and Citibank
prepared a chronology of the incident that shows that Citibank
officials in Argentina met with or communicated with M.A. Bank
officials at least six times about this matter between May 1998
and March 1999. M.A. Bank told you they were hiring a lawyer in
the United States. They told you Customs would likely subpoena
the records of the M.A. Bank account. They told you they were
going to meet with the Customs Service in Argentina.
You instructed, according to the conversation with our
staff, that your relationship manager should find out from M.A.
Bank what the situation was about, but M.A. Bank never told her
what was going on. Another red flag. M.A. Bank did not tell
your own relationship manager. So then it became clear that the
Customs Service was investigating the matter, and still no
request or demand to your client to tell you what this was all
about.
So we have all of these red flags, in addition to the
seizure of the funds, and it seems to me that this is a lot
more negligent, at best, than just simply failing to respond to
a seizure order. I mean, you have public notices, you have
meetings with your client demanding explanations, you have
conversations with Customs officials. There are all kinds of
bells going off in the public press and with your staff, and
yet nothing in terms of your anti-money laundering efforts with
this client.
So I would hope as you go through your anti-money
laundering efforts and procedures that you would not only look
at the failure to respond, to even know what is in a seizure
order that is served upon you, but that you instruct or require
your staff folks who have all this information to transmit it
to your anti-money laundering efforts. I mean, this is one
failure after another. It is just not a failure; it is one
failure after another relative to those funds of M.A. Bank.
So I will leave it at that. I know we have reached a time
when the hearing is supposed to end. I do have a short closing
statement that I would like to make, if that is all right,
Madam Chairman.
Senator Collins. Why don't you proceed with your closing
statement, Senator Levin? We do need to adjourn very shortly,
however.
Senator Levin. These 2 days of hearings have confirmed what
the Subcommittee's investigation revealed, that U.S.
correspondent banking provides a significant gateway for rogue
foreign banks and their criminal clients to carry on money
laundering and other criminal activity in the United States and
to benefit from the protections afforded by the safety and
soundness of the U.S. banking industry.
This investigation's findings have been confirmed in these
hearings that shell banks, offshore banks, and banks in
jurisdictions with weak anti-money laundering controls carry
high money laundering risks, and they use their correspondent
banking accounts to conduct their banking operations.
Next, U.S. banks have routinely established correspondent
relationships with these high-risk foreign banks because many
U.S. banks don't have adequate anti-money laundering safeguards
in place to screen and monitor such banks. This problem is
longstanding, widespread and ongoing.
Next, U.S. banks are often unaware of legal actions related
to money laundering, fraud, and drug trafficking that involve
their current or prospective respondent banks.
Next, U.S. banks have particularly inadequate anti-money
laundering safeguards when a correspondent relationship does
not involve credit-related services.
Next, high-risk foreign banks that may be denied their own
correspondent accounts at U.S. banks can obtain the same access
to the U.S. financial system by opening correspondent accounts
at foreign banks that already have a U.S. bank account. U.S.
banks have largely ignored or failed to address the money
laundering risks associated with nested correspondent banking.
In the last 2 years some banks in the U.S. have begun to
show concern about the vulnerability of their correspondent
banking to money laundering and are taking steps to reduce the
money laundering risks. But the steps are slow, incomplete, and
they are not industry-wide.
If U.S. correspondent banks were to close their doors to
rogue foreign banks and to adequately screen and monitor high-
risk foreign banks, the United States would reap significant
benefits. By eliminating a major money laundering mechanism
which frustrates ongoing efforts to look into criminal
activity, we would reduce illicit income that fuels offshore
banking and we would deny criminals the ability to deposit
illicit proceeds in U.S. banks with impunity and profit from
the safety, soundness and investments that are made possible
and available to them in the U.S. banking and financial system.
Next Tuesday, we are going to discuss with the Department
of Justice and the Department of the Treasury ways to close the
door to these money laundering opportunities.
I again want to thank our Chairman for having these
hearings. I think they have been extremely helpful. I want to
thank our witnesses today, and look forward to their supplying
us with additional information, as they have committed to do.
Senator Collins. Thank you, Senator Levin.
Our current witnesses are now excused. I want to thank all
of our witnesses for their participation today.
The Subcommittee stands in recess until Tuesday, March 6,
at 9:30 a.m., when we will reconvene in room 342 of the Dirksen
Senate Office Building.
[Whereupon, at 12:38 p.m., the Subcommittee was adjourned.]
ROLE OF U.S CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING
----------
TUESDAY, MARCH 6, 2001
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
Room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Subcommittee, presiding.
Present: Senators Collins and Levin.
Staff Present: Christopher A. Ford, Chief Counsel and Staff
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy
Chief Counsel; Eileen Fisher, Investigator; Claire Barnard,
Detailee/HHS; Elise Bean, Democratic Deputy Chief Counsel; Bob
Roach, Democratic Counsel; Laura Stuber, Democratic Counsel;
Jamie Burnett (Senator Gregg); and Bob Westbrooks (Senator
Akaka).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. The Subcommittee will come to order.
This morning, the Subcommittee concludes its examination of
the vulnerabilities of correspondent banking to international
money laundering activities. As we have seen, correspondent
accounts allow banks to have a presence in jurisdictions in
which they do not have a branch or other physical presence, as
well as to offer services that they themselves may have too few
resources to provide. For these reasons, foreign banks that
have correspondent accounts with U.S. banks possess a powerful
means of attracting customers.
Last week, the Subcommittee heard troubling testimony from
a convicted criminal who has seen the role of correspondent
banking in money laundering ``from the inside.'' He testified
about the crucial importance of correspondent banking
relationships to shady offshore money laundering institutions,
such as the one he ran for a number of years in the Cayman
Islands.
We also heard testimony from three U.S. banks whose
correspondent accounts appear to have been used at various
points by unscrupulous individuals to launder the proceeds of
questionable, and sometimes outright criminal, activity. Their
testimony showed that lapses in due diligence on the part of
some U.S. banks may have unwittingly helped criminals launder
their ill-gotten gains by passing them largely undetected
through correspondent accounts.
To make matters worse, jurisdictions in which several of
the foreign banks were located not only made due diligence
efforts more difficult for the U.S. banks, but also actually
hampered efforts by law enforcement and regulators to track
down the crooks and to find and recover their illicit funds.
Additionally, the Subcommittee received testimony from
three witnesses who have extensive knowledge of the complexity
of money laundering. They helped outline the scope of the
international money laundering problem, as well as the types of
steps that correspondent banks might be able to take in order
to better vet prospective clients and to monitor and detect
suspicious activity by respondent banks after relationships
have begun.
One expert also described the difficulties of tracking
down--and recovering for victims--the proceeds of fraudulent
schemes that are laundered through correspondent accounts in
U.S. banks. These experts' testimony also highlighted how
important it is for the United States to help lead
international efforts to detect and facilitate the recovery of
stolen and laundered funds.
Today, in our final day of hearings on correspondent
banking, the Subcommittee will hear testimony from Arthur
Jacques, who will describe the operations of British Trade and
Commerce Bank, an offshore bank licensed in Dominica through
which the Minority staff's investigation indicated that
millions of dollars in fraud proceeds have been funneled. Given
BTCB's lack of cooperation with authorities in making
restitution to the victims of these frauds, I was interested to
read in the Miami Herald not long ago that the Government of
Dominica has finally revoked BTCB's license.
To finish up our hearings on money laundering and
correspondent banking, we will also hear testimony from
representatives of the U.S. Department of Justice and the
Department of the Treasury. They will discuss the Bush
Administration's commitment to fighting international money
laundering and outline the efforts that have been made by their
respective agencies to combat foreign banks' use of U.S.
correspondent accounts to aid and abet money launderers.
I look forward to hearing the testimony of all of our
witnesses this morning, and at this time I would like to
recognize the Subcommittee's distinguished Ranking Minority
Member, Senator Levin, who led and initiated this
investigation, for his opening statement.
Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you very much, Madam Chairman. As you
have pointed out, through the Minority staff's year-long
investigation, and its 450-page report, that report's very
close look at 10 high-risk foreign banks, its survey of 20
major U.S. correspondent banks, and through this Subcommittee's
hearings last week with experts and correspondent banking
participants, we are getting a good understanding of the role
of U.S. correspondent banking in money laundering.
Drug traffickers, defrauders, bribe-takers, and other
perpetrators of crimes can do indirectly through a foreign
bank's correspondent account with a U.S. bank what they can't
readily do directly, which is to have access to a U.S. bank
account. The stability of the U.S. dollar, the services our
banks perform, and the safety and soundness of our banking
system make access to a U.S. bank account an extremely
attractive objective for money launderers. It is up to us--the
Congress, the regulators, the banks--to try to stop money
launderers from reaping the benefits of the prestigious banking
system and stable economy that we have worked so hard to
achieve.
It boils down to the quality of the regulatory scheme under
which a foreign bank operates. To achieve entree into the U.S.
banking system, a foreign bank should be subject to the same
quality of regulation and periodic examination as U.S. banks.
Whether banks are subject to such regulation seems to be a
defining factor in whether their due diligence and anti-money
laundering controls are adequate.
I know that you, Madam Chairman, have been a leader in food
safety issues. The situation with correspondent banking has
some similarities to the problem this country faces in
importing food. The United States has developed a highly
effective food safety system, and as our Chairman has
effectively argued, we don't want contaminated food from abroad
slipping into our food supply. So, for example, when it comes
to meat, we accept only that meat from countries which have
inspection systems that meet our standards, and that is how we
protect ourselves. Why not apply a similar standard to foreign
banks? We don't want contaminated food and we shouldn't accept
contaminated banks.
That is why all the experts that we have heard and several
officers of our Nation's largest banks have said that shell
banks should be banned from U.S. correspondent accounts,
period. Shell banks are banks with no physical presence,
oftentimes no staff and no real regulation. If such a
prohibition were in place, all 400 of Nauru's shell banks would
lose their access to U.S. dollar accounts. So would the more
than 50 Vanuatu shell banks, so would the many shell banks
licensed in the Caribbean and operating in Latin America, so
would the Montenegro shell banks using the Bank of Montenegro's
correspondent accounts, so would all the shell banks being sold
on the Internet. That alone would be a significant
accomplishment.
Offshore banks and banks in jurisdictions that don't
cooperate with anti-money laundering efforts are two more
categories of banks that raise contamination concerns. The
hearings showed that these types of high-risk foreign banks
were able to open correspondent accounts at major U.S. banks,
including Bank of America, Chase Manhattan Bank, and Citibank.
Each of these U.S. banks opened and kept open accounts for
these foreign banks, despite high money laundering risks and
even after being confronted with disturbing evidence of
misconduct or suspicious transactions. They also acknowledged
that they should have done a better job in screening and
monitoring the correspondent accounts that they opened for
high-risk foreign banks.
When we looked at Citibank's relationship with Federal Bank
and M.A. Bank last week, we heard Citibank say that they knew
the parent entities of those banks extremely well. In fact,
with respect to Federal Bank, Citibank was a major business
partner with its parent in a holding company called CEI. Yet,
in both of those cases, the offshore banks were not subject to
examination and each bank had serious problems with anti-money
laundering controls.
Citibank said it was surprised when it heard that one of
the banks, Federal Bank, had no anti-money laundering controls.
The relationship manager for Citibank said that Federal Bank
lied to him. Citibank had claimed, in their words, ``profound
knowledge'' of how the offshore bank operated. But the absence
of a strong regulatory hand with regular or periodic
examination of Federal Bank puts everything in doubt.
Today, I will explore with witnesses whether we should ban
or much more strictly control correspondent accounts of
offshore banks not affiliated with U.S. banks and of offshore
banks not subject to examination in the jurisdiction in which
they are licensed.
Another matter that merits legislative attention is the
ability of injured parties and governments to seize illicit
funds in correspondent accounts. Unlike a regular bank account
where law enforcement authorities and plaintiffs in civil suits
can freeze or seize the funds at issue, in a correspondent
account, because the owner of the account is the respondent
bank and not the clients of the respondent bank, persons trying
to seize or freeze funds unlawfully obtained by a client of the
respondent bank are required to chase the bank abroad. That is
not only a tough job, that can be an impossible job.
Showing that the illegal funds are in a correspondent bank
account is not enough. The consequence of this situation is
that the depositors in foreign banks with accounts in U.S.
banks have greater protection than U.S. depositors in U.S.
banks. And where U.S. citizens are victims of illegal activity,
they may be denied recovery even though the money sits in a
U.S. bank. That anomaly should be fixed.
These issues are not an academic concern that only banking
circles need to examine. Money laundering finances crime. It
provides the funds needed to conduct illegal drug operations,
financial scams, and Internet gambling. It provides the means
for corrupt public officials to enjoy their ill-gotten gains.
It safeguards the profits that reward criminals and organized
crime.
Stopping money laundering takes the profit out of crime. It
helps in the fights against criminal enterprise, corrupt
politicians, and the local con man who steals a person's
savings. Shell banks, offshore banks, and banks in non-
cooperative jurisdictions are major money laundering
mechanisms, and there is much that can and should be done to
dismantle them.
Today, we will hear from a representative of one group that
has not yet spoken at these hearings and that is the victims of
the money laundering that goes on through correspondent
accounts. Sometimes the victim is a specific individual taken
in by a financial fraud, someone whose savings have disappeared
into an offshore bank never to be recovered. Sometimes the
victim is a class of individuals subject to the same
wrongdoing, such as the 700,000 credit card holders who
collectively got socked with $40 million in illegal credit card
charges by a criminal who sent the stolen funds to offshore
banks with U.S. correspondent accounts.
Today, we will also discuss with the Treasury Department
and the Department of Justice their experience with the various
problems involved in correspondent banking, their reaction to
our proposed reforms, and any proposed fixes that they may have
in mind. The prior administration placed a high priority on
stopping money laundering and it made some progress. Hopefully,
the current administration will maintain that priority and
continue the battle.
I look forward to the testimony and again want to thank our
Chairman for her efforts in this matter, for calling today's
hearings and last week's hearings, and for supporting this
investigation.
Thank you.
Senator Collins. Thank you, Senator Levin.
I am pleased to welcome our first witness this morning. He
is Arthur Jacques, of Jacques Little in Toronto, Canada. Mr.
Jacques went to great difficulty to get here to these hearings.
His flights were canceled yesterday and he has interrupted a
very busy schedule to be here, so we very much appreciate his
efforts. He will discuss the case of British Trade and Commerce
Bank, yet another case study of how correspondent accounts in
legitimate banks can be used by questionable financial
institutions and their customers to launder the proceeds of
fraudulent activities.
Pursuant to Rule VI, all witnesses are required to be
sworn, so I would ask, Mr. Jacques, that you stand so I can
swear you in.
Do you swear that the testimony that 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. Jacques. I so swear.
Senator Collins. Thank you.
Mr. Jacques, we are going to be using a timing system
today. You will see in front of you a device with three lights.
You will have 10 minutes to give your oral presentation. Your
complete written statement will be included in its entirety in
the record. When you see the yellow light come on, you have
about a minute to wrap up your comments.
So if you would please proceed.
TESTIMONY OF ARTHUR O. JACQUES, ESQUIRE,\1\ JACQUES LITTLE
BARRISTERS AND SOLICITORS, TORONTO, ONTARIO, CANADA
Mr. Jacques. Thank you, Madam Chairman. I will try to be as
brief and non-technical as possible to assist you in your
deliberations.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Jacques with attachments appears
in the Appendix on page 241.
---------------------------------------------------------------------------
By way of background, I would like to emphasize that the
client that I represent or the group of clients that I
represent was an unwilling victim in terms of issues that they
had no control over, and at all material times until the actual
event occurred they were completely unaware of British Trade
and Commerce Bank being the asset protection bank domiciled in
Dominica, as well as any role that First Union National Bank,
its correspondent bank in Florida, portrayed.
By way of background--and I will be very, very brief in
terms of the structure--my clients in Canada attempted to
borrow significant funds based in U.S. dollar denominations,
and they tried to borrow $15 to $25 million to exploit a
certain kind of technology. It was a very high-risk technology
and Canadian banks had no enthusiasm for this form of venture
capital.
Through an intermediary in Toronto, Canada, our client was
introduced to a party by the name of Chatterpaul, who is
referred to in the Minority report, who indicated that he could
provide the funding. Letters of intent were executed. A
contract was executed in the fall of 1999 to borrow US$15
million, and my client as a condition precedent of that
borrowing agreement put forward a deposit of $3 million.
The $3 million was then placed in a segregated trust
account, in a lawyer's trust account in a Canadian bank. A
condition of the loan--i.e., the draw-down of the $15 million--
was the deposit would remain--the $3 million would remain in
the attorney's segregated account until the full loan was
advanced. The loan was never advanced. The request was made for
the return of the money. It is at this point that I am
introduced to the problem.
A demand is made on the attorney for the return of the $3
million and it is not forthcoming. Legal proceedings are
implemented in Ontario. The law firm is placed into a very
restricted kind of receivership. Other parties are added, and
then we find out the existence of British Trade and Commerce
Bank being this asset protection bank in Dominica.
And we find out that the flow of funds went from Toronto,
$3 million, into a correspondent bank in South Florida, being
First Union National Bank. We find that because of American
bank secrecy laws and Dominican bank secrecy laws that when we
make demands on the respective entities, we are told ``we can't
speak to you.''
We are compelled at this point--we have implemented
receivership and we have all kinds of technical restraining
orders in Canada, and we are then compelled to retain attorneys
in Florida. We retain a reputable law firm, Steel, Hector and
Davis, and letters of request are issued by the Ontario court
to the Floridian court. And we then find out that this $3
million goes from Toronto to Florida, and then on the advice of
British Trade and Commerce Bank, who is the named account in
Florida, the funds are then transferred all over the world.
I provided a few days ago a chart to your secretariat and I
don't know if you have that chart available to you. The long
and the short of that chart is simply that the funds flow from
Florida into Idaho, into China, into India, possibly into the
United Kingdom, into Oklahoma, back to Dominica.
We attempt upon issuing subpoenas in Florida through our
attorneys, and there are stumbling blocks on a procedural and a
substantive basis in finding the answers, but as we sit here
today my client is out approximately $6.5 million.
Consequential damages are growing on a daily basis and we
estimate at a point in time that our damages will be
approximately $10 million-plus.
Senator Collins. Mr. Jacques, excuse me for interrupting,
but could you take a little extra time and take us through the
chart that you have referred to?
Mr. Jacques. Do you want me to address the chart from here?
Senator Collins. Yes.
Senator Levin. If I could just interrupt for a second, this
is our staff's redo of your chart to, we thought, make it a
little simpler, but I am not sure we have. We took your 5 pages
and tried to put it on one page, is what we did.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 47 that appears in the Appendix on page 824.
---------------------------------------------------------------------------
Mr. Jacques. The flow of funds is really from the law firm
to the Bank of Montreal in Toronto, which is simply the
domiciled account for the law firm, a segregated trust account.
A $3 million wire transfer then goes to First Union National
Bank and stops, and then within a period of ``x'' number of
days goes to Idaho, back into Ontario; New Delhi, India;
Florida; Abu Dhabi; Dominica; Hong Kong; Switzerland; Colorado,
Nassau, Nevis, California, and it goes all over.
We attempted--and I want to emphasize one thing that my
client is of commercial means but doesn't have unlimited means,
and every time we are making an application in a foreign
jurisdiction to compel--emphasis added--to compel the
penetration of bank secrecy laws, it costs us US$25,000 to
$40,000 to do it. At a point in time, financial resources are
completely exhausted, and you make an assessment--you will
pardon the metaphor--is the game worth the candle. How far do
you get involved in litigation which is defensive, mechanical?
We concentrated our efforts in Florida for a whole host of
reasons and we were relatively successful, with high degrees of
information coming back in terms of the routing of the funds.
As we now speak, as of this day, I can tell you the following
in terms of the status of the return of the monies.
Aggressive litigation has been commenced in Ontario and the
trial started on Monday. It is adjourned today and it resumes
when I return tomorrow. As a result of your February 5 report,
I believe an inordinate amount of pressure, productive
pressure, positive pressure was exerted on British Trade and
Commerce Bank by the regulatory agency in that island.
The Ministry of Finance of Dominica purported to cancel the
license of British Trade and Commerce Bank, and as we speak the
bank there--and I use ``bank'' in parens--finds itself in a
form of receivership. That receivership is being appealed.
There is a receiver in sort of a quasi-stay in terms of its
status, and the receiver, if its status is maintained by the
appellate jurisdiction, will then proceed to attempt to
discover assets wherever it may find them, either in Dominica
or elsewhere in the world. It is conjecture whether there will
be any return for anyone with respect to British Trade and
Commerce Bank.
And that is the story.
Senator Collins. Thank you very much, Mr. Jacques.
Senator Levin.
Senator Levin. Originally, we were going to call as a
witness this morning two individuals who were associated with
the offshore bank that you have referred to, British Trade and
Commerce Bank, and that bank, as you have pointed out, is
described in detail in our Minority staff's report.\2\
---------------------------------------------------------------------------
\2\ See Exhibit No. 45 that appears in the Appendix on page 816.
---------------------------------------------------------------------------
The report describes numerous instances of money laundering
and suspicious activity associated with the bank, including $4
million that a self-confessed money launderer, Bill Koop,
admitted moving through the bank in connection with financial
frauds, another $4 million associated with Ben Cook, who is
currently being prosecuted in Arizona for fraud and money
laundering, as well as millions of dollars associated with
illegal Internet gambling and other questionable activities.
Two weeks ago, on February 15, the Dominican Government finally
revoked the bank's license and seized its records.
The Subcommittee issued two subpoenas to obtain documents
and sworn testimony from two persons involved with this bank.
The first subpoena was to Rodolfo Requena, the long-time
president and part owner of BTCB. We sent the subpoena to the
U.S. Marshal Service in Miami to serve on Mr. Requena, a
Venezuelan citizen who lives in a suburb of Miami, owns a house
there, and has a Florida driver's license. Mr. Requena took
steps to avoid service of the Subcommittee's subpoena rather
than answer questions about this bank.
The second subpoena was served by the U.S. Marshal in
Oklahoma on John Long, who helped form the bank and we believe
was its majority shareholder. Mr. Long did accept service, but
at his deposition in response to questions about his
involvement with BTCB, Mr. Long invoked his Fifth Amendment
privilege 15 times and declined to answer the questions posed
to him about the bank. Based upon his statement that he would
invoke his Fifth Amendment privilege at this hearing, we
decided it was pointless to call him as a witness this morning.
From the evidence we were able to gather, BTCB appeared to
be a bank that was owned by an American, run by Americans, and
used to launder money associated with frauds committed against
Americans and others. It was highly dependent upon U.S. banks
to conduct its business, and its business was replete with
examples of suspicious transactions.
So in place of those two people, we have asked you to come
this morning, Mr. Jacques, and we very much appreciate your
being here representing a victim, one of the many of this bank.
This was a victim, as we understand your testimony, of a
classic advance fee for loan fraud who had the $3 million you
referred to disappear into the jaws of this offshore bank, and
who has so far, despite your best efforts, not been able to pry
that money loose, despite over a year of legal action.
Now, after you took over the representation of your client,
I assume you contacted BTCB first and got no assistance from
them. Did you then contact the Government of Dominica, and what
was their response? Were they helpful?
Mr. Jacques. No. They were indifferent. We attempted to
communicate with them.
Senator Levin. They were indifferent?
Mr. Jacques. Right. We attempted to communicate by
telephone. For a whole host of reasons, we never put our
requests in writing. We were moving very, very quickly. We had
a great deal of difficulty with the levels of sophistication
there. It is a tiny island, and I don't mean in the pejorative
sense. It is a banana republic. It is primarily agricultural
and its mean income is relatively low.
We got the sense from a whole host of indirect sources that
BTCB was a very effective lobby in Dominica. It had exerted
commercial relationships, professional relationships, and
people were extremely reserved in attempting to talk to us when
we tried to make inquiries about them. And when we indicated
that we had difficulties there, they said, well, why don't you
solve your difficulties in Canada? I said, well, we will
probably do that.
The only communication that I have had directly with BTCB
is when we first got involved. Because of immediate access in
terms of telephone and Internet, we communicated with BTCB and
I personally on at least three occasions have spoken with
George Betts. Mr. Betts is a defendant--emphasis added--a
defendant in a Canadian action as a codefendant with BTCB.
We sued BTCB and Mr. Betts. I am modestly pleased to tell
you that yesterday we obtained judgment in Canada against BTCB
and Mr. Betts. Now, it is simply conjecture whether that
judgment will have any value. Mr. Betts, by his own admission
in terms of the BTCB Website, is a member of the accounting
community, a former member of an international accounting firm,
and he seems to, by the way he operates, to be very
sophisticated in certain issues in terms of regulatory aspects
of banking, both domestic and international.
Senator Levin. Did you try to find out from Dominica who
owned BTCB?
Mr. Jacques. No. We made inquiries there, but the quality
of the recordkeeping in terms of intermediaries who had access
to it did not respond in any positive sense. We sensed--and I
want to emphasize one thing that in a very simplistic fashion
an ordinate amount of information which may in the first
instance sound as though it is hearsay was gleaned from the
Internet, the Internet sites of BTCB.
We used a variety of search engines and we found an
inordinate amount of information about BTCB and associated and
affiliated entities, one being First Equity Corporation of
Florida. And through the various search devices we used, we
pieced together what we thought was a matrix of shareholdings,
and we had a sense, albeit inaccurate, that possibly Mr. Long
was a shareholder either directly or indirectly in terms of
either a beneficial interest or a legal interest. I personally
have never spoken to Mr. Long, though.
Senator Levin. Is Dominica a bank secrecy jurisdiction, do
you know?
Mr. Jacques. Yes, it is.
Senator Levin. And that means that they do not disclose
bank ownership, is that correct?
Mr. Jacques. That is correct, and Mr. Requena in his
testimony exhibited some kind of card with respect to Dominican
bank secrecy laws and refused to disclose the kind of
information that we wanted. And we always had the sense he was
using that as a shield, a complete shield.
Senator Levin. Dominica itself will not, as I understand
it, disclose the ownership of banks because of its own laws, so
that if you wrote Dominica asking for the owners of that bank,
it is my understanding, and correct me if I am wrong, that you
could not receive a list.
Mr. Jacques. That is correct, and we had informal advice
from local barristers in Dominica that if we were to attempt to
bring proceedings in Dominica, it would be a complete waste of
time.
Senator Levin. And that is a major problem because here you
are trying to find out the owners of a bank, presumably so you
can bring suit against them if they commit a wrongdoing.
Mr. Jacques. That is correct.
Senator Levin. But you can't find out from the licensing
jurisdiction who those owners are. Is that correct?
Mr. Jacques. That is correct.
Senator Levin. We are going to put Exhibit 34c.\1\ on the
screen, and I think those exhibits are in front of you in a
book. This is a purported list of shareholders of BTCB. Now, we
were able to obtain this from the U.S. bank where they opened
their account. That is where we obtained this as part of our
investigation.
---------------------------------------------------------------------------
\1\ See page 3 of Exhibit 34 that appears in the Appendix on page
784.
---------------------------------------------------------------------------
This exhibit says, on BTCB stationery, that the beneficial
interest of 15,000 shares, which is half of the authorized
shares, are held by Mr. John Long, and 3,000 by Mr. Rodolfo
Requena.
Did you ever see a document like that? Were you ever able
to get possession of this kind of a document?
Mr. Jacques. No, sir. I know this information. We have
pieced it together, but I have never been given this from
British Trade and Commerce Bank. I would--
Senator Levin. Now, as I indicated--go on. I interrupted
you.
Mr. Jacques. I would have to ask my friend and colleague,
Mr. Lindsay, when he deposed Mr. Requena whether he had this
information given to him.
Senator Levin. All right.
Mr. Jacques. There are outstanding stipulations of the
Florida court with respect to information obtained on
depositions, but I know this information.
Senator Levin. Now, assuming then that one way or another
you identified a Mr. John Long as being an owner or alleged
owner of the bank, my last question--my time is up for this
round--is did you bring suit against him, and if not why not?
Mr. Jacques. To date, we haven't brought suit against him,
for the very simplistic reason that how long is a piece of
string? I mean, we can commence litigation on an indefinite
basis, and quite candidly my client doesn't have infinite
resources to do that.
We were shocked when we found out in terms of the flow of
funds that it appeared when we obtained information from First
Union National Bank, we saw information indicating that some of
our funds went to Mr. Long for his own--he received it. What he
did with it I don't know.
Senator Levin. Thank you. My time is up.
Senator Collins. Mr. Jacques, I want to go back to some of
the basic facts of this case just to make sure that they are on
the record.
It is my understanding that your clients wished to borrow
and agreed to borrow money from TriGlobe International Funding,
Inc., is that correct?
Mr. Jacques. That is correct.
Senator Collins. And was the amount that they intended to
borrow about $12 million?
Mr. Jacques. Ultimately, it was reduced to $12 million.
Senator Collins. And as part of the agreement for borrowing
this $12 million, it is my understanding that your clients had
to post 25 percent of the loan amount as a cash collateral
account. Is that correct?
Mr. Jacques. That is correct.
Senator Collins. So that is where the $3 million that we
are talking about comes from?
Mr. Jacques. That is right, that is correct.
Senator Collins. Your clients later learned that the $3
million had been wired to the BTCB account at First Union Bank,
is that correct?
Mr. Jacques. That is correct. We discovered that in April
of 2000.
Senator Collins. Did your clients ever directly engage in
business with BTCB?
Mr. Jacques. Up until the receipt of information that the
money had gone to the BTCB account in Florida, my client did
not know of the existence of BTCB, other than when we became
extremely aggressive in terms of our demands. We were told that
the money went to an offshore bank in the Caribbean.
Senator Collins. It is my understanding that in September
of last year, BTCB's president filed an affidavit with the
Canadian court in which he admitted that BTCB had possession of
your client's $3 million. Is that accurate?
Mr. Jacques. That is relatively accurate. The allegations
asserted by BTCB was that the money, however received by them,
went into a managed account.
Senator Collins. And this was an investment that was
scheduled to mature in December of last year. Is that accurate?
Mr. Jacques. That is correct, and just as a footnote to
your question, when we became aggressive in terms of our
litigation, in October, at the end of October, in Ontario,
British Trade and Commerce Bank deposited its own letter of
credit for US$3 million to the credit of our action with a
maturity date of December 15, 2000. On December 15, 2000, we
sat anxiously in court to be notified that the funds had
cleared. The funds did not clear and the bank defaulted on its
own letter of credit.
Senator Collins. So BTCB defaulted on the letter of credit,
and I assume that your client still has not received any money.
Is that accurate?
Mr. Jacques. That is correct.
Senator Collins. And it is my understanding that BTCB now
claims not to have the $3 million. Have you been able to
ascertain where the money is now?
Mr. Jacques. I can only speculate that--and I am not being
facetious--it is someplace in the world, but I don't think it
is recoverable.
Senator Collins. And it has most likely been divided up and
wired all over the world, based on the Minority's exhibit?
Mr. Jacques. Well, if I refer to the chart there, $3
million was disbursed to multiple payees and, in essence, this
is a Ponzi scheme.
Senator Collins. And it greatly complicates your ability to
recover the money for your clients?
Mr. Jacques. Almost impossible.
Senator Collins. Your clients obviously were in need of
borrowing funds. They still have ongoing obligations. Do you
know how much additional money they have lost just as a result
of the monthly interest charges while the dispute continues?
Mr. Jacques. This is part of the court record in Ontario.
Interest accrues--the $3 million that was given to BTCB was
borrowed from the Toronto Dominion Bank in Toronto at a prime
plus 1 percent over commercial rate. Interest accrues floating
on a basis of, say, $35,000 to $40,000 a month, so in excess of
$500,000, plus, has accrued on that U.S.-dollar loan. There are
administrative charges, there are obvious legal fees, there are
disbursements.
We have maintained litigation in three jurisdictions--
Ontario, Florida, and Idaho. We had the same difficulty in
Idaho in terms of when we attempted to--I think it was a major
American bank resisted, and we issued letters of request and we
then got involved in mechanistic delays and adjournments. And
simply, we ran out of gas and, we are not going to spend more
money chasing our tail.
Senator Collins. Thank you.
Senator Levin.
Senator Levin. Thank you.
The letter of credit that you made reference to and the
Chairman made reference to is Exhibit 34e,\1\ I believe. Could
you just take a look at that in your exhibit book?
---------------------------------------------------------------------------
\1\ See page 5 of Exhibit 34 that appears in the Appendix on page
784.
---------------------------------------------------------------------------
Mr. Jacques. I know it all by heart, Mr. Senator.
Senator Levin. It is etched.
This, I take it, is a letter of credit that this rogue bank
wrote on itself. Is that basically it?
Mr. Jacques. That is correct, and we took no position when
they offered the letter of credit because, quite candidly, it
was a joke. And the letter of credit is in standard
international banking terms. There is nothing unusual about
this document. It is used hundreds of times a day in
international banking.
Basically, it is a clean letter of credit issued under
international documentary terms, nothing untoward about it.
When you examine the letter of credit, however, though, you
ascertain a couple of things. One, it is not confirmed by a
bank other than BTCB. They issued their own letter of credit.
So, in essence, this is a promissory note; ``I will pay on
demand on December 15th.''
When this letter of credit was tendered to us, I was
obviously jaundiced with respect to its ultimate success in
terms of cashing. But I went through the ritual of attempting
to have a Canadian bank either confirm it or discount it, and I
was asked if I was a fool.
Senator Levin. You were asked what?
Mr. Jacques. If I was a fool.
Senator Levin. In other words, they were familiar with what
was going on here?
Mr. Jacques. That is correct.
Senator Levin. The legitimate banks?
Mr. Jacques. That is correct.
Senator Levin. So we have got a rogue bank issuing a letter
of credit on itself which is worthless.
Then in Exhibit 33,\1\ let's take a look at some of the
other things that this bank did, British Trade and Commerce
Bank. This is an advertisement for certificate of deposit
investments. The return rates are from 16 percent for $25,000,
all the way up to a 79-percent return rate if you will give
them $3,500,000. That is an annual return rate of 79 percent.
---------------------------------------------------------------------------
\1\ See Exhibit 33 that appears in the Appendix on page 782.
---------------------------------------------------------------------------
Mr. Jacques. Well, these are urban tales, Senator.
Senator Levin. These are what?
Mr. Jacques. Urban tales. These are fictions. These return
rates are impossible, in a realistic banking community, in a
legitimate banking community, to obtain.
Senator Levin. Of course.
Mr. Jacques. No one has these rates.
Senator Levin. But this is the tout, this is the come-on,
this is the promise that a rogue bank makes. You give us money,
you will get this kind of return. But apparently some people
must have been taken in. There are a lot of other victims here
beside your client, but anyway this is the representation of
this bank, up to a 79-percent return rate for a $3.5 million
certificate of deposit.
Mr. Jacques. That is correct. In this kind of marketing or
enticement, there are victims both in the United States and
Canada and the United Kingdom. There are institutions,
charitable institutions; the Boy Scouts of the United States
was defrauded. There was a charitable institution in Chicago
many years ago. And these come-ons are basically an enticement
to go into a high-yield investment program, and these high-
yield investment programs are myths. They do not exist in the
legitimate investment and/or banking communities worldwide.
Senator Levin. Then if we could turn to Exhibit 34d.\2\
This is a letter which apparently the president of the bank
issued to creditors and it was reprinted in an offshore
business newsletter.
---------------------------------------------------------------------------
\2\ See page 4 of Exhibit 34 that appears in the Appendix on page
784.
---------------------------------------------------------------------------
Have you ever seen this letter before?
Mr. Jacques. Yes, Senator, I have.
Senator Levin. Okay. This is one of the things that this
letter says that, ``The bank is unable to meet its obligations
with its depositors and creditors. As President of the bank, it
is my responsibility to bring this matter to your attention and
outline to you the causes and the measures that management is
implementing to re-capitalize the bank, rebuild its liquidity,
and meet its obligations with its depositors and creditors.''
And then point 1 states: ``In May of this year, the major
shareholder of the bank retired from the organization due to
severe health problems. The retirement resulted in a large
withdrawal of deposits from the bank due to the close
relationship of the depositor with the shareholder,'' the close
relationship presumably being the same person. Is that the way
you would read that?
Mr. Jacques. That is correct.
Senator Levin. That is a fairly close relationship indeed.
Mr. Jacques. And I believe the inference there ultimately
is that is Mr. Long.
Senator Levin. That is Mr. Long, so that they are actually
stating here--this is a hint as to where these monies went. If,
in fact, it is Mr. Long, what they are actually saying is a
large withdrawal of deposits went to Long.
Mr. Jacques. That is correct.
Senator Levin. Yet, you are still dubious that he is a
potential source of recovery?
Mr. Jacques. All I can say is that in terms of the kind of
strategies that are underway, we recognize he has been there,
but we just haven't dealt with that issue.
Senator Levin. Do you think it is possible the word
``depositor'' there, is a shell company owned by Mr. Long
rather than he himself? Would that be at least a possibility
there?
Mr. Jacques. I have no specific knowledge, but if I were
speculating, I would agree with you.
But it is paragraph 2 which I found in that letter of
November 9th to be the most disturbing when Requena indicates
that, referring to our action in Ontario, and he states, ``The
bank was never involved in or aware of those actions. . . . The
lawyers for the plaintiffs''--that is my client--``convinced
the Canadian Court that BTCB was part of the action.'' That is
correct.
``The lawyers for the plaintiffs spread all kinds of
erroneous information and allegations against the bank.'' That
is incorrect. They circulated private and confidential
information--for example, you can buy this letter on the
Internet for $10. This is within the public domain.
The irony of this letter, which is dated November 9th, is
that at the end of October they came to the Ontario court and
deposited their letter of credit.
Senator Levin. Their worthless letter of credit?
Mr. Jacques. That is correct. Nine days later, they issue
this statement here which is basically a declaration that they
are incapable of paying their liabilities as they normally fall
due.
Senator Levin. So that it is lie followed by lie, followed
by misrepresentation, followed by another tout for certificates
of deposit, followed by more lies, and it just goes on and on,
basically. Is that a fair summary of this bank?
Mr. Jacques. You are being very polite, sir.
Senator Levin. Unintentionally.
The goal of Congress and of our regulators has got to be
that our legitimate banks, our U.S. banks, not in any way,
directly or indirectly, aid and abet this kind of an
enterprise. And in order to do that, we are going to have to
have tighter money laundering laws to look at these accounts
that come from these banks, these foreign banks, so that our
banks are not misused as part of either a fraudulent bank or by
a money launderer. That is our goal, and your testimony is very
helpful in our achieving that goal here today.
I just would close by asking whether you have any advice
for people who are potential victims or who are the actual
victims of this bank. You have now been through it. You have
seen your client lose money both in the original deposit with
that law firm and then also in trying to seek recovery.
What advice would you have both for current victims seeking
to recover money and for potential victims of this kind of a
bank?
Mr. Jacques. Well, I think if I may dissect your question
into a couple of components, the historical victims of the
frauds fit into at least two categories: Those that are totally
innocent and who are simply being aggressive with respect to
the return or the promised return, and these people come
forward time and time again.
One of the goals of an asset protection bank--and I am
talking generically as opposed to a specific bank, i.e. BTCB,
but one of its mandates is an attempt on an offshore
jurisdiction to shelter assets, to make those assets judgment-
proof in the home jurisdiction. If I have a judgment against
Mr. Brown, I can't get his assets in the United States. He has
basically placed all his assets beyond the reach of the United
States; he has placed them offshore. And there are certain
functional advantages in terms of asset protection banks.
The other component of an asset protection bank is simply a
return is being made and it is being sheltered, and it is
probably not being disclosed in any jurisdiction in terms of
income. That kind of situation I am now talking to. There are
hundreds and hundreds of victims throughout North America,
probably thousands, and it goes throughout the rest of the
world.
For example, there is an agency in the United Kingdom
called the International Chamber of Commerce which I believe
you are familiar with. They have a tracking system where they
are tracking this on a worldwide basis, and they have hundreds
of instances that are occurring on a daily basis.
Does education work? Probably not. Does notoriety work?
Probably, yes. Do lawsuits work? Yes, but they are highly
individualistic. I would believe that probably the best
attempt--and emphasis on the word ``attempt''--would be to have
effective legislation whereby these entities can't operate
effectively but for the media of correspondent banking. If they
don't have a transportation system under which to move the
funds into any jurisdiction, they are shut down. Look at the
example of your report on February 5 and then 10 days later an
inordinate amount of pressure is obviously exerted domestically
in Dominica and the license is canceled. That is very
effective.
Senator Levin. I do have one additional question, and that
is are you familiar with the Canadian banking laws and
regulations relative to correspondent accounts in your
legitimate banks? Are you more strict than our banks? Are you
familiar with that area of law and regulation?
Mr. Jacques. I am more than a student, but I am not an
expert. I can only tell you--and I took the liberty of bringing
down a statute which I will give to your Subcommittee, which is
an attempt by the Canadian Government. It is called the
Proceeds of Crime Money Laundering Act, and this statute came
into effect in October of 2000.
We have the same problem. Obviously, our economy is a tenth
the size of the United States, so you use that factor. But I
would assume that, yes, money laundering does take place in
Canada. I know that. I shouldn't say ``assume''; I know it
takes place. Are we any better than you are? Probably not in
terms of how we effectively police it.
Toronto would probably be a magnet for it by virtue of its
position in the Canadian economy in terms of what goes on
there. But banks in Canada are very, very vigilant. I have a
commercial practice, a commercial corporate practice, and
occasionally I am asked by clients to transfer funds directly
or indirectly to other jurisdictions. I can say to you that on
a number of occasions when these funds are leaving my firm's
trust account, I am confronted by a bank officer asking us the
personality of the funds. Then I get into these issues of
solicitor-client relationships and I have that issue with the
bank. But I can tell you the banks in my country are observant,
vigilant, and they are attempting to enforce it.
Senator Levin. Thank you. Thank you, Madam Chairman.
Senator Collins. Thank you very much, Mr. Jacques. I very
much appreciate your assisting the Subcommittee with this
important investigation.
Mr. Jacques. Thank you.
Senator Collins. I wish you a good and safe and easier trip
back home.
Our next panel of witnesses for this hearing will be
representatives of the Departments of Treasury and Justice. At
this time, I would like to ask Joseph Myers from the Treasury
Department and Mary Lee Warren from the Criminal Division of
the Department of Justice to come forward.
These two civil servants will highlight for the
Subcommittee the current status of U.S. anti-money laundering
efforts with regard to correspondent banking, and will describe
for us the two Departments' commitment to protecting the
American banking system from abuse by money launderers and
other criminals.
I would note that I had the opportunity yesterday morning
to discuss these hearings with Secretary O'Neill and I was very
impressed with his knowledge of our hearings and his commitment
to helping stem the tide of money laundering that these
hearings have disclosed.
I am going to ask both witnesses to stand, since pursuant
to Rule VI all witnesses who testify are required to be sworn.
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. Myers. I do.
Ms. Warren. I do.
Senator Collins. Mr. Myers, we are going to start with you,
if you will proceed, please.
TESTIMONY OF JOSEPH M. MYERS,\1\ ACTING DEPUTY ASSISTANT
SECRETARY (ENFORCEMENT POLICY), U.S. DEPARTMENT OF THE
TREASURY, WASHINGTON, DC
Mr. Myers. Madam Chairperson, Senator Levin, I am pleased
to appear before you today to discuss the issues raised in your
Minority staff's February 5 report ``Correspondent Banking: A
Gateway to Money Laundering.''
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Myers appears in the Appendix on
page 250.
---------------------------------------------------------------------------
I would like to submit my full written testimony for the
record and highlight a few points, if I may, orally.
Senator Collins. Both of your written statements will be
included in the record in their entirety.
Mr. Myers. Thank you.
I would like to begin by congratulating the Subcommittee
and the Minority staff for its impressive work on this report
and in gathering a factual record for this hearing. In our
view, the report and the hearing raise serious issues. We are
studying them very closely. It is a complex area and a
difficult one.
I think the work that you have done here has already had
real consequences, and I congratulate you for that. We have
seen rogue banks closed. We have seen changed policies in the
Bahamas and the Cayman Islands with respect to shell banks, and
I think you have done an impressive job of drawing the
attention of the domestic banks and the public to this
important area.
As you know, the Treasury and Justice Departments have
jointly issued two national money laundering strategies to meet
our obligations under the Money Laundering and Financial Crimes
Strategy Act of 1998. In last year's National Money Laundering
Strategy, we acknowledged that correspondent banking accounts
and other international financial mechanisms, such as payable
through accounts, private banking, and wire transfers, all are
important features of the international banking system, and yet
they are potential vehicles for money laundering. The strategy
thus recognized the need for further examination of these
mechanisms and to find ways of addressing potential abuses
without disrupting legitimate economic activity.
The interagency community has substantially accomplished
the goals articulated in last year's strategy in this area. In
September 2000, the Office of the Comptroller of the Currency
of the Treasury Department issued the Bank Secrecy Act Anti-
Money Laundering Examination Handbook. This handbook identifies
high-risk products and services, including international
correspondent banking relationships, special use accounts, and
private banking, and establishes examination procedures to
address these subjects, including specialized procedures for
foreign correspondent banking.
In addition, the OCC has initiated a program to identify
banks that may be vulnerable to money laundering and examined
those banks using agency experts and specialized procedures.
Some of those examinations have already focused on foreign
correspondent banking.
We have also made a great deal of progress in addressing
the risks involved in international correspondent banking
through our active support of the Financial Action Task Force's
project to identify non-cooperative countries and territories.
Of the eight foreign jurisdictions involved in the case
studies highlighted in the Minority staff's report, six of them
are on the FATF list of 15 non-cooperative countries and
territories, and seven of them are the subject of formal
advisories from the Treasury's Financial Crimes Enforcement
Network, or FinCEN. The FinCEN advisories alert U.S. financial
institutions of specific deficiencies identified by the FATF
review and confirmed by our own analysis, and they encourage
our institutions to apply enhanced scrutiny to transactions
involving those jurisdictions. Twenty-three of the 29 FATF
member countries have issued similar warnings to their domestic
financial institutions.
As a result of the FinCEN advisories, the OCC implemented a
program to review the anti-money laundering programs in all
banks with significant exposure to one or more of the non-
cooperative countries and territories. The OCC is currently in
the process of evaluating these banks to determine whether
their systems and processes are adequate to control the anti-
money laundering risks associated with the non-cooperative
countries and territories.
We have also been working with our allies and with
officials from these jurisdictions to correct deficiencies in
law, regulation, and practice that aggravate the risk
associated with international correspondent banking business.
In response to these efforts, 7 of the 15 countries
listed--the Bahamas, the Cayman Islands, the Cook Islands,
Israel, Liechtenstein, and Panama--have already enacted most,
if not all, of the legislative or regulatory changes necessary
to bring their systems into line with international standards.
These jurisdictions are now developing and discussing with the
FATF and with the U.S. bilaterally specific plans to implement
these changes, and we are working on a timetable that will
allow those that take appropriate remedial measures to be de-
listed at the earliest possible time.
I want to highlight that not only has the list and the
FinCEN advisories prompted movement within these jurisdictions;
they have also increased the quantity and quality of suspicious
activity reports filed by U.S. financial institutions.
The Financial Crimes Enforcement Network has begun to
analyze the SAR filings related to the 15 NCCTs. The findings
from their work will be incorporated fully into the second
review of SAR filings that the interagency community expects to
publish jointly with the American Bankers' Association in
April. This report will show, among other things, that since
the issuance of the advisories last July through November 2000,
U.S. financial institutions, including foreign banks operating
in the U.S., roughly doubled the rate of filings of suspicious
activity reports for most non-cooperative countries and
territories.
A preliminary analysis of December 2000 data confirms this
trend, and the majority of these findings describe wire
transfer activity either to or from the country in question.
Dollar amounts involving wire transfer activity tend to be
high, frequently in the millions of dollars.
The remaining suspicious activity reports described for the
most part structuring of cash and monetary instrument
transactions involving money orders, traveler's checks, and
cashier's checks. In most instances, financial institutions in
the United States are a link in the chain of international
transactions, as opposed to the originating or end point in the
movement of suspicious funds.
Although further FinCEN analysis is needed with respect to
these suspicious activity reports, it is apparent that
international correspondent account activity of the type
discussed in the Minority staff's report has been and continues
to be noted. Such correspondent account activity was also
identified in a separate study of domestic U.S. shell company
activity that was summarized last fall in the initial issue of
the SAR activity review.
The challenge we now face is to make effective use of this
information, both in investigations and in providing feedback
to the financial services community. I want to emphasize that
the FATF project and our support for it are works in progress.
There is a second round of review currently underway and we
expect to be in a position to put additional jurisdictions on
the list in June.
As I have indicated, we are also actively involved in
helping jurisdictions respond to the concerns. Unfortunately,
some of them have shown very little progress. The FATF
indicated its special concern about the relative lack of
progress in the Russian Federation, Lebanon, the Philippines,
and Nauru. Each has its own particular obstacles to address,
but the international community is expecting a positive
response to the concerns identified. The FATF is planning in
June to reach a decision with respect to countermeasures for
those jurisdictions which have not made adequate progress.
Secretary O'Neill attended his first meeting with his G-7
counterparts in Palermo 2 weeks ago, where the Ministers
confirmed their support for countermeasures as necessary.
By statute, the National Money Laundering Strategy is due
to the Congress each year on February 1. This year, with the
new administration in office, we have asked for an extension of
the deadline until April 1. As we work to meet that deadline,
we look forward to a continuing cooperative effort in pursuit
of our common goal to prevent criminals from realizing the
profits of their crimes.
The Minority staff's report raises a number of important
issues. We are carefully considering them. As we consider what
additional measures may be necessary to reduce the risk of
abuse in this area, it will be important to ensure that such
measures do not interfere with legitimate commerce and
international trade finance, or put our institutions at a
competitive disadvantage in the global marketplace.
The Treasury is committed to working with the Congress to
ensure that we have all the necessary tools to combat money
laundering. We will carefully evaluate the various legislative
proposals that have been and may be put forward in this area.
In so doing, we will consult with the interagency community and
financial institutions, and seek to balance the legitimate
interests of law enforcement with the equally legitimate
concerns about privacy and regulatory burden.
Meanwhile, we will continue to pursue the FATF work. We
will be prepared to implement countermeasures as necessary, and
we will take the findings of this hearing into consideration in
the context of our review of the FATF 40 recommendations.
Thank you again for the opportunity to appear today. I will
be happy to answer any questions you may have.
Senator Collins. Thank you, Mr. Myers.
Ms. Warren.
TESTIMONY OF MARY LEE WARREN,\1\ DEPUTY ASSISTANT ATTORNEY
GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE,
WASHINGTON, DC
Ms. Warren. Thank you, Madam Chairman and Ranking Minority
Senator Levin. I appreciate the invitation to appear today to
offer the Department of Justice's views regarding the use and
abuse of correspondent banking relationships in the United
States.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Warren appears in the Appendix on
page 256.
---------------------------------------------------------------------------
The Criminal Division has been pleased to provide the
Subcommittee with information concerning law enforcement's
concerns and our insights on the obstacles and hindrances
presented by correspondent banking to investigations and
prosecutions. We look forward to continuing this cooperative
arrangement.
Today, I would like to focus on three main areas identified
in the report of the Minority staff: The extent to which money
laundering through U.S. correspondent bank accounts is a
significant law enforcement concern, some of the legal and
practical challenges in seizing alleged illicit funds and
identifying beneficial owners of and depositors into such
accounts, and our general views on the recommendation for
amending the U.S. forfeiture law and enhancing law enforcement-
industry communications with regard to correspondent bank
accounts.
The international movement of illicit proceeds through
correspondent bank accounts servicing foreign institutions is
often difficult for law enforcement to detect. Even when
detected, law enforcement may encounter significant hurdles in
tracing, seizing, and forfeiting such funds, made once again
all the more difficult when it is hard to discern the true
beneficial owner of the funds being transferred.
Most often, as the Minority staff's report concludes, this
occurs when U.S. financial institutions offer banking relations
to foreign shell banks, offshore banks, and to banks in those
jurisdictions with unduly broad bank secrecy protections and
those that have little or no effective anti-money laundering
regimes. Typically, such banks fail to make and maintain proper
account and transaction records as well.
From a prosecutor's perspective, in order to attack the
abuse of correspondent banking by money launderers, the U.S.
financial institutions must be vigilant and the U.S. Government
must work to ensure that our laws provide the necessary tools
to prosecute individuals who knowingly facilitate the transfer
of illicit funds, and to identify, seize, freeze, and forfeit
criminal proceeds transacted through such accounts. We need
that help as well.
Let me hasten to add that with all these frustrations and
difficulties, the Departments of Justice and Treasury, in our
coordinated fight against international financial crime, have
scored some significant successes.
In my full written statement, I have outlined Operation
Skymaster and Operation Juno, in which our investigators and
prosecutors were able to penetrate the use of the Black Market
Peso Exchange scheme and to identify the traffickers and those
who facilitated trafficking through money laundering.
These successful cases also revealed and highlighted some
problems facing law enforcement in tracing and forfeiting
criminal proceeds in foreign countries and in instances when
correspondent banking is used. Our money laundering laws,
dating to 1986, addressed primarily a domestic problem in the
beginning and unfortunately have not always kept pace with the
developments in technology and international commerce.
Three major areas of problems emerge. First, when offshore
banks in one jurisdiction have their representatives in
another, it can be difficult for U.S. law enforcement to
determine the actual location of the funds and in which
jurisdiction we should focus our forfeiture efforts. Once U.S.
law enforcement pinpoints the correct foreign jurisdiction, our
ability to forfeit these funds is dependent upon the level of
cooperation offered by that jurisdiction and by the strength of
that jurisdiction's forfeiture laws.
The second major problem area is the complexities that can
arise from our own forfeiture law with respect to jurisdiction
and venue in forfeiture cases in the United States. This is
particularly true in cases when U.S. law enforcement does not
know initially the final destination or beneficiary of the
funds sent through a correspondent account and only determines
that fact much later on.
Third, the relevant U.S. statute of limitations requires
the government to bring forfeiture actions against fungible
property, such as funds in a bank account, within 1 year from
the date of a money laundering offense. If the government does
not file within that deadline period, we are required to make a
strict one-for-one tracing review of the funds or prove that
the foreign bank itself was involved in the wrongdoing. These
requirements are often difficult to satisfy, particularly in
cases involving correspondent bank accounts.
Some of these problems were best exemplified in the
forfeiture cases resulting from Operation Casablanca. Criminal
Division prosecutors in Washington filed civil forfeiture
complaints in the District of Columbia against the funds wire-
transferred to other foreign accounts. We used the statutory
authority granted in Title 18, United States Code, Section
981(a) and 984, as well as 28 U.S.C. Section 1355(b).
In one instance in Operation Casablanca, funds had been
wire-transferred to a bank account in one jurisdiction, a
foreign location. After filing our civil forfeiture complaint,
the Department requested assistance from that foreign
government. It was learned by our foreign counterparts,
however, that the bank, as well as the account into which the
funds had been transferred, were actually located in the second
jurisdiction.
In the second country, the Department advised authorities
that we had information concerning the transfer of drug
proceeds to bank accounts within its jurisdiction. That
country's officials then filed a criminal forfeiture action,
the only forfeiture available in that particular country. They
based their criminal case on our request for assistance. That
jurisdiction froze the accounts.
But then because the defendants were not before the court,
it was uncertain whether they could indeed be forfeited
criminally. In addition, the bank did not appear to have any
actual buildings or branches within the court's jurisdictions,
and the assets securing the bank's obligations were not located
in the country.
Finally, having come almost full circle, it was determined
that the assets we were pursuing were likely located in the
foreign bank's correspondent account back here in the United
States, at a U.S. bank in New York City. This was a tortuous,
time-consuming chase.
The prospects for success in our U.S. civil forfeiture
action in that particular instance remain uncertain. There is a
potential claim that the assets in question were actually
located in the foreign bank's correspondent account in New York
City. Jurisdiction, venue, and the 1-year statute of
limitations then may become grounds for challenge. Now, I need
to note this was an instance when we had enormous cooperation
from the foreign jurisdictions and we still had all these
obstacles.
Let me shift very briefly to the recommendations in the
Minority staff's report.
The first four recommendations, I think, are better treated
by regulators and supervisors. The final two recommendations,
however, deal with law enforcement issues. They suggest better
U.S. communication with the industry and assistance to the bank
in identifying and evaluating high-risk foreign banks. The
final recommendation was forfeiture protections in the United
States perhaps should be amended to enhance our ability to
seize and forfeit illicit funds.
These are valuable recommendations, and we concur that they
warrant further study and review. We would be pleased to work
with the Subcommittee and members of the staff toward these
goals.
With respect to improving communication channels between
the U.S. Government and U.S. banks, Mr. Myers has already noted
several of the ways we are working bilaterally, multilaterally
and with the industry itself. Law enforcement intends to
continue to enhance these working relationships, all, of
course, within the constraints that we cannot reveal ongoing
criminal investigations and the sensitive information in those
investigations.
With respect to the final recommendation amending our asset
forfeit laws, we believe that such a provision would be
beneficial in terms of pursuing and prosecuting forfeiture
cases and, as I stated, is well-deserving of further study and
review. We strongly believe that illicit proceeds, wherever
located in the world, should not be hidden from detection or
immune from forfeiture when money launderers take advantage of
some weak link somewhere in the world in the international
money laundering campaign.
There should be no safe haven for money that is the
proceeds of crime. We understand at the same time, of course,
that the prosecutor's concerns would need to be carefully
balanced against other needs in the U.S. financial system and
legitimate commerce.
Once again, I commend the Subcommittee and staff for
focusing attention on this important issue. We look forward to
continuing our work with the staff and the Members to find
solutions to the problems you have highlighted.
I look forward to your questions.
Senator Collins. Thank you very much, Ms. Warren, for your
testimony.
Mr. Myers, you mentioned in your statement that Treasury
and Justice have jointly issued two national money laundering
strategies, and that in both correspondent banking
relationships, in particular international correspondent
banking relationships, were found to be vulnerable to abuse by
criminals seeking to launder funds.
You go on to say that the advisories issued by the
Financial Crimes Enforcement Network--FinCEN, I believe, is the
acronym--do not discourage banks from maintaining relationships
with non-cooperative countries. Instead, in your written
testimony you indicate that they are intended to encourage
banks to exercise caution in such relationships, but not
actually to discourage them.
I am curious why not. Why wouldn't you discourage banks
from maintaining relationships with foreign banks in countries
that have been non-cooperating and aren't showing the kind of
progress that the countries that you have listed that have
moved on anti-money laundering laws have shown?
Mr. Myers. Thank you, Senator. We essentially view the
advisories as a warning. Our best analogy is to a sign on a
highway bridge, for example, that would say ``slippery when
wet.'' We are not telling a driver not to cross the bridge, but
we are telling the driver to be very careful and to take into
account the circumstances of the road, the weather conditions,
the type of car he or she is driving, the speed at which he or
she is traveling.
In this way, when we look at a complex array of factors
that may influence a decision to do business in a particular
jurisdiction, we recognize that our banks are in very different
circumstances. Across the United States, we have large money
center banks with very sophisticated compliance systems. We
have small independent banks without a lot of international
connections.
Similarly, in particular jurisdictions that we have named
on our list, take Israel, for example, they don't have a money
laundering law. On the other hand, they have a fairly mature
and well-functioning bank regulatory system. So we wouldn't
want in that case to tell banks not to deal with Israel or
advise them that it is--
Senator Collins. Well, you used Israel as an example of a
country that has taken steps. I am talking about those
countries that are non-cooperating and haven't taken any steps.
Mr. Myers. I guess my point, Senator, is simply to try to
clarify. The countries that made it on to this infamous list
made it on to that list for various reasons, and the world
presents itself to us in shades of gray. We thought it best in
the first instance for the first year around to issue warnings
and to tell our banks specifically about our concerns and to
make those concerns public. We have seen that that has provoked
a lot of movement in the jurisdictions, and also we think a lot
more caution in our banking community.
As I have indicated, however, if the jurisdictions are not
willing to change their practices, if we find that it is not
working, we are prepared to consider further countermeasures
and all options are on the table as far as we are concerned.
But we are only--we are 9 months into this public process, and
I remind you we have consensus across 29 jurisdictions to take
these steps. We certainly weren't in a position to build a
consensus around cutting off 15 countries from the world's
financial systems without some kind of fair notice and
opportunity for them to amend their ways.
Senator Collins. One of our banking representatives last
week--I believe it was the witness from Bank of America--
emphasized that U.S. banks would welcome more guidance from
FinCEN about which banks the American Government believes are
promoting illegal activities or closing their eyes to illegal
activities. These banks seem to be asking for more guidance
from FinCEN on where they should do business, and are
essentially telling us that they would welcome more red flags.
Could you comment on that?
Mr. Myers. Yes, thank you. I would agree with you that the
banks have made it very clear to us that they welcome as much
guidance as we can give them. I note that the OCC, Treasury's
main regulator, has historically issued alerts to the banking
industry and other regulators about offshore shell banks and
other institutions that hold themselves out as banks but lack
licenses from recognized authorities or otherwise are not
suitable to be engaged in the banking business. These
advisories have come out regularly and so we try to meet this
obligation.
Beyond that, I would just echo the comments made by my
colleague from the Justice Department that we are very
interested in trying to provide this kind of information where
we can, but it obviously raises, as does the process through
which we identify drug kingpins and others with respect to whom
we cut out of the U.S. financial system under OFAC sanctions--
this raises a host of concerns about disclosure of sensitive
information, both from the law enforcement community and also
the intelligence community.
Senator Collins. You mentioned shell banks and doing
business with shell banks. Senator Levin and other experts on
money laundering have raised the question of prohibiting U.S.
banks from opening correspondent accounts for foreign shell
banks because they have no physical location, and are not
affiliated with any other regulated financial institutions.
I would like to ask both of you for your opinion on whether
steps should be taken to prohibit U.S. banks from having
correspondent accounts with shell banks.
Mr. Myers. Yes, thank you. We are carefully studying this
recommendation, and I want to congratulate the Subcommittee and
the staff for focusing as you have. I note that the report
defines very narrowly, and you have been defining in the
hearing very narrowly the term ``shell bank,'' and I think that
is very productive.
We recognize that these institutions, as you have defined
them, pose a significant risk and that they are often used to
perpetuate all types of fraud and are the subject, as I
indicated in my previous answer, of a series of Office of the
Comptroller of the Currency alerts. We also welcome the news
that jurisdictions such as the Cayman Islands and the Bahamas
have taken steps to eliminate such institutions.
We are still struggling around the margins on this issue
before we can give a ringing endorsement of the recommendation,
and let me try to explain. We understand, for example--and we
are still studying this with relevant regulatory authorities--
that entities may be subsidiaries of, for example, securities
companies or insurance companies. They may be set up in a way
that might meet your definition of shell bank, or shell
financial institution if I can broaden it out a little bit, and
there may be legitimate purposes occasionally for institutions
like that. We also can imagine an example of an Internet bank
that doesn't really exist anywhere but may be legitimate and
sufficiently supervised.
So with those caveats and with those concerns that we have
that we are trying to work through, we do think there may be
scope for work in this area. We welcome what I understand to be
a new initiative on behalf of the New York Clearing House banks
to develop best practices in this area, and we think we should
work with the private sector and with the Congress on any
specific proposals in this area.
Senator Collins. Ms. Warren, what is your judgment on this
issue?
Ms. Warren. I need to first caveat that our view is from a
prosecutorial perspective or an investigator's perspective, and
in many ways it is the view from the medical examiner's office
or the pathologist. We see where it really goes wrong, and
there have been enormous harms visited on those who have been
the victims of fraud or have allowed drug trafficking to
proceed.
So from our very limited perspective, we would certainly
applaud the recommendation. But we also understand that ours is
only one part of a much larger view of what needs to be looked
at in terms of regulating and controlling this kind of banking,
and we would look to work together to provide our insights from
our medical pathologist office with those who have a different
piece of the puzzle to provide.
Senator Collins. Ms. Warren, does the Justice Department
have concerns that if it alerts banks to problems with a
specific jurisdiction's bank that you may compromise an ongoing
investigation?
I am trying to figure out why the government doesn't more
readily share information with U.S. banks that would prevent
them from doing business with people who may, in fact, be
facilitating the laundering of criminal proceeds.
Ms. Warren. I can foresee some instances where the
information about not dealing with a bank, of such identifiable
particularity, would alert others to our ongoing investigation.
And we would need to weigh, and ask that others weigh, the
importance of our proceeding with our investigation against
immediately shutting down such a bank by providing information
of such a peculiar nature that it would lead to a conclusion
that this one bank was the target, or its customers the targets
of our investigation. There might be such instances.
If it is information of an ongoing investigation, there may
be some ways that we can provide more generic advice. But we
don't want to jeopardize our investigation, and more than that,
we don't want to jeopardize any of our undercover officers who
are often right in the middle of such an investigation. Their
lives could be on the line.
Senator Collins. I am just going to raise quickly one more
issue with you before turning to Senator Levin for his
questions.
In your written testimony, you indicated that the United
States must bring a civil forfeiture action against criminal
proceeds in a bank account within 1 year of the date of the
money laundering offense, and that is in order to take
advantage, as I understand it, of the relaxed tracing
requirements in the current law. Is that accurate?
Ms. Warren. That is correct.
Senator Collins. Are there any similar time limitations
under the criminal forfeiture statutes?
Ms. Warren. In the criminal context, we don't have the
advantage of the fungible property provision of that 1-year
statute of limitations in Title 18 for civil actions. So we
don't have that at all in a criminal forfeiture proceeding
today. We would have to do strict tracing of the assets in a
criminal forfeiture action.
Senator Collins. If you have any recommendations to the
Subcommittee on changing these laws, I would very much welcome
hearing them today or having you submit them in writing.
Ms. Warren. Understood.
Senator Collins. Thank you.
Senator Levin.
Senator Levin. Thank you, Madam Chairman.
On the question of shell banks and the purpose they serve,
we had two U.S. banks in front of us who testified that they
don't open correspondent accounts for shell banks and they
could not see any reason not to prohibit correspondent accounts
for shell banks, as we define that term.
Are you familiar with their testimony? Were you or someone
else present for that testimony?
Mr. Myers. Yes, sir, I am familiar. Thank you.
Senator Levin. You are looking, I think, at the edges, you
said, as to what conceivable legitimate purpose there would be
to open up a correspondent account with a shell bank. I think
that is well and good, but I think we also have got to look at
the problem that is created and try to address that problem.
If U.S. legitimate banks can't see any reason, or at least
the ones who were in front of us can't see a reason for opening
up a correspondent account with a shell bank, I would hope that
you would take their thoughts into consideration and move on
with it.
You know, the M.A. Bank was affiliated with a financial
institution. That was the excuse that was used there. First of
all, even if the regulatory process for a financial institution
is good, as we hope it is in the United States, it is a very
different regulatory process than the one for a bank. So I
don't think that that part of the fringe that you are looking
at will provide adequate assurance that the bank regulator
effort--the regulations that the bank inspectors and bank
regulators enforce--are being enforced by securities
investigators. It is a different form of regulation.
So I don't see offhand how saying, well, there could be a
shell bank that is associated with a financial institution or
an insurance company--I don't see how that provides any answer
in terms of bank regulation.
Mr. Myers. Thank you, Senator. I am not sure that we
disagree at all. I hope you will appreciate that we have a new
administration, and I certainly don't want to be in a position
of having committed my Secretary to something on which he
hasn't been fully briefed.
Senator Levin. Well, we can appreciate that, but if you
could give yourselves a reasonable time line to reach a
conclusion on it and let us know what that conclusion is, I
think we would appreciate that. Is that all right?
Mr. Myers. Yes, sir. In fact, we very much look forward to
continued discussion and we think you have raised a very
important issue. We are looking very carefully at it.
Senator Levin. Do you think that you give us your opinion
within a couple of months? Does that sound fair?
Mr. Myers. Yes, it sounds fair to me, sir.
Senator Levin. Now, on the question of offshore banks that
aren't shell banks but are offshore banks that are not allowed
to do business with the people who live in the jurisdiction
granting the license, we had testimony here from a former
offshore bank owner named John Mathewson. He testified that 95
percent of his bank's 1,500 clients were Americans, and he
thought that all of them were engaged in tax evasion.
He has spent the last 5 years cooperating with the Justice
Department identifying people who had, in fact, evaded our tax
laws, some of his former clients. He said that his bank is not
unique; it was a ``run of the mill'' bank in the Cayman
Islands. He thinks, in other words, that most of these offshore
banks are engaged mostly in that, hiding the assets of
Americans who are evading taxes.
The question is how do we try to get at that issue, as
well. It seems to me that the shell bank issue, frankly, is a
relatively easy one. I don't think that should take us a whole
lot of time, although you want to make sure there are not any
unintended consequences. One of our witnesses called it a no-
brainer--I think that is what he said, and it seems to me it is
pretty close to a no-brainer. I don't want to imply that your
brains won't be at work for the next 60 days, but I will put it
that way. To me, at least, it is pretty close to a no-brainer.
Now, let's talk about offshore banks. We have pretty good
evidence, and Mr. Mathewson in his cooperating role has
provided an extraordinary amount of it, as to what so many of
these offshore banks--again, we are talking banks that are not
affiliated with our regulated institutions--but what these
offshore banks are mainly about, or many of them are about or
most of them are about.
Now, how do we get at it? How do we take a look at these
unaffiliated offshore banks opening up accounts in American
banks and then using all the services of our banks to hide
assets and to really get involved in tax evasion for their
clients? What do you suggest? It is going on, it is rampant.
Ms. Warren, why don't you start?
Ms. Warren. This is a much harder puzzle. Again, there may
be legitimate commercial reasons for these offshore entities
that are not affiliated with regulated institutions to
continue. That is not what we see from the Justice Department's
viewpoint because of our particular perspective. We see where
they are abused and abuse our citizens.
I believe we need to hear--and this set of hearings has
tried to bring out--all the available information from the
other pieces in the puzzle, from the bankers themselves, from
the industry, from the regulators, and from those who have to
look at the much larger picture to try and see how best to do
this. Again, I can only speak from the prosecutor-investigator
point of view, and that is when these banks, these institutions
are clearly abused.
Senator Levin. How do we get at the abuses? They are out
there.
Mr. Myers. Thank you, Senator. Let me start by agreeing
with your estimation that this is a much more thorny problem.
As I am sure you are well aware, the historical antecedents for
offshore finance are deep and long, and we have much of U.S.
business and securities trading, insurance, takes place taking
advantage of offshore markets through subsidiaries and complex
arrangements.
Our basic view on this is that--
Senator Levin. Again, we are only talking unaffiliated.
Mr. Myers. Yes, I understand, I understand.
Senator Levin. When you say subsidiaries, you are not
addressing my question. I am talking about unaffiliated
offshore banks.
Mr. Myers. Right. Given a global economy where we have this
historical basis and then we have, I think, the emergence in
sophisticated offshore markets like the Cayman Islands and the
Channel Islands of banks and other firms that would like to
compete with the subsidiaries of U.S. firms or of London firms
or of Dutch firms or German firms, I don't know that we can
draw a line around subsidiaries of U.S. firms in a way that
would protect our firms' competitiveness with their foreign
counterparts from England, Germany, other major centers.
That said, we do think there are things that can be done.
We are working actively in a couple of areas. One, through the
FATF and other international standard-setting bodies, we
believe--and we assert this repeatedly and often--that it
shouldn't matter to a regulatory regime whether they are
regulating offshore or onshore entities.
For purposes of money laundering control, tax evasion,
cooperation on tax matters, it shouldn't matter whether a firm
is offshore or onshore, and we push that point of view in all
of our foreign relations and through all of the international
bodies in which we participate. The FATF is active in that
respect, as is the OECD tax initiative which, as I understand
it, is going forward on the view that there really again is no
excuse for not cooperating in tax matters and offering up a
transparent regime. Put aside the question of tax rates.
Competition on tax rates is another issue, and that is one
where there is a lot more heated debate.
Senator Levin. You used the analogy of a traffic sign that
says ``slippery when wet.'' I would suggest that that is not
what we are dealing with here. These banks, most of them, are
slippery under any weather conditions.
This isn't a case of a few bad apples ruining a barrel.
This is a case of a few good apples somewhere in the barrel.
I really think that unless your assessment of the use of
these unaffiliated--I emphasize that--offshore banks is
different from that staff report, that is the way you should go
at it. We have got to try to protect the relatively few good by
insisting on, first, regulation of these banks. And if they are
not regulated by a jurisdiction that has good regulation, we
should tell our banks forget it. We don't have to regulate
them, but we want a good jurisdiction that does have regulatory
capability to do the regulating.
Second, it seems to me we should be able to know who the
beneficial owners are of these banks. We don't know that now.
We just heard the example this morning of a victim who was
victimized by a bank that had a fancy name on it, but which is
a rogue bank that is stealing money, and you can't find out who
the owners of that bank are. They have bank secrecy laws in the
jurisdiction that licenses it.
It seems to me that as a condition of accepting a
correspondent account with an offshore bank, or opening an
account for an offshore bank, our banks ought to be told ``you
must get the list of beneficial owners of that bank; you must
have that in your possession and require that bank to notify
you of any changes, at a minimum'' so our law enforcement
officials aren't faced with some secrecy laws down in wherever
the island is or wherever the country is, and where people who
have been victimized by that bank can, through a subpoena
process, get access to the beneficial owners of that bank and
go after them in the case of this bank we have heard about this
morning.
We also have to do, it seems to me, much more in terms of
seizure of assets, and I will get back into that in my next
round. I am over already. Thank you.
Shall I go ahead?
Senator Collins. Yes.
Senator Levin. Thank you.
We have a handbook which is issued by the Office of the
Comptroller of the Currency for bank examiners which says that
a bank--and this is the September 2000 version of it--it says a
bank must exercise caution and due diligence in determining the
level of risk associated with each of its correspondent
accounts. That caution and due diligence is set forth in some
detail on page 22, which really sounds pretty good.
My question is going to be how is this enforced, but here
is the way it reads: ``A bank must exercise caution and due
diligence in determining the level of risk associated with each
of its correspondent accounts. Information should be gathered
to understand fully the nature of the correspondent's business.
Factors to consider include the purpose of the account; whether
the correspondent bank is located in a bank secrecy or money
laundering haven; if so, the nature of the bank license, i.e.
shell or offshore bank, fully licensed bank, or an affiliate
subsidiary of a major financial institution; the level of the
correspondent's money laundering prevention and detection
efforts; and the condition of bank regulation and supervision
in the correspondent's country.''
That gets at a whole bunch of issues we have been talking
about for 3 days. My question: In your judgment, how many of
the correspondent accounts at U.S. banks are subjected to that
degree of scrutiny right now? Can you give us a guess?
Mr. Myers. I am sorry, Senator. I am sitting here today not
able to give you that number. I would be happy to get it for
you as soon as I can. I would need to call my friends at the
OCC. I do know that they have begun, as I think I indicated in
my testimony--if I didn't say it, it is in the written part--
they have begun doing targeted examinations on the basis of
that handbook from which you just quoted. So I will endeavor to
get you an answer.
Senator Levin. On the question of seizure of assets, where
there is credible evidence that dirty money is in a
correspondent account, assume the same standard, whatever the
standard is for seizure of assets in a domestic account. And I
am not sure of the exact standard, but let's say it is credible
evidence that there is illegal money in a U.S. bank account.
The Justice Department, as I understand it--and I want you
to comment on this because I may be wrong, but the Justice
Department, I believe, has greater capability to seize the
asset in a regular domestic account than it does in a
correspondent account. Is that correct?
Ms. Warren. Yes, that is. Checking with my experts, yes.
Senator Levin. So we have a bizarre situation where a
foreign bank's bank account at a U.S. bank is given greater
protection than a U.S. citizen's account in a domestic bank. Is
that correct?
Ms. Warren. Correct.
Senator Levin. Now, I think it is pretty clear that we
ought to be changing that, and again I think it is as clear as
it is that we ought to be changing some of the shell bank
regulation. The offshore bank that isn't a shell bank is a
little more complicated, as we have talked about.
Nonetheless, this one, it seems to me, is fairly clear. We
should not be giving greater protection to a foreign bank's
bank account than we are to a domestic person's bank account at
our U.S. banks.
I am wondering if the Justice Department could give us,
first, a reaction to the proposal which is in the staff report
and, second, give us any suggested changes in that approach and
give us actual language that you might recommend. And then we
would ask the Treasury Department to--why don't you do this
jointly, if you can, or give us separate recommendations either
way? But can you do that within a 30-day period?
Ms. Warren. Agreed.
Senator Levin. Are you able to do that?
Mr. Myers. Yes, sir.
Senator Levin. What about the confirmation of beneficial
ownership of the foreign offshore bank? I made reference to
that a few moments ago, but I didn't get a reaction from you.
Do you think it is reasonable to require that our banks in
opening correspondent accounts for offshore banks have in their
files a representation as to who the beneficial owners of that
bank are? Is that a reasonable requirement, do you believe?
Ms. Warren. It certainly sounds reasonable for the initial
opening. Unfortunately, the problems are not just in the
initial opening of the account, though. How do you monitor that
as the account proceeds, particularly as we learn about nested
accounts and those kinds of transfers? Peeling back that onion
is a lot more difficult.
Senator Levin. We could require, however, that the
respondent bank who has that account at the U.S. bank notify
the bank of any changes. I mean, if they violate that, then
what the remedy is might be difficult. Nonetheless, we could
require that right up front the beneficial owners be listed,
and that the bank tell its customer that if there are changes,
you must notify us.
Is there any problem in doing that? I know there is a
problem in what happens if they lie and don't follow through,
but nonetheless there is some deterrence in just that
requirement. Is there any problem in going that far that you
can see offhand, Ms. Warren?
Ms. Warren. There are no problems that I foresee or that I
would foresee in my own very small business relationships. I
would like to know that. I would think--and this is just a
prosecutor's view--that a bank, for instance, if it were
extending credit, would certainly want to know that if it is
providing these other kinds of services. It seems appropriate,
again, from this limited perspective, to ask the same
questions.
Senator Levin. Mr. Myers.
Mr. Myers. Yes, Senator, I tend to agree with my colleague.
I think where we are today is that your report has shown a lot
of light on what has been viewed as a complicated problem. I
don't think it has been fully understood, and as Ms. Warren
pointed out, the history here is that banks have been very
careful when they extend credit and they have been a little
less careful when they simply provide services. I think there
are some lessons learned--
Senator Levin. A little less careful? I think you are being
a little too cautious.
Mr. Myers. They have been less careful, and I think that is
changing. It does seem to me perfectly reasonable for any bank
to know the owners of another bank they are doing business
with.
Senator Levin. I want to go back to the question of a
moment ago relative to the beneficial owners being made known
to our U.S. bank when they open up a correspondent bank
account.
Isn't the knowledge of ownership of a customer, in this
case a respondent bank, really something that banks should be
doing under the ``know your customer'' requirement anyway? I
guess I should look first to Mr. Myers on this one.
Mr. Myers. If the question is knowing who owns the bank
with whom they are doing business--
Senator Levin. Yes.
Mr. Myers. Yes, sir, absolutely.
Senator Levin. Since we have ``know your customer''
requirements, ongoing requirements, that would address the
question that Ms. Warren raised about what happens if they
don't tell you if there is a change in beneficial ownership.
The answer is that then our ``know your customer'' effort would
have been thwarted and frustrated. But at least we do have a
requirement that our banks put in place a ``know your
customer'' regime, and presumably that effort would at least be
aimed at knowing if there is a change in the beneficial
ownership of a correspondent bank customer.
Is that accurate, would you say?
Mr. Myers. I think that is accurate. If I might just
offer--this issue does become, as Ms. Warren suggested, a
question of peeling the onion. Our regulators have taken a view
that our banks need to make a risk-based assessment and then
make decisions about how many layers of the onion to peel.
We find in our international discussion there is really no
agreed standard here. We use the term ``know your customer'' to
mean customer identification at the outset of the account-
opening. There are really no agreed standards about what steps
should be taken on an ongoing relationship. I fully agree with
you that our regulators expect our banks to be careful and to
keep apprised of who they are doing business with.
Senator Levin. I would like to pursue a question that the
Chairman was getting into relative to the exchange of
information. When there is negative information that is
forthcoming about what we call a high-risk foreign bank--that
is either a shell bank or an offshore bank or a bank from a
jurisdiction that doesn't have a good regulatory process--we
call those a problem bank or a high-risk foreign bank.
So when negative information is received about a high-risk
foreign bank, for instance that a bank has been indicted or
that a bank is under investigation by an investigatory wing of
a government, I know that the regulators issue advisories. But
is the kind of information that I just talked about part of
that advisory, where a bank is under investigation or only
where there has been an indictment?
Mr. Myers. As I understand it, Senator, that kind of
information may very well--almost certainly will inform a
decision whether to issue an advisory and it may be a part of
an advisory. I think typically the problem that our banks have
expressed through this hearing and to us directly is that they
think sometimes the warnings are too little, too late, because
the investigation is already concluded. We have to work that
out on a case-by-case basis with our agencies and the Justice
Department that are conducting the investigation.
Senator Levin. I want to raise the case of the American
International Bank, where before there was any indictment or
conviction there were a lot of subpoenas which were issued. So
I want to talk about information short of indictment or
conviction.
Law enforcement agencies examining the American
International Bank had issued numerous subpoenas to the bank's
correspondents for records of the bank and its clients. When
the American International Bank tried to open a new
correspondent account with a different U.S. bank, that new
correspondent bank had no idea of the subpoenas and the
questionable activity that led to them. Had the new
correspondent bank known, it might have refused to open an
account for the American International Bank.
So I wonder whether or not there are any steps that can be
taken to let U.S. banks know about that kind of a situation
without jeopardizing the investigation. Here, I would include
both Ms. Warren and you, Mr. Myers, in this question because we
don't want to jeopardize investigations. But at that level
where subpoenas have been issued, can an advisory be issued to
alert potential new correspondent banks of at least what the
current problems are or are alleged to be?
Ms. Warren, can we start with you on that?
Ms. Warren. I think it would be a greater problem to alert
about subpoenas. For example, if there are grand jury
subpoenas, we would not be able to share that information.
There are often, however, very public indicia that the bank is
in trouble. I mean, in some of the cases cited in the report,
there had been forfeitures already effected or freeze orders in
place, and those are public information and that information
should be shared, in my view, as swiftly as possible because in
the end it just means there will be more victims over time.
Senator Levin. Could you go through some of the records--
not today but perhaps for the record, could you go through some
of the files and experiences of the Justice Department and give
us examples of where there were public indicia or other indicia
that you think could legitimately and should legitimately be on
that advisory which are currently not now part of, or assumed
to be part of that advisory?
This is a question which our Chairman was getting into in
terms of exchanging of information. Even if the subpoena
particularly to a grand jury can't be referred to, for reasons
that you have given, there could be, it seems to me, additional
items which are expected to be on an advisory which
historically have not or have been overlooked. If perhaps both
of you could look through your files and give us examples of
those and how you think that problem could be addressed so we
could get the better of information that was referred to, that
would be very helpful.
Ms. Warren. We will undertake that, and I think maybe in
our review of that information we might also come up with, I
would hope, some further suggestions about how law enforcement
could be more forward-leaning in terms of providing information
that is available.
We recognize that part of law enforcement is making public
announcements, providing that information either to the target
community or to the citizenry at large to protect victims.
Clearly, we can always do a better job at that.
Senator Levin. When we started to investigate the offshore
bank which we heard about this morning, the British Trade and
Commerce Bank, staff came across a number of criminal
investigations and prosecutions that dealt with specific
incidents at the bank, but not the bank itself. The bank itself
is a major problem. This is truly a rogue bank, and that may be
generous.
Here are some of the incidents: One Federal prosecutor in
New Jersey went after William Koop, a U.S. citizen who had
defrauded his victims and laundered about $12 million through
three offshore banks, including the British Trade and Commerce
Bank. The prosecution obtained a guilty plea from Mr. Koop, but
no action was taken relative to the bank.
A second prosecution is underway in Arizona against
Benjamin Cook, a U.S. citizen who is alleged to have defrauded
other U.S. citizens out of $40 million, and who then laundered
the money through a number of banks, including the British
Trade and Commerce Bank. Again, the prosecution is focusing on
the person who committed the fraud, but not the offshore banks
that he used.
Other criminal and SEC investigations are going on in
California, Texas, Washington State, and Florida. All are
looking at the possible frauds, but none at the offshore bank
or banks that facilitated the frauds by accepting the fraud
proceeds with little or no due diligence.
It seems to me that the prosecutors here--and I am not
being critical of them at all, believe me, because I know the
problems that they go through. But the prosecutors are each
sort of touching a different part of the elephant without
anyone taking aim at the elephant itself.
I am wondering if there is any strategy at the Justice
Department to go after the offshore banks that are operating in
the United States through these U.S. bank accounts and acting
as repositories in multiple instances of laundered funds. That
is the specific question.
Ms. Warren. There is certainly a general strategy that we
look for banks as corporations, as entities, as defendants
themselves if it appears that they are guilty of wrongdoing. We
have prosecuted--and we have a chart that goes on for many
pages of numbers of financial institutions that we have
proceeded against directly and not just against any particular
offender within that bank.
What you suggest as certainly the collection now of so many
instances of wrongdoing from one relatively small bank may
suggest, or more than suggest some rottenness at the very core
here. Those are the kinds of instances that we need to analyze
to see if we can meet our standards for corporate liability
proof in a criminal case against the entity itself. We have
found that proceeding in that way has had an enormously
deterrent effect in the banking community, not just in the
United States but our efforts against foreign banks as well,
and could have a salutary effect here.
Senator Levin. Is there a place where the information is
put together that the same offshore bank is being mentioned in
numerous criminal investigations or prosecutions, even though
it is not the target of the investigation itself? Is there one
place where the banks that are named in those investigations
are accumulated so that you can see whether or not the bank
itself should become a target?
Ms. Warren. Between the Treasury Department's entities and
the Justice Department's entities, there are several databases
that help us even down to particular accounts in terms of
collecting instances where they are misused. We are just
learning some facility with that information and how to use it
in a more active way. I predict that we will get much better in
time.
If I just might add a postscript on the instance you raise
about a rogue bank in a series of violations, in order to prove
our case we are going to still need the documentary evidence
from that entity or from that jurisdiction, and sometimes that
can be very difficult. If we have a mutual legal assistance
treaty with the overseeing jurisdiction, we ought to be able to
obtain that readily.
If we have other agreements for financial information
production, then we can secure it. But without the documentary
corroboration, our cases can be very difficult to prove. So
there remain some obstacles and we just have to keep working at
it.
Senator Levin. Should we not allow correspondent accounts
from banks that are licensed by jurisdictions with whom we have
no such treaties or agreements?
Ms. Warren. Perhaps there are other ways to look at it.
That is one way. Another might be in terms of your ``know your
customer'' rules, an extension of that is to also have an entry
on that who is your representative for service of process here
in the United States so that if, in fact, they are doing
business through their correspondent account, they are present
for purposes of service of our process as well to retrieve that
information. I think there are many ways that we could look at
this and see what might best help us.
Senator Levin. We would welcome all the suggestions from
both of you and your agencies in this effort.
Thank you.
Senator Collins. Thank you, Senator Levin.
I want to thank our witnesses of this panel, and I want to
second Senator Levin's request and urge your assistance in
helping us to strike the right balance as we seek to prevent
money laundering, but to do so in such a way that we don't
needlessly hamper the legitimate operations of the
international banking system. I would encourage you to work
very closely with us as we proceed to help us find that right
balance.
I want to thank you both for your testimony this morning.
The two witnesses are excused.
Ms. Warren. Thank you.
Mr. Myers. Thank you.
Senator Collins. The 3 days of hearings that we have held
during the past week on the role of correspondent banking in
international money laundering have truly been an eye-opening
experience.
Most Americans give little thought to the world of offshore
banking at all. If and when they do so, I suspect that they
assume, as I did, that it is a shady world of wealthy criminals
and tax evaders that exists entirely separate and apart from
the normal world of reputable banking institutions in the
domestic arena with familiar and prestigious names that we all
know. Such thoughts would only be half right.
The offshore banking and shell bank world certainly
contains more than its fair share of shady characters and
outright criminals. But these hearings have made very clear
that prestigious and reputable American banks with excellent
reputations have far too often failed to escape being
indirectly tied to institutions that either knowingly or with
their eyes deliberately shut are facilitating money laundering.
As we have seen, the offshore shell banks and other poorly
regulated institutions can often insinuate themselves into the
reputable world of the premiere banks by means of correspondent
banking accounts. The Minority's investigation has provided an
important service in pointing out the vulnerability of our
correspondent banking system to abuse by money launderers, and
in making clear how lax due diligence and sloppy oversight by
otherwise distinguished American banks can play right into the
hands of criminals.
I am pleased to hear that American banks are making
important strides in improving their due diligence and account-
opening and monitoring procedures. I hope, however, that the
case studies that the Minority's investigation has undertaken
will spur them to do much more to strengthen their procedures.
I also believe that we need an even greater effort by the
Federal Government working with other countries to crack down
on international money laundering.
All in all, I hope and believe that the Subcommittee has
been able to contribute in important ways to the goal of
ensuring that our banking industry is made far less vulnerable
to abuse by money launderers and other criminals.
I want to thank all of the witnesses who have participated
in the Subcommittee's investigation. They have made important
contributions to the work of this Subcommittee.
I also would again like to commend Senator Levin and his
staff for their very hard and diligent work on a complex and
fascinating topic, and for all of their efforts in undertaking
and leading this complicated investigation.
Finally, I would like to thank the members of my own
Subcommittee staff who also worked very hard on these hearings,
especially Eileen Fisher, Claire Barnard, Rena Johnson, Chris
Ford, and Mary Robertson. Their hard work and attention to
detail has also been indispensable in bringing these hearings
to fruition.
Senator Levin.
Senator Levin. Madam Chairman, first let me thank you for
your invaluable support, both yourself personally and your
staff, of this investigation.
We have already achieved some significant results,
including the delicensing and closure of some rogue banks that
should have been closed a long time ago. We have heightened the
awareness in a number of jurisdictions that do not do an
adequate job, to put it mildly, of controlling their own banks.
But we have a responsibility of controlling our banks and
to make sure that our banks do not unwittingly aid and abet
money laundering through the correspondent accounts that they
maintain with foreign banks. That has been the goal of this
investigation. It is a 450-page report which really is the book
now, as far as I can tell, on the way in which correspondent
accounts are being used to facilitate improper activities by
foreign banks.
I can't say enough about my own staff and their year-long-
plus effort to put this book together. It is an extraordinary
contribution to a very complicated area about which there has
been too much mystery. We have got to rip away that mystique
and we have got to make sure that our banks, our legitimate
banks, are not misused by foreign banks who either are shell
banks with no physical presence anywhere or offshore banks
which are not allowed to do business with the people who live
in the jurisdiction that licenses the banks or banks that come
from jurisdictions that have no strong regulatory process. We
just don't want them to misuse anymore their accounts with
American banks to take full use of the services of those banks,
including earning interest, including separating ownership from
money, hiding ownership, investing that dirty money, and so
forth.
That is our responsibility as a people. We give a lot of
very strongly-held lectures and sermons to other countries
about trying to end corruption. We cannot allow the product of
that corruption to flow through our banks. We prohibit our own
corporations from giving bribes. It is a crime for an American
corporation to give a bribe. We cannot allow that money to flow
through and be cleansed by American banks.
We feel very strongly about the impact of drugs on this
society. We spend billions of dollars trying to stop the flow
of drugs into this country and then dealing with the impact of
those drugs when they do reach our shores. We cannot accept our
banks, knowingly or unwittingly, being the depository of dirty
drug money.
There have been some steps taken, and as a result of this
investigation there have been some additional steps taken, but
we have a long way to go regulatory-wise and in terms of our
laws. We will be working very hard on trying to close the
loopholes in our laws, trying to strengthen our laws, trying
to, in my judgment at least, end correspondent accounts for
shell banks, trying to tighten up on the use of correspondent
accounts for offshore banks and for banks that are licensed in
jurisdictions which have no effective regulation.
We have to try to be sure that the beneficial owners of
these accounts are made known to our banks so that we have
access through subpoenas and through lawsuits to people who do
perpetrate fraud and then try to cleanse their money through
our banks, or who do take bribe money and try to cleanse the
money, or who make drug money and then try to cleanse it
through our banks, and so forth.
That is our responsibility. It is a heavy responsibility.
Our Chairman very properly points out that we are going to
attempt to do that in way which does not impact on the
legitimate operations of legitimate banks, but that is surely
our goal. No one should mistake either our intention to get
after the misuse of our correspondent accounts or our
determination that in getting after the misuse that we are not
going to be doing damage to the legitimate use of correspondent
accounts. Both of those goals are in mind.
Again, I want to thank our Chairman for her support of this
investigation. We could not have gotten here without your full
support or get to where we are going without it, and I again
thank you and your staff for that support.
Senator Collins. Thank you, Senator Levin.
The Subcommittee hearings are now adjourned.
[Whereupon, at 12:18 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
[GRAPHIC] [TIFF OMITTED] T1166.001
[GRAPHIC] [TIFF OMITTED] T1166.002
[GRAPHIC] [TIFF OMITTED] T1166.003
[GRAPHIC] [TIFF OMITTED] T1166.004
[GRAPHIC] [TIFF OMITTED] T1166.005
[GRAPHIC] [TIFF OMITTED] T1166.006
[GRAPHIC] [TIFF OMITTED] T1166.007
[GRAPHIC] [TIFF OMITTED] T1166.008
[GRAPHIC] [TIFF OMITTED] T1166.009
[GRAPHIC] [TIFF OMITTED] T1166.010
[GRAPHIC] [TIFF OMITTED] T1166.011
[GRAPHIC] [TIFF OMITTED] T1166.012
[GRAPHIC] [TIFF OMITTED] T1166.013
[GRAPHIC] [TIFF OMITTED] T1166.014
[GRAPHIC] [TIFF OMITTED] T1166.015
[GRAPHIC] [TIFF OMITTED] T1166.016
[GRAPHIC] [TIFF OMITTED] T1166.017
[GRAPHIC] [TIFF OMITTED] T1166.018
[GRAPHIC] [TIFF OMITTED] T1166.019
[GRAPHIC] [TIFF OMITTED] T1166.020
[GRAPHIC] [TIFF OMITTED] T1166.021
[GRAPHIC] [TIFF OMITTED] T1166.022
[GRAPHIC] [TIFF OMITTED] T1166.023
[GRAPHIC] [TIFF OMITTED] T1166.024
[GRAPHIC] [TIFF OMITTED] T1166.025
[GRAPHIC] [TIFF OMITTED] T1166.026
[GRAPHIC] [TIFF OMITTED] T1166.027
[GRAPHIC] [TIFF OMITTED] T1166.028
[GRAPHIC] [TIFF OMITTED] T1166.029
[GRAPHIC] [TIFF OMITTED] T1166.030
[GRAPHIC] [TIFF OMITTED] T1166.031
[GRAPHIC] [TIFF OMITTED] T1166.032
[GRAPHIC] [TIFF OMITTED] T1166.033
[GRAPHIC] [TIFF OMITTED] T1166.034
[GRAPHIC] [TIFF OMITTED] T1166.035
[GRAPHIC] [TIFF OMITTED] T1166.036
[GRAPHIC] [TIFF OMITTED] T1166.037
[GRAPHIC] [TIFF OMITTED] T1166.038
[GRAPHIC] [TIFF OMITTED] T1166.039
[GRAPHIC] [TIFF OMITTED] T1166.040
[GRAPHIC] [TIFF OMITTED] T1166.041
[GRAPHIC] [TIFF OMITTED] T1166.042
[GRAPHIC] [TIFF OMITTED] T1166.043
[GRAPHIC] [TIFF OMITTED] T1166.044
[GRAPHIC] [TIFF OMITTED] T1166.045
[GRAPHIC] [TIFF OMITTED] T1166.046
[GRAPHIC] [TIFF OMITTED] T1166.047
[GRAPHIC] [TIFF OMITTED] T1166.048
[GRAPHIC] [TIFF OMITTED] T1166.049
[GRAPHIC] [TIFF OMITTED] T1166.050
[GRAPHIC] [TIFF OMITTED] T1166.051
[GRAPHIC] [TIFF OMITTED] T1166.052
[GRAPHIC] [TIFF OMITTED] T1166.053
[GRAPHIC] [TIFF OMITTED] T1166.054
[GRAPHIC] [TIFF OMITTED] T1166.055
[GRAPHIC] [TIFF OMITTED] T1166.056
[GRAPHIC] [TIFF OMITTED] T1166.057
[GRAPHIC] [TIFF OMITTED] T1166.058
[GRAPHIC] [TIFF OMITTED] T1166.059
[GRAPHIC] [TIFF OMITTED] T1166.060
[GRAPHIC] [TIFF OMITTED] T1166.061
[GRAPHIC] [TIFF OMITTED] T1166.062
[GRAPHIC] [TIFF OMITTED] T1166.063
[GRAPHIC] [TIFF OMITTED] T1166.064
[GRAPHIC] [TIFF OMITTED] T1166.065
[GRAPHIC] [TIFF OMITTED] T1166.066
[GRAPHIC] [TIFF OMITTED] T1166.067
[GRAPHIC] [TIFF OMITTED] T1166.068
[GRAPHIC] [TIFF OMITTED] T1166.069
[GRAPHIC] [TIFF OMITTED] T1166.070
[GRAPHIC] [TIFF OMITTED] T1166.071
[GRAPHIC] [TIFF OMITTED] T1166.072
[GRAPHIC] [TIFF OMITTED] T1166.073
[GRAPHIC] [TIFF OMITTED] T1166.074
[GRAPHIC] [TIFF OMITTED] T1166.075
[GRAPHIC] [TIFF OMITTED] T1166.076
[GRAPHIC] [TIFF OMITTED] T1166.077
[GRAPHIC] [TIFF OMITTED] T1166.078
[GRAPHIC] [TIFF OMITTED] T1166.079
[GRAPHIC] [TIFF OMITTED] T1166.080
[GRAPHIC] [TIFF OMITTED] T1166.081
[GRAPHIC] [TIFF OMITTED] T1166.082
[GRAPHIC] [TIFF OMITTED] T1166.083
[GRAPHIC] [TIFF OMITTED] T1166.084
[GRAPHIC] [TIFF OMITTED] T1166.085
[GRAPHIC] [TIFF OMITTED] T1166.086
[GRAPHIC] [TIFF OMITTED] T1166.087
[GRAPHIC] [TIFF OMITTED] T1166.088
[GRAPHIC] [TIFF OMITTED] T1166.089
[GRAPHIC] [TIFF OMITTED] T1166.090
[GRAPHIC] [TIFF OMITTED] T1166.091
[GRAPHIC] [TIFF OMITTED] T1166.092
[GRAPHIC] [TIFF OMITTED] T1166.093
[GRAPHIC] [TIFF OMITTED] T1166.094
[GRAPHIC] [TIFF OMITTED] T1166.095
[GRAPHIC] [TIFF OMITTED] T1166.096
[GRAPHIC] [TIFF OMITTED] T1166.097
[GRAPHIC] [TIFF OMITTED] T1166.098
[GRAPHIC] [TIFF OMITTED] T1166.099
[GRAPHIC] [TIFF OMITTED] T1166.100
[GRAPHIC] [TIFF OMITTED] T1166.101
[GRAPHIC] [TIFF OMITTED] T1166.102
[GRAPHIC] [TIFF OMITTED] T1166.103
[GRAPHIC] [TIFF OMITTED] T1166.104
[GRAPHIC] [TIFF OMITTED] T1166.105
[GRAPHIC] [TIFF OMITTED] T1166.106
[GRAPHIC] [TIFF OMITTED] T1166.107
[GRAPHIC] [TIFF OMITTED] T1166.108
[GRAPHIC] [TIFF OMITTED] T1166.109
[GRAPHIC] [TIFF OMITTED] T1166.110
[GRAPHIC] [TIFF OMITTED] T1166.111
[GRAPHIC] [TIFF OMITTED] T1166.112
[GRAPHIC] [TIFF OMITTED] T1166.113
[GRAPHIC] [TIFF OMITTED] T1166.114
[GRAPHIC] [TIFF OMITTED] T1166.115
[GRAPHIC] [TIFF OMITTED] T1166.116
[GRAPHIC] [TIFF OMITTED] T1166.117
[GRAPHIC] [TIFF OMITTED] T1166.118
[GRAPHIC] [TIFF OMITTED] T1166.119
[GRAPHIC] [TIFF OMITTED] T1166.120
[GRAPHIC] [TIFF OMITTED] T1166.121
[GRAPHIC] [TIFF OMITTED] T1166.122
[GRAPHIC] [TIFF OMITTED] T1166.123
[GRAPHIC] [TIFF OMITTED] T1166.124
[GRAPHIC] [TIFF OMITTED] T1166.125
[GRAPHIC] [TIFF OMITTED] T1166.126
[GRAPHIC] [TIFF OMITTED] T1166.127
[GRAPHIC] [TIFF OMITTED] T1166.128
[GRAPHIC] [TIFF OMITTED] T1166.129
[GRAPHIC] [TIFF OMITTED] T1166.130
[GRAPHIC] [TIFF OMITTED] T1166.131
[GRAPHIC] [TIFF OMITTED] T1166.132
[GRAPHIC] [TIFF OMITTED] T1166.133
[GRAPHIC] [TIFF OMITTED] T1166.134
CORRESPONDENT BANKING:
A GATEWAY FOR MONEY LAUNDERING
A REPORT BY THE
MINORITY STAFF OF THE
PERMANENT SUBCOMMITTEE ON
INVESTIGATIONS
C O N T E N T S
------
I. Executive Summary............................................. 277
II. Minority Staff Investigation Into Correspondent Banking...... 284
III. Anti-Money Laundering Obligations........................... 285
IV. Correspondent Banking Industry in the United States.......... 287
A. Correspondent Banking Products and Services............... 288
B. Three Categories of High Risk Banks....................... 289
Shell Banks............................................. 289
Offshore Banks.......................................... 290
Banks in Non-Cooperating Jurisdictions.................. 292
C. Survey on Correspondent Banking........................... 293
D. Internet Gambling......................................... 298
V. Why Correspondent Banking is Vulnerable to Money Laundering... 301
A. Culture of Lax Due Diligence.............................. 301
B. Role of Correspondent Bankers............................. 307
C. Nested Correspondents..................................... 310
D. Foreign Jurisdictions with Weak Banking or Accounting
Practices.................................................. 311
E. Bank Secrecy.............................................. 314
F. Cross Border Difficulties................................. 316
G. U.S. Legal Barriers to Seizing Funds in U.S. Correspondent
Accounts................................................... 316
VI. GHow an Offshore Bank Launders Money Through a U.S.
Correspondent Account: The Lessons of Guardian Bank............ 318
VII. Conclusions and Recommendations............................. 330
VIII. Ten Case Histories......................................... 333
No. 1: American International Bank........................... 333
No. 2: Caribbean American Bank............................... 333
No. 3: Overseas Development Bank and Trust Company........... 333
A. THE FACTS................................................. 334
(1) American International Bank Ownership and Management.. 334
(2) Financial Information and Primary Activities.......... 334
(3) AIB Correspondents.................................... 336
(4) AIB Operations and Anti-Money Laundering Controls..... 336
(5) Regulatory Oversight.................................. 337
(6) Money Laundering and Fraud Involving AIB.............. 337
(a) The Forum Investment Scheme........................ 337
(b) Nested Correspondent Banking at AIB................ 343
(c) Internet Gambling/Sports Betting................... 349
(d) Loans/Self Dealing................................. 350
(7) Correspondent Accounts at U.S. Banks.................. 353
(a) Bank of America.................................... 353
(b) Toronto Dominion Bank (New York Branch)............ 357
(c) Chase Manhattan Bank............................... 358
(d) Popular Bank of Florida (now BAC Florida Bank)..... 362
(e) Barnett Bank....................................... 365
(8) GAIB's Relationship with Overseas Development Bank and
Trust Company.............................................. 367
(a) The Koop Fraud..................................... 370
(b) Financial Statement................................ 372
(c) ODBT's Correspondent Relationships................. 373
B. THE ISSUES................................................ 377
No. 4: British Trade and Commerce Bank....................... 386
A. THE FACTS................................................. 386
(1) BTCB Ownership and Management......................... 386
(2) BTCB Financial Information............................ 391
(3) BTCB Correspondents................................... 394
(4) BTCB Anti-Money Laundering Controls................... 394
(5) BTCB Affiliates....................................... 396
(6) BTCB Major Lines of Business.......................... 398
(7) Money Laundering and Fraud Involving BTCB............. 404
(8) Correspondent Accounts at U.S. Banks.................. 408
(a) Banco Industrial de Venezuela (Miami Office)....... 409
(b) Security Bank N.A.................................. 416
(c) First Union National Bank.......................... 424
(d) Other U.S. Banks................................... 431
B. THE ISSUES................................................ 431
No. 5: Hanover Bank.......................................... 439
A. THE FACTS................................................. 439
(1)Hanover Bank Ownership and Management.................. 439
(2) Hanover Bank Financial Information.................... 444
(3) Hanover Bank Correspondents........................... 445
(4) Hanover Bank Operations and Anti-Money Laundering
Controls................................................... 447
(5) Regulatory Oversight of Hanover Bank.................. 454
(6) Money Laundering and Fraud Involving Hanover Bank..... 455
(7) Correspondent Account at Harris Bank International.... 467
B. THE ISSUES................................................ 470
No. 6: British Bank of Latin America......................... 474
A. THE FACTS................................................. 474
(1) BBLA Ownership........................................ 474
(2) BBLA Principal Lines of Business...................... 475
(3) BBLA Correspondents................................... 477
(4) BBLA Management and Operations........................ 477
(5) Money Laundering Involving BBLA....................... 482
(6) Closure of BBLA....................................... 487
(7) Correspondent Account at Bank of New York............. 487
B. THE ISSUES................................................ 490
No. 7: European Bank......................................... 495
A. THE FACTS................................................. 495
(1) European Bank Ownership and Management................ 495
(2) European Bank Financial Information and Primary
Activities................................................. 496
(3) European Bank Correspondents.......................... 498
(4) European Bank Operations and Anti-Money Laundering
Controls................................................... 499
(5) Regulatory Oversight of European Bank................. 501
(6) Money Laundering and Fraud Involving European Bank.... 504
(7) Correspondent Account at Citibank..................... 509
B. THE ISSUES................................................ 514
No. 8: Swiss American Bank and Swiss American National Bank.. 521
A. THE FACTS................................................. 521
(1) Ownership and Management.............................. 521
(2) Financial Information and Primary Activities.......... 523
(3) Correspondents........................................ 523
(4) Operations and Anti-Money Laundering Controls......... 524
(5) Regulatory Oversight.................................. 524
(6) Money Laundering and Fraud Involving SAB/SANB......... 525
(a) Controversial Leadership........................... 525
(b) The Fitzgerald Case--Drugs and Terrorist Money..... 527
(c) The Gherman Fraud.................................. 531
(d) The DeBella Fraud.................................. 533
(e) The Fortuna Alliance Fraud......................... 538
(f) Other Frauds/Questionable Accounts................. 541
(g) Internet Gambling/Sports Betting................... 544
(7) Correspondent Accounts at U.S. Banks.................. 543
(a) Bank of New York................................... 543
(b) Bank of America.................................... 553
(c) Chase Manhattan Bank............................... 560
B. THE ISSUES................................................ 576
No. 9 and No. 10: M.A. Bank and Federal Bank................. 579
A. THE FACTS................................................. 580
M.A. Bank
(1) M.A. Bank Ownership and Management.................... 580
(2) Financial Information and Primary Activities.......... 581
(3) M.A. Bank's Correspondents............................ 582
(4) M.A. Bank's Operations and Anti-Money Laundering
Controls................................................... 582
(5) Regulatory Oversight.................................. 582
(6) Money Laundering and Fraud Involving M.A. Bank........ 584
(a) Laundering of Drug Proceeds through M.A. Bank...... 584
(b) Unsound and Illegal Banking Practices.............. 588
(7) Correspondent Account at Citibank..................... 593
Federal Bank
(1) Grupo Moneta and Banco Republica...................... 605
(2) Federal Bank Ownership................................ 606
(3) Financial Information and Primary Activities.......... 607
(4) CEI................................................... 609
(5) Correspondent Account at Citibank..................... 610
(6) Regulatory Oversight.................................. 611
(7) Central Bank of Argentina Concerns.................... 613
(8) American Exchange Company............................. 619
(9) Suspicious Activity At Federal Bank................... 620
B. THE ISSUES................................................ 624
APPENDIX
(1) Bank of New York Scandal.............................. 644
(2) Koop Fraud............................................ 646
(3) Cook Fraud............................................ 654
(4) Gold Chance Fraud..................................... 659
(5) $10 Million CD Interpleader........................... 665
(6) GOther Suspect Transactions At BTCB: KPJ Trust,
Michael Gendreau, Scott Brett, Global/Vector Medical
Technologies............................................... 671
(7) Taves Fraud and the Benford Account................... 675
(8) IPC Fraud............................................. 686
MINORITY STAFF OF THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
REPORT ON
CORRESPONDENT BANKING:
A GATEWAY FOR MONEY LAUNDERING
February 5, 2001
U.S. banks, through the correspondent accounts they provide
to foreign banks, have become conduits for dirty money flowing
into the American financial system and have, as a result,
facilitated illicit enterprises, including drug trafficking and
financial frauds. Correspondent banking occurs when one bank
provides services to another bank to move funds, exchange
currencies, or carry out other financial transactions.
Correspondent accounts in U.S. banks give the owners and
clients of poorly regulated, poorly managed, sometimes corrupt,
foreign banks with weak or no anti-money laundering controls
direct access to the U.S. financial system and the freedom to
move money within the United States and around the world.
This report summarizes a year-long investigation by the
Minority Staff of the U.S. Senate Permanent Subcommittee on
Investigations, under the leadership of Ranking Democrat
Senator Carl Levin, into correspondent banking and its use as a
tool for laundering money. It is the second of two reports
compiled by the Minority Staff at Senator Levin's direction on
the U.S. banking system's vulnerabilities to money laundering.
The first report, released in November 1999, resulted in
Subcommittee hearings on the money laundering vulnerabilities
in the private banking activities of U.S. banks.\1\
---------------------------------------------------------------------------
\1\ See ``Private Banking and Money Laundering: A Case Study of
Opportunities and Vulnerabilities,'' S. Hrg. 106-428 (November 9 and
10, 1999), Minority Staff report at 872.
---------------------------------------------------------------------------
I. Executive Summary
Many banks in the United States have established
correspondent relationships with high risk foreign banks. These
foreign banks are: (a) shell banks with no physical presence in
any country for conducting business with their clients; (b)
offshore banks with licenses limited to transacting business
with persons outside the licensing jurisdiction; or (c) banks
licensed and regulated by jurisdictions with weak anti-money
laundering controls that invite banking abuses and criminal
misconduct. Some of these foreign banks are engaged in criminal
behavior, some have clients who are engaged in criminal
behavior, and some have such poor anti-money laundering
controls that they do not know whether or not their clients are
engaged in criminal behavior.
These high risk foreign banks typically have limited
resources and staff and use their correspondent bank accounts
to conduct operations, provide client services, and move funds.
Many deposit all of their funds in, and complete virtually all
transactions through, their correspondent accounts, making
correspondent banking integral to their operations. Once a
correspondent account is open in a U.S. bank, not only the
foreign bank but its clients can transact business through the
U.S. bank. The result is that the U.S. correspondent banking
system has provided a significant gateway into the U.S.
financial system for criminals and money launderers.
The industry norm today is for U.S. banks \2\ to have
dozens, hundreds, or even thousands of correspondent
relationships, including a number of relationships with high
risk foreign banks. Virtually every U.S. bank examined by the
Minority Staff investigation had accounts with offshore
banks,\3\ and some had relationships with shell banks with no
physical presence in any jurisdiction.
---------------------------------------------------------------------------
\2\ The term ``U.S. bank'' refers in this report to any bank
authorized to conduct banking activities in the United States, whether
or not the bank or its parent corporation is domiciled in the United
States.
\3\ The term ``offshore bank'' is used in this report to refer to
banks whose licenses bar them from transacting business with the
citizens of their own licensing jurisdiction or bar them from
transacting business using the local currency of the licensing
jurisdiction. See also the International Narcotics Control Strategy
Report issued by the U.S. Department of State (March 2000)(hereinafter
``INCSR 2000''), ``Offshore Financial Centers'' at 565-77.
---------------------------------------------------------------------------
High risk foreign banks have been able to open
correspondent accounts at U.S. banks and conduct their
operations through their U.S. accounts, because, in many cases,
U.S. banks fail to adequately screen and monitor foreign banks
as clients.
The prevailing principle among U.S. banks has been that any
bank holding a valid license issued by a foreign jurisdiction
qualifies for a correspondent account, because U.S. banks
should be able to rely on the foreign banking license as proof
of the foreign bank's good standing. U.S. banks have too often
failed to conduct careful due diligence reviews of their
foreign bank clients, including obtaining information on the
foreign bank's management, finances, reputation, regulatory
environment, and anti-money laundering efforts. The frequency
of U.S. correspondent relationships with high risk banks, as
well as a host of troubling case histories uncovered by the
Minority Staff investigation, belie banking industry assertions
that existing policies and practices are sufficient to prevent
money laundering in the correspondent banking field.
For example, several U.S. banks were unaware that they were
servicing respondent banks \4\ which had no office in any
location, were operating in a jurisdiction where the bank had
no license to operate, had never undergone a bank examination
by a regulator, or were using U.S. correspondent accounts to
facilitate crimes such as drug trafficking, financial fraud or
Internet gambling. In other cases, U.S. banks did not know that
their respondent banks lacked basic fiscal controls and
procedures and would, for example, open accounts without any
account opening documentation, accept deposits directed to
persons unknown to the bank, or operate without written anti-
money laundering procedures. There are other cases in which
U.S. banks lacked information about the extent to which
respondent banks had been named in criminal or civil
proceedings involving money laundering or other wrongdoing. In
several instances, after being informed by Minority Staff
investigators about a foreign bank's history or operations,
U.S. banks terminated the foreign bank's correspondent
relationship.
---------------------------------------------------------------------------
\4\ The term ``respondent bank'' is used in this report to refer to
the client of the bank offering correspondent services. The bank
offering the services is referred to as the ``correspondent bank.'' All
of the respondent banks examined in this investigation are foreign
banks.
---------------------------------------------------------------------------
U.S. banks' ongoing anti-money laundering oversight of
their correspondent accounts is often weak or ineffective. A
few large banks have developed automated monitoring systems
that detect and report suspicious account patterns and wire
transfer activity, but they appear to be the exception rather
than the rule. Most U.S. banks appear to rely on manual reviews
of account activity and to conduct limited oversight of their
correspondent accounts. One problem is the failure of some
banks to conduct systematic anti-money laundering reviews of
wire transfer activity, even though the majority of
correspondent bank transactions consist of incoming and
outgoing wire transfers. And, even when suspicious transactions
or negative press reports about a respondent bank come to the
attention of a U.S. correspondent bank, in too many cases the
information does not result in a serious review of the
relationship or concrete actions to prevent money laundering.
Two due diligence failures by U.S. banks are particularly
noteworthy. The first is the failure of U.S. banks to ask the
extent to which their foreign bank clients are allowing other
foreign banks to use their U.S. accounts. On numerous
occasions, high risk foreign banks gained access to the U.S.
financial system, not by opening their own U.S. correspondent
accounts, but by operating through U.S. correspondent accounts
belonging to other foreign banks. U.S. banks rarely ask their
client banks about their correspondent practices and, in almost
all cases, remain unaware of their respondent bank's own
correspondent accounts. In several instances, U.S. banks were
surprised to learn from Minority Staff investigators that they
were providing wire transfer services or handling Internet
gambling deposits for foreign banks they had never heard of and
with whom they had no direct relationship. In one instance, an
offshore bank was allowing at least a half dozen offshore shell
banks to use its U.S. accounts. In another, a U.S. bank had
discovered by chance that a high risk foreign bank it would not
have accepted as a client was using a correspondent account the
U.S. bank had opened for another foreign bank.
The second failure is the distinction U.S. banks make in
their due diligence practices between foreign banks that have
few assets and no credit relationship, and foreign banks that
seek or obtain credit from the U.S. bank. If a U.S. bank
extends credit to a foreign bank, it usually will evaluate the
foreign bank's management, finances, business activities,
reputation, regulatory environment and operating procedures.
The same evaluation usually does not occur where there are only
fee-based services, such as wire transfers or check clearing.
Since U.S. banks usually provide cash management services\5\ on
a fee-for-service basis to high risk foreign banks and
infrequently extend credit, U.S. banks have routinely opened
and maintained correspondent accounts for these banks based on
inadequate due diligence reviews. Yet these are the very banks
that should be carefully scrutinized. Under current practice in
the United States, high risk foreign banks in non-credit
relationships seem to fly under the radar screen of most U.S.
banks' anti-money laundering programs.
---------------------------------------------------------------------------
\5\ Cash management services are non-credit related banking
services such as providing interest-bearing or demand deposit accounts
in one or more currencies, international wire transfers of funds, check
clearing, check writing, or foreign exchange services.
---------------------------------------------------------------------------
The failure of U.S. banks to take adequate steps to prevent
money laundering through their correspondent bank accounts is
not a new or isolated problem. It is longstanding, widespread
and ongoing.
The result of these due diligence failures has made the
U.S. correspondent banking system a conduit for criminal
proceeds and money laundering for both high risk foreign banks
and their criminal clients. Of the ten case histories
investigated by the Minority Staff, numerous instances of money
laundering through foreign banks' U.S. bank accounts have been
documented, including:
--laundering illicit proceeds and facilitating crime by
accepting deposits or processing wire transfers involving funds
that the high risk foreign bank knew or should have known were
associated with drug trafficking, financial fraud or other
wrongdoing;
--conducting high yield investment scams by convincing
investors to wire transfer funds to the correspondent account
to earn high returns and then refusing to return any monies to
the defrauded investors;
--conducting advance-fee-for-loan scams by requiring loan
applicants to wire transfer large fees to the correspondent
account, retaining the fees, and then failing to issue the
loans;
--facilitating tax evasion by accepting client deposits,
commingling them with other funds in the foreign bank's
correspondent account, and encouraging clients to rely on bank
and corporate secrecy laws in the foreign bank's home
jurisdiction to shield the funds from U.S. tax authorities; and
--facilitating Internet gambling, illegal under U.S. law,
by using the correspondent account to accept and transfer
gambling proceeds.
While some U.S. banks have moved to conduct a systematic
review of their correspondent banking practices and terminate
questionable correspondent relationships, this effort is
usually relatively recent and is not industry-wide.
Allowing high risk foreign banks and their criminal clients
access to U.S. correspondent bank accounts facilitates crime,
undermines the U.S. financial system, burdens U.S. taxpayers
and consumers, and fills U.S. court dockets with criminal
prosecutions and civil litigation by wronged parties. It is
time for U.S. banks to shut the door to high risk foreign banks
and eliminate other abuses of the U.S. correspondent banking
system.
[GRAPHIC] [TIFF OMITTED] T1166.135
HIGH RISK FOREIGN BANKS
EXAMINED BY PSI MINORITY STAFF INVESTIGATION
----------------------------------------------------------------------------------------------------------------
CURRENT U.S. CORRESPONDENTS MONEY LAUNDERING
NAME OF BANK STATUS LICENSE AND OPERATION EXAMINED CONCERNS
----------------------------------------------------------------------------------------------------------------
American International Bank In Licensed in BAC of Florida Financial
(AIB) Receivershi Antigua/Barbuda Bank of America fraud money
1992-1998 p Offshore Barnett Bank Nested
Physical Chase Manhattan Bank correspondents
presence in Antigua Toronto Dominion Internet
Union Bank of Jamaica gambling
----------------------------------------------------------------------------------------------------------------
British Bank of Latin Closed Licensed by Bank of New York Drug money
America (BBLA) Bahamas from Black Market
1981-2000 Offshore Peso Exchange
Physical
presence in Bahamas and
Columbia
Wholly owned
subsidiary of Lloyds
TSB Bank
----------------------------------------------------------------------------------------------------------------
British Trade and Commerce Open Licensed by Banco Industrial de Financial
Bank (BTCB) Dominica Venezuela (Miami) fraud money
1997-present Offshore First Union National High yield
Physical Bank investments
presence in Dominica Security Bank N.A. Nested
correspondents
Internet
gambling
----------------------------------------------------------------------------------------------------------------
Caribbean American Bank In Licensed by U.S. correspondents Financial
(CAB) Liquidation Antigua/Barbuda of AIB fraud money
1994-1997 Offshore Nested
No physical correspondents
presence Shell bank
----------------------------------------------------------------------------------------------------------------
European Bank Open Licensed by ANZ Bank (New York) Credit card
1972-present Vantuatu Citibank fraud money
Onshore
Physical
presence in Vantuatu
----------------------------------------------------------------------------------------------------------------
Federal Bank Open Licensed by Citibank Bribe money
1992-present Bahamas Shell bank
Offshore
No physical
presence
----------------------------------------------------------------------------------------------------------------
HIGH RISK FOREIGN BANKS
EXAMINED BY PSI MINORITY STAFF INVESTIGATION--Continued
----------------------------------------------------------------------------------------------------------------
CURRENT U.S. CORRESPONDENTS MONEY LAUNDERING
NAME OF BANK STATUS LICENSE AND OPERATION EXAMINED CONCERNS
----------------------------------------------------------------------------------------------------------------
Guardian Bank and Trust Closed Licensed by Bank of New York Financial
(Cayman) Ltd. Cayman Islands fraud money
1984-1995 Offshore Tax evasion
Physical
presence in Cayman
Islands
----------------------------------------------------------------------------------------------------------------
Hanover Bank Open Licensed by Standard Bank Financial
1992-present Antigua/Barbuda (Jersey) Ltd.'s U.S. fraud money
Offshore correspondent, Nested
No physical Harris Bank correspondents
presence International (New Shell bank
York)
----------------------------------------------------------------------------------------------------------------
M.A. Bank Open Licensed by Citibank Drug money
1991-present Cayman Islands Union Bank of Shell bank
Offshore Switzerland (New
No physical York)
presence
----------------------------------------------------------------------------------------------------------------
Overseas Development Bank Open Licensed by U.S. correspondents Financial
and Trust (ODBT) Dominica of AIB fraud money
1996-present Offshore AmTrade International Nested
Physical (Florida) correspondents
presence in Dominica Bank One
(formerly in Antigua)
----------------------------------------------------------------------------------------------------------------
Swiss American Bank (SAB) Open Licensed by Bank of America Financial
1983-present Antigua/Barbuda Chase Manhattan Bank fraud money
Offshore Internet
Physical gambling
presence in Antigua Drug and
illegal arms sales
money
----------------------------------------------------------------------------------------------------------------
Swiss American National Open Licensed by Bank of New York Financial
Bank (SANB) Antigua/Barbuda Chase Manhattan Bank fraud money
1981-present Onshore Drug and
Physical illegal arms sales
presence in Antigua money
----------------------------------------------------------------------------------------------------------------
Prepared by Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, January 2001.
II. Minority Staff Investigation Into Correspondent Banking
To examine the vulnerability of correspondent banking to
money laundering, the Minority Staff investigation interviewed
experts; reviewed relevant banking laws, regulations and
examination manuals; surveyed U.S. banks about their
correspondent banking practices; reviewed court proceedings and
media reports on cases of money laundering and correspondent
banking; and developed ten detailed case histories of money
laundering misconduct involving U.S. correspondent accounts.
The 1-year investigation included hundreds of interviews and
the collection and review of over 25 boxes of documentation,
including subpoenaed materials from 19 U.S. banks.
The Minority Staff began its investigation by interviewing
a variety of anti-money laundering and correspondent banking
experts. Included were officials from the U.S. Federal Reserve,
U.S. Department of Treasury, Internal Revenue Service, Office
of the Comptroller of the Currency, Financial Crimes
Enforcement Network (``FinCEN''), U.S. Secret Service, U.S.
State Department, and U.S. Department of Justice. Minority
Staff investigators also met with bankers from the American
Bankers Association, Florida International Bankers Association,
and banking groups in the Bahamas and Cayman Islands, and
interviewed at length a number of U.S. bankers experienced in
monitoring correspondent accounts for suspicious activity.
Extensive assistance was also sought from and provided by
government and law enforcement officials in Antigua and
Barbuda, Argentina, Australia, Bahamas, Cayman Islands,
Dominica, Jersey, Ireland, the United Kingdom, and Vanuatu.
Due to a paucity of information about correspondent banking
practices in the United States, the Minority Staff conducted a
survey of 20 banks with active correspondent banking
portfolios. The 18-question survey sought information about the
U.S. banks' correspondent banking clients, procedures, and
anti-money laundering safeguards. The survey results are
described in Chapter IV.
To develop specific information on how correspondent
banking is used in the United States to launder illicit funds,
Minority Staff investigators identified U.S. criminal and civil
money laundering indictments and pleadings which included
references to U.S. correspondent accounts. Using these public
court pleadings as a starting point, the Minority Staff
identified the foreign banks and U.S. banks involved in the
facts of the case, and the circumstances associated with how
the foreign banks' U.S. correspondent accounts became conduits
for laundered funds. The investigation obtained relevant court
proceedings, exhibits and related documents, subpoenaed U.S.
bank documents, interviewed U.S. correspondent bankers and,
when possible, interviewed foreign bank officials and
government personnel. From this material, the investigation
examined how foreign banks opened and used their U.S.
correspondent accounts and how the U.S. banks monitored or
failed to monitor the foreign banks and their account activity.
The investigation included an interview of a U.S. citizen
who formerly owned a bank in the Cayman Islands, has pleaded
guilty to money laundering, and was willing to explain the
mechanics of how his bank laundered millions of dollars for
U.S. citizens through U.S. correspondent accounts. Another
interview was with a U.S. citizen who has pleaded guilty to
conspiracy to commit money laundering and was willing to
explain how he used three offshore banks to launder illicit
funds from a financial investment scheme that defrauded
hundreds of U.S. citizens. Other interviews were with foreign
bank owners who explained how their bank operated, how they
used correspondent accounts to transact business, and how their
bank became a conduit for laundered funds. Numerous interviews
were conducted with U.S. bank officials.
Because the investigation began with criminal money
laundering indictments in the United States, attention was
directed to foreign banks and jurisdictions known to U.S.
criminals. The case histories featured in this report are not
meant to be interpreted as identifying the most problematic
banks or jurisdictions. To the contrary, a number of the
jurisdictions identified in this report have taken significant
strides in strengthening their banking and anti-money
laundering controls. The evidence indicates that equivalent
correspondent banking abuses may be found throughout the
international banking community,\6\ and that measures need to
be taken in major financial centers throughout the world to
address the types of money laundering risks identified in this
report.
---------------------------------------------------------------------------
\6\ See, for example, ``German Officials Investigate Possible Money
Laundering,'' Wall Street Journal (1/16/01)(Germany); ``Prosecutors set
to focus on Estrada bank records,'' Business World (1/15/
01)(Philippines); Canada's Exchange Bank & Trust Offers Look at `Brass-
Plate' Banks,'' Wall Street Journal (12/29/00)(Canada, Nauru, St.
Kitts-Nevis); ``Peru's Montesinos hires lawyer in Switzerland to keep
bank accounts secret,'' Agence France Presse (12/11/00)(Peru,
Switzerland); ``The Billion Dollar Shack,'' New York Times Magazine
(12/10/00) (Nauru, Russia); ``Launderers put UK banks in a spin,''
Financial Times (London)(United Kingdom, Luxembourg, Switzerland,
Nigeria); ``Croats Find Treasury Plundered,'' Washington Post (6/13/
00)(Croatia); ``Arrests and millions missing in troubled offshore
bank,'' Associated Press (9/11/00)(Grenada); ``Judgement Daze,'' Sunday
Times (London) (10/18/98)(Ireland); ``That's Laird To You, Mister,''
New York Times (2/27/00)(multiple countries).
---------------------------------------------------------------------------
III. Anti-Money Laundering Obligations
Two laws lay out the basic anti-money laundering
obligations of all United States banks. First is the Bank
Secrecy Act which, in section 5318(h) of Title 31 in the U.S.
Code, requires all U.S. banks to have anti-money laundering
programs. It states:
In order to guard against money laundering through
financial institutions, the Secretary [of the Treasury] may
require financial institutions to carry out anti-money
laundering programs, including at a minimum--(A) the
development of internal policies, procedures, and controls, (B)
the designation of a compliance officer, (C) an ongoing
employee training program, and (D) an independent audit
function to test programs.
The Bank Secrecy Act also authorizes the U.S. Department of
the Treasury to require financial institutions to file reports
on currency transactions and suspicious activities, again as
part of U.S. efforts to combat money laundering. The Treasury
Department has accordingly issued regulations and guidance
requiring U.S. banks to establish anti-money laundering
programs and file certain currency transaction reports
(``CTRs'') and suspicious activity reports (``SARs'').\7\
---------------------------------------------------------------------------
\7\ See, for example, 31 C.F.R. Sec. Sec. 103.11 and 103.21 et seq.
CTRs identify cash transactions above a specified threshold; SARs
identify possibly illegal transactions observed by bank personnel.
---------------------------------------------------------------------------
The second key law is the Money Laundering Control Act of
1986, which was enacted partly in response to hearings held by
the Permanent Subcommittee on Investigations in 1985. This law
was the first in the world to make money laundering an
independent crime. It prohibits any person from knowingly
engaging in a financial transaction which involves the proceeds
of a ``specified unlawful activity.'' The law provides a list
of specified unlawful activities, including drug trafficking,
fraud, theft and bribery.
The aim of these two statutes is to enlist U.S. banks in
the fight against money laundering. Together they require banks
to refuse to engage in financial transactions involving
criminal proceeds, to monitor transactions and report
suspicious activity, and to operate active anti-money
laundering programs. Both statutes have been upheld by the
Supreme Court.
Recently, U.S. bank regulators have provided additional
guidance to U.S. banks about the anti-money laundering risks in
correspondent banking and the elements of an effective anti-
money laundering program. In the September 2000 ``Bank Secrecy
Act/Anti-Money Laundering Handbook,'' the Office of the
Comptroller of the Currency (OCC) deemed international
correspondent banking a ``high-risk area'' for money laundering
that warrants ``heightened scrutiny.'' The OCC Handbook
provides the following anti-money laundering considerations
that a U.S. bank should take into account in the correspondent
banking field:
A bank must exercise caution and due diligence in
determining the level of risk associated with each of its
correspondent accounts. Information should be gathered to
understand fully the nature of the correspondent's business.
Factors to consider include the purpose of the account, whether
the correspondent bank is located in a bank secrecy or money
laundering haven (if so, the nature of the bank license, i.e.,
shell/offshore bank, fully licensed bank, or an affiliate/
subsidiary of a major financial institution), the level of the
correspondent's money laundering prevention and detection
efforts, and the condition of bank regulation and supervision
in the correspondent's country.\8\
---------------------------------------------------------------------------
\8\ ``Bank Secrecy Act/Anti-Money Laundering Handbook'' (September
2000), at 22.
The OCC Handbook singles out three activities in
correspondent accounts that warrant heightened anti-money
---------------------------------------------------------------------------
laundering scrutiny and analysis:
Three of the more common types of activity found in
international correspondent bank accounts that should receive
heightened scrutiny are funds (wire) transfer[s], correspondent
accounts used as ``payable through accounts'' and ``pouch/cash
letter activity.'' This heightened risk underscores the need
for effective and comprehensive systems and controls particular
to these types of accounts.\9\
---------------------------------------------------------------------------
\9\ Id.
With respect to wire transfers, the OCC Handbook provides
---------------------------------------------------------------------------
the following additional guidance:
Although money launderers use wire systems in many ways,
most money launderers aggregate funds from different sources
and move them through accounts at different banks until their
origin cannot be traced. Most often they are moved out of the
country through a bank account in a country where laws are
designed to facilitate secrecy, and possibly back into the
United States. . . . Unlike cash transactions that are
monitored closely, . . . [wire transfer systems and] a bank's
wire room are designed to process approved transactions
quickly. Wire room personnel usually have no knowledge of the
customer or the purpose of the transaction. Therefore, other
bank personnel must know the identity and business of the
customer on whose behalf they approve the funds transfer to
prevent money launderers from using the wire system with little
or no scrutiny. Also, review or monitoring procedures should be
in place to identify unusual funds transfer activity.\10\
---------------------------------------------------------------------------
\10\ Id. at 23.
---------------------------------------------------------------------------
IV. Correspondent Banking Industry in the United States
Correspondent banking is the provision of banking services
by one bank to another bank. It is a lucrative and important
segment of the banking industry. It enables banks to conduct
business and provide services for their customers in
jurisdictions where the banks have no physical presence. For
example, a bank that is licensed in a foreign country and has
no office in the United States may want to provide certain
services in the United States for its customers in order to
attract or retain the business of important clients with U.S.
business activities. Instead of bearing the costs of licensing,
staffing and operating its own offices in the United States,
the bank might open a correspondent account with an existing
U.S. bank. By establishing such a relationship, the foreign
bank, called a respondent, and through it, its customers, can
receive many or all of the services offered by the U.S. bank,
called the correspondent.\11\
---------------------------------------------------------------------------
\11\ Similar correspondent banking relationships are also often
established between domestic banks, such as when a local domestic bank
opens an account at a larger domestic bank located in the country's
financial center.
---------------------------------------------------------------------------
Today, banks establish multiple correspondent relationships
throughout the world so they may engage in international
financial transactions for themselves and their clients in
places where they do not have a physical presence. Many of the
largest international banks located in the major financial
centers of the world serve as correspondents for thousands of
other banks. Due to U.S. prominence in international trade and
the high demand for U.S. dollars due to their overall
stability, most foreign banks that wish to provide
international services to their customers have accounts in the
United States capable of transacting business in U.S. dollars.
Those that lack a physical presence in the United States will
do so through correspondent accounts, creating a large market
for those services.\12\
---------------------------------------------------------------------------
\12\ International correspondent banking is a major banking
activity in the United States in part due to the popularity of the U.S.
dollar. U.S. dollars are one of a handful of major currencies accepted
throughout the world. They are also viewed as a stable currency, less
likely to lose value over time and, thus, a preferred vehicle for
savings, trade and investment. Since U.S. dollars are also the
preferred currency of U.S. residents, foreign companies and individuals
seeking to do business in the United States may feel compelled to use
U.S. dollars.
In the money laundering world, U.S. dollars are popular for many
of the same reasons. In addition, U.S. residents targeted by financial
frauds often deal only in U.S. dollars, and any perpetrator of a fraud
planning to take their money must be able to process U.S. dollar checks
and wire transfers. The investigation found that foreign offshore banks
often believe wire transfers between U.S. banks receive less money
laundering scrutiny than wire transfers involving an offshore
jurisdiction and, in order to take advantage of the lesser scrutiny
afforded U.S. bank interactions, prefer to keep their funds in a U.S.
correspondent account and transact business through their U.S. bank. In
fact, all of the foreign banks examined in the Minority Staff
investigation characterized U.S. dollars as their preferred currency,
all sought to open U.S. dollar accounts, and all used their U.S. dollar
accounts much more often than their other currency accounts.
---------------------------------------------------------------------------
Large correspondent banks in the U.S. manage thousands of
correspondent relationships with banks in the United States and
around the world. Banks that specialize in international funds
transfers and process large numbers and dollar volumes of wire
transfers daily are sometimes referred to as money center
banks. Some money center banks process as much as $1 trillion
in wire transfers each day. As of mid-1999, the top five
correspondent bank holding companies in the United States held
correspondent account balances exceeding $17 billion; the total
correspondent account balances of the 75 largest U.S.
correspondent banks was $34.9 billion.\13\
---------------------------------------------------------------------------
\13\ ``Top 75 Correspondent Bank Holding Companies,'' The American
Banker (12/8/99) at 14.
---------------------------------------------------------------------------
A. Correspondent Banking Products and Services
Correspondent banks often provide their respondent banks
with an array of cash management services, such as interest-
bearing or demand deposit accounts in one or more currencies,
international wire transfers of funds, check clearing, payable
through accounts,\14\ and foreign exchange services.
Correspondent banks also often provide an array of investment
services, such as providing their respondent banks with access
to money market accounts, overnight investment accounts,
certificates of deposit, securities trading accounts, or other
accounts bearing higher rates of interest than are paid to non-
bank clients. Along with these services, some correspondent
banks offer computer software programs that enable their
respondent banks to complete various transactions, initiate
wire transfers, and gain instant updates on their account
balances through their own computer terminals.
---------------------------------------------------------------------------
\14\ ``Payable through accounts'' allow a respondent bank's clients
to write checks that draw directly on the respondent bank's
correspondent account. See Advisory Letter 95-3, issued by the Office
of the Comptroller of the Currency identifying them as high risk
accounts for money laundering. Relatively few banks offer these
accounts at the present time.
---------------------------------------------------------------------------
With smaller, less well-known banks, a correspondent bank
may limit its relationship with the respondent bank to non-
credit, cash management services. With respondent banks that
are judged to be secure credit risks, the correspondent bank
may also afford access to a number of credit-related products.
These services include loans, daylight or overnight extensions
of credit for account transactions, lines of credit, letters of
credit, merchant accounts to process credit card transactions,
international escrow accounts, and other trade and finance-
related services.
An important feature of most correspondent relationships is
providing access to international funds transfer systems.\15\
These systems facilitate the rapid transfer of funds across
international lines and within countries. These transfers are
accomplished through a series of electronic communications that
trigger a series of debit/credit transactions in the ledgers of
the financial institutions that link the originators and
beneficiaries of the payments. Unless the parties to a funds
transfer use the same financial institution, multiple banks
will be involved in the payment transfer. Correspondent
relationships between banks provide the electronic pathway for
funds moving from one jurisdiction to another.
---------------------------------------------------------------------------
\15\ ``These funds transfer systems include the Society for
Worldwide Interbank Financial Telecommunications (``SWIFT''), the
Clearing House Interbank Payments System (``CHIPS''), and the United
States Federal Wire System (``Fedwire'').
---------------------------------------------------------------------------
For the types of foreign banks investigated by the Minority
Staff, in particular shell banks with no office or staff and
offshore banks transacting business with non-residents in non-
local currencies, correspondent banking services are critical
to their existence and operations. These banks keep virtually
all funds in their correspondent accounts. They conduct
virtually all transactions external to the bank--including
deposits, withdrawals, check clearings, certificates of
deposit, and wire transfers--through their correspondent
accounts. Some use software provided by their correspondents to
operate their ledgers, track account balances, and complete
wire transfers. Others use their monthly correspondent account
statements to identify client deposits and withdrawals, and
assess client fees. Others rely on their correspondents for
credit lines and overnight investment accounts. Some foreign
banks use their correspondents to provide sophisticated
investment services to their clients, such as high-interest
bearing money market accounts and securities trading. While the
foreign banks examined in the investigation lacked the
resources, expertise and infrastructure needed to provide such
services in-house, they could all afford the fees charged by
their correspondents to provide these services and used the
services to attract clients and earn revenue.
Every foreign bank interviewed by the investigation
indicated that it was completely dependent upon correspondent
banking for its access to international wire transfer systems
and the infrastructure required to complete most banking
transactions today, including handling multiple currencies,
clearing checks, paying interest on client deposits, issuing
credit cards, making investments, and moving funds. Given their
limited resources and staff, all of the foreign banks
interviewed by the investigation indicated that, if their
access to correspondent banks were cut off, they would be
unable to function. Correspondent banking is their lifeblood.
B. Three Categories of High Risk Banks
Three categories of banks present particularly high money
laundering risks for U.S. correspondent banks: (1) shell banks
that have no physical presence in any jurisdiction; (2)
offshore banks that are barred from transacting business with
the citizens of their own licensing jurisdictions; and (3)
banks licensed by jurisdictions that do not cooperate with
international anti-money laundering efforts.
Shell Banks. Shell banks are high risk banks principally
because they are so difficult to monitor and operate with great
secrecy. As used in this report, the term ``shell bank'' is
intended to have a narrow reach and refer only to banks that
have no physical presence in any jurisdiction. The term is not
intended to encompass a bank that is a branch or subsidiary of
another bank with a physical presence in another jurisdiction.
For example, in the Cayman Islands, of the approximately 570
licensed banks, most do not maintain a Cayman office, but are
affiliated with banks that maintain offices in other locations.
As used in this report, ``shell bank'' is not intended to apply
to these affiliated banks--for example, the Cayman branch of a
large bank in the United States. About 75 of the 570 Cayman-
licensed banks are not branches or subsidiaries of other banks,
and an even smaller number operate without a physical presence
anywhere. It is these shell banks that are of concern in this
report. In the Bahamas, out of a total of about 400 licensed
banks, about 65 are unaffiliated with any other bank, and a
smaller subset are shell banks. Some jurisdictions, including
the Cayman Islands, Bahamas and Jersey, told the Minority Staff
investigation that they no longer issue bank licenses to
unaffiliated shell banks, but other jurisdictions, including
Nauru, Vanuatu and Montenegro, continue to do so. The total
number of shell banks operating in the world today is unknown,
but banking experts believe it comprises a very small
percentage of all licensed banks.
The Minority Staff investigation was able to examine
several shell banks in detail. Hanover Bank, for example, is an
Antiguan licensed bank that has operated primarily out of its
owner's home in Ireland. M.A. Bank is a Cayman licensed bank
which claims to have an administrative office in Uruguay, but
actually operated in Argentina using the offices of related
companies. Federal Bank is a Bahamian licensed bank which
serviced Argentinian clients but appears to have operated from
an office or residence in Uruguay. Caribbean American Bank, now
closed, was an Antiguan-licensed bank that operated out of the
offices of an Antiguan firm that supplied administrative
services to banks.
None of these four shell banks had an official business
office where it conducted banking activities; none had a
regular paid staff. The absence of a physical office with
regular employees helped these shell banks avoid oversight by
making it more difficult for bank regulators and others to
monitor bank activities, inspect records and question bank
personnel. Irish banking authorities, for example, were unaware
that Hanover Bank had any connection with Ireland, and Antiguan
banking regulators did not visit Ireland to examine the bank
on-site. Argentine authorities were unaware of M.A. Bank's
presence in their country and so never conducted any review of
its activities. Cayman bank regulators did not travel to
Argentina or Uruguay for an on-site examination of M.A. Bank;
and regulators from the Bahamas did not travel to Argentina or
Uruguay to examine Federal Bank.
The Minority Staff was able to gather information about
these shell banks by conducting interviews, obtaining court
pleadings and reviewing subpoenaed material from U.S.
correspondent banks. The evidence shows that these banks had
poor to nonexistent administrative and anti-money laundering
controls, yet handled millions of dollars in suspect funds, and
compiled a record of dubious activities associated with drug
trafficking, financial fraud and other misconduct.
Offshore Banks. The second category of high risk banks in
correspondent banking are offshore banks. Offshore banks have
licenses which bar them from transacting banking activities
with the citizens of their own licensing jurisdiction or bar
them from transacting business using the local currency of the
licensing jurisdiction. Nearly all of the foreign banks
investigated by the Minority Staff held offshore licenses.
The latest estimates are that nearly 60 offshore
jurisdictions around the globe \16\ have, by the end of 1998,
licensed about 4,000 offshore banks.\17\ About 44% of these
offshore banks are thought to be located in the Caribbean and
Latin America, 29% in Europe, 19% in Asia and the Pacific, and
10% in Africa and the Middle East.\18\ These banks are
estimated to control nearly $5 trillion in assets.\19\ Since,
by design, offshore banks operate in the international arena,
outside their licensing jurisdiction, they have attracted the
attention of the international financial community. Over the
past few years, as the number, assets and activities of
offshore banks have expanded, the international financial
community has expressed increasing concerns about their
detrimental impact on international anti-money laundering
efforts.\20\
---------------------------------------------------------------------------
\16\ See INCSR 2000 at 565. Offshore jurisdictions are countries
which have enacted laws allowing the formation of offshore banks or
other offshore entities.
\17\ INCSR 2000 at 566 and footnote 3, citing ``The UN Offshore
Forum,'' Working Paper of the United Nations Office for Drug Control
and Crime Prevention (January 2000) at 6.
\18\ Id.
\19\ INCSR 2000 at 566 and footnote 1, citing ``Offshore Banking:
An Analysis of Micro- and Macro-Prudential Issues,'' Working Paper of
the International Monetary Fund (1999), by Luca Errico and Alberto
Musalem, at 10.
\20\ See, for example, INCSR 2000 discussion of ``Offshore
Financial Centers,'' at 565-77.
---------------------------------------------------------------------------
Offshore banks pose high money laundering risks in the
correspondent banking field for a variety of reasons. One is
that a foreign country has significantly less incentive to
oversee and regulate banks that do not do business within the
country's boundaries than for banks that do.\21\ Another is
that offshore banking is largely a money-making enterprise for
the governments of small countries, and the less demands made
by the government on bank owners, the more attractive the
country becomes as a licensing locale. Offshore banks often
rely on these reverse incentives to minimize oversight of their
operations, and become vehicles for money laundering, tax
evasion, and suspect funds.
---------------------------------------------------------------------------
\21\ See also discussion in Chapter V, subsections (D), (E) and
(F).
---------------------------------------------------------------------------
One U.S. correspondent banker told the Minority Staff that
he is learning that a large percentage of clients of offshore
banks are Americans and, if so, there is a ``good chance tax
evasion is going on.'' He said there is ``no reason'' for
offshore banking to exist if not for ``evasion, crime, or
whatever.'' There is no reason for Americans to bank offshore,
he said, noting that if an offshore bank has primarily U.S.
clients, it must ``be up to no good'' which raises a question
why a U.S. bank would take on the offshore bank as a client. A
former offshore bank owner told the investigation that he
thought 100% of his clients had been engaged in tax evasion
which was why they sought bank secrecy and were willing to pay
costly offshore fees that no U.S. bank would charge.
Another longtime U.S. correspondent banker was asked his
opinion of a former offshore banker's comment that to ``take-
in'' deposits from U.S. nationals was not a transgression and
that not reporting offshore investments ``is no legal concern
of the offshore depository institution.'' The correspondent
banker said that the comment showed that the offshore banker
``knew his craft.'' He said that the whole essence of offshore
banking is ``accounts in the name of corporations with bearer
shares, directors that are lawyers that sit in their tax havens
that make up minutes of board meetings.'' When asked if part of
the correspondent banker's job was to make sure the client bank
did not ``go over the line,'' the correspondent banker
responded if that was the case, then the bank should not be
dealing with some of the bank clients it had and should not be
doing business in some of the countries where it was doing
business.
Because offshore banks use non-local currencies and
transact business primarily with non-resident clients, they are
particularly dependent upon having correspondent accounts in
other countries to transact business. One former offshore
banker commented in an interview that if the American
government wanted to get offshore banks ``off their back,'' it
would prohibit U.S. banks from having correspondent
relationships with offshore banks. This banker noted that
without correspondent relationships, the offshore banks ``would
die.'' He said ``they need an established bank that can offer
U.S. dollars.''
How offshore banks use correspondent accounts to launder
funds is discussed in Chapter VI of this report as well as in a
number of the Case histories. The offshore banks investigated
by the Minority Staff were, like the shell banks, associated
with millions of dollars in suspect funds, drug trafficking,
financial fraud and other misconduct.
Banks in Non-Cooperating Jurisdictions. The third category
of high risk banks in correspondent banking are foreign banks
licensed by jurisdictions that do not cooperate with
international anti-money laundering efforts. International
anti-money laundering efforts have been led by the Financial
Action Task Force on Money Laundering (``FATF''), an inter-
governmental organization comprised of representatives from the
financial, regulatory and law enforcement communities from over
two dozen countries. In 1996, FATF developed a set of 40
recommendations that now serve as international benchmarks for
evaluating a country's anti-money laundering efforts. FATF has
also encouraged the establishment of international
organizations whose members engage in self and mutual
evaluations to promote regional compliance with the 40
recommendations.
In June 2000, for the first time, FATF formally identified
15 countries and territories whose anti-money laundering laws
and procedures have ``serious systemic problems'' resulting in
their being found ``non-cooperative'' with international anti-
money laundering efforts. The 15 are: The Bahamas, Cayman
Islands, Cook Islands, Dominica, Israel, Lebanon,
Liechtenstein, Marshall Islands, Nauru, Niue, Panama,
Philippines, Russia, St. Kitts and Nevis, and St. Vincent and
the Grenadines.\22\ Additional countries are expected to be
identified in later evaluations.
---------------------------------------------------------------------------
\22\ See FATF's ``Review to Identify Non-Cooperative Countries or
Territories: Increasing the Worldwide Effectiveness of Anti-Money
Laundering Measures'' (6/22/00), at paragraph (64).
---------------------------------------------------------------------------
FATF had previously established 25 criteria to assist it in
the identification of non-cooperative countries or
territories.\23\ The published criteria included, for example,
``inadequate regulation and supervision of financial
institutions''; ``inadequate rules for the licensing and
creation of financial institutions, including assessing the
backgrounds of their managers and beneficial owners'';
``inadequate customer identification requirements for financial
institutions''; ``excessive secrecy provisions regarding
financial institutions''; ``obstacles to international co-
operation'' by administrative and judicial authorities; and
``failure to criminalize laundering of the proceeds from
serious crimes.'' FATF explained that, ``detrimental rules and
practices which obstruct international co-operation against
money laundering . . . naturally affect domestic prevention or
detection of money laundering, government supervision and the
success of investigations into money laundering.'' FATF
recommended that, until the named jurisdictions remedied
identified deficiencies, financial institutions around the
world should exercise heightened scrutiny of transactions
involving those jurisdictions and, if improvements were not
made, that FATF members ``consider the adoption of counter-
measures.'' \24\
---------------------------------------------------------------------------
\23\ See FATF's 1999-2000 Annual Report, Annex A.
\24\ FATF 6/22/00 review at paragraph (67).
---------------------------------------------------------------------------
Jurisdictions with weak anti-money laundering laws and weak
cooperation with international anti-money laundering efforts
are more likely to attract persons interested in laundering
illicit proceeds. The 15 named jurisdictions have together
licensed hundreds and perhaps thousands of banks, all of which
introduce money laundering risks into international
correspondent banking.
C. Survey on Correspondent Banking
In February 2000, Senator Levin, Ranking Minority Member of
the Permanent Subcommittee on Investigations, distributed a
survey on correspondent banking to 20 banks providing
correspondent services from locations in the United States. Ten
of the banks were domiciled in the United States; ten were
foreign banks doing business in the United States. Their
correspondent banking portfolios varied in size, and in the
nature of customers and services involved. The survey of 18
questions was sent to:
ABN AMRO Bank of Chicago, Illinois
Bank of America, Charlotte, North Carolina
The Bank of New York, New York, New York
Bank of Tokyo Mitsubishi Ltd., New York, New York
Bank One Corporation, Chicago, Illinois
Barclays Bank PLC--Miami Agency, Miami, Florida
Chase Manhattan Bank, New York, New York
Citigroup, Inc., New York, New York
Deutsche Bank A.G./Bankers Trust, New York, New York
Dresdner Bank, New York, New York
First Union Bank, Charlotte, North Carolina
FleetBoston Bank, Boston, Massachusetts
HSBC Bank, New York, New York
Israel Discount Bank, New York, New York
MTB Bank, New York, New York
Riggs Bank, Washington, D.C.
Royal Bank of Canada, Montreal, Quebec, Canada
LThe Bank of Nova Scotia (also called ScotiaBank), New
York,
New York
Union Bank of Switzerland AG, New York, New York
Wells Fargo Bank, San Francisco, California
All 20 banks responded to the survey, and the Minority
Staff compiled and reviewed the responses. One Canadian bank
did not respond to the questions directed at its correspondent
banking practices, because it said it did not conduct any
correspondent banking activities in the United States.
The larger banks in the survey each have, worldwide, over a
half trillion dollars in assets, at least 90,000 employees, a
physical presence in over 35 countries, and thousands of
branches. The smallest bank in the survey operates only in the
United States, has less than $300 million in assets, 132
employees and 2 branches. Three fourths of the banks surveyed
have over one-thousand correspondent banking relationships and
many have even more correspondent banking accounts. Two foreign
banks doing business in the United States had the most
correspondent accounts worldwide (12,000 and 7,500,
respectively). The U.S. domiciled bank with the most
correspondent accounts reported over 3,800 correspondent
accounts worldwide.
The survey showed an enormous movement of money through
wire transfers by the biggest banks. The largest number of wire
transfers processed worldwide by a U.S. domiciled bank averaged
almost a million wire transfers processed daily. The largest
amount of money processed by a U.S. domiciled bank is over $1
trillion daily. Eleven of the banks surveyed move over $50
billion each in wire transfers in the United States each day; 7
move over $100 billion each day. The smallest bank surveyed
moves daily wire transfers in the United States totaling $114
million.
The banks varied widely on the number of correspondent
banking relationship managers employed in comparison to the
number of correspondent banking relationships maintained.\25\
One U.S. domiciled bank, for example, reported it had 31
managers worldwide for 2,975 relationships, or a ratio of 96 to
1. Another bank reported it had 46 relationship managers
worldwide handling 1,070 correspondent relationships, or a
ratio of 27 to 1. One bank had a ratio of less than 7 to 1, but
that was clearly the exception. The average ratio is
approximately 40 or 50 correspondent relationships to each
relationship manager for U.S. domiciled banks and approximately
95 to 1 for foreign banks.
---------------------------------------------------------------------------
\25\ ``Relationship manager'' is a common term used to describe the
correspondent bank employees responsible for initiating and overseeing
the bank's correspondent relationships.
---------------------------------------------------------------------------
In response to a survey question asking about the growth of
their correspondent banking business since 1995, three banks
reported substantial growth, six banks reported moderate
growth, two banks reported a substantial decrease in
correspondent banking, one bank reported a moderate decrease,
and seven banks reported that their correspondent banking
business had remained about the same. Several banks reporting
changes indicated the change was due to a merger, acquisition
or sale of a bank or correspondent banking unit.
The banks varied somewhat on the types of services offered
to correspondent banking customers, but almost every bank
offered deposit accounts, wire transfers, check clearing,
foreign exchange, trade-related services, investment services,
and settlement services. Only six banks offered the
controversial ``payable through accounts'' that allow a
respondent bank's clients to write checks that draw directly on
the respondent bank's correspondent account.
While all banks reported having anti-money laundering and
due diligence policies and written guidelines, most of the
banks do not have such policies or guidelines specifically
tailored to correspondent banking; they rely instead on general
provisions in the bank-wide policy for correspondent banking
guidance and procedures. One notable exception is the ``Know
Your Customer Policy Statement'' adopted by the former Republic
National Bank of New York, now HSBC USA, for its International
Banking Group, that specifically addressed new correspondent
banking relationships. Effective December 31, 1998, the former
Republic National Bank established internal requirements for a
thorough, written analysis of any bank applying for a
correspondent relationship, including, among other elements, an
evaluation of the applicant bank's management and due diligence
policies.
In response to survey questions about opening new
correspondent banking relationships, few banks said that their
due diligence procedures were mandatory; instead, the majority
said they were discretionary depending upon the circumstances
of the applicant bank. All banks indicated that they followed
three specified procedures, but varied with respect to others.
Survey results with respect to 12 specified account opening
procedures were as follows:
All banks said they:
--Obtain financial statements;
--Evaluate credit worthiness; and
--Determine an applicant's primary lines of business.
All but two banks said they:
--Verify an applicant's bank license; and
--Determine whether an applicant has a fixed, operating
office in the licensing jurisdiction.
All but three banks said they:
--Evaluate the overall adequacy of banking supervision
in the jurisdiction of the respondent bank; and
--Review media reports for information on an applicant.
All but four banks said they visit an applicant's primary
office in the licensing jurisdiction; all but five banks said
they determine if the bank's license restricts the applicant to
operating outside the licensing jurisdiction, making it an
offshore bank. A majority of the surveyed banks said they
inquire about the applicant with the jurisdiction's bank
regulators. Only six banks said they inquire about an applicant
with U.S. bank regulators.
A majority of banks listed several other actions they take
to assess a correspondent bank applicant, including:
--Checking with the local branch bank, if there is one;
--Checking with bank rating agencies;
--Obtaining bank references; and
--Completing a customer profile.
The survey asked the banks whether or not, as a policy
matter, they would establish a correspondent bank account with
a bank that does not have a physical presence in any location
or whose only license requires it to operate outside the
licensing jurisdiction, meaning it holds only an offshore
banking license. Only 18 of the 20 banks responded to these
questions. Twelve banks said they would not open a
correspondent account with a bank that does not have a physical
presence; nine banks said they would not open a correspondent
account with an offshore bank. Six banks said there are times,
depending upon certain circumstances, under which they would
open an account with a bank that does not have a physical
presence in any country; eight banks said there are times when
they would open an account with an offshore bank. The
circumstances include a bank that is part of a known financial
group or a subsidiary or affiliate of a well-known,
internationally reputable bank. Only one of the surveyed banks
said it would, without qualification, open a correspondent
account for an offshore bank.
Surveyed banks were asked to identify the number of
correspondent accounts they have had in certain specified
countries,\26\ in 1995 and currently. As expected, several
banks have had a large number of correspondent accounts with
banks in China. For example, one bank reported 218
relationships, another reported 103 relationships, and four
others reported 45, 43, 39 and 27 relationships, respectively.
Seven banks reported more than 30 relationships with banks in
Switzerland, with the largest numbering 95 relationships. Five
banks reported having between 14 and 49 relationships each with
banks in Colombia.
---------------------------------------------------------------------------
\26\ The survey asked about correspondent relationships with banks
in Antigua, Austria, Bahamas, Burma, Cayman Islands, Channel Islands,
China, Colombia, Cyprus, Indonesia, Latvia, Lebanon, Lichtenstein,
Luxembourg, Malta, Nauru, Nigeria, Palau, Panama, Paraguay, Seychelle
Islands, Singapore, Switzerland, Thailand, United Arab Emirates,
Uruguay, Vanuatu, and other Caribbean and South Pacific island nations.
---------------------------------------------------------------------------
The U.S. State Department's March 2000 International
Narcotics Control Strategy Report and the Financial Action Task
Force's June 2000 list of 15 jurisdictions with inadequate
anti-money laundering efforts have raised serious concerns
about banking practices in a number of countries, and the
survey showed that in some of those countries, U.S. banks have
longstanding or numerous correspondent relationships. For
example, five banks reported having between 40 and 84
relationships each with banks in Russia, down from seven banks
reporting relationships that numbered between 52 and 282 each
in 1995.\27\ Five banks reported having between 13 and 44
relationships each with banks in Panama. One bank has a
correspondent relationship with a bank in Nauru, and two banks
have one correspondent relationship each with a bank in
Vanuatu. Three banks have correspondent accounts with one or
two banks in the Seychelle Islands and one or two banks in
Burma.
---------------------------------------------------------------------------
\27\ The survey found that the number of U.S. correspondent
relationships with Russian banks dropped significantly after the Bank
of New York scandal of 1999, as described in the appendix.
---------------------------------------------------------------------------
There are several countries where only one or two of the
surveyed banks has a particularly large number of correspondent
relationships. These are Antigua, where most banks have no
relationships but one bank has 12; the Channel Islands, where
most banks have no relationships but two banks have 29 and 27
relationships, respectively; Nigeria, where most banks have few
to no relationships but two banks have 34 and 31 relationships,
respectively; and Uruguay, where one bank has 28 correspondent
relationships and the majority of other banks have ten or less.
One bank reported having 67 correspondent relationships with
banks in the Bahamas; only two other banks have more than 10
correspondent relationships there. That same bank has 146
correspondent relationships in the Cayman Islands; only two
banks have more than 12 such relationships, and the majority of
banks have 2 or less.
The survey asked the banks to explain how they monitor
their correspondent accounts. The responses varied widely. Some
banks use the same monitoring systems that they use with all
other accounts--relying on their compliance departments and
computer software for reviews. Others place responsibility for
monitoring the correspondent banking accounts in the
relationship manager, requiring the manager to know what his or
her correspondent client is doing on a regular basis. Nine
banks reported that they placed the monitoring responsibility
with the relationship manager, requiring that the manager
perform monthly monitoring of the accounts under his or her
responsibility. Others reported relying on a separate
compliance office in the bank or an anti-money laundering unit
to identify suspicious activity. Monitoring can also be done
with other tools. For example, one bank said it added news
articles mentioning companies and banks into an information
database available to bank employees.
Several banks reported special restrictions they have
imposed on correspondent banking relationships in addition to
the procedures identified in the survey. One bank reported, for
example, that it prohibits correspondent accounts in certain
South Pacific locations and monitors all transactions involving
Antigua and Barbuda, Belize and Seychelles. Another bank said
it requires its relationship managers to certify that a
respondent bank does not initiate transfers to high risk
geographic areas, and if a bank is located in a high risk
geographic area, it requires a separate certification. One bank
said its policy is to have a correspondent relationship with a
bank in a foreign country only if the U.S. bank has a physical
presence in the country as well. Similarly, another bank said
it does not accept transfers from or to Antigua, Nauru, Palau,
the Seychelles, or Vanuatu. One bank reported that it takes
relationship managers off-line, that is, away from their
responsibility for their correspondent banks, for 10 days at a
time to allow someone else to handle the correspondent accounts
as a double-check on the activity. The Minority Staff did not
attempt to examine how these stated policies are actually put
into practice in the banks.
The surveyed banks were asked how many times between 1995
and 1999 they became aware of possible money laundering
activities involving a correspondent bank client. Of the 17
banks that said they could answer the question, seven said
there were no instances in which they identified such
suspicious activity. Ten banks identified at least one instance
of suspicious activity. One bank identified 564 SARs filed due
to ``sequential strings of travelers checks and money orders.''
The next largest number was 60 SARs which the surveyed bank
said involved ``correspondent banking and possible money
laundering.'' Another bank said it filed 52 SARs in the
identified time period. Two banks identified only one instance;
the remaining banks each referred to a handful of instances.
There were a number of anomalies in the survey results. For
example, one large bank which indicated in an interview that it
does not market correspondent accounts in secrecy havens,
reported in the survey having 146 correspondent relationships
with Cayman Island banks and 67 relationships with banks in the
Bahamas, both of which have strict bank secrecy laws. Another
bank said in a preliminary interview that it would ``never''
open a correspondent account with a bank in Vanuatu disclosed
in the survey that it, in fact, had a longstanding
correspondent relationship in Vanuatu. Another bank stated in
its survey response it would not open an account with an
offshore bank, yet also reported in the survey that its policy
was not to ask bank applicants whether they were restricted to
offshore licenses. Two other banks reported in the survey that
they would not, as a policy matter, open correspondent accounts
with offshore or shell banks, but when confronted with
information showing they had correspondent relationships with
these types of banks, both revised their survey responses to
describe a different correspondent banking policy. These and
other anomalies suggest that U.S. banks may not have accurate
information or a complete understanding of their correspondent
banking portfolios and practices in the field.
D. Internet Gambling
One issue that unexpectedly arose during the investigation
was the practice of foreign banks using their U.S.
correspondent accounts to handle funds related to Internet
gambling. As a result, the U.S. correspondent banks facilitated
Internet gambling, an activity recognized as a growing industry
providing new avenues and opportunities for money laundering.
Two recent national studies address the subject: ``The
Report of the National Gambling Impact Study Commission,'' and
a report issued by the Financial Crimes Enforcement Network
(``FinCEN'') entitled, ``A Survey of Electronic Cash,
Electronic Banking, and Internet Gaming.'' \28\ Together, these
reports describe the growth of Internet gambling and related
legal issues. They report that Internet gambling websites
include casino-type games such as virtual blackjack, poker and
slot machines; sports event betting; lotteries; and even horse
race wagers using real-time audio and video to broadcast live
races. Websites also typically require players to fill out
registration forms and either purchase ``chips'' or set up
accounts with a minimum amount of funds. The conventional ways
of sending money to the gambling website are: (1) providing a
credit card number from which a cash advance is taken; (2)
sending a check or money order; or (3) sending a wire transfer
or other remittance of funds.
---------------------------------------------------------------------------
\28\ The National Gambling Impact Study Commission (``NGISC'') was
created in 1996 to conduct a comprehensive legal and factual study of
the social and economic impacts of gambling in the United States. The
NGISC report, published in June 1999, contains a variety of information
and recommendations related to Internet gambling. The FinCEN report,
published in September 2000, examines money laundering issues related
to Internet gambling.
---------------------------------------------------------------------------
An important marketing tool for the Internet gambling
industry is the ability to transfer money quickly,
inexpensively and securely.\29\ These money transfers together
with the off-shore locations of most Internet gambling
operations and their lack of regulation provide prime
opportunities for money laundering.\30\ As technology
progresses, the speed and anonymity of the transactions may
prove to be even more attractive to money launderers.
---------------------------------------------------------------------------
\29\ More than a dozen companies develop and sell turnkey software
for Internet gambling operations. Some of these companies provide full
service packages, which include the processing of financial
transactions and maintenance of offshore hardware, while the ``owner''
of the gambling website simply provides advertising and Internet access
to gambling customers. These turnkey services make it very easy for
website owners to open new gambling sites.
\30\ See, for example, the FinCEN report, which states at page 41:
``Opposition in the United States to legalized Internet gaming is based
on several factors. First, there is the fear that Internet gaming . . .
offer[s] unique opportunities for money laundering, fraud, and other
crimes. Government officials have also expressed concerns about
underage gaming and addictive gambling, which some claim will increase
with the spread of Internet gaming. Others point to the fact that
specific types of Internet gaming may already be illegal under State
laws.''
---------------------------------------------------------------------------
One researcher estimates that in 1997, there were as many
as 6.9 million potential Internet gamblers and Internet
gambling revenues of $300 million. By 1998, these estimates had
doubled, to an estimated 14.5 million potential Internet
gamblers and Internet gambling revenues of $651 million. The
River City Group, an industry consultant, forecasts that U.S.
Internet betting will rise from $1.1 billion in 1999, to $3
billion in 2002.
Current Federal and State laws. In the United States,
gambling regulation is primarily a matter of State law,
reinforced by Federal law where the presence of interstate or
foreign elements might otherwise frustrate the enforcement
policies of State law.\31\ According to a recent Congressional
Research Service report, Internet gambling implicates at least
six Federal criminal statutes, which make it a Federal crime
to: (1) conduct an illegal gambling business, 18 U.S.C.
Sec. 1955 (illegal gambling business); (2) use the telephone or
telecommunications to conduct an illegal gambling business, 18
U.S.C. Sec. 1084 (Interstate Wire Act); (3) use the facilities
of interstate commerce to conduct an illegal gambling business,
18 U.S.C. Sec. 1952 (Travel Act); (4) conduct the activities of
an illegal gambling business involving either the collection of
an unlawful debt or a pattern of gambling offenses, 18 U.S.C.
Sec. 1962 (RICO); (5) launder the proceeds from an illegal
gambling business or to plow them back into the business, 18
U.S.C. Sec. 1956 (money laundering); or (6) spend more than
$10,000 of the proceeds from an illegal gambling operation at
any one time and place, 18 U.S.C. Sec. 1957 (money
laundering).\32\
---------------------------------------------------------------------------
\31\ ``Internet Gambling: Overview of Federal Criminal Law,''
Congressional Research Service, CRS Report No. 97-619A (3/17/00),
Summary.
\32\ Id.
---------------------------------------------------------------------------
The NGISC reports that the laws governing gambling in
cyberspace are not as clear as they should be, pointing out,
for example, that the Interstate Wire Act was written before
the Internet was invented. The ability of the Internet to
facilitate quick and easy interactions across geographic
boundaries makes it difficult to apply traditional notions of
State and Federal jurisdictions and, some argue, demonstrates
the need for additional clarifying legislation.
Yet, there have been a number of successful prosecutions
involving Internet gambling. For example, in March 1998, the
U.S. Attorney for the Southern District of New York indicted 21
individuals for conspiracy to transmit wagers on sporting
events via the Internet, in violation of the Interstate Wire
Act of 1961. At that time, U.S. Attorney General Janet Reno
stated, ``The Internet is not an electronic sanctuary for
illegal betting. To Internet betting operators everywhere, we
have a simple message, `You can't hide online and you can't
hide offshore.' '' Eleven defendants pled guilty and one, Jay
Cohen, was found guilty after a jury trial. He was sentenced to
21 months in prison, a 2-year supervised release, and a $5,000
fine.
In 1997, the Attorney General of Minnesota successfully
prosecuted Granite Gate Resorts, a Nevada corporation with a
Belize-based Internet sports betting operation. The lawsuit
alleged that Granite Gate and its president, Kerry Rogers,
engaged in deceptive trade practices, false advertising, and
consumer fraud by offering Minnesotans access to sports
betting, since such betting is illegal under State laws. In
1999, the Minnesota Supreme Court upheld the prosecution.
Missouri, New York, and Wisconsin have also successfully
prosecuted cases involving Internet gaming.
Given the traditional responsibility of the States
regarding gambling, many have been in the forefront of efforts
to regulate or prohibit Internet gambling, Several States
including Louisiana, Texas, Illinois, and Nevada have
introduced or passed legislation specifically prohibiting
Internet gambling. Florida has taken an active role, including
cooperative efforts with Western Union, to stop money-transfer
services for 40 offshore sports books.\33\ In 1998, Indiana's
Attorney General stated as a policy that a person placing a bet
from Indiana with an offshore gaming establishment was engaged
in in-state gambling just as if the person engaged in
conventional gambling. A number of State attorneys general have
initiated court actions against Internet gambling owners and
operators, and several have won permanent injunctions.
---------------------------------------------------------------------------
\33\ In December 1997, the Attorney General of Florida and Western
Union signed an agreement that Western Union would cease providing
Quick Pay money transfer services from Florida residents to known
offshore gaming establishments. Quick Pay is a reduced-fee system
normally used to expedite collection of debts or payment for goods.
---------------------------------------------------------------------------
Legislation and recommendations. Several States have
concluded that only the Federal Government has the potential to
effectively regulate or prohibit Internet gambling. The
National Association of Attorneys General has called for an
expansion in the language of the Federal anti-wagering statute
to prohibit Internet gambling and for Federal-State cooperation
on this issue. A number of Internet gambling bills have been
introduced in Congress.
The National Gambling Impact Study Commission report made
several recommendations pertaining to Internet gambling, one of
which was to encourage foreign governments to reject Internet
gambling organizations that prey on U.S. citizens.
The Minority Staff investigation found evidence of a number
of foreign banks using their U.S. correspondent accounts to
move proceeds related to Internet gambling, including wagers or
payments made in connection with Internet gambling websites,
deposits made by companies managing Internet gambling
operations, and deposits made by companies active in the
Internet gambling field in such areas as software development
or electronic cash transfer systems. One U.S. bank, Chase
Manhattan Bank, was fully aware of Internet gambling proceeds
being moved through its correspondent accounts; other U.S.
banks were not. Internet gambling issues are addressed in the
case histories involving American International Bank, British
Trade and Commerce Bank, and Swiss American Bank.
V. Why Correspondent Banking is Vulnerable to Money Laundering
Until the Bank of New York scandal erupted in 1999,\34\
international correspondent banking had received little
attention as a high-risk area for money laundering. In the
United States, the general assumption had been that a foreign
bank with a valid bank license operated under the watchful eye
of its licensing jurisdiction and a U.S. bank had no obligation
to conduct its own due diligence. The lesson brought home by
the Bank of New York scandal, however, was that some foreign
banks carry higher money laundering risks than others, since
some countries are seriously deficient in their bank licensing
and supervision, and some foreign banks are seriously deficient
in their anti-money laundering efforts.
---------------------------------------------------------------------------
\34\ For a description of the Bank of New York scandal, see the
appendix.
---------------------------------------------------------------------------
The reality is that U.S. correspondent banking is highly
vulnerable to money laundering for a host of reasons. The
reasons include: (A) a culture of lax due diligence at U.S.
correspondent banks; (B) the role of correspondent bankers or
relationship managers; (C) nested correspondents, in which U.S.
correspondent accounts are used by a foreign bank's client
banks, often without the express knowledge or consent of the
U.S. bank; (D) foreign jurisdictions with weak banking or
accounting standards; (E) bank secrecy laws; (F) cross border
difficulties; and (G) U.S. legal barriers to seizing illicit
funds in U.S. correspondent accounts.
A. Culture of Lax Due Diligence
The U.S. correspondent banks examined during the
investigation operated, for the most part, in an atmosphere of
complacency, with lax due diligence, weak controls, and
inadequate responses to troubling information.
In initial meetings in January 2000, U.S. banks told the
investigation there is little evidence of money laundering
through correspondent accounts. Chase Manhattan Bank, which has
one of the largest correspondent banking portfolios in the
United States, claimed that U.S. banks do not even open
accounts for small foreign banks in remote jurisdictions. These
representations, which proved to be inaccurate, illustrate what
the investigation found to be a common attitude among
correspondent bankers--that money laundering risks are low and
anti-money laundering efforts are unnecessary or
inconsequential in the correspondent banking field.
Due in part to the industry's poor recognition of the money
laundering risks, there is substantial evidence of weak due
diligence practices by U.S. banks providing correspondent
accounts to foreign banks. U.S. correspondent bankers were
found to be poorly informed about the banks they were
servicing, particularly small foreign banks licensed in
jurisdictions known for bank secrecy or weak banking and anti-
money laundering controls. Account documentation was often
outdated and incomplete, lacking key information about a
foreign bank's management, major business activities,
reputation, regulatory history, or anti-money laundering
procedures. Monitoring procedures were also weak. For example,
it was often unclear who, if anyone, was supposed to be
reviewing the monthly account statements for correspondent
accounts. At larger banks, coordination was often weak or
absent between the correspondent bankers dealing directly with
foreign bank clients and other bank personnel administering the
accounts, reviewing wire transfer activity, or conducting anti-
money laundering oversight. Even though wire transfers were
frequently the key activity engaged in by foreign banks, many
U.S. banks conducted either no monitoring of wire transfer
activity or relied on manual reviews of the wire transfer
information to identify suspicious activity. Subpoenas directed
at foreign banks or their clients were not always brought to
the attention of the correspondent banker in charge of the
foreign bank relationship.
Specific examples of weak due diligence practices and
inadequate anti-money laundering controls at U.S. correspondent
banks included the following:
--Security Bank N.A., a U.S. bank in Miami, disclosed
that, for almost 2 years, it never reviewed for suspicious
activity numerous wire transfers totaling $50 million that went
into and out of the correspondent account of a high risk
offshore bank called British Trade and Commerce Bank (BTCB),
even after questions arose about the bank. These funds included
millions of dollars associated with money laundering, financial
fraud and Internet gambling. A Security Bank representative
also disclosed that, despite an ongoing dialogue with BTCB's
president, he did not understand and could not explain BTCB's
major business activities, including a high yield investment
program promising extravagant returns.
--The Bank of New York disclosed that it had not known
that one of its respondent banks, British Bank of Latin America
(BBLA), a small offshore bank operating in Colombia and the
Bahamas, which moved $2.7 million in drug money through its
correspondent account, had never been examined by any bank
regulator. The Bank of New York disclosed further that: (a)
despite being a longtime correspondent for banks operating in
Colombia, (b) despite 1999 and 2000 U.S. National Money
Laundering Strategies' naming the Colombian black market peso
exchange as the largest money laundering system in the Western
Hemisphere and a top priority for U.S. law enforcement, and (c)
despite having twice received seizure orders for the BBLA
correspondent account alleging millions of dollars in drug
proceeds laundered through the Colombian black market peso
exchange, the Bank of New York had not instituted any special
anti-money laundering controls to detect this type of money
laundering through its correspondent accounts.
--Several U.S. banks, including Bank of America and
Amtrade Bank in Miami, were unaware that their correspondent
accounts with American International Bank (AIB), a small
offshore bank in Antigua that moved millions of dollars in
financial frauds and Internet gambling through its
correspondent accounts, were handling transactions for shell
foreign banks that were AIB clients. The U.S. correspondent
bankers apparently had failed to determine that one of AIB's
major lines of business was to act as a correspondent for other
foreign banks, one of which, Caribbean American Bank, was used
exclusively for moving the proceeds of a massive advance-fee-
for-loan fraud. Most of the U.S. banks had also failed to
determine that the majority of AIB's client accounts and
deposits were generated by the Forum, an investment
organization that has been the subject of U.S. criminal and
securities investigations.
--Bank of America disclosed that it did not know, until
tipped off by Minority Staff investigators, that the
correspondent account it provided to St. Kitts-Nevis-Anguilla
National Bank, a small bank in the Caribbean, was being used to
move hundreds of millions of dollars in Internet gambling
proceeds. Bank of America had not taken a close look at the
source of funds in this account even though this small
respondent bank was moving as much as $115 million in a month
and many of the companies named in its wire transfer
instructions were well known for their involvement in Internet
gambling.
--Citibank correspondent bankers in Argentina indicated
that while they opened a U.S. correspondent account for M.A.
Bank, an offshore shell bank licensed in the Cayman Islands and
operating in Argentina that later was used to launder drug
money, and handled the bank's day-to-day matters, they did not,
as a rule, see any monthly statements or monthly activity
reports for the bank's accounts. The Argentine correspondent
bankers indicated that they assumed Citibank personnel in New
York, who handled administrative matters for the accounts, or
Citibank personnel in Florida, who run the bank's anti-money
laundering unit, reviewed the accounts for suspicious activity.
Citibank's Argentine correspondent bankers indicated, however,
that they could not identify specific individuals who reviewed
Argentine correspondent accounts for possible money laundering.
They also disclosed that they did not have regular contact with
Citibank personnel conducting anti-money laundering oversight
of Argentine correspondent accounts, nor did they coordinate
any anti-money laundering duties with them.
--When U.S. law enforcement filed a 1998 seizure warrant
alleging money laundering violations and freezing millions of
dollars in a Citibank correspondent account belonging to M.A.
Bank and also filed in court an affidavit describing the frozen
funds as drug proceeds from a money laundering sting, Citibank
never looked into the reasons for the seizure warrant and never
learned, until informed by Minority Staff investigators in
1999, that the frozen funds were drug proceeds.
--Citibank had a 10-year correspondent relationship with
Banco Republica, licensed and doing business in Argentina, and
its offshore affiliate, Federal Bank, which is licensed in the
Bahamas. Citibank's relationship manager for these two banks
told the investigation that it was ``disturbing'' and
``shocking'' to learn that the Central Bank of Argentina had
reported in audit reports of 1996 and 1998 that Banco Republica
did not have an anti-money laundering program. When the
Minority Staff asked the relationship manager what he had done
to determine whether or not there was such a program in place
at Banco Republica, he said he was told by Banco Republica
management during his annual reviews that the bank had an anti-
money laundering program, but he did not confirm that with
documentation. The same situation applied to Federal Bank.
--A June 2000 due diligence report prepared by a First
Union correspondent banker responsible for an account with a
high risk foreign bank called Banque Francaise Commerciale
(BFC) in Dominica, contained inadequate and misleading
information. For example, only 50% of the BFC documentation
required by First Union had been collected, and neither BFC's
anti-money laundering procedures, bank charter, nor 1999
financial statement was in the client file. No explanation for
the missing documentation was provided, despite instructions
requiring it. The report described BFC as engaged principally
in ``domestic'' banking, even though BFC's monthly account
statements indicated that most of its transactions involved
international money transfers. The report also failed to
mention Dominica's weak banking and anti-money laundering
controls.
--A number of U.S. banks failed to meet their internal
requirements for on-site visits to foreign banks. Internal
directives typically require a correspondent banker to visit a
foreign bank's offices prior to opening an account for the bank
and to pay annual visits thereafter. Such visits are intended,
among other purposes, to ensure the foreign bank has a physical
presence, to learn more about the bank's management and
business activities, and to sell new services. However, in many
cases, the required on-site visits were waived, postponed or
conducted with insufficient attention to important facts. For
example, a Chase Manhattan correspondent banker responsible for
140 accounts said she visited the 25 to 30 banks with the
larger accounts each year and visited the rest only
occasionally or never. First Union National Bank disclosed that
no correspondent banker had visited BFC in Dominica for 3
years. Security Bank N.A. disclosed that it had not made any
visits to BTCB in Dominica, because Security Bank had only one
account on the island and it was not ``cost effective'' to
travel there. In still another instance, Citibank opened a
correspondent account for M.A. Bank, without traveling to
either the Cayman Islands where the bank was licensed or
Uruguay where the bank claimed to have an ``administrative
office.'' Instead, Citibank traveled to Argentina and visited
offices belonging to several firms in the same financial group
as M.A. Bank, apparently deeming that trip equivalent to
visiting M.A. Bank's offices. Citibank even installed wire
transfer software for M.A. Bank at the Argentine site, although
M.A. Bank has no license to conduct banking activities in
Argentina and no office there. Despite repeated requests,
Citibank has indicated that it remains unable to inform the
investigation whether or not M.A. Bank has an office in
Uruguay. The investigation has concluded that M.A. Bank is, in
fact, a shell bank with no physical presence in any
jurisdiction.
--Harris Bank International, a New York bank specializing
in correspondent banking and international wire transfers, told
the investigation that it had no electronic means for
monitoring the hundreds of millions of dollars in wire
transfers it processes each day. Its correspondent bankers
instead have to conduct manual reviews of account activity to
identify suspicious activity. The bank said that it had
recently allocated funding to purchase its first electronic
monitoring software capable of analyzing wire transfer activity
for patterns of possible money laundering.
Additional Inadequacies with Non-Credit Relationships. In
addition to the lax due diligence and monitoring controls for
correspondent accounts in general, U.S. banks performed
particularly poor due diligence reviews of high risk foreign
banks where no credit was provided by the U.S. bank. Although
often inadequate, U.S. banks obtain more information and pay
more attention to correspondent relationships involving the
extension of credit where the U.S. bank's assets are at risk
than when the U.S. bank is providing only cash management
services on a fee basis.\35\ U.S. banks concentrate their due
diligence efforts on their larger correspondent accounts and
credit relationships and pay significantly less attention to
smaller accounts involving foreign banks and where only cash
management services are provided.
---------------------------------------------------------------------------
\35\ A correspondent bank's analysis of credit risk does not
necessarily include the risk of money laundering; rather it is focused
on the risk of monetary loss to the correspondent bank, and the two
considerations can be very different. For example, one correspondent
bank examined in the investigation clearly rejected a credit
relationship with a respondent bank due to doubts about its investment
activities, but did not hesitate to continue providing it with cash
management services such as wire transfers.
---------------------------------------------------------------------------
Money launderers are primarily interested in services that
facilitate the swift and anonymous movement of funds across
international lines. These services do not require credit
relationships, but can be provided by foreign banks with access
to wire transfers, checks and credit cards. Money launderers
may even prefer small banks in non-credit correspondent
relationships since they attract less scrutiny from their U.S.
correspondents. Foreign banks intending to launder funds may
choose to limit their correspondent relationships to non-credit
services to avoid scrutiny and move money quickly, with few
questions asked.
Under current practice in the United States, high-risk
foreign banks in non-credit correspondent relationships seem to
fly under the radar screen of U.S. banks conducting due
diligence reviews. Yet from an anti-money laundering
perspective, these are precisely the banks which--if they hold
an offshore license, conduct a shell operation, move large sums
of money across international lines, or demonstrate other high
risk factors--warrant heightened scrutiny.
Specific examples of the different treatment that U.S.
banks afforded to foreign banks in non-credit relationships
included the following:
--One Chase Manhattan correspondent banker said that she
did not review the annual audited financial statement of a
foreign bank in a non-credit relationship. Another Chase
Manhattan representative described Chase's attitude towards
non-credit correspondent relationships as ``essentially
reactive'' and said there was no requirement to make an annual
visit to bank clients in non-credit relationships.
--Bank of America representatives said that most small
correspondent bank relationships were non-credit in nature,
Bank of America ``has lots'' of these, it views them as ``low
risk,'' and such relationships do not require an annual review
of the respondent bank's financial statements.
--One bank that maintained a non-credit correspondent
relationship for a year with American International Bank (AIB),
an offshore bank which used its correspondent accounts to move
millions of dollars connected to financial frauds and Internet
gambling, sought significantly more due diligence information
when AIB requested a non-secured line of credit. To evaluate
the credit request, the correspondent bank asked AIB to provide
such information as a list of its services; a description of
its marketing efforts; the total number of its depositors and
``a breakdown of deposits according to maturities''; a
description of AIB management's experience ``in view of the
fact that your institution has been operating for only 1
year''; a profile of the regulatory environment in Antigua'';
the latest financial statement of AIB's parent company, and
information about certain loan transactions between AIB and its
parent. Apparently none of this information was provided a year
earlier when the bank first established a non-credit
correspondent relationship with AIB.
--A Security Bank representative reported that when he
encountered troubling information about British Trade and
Commerce Bank, a bank that used its correspondent accounts to
move millions of dollars connected with financial frauds, he
decided against extending credit to the bank, but continued
providing it with cash management services such as wire
transfers, because he believed a non-credit relationship did
not threaten Security Bank with any monetary loss.
Inadequate Responses to Troubling Information. While some
U.S. banks never learned of questionable activities by their
foreign bank clients, when troubling information did reach a
U.S correspondent banker, in too many cases, the U.S. bank took
little or no action in response. For example:
--Citibank left open a correspondent account belonging to
M.A. Bank and allowed hundreds of millions of dollars to flow
through it, even after receiving a seizure order from U.S. law
enforcement alleging drug money laundering violations and
freezing $7.7 million deposited into the account. Citibank also
failed to inquire into the circumstances surrounding the
seizure warrant and, until informed by Minority Staff
investigators, failed to learn that the funds were drug
proceeds from a money laundering sting.
--Chase Manhattan Bank left open a correspondent account
with Swiss American Bank (SAB), an offshore bank licensed in
Antigua and Barbuda, even after SAB projected that it would
need 10,000 checks per month and began generating monthly bank
statements exceeding 200 pages in length to process millions of
dollars in Internet gambling proceeds.
--First Union National Bank left open a money market
account with British Trade and Commerce Bank (BTCB) for almost
18 months after receiving negative information about the bank.
When millions of dollars suddenly moved through the account 8
months after it was opened, First Union telephoned BTCB and
asked it to voluntarily close the account. When BTCB refused,
First Union waited another 9 months, replete with troubling
incidents and additional millions of dollars moving through the
account, before it unilaterally closed the account.
--When Citibank was asked by the Central Bank of Argentina
for information about the owners of Federal Bank, an offshore
bank licensed in the Bahamas with which Citibank had a 10-year
correspondent relationship, Citibank responded that its
``records contain no information that would enable us to
determine the identity of the shareholders of the referenced
bank.'' Citibank gave this response to the Central Bank despite
clear information in its own records identifying Federal Bank's
owners. When the Minority Staff asked the relationship manager
to explain Citibank's response, the relationship manager said
he had the impression that the Central Bank ``was trying to
play some kind of game,'' that it was ``trying to get some
legal proof of ownership.'' After further discussion, the
relationship manager said that he now knows Citibank should
have answered the letter ``in a different way'' and that
Citibank ``should have done more.''
The investigation saw a number of instances in which U.S.
banks were slow to close correspondent accounts, even after
receiving ample evidence of misconduct. When asked why it took
so long to close an account for Swiss American Bank after
receiving troubling information about the bank, Chase Manhattan
Bank representatives explained that Chase had solicited Swiss
American as a client and felt ``it wasn't ethical to say we've
changed.'' Chase personnel told the investigation, we
``couldn't leave them.'' Bank of America explained its delay in
closing a correspondent account as due to fear of a lawsuit by
the foreign bank seeking damages for hurting its business if
the account were closed too quickly. A First Union
correspondent banker expressed a similar concern, indicating
that it first asked BTCB to close its account voluntarily so
that First Union could represent that the decision had been
made by the customer and minimize its exposure to litigation.
The Minority Staff found this was not an uncommon practice,
even though the investigation did not encounter any instance of
a foreign bank's filing such a suit.
B. Role of Correspondent Bankers
Correspondent bankers, also called relationship managers,
should serve as the first line of defense against money
laundering in the correspondent banking field, but many appear
to be inadequately trained and insufficiently sensitive to the
risk of money laundering taking place through the accounts they
manage. These deficiencies are attributable, in part, to the
industry's overall poor recognition of money laundering
problems in correspondent banking.
The primary mission of most correspondent bankers is to
expand business--to open new accounts, increase deposits and
sell additional services to existing accounts. But many are
also expected to execute key anti-money laundering duties, such
as evaluating prospective bank clients and reporting suspicious
activity. Those correspondent bankers are, in effect, being
asked to fill contradictory roles--to add new foreign banks as
clients, while maintaining a skeptical stance toward those same
banks and monitoring them for suspicious activity. The
investigation found that some banks compensate their
correspondent bankers by the number of new accounts they open
or the amount of money their correspondent accounts bring into
the bank. The investigation found few rewards, however, for
closing suspect accounts or filing suspicious activity reports.
In fact, the financial incentive is just the opposite; closing
correspondent accounts reduces a bank's income and can reduce a
correspondent banker's compensation. The result was that a
correspondent banker's anti-money laundering duties were often
a low priority.
For example, the Bank of America told the Minority Staff
investigation that their relationship managers used to be seen
as sales officers, routinely seeking new accounts, maintaining
a ``positive sales approach,'' and signing up as many
correspondent banks as possible. Bank of America's attitude in
the early and middle 1990s, it said, was that ``banks are
banks'' and ``you can trust them.'' The bank said it has since
changed its approach and is no longer ``beating the bushes''
for new correspondent relationships.
Even if correspondent bankers were motivated to watch for
signs of money laundering in their accounts, the investigation
found that most did not have the tools needed for effective
oversight. Large correspondent banks in the United States
operate two or three thousand correspondent accounts at a time
and process billions of dollars of wire transactions each day.
Yet until very recently, most U.S. banks did not invest in the
software, personnel or training needed to identify and manage
money laundering risks in correspondent banking. For example,
U.S. correspondent bankers reported receiving limited anti-
money laundering training and seemed to have little awareness
of the money laundering methods, financial frauds and other
wrongdoing that rogue foreign banks or their clients perpetrate
through correspondent accounts.\36\ Standard due diligence
forms were sometimes absent or provided insufficient guidance
on the initial and ongoing due diligence information that
correspondent bankers should obtain. Coordination between
correspondent bankers and anti-money laundering bank personnel
was often lacking. Automated systems for reviewing wire
transfer activity were usually not available. Few banks had
pro-active anti-money laundering programs in place to detect
and report suspect activity in correspondent accounts. The
absence of effective anti-money laundering tools is further
evidence of the low priority assigned to this issue in the
correspondent banking field.
---------------------------------------------------------------------------
\36\ The case histories in this report provide specific examples of
how rogue foreign banks or their clients are using U.S. correspondent
account to launder funds or facilitate crime, including from drug
trafficking, prime bank guarantees, high yield investment scams,
advanced-fee-for-loan scams, stock fraud, Internet gambling and tax
evasion. Correspondent bankers appear to receive little or no training
in recognizing and reporting suspicious activity related to such
correspondent banking abuses.
---------------------------------------------------------------------------
Examples of correspondent bankers insufficiently trained
and equipped to identify and report suspicious activity
included the following:
--A Bank of New York relationship manager told the
investigation that there had been little anti-money laundering
training for correspondent banking, but it is ``in the
developmental stages now.'' The head of Bank of New York's
Latin American correspondent banking division disclosed that
she had received minimal information about the black market
peso exchange and was unaware of its importance to U.S. law
enforcement. She also said the bank had not instituted any
means for detecting this type of money laundering, nor had it
instructed its respondent banks to watch for this problem and
refuse wire transfers from money changers involved in the black
market.
--A Chase Manhattan Bank relationship manager who handled
140 correspondent accounts told the investigation that she had
received no anti-money laundering training during her
employment at Chase Manhattan or her prior job at Chemical
Bank; she was not trained in due diligence analysis; the bank
had no standard due diligence forms; and she received no notice
of countries in the Caribbean to which she should pay close
attention when opening or monitoring a correspondent banking
relationship.
--A Bank of America official said that anti-money
laundering training had received little attention for several
years as the bank underwent a series of mergers. The bank said
it is now improving its efforts in this area.
--A relationship manager at the Miami office of Banco
Industrial de Venezuela told the investigation that she had
received no training in recognizing possible financial frauds
being committed through foreign bank correspondent accounts and
never suspected fraudulent activity might be a problem. She
indicated that, even after several suspicious incidents
involving a multi-million-dollar letter of credit, a proof of
funds letter discussing a prime bank guarantee, repeated large
cash withdrawals by the respondent bank's employees, and
expressions of concern by her superiors, no one at the bank
explained the money laundering risks to her or instructed her
to watch the relationship.
A few banks have developed new and innovative anti-money
laundering controls in their correspondent banking units,
including wire transfer monitoring software and pro-active
reviews of correspondent bank activity. A number of the banks
surveyed or interviewed by the Minority Staff expressed new
interest in developing stronger due diligence and monitoring
procedures for correspondent accounts. But most of the U.S.
banks contacted during the investigation had not devoted
significant resources to help their correspondent bankers
detect and report possible money laundering.
C. Nested Correspondents
Another practice in U.S. correspondent banking which
increases money laundering risks in the field is the practice
of foreign banks operating through the U.S. correspondent
accounts of other foreign banks. The investigation uncovered
numerous instances of foreign banks gaining access to U.S.
banks--not by directly opening a U.S. correspondent account--
but by opening an account at another foreign bank which, in
turn, has an account at a U.S. bank, In some cases, the U.S.
bank was unaware that a foreign bank was ``nested'' in the
correspondent account the U.S. bank had opened for another
foreign bank; in other cases, the U.S. bank not only knew but
approved of the practice. In a few instances, U.S. banks were
surprised to learn that a single correspondent account was
serving as a gateway for multiple foreign banks to gain access
to U.S. dollar accounts, U.S. wire transfer systems and other
services available in the United States.
Examples uncovered during the investigation included the
following:
--In 1999, First Union National Bank specifically rejected
a request by a Dominican bank, British Trade and Commerce Bank
(BTCB), to open a U.S. correspondent account. First Union was
unaware, until informed by Minority Staff investigators, that
it had already been providing wire transfer services to BTCB
for 2 years, through BTCB's use of a First Union correspondent
account belonging to Banque Francaise Commerciale (BFC). BFC is
a Dominican bank which had BTCB as a client.
--A Chase Manhattan Bank correspondent banker said that
she was well aware that American International Bank (AIB) was
allowing other foreign banks to utilize its Chase account. She
said that she had no problem with the other banks using AIB's
correspondent account, since she believed they would otherwise
have no way to gain entry into the U.S. financial system. She
added that she did not pay any attention to the other foreign
banks doing business with AIB and using its U.S. account. One
of the banks using AIB's U.S. account was Caribbean American
Bank, a bank used exclusively for moving the proceeds of a
massive advance-fee-for-loan fraud.
--The president of Swiss American Bank in Antigua said
that no U.S. bank had ever asked SAB about its client banks,
and SAB had, in fact, allowed at least two other offshore banks
to use SAB's U.S. accounts.
--Harris Bank International in New York said that its
policy was not to ask its respondent banks about their bank
clients. Harris Bank indicated, for example, that it had a
longstanding correspondent relationship with Standard Bank
Jersey Ltd., but no information on Standard Bank's own
correspondent practices. Harris Bank disclosed that it had been
unaware that, in providing correspondent services to Standard
Bank, it had also been providing correspondent services to
Hanover Bank, a shell bank which, in 1998 alone, handled
millions of dollars associated with financial frauds. Hanover
Bank apparently would not have met Harris Bank's standards for
opening an account directly, yet it was able to use Harris
Bank's services through Standard Bank. Harris Bank indicated
that it still has no information on what foreign banks may be
utilizing Standard Bank's U.S. correspondent account, and it
has no immediate plans to find out.
Case histories on American International Bank, Hanover
Bank, and British Trade and Commerce Bank demonstrate how
millions of dollars can be and have been transferred through
U.S correspondent accounts having no direct links to the
foreign banks moving the funds. Despite the money laundering
risks involved, no U.S. bank contacted during the investigation
had a policy or procedure in place requiring its respondent
banks to identify the banks that would be using its
correspondent account, although Harris Bank International said
it planned to institute that policy for its new bank clients
and, during a Minority Staff interview, Bank of America's
correspondent banking head stated ``it would make sense to know
a correspondent bank's correspondent bank customers.''
D. Foreign Jurisdictions with Weak Banking or Accounting Practices
International correspondent accounts require U.S. banks to
transact business with foreign banks. U.S. correspondent banks
are inherently reliant, in part, on foreign banking and
accounting practices to safeguard them from money laundering
risks in foreign jurisdictions. Weak banking or accounting
practices in a foreign jurisdiction increase the money
laundering risks for U.S. correspondent banks dealing with
foreign banks in that jurisdiction.
Weak Foreign Bank Licensing or Supervision. The
international banking system is built upon a hodge podge of
differing bank licensing and supervisory approaches in the
hundreds of countries that currently participate in
international funds transfer systems. It is clear that some
financial institutions operate under substantially less
stringent requirements and supervision than others. It is also
clear that jurisdictions with weak bank licensing and
supervision offer more attractive venues for money launderers
seeking banks to launder illicit proceeds and move funds into
bank accounts in other countries.\37\
---------------------------------------------------------------------------
\37\ See, for example, discussion of ``Offshore Financial
Centers,'' INCSR 2000, at 565-77.
---------------------------------------------------------------------------
Licensing requirements for new banks vary widely. While
some countries require startup capital of millions of dollars
in cash reserves deposited with a central bank and public
disclosure of a bank's prospective owners, other countries
allow startup capital to be kept outside the country, impose no
reserve requirements, and conceal bank ownership. Regulatory
requirements for existing banks also differ. For example, while
some countries use government employees to conduct on-site bank
examinations, collect annual fees from banks to finance
oversight, and require banks to operate anti-money laundering
programs, other countries conduct no bank examinations and
collect no fees for oversight, instead relying on self-policing
by the country's banking industry and voluntary systems for
reporting possible money laundering activities.
Offshore banking has further increased banking disparities.
Competition among jurisdictions seeking to expand their
offshore banking sectors has generated pressure for an
international ``race to the bottom'' in offshore bank
licensing, fees and regulation. Domestic bank regulators appear
willing to enact less stringent rules for their offshore banks,
not only to respond to the competitive pressure, but also
because they may perceive offshore banking rules as having
little direct impact on their own citizenry since offshore
banks are barred from doing business with the country's
citizens. Domestic bank regulators may also have less incentive
to exercise careful oversight of their offshore banks, since
they are supposed to deal exclusively with foreign citizens and
foreign currencies. A number of countries, including in the
East Caribbean and South Pacific, have developed separate
regulatory regimes for their onshore and offshore banks, with
less stringent requirements applicable to the offshore
institutions.
The increased money laundering risks for correspondent
banking are apparent, for example, in a web site sponsored by a
private firm urging viewers to open a new bank in the Republic
of Montenegro. The web site trumpets not only the
jurisdiction's minimal bank licensing requirements, but also
its arrangements for giving new banks immediate access to
international correspondent accounts.
``If you're looking to open a FULLY LICENSED BANK which is
authorized to carry on all banking business worldwide, the MOST
ATTRACTIVE JURISDICTION is currently the REPUBLIC OF
MONTENEGRO. . . . JUST USD$9,999 for a full functioning bank
(plus USD$4,000 annual fees). . . . No large capital
requirements--just USD$10,000 capital gets your Banking License
(and which you get IMMEDIATELY BACK after the Bank is . . .
set-up)[.] . . . [N]o intrusive background checks! . . . The
basic package includes opening a CORRESPONDENT BANK [ACCOUNT]
at the Bank of Montenegro. This allows the new bank to use
their existing correspondent network which includes Citibank,
Commerzbank, Union Bank of Switzerland etc[.] for sending and
receiving payments. For additional fee we can arrange direct
CORRESPONDENT ACCOUNTS with banks in other countries.'' \38\
[Emphasis and capitalization in original text.]
---------------------------------------------------------------------------
\38\ See global-money.com/offshore/europe-montenegro-bank.html. See
also web.offshore.by.net/unitrust/enmontenegro-bank.html and
www.permanenttourist.com/offshore-montenegro-bank.html.
A similar web site offers to provide new banks licensed in
Montenegro with a correspondent account not only at the ``State
Bank of Montenegro,'' but also at a ``Northern European Bank.''
\39\ When contacted, Citibank's legal counsel indicated no
awareness of the web sites or of how many banks may be
transacting business through its Bank of Montenegro
correspondent account.
---------------------------------------------------------------------------
\39\ www.permanenttoursit.com/offshore-montenegro-bank.html.
---------------------------------------------------------------------------
Weak Foreign Accounting Practices. Working in tandem with
banking requirements are accounting standards which also vary
across international lines. Accountants are often key
participants in bank regulatory regimes by certifying the
financial statements of particular banks as in line with
generally accepted accounting principles. Government regulators
and U.S. banks, among others, rely on these audited financial
statements to depict a bank's earnings, operations and
solvency. Accountants may also perform bank examinations or
special audits at the request of government regulators. They
may also be appointed as receivers or liquidators of banks that
have been accused of money laundering or other misconduct.
The investigation encountered a number of instances in
which accountants in foreign countries refused to provide
information about a bank's financial statements they had
audited or about reports they had prepared in the role of a
bank receiver or liquidator. Many foreign accountants contacted
during the investigation were uncooperative or even hostile
when asked for information.
--The Dominican auditing firm of Moreau Winston & Company,
for example, refused to provide any information about the 1998
financial statement of British Trade and Commerce Bank, even
though the financial statement was a publicly available
document published in the country's official gazette, the firm
had certified the statement as accurate, and the statement
contained unusual entries that could not be understood without
further explanation.
--A PriceWaterhouseCoopers auditor in Antigua serving as a
government-appointed liquidator for Caribbean American Bank
(CAB) refused to provide copies of its reports on CAB's
liquidation proceedings, even though the reports were filed in
court, they were supposed to be publicly available, and the
Antiguan government had asked the auditor to provide the
information to the investigation.\40\
---------------------------------------------------------------------------
\40\ ``See correspondence on CAB between the Minority Staff, the
PriceWaterhouseCoopers auditor and the auditor's legal counsel in the
case study on American International Bank.
--Another Antiguan accounting firm, Pannell Kerr Foster,
issued an audited financial statement for Overseas Development
Bank and Trust in which the auditor said certain items could
not be confirmed because the appropriate information was not
available from another bank, American International Bank. Yet
Pannell Kerr Foster was also the auditor of American
International Bank, with complete access to that bank's
---------------------------------------------------------------------------
financial records.
The investigation also came across disturbing evidence of
possible conflicts of interest involving accountants and the
banks they audited, and of incompetent or dishonest accounting
practices. In one instance, an accounting firm verified a $300
million item in a balance sheet for British Trade and Commerce
Bank that, when challenged by Dominican government officials,
has yet to be substantiated. In another instance, an accounting
firm approved an offshore bank's financial statements which
appear to have concealed indications of insolvency, insider
dealing and questionable transactions. In still another
instance raising conflict of interest concerns, an accountant
responsible for auditing three offshore banks involving the
same bank official provided that bank official with a letter of
reference, which the official then used to help one of the
banks open a U.S. correspondent account.
U.S. correspondent bankers repeatedly stated that they
attached great importance to a foreign bank's audited financial
statements in helping them analyze the foreign bank's
operations and solvency. Weak foreign accounting practices
damage U.S. correspondent banking by enabling rogue foreign
banks to use inaccurate and misleading financial statements to
win access to U.S. correspondent accounts.
International banking and accounting organizations, such as
the International Monetary Fund, Basle Committee for Banking
Supervision, and International Accounting Standards Committee,
have initiated efforts to standardize and strengthen banking
and accounting standards across international lines. A variety
of published materials seek to improve fiscal transparency,
bank licensing and supervision, and financial statements, among
other measures. For the foreseeable future, however,
international banking and accounting variations are expected to
continue, and banks will continue to be licensed by
jurisdictions with weak banking and accounting practices. The
result is that foreign banks operating without adequate
capital, without accurate financial statements, without anti-
money laundering programs, or without government oversight will
be knocking at the door of U.S. correspondent banks.
U.S. correspondent banks varied widely in the extent to
which they took into account a foreign country's banking and
anti-money laundering controls in deciding whether to open an
account for a foreign bank. Some U.S. banks did not perform any
country analysis when deciding whether to open a foreign bank
account. Several U.S. correspondent bankers admitted opening
accounts for banks in countries about which they had little
information. Other U.S. banks performed country evaluations
that took into account a country's stability and credit risk,
but not its reputation for banking or anti-money laundering
controls. Still other U.S. banks performed extensive country
evaluations that were used only when opening accounts for
foreign banks requesting credit. On the other hand, a few
banks, such as Republic National Bank of New York, explicitly
required their correspondent bankers to provide information
about a country's reputation for banking supervision and anti-
money laundering controls on the account opening documentation,
and routinely considered that information in deciding whether
to open an account for a foreign bank.
E. Bank Secrecy
Bank secrecy laws further increase money laundering risks
in international correspondent banking. Strict bank secrecy
laws are a staple of many countries, including those with
offshore banking sectors. Some jurisdictions refuse to disclose
bank ownership. Some refuse to disclose the results of bank
examinations or special investigations. Other jurisdictions
prohibit disclosure of information about particular bank
clients or transactions, sometimes refusing to provide that
information to correspondent banks and foreign bank regulators.
The Minority Staff identified several areas where bank
secrecy impedes anti-money laundering efforts. One area
involves secrecy surrounding bank ownership. In a case
involving Dominica, for example, government authorities were
legally prohibited from confirming a Dominican bank's
statements to a U.S. bank concerning the identity of the
Dominican bank's owners. In a case involving the South Pacific
island of Vanuatu, bank ownership secrecy impeded local
oversight of offshore banks. A local bank owner, who also
served as chairman of Vanuatu's key commission regulating
offshore banks, was interviewed by Minority Staff
investigators. He indicated that Vanuatu law prohibited
government officials from disclosing bank ownership information
to non-government personnel so that, even though he chaired a
key offshore bank oversight body, he was not informed about who
owned the 60 banks he oversaw. When asked who he thought might
own the offshore banks, he speculated that the owners were
wealthy individuals, small financial groups or, in a few cases,
foreign banks, but stressed he had no specific information to
confirm his speculation.
Another area involves secrecy surrounding bank
examinations, audits and special investigations. In several
cases, government authorities said they were prohibited by law
or custom from revealing the results of bank examinations, even
for banks undergoing liquidation or criminal investigations.
Bank regulators in Jersey, for example, declined to provide a
special report that resulted in the censure of Standard Bank
Jersey Ltd. for opening a correspondent account for Hanover
Bank, because the Jersey government did not routinely disclose
findings of fact or documents accumulated through
investigations. The United Kingdom refused a request to
describe the results of a 1993 inquiry into a =20 million
scandal involving Hanover Bank and a major British insurance
company, even though the inquiry had gone on for years,
resulted in official findings and recommendations, and involved
a closed matter. U.S. Government authorities were also at times
uncooperative, declining, for example, to disclose information
related to Operation Risky Business, a Customs undercover
operation that exposed a $60 million fraud perpetrated through
two foreign banks and multiple U.S. correspondent accounts.
Bank examinations, audits and investigations that cannot be
released or explained in specific terms hinder international
efforts to gather accurate information about suspect financial
institutions, companies and individuals.
A third area involves secrecy of information related to
specific bank clients and transactions. When Minority Staff
investigators sought to trace transactions and bank accounts
related to individuals or entities either convicted of or under
investigation for wrongdoing in the United States, foreign
banks often declined to answer specific questions about their
accounts and clients, citing their country's bank secrecy laws.
When asked whether particular accounts involved Internet
gambling, the same answer was given. When asked about whether
funds distributed to respondent bank officials represented
insider dealing, the same answer was given.
Bank secrecy laws contribute to money laundering by
blocking the free flow of information needed to identify rogue
foreign banks and individual wrongdoers seeking to misuse the
correspondent banking system to launder illicit funds. Bank
secrecy laws slow law enforcement and regulatory efforts. Bank
secrecy laws also make it difficult for U.S. banks considering
correspondent bank applications to make informed decisions
about opening accounts or restricting certain depositors or
lines of business. Money launderers thrive in bank secrecy
jurisdictions that hinder disclosure of their accounts and
activities, even when transacting business through U.S.
correspondent accounts.
F. Cross Border Difficulties
Due diligence reviews of foreign banks, if performed
correctly, require U.S. correspondent banks to obtain detailed
information from foreign jurisdictions. This information is
often difficult to obtain. For example, some governments are
constrained by bank secrecy laws from providing even basic
information about the banks operating in the country.
Jurisdictions with weak banking oversight and anti-money
laundering regimes may have little useful information to offer
in response to an inquiry by a U.S. based bank. Jurisdictions
reliant on offshore businesses for local jobs or government
fees may be reluctant to disclose negative information. Other
sources of information may be limited or difficult to evaluate.
Many foreign jurisdictions have few or no public databases
about their banks. Court records may not be computerized or
easily accessible. Credit agencies may not operate within the
jurisdiction. Media databases may be limited or nonexistent.
Language barriers may impose additional difficulties. Travel to
foreign jurisdictions by U.S. correspondent bankers to gather
first-hand information is costly and may not produce immediate
or accurate information, especially if a visit is short or to
an unfamiliar place. The bottom line is that due diligence is
not easy in international correspondent banking.
The difficulty continues after a correspondent account with
a foreign bank is opened. Correspondent banking with foreign
banks, by necessity, involves transactions across international
lines. The most common correspondent banking transaction is a
wire transfer of funds from one country to another. Foreign
exchange transactions, including clearing foreign checks or
credit card transactions, and international trade transactions
are also common. All require tracing transactions from one
financial institution to another, usually across international
borders, and involve two or more jurisdictions, each with its
own administrative and statutory regimes. These cross border
financial transactions inevitably raise questions as to which
jurisdiction's laws prevail, who is responsible for conducting
banking and anti-money laundering oversight, and what
information may be shared to what extent with whom. Cross
border complexities increase the vulnerability of correspondent
banking to money laundering by rendering due diligence more
difficult, impeding investigations of questionable
transactions, and slowing bank oversight.
G. U.S. Legal Barriers to Seizing Funds in U.S. Correspondent
Accounts
Another contributor to money laundering in correspondent
banking are U.S. legal barriers to the seizure of laundered
funds from a U.S. correspondent bank account.
Under current law in the United States, funds deposited
into a correspondent bank account belong to the respondent bank
that opened and has signatory authority over the account; the
funds do not belong to the respondent bank's individual
depositors.\41\ Federal civil forfeiture law, under 18 U.S.C.
984, generally prohibits the United States from seizing suspect
funds from a respondent bank's correspondent account based upon
the wrongdoing of an individual depositor at the respondent
bank. The one exception, under 18 U.S.C. 984(d), is if the
United States demonstrates that the bank holding the
correspondent account ``knowingly engaged'' in the laundering
of the funds or in other criminal misconduct justifying seizure
of the bank's own funds.
---------------------------------------------------------------------------
\41\ See, for example, United States v. Proceeds of Drug
Trafficking Transferred to Certain Foreign Bank Accounts (Civil Action
No. 98-434(NHJ), U.S. District Court for the District of Columbia
2000), court order dated 4/11/00.
---------------------------------------------------------------------------
Few cases describe the level of bank misconduct that would
permit a seizure of funds from a U.S. correspondent account
under Section 984(d). One U.S. district court has said that the
United States must demonstrate the respondent bank's ``knowing
involvement'' or ``willful blindness'' to the criminal
misconduct giving rise to the seizure action.\42\ That court
upheld a forfeiture complaint alleging that the respondent bank
had written a letter of reference for the wrongdoer, handled
funds used to pay ransom to kidnappers, and appeared to be
helping its clients avoid taxes, customs duties and transaction
reporting requirements. The court found that, ``under the
totality of the circumstances . . . the complaint sufficiently
allege[d] [the respondent bank's] knowing involvement in the
scheme.''
---------------------------------------------------------------------------
\42\ United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602,
2000 WL 1234593 SDNY 2000).
---------------------------------------------------------------------------
Absent such a showing by the United States, a respondent
bank may claim status as an ``innocent bank'' and no funds may
be seized from its U.S. correspondent account. If a foreign
bank successfully asserts an innocent bank defense, the United
States' only alternative is to take legal action in the foreign
jurisdiction where the suspect funds were deposited. Foreign
litigation is, of course, more difficult and expensive than
seizure actions under U.S. law and may require a greater
threshold of wrongdoing before it will be undertaken by the
U.S. Government.
In some instances, money launderers may be deliberately
using correspondent accounts to hinder seizures by U.S. law
enforcement, and some foreign banks may be taking advantage of
the innocent bank doctrine to shield themselves from the
consequences of lax anti-money laundering oversight. For
example, there are numerous criminal investigations in the
United States of frauds committed by Nigerian nationals and
their accomplices involving suspect funds deposited into U.S.
correspondent accounts in the name of Nigerian banks.
Nigerian financial fraud cases are a well known, widespread
problem which consumes significant U.S. law enforcement and
banking resources. The INCSR 2000 report states:
``Nigeria continues to be the money laundering and
financial fraud hub of West Africa, and may be assuming that
role for the entire continent. Nigerian money launderers
operate sophisticated global networks to repatriate illicit
proceeds. . . . Nigerian Advance Fee Fraud has arguably become
the most lucrative financial crime committed by Nigerian
criminals worldwide, with conservative estimates indicating
hundred of millions of dollars in illicit profits generated
annually. This type of fraud is referred to internationally as
`Four-One-Nine' (419), referring to the Nigerian criminal
statute for fraud, and has affected a large number of American
citizens and businesses.'' \43\
---------------------------------------------------------------------------
\43\ INCSR 2000 at 713. The INCSR 2000 report also expresses
concern about Nigeria's weak anti-money laundering efforts, which was
echoed by international banking experts interviewed by Minority Staff
investigators. The Federal Deposit Insurance Corporation recently
issued a special alert urging U.S. financial institutions to scrutinize
transactions to avoid funds associated with Nigerian frauds. FDIC
Financial Institution Letter No. FIL-64-2000 (9/19/00). See also, for
example, ``Letters from Lagos promise false riches for the gullible,''
The Times (London) (8/20/99); ``Nigerian Con Artists Netting Millions
in Advance-Fee Schemes,'' Los Angeles Times (1/24/98).
U.S. prosecutors seeking to recover Nigerian 4-1-9 fraud
proceeds face serious legal hurdles if the funds have been
deposited into a Nigerian bank's U.S. correspondent account.
Section 984(d) precludes seizure of the funds from the
correspondent account unless the United States demonstrates
that the Nigerian bank was knowingly engaged in misconduct.
Demonstrating Nigerian bank misconduct is not an easy task;
Nigerian bank information is not readily available and
prosecutors would likely have to travel to Nigeria to obtain
documents or interview bank personnel. Law enforcement advised
that these legal and investigatory complications make U.S.
prosecutors reluctant to pursue 4-1-9 cases, that Nigerian
wrongdoers are well aware of this reluctance, and that some
Nigerians appear to be deliberately using U.S. correspondent
accounts to help shield their ill-gotten gains from seizure by
U.S. authorities.
The survey conducted by the investigation discovered that
at least two U.S. banks have numerous correspondent
relationships with Nigerian banks, one listing 34 such
correspondent relationships and the other listing 31. The
investigation also determined that many of these Nigerian banks
were newly established, there was little information readily
available about them, and the only method to obtain first hand
information about them was to travel to Nigeria. These U.S.
correspondent accounts increase money laundering risks in U.S.
correspondent banking, not only because of Nigeria's poor anti-
money laundering and banking controls, but also because of U.S.
legal protections that shield these accounts from seizures of
suspect funds.
The special forfeiture protections in U.S. law for deposits
into correspondent accounts are not available for deposits into
any other type of account at U.S. banks. Additional examples of
U.S. legal barriers impeding forfeiture of illicit proceeds
from U.S. correspondent accounts are discussed in the case
histories involving European Bank, British Bank of Latin
America, and British Trade and Commerce Bank.
VI. How an Offshore Bank Launders Money Through a U.S. Correspondent
Account: The Lessons of Guardian Bank
In March 2000, the Minority Staff conducted an in-depth
interview of a former offshore bank owner who had pled guilty
to money laundering in the United States and was willing to
provide an insider's account of how his bank used U.S.
correspondent accounts to launder funds and facilitate crime in
the United States.
Guardian Bank and Trust (Cayman) Ltd. was an offshore bank
licensed by the Cayman Islands which opened its doors in 1984
and operated for about 10 years before being closed by the
Cayman Government. At its peak, Guardian Bank had a physical
office in the Cayman Islands' capital city, over 20 employees,
over 1,000 clients, and about $150 million in assets. The bank
operated until early 1995, when it was abruptly closed by
Cayman authorities and eventually turned over to a government-
appointed liquidator due to ``serious irregularities''
identified in the conduct of the Offshore Bank's business.\44\
---------------------------------------------------------------------------
\44\ Johnson v. United States, 971 F. Supp. 862, 863 (U.S. District
Court for the District of New Jersey 1997).
---------------------------------------------------------------------------
The majority owner and chief executive of Guardian Bank for
most of its existence was John Mathewson, a U.S. citizen who
was then a resident of the Cayman Islands. In 1996, while in
the United States, Mathewson was arrested and charged with
multiple counts of money laundering, tax evasion and fraud, and
later pleaded guilty.\45\ As part of his efforts to cooperate
with Federal law enforcement, Mathewson voluntarily provided
the United States with an electronic ledger and rolodex
providing detailed records for a 1-year period of all Guardian
Bank customers, accounts and transactions.
---------------------------------------------------------------------------
\45\ In 1997, Mathewson pleaded guilty to charges in three Federal
prosecutions. The U.S. District of New Jersey had indicted him on three
counts of money laundering, United States v. Mathewson (Criminal Case
No. 96-353-AJL); the Eastern District of New York had charged him with
four counts of aiding and abetting the evasion of income tax, United
States v. Mathewson (Criminal Case No. 97-00189-001-ALJ); and the
Southern District of Florida had charged him with one count of
conspiracy to commit wire fraud, United States v. Mathewson (Criminal
Case No. 97-0188-Marcus). He was also subject to a 1993 civil tax
judgment for over $11.3 million from United States v. Mathewson (U.S.
District Court for the Southern District of Florida Civil Case No. 92-
1054-Davis).
---------------------------------------------------------------------------
The encrypted computer tapes provided by Mathewson
represent the first and only time U.S. law enforcement
officials have gained access to the computerized records of an
offshore bank in a bank secrecy haven.\46\ Mathewson not only
helped decode the tapes, but also explained the workings of his
bank, and provided extensive and continuing assistance to
Federal prosecutors in securing criminal convictions of his
former clients for tax evasion, money laundering and other
crimes.\47\
---------------------------------------------------------------------------
\46\ The government-appointed liquidator of Guardian Bank sued
unsuccessfully to recover the computer tapes from the U.S. Government,
arguing that they had been improperly obtained and disclosure of the
bank information would violate Cayman confidentiality laws and damage
the reputation of the Cayman banking industry. Johnson v. United
States, 971 F. Supp. 862 (U.S. District Court for the District of New
Jersey 1997). The Cayman Government also refused U.S. requests for
assistance in decoding the information on the computer tapes.
\47\ Some of the former clients for whom Mathewson has provided
assistance in obtaining a criminal conviction include: (1) Mark A.
Vicini of New Jersey, who had deposited $9 million into a Guardian
account and pleaded guilty to evading $2.2 million in taxes (U.S.
District Court for the Eastern District of New York Case No. CR-97-
684); (2) members of the Abboud family of Omaha, Nebraska, who have
been indicted for money laundering and fraud in connection with $27
million in cable piracy proceeds transferred to Guardian Bank (U.S.
District Court for the District of Nebraska Case No. 8:99CR-80); (3)
Frederick Gipp, a Long Island golf pro who had deposited $150,000 into
a Guardian account and pleaded guilty to tax evasion (U.S. District
Court for the Eastern District of New York Case No. CR-98-147-ERK); (4)
Dr. Jeffrey E. LaVigne, a New York proctologist who deposited $560,000
into a Guardian account and who pleaded guilty to evading $160,000 in
taxes (U.S. District Court for the Eastern District of New York Case
No. 94-1060-CR-ARR); (5) Dr. Bartholomew D'Ascoli, a New Jersey
orthopedic surgeon, who had deposited $395,000 into a Guardian account
and pleaded guilty to evading $118,000 in taxes (U.S. District Court
for the Eastern District of New York Criminal Case No. 98-739-RJD); (6)
Michael and Terrence Hogan of Ohio, who had deposited $750,000 of
undeclared income into a Guardian account and pleaded guilty to tax
evasion (U.S. District Court for the Southern District of Ohio Criminal
Case No. CR-1-98-045); (7) David L. Bamford of New Jersey, who had
diverted corporate income into a Guardian account and pleaded guilty to
tax evasion (U.S. District Court for the District of New Jersey Case
Number 2:98-CR-0712); and (8) Marcello Schiller of Florida who had
deposited funds in a Guardian account, pleaded guilty to Medicare
fraud, and was ordered to pay restitution exceeding $14 million (U.S.
District Court for the Southern District of Florida Criminal Case No.
1:98-CR-0397).
---------------------------------------------------------------------------
Mathewson stated at his sentencing hearing, ``I have no
excuse for what I did in aiding U.S. Citizens to evade taxes,
and the fact that every other bank in the Caymans was doing it
is no excuse. . . . But I have cooperated.'' His cooperation
has reportedly resulted in the collection of more than $50
million in unpaid taxes and penalties, with additional
recoveries possible.\48\ One prosecutor has characterized
Mathewson's assistance as ``the most important cooperation for
the government in the history of tax haven prosecution.''\49\
---------------------------------------------------------------------------
\48\ The Record (Bergen County, N.J.) (8/3/97).
\49\ New York Times (8/3/99).
---------------------------------------------------------------------------
Pursuant to his plea agreement to provide assistance to
government officials investigating matters related to Guardian
Bank, Mathewson provided the Minority Staff investigation with
a lengthy interview and answers to written questions on how
Guardian Bank laundered funds through its U.S. correspondent
accounts.
Bank Secrecy. Mathewson first explained why bank secrecy
plays a central role in the offshore banking industry. He said
that Cayman laws strictly limit government and bank disclosure
of bank records and personal information associated with
depositors. He said that, in his experience, Cayman bank
clients relied on those secrecy laws and believed no one would
be able to trace a Cayman bank account or corporation back to
them. Mathewson asserted that this secrecy was and still is the
basis of the Cayman financial industry, and is protected by
Cayman authorities. He indicated that, without this secrecy, he
thought there would be no reason for U.S. citizens to establish
offshore bank accounts, trusts or corporations in the Cayman
Islands and pay the costly fees associated with them.
Mathewson stated at another point that he thought 100% of
his clients had been engaged in tax evasion, which was one
reason they sought bank secrecy. He pointed out that tax
evasion is not a crime in the Cayman Islands; Guardian Bank
could legally accept the proceeds of tax evasion without
violating any Cayman criminal or money laundering prohibitions;
and Cayman law placed no legal obligation on its banks to avoid
accepting such deposits.\50\ His analysis of the bank's clients
is echoed in statements made on behalf of the Guardian Bank
liquidator in a letter warning of the consequences of Guardian
computer tapes remaining in U.S. custody:
---------------------------------------------------------------------------
\50\ Mathewson drew a sharp contrast between the proceeds of tax
evasion, which his bank had accepted, and the proceeds of drug
trafficking, which his bank had not. He stated that Guardian Bank had
refused to accept suspected drug proceeds, and multiple reviews of its
accounts by law enforcement had found no evidence of any drug proceeds
in the bank.
``[I]t is quite obvious that the consequences of the
seizure of these records by the Federal authorities are
potentially very damaging to those of the [Offshore] Bank's
clients liable for taxation in the U.S. In the likely event
that the Federal authorities share the information . . . with
the Internal Revenue Service, we would anticipate widespread
investigation and possibly prosecution of the [Offshore] Bank's
clients.'' \51\
---------------------------------------------------------------------------
\51\ Johnson v. United States, 971 F. Supp. at 865.
Subsequent U.S. tax prosecutions against Guardian clients
have demonstrated the accuracy of this prediction, establishing
that numerous depositors had, in fact, failed to pay U.S. tax
on the funds in their offshore accounts.
Guardian Procedures Maximizing Secrecy. Mathewson said that
Guardian Bank had complied with Cayman secrecy requirements,
and he had designed Guardian Bank policies and procedures to
maximize secrecy protections for its clients. He stated, for
example, that he had begun by changing the name of the bank
from Argosy Bank to Guardian Bank. He indicated that he had
selected the name Guardian Bank in part after determining that
at least 11 other banks around the world used the word Guardian
in their title. Mathewson indicated that he had thought the
commonness of the name would help secure Guardian's anonymity
or at least make it more difficult to trace transactions
related to the bank. He indicated that this was a key concern,
because offshore banks in small jurisdictions by necessity
conduct most of their transactions through international
payment systems and so need to find ways to minimize detection
and disclosure of client information.
Mathewson advised that a second set of Guardian procedures
designed to maximize client secrecy involved the bank's opening
client accounts in the name of shell corporations whose true
ownership was not reported in public records. He said that
almost all Guardian clients had chosen to open their accounts
in the name of a corporation established by the bank. Mathewson
explained that Guardian Bank had typically set up several
corporations at a time and left them ``on the shelf '' for
ready use when a client requested one.
Mathewson said that Guardian Bank had typically charged
$5,000 to supply a ``shelf corporation'' to a client and $3,000
to cover the corporation's first-year management fee, for a
total initial charge of $8,000. He said that clients were then
required to pay an annual management fee of $3,000 for each
corporation they owned. He said that these fees represented
mostly revenue for Guardian Bank, since, at the time, the only
major expense per corporation was about $500 charged by the
Cayman authorities each year for taxes and other fees. He said
that many Cayman banks offered the same service, and $8,000 was
the going rate at the time.
According to Mathewson, for an additional fee, Guardian
clients could obtain an ``aged'' shelf corporation. He
explained that an aged shelf corporation was one which had been
in existence for several years and which either had never been
sold to a client or had been sold and returned by a client
after a period of time. Mathewson indicated that some clients
wanted aged shelf corporations in order to back-date invoices
or create other fictitious records to suggest past years of
operation. He said that this type of corporation helped
Guardian clients with preexisting tax problems to fabricate
proof of corporate existence and business activity. Mathewson
stated that he and other Cayman bankers would customize these
aged shelf corporation to suit a client's specific needs.
In addition to providing a shelf corporation to serve as a
client's accountholder, Mathewson stated that Guardian Bank
usually provided each client with nominee shareholders and
directors to further shield their ownership of the corporation
from public records. He explained that Cayman law allowed
Cayman corporations to issue a single share which could then be
held by a single corporate shareholder. He said that a Guardian
subsidiary, such as Fulcrum Ltd., was typically named as the
shelf corporation's single shareholder. He said that Fulcrum
Ltd. would then be the only shareholder listed on the
incorporation papers.
Mathewson said that Guardian also usually supplied nominee
directors for the shelf corporation. He explained that Cayman
law required only one director to appear on the incorporation
papers, allowed that director to be a corporation, and allowed
companies to conduct business in most cases with only one
director's signature. He said that a Guardian subsidiary called
Guardian Directors Ltd. was typically used to provide nominee
directors for clients and to manage their shelf corporations.
He said that the only director's name that would appear on a
shelf corporation's incorporation papers was ``Guardian
Directors Ltd.,'' and that only one signature from the
subsidiary was then needed to conduct business on the shelf
corporation's behalf. That meant, Mathewson advised, that a
client's name need never appear on the shelf corporation's
incorporation papers or on any other document requiring a
corporate signature; signatures were instead provided by a
person from Guardian Directors Ltd. In this way, Mathewson
indicated, a client's corporation ``could do business worldwide
and the U.S. client (beneficial owner) could be confident that
his name would never appear and, in fact, he or she would have
complete anonymity.''
Mathewson explained that, to establish a client's ownership
of a particular shelf corporation, Guardian Bank typically used
a separate ``assignment'' document which assigned the
corporation's single share from the Guardian subsidiary to the
client. He said this assignment document was typically the only
documentary evidence of the client's ownership of the shelf
corporation. He indicated that the assignment document could
then be kept by Guardian Bank in the Cayman Islands, under
Cayman banking and corporate secrecy laws, to further ensure
nondisclosure of the client's ownership interest.
Mathewson said Guardian Bank usually kept clients' bank
account statements in the Cayman Islands as well, again to
preserve client secrecy. His written materials state, ``No bank
statements were ever sent to the client in the United States.''
Instead, he indicated, a client visiting the Cayman Islands
would give the bank a few days notice, and Guardian Bank would
produce an account statement for an appropriate period of time,
for the client's in-person review and signature during their
visit to the bank.
Guardian Use of Correspondent Accounts. Mathewson said
Guardian Bank utilized correspondent bank accounts to
facilitate client transactions, while minimizing disclosure of
client information and maximizing Guardian revenues.
Mathewson noted that, because Guardian Bank was an offshore
bank, all of its depositors were required to be non-Cayman
citizens. He said that 95% of the bank's clientele came from
the United States, with the other 5% from Canada, South America
and Europe, which he said was a typical mix of clients for
Cayman banks. In order to function, he said, Guardian had to be
able to handle foreign currency transactions, particularly U.S.
dollar transactions, including clearing U.S. dollar checks and
wires. He said that, as a non-U.S. bank, Guardian Bank had no
capability to clear a U.S. dollar check by itself and no direct
access to the check and wire clearing capabilities of Fedwire
or CHIPS. But Guardian Bank had easily resolved this problem,
he said, by opening correspondent accounts at U.S. banks.
Mathewson said that, over time, Guardian Bank had opened
about 15 correspondent accounts and conducted 100% of its
transactions through them. He said, ``Without them, Guardian
would not have been able to do business.'' He said that, at
various times, Guardian had accounts at seven banks in the
United States, including Bank of New York; Capital Bank in
Miami; Eurobank Miami; First Union in Miami; Popular Bank of
Florida; Sun Bank; and United Bank in Miami. He said Guardian
also had accounts at non-U.S. banks, including Bank of
Butterfield in the Cayman Islands; Bank of Bermuda in the
Cayman Islands; Barclay's Grand Cayman; Credit Suisse in
Guernsey; Credit Suisse in Toronto; Royal Bank of Canada in the
Cayman Islands; and Toronto Dominion Bank.
Mathewson indicated that Guardian Bank's major
correspondents were Bank of New York, First Union in Miami, and
Credit Suisse in Guernsey, with $1-$5 million on deposit at
each bank at any given time. He said that when Guardian Bank
was closed in early 1995, it had a total of about $150 million
in its correspondent accounts. He estimated that, over 10 years
of operation, about $300-$500 million had passed through
Guardian Bank's correspondent accounts.
Mathewson said that Guardian Bank had used the services
provided by its correspondent banks to provide its clients with
a wide array of financial services, including checking
accounts, credit cards, wire transfer services, loans and
investments. He wrote, ``The bank offered almost any service
that a U.S. bank would offer, i.e., wire transfers, current
accounts, certificates of deposit, the purchase of shares on
any share market in the world, purchase of U.S. treasury bills,
bonds, credit cards (Visa), and almost any investment that the
client might wish.'' He explained that, while Guardian Bank
itself lacked the resources, expertise and infrastructure
needed to provide such services in-house, it easily afforded
the fees charged by correspondent banks to provide these
services for its clients.
Mathewson said that to ensure these correspondent services
did not undermine Cayman secrecy protections, Guardian Bank had
also developed a series of policies and procedures to minimize
disclosure of client information.
Client Deposits. Mathewson said that one set of policies
and procedures were designed to minimize documentation linking
particular deposits to particular clients or accounts and to
impede the tracing of individual client transactions. He said
that Guardian Bank provided its clients with instructions on
how to make deposits with either checks or wire transfers.
Client Deposits Through Checks. If a client wanted to use a
check to make a deposit, Mathewson said, the client was advised
to make the check payable to Guardian Bank; one of Guardian's
subsidiaries--Fulcrum Ltd., Sentinel Ltd., or Tower Ltd.; or
the client's own shelf corporation. He said the client was then
instructed to wrap the check in a sheet of plain paper, and
write their Guardian account number on the sheet of paper. He
said that the client account number was written on the plain
sheet of paper rather than on the check, so that the account
number would not be directly associated with the check
instrument used to make the deposit.
Mathewson said that Guardian Bank provided its clients with
several options for check payees to make a pattern harder to
detect at their own bank. He said that if a check was made out
to the client's shelf corporation, the client was advised not
to endorse it on the back and Guardian Bank would ensure
payment anyway. He said that Guardian would then stamp each
check on the back with: ``For deposit at [name of correspondent
bank] for credit to Guardian Bank'' and provide Guardian's
account number at the correspondent bank. He noted that this
endorsement included no reference to the Cayman Islands which
meant, since there were multiple Guardian Banks around the
world, the transaction would be harder to trace.
Mathewson said that after Guardian Bank accumulated a
number of U.S. dollar checks sent by its clients to the bank in
the Cayman Islands, it batched them into groups of 50 to 100
checks and delivered them by international courier to one of
its U.S. correspondent banks for deposit into a Guardian
account. He said that the U.S. bank would then clear the client
checks using its own U.S. bank stamp, which meant the client's
U.S. bank records would show only a U.S. bank, and not a Cayman
bank, as the payor. He said the correspondent bank would then
credit the check funds to Guardian's account, leaving it to
Guardian Bank itself to apportion the funds among its client
accounts.
Mathewson explained that Guardian Bank never actually
transferred client funds out of Guardian's correspondent
accounts to the bank in the Cayman Islands, nor did it create
subaccounts within its U.S. correspondent accounts for each
client. He said that Guardian Bank purposely left all client
funds in its correspondent accounts in order to earn the
relatively higher interest rates paid on large deposits,
thereby generating revenue for the bank. For example, Mathewson
said, a Guardian correspondent account might generate 6%
interest, a higher rate of return based on the large amount of
funds on deposit, and Guardian Bank would then pay its clients
5%, keeping the 1% differential for itself. He said that
Guardian might also transfer some funds to an investment
account in its own name to generate still larger revenues for
the bank. He said that Guardian Bank had opened investment
accounts at 10 or more securities firms, including Prudential
Bache in New York, Prudential Securities in Miami, Smith Barney
Shearson, and Charles Schwab.
He explained that Guardian did not create client
subaccounts or otherwise ask its correspondent banks keep track
of Guardian client transactions, since to do so would have
risked disclosing specific client information. Instead, he
said, transactions involving individual Guardian accounts were
recorded in only one place, Guardian Bank's ledgers. He said
that Guardian Bank's ledgers were kept electronically, using
encrypted banking software that was capable of tracking
multiple clients, accounts, transactions and currencies and
that ran on computers physically located in the Cayman Islands,
protected by Cayman bank secrecy laws.
Client Deposits Through Wire Transfers. Mathewson also
described the arrangements for client deposits made through
wire transfers. He said that clients were provided the names of
banks where they could direct wire transfers for depositing
funds into a Guardian correspondent account. He said the wire
instructions typically told clients to transfer their funds to
the named bank ``for further credit to Guardian Bank,'' and
provided Guardian's correspondent account number.
Mathewson said that Guardian Bank had preferred its clients
to send wire deposits to a non-U.S. bank, such as Credit Suisse
in Guernsey, or the Bank of Butterfield in the Caymans, to
minimize documentation in the United States. He said the
clients were given Guardian's account number at each of the
banks and were instructed to direct the funds to be deposited
into Guardian's account, but not to provide any other
identifying information on the wire documentation. He said
clients were then instructed to telephone Guardian Bank to
alert it to the incoming amount and the account to which it
should be credited. He said that Guardian Bank commingled the
deposit with other funds in its correspondent account,
recording the individual client transaction only in its Cayman
records.
Mathewson stated that, although discouraged from doing so,
some clients did wire transfer funds to a Guardian
correspondent account at a U.S. bank. He said that Guardian had
also, on occasion, permitted clients to make cash deposits into
a Guardian correspondent account at a U.S. bank. In both cases,
however, he indicated that the clients were warned against
providing documentation directly linking the funds to
themselves or their Guardian account numbers. He said that
after making a deposit at a U.S. bank, clients were supposed to
telephone Guardian Bank to alert it to the deposit and to
indicate which Guardian account was supposed to be credited. He
indicated that, as a precaution in such cases, Guardian Bank
would sometimes wire the funds to another Guardian
correspondent account at a bank in a secrecy jurisdiction, such
as Credit Suisse in Guernsey, before sending it to the next
destination, to protect client funds from being traced.
Mathewson said that, whether a client used a check or wire
transfer to deposit funds, if the client followed Guardian's
instructions, the documentation at the correspondent bank ought
to have contained no information directly linking the incoming
funds to a named client or to a specific account at Guardian
Bank in the Cayman Islands.
Client Withdrawals. Mathewson next explained how Guardian
Bank used its U.S. correspondent accounts to provide its
clients with easy, yet difficult-to-trace access to their
offshore funds. He described three options for client
withdrawals involving credit cards, checks or wire transfers.
Client Withdrawals Through Credit Cards. Mathewson said
that Guardian Bank had recommended that its clients access
their account funds through use of a credit card issued by the
bank, which he described as the easiest and safest way for them
to access their offshore funds. He explained that Guardian Bank
had set up a program to assign its U.S. clients a corporate
Visa Gold Card issued in the name of their shelf corporation.
He said that the only identifier appearing on the face of the
card was the name of the shelf corporation, imprinted with
raised type. He said that the clients were then told to sign
the back of the card, using a signature that was reproducible
but hard to read. He said that, while some clients had
expressed concern about merchants accepting the credit card,
Guardian had never experienced any problems.
Mathewson said that Guardian Bank had charged its clients
an annual fee of $100 for use of a Visa card. Mathewson
explained that the cards were issued and managed on a day-to-
day basis by a Miami firm called Credomatic. To obtain a card
for a particular client, Mathewson explained that Guardian Bank
had typically sent a letter of credit on behalf of the client's
shelf corporation to Credomatic. He said the amount of the
letter of credit would equal the credit limit for the
particular card. He said that, to ensure payment by the client,
Guardian Bank would simultaneously establish a separate account
within Guardian Bank containing funds from the client in an
amount equal to twice the client's credit card limit. He said
these client funds then served as a security deposit for the
credit card. He said, for example, if a client had a $50,000
credit card limit, the security deposit would contain $100,000
in client funds. He said that, while most of their cardholders
had $5,000 credit limits, some went as high as $50,000.
Mathewson stated that Credomatic had not required nor
conducted background checks on Guardian's cardholders, because
Guardian Bank had guaranteed payment of their credit card
balances through the letters of credit, which meant Credomatic
had little or no risk of nonpayment. Mathewson stated that
Guardian Bank had instructed Credomatic never to carry a credit
card balance over to a new month, but to ensure payment in full
each month using client funds on deposit at Guardian Bank. In
that way, he said, the client funds in the security deposit
eliminated any nonpayment risk to Guardian Bank. According to
Mathewson, the arrangement was the equivalent of a monthly loan
by the bank to its clients, backed by cash, through a device
which gave its U.S. banking clients ready access to their
offshore funds.
Mathewson observed that Guardian Bank had earned money from
the Visa card arrangement, not only through the $100 annual
fee, but also through commissions on the card activity. He
explained that once a credit card was issued, Credomatic
managed the credit relationship, compiling the monthly charges
for each card and forwarding the balances to Guardian Bank
which immediately paid the total in full and then debited each
client. In return, he said, Credomatic received from merchants
the standard Visa commission of approximately 3% of the sales
drafts and, because Guardian Bank had guaranteed payment of the
monthly credit card balances, forwarded 1% to the bank. He said
it was a popular service with clients and profitable for
Guardian Bank. In response to questions, he said that, as far
as he knew, Credomatic had never questioned Guardian Bank's
operations or clients and was ``delighted'' to have the
business. Credomatic is still in operation in Miami.
Client Withdrawals Through Correspondent Checks. Mathewson
said that a second method Guardian Bank sometimes used to
provide U.S. clients with access to their offshore funds was to
make payments on behalf of its clients using checks drawn on
Guardian's U.S. correspondent accounts.
Mathewson explained that each correspondent bank had
typically provided Guardian Bank with a checkbook that the bank
could use to withdraw funds from its correspondent account. He
said that the Bank of New York, which provided correspondent
services to Guardian Bank from 1992 until 1996, had actually
provided two checkbooks. He said the first checkbook from the
Bank of New York had provided checks in which the only
identifier at the top of the check was ``Guardian Bank''--
without any address, telephone number or other information
linking the bank to the Cayman Islands--and the only account
number at the bottom was Guardian's correspondent account
number at the Bank of New York in New York City. He said the
second checkbook provided even less information--the checks had
no identifier at the top at all and at the bottom referenced
only the Bank of New York and an account number that, upon
further investigation, would have identified the Guardian
account. He explained that checks without any identifying
information on them were common in Europe, Asia and offshore
jurisdictions, and that Guardian Bank had experienced no
trouble in using them.
He said that Guardian Bank sometimes used these checks to
transact business on behalf of a client--such as sending a
check to a third party like a U.S. car dealership. He said that
if the amount owed was over $10,000, such as a $40,000 payment
for a car, the client would authorize the withdrawal of the
total amount of funds from their Cayman account, and Guardian
Bank would send multiple checks to the car dealership, perhaps
five or six, each in an amount less than $10,000, to avoid
generating any currency report. He noted that, once deposited,
each check would be cleared as a payment from a U.S. bank,
rather than from a Cayman bank. He said that if the check used
did not have an identifier on top, the payee would not even be
aware of Guardian Bank's involvement in the transaction. If
traced, he noted that the funds would lead only to the
correspondent account held by Guardian Bank, rather than to a
specific Guardian client. He said that Cayman secrecy laws
would then prohibit Guardian Bank from providing any specific
client information, so that the trail would end at the
correspondent account in the United States.
Mathewson said that correspondent checks, like the VISA
credit cards, gave Guardian clients ready access to their
offshore funds in ways that did not raise red flags and would
not have been possible without Guardian Bank's correspondent
relationships.
Client Withdrawals Through Wire Transfers. A third option
for clients to access their offshore funds involved the use of
wire transfers. Mathewson explained that Guardian clients had
no authority to wire transfer funds directly from Guardian
Bank's correspondent accounts, since only the bank itself had
signatory authority over those accounts. He said that the
clients would instead send wire transfer instructions to
Guardian Bank, which Guardian Bank would then forward to the
appropriate correspondent bank. He said that Guardian Bank
would order the transfer of funds to the third party account
specified by the client, without any client identifier on the
wire documentation itself, requiring the client to take
responsibility for informing the third party that the incoming
funds had originated from the client.
Mathewson observed that its correspondent accounts not only
enabled its clients readily to deposit and withdraw their
offshore funds and hide their association with Guardian Bank,
but also generated ongoing revenues for Guardian Bank, such as
the higher interest paid on aggregated client deposits, credit
card commissions, and wire transfer fees.
Two Other Client Services. In addition to routine client
services, Mathewson described two other services that Guardian
Bank had extended to some U.S. clients, each of which made use
of Guardian Bank's correspondent accounts. Both of these
services enabled Guardian clients to evade U.S. taxes, with the
active assistance of the bank.
Invoicing. Mathewson first described a service he called
invoicing, which he said was provided in connection with sales
transactions between two corporations controlled by the same
Guardian client. He said that a typical transaction was one in
which the client's Cayman corporation purchased a product from
abroad and then sold it to the client's U.S. corporation at a
higher price, perhaps with a 30% markup, using an invoice
provided by Guardian Bank. He said that this transaction
benefited the client in two ways: (1) the client's Cayman
corporation could deposit the price differential into the
client's account at Guardian Bank tax free (since the Cayman
Islands imposes no corporate taxes) and, if the client chose,
avoid mention of the income on the client's U.S. taxes; and (2)
the client's U.S. corporation could claim higher costs and less
revenue on its U.S. tax return, resulting in a lower U.S. tax
liability.
Mathewson said that the Guardian Bank service had included
supplying any type of invoice the client requested, with any
specified price or other information. He said Guardian Bank had
also made its correspondent accounts available to transfer the
funds needed by the client's Cayman corporation for the initial
product purchase, and to accept the sales price later ``paid''
by the client's U.S. corporation. In return for its services,
he said, Guardian Bank had charged the client in one of three
ways: (1) a fee based upon the time expended, such as $1,000
for 4 hours of work; (2) a flat fee for the service provided,
such as $25,000 per year; or (3) a fee based on a percentage of
the shipment cost of the product invoiced. Mathewson observed
that, at the time, he did not consider this activity to be
illegal since, unlike the United States, the Cayman Islands
collected no corporate taxes and did not consider tax evasion a
crime. However, Cayman authorities told Minority Staff
investigators that Guardian Bank's invoicing services were both
unusual in Cayman banking circles and a clearly fraudulent
practice.
Dutch Corporations. Mathewson advised that Guardian Bank
had also assisted a few U.S. clients in obtaining Dutch
corporations to effect a scheme involving fake loans and
lucrative U.S. tax deductions. He explained that Guardian Bank
had begun offering this service after hiring a new vice
president who had set up Dutch corporations in his prior
employment. Mathewson said, for a $30,000 fee, Guardian Bank
would establish a Dutch corporation whose shares would be
wholly owned by the client's Cayman corporation. Mathewson said
that Guardian Bank used a Dutch trust company to incorporate
and manage the Dutch corporations, paying the trust company
about $3,000-$4,000 per year per corporation. He said that
Guardian Bank was able to charge ten times that amount to its
clients, because the few clients who wanted a Dutch corporation
were willing to pay.
Once established, Mathewson said, the Dutch corporation
would issue a ``loan'' to the U.S. client, using the client's
own funds on deposit with Guardian Bank. He said the U.S.
client would then repay the ``loan'' with ``interest,'' by
sending payments to the Dutch corporation's bank account,
opened by the Dutch trust company at ANB AMRO Bank in
Rotterdam. He said that the Dutch corporation would then
forward the ``loan payments'' to the client's Guardian account,
using one of Guardian Bank's correspondent accounts.
In essence, he said, the U.S. client was using Guardian
Bank's correspondent accounts to transfer and receive the
client's own funds in a closed loop. He said the benefits to
the client were fourfold: (1) the client secretly utilized his
or her offshore funds; (2) the client obtained seeming
legitimate loan proceeds which could be used for any purpose in
the United States; (3) the client repaid not only the loan
amount, but additional ``interest'' to the Dutch corporation,
which in turn sent these funds to the client's growing account
at Guardian Bank; and (4) if the client characterized the loan
as a ``mortgage,'' the client could deduct the ``interest''
payments from his or her U.S. taxes, under a U.S.-Netherlands
tax treaty loophole which has since been eliminated.
Due Diligence Efforts of U.S. Banks. When asked about the
due diligence efforts of the U.S. banks that had provided
correspondent services to Guardian Bank, Mathewson said that he
thought the U.S. banks had required little information to open
a correspondent account, had requested no information about
Guardian Bank's clients, and had conducted little or no
monitoring of the account activity.
Mathewson said the account opening process was ``not
difficult.'' He said that, during the 10 years of Guardian
Bank's operation from 1984 to 1994, U.S. banks wanted the large
deposits of offshore banks like Guardian Bank and were
``delighted'' to get the business. He said it was his
understanding that they would open a correspondent relationship
almost immediately upon request and completion of a simple
form. He said the account was opened within ``a matter of
days'' and apparently with little verification, documentation,
or research by the correspondent bank. He could not recall any
U.S. based bank turning down Guardian Bank's request for an
account, nor could he recall any U.S. correspondent bank
officer visiting Guardian Bank prior to initiating a
correspondent relationship.
Mathewson also could not remember any effort by a U.S.
based bank to monitor Guardian Bank's correspondent account
activity. He said, ``I don't think any of them ever attempted
to monitor the account.'' He stated that, to his knowledge,
Guardian Bank's correspondent banks also had no information
related to Guardian's individual clients, since Guardian Bank
had designed its procedures to minimize information about its
clients in the United States.
An Insider's View. Guardian Bank was in operation for 10
years. It had over 1,000 clients and $150 million in its
correspondent accounts when it was closed by the Cayman
Government in early 1995. Since then, Mathewson has pled guilty
to money laundering, tax evasion and fraud, and has helped
convict numerous former bank clients of similar misconduct. He
has also provided the most detailed account yet of the
operations of an offshore bank.
Mathewson informed Minority Staff investigators that
correspondent banks are fundamental to the operations of
offshore banks, because they enable offshore banks to transact
business in the United States, while cloaking the activities of
bank clients.
When asked whether he thought Guardian Bank's experience
was unusual, Mathewson said that, to his knowledge, he was
``the first and last U.S. citizen'' allowed to attain a
position of authority at a Cayman bank. He said he thought he
was both the first and last, because Cayman authorities had
been wary of allowing a U.S. citizen to become a senior bank
official due to their vulnerability to U.S. subpoenas, and
because he had met their fears of a worst case scenario--he
was, in fact, subpoenaed and, in response, had turned over the
records of all his bank clients to criminal and tax authorities
in the United States. However, in terms of Guardian Bank's
operations, Mathewson said that Guardian Bank ``was not
unusual, it was typical of the banks in the Cayman Islands and
this type of activity continues to this day.'' He maintained
that he had learned everything he knew from other Cayman
bankers, and Guardian Bank had broken no new ground, but had
simply followed the footsteps made by others in the offshore
banking community.
The Mathewson account of Guardian Bank provides vivid
details about an offshore bank's use of U.S. correspondent
accounts to move client funds, cloak client transactions, and
maximize bank revenues. One hundred percent of Guardian Bank's
transactions took place through its correspondent accounts,
including all of the criminal transactions being prosecuted in
the United States. A number of the following case histories
demonstrate that Guardian Bank was not a unique case, and that
the deliberate misuse of the U.S. correspondent banking system
by rogue foreign banks to launder illicit funds is
longstanding, widespread and ongoing.
VII. Conclusions and Recommendations
The year-long Minority Staff investigation into the use of
international correspondent banking for money laundering led to
several conclusions and recommendations by the Minority Staff.
Based upon the survey results, case histories and other
evidence collected during the investigation, the Minority Staff
has concluded that:
(1) U.S. correspondent banking provides a significant
gateway for rogue foreign banks and their criminal clients to
carry on money laundering and other criminal activity in the
United States and to benefit from the protections afforded by
the safety and soundness of the U.S. banking industry.
(2) Shell banks, offshore banks, and banks in
jurisdictions with weak anti-money laundering controls carry
high money laundering risks. Because these high risk foreign
banks typically have limited resources and staff and operate in
the international arena outside their licensing jurisdiction,
they use their correspondent banking accounts to conduct their
banking operations.
(3) U.S. banks have routinely established correspondent
relationships with foreign banks that carry high money
laundering risks. Most U.S. banks do not have adequate anti-
money laundering safeguards in place to screen and monitor such
banks, and this problem is longstanding, widespread and
ongoing.
(4) U.S. banks are often unaware of legal actions
related to money laundering, fraud and drug trafficking that
involve their current or prospective respondent banks.
(5) U.S. banks have particularly inadequate anti-money
laundering safeguards when a correspondent relationship does
not involve credit-related services.
(6) High risk foreign banks that may be denied their own
correspondent accounts at U.S. banks can obtain the same access
to the U.S. financial system by opening correspondent accounts
at foreign banks that already have a U.S. bank account. U.S.
banks have largely ignored or failed to address the money
laundering risks associated with ``nested'' correspondent
banking.
(7) In the last 2 years, some U.S. banks have begun to
show concern about the vulnerability of their correspondent
banking to money laundering and are taking steps to reduce the
money laundering risks, but the steps are slow, incomplete, and
not industry-wide.
(8) Foreign banks with U.S. correspondent accounts have
special forfeiture protections in U.S. law which are not
available to other U.S. bank accounts and which present
additional legal barriers to efforts by U.S. law enforcement to
seize illicit funds. In some instances, money launderers appear
to be deliberately using correspondent accounts to hinder
seizures by law enforcement, while foreign banks may be using
the ``innocent bank'' doctrine to shield themselves from the
consequences of lax anti-money laundering oversight.
(9) If U.S. correspondent banks were to close their
doors to rogue foreign banks and to adequately screen and
monitor high risk foreign banks, the United States would reap
significant benefits by eliminating a major money laundering
mechanism, frustrating ongoing criminal activity, reducing
illicit income fueling offshore banking, and denying criminals
the ability to deposit illicit proceeds in U.S. banks with
impunity and profit from the safety and soundness of the U.S.
financial system.
Based upon its investigation, the Minority Staff makes the
following recommendations to reduce the use of U.S.
correspondent banks for money laundering:
(1) U.S. banks should be barred from opening
correspondent accounts with foreign banks that are shell
operations with no physical presence in any country.
(2) U.S. banks should be required to use enhanced due
diligence and heightened anti-money laundering safeguards as
specified in guidance or regulations issued by the U.S.
Treasury Department before opening correspondent accounts with
foreign banks that have offshore licenses or are licensed in
jurisdictions identified by the United States as non-
cooperative with international anti-money laundering efforts.
(3) U.S. banks should conduct a systematic review of
their correspondent accounts with foreign banks to identify
high risk banks and close accounts with problem banks. They
should also strengthen their anti-money laundering oversight,
including by providing regular reviews of wire transfer
activity and providing training to correspondent bankers to
recognize misconduct by foreign banks.
(4) U.S. banks should be required to identify a
respondent bank's correspondent banking clients, and refuse to
open accounts for respondent banks that would allow shell
foreign banks or bearer share corporations to use their U.S.
accounts.
(5) U.S. bank regulators and law enforcement officials
should offer improved assistance to U.S. banks in identifying
and evaluating high risk foreign banks.
(6) The forfeiture protections in U.S. law should be
amended to allow U.S. law enforcement officials to seize and
extinguish claims to laundered funds in a foreign bank's U.S.
correspondent account on the same basis as funds seized from
other U.S. accounts.
Banking and anti-money laundering experts repeatedly
advised the Minority Staff throughout the course of the
investigation that U.S. banks should terminate their
correspondent relationships with certain high risk foreign
banks, in particular shell banks. They also advised that
offshore banks and banks in countries with poor bank
supervision, weak anti-money laundering controls and strict
bank secrecy laws should be carefully scrutinized. The Minority
Staff believes that if U.S. banks terminate relationships with
the small percentage of high risk foreign banks that cause the
greatest problems and tighten their anti-money laundering
controls in the correspondent banking area, they can eliminate
the bulk of the correspondent banking problem at minimal cost.
VIII. Ten Case Histories
The investigation developed the following ten case
histories of high risk foreign banks with U.S. correspondent
accounts.
Case Histories
No. 1: AMERICAN INTERNATIONAL BANK
No. 2: CARIBBEAN AMERICAN BANK
No. 3: OVERSEAS DEVELOPMENT BANK AND TRUST COMPANY
American International Bank (AIB) is a small offshore bank
that was licensed in Antigua and Barbuda and is now in
liquidation. This case history shows how, for 5 years, AIB
facilitated and profited from financial frauds in the United
States, laundering millions of dollars through a succession of
U.S. correspondent accounts, before collapsing from
insufficient capital, insider abuse, and the sudden withdrawal
of deposits. The case history examines how, along the way, AIB
enabled other offshore shell banks to gain access to the U.S.
banking system through AIB's own U.S. correspondent accounts,
including Carribean American Bank, a notorious shell bank set
up by convicted U.S. felons. Finally, the case history shows
that AIB's questionable financial condition went unnoticed due,
in part, to years of late and inaccurate financial statements
by AIB's outside auditor.
The following information was obtained from documents
provided by the Government of Antigua and Barbuda, the
Government of Dominica, Bank of America, Toronto Dominion Bank
(New York), Chase Manhattan Bank, Popular Bank of Florida (now
BAC Florida Bank), First National Bank of Commerce (now Bank
One Corporation), Jamaica Citizens Bank Ltd. (now Union Bank of
Jamaica, Miami Agency), AmTrade International Bank; court
pleadings; interviews of government officials and other persons
in Antigua and Barbuda, the United Kingdom, Dominica, and the
United States, and other materials. Key sources of information
were interviews with William Cooper, owner and Chairman of
American International Bank, conducted on October 12, 2000;
John Greaves, President of American International Bank, owner
of American International Management Services (later called
Overseas Management Services), and formerly owner and Director
of Overseas Development Bank and Trust of Dominica and Overseas
Development Bank (in Antigua and Barbuda), conducted on July 24
and 25, 2000; Malcolm West, owner of Overseas Development Bank
and Trust of Dominica and Overseas Development Bank (in Antigua
and Barbuda), conducted on October 13, 2000; relationship
managers and other officials from Bank of America (conducted
July 10, 11 and 31 and October 24, 2000), Chase Manhattan Bank
(conducted August 2, 3, and 4, 2000), Popular Bank of Florida
(now BAC Florida Bank) (conducted July 31 and December 12,
2000), Barnett Bank (conducted October 26, 2000) and AmTrade
International Bank (conducted October 26, 2000); Eddie St.
Clair Smith, receiver of American International Bank, conducted
October 12, 2000; and Wilbur Harrigan, partner for Pannell Keff
and Forster, conducted October 10, 2000. The investigation
greatly benefited from the cooperation and assistance provided
by a number of officials of the Government of Antigua and
Barbuda, particularly the Executive Director of the
International Financial Sector Regulatory Authority and the
Director of the Office of Drugs and Narcotics Control Policy;
and officials from the Government of Dominica.
A. THE FACTS
(1) American International Bank Ownership and Management
American International Bank (``AIB'') was incorporated as
an offshore bank in Antigua and Barbuda on April 18, 1990, one
day after applying for its license. Antigua Management and
Trust Ltd., (hereafter called ``AMT Trust'') an Antiguan trust
company owned by William Cooper and his wife, formed AIB,
served as its agent and one of the three directors of the bank,
and was to manage the bank for the shareholder, Shirley
Zeigler-Feinberg of Boca Raton, Florida.\52\ However, according
to Cooper, the Feinbergs' plans for the bank never
materialized, and in September 1992, Cooper and his wife
purchased the 1 million capital shares of AIB using a British
Virgin Islands (BVI) corporation that they owned, called AMT
Management Ltd. (hereafter called ``AMT Management''). Cooper
then became President of AIB.\53\
---------------------------------------------------------------------------
\52\ Although the owner of the bank at the time of formation was
listed as Shirley Zeigler-Feinberg, the true owner of the bank,
according to Cooper, was her son who didn't want to be identified as
the owner of the bank.
\53\ At that time, Antiguan law required a bank to be capitalized
with $1 million. In the case of AIB, the capital shares of the bank
were acquired through a ``book entry transaction,'' according to the
bank's current receiver. AMT Management borrowed $1 million from AIB to
pay for the purchase of the bank's stock, and it secured that loan with
the very stock AMT Management was purchasing. The initial financial
audit of the bank shows that upon opening, the bank had $1.1 million in
outstanding loans; it doesn't show that at least $1 million was to
finance the purchase of the bank itself. This transaction set a pattern
for future lending activity at the bank that ultimately contributed to
a liquidity crisis leading to its collapse.
---------------------------------------------------------------------------
(2) Financial Information and Primary Activities
AIB was part of a group of companies owned by Cooper and
his wife collectively known as the American International
Banking Group. The companies offered banking, trust, company
formation and management and ship registry services to
clients.\54\
---------------------------------------------------------------------------
\54\ The companies that comprised American International Banking
Group were: American International Bank, AMT Management, AMT Trust, and
Ship Registry Services, Ltd., a ship registry company. All four
companies in the group were owned by Cooper and his wife. In June 1996
Cooper formed and licensed another offshore bank, American
International Bank and Trust. It was one of the first banks licensed
under Dominica's offshore banking law which had been enacted in early
1996. However, the bank had very little activity and ceased operations
1997.
---------------------------------------------------------------------------
AIB's brochures indicated that its primary banking business
was focused on private banking and investment banking services.
The bank grew quite rapidly from when it began operations in
mid-1993 and became one of the largest offshore banks in
Antigua and Barbuda. According to the bank's audited financial
statements, its asset base grew from $1.2 million from the end
of 1993 to $57 million at the end of 1996. According to Cooper,
after 2\1/2\ years of operation the bank had $3.5 million in
accumulated earnings. No financial statement was produced in
1997, but Cooper indicated that the assets of the bank had
grown to about $100 million by the end of 1997. AIB's receiver
put AIB's assets as high as $110 million.
By the end of 1997, AIB had approximately 8,000 clients and
the same number of accounts. According to Cooper, about 50% of
AIB's client base was from the United States; 10% was from
Canada; 40% was from Europe and the Middle East. Almost all
clients had established International Business Corporations
(``IBCs'')\55\ in whose names the accounts were opened. Cooper
said the main reason why Americans established accounts at AIB
was for ``confidentiality'' reasons.
---------------------------------------------------------------------------
\55\ International Business Corporations (``IBCs'') are
corporations that are established in offshore jurisdictions and are
generally licensed to conduct business only outside the country of
incorporation. Often, jurisdictions with IBC statutes will also offer
little or no taxation and regulation of the IBCs and will have
corporate secrecy laws that prohibit the release of information about
the ownership of the IBC. In some jurisdictions, IBCs are not required
to keep books and records. A report for the United Nations Global
Programme Against Money Laundering, Financial Havens, Banking Secrecy
and Money Laundering, stated: ``International Business Corporations
(``IBCs'') are at the heart of the money laundering problem . . .
virtually all money laundering schemes use these entities as part of
the scheme to hide the ownership of assets.''
---------------------------------------------------------------------------
The AIB Banking Group created and operated offshore banks
for individuals with no staff of their own or any physical
presence in Antigua and Barbuda. AIB generated revenue by
serving as a correspondent bank to a number of these and other
offshore banks. According to Cooper and John Greaves, former
President and Board Member of AIB, six banks formed by AMT
Trust established correspondent relationships with AIB. At
least two of these banks were the centers for financial frauds
and money laundering activity.
Cooper told the Minority Staff that through AMT Trust, he
helped form and obtain Antiguan offshore banking licenses for
approximately 15 other offshore banks.\56\ Antiguan law
requires that the board of each offshore bank include an
Antiguan citizen with banking experience. Since only a small
number of Antiguans could qualify for that position and Cooper
was one of them, he often became the local director for the
banks that he formed through AMT Trust. In a number of
instances he would also serve as an officer of the bank.\57\
---------------------------------------------------------------------------
\56\ The Minority Staff identified 30 banks with Antiguan offshore
banking licenses that identified AMT Trust as their agent. This could
mean that Cooper underestimated the number of banks he and his company
formed and licensed, or that AMT Trust became the agent for some of the
banks after another company had formed and licensed the bank.
\57\ The value of the legal requirement of a local board member is
questionable, however. As Cooper informed the Minority Staff, he never
followed the activities of the banks on whose boards he served. He said
he was sitting on the board only to fulfill the legal requirement for a
local director and, in fact, required each of his client banks to sign
liability waivers and indemnity provisions to protect him from any
liability that might accrue as a result of his position on the board.
---------------------------------------------------------------------------
In 1995 Greaves formed American International Management
Services (AIMS).\58\ Greaves had over 30 years of banking
experience at the time, having just served as the General
Manager of the Swiss American Bank Operation--comprised of an
Antiguan bank, an offshore bank licensed in Antigua and
Barbuda, and a management and trust company (Antigua
International Trust). AIMS was created to provide back office,
or administrative, operations for offshore banks. After its
formation in 1995, AIMS became closely linked to the AIB
Banking Group operations.\59\ AIMs assumed back office
operations for a number of AIB respondent banks, including
Caribbean American Bank, Hanover Bank and Overseas Development
Bank and Trust. AIMS also serviced some other banks that were
not clients of AIB. Because of his long experience in banking,
Greaves often served as the local director for offshore banks
that were formed by AMT and/or operated by AIMS. In September
1995, Greaves became Senior Vice President and a Director of
AIB. In November 1996, he was appointed President of AIB, with
Cooper assuming the position of Chairman of the Board.
Throughout this association with AIB, Greaves retained his
ownership of AIMS.
---------------------------------------------------------------------------
\58\ The ownership of AIMS is uncertain. Greaves informed the
Minority Staff that he and Cooper each owned half of AIMS. Cooper told
the Minority Staff he had nothing to do with AIMS. The company's
incorporation papers list only Greaves as the owner. However, the bank
management services contract used by AIMS lists both Greaves and Cooper
as signing on behalf of AIMS. Additionally, brochures on the AIB group
include AIMS as a member of the group.
\59\ 0ne of the back office services listed in the AIMS bank
management contract was ``the establishment of a correspondent banking
relationship with American International Bank to effect wire transfers
and issue multi-currency drafts.''
---------------------------------------------------------------------------
(3) AIB Correspondents
In order to service its clients who wanted to conduct
financial activity in the major economies of the world, AIB
established correspondent relationships with banks in a number
of countries. As will be discussed in more detail below, AIB
had numerous correspondent accounts with U.S. banks. They
included: Jamaica Citizens Bank Ltd. (now Union Bank of
Jamaica, Miami Agency), the New York Branch of Toronto Dominion
Bank, Bank of America, Popular Bank of Florida (now BAC Florida
Bank), Chase Manhattan Bank, Norwest Bank in Minnesota, and
Barnett Bank. According to Cooper and AIB documents, AIB
correspondents in other jurisdictions included Privat Kredit
Bank in Switzerland, Toronto Dominion Bank in Canada, Midland
Bank in England, a German bank (whose name could not be
recalled by Cooper) \60\ and Antigua Overseas Bank.
---------------------------------------------------------------------------
\60\ Account opening documentation supplied by AIB to one of its
U.S. correspondents identified Berenberg Bank in Germany as a
correspondent bank.
---------------------------------------------------------------------------
Antigua Overseas Bank, an offshore bank licensed by the
Government of Antigua and Barbuda, became particularly useful
to AIB when AIB was no longer able to obtain correspondent
accounts at U.S. banks. Antigua Overseas Bank had a number of
correspondent accounts at U.S. banks, including Bank of
America, Chase Manhattan Bank and Bank of New York. AIB,
through its relationship with Antigua Overseas Bank, exploited
Antigua Overseas Bank's correspondent relationships with U.S.
banks to maintain its (AIB's) access to the U.S. banking
system.
(4) AIB Operations and Anti-Money Laundering Controls
Cooper described AIB's due diligence and anti-money
laundering controls to the Minority Staff. According to Cooper,
AIB had many requests to establish accounts for IBCs without
identifying the beneficial owner but AIB never granted the
request. The bank did not establish pseudonym accounts or
numbered accounts. AIB required the identification of the owner
and shareholder of all accounts and that it be able to contact
all account holders. AIB required passports, a bank reference
letter, a professional letter of reference and the full
address, and phone number for all account holders. Daily
reports on all transactions of $5,000 or more were produced and
reviewed by Cooper. According to Cooper AIB's correspondent
banks always inquired about its due diligence policies and
requested a copy of AIB's operation manual. An AIB brochure
that contained a description of its operating procedures
stated:
Each new client is screened by the account officer of
American International Bank Ltd. before being accepted. In each
individual case, the origin of the funds have to be known. No
cash deposits are accepted. Any and all deposits with the bank
are to be done through wire transfer or by check.
However, in a number of AIB relationships discussed in this
case study, it is apparent that these policies were not
implemented.
(5) Regulatory Oversight
During its operation between 1993 and 1998, AIB was never
subjected to a bank examination by its sole regulator, the
Government of Antigua and Barbuda. Regulators did not conduct
examinations of any licensed offshore banks until 1999, relying
on audited financial statements and other filings prepared by
the banks as a means of monitoring their activity. The
government made an effort in the 1997-1998 period to collect
information on the ownership and activities of all licensed
offshore banks in Antigua and Barbuda. However, there was no
follow up on the information that was collected. In 1999,
Antigua and Barbuda initiated a new program for government bank
examinations of licensed offshore banks.
(6) Money Laundering and Fraud Involving AIB
After operating for 4\1/2\ years, AIB eventually failed as
a result of bad loans and loss of deposits. Despite several
attempts to sell the bank, AIB was formally placed in
receivership in July 1998, where it remains today.
During its period of operation, AIB had correspondent
relationships with over seven U.S. banks. These correspondent
accounts were essential to AIB's operations and provided AIB's
clients with access to U.S. banks as well. AIB's growth
centered around three activities, some of which evidence a high
probability of money laundering, and which ultimately
contributed to the collapse of the bank in 1998:
servicing accounts associated with a highly
questionable investment scheme;
providing correspondent banking to other
questionable banks; and
highly questionable and unsound lending
practices.
(a) The Forum Investment Scheme
As many as 3,000 to 6,000 of AIB's 8,000 accounts were
related to investors in a highly questionable investment scheme
called the Forum.\61\ The Forum established a relationship with
AIB shortly after the bank was opened in 1993. The Forum is an
Antiguan corporation that promotes investment schemes and
provides administrative services to individuals who invest in
those schemes. It has a staff that serves as a point of contact
between investors and the offshore banks and accounting firms
handling their accounts. The Forum appears to be a Ponzi-type
investment scheme, apparently targeted at low and middle income
individuals, offering investors extraordinarily high returns.
It appears that the investment returns investors received
actually came from funds paid by new investors. The Forum also
employed a multi-level marketing plan to bring in new
investors. That is, partners (existing investors) who brought
in new investors would receive a portion of the initial
payments made by those new investors and also would receive
descending percentages of the initial payments made by
subsequent members recruited by the new investors. According to
AIB's receiver, at the end of 1997, when AIB's assets were $110
million, approximately $60 million were attributable to
accounts by the Forum and its investors.
---------------------------------------------------------------------------
\61\ Cooper estimated that 30% to 40% of AIB's accounts were
related to Forum investors. Greaves estimated that as many as 60% of
the accounts were related to Forum investors. The AIB receiver concurs
with the latter figure.
---------------------------------------------------------------------------
A central figure in the Forum is Melvin Ford of Bowie,
Maryland.\62\ Ford has a history of developing questionable
investment programs.\63\ Using financial empowerment messages
at seminars and rallies, Ford told attendees they could become
wealthy through a series of high yield and speculative
investment schemes.\64\
---------------------------------------------------------------------------
\62\ Ford did not assume a formal position of leadership in the
organization. This may be the result of a former civil action brought
against him by the SEC in the early 1990's. (See next footnote.)
However, there are clear indications that he played a leading role in
the activities of the Forum. A 1996 story in The Washington Post on the
Forum reported:
Last week Ford requested and was granted a meeting with Prime
Minister [Lester] Bird [of the Government of Antigua and Barbuda].
According to Bird, Ford represented himself as the leader of the Forum
and explained that his group's operation was legal and aboveboard.
Many times, Ford was the featured speaker at Forum gatherings.
Forum members and leaders referred to him as ``Chief'' or ``chief
consultant.'' One insider described Ford as the leader of the
organization and identified Ford as the originator of many of the Forum
investment schemes. He and an associate, Gwendolyn Ford Moody, were the
ones who directly dealt with Cooper regarding the account that held the
funds received from the IBCs and the fund used for the dispersal of
those funds. In interviews with the Minority Staff, both Cooper and
Greaves spoke of Ford as the leader of the Forum and its investment
activities.
\63\ Prior to his involvement with the Forum, Ford was the founder
and president of an organization called the International Loan Network
(``ILN''), which he described as ``a financial distribution network
whose members believe that through the control of money and through the
control of real estate you can accumulate wealth and become financially
independent.'' The organization included, among other things, a multi-
level marketing program where ILN members shared in the fees paid by
individuals they recruited into the program, as well as descending
percentages of fees for additional members recruited by the new members
they had brought in (i.e., ``downline recruitments''). ILN also ran a
series of property acquisition programs in which ILN investors would
receive their choice of either rights to property or cash pay outs
equivalent to five to ten times their initial investment within 3 to 6
months. One version of the program also offered a refund (with 50%
interest). The SEC alleged that over $11 million in refunds were
requested and only $2 million had been paid. It was estimated that
participants paid over $100 million into the ILN during its operation.
In May 1991 the SEC commenced an action against Ford and one of his
partners for the fraudulent sale of unregistered securities. The U.S.
District Court for the District of Columbia subsequently issued a
Temporary Restraining Order and then a Preliminary Injunction against
ILN and Ford and his partner and froze the assets of ILN. In its
decision, the court concluded:
. . . the evidence is clear that ILN is nothing more than a
glorified chain letter, destined to collapse of its own weight. Despite
the inevitably of this outcome, potential investors were, until the
issuance of the temporary restraining order in this case, continuing to
be promised great wealth through their participation in the ILN. The
pyramid nature of the organization was never fully revealed to them.
In 1992, the SEC and Ford reached a settlement in which Ford agreed
to pay an $863,000 fine, and a trustee was appointed to recover funds
for the investors. After paying approximately $5,000 of the fine, Ford
declared bankruptcy. To date, the trustee has been able to recover only
a small percentage of the investors' funds.
\64\ International Debt Recovery (``IDR''), an Irish corporation
that seeks to recover funds lost by victims of frauds, representing
over 1,600 Forum-related IBCs that have invested in Forum-related
ventures provided details of some of the investment schemes. They
included a commercial fishing venture in Gambia called Pelican Foods,
which has been directed by Chester Moody, a close associate of Ford.
The company has been unable to obtain a fishing license from the
government because of non-payment of port duties. Only one of four
fishing boats owned by the company is seaworthy. Workers had been
unpaid for nearly 8 months and the company has many large unpaid bills
due.
Another recipient of Forum-related investors is the A.A. Mining
Company, which has a joint venture with the De Beers diamond company. A
Forum-related management committee recently wrote to investors ``that
the Mining company has entered into a letter of intent to joint venture
on a project which could be worth over 500 million dollars. In
addition, with proper funding this venture could start to send money
back to the Trustees within 180 days.'' However, according to De Beers
officials and publications, De Beers has put up the bulk of the funds
in the operation, and results at the site which is the subject of the
venture ``are so far disappointing,'' and the prospects for discovery
of diamond-containing minerals is ``moderate to low.''
A November 1999 article in The Washington Post identified two other
Forum-related investments: purchases of locked boxes from Sierra Leone
that reportedly contained $10 million worth of gold, but only contained
rocks and dirt, and the Diamond Club International, a venture that sold
mail order diamonds and has been sued by creditors for over $500,000 in
unpaid bills.
---------------------------------------------------------------------------
Investors were required to establish International Business
Corporations (IBCs) and accounts for the IBCs at overseas
banks. The accounts were structured so power of attorney to
withdraw funds from the account was transferred to other
accounting and management entities. According to one individual
familiar with the organization, the transfer of funds was
really controlled by associates of Ford. When investors
deposited funds to their IBCs, the funds were transferred to a
holding account. Disbursements were made from a second account
(``disbursement account''). Authority to order disbursements
from the disbursement account was vested in Gwendolyn Ford
Moody, a close associate of Ford. The funds in the holding
account were apparently used as collateral for expenditures
from the disbursement account.
The funds were used to support highly speculative
investments--many of which were controlled by Ford and his
associates--and lavish lifestyles for Ford and his associates.
International Debt Recovery (``IDR''), an Irish corporation
that seeks to recover funds lost by victims of frauds and now
represents over 1,600 Forum-related IBCs that have invested in
Forum-related ventures, discovered one scheme in which Ford and
his associate, Gwendolyn Ford Moody, held AIB-issued Visa Cards
with very high limits. The disbursement account was used to pay
the debts accumulated on the cards. Although the funds
supporting the disbursement account represented deposits that
were for investments, they were used to fund operations, staff
salaries and personal expenses of Ford and Moody. Millions of
dollars of investors' funds were expended in this way.
Cooper told investigators that significant sums obtained
through Ford's schemes were transferred from AIB to The Marc
Harris Organization (``The Harris Organization'') in Panama.
The Harris Organization, which is the owner of a number of
investment and trust companies licensed in different offshore
jurisdictions, is owned by Marc M. Harris. Harris and the
companies he controls have been found to be behind a number of
international bank and investment frauds, including banks that
have been shut down by the British banking authorities for
conducting illegal and fraudulent activities. More recently,
his organization is alleged to have co-mingled and misapplied
client funds and engaged in securities fraud.\65\ In addition,
Harris and his organizations are allegedly closely associated
with organizations that advocate offshore mechanisms for
evading taxes and avoiding other legal judgments.\66\ Recently
some clients of Harris have been indicted in the United States
for money laundering and tax evasion through offshore vehicles
set up and established by The Harris Organization.\67\
---------------------------------------------------------------------------
\65\ In 1998 Harris filed a claim against an investigative
journalist named David Marchant for reporting these facts. Marc M.
Harris v. David E. Marchant (United States District Court for the
Southern District of Florida, Miami Division, Case No. 98-761-CIV-
MOORE), Final Judgment (August 10, 1999). The court's opinion listed
some of the allegations:
``. . . 12. Marchant learned from Shockey [John Shockey, former
investigator for the U.S. Office of the Comptroller of the Currency]
that Marc M. Harris (``Harris''), the founder and de facto head of the
Harris Organization, had operated several offshore shell banks in
Montserrat in the 1980's. These banks were subsequently closed down in
1988 by British banking authorities for conducting ``illegal and
fraudulent activities.'' According to Shockey, these banks exhibited
numerous financial and fiduciary improprieties. One of the banks, the
Fidelity Overseas Bank, took fees from clients even though it never
performed any services for them. Another bank, the First City Bank,
doctored its financial statements. Finally, a third bank, the Allied
Reserve Bank, was issued cease-and-desist orders for operating in the
United States without authorization. . . .
``. . . 33. On March 31, 1998, Marchant published an article in
Offshore Alert titled ``We Expose The Harris Organization's Multi-
Million Dollar Ponzi Scheme.
``34. This article made a number for factual allegations, which
substantively accused The Harris Organization of defrauding its clients
and misappropriating clients' funds. These allegations specifically at
issue are:
a. That The Harris Organization operates as a ``Ponzi'' scheme.
b. That The Harris Organization was insolvent by $25 million.
c. That Harris used clients funds to invest in the Infra-fit [a
Chilean bicycle manufacturer] venture.
d. That The Harris Organization inflated the land value of the LARE
[Latin American Real Estate Fund, a Harris-affiliate entity] investment
in their financial statements. . . .
g. That The Harris Organization might be laundering the proceeds of
crime.
h. That The Harris Organization had issued $20 million of worthless
preference shares.''
In its conclusion in support of Marchant, the court found:
``. . . 8. From the time he published the initial article to the
present, Marchant had evidence which provided persuasive support for
the truth of each of the allegations at issue. He spoke with numerous
inside sources, including Dilley (a consultant who served in a position
equivalent to the CEO of The Harris Organization), and outside sources
such as Shockey, who appeared credible and knowledgeable about Harris,
The Harris Organization, and the financial situation within The
Organization. Marchant was privy to internal financial and management
documentation which supported the information learned from his
sources.''
A 1998 Business Week article on Marc Harris (``Tax Haven Whiz or
Rogue Banker?'' Business Week, June 1, 1998, p. 136) reported that the
Florida Professional Regulation Department suspended Harris' Certified
Public Accountant license in 1990 for various ``accounting
violations.'' One violation cited in the order was that Harris ``issued
an accounting compilation, similar to an audit, for MMH Equity Fund
Inc. The compilation did not disclose that Harris was an officer and
director of the fund.''
The article also notes that: ``. . . Harris is now flouting U.S.
law that prohibits U.S. citizens from making investments in Cuba.'' His
Cuba Web site offers Americans just that . . . if Americans take his
advice and form offshore corporations to invest in Cuba, that's
``entirely their decision,'' he says. Yet a senior Treasury Dept.
official says such moves are illegal: ``Even if you interpose a third-
country company, it's the same as going to Cuba directly.''
In October 2000, La Commission Nacional de Valores, the Panamanian
Securities Commission, suspended the operations of The Harris
Organization.
\66\ ``28. The Harris Organization maintained substantial links,
either directly or indirectly, with persons and entities known
variously as `PT Shamrock,' `Peter Trevellian,' and `Adam Starchild,'
that advocated in print and on the Internet offshore mechanisms for
evading the payment of taxes, judgments, and other debts in the United
States . . . in essence, tax evasion and fraudulent conveyance of funds
to offshore locations.'' (Marc M. Harris v. David E. Marchant, Case No.
98-761-CIV-MOORE, United States District Court for The Southern
District of Florida Miami Division).
\67\ ``Anthony Vigna and his son Joseph were arrested on November
9, 2000 in Panama . . . 22 months after they were criminally indicted
at the U.S. District Court for the Southern District of Florida on
multiple counts of money laundering and conspiracy to defraud the
IRS,'' according to Offshore Alert (``Two more Harris clients deported
to the US'', Offshore Alert, November 30, 2000, Issue 46, p. 5).
The 1998 Business Week article provided a description of the
structure used by Harris:
Harris insists he is not trying to help folks illegally evade
taxes. But an attendee of two Harris seminars, Jay Adkisson, an
Oklahoma City tax lawyer, says Harris explicitly promoted tax evasion.
He says Harris ``starts with the premise: We're going to evade taxes.
No. 2, we're going to make this so smooth that while we're evading
taxes, we don't get caught.'' Adkisson sets up offshore trusts to
protect clients from the future creditors, not the IRS.
Harris' scheme, says Adkisson, is for clients to move assets
offshore to avoid taxes yet still retain control over those assets.
Harris recommends setting up what he refers to as ``the octopus,'' says
Adkisson. Its head is a Panamanian foundation, an amorphous legal
entity where neither the owner of the assets nor his beneficiaries'
names need be disclosed. The foundation creates a tangle of companies--
banks, leasing companies, insurance firms--in other offshore havens
that appear to be unrelated. They then bill the client for various
expenses. The client pays the invoices to offshore entities, then
deducts the payments as business expenses on his tax return. To the
IRS, it appears that the client has been billed by many unrelated third
parties, says Adkisson. Under offshore secrecy laws, the IRS can't
determine whether the entities the octopus controls are really
controlled by the same person.
The article reports that Harris said ``that 80% of his `several
thousand' clients are Americans or Canadians.''
---------------------------------------------------------------------------
Documents show that by 1996, Ford had established four
accounts in his name at The Harris Organization: Fundacion
Greenwich, Greenwich Trading Company, S.A., Melvin J. Ford
Trust, and Onan Enterprises, Inc. (incorporated in Nevada). His
associates, Chester Moody and Gwendolyn Ford Moody, had
established six accounts: Chester and Goldie Moody Trust,
Jackson Management. Inc., Sancar International, S.A., Argyll
Trading Corporation, Steel Management Corporation, and the
Chester and Goldie Moody Trust (business). Cooper estimated
that for a period of time Ford and his associates were
transferring up to $800,000 per week from investors' accounts
to The Harris Organization and that during a period of 6 to 8
months during 1997-1998, between $5 million and $10 million
were moved to The Harris Organization. Antiguan officials
confirmed extensive transfers from the Forum-related accounts
at AIB to The Harris Organization. Antiguan officials estimate
that the amounts transferred are likely as high as tens of
millions of dollars.\68\ In a letter to Senator Levin, IDR
estimates that during an 18-month period starting in 1997,
approximately $100 million from Forum-related investors flowed
through AIB to The Harris Organization.
---------------------------------------------------------------------------
\68\ The AIB receiver concurred with the estimates of Cooper and
the Antiguan officials. He told the Minority Staff that during 1997,
large transfers on the order of $300,000 were made from Forum-related
accounts two to three times each week. He stated that most, if not all,
of the transfers went to The Harris Organization in Panama.
---------------------------------------------------------------------------
Thousands of individuals were drawn into Ford's investment
schemes. One individual close to the operation estimated that
as many as 30,000 people invested in Forum-related ventures.
IDR represents over 1,600 IBC's whose owners (estimated to
number approximately 16,000 individuals) lost investments
through Forum-related ventures. IDR told the Subcommittee that
its clients had provided documentation of a total of $52
million that they had lost to those ventures. In the 1998-1999
time period, Federal IRS agents executed search warrants on the
homes of Melvin Ford and Gwendolyn Ford Moody, and the Federal
investigation into this investment scheme is still continuing.
Ford and his associates used a series of offshore
corporations, banks, accounting firms and trusts that were
established in offshore banking and corporate secrecy
jurisdictions such as the Bahamas, Antigua and Barbuda, Nevis,
Panama, St. Vincent and the Grenadines.\69\ Administration of
investor IBC accounts was, over time, shifted among at least
two different accounting firms.\70\ IBC formation and renewal
were handled by at least three different firms.\71\ Investor
relations with AIB, the bank that managed their accounts, was
handled through the Forum. All of this had the effect of
generating more fees, obscuring the flow of funds, obscuring
the involvement of Ford and his associates, confusing the
investors and making it more difficult for U.S. regulators and
law enforcement officials to regulate and investigate their
activities. A major base of operation for the Forum was the
nation of Antigua and Barbuda, where Ford held regular meetings
and seminars, drawing many prospective U.S. investors.
---------------------------------------------------------------------------
\69\ For example, investment programs funded by Forum-related IBCs
have been operated or administered by a company in the Bahamas and a
company in Dominica (which apparently later moved to St. Vincent and
the Grenadines), and an investment company in Nevis. In the past few
years documents indicate that Forum-related investment programs have
been placed under the control of The Wilshire Trust, which granted the
shares to the WT Trust, which then appointed a company called Financial
and Corporate Services as the trustee. All of those entities are
located in Nevis.
\70\ Two accounting firms--LMB Accounting Services Ltd.
(``LMBASL'') in the Bahamas and Corporate Accounting Services Ltd.
(``CASL'') in Antigua and Barbuda (now re-located to Dominica)--were
utilized to administer investor IBC accounts (which included forwarding
investments to the IBC accounts at the offshore banks). Each investor
in an IBC was charged an annual fee of $100 for this service. LMBASL
had an account at BTCB--another bank profiled in this report. One of
BTCB's U.S. correspondent banks questioned the LMBASL deposits into
BTCB's account. LMBASL's response provided an explanation of its
operations and relationships:
LMBASL is a domestic Bahamian company which was incorporated on
April 2, 1996, to provide accounting services for International
Business Companies (IBC's).
The source of LMBASL customers are Trust Companies in various
Caribbean jurisdictions. These companies are primarily engaged in
company formation and off-shore financial services. LMBASL provides
accounting services for companies formed by Antigua and Barbuda
Management and Trust in Antigua and Barbuda; Antigua Barbuda
International Trust in Antigua and Barbuda; International Management &
Trust in Dominica and upon referral other Trust companies.
The number of IBC's formed by these companies number in the
hundreds. Also each IBC could have three or more members. It is not
unusual for some IBC's to have five to ten members. LMBASL charges each
IBC member a $100.00 annual fee for computer services. This fee
compensates LMBASL for accounting services involving processing
transactions which relate to individual IBC members.
Also IBC members send larger deposits for the account of the
IBC. LMBASL has satisfied itself that the sources of these IBC funds
are from savings accounts or other banks, or investment accounts of the
IBC members and are not derived from any questionable sources. LMBASL
has also taken steps to personally meet many of these IBC members and
feel comfortable that they are solid citizens.
\71\ AMT Trust initially formed most of the IBCs. After AIB
collapsed, Forum-investors were told to have their IBCs renewed through
LMBASL or CASL, rather than AMT Trust, Cooper's firm. The investors
were told that their investments would no longer be accepted if their
IBCs were still managed through AMT Trust.
---------------------------------------------------------------------------
AIB became the base through which Ford ran his investment
scheme \72\ and millions of dollars flowed through the bank.
Cooper, the owner and Chairman of the Board of AIB, was
directly involved in servicing the Forum program. He attended
Forum seminars, spoke about offshore corporations and passed
out material on offshore corporation formation and AIB. With
the assistance and encouragement of Forum personnel, investors
would apply for the creation of an IBC and an account at AIB.
AMT Trust, Cooper's company, would form IBCs for Forum
investors. (Often as many as five, ten or more individuals
would jointly invest through one IBC.) \73\ One of the entities
established to manage some of the Forum-related investments,
Equity Management Services, Ltd. at one point used the offices
of AMT Trust as its mailing address. Cooper told the Minority
Staff that most of the profits that the AIB Banking group made
from Forum-related operations resulted from the formation of
the IBCs.
---------------------------------------------------------------------------
\72\ Other Antiguan banks were also used to hold Forum-related
investments. Before the Forum operations began to use AIB, investor
funds were deposited into Swiss American Bank. Another Antiguan bank,
Worldwide International Bank (whose President, Joan DeNully, had
previously been an official at AIB), was also used by the Forum and its
investors, as was Antigua Overseas Bank.
\73\ Normally, AMT Trust charged a fee of $1,225 for the formation
of an IBC, but in the case of the Forum-related IBCs, AMT Trust charged
clients $1,500. AMT Trust kept $1,225 and the additional $275 was put
into accounts controlled by Ford and associates at the Forum. This
business alone was very lucrative for Cooper and his company, since it
is estimated that there were approximately 3,000 to 6,000 IBC accounts
at AIB. In addition, each account was charged an annual administrative
fee of $100 and an annual IBC renewal fee of approximately $800.
---------------------------------------------------------------------------
Ford and his associates used AIB's correspondent accounts
with U.S. banks to hide the trail of the funds. For example, by
piecing together documents made available to the Minority Staff
and the Government of Antigua and Barbuda, it can be seen that
a number of transfers from Forum accounts utilized AIB's
correspondent relationship with Chase Manhattan Bank. From
there, the funds were transferred to Banco de Brazil in New
York. Banco de Brazil then transferred the funds to its branch
in Panama, which transferred the funds to The Harris
Organization in Panama. Funds were also transferred from AIB to
Gwendolyn Ford Moody's account at a Maryland branch of
NationsBank.
The Forum is still an operating organization. Meetings and
seminars are still held in the U.S.\74\ and elsewhere to
continue to attract investors. Offshoot organizations,
controlled by Ford associates, are still promoting
investments.\75\
---------------------------------------------------------------------------
\74\ One such meeting, at which Ford spoke, was held at the Raleigh
Sheraton in Raleigh, North Carolina on November 7, 1999. Presentations
on IBC formation and investment are still being held. One victim of the
Forum-related investments recently received a notice of ``private
workshops'' that are scheduled for 2001 and will involve the W.T.
Trust, the Nevis company that serves as trustee for many of the Forum-
related investments.
\75\ For example, an organization called the Offshore Business
Managers Association (formerly called the Offshore Business Managers
Forum) was established to: ``provide a vehicle to bring together
parties that share an interest in wealth accumulation through
international trade and international financial activities. The common
theme among all members is the use of the International Business
Company (IBC) as a trading and financial entity and the belief that
confidentiality and the right to financial privacy is a right that the
government should respect and not hinder.'' (See the organization's Web
site at www.osbma.com.) In the early stages of the organization, the
Executive Committee included such close Ford associates as Gwendolyn
Ford Moody and Chester Moody. More recently, the Chairman was Earl
Coley, a frequent speaker at the Forum meetings and reportedly a
relative of Moody. According to the organization's mailings, the point
of contact for the organization was the Forum offices in Antigua and
Barbuda.
---------------------------------------------------------------------------
(b) Nested Correspondent Banking at AIB
AIB provided correspondent banking services to a number of
other offshore banks licensed in Antigua and Barbuda. By
establishing correspondent accounts at AIB, those banks (and
their clients), like Russian Matryoshka dolls, nested within
AIB and gained access to the same U.S. dollar accounts at U.S.
banks that AIB enjoyed through its correspondent accounts at
those U.S. banks. The U.S. banks performed no due diligence
review of AIB's correspondent accounts. Instead, they relied on
AIB to review and clear its client banks, even though the U.S.
correspondent banks were the vehicles for their access into the
U.S. financial system. In a number of instances, AIB's client
banks utilized their accounts with AIB to launder funds and
take advantage of AIB's correspondent accounts with U.S. banks
to work the illicit funds into the U.S. financial system. The
most notorious example is Caribbean American Bank.
Caribbean American Bank. Caribbean American Bank emerged as
the focal point of a major advance-fee-for-loan fraud that
originated in the United States and defrauded victims across
the world of over $60 million over 8 years. Between 1991 and
1997, members of the organization posed as representatives of a
group of venture capital investors willing to provide funding
to business projects. Individuals and businesses seeking
capital were required to pay advanced fees or retainers which,
ostensibly, were to be used for processing loans and
syndicating the investors. Applicants were instructed to wire
the retainers to an attorney or bank escrow account, often
located at an offshore bank. However, the terms of the funding
agreements were almost impossible for the applicants to
fulfill. For example, applicants were required to produce fully
collateralized bank payment guarantees or letters of credit
equivalent to 20% of the loan amount requested. Usually, the
guarantee had to be produced within 5 to 7 days. Members of the
organization targeted applicants who had little financial
resources and were, therefore, unlikely to secure such a
guarantee within the 5 to 7 day time period. Sometimes, for an
additional fee, the organization would supply the applicants
with a facilitator who pretended to assist the applicants in
their efforts to obtain a guarantee from a financial
institution. When the applicants were unable to meet this or
other terms of the agreement, the members of the organization
notified the applicants that they had violated the terms of the
agreement, that no loans would be made and that their retainers
were forfeited. If any of the funds still remained in the
escrow accounts, they were quickly moved to other accounts
controlled by accomplices of the organization.\76\
---------------------------------------------------------------------------
\76\ U.S. Customs Service press release ``U.S. Customs and FBI
Crack Huge Money Laundering Scam,'' May 7, 1998.
USA v. Donald Ray Gamble a/k/a Donald Jake Gamble (U.S. District
Court for the Middle District of Tennessee, Northeastern Division,
Criminal Case No. 2:97-00002), Information and Accompanying Statement
of Facts, February 10, 1997.
USA v. Arthur Householder, et. al. (U.S. District Court for the
Northern District of Florida, Gainesville Division, Criminal Case No.
1:98CR19), Testimony of Lawrence Sangaree, June 19, 2000.
USA v. Lawrence Sanizaree, Terri Sangaree, Maxine Barnum and Peter
Barnum (U.S. District Court for the Northern District of Florida,
Gainesville Division, Criminal Case No. 1:97CR MMP), Statement of Facts
in Support of Guilty Plea of Peter and Maine Barnum, 11/25/97, and
Statement of Facts in Support of Guilty Plea of Lawrence Sangaree,
December 8, 1997.
USA v. William Cooper, et. al. (U.S. District Court for the
Northern District of Florida, Gainesville Division, Criminal Case No.
1:98CR19 MMP), Superseding Indictment, April 27, 1999.
---------------------------------------------------------------------------
A document seized during the execution of a search warrant
issued for the residence of one of the leaders of the
organization provided a description of the fraud. It was marked
``Confidential'' and addresses payments made by the loan
applicants under the terms of the contract. It makes clear that
members of the fraud should not expect to collect loan fees
other than the initial retainer from the applicant because the
loan will never be provided. The only fees that the
organization focused on were the fees that the client paid in
advance of receipt of the loan:
You have to make the client think you are really working
to get to the second payment and the third payment. This draws
his attention away from the first payment--which is the only
payment you will see but he doesn't know that.
. . . FOR YOUR INFORMATION the 2nd and 3rd payments will
never come. You are in it for the first payment. However, you
act like you are after all 3 payments.
. . . What all the clients refuse to see, just plain do
not understand is that in Section 3 the Syndication Agreement
demands that the Payment Guarantee be COLLATERALIZED. That
means it must be cash backed or no bank will issue it. It is
the clients responsibility to do that. However, you do not call
any attention to that UNTIL you have been paid. Period. No
exceptions.
Perpetrators of the fraud also required their applicants to
establish Antiguan IBCs, with the idea that all transactions
would take place between Antiguan entities. This was an effort
to ensure that if applicants initiated legal action against the
organization, the dispute would be subject to Antiguan, rather
than U.S. jurisdiction since both parties would be Antiguan
entities. A document seized from one of the organization's
representatives, entitled Business Development Syndications
Program Description, stated:
You must be an Antiguan offshore business corporation to
enter our programs. To guarantee this is done before a DBA
[sic] (Business Development Agreement-Equity Purchase) is
entered into such incorporation will be handled for you by your
syndicator. We will not accept any other method of
incorporation. Neither your syndicator nor the investors wish
to become familiar with any laws, corporate or otherwise, other
than those of Antigua and Barbuda. All transactions will be
done between chartered Antiguan corporations only. No
exceptions.
Between 1994 and 1998 the U.S. FBI and the U.S. Customs
Service conducted an investigation (called ``Operation Risky
Business'') of the fraud operation. The Customs Service
described the operation as the largest non-drug related
undercover operation that it ever conducted. The government
estimates that as many as 300 to 400 firms or individuals in 10
different countries have been victimized by the fraud. It is
estimated that as much as $60 million dollars were stolen
through this operation. Twenty-two individuals have been
indicted or charged as a result of their participation in this
operation; 14 have pleaded guilty; and 4 have been found guilty
at trial. Investigations and prosecutions are continuing.
AIB, AMT Trust and AIMS played key roles in the formation
and operation of Caribbean American Bank.\77\ In August 1994,
William Cooper (through AMT Trust) established two IBCs-BSS
Capital and RHARTE. The beneficial owners of those corporations
were, respectively, Jake Gamble and Larry Sangaree, two
organizers of the fee-for-loan scam. Cooper then formed
Caribbean American Bank. The bank license application
identifies BSS Capital and RHARTE as the shareholders/owners of
the bank. Cooper was listed as the President of both BSS
Capital and RHARTE. Cooper and Gamble were listed as the
Directors of the bank.\78\ In September 1994, Caribbean
American Bank was granted an offshore banking license by the
Government of Antigua and Barbuda. AMT Trust initially managed
the CAB account at AIB for a fee of $5,000 per month. The
administration of CAB was taken over by AIMS after it was
formed and took over management of the correspondent accounts
at AIB.
---------------------------------------------------------------------------
\77\ In 1993, fairly early in the history of this fraud operation,
members of the organization flew to Antigua and Barbuda to establish a
bank that would serve as the repository for the retainer payments and
facilitate the laundering of the illicit proceeds of the operations.
According to court records, they met with Vere Bird, Jr., son of the
former Prime Minister of Antigua and Barbuda. The introduction was
arranged by Julien Giraud, a senior member of the Democrat Labor Party
in Dominica who knew Frank Dzwonkowski, a member of the organization
who had been convicted of distribution of methaqualone in the U.S. and
had contacts in Antigua and Barbua. In 1994, members of the
organization again flew to Antigua and Barbuda and met with William
Cooper, owner of AIB. The members of the organization who made the trip
were Jake Gamble, a Tennessee attorney who served as the agent for the
escrow accounts that received the retainer payments and posed as an
underwriter with access to the venture capital (backed by a fraudulent
Japanese Yen bond); Larry Sangaree, who had been convicted of murder
and served as the organization's field operations manager; and
Dzwonkowski. Dzwonkowski maintained an account at another Antiguan
offshore bank, Swiss American Bank, which members of the organization
had been using to launder funds stolen in the fraud. Sangaree testified
that the group decided to establish a bank in Antigua and Barbuda
because of the favorable secrecy laws (``you could effectively hide
funds down there from the government''); the connections enjoyed by
Giraud; and the desire to mirror the operations of another group within
the organization that was claiming to use a bank in the Cayman Islands.
Cooper agreed to assist in the formation and operation of the bank.
\78\ According to one U.S. bank that provided correspondent
services to AIB, Cooper informed the bank that the offshore bank
licensing process in Antigua and Barbuda required detailed information
about all shareholders and directors, verified with background checks,
bank and professional references. The applicant, whether it is a
corporation or an individual, must submit financial information for
review by the Director of International Business Corporations.
Biographical information for each proposed director, officer and
subscriber of 5% or more of the bank stock must be submitted.
It appears as if AMT Trust did not comply with these requirements.
The Minority Staff asked Cooper what due diligence he performed on the
owners of the bank before he submitted the application to the Antiguan
licensing authority, and if he was aware of Sangaree's conviction.
Cooper stated that he had asked the Finance Minister Keith Hurst about
obtaining information on those individuals and Hurst informed him that
it would not be possible to obtain information from the United States
and, based on Hurst's statement, Cooper did not try to obtain any
information on Sangaree. One part of the application asks ``Have any of
the proposed directors, officers or proposed stockholders of five
percent or more of the IBC's stock ever been charged with or convicted
of any criminal offense? If so, give details, including status of
case.'' The answer on the form is ``No.'' However, Sangaree was
convicted of first degree murder in Florida in 1970 and sentenced to
life imprisonment. He was released from prison in the late 1980's. He
was subsequently arrested for aggravated assault in 1987 and arrested
for grand theft in 1990.
To receive an offshore banking license in Antigua and Barbuda at
that time, applicants were required to demonstrate that they had $1
million in capital. A report of CAB's liquidators filed in the High
Court of Justice of Antigua and Barbuda offers the following
description of CAB's capitalization funds:
There are two shareholder loans of record, both of which are for
$500,00. The loans appear to have been generated by the Bank to enable
the shareholders to finance the capitalization of the Bank. The funds
were never deposited in the bank. The two shareholders are holding
companies, which have issued bearer shares, and we do not know who is
in possession of the shares. Collectibility of these loans is unlikely
and the amounts have been written-off in the books of the Bank.
Lawrence Sangaree, the owner of one of the bearer share
corporations that owned CAB, testified at the trial of one of his
accomplices earlier this year. He said that to comply with the $1
million capitalization requirement, perpetrators of the fraud used
funds that had been wired into the bank by one of the victims. The
funds were placed in AIB in August of 1994. After an auditing firm
confirmed the presence of the $1 million in AIB, it was distributed
among the members of the organization.
---------------------------------------------------------------------------
A number of other accomplices in the organization also
established IBCs in Antigua and Barbuda, many of them with the
assistance of Cooper and his company, AMT Trust. Those IBCs in
turn established accounts at Caribbean American Bank. The
Department of Justice informed the Minority Staff that it
identified 79 IBC accounts established at CAB that were
controlled by members of the fee-for-loan fraud organization.
According to DOJ, all of those IBCs were formed by Cooper or
his company AMT Trust. Many were bearer share corporations,
meaning that ownership was vested in whoever had physical
possession of the corporate shares. Such an arrangement makes
it virtually impossible for a bank to really know who the
ultimate account holder is and what the purpose of the
organization is. Retainer fees wired into the organization's
escrow account by the fraud victims would be dispersed into the
IBC accounts controlled by accomplices of the scheme. From
there, the accomplices transferred the funds to other accounts
they maintained at other banks, using the correspondent
accounts of AIB.
AIB also issued credit cards to CAB clients. This provided
a perfect avenue for money laundering. The card holder would
use a credit card to charge purchases and other transactions.
The outstanding balance on the cards could be paid out of the
illicit proceeds the clients had on deposit in their CAB
accounts. This enabled the card holders to utilize their funds
without even engaging in additional wire transfers that might
raise questions about the origins of the funds.
Documentation shows that in 1994, AIB attempted to use its
correspondent relationship with Bank of America to confirm
letters of credit issued to the fraudulent venture capital
companies, American European Venture Capital and Bond Street
Commercial Corporation, operated by the perpetrators of the
advance-fee-for-loan fraud. The confirmed letters of credit
would then be used by the criminals to convince victims that
venture capital was available once the advance payments were
made by the victims.\79\
---------------------------------------------------------------------------
\79\ In April 1994, AIB requested that Bank of America confirm
letters of credit for two entities. Although AIB did not have a credit
relationship with BOA, the communications AIB forwarded to one of the
targeted victims of the fraud suggest that AIB had developed a
financing plan with Bank of America. Communications sent by AIB to Bank
of America 2 months later in June 1994 indicate AIB was still pursuing
the confirmation of two letters of credit. Since CAB was not licensed
until September 1994, it suggests that Cooper and AIB were providing
assistance to the entities involved in the fraud even before CAB was
opened and those entities became account holders at CAB.
---------------------------------------------------------------------------
In October 1996, one of the loan applicants sent a
facsimile to Caribbean American Bank, instructing it to return
$62,500 his company had wired into a CAB escrow account. A copy
of the facsimile was supplied to the FBI. The funds were never
returned.
In early 1997, a due diligence report performed by an
Antiguan law firm for a Russian bank that was considering doing
business with the organization wrote the following about
Caribbean American Bank:
Caribbean American Bank has two shareholders both of
which are non-banking offshore companies and were incorporated
by William Cooper, one of Caribbean American Bank's two
Directors, who is known to be an active figure in Antigua and
Barbuda's offshore banking industry. Non-banking offshore
companies are not required to disclose details of their
shareholders or show financial statements.
The company files disclosed that inquiries similar to
yours have been addressed to the Director of International
Banking & Trust Corporations in respect of Caribbean American
Bank involving foreign investors who have been required to
deposit funds into escrow accounts to be held by Caribbean
American Bank. In one such instance Barclays Bank of Antigua
made inquiries of the Director of International Banking & Trust
Corporations and in light of the information received about
Caribbean American Bank advised their customers not to proceed
with the transaction.
Further it may be of interest to you to learn that the
share issue of Caribbean American Bank apparently consists of
bearer shares only and Caribbean American Bank's filed annual
returns disclose No Activity, in terms of movement of funds,
whatsoever.
As noted above, the report of CAB's liquidator confirmed
that the listed owners of the bank were bearer share
corporations. The current receiver of AIB informed the Minority
Staff that the CAB account at AIB had multiple sub accounts.
According to the receiver, tens of millions of dollars moved
quickly through the CAB account, with the funds being wired to
many different locations. In addition, monthly statements of
AIB's correspondent accounts at U.S. banks clearly show
movements of funds through the IBC accounts at CAB. The
Minority Staff could not gain access to the CAB ``filed annual
returns'' referenced above. However, the information contained
in AIB's monthly statements and the AIB receiver's comments
about the flow of funds suggest that either the due diligence
report on the filed financial statements was inaccurate or the
financial statements filed by CAB's manager (AIMS) were false.
Key perpetrators of the fraud were arrested and convicted
in 1997.\80\ Greaves and Cooper told the Minority Staff that
despite their role in forming and managing CAB and forming many
of the IBCs used by the perpetrators of the fraud, they were
unaware of the fraud being perpetrated through Caribbean
American Bank and AIB. Greaves told the Minority Staff that in
the March/April 1997 time frame his staff began to develop
concerns about the CAB account because of customer complaints
and the transactions being conducted. Greaves said he contacted
the Antiguan Supervisor of International Banks and Trust
Corporations \81\ about his concerns, and then unilaterally
froze the CAB account. However, events in the U.S. suggest that
Greaves may have been acting in response to actions taken by
U.S. law enforcement agencies.\82\ In addition, CAB internal
documents show that the bank continued to disburse funds at the
instruction of one of the perpetrators at least until early
May. In August 1997, the Antiguan Supervisor of International
Banks and Trust Corporations appointed Price Waterhouse as the
Receiver/Manager of CAB. On November 19, 1997, the High Court
of Antigua and Barbuda ordered the Receiver/Manager to
liquidate CAB.
---------------------------------------------------------------------------
\80\ In February 1997, Gamble was indicted, provided information to
government officials and pleaded guilty to money laundering in early
May 1997. On February 16, 1997, a U.S. District Court Judge issued a
warrant for the search of Sangaree's property for information and
materials related to the advance-fee-for-loan fraud. Sangaree was
subsequently arrested and charged on a parole violation related to
weapons possession in February 1997. Information on his role in the
fraud was brought out during a subsequent bail hearing. In August 1997,
Sangaree and several other members of the organization were indicted
for money laundering and fraud. Sangaree pleaded guilty in December
1997.
\81\ This is the predecessor to the International Financial Sector
Regulatory Authority, which is the Government of Antigua and Barbuda
authority that regulates offshore banks.
\82\ The U.S. Government served a subpoena on one of the
perpetrators of the fraud, Judith Giglio, in January or early February
of 1997. Lawrence Sangaree, one of the leaders of the fraud, testified
at the trial of one of the perpetrators that: ``A copy of that subpoena
was circulated by Giglio to everybody in this operation. They all knew
that the U.S. Government was targeting AIB, CAB and people associated
with that operation.'' Also, see footnote 29, above, for additional
actions taken against the perpetrators before the March/April 1997 time
period.
---------------------------------------------------------------------------
At a hearing in a U.S. Federal District Court, a U.S.
Customs Service agent testified that U.S. law enforcement
agencies investigating the fraud had identified no legitimate
purpose for the existence of Caribbean American Bank. That
conclusion was supported by the report of the CAB liquidator
which reported that: ``The shareholders of the Bank are under
investigation for money laundering'' and that ``(a)ll
depositors of the Bank are under investigation for money
laundering.''
An FBI agent's affidavit contained a description of how
IBCs and AIB's correspondent accounts were used to perpetrate
the fraud and launder the funds that were illicitly obtained:
The violators also make extensive use of offshore
corporations, principally in Antigua, W.I., to shield
themselves from investigation and lend credibility to their
assertion that they have access to funds from unidentified
offshore investors. Additionally, fees received from victims
are, at the direction of the violators, transferred offshore
through American International Bank accounts in Canada,
Switzerland, Germany, and elsewhere, ultimately ending up in
the Caribbean American Bank in St. Johns, Antigua. As indicated
in previous paragraphs, funds have already been traced from
victims to American International Bank correspondent accounts
in the U.S. and Caribbean American bank accounts in Antigua,
W.I. These funds have also been traced as they are returned to
the violators to purchase a variety of assets.
These fund transfers were accomplished by exploiting the
correspondent banking network. Since CAB had a correspondent
account with AIB, CAB and its account holders could transact
business through the correspondent accounts that AIB had
established with other banks, including U.S. banks. AIB
accounts at Bank of America, Chase Manhattan Bank, Toronto
Dominion Bank were used to receive wire transfers from fraud
victims and/or to disburse the illicit funds to accounts
controlled by the criminals. Funds would be transferred from
AIB's accounts in the United States to accounts controlled by
the criminals in other U.S. banks and securities firms.\83\ The
banks that served as AIB's correspondents were either unaware
that AIB itself had correspondent accounts, or they relied on
AIB to review and monitor its own clients, including the banks
that had accounts at AIB. Thus, by nesting within AIB, CAB and
the criminals who were its owners and account holders gained
entry into the U.S. banking system with no review or due
diligence by the host U.S. banks.
---------------------------------------------------------------------------
\83\ At the trial of one of the perpetrators of the fraud, the
government produced a list of wire codes obtained through the execution
of a search warrant. The seven page document identifies over 35
accounts at over 20 U.S. and foreign banks that the perpetrators used
for the movement of these funds.
---------------------------------------------------------------------------
In April 1999, Cooper was also indicted in the United
States for money laundering related to the illicit funds
associated with the advance-fee-for-loan fraud.
Other Correspondent Accounts at AIB. Other banks that
established correspondent accounts at AIB include Hanover
Bank,\84\ Overseas Development Bank and Trust Company,\85\
Washington Commercial Bank, and Bank Kometa.
---------------------------------------------------------------------------
\84\ For more information about Hanover Bank, see the case history
in this report.
\85\ Overseas Development Bank and Trust Company Ltd., a bank
licensed in 1995 in Dominica, was a correspondent of AIB from mid-1996
until late 1997. This bank is discussed later in this case history.
---------------------------------------------------------------------------
(c) Internet Gambling/Sports Betting
Another portion of AIB's account base was comprised of
sports gambling entities. The legal and money laundering issues
related to this type of activity are addressed in another
section of this report. Many U.S. banks have been unwilling to
accept these types of accounts or enter into correspondent
relationships with banks engaged in this activity primarily
because of the reputational risk that they pose. Moreover,
recent court cases in the United States have held that the wire
transfer of funds for gambling is illegal, raising serious
legal questions for banks that facilitate the transfer of such
funds.
From the earliest days of its activity, AIB serviced sports
betting accounts. In the period 1994-95, AIB had the accounts
of a number of sports betting firms that advertised widely and
directed clients to wire transfer funds through the
correspondent accounts AIB had established at U.S.
correspondent banks. AIB maintained. these types of accounts at
least through 1997, despite its representation to its
correspondents that it did not want that type of business.\86\
Clients associated with gambling/sports betting included Top
Turf, English Sports Betting, Caribe International Sheridan
Investment Trust and World Wide Tele-Sports (``WWTS''). WWTS,
an Antiguan sports betting firm, was one of 11 sports betting
firms indicted by the U.S. Government in March 1998 for
illegally accepting wagers on sports events over the phone or
Internet. In December 1997, an article in the Atlanta
Constitution described WWTS as ``the island's largest sports
book, tak[ing] 35,000 wagers a week, with a Monday-to-Sunday
handle [the amount of money wagered before the payment of
prizes] ranging from $5 million to $10 million.'' The article
noted that the winnings are tax free. ``If the gamblers want to
declare their profits to the Internal Revenue Service, fine.
But [the director of the operation in Antigua and Barbuda]'s
not forwarding any information. . . . He points to a paper
shredder in the accounting office. `That's what I do for the
U.S. Government,' he says, laughing as he guides a piece of
paper into the machine. `We have clients with sensitive
information.' '' Through AIB and its correspondent account,
WWTS was able to use U.S. banks for processing customer
gambling deposits and possibly disbursements.
---------------------------------------------------------------------------
\86\ In October 1994 Bank of America (``BOA''), a correspondent
bank of AIBs, learned that a client of AIBs was a sports betting
company and that gambling proceeds were being moved through the BOA
account. In an October 1994 fax memo to BOA, Cooper wrote that, ``It is
clearly not our policy to deal with such companies and we are pursuing
as quickly as possible to terminate the entire relationship.'' In May
of 1997, the relationship manager who handled the AIB account for
Popular Bank (now BAC Florida Bank) asked AIB about some of AIB's
customers, including Caribe International and Sheridan Investment
Trust. AIB identified those two entities as sports betting
establishments.
---------------------------------------------------------------------------
(d) Loans/Self Dealing
In marketing brochures that it shared with prospective
correspondent banks, AIB reported its loan philosophy as
follows:
The bank engages in lending only under certain
conditions. Loans must be either cash collateralized or
properly backed up by valuables or other guarantees to the
satisfaction of and under control of the bank. Loans are given
only to the best of clients. A credit analysis is made, and the
sources of for payback must be clearly identifiable. A reserve
for loan losses will be established, if required, but the bank
will not take significant commercial lending risks.
Every loan is approved by at least two officers, and
every loan agreement is signed by at least two directors of the
bank. Every loan is reviewed at least on an annual basis.
However, within its first year of existence, the AIB loan
portfolio swelled from $1.1 million to $25 million. It receded
slightly in 1994 and 1995. By the end of 1996, AIB's loan
portfolio reached $41.2 million. A significant portion of those
loans (estimated by the receiver to be roughly 40%) were loans
that AIB made to Cooper (AIBs owner), his family members and
business interests. According to the receiver, this included a
$6 million dollar loan to Woods Estate Holdings Ltd., which was
half owned by Cooper and his wife.\87\ Other loans were a loan
to Julien Giraud, a well-known political figure in Dominica,
who introduced some of the criminals involved in the Caribbean
American Bank fraud to Vere Bird, Jr., and one to a broker who
handled the AIB trading account at a U.S. securities firm.
---------------------------------------------------------------------------
\87\ Brochures of the AIB Group show that AMT Management, the BVI
company wholly owned by Cooper and his wife, owned 50% of Woods Estate
Holdings Ltd. Greaves told the Subcommittee that the amount of the loan
was $6 million, and that Cooper owned half of the venture. The AIB
receiver confirmed the size of the loan and Cooper's ownership.
---------------------------------------------------------------------------
By the time AIB encountered serious financial trouble in
late 1997, non-performing loans represented a substantial
problem to the institution and contributed to its closure. When
AIB was placed under the control of a receiver in July 1998,
the receiver discovered that most of the outstanding loans were
non-performing. In a November 1998 letter to the bank's
clients, the receiver wrote:
I have since conducted a more thorough examination of
the records and received a draft report of the Bank's
activities for the year ended December 31, 1997. Of particular
concern to me, has been the quality of the Bank's assets,
particularly, its loan portfolio. In many instances, I have
been forced to refer these accounts to legal counsel for
collection and where necessary, to utilize the Courts, in this
exercise.
The receiver informed the Minority Staff that there were
numerous non-performing loans. In some instances, provisions
weren't made for non-performance. No security was provided for
a number of loans. According to the receiver, there were
instances where loans were issued with the expectation that
security would be provided after the issuance of the loan, but
no security was provided for the loan. The receiver stated that
there were also a number of instances in which AIB had
circumvented regulations that prohibit offshore banks from
making loans to local residents and businesses by making loans
to Cooper's BVI Company, AMT Management, which would then make
loans to the local businesses. In those cases, the collateral
was assigned to AMT Management, and not the bank. This has
impeded the receiver's efforts to collect on non-performing
loans.
Presently, the receiver estimates that there are
approximately $18 million in outstanding loans and $10 million
in overdrafts on the bank's books. The receiver estimates that
approximately 50% of those are loans to Cooper or individuals
or entities associated with Cooper. The receiver has retained
legal counsel to recover about $13 million of the outstanding
loans.\88\
---------------------------------------------------------------------------
\88\ In late 1997, when AIB was encountering severe financial
problems, Overseas Development Bank and Trust (``ODBT''), a Dominican
bank, attempted to purchase AIB. The effort lasted about 4 months
before it was abandoned by ODBT. When it abandoned its effort to
acquire AIB, ODBT accepted approximately $4.5 million worth of AIB
loans as settlement, for the funds it had on account at AIB and for the
funds it expended while it had tried to take over AIB. Many of those
loans are not being repaid. Malcolm West, owner of ODBT, informed the
Minority Staff that ODBT was planning to go to court to attempt to
collect on many of those loans.
---------------------------------------------------------------------------
According to the receiver, the AIB annual Audited financial
statements prepared by Pannel Kerr Forster did not accurately
portray the status or nature of the loans made by AIB. Review
by the Minority Staff of the annual audits shows that the
auditors never identified any problems with the loan portfolio.
The audits did not reflect any concern about a lack of
provisions for bad loans,\89\ nor did they reflect that a high
portion of the loans were made to individuals or interests
associated with the owner or officers of the bank. For example,
the audited financials for 1993 through 1996 report that 8%,
23.9%, 18.4% and 11.9%, respectively, of AIB's loans were
issued to owners, staff or interests associated with owners.
This sharply contrasts with the estimates made by the receiver
and Greaves.
---------------------------------------------------------------------------
\89\ The 1993 audited financial statement contains the following
language under Note 4 (``Loans'') of the statement: ``There were no
loans requiring provision for bad debts during the period under
review.'' The financial statements for 1993 through 1996 all contained
the following language: ``The provision for loan losses is based on a
monthly evaluation of the loan portfolio by management. In this
evaluation management considers numerous factors including, but not
necessarily limited to, general economic conditions, loan portfolio
composition, prior loan loss experience and management's estimation of
future potential losses.'' This seems to conflict with the brochure
distributed by AIB to potential correspondents, which stated: ``Loans
must be either cash collateralized or properly backed up by valuables
or other guarantees to the satisfaction of and under control of the
bank. Loans are given only to the best of clients. A credit analysis is
made, and the sources of for payback must be clearly identifiable.''
---------------------------------------------------------------------------
Greaves agreed that the percentage of loans to related
individuals or entities was much higher than reflected in the
audited financial statements. The AIB marketing brochure
states, ``All reports that are made available to sources
outside the bank are checked, approved and signed by two
directors.'' When the Minority Staff asked Greaves why he
signed off on the auditor's report if he realized that it
understated the amount of loans to related entities, he stated
that he had written a letter to the auditor advising him that
the information in the report was not correct, yet the numbers
in the report were not changed.
The auditor for Pannell Kerr Foster noted that initially,
in 1993, AIB did not make provisions for bad debts because the
bank was new and the loans were new. He stated that when AIB
officials conducted subsequent reviews of the loan portfolio,
and as loans went bad, they required provisions for bad loans.
He did state that AIB became a ``little bit loose'' with its
loans. He disagreed with the receiver that many of the loans
were uncollectible and that AIB was insolvent. He told the
staff that he had conducted a review of the loan portfolio and
concluded the loans were good and AIB was not insolvent. He
noted that he had contacted Cooper and told Cooper that the
loans associated with Cooper had to be ``regularized'' and that
Cooper agreed to fulfill the loans that he was responsible for
and to his knowledge Cooper had not ``shirked'' any of his
responsibilities to those loans.
The auditor also disagreed that a high percentage of the
bank's loans were to individuals and entities associated with
Cooper and AIB staff. He pointed out that in December of 1997,
AIB had $66 million in outstanding loans, $40 million of which
were associated with a fully collateralized loan associated
with the Forum. He did not address prior years. According to
the auditor, in June 1998, after the Forum-related loan was
repaid, $13 million of the $26 million in outstanding loans
were associated with entities or individuals associated with
Cooper or AIB staff.
The auditor also told the Minority Staff that he did not
receive a letter from Greaves reporting that the information
regarding the amount of associated loans on the financial
statement was incorrect.\90\
---------------------------------------------------------------------------
\90\ Cooper told the Minority Staff that all loans to his family
members either had been repaid or are in the process of being repaid.
---------------------------------------------------------------------------
(7) Correspondent Accounts at U.S. Banks
Over its short life, June 1993-July 1998, AIB established
correspondent accounts with a number of U.S. banks. They
included: Jamaica Citizens Bank Ltd. (now Union Bank of
Jamaica, Miami Agency), the New York Branch of Toronto Dominion
Bank, Bank of America, Popular Bank of Florida (now BAC Florida
Bank), Chase Manhattan Bank, Norwest Bank in Minnesota, and
Barnett Bank. With many of the banks, the pattern of the
relationship was similar. AIB would apply for a correspondent
account at a U.S. bank; due diligence reviews would not
identify any problems with AIB; the U.S. bank would establish a
correspondent account for AIB; then, account activity over time
would generate concerns that would lead to the termination of
the account. The termination would then often be delayed at
AIB's request to allow it to first associate with another
correspondent bank.
(a) Bank of America
AIB maintained a correspondent account at Bank of America
(``BOA'') from June 1993 through April 1996. During that
period, $128 million moved through its account. AIB approached
BOA about a correspondent relationship in June 1993, shortly
after it began to function as a bank. The BOA relationship
manager had known Cooper from the time that Cooper had been
manager of another offshore institution, Antigua Barbuda
Investment Bank, that was a customer of BOA. BOA employees said
that before 1997, there was a great reliance on the
relationship manager's decision about a client, and this
appears to be the case with AIB.
At that time BOA was one of the more active U.S. banks in
the Caribbean area. A senior BOA official said that at that
time the relationship managers were primarily sales officers
and the primary objective of the relationship managers was on
expanding the business. BOA readily established correspondent
relationships with offshore banks that wanted demand deposit
accounts or cash management services in the United States.
Because no credit was involved, BOA said relationship managers
placed less emphasis on those accounts and did not follow those
kind of accounts as closely as accounts with more potential for
additional business. There was an expectation that
documentation on a bank client would be obtained and available,
but depending on the relationship, sometimes it would not be
required. To the extent there was concern about risk, the focus
was placed on a client bank's credit risk, not the money
laundering risk it posed.
The BOA relationship manager for AIB said he typically did
not establish relationships with offshore banks. He generally
established relationships only with commercial, indigenous
banks (banks that were licensed to operate and serve residents
in the jurisdiction that granted the license). The only
exceptions to that practice were AIB and Swiss American Bank
(addressed in a later section). According to the relationship
manager, although he had heard that the regulatory program in
Antigua and Barbuda was weak at the time, BOA representatives
relied more upon the individual owning the bank than the
regulatory apparatus. The relationship manager said the key to
doing business in the Caribbean was to know your customer. He
told the Minority Staff that he knew Cooper personally, spoke
to people in the community about him and that he thought Cooper
had a good reputation.
Account opening documentation for AIB that was provided to
the Subcommittee showed that BOA obtained the following: a
background description of America International Banking Group;
a copy of the articles of incorporation of AIB; minutes of the
organizational meeting of the board; and a copy of the bank
license and certificate of good standing. Financial statements
for the bank were not yet available because the bank only
started operation in June 1993 and the first audited financial
statement was not issued until March 1994. There were no
written references.
In June 1993 the relationship manager wrote a memo to the
credit manager seeking a decision on whether to open the AIB
account. He described AIB as a commercial bank in the process
of formation. He said he knew the directors and major
stockholders, having worked with them in their previous banks.
Since AIB was a new bank, there was not much of an operational
history from which to assess its performance. However, BOA did
little probing into the nature of the bank or its clientele.
Material provided to BOA indicated that although AIB was formed
in 1990, it did not hold its first organizational meeting until
December 1992. A senior BOA official acknowledged this was not
typical operating procedure for a bank and that it should have
raised questions about the regulatory authority when it allowed
such a thing to happen. However, there is no indication in the
account opening materials supplied by BOA that this issue was a
factor in BOA's decision to open a correspondent account for
AIB.
An AIB brochure identified the commercial activities and
objectives of the bank: to provide offshore financial services
in a tax free environment, primarily but not exclusively to
private banking and corporate customers. It stated, ``The
ability to provide this complete service in a confidential
manner is seen as a competitive advantage which will enable the
bank to expand its client base on a worldwide basis.'' The
issue of confidentiality did not raise concerns with BOA. As
one senior official noted, while it is an issue today, it was
not so in the early 1990's. It was viewed as standard wording
for offshore banks and the relationship manager was comfortable
with the relationship.
A senior BOA official observed that more should have been
done before the account was accepted, although he said it is
difficult to say exactly what should have been done. The
relationship manager made a trip to AIB in 1993 and saw AIB's
premises and an organizational chart. In May 1994 he made
another site visit and saw the AIB offices, employees, and
customers. According to the relationship manager, everything
BOA heard about Cooper at that time was positive. The senior
official suggested that there should be a more careful analysis
by the bank of why it wants to do business with a particular
client, and whether the regulatory authority can be relied
upon.
Ongoing monitoring of the bank was the responsibility of
the account administrator, who handled the day to day
operations of the correspondent account. The relationship
manager was liaison with 80 banks that had relationships with
BOA; the account administrator had more accounts to handle than
the relationship manager. In addition, as noted above, because
the AIB account was a cash management account and not
classified as a full relationship involving credit, it received
less attention from the relationship manager. BOA officials
told the Minority Staff that the account administrator
monitored account activity, but if the activity did not reach a
certain level it would likely not be noticed. The relationship
manager would see summaries of balances and the checks issued
by the client to get an idea of the business being conducted,
but there was no anticipated account activity profile
established and there did not appear to be any tracking to make
sure the activity in the account was in line with account
purposes. In addition, because the AIB account was a non-credit
relationship, annual audited financials were not required. No
audited financial statements were issued by AIB between March
1994 and June 1996.
In May 1994, the relationship manager wrote a description,
of his site visit:
Formed just a year ago by a former general manager of
Antigua Barbuda Bank, American Int'l. is already profitable . .
. nice quarters and a very slick operation. The group includes
the bank (offshore/private), a management and trust co.
(offshore records and registration), asset management and even
a ship registry Co. While probably never a user of any volume
corbank services, this is already a nice relationship. . . .
Cooper is also a big supporter of BofA as the result of his
experiences at Antigua Barbuda, and provided a new lead during
the visit.
According to BOA officials, they did not see any
indications of problems with the AIB account until 1995.
However, in April and June 1994 AIB asked BOA to confirm
letters of credit for two entities--American European Venture
Capital and Bond Street Commercial Corporation. These requests
raised a number of questions. Although AIB did not have a
credit relationship with BOA, the communications AIB forwarded
to BOA suggest that AIB had developed a financing plan with
BOA. Communications sent to BOA 2 months later indicate AIB was
still pursuing the confirmation of the same letters of credit.
However, these requests did not lead to further investigation
or review by BOA. The relationship manager explained that the
communications did not make him suspicious, because it appeared
to him that Cooper had designed a scheme to make a deposit and
convert it into a loan to accommodate a private banking
customer. However these entities were two of the venture
capital corporations that were used to perpetrate the advance-
fee-for-loan fraud that eventually operated through CAB, an
offshore bank that had a correspondent account at AIB.
In October 1994, BOA learned that a client of AIBs was a
sports betting company. Gambling proceeds were being moved
through the BOA account, and the AIB client was telling its
customers to wire money through the AIB account at BOA. BOA
notified AIB. AIB told BOA that the account was being
terminated and wrote to BOA that ``It is clearly not our policy
to deal with such companies and we are pursuing as quickly as
possible to terminate the entire relationship.'' \91\
---------------------------------------------------------------------------
\91\ Fax memo from William Cooper, President, AIB, to Lee Roy King,
a BOA relationship manager, October 1994. Although Wulff was the
relationship manager for the AIB account, he worked closely with King,
who had worked in the Caribbean region for BOA for a long time.
According to Wulff, sometimes Cooper would communicate with King.
---------------------------------------------------------------------------
However, AIB maintained other accounts related to sports
betting and gambling throughout its existence.
On October 10, 1995, an internal BOA memo from the Vice
President of International Deposit Services to the Vice
President of Account Administration notes that the AIB account
``has recently seen a number of returned items for large dollar
amounts.'' The returns were for forged checks. After providing
details of the parties involved, the memo states:
It would seem to me that our customer is dealing with
clients on their side that are unknown to them. The area in
which they are located, St. John's Antigua W.I. is already well
known to us and has caused us substantial problems in the past.
Therefore, based on our limited knowledge of customers
practices I would suggest the following:
1. Contact Tom Wulff and request a background check on
this account.
2. Increase the availability given to this customer from
5 business days to 10 in order to avoid a potential overdraft
situation that will not be covered.
3. Upon review of the background make a logical decision
as to why we should NOT disengage from this customer. [Emphasis
in original.]
On October 18, the relationship manager reported to the
Vice President for International Deposit services that he
contacted Cooper, President of AIB and informed him that BOA
wanted to terminate the correspondent relationship with AIB
within 60 days. As a reason he ``reiterated the several
transactions below which has [sic] recently passed through his
account and which we considered unacceptable.'' He later notes
some of the unacceptable transactions included: 10/94--apparent
gambling proceeds, advertising leaflets; 4/95--clearing high
volumes of small money orders, apparent gambling or money
laundering; 10/95--clearing large denomination forged checks.
Cash letter activity was terminated 60 days later, and the
account was completely closed in April 1996. The relationship
manager said this arrangement was reached in order to give AIB
time to find a new bank and establish a correspondent
relationship while still reducing AIB's ability to move more
funds through the account.
In July 1996, the relationship manager wrote a memo about a
visit he made to another Antiguan bank. As part of that memo he
included the following:
LOn a related subject, and although I did not call on
American International Bank for obvious reasons, exiting that
relationship (the account is now totally closed) also seems to
have been prudent since although no proof is of course
available, their reputation in the local market is abysmal.
Rumors include money laundering, Russian Mafia, etc., while
management of that bank also now includes the former manager of
SAB, again not a reassuring situation.
The relationship manager told staff that the situation with
Cooper's reputation changed suddenly and he ``became the poster
boy for bad banking.'' He stated that he brought the AIB
account in as an exception and he shouldn't have. It should be
noted that no one else in the BOA system objected to opening
the account. He also told the Minority Staff when informed that
other U.S. banks serviced AIB after BOA closed the account,
that it was hard to believe that other banks would accept AIB
as a client as late as 1997, noting that they should have known
better by that time.
(b) Toronto Dominion Bank (New York Branch)
AIB maintained a correspondent account at the New York
Branch of Toronto Dominion Bank from January 1996 to January
1997. During that period, $16 million moved through its
account. AIB had previously established a correspondent account
with Toronto Dominion Bank in Canada and on January 8, 1996,
requested that the Canadian branch establish a U.S. dollar
account at the New York office, which the New York office did
on January 10, 1996.
Information on due diligence and account opening activities
in the Canadian branch were not made available to the
Subcommittee. The New York branch did not perform any due
diligence on AIB before establishing an account, apparently
relying on the due diligence performed by the Toronto office
when AIB first became a customer of the bank. The individual
who handled the AIB account in New York has left the bank, and
a box of records related to the account cannot be located.
Monthly statements which are available show a high level of
activity in the account. On November 1, 1996, the account
manager in New York sent the following email to the Toronto
office:
To accommodate your request, we opened the above account
last January. However, this is a heavy volume account and we
are not set up for this accommodation. We have therefore,
decided to close the account. Since they made their opening
arrangements through Corresponding Banking in Toronto, we now
request that you notify the customer.
On the same day, the Toronto office sent a letter to AIB
informing the bank that the New York correspondent account was
going to be closed. The letter stated:
As you are aware, this account was opened to accommodate
your request to have a US dollar account in the United States.
Because of the high volume activity on this account (approx.
2000 per month), special arrangements had to be made with our
Toronto Office to have regular transfers made to the subject
account to cover any overdrafts. This account has since had to
be monitored on a daily basis to ensure coverage of funds.
Clearly this has become a high cost account for us and
it is no longer economically feasible for us to retain this or
any other such accounts.
Toronto Dominion Bank informed AIB that the account would
remain open until November 30. The closing date was
subsequently moved. The account was frozen in mid-December and
was closed as of January 9, 1997. In December the Toronto
Dominion head office in Canada also informed AIB that it would
no longer provide cash letter services for U.S. dollar items
drawn on U.S. locations; it would continue to accept cash
letters for Canadian dollar and U.S. dollar items drawn on
Canadian locations. In January 1997, the New York branch
transferred the remaining account balance to the head office in
Toronto.
The Vice President and Director for the New York office
where the AIB account had been located informed the Minority
Staff that the bank had not seen any suspicious activity
associated with the account. According to the counsel, the
basis for the closure of the account was what was noted in the
letter to AIB--given the volume of activity, it was too costly
for the Toronto Dominion branch in New York to service the
account.
In addition to the activity in AIB's account in Toronto
Dominion's New York branch, records of AIB's other U.S.
correspondent accounts suggest that the Toronto Dominion
account in Canada was a major conduit for AIB funds into the
U.S. banking system. For example, between June 1996 and January
1997, $20.9 million was wired to the AIB correspondent account
at Chase Manhattan Bank from the AIB account at Toronto
Dominion Bank in Canada.
From the records available to the Subcommittee, it appears
as if the Toronto Dominion office in Canada maintained AIB's
correspondent account until at least mid-1997.
(c) Chase Manhattan Bank
AIB maintained a correspondent account at Chase Manhattan
Bank (Chase) from April 1996 through June 1997. During that
period, $116 million moved through its account. The initial
contact was made through a ``cold'' or unsolicited call to AIB
from a Chase representative. At the time, AIB had been notified
by BOA that its correspondent relationship would be terminated.
In the mid 1990's Chase was not promoting credit
relationships with banks in many nations in the Caribbean and
South America. However, it was making a concerted effort to
promote service products that would generate fees without
exposing the bank to credit risk. A major product was
electronic banking--taking advantage of the bank's
sophisticated computer equipment and hardware to provide U.S.
bank accounts and non-credit related services to offshore
banks. As a result of this focus, Chase's contact with banks in
those areas was conducted primarily through sales
representatives rather than a relationship manager that would
have a wider range of responsibilities and functions. The sales
team was overseen by a credit risk manager. At the time, Chase
sales representatives working in the area handled a large
number of bank clients. One representative had more than 75
banks. The salary of the Chase representatives was tied to
revenues and fees generated by the accounts they handled. One
representative reported that it could be a large part of one's
salary.
At the time of Chase's association with AIB, the account
opening procedures required the sales representative to obtain
a letter from the client requesting to open an account, bank
reference letters, bank financials and a background/
justification memo. In addition, the individual who served as
the credit risk manager at the time stated that the
representatives were required to know the nature of the bank's
business through an on-site visit and have a reasonable
understanding of the transactions the bank would initiate.
The initial contact memo for AIB was written on January 23,
1996. The memo states that AIB will provide the copies of
audited figures for the 3 years that AIB had been in existence.
Neither the Chase sales representative nor the risk manager
could remember if the financials were provided. A subsequent
memo indicates that financial statements were received and
reviewed during February or March. However, at that time the
only audited financial statement available was the 1993
statement. Financial statements for 1994 and 1995 were not
published until June 1996. Although Antiguan regulations
require that audited financial statements be produced within 4
or 5 months of the end of the year, Chase did not question the
absence or lateness of the financial audit for 1994. The memo
also describes a primary function of AIB:
As I understand it, his [Greaves'] typical pitch is to
``incorporate'' individuals into offshore citizenship which
then makes them eligible for a host of products voided to
domestic (U.S.) Nationals. Such set-up typically costs $1,250
and is efficient for someone with as little as $20M [thousand]-
$25M [thousand] to invest. John elaborated to the effect that
to ``take-in'' deposits from US nationals is not a
transgression. It becomes a transgression if and when these
nationals end up not reporting the investment, which is no
legal concern of the offshore depository institution.
When asked by staff if these comments by Greaves had caused
any concern, the sales representative who is still involved in
correspondent banking for Chase replied that they showed that
Greaves knew his craft--that he set up mechanisms to ensure
compliance with the law. The representative noted that the
whole essence of offshore banking is non-resident accounts,
accounts in the name of corporations with bearer shares, and
directors that are lawyers ``that sit in these tax havens that
make up minutes of board meetings.'' He noted that the comments
in the memo were intended to be informational and not
questioning whether Chase should be in the field. When asked if
part of the sales representative's job was to make sure the
client bank did not go over the line, the representative
responded if that was the case, then the bank should not be
dealing with some of the clients it had and shouldn't be doing
business in some of the countries where it was doing business.
He added, however, that in the case of AIB, it did not seem
that AIB was doing anything illicit, rather it was in the
business of offshore banking and that is the type of thing AIB
needed to do to attract clients.
In March 1996, the Chase sales representative and the
credit risk manager participated in a conference call with
Greaves. The purpose was to clarify three specific points
before establishing a relationship with AIB: the ownership of
AIB, AIB's due diligence and KYC policies, and Chase's
expectations regarding cash management letters. Both Chase
officials admitted that it was rather unusual for the credit
risk manager to participate in such a call before approving an
account. The credit manager could not remember if there was
something in the AIB material that caused the call. However, he
noted that he generally had developed a heightened concern
about small ``boutique'' banks and because of the ongoing
Chase-Chemical Bank merger, he was concerned that if his
department were eliminated he did not want to admit a bank that
might later create problems for whoever inherited the account.
The risk manager wrote a memo on the phone conversation, and in
the section regarding AIB's due diligence and KYC programs, he
included the sales representative's characterization that:
``Greaves stated that AIB exceeds the U.S. Treasury's
guidelines in this area. AIB takes this issue so seriously that
Greaves himself was unable to `free up' any time to see [the
Chase sales representative] in Miami last month while attending
a local Treasury-sponsored Anti Money Laundering Seminar.'' A
Chase representative noted that this characterization of AIB's
commitment to anti-money laundering was perhaps an
``embellishment.''
Regarding AIB's Due Diligence/Know Your Customer policies,
the memo reported that: A 12-page instructional document is
sent to, and acknowledged by all AIB staffers who handle
accounts.'' However, neither the credit manager nor the sales
representative can recall if they ever saw the document. After
the March 26 teleconference, the AIB correspondent account was
approved and established.
As noted above, Chase representatives were required to know
the nature of the bank's business through an on-site visit and
have a reasonable understanding of the transactions they would
initiate. The sales representative stated that he believed that
AIB's businesses included offering products to personal
corporations, forming trusts and a ship registry. He told staff
that although he was not told so by AIB, on the basis of his
experience, he understood that since AIB was an offshore bank,
its clientele was largely private banking type clients,
individuals with enough discretionary wealth to form trusts and
other products. Neither the sales representative nor the credit
manager was aware of the Forum or the large presence that
Forum-related accounts had at AIB.
In addition neither the sales representative or the credit
risk manager were aware that AIB served as a correspondent bank
for a number of other offshore banks such as Caribbean American
Bank, Hanover Bank or Overseas Development and Trust Company.
The manager noted that at that time Chase representatives were
not required to ask a client bank if it served as a
correspondent for other banks. He said the issue never came up,
but if it were a regular service offered by AIB it should have
been raised to him. He noted that there was no Chase policy
against establishing a correspondent relationship with a bank
that served as a correspondent to other banks, but noted that
if he had been aware that AIB served as a correspondent to
other banks, he would have asked additional questions about
that situation.
Chase's ongoing monitoring efforts were admittedly less
rigorous for non-credit correspondent relationships than the
ongoing monitoring for credit relationships. The credit risk
manager described the effort as ``reactive,'' responding to any
suspicious activity or any other reports that might come to the
attention of the bank. According to the credit risk manager,
while the general policy was to keep alert in all areas where
Chase conducted business, there was no annual review of non-
credit relationships such as AIB's and clients were not
required to supply updated financials. Sales representatives
did not review monthly statements; they would review billing
statement analyses to get an idea of the activity of the
account. Although a key aspect of ongoing monitoring was
maintenance of direct contact with the client through site
visits, smaller revenue clients were not visited on a regular
basis, if at all.
In May 1996, a new sales representative assumed
responsibility for the account. The new representative visited
the AIB offices in September 1996. The report of the meeting
indicates that AIB officials advised the representative that
BOA had previously handled AIB's accounts and that AIB had been
unhappy with the support received from BOA. There was no
mention that BOA, not AIB, had terminated the relationship. The
new representative stated that since she had taken over the
account after it was opened up, she didn't inquire about the
BOA relationship because she assumed that the matter had been
addressed during the opening of the account. The new
representative stated there was no information in the file
about the customer base and she had inquired about the nature
of AIB's clientele. The site visit representative noted that
AIB managed ``three to four thousand offshore customers (trust
private banking) and they are not allowed to operate locally in
Antigua.'' The representative was not aware of the large base
of Forum-related IBCs that were part of AIB's clientele. She
noted that while she obtained an overview of the clientele, she
felt that the bank would not provide information on what the
offshore client base was. The report also noted:
A subsidiary, American International Management Services
(AIMS) provides head office services for other banks. They
manage twelve banks, have dedicated systems, preparing
statements (outsourcing) that have physical presence in
Venezuela, Canada, Australia, St. Petersburg, Brazil, England,
Antigua due to offshore nature. They are purely international
and wholesale in nature . . . involved in project financing,
non discretionary funds only (have branches in Dominica, St.
Kitts).
This apparently did not raise concerns with the new
representative. She told the Minority Staff that she did not
pay attention to AIB's respondent banks. When asked by the
Minority Staff if she made further inquiries about the banks
serviced by AIB, she noted that AIB had told her that the banks
it serviced were much smaller banks and that no money center
banks would do business with them. She noted it was a judgment
call as to whether the client would tell the representative
what its customers were doing.
In March 1997, the sales representative was instructed by
the Chase fraud department to terminate the relationship with
AIB. According to the sales representative, the instruction was
delivered shortly after AIB received a sizable stolen check and
had recently completed a questionable wire transfer. On March
12, 1997, Chase informed AIB that it would close the account in
30 days (April 12). After two letters of complaint from AIB
about the decision and the difficulty of establishing a new
relationship within 30 days, Chase informed AIB that it would
extend the closing date to May 17, 1997, and agreed to accept
cash letters until May 2.
On April 7, AIB reiterated a request for an additional
3,000 checks. On May 21, 1997, AIB requested that its remaining
balance be forwarded to Popular Bank in Florida. A June 2 Chase
memo addressed the account:
[W]e concluded that it should be closed, we can't wait
any more. . . . I tried to get a list of outstanding checks
from Syracuse but the list was not only very long but also
included pending items from June/96. I do not think the list is
accurate. We have given them over two weeks more from the date
the account was supposed to be closed which was May 16/97. You
can go ahead and do what is necessary to close it. . . .
On June 17, 1997, the account was officially closed. After
its correspondent account with Chase was terminated, AIB
informed its clients of the closure in the following way:
Due to certain operational considerations, we have
decided to close our account with Chase Manhattan Bank in New
York by May 15, 1997.
(d) Popular Bank of Florida (now BAC Florida Bank)
AIB maintained a correspondent account at Popular Bank from
April 1997 through July 1997. During that period, $18 million
moved through its account. Popular Bank had approached AIB
about a correspondent account in early 1997.
Since April 1995, AIB maintained a Visa Credit Card
settlement account at Popular Bank, backed by a $100,000
Certificate of Deposit. Credomatic, a credit card payment
processing company, was owned by the same individuals who owned
Popular Bank. Some of the financial institutions that utilized
Credomatic's services established their escrow accounts at
Popular Bank. Popular Bank used that escrow account list to
market its correspondent banking services.
In early March the relationship manager for Popular Bank
wrote a letter to AIB describing the correspondent services
Popular Bank could provide and requested the following from
AIB: financial statements for the past 3 years, background on
the bank and the nature of its business, identity of the major
shareholders and other business interests they had, and a list
of senior officers. A site visit was not made before the
account was opened. The account manager was planning a visit to
Antigua and Barbuda in the near future and planned to make a
site visit at that time. In a later communication, the
relationship manager requested a list of some of the
correspondent banks used by AIB.
In a letter responding to the request, Greaves pointed out
that AIB operated in Antigua, Barbuda and Dominica. The letter
noted that AMT Trust was a part of the American International
Banking Group, formed and managed corporations, and had over
5,000 corporations on its books that could be incorporated in
Antigua and Barbuda, St. Kitts or Dominica. Greaves also
pointed out that American International Management Services
Ltd. provided full back office services for offshore banks and
corporations. The letter also states that ``the bank does very
little lending and is mainly used as an investment vehicle for
our clients.'' At the same time, AIB's balance sheet showed
that as of December 1996, AIB had over $40 million in loans and
advances out of a total asset base of $57 million. The list of
correspondent banks provided by AIB named Toronto Dominion Bank
in Canada, Privat Kredit Bank in Switzerland and Berenberg Bank
in Germany. The list did not include any of AIB's U.S.
correspondents.
As part of the due diligence process, the relationship
manager made inquiries about AIB with a European bank with a
branch in Antigua and Barbuda. He was cautioned to be careful
about doing business in Antigua and Barbuda, although no
negative information about AIB or its officers was transmitted.
The account became operational on April 1, 1997. Although
the account was quiet during the first month, activity
increased dramatically in the month of May. During that month,
$7.5 million was deposited and $2.7 million was withdrawn from
the account (including $1.6 million withdrawn through 488
checks). Also in May, the relationship manager made an inquiry
of AIB about some of AIB's customers and, at the end of May,
learned that AIB serviced the accounts of sports betting
companies. In June, Popular Bank received a request from a
Russian bank to transmit the text of two loan guarantees ($10
million and $20 million) to AIB, for further transmittal to
Overseas Development Bank and Trust. Popular Bank refused to
transmit the guarantees, because it would have put Popular Bank
in the position of guaranteeing the loans for the Russian
banks, which were not clients of Popular Bank.
In early June, the relationship manager visited Antigua and
Barbuda. During the trip, he visited the AIB offices and
acquired some AIB brochures that highlighted some services of
the group that raised questions about its vulnerability to
money laundering and the nature of the clientele it was trying
to attract. One document described the various entities that
made up the American International Banking Group and the bank
formation and management services offered by the group,
including the fact that AIMS provided back office services for
some of the offshore banks that had accounts with AIB. The
description of the management services offered by the American
International Management Services Ltd. (``AIMS'') contained the
following:
It has become increasingly important for overseas tax
authorities to see that the ``mind and management'' of a bank
is in the country of origin. Therefore, we are now providing
management services for a number of our clients. American
International Management Services Ltd. can provide offshore
management services for an offshore bank.
. . . In addition to the administrative responsibilities
mentioned above, we will also provide full back office
services. These services will include but not be limited to:
establishing an account with American International Bank to
make wire transfers and the issuance of multi-currency drafts;
the operation of a computerized banking and accounting system;
issuance of certificates of deposit and account statements;
administrative/clerical functions relating to the purchase and
sale of securities and foreign exchange and the filing of all
correspondence/documentation and all other ancillary functions
of an administrative nature. . . . [emphasis added]
Another document describing the corporate and trust
services of the American International Banking Group identified
a number of advantages of incorporating in Antigua and Barbuda,
some of which stressed how, under Antiguan law, it was easy to
hide information about account activity and ownership:
--Antigua and Barbuda only has an Exchange of Information
Treaty with the U.S.A and this is only for criminal matters.
--There are no requirements to file any corporate reports
with the government regarding any offshore activities.
--The books of the corporation may be kept in any part of
the world.
--Share [stock] certificates can be issued in registered
or bearer share form.
The manager informed the Minority Staff that he also
visited with governmental officials and became concerned when
he learned that although the government was in the process of
collecting a great deal of information about its offshore
banks, it lacked the resources to review and analyze the
information it had collected.
On June 13, he filed a report on his visit to AIB. The memo
reviewed the various entities that made up the American
International Banking group. After noting that one of the
entities in the group provided back office services that
included establishing accounts at AIB, he commented: ``The back
up services provided by the group offer a high risk as we do
not know either the entities nor the people behind those banks
receiving the service.''
The memo also noted that information obtained from the
Antiguan banking community about Greaves ``leaves me
uncomfortable.'' The memo concluded with the following
recommendation:
I recommend that we do cut our banking relationship with
American International Bank for the following reasons:
Antigua has no regulations nor the capacity to enforce
them for offshore banks.
American International Bank offers management services
to offshore banks incorporated in Antigua. We do not know who
are behind those banks. Therefore, the risk of any of those
banks being involved in unlawful activities (as per US
regulations) results extremely high.
John Greaves has not the best prestige among bankers in
Antigua. [emphasis in original]
On June 16, the relationship manager sent a facsimile to
AIB, stating the following:
Please be advised that we will be unable to continue
servicing your operating account effective Monday June 23,
1997. Please do not send any more items for deposit after today
June 16, 1997.
We thank you for your business but we must be guided by
U.S. banking regulations which require a disclosure of
comprehensive information about our clients and parties
involved in our transactions.
The bank refused to grant an extension to AIB. Two days
later, Popular Bank also terminated AIB's credit card
settlement account, which had been at the bank since 1995. In
the month of June, $7.8 million was deposited into AIB's
account at Popular Bank and $11.6 million was withdrawn
(including $3.4 million through 962 checks). All account
activity was ceased at the end of June and the account was
closed in early July.
(e) Barnett Bank
AIB maintained a correspondent account at Barnett Bank from
May 1997 through November 1997. During that period, $63 million
moved through its account. AIB President John Greaves contacted
the relationship manager for Barnett's Caribbean division and
said that AIB was looking for a correspondent bank to provide
cash management activities for the bank in the United States.
Barnett Bank had a small correspondent banking department.
It consisted of four correspondent bankers who covered four
geographic regions. They were assisted by one administrative
assistant. The bankers reported to the head of International
Banking. The work on correspondent accounts was shared with the
Treasury Management Services Department, which handled the cash
management services of the account. The correspondent banker,
also called the relationship manager, would handle both credit
and cash management relationships. The Caribbean Region office
in Barnett had about 25 clients and did a lot of cash letter
and wire transfer business. While financial incentives were not
offered to relationship managers for attracting new accounts,
they were related to fee income and loan balances.
To open a correspondent account, a bank was required to
supply financial statements, management organizational charts
and bank references. Barnett Bank said it would not deal with
shell banks that didn't have a physical presence in the
jurisdiction in which they were licensed. According to the
relationship manager of the AIB account, all of Barnett Bank's
clients had a physical presence. In fact Barnett Bank said it
had only one or two offshore banks as clients and had no client
banks that held bearer share accounts. The relationship manager
did not know if any client banks were providing correspondent
services to other banks, because that was not an inquiry made
of prospective client banks. One of the offshore banks that was
a correspondent of AIB had a number of bearer share IBC
accounts that had been formed by Cooper's company, AMT Trust.
The relationship manager said that as part of her due
diligence review, she would check with the bank regulator of
the jurisdiction in which the client was located. The
regulatory authority of the bank's home jurisdiction was
assessed as part of a country risk evaluation. However those
assessments were performed for credit relationships; they were
not done for cash management, non-credit relationships.
Similarly, although reports of agencies that rated the
creditworthiness of banks were reviewed, the reports didn't
include Caribbean banks. Bankers were not required to perform
an initial site visit or write a call memo before the
relationship was established. An initial site visit was not
made to AIB, because the relationship manager had just returned
from a trip to Antigua and Barbuda when AIB made its request to
open an account. The manager made a site visit during the next
scheduled trip to Antigua and Barbuda in August 1997.
Treasury Management would review the account opening
documentation for completeness and establish the account. The
relationship manager had the authority to approve the opening
of a non-credit relationship. Credit relationships had to be
reviewed and approved by a credit committee.
When Greaves initially contacted the relationship manager,
he explained that the bank serviced private banking clients and
trusts. Information materials supplied to Barnett by AIB
indicated that the bank serviced wealthy individuals. The
manager was unaware of Melvin Ford or the Forum and had not
heard of Caribbean American Bank and the relationship those
entities had with AIB. The relationship manager was not aware
that AIB served as a correspondent to a number of offshore
banks. The relationship manager was unaware that AIB had
licensed a bank in Dominica in June 1996. The fact that there
were other companies in the American International Banking
Group that formed IBCs was not viewed as relevant to the bank.
Barnett did not obtain any information that provided details of
AIB's client base. Because AIB had a cash management
relationship, its loan profile and loan philosophy were not
reviewed.
The relationship manager noted that the staff always tried
to perform substantial due diligence but Barnett did not have a
presence in the local market and had to rely on the opinions of
people in the market and the regulatory agencies. However, the
manager noted that those entities are reluctant to provide
information and don't want to say anything negative about
another party. Barnett said that their reluctance to provide
information made it difficult for Barnett to assess the entire
situation.
With respect to ongoing monitoring, the relationship
manager would make annual on-site visits to banks that had cash
management relationships with Barnett and more frequent visits
to clients with credit relationships. The relationship manager
would review some recent monthly statements and check with
Treasury Management on the status of the account before making
site visits. Treasury Management would notify the manager if
any unusual activity was noticed, and Barnett said it had an
Anti-Money Laundering unit that monitored accounts.
The AIB account at Barnett Bank operated for 5 months.
During that period, the account experienced substantial wire
and checking activity. In June and July, there was a large
number of transfers out of the account valued between 1 and 10
thousand dollars. In July, there were over 500 checks issued
for a total value of $3.2 million. The relationship manager
noted that the volume of checks was unusual and it was also
unusual to issue checks in the denomination of 75 to 100
thousand dollars, as AIB was doing. In August, there were $5
million worth of checks written against the account.
The relationship manager was informed by Treasury
Management personnel in about July that there was a large
volume of wire transfer activity in the account and it was
difficult to keep up with the volume. When an inquiry was made
to AIB, the bank explained that the activity was related to
many payments to trust accounts. This response didn't raise the
suspicions of the manager.
In late July or early August, prior to a trip to Antigua
and Barbuda, the relationship manager noted an incoming wire
transfer for $13 million. It attracted the manager's attention
because it was unusually large. She was unable to reach
Greaves, and she received an unsatisfactory explanation about
the wire from AIB's operations manager. The following week the
relationship manager traveled to Antigua and Barbuda and met
with AIB officials. She was still unable to receive a
satisfactory explanation for the $13 million transfer. After
returning to Miami, she spoke with the head of the
International Banking Department and the Compliance Department
and the decision was made to close the account. Initially,
Barnett informed AIB that the account would be closed at the
beginning of October. AIB requested additional time, and
Barnett agreed to hold the account open until November. AIB was
able to use wire transfer services throughout that period. The
account was closed in November.
(8) AIB's Relationship with Overseas Development Bank and Trust
Company
In late 1997 AIB was suffering severe liquidity problems
largely because of non-performing loans and the attempt by
certain investors to withdraw their funds. As the growing
liquidity problem threatened the solvency of the bank, the
owners of Overseas Development Bank and Trust Company Ltd.
(``ODBT''), an offshore bank licensed in Dominica, attempted to
take over AIB. ODBT was licensed in 1995 in Dominica; it was
one of the first offshore banks licensed in Dominica after
Dominica passed its law allowing offshore banks in June
1996.\92\ ODBT's formation was handled by AMT Management, the
British Virgin Islands corporation owned by William Cooper and
his wife. ODBT's initial shareholders were Cooper, his wife and
John Greaves. The Coopers disposed of their shares and the
owners of ODBT, each with an equal share, became John Greaves,
Arthur Reynolds and Malcolm West.
---------------------------------------------------------------------------
\92\ The other offshore bank initially licensed was American
International Bank and Trust Company Ltd., owned by Cooper and his
wife. According to the manager of the Dominica International Business
Unit (the governmental body that regulates offshore banks), American
International and ODBT were closely aligned. The banks' applications
were submitted at the same time, they shared the same agent (AMT
Management) and they shared the same office space.
---------------------------------------------------------------------------
On December 30, 1997, AIB and ODBT signed an agreement for
the sale of all of AIB's assets and liabilities to ODBT. At the
same time, officers of both AIB and ODBT wrote to a former U.S.
correspondent bank of AIB and informed it that ODBT was taking
over the assets of AIB.\93\ In January 1998, the counsel for
ODBT issued an opinion certifying that he had examined the
documents associated with the purchase (purchase agreement,
deed of assignment, absolute bill of sale, assumption of
liabilities) and that the documents were ``duly executed and
legally binding and enforceable.'' On January 6, 1998, the
Board of Directors of ODBT published a public notice stating
that the bank had purchased the assets and liabilities of AIB,
that it had applied to the Government of Antigua and Barbuda
for a banking license and that if the license was granted it
hoped to employ 50 people in its bank in Antigua and Barbuda.
However over the next 4 months, the financial problems of AIB
did not abate and by April, after ODBT had invested nearly $4.5
million in AIB, the purchase agreement was dissolved. The
owners of ODBT subsequently worked out an arrangement with the
receiver of AIB to assume $4.5 million worth of loans payable
to AIB as repayment for the funds it had invested into AIB.\94\
In the second half of 1999, Greaves and Reynolds sold their
shares to West, who told the Minority Staff that he is
currently the sole shareholder of ODBT.
---------------------------------------------------------------------------
\93\ In order to comply with Antiguan regulations that prohibit a
bank from using the word ``trust'' in its name, the owners of ODBT
applied for, and received, a temporary bank license for a new Antiguan
bank in the name of Overseas Development Bank (``ODB''). In a December
1997 letter to the counsel in Antigua and Barbuda who was handling the
incorporation and licensing for ODBT, John Greaves supplied ``a full
name of all shareholders in various companies that own the Overseas
Development Bank & Trust Company Ltd.'' According to Greaves' letter,
ODBT was owned 100% by Overseas Development Corporation, an Antiguan
Corporation, which was owned by three companies--Financial Services
Group, International Management Services, Inc., and Overseas
Development & Trust Company. The owners of the Financial Services group
were listed John Greaves, Arthur Reynolds and Derek Pinard (General
Manager of ODBT). Greaves was listed as the owner of International
Management Services, Inc. The owner of Overseas Development Trust
Company was listed as the Honorable Ivan Buchanan (a director of ODBT).
Malcolm West was not listed.
\94\ The owners of ODBT subsequently characterized the relationship
with AIB in different ways. In one instance, the investment in AIB was
a ``loan'' rather than expenditures associated with the purchase of the
bank. In another communication, Greaves stated that ``in order to offer
final assistance to American International Bank and their clients aimed
more at perhaps assisting the image of the offshore banking industry
than the individual bank, we purchased loans from the Receiver to the
sum of US$4.5 million. All of these loans are active and in good
standing although some of them are longer than we would prefer.'' The
receiver of AIB informed the Minority Staff that many of the loans
assumed by ODBT were non-performing and the current owner of ODBT
concurred, stating that the bank was planning to initiate legal
proceeding to recover the funds. ODBT officials estimated that
approximately one half of the $4.5 million in loans were related to
interest associated with the former owner of AIB, Cooper.
In December 1999, the Supervisor of International Banks of the
Antiguan International Financial Sector Authority (the immediate
predecessor to the International Financial Sector Regulatory Authority,
the current regulator of offshore banks in Antigua and Barbuda) wrote
to ODB and informed the bank that its tentative license was to be
revoked on January 14, 2000, due to lack of activity and assets.
After ODBT abandoned its takeover of AIB, a second takeover effort
was mounted. In May, another Antiguan bank, called Overseas Development
Bank, Antigua was formed. The bank was granted a license in 1 day.
According to filings that accompanied the license application, that
leadership of the bank was closely connected to the Forum operations.
The major shareholder (owning 3 million of 5 million shares of the
capital stock) was Wilshire Trust Limited, which was one of the trusts
that controlled many of the Forum-related investments. Some board
members of the new Overseas Development Bank, Antigua, also had ties
with the Forum. David Jarvis had run the Forum office in Antigua and
Barbuda. Earl Coley of Clinton, Maryland, was a frequent speaker at
Forum meetings and is reported to be a relative of Gwendolyn Ford
Moody, who handled much of the financial activity for Melvin Ford and
the Forum. A number of individuals familiar with the formation of
Overseas Development Bank, Antigua told the Minority Staff that backers
of the new bank were two Antiguan banks, Antigua Overseas Bank and
World Wide International Bank. Both of those banks serviced accounts of
Forum-related investors. However, the staff saw no written record of
their involvement. Within a month or two, after investing a few million
dollars, Overseas Development Bank, Antigua abandoned its efforts to
takeover AIB. The Minority Staff has acquired records that show that at
the same time that Overseas Development Bank, Antigua was formed,
Corporate and Accounting Services Ltd., one of the accounting firms
that administered accounts of the Forum-related IBCs, sent out a letter
to IBC members offering them the opportunity to buy shares of Overseas
Development Bank, Antigua.
In August 2000, the Antiguan International Financial Sector
Regulatory Authority informed the Minority Staff that Overseas
Development Bank, Antigua had not been in operation since August 1998
and the bank had been put on notice that its license was to be revoked.
---------------------------------------------------------------------------
Like AIB, ODBT was one of a group of companies within an
umbrella group; ODBT's umbrella group was called Overseas
Development Banking Group. In addition to ODBT, the group
contained companies for corporate and trust formation and bank
management.
ODBT shared a number of common elements with AIB. Although
licensed in Dominica, the bank was operated out of Antigua and
Barbuda by AIMS, the bank management service owned by Greaves
and closely tied with AIB.\95\ A number of officers and
employees of AIB and the management service became employees of
ODBT and were authorized signators for the correspondent
accounts established for ODBT.\96\ From the time that ODBT
commenced operations as an offshore bank through the end of
1997, it used AIB as its correspondent bank to access the U.S.
financial system. ODBT also issued Visa cards to its clients
through AIB.
---------------------------------------------------------------------------
\95\ AIMS changed its name to Overseas Management Services
(``OMS'') before closing in August 1999. Greaves also informed the
Minority Staff that AIMS was also known as International Management
Services (``IMS'') before its name was changed to Overseas Management
Services (``OMS'').
\96\ They included: Pat Randall Diedrick, Assistant Manager, ODBT
(Corporate Secretary and Director, AIB), Danley Philip, Assistant
Manager, ODBT (Assistant Manager/Accountant, AIB) Sharon Weeks,
Accounts Manager, ODBT (AIMS employee), Anne Marie Athill, Office
Manager, ODBT (AIMS employee).
---------------------------------------------------------------------------
Promotional literature of ODBT touted the secrecy and
anonymity the bank used to attract clients:
Numbered accounts--are available and are particularly
useful; not only in providing anonymity but, as further
security against unauthorized access to accounts. . . . Bank
secrecy regulations do not permit the release of any
information without specific written permission from the
account holder. . . . Annual bank audits required by government
do not reflect individual accounts. . . . Account information
is otherwise only available by order from the high Court. . . .
Formation of ``International Business `offshore' companies''
can be arranged in a variety of Caribbean jurisdictions. Such
companies can be comprised of Registered, or Bearer shares, or
a combination of both, at the discretion of the client. . . .
In the case of Bearer Share companies, where the client is
concerned about anonymity, our trust company can function as
the Sole Director.
Another brochure on the Overseas Development Banking Group
offered clients economic citizenship in other
jurisdictions.\97\
---------------------------------------------------------------------------
\97\ Economic citizenship is conferred when an individual makes the
investment of a certain amount of money in, and/or pays a fee to, a
country and in return receives a citizenship in that country. The
required level of investment and/or fee is set by the country offering
the citizenship. As with IBCs, economic citizenship is generally
offered by jurisdictions that also have little or no taxation and bank
secrecy and corporate secrecy statutes. Individuals who obtain the
economic citizenship can then enjoy the economic benefits of those
policies and obtain second passports.
---------------------------------------------------------------------------
As a result of these policies, ODBT had numerous accounts
where the true owners were unknown to the bank. In an interview
with the Minority Staff, ODBT officials said that because of
the wide use of bearer share accounts in the bank, they could
not determine the beneficial owners of almost half of ODBT's
accounts. So, for example, when asked how many of their clients
were from the United States, they were unable to answer. Bank
personnel knew who the signators on the accounts were, but they
had no way of identifying the beneficial owner of the accounts.
The bank personnel told the Minority Staff that when ownership
of ODBT was shifted to West in July 1999, the bank had roughly
3,000 accounts and nearly 45% of those accounts did not contain
sufficient information to establish ownership and were closed.
West told the Minority Staff that the bank currently had
approximately 100 accounts.
At the same time, ODBT's due diligence policy told a
different story. In an August 1996 publication, which was sent
to one of its U.S. correspondent banks, ODBT stated that its
policy for International Business Corporation (IBC) accounts
was to require its employees to obtain, among other things:
``Full details of beneficial owner, including address, work and
home telephone number and relationships with employer and
social security number of U.S. citizen,'' a copy of the
beneficial owner's passport; and a banker's reference. For
individual accounts, the policy directed that ``personal
identification must be taken and retained on file, i.e. a copy
of the front page of the passport with photographs, drivers
license, etc.,'' and that employees should ``obtain a home
address and telephone number and verify that by calling after
the interview if there is no acceptable supporting
information.''
Of those clients who were actually identifiable, several
raise serious concerns.
(a) The Koop Fraud
ODBT was a key offshore vehicle used in the Koop fraud.\98\
William H. Koop, a U.S. citizen from New Jersey, was the
central figure in a financial fraud which, in 2 years from 1997
to 1998, bilked hundreds of U.S. investors out of millions of
dollars through a fraudulent high yield investment program.
Koop carried out this fraud in part by using three offshore
banks, ODBT, Hanover Bank, and British Trade and Commerce Bank
(BTCB). In February 2000, Koop pleaded guilty to conspiracy to
commit money laundering. As part of his plea agreement to
cooperate with government investigations into his crimes, Koop
provided the Minority Staff investigation with a lengthy
interview as well as documents related to his use of offshore
banks.
---------------------------------------------------------------------------
\98\ For more information, see the explanation of the Koop fraud in
the appendix.
---------------------------------------------------------------------------
ODBT was the first offshore bank Koop used in his fraud and
seemed to set a pattern for how he used the other two. First,
ODBT established Koop's initial offshore corporation,
International Financial Solutions, Ltd., a Dominican company
that would become one of Koop's primary corporate vehicles for
the fraud. Second, over time, ODBT opened five accounts for
Koop and allowed him to move millions of dollars in illicit
proceeds through them. Third, ODBT itself began to feature in
the fraud after Koop offered, for a fee, to open an offshore
account for any investor wishing to keep funds offshore.
Documentation suggests that Koop opened at least 60 ODBT
accounts for fraud victims, before ODBT liquidity problems
caused Koop to switch his operations to Hanover Bank and BTCB.
The documentation indicates that Koop had accounts at ODBT
for almost 2 years, from August 1997 until April 1999, which
was also the key time period for his fraudulent activity.\99\
ODBT documentation indicates that the bank established at least
five Dominican corporations for Koop and opened bank accounts
in their names.\100\
---------------------------------------------------------------------------
\99\ ODBT also appears to have kept the Koop-related accounts after
it terminated its association with AIB in the spring of 1998, possibly
because Koop was one of the few AIB depositors with substantial assets.
\100\ See the appendix for more details on the corporations and
accounts.
---------------------------------------------------------------------------
The statements for one of the accounts established by Koop
include four entries showing that Koop paid $300 per account to
open 60 additional accounts at ODBT, apparently for fraud
victims who wished to open their own offshore accounts.\101\
When asked, West indicated during his interview that he had
been unaware of the 60 accounts opened by Koop for third
parties. He said that, in 1999, ODBT had closed numerous
accounts with small balances due to a lack of information about
the beneficial owners of the funds, and guessed that the 60
accounts were among the closed accounts. While he promised to
research the 60 accounts, he did not provide any additional
information about them.
---------------------------------------------------------------------------
\101\ These account entries were:
--$7,500 on 11/7/97 for 25 accounts;
--$4,500 on 11/12/97 for 15 accounts;
--$4,500 on 1/16/98 for 15 accounts; and
--$1,800 on 2/13/98 for 6 accounts.
---------------------------------------------------------------------------
Koop directed his co-conspirators and fraud victims to send
funds to his ODBT accounts through various U.S. correspondent
accounts. For example, account statements for Jamaica Citizens
Bank Ltd. (now Union Bank of Jamaica, Miami Agency) show
numerous Koop-related transactions from October 1997 into early
1998. Wire transfer documentation shows repeated transfers
through Barnett Bank in Jacksonville. In both cases, the funds
went through a U.S. account belonging to AIB, and from there
were credited to ODBT and then to Koop. In January 1998, Koop
also issued wire transfer instructions directing funds to be
sent to Bank of America in New York, for credit to Antigua
Overseas Bank, for further credit to Overseas Development Bank,
and then to one of his five accounts at ODBT.
Given the millions of dollars that went through his ODBT
accounts, it is likely that Koop was one of ODBT's larger
clients. The documentation indicates that Koop was in frequent
contact with West and ODBT administrative personnel at AIMS, in
part due to his establishment of new corporations and frequent
wire transfers. West said that he recognized the name but
professed not to remember Koop. There is also no documentation
indicating that ODBT expressed any concerns about the nature of
Koop's business, the deposits made to his account from so many
sources, the source of the funds, or their rapid turnover.
Koop might have remained at ODBT, except that in the spring
of 1998, ODBT began experiencing liquidity problems due to its
efforts to prop up the solvency of AIB, and it began failing to
complete Koop's wire transfer requests. Koop materials from
this time period state:
We are currently transacting our banking business with
the Overseas Development Bank and Trust Company, which is
domiciled in the island of Dominic[a] in the West Indies. We
have witnessed a slowness in doing business with this bank as
far as deposit transfers and wire transfers are concerned.
Because of these delays, we have made arrangements with the
Hanover Bank to open accounts for each of our clients that are
currently with ODB, without any charge to you. If you are
interested in doing so, please send a duplicate copy of your
bank reference letter . . . passport picture . . . [and]
drivers license. . . . IFS [one of Koop's companies] will then
open an account for you in the Hanover Bank, in the name of
your trust.
By April 1998, Koop began directing his co-conspirators and
fraud victims to deposit funds in U.S. correspondent accounts
being used by Hanover Bank or British Trade and Commerce Bank,
and generally stopped using his ODBT accounts.\102\
---------------------------------------------------------------------------
\102\ Both of these banks are the subject of case studies in this
report.
---------------------------------------------------------------------------
(b) Financial Statements
The audited financial statements of ODBT also raised some
issues. The 1996 audit, due in the spring of 1997, was not
produced until July 1997. In the 1998 audit, produced in July
1999, the auditor noted:
[W]e were unable to verify the accuracy and
collectability of the amount of $1,365,089 due from American
International Bank (In Receivership) since we have not yet
received a third party confirmation and there were no practical
alternative audit procedures to enable us to substantiate the
collectability of the amount. No provision has been made in the
Financial Statements in the event of any uncollectable amounts.
The same report also noted that:
Our examination of the US Dollar bank reconciliation
revealed that there were numerous reconciling items totaling
$2,198,181.72 for which management was unable to obtain the
supporting information from American International Bank to
substantiate their entries on the bank statement. Management is
of the view that although the balance is in its favor, it arose
as a result of errors on the path of American International
Bank.
In January 1999 three default judgments totaling $1.2
million had been entered against ODBT in Dominica. Two of the
judgments (one for $487,000 and another for $350,000) involved
unauthorized use of client funds and failure to return client
funds. The third judgment was for $400,000 and involved a
complaint by Western Union that ODBT failed to repay Western
Union for wires sent through and paid by Western Union.
(c) ODBT's Correspondent Relationships
First National Bank of Commerce (now Bank One International
Corporation). ODBT maintained a correspondent account at First
National Bank of Commerce (``FNBC'') from January 1998 through
October 1998. One of the owners of ODBT contacted an attorney
associated with FNBC about opening a correspondent account with
the bank.
In late 1997, shortly after ODBT and AIB reached an
agreement on the sale of AIB to ODBT, Arthur Reynolds, one of
the owners and Board members of ODBT, wrote a letter to a New
Orleans attorney, Joseph Kavanaugh, asking for assistance in
setting up a correspondent account. Reynolds noted that ODBT
was acquiring AIB and that ODBT had previously utilized AIB's
correspondent banking network and Visa card services. However,
he said, those services had been withdrawn from AIB, and ODBT
would not be able to use those services ``pending a complete
new due diligence and reviewing an audited statement on the
expanded ODBT operation.'' Reynolds also noted that one U.S.
bank that had been processing over 1,000 checks per week for
AIB and ODBT was expected to terminate the relationship because
it could not handle the volume. Reynolds concluded the letter
by noting that ``time is of the essence in this situation.''
Reynolds forwarded his business card, a copy of ODBT's
banking license, a one page consolidated balance sheet covering
the period up to December 11, 1998, and resumes and reference
letters for himself and Greaves. Kavanaugh then sent this
material to a correspondent banker at FNBC on January 2, 1998.
By January 29, 1998, FNBC had established a correspondent
account for ODBT. None of the documents related to the ODBT
account that were supplied by FNBC in response to a
Subcommittee subpoena indicate what, if any, additional
information was collected or due diligence was performed.
Over the course of the relationship, two additional
accounts at FNBC were opened for ODBT, one in March 1998 and
another in May 1998. Other than communications regarding the
updating of signatures on signature cards and the return of a
few checks, there are no records to indicate there was any
contact between the relationship manager at FNBC and ODBT
between the time the accounts were opened and late August 1998.
There were two communications which raise questions about
how well FNBC representatives understood the operations of
their client, ODBT. On July 27, 1998, the FNBC relationship
manager wrote a letter to Eddie St. Clair Smith, the receiver
of AIB in Antigua and Barbuda, enclosing the signature cards
and resolutions for the three ODBT accounts at FNBC and asking
Smith to sign and return them. On August 31, the FNBC Regional
Manager for Latin America also wrote to Smith to inform him
that Bank One had acquired FNBC (``your correspondent in New
Orleans''). The regional manager informed Smith that he would
try to contact Smith within the next day or so and looked
forward ``to, continuing and developing the correspondent
banking relationship that your institution has maintained with
First National Bank of Commerce.''
Smith was, and continues to be, the receiver for AIB. As
far as the Minority Staff can tell, Smith had no affiliation
with ODBT other than as receiver for AIB negotiating the
settlement of accounts and money owed with respect to ODBT's
former dealings with AIB. ODBT wasn't in receivership, and if
it had been, that should have raised questions for FNBC. Yet,
FNBC communicated with an individual identified as such, and
there is nothing in the FNBC records to indicate that FNBC had
any concerns or made any inquiry about the fact that its
correspondent appeared to be in receivership, even though it
was the wrong bank.
On September 22, 1998, nearly 9 months after FNBC
established a correspondent relationship with ODBT, the FNBC
Latin America Regional Manager wrote the following to Greaves
of ODBT:
. . . the following information is required in order to
document and evaluate the correspondent banking relationship
with Overseas Development Bank & Trust Company, Ltd.:
Annual reports for the last 3 years including the
auditor's statement of opinion.
The most recent 1998 interim financial statement.
A brief explanation of significant changes in the
balance sheet and income statement over the last 3 years.
Number of years in business.
Management discussion of the bank's activities such as
overall strategy, targeted business segments, resources to
carry out the strategy, and strategy accomplishments that need
to be consistent with the financial information provided.
Bank's market share in terms of total assets, deposit,
capitalization, number of branches (include locations if
outside Antigua) and number of deposit accounts.
Peer comparison in terms of capitalization, asset
quality, earnings, and liquidity/funding. Also list of main
competitors.
Information on the main stockholders/investors and
resumes of the banks's executive management.
At least three bank references from existing
correspondents outside Antigua.
The following day, Greaves responded with a letter that
answered some of the questions posed by the manager and
included some of the requested documents. He promised to supply
the rest of the requested materials and wrote, ``The
Certificate of Good Standing will be included but will, of
course, come from the Dominican banking regulators.'' On August
9, 2000, the manager of the International Business Unit for
Dominica informed the Subcommittee that a Certificate of Good
Standing had never been issued to ODBT.
On October 2, 1998, the FNBC relationship manager received
a letter from the President of a U.S. company requesting FNBC
to confirm that a large quantity of oil was available for sale
by a client of ODBT's and asking FNBC to issue a 2% performance
bond as guarantee of delivery.
On October 5, 1998, the bank informed ODBT that the
correspondent relationship would be terminated on October 15,
1998. The reason given for terminating the relationship was
lack of ``strategic fit'' between FNBC and ODBT. It was
subsequently agreed that FNBC would move the closure date back
to November 2, 1998, and ODBT would discontinue sending cash
letters for processing on October 28, 1998. Two of the three
ODBT accounts were closed on November 2, 1998. A third account
remained open solely for the payment of pending drafts. That
account was closed on December 16, 1998.
AmTrade International Bank. ODBT maintained a correspondent
account at AmTrade International Bank from June 1999 through
August 2000. ODBT reached out to AmTrade through an ODBT Board
member who had an acquaintance with the majority owner of
AmTrade International who also served on AmTrade's advisory
board. ODBT had already been using AmTrade's services
indirectly. Antigua Overseas Bank, with whom ODBT had a
correspondent relationship, had a correspondent account at
AmTrade. Therefore, by nesting within AOB, ODBT was able to
utilize the correspondent relationship that AOB had with
AmTrade to gain access to the U.S. financial system.
At the time, according to the Senior Vice President for
correspondent banking, AmTrade had a very small correspondent
banking business, with a focus on Latin/South America and the
Caribbean. The staff consisted of a Senior Vice President, who
reported to the President of the bank, another correspondent
banker and some assistants. The Senior Vice President handled
credit relationships and the other banker was responsible for
depository, or cash management, relationships. The bank had
about 40-45 credit relationships and 20 depository
relationships on the Caribbean/Latin American area. The Senior
Vice President and the compliance officer were responsible for
approving new accounts. According to the Senior Vice President,
in principle the bank had a policy of visiting correspondent
clients once a year at the client's bank site, but he added
that bank representatives also met with clients at meetings
outside the bank's jurisdiction, such as banking conferences.
In March 1999 Malcolm West, a shareholder of ODBT, met with
AmTrade officials and discussed establishing a correspondent
relationship. Later in March, the President of AmTrade Bank,
Herbert Espinosa, asked the Senior Vice President to meet with
West to discuss the opening of a correspondent account.
According to the Senior Vice President, ODBT was referred to
AmTrade by its majority owner, Lord Sandberg, who had an
acquaintance with a board member of ODBT, Lord Razzle. Espinosa
asked the Senior Vice President to be the account manager and
have the primary relationship with West because of the
Sandberg/Razzle connection. The Senior Vice President had
little connection with the day to day operation of the account,
which was assigned to another account manager.
The Senior Vice President understood that ODBT did a fair
amount of private banking and served businesses and individuals
in the area. It was expected that the bank would require cash
management services such as wire transfers, possibly check
clearances and a pass though checking account. No site visit
was made before opening the account. The Senior Vice President
said he understood that the President was traveling and would
meet with the client on site during his trip (sometime between
April and August). There is no site visit or call report in the
client file. However, the Vice President stated that he met
with West four or five times between March and August, when he
left the bank.
Significant details of ODBT's ownership, its background,
practices and current status, which may have affected the
decision to open the account were unknown to AmTrade. The
government investigation and prosecution of the fee-for-loan
fraud that was operated through Caribbean American Bank and
American International Bank occurred in Florida. Significant
national and local publicity had been focused on the case as
indictments and prosecutions were initiated from mid-1997 and
continued through the time that AmTrade was conducting its due
diligence review of ODBT. The Senior Vice President was not
aware of the role of AIB, where Greaves served as President, in
the fraud, but said he would have raised it as an issue had he
known.
Although AmTrade did not have a policy against accepting
banks that offered bearer share account, the Senior Vice
President said he typically did not like to deal with them
because of the problems they present. However, he was not aware
that a significant portion of ODBT's accounts were bearer share
accounts.
AmTrade received ODBT's internal financials for 1998 and
was aware that ODBT resources had been committed to the
takeover of AIB and resulted in the assumption of loans from
AIB. The Vice President was not sure if AmTrade had received
the audited financial statements for previous years and was not
aware of the issues raised in the audited financial statements
for FY97, such as the auditor's finding that ODBT management
could not find supporting information to substantiate over $2
million worth of entries into its balance sheet. He stated that
the issue would have raised concerns with respect of the
adequacy of assets and questions as to the strength of the
balance sheets. The auditor's finding that it could not verify
the accuracy and collectibility of $1.3 million due from AIB,
and that ODBT had made no provision to address uncollectible
amounts, raised issues as to the quality of the asset base and
the impact on the balance sheet and the capital base.
The official was unaware that in early 1999 three judgments
totaling $1.2 million had been entered against ODBT in
Dominica. He mentioned that it would have been an issue that
needed to be resolved. Similarly, he was unaware that in April
1999, shortly before the due diligence review on ODBT was
initiated, the President of the bank received a subpoena for
OBDT records from a governmental enforcement agency
investigating financial crimes. The Senior Vice President
stated that he was never informed of the subpoena and thought
it was strange that he was not informed. He stated that had he
known about the subpoena he would have held up opening the
account until he knew how the investigation was resolved.
The Senior Vice President left AmTrade in August 1999.
There are no documents in the records supplied to the
Subcommittee that indicate that there was any additional
contact or interaction between AmTrade representatives and ODBT
after that period (other than monthly statements) until AmTrade
sent a letter to ODBT terminating the relationship on August 8,
2000.
The Senior Vice President observed that some additional
oversight probably should have been performed and AmTrade could
have done more with respect to the background check on the bank
itself He also noted it would have been helpful if he or the
other account manager had visited the site earlier.
B. THE ISSUES
AIB was a troubled bank from the beginning. It was licensed
and operated in a jurisdiction, Antigua and Barbuda, which did
not effectively regulate its banks during the time that the
bank existed. There were a number of warning signs that certain
policies and practices of AIB posed serious money laundering
vulnerabilities: the servicing of correspondent accounts,
Internet gambling, and bearer share accounts, and AIB's related
business activities such as arranging economic citizenship and
promoting IBCs.
Relationship managers of a number of banks acknowledged
that some of these practices would have raised concerns or
caused them to ask additional questions, but they were not
aware of, or had not inquired about, them during the account
opening/due diligence process.
Moreover, even as troubles for AIB mounted, activities of
its clients came under law enforcement attention and its
reputation diminished in the local banking community, U.S.
correspondents did not seem to pick up on those developments.
As a Bank of America representative wrote of AIB in 1996,
``their reputation in the local market is abysmal.'' Yet, even
after that assessment, a number of new correspondent accounts
for AIB was established. No one appeared to question why AIB
moved from bank to bank. As one manager noted it was difficult
to receive candid appraisals from other banks who serviced the
account. This enabled AIB to continue opening new correspondent
banking accounts and maintain its access into the U.S.
financial system.
The nature of the correspondent relationship that most
banks had with AIB also resulted in a weakened degree of
scrutiny. Non-credit, cash management relationships were viewed
as opportunities to generate fees without putting the
correspondent bank at risk. Since the basic investment in the
cash management systems had already been made and the
incremental costs of handling additional accounts were
generally nominal, the cash management accounts provided a
risk-free, solid rate of return. Because of the low level of
risk, the banks that established relationships with AIB
performed a lower level of scrutiny during both the account
opening and monitoring stages than if they had established a
credit relationship where their own funds were at risk. Most of
the banks interviewed by staff noted that certain reviews or
assessments were only applied to banks that were attempting to
establish credit relationships and therefore would put the
correspondents' funds at risk. In the case of ODBT, fundamental
due diligence questions were never asked until almost 9 months
after the correspondent relationship was established.
The fact that a certain type of correspondent relationship
poses a lower level of financial risk to the correspondent bank
does not mean that it poses a lower risk of money laundering.
In fact, it could be quite the opposite. The lower level of
scrutiny applied to non-credit relationships plays into the
hands of money launderers who require only a system to move
funds back into the U.S. financial system. The less scrutiny
that system receives, the greater the money laundering
opportunities and greater the chances for success.
Although some of the banks reviewed in this section reacted
quickly after problems and issues surfaced during the operation
of the AIB account, initial due diligence was often lacking.
This enabled AIB to move from one correspondent relationship to
another, opening a new account at one bank while an existing
account at another bank was being terminated, even as its
problems accumulated and its reputation diminished. Then, as
its access to U.S. correspondents began to diminish, AIB was
able to utilize the services of U.S. banks through a
correspondent account it established at Antigua Overseas Bank,
which itself had correspondent relationships with U.S. banks.
Through its relationship with Antigua Overseas Bank, AIB
received banking services from some of the same banks that had
said they no longer wanted to provide those services to AIB.
All of these factors allowed AIB and the clients it served to
maintain their gateway into the U.S. banking system.
[GRAPHIC] [TIFF OMITTED] T1166.136
AIB MONTHLY ACTIVITY AT BANK OF AMERICA INTERNATIONAL
June 1993-March 1996
------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
------------------------------------------------------------------------
June $0 $20,000 $0 $20,000
1993
------------------------------------------------------------------------
July $20,000 $73,153 $11,367 $81,786
1993
------------------------------------------------------------------------
August $81,786 $136,586 $96,940 $121,431
1993
------------------------------------------------------------------------
Septembe $121,431 $346,127 $287,884 $179,674
r 1993
------------------------------------------------------------------------
October $179,674 $4,695,780 $1,774,703 $3,100,751
1993
------------------------------------------------------------------------
November $3,100,751 $3,098,838 $6,057,870 $141,719
1993
------------------------------------------------------------------------
December $141,719 $1,073,867 $1,024,258 $191,329
1993
------------------------------------------------------------------------
January $191,329 $1,237,299 $1,401,875 $26,753
1994
------------------------------------------------------------------------
February $26,753 $1,433,432 $1,255,310 $204,875
1994
------------------------------------------------------------------------
March $204,875 $2,422,740 $2,018,959 $608,656
1994
------------------------------------------------------------------------
April $608,656 $3,594,492 $2,975,453 $1,227,695
1994
------------------------------------------------------------------------
May 1994 $1,227,695 $3,080,657 $4,298,991 $9,361
------------------------------------------------------------------------
June $9,361 $2,779,597 $1,861,106 $927,851
1994
------------------------------------------------------------------------
July $927,851 $2,847,385 $3,694,989 $80,247
1994
------------------------------------------------------------------------
August $80,247 $6,687,074 $6,546,953 $220,369
1994
------------------------------------------------------------------------
Septembe $220,369 $2,494,651 $2,401,337 $313,683
r 1994
------------------------------------------------------------------------
October $313,683 $2,404,374 $2,128,733 $589,324
1994
------------------------------------------------------------------------
November $589,324 $2,181,186 $2,714,179 $56,331
1994
------------------------------------------------------------------------
December $56,331 $3,221,380 $3,181,498 $96,213
1994
------------------------------------------------------------------------
January $96,213 $6,624,614 $5,586,309 $134,519
1995
------------------------------------------------------------------------
February $134,519 $5,649,710 $5,803,829 $130,400
1995
------------------------------------------------------------------------
March $130,400 $5,443,313 $5,316,281 $109,708
1995
------------------------------------------------------------------------
April $109,708 $3,589,229 $3,934,975 $13,962
1995
------------------------------------------------------------------------
May 1995 $13,962 $3,932,691 $3,806,137 $140,516
------------------------------------------------------------------------
June $140,516 $2,788,443 $3,014,974 $63,986
1995
------------------------------------------------------------------------
July $63,986 $5,067,879 $5,191,144 $90,721
1995
------------------------------------------------------------------------
August $90,721 $14,574,482 $12,588,704 $126,499
1995
------------------------------------------------------------------------
Septembe $126,499 $7,002,374 $8,363,786 $115,087
r 1995
------------------------------------------------------------------------
October $115,087 $9,088,930 $9,961,814 $105,202
1995
------------------------------------------------------------------------
November $105,202 $8,932,140 $10,682,259 $85,083
1995
------------------------------------------------------------------------
December $85,083 $5,097,470 $4,690,992 $141,560
1995
------------------------------------------------------------------------
January $141,560 $4,742,504 $4,470,813 $113,251
1996
------------------------------------------------------------------------
February $113,251 $540,586 $409,628 $144,129
1996
------------------------------------------------------------------------
March $144,129 $456,529 $941,711 $8,947
1996
------------------------------------------------------------------------
TOTALS $127,359,432 $128,498,761
------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee of Investigations,
Minority Staff, December 2000.
AIB MONTHLY ACTIVITY AT TORONTO-DOMINION BANK
(New York Branch)
January 1996-January 1997
------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
------------------------------------------------------------------------
January $0 $0 $0 $0
1996
------------------------------------------------------------------------
February $0 $200,000 $105,121 $94,878
1996
------------------------------------------------------------------------
March $94,878 $1,250,000 $1,394,805 -$49,928
1996
------------------------------------------------------------------------
April -$49,928 $2,000,000 $1,948,056 $2,013
1996
------------------------------------------------------------------------
May 1996 $2,013 $2,599,454 $2,601,308 $156
------------------------------------------------------------------------
June $156 $2,000,000 $1,986,688 $13,467
1996
------------------------------------------------------------------------
July $13,467 $3,552,100 $3,542,127 $23,437
1996
------------------------------------------------------------------------
August $23,437 $2,300,000 $2,405,157 -$81,722
1996
------------------------------------------------------------------------
Septembe -$81,722 $1,850,000 $1,721,878 $46,396
r 1996
------------------------------------------------------------------------
October $46,396 $300,000 $328,420 $17,975
1996
------------------------------------------------------------------------
November $17,975 $50,000 $22,231 $45,743
1996
------------------------------------------------------------------------
December $45,743 $0 $6,069 $39,674
1996
------------------------------------------------------------------------
January $39,674 $0 $39,674 $0
1997
------------------------------------------------------------------------
TOTAL $16,101,554 $16,101,534
------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee on Investigations,
Minority Staff, December 2000.
AIB-CHASE ACCOUNT
TORONTO-DOMINION BANK TRANSACTIONS
April 1996-June 1997
------------------------------------------------------------------------
DATE DEBIT CREDIT ORDER PARTY
------------------------------------------------------------------------
June 26, $300,000 AIB
1996
------------------------------------------------------------------------
July 11, $300,000 AIB
1996
------------------------------------------------------------------------
August 2, $400,000 AIB
1996
------------------------------------------------------------------------
August 15, $500 ???
1996
------------------------------------------------------------------------
Sept. 10, $500,000 AIB
1996
------------------------------------------------------------------------
Sept. 13, $400,000 AIB
1996
------------------------------------------------------------------------
Sept. 18, $700,000 AIB
1996
------------------------------------------------------------------------
Sept. 23, $700,000 AIB
1996
------------------------------------------------------------------------
Sept. 25, $650,000 AIB
1996
------------------------------------------------------------------------
Sept. 26, $500,000 Stanford Intl Bank
1996 Ltd.
------------------------------------------------------------------------
Oct. 1, 1996 $450,000 AIB
------------------------------------------------------------------------
Oct. 3, 1996 $400,000 AIB
------------------------------------------------------------------------
Oct. 7, 1996 $400,000 AIB
------------------------------------------------------------------------
Oct. 9, 1996 $100,000 AIB
------------------------------------------------------------------------
Oct. 10, $400,000 B/O Toronto-Dominion
1996 Bank
------------------------------------------------------------------------
Oct. 16, $500,000 B/O AIB
1996
------------------------------------------------------------------------
Oct. 17, $25,000 ????
1996
------------------------------------------------------------------------
Oct. 18, $800,000 B/O AIB
1996
------------------------------------------------------------------------
Oct. 21, $500,000 AIB
1996
------------------------------------------------------------------------
Oct. 22, $500,000 AIB
1996
------------------------------------------------------------------------
Oct. 24, $600,000 B/O AIB
1996
------------------------------------------------------------------------
Oct. 25, $500,000 AIB
1996
------------------------------------------------------------------------
Oct. 29, $700,000 AIB
1996
------------------------------------------------------------------------
Oct. 31, $500,000 AIB
1996
------------------------------------------------------------------------
Nov. 4, 1996 $800,000 B/O AIB
------------------------------------------------------------------------
Nov. 5, 1996 $500,000 AIB
------------------------------------------------------------------------
Nov. 12, $500,000 AIB
1996
------------------------------------------------------------------------
Nov. 12, $500,000 B/O AIB
1996
------------------------------------------------------------------------
Nov. 19, $500,000 AIB
1996
------------------------------------------------------------------------
Nov. 26, $1,000,000 AIB
1996
------------------------------------------------------------------------
Dec. 2, 1996 $700,000 AIB
------------------------------------------------------------------------
Dec. 5, 1996 $900,000 AIB
------------------------------------------------------------------------
Dec. 6, 1996 $700,000 AIB
------------------------------------------------------------------------
Dec. 9, 1996 $1,000,000 AIB
------------------------------------------------------------------------
Dec. 12, $300,000 AIB
1996
------------------------------------------------------------------------
Jan. 15, $1,000,000 AIB
1997
------------------------------------------------------------------------
Jan. 17, $100,000 AIB
1997
------------------------------------------------------------------------
Jan. 21, $100,000 B/O AIB
1997
------------------------------------------------------------------------
Jan. 22, $400,000 AIB
1997
------------------------------------------------------------------------
Jan. 23, $95,000 B/O AIB
1997
------------------------------------------------------------------------
Jan. 24, $60,000 AIB
1997
------------------------------------------------------------------------
Jan. 28, $700,000 AIB
1997
------------------------------------------------------------------------
Jan. 30, $250,000 AIB
1997
------------------------------------------------------------------------
May 2, 1997 $15,000 ????
------------------------------------------------------------------------
TOTAL $40,500 $20,905,000
------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee on Investigations,
Minority Staff, December 2000.
AIB MONTHLY ACTIVITY AT CHASE
May 1996-June 1997
----------------------------------------------------------------------------------------------------------------
WITHDRAWALS
-------------------------------------
MONTH OPENING DEPOSITS CHECKS CLOSING
BALANCE OTHER ----------------------- BALANCE
AMOUNT No.
----------------------------------------------------------------------------------------------------------------
May 1996 $0 $2,025,000 $1,500,000 $0 0 $525,000
----------------------------------------------------------------------------------------------------------------
June 1996 $525,000 $327,355 $754,678 $0 0 $99,723
----------------------------------------------------------------------------------------------------------------
July 1996 $99,723 $814,535 $570,730 $0 0 $343,704
----------------------------------------------------------------------------------------------------------------
August 1996 $343,704 $9,069,808 $8,746,338 $0 0 $667,600
----------------------------------------------------------------------------------------------------------------
September 1996 $667,600 $5,241,279 $5,234,400 $454,276 110 $222,162
----------------------------------------------------------------------------------------------------------------
October 1996 $222,162 $11,320,529 $10,327,642 $1,163,742 331 $51,666
----------------------------------------------------------------------------------------------------------------
November 1996 $51,666 $12,059,520 $11,649,928 $88,875 15 $372,355
----------------------------------------------------------------------------------------------------------------
December 1996 $372,355 $11,667,993 $10,676,801 $873,885 112 $490,501
----------------------------------------------------------------------------------------------------------------
January 1997 $490,501 $13,209,330 $10,907,526 $1,159,973 327 $1,632,906
----------------------------------------------------------------------------------------------------------------
February 1997 $1,632,906 $9,821,060 $9,613,906 $1,313,950 273 $526,632
----------------------------------------------------------------------------------------------------------------
March 1997 $526,632 $14,434,982 $8,311,270 $2,983,634 861 $3,667,529
----------------------------------------------------------------------------------------------------------------
April 1997 $3,667,529 $18,626,782 $14,703,004 $3,082,215 686 $4,511,912
----------------------------------------------------------------------------------------------------------------
May 1997 $4,511,912 $7,062,740 $11,249,950 $205,579 50 $151,315
----------------------------------------------------------------------------------------------------------------
June 1997 $151,315 $482,088 $692,823 $9,902 10 $0
----------------------------------------------------------------------------------------------------------------
TOTAL $116,162,830 $104,938,996 $11,336,031
----------------------------
$116,275,027
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000.
AIB MONTHLY ACTIVITY AT POPULAR BANK
April 1997-June 1997
----------------------------------------------------------------------------------------------------------------
WITHDRAWALS
------------------------------------
MONTH OPENING DEPOSITS CHECKS CLOSING
BALANCE OTHER ----------------------- BALANCE
AMOUNT NUMBER
----------------------------------------------------------------------------------------------------------------
April $0 $2,446,265 $0 $79,760 8 $2,368,099
----------------------------------------------------------------------------------------------------------------
May $2,368,099 $7,514,083 $1,129,247 $1,634,090 488 $7,135,558
----------------------------------------------------------------------------------------------------------------
June $7,135,558 $7,854,094 $11,603,700 $3,488,219 962 -$88,291
----------------------------------------------------------------------------------------------------------------
July $0 $122,906 $289 $121,620 17 $0
----------------------------------------------------------------------------------------------------------------
TOTALS $17,937,348 $12,733,236 $5,323,689
--------------------------
$18,056,925
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000.
AIB MONTHLY ACTIVITY AT BARNETT BANK
May 1997-November 1997
----------------------------------------------------------------------------------------------------------------
WITHDRAWALS
------------------------------------
MONTH OPENING DEPOSITS CHECKS CLOSING
BALANCE OTHER ----------------------- BALANCE
AMOUNT NUMBER
----------------------------------------------------------------------------------------------------------------
May $0 $220,000 $0 $0 0 $.66
----------------------------------------------------------------------------------------------------------------
June $.66 $2,419,588 $1,877,551 $26,457 12 $7,243
----------------------------------------------------------------------------------------------------------------
July $7,243 $18,783,934 $14,027,641 $3,200,766 858 $37,390
----------------------------------------------------------------------------------------------------------------
August $37,390 $21,310,634 $18,525,032 $5,625,795 1001 $70,959
----------------------------------------------------------------------------------------------------------------
September $70,959 $16,406,311 $13,899,129 $2,974,534 863 $.79
----------------------------------------------------------------------------------------------------------------
October $.79 $3,625,040 $3,320,245 $396,434 89 $50,473
----------------------------------------------------------------------------------------------------------------
November $50,473 $0 $50,473 $0 0 $0
----------------------------------------------------------------------------------------------------------------
TOTALS $62,765,507 $51,700,071 $12,223,986
--------------------------
$63,924,057
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000.
Case History No. 4
BRITISH TRADE AND COMMERCE BANK
British Trade and Commerce Bank (BTCB) is a small offshore
bank licensed in Dominica, a Caribbean island nation that has
been identified as non-cooperative with international anti-
money laundering efforts.\103\ This case history examines the
failure of U.S. banks to exercise adequate anti-money
laundering oversight in their correspondent relationships with
this offshore bank, which is managed by persons with dubious
credentials, abusive of its U.S. correspondent relationships,
and surrounded by mounting evidence of deceptive practices and
financial fraud. Although each of the U.S. banks examined in
this case history ended its relationship with BTCB in less than
2 years, the end result was that BTCB succeeded in using U.S.
bank accounts to engage in numerous questionable transactions
and move millions of dollars in suspect funds.
---------------------------------------------------------------------------
\103\ Dominica is one of 15 countries named in the Financial Action
Task Force's ``Review to Identify Non-Cooperative Countries or
Territories'' (6/22/00), at paragraph (64). See also Chapter IV(B) of
this report.
---------------------------------------------------------------------------
BTCB was among the least cooperative of the foreign banks
contacted during the Minority Staff investigation. The bank
declined to be interviewed, took 4 months to answer a letter
requesting basic information, and refused to disclose or
discuss important aspects of its operations and activities. The
following information was obtained from BTCB's written
submission to the Subcommittee dated September 18, 2000; BTCB's
website and other websites; documents subpoenaed from U.S.
banks; court pleadings; interviews in Dominica, Antigua, Canada
and the United States; and documents provided by persons who
transacted business with the bank. The investigation also
benefited from assistance provided by the Governments of
Dominica and the Bahamas.
A. THE FACTS
(1) BTCB Ownership and Management
Although BTCB refused to identify its owners and Dominican
bank secrecy laws prohibit government disclosure of bank
ownership, evidence obtained by the Minority Staff
investigation indicates that this offshore bank was formed and
directed for much of its existence by a U.S. citizen, John G.
Long IV of Oklahoma. The bank's other owners and senior
management have ties to Dominica, Venezuela, the United States
and Canada. BTCB is very active within the United States,
through its affiliation with a U.S. securities firm,
solicitation of U.S. clients, and preference for transacting
business in U.S. dollars.
BTCB's Formation. BTCB was established as a Dominican
corporation on February 26, 1997, and received its offshore
banking license 1 month later, on March 27, 1997. BTCB's
banking license was issued about 6 months after enactment of
Dominica's 1996 Offshore Banking Act, the country's first
offshore banking law. BTCB is one of the first offshore banks
approved by the government and, to date, is one of only a
handful of offshore banks actually operating in Dominica.\104\
---------------------------------------------------------------------------
\104\ A Dominican Ministry of Finance official told the
investigation that, as of September 6, 2000, the government had issued
licenses to seven offshore banks, of which three were actually
operating. The official said the three operating banks were BTCB,
Overseas Development Bank and Trust, and Banc Caribe. The official
listed four other banks which held licenses but were not yet operating
because they were still raising required capital: Euro Bank, First
International Bank, Global Fidelity Bank and Griffon Bank. The official
said that one bank, American International Bank and Trust, had its
offshore license revoked in 1999. The official noted that Dominica also
had two onshore banks: National Commercial Bank of Dominica and
Dominica Agricultural Industrial and Development Bank. One bank that
was not mentioned by the official but also operates in Dominica is
Banque Francaise Commerciale, which is a branch of a wholly owned
subsidiary of a French bank, Credit Agricole-Indosuez.
---------------------------------------------------------------------------
BTCB's 1998 financial statement indicates that BTCB began
actual banking operations in October 1997, about 7 months after
receiving its license. If accurate, BTCB has been in operation
for a little more than 3 years. BTCB has one office in Roseau,
the capital city of Dominica. It refused to disclose the total
number of its employees, but appears to employ less than ten
people. The bank refused to disclose the total number of its
clients and accounts. The bank's 1998 financial statement
claimed total assets of approximately $370 million, but the
evidence suggests the bank is, in fact, suffering severe
liquidity problems.
BTCB Ownership. BTCB refused a request by the Minority
Staff investigation to identify its owners. However, when
applying for correspondent relationships at U.S. banks, BTCB
provided the following specific ownership information.
In 1997, when applying for its first U.S. correspondent
relationship at the Miami office of Banco Industrial de
Venezuela, BTCB stated in a September 17, 1997 letter that it
had two owners, Rodolfo Requena Perez and Clarence A.
Butler.\105\ Requena, a citizen of Venezuela, has been
associated with BTCB from its inception and serves as BTCB's
chairman of the board and president. BTCB materials state that
he has extensive banking experience, including past positions
with major financial institutions in Venezuela. Requena, spends
considerable time in Florida, maintaining a Florida office,
residence and drivers license. Butler is a citizen of Dominica
and, according to BTCB materials, his credentials include
heading the Dominican Chamber of Commerce and Tourism, and
helping to form and operate The Ross Medical University in
Dominica. He does not appear to be involved with the daily
management of the bank.
---------------------------------------------------------------------------
\105\ Documentation indicates that Requena and Butler were the
original ``subscribers'' to the ``Memorandum of Association'' that
established ``British Trade and Commerce Ltd.,'' before it received its
banking license.
---------------------------------------------------------------------------
In 1998, when applying for correspondent relationships at
two other U.S. banks, Security Bank N.A. and First Union
National Bank BTCB provided new ownership information
indicating that it had seven shareholders, with the largest
shareholder controlling 50% of its stock. BTCB provided both
banks with the same one-page ``confidential'' document listing
the following ``Shareholders of British Trade & Commerce
Bank'':
British Trade & Commerce Bank Bancorp Trust represented
by Rodolfo Requena, Trustee, beneficial interests are held by
John Long--15,000 [shares]
Rodolfo Requena--3,000 [shares]
Baillet[t] International Ltd.[,] beneficial interests
held by Dr. Dana Bailey and Scott Brett \106\--3,000 [shares]
---------------------------------------------------------------------------
\106\ Baillett International Ltd. was apparently a Bahamian
corporation. Bahamian Government officials informed the investigation
that its records show this company was incorporated in the Bahamas on
1/17/95, but ``struck'' on 10/31/97, and is no longer a recognized
corporation in the jurisdiction. BTCB materials provided by the
Dominican Government to the investigation describe Dana Bailey as a
medical doctor and ``the Canadian representative for Bail[l]ett
International Ltd., a consulting firm specializ[ing] in Trust and Fund
Management activities.'' Evidence obtained by the investigation
indicates that Scott Brett is a U.S. citizen who has resided in Texas,
transacted business with John Long and BTCB, and served on BTCB's
advisory committee.
Bayfront Investment Trust[,] beneficial owner Pablo
Urbano \107\--750 [shares]
---------------------------------------------------------------------------
\107\ The BTCB shareholder list and other information indicate that
the beneficial owner of Bayfront Investment Trust, Pablo Urbano Torres,
is a Venezuelan citizen. The trust is described in BTCB documentation
as a ``Dominica corporation,'' and U.S. bank records reference what
appears to be a related company, ``Bayfront Ltd.''
Diran Sarkissian \108\--750 [shares]
---------------------------------------------------------------------------
\108\ BTCB documents indicate that Diran Sarkissian Ramos is a
citizen of Venezuela.
Herry Royer \109\--750 [shares]
---------------------------------------------------------------------------
\109\ Herry Calvin Royer, a citizen of Dominica, serves as BTCB's
corporate secretary. Documentation and interviews indicate he is
involved with BTCB's activities on a daily basis. According to BTCB's
Subcommittee submission, Royer is also a director of International
Corporate Services, Ltd., a wholly owned BTCB subsidiary.
---------------------------------------------------------------------------
Clarence Butler--750 [shares]
Treasury shares held for officer and employee profit
sharing \110\--6,000 [shares]
---------------------------------------------------------------------------
\110\ BTCB's 1998 balance sheet indicates that, sometime during the
bank's first 15 months of operation, it paid $1.1 million for
``Treasury stock.'' It is unclear whether the Treasury stock referenced
in the balance sheet is the 6,000 shares referenced in the BTCB
shareholder list. It is also unclear who, if anyone, was the original
owner of this stock and why BTCB expended over $1 million to repurchase
its stock at such an early stage of its existence.
---------------------------------------------------------------------------
Total shares authorized and outstanding--30,000[.]
This BTCB shareholder list indicates that BTCB's
controlling shareholder is a trust beneficially owned by John
Long. Other BTCB materials describe Long as chairman of the
bank's ``advisory committee,'' a two-person committee that
apparently consisted of himself and Brett.'' \111\ John G. Long
IV is a U.S. citizen residing in Antlers, Oklahoma. In a
telephone conversation on July 11, 2000, initiated by a
Minority Staff investigator, Long stated that he had helped
form BTCB and assisted it in purchasing a securities firm in
Florida. However, Long vigorously denied being a shareholder,
insisting, ``I have never owned one share of stock in the
bank.'' \112\
---------------------------------------------------------------------------
\111\ BTCB materials include various descriptions of Long's
background. For example, BTCB materials provided by the Dominican
Government state the following:
``John G[.] Long, Chairman of the [BTCB] Advisory Committee. JD,
MBA, CPA (USA), with extensive experience in banking originating with
his family which has been in banking for over 100 years. His family was
the founders of the Farmers Exchange Bank in Oklahoma and co-owners of
the First State Bank McKinney in Dallas[,] Texas. . . . He has also
served as Senior Financial Analyst for projects in Central America for
US AID (United States Agency for International Development); Special
Attache of the United States Justice Department based in Geneva, with
contacts with all major Western European Banks. Serves as consultant to
financial projects and to managing trust operations in the Bahamas.''
Minority Staff investigators were unable to confirm much of this
biographical information. Sources in Antlers, Oklahoma confirmed that
the Long family had been in banking for decades and once owned the two
listed banks, but denied that Long had acquired extensive banking
experience through the family businesses. Antlers sources also denied
that Long held a law degree or accounting certification. The U.S.
Justice Department and U.S. Agency for International Development each
sent letters denying any record of Long's employment with them over the
past 25 and 30 years respectively. Since Long and BTCB declined to be
interviewed, neither was available to provide additional information or
answer questions about Long's credentials, past experience or current
employment.
\112\ Long's characterization of his ownership interest, while
misleading, could be seen as consistent with BTCB's shareholder list
if, in fact, Long has held his BTCB shares through a trust or
corporation. There is also some evidence that the trust's official
beneficiaries may be Long's two minor children.
---------------------------------------------------------------------------
Besides his own admission of involvement with the bank, the
investigation found considerable evidence of Long's continuing
association with BTCB. The evidence includes monthly account
statements at U.S. banks showing BTCB transactions involving
Long, his companies Republic Products Corporation and Templier
Caisse S.A., and companies such as Nelson Brothers Construction
involved with building a new house in Oklahoma for the Long
family. One U.S. correspondent banker described meeting Long,
and sources in Antlers spoke of Long's association with a
Dominican bank. The investigation also has reason to believe
that Long and his son attended a BTCB board meeting in the
spring of 2000 in Dominica. Dominican Government officials,
when asked whether BTCB was correct in telling U.S. banks that
Long was the bank's majority owner, indicated that, while they
could not disclose BTCB's ownership, they were ``not
unfamiliar'' with Long's name.
The evidence suggests that Long formed and has been
actively involved in the bank's affairs, but chose to conceal
from the investigation his majority ownership of the bank.
BTCB Management. In its September submission to the
Subcommittee, BTCB asserted that a list of its ``Officers,
Consultants, and Directors . . . shows the breadth, depth and
integrity of the [bank's] senior management. . . . Unlike some
`offshore' banks, this is no haven for misfits; rather BTCB is
composed of officers whose backgrounds compare to those at high
levels in the United States.''
BTCB lists four directors in its September 2000 submission:
Royer, Butler, Urbano, and Oscar Rodriguez Gondelles.\113\
However, a list of BTCB directors provided by the Dominican
Government in August 2000, identifies seven directors. The
government-supplied BTCB director list names three persons
mentioned in BTCB's submission--Royer, Butler and Urbano--as
well as Requena, Sarkissian, Bailey, and George E. Betts. The
discrepancies between the two director lists has not been
explained.
---------------------------------------------------------------------------
\113\ BTCB's submission describes Rodriguez as having 20 years of
experience ``in Venezuelan banking and credit card institutions.''
---------------------------------------------------------------------------
BTCB's chief executive officer is Requena. Documentation
and interviews indicate that Requena is actively involved in
the day-to-day business of BTCB, including its correspondent
relationships. Requena is also president of BTC Financial
Services, a U.S. holding company whose primary subsidiary is
First Equity Corporation of Florida (``FECF''), an SEC-
regulated broker-dealer. He is also the president of FECF. When
Minority Staff attempted to reach Requena by telephone in
Dominica, BTCB personnel suggested calling him at BTC Financial
Services in Miami, where he maintains another office. Requena,
did not, however, return calls placed to him and never spoke
with any Minority Staff.
George Elwood Betts, who like Requena has been associated
with BTCB from its inception, is listed in BTCB's submission to
the Subcommittee as a key management official. His job title is
Executive Vice President and Chief Financial Officer of BTCB.
Documentation and interviews indicate that he is actively
involved in the day-to-day operations of the bank. Betts has
also served as the treasurer of BTC Financial Services.
The background provided by BTCB for Betts highlights his
accounting degree and experience with Deloitte & Touche in
Asia, which Minority Staff investigators were able to confirm.
Further investigation indicates that Betts is a U.S. citizen
who formerly resided in Idaho and whose wife apparently still
resides there. In November 1997, after beginning work at BTCB,
Betts pleaded guilty in U.S. criminal proceedings \114\ to one
count of illegally transporting hazardous waste materials from
a wood laminating company, Lam Pine, Inc., which he owned and
operated in Oregon, to the site of another company he owned in
Idaho, North Point Milling Company. In 1998, in connection with
his guilty plea, Betts served 2 weeks in Federal prison and
agreed to pay a $163,000 fine. He was also placed on criminal
probation for 5 years ending in 2003. Dominican Government
officials told the investigation that they were unaware of this
criminal conviction and that BTCB should have but did not
report it to the Dominican Government.
---------------------------------------------------------------------------
\114\ See United States v. Betts, (Criminal Case No. 97-011-S-BLW,
U.S. District Court for the District of Idaho), plea agreement dated
11/13/97, and judgment dated 5/29/98.
---------------------------------------------------------------------------
A third key BTCB management official listed in BTCB's
submission is Charles L. (``Chuck'') Brazie, Vice President of
Managed Accounts. Documentation and interviews indicate Brazie
is actively involved with BTCB clients and investment
activities. Brazie is a U.S. citizen who has resided in various
U.S. States, including Florida, Missouri, Nebraska and
Virginia. Minority Staff investigators located documentation
supporting some of his past employment and education
credentials. Information was also located regarding a key
credential listed in the BTCB submission to the Subcommittee,
Brazie's service as a ``Special Consultant to the Executive
Office of the President.'' Brazie discussed this experience in
a sworn deposition he provided to the Securities and Exchange
Commission (SEC) on November 7, 1994, in connection with SEC v.
Fulcrum Holding Co. (Civil Case No. 1:94:CV02352, DDC) and
United States v. Andrews (Criminal Case No. 96-139 (RCL), DDC).
These cases involved fraud investigations which were examining,
in part, Brazie's work for Fulcrum Holding Company. In his
deposition, Brazie indicated that his association with the
Executive Office of the President occurred in 1973, more than
25 years ago, when as part of his work for a ``think tank,'' he
was ``assigned to a project in the White House and spent a year
and a half-plus on a temporary assignment at a remote
location.'' \115\ Brazie also disclosed during his deposition
that, in 1992, he declared bankruptcy in St. Louis,
Missouri.\116\ His deposition presents additional disturbing
information about his conduct at Fulcrum Holding Co. and
involvement with individuals such as Arthur Andrews, later
convicted of securities fraud.
---------------------------------------------------------------------------
\115\ Deposition of Brazie at 13.
\116\ Deposition of Brazie at 11.
---------------------------------------------------------------------------
BTCB's submission to the Subcommittee was noticeably silent
with respect to Long. It also failed to mention Ralph Glen
Hines, a U.S. citizen who resides in Florida and North
Carolina, has handled some of BTCB's administrative and
computer operations, and served as the contact person for
BTCB's account at First Union National Bank. Hines has a
criminal record which includes serving more than a year in
prison for obtaining goods and property under false pretenses,
more than 6 months in prison for unauthorized use of state
equipment, and 60 days of probation for misappropriation of an
insurance refund check. The BTCB submission also stated that
BTCB has ``no managing agents'' in other countries, despite
U.S. bank records showing 3 years of regular transactions with
Stuart K. Moss, a London resident identified in some interviews
as working for BTCB. The management list provided by BTCB to
the Subcommittee is marred by these omissions, the
discrepancies over BTCB's directors, the questionable
credentials of some BTCB officials which include past criminal
convictions, a bankruptcy and an SEC fraud investigation, and
BTCB's refusal to answer questions about its staff.
(2) BTCB Financial Information
Dominican law requires its offshore banks to submit annual
audited financial statements which are then published in the
country's official gazette. These audited financial statements
are intended to provide the public with reliable information
regarding the solvency and business activities of Dominica's
offshore banks.
BTCB's 1999 audited financial statement was required to be
submitted in April 2000, but as of October 2000, had not been
filed. BTCB has filed only one, publicly available audited
financial statement. This financial statement covers a 15-month
period, from October 1, 1997 until December 31, 1998, which
BTCB presents as covering the first 15 months of its
operations. Although the 1998 audited financial statement is a
public document, BTCB declined to provide a copy. The Dominican
Government, however, did provide it.
BTCB's 1998 financial statement was audited by Moreau,
Winston & Co., an accounting firm located in Dominica.\117\ On
August 22, 2000, after speaking by telephone with Austin
Winston who requested all inquiries to be placed in writing,
Minority Staff investigators sent a letter requesting the
firm's assistance in understanding BTCB's 1998 financial
statement. The firm's legal counsel responded the next day with
a letter stating that the auditors would be unable to provide
any information. The legal counsel wrote:
---------------------------------------------------------------------------
\117\ Moreau, Winston & Co. stated in a covering letter:
``These financial statements are the responsibility of
management of British Trade and Commerce Bank Limited; our
responsibility is to express an opinion on the financial statements
based on our audit. We conducted our audit . . . in accordance with
generally accepted auditing standards . . . to obtain reasonable
assurance as to whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. . .
. In our opinion, these financial statements present fairly, in all
material respects, the financial position of the Bank as at December
31, 1998.''
[BTCB] is a private bank chartered under the Offshore
Banking Act of the Commonwealth of Dominica. Our clients are
constrained by the provisions of the governing statute. All
information might better be provided by [BTCB] itself or as
---------------------------------------------------------------------------
otherwise allowed under the said statute.
On September 22, 2000, the Minority Staff asked BTCB to
authorize its auditors to answer questions about the 1998
financial statement, but BTCB never responded. Accordingly,
neither the bank nor its auditors have provided any information
about the 1998 audited statement.
In the absence of obtaining first hand information from the
bank or its auditors, inquiries were directed to Dominican
Government officials and U.S. bankers for their analysis of
BTCB's 1998 financial statement. Without exception, those
reviewing BTCB's 1998 financial statement said it contained
questionable entries. The questionable entries included the
following:
--$300 Million Assets. The two largest entries on BTCBs
1998 balance sheet cite over $300 million in ``[s]ecurities
held for investment and financing'' and a $300 million
``reserve for project financing.'' Dominican Government
officials informed the investigation that, when they asked BTCB
about these entries during the summer of 2000, BTCB refused to
provide any concrete information or support for them, claiming
they involved ``secret'' transactions which the U.S. and U.K.
Governments prohibited them from disclosing. The Dominican
officials indicated that they considered this explanation
unsubstantiated and insufficient. The Minority Staff
investigation obtained an earlier version of the 1998 financial
statement, which BTCB had given to First Union National Bank
when applying for a correspondent account. That version
reported BTCB's finances as of June 30, 1998, and cited over
$400 million in ``securities held for investment and
financing.'' This figure is $100 million, or 25% larger than
the comparable entry in the financial statement dated just 6
months later. Note 4 in the June 1998 statement provides a
breakdown of the $400 million figure into four constituent
elements: $130 million in ``Government of Grenada Guarantees'';
over $76 million in ``Bolivian Municipal Bonds''; $140 million
in ``Russian Government Guarantees'' and $55 million attributed
to ``Other.'' When asked about these items, the First Union
correspondent banker who analyzed BTCB's financial statement
said they were ``not credible,'' and were part of the reason
First Union had rejected a correspondent relationship with
BTCB. A Dominican Government official stated that Grenadian
Government officials, when asked about the alleged $130 million
in ``Government of Grenada Guarantees,'' had refused to confirm
their existence.
--$51 Million in Receivables. The next largest entry in
BTCB's balance sheet is $51 million in ``[l]oans, debentures
and other receivables,'' which Note 5 in the audited statement
attributes primarily to $49.4 million in ``fees receivable.''
Both Dominican Government officials and U.S. bankers expressed
skepticism about a new bank's generating $50 million in fees in
the first 15 months of operation. When asked, neither could
offer a banking scenario which would explain the nature of the
fees or who would be expected to pay them.
--$16 Million in Investment Fees. Another BTCB balance
sheet entry reports that, as of the end of 1998, BTCB had over
$27 million in ``customers' deposits.'' Note 10 states that, as
of December 31, 1998, BTCB ``held $27,100,000 of such funds and
had earned an investment transaction fee of $16,330,000 from
the management of those funds and execution of such
transactions during the year.'' Both Dominican Government
officials and U.S. bankers expressed doubt that any bank could
have earned $16 million in fees on $27 million in deposits,
especially in a 15-month period.
--$1.1 Million For Treasury Stock. Under stockholders'
equity, the BTCB balance sheet records a $1.1 million reduction
due to ``Treasury stock.'' Both Dominican Government officials
and U.S. bankers questioned why a new bank, in operation for
only 15 months, would have re-purchased its stock and paid such
a substantial price for it. It is also unclear from the
financial statement whether the stock repurchase was paid in
cash.
The Minority Staff investigation was unable to obtain any
BTCB financial statements for 1999 or 2000. Evidence obtained
through documents and interviews indicates, however, that BTCB
experienced severe liquidity problems throughout the latter
half of 2000, including nonpayment of bills and a failure to
honor a $3 million letter of credit posted with a Canadian
bank.\118\ On November 30, 2000, a publication that tracks
offshore business developments carried an article entitled,
``British Trade & Commerce Bank: Financial troubles deepen.''
\119\ It published the text of a November 9, 2000 letter
allegedly sent by BTCB to its clients in which the bank
essentially admitted that it was temporarily insolvent. The
letter, by BTCB president Rodolfo Requena, begins:
---------------------------------------------------------------------------
\118\ See Gold Chance International Ltd. v. Daigle & Hancock
(Ontario Superior Court of Justice, Case No. 00-CV-188866). BTCB's role
in this litigation is discussed in the appendix.
\119\ OffshoreAlert newsletter (11/30/00) at 9. See also ``British
Trade & Commerce Bank answers questions about its liquidity,''
OffshoreAlert newsletter (7/31/00) at 8. Both are available at
www.offshorebusiness.com.
You may be aware our bank has been suffering from a
temporary liquidity situation. This situation has continued to
the point that the bank is unable to meet its obligations with
---------------------------------------------------------------------------
its depositors and creditors.
The letter provides several explanations for the bank's
liquidity problems, including citing ``a large withdrawal of
deposits from the bank'' after the retirement of the bank's
``major shareholder'' in May 2000. It also described steps the
bank was taking ``to re-capitalize the bank, rebuild its
liquidity, and meet its obligations with its depositors and
creditors,'' including ``holding conversations with three
different investor groups . . . to bring fresh capital to the
bank.''
The letter asked the bank's clients to consider converting
their existing accounts to ``a one-year Certificate of Deposit
earning interest at a 15% per annum'' or to purchase
``convertible preferred stock of the bank'' with one share for
``every $500 of bank deposit you have.'' The letter stated,
``Customers requesting withdrawals from their accounts must
wait for new investors or wait until the bank works its way out
of the liquidity problem,'' an arrangement characterized by the
newsletter as equivalent to an admission by the bank ``to
running a Ponzi scheme.''
(3) BTCB Correspondents
When asked about its correspondent banks, BTCB indicated
that it kept 100% of its funds in correspondent accounts. BTCB
stated the following in its September 2000 submission to the
Subcommittee:
It is very important to note that all of BTCB's deposits
are held in the bank's regulated accounts, inside the United
States. . . . Moreover, with rare exceptions, all our
transactions are denominated in United States dollars and . . .
all transfers to BTCB's accounts flow through the United States
Federal Wire System or the SWIFT (Society for Worldwide
Interbank Financial Telecommunications). . . . BTCB is very
protective of its U.S. correspondent banking relations, since
this is our only way to transfer and move funds.
BTCB stated that it had no ``formal correspondent
relationships with any other banks,'' but had maintained
``customary commercial banking accounts with a few reputable
institutions as needed.'' BTCB specified accounts at three U.S.
banks: (1) First Union National Bank; (2) Security Bank N.A. of
Miami; and (3) Banco International de Costa Rica (Miami).
The list provided by BTCB is incomplete, omitting BTCB
accounts at the Miami office of Banco Industrial de Venezuela,
the Miami office of Pacific National Bank,\120\ U.S. Bank, and
the New York office of Bank of Nova Scotia. In addition, the
Minority Staff investigation uncovered three U.S. correspondent
accounts belonging to other foreign banks through which BTCB
transacted business on a regular basis: a Citibank
correspondent account for Suisse Security Bank and Trust; a
First Union correspondent account for Banque Francaise
Commercial; and a Bank of America correspondent account for St.
Kitts-Nevis-Anguilla National Bank. The evidence indicates that
BTCB also had correspondent accounts at several banks located
outside the United States.\121\
---------------------------------------------------------------------------
\120\ Pacific National Bank is a subsidiary of Banco del Pacifico
of Ecuador.
\121\ These non-U.S. banks include National Commercial Bank of
Dominica and Banco Cypress.
---------------------------------------------------------------------------
(4) BTCB Anti-Money Laundering Controls
BTCB provided one page of information in response to a
request to describe its anti-money laundering efforts. Without
providing a copy of any written anti-money laundering policies
or procedures, BTCB's September 2000 submission to the
Subcommittee provided the following description of its anti-
money laundering efforts:
It is very important to note that all of BTCB's deposits
are held in the bank's regulated accounts inside the United
States. . . . [I]ndeed, all transfers to BTCB's accounts flow
through the United States Federal Wire System or the SWIFT
(Society for Worldwide Interbank Financial Telecommunications).
As you are aware, any transaction approved and flowing through
the U.S. Fed Wire System via SWIFT is already deemed or
approved to be ``good, clean, legitimately earned funds of non-
criminal origin.'' Thus BTCB's Know Your Customer Policies are
the same as all U.S. banks' policies, since we must satisfy the
regulated U.S. banks with respect to any deposit BTCB receives
in our corporate banking account at their institution.
BTCB also stated:
Our bank's Know Your Customer Policies require, among
other things, that a senior bank officer conduct an interview
with each new customer. This interview covers such things as
the nature of the customer's business, how their profits are
earned and where those profits are earned. In many cases, we
require audited financial statements . . . or in the case of
individuals, we require bank reference letters. . . . We
require copies of their passports, and if warranted, BTCB will
have a security check conducted in their home country.
BTCB stated further that it ``employs a full-time staff
person who monitors for suspicious activity in customer
accounts, and reports weekly to the Chief Financial Officer.''
It also stated that ``BTCB has a special compliance consultant
who had a long and distinguished career with the Florida
Department of Banking Regulation and advises on our regulatory
policies and compliance issues.''
BTCB's description of its anti-money laundering efforts
suggests a fundamental misunderstanding of U.S. banking law.
BTCB seems to suggest that as long as it uses U.S.
correspondent accounts and U.S. wire transfer systems, its
funds automatically qualify as ``good, clean, legitimately
earned funds of non-criminal origin.'' BTCB also seems to
suggest that if a U.S. bank accepts its funds, the U.S. bank
has reached a judgment about the funds' legitimacy and BTCB has
met the U.S. bank's due diligence standards. In fact, the
opposite is true. U.S. correspondent banks rely in large part
upon their respondent banks to ensure the legitimacy of funds
transferred into their U.S. correspondent accounts. U.S. law
does not require and U.S. banks do not routinely undertake to
examine a foreign bank's individual clients or the source of
funds involved individual client transactions. Nor do U.S.
banks certify the legitimacy of a foreign bank's funds simply
by accepting them.
Because BTCB did not agree to an interview, the Minority
Staff investigation was unable to clarify its policies or
obtain additional information about its anti-money laundering
efforts. It is still unclear, for example, whether BTCB has
written anti-money laundering procedures. None of the U.S.
banks with BTCB accounts requested or received materials
documenting BTCB's anti-money laundering efforts. Minority
Staff investigators were unable to learn which BTCB employee is
assigned to monitoring client accounts for suspicious activity.
The compliance consultant BTCB mentioned appears to be Dr.
Wilbert O. Bascom, who is also listed in BTCB's description of
its senior management team as the bank's ``Consultant on
Compliance Issues.'' When a Minority Staff investigator
contacted Bascom at the suggestion of Long, however, Bascom
said that he works for BTC Financial Services, has ``no direct
connection'' to BTCB, ``did not get involved with the bank's
activities,'' and could not provide any information or
assistance regarding the bank.\122\
---------------------------------------------------------------------------
\122\ Memorandum of telephone conversation with Bascom on 8/22/00.
---------------------------------------------------------------------------
It is also important to note that, despite more than three
years of operation, BTCB has never been the subject of an on-
site examination by any bank regulator. In July 2000, the
United States issued a bank advisory warning U.S. banks that
offshore banks licensed by Dominica ``are subject to no
effective supervision.'' In June 2000, Dominica was named by
the Financial Action Task Force as non-cooperative with
international anti-money laundering efforts. Dominica is
attempting to strengthen its anti-money laundering oversight
by, for example, authorizing the East Caribbean Central Bank
(ECCB), a respected regional financial institution, to audit
its offshore banks, but the ECCB has never actually audited
BTCB.
(5) BTCB Affiliates
BTCB was asked to identify its subsidiaries and affiliates.
In its September 2000 submission to the Subcommittee, BTCB
stated that, while it had no affiliations with other banks, it
did have affiliations with a number of companies. These
affiliations depict the bank's participation in a network of
inter-related companies in Dominica, as well as BTCB's
increasing business activities in the United States.
(1) Dominican Affiliates--BTCB identified four Dominican
companies as affiliates. One was International Corporate
Services, Ltd. (``ICS'') which plays an active role in BTCB's
operations, primarily by forming the Dominican trusts and
corporations that serve as BTCB's accountholders.\123\ Two of
the affiliates, InSatCom Ltd.\124\ and Dominica Unit Trust
Corporation,\125\ are active in the Dominican
telecommunications and investment industries, while the fourth,
Generale International Assurance,\126\ is currently dormant.
---------------------------------------------------------------------------
\123\ In its September 2000 submission to the Subcommittee, BTCB
described ICS as a ``separate, corporate services company affiliated
with BTCB to incorporate [international business corporations] in
Dominica and provide routine nominee, director, and shareholder
services to various [corporations] in Dominica.'' BTCB stated that
Herry Royer was a director of both ICS and BTCB, and in another
document BTCB indicated that it owned 100% of ICS.
\124\ BTCB stated in its September 2000 submission that it owns 55%
of InSatCom Ltd., a telecommunications company which holds a Dominican
license ``to provide data transmission services to customers and web
hosting services'' and which operates a satellite earth station ``in
conjunction with Cable & Wireless of Dominica.'' InSatCom also provides
services to companies involved with Internet gambling. Requena is the
president of InSatCom.
\125\ BTCB stated that it held a 20% ownership interest in Dominica
Unit Trust Corporation, an investment company that is also partly owned
by ``Dominican Government entities.''
\126\ BTCB described Generale International Assurance as an
``inactive'' Dominican corporation that it may someday use to offer
insurance products.
(2) U.S. Affiliates--BTCB also acknowledged a
relationship with two U.S. corporations, First Equity
Corporation of Florida (FECF) and BTC Financial Services, but
attempted to hide its ongoing, close association with them.
BTCB stated in its September 2000 submission to the
Subcommittee that, ``in-mid 1998, BTCB acquired the stock of
First Equity Corporation, a licensed broker-dealer in Miami,
Florida'' and ``legally held First Equity's stock for
approximately 8 months, when the stock was transferred into a
U.S. publicly traded company'' called BTC Financial Services
(Inc.). BTCB stated that, currently, it ``has no ownership,
management, nor any other affiliation with [FECF] except for a
routine corporate account, line of credit and loan as would be
---------------------------------------------------------------------------
the case for any other corporate client.''
This description does not accurately depict the
ongoing, close relationships among BTCB, FECF, BTC Financial,
and related affiliates.\127\ Long, Requena and Brett are major
shareholders of both BTCB and BTC Financial. Requena is the
president of BTCB, BTC Financial and FECF. BTCB's website
prominently lists FECF as an affiliated company. FECF used to
be owned by FEC Financial Holdings, Inc., a U.S. holding
company which BTCB acquired when it took control of FECF and
with which it still does business. BTC Financial, FECF, FEC
Financial Holdings and other affiliates operate out of the same
Miami address, 444 Brickell Avenue. They also share
personnel.\128\ Bank records reflect ongoing transactions and
the regular movement of funds among the various companies. One
U.S. bank, First Union, mailed BTCB's monthly account
statements to 444 Brickell, ``c/o FEC Financial Holdings.'' In
short, BTCB is closely intertwined with the BTC Financial and
FECF group of companies, it regularly uses FECF to transact
business in the United States, and its declaration that it has
no FECF affiliation beyond ``any other corporate client'' is
both inaccurate and misleading.
---------------------------------------------------------------------------
\127\ BTC Financial owns FECF, which has a number of subsidiaries
and affiliates. See, for example, affiliates listed in FECF's website,
www.lsteguity.com/directory.html including a ``Ft. Lauderdale
Affiliate,'' First Equity Properties, Inc. and Swiss Atlantic Mortgage
Corp. Another possible FECF affiliate, listed in the SEC Edgar
database, is First Equity Group, Inc.
\128\ For example, Betts is the financial controller of BTCB and
the treasurer of BTC Financial. Wilbert Bascom is described as a
consultant to both BTCB and BTC Financial. Ralph Hines has performed
work for BTCB, BTC Financial, FECF and FEC Financial Holdings. Robert
Garner, an attorney, is listed on FECF's website as its general counsel
and has also signed letters as general counsel to BTCB. Long was also,
until recently, the chairman of BTC Financial and the chairman of
BTCB's advisory committee.
(3) Website Affiliates--BTCB's September 2000
submission also addressed its apparent affiliation with three
entities listed in BTCB's websites. BTCB stated that ``[t]o
avoid confusion'' it wanted to make clear that certain names
appearing on its websites, ``WorldWideAsset Protection,'' ``IBC
Now, Limited'' and ``EZ WebHosting,'' were ``merely websites''
and not companies or subsidiaries of the bank. This
clarification by BTCB was helpful, because the websites do
imply the existence of companies separate from the bank. For
example, a WorldWide Assets Protection website lists six
``corporate members'' who have ``joined'' its organization,
including BTCB. The WorldWide website contains no indication
that WorldWide itself is simply a BTCB-operated website with no
independent corporate existence. The IBC Now website \129\
encourages individuals to consider becoming a paid
representative of a variety of companies offering ``Internet
banking, brokerage, web hosting, confidential e-mail, and on-
line casino's.'' IBC Now lists BTCB as one option, again,
without ever indicating that IBC Now is itself a BTCB creation
with no independent corporate existence.
---------------------------------------------------------------------------
\129\ See www.ibcnow.com/service.html.
More disturbing is BTCB's failure to provide clarification
with respect to other entities that may be its subsidiaries or
affiliates. BTCB's 1998 audited financial statement, for
example, records over $4 million in ``[i]nvestments and
advances to subsidiaries,'' which Note 8 states represented
``the cost of acquisition and advances to First Equity
Corporation of Florida, International Corporate Services S.A.,
Generale International Assurance Inc., InSatCom Ltd., Global
Investment Fund S.A., FEC Holdings Inc. and Swiss Atlantic
Inc.'' The latter three ``subsidiaries'' are not mentioned in
BTCB's September 2000 submission to the Subcommittee. Yet
Global Investment Fund appears repeatedly in BTCB documentation
and U.S. bank records; in 1998, it was the recipient of
millions of dollars transferred from BTCB accounts. A September
15, 1998 letter by Brazie describes Global Investment Fund as
``wholly owned by ICS/BTCB.'' FEC Holdings Inc. is listed on
BTCB's website as an affiliated company. It is unclear whether
it is a separate company from FEC Financial Holdings Inc.,
which BTCB purchased in 1998. Swiss Atlantic Inc. is presumably
the same company as Swiss Atlantic Corporation, which is also
listed on BTCB's website as an affiliated company and cites 444
Brickell as its address. It may also be related to Swiss
Atlantic Mortgage Company, a Florida corporation which is an
FECF affiliate, lists 444 Brickell as its principal address,
and lists Robert Garner as its registered agent. The Minority
Staff investigation uncovered evidence of other possible BTCB
affiliates as well.\130\
---------------------------------------------------------------------------
\130\ For example, Lugano Synergy Global Services, S.A. has used as
its address the same postal box as BTCB, Box 2042 in Roseau, Dominica.
This company is associated with the Lugano Synergy Investment Group,
Ltd., a company which claims in its website to have a contract with
BTCB to provide financial services. See http:lsynergy.com/
investmentbanking/high--yield--investment.html. U.S. bank records show
a number of transactions between BTCB and the Lugano Synergy companies.
Another possible affiliate is Global Medical Technologies, Inc., a
Florida corporation which changed its name in 1999, to Vector Medical
Technologies, Inc. BTCB held the right to over 1 million unissued
shares in the company and provided it with substantial funding, as
described in the appendix. A third possible affiliate is British Trade
and Commerce Securities, Ltd. (Bahamas), which was listed in a BTCB
document supplied by the Dominican Government. When asked about this
company, the Bahamas Government indicated that it found no record of
its existence; however, corporate licensing records did show a company
called British Trade and Securities Ltd., which was incorporated on 9/
15/97, and ``struck off the record'' on 1/1/00.
---------------------------------------------------------------------------
BTCB's subsidiaries and affiliates bespeak a bank that is
fluent in international corporate structures; functions through
a complex network of related companies and contractual
relationships; and is willing to use website names to suggest
nonexistent corporate structures. Together, BTCB's subsidiaries
and affiliates depict a sophisticated corporate operation,
active in both Dominica and the United States.
(6) BTCB Major Lines of Business
In its September 2000 submission to the Subcommittee, BTCB
provided the following description of its major lines of
business:
BTCB is a full service bank that provides standard
services in the areas of private banking, investment banking,
and securities trading. Our private banking services include
money management services and financial planning, as well as
investment accounts of securities for long-term appreciation,
global investment funds, and Certificates of Deposit (CD's)
with competitive interest rates. . . . Our investment banking
activities include: debt financing for both private and public
companies in the form of senior, mezzanine, subordinated or
convertible debt; bridge loans for leveraged and management
buyouts; and recapitalization transactions. BTCB assists in the
establishment and administration of trusts, international
business corporations, limited liability companies, and bank
accounts. Finally, the securities trading services include
foreign securities trading on behalf of our clients. . . . BTCB
offers credit card services as a principal MasterCard Member.
This description of BTCB's major activities, while
consistent with evidence collected during the investigation, is
incomplete and fails to address two of BTCB's major activities:
high yield investments and Internet gambling.
High Yield Investments. BTCB is known for offering high
yield investments. Dominican Government officials, U.S. and
Dominican bankers, and BTCB clients all confirmed this activity
by the bank. Numerous documents obtained by the Minority Staff
provide vivid details regarding BTCB's efforts in this area.
BTCB's statement to the Subcommittee that it offers CDs
with ``competitive interest rates'' does not begin to provide
meaningful disclosure about the investment returns promised to
clients. Two documents on BTCB letterhead, for example, offer
to pay annual rates of return on BTCB certificates of deposit
in amounts as high as 46% and 79%. Higher yields are promised
for ``amounts exceeding US$5,000,000.'' When asked about these
rates of return, Dominican Government officials indicated that
they did not understand how any bank could produce them. Every
U.S. banker contacted by the Minority Staff investigation
expressed the opinion that such large returns were impossible
for a bank to achieve, either for itself or its clients.
Several described the offers as fraudulent.
Civil suits have been commenced in the United States and
Canada over BTCB's high yield investment program.\131\
Documents associated with these cases, as well as other
evidence collected by the investigation, indicate that the key
personnel administering BTCB's high yield investment program
are Brazie and Betts. Brazie advises potential investors on how
to set up an investment structure, enter into agreements with
BTCB and related companies to invest funds, and use BTCB bank
accounts to make investments and obtain promised profits. A
two-page document on BTCB letterhead, signed by Brazie and
provided to investors in the high yield program, includes the
following advice:
---------------------------------------------------------------------------
\131\ A civil suit filed in New York, for example, involves a BTCB
certificate of deposit for $10 million whose funds would allegedly be
invested and produce returns in excess of $50 million. See
Correspondent Services Corp. v. J.V.W. Investment Ltd. (U.S. District
Court for the Southern District of New York Civil Case No. 99-CIV-8934
(RWS))(9/23/98 letter from Waggoner to his investment advisor,
Kelleher, referencing $50 million return; 4/13/99 letter from Kelleher
to BTCB referencing $58 million return). A civil suit before a Canadian
court complains that a BTCB investor wrongly took possession of the
plaintiffs' $3 million and placed it in the BTCB high yield program,
after which BTCB wrongly refused to refund the funds. Gold Chance
International Ltd. v. Daigle & Hancock (Ontario Superior Court of
Justice, Case No. 00-CV-188866)(hereinafter ``Gold Chance''). A civil
suit in New Jersey includes sworn deposition testimony from a U.S.
citizen regarding an alleged $1.3 million payment into BTCB's high
yield program that has yet to produce any return. See Schmidt v. Koop
(U.S. District Court for the District of New Jersey Civil Case No. 98-
4305)(Koop deposition (3/2/99) at 433). Each of these suits is
discussed in more detail in the appendix.
In order to protect assets properly, whether in BTCB or
elsewhere you should consider setting-up a specific structure
to assure privacy and avoid unnecessary reporting and taxation
issues. . . . (1) Immediately, establish an [International
Business Corporation or IBC] in Dominica (if necessary, in the
same name as the one in which you have contractual identity. .
. . This will allow an orderly and mostly invisible transition.
This IBC should have an Account at BTCB in order to receive the
proceeds of Programs and to disburse them as instructed. This
IBC should be 100% owned by bearer shares to be held by the
Business Trust. . . . (2) Simultaneously, you could establish a
Business Trust . . . in Dominica. This trust would not hold . .
. any assets except the bearer shares of [the] IBC. . . . (3)
You should select an ``Organizer'' of the IBC and Business
Trust, and could designate International Corporate Services
Ltd. (an IBC owned 100% by BTCB) as the Director-Designee for
the IBC and BTCB as Trustee of the Business Trust. . . . (4)
The IBC's Accounts should be set-up with dual signatures
required, including an officer of ICS Ltd. and an officer of
BTCB (usually myself as Vice President over all managed
accounts). . . . (7) The IBC held under the Business Trust
would be the entity that would enter into subsequent Trading
Programs on a 50/50 cooperative venture with BTCB and would
receive all resulting ``Investor'' earnings. . . . Such IBC
Account would operate under a Cooperative Venture Agreement. .
. . (10) The choice of structure is of course yours, however
any client entity that is not domiciled in Dominica is
prohibited by our Board from participating in our High Yield
Income Programs, so that we may protect the bank and its
---------------------------------------------------------------------------
clients against ``cross-jurisdiction'' exposure/penetration.
Brazie closed the document by providing telephone, fax and
cellular numbers to contact him, including cellular numbers in
Dominica and Virginia.
The Brazie proposals involve BTCB in every aspect of a
client's investment program, from establishing the client's IBC
and trust, to providing dual signatory authority over the IBC's
account at BTCB, to joining the IBC in a ``cooperative venture
agreement.'' In fact, by encouraging clients to name BTCB as
the trustee of their trust and giving the trust full ownership
of the client's IBC, Brazie was, in effect, encouraging BTCB
clients to cede control over their entire investment structure
to the bank. The Brazie document also states that only
Dominican entities are allowed to participate in BTCB's high
yield programs and urges clients to use the bank's wholly-owned
subsidiary, ICS, to establish them.\132\ Numerous documents
collected by the investigation establish that the suggested
structure was, in fact, used by BTCB clients.\133\ One key
feature of the standard investment contract used by BTCB in its
high yield program is its insistence on secrecy. BTCB's
standard cooperative venture agreement \134\ essentially
prohibits participants in its high yield investment program
from disclosing any information related to their dealings with
BTCB. A section entitled, ``Confidentiality,'' states in
paragraph 4.1:
---------------------------------------------------------------------------
\132\ Similar advice has appeared in a BTCB-related website, under
a subsection called ``The Wall Structure.'' The website states, ``This
structure was submitted by the Managed Account Division for British
Trade and Commerce Bank--for further information, please contact
them.'' See www.worldwideassets.org/structure2.html.
\133\ See, for example, in the Gold Chance case, a 9/7/00 affidavit
by BTCB president Requena, with copies of the ``standard form
agreements'' used by BTCB in its ``Managed Accounts'' program,
including a standard ``Cooperative Venture Agreement, a Management
Account Custody Agreement, a Specific Transaction Instructions
Agreement and a Residual Distribution Instructions Agreement.'' The
Requena affidavit also provides copies of completed forms signed by a
particular BTCB client, Free Trade Bureau S.A. Similar forms appear in
other civil proceedings, as explained in the appendix.
\134\ See Gold Chance, Requena affidavit (9/7/00), Exhibit H.
The Parties agree: that any and all information
disclosed, or to be disclosed, by any other party hereto, or by
legal counsel or other associate; and, that any and all
documents and procedures transmitted to each other for and in
execution of this AGREEMENT are privileged and confidential and
are to be accorded the highest secrecy. . . . [T]he Parties
specifically: A) . . . undertake . . . not to disclose to any
third party, directly or indirectly, or to use any such
information for any purpose other than for accomplishment of
the objectives of the business undertaken herein without the
express written prior consent of the party supplying that . . .
information[; and] B) [a]cknowledge that any unauthorized . . .
disclosures . . . shall constitute a breach of confidence and
shall form the basis of an action for damages by the injured
---------------------------------------------------------------------------
party. . . . [Emphasis in original text.]
A later paragraph 5.7 states:
No unauthorized communications by either party with any
bank outside of these procedures is allowed without the prior
written consent of the other party. Failure to observe this
consideration will immediately cause this AGREEMENT to be
deemed to have been breached. [Emphasis in original text.]
Together, documentation and interviews demonstrate that
BTCB aggressively marketed its high yield investment program,
induced its clients to establish investment structures under
similar agreements including secrecy requirements, promised
extravagant rates of return, and obtained millions of dollars.
The evidence also demonstrates that BTCB repeatedly failed to
return invested funds or pay promised profits and is the
subject of client complaints and law suits.\135\
---------------------------------------------------------------------------
\135\ For more information on the many complaints associated with
the BTCB high yield investment program, see the appendix.
---------------------------------------------------------------------------
Internet Gambling. BTCB's September 2000 submission to the
Subcommittee omits a second major activity of the bank--its
involvement in multiple aspects of Internet gambling.
Internet gambling is legal in Dominica, which began issuing
Internet gambling licenses to offshore companies as early as
1996. Documentation establishes that BTCB has opened a number
of accounts for companies providing Internet gambling services,
handled millions of dollars in Internet gambling proceeds, and
in the case of Vegas Book, Ltd., assumed an integral role in
the day-to-day operations of an Internet gambling enterprise.
One of the first signs of BTCB's involvement in Internet
gambling occurred in May 2000, when one of its U.S.
correspondents, Security Bank N.A. in Miami, discovered that
ten Internet gambling websites were directing gamblers to
transfer their funds to Security Bank, for further credit to
BTCB.\136\ Security Bank sent a May 16, 2000 letter to BTCB
demanding removal of its name from the websites and announcing
its intention to close the BTCB account. BTCB responded in a
May 17th letter that it had been unaware of and had not
authorized Online Commerce, Inc.--a South African corporation
that BTCB described as the ``owner'' of the offending Internet
gambling sites--to use Security Bank's name. BTCB apologized
and provided a copy of its letter to Online Commerce, at a
Dominican address, requesting removal of the wire transfer
information from the Internet gambling websites. U.S. bank
records at Security Bank indicate that, from 1998 into 2000,
hundreds of thousands of dollars in the BTCB correspondent
account were transferred to persons and entities associated
with Online Commerce.
---------------------------------------------------------------------------
\136\ The websites were www.astrobet.com; www.atlantisstar.com;
www.aztecgoldcasino.com; www.bingotops.com; www.fairplaycasino.com;
www.magic-carpetcasino.com; www.casinoold-glory.com;
www.casinoorientexpress.com; www.casinoiceberg.com; and
www.flyingdragon-casino.com.
---------------------------------------------------------------------------
U.S. bank records show numerous other BTCB transactions
involving persons or entities associated with Internet
gambling. For example, $525,000 in deposits into BTCB's account
over 5 months in 1999 and 2000, were directed to Cyberbetz,
Inc., a known Internet gambling company that is a Dominican
subsidiary of another Internet gambling enterprise, Global
Intertainment Inc.\137\ In December 1999, Security Bank records
show over $100,000 was deposited into the BTCB account for
International Gaming Ltd.
---------------------------------------------------------------------------
\137\ See Survey of Electronic Cash, Electronic Banking and
Internet Gaming, Financial Crimes Enforcement Network (FinCEN), U.S.
Department of Treasury (2000) at 76, 88.
---------------------------------------------------------------------------
BTCB's involvement with Internet gambling did not stop with
opening accounts and handling gambling related proceeds. In the
case of Vegas Book, Ltd., BTCB appears to have gone farther and
become a direct participant in the day-to-day operations of an
Internet gambling enterprise. Vegas Book is the only Internet
gambling website that is directly referenced in BTCB websites
and to which BTCB-related websites have provided a direct
electronic link.\138\ The Vegas Book website trumpets as a key
selling point its ``unique'' arrangement with a bank,
identified elsewhere as BTCB, which enables its gamblers to
deposit their funds into a bank account (instead of a casino
account); to gain instant access to their funds through a bank-
issued credit card; and to place their bets through a Dominican
international business corporation to circumvent U.S.
prohibitions on Internet gambling.\139\ The Vegas Book website
helpfully points out that Vegas Book customers can use their
Dominican bank ``account for asset protection'' as well as for
gambling, directing them to BTCB's WorldWide Asset Protection
website.\140\
---------------------------------------------------------------------------
\138\ BTCB's website, www.btcb.com/group.html, on a screen
entitled, ``Worldwide Group,'' lists ``independent subsidiaries'' that
provide ``related financial services'' to BTCB clients. Included are
``WorldWide Asset Protection'' and ``IBCNOW.com,'' which BTCB has
disclosed to the Subcommittee are simply BTCB-controlled websites. Both
provide direct electronic links to ``Vegas Book.'' See
www.worldwideassets.com/membership.html; www.ibcnow.com/link.html and
www.ibcnow.com/service.html.
\139\ The website, www.vegasbook.com/sportsbook/index2.html,
explains:
``Dominica-based Vegas Book, a state-of-the-art Las Vegas-style
sports book takes action via toll-free phones and the Internet, and
trumps every other shop in the industry with its unique method of
payment. . . . Proceeds from every winning wager are credited to your
betting account within three minutes of the conclusion of the event. .
. . Your account at Vegas Book is totally secure from all outside
enquiries due to [Dominica's] Off Shore Privacy Act of 1996. This
statute sets sever[e] penalties for any release of information
including identity, revenues and profits. . . . All Vegas Book members
are given, or purchase . . . an International Business Corporation bank
account. Acting on your wishes, the IBC wagers directly with Vegas
Book, thus avoiding conflict with U.S. anti-gaming laws. Funds in the
account . . . are available to the account holder 24 hours a day.
Simply take the money out of the account at any ATM, or use secured
card wherever credit cards are accepted. Your money is protected
because it remains in your control, escrowed in your account at the
Bank--not at Vegas Book.''
\140\ See www.vegasbook.com/sportsbook/help.html, answer to ``Can I
use my IBC to protect my house and car?''
---------------------------------------------------------------------------
The Vegas Book website provides a detailed form for opening
a Vegas Book account. This form identifies BTCB as the bank
opening the accounts for Vegas Book clients. The form also
provides wire transfer instructions for Vegas Book gamblers
wishing to deposit funds into their BTCB account. The
instructions direct funds to be sent to the Bank of America,
for further credit to St. Kitts-Nevis-Anguilla National Bank
(``SKNANB''), for further credit to BTCB.\141\ Bank of America
informed the investigation that it had been unaware that BTCB
was using the SKNANB correspondent account and unaware that the
SKNANB account was handling Internet gambling proceeds. A
review of the SKNANB account records indicates that, during
2000, millions of dollars moving through the account each month
were related to Internet gambling, including over $115 million
in August 2000 alone.\142\
---------------------------------------------------------------------------
\141\ The Vegas Book website also allows clients to send certified
checks to deposit funds in their account. The checks are directed to be
sent to BTCB. See ``Sending Funds,'' rule (1) at www.vegasbook.com/
sportsbook/rule.html.
\142\ SKNANB's monthly account statements do not indicate what
percentage of the Internet gambling funds are attributable to SKNANB
clients and what percentage to BTCB clients.
---------------------------------------------------------------------------
According to its website, Vegas Book, Ltd. is ``a
partnership between Virtual Gaming Enterprises, Casino del Sol,
Ltd. and Chinnok West, Ltd.,'' \143\ and apparently operates
under a 5/6/99 Dominican gaming license issued to Casino del
Sol.\144\ BTCB and U.S. bank records suggest the existence of
additional ties among BTCB, Casino del Sol and Virtual Gaming
Enterprises. For example, in addition to directing Internet
gamblers to the Vegas Book website, BTCB-related websites
encourage individuals to consider opening their own Internet
gambling website using Casino del Sol software.\145\ U.S. bank
records also show over a million dollars in transactions
involving Virtual Gaming Enterprises since 1999.
---------------------------------------------------------------------------
\143\ See www.vegasbook.com/sportsbook/help.html, answer to ``Who
are we?''
\144\ The Vegas Book website reproduces a copy of the license at
www.vegasbook.com/sportsbook/lisc.html.
\145\ The following pitch appears in the IBC Now website's
``representative marketing program'':
``Casino del Sol offers the savvy marketer the opportunity to
open an Internet business with worldwide appeal. Daily, millions of
dollars are wagered by gamblers hoping that lady luck will grant them a
fortune. With our casino program you eliminate chance by becoming the
house. It is easy . . . we host your custom designed site from a high
speed, state of the art secure server in the Commonwealth of Dominica
with proprietary casino software proven as the industry's best. After
designing the look for your casino, choose your games including Black
Jack, Slots, Poker or Lil Baccarat. Each time one of your members logs
in and plays, we track his/her winnings and losses and deposit the
difference in your BTCB bank account.'' See www.ibcnow.com/
service.html.
---------------------------------------------------------------------------
Virtual Gaming Enterprises is a publicly traded Nevada
corporation that was incorporated in June 1998, and is the
subject of an ongoing SEC investigation into possible stock
fraud.\146\ Brenda Williams and her husband Virgil Williams are
the company's controlling stockholders and senior
management.\147\ In 1995, Virgil Williams was found liable for
securities fraud and ordered to pay a $27 million judgment. In
1997, he and Mrs. Williams filed for bankruptcy. The company's
latest SEC filing states that Virtual Gaming Enterprises was
``formed to purchase, manage, develop, market, and resell
casino style Internet games that will allow players to wager,''
and operates out of Dominica.\148\ The filings describe the
company's involvement in several Internet gambling efforts,
including holding a 20% interest in Vegas Book. Virtual Gaming
Enterprises is apparently soliciting funds from small investors
across the United States to buy its shares.\149\ Security Bank
records show a total of about $1.2 million deposited into
BTCB's account over a 6-month period, from August 1999 until
March 2000, for ``Brenda J. Williams DBA-Virtual Gambling
Enterprises.'' When contacted, SEC staff indicated that they
had been unaware that Virtual Gambling Enterprises had a BTCB
account and was making these deposits.
---------------------------------------------------------------------------
\146\ See Virtual Gaming Enterprises, Inc. 10-KSB report to the SEC
(9/14/00), Item 3 on ``Legal Proceedings''; SEC v. Virtual Gaming
Enterprises, Inc. (USDC SDCA Civil Case No. 99-MC-336); ``Gaming firm
faces long odds in shaking shady ties,'' San Diego Union-Tribune (9/19/
99); ``For Virtual Gaming, life is like a house of cards,'' San Diego
Union-Tribune (5/5/00).
\147\ See Virtual Gaining Enterprises, Inc. 10-KSB report to the
SEC (9/14/00), Item 9.
\148\ Id., Item 1.
\149\ See, for example, www.penyprofits.com/profiles/vgain.shtml.
---------------------------------------------------------------------------
Internet gambling, as explained earlier in this
report,\150\ is illegal in the United States. Evidence suggests
that BTCB has attempted to conceal its role in Internet
gambling, not only from the Minority Staff investigation, but
also from its U.S. correspondent banks. For example, BTCB moved
hundreds of thousands of dollars in Internet gambling related
proceeds through its Security Bank account without informing
the bank of this activity. After Security Bank found out,
BTCB's president Requena wrote in a May 17, 2000 letter, ``We
are aware of the position that U.S. Banks maintain on this
regards, and we do not encourage at all the use of your good
bank for [these] matters.'' Betts sent a May 19, 2000 fax
stating, ``I have made arrangements with another of our
correspondent banks to take their wire transfers. . . . The
customer did not consult with us before using Security Bank's
name. We certainly would not have allowed them to use it.'' It
is unclear what correspondent bank BTCB turned to next and
whether it informed that bank of its Internet gambling
activities; Bank of America states that it never knew it was
handling BTCB funds related to Internet gambling.
---------------------------------------------------------------------------
\150\ See Chapter IV(D) of this report.
---------------------------------------------------------------------------
(7) Money Laundering and Fraud Involving BTCB
The Minority Staff investigation found evidence indicating
the BTCB was involved in a number of financial frauds and
suspicious transactions moving millions of dollars through its
U.S. accounts. In each instance, the bank's U.S. correspondent
relationships played a critical role in enabling BTCB to
conduct its activities. BTCB's refusal to be interviewed
prevented the Minority Staff from obtaining any clarification
or explanation that the bank might have provided with respect
to the following matters, which are summarized below and
described in more detail in the appendix to this report.
(a) Koop Fraud
William H. Koop, a U.S. citizen from New Jersey, pleaded
guilty in February 2000 to conspiracy to commit money
laundering in violation of 18 U.S.C. 1957.\151\ Using BTCB, two
other offshore banks,\152\ and their U.S. correspondent
accounts, Koop bilked hundreds of U.S. investors out of
millions of dollars over a 2-year period by falsely promising
high yield investment opportunities. In just 6 months during
1998, Koop moved almost $4 million from his self-confessed
frauds through BTCB's U.S. correspondent accounts.
---------------------------------------------------------------------------
\151\ For more information, see the description of the Koop fraud
in the appendix.
\152\ Koop's activities at the other two banks, Hanover Bank and
Overseas Development Bank and Trust, are discussed in the case
histories on those banks.
---------------------------------------------------------------------------
In 1997, Koop began promoting ``prime bank notes,'' which
he admitted are fictitious financial instruments, as well as
other fraudulent investments, promising rates of return as high
as 489%. Koop falsely promoted the investments as secure and
touted the fact that the investment profits would be reported
to no one. Over 200 U.S. investors placed their funds with him;
with few exceptions, none recovered either their principal or
any profit.
Koop began his relationship with BTCB in mid-1998 after a
chance meeting with Brazie who told him about BTCB's own high
yield investment program and other services. Koop used BTCB to
establish Dominican corporations and bank accounts for use in
his fraudulent activities. Koop instructed his co-conspirators
and some of the investors in his program to send funds to him
at BTCB's U.S. accounts. He then laundered the funds by
instructing BTCB to wire them to other bank accounts around the
world or by using them for other purposes such as purchasing a
house in New Jersey. Koop's largest single investor, for
example, wire transferred $2.5 million to BTCB's correspondent
account at the Miami office of Banco Industrial de Venezuela
for further credit to Koop's company. Koop used the money to
pay his co-conspirators, open new accounts at BTCB, and advance
his fraud. When the investor sued to recover the $2.5 million,
BTCB at first denied having any accounts for Koop or his
company. It was only after Koop pleaded guilty, began
cooperating with prosecutors, and directed BTCB in writing to
disclose information about his accounts, that BTCB acknowledged
having five Koop-related accounts.
The evidence reviewed by the Minority Staff indicates that
BTCB did more than establish corporations, open bank accounts
and transfer funds for Koop; it also convinced Koop to place
$1.3 million in fraud proceeds into BTCB's own high yield
investment program. Koop indicated that BTCB repeatedly
solicited him to place funds in various investments offered by
the bank. Koop said he finally provided $1.3 million to BTCB's
subsidiary, Global Investment Fund. In an ironic twist, Global
had promised to pay Koop a 100% return on the funds each week
for 40 weeks. After 2 years, Koop said he had yet to receive a
single payment or the return of his principal. If true, BTCB
retains possession of over $1 million in illicit proceeds taken
from Koop's defrauded investors.
(b) Cook Fraud
Benjamin Franklin Cook III, a U.S. citizen from Arizona,
was named in March 1999 pleadings filed by the Securities and
Exchange Commission (SEC) as the central figure in a fraudulent
high yield investment program which, in the course of less than
one year, bilked over 300 investors out of more than $40
million.\153\ In August 2000, a criminal indictment in Arizona
charged Cook with 37 counts of racketeering, fraud and theft.
U.S. bank records indicate that at least $4 million associated
with this fraud passed through U.S. correspondent accounts
belonging to BTCB, and BTCB was directly involved in investment
activities undertaken by persons and companies associated with
the Cook fraud.
---------------------------------------------------------------------------
\153\ For more information, see the description of the Cook fraud
in the appendix.
---------------------------------------------------------------------------
An analysis of BTCB's U.S. correspondent bank records by
Minority Staff investigators uncovered documentary evidence
linking 100 wire transfers to defrauded investors or entities
associated with the Cook fraud. These transactions, which made
up a substantial portion of BTCB's account activity at the
time, moved over $4 million through the bank in a 2-year
period, from 1998 to 2000, demonstrating that BTCB was an
active conduit for illicit proceeds from the Cook fraud.
As in the Koop fraud, documentation and interviews indicate
that BTCB did not stop at providing deposit accounts and wire
transfers to persons and companies associated with the Cook
fraud; the bank also worked with them to invest funds in its
own high yield investment program. One Canadian investor told
the Minority Staff that he invested $30,000 in the BTCB high
yield program on the advice of a friend associated with several
companies involved in the Cook fraud. He also convinced other
persons to invest their funds. He indicated that the funds were
wire transferred to BTCB's U.S. correspondent account at
Security Bank in several installments. He stated that, despite
repeated inquiries, neither he nor his associates have
recovered any of their investments, much less any of the
promised returns. The documentation suggests that BTCB may
still have possession of substantial funds taken from Cook's
defrauded investors.
(c) Gold Chance Fraud
In April 2000, two brothers who are Canadian citizens filed
suit in Ontario alleging that their company, Gold Chance
International Ltd. (``Gold Chance'') was the victim of a loan
fraud involving $3 million.\154\ They alleged that Gold Chance
had been fraudulently induced to deposit $3 million as supposed
loan collateral into an attorney trust account in Canada,
waited months for a loan that never materialized, and then
learned that the company's funds had been secretly transferred
to an offshore account at BTCB.
---------------------------------------------------------------------------
\154\ For more information, see the description of the Gold Chance
fraud in the appendix.
---------------------------------------------------------------------------
An Ontario court granted them immediate emergency relief,
including appointing a receiver to take control of the attorney
trust account and ordering BTCB and others to cooperate with
discovery requests. Although the court proceedings have yet to
reach a conclusion, a preliminary court decision, pleadings in
the case, bank records and other information indicate that the
$3 million was deposited into BTCB's U.S. account at First
Union on December 15, 1999, and within a week, the funds were
divided up and wired to multiple bank accounts around the
world. On the day the funds were deposited, BTCBs account
balance at First Union was only about $14,000. During December
1999, the $3 million in Gold Chance funds were the primary
source of funds in the BTCB account and were used to make
payments to the bank's creditors, clients, and other
correspondent accounts.
BTCB maintained in court pleadings that the $3 million had
been sent to the bank by a longtime bank client for immediate
placement in its high yield investment program. The bank said
that the money had been locked into a year-long program on
December 15, 1999, and could not be removed before December 15,
2000. In a June 12, 2000 order, the Ontario court expressed
skepticism regarding BTCB's claim that the $3 million was still
safely on deposit with the bank. The court wrote, ``The
prepared statement of [BTCB] that the funds are in BTCB is not
to be believed, against either the tracing evidence or [BTCB's]
failure to deliver the funds.'' BTCB later posted with the
court a $3 million letter of credit which matured on December
15, 2000. When that date came, BTCB failed to pay the court the
required $3 million. Gold Chance is still seeking recovery of
its funds.
Other Troubling Incidents. The investigation obtained
additional evidence of other suspicious transactions and
questionable conduct at BTCB, most of which involved BTCB's
high yield investment program. Discussed in more detail in the
appendix, they include the following:
--A dispute over the ownership of a $10 million
certificate of deposit (``CD'') issued by BTCB in bearer form
resulted in extensive litigation in a New York court. In August
2000, the U.S. district court resolved the CD's ownership in
favor of a wealthy Texan, while disclosing troubling
information about BTCB's operations. The legal dispute and
other information disclosed, for example, inconsistent and
ambiguous documentation regarding the disputed CD and a
Dominican corporation established at BTCB's direction; BTCB's
questionable dealings with a small Bahamian bank having a poor
reputation and limited assets, including BTCB's use of the
Bahamian bank's correspondent account at Citibank without
Citibank's knowledge; and BTCB's apparent representations that
its high yield investment program could quickly turn a $10
million investment into a $50 million return. U.S. bank records
also show that, as with the Gold Chance funds, BTCB may have
used $6 million of the CD funds to pay creditors and clients,
rather than make investments as promised.
--An investor from Malaysia has complained to Dominican,
U.K. and U.S. authorities about his continuing inability to
recover a $1 million investment which he wired to BTCB's U.S.
account at Security Bank in September 1998, for placement in
its high yield program. The investor claims he was induced to
send the money by KPJ Trust, a BTCB client. Documents supplied
by the investor contain repeated broken promises by BTCB to
return the funds. U.S. bank records show his incoming deposit
to BTCB as well as several outgoing payments to persons
associated with the KPJ Trust.
--Investors in Texas, California and Canada have made
similar complaints about funds they invested in BTCB's high
yield program allegedly at the direction of Scott Brett, a part
owner of BTCB through his company Baillett International Ltd.
U.S. bank records show incoming wire transfers to BTCB's U.S.
accounts from these investors, as well as outgoing wires to
companies associated with Brett. A criminal investigation of
these complaints may be underway in the United States.
--U.S. bank records and other documents demonstrate
BTCB's involvement with a company headed by an individual
suspected of past securities fraud, including a BTCB payment of
$500,000 to the company followed over the next year by $1
million in payments from the company. The company explained the
$1 million payment by saying it was repaying a BTCB ``loan''
and obtaining a release of BTCB's right to over 1 million in
``unissued shares'' in the company. Documents indicate that,
during 1999 and 2000, the company obtained over $16 million
from hundreds of small investors across the United States.
Civil and criminal investigations into the company's possible
involvement in securities fraud may be underway.
BTCB has been in operation for only about 3 years. In that
time, it has become entangled in three multi-million dollar
financial fraud investigations in the United States and Canada,
as well as numerous client complaints in multiple
jurisdictions. The emergent picture is of a bank surrounded by
mounting evidence of questionable transactions, deceptive
practices and suspect funds related to Internet gambling,
fraudulent investments, and criminal activity.
(8) Correspondent Accounts at U.S. Banks
BTCB stated in its September 2000 submission to the
Subcommittee that virtually all of its deposits and fund
transfers go through U.S. banks, and it is ``very protective of
its U.S. correspondent banking relations, since this is our
only way to transfer and move funds.''
The Minority Staff investigation subpoenaed documents and
interviewed personnel at three U.S. banks that operated
accounts for BTCB. The banks are: (1) the Miami office of Banco
Industrial de Venezuela which operated a correspondent account
for BTCB from October 1997 until June 1998; (2) Security Bank
N.A. which operated a correspondent account for BTCB from June
1998 until July 2000; and (3) First Union National Bank, whose
securities affiliate operated a money market account for BTCB
from September 1998 until February 2000. While none of the
banks was fully aware of BTCB's activities or the financial
frauds that moved funds through BTCB accounts, all three
indicated that BTCB had, at times, engaged in unusual or
suspicious activity, had made unauthorized use of the U.S.
bank's name in questionable transactions, and had abused its
relationship with the U.S. bank. All three initiated the
closing of BTCB's accounts.
(a) Banco Industrial de Venezuela (Miami Office)
Banco Industrial de Venezuela (BIV) is a large, government-
owned bank in Venezuela. BIV has two offices in the United
States, one in New York and one in Miami, each with about 20
employees. The Miami office has about $85 million in assets.
BIV's Miami office opened BTCB's first U.S. correspondent
account, one of only three correspondent bank accounts at that
office. BIV closed the BTCB account 7 months later due to
evidence of suspicious transactions that, in the words of the
bank, involved possible ``money laundering'' and ``self-
dealing.''
Interviews were conducted with BIV employees involved in
the opening, administration and closing of the BTCB account and
in BIV's anti-money laundering program. Some BIV personnel who
made key decisions with respect to the BTCB account were not
interviewed, because they are no longer with the bank.
Documentation in BIV files, account statements, and other
materials and information were collected and reviewed.
Due Diligence Prior to Opening the Account. Prior to
opening an account for BTCB, BIV conducted a due diligence
inquiry into the bank's ownership and operations. BIV
documentation and interviews suggest, however, that because
BTCB was newly licensed and not yet in operation, BIV relaxed
some of its documentation requirements and collected only
limited information about the bank.
According to the BIV account officer who helped open and
administer the account, BTCB was referred to BIV by a former
BIV client. It is possible that BTCB selected BIV because
BTCB's president, Requena, was from Venezuela and was familiar
with this Venezuelan bank's operations. Requena apparently
telephoned BIV in 1997, and spoke with BIV's credit manager,
Pierre Loubeau, who was then responsible for correspondent
banking. BTCB followed with a letter dated July 28, 1997,
providing initial information about the bank and requesting ``a
correspondent relationship.'' On September 15, 1997, BTCB
provided another letter, signed by Requena, answering inquiries
about the bank's ownership and main sources of income. The BTCB
letter stated that the bank ``was formed and is owned by
Clarence Butler of Dominica, and Rodolfa Requena of
Venezuela.'' The letter said that the bank's ``main income''
derived from ``Trust related activities'' and ``investments in
Financial instruments,'' and that it was developing ``a Program
for Insured Credit Cards.'' The letter also stated that, ``as
soon as we have a positive answer from your [fine] bank we are
ready to transfer up to US $40 million to open the account.''
Because the BIV personnel currently at the bank did not
have first hand information about the credit manager's due
diligence efforts, the investigation was unable to determine
whether he made inquiries in Venezuela about Requena or in
Dominica about BTCB. The BIV account officer noted that BIV's
comptroller at the time, Louis Robinson, was originally from
Dominica, knew Dominican government officials, and was a
distant relative of one of the BTCB owners, Clarence Butler,
and may have made inquiries in the country at the time. There
was no documentation recording such inquires in the BIV file
for BTCB. The BIV account officer stated that she personally
checked the U.S. Office of Foreign Asset Control list of
designated persons, and determined at the time that neither
Requena nor Butler was designated as a person barred from
holding assets in U.S. financial institutions. She also
indicated that, because the bank was so new, she thought BIV
had been unable to acquire much information about BTCBs
reputation or past performance.
The BIV account officer said that the preliminary decision
to open the BTCB account was made by two of her superiors,
Loubeau, the credit manager, and Esperanza de Saad, the head of
BIV's Miami office, neither of whom are still with BIV. She
said their decision was made dependent upon BTCB's successfully
submitting required account opening forms and documentation,
which she requested in a letter dated September 19, 1997. The
BIV account officer said that she was then responsible for
collecting the required information for BTCB's client file.
Despite language in the BIV account opening application
stating that the ``following documents MUST be submitted'' and
a ``new account shall not be opened without the receipt of
these documents,'' the BIV account officer said that accounts
were sometimes opened before all of the required documentation
was obtained. She indicated that several exceptions had
apparently been made for BTCB. For example, she said that BTCB
was allowed to submit an unaudited financial statement in place
of the required audited statement. She indicated that she
thought BTCB had been allowed to submit an unaudited statement
because it was still too new a bank to have undergone an audit.
The BTCB financial statement on file at BIV indicated that, as
of June 30, 1997, total BTCB assets were about $7.2 million.
The BIV account officer said that BTCB was also apparently
allowed to submit one, instead of the required two, bank
references. Although she could not recall whether someone had
specifically waived the requirement for a second bank
reference, she speculated that, because BTCB was so new, it may
have had only one bank account at the time. She noted that the
bank reference provided was for an account that had been opened
only 2 months earlier at another Dominican bank, Banque
Francaise Commerciale.
BIV's account opening documentation did not require and the
BIV file did not contain a copy of any written anti-money
laundering policies or procedures in place at BTCB. Nor was the
issue of BTCB's anti-money laundering efforts discussed in any
BIV documentation. There was also no documentation indicating
the extent to which BIV may have inquired into Dominica's
reputation for banking regulation or anti-money laundering
controls.
In response to a question about a site visit.\155\ the BIV
account officer said that no visit was made to BTCB prior to
opening the account, but one was made in the first few months
after the account was opened. She indicated that BIV's
comptroller, Louis Robinson, who was from Dominica, had
traveled to the island on vacation and, during his vacation,
had visited the BTCB office, which was not yet open to the
public. She said that he met with Butler and brought back
additional information about the bank. While no report on his
visit was in the client file as required by BIV procedures, the
file did contain key due diligence information about the bank
that was apparently obtained during this site visit.
---------------------------------------------------------------------------
\155\ BIV's Customer Service Handbook in place at the time, in
Chapter 6, required ``[p]hysical inspections'' of a client's domicile
within a year of an account opening and issuance of a ``written
visitation report to be kept in Agency's customer file.''
---------------------------------------------------------------------------
BIV's account opening form, entitled ``New Customer and
Account Input Information Sheet,'' shows that BIV's senior
official, Ms. de Saad, approved opening the BTCB account on
September 29, 1997. Other documentation indicates that the
official opening date for the BTCB account was October 1st. The
three account signatories were Requena, Betts and Royer.
Monitoring the Account Activity. The evidence indicates
that, once the BTCB account was opened, BIV failed adequately
to monitor the account activity or inquire about unusual
transactions, despite repeated signs of suspicious activity.
BIV provided primarily three services to BTCB: A deposit
account, an overnight sweep account which increased the
interest paid on BTCB deposits, and use of BIV's wire transfer
services. BIV did not provide BTCB with any loans or extensions
of credit.
BTCB's initial deposit was a wire transfer on October 20,
1997, for approximately $1 million. On October 21, 1997,
according to a BIV call report, the BIV account officer
contacted BTCB to confirm the transfer. She was told that BTCB
was holding its official ``inauguration'' on November 15, 1997,
and BTCB would be transferring another $25 million to the BIV
account during the week.
The BIV account officer indicated that she did not recall
inquiring into or being told the source of the initial $1
million deposit. She said that she would have asked about the
source of a $25 million or $40 million deposit by BTCB, but no
such deposit was ever made. In fact, BIV account statements
show that, after the initial deposit, the BTCB account
experienced little activity for 4 months, with few deposits and
a steady withdrawal of funds until the end of January 1998,
when the closing account balance was about $45,000.
The next 3 months, however, reversed course, and each month
showed increased account activity.\156\ The bulk of the funds
in the final three months appear to have come from three
sources: The Koop fraud, the Cook fraud, and BTCB itself.\157\
Overall, about $17 million moved through the account, most of
it in the last 3 months the account was open.
---------------------------------------------------------------------------
\156\ For example, in February 1998, multiple deposits totaling in
excess of $1 million and multiple withdrawals totaling about $650,000,
led to a closing balance of about $350,000. March saw more deposits and
withdrawals, including a single deposit on 3/30/98 of about $2 million
and a closing account balance of about $2.5 million. April account
activity increased still further, with multiple transactions throughout
the month including deposits of $2.5 million, $634,982, $500,000 and
$406,000 that, together, increased the account balance to $6.5 million.
May witnessed similar account activity, including deposits of $1
million; $450,000; $220,000; $200,000; $199,980; $150,000; $101,850;
and $100,000, followed by a $5 million withdrawal on 5/27/98 to a BTCB
securities account at PaineWebber's clearing firm, Correspondent
Services Corporation. Even after the $5 million withdrawal, the account
held almost $3.5 million. On June 5, 1998, BIV closed the account.
\157\ Koop received deposits totaling about $3.1 million during
this period, including a $2.5 million deposit from a defrauded
investor. International Business Consultants, Ltd., named by the SEC as
a key participant in the Cook fraud, received 34 deposits totaling
about $1.4 million. One deposit for $2 million was made by ``Inter
Trade and Commerce Ltd.,'' a company otherwise unidentified.
Transactions traceable to persons associated with BTCB provided two
deposits totaling $113,000, and numerous withdrawals totaling about
$700,000.
---------------------------------------------------------------------------
When asked about the increased account activity in the
spring of 1998, the BIV account officer indicated that she did
not recall noticing it at the time but thought, if she had, she
would have attributed it to the normal growth of a new bank.
She also did not recall asking or being told about the source
of funds for the three largest deposits of $1 million, $2
million and $2.5 million. She indicated that she had assumed a
correspondent bank account would include large transactions.
However, another BIV employee told Minority Staff investigators
that, when he reviewed the BTCB account in May, he immediately
noticed and had concerns about the increased account activity,
large transactions, and BTCB-related transactions, all of which
contributed to BIV's decision in May to close the BTCB account.
By the spring of 1998, BTCB's account had become one of the
largest accounts at the BIV Miami office. The BIV account
officer indicated that she began to spend considerable time
working with BTCB personnel on matters related to the account.
She indicated that she spoke with the bank several times per
week, usually dealing with BTCB's chief financial officer,
Betts, and sent the bank weekly account statements, a service
BIV provided upon request to large accounts.
The BIV account officer recalled three activities in
particular that occupied her time on the BTCB account,
involving letters, wire transfers and SWIFT telexes. She said
that BTCB had made several requests for letters providing
either a bank reference or confirmation of funds on deposit.
She said these letters were intended for other financial
institutions or for investors considering placing money with
BTCB. BIV files contained four letters written on behalf of
BTCB. The first was a letter of reference which BIV provided in
March 1998, but which is undated, addressed ``TO WHOM IT MAY
CONCERN,'' and signed by the Miami office head, Esperanza de
Saad. The BIV account officer said that similar reference
letters had been prepared for other customers. BIV indicated
that it had no knowledge of how BTCB had used this reference
letter.
The BIV account officer recalled BTCB's engaging in lengthy
negotiations over the wording of another letter requested in
April 1998. She said that BTCB had asked BIV to provide a
``proof of funds'' letter, addressed to BTCB itself, confirming
a certain amount of funds in the BTCB account. BTCB wanted the
letter to confirm the ``non-criminal origin'' of the funds, and
to state that BIV was prepared to block these funds . . . or to
place these funds'' upon BTCB's instruction. When asked what
she thought of the requested wording, the BIV account officer
said that she did not understand what BTCB wanted, but the
requested language had made her superiors uncomfortable. She
said that BIV had refused to provide the wording, despite
BTCB's insistence. When asked why, she indicated that her
superiors had made the final decision and she could not recall
their reasoning. She indicated that she had no familiarity with
fraud schemes using prime bank guarantees or U.S. bank
confirmations, and had never thought that BTCB might be
engaging in suspicious conduct. She said the letter finally
provided on May 5, 1998, did not contain any of the contested
language.
The BIV account officer said that, on a number of
occasions, BTCB's president, Requena, had instructed the BIV
Miami office to wire transfer funds to a BIV branch in Caracas,
Venezuela, which he would then pick up in cash. The BIV account
officer explained that this arrangement, which BIV no longer
allows, was used because Requena did not have a personal bank
account at BIV to which the funds could be sent, so he was
instead allowed to pick up the funds in cash. She said that the
amount was typically $6,000, which Requena had described as his
salary payment. She said that, on one occasion in December
1998, Betts had telephoned from BTCB and indicated that Requena
had not received the $6,000 wired to him in Venezuela, and she
had made inquiries about the funds transfer. She said that
Requena later confirmed receipt of the funds ``on 12/18/97 and
Jan. 6/98.'' \158\ The BIV account officer stated that similar
cash payments may have been made to BTCB personnel other than
Requena, although she was unable to state with certainty that
they were. BIV account statements show numerous transactions
with BTCB employees and other persons associated with the
bank.\159\ Some of these transactions may have involved cash;
others were wire transfers to accounts. Together, they and the
Requena transactions involved more than $800,000 in deposits
and withdrawals over a 7-month period.
---------------------------------------------------------------------------
\158\ BIV bank records show 11 occasions in 7 months on which funds
were wire transferred to Requena and may have been paid to him in cash.
These payments included:
--12/15/97 wire transfer for $16,849.57;
--12/16/97 wire transfer for $6,000;
--12/19/97 wire transfer for $6,000;
--2/17/98 wire transfer for $6,000;
--2/20/98 wire transfer for $826;
--3/25/98 wire transfer for $6,000;
--4/3/98 wire transfer for $7,384;
--4/27/98 wire transfer for $6,000;
--4/28/98 wire transfer for $6,000; and
--5/11/98 wire transfer for $6,000.
In addition, $10,000 was wire transferred to Requena on 5/26/98, to
a U.S. office of Banco Venezuela, an unrelated bank. When shown these
11 transactions totaling $77,000, the BIV account officer could not
recall whether all of them resulted in cash payments to Requena, or
just the ones involving $6,000. She also could not recall the purpose
of the wire transfers in amounts other than $6,000, or why Requena
occasionally received two ``salary'' payments in the same month. She
was also unable to explain her handwritten notation that Requena had
received funds on 1/6/98, a date not included in the BIV account
statements. She therefore was unable to say whether other payments had
also been made to Requena.
\159\ These transactions included:
--$470,000 in payments to John Long, his companies Republic
Products Corporation and Templier Caisse S.A., and companies involved
with constructing a new residence for the Long family in Antlers,
Oklahoma, such as Nelson Brothers Construction;
--$113,000 in payments to Mavis Betts, the wife of BTCB's chief
financial officer George Betts, or to Lavern Erspan, a woman associated
with Mrs. Betts;
--$100,000 deposit to the credit of Bayfront Ltd., a company
apparently associated with Pablo Urbano Torres who was a BTCB director,
and $16,800 in payments directed to him; and
--$25,000 in payments to Mary Brazie, the wife of Charles
Brazie, the BTCB vice president in charge of managed accounts.
The BIV account officer indicated that the only BTCB officials she
knew at the time were Requena, Betts and Butler; and she was not aware
that so many of the bank's transactions had involved persons affiliated
with BTCB.
---------------------------------------------------------------------------
The BIV account officer said that a third BTCB account
activity requiring her attention had been the re-transmission
of SWIFT telexes to and from BTCB. She explained that BTCB's
staff had been unable to operate BTCB's telex equipment, and
had instead routinely faxed telexes to BIV and asked BIV to re-
transmit them. She said they had also directed their clients to
send telexes to BIV for re-transmission to BTCB. The BIV
account officer said the SWIFT traffic for BTCB had increased
so rapidly that BIV's operations department had begun
complaining about the additional work.
The BIV account officer described events related to one
particular April 1998 telex involving a Mexican credit union
called ``Union de Credito de Fornento Integral de Naucalpan
SA.'' This telex had been sent to BIV, and the credit union had
asked BIV to re-transmit the message to BTCB in Dominica. The
text of the message, addressed to BTCB, stated that the credit
union was going to send a telex to Metropolitan Bank and Trust
Co. in Chicago confirming ten ``letters of guarantee'' at $10
million apiece for a total of $100 million, and promising to
honor these letters of guarantee ``irrevocably and
unconditionally.'' The BIV officer said that, in this instance,
BIV had refused to re-transmit the message. When asked why, the
BIV account officer said her superiors had made that decision
and she was unsure of the reason. She indicated that she was
unfamiliar with ``letters of guarantee'' or their use in
financial frauds, and it had never occurred to her that BTCB
might have been attempting to include BIV's name on the telex
to lend credibility to what may have been a fraudulent
transaction. She could not provide any other information about
the transaction. She said that, with hindsight, it was
surprising that such a new bank, with only $7 million in
assets, would have been engaged in a $100 million transaction.
BIV's anti-money laundering officer while the BTCB account
was open was Louis Robinson, the comptroller who originated
from Dominica. The investigation did not interview him since he
had left the bank, so his efforts in reviewing the BTCB account
while it was open are unclear. The BIV account officer recalled
informing him on several occasions of troubling incidents
involving BTCB, including the contested proof of funds letter
and the $100 million telex. She said that Mr. Robinson was one
of her supervisors who had refused to go along with BTCB's
requests. At the same time, he apparently never warned her
about the account or instructed her to pay special attention to
it. BIV's anti-money laundering procedures at the time, a copy
of which were provided to the investigation, explicitly called
for heightened scrutiny of accounts opened by foreign
corporations domiciled in ``an `Offshore' Tax haven,'' stating
that the corporation's ``beneficial owner(s) must be identified
and their source of wealth verified.'' While the section did
not reference foreign banks or bank secrecy jurisdictions, the
analogy could have been made to apply the heightened scrutiny
standard to BTCB. There is no evidence, however, that Mr.
Robinson or other BIV employees exercised heightened scrutiny
of the BTCB account.
Closing the BTCB Account. The BIV account officer told
Minority Staff investigators that she never suspected BTCB of
wrongdoing and never recommended closing the account. The
investigation learned that the closure decision was a
consequence, instead, of the sudden arrest of the head of the
Miami office, Esperanza de Saad, on May 15, 1998, for alleged
misconduct in connection with a U.S. Customs money laundering
sting known as Operation Casablanca.\160\ After de Saad's
arrest, a team of senior bank officials flew in from BIV's New
York office to assume control of the Miami office and review
all accounts. The BTCB account was one of more than a dozen
accounts closed during the review process.
---------------------------------------------------------------------------
\160\ United States v. de Saad (U.S. District Court for the Central
District of California Criminal Case No. 98-504(B)). De Saad was
convicted by a jury on ten counts of laundering narcotics proceeds, but
a district court judge overturned the jury verdict and acquitted her on
all counts. See ``Opinion and Order Granting Defendant Esperanza de
Saad's Motion for Judgment of Acquittal'' by Judge Friedman (7/13/00).
The United States is appealing the judge's decision.
---------------------------------------------------------------------------
The Minority Staff investigation interviewed the key BIV
employee from New York involved in closing the BTCB account. He
explained that, after de Saad's arrest, as a precautionary
measure, BIV had placed the remaining three senior officers in
the Miami office on leave, although none were accused of
wrongdoing. He said that the New York BIV team then began
reviewing all of the Miami accounts, looking for suspicious
activity. He said that the New York team purposely conducted
this review without consulting the Miami staff, due to
uncertainty over the extent of the problems in the Miami
office. He said that, due to the de Saad arrest, U.S. bank
regulators and law enforcement personnel were also reviewing
BIV records.
The BIV employee said that the BTCB account was one of the
largest in the Miami office. He said that when he reviewed it,
he immediately became concerned about wire transfers making
payments to BTCB officers, which he considered signs of ``self-
dealing.'' He indicated that when he reviewed the BTCB file, he
also became concerned about missing documentation, including
the absence of an audited financial statement. He said his
immediate reaction was, ``I didn't like what I saw.''
On May 28, 1998, BIV sent a letter to BTCB requesting
additional due diligence documentation including picture
identifications, reference letters, the bank's articles of
incorporation, and a current financial statement. BIV sent
another letter the next day requesting the name of BTCB's
accountant and law firm. BTCB responded on the same day, May
29, 1998, providing most of the requested information.
After reviewing this information and additional account
transactions, the decision was made by the New York BIV team,
in consultation with legal counsel, to close the account. In
interviews, BIV personnel indicated that the decision to close
the account was made due to a number of concerns about the
account, including the increased account activity, rapid
turnover of funds, large transactions, transactions involving
the same payer and payee, and the transactions involving BTCB
officers and employees. A memorandum dated May 29, 1998
instructed BIV operational staff to close the BTCB account
``[e]ffective immediately.'' \161\
---------------------------------------------------------------------------
\161\ BIV personnel indicated, when asked, that the bank had not
been aware of the Koop fraud at the time the BTCB account was open,
although bank documents were later requested in connection with a
related civil lawsuit, Schmidt v. Koop. BIV was also unaware, until
informed by Minority Staff, that a company frequently named in BTCB
wire transfer documentation, International Business Consultants Ltd.,
had been named in SEC pleadings related to the Cook fraud.
---------------------------------------------------------------------------
The BIV employee said that at the time the closure decision
was made, BTCB's president Rodolfo Requena was in Miami. He
stated that, on June 1, 1998, BTCB had sent BIV a letter
requesting that BIV prepare letters of reference for BTCB to be
given to four U.S. banks, and that Requena would pick up the
letters in person. The BIV employee said that none of these
letters was prepared. Instead, he said, a meeting was held in
the conference room of the BIV Miami office in which BIV
discussed with Requena the bank's decision to close the BTCB
account. He said that the reasons BIV gave for closing the
account were the restructuring of the Miami office and the need
to reduce the customer service portfolio, because BIV had no
proof of misconduct, such as a criminal indictment against
BTCB. He said that Requena became angry, claimed to know the
president of BIV in Venezuela, and threatened to have him fired
for improperly closing the BTCB account.
The following week, a two-page internal BIV memorandum,
dated June 11, 1998, was sent by the BIV Miami office to BIV
headquarters in Venezuela with information about the closing of
the BTCB account. It is unclear whether this memorandum was
prepared in response to a complaint by BTCB. One part of the
memorandum described the surge in account activity in April,
noting that it had increased the account balance to $6 million,
included wire transfers in large amounts, and included wire
transfers in which the payer and payee were the same individual
or corporation, such as International Business Consultants. In
other documents, BIV described the transactions as indicative
of ``money laundering'' and ``self-dealing,'' and stated that
BTCB appeared to have been using the account to provide
``payment orders to its own officers'' and ``trying to use our
institution as a pass through (window to USA) account.''
On June 5, 1998, BIV formally closed the account and sent
BTCB a check for about $3.5 million. On June 8, 1998, BTCB
opened a new account at Security Bank N.A. in Miami.
(b) Security Bank N.A.
Security Bank N.A. is a small Florida bank with several
offices across the State and about $90 million in assets. Its
Miami office is located in the lobby of 444 Brickell, the same
building occupied by First Equity Corporation of Florida
(FECF), BTC Financial and related companies. Security Bank
operated a correspondent account for BTCB for about 2 years,
from June 1998 until July 2000. It closed the BTCB account
after discovering that BTCB was handling Internet gambling
proceeds and Security Bank was being referenced in Internet
gambling websites.
Interviews were conducted with Security Bank employees
involved in the opening, administration and closing of the BTCB
account and in Security Bank's anti-money laundering program.
Documentation in Security Bank files, account statements, and
other materials and information were collected and reviewed.
Due Diligence Prior to Opening the Account. The evidence
indicates that Security Bank opened a correspondent account for
BTCB prior to conducting any due diligence on the bank, but on
the understanding that the account would be closed if negative
information surfaced. Security Bank followed the account
opening with a due diligence effort that failed to uncover any
problems with BTCB, which by then had been in operation for
about 6 months.
According to Security Bank interviews and a June 10, 1998
memorandum describing the opening of the account, shortly after
FECF first moved into 444 Brickell Avenue, Security Bank
approached FECF about opening an account, given the convenience
of the bank's office in the lobby of the building. FECFs then
owner, Steven Weil, introduced BTCB president Requena to
Security Bank personnel, indicating that BTCB was then in the
process of purchasing FECF. Requena expressed interest in
opening an account at Security Bank for BTCB. Requena indicated
that BTCB was then closing its ``main account'' at BIV's Miami
office due to, in the words of the Security Bank memorandum,
``bad publicity that [BIV] was receiving . . . as a result of
laundering money charges against one of its principal
officers.'' Security Bank agreed to open an account for BTCB
immediately, on the understanding that it would conduct
subsequent inquiries into the bank. The account was opened on
June 8th, with a BIV cashiers check for $3.5 million, which
Security Bank personnel considered a very large deposit.\162\
---------------------------------------------------------------------------
\162\ According to Security Bank, it was because this deposit was
so large that it prepared a memorandum documenting the circumstances
related to the opening of the account. It said that it did not normally
prepare an account opening memorandum.
---------------------------------------------------------------------------
The head of Security Bank's international department, who
assisted in the opening, administration and closing of the BTCB
account, said that at the time the account was opened Security
Bank had 25 to 30 foreign bank clients, primarily from Latin
America. He said that it was not uncommon for Security Bank to
open an account for a bank subject to later due diligence
research. He said we ``usually open and then investigate,'' due
to the time required to obtain due diligence information and
documentation.
The international department head described a number of
steps that the bank took to investigate BTCB. First, BTCB
supplied requested information about the bank's ownership,
lines of business and financial status. Bank files included
copies of BTCB's banking license, articles of incorporation,
website information, a BTCB shareholder list, an unaudited
financial statement, and other documentation about the bank.
The international department head stated that, because Security
Bank was not familiar with Dominica, it had decided not to
initiate a credit relationship with BTCB and to provide only
limited correspondent banking services such as a deposit
account and wire transfer services. For that reason, he said,
no financial analysis was performed of BTCB, nor did he or his
staff take a detailed look at BTCB's major lines of business.
He said that he did not recall even seeing BTCB's financial
statement at the time and thought no one had examined it.
The international department head said that Security Bank
undertook several efforts to check BTCB's reputation. He said
the bank required BTCB to provide two written, personal
references for each account signatory, copies of which were in
the file. In addition, he said, inquiries were directed to
banking personnel in Venezuela about Requena, who received
favorable reports. He said another due diligence factor in
BTCB's favor was its purchase of FECF, which was completed
within a month of opening the account. He said the purchase had
given Security Bank ``comfort'' because they knew the SEC
investigated potential securities firm owners, and BTCB had
apparently received SEC approval.
He said that Security Bank had also obtained two written
bank references for BTCB, one from Banque Francaise Commerciale
and one from BIV's Miami office. Security Bank provided a copy
of the BIV reference letter, which was undated and signed by
Esperanza de Saad. The international department head indicated
that the letter had been provided in July 1998. When told that,
in July 1998, de Saad was in jail awaiting trial on money
laundering charges and the BIV account officer who handled the
BTCB account was absent from the bank on maternity leave, the
Security Bank employee indicated he had been unaware of those
facts. When told that it was actually BIV that had closed the
BTCB account, he said that he had also been unaware, until
informed by Minority Staff investigators, that BIV had
initiated the closing of the BTCB account. He expressed
surprise and concern at that information. When asked how the
letter of reference was delivered to Security Bank, and shown
the BTCB fax line at the top of the letter, he indicated that
he could not recall whether the letter had come directly from
BIV or whether it had been supplied by BTCB. When shown the
BTCB reference letter prepared by de Saad in March 1998, he
agreed that it looked like the same letter given to Security
Bank in July 1998.
When asked about a site visit, the international department
head said that, while Security Bank normally did visit its
foreign bank clients, no on-site visit was made to BTCB. He
said that BTCB was less than a year old when the account was
opened and Dominica was unfamiliar territory, which meant that
an on-site evaluation was unlikely to provide meaningful
information. He said that he had met with BTCB senior personnel
in Miami, including John Long, and was comfortable with the
bank's leadership. He noted that BTCB had a limited
correspondent relationship that imposed no credit risk to the
bank. He said that, because BTCB was their only client on
Dominica, he had made the decision that it was not ``cost
effective'' to fly there.
The international department head said that he was unaware,
in 1998, that Dominica had a reputation for weak banking
regulation and anti-money laundering controls. He indicated
that he had recently read press reports about Dominica's anti-
money laundering deficiencies.\163\ The documentation suggests
that no inquiry was made into BTCBs anti-money laundering
efforts either. The Security Bank file for BTCB did not contain
copies of written anti-money laundering policies or procedures
in place at BTCB nor is the issue of BTCB's anti-money
laundering efforts ever mentioned or analyzed.
---------------------------------------------------------------------------
\163\ In June 2000, Dominica was named by the Financial Action Task
Force on Money Laundering, the leading international anti-money
laundering organization, as one of 15 countries that failed to
cooperate with international anti-money laundering efforts.
---------------------------------------------------------------------------
Security Bank's internal account opening documentation
indicates that the BTCB account was opened in June 1998, with
three account signatories, Requena, Betts and Royer. Over the
next 2 years, Security Bank provided primarily three services
to BTCB: a checking account, a ``supernow account'' which
functioned as a savings account and increased the interest paid
on BTCB deposits, and access to Security Bank's wire transfer
services.
Monitoring the Account Activity. The evidence indicates
that, once the BTCB account was opened, Security Bank failed
adequately to monitor the account activity and failed to
provide effective responses to repeated signs of suspicious
activity.
The international department head said that BTCB was ``a
very big account'' for Security Bank, and BTCB was its largest
foreign bank client. An analysis of the BTCB account
transactions shows that, over the course of 2 years, more than
$50 million moved through its Security Bank account. The
initial deposit of $3.5 million was followed 2 days later by a
wire transfer of $3.6 million from BTCB's account at
PaineWebber's clearing firm, Correspondent Services
Corporation. Over the next two years, the account saw 16
transactions involving $1 million or more, with the largest
involving $6.5 million. Many of the transactions appear
associated with matters under civil or criminal investigation
or otherwise open to question.\164\ In addition, Security Bank
account statements and wire transfer documentation show
numerous transactions over two years involving persons or
companies closely associated with BTCB and collectively
involving more than $3.5 million.\165\ Although BIV personnel
considered similar transactions signs of possible ``self-
dealing,'' Security Bank personnel indicated that they had felt
no concern nor asked any questions about BTCB transactions
involving affiliated parties.
---------------------------------------------------------------------------
\164\ These transactions included the following:
--$3.8 million in deposits and $3 million in withdrawals
involving the Koop fraud (see explanation of Koop fraud in the
appendix);
--$2.3 million in deposits and $2 million in withdrawals
involving companies or persons associated with the Cook fraud (see
explanation of Cook fraud in the appendix);
--$770,000 in deposits and $10,000 in withdrawals involving
Zhernakov, Chatterpaul or Free Trade (see explanation of the Gold
Chance fraud in the appendix);
--$10 million in deposits and withdrawals involving McKellar,
Garner and possibly the JVW high yield investment funds (see
explanation of the JVW interpleader action in the appendix);
--$1 million deposit by Tiong, and $30,000 in withdrawals and an
attempted $200,000 withdrawal involving companies or persons associated
with the KPJ Trust (see explanation of the Tiong $1 million investment
in the appendix);
--$443,000 in deposits and $320,000 in withdrawals involving
companies associated with Scott Brett (see explanation of Brett
investors in the appendix); and
--$600,000 in deposits and $500,000 in transfers involving
Global/Vector Medical Technology (see explanation in the appendix).
\165\ These transactions included:
--L$2 million in deposits and withdrawals involving Global
Investment Fund, S.A., a BTCB affiliate;
--L$1.3 million in payments to John Long or his companies
Republic Products Corporation and Templier Caisse S.A.;
--L$950,000 in deposits and withdrawals involving FEC Financial
Holdings;
--L$239,000 in payments to Requena, BTCB's president;
--L$134,000 in payments to Mavis or Anthony Betts, relatives of
George Betts, BTCB's chief financial officer, or to Lavern Erspan, a
woman associated with Mavis Betts;
--L$110,000 in payments to Mary Brazie, wife of Charles Brazie, a
BTCB vice president; or to Brazie's apparent landlord, Clifford
Shillingford;
--L$105,000 in payments to Stuart K. Moss, a U.K. resident who
works with BTCB; and
--L$56,000 in payments to Ralph Hines, who performed work for
BTCB.
---------------------------------------------------------------------------
When asked about BTCB's account activity, Security Bank
personnel told Minority Staff investigators that they had never
witnessed evidence of actual illegal activity in the account
and had not been concerned about particular transactions. One
Security Bank employee said that they had expected a
correspondent account to show large movements of funds,
particularly when, in the case of BTCB, the bank also owned a
securities firm.
Security Bank personnel also described a number of
troubling incidents over the 2 years the account was open,
involving law enforcement inquiries, BTCB attempts to include
Security Bank's name on documents associated with multi-million
dollar transactions, BTCB's high yield investment program, and
BTCB's involvement with Internet gambling.
The first incident occurred in July 1998, 2 months after
the account was opened, when the bank received inquiries from
U.S. law enforcement about BTCB account transactions involving
William Koop. In response, a July 27, 1998 Security Bank
memorandum shows that the bank contacted two U.S. banking
agencies, the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, to request information
about BTCB. The banking regulators advised Security Bank to be
``cautious'' due to concerns that BTCB was possibly involved
with ``bogus guarantee[s]'' known as the ``Grenada
Guarantees,'' but ``there were no prohibitions [on] doing
business'' with BTCB. The memorandum noted that a Secret
Service agent had also checked but found ``no adverse
information'' on BTCB.
A month later, Security Bank sent a letter dated August 27,
1998, to the Federal prosecutor handling indictments related to
the Koop fraud and included the following request:
If there comes a time that your office feels that
information should be given to us concerning British Trade and
Commerce Bank that indicates that we should not do business
with British Trade and Commerce Bank, it would be appreciated
if you would so advise.
Security Bank personnel said that the prosecutor advised
calling U.S. banking regulators, but never suggested closing
the BTCB account. That Security Bank made inquiries to four
different government agencies shows it had concerns about BTCB
and made reasonable due diligence inquiries about the bank, but
received no adverse information indicating the account should
be closed.
Additional troubling incidents, however, followed. Security
Bank memoranda describe three separate occasions, for example,
on which it had to insist on BTCB's removing its name from
documentation related to multi-million-dollar certificates of
deposit (``CDs''). The incidents, which took place over a two
month period in late 1998, involved BTCB-prepared CDs for $1
million, $6 million and $20 million.\166\
---------------------------------------------------------------------------
\166\ The three incidents were described in Security Bank
documentation as follows:
--A 10/21/98 Security Bank memorandum stated that BTCB had
telephoned to request the bank's approval of a $6 million CD for ``The
Northfield Trust,'' which included language stating that the $6 million
``will be paid by the issuing Bank or at the counters of Security
Bank.'' The memorandum stated that Security Bank would not honor the CD
and its name ``must not appear'' on the paperwork.
--A 11/5/98 Security Bank memorandum stated that 2 weeks later,
BTCB sought approval of a $20 million draft CD for ``Heller
Securities'' which an accompanying letter stated was ``payable upon
presentation at our counter as the Issuing Bank, or upon three (3)
banking days advance notice . . . at the counter of our U.S.
correspondent bank, Security Bank.'' The memorandum stated that
Security Bank ``will not make any commitment like that one, as . . .
discussed before.'' Security Bank's international department head
indicated that he considered this CD ``very similar'' to the rejected
CD, and was ``concerned'' that BTCB was not familiar with or did not
understand U.S. banking rules regarding CDs. He said that he personally
spoke with Betts of BTCB and told him that the wording created a
possible liability for Security Bank. He said that Betts told him that
he was ``wrong'' and Security Bank would have ``no responsibility'' for
the transaction. He said Security Bank had nevertheless insisted on
removing its name from the letter.
--A Security Bank memorandum dated about 1 month later, on 12/
10/98, stated that a draft $1 million CD containing the same wording as
the rejected CD from October, had been faxed by Banco Solidario de
Costa Rica which was attempting to verify it. The memorandum said that
Security Bank informed the Costa Rican bank that it ``did not accept
any responsibility and that the document had no validity for us.'' The
international department head said that he had, again, become worried.
He said that he had thought BTCB either was acting in good faith but
did not understand U.S. banking law, or that it was trying to take
advantage of Security Bank.
---------------------------------------------------------------------------
Another troubling incident, in November 1998, involved a
sudden influx of over 300 checks, primarily from U.S. residents
in amounts ranging from $100 to $10,000, which BTCB presented
to Security Bank for clearing. All of the checks were made out
to LBM Accounting, a Bahamian firm that allegedly provided
accounting services to international business
corporations.\167\ Security Bank personnel indicated to BTCB
that the bank ``didn't like that type of deposit,'' and would
not clear similar checks in the future. The bank records
contain no evidence that BTCB attempted to deposit those types
of checks again.
---------------------------------------------------------------------------
\167\ This company is also discussed in the case history on
American International Bank.
---------------------------------------------------------------------------
Another incident, which began with a $1 million wire
transfer by an individual from Malaysia named Tiong to BTCB's
account in September 1998, escalated after a February 1999
letter from Tiong demanded that Security Bank return his
funds.\168\ The letter stated that the wire transfer
documentation had instructed Security Bank not to accept the
funds unless it agreed to return them a year later. The Tiong
letter stated that, because Security Bank had not acknowledged
that condition prior to accepting the $1 million, he wanted his
money back. Telephone conversations and correspondence followed
involving Security Bank, BTCB and Tiong. Security Bank sent
Tiong a letter denying any liability in the matter. Security
Bank's international department head indicated that this
incident had raised concern that BTCB might be, again, misusing
Security Bank's name in dealing with its clients.
---------------------------------------------------------------------------
\168\ This matter is described in more detail in the appendix.
---------------------------------------------------------------------------
Still another incident took place during the summer of
1999, when Security Bank received a fax dated August 19, 1999,
from a company called Actrade Capital asking it to confirm a $1
million ``Standby Letter of Credit.'' The standby letter of
credit by BTCB was accompanied by a document stating that the
``Confirm and Paying Bank'' was Security Bank. Security Bank
sent a fax the next day to Actrade Capital stating that it
``has not and will not confirm this letter of credit[.] [T]he
name of Security Bank, N.A. has been used without our
authorization and we do not have or accept any liability on
this matter.'' The international department head indicated that
he personally told Betts at BTCB ``don't do this anymore,''
because BTCB had no credit relationship with Security Bank and
would not confirm its letters of credit. He said this incident
had caused additional concern about BTCB.
Security Bank reported that it later received, on three
occasions, civil subpoenas or law enforcement inquiries about
these and other incidents involving BTCB clients.
In addition to these incidents, at some point during 1998
or 1999, according to the international department head, BTCB
asked Security Bank to consider providing them with a line of
credit. He said that Requena talked to him personally on
several occasions about obtaining credit from Security Bank. He
said that he did not support extending credit, however, because
of the bank's ``unusual'' activities. He indicated, for
example, that BTCB was not engaged in the typical international
trade or lending activities engaged in by their other foreign
bank clients. He said that Requena had explained that BTCB was
instead an ``investment bank'' engaged in investing in ``high
yield paper.'' He said that Requena had indicated BTCB would,
for example, invest client funds, earn a 20% return, pay 15% to
their clients, and keep 5% for the bank. Security Bank's
international department head said that he had ``never heard''
of investments with such high rates of return, and did not
understand ``how it is done.'' He said that BTCB was also
involved in unusually large credit transactions--involving $1
million, $6 million, even $20 million--that Security Bank
itself did not have the capital to handle. He said, ``I
couldn't understand their activities.'' He said that, because
he could not understand BTCB's high yield investment activities
or its multi-million-dollar letters of credit, he had declined
to recommend extending BTCB a credit relationship.
The international department head stated, however, that
while he did not support extending BTCB credit, he did not
support ending the relationship either. He said that, while
some of the BTCB transactions were worrying, Security Bank had
a ``good relation'' with BTCB, the BTCB account had ``good
balances,'' and the transactions were ones that Security Bank
felt it had ``under control.'' He said that the inquiries made
about the bank with U.S. banking regulators and the Secret
Service had also reassured them about BTCB, so the account was
allowed to continue into 2000.
Anti-Money Laundering Controls and Oversight. Discussions
with Security Bank's anti-money laundering personnel and review
of its anti-money laundering manual disclosed a number of
deficiencies in Security Bank's written materials and day-to-
day monitoring of accounts for suspicious activity, which were
illustrated by the bank's failure to conduct adequate
monitoring of the BTCB account.
One key deficiency was that Security Bank's Bank Secrecy
Act (``BSA'') Manual did not direct either the BSA officer for
the bank or individual account officers to monitor accounts for
suspicious activity. While the BSA Manual provided detailed
guidance and procedures for identifying and reporting cash
transactions, it contained virtually no guidance or procedures
for identifying and reporting suspicious activity. No
provisions directed bank employees to report suspicious
activity to the BSA officer. No provisions required the BSA
officer to examine bank transactions for suspicious activity.
No provisions discussed the filing of Suspicious Activity
Reports. No provisions even mentioned correspondent banking.
When Security Bank's BSA officer was asked about his anti-
money laundering duties, he did not mention monitoring accounts
or transactions for suspicious activity. When asked whether he
had ever reviewed the BTCB account, he indicated that he had
not because the account had rarely involved cash transactions.
He indicated that it was his responsibility to monitor cash
transactions, while it was the responsibility of another
Security Bank official to monitor wire transfer and other non-
cash transactions. The Security Bank official responsible for
monitoring non-cash transactions had not reviewed the BTCB
account either. He explained that, because bank policy
prohibited wire transactions by non-customers, and all
customers underwent a due diligence review prior to opening an
account, bank policy did not require reviewing wire transfers
for suspicious activity, beyond an automatic OFAC screening
when a wire transfer was first recorded.\169\
---------------------------------------------------------------------------
\169\ The Security Bank monthly account statements also contained
much less wire transfer information than other statements reviewed in
the investigation. A bank official explained that, in 1999, due to
increased wire traffic, the bank had purchased a new software system
which identified individual wire transfers primarily by providing a
unique identification number for each transaction. For example, an
outgoing wire transfer might be designated on the monthly account
statement as: ``OT906020010,'' without any origination or beneficiary
information. An incoming wire transfer might be designated
``IN905060020.'' He said that this software had been selected because,
among other features, it enabled the bank's electronic database to
process wire transfers more quickly, in part by making more rapid OFAC
checks. When the new system was implemented in May 2000, however, it
also eliminated the names of wire transfer originators and
beneficiaries from the monthly account statements, significantly
increasing the difficulty of money laundering analysis. The analysis
was more difficult because instead of analyzing wire traffic simply by
looking at an account's monthly statement, a second set of documents--
the original wire transfer documentation with origination and
beneficiary information--would have to be collected and compared to the
information in the account statement. Making the work even more
difficult was the absence of any Security Bank software capable of
analyzing wire traffic data for patterns or unusual transactions. These
obstacles to effective anti-money laundering oversight continue today.
---------------------------------------------------------------------------
In short, Security Bank's policies failed to require any
monitoring of wire transfers for suspicious activity and, even
if it had required this monitoring, its software made anti-
money laundering analysis difficult. The result was that no
Security Bank employee, in 2 years, had reviewed or analyzed
the nearly $50 million in incoming and outgoing wire transfers
in BTCB's account.
But even if Security Bank had adequate policies, procedures
and automated systems in place and its BSA officer had reviewed
the BTCB account, it is unclear whether the bank would have
identified or reported any suspicious activity. In the words of
one Security Bank official, correspondent bank accounts were
expected to show ``lots of money going in and out.'' The bank
had no procedures calling for heightened scrutiny of
correspondent accounts, offshore banks or transactions in bank
secrecy jurisdictions.
Closing the Account. Security Bank personnel said the
incident that ``spilled the cup'' with respect to the BTCB
account and led to its closure occurred in May 2000, when it
discovered BTCB was involving Security Bank in Internet
gambling. One Security Bank employee explained that the bank
simply did not want to be associated with gambling; another
said that all of the other BTCB incidents causing concern had
involved single transactions which Security Bank had felt could
be controlled, but Internet gambling involved multiple
transactions by multiple parties that were beyond its control.
In a letter dated May 16, 2000, Security Bank informed BTCB
that it objected to use of its name in gambling websites and
advised that the BTCB account would be closed ``within 30 days
of this communication.'' The account was closed, in fact, about
60 days later in July 2000.
Security Bank personnel indicated that, overall, Security
Bank had been careful not to go along with questionable
transactions requested by BTCB and had closed the account once
Internet gambling problems were uncovered. The personnel
stressed that they felt they had never seen any direct evidence
of illegal activity by the bank and were not convinced that the
bank had been engaged in any wrongdoing. One pointed out that
when all of the questionable events involving BTCB were
discussed in the same interview, they conveyed a much stronger
impression than when the account was open and each problem
occurred and was resolved weeks apart. The international
department head said that he felt that Security Bank could not
be faulted in its handling of the BTCB account except for
``maybe delaying the closing of the account.''
(c) First Union National Bank
First Union National Bank is a major U.S. bank, with over
72,000 employees, $250 billion in assets, and one of the larger
correspondent banking portfolios in the United States. Although
First Union's correspondent banking department rejected a BTCB
request for a correspondent relationship, BTCB managed to open
a money market account with First Union's securities affiliate
and used it as if it were a correspondent account for almost 18
months, from September 1998 until February 2000. During that
period, BTCB moved more than $18 million through the account.
First Union closed the account due to concerns about suspicious
activity and to stop BTCB from claiming a correspondent
relationship. It subsequently discovered and closed several
other First Union accounts associated with BTCB.
Interviews were conducted with First Union employees
involved in the opening, administration and closing of the BTCB
account and in First Union's anti-money laundering program.
Documentation in First Union files, account statements, and
other materials and information were collected and reviewed.
Due Diligence Prior to Opening the Account. The evidence
indicates that, in September 1998, BTCB opened a money market
account with First Union's securities affiliate without any due
diligence review. BTCB then requested a formal correspondent
relationship, but was turned down by First Union due to
negative information about the bank.
According to First Union interviews and documentation, on
September 17, 1998, First Union Brokerage Services, Inc.
accepted a telephone call from BTCB and immediately opened a
money market account for the bank, called a ``CAP'' account.
First Union Brokerage Services, Inc., now First Union
Securities, Inc., is a subsidiary of First Union Corporation
and closely affiliated with First Union National Bank. It is a
fully licensed and regulated broker-dealer.
A licensed broker at a First Union Brokerage Services
``call center'' opened the BTCB account. First Union indicated
during interviews that rules in place at the time prohibited
opening a CAP account for a bank, but those rules had not been
spelled out and the broker was unaware of them. First Union
said that research has since determined that no bank, other
than BTCB, has ever opened a First Union CAP account, and its
rules have since been clarified to prevent any bank from
opening a CAP account in the future.
First Union said that the money market account was
immediately opened, without any due diligence, on the
understanding that the accountholder would subsequently provide
a limited amount of account opening and corporate
documentation. First Union indicated during interviews that the
broker acted in accordance with accepted practice in 1998,
although its money market account opening procedures have since
been changed. First Union said that its brokers must now
complete an initial due diligence checklist over the telephone
prior to opening a CAP account. It said that foreign nationals
or nonresident aliens are no longer permitted to open CAP
accounts over the telephone; their inquiries are instead
directed to First Union's private bank. It said that, if a U.S.
citizen or resident alien provided satisfactory oral
information in response to the due diligence telephone
checklist, a First Union broker could authorize the immediate
opening of a money market account during the telephone
conversation, subject to a subsequent review by compliance
personnel and senior securities personnel.
It is unclear who from BTCB made the call to First Union's
securities affiliate. First Union's ``New Commercial CAP
Account Application'' lists two contacts for the account: Ralph
Hines and George Betts. The application also provides a U.S.
address for the account: ``British Trade and Commerce Bank . .
. c/o First Equity Group of [Florida], 444 Brickell Avenue.''
Later bank statements list the same 444 Brickell Avenue
address, but send the statements in care of ``FEC Financial
Holdings, Inc.'' The CAP account application is signed by
Betts.
Within a few months of opening the CAP account, BTCB asked
First Union to issue a letter of credit to secure a BTCB credit
card account with Mastercard. BTCB was initially directed to
First Union's domestic corporate banking personnel. However,
when told that BTCB was ``chartered in Dominica and owned by
Texans,'' a domestic corporate banker directed BTCB to First
Union's international division. First Union records indicate
that BTCB contacted three different international bankers at
different First Union offices over several months in late 1998
and early 1999, in an attempt to open a formal correspondent
relationship, but First Union personnel declined to issue a
letter of credit or otherwise establish a correspondent
relationship with BTCB.
First Union interviews indicate that its most detailed due
diligence review of BTCB was conducted in late 1998, after
Hines had contacted a Miami office that formerly belonged to
Corestates Financial Corporation, a U.S. bank which had been
purchased by First Union. BTCB submitted a large packet of
information about its ownership, lines of business and
financial status, and offered to deposit $15 million with the
bank. In response, several First Union employees in the
international division made inquiries about the bank. One First
Union correspondent banker indicated in an interview that he
asked three other U.S. banks about BTCB which, by then, had
been in operation for over a year. The First Union
correspondent banker indicated that he had received uniformly
negative reports about BTCB, including statements that the bank
was ``not reputable'' and First Union should ``stay away.''
The First Union correspondent banker also reviewed the
materials provided by BTCB. He said that BTCB had presented
itself as having strong ties to the United States, stressing
its ownership of First Equity Corporation of Florida, but he
was not familiar with that securities firm. He indicated that
BTCB's unaudited financial statement as of June 1998, had
raised ``red flags.'' He said it had indicated, unlike most
banks, that BTCB was involved with investment, rather than
lending activities. He noted that BTCB had claimed $400 million
in ``securities held for investment and financing'' and then
listed three ``unusual'' securities. The first was $130 million
in ``Government of Grenada Guarantees,'' which he said he had
``never heard of' and could not verify as having the value
indicated. The second was $76 million in ``Bolivian Municipal
Bonds.'' He said that Bolivian bonds represented a ``very small
market,'' and the large investment figure claimed in the
financial statement did not ``make sense'' to him. He also
questioned the value of the third investment, $140 million in
``Russian Government Guarantees.'' He said that, together, the
listed securities were ``beyond credibility.''
He said the statement's claim that BTCB had $9 million in
retained earnings after just 9 months of operation was also
``unusual'' and ``not credible.'' He said that Note 8's claim
that BTCB had earned $10 million from ``primarily the financing
of bonds from the Government of Venezuela'' was also ``not
feasible'' since Venezuela was then experiencing economic
hardship. He also questioned the $1 million Treasury stock
entry, given BTCB's brief existence. He said that, overall, the
financial statement was ``not credible.'' He said that he did
not question BTCB about its financial statement, however, since
the negative reports on the bank's reputation had already led
him to recommend against establishing a correspondent
relationship.
Although BTCB's request for a correspondent relationship
was rejected, BTCB began to use the CAP account at First
Union's securities affiliate as if it were a correspondent
account and began to claim a correspondent relationship with
First Union. First Union personnel were adamant in rejecting
BTCB's claim of a First Union correspondent relationship,
calling that characterization of the relationship between the
two banks ``unfair'' and ``inaccurate.''
Monitoring the CAP Account Activity. The evidence indicates
that, about 6 months after BTCB opened the CAP account, First
Union began receiving reports of unusual account activity,
suspicious letter of credit transactions, and inaccurate claims
by BTCB that it had a correspondent relationship with First
Union. While First Union quickly detected and analyzed the
transactions in the BTCB account, it was slow to take decisive
action in response. After first asking BTCB to voluntarily
close its account in May 1999, First Union unilaterally closed
it 9 months later, in February 2000.
The CAP account opened by BTCB functioned in the same way
as a checking account. BTCB made deposits and withdrawals,
using wire transfers, deposit slips and checks drawn on the
account. First Union paid interest on the deposits and imposed
charges for wire transfers, overdrafts and other account
activity. First Union sent BTCB monthly account statements.
First Union also opened a brokerage account for BTCB, although
this account was never used. BTCB used the CAP solely to move
funds; it never used the account to purchase any securities.
BTCB opened the CAP account on September 17, 1998, with
$10,000. The account saw little activity for about 6
months.\170\ The next 9 months saw a significant increase in
account activity, as millions of dollars began moving through
the CAP account. An analysis of the BTCB account transactions
shows that, overall during its almost 18 months of existence,
about $18 million moved through the CAP account. Nine
transactions involved $1 million or more, with the largest
involving $6 million. Many of the transactions appear
associated with matters under civil or criminal investigation
or otherwise open to question.\171\
---------------------------------------------------------------------------
\170\ Transactions of note included a $175,000 deposit by BTCB in
November 1998, in connection with its requests seeking a letter of
credit and correspondent relationship with First Union. In December
1998, BTCB deposited 200 small checks and increased the closing balance
to $252,000. January saw 185 small deposits, BTCB's withdrawal of the
$175,000, and a closing balance of $187,000. February saw $279,000 in
small deposits, and a closing balance of $467,000. March saw a $400,000
withdrawal by BTCB which sent the funds to its account at Security
Bank. The closing balance in March was only $16,000.
\171\ These transactions included the following:
--$2 million in withdrawals from April to October 1999,
involving companies or persons associated with IBCL and the Cook fraud
(see explanation of the Cook fraud in the appendix);
---$6 million deposit on 4/26/99, involving McKellar, Garner and
possibly the JVW high yield investment funds, followed by 101 outgoing
wire transfers totaling $5.7 million, including $1 million to BTCB's
account at Correspondent Services Corporation and $1 million to BTCB's
account at Security Bank (see explanation of the $10 million CD
interpleader action in the appendix);
--$1 million deposit on 10/19/99 by Garner, possibly involving
the JVW investment funds, followed by multiple outgoing wire transfers
to bank accounts around the world;
--$3 million Gold Chance deposit on 12/15/99, followed by
multiple wire transfers to bank accounts around the world (see
explanation of the Gold Chance fraud in the appendix);
--$2.1 million in transfers from July 1999 to January 2000
involving Orphan Advocates, China Fund for the Handicapped, and
``Corporation Project of the Rehabilitation of Disable Children'' (see
explanation of the Gold Chance fraud in the appendix);
--$185,000 in transfers in November 1999 involving the KPJ Trust
(see explanation of the $1 million investment involving KPJ Trust in
the appendix);
--$220,000 transfer involving Aurora Investments S.A., a company
associated with Scoff Brett, a part owner of BTCB (see explanation of
Brett investors in appendix); and
--$300,000 in deposits involving Global/Vector Medical
Technology (see explanation in the appendix).
---------------------------------------------------------------------------
April 1999 was the first month of increased account
activity, when a $6 million deposit was made from a First Union
attorney account belonging to Robert Garner.\172\ This $6
million deposit was followed by almost $4 million in
withdrawals. The April closing balance was $2.3 million, more
than five times the previous largest balance in the account.
---------------------------------------------------------------------------
\172\ The $6 million deposit is associated with the JVW
interpleader action and is described in more detail in the appendix.
---------------------------------------------------------------------------
On April 15, 1999, a First Union representative in Brazil
sent an email to First Union's international division
describing a customer engaged in negotiating a credit
arrangement with BTCB which claimed to ``have [an] account with
First Union National Bank.'' In response, another First Union
employee sent an email stating that a corporate customer in
Montreal had reported ``expecting to receive a $30 [million]
standby letter of credit'' from BTCB who had listed First Union
``as a reference.'' These and other First Union emails in April
1999 expressed concerns about BTCB, Dominica, and whether the
CAP account should be closed. One stated: ``Dominica is about
20 sq. miles, with mountainous territory. Their business is
banana exports. . . . Very dirty offshore banking center.''
Another said, ``I think if we don't feel good about the client,
we absolutely must close the account.'' First Union's
international division asked its anti-money laundering
personnel to research the activity in the CAP account.
On May 3, 1999, a First Union employee circulated an email
about the BTCB account stating the following:
We have a multitude of problems here:
(1) International refused to open this acct originally
for cause.
(2) Customer established an acct via telephone thru CAP
in Sept. of 98.
(3) On 4/26/99, $6MM rolled into the account, via wire,
and half of that rolled out THE SAME DAY, via wire, and went
all over the place. . . .
(4) Customer is indicating that they are a correspondent
of First Union (they're not); we need a cease and desist letter
and we also need to close this account.
[Emphasis in original text.]
On May 5, another First Union employee forwarded a copy of
a BTCB letter discussing a $6 million letter of credit. The
letter by BTCB, dated April 13, 1999, stated that the bank was
``ready, willing and able to issue a Standby Letter of Credit
in the favor of US C&R HOLDINGS INC. for the amount of . . .
$6,000,000.'' [Emphasis in original text.] An attached 1998
financial statement for BTCB referenced deposits of over
$800,000 at First Union, which apparently led to First Union's
being asked to confirm the information.
On May 13, 1999, First Union sent BTCB a letter stating
that, in a ``written communication with third parties,'' BTCB
had ``implied that First Union will somehow act in concert with
[BTCB] in a letter of credit arrangement. You are directed to
immediately cease and desist from such unauthorized use of
First Union National Bank's name, and from any express or
implied indication that you have a correspondent or any other
sort of relationship with First Union other than as a
depositor.''
The letter did not, however, ask BTCB to close the CAP
account. Instead, explained a First Union correspondent banker
in an interview, the decision had been made to make a verbal
request to BTCB to close the CAP account. He said that he
personally made this request in a May telephone conversation
with Ralph Hines who responded with a ``belligerent tone.'' He
said they then waited to see whether BTCB would close the CAP
account. When asked why First Union did not put the request to
close the account in writing or unilaterally close it, the
correspondent banker indicated that the bank was worried that
it did not have sufficient proof of wrongdoing and BTCB might
sue them, so they had decided to try to encourage BTCB to close
the account on its own.
BTCB chose not to close the account. Instead, it used the
next 4 months to move over $5 million through the CAP account,
including a $900,000 wire transfer to International Business
Consultants, Ltd., a company associated with the Cook fraud,
and a $3 million deposit by the China Fund for the Handicapped
for BTCB's high yield investment program.\173\ On August 27,
1999, a First Union representative in Argentina sent an email
to the international division indicating that BankBoston had
called to confirm a statement by BTCB that it was a
correspondent of First Union. First Union's international
division replied in an email of the same date:
---------------------------------------------------------------------------
\173\ For more information, see the explanation of the Gold Chance
fraud in the appendix.
They are not, but they continue to claim that they have
a correspondent banking relationship with First Union. We have
asked them to close an unauthorized CAP account that they
opened last year. This is their only claim to a relationship
with First Union. We have sent a legal advice to the bank's
President, requesting that they stop promoting false facts, and
to refrain from using First Union's name again. They are not a
---------------------------------------------------------------------------
correspondent!
This email was ``broadcast'' to all First Union
international offices as a warning about BTCB. Despite the
email's exasperated tone, First Union took no further action to
close BTCB's CAP account.
The next 4 months saw another $5 million move through the
CAP account, including a $1 million deposit from the Robert
Garner account and $300,000 from the Vector Medical Technology
account.\174\ December witnessed the $3 million Gold Chance
deposit, followed by $3 million in wire transfers to bank
accounts around the world.
---------------------------------------------------------------------------
\174\ For more information, see the appendix, in which the $1
million Garner transfer is discussed in connection with the $10 million
CD interpleader action and the $300,000 deposit is discussed in
connection with Vector Medical Technology matter.
---------------------------------------------------------------------------
Closing the BTCB Account. In late December 1999, BTCB
attempted to withdraw $1 million on an account balance of about
$733,000. First Union refused to approve the overdraft and
another round of internal emails raised questions about the
account, including the risk of monetary loss to First Union. On
December 28, 1999, the First Union correspondent banker then in
charge of the Americas division decided the time had come for
the bank to unilaterally close the account. He telephoned BTCB
and informed it that the account was going to be closed and
then sent an email to the legal division stating the following:
URGENT!! This account has significant wire and cash
letter activity that is suspicious. We need to close account! I
just spoke to the . . . accounts Manager at BT&C and I
requested for the bank to close the account at once. He
requested for me to send a letter to the bank's President. . .
. This account was opened by the CAP department without
International's authorization, and without any compliance
requirements. I have reported this problem to Loss Prevention
for over 1 year. It has turned out to be a headache for the
bank, as this entity boasts to be a correspondent of First
Union National Bank. . . . I need a letter as soon as possible.
In an interview, the First Union correspondent banker said
that later the same day, he received a telephone call from
Betts in Florida asking for the account to be kept open, at
least to the end of the year, to allow completion of ongoing
transactions. On December 29, 1999, First Union sent a letter
to BTCB stating that the CAP account would allow fund transfers
for 10 days and close in 30 days. No significant account
transactions took place after that letter, aside from a final
$1 million transfer to Orphan Advocates LLC. First Union
notified law enforcement about BTCB's actions, and, on February
7, 2000, First Union closed the CAP account.
But the BTCB story was not over. For 6 months, First Union
continued to receive reports of suspicious activity and
requests to confirm a First Union correspondent relationship.
On January 13, 2000, for example, Huntington National Bank in
Cleveland asked First Union to confirm a BTCB letter of credit
for $30,000. First Union personnel summed up their reaction
with one word: ``unbelievable.'' First Union sent word that it
had no correspondent relationship with BTCB and would not
confirm a letter of credit.
On May 1, 2000, First Union received two telexes from BTCB
about a $100 million transaction. The two telexes, which
contained the same message, began as follows:
Please advise First Union National Bank Jacksonville,
Florida as follows. We British Trade and Commerce Bank confirm
with full responsibility the authenticity of the issuance of
promissory notes numbers 1-10 with a nominal value of ten
million dollars each to in total equals 100 million United
States dollars in favor of St. David's Investment Trust and
Bank Co., Ltd.
First Union personnel said their reaction to this $100
million telex was twofold: ``unbelievable'' and ``this is
fraud.''
On May 4, 2000, First Union sent a second ``broadcast''
warning to all of its international personnel about BTCB. The
email stated, ``Please be advised that, under no circumstances,
is business to be conducted with [BTCB] without first
contacting me.'' [Emphasis in original text.]
On May 8, 2000, First Union sent BTCB a letter stating:
[W]e have become aware of a Brokerage account . . . in
the name of [BTCB]. We have also received two unauthenticated
SWIFT messages from [BTCB] dated May 1, 2000 confirming the
issuance of ten promissory notes in the amount of ten million
dollars each. . . . Please be advised that it is our policy to
work and maintain accounts only with foreign banking
institutions that meet our internal compliance criteria and
that fit our line of business criteria. [T]he Bank has
ascertained that your company does not fit our requirements. .
. . [E]ffective immediately, your above referenced account has
been closed. Please refrain from attempting to use this account
and from sending First Union National Bank or any subsidiaries
thereof transaction related information or requests in the
future. . . . [A]ny attempt to use First Union's services or
its name will invite First Union to consider other remedies it
may have.
First Union reported the telexes to law enforcement, and
placed BTCB on an internal ``hotlist'' to prevent BTCB from
opening a new account.
In July 2000, First Union received an email indicating that
a Costa Rican bank was discussing a standby letter of credit
with BTCB who was, again, claiming a correspondent relationship
with First Union. First Union also learned that BTCB had listed
First Union as one of its correspondent banks in the widely-
used Polk directory of correspondent banking relationships. One
First Union correspondent banker wrote: ``Too late . . . it is
already in the Polks directory!! We are one of their
correspondents listed . . . unbelievable.'' But another First
Union employee responded, ``It's never [too] late! . . . Polk's
is now going through the update process and has informed us
that they will honor our written request to remove our name
from BTC's entry if BTC includes us.'' First Union sent a
letter regarding the Polks directory on July 21, 2000.
First Union personnel told Minority Staff investigators
that the bank's experience with BTCB was an eye-opening lesson
about how a foreign bank can misuse a U.S. correspondent
relationship. They indicated that they felt BTCB had repeatedly
mischaracterized its relationship with First Union, had
repeatedly misused First Union's name to lend credibility to
questionable transactions, and had moved suspect funds through
First Union accounts.
Other BTCB-Related Accounts at First Union. In interviews,
First Union personnel indicated that they had since learned of
other First Union accounts with ties to BTCB.\175\ They
indicated that they had closed or were in the process of
closing these accounts. First Union also learned from Minority
Staff investigators that its correspondent account with Banque
Francaise Commerciale (``BFC'') in Dominica, had functioned as
a conduit for BTCB banking transactions for over 2 years. An
analysis of BFC monthly account statements showed transactions
linked to BTCB from July 1997 until May 1999. First Union
subsequently decided to close the BFC account as well.
---------------------------------------------------------------------------
\175\ See chart entitled, ``BTCB Related Accounts at First Union
National Bank.'' These accounts included:
--the Robert Garner attorney account, which was opened on 1/20/
98, had only a few transactions over 3 years, almost all of which
appeared to involve BTCB, and was scheduled for closure in October
2000;
--an FEC Financial Holdings, Inc. account, which was opened over
the telephone, operated for about 19 months from 11/12/98 until 6/30/
00, and appeared to involve primarily BTCB related transactions;
--a BTC Financial Services account, which was opened on 11/2/99,
appeared to involve primarily BTCB related transactions, and was
scheduled for closure in October 2000; and
--numerous accounts involving Global/Vector Medical Technology,
Inc., described in the appendix.
---------------------------------------------------------------------------
(d) Other U.S. Banks
In addition to the bank accounts just examined, BTCB
appears to have had access to a number of other U.S. based
banks, including past or present accounts at Banco
International de Costa Rica in Miami, Pacific National Bank in
Miami, U.S. Bank, Bank of Nova Scotia in New York, the Suisse
Security Bank and Trust account at Citibank, and the St. Kitts-
Nevis-Antilles National Bank account at Bank of America. It may
also be functioning through bank accounts opened by First
Equity Corporation of Florida, FEC Financial Holdings, Inc.,
BTC Financial Services or other related entities. It has also
carried on business through bank accounts belonging to
securities firms, including PaineWebber's Correspondent
Services Corporation account at the Bank of New York.
B. THE ISSUES
When it began operations in 1997, BTCB was an unknown,
offshore bank in a small bank secrecy jurisdiction known for
weak banking and anti-money laundering controls. BTCB was
nevertheless able, within 3 years, to open accounts at several
U.S. banks and move more than $85 million through the three
accounts examined in this investigation. Evidence indicates
that a significant portion of these funds involved illicit
proceeds from financial frauds or Internet gambling. While the
U.S. banks examined in this investigation closed their BTCB
accounts in 7 months to 2 years, BTCB was able to replace each
closed account with a new one, and continues to operate in the
United States today. BTCB's apparent case in opening and
utilizing U.S. bank accounts demonstrates how vulnerable the
U.S. international correspondent banking system is to a rogue
foreign bank intent on infiltrating the U.S. financial system.
Lack of Due Diligence by U.S. Banks
The BTCB case history illustrates problems in the due
diligence efforts at each of the three U.S. banks examined in
this investigation.
When asked to open an account, all three of the U.S. banks
worked to gather information about BTCB's ownership, finances
and business activities. The efforts of BIV and Security Bank
were made more difficult by the fact that BTCB was a new bank
with a limited track record, while First Union was able to draw
on reactions to the bank after more than a year of operation.
Despite their good intent and initial work, the due diligence
efforts of all three are open to criticism. BIV relaxed its
requirements for audited financial statements and bank
references, and opened the BTCB account prior to compiling a
complete file. Security Bank failed to conduct even minimal
research into Dominica, waived its usual on-site visit to the
bank, and failed to analyze BTCB's financial statement. First
Union obtained immediate negative information on BTCB and
decided against establishing a correspondent relationship, but
failed to close the CAP account which BTCB then used as if it
were a correspondent account. None of the three banks appear to
have asked BTCB anything about BTCB's own anti-money laundering
efforts.
Once BTCB began using its U.S. accounts, new warning
signals emerged. All three banks witnessed sudden surges in
account activity, involving millions of dollars. All three
received telexes or faxes about BTCB's participation in
questionable credit transactions involving $1 million, $6
million, $20 million, even $100 million. BTCB tried to pressure
BIV into signing a proof of funds letter containing unusual
language. BTCB tried to convince Security Bank that its high
yield investment program could earn returns of 20%. BTCB
ignored First Union's demands to stop claiming a correspondent
relationship.
The U.S. banks' response to these warning signs was
indecisive and ineffective. The BIV account officer indicated
that it never occurred to her that BTCB might be engaged in
wrongdoing. She assumed the sudden increase in account activity
was the normal growth of a new bank. She viewed in the best
possible light BTCB's letter requests, telex difficulties, and
involvement in letters of guarantee for $100 million. She
accepted BTCB's explanation that the repeated cash payments to
its personnel involved salary payments. Neither she nor any of
her superiors engaged in heightened scrutiny of an offshore
bank that, despite its brief existence, remote location and
limited assets, was moving millions of dollars through its BIV
account. It was only after the BIV team from New York arrived
that the BTCB account was reviewed with a skeptical eye, and
signs of self-dealing and possible money laundering were
followed by the account's immediate closure.
Security Bank personnel did not view BTCB through quite the
same rose-tinted glasses as the BIV account officer, but they
too gave BTCB the benefit of repeated doubts. Security Bank's
international department head indicated that the bank
repeatedly had concerns about BTCBs conduct, but felt they
never witnessed actual wrongdoing by the bank. Security Bank
knew about BTCB's high yield investment program, its lack of
lending or trade activities typical of foreign banks, and its
involvement in unusual, multi-million-dollar letter of credit
transactions. It was aware that at least one financial fraud,
committed by Koop, had utilized BTCB's account, and another
depositor was fighting BTCB for the return of $1 million.
Security Bank had itself repeatedly warned BTCB against
wrongfully involving it in credit transactions with third
parties. But Security Bank personnel showed no skepticism or
reticence in providing services to an offshore bank in a remote
location. The international department head said that he
thought he had stopped BTCB transactions misusing Security
Bank's name, and had protected the bank against loss by
refusing to extend BTCB any credit. The bank's anti-money
laundering personnel had assumed a correspondent account would
show multi-million-dollar movements of funds and made no
attempt to understand the transactions, clients or origins of
the funds. The only reason Security Bank closed the BTCB
account was because its name began appearing on Internet
gambling websites and it did not want to be associated with
gambling.
First Union initially displayed a much tougher attitude
than BIV or Security Bank toward BTCB. Its initial inquiries
produced an immediate negative impression of BTCB, and First
Union refused to establish a correspondent relationship.
Nevertheless, First Union did not initially recommend or even
seem to consider closing-BTCB's CAP account. Later, when it
began to receive information that BTCB was falsely claiming a
correspondent relationship with First Union, misusing the
bank's name in questionable transactions, and moving millions
of dollars in suspect funds through its money market account,
First Union responded with a weak verbal request that BTCB
voluntarily close the account. When BTCB refused, First Union
took another 9 months, replete with troubling incidents and
additional millions of dollars, before it unilaterally closed
the CAP account. The incident that finally produced decisive
action was an attempted overdraft by BTCB that risked monetary
loss to First Union.
Each of the U.S. banks examined in this investigation
provided BTCB with access to the U.S. banking system. BIV
opened the door to BTCB's U.S. activities, not only by
providing BTCBs first correspondent relationship, but also by
providing letters of reference for the bank, including the
undated general letter relied upon, in part, by Security Bank.
Security Bank personnel appeared oblivious to common signs of
financial fraud, such as high yield investment programs
offering double digit returns, standby letters of credit
involving millions of dollars, and a small foreign bank with no
lending or international trade portfolio but alleged access to
tens of millions of dollars. First Union provided a major boost
to BTCB's U.S. profile by allowing it to keep a money market
account for 2 years despite mounting evidence of misconduct--a
decision of increasing significance in U.S. financial circles,
given the consolidation of the U.S. banking and securities
industries and the uneven anti-money laundering controls being
applied to securities accounts.
None of the three U.S. banks appeared sufficiently aware of
or alarmed by the potential damage that a single rogue foreign
bank with a U.S. bank account could cause in the United States.
The potential damage is illustrated by the facts of the BTCB
case history, with all its suspect transactions, client
complaints, correspondent abuses, law enforcement
investigations, and prosecutions. Here, a single foreign bank
accepted $8 million in proceeds from the Koop and Cook frauds,
facilitating the swindling of hundreds of U.S. investors, with
their resulting criminal prosecutions and civil recovery
proceedings. It accepted $3 million in Gold Chance fraud
proceeds leading to civil litigation in Canada and related
discovery proceedings in the United States. It issued a $10
million bearer-share CD, resulting in lengthy civil litigation
in New York, and took $1 million from a Malaysian investor who
is still trying to recover his money through complaints to
officials in Dominica and the United States. These and other
BTCB-related investigations and proceedings continue to clog
U.S. courts and consume U.S. law enforcement resources, while
tarnishing the U.S. banking system with questions about its
safety, integrity and money laundering risks. None of it would
have happened if the U.S. banks had not opened their doors and
their dollar accounts to BTCB, an offshore bank in a suspect
jurisdiction.
Difficulties in Seizing Illicit Funds
The BTCB case history also illustrates the legal
difficulties involved in seizing funds related to financial
frauds from a U.S. correspondent account. The Koop, Cook, and
Gold Chance proceedings involve fraud victims seeking the
recovery of millions of dollars. In proceeding after
proceeding, BTCB has contested jurisdiction and impeded
discovery.
In Schmidt v. Koop, for example, a defrauded investor filed
civil suit in a Federal court in New Jersey to recover $2.5
million he wire transferred to BTCB. BTCB claimed that the U.S.
court had no jurisdiction over it and responded to discovery
requests with claims that it had no accounts for Koop or his
company. It was only after Koop pleaded guilty to criminal
charges and sent BTCB written authorization to disclose
information about his accounts that BTCB admitted the existence
of five Koop-related accounts and produced limited documents
for them, in exchange for being dismissed from the suit. It has
not returned any funds to the defrauded investor, even though
it may have $1.3 million in Koop-related funds. In the Gold
Chance civil suit, the fraud victims have named BTCB a
defendant and are actively seeking return of their funds. BTCB
is contesting jurisdiction and has refused to return the
disputed $3 million. In the Cook case, a receiver appointed by
the SEC to recover funds for defrauded investors was never told
by BTCB that BTCB had invested funds for some of the fraud
victims and may still retain possession of some of the money.
The SEC receiver is still mulling his legal options for
compelling discovery and seizing funds from this bank's U.S.
accounts.
BTCB is contesting jurisdiction in the United States,
despite its U.S. ownership, affiliation with U.S. firms,
numerous U.S. clients and multiple U.S. accounts. It does not
volunteer any information about its U.S. business activities,
and litigants are not having an easy time investigating or
proving them. Should jurisdiction be established, BTCB could
then draw upon a body of U.S. law giving it added protections
against seizing funds from its U.S. accounts.\176\ BTCB's
conduct in the legal proceedings suggests that it is well aware
of the legal protections afforded to U.S. correspondent
accounts and the difficulties involved in obtaining information
or funds from an offshore bank in a bank secrecy jurisdiction.
---------------------------------------------------------------------------
\176\ See Chapter V (G) of this report.
---------------------------------------------------------------------------
BTCB MONTHLY ACCOUNT ACTIVITY AT BANCO INDUSTRIAL DE VENEZUELA (MIAMI
OFFICE)
October 1997-June 1998
------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
------------------------------------------------------------------------
October $0 $1,005,000 $25,020 $980,195
1997
------------------------------------------------------------------------
November $980,195 $0 $25,020 $958,052
1997
------------------------------------------------------------------------
December $958,052 $0 $953,473 $5,860
1997
------------------------------------------------------------------------
January $5,860 $49,784 $9,413 $46,231
1998
------------------------------------------------------------------------
February $46,231 $1,224,688 $820,886 $99,980
1998
------------------------------------------------------------------------
March $99,980 $2,294,532 $181,742 $2,565,499
1998
------------------------------------------------------------------------
April $2,565,499 $4,573,517 $474,375 $6,679,330
1998
------------------------------------------------------------------------
May 1998 $6,679,330 $7,878,012 $11,095,470 $3,498,560
------------------------------------------------------------------------
June $3,498,560 $0 $3,498,560 $0
1998
------------------------------------------------------------------------
TOTAL: $17,025,533 $17,061,441
------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations,
Minority Staff, November 2000.
BTCB MONTHLY ACCOUNT ACTIVITY AT SECURITY BANK N.A.
June 1998-March 2000
E-Z Checking-01 and Supernow Account-02 \177\
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
June 1998 $0 $7,531,481 $2,843,531 $4,702,514
----------------------------------------------------------------------------------------------------------------
July 1998 $4,702,514 $1,959,222 $4,311,023 $2,349,448
----------------------------------------------------------------------------------------------------------------
August 1998 $2,349,448 $2,706,444 $4,076,552 $983,035
----------------------------------------------------------------------------------------------------------------
September 1998 $983,035 $3,503,107 $1,362,231 $3,128,526
----------------------------------------------------------------------------------------------------------------
October 1998 $3,128,526 $9,104,555 \178\ $11,525,055 $199,781
----------------------------------------------------------------------------------------------------------------
November 1998 $199,781 $2,471,456 $1,142,509 $1,513,716
----------------------------------------------------------------------------------------------------------------
December 1998 $1,513,716 $1,256,985 $2,436,698 $334,430
----------------------------------------------------------------------------------------------------------------
January 1999 $334,430 $932,660 $1,075,860 $139,939
----------------------------------------------------------------------------------------------------------------
February 1999 $139,939 $3,927,591 $3,346,225 $722,161
----------------------------------------------------------------------------------------------------------------
March 1999 $722,161 $740,980 $1,914,233 $41,262
----------------------------------------------------------------------------------------------------------------
April 1999 $41,262 $1,776,821 $698,192 $1,119,728
----------------------------------------------------------------------------------------------------------------
May 1999 $1,119,728 $543,072 $0 $1,726,521
----------------------------------------------------------------------------------------------------------------
June 1999 $1,726,521 $1,346,212 \179\ $2,603,353 $447,978
----------------------------------------------------------------------------------------------------------------
July 1999 $447,978 $943,969 $885,209 $485,338
----------------------------------------------------------------------------------------------------------------
August 1999 $485,338 $1,276,015 $1,497,505 $275,793
----------------------------------------------------------------------------------------------------------------
September 1999 $275,793 $1,591,406 $1,764,662 $100,866
----------------------------------------------------------------------------------------------------------------
October 1999 $100,866 $1,233,542 $718,733 $617,388
----------------------------------------------------------------------------------------------------------------
November 1999 $617,388 $1,175,632 $1,326,191 $236,179
----------------------------------------------------------------------------------------------------------------
December 1999 $236,179 $2,285,069 $1,907,943 $387,808
----------------------------------------------------------------------------------------------------------------
January 2000 $387,808 $1,546,739 $1,460,796 $464,204
----------------------------------------------------------------------------------------------------------------
February 2000 $464,204 $1,679,586 \180\ $2,187,400 $103,244
----------------------------------------------------------------------------------------------------------------
March 2000 $103,244 $1,333,168 $1,439,092 $4,944
----------------------------------------------------------------------------------------------------------------
TOTAL: $50,865,712 $49,310,114
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.
\177\ Records were subpoenaed from June 1998 to March 2000. The account remained open until July 2000.
\178\ Includes $6 million withdrawal from Supernow Account-02.
\179\ Includes $1 million withdrawal from Supernow Account-02.
\180\ Includes $200,000 withdrawal from Supernow Account-02.
BTCB MONTHLY ACCOUNT ACTIVITY AT FIRST UNION
September 1998-February 2000
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS \181\ WITHDRAWALS \182\ BALANCE
----------------------------------------------------------------------------------------------------------------
September 1998 $0 $10,000 $0 $9,912
----------------------------------------------------------------------------------------------------------------
October 1998 $9,912 $0 $0 $9,941
----------------------------------------------------------------------------------------------------------------
November 1998 $9,941 $190,000 $0 $200,185
----------------------------------------------------------------------------------------------------------------
December 1998 $200,185 $52,041 $0 $252,862
----------------------------------------------------------------------------------------------------------------
January 1999 $252,862 $109,441 $175,000 $187,804
----------------------------------------------------------------------------------------------------------------
February 1999 $187,804 $278,980 $0 $467,449
----------------------------------------------------------------------------------------------------------------
March 1999 $467,449 $9,500 $462,000 $15,941
----------------------------------------------------------------------------------------------------------------
April 1999 $15,941 $6,250,445 $3,929,780 $2,336,908
----------------------------------------------------------------------------------------------------------------
May 1999 $2,336,908 $40,000 $1,755,818 $617,476
----------------------------------------------------------------------------------------------------------------
June 1999 $617,476 $3,131,007 $1,665,228 $2,070,975
----------------------------------------------------------------------------------------------------------------
July 1999 $2,070,975 $94,055 $2,162,187 $3,502
----------------------------------------------------------------------------------------------------------------
August 1999 $3,502 $2,367,820 $732,900 $1,642,611
----------------------------------------------------------------------------------------------------------------
September 1999 $1,642,611 $226,263 $1,837,721 $32,068
----------------------------------------------------------------------------------------------------------------
October 1999 $32,068 $1,363,509 $806,375 $589,525
----------------------------------------------------------------------------------------------------------------
November 1999 $589,525 $289,243 $804,275 $74,951
----------------------------------------------------------------------------------------------------------------
December 1999 $74,951 $3,986,184 $3,051,363 $1,011,538
----------------------------------------------------------------------------------------------------------------
January 2000 $1,011,538 $2,655 $1,014,175 $211
----------------------------------------------------------------------------------------------------------------
February 2000 $211 $56 $229 $0
----------------------------------------------------------------------------------------------------------------
TOTAL: $18,401,199 $18,397,051
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.
\181\ Does not include interest/dividend payments.
\182\ Does not include wire transfer or annual fees.
BTCB RELATED ACCOUNTS
AT FIRST UNION
----------------------------------------------------------------------------------------------------------------
ACCOUNT HOLDER TYPE OF ACCOUNT ACCOUNT NUMBER ACCOUNT STATUS REMARKS
----------------------------------------------------------------------------------------------------------------
British Trade & Commerce Bank CAP 998-387-1373 Open 9/17/98-2/4/00 Key account
BRK 17624265 Open 9/17/98-2/4/00 Never used
----------------------------------------------------------------------------------------------------------------
Banque Francaise Commerciale DDA-corporate 209-000-140-8334 Open 5/15/96-now
IIDA 200-009-067-1052 Open 8/28/98-5/17/
99
IIDA 200-009-060-0120 Open 5/14/99-now
----------------------------------------------------------------------------------------------------------------
FEC Financial Holdings Inc. DDA-corporate 202-000-072-6184 Open 11/12/98-6/30/
00
----------------------------------------------------------------------------------------------------------------
BTC Financial Services Inc. DDA-corporate 200-000-282-1162 Open 11/2/99-now
----------------------------------------------------------------------------------------------------------------
Robert F. Garner Attorney At Law DDA-corporate 202-000-035-7100 Open 1/30/98-now
----------------------------------------------------------------------------------------------------------------
Global/Vector Medical Technologies DDA-corporate 209-000-294-6659 Open 9/30/98-11/01/
Inc. 99
CAP 998-324-6063 Open 1/6/99-now Key account
DDA-corporate 200-000-276-0469 Open 8/30/99-now
DDA-corporate 200-000-276-0375 Open 9/8/99-now
DDA-corporate 200-000-748-1837 Open 5/10/00-now $5-$8 million
BRK 24021271 Open now $6-$7 million
Money manager 4063000997 Open now
Possibly other
accounts in
First Union
private bank
----------------------------------------------------------------------------------------------------------------
Michael H. Salit, M.D. DDA-individual 109-001-566-5656 Open 4/28/98-now
----------------------------------------------------------------------------------------------------------------
Signal Hill Media Grp DDA-corporate 200-000-677-7665 Open 6/30/00-now
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000
Case History No. 5
HANOVER BANK
Hanover Bank is an offshore shell bank licensed by the
Government of Antigua and Barbuda (GOAB). This case history
looks at how an offshore bank, operating well outside the
parameters of normal banking practice with no physical
presence, no staff, virtually no administrative controls, and
erratic banking activities, transacted business in the United
States by utilizing a U.S. correspondent account belonging to
another foreign bank and became a conduit for millions of
dollars in suspect funds.
The following information was obtained from documents
provided by GOAB, Hanover Bank, and Harris Bank International;
court pleadings; documents associated with regulatory
proceedings in Jersey and the United Kingdom; interviews of
persons in Antigua and Barbuda, Ireland, Jersey, the United
Kingdom and the United States; and other materials. A key
source of information was a June 26, 2000 interview of Hanover
Bank's sole owner, Michael Anthony (``Tony'') Fitzpatrick, an
Irish citizen who voluntarily cooperated with the
investigation. Another key bank official, Richard O'Dell
Poulden, a British citizen no longer with the bank, refused to
provide either an interview or answers to written questions.
Two additional key interviews were conducted on March 30, 2000,
with William H. Koop, a U.S. citizen who has pled guilty to
laundering money from a financial fraud through Hanover Bank,
and on July 23, 2000, with Terrence S. Wingrove, a British
citizen fighting extradition to the United States to stand
trial on criminal charges related to the Koop fraud.\183\
Wingrove was interviewed at Wormwood Scrubs prison in London.
The investigation also greatly benefited from assistance
provided by the Antigua and Barbuda Government, the Jersey
Financial Services Commission, and the Jersey Attorney General.
---------------------------------------------------------------------------
\183\ See United States v. Koop (U.S. District Court for the
District of New Jersey Criminal Case No. 00-CR-68); United States v.
Wingrove (U.S. District Court for the District of South Carolina
Criminal Case No. 0:00-91); and United States v. Cabe (U.S. District
Court for the District of South Carolina Criminal Case No. 0:00-301).
See also the description of the Koop fraud in the appendix.
---------------------------------------------------------------------------
A. THE FACTS
(1) Hanover Bank Ownership and Management
The Hanover Bank, Ltd. (``Hanover Bank'') was established
as an international business corporation on August 12, 1992.
According to one document, the bank received its offshore
banking license the same day; according to another, the license
was actually granted 4 months later on December 8, 1992. As of
this writing, Hanover Bank remains a fully licensed offshore
bank. Throughout its existence, the bank has had no physical
office or permanent staff other than Fitzpatrick, the bank's
sole owner, who operates the bank from his residence in
Ireland.
Hanover Bank's Formation. When asked how Hanover Bank got
started and how he ended up as its sole owner and chief
executive despite a lack of banking experience, Fitzpatrick
provided the following information. Fitzpatrick indicated that,
in 1992, when he decided to try to open an offshore bank in
Antigua and Barbuda, he realized he would need assistance from
persons with banking experience. Fitzpatrick stated in his
interview that he was ``not a banker'' and did not have any
banking experience prior to his involvement with Hanover Bank.
He said that his business background was in marketing, and
later noted that he had never ``gone to university.'' A copy of
his resume, which he submitted to GOAB in 1993 in connection
with Hanover Bank, lists credentials in the field of journalism
and public relations, including serving from 1981-82, as public
relations advisor to the Honorable Charles Haughey, then Prime
Minister of Ireland.
Fitzpatrick turned to two individuals with banking
experience to help him establish Hanover Bank. The first was
Richard O'Dell Poulden, a British citizen with whom Fitzpatrick
had done business in the past. He said that he turned to
Poulden, because Poulden's credentials, which include a London
and Harvard Business School degree, an Oxford law degree, and
work at a leading merchant bank and accounting firm, would
impress GOAB authorities, and because Poulden's business
connections would help attract deposits for the bank. He said
that Poulden agreed in a telephone call to serve as the bank's
nominal owner and chairman.
The second individual with banking experience who helped
Fitzpatrick establish Hanover Bank was William W. Cooper.\184\
Fitzpatrick said that he met Cooper through the Antiguan office
of PriceWaterhouse (now PriceWaterhouseCoopers), an accounting
firm he had contacted for assistance. Fitzpatrick said that he
worked with one of the PriceWaterhouse partners, Don Ward, to
set up the bank. He said that Ward introduced him to Cooper, an
American who was an Antiguan resident with extensive banking
experience and who owned Antigua Management and Trust, Ltd.,
which was experienced in obtaining bank licenses. He said that
GOAB law required a local director for each of its banks, and
Cooper had agreed to serve as Hanover Bank's local director. He
said that Ward also introduced him to Justin L. Simon, an
Antiguan citizen who was then legal counsel to PriceWaterhouse
and who agreed to serve as the bank's local registered agent,
another requirement under GOAB law. He indicated that
PriceWaterhouse prepared the paperwork necessary to ``set up
the bank for me.'' \185\ Fitzpatrick said that he paid
PriceWaterhouse a total of $25,000, of which $10,000 went for
the bank's initial licensing fees.
---------------------------------------------------------------------------
\184\ Cooper is also associated with American International Bank,
another case history examined in this investigation.
\185\ Fitzpatrick and Poulden also established Hanover Nominees
Ltd., described in Fitzpatrick's resume as a ``marketing subsidiary of
The Hanover Bank.''
---------------------------------------------------------------------------
GOAB documentation corroborates this description of Hanover
Bank's formation. The August 1992 application to establish
Hanover Bank Ltd., for example, lists Cooper and Simon as the
company's original ``incorporators,'' as does the company's
articles of incorporation. The company's by-laws state that the
``initial Board of Directors shall consist of the following
members: Justin Simon, Richard O'Dell Poulden and Antigua
Management & Trust Ltd.'' [Lower case letters added to original
text.] The banking license application names the same three
``proposed directors'' for the bank. Although Fitzpatrick's
name does not appear on any of the 1992 incorporation or
licensing documents, Simon confirmed that Fitzpatrick was the
moving force behind the formation of the bank. Cooper also
recalled Fitzpatrick's being associated with the bank from its
inception.
When asked, Fitzpatrick indicated that although he was the
initial organizer and financial backer of Hanover Bank, he did
not undergo any due diligence review by GOAB authorities in
1992. He said that GOAB authorities instead focused on Poulden,
who was then the bank's sole shareholder and chief executive.
Because Poulden refused to respond to requests for information,
he did not provide any description of his role in Hanover
Bank's formation. Ward of PriceWaterhouseCoopers also declined
to cooperate with the investigation and so was unavailable to
answer questions about his role in the bank's formation.
In early 1993, Fitzpatrick was listed for the first time in
filings submitted by the bank to GOAB as Hanover Bank's sole
owner. Notice of his status is recorded in a Hanover Bank
corporate resolution which was signed by Fitzpatrick, as sole
shareholder, and submitted to GOAB on March 31, 1993. The
resolution stated that Hanover Bank had replaced Antigua
Management & Trust Ltd. with two new directors, Fitzpatrick and
Cooper. The official form notifying the government of this
change did not explain how Fitzpatrick had become the bank's
sole shareholder, nor what happened to Poulden.
According to Fitzpatrick, Poulden had decided to resign
from the bank after the Clerical Medical scandal, described
below, and, in 1993, transferred all of his shares to
Fitzpatrick, in return for about $200,000 that was never paid.
Simon also recalled a transfer of shares in 1993, and promised
to look for the official notification to the government of the
change in bank ownership. Although neither Fitzpatrick nor
Simon produced documentation to substantiate this explanation
of how Fitzpatrick assumed control of the bank, the
investigation found no evidence to contradict it. It is
undisputed that, from 1993 to the present, Fitzpatrick--a man
without any banking experience--took control of Hanover Bank
and served as its sole owner and chief executive.
Hanover Bank Management. Hanover Bank's chief executive,
holding the titles of Chairman of the Board and Managing
Director, has long been Fitzpatrick. The bank has no other paid
staff, either on a management or clerical level, although
Fitzpatrick indicated that the bank could hire employees on a
part-time basis if needed and has paid commissions to
individuals in the past for bringing in deposits or performing
other services. Fitzpatrick said during his interview that it
had always been his intent to hire professionals to manage
Hanover Bank, but the persons he had dealt with had ``never
delivered,'' and he had essentially been operating the bank on
his own ``most of the time.'' He said that he believed his lack
of banking experience and misjudgements had contributed to
problems at the bank.
GOAB documentation does not identify Hanover Bank's
management team other than Fitzpatrick, but does record 8 years
of frequent changes in Hanover Bank's directors, including nine
individuals and one company.\186\ The Bankers Almanac, a
leading source of information about banks worldwide, states in
a 1999 entry for Hanover Bank that the bank had five employees,
including three executives besides Fitzpatrick: John Burgess,
described as the bank's ``general manager''; Brian Shipman, in
the bank's ``International Division''; and Jeffre St. James, in
the bank's ``Foreign Exchange & Documentary Credits'' division.
Older versions of the Bankers Almanac list Poulden as the
general manager and Peter Coster as the head of correspondent
banking. When asked about the Bankers Almanac information,
Fitzpatrick said the named individuals had been bank employees
or officers in the past, although never ``full time.'' However,
Burgess told a Minority staff investigator that, although he
had received commissions from the bank and did ``not want to
embarrass Tony,'' he had never been a Hanover Bank employee.
When told that the Bankers Almanac described him as Hanover
Bank's general manager, Burgess laughed and said, ``That's the
first I've heard of it.''
---------------------------------------------------------------------------
\186\ Hanover Bank's directors included the following:
4/92 LInitial directors: Simon, Poulden, and Antigua Management
& Trust Ltd. (AMT), the company owned by Cooper.
3/93 LAMT was removed as a director, and Fitzpatrick and Cooper
were appointed. Although the status of Simon and Poulden is unclear
from the documentation, it appears that Simon remained a director,
while Poulden resigned during 1993.
Cooper resigned at some point.
C. Peter Crawshay appointed at some point.
10/97 LCrawshay resigned on 10/7/97, and Peter Coster was
appointed. Directors were: Fitzpatrick, Simon, Coster.
3/98 LPoulden and Tbeoddor Tsuru appointed directors by bank
resolution on 3/12/98, with notice provided to GOAB on 5/11/98, in
Hanover Bank's annual report (item 5). Directors were: Fitzpatrick,
Poulden, Tsuru, Simon and Coster. Tsuru appointment was later
rescinded, and Poulden apparently resigned or his appointment was ended
at some point in 1998.
4/99 LCoster resigned.
11/99 LMohammad Jawad and Michael Gersten appointed. Directors
were: Fitzpatrick, Simon, Jawad and Gersten.
---------------------------------------------------------------------------
Proposed Bank Sale in 1998. Fitzpatrick indicated in his
interview that he had attempted several times to sell Hanover
Bank and was still interested in selling it. He said that one
set of negotiations took place in 1998, when Poulden telephoned
him unexpectedly and asked whether he would consider selling
Hanover Bank to a group of Japanese stockbrokers looking to
form a financial group. Fitzpatrick indicated that he would,
and said it was unclear whether Poulden was representing the
group as an attorney or as a business partner who might become
one of the bank owners. He said that Poulden introduced him to
Theoddor Tsuru and Takuma Abe, two Japanese businessmen who
appeared to be part of the group negotiating to buy Hanover
Bank, although Poulden never identified the specific
individuals involved. Fitzpatrick said that Poulden engaged in
detailed negotiations on behalf of the group, including
settling on a $1 million purchase price and proposing to
structure the sale by using a company to purchase the bank. He
said that the designated company was at first Cranest Capital
S.A., a company that appeared to be associated with Tsuru, but
it later changed to Societe Suisse S.A., a bearer share
corporation then owned by Poulden. Societe Suisse S.A. made an
initial payment of =20,000 towards the purchase price, and a
second payment of $100,000 was made from another source, before
the deal fell through during the summer of 1998.
Fitpatrick said that as part of the purchase negotiations,
Poulden had requested and he had agreed to immediately appoint
Poulden as the chairman of the bank and to appoint Tsuru as a
director. He said that Hanover Bank issued a corporate
resolution in March 1998 appointing both men to the board of
directors, but never filed formal notice of the change in
directors with the government, as required by GOAB law, so the
appointments never became final. When asked why the required
papers were not filed, he said that he had been keeping them
until closure of the deal and awaiting final paperwork from
Poulden and Tsuru that never arrived. Fitzpatrick stated that
he did not conduct any due diligence review of Tsuru prior to
appointing him a bank director, but relied on Poulden's
judgment as to Tsuru's reputation and suitability. He said when
he later learned of Tsuru's possible involvement in the Casio
fraud, described below, he rescinded the Tsuru appointment. He
said the Poulden board appointment also ended after the bank
purchase fell through.
Documentation obtained by the investigation indicates that,
whether or not the Poulden and Tsuru appointments became final
under GOAB law, during 1998, Poulden repeatedly represented
himself as the bank's chairman. In addition, Hanover Bank's
1997 annual submission to the GOAB announced in Note 5, ``two
new appointments to the Board of Directors,'' naming Poulden
and Tsuru. Poulden also exercised joint signatory authority
over Hanover Bank's correspondent account at Standard Bank,
which was opened in 1998. Fitzpatrick explained that he had
agreed to make Poulden a signatory on the account, because
Poulden had helped convince Standard Bank to open the
correspondent account, he thought Poulden would attract new
business to the bank, and his group would soon be the bank
owner. He said that he did not give Poulden sole signatory
authority over the account, because he had to protect the
assets of the bank until the purchase was complete. He said
that because the transfer of ownership over the bank was still
``in transition,'' it had seemed appropriate for them to share
control over the Hanover account and so became joint
signatories.
Fitzpatrick indicated that, while serving as bank chairman
in 1998, Poulden also became actively involved in the bank's
management. He said that Poulden opened accounts, attracted new
deposits, and approved all outgoing wire transfers. He said he
had communicated with Poulden two or three times per week,
usually by telephone or fax. He said that he had also traveled
with Poulden to Antigua and introduced him to government
officials and other business contacts. Fitzpatrick indicated
that Poulden's management role at the bank had ended when the
purchase agreement fell through in the latter half of 1998.
Fitzpatrick said that he had entertained other offers to
buy Hanover Bank as well. He said that one of the bank clients,
Terrence Wingrove, had repeatedly expressed interest in buying
the bank in 1998, but never took any concrete action to do so.
In 1999, he said, two British residents, Mohammad Jawad and
Michael Gersten, had offered to buy the bank for $500,000. He
appointed them directors in November 1999, and notified GOAB
authorities. As of December 2000, however, the bank had not yet
changed hands.
(2) Hanover Bank Financial Information
GOAB law requires offshore banks to submit annual audited
financial statements. Hanover Bank's financial statements for 3
years, 1997, 1998 and 1999, were audited by Vaghela Unadkat &
Co., which the investigation has been told is a one-man firm
operating out of the accountant's residence in Birmingham,
England. These statements show, over a 3-year period,
tremendous swings in Hanover Bank assets, liabilities and
expenses, as well as significant payments to Fitzpatrick.
The 1997 statement depicted an active bank with rapidly
growing earnings, and net profits of over $1.3 million.\187\ It
indicated that customer deposits had skyrocketed over the prior
year to almost $14 million, almost all of which would turn out
to be related to the Koop and Casio frauds, described below.
The financial statement also showed a dividend payment to
Fitzpatrick, the bank's sole shareholder, of $350,000.
---------------------------------------------------------------------------
\187\ Assets included ``[f]ee income'' of over $1.3 million, and
``[i]nterest receivable'' of over $1.1 million, both of which showed a
tenfold increase over the prior year. Expenses exceeded $1 million,
including ``[m]anagement charges'' of $124,500; ``[c]ommissions and
consultancy fees'' of almost $276,000; travel expenses exceeding
$93,000; and interest charges exceeding $562,000. The financial
statement showed ``[c]ash & inter bank deposits'' of $1.2 million;
``Government securities'' valued at about $1 million; ``[o]ther listed
securities'' valued at $4.1 million; and ``[b]ills of exchange'' valued
at $6.4 million. ``Loans and advances'' were $3.4 million. ``Issued
share capital'' was $1 million, the minimum required under GOAB law.
Audit and accountancy fees were a bargain, just $15,000.
---------------------------------------------------------------------------
The 1998 statement presented a more mixed picture of the
bank, but an even larger dividend payment to Fitzpatrick.\188\
Net profits were about $1 million. Customer deposits had fallen
from $14 million to $650,000. The dividend payment to
Fitzpatrick had climbed to $1.9 million, twice the amount of
net profits.
---------------------------------------------------------------------------
\188\ Assets showed fee income had dropped to about $965,000, while
interest receivables had increased to about $1.4 million. Expenses
again exceeded $1 million, including management charges of $82,000;
commissions and consultancy fees of more than $344,000; travel expenses
exceeding $71,000; and interest charges exceeding $645,000. A new
expense for ``[f]oreign exchange trading losses'' exceeded $186,000. At
the same time, ``[c]ash and inter bank deposits'' had fallen tenfold to
about $150,000. Assets represented by securities were zeroed out, while
``[b]ills of exchange'' had risen slightly to $6.5 million. ``Loans and
advances'' had increased significantly to $5.6 million. ``Issued share
capital'' increased fivefold, from $1 million to $5 million, in
response to GOAB's new capital requirement for offshore banks. At the
same time, the financial statement included a new entry for $4 million
in ``[p]romissory notes,'' suggesting that the bank's $4 million in
additional capital might have been financed through a book entry loan.
Audit and accountancy fees remained at $15,000.
---------------------------------------------------------------------------
The 1999 statement depicted a much less active and
profitable bank.\189\ Net profits were 80% lower, at about
$211,000. Customer deposits had fallen another 10% to about
$563,000. No dividend payment was made to Fitzpatrick. This
statement covers the period in which, according to Fitzpatrick,
Hanover Bank had ceased operations and kept its funds in its
solicitor's account in London.
---------------------------------------------------------------------------
\189\ Fee income had fallen to about $119,000, and interest
receivables were down to about $283,000. Expenses had also fallen, with
management charges down to $60,000; commissions and consultancy fees
down tenfold to $24,000; travel expenses halved to about $37,000; and
both interest charges and foreign exchange losses zeroed out. ``Cash &
inter bank deposits'' were down to about $66,000. ``Bills of exchange''
were down tenfold to $658,000. ``Loans and advances'' were down a
similar amount to about $630,000. A new category of liability appeared
called ``Directors loan accounts,'' for about $84,000. The promissory
note total had increased to about $4.2 million. Audit and accountancy
fees were halved to $7,500.
---------------------------------------------------------------------------
The three financial statements show wild swings in the
bank's assets and liabilities. In the space of a year, customer
deposits plummeted from $14 million to $650,000; Hanover Bank's
own deposits fell from $1.2 million to $150,000; commission
payments dropped from $344,000 to $24,000; securities valued at
$5 million disappeared; foreign exchange losses of $186,000
appeared one year and disappeared the next; dividend payments
swung from $1.9 million to nothing. These financial statements
suggest an offshore bank that was neither stable nor engaged in
the prudent banking activities typical of a U.S. financial
institution subject to safety and soundness regulation.
(3) Hanover Bank Correspondents
Fitzpatrick told the investigation that he kept 100% of
Hanover Bank's client deposits in correspondent accounts.
Although the Minority Staff investigation never discovered any
U.S. bank that opened a correspondent account for Hanover Bank,
Hanover Bank nevertheless gained access to the U.S. banking
system by using U.S. correspondent accounts belonging to other
foreign banks, such as American International Bank and Standard
Bank.
American International Bank. Fitzpatrick indicated that
when Hanover Bank began operation in 1992, he opened its first
correspondent account at American International Bank (AIB), an
offshore bank that was also licensed in Antigua and Barbuda. He
said that he left this account open for years, despite making
little use of it. He indicated that, in 1997, he received a
letter from Overseas Development Bank and Trust (ODBT)
indicating that AIB had gone into liquidation and ODBT would be
opening an office in Antigua and taking over AIB's accounts. He
said that he, again, left Hanover Bank's account open and, in a
1997 submission to GOAB, listed ``Overseas Development Bank
Ltd.'' in Antigua as Hanover Bank's ``banker.'' He said that he
later learned ODBT had closed its Antiguan office, but
continued to operate in Dominica.
AIB and OBDT each opened a number of correspondent accounts
in the United States, as explained in the AIB case history. By
maintaining an account at AIB and then ODBT, Hanover Bank
maintained access to their U.S. correspondent accounts as well.
Fitzpatrick said that, in 2000, he had telephoned ODBT to see
if he could deposit a client's funds in Hanover Bank's account
at that bank. He said he was informed that ODBT had
unilaterally closed the Hanover Bank account due to inactivity,
and he took no steps at that time to re-open it.
Standard Bank/Harris Bank International. Fitzpatrick said
that he soon discovered that clients in Europe did not want to
deal with a bank whose only correspondent was another Antiguan
offshore bank. He said that is why, in 1992, Hanover Bank
opened a correspondent account at Standard Bank Jersey Ltd.
According to the Bankers Almanac, Standard Bank Jersey Ltd. is
a subsidiary of Standard Bank Offshore Group Ltd., and is
related to The Standard Bank of South Africa Ltd., a major
financial institution with over $22 billion in assets, and
subsidiaries and related companies worldwide. According to the
Bankers Almanac, Standard Bank Jersey Ltd. alone has over 200
employees and more than $600 million in assets.
When asked how Hanover Bank was able to open a
correspondent account at Standard Bank Jersey Ltd. (``Standard
Bank''), Fitzpatrick attributed it to Poulden's business
contacts. He said that, in 1992, Poulden served on the boards
of several companies, including a venture capital company whose
board included David J. Berkeley, then managing director of
Standard Bank. He said that Poulden telephoned Berkeley
directly to request a correspondent account for Hanover Bank.
He said it was his understanding that Berkeley immediately
agreed on the telephone, and the account opening forms were a
mere formality. Because Standard Bank declined to respond to
requests for information, it has not provided a description of
or documentation related to the 1992 account opening.
Fitzpatrick stated that he knew in 1992, that Standard Bank
had a U.S. dollar account with Harris Bank International in New
York, and that by opening an account with Standard Bank in
Jersey, Hanover Bank would be able to transact business through
Standard Bank's account in the United States.
Fitzpatrick indicated that Standard Bank closed the Hanover
account in 1993, after less than a year, due to the Clerical
Medical scandal, described below. However, he said that 6 years
later in 1998, Standard Bank opened a new account for Hanover
Bank, again after Poulden contacted Berkeley, who was still at
Standard Bank. Fitzpatrick explained that, to strengthen the
bank in connection with the proposed 1998 sale, Poulden had,
again, telephoned Berkeley and reached him at an airport. He
said that Berkeley gave his approval for the correspondent
account during the telephone call, instructed Poulden to wait 5
minutes to give him time to contact a Standard Bank employee,
and then to call that employee who would provide him with an
account number. He said that Berkeley told Poulden that he
could complete the account opening documentation at a later
time. He said that the Clerical Medical scandal was not
discussed. He said that Poulden followed the instructions and
immediately obtained an account number for Hanover Bank from a
Standard Bank employee. He said they later met with Standard
Bank employees in person and completed the account opening
documentation. Fitzpatrick said that Standard Bank should not
have opened the account in the way that it did, but it was
instructive to him to see that large banks also sometimes broke
the rules.
Because Standard Bank declined to respond to requests for
information, it has not provided a description of or
documentation related to the 1998 account opening. What is
known, however, is that Jersey banking regulators subsequently
investigated and censured Standard Bank for exercising
inadequate due diligence in opening the Hanover Bank account.
In a statement issued on July 13, 2000, the Jersey Financial
Services Commission stated that, in opening the Hanover Bank
account, ``the senior officers [at Standard Bank] directly
involved failed to follow proper procedures'' and ``[t]he
conduct of the Bank fell well short of the standards expected
by the Commission'' with respect to due diligence. As a result
of the investigation, Berkeley and another senior official left
Standard Bank. The Commission's July statement observed: ``The
Commission is also satisfied that senior management changes in
place, including the departure of the officers concerned, have
strengthened the management of the Bank.'' When contacted by
Minority Staff about this investigation, Jersey regulators
indicated that the facts they uncovered did not match
Fitzgerald's description of the 1998 account opening, but
declined to provide the text of the report, a description of
their findings or the underlying documentation, because the
report had not been made public. The regulators indicated that,
as a rule, such reports are not made public, although the
Commission had yet to make a decision with respect to the
Hanover Bank matter.
Fitzpatrick indicated that Hanover Bank actually used the
Standard Bank correspondent account for only about 3 months,
primarily from April to June 1998, after which the account was
frozen amid questions regarding possibly suspicious activity.
Fitzpatrick said the account was actually closed in December
1998 or January 1999.
Documents obtained by the investigation substantiate this
description of the Hanover correspondent account at Standard
Bank. In response to a Subcommittee subpoena, Harris Bank
International provided copies of Standard Bank account
statements for 1998 and 1999. These account statements and
related wire transfer documentation show Hanover transactions
taking place over approximately a 3-month period, with the
first on March 30, and the last on June 16, 1998. Harris Bank
International also provided a copy of a June 14, 2000 letter
from Standard Bank attaching ``a schedule detailing all items
relating to Hanover Bank which were received and paid through
Harris Bank for the whole period during which Hanover Bank
maintained accounts with our client.'' The Standard Bank
schedule shows a total of about $17.4 million in deposits and
$13.9 million in withdrawals moving through the Harris Bank
International over the 3-month period. Other documentation
indicates that Hanover Bank made use of other Standard Bank
correspondent accounts, for example, to transact business in
British pounds or Australian dollars. Harris Bank did not have,
and Standard Bank did not produce any records relating to the
closing of the Hanover Bank account in late 1998 or early 1999.
Hanover Bank has had at least a few other correspondent
accounts during its 8 years of existence, including a 1992
account at Lombard National Westminster Bank in Cyprus, and
perhaps an account at a bank in Switzerland. The investigation
did not attempt to document its non-U.S. correspondent
accounts.
No Current Correspondent Bank. Fitzpatrick indicated that,
as of his June 2000 interview, Hanover Bank had become inactive
and had no correspondent account at any bank. According to
Fitzpatrick, all remaining funds in the Hanover Bank account at
Standard Bank had been transferred in late 1998 or early 1999
to an attorney trust account belonging to Finers in London,
Hanover Bank's legal counsel. He indicated that funds remained
in that account, although reduced, in part, by legal fees. The
bank's 1998 financial statement shows that Hanover Bank also
paid Fitzpatrick a 1998 `` dividend'' of $1.9 million, twice
the amount of the bank's net profits. It is unclear whether any
client deposits were used for the dividend.
(4) Hanover Bank Operations and Anti-Money Laundering Controls
Because the investigation was interested in the day-to-day
operations of a shell offshore bank, Minority Subcommittee
investigators interviewed Fitzpatrick about how his bank
actually conducted business. His explanations and other
information provide vivid details about a bank operating with
few, if any, of the administrative procedures and internal
controls in place at U.S. banks.
According to Fitzpatrick, Hanover Bank did not have a
permanent office or a permanent staff other than himself, and
he was not a banker or accountant by training. Fitzpatrick said
that he generally kept records associated with Hanover Bank at
his residence in Ireland, although Poulden also kept some
records during the time he was associated with the bank.
Fitzpatrick stated that he did not have ``computerized''
records for Hanover Bank in Ireland, nor did the bank have an
electronic ledger.
Fitzpatrick indicated that, for about a 6-month period in
1997, the bank used the services of an Antiguan company called
American International Management Services Ltd. (``AIMS'') to
handle Hanover Bank's back office operations, including
administering its client accounts and keeping the bank's
books.\190\ He said that he had visited the company in Antigua
and found a ``very professional'' operation handling
administrative matters for six or seven ``small obscure banks
like mine.'' He said, however, that Hanover Bank could not
afford the $5,000 per month cost. He also described an
unpleasant encounter with the head of AIMS, John Greaves, over
what he described as improper disclosures of confidential
information to a Hanover Bank client, which led him to sever
relations with AIMS and return to operating the bank on his
own.
---------------------------------------------------------------------------
\190\ AIMS is also discussed in the case history for American
International Bank.
---------------------------------------------------------------------------
Fitzpatrick said that Hanover Bank kept 100% of its client
funds in its correspondent accounts. He said that the bank
dealt mostly in U.S. dollars, but also occasionally in other
major currencies such as sterling or yen. He said the bank
usually had only a few client accounts open at a time, and he
kept track of each client's funds by analyzing the monthly
account statements sent by the correspondent banks. He said the
monthly statements showed all of the deposits, withdrawals and
fees affecting the Hanover Bank accounts, and he would use this
information to attribute deposits, withdrawals and fees to
Hanover Bank's individual client accounts.
Fitzpatrick said that Hanover Bank did not routinely
prepare bank statements for its clients, nor did it pay
interest on client funds. He said that most persons using a
bank like his were concerned about confidentiality, and did not
want monthly statements sent to them because they did not want
others knowing they had an offshore bank account. He said the
bank usually prepared account statements only upon request. He
described one occasion in 1998, when he and Poulden together
typed up statements for two client accounts, the Wingrove and
Doi accounts, using Poulden's computer in England. He said they
prepared the statements without assistance from anyone else,
using the information in correspondent banks' monthly
statements. His description indicated that it was an unusual
and ad hoc effort.
One of Hanover Bank's clients, Terrence Wingrove, who was
interviewed by Minority Staff investigators, confirmed that the
bank did not routinely prepare account statements. When asked
how he felt about not receiving monthly account statements,
Wingrove said, ``You don't go into a fish and chip shop and ask
for filet mignon.'' He said that he had trusted Fitzpatrick to
handle his money properly, without worrying about the
paperwork, and had told Fitzpatrick, ``If my money goes
walkabout, you go walkabout. That wasn't a threat, it was a
promise.'' He said that, while Hanover Bank was not the most
``efficient'' bank, Fitzpatrick had acted as his ``personal
banker'' and provided acceptable service, which was why he had
maintained an account there.
When asked how Hanover Bank found clients, Fitzpatrick
indicated that it was willing to pay commissions to individuals
who brought deposits to the bank. He said the bank also had an
entry in the Bankers Almanac, which helped demonstrate to
clients that the bank was an established institution with an 8-
year track record. He said that the bank did not engage in
extensive marketing efforts, which was one reason it had so few
accounts at a time.
Subsequent to the Fitzpatrick interview, another Hanover
Bank client, John Burgess, voluntarily contacted a Minority
Staff investigator and discussed his experience with the bank.
Burgess said that for a period of time, from 1997 until early
1998, a Swiss company he controlled, The Trust and Agency Co.
(``Tragenco''), had managed a portion of the bank's business.
He said Tragenco had operated under an agreement which
authorized it to unilaterally open Hanover Bank accounts for
Tragenco clients engaged in investment activities. He said
these clients collectively made $50-$60 million in deposits and
provided Hanover Bank with about $2 million in earnings, until
Tragenco ended its investment program. While the investigation
did not attempt to confirm this activity, it suggests the
existence of another roster of Hanover Bank clients functioning
through another, unidentified correspondent account, perhaps in
Switzerland, raising additional questions about Hanover Bank's
account opening procedures and internal controls.
When asked how the bank handled wire transfers, Fitzpatrick
indicated that Hanover Bank did not have its own capability to
send or receive wire transfers, but worked through its
correspondent banks. He said that incoming wire transfers were
handled entirely by the correspondent bank, which unilaterally
decided whether to accept the incoming funds and credit them to
Hanover Bank's account. He said that he played no role in
deciding whether the funds should be accepted. He said that he
usually learned of an incoming wire transfer some days after
the funds had come in, when he received and reviewed Hanover
Bank's monthly account statement from the correspondent bank.
He said that the monthly statement would list all deposits into
the Hanover Bank account, virtually all of which would have
been made by wire transfer.
Fitzpatrick said that the monthly statements often provided
little or no information about particular deposits, and he
sometimes had to contact the correspondent bank to get
additional information to determine which client account should
be credited with the incoming funds. He said, for example, that
the wire transfer documentation often failed to name a Hanover
Bank accountholder as the beneficiary of the funds, instead
referencing individuals or companies who were not
accountholders at the bank. When asked how he knew to attribute
these incoming funds to a particular client, Fitzpatrick said
that the bank generally had only a few accounts and he could
figure it out. He said that Hanover Bank's clients also often
contacted him to let him know funds were coming in and should
be attributed to their account.
When asked about outgoing wire transfers, Fitzpatrick
explained that he personally approved all outgoing wires.
Fitzpatrick said that the outgoing wire transfers were actually
made by correspondent bank personnel who would debit the funds
from Hanover Bank's correspondent account. He said that the
bank would complete an outgoing wire transfer only after
receiving written ``wire instructions'' from Hanover Bank
specifying the amount, the beneficiary and the beneficiary's
bank, and signed by a person authorized to withdraw funds from
the account. He said that he usually faxed the wire
instructions from his residence in Ireland to the appropriate
correspondent bank personnel.
Fitzpatrick described, for example, how Hanover Bank worked
with Standard Bank in 1998 with respect to wire transfers. He
said that incoming funds were typically in U.S. dollars and
wired to Standard Bank's correspondent account at Harris Bank
International in New York. He said that the accompanying wire
transfer documentation, identifying the originator and intended
recipient of the funds, went to Harris Bank International, and
was not routinely forwarded to Hanover Bank. He said that what
he received was Hanover Bank's monthly account statement from
Standard Bank, which was sent to his address in Ireland. He
said that he would review the monthly statement to determine
what deposits had been made into the account. However, the
monthly statements often listed an incoming amount without any
origination or beneficiary information. He indicated that, even
when information was provided, he was sometimes unable to
determine who was the intended recipient of the funds at
Hanover Bank and would have to contact his clients to ask about
particular deposits.
With respect to outgoing wire transfers, Fitzpatrick
explained that he and Poulden had joint signatory authority
over the 1998 Hanover account at Standard Bank, and had to
jointly approve all funding withdrawals. He said that,
typically, if an outgoing wire transfer involved an account he
had opened, such as the Wingrove account, he would initiate a
fax with the desired wire transfer instructions and send it to
Poulden; Poulden would sign the instructions with no questions
asked; and Poulden would fax the instructions to Standard Bank.
He said that if an outgoing wire transfer involved an account
that had been opened by Poulden, Poulden would initiate the fax
to him, he would sign it with no questions asked, and he would
fax the instructions to Standard Bank. Standard Bank would then
complete the transfer.
Fitzpatrick discussed one incident in May 1998, which
suggested that the wire transfer approval process did not
always work smoothly. He said that, on the day he was moving to
a new residence in Ireland, he received a request from Wingrove
for an outgoing wire transfer. He said that he approved the
wire and sent the wire instructions to Poulden, without first
checking Wingrove's account balance because the bank records
were inaccessible during the move. Standard Bank completed the
wire transfer, and Fitzgerald later discovered that there was a
shortfall in the Wingrove account of more than $800,000. That
meant the outgoing wire transfer had been paid for with funds
deposited by another Hanover client. Both he and Wingrove
stated that neither had been aware there were insufficient
funds in Wingrove's account to cover the wire transfer. Both
said that Wingrove quickly repaid about $400,000 of the
shortfall but, as of July 2000, 2 years later, about $400,000
plus interest remained unpaid.
Hanover Bank's Anti-Money Laundering Controls. When asked
about Hanover Bank's anti-money laundering efforts, Fitzpatrick
provided a copy of a 1997, one-page ``Policy Statement on the
Opening and Conduct of Accounts.'' Fitzpatrick indicated that
he had drafted the policy statement in response to efforts by
the Antiguan government to strengthen their banks' anti-money
laundering controls. The Hanover Bank policy statement set
forth a number of due diligence requirements for opening new
accounts, including the following:
--Customers must supply one reference from another
banking institution covering the customer's banking history for
at least 5 years.
--[A] customer must supply two professional references,
by whom the customer has been known for at least 10 years.
--In respect of a corporation, the same references must
be supplied for each director as well as for the corporation
itself.
--Each and every signatory or proposed signatory of an
account . . . must be personally interviewed by a Bank officer
prior to the opening of the account.
--[T]he required account opening forms must be
completed.
--[T]he original of each signatory's passport must be
inspected and a copy taken for the Bank's file.
--[A] notarized statutory declaration, duly legalized,
as to beneficial ownership of funds . . . must be completed.
--Cash transactions are prohibited.
--All transactions in excess of USD 50,000 have to be
personally authorized by a bank director.
Fitzpatrick said that he was responsible for implementing
these due diligence requirements, but admitted that he did not
always comply with them. For example, he said that when he
opened the Wingrove account in November 1997, a month after
issuing the policy statement, he did not perform any due
diligence review. He said that he had known Wingrove for
several years and was convinced that Wingrove was an
established art dealer with access to substantial funds.
Fitzpatrick said that, contrary to Hanover Bank policy, he did
not obtain any bank or professional references prior to opening
the account. He said that he had actually asked Wingrove for
these references, but he had not produced them, and Fitzpatrick
had opened the account anyway. He acknowledged that there were
only two pages of account opening documentation for the
Wingrove account, a one-page application form and a 1-page copy
of Wingrove's passport photograph. In his interview, Wingrove
said that he had signed the account opening documentation while
at an airport in England, and never saw or was asked to sign a
signatory card for the account.
Fitzpatrick said that although he normally was the only
person who opened accounts at Hanover Bank, in 1998 Poulden
also opened them. Fitzpatrick explained that, since Poulden was
then chairman of the bank, he and Poulden had agreed that
Poulden could open accounts on his own authority, without the
prior approval of Fitzpatrick. He said that he had instructed
Poulden on how to open an account, by completing certain
paperwork and performing a due diligence review on the
prospective client, as set out in Hanover Bank's policy
statement. Fitzpatrick said that because Poulden was a
``practicing barrister'' and experienced businessman and seemed
to want a successful Hanover Bank as much as he did, he had
trusted Poulden to comply with the account opening requirements
and never doublechecked his efforts. He said that Poulden had
also often told him he had the paperwork for the accounts he
had opened, so Fitzpatrick had not bothered to obtain a copy
for his files.
Fitzpatrick said he later determined, however, that Poulden
had opened some accounts without telling him and had failed to
complete any account opening or due diligence documentation.
Fitzpatrick was also unaware of what due diligence reviews
Poulden had conducted, if any. According to Fitzpatrick and
documentation obtained during the investigation, Poulden
appears to have opened at least four accounts in 1998:
(1) Account No. 930509--$2.4 million deposit made on 4/
1/98 for Yoshiki Doi;
(2) Account No. 930510--opened for Cranest Capital S.A.,
but no apparent transactions;
(3) Account No. 930511--$190,000 deposit made on 4/24/98
for Ted Tsuru and Takuma Abe joint account; and
(4) Account No. 930512--$10 million deposit made on 6/2/
98 for Morgan Steepleton Investment & Securities S.A.; funds
withdrawn and wire transferred 2 weeks later on 6/15/98 to a
Morgan Steepleton account at another bank.
Fitzpatrick said that, because there was no account opening
or due diligence documentation, he could not say with certainty
who the account signatories were or what the relationships were
among the accounts. He said that he had no information about
Doi other than an address in Japan, and had never met or spoken
with him. He thought that Poulden, Tsuru and Abe had
administered the Doi account but was not sure who had signatory
authority over it. Fitzpatrick thought Cranest Capital and
Morgan Steepleton Investment & Securities were companies
associated with Tsufu, but was not sure and was unaware who had
signatory authority over either of those accounts.
When asked about the $2.4 million deposit to the Doi
account, Fitzpatrick said that he first learned of that deposit
when reviewing Hanover Bank's April 1998 account statement from
Standard Bank. He said the amount ``surprised'' and
``delighted'' him, because he assumed it was the result of
Poulden's efforts to bring new deposits to the bank and
provided proof that Poulden had access to individuals with
substantial funds. He said that after he saw the deposit, he
telephoned Poulden who told him about opening the account for
Doi. Fitzpatrick said that he did not know the purpose of the
deposit or the source of the funds.
When asked what had happened to the $2.4 million,
Fitzpatrick said that a number of large outgoing wire transfers
initiated by Poulden had utilized funds from the Doi
account.\191\ Fitzpatrick thought these transfers were used, in
part, to purchase an oil company in Texas and a securities firm
in New York; \192\; to pay legal or consulting fees; and to
help finance the purchase of Hanover Bank.\193\ Fitzpatrick
said that another $400,000 was inadvertently withdrawn from the
Doi account in connection with the Wingrove overdraft. He said
that he wrote to Doi several times about the overdraft, but Doi
had never responded or requested the return of his $400,000,
which Fitzpatrick said he found surprising and suspicious.
---------------------------------------------------------------------------
\191\ U.S. bank records show outgoing transfers totaling over $1.3
million, including $300,000 on 4/6/98; $100,000 (in two $50,000
payments) on 4/9/98; $300,000 on 4/9/98; $150,000 on 4/20/98; $400,000
on 5/15/98; and $100,000 on 6/19/98, that were apparently initiated by
Poulden or associated with the accounts opened by Poulden. Other bank
records show outgoing transfers of =135,000 (U.S. $225,000) on 4/21/98;
and 130 million Japanese yen (U.S. $500,000) on 5/29/98.
\192\ The $300,000 payment on 4/9/98 was made to an account at
Texas Commerce Bank N.A. for ``Anglo Gulf Energy Inc.'' Articles of
incorporation for Anglo-Gulf Energy Inc., filed in Texas in October
1997, indicate that it is a Texas corporation and Poulden was one of
its two initial directors. An article in Private Equity Week, dated 8/
10/98, states: ``Anglo-Gulf Energy Inc. of Spring, Texas, is raising $3
million through a private placement of common stock. . . . Alden
Capital Markets Inc. of New York is acting as agent for a sales
commission of $300,000.'' It is possible that Alden Capital Markets
Inc. was the securities firm referred to by Fitzpatrick.
\193\ With respect to purchasing Hanover Bank, Fitzpatrick
indicated that he thought Poulden had obtained approval to transfer
$100,000 from the Doi account, in two $50,000 payments on 4/9/98, to
Fitzpatrick's personal bank accounts, in partial satisfaction of the
bank's proposed $1 million purchase price. When asked whether Doi was
one of the Japanese stockbrokers buying the bank, Fitzpatrick said that
was never made clear.
---------------------------------------------------------------------------
When asked about the $10 million deposit in June and its
withdrawal 2 weeks later, Fitzpatrick indicated that he did
make inquiries about those wire transfers at the time. He said
that Poulden had told him the $10 million was going to be used
to purchase ``prime bank notes,'' and that Poulden was acting
as a middleman in the transaction, between the sellers of the
notes and the purchaser, Tsuru. Fitzpatrick said that Poulden
had agreed with him that it was a scam, since prime bank notes
are fictitious instruments with no tradeable market, but
Poulden said he had been unable to convince Tsuru not to go
forward with the purchase. Fitzpatrick thought, in the end,
however, the purchase had not gone forward. Fitzpatrick said he
did not know Tatsuya Omura, the person identified on the wire
transfer documentation as the originator of the $10 million
deposit, nor did he know the source of the funds. He also had
no information about the Morgan Steepleton account to which the
$10 million was transferred.
Fitzpatrick was also asked about Hanover Bank's lending
activities. He said that Hanover Bank did not engage in regular
lending, but occasionally issued a letter of credit,
certificate of deposit or loan, which he would approve. The few
credit transactions examined during the Minority Staff
investigation presented additional evidence of questionable
operations at the bank. For example, an April 3, 1998 letter
signed by Fitzpatrick stated that Doi had $16.5 million in his
account, even though bank records indicate that the account
never held more than $2.4 million. When asked about the letter,
Fitzpatrick said that Doi had asked for a ``temporary loan,''
and Hanover Bank had engaged in a ``book transaction'' in which
it loaned him the funds and he repaid them a few days later,
returning his account to its original status. When asked where
Hanover Bank had obtained the capital to make a $16.5 million
loan, Fitzpatrick said that it was ``just a book transaction''
that took place on paper and did not involve actual funds. He
said that Poulden had drafted and asked him to sign the letter.
He said he had trusted Poulden ``one hundred percent,'' thought
Poulden would not want to get him or the bank into trouble, and
so had done as he asked in signing the letter. Fitzpatrick
could not provide any other information about the transaction.
A second questionable credit transaction, involving a $1
million letter of credit issued to an individual seeking to
launder criminal proceeds, is described below in connection
with the criminal conviction of Eric Rawle Samuel who once
worked for Hanover Bank.
Together, the information collected by the Minority Staff
investigation about the day-to-day operations of Hanover Bank
show a bank that operated with few formalities, few controls,
few records, and few worries about client due diligence or
money laundering.
(5) Regulatory Oversight of Hanover Bank
In 8 years of operation, Hanover Bank never underwent a
bank examination by its primary regulator, the Government of
Antigua and Barbuda. GOAB authorities did not conduct
examinations of any of its licensed banks until 1999,
previously relying on audited financial statements and other
filings prepared by its banks to monitor their activities. In
1999, GOAB authorities initiated a new program for government-
sponsored bank examinations and, in 2000, began its first
examination of Hanover Bank.\194\ The examination completed a
review of the bank's documents in Antigua over the summer and
requested an on-site inspection in Ireland in late 2000.
---------------------------------------------------------------------------
\194\ See 8/25/00 letter from the GOAB's International Financial
Sector Regulatory Authority to Elise Bean of Senator Levin's office, at
2.
---------------------------------------------------------------------------
Irish banking authorities have also never conducted an
examination of Hanover Bank. Personnel from the Central Bank of
Ireland indicated, when contacted by the Minority Staff
investigation, that they had been unaware of Hanover Bank's
activities in Ireland. They indicated that they had not known
that Fitzpatrick was involved in international banking, that he
was the sole owner of Hanover Bank, or that he was keeping bank
records and faxing wire transfer instructions from his
residence in Ireland. They also indicated that Ireland does not
exercise any regulatory authority over Hanover Bank, since it
is licensed by GOAB and apparently does not solicit deposits in
Ireland.
Although it has not been the subject of routine bank
examinations, Hanover Bank has undergone three special reviews
by bank regulators. The first took place in 1993, shortly after
the bank was licensed, when it was alleged to be involved in
the Clerical Medical fraud, described below. U.K. authorities
conducted a lengthy investigation, but took no formal action
against the bank. GOAB authorities apparently did not
investigate or take any action against the bank in this matter.
A few years later, however, as part of a general offshore
banking reform effort, GOAB issued a March 24, 1997 notice of
its intent to revoke Hanover Bank's license. The specified
grounds were the bank's failure to pay its 1996 registration
fees and its failure in 1992 to commence banking operations
within 6 months of receiving a license. GOAB actually revoked
the bank's license 2 days later. Hanover Bank was one of over a
dozen banks whose licenses were revoked in the 1997 GOAB reform
effort, and it is included in a list of banks that GOAB told
the U.S. State Department were closing their doors. But Hanover
Bank refused to close. Justin Simon, the bank's local director
and registered agent, filed suit in court to overturn the
license revocation. According to Simon, the suit was heard by
Justice Kenneth Allen in 1997. Although GOAB authorities
thought the court had overturned the revocation as a result of
that proceeding, Simon indicated that Justice Allen did not
actually issue a decision on the merits. He said that, instead,
Keith Hurst, then head of the GOAB's International Business
Corporations (IBC) Unit, unilaterally reversed the government's
position and reissued the bank's license. The May 30, 1997
certificate reinstating Hanover Bank's license is signed by IBC
Director Hurst.
In 1998, U.K. and Jersey banking authorities commenced a
special investigation of Hanover Bank after receiving evidence
that the bank was conducting illegal banking activities in both
jurisdictions, as described below. In July 1998, the U.K.
Financial Services Authority (FSA) obtained a court injunction
prohibiting Hanover Bank from conducting banking activities in
the United Kingdom. The FSA rescinded this injunction only
after receiving Hanover Bank's assurance that it would not
conduct business in the jurisdiction. Jersey banking
authorities conducted a parallel investigation into Hanover
Bank's activities in Jersey. This investigation led to its
censuring Standard Bank Jersey Ltd. for opening a Hanover Bank
correspondent account; alerting U.S. authorities to suspicious
activity in Standard Bank's U.S. correspondent account at
Harris Bank International related to Hanover Bank; and alerting
GOAB authorities to their findings and concerns about Hanover
Bank. These actions contributed to the unraveling, of the Koop
fraud and the filing of multiple U.S. indictments,\195\ as well
as GOAB's subsequent decision to conduct an on-site examination
of Hanover Bank in 2000.
---------------------------------------------------------------------------
\195\ See appendix for a more detailed description of the Koop
fraud.
---------------------------------------------------------------------------
(6) Money Laundering and Fraud Involving Hanover Bank
The Minority Staff investigation found evidence of
fraudulent and criminal activities throughout Hanover Bank's 8
years of operation, involving millions of dollars lodged in
various correspondent bank accounts. Three frauds in 1998,
involving virtually all of Hanover Bank's clients and 100% of
the funds it moved through a U.S. correspondent account, raise
particular concerns. Together, they demonstrate that Hanover
Bank's inadequate oversight of its few clients, associates and
transactions contributed to fraudulent activity and multiple
violations of banking, civil and criminal laws in the United
States, United Kingdom, Jersey and elsewhere.
(a) Clerical Medical Scandal
In 1993, soon after receiving its banking license, Hanover
Bank became embroiled in a major financial scandal involving
=20 million, a prominent British insurance company called
Clerical Medical, and a fraudulent investment scheme involving
prime bank notes. Prime bank notes are fictitious financial
instruments which typically contain a false promise or
``guarantee'' by a well-known or ``prime'' bank to pay a
specified amount of funds, and the notes are then fraudulently
characterized as available for trade at a discounted price.
Fitzpatrick said during his interview that he now knows that no
trading market exists for prime bank notes and they are
considered a warning sign of financial fraud, but said he did
not have that information at the time. The 1993 scandal, highly
visible at the time, is still cited on occasion as one of the
earliest examples of prime bank note fraud.\196\
---------------------------------------------------------------------------
\196\ See, for example, ``Primed for fraud,'' Accountancy (4/95).
---------------------------------------------------------------------------
Fitzpatrick explained that, soon after the bank began
operations, Poulden and he began to negotiate a prime bank note
investment with Managed Opportunities Ltd., an Isle of Man
corporation that managed funds for the Clerical Medical Group.
He said the negotiations led to an agreement among Hanover
Bank, Managed Opportunities Ltd., and a Cyprus company called
Kinitor Ltd., which essentially provided that Kinitor would
provide certain prime bank notes in exchange for =20 million to
be deposited into a Hanover Bank correspondent account at
Lombard National Westminster Bank in Cyprus. Other companies,
such as Bankhall Investment Management and Corporate Financial
Investments were also involved.
Press reports indicate that after the =20 million was
transferred to Hanover Bank's account at the Cyprus bank in or
around June 1993, Clerical Medical claimed the transfer was
unauthorized and demanded return of the funds.\197\ Legal
injunctions and lawsuits followed, freezing the funds in the
Hanover account in Cyprus for about a year. Inquiries were
launched by two U.K. bodies, the Securities and Investments
Board and the Financial Intermediaries, Managers and Brokers
Regulatory Association, as well as by the fraud office of the
International Chamber of Commerce. Fitzpatrick said that, in
the end, Clerical Medical recovered the =20 million, and the
lawsuits were settled. He said that none of the inquiries
reached any conclusions regarding Hanover Bank's knowing
participation in a fraud. When the Minority Staff contacted the
U.K. Financial Services Authority (FSA) for its evaluation of
the Clerical Medical matter, the FSA declined to provide any
information because, as the FSA stated in a letter, ``the
Financial Services Act of 1986 . . . does not provide for
publication of any report . . . and use of, and/or disclosure
to third parties, of information contained in any such report
or otherwise obtained in the course of a Section 105
investigation is subject to statutory restrictions.'' \198\
---------------------------------------------------------------------------
\197\ See, for example, ``Suspension lifted on fund managers,''
Financial Times (London) (7/19/94); ``Clerical Medical regains Pounds
20m,'' The Times (7/11/94); ``British Firm Sues Two Lebanese Men For
Embezzlement,'' AP Worldstream (4/28/94); ``SIB investigates switch of
Clerical Medical funds to Cyprus,'' The Times (1/3/94); ``Clerical
Medical rejects demands over funds,'' The Times (8/23/93); ``Insurer
sues over controls of Pounds 20m,'' The Times (8/14/93).
\198\ Letter dated 5/30/00 from FSA to Subcommittee.
---------------------------------------------------------------------------
The Clerical Medical scandal was the first indication that
Hanover Bank was possibly engaging in questionable activity.
Despite the lengthy investigations into its conduct, U.K.
policies against releasing FSA reports meant than none of the
FSA information was made available to the public or persons
attempting to evaluate Hanover Bank's track record.
(b) Eric Rawle Samuel Criminal Conviction
In September 1993, just after the Clerical Medical scandal
broke, Eric Rawle Samuel was arrested in the United States for
offering to launder up to $12 million through Hanover
Bank.\199\ In January 1994, Samuel pled guilty to one count of
money laundering related to his actions and was sentenced to
more than 5 years imprisonment in the United States.
---------------------------------------------------------------------------
\199\ See United States v. Samuel (U.S. District Court for the
Northern District of Georgia Criminal Case No. 93-CR-420-ALL),
indictment dated 10/5/93; ``News Release'' dated 1/19/94, by the U.S.
Attorney for the Northern District of Georgia, announcing guilty plea;
``Judgement in a Criminal Case'' dated 3/30/94.
---------------------------------------------------------------------------
Samuel had ``represented himself to be an employee'' of
Hanover Bank, according to the indictment. Fitzpatrick said in
his interview that Samuel was never an employee of the bank,
although he had occasionally performed some services for it.
According to the indictment, Samuel had traveled to the United
States on two occasions, in August and September 1993, to
negotiate the sale of letters of credit to be issued by Hanover
Bank in exchange for drug proceeds and a $100,000 fee for each
$1 million laundered through the bank. A publicly available
affidavit filed by U.S. law enforcement noted that Samuel had
specifically mentioned Hanover Bank's correspondent
relationships with Standard Bank in Jersey and Harris Bank in
New York in connection with the laundering scheme.\200\ The
affidavit indicated that Samuel had also mentioned Hanover
Bank's involvement with a ``scam'' involving ``prime bank
guarantees'' and laundering funds ``from Nigeria.'' \201\
Samuel was arrested in Atlanta, Georgia, after exchanging a
$1,000,000 Hanover Bank letter of credit for ``what he believed
to be . . . $100,000 in cash.'' \202\
---------------------------------------------------------------------------
\200\ See United States v. Samuel, ``Affidavit'' dated 9/10/93,
paragraph (3).
\201\ Id., paragraphs (19) and (25).
\202\ United States v. Samuel, indictment, paragraph (17).
---------------------------------------------------------------------------
In his interview, Fitzpatrick characterized the U.S.
prosecution as a case of ``clear entrapment.'' He said that it
was his understanding that Samuel had received an unexpected
telephone call from someone he knew in the United States, who
was secretly participating in a law enforcement sting operation
in an effort to reduce his own criminal sentence after an
arrest. He said that the individual had apparently told Samuel
that he had cash to invest, and wanted to buy a certificate of
deposit or letter of credit from Hanover Bank with a face value
of $1 million, for which he would pay $800,000 up-front and the
rest later. He said that Samuel had told him about the
proposal, which he had considered essentially a loan request,
and he had approved going forward. Fitzpatrick said that he
personally drafted the letter of credit Samuel used in the
transaction. He said that Samuel then telephoned the person in
the United States to inform him that the deal had been
approved.
He said that the person had then told Samuel that he had
``dirty money,'' and Samuel ``fell for it'' and said he
``didn't mind'' and would accept the cash. He said that Samuel
flew to the United States with the letter of credit and met the
person at a hotel, where their conversation was apparently
recorded by the Federal Bureau of Investigation (FBI). He said
that the person had apparently again told Samuel that he had
``dirty money'' and Samuel had again said he ``didn't mind''
and would accept it. He said the FBI then arrested Samuel who
spent 5 years in prison.\203\
---------------------------------------------------------------------------
\203\ Fitzpatrick said that after the arrest, a friend of Samuel
had telephoned him and told him what had happened, and he had sent some
money to help pay Samuel's legal fees. He said that he was never
questioned by anyone about the matter and was never asked to testify.
---------------------------------------------------------------------------
GOAB authorities indicated, when asked about the Samuel
money laundering conviction, that they had no knowledge or
record of the indictment or Hanover Bank's involvement. Hanover
Bank's local director and registered agent, Justin Simon,
indicated that he thought the indictment had involved a
different Hanover Bank and was surprised to hear that
Fitzpatrick had acknowledged his bank's involvement in the
facts underlying that prosecution. The Samuel money laundering
conviction provided a second strong, and early indication of
Hanover Bank misconduct, but news of the conviction apparently
never even reached the bank's licensing authority.
(c) Koop Fraud
William H. Koop, a U.S. citizen from New Jersey, utilized
Hanover Bank in a financial fraud in which, from 1997 to 1998,
he bilked hundreds of U.S. investors out of millions of dollars
through a high yield investment scam.\204\ In interviews with
Minority Staff investigators, Fitzpatrick, Koop and Wingrove
offered different and often conflicting views of what happened
during the fraud, who was defrauding whom, and who knew what
was going on when. Rather than attempt to evaluate their
conflicting statements or assign culpability, the investigation
focused on how Hanover Bank, whether knowingly or unknowingly,
became a conduit for millions of dollars in illicit fraud
proceeds.
---------------------------------------------------------------------------
\204\ For more information about the Koop fraud, see the appendix
and the case histories for British Trade and Commerce Bank and Overseas
Development Bank and Trust.
---------------------------------------------------------------------------
The evidence indicates that Hanover Bank played a prominent
role in the Koop fraud in two ways. First, Koop sent almost $5
million in fraud proceeds to Hanover Bank, partly in response
to claims by Wingrove that Koop could earn returns of 20% or
more. Second, Hanover Bank became a featured element in Koop
promotional materials. Koop urged potential investors in his
fraudulent high yield program to wire their investment funds to
his Hanover Bank account and offered, for a fee, to open a
Hanover Bank account for any investor wanting an offshore
account. Documentation suggests that Koop pretended to open
over 200 Hanover Bank accounts for his defrauded clients,
eventually charging over $3,300 to open each new account.
Laundering $5 Million in Fraud Proceeds. In his interview,
Koop stated that he first learned of Hanover Bank in late 1997,
during a London meeting in which he was introduced to Wingrove.
In a sworn deposition, Koop said that Wingrove had claimed to
be a ``majority stockholder of Hanover Bank'' \205\ and an
international trader who could produce significant returns on
short term investments.\206\ Koop indicated that, after
checking into the background of both Wingrove and Hanover Bank,
he had decided to open an account and direct some of his
illicit proceeds to Wingrove for investment.\207\
---------------------------------------------------------------------------
\205\ Koop deposition in Schmidt v. Koop (12/10/98) at 182.
\206\ Id. at 169, 232.
\207\ Id. at 169-71.
---------------------------------------------------------------------------
Koop said that he never spoke with anyone else at Hanover
Bank, including Fitzpatrick, and did not find out for a number
of months that Wingrove had no official position with the
bank.\208\ He said that he thought Wingrove had opened a
Hanover Bank account for him, under the name of IFS, for which
Koop was the sole signatory, and which paid 20% interest on
deposits.\209\ He said that he later discovered that no account
had ever been opened, and all the funds he sent to Hanover Bank
had actually been deposited into Wingrove's account at the
bank.\210\
---------------------------------------------------------------------------
\208\ Id. at 225. See also Koop deposition in Schmidt v. Koop (3/2/
99) at 369.
\209\ Koop deposition in Schmidt v. Koop (12/10/98) at 165-167.
\210\ Id. at 165-66, 182-83.
---------------------------------------------------------------------------
Koop maintained in his deposition that, of the nearly $5
million that he and his associates directed to Hanover Bank,
about $3 million was supposed to have been deposited into his
account, while the other $2 million was intended for Wingrove,
for international investments.\211\ Koop said that Wingrove
actually took control of all $5 million and has yet to return a
single dollar of these funds. Koop indicated that Wingrove had
led him to believe he was investing the funds in artwork and
antiquities, ``currency trading'' and ``computer chips,''
although he did not ask and was not informed about specific
trades made with his funds.\212\
---------------------------------------------------------------------------
\211\ Koop deposition in Schmidt v. Koop (12/10/98) at 166, 178-80.
\212\ Id. at 169, 227-232.
---------------------------------------------------------------------------
Wingrove maintained in his interview that he never
misrepresented his relationship to Hanover Bank and never
agreed to make investments of any type other than in art and
antiquities, which were his specialty. He said that he did
promise Koop to produce a 50% return over a 5-year period from
the purchase and sale of art and antiques. Both Koop and
Wingrove agreed, however, that this promise was never put in
writing, and Koop sent Wingrove millions of dollars without any
formal agreement.
Wingrove said that ``within weeks'' of their first meeting,
Koop began sending him money to speculate in art. He said, at a
later point, Koop arranged for him to meet his associate,
Johnny Cabe, who was in London on a business trip. He said that
Cabe also began to invest funds with him and introduced him to
his London accountant, Winston Allen.
Both Koop and Wingrove indicated that the $5 million sent
to Hanover Bank was part of a larger sum, $12 million, that
Koop directed to Wingrove over the course of 6 months using
accounts at several banks. According to Wingrove, the funds
sent to Hanover Bank were at first deposited by Koop through
his company IFS,\213\ or by Cabe through his company Hisway
International Ministries. Later, Wingrove said, funds were sent
to Hanover Bank by third parties in the United States with whom
he had no direct contact. He said these third party deposits
caused confusion and cash flow problems, because the timing and
amounts of the deposits often conflicted with information
provided by Koop or Cabe about incoming funds.
---------------------------------------------------------------------------
\213\ As explained in the BTCB case history, ``IFS'' refers to
several different corporations controlled by Koop, including
International Financial Solutions. Ltd. and Info-Seek Asset Management
S.A.
---------------------------------------------------------------------------
Standard Bank account statements at Harris Bank
International and a Hanover Bank account statement prepared for
the Wingrove account \214\ show numerous deposits related to
the Koop fraud, totaling almost $5 million. Fitzpatrick
confirmed that he attributed all of these funds to the Wingrove
account. He explained that he had never met Koop or any of the
other persons indicted in the Koop fraud and had never opened
an account for any of them other than Wingrove. Fitzpatrick
indicated that he had no idea that Koop and Cabe thought they
had accounts at Hanover Bank and were directing funds into
them. According to him, that was why it never occurred to him,
when a $240,000 deposit was made on April 6, 1998, to
``International Financial Solutions,'' or a $103,000 deposit
was made on April 22, 1998, to ``Hisway Inc.,'' that the funds
might be intended for an account other than the Wingrove
account.\215\ Banking experts, however, have told the Minority
Staff that a bank's casual acceptance of deposits earmarked for
persons or accounts not associated with the bank is both
unusual and improper bank procedure.
---------------------------------------------------------------------------
\214\ Fitzpatrick and Poulden prepared one account statement for
the Wingrove account, covering the months of April and May 1998. This
document was turned over by Hanover Bank in discovery proceedings
associated with a U.S. civil suit filed by an investor attempting to
recover his funds from Koop, Schmidt v. Koop (U.S. District Court for
the District of New Jersey Civil Case No. 978-CIV-4305). This suit
named Hanover Bank as a defendant, but voluntarily dismissed the bank
from the suit after obtaining discovery documents.
\215\ Virtually all of the deposits credited by Fitzpatrick to the
Wingrove account were directed to be paid to someone other than
Wingrove. For example, the very first deposit into the 1998 Hanover
Bank account at Standard Bank was for $250,000 on March 30, 1998. That
deposit was made by wire transfer from the United States and directed
the funds to be paid to ``Financial Solutions Ltd.'' Three days later,
on 4/2/98, $1.2 million was deposited into the Hanover Bank account for
further credit to ``Acct A01001001 INT.'' Fitzpatrick acknowledged in
his interview that Financial Solutions Ltd. was not a Hanover Bank
accountholder, nor would Hanover Bank's numbering system produce an
account number like ``A01001001.'' He said that many of the deposits
into the Hanover Bank account referenced companies or individuals who
were not accountholders at the bank and were unfamiliar to him. When
asked how he knew to credit such funds to the Wingrove account,
Fitzpatrick said that Wingrove had sometimes called to alert him to
expected incoming funds, while other times Wingrove had appeared
surprised by particular deposits but agreed they should be attributed
to his account.
---------------------------------------------------------------------------
Fitzpatrick noted that Hanover Bank had only a handful of
accounts in 1998, and the Wingrove account was the only one
receiving numerous deposits at the time.\216\ He said that he
opened the Wingrove account in November 1997, but Wingrove did
not begin using it until March 1998, when Hanover Bank opened
its correspondent account at Standard Bank. Fitzpatrick stated,
and bank records confirm, that from the day the account opened,
Wingrove immediately began moving millions of dollars through
it.
---------------------------------------------------------------------------
\216\ Fitzpatrick said that the only other active Hanover Bank
accounts in 1998 had been opened by Poulden, who would tell him when
incoming funds should be credited to one of his clients' accounts.
---------------------------------------------------------------------------
The bank records and other information indicate that
Wingrove quickly transferred the deposits made into his Hanover
Bank account to other bank accounts around the world.
Fitzpatrick said that the quick passage of the funds through
the Wingrove account did not strike him as suspicious, since he
assumed Wingrove was receiving funds from clients and
immediately using the funds to purchase artwork. Legal action
on behalf of Koop fraud victims has since been taken to seize
remaining funds from Wingrove-controlled accounts as well as
some of the artwork purchased with the Koop funds.
Advertising Hanover Bank in the Fraud. In early 1998,
promotional materials associated with the Koop fraud began to
feature Hanover Bank. One example is a packet of information
entitled, ``The I.F.S. Monthly `Prime' Program,'' which Koop
gave to potential investors to convince them to place funds in
his fraudulent investment program. Section 2 of the packet,
entitled ``Wire Transfer Instructions,'' directed all investors
to send their funds to the IFS account at Hanover Bank.\217\
The Koop packet also provided background information about
Hanover Bank, describing the bank's establishment, services and
correspondents, and claiming the bank had ``one of the most
extensive and complete list of correspondent banks in the
entire banking business.''
---------------------------------------------------------------------------
\217\ These instructions stated in part:
``Deposit Funds To: Harris Bank International, New York, New
York
For Credit To: Standard Bank Jersey, Limited, Isle of Jersey,
Channel Islands
For Further Credit To: Hanover Bank, Limited
For Further Credit To: I.F.S. Account #A01-001-001.''
---------------------------------------------------------------------------
In an early version of the Koop packet, a document entitled
``Banking Information'' stated:
We have made arrangements with The Hanover Bank to open
accounts for each of our clients . . . without any charge to
you. If you are interested in doing so, please send a duplicate
copy of your bank reference letter and a copy of your passport
picture page. . . . IFS will then open an account for you in
The Hanover Bank in the name of your trust. We are negotiating
for the purchase of this bank at this time.
A later version of this document stated that, ``[a]s of
April 1st, 1998, IFS has . . . become the largest stockholder .
. . of the Hanover Bank.'' A document entitled, ``Trusts and
Bank Accounts'' offered to set up an offshore trust and bank
account at Hanover Bank for $3,375, with checks made payable to
Koop. Both the early and late versions of the Koop packet
provided blank copies of Hanover Bank's account opening forms
for personal and corporate accounts.
Still another document, dated June 22, 1998, and entitled
``A Personal Letter from the Desk of William H. Koop,''
described how Koop's company, IFS, had been experiencing
problems with its prior bank, Overseas Development Bank, and
decided to make a ``changeover'' to Hanover Bank. The document
described plans to ``re-structure'' the bank and move its
``operating office from Antigua to the Island of Jersey.'' The
Koop letter promised ``in the very near future'' to ``unveil
the positive factors of the bank, showing you the opportunities
that it will present to you personally [including]. . . .
numbered accounts[,] . . . high interest rates on time deposit
accounts[, and] . . . debit cards.'' The Koop letter remarked
that, by June 1998, ``[m]ost of you'' already had Hanover Bank
accounts. Documents collected in civil proceedings associated
with the Koop fraud \218\ included a specific list of investors
who supposedly had Hanover Bank accounts. This list identified
over 200 individuals by name, providing each with a fictitious
account number at Hanover Bank.
---------------------------------------------------------------------------
\218\ Schmidt v. Koop, (U.S. District Court for the District of New
Jersey Civil Case No. 978-CIV-4305).
---------------------------------------------------------------------------
Fitzpatrick indicated during his interview that he had no
idea at the time that Koop was purporting to open Hanover Bank
accounts. Fitzpatrick speculated, and Wingrove separately
confirmed, that Koop had obtained copies of Hanover Bank's
account opening forms and wire transfer instructions from
Wingrove, who had that information. Wingrove stated in his
interview that he had sent the Hanover Bank account opening
forms to Koop, because Koop had been considering opening an
account.
When asked about statements in the IFS promotional
materials about purchasing Hanover Bank, Koop indicated during
his interview that he and Wingrove had often spoken about
buying the bank, but never completed the transaction. In a
sworn deposition, Koop said Wingrove had told him he was
``going to have a percentage of stock in [Hanover Bank, but] .
. . never turned the stock over to me.'' \219\
---------------------------------------------------------------------------
\219\ Koop deposition in Schmidt v. Koop, (12/10/98) at 158.
---------------------------------------------------------------------------
Koop created further confusion about his relationship to
Hanover Bank and the bank's role in the Koop fraud by
incorporating a Dominican company called ``Hanover B Ltd.'' and
opening an account at British Trade and Commerce Bank (BTCB) in
the name of this corporation. Koop stated in a sworn deposition
that he chose the company's name ``to correspond to Hanover
Bank.'' \220\ Wingrove indicated during his interview that he
was well aware of the account at BTCB, thought Koop had opened
it in a deliberate attempt to ``mirror'' the Hanover Bank
account, and thought it had helped Koop appear to be opening
Hanover Bank accounts for Koop investors. Fitzpatrick indicated
that he knew nothing of ``Hanover B Ltd.,'' had never had any
contact with BTCB, and had never opened a correspondent account
for Hanover Bank at BTCB.
---------------------------------------------------------------------------
\220\ Koop deposition in Schmidt v. Koop (3/2/99) at 431.
---------------------------------------------------------------------------
The Koop fraud provides a detailed account of how criminals
can use an offshore bank to launder funds and perpetuate
financial frauds. It also demonstrates how loose bank controls
and nonexistent money laundering oversight contribute to the
ability of criminals to carry out their activities. Fitzpatrick
repeatedly said that he had no knowledge of Koop's misconduct,
Wingrove's misrepresentations, or their joint misuse of the
bank, yet he also failed to follow basic banking procedures
that would have enhanced his awareness and understanding of the
transactions taking place through his bank. When asked when he
first got wind of possible wrongdoing, Fitzpatrick said that
the first indications probably came in the summer of 1998, when
he learned that the U.K. Financial Services Authority was
investigating Hanover Bank for illegal banking activities in
England and Jersey and asking about Wingrove's role at the
bank.
(d) Illegal Bank Activities in England and Jersey
In 1998, for the first time since the Clerical Medical
scandal 5 years earlier, bank regulators in England and Jersey
took a close look at Hanover Bank. They determined that the
bank was not only operating illegally in both their countries,
but was also moving millions of dollars in suspect funds. Their
inquiry led to exposure of the Koop fraud, the censure of
Standard Bank for providing correspondent services to Hanover
Bank, and additional regulatory examination of this offshore
shell bank's activities.
The 1998 inquiry began after an individual who was
considering depositing funds with the bank asked Jersey banking
authorities to confirm that Hanover Bank had a Jersey banking
license and a London representative office.\221\ The Jersey
authorities contacted the U.K. Financial Services Authority
(FSA) which obtained a search warrant, entered the alleged
Hanover Bank office in London, and seized documents. The
documents included Hanover Bank ``brochures'' stating that
``[t]he bank holds a license to conduct international banking
business on the Island of Jersey'' and was ``operating within
the security of Jersey's stringent banking laws.'' \222\
Another document described the London address as Hanover Bank's
``Representative Office.'' \223\ FSA investigators then
interviewed persons associated with the London office,
including Terrence Wingrove, Winston Allen \224\ and Patrick
Makosso-Jouvam.
---------------------------------------------------------------------------
\221\ See FSA v. The Hanover Bank Ltd., ``First Affidavit of Peter
Geoffrey Brian Willsher,'' (7/23/98) at 4. See also FSA Press Release,
``The FSA gains injunctions against Hanover Bank Limited, Winston Allen
and Patrick Makosso-Jouvam'' (7/24/98), reprinted at www.fsa.gov.uk/
pubs/press/1998/050.html; and Terry Wingrove, Winston Allen, Patrick
Makosso-Jouvam (CH 1998 Case No. F4107) before the High Court of
Justice, Chancery Division. Neither the FSA nor Jersey authorities
would provide copies of the pleadings. However, Fitzpatrick provided
copies of certain pleadings to the plaintiff in Schmidt v. Koop
pursuant to discovery in that case, and plaintiff provided copies to
the Minority Staff investigation.
\222\ Id. at 5.
\223\ Id. at 7-8.
\224\ Evidence obtained by the Minority Staff investigation
indicates that Allen was also associated with the Koop fraud. For
example, documentation and interviews establish that, in 1997 and 1998,
Allen worked for Cabe, Hisway International Ministries, and related
companies. In a sworn deposition, Koop described Allen as ``a personal
friend'' to whom he loaned over $140,000 to purchase and furnish an
apartment in New York. See Schmidt v. Koop, Koop deposition (12/10/98)
at 209, 211-14, 235-36, 243; and Koop deposition (3/2/99) at 393-95. A
10/1/98 fax sent by Koop to Leonard Bedneau at BTCB, asked the bank to
establish a new Dominican corporation called Atlantic Marine Bancorp,
Ltd. and ``add Winston Allen as an organizer with William H. Koop.''
Wingrove indicated in his interview that Allen was also involved in
Koop's establishment of the Hanover B account at BTCB.
---------------------------------------------------------------------------
On July 24, 1998, at the request of the FSA, the High Court
in London issued an emergency injunction prohibiting Hanover
Bank from conducting banking activities in the United Kingdom,
since it was not licensed to accept deposits or operate a
representative office.\225\ An affidavit filed in the case by
an FSA official stated that Wingrove had allegedly represented
himself to be Hanover Bank's chairman and promised to pay
commissions to Allen and Jouvam if they located new deposits
for the bank.
---------------------------------------------------------------------------
\225\ The injunction also prohibited Wingrove, Allen, and Jouvam
from ``using the name Hanover Bank,'' describing themselves as bankers,
or otherwise engaging in banking activities within the United Kingdom.
A second FSA affidavit in FSA v. The Hanover Bank Limited, ``Second
Affidavit of Peter Geoffrey Brian Willsher (7/28/98), asked the court
to restrain Wingrove from ``making certain misleading, false or
deceptive statements'' regarding Hanover Bank.
---------------------------------------------------------------------------
Fitzpatrick said that he first learned of the FSA
injunction when, in July 1998, he received a letter from
Standard Bank stating that it intended to close Hanover Bank's
correspondent account due to its distribution of inaccurate
literature. He said the letter was a ``shock,'' and he
immediately began investigating the matter. Fitzpatrick said he
eventually learned of the role of Wingrove, who denied
misrepresenting his relationship with Hanover Bank and admitted
only to describing Hanover Bank's willingness to pay
commissions for new deposits. Fitzpatrick said that Allen and
Jouvam had used a computer to design new Hanover Bank
``literature'' to market the bank, included incorrect
information about its license and ability to transact business
in the U.K. and Jersey; and began prospecting for clients.\226\
Fitzpatrick indicated that he did not know how many clients had
been contacted or how many accounts had been purportedly opened
in the Allen-Jouvam marketing effort, but believed no deposits
had actually been made to the bank in connection with the
effort.\227\
---------------------------------------------------------------------------
\226\ In his interview, Wingrove essentially confirmed
Fitzpatrick's description of what happened, but maintained that Allen
and Jouvam had prepared the false Hanover Bank literature without his
knowledge or involvement.
\227\ An analysis of Hanover and Wingrove account statements by
Minority investigators, however, found one $50,000 deposit on May 20,
1998, described in wire transfer documentation as a transfer from
``Metro Telecom Inc.'' for further credit to ``Ottershaw Consultancy
Ltd.,'' but which was credited to the Wingrove account and appeared to
be associated with the Allen-Jouvam marketing effort. When asked about
this deposit, Fitzpatrick said that he was unfamiliar with the names
and could not recall the circumstances surrounding the deposit. He said
it was possible that Wingrove had told him to credit the $50,000 to his
account and he did so without asking additional questions.
---------------------------------------------------------------------------
On November 26, 1998, the High Court in London withdrew the
injunction against Hanover Bank, with the consent of the FSA
and on Hanover Bank's representation that it would not transact
any banking business in the U.K. Hanover Bank issued a press
release claiming it had been cleared and including the
Fitzpatrick statement, ``I am delighted the FSA has accepted
that the bank was not involved in any wrongdoing.''
But the FSA had not cleared Hanover Bank of wrongdoing. To
the contrary, the inquiry led FSA and Jersey authorities to
take a much closer look at Hanover Bank and its Standard Bank
account. Jersey authorities alerted U.S. authorities to signs
of suspicious activity in the Standard Bank account at Harris
Bank International, which led to a U.S. law enforcement
investigation of the Koop fraud, and the resulting guilty pleas
and pending indictments, including the pending indictment of
Wingrove. Jersey authorities not only cooperated with the U.S.
investigation, but also launched an investigation of Standard
Bank, resulting in the censure of the bank and the departure of
the bank's chairman.
Fitzpatrick was asked during his interview, what steps
Hanover Bank had taken or could take in the future to prevent
third parties like Koop, Wingrove, Allen and others from
misusing the bank's name and pretending to own it. Fitzpatrick
responded that he was only one person, the bank was very small,
and it was very difficult to guard against third parties
misusing the name and reputation of the bank. He said that he
had experienced repeated instances of strangers misrepresenting
the ownership of Hanover Bank, and there was ``nothing [he] can
do to stop it'' unless others demanded adequate proof of
ownership.
He related an incident of several years ago in which his
Antiguan agent, Justin Simon, telephoned him from Antigua to
say that a Brazilian businessman was on the island claiming to
be the Brazilian representative of Hanover Bank and
investigating the bona fides of the bank. He asked Simon to
have the gentleman telephone him in Ireland. He said that the
person called, and Fitzpatrick informed him of his ownership of
Hanover Bank. He said the Brazilian told him that a U.S.
citizen had shown him documents establishing his ownership of
the bank and had asked him to become the bank's Brazilian
representative to find new deposits for the bank. Fitzpatrick
said that the Brazilian told him he had already raised $15,000.
Fitzpatrick said that when he asked for the name, address and
telephone number of the U.S. person claiming ownership of the
bank, the Brazilian said that he did not have that information.
Fitzpatrick said this was not the only incident of this kind--
it had happened a number of times over the years.
(e) Casio Fraud
227An analysis of Hanover and Wingrove account statements
by Minority investigators, however, found one $50,000 deposit
on May 20, 1998, described in wire transfer documentation as a
transfer from ``Metro Telecom Inc.'' for further credit to
``Ottershaw Consultancy Ltd.,'' but which was credited to the
Wingrove account and appeared to be associated with the Allen-
Jouvam marketing effort. When asked about this deposit,
Fitzpatrick said that he was unfamiliar with the names and
could not recall the circumstances surrounding the deposit. He
said it was possible that Wingrove had told him to credit the
$50,000 to his account and he did so without asking additional
questions.
In 1998, banking authorities examined Hanover Bank for
illegal banking activities in Jersey and the United Kingdom and
launched an investigation into what would turn out to be the
Koop fraud, but they apparently missed the bank's possible
involvement in still another multi-million-dollar financial
fraud, which began in Japan and led to legal proceedings in
multiple jurisdictions. The fraud involved a major Japanese
electronics company, Casio Computer Co. Ltd. (``Casio''), which
filed suit in Japan, the United Kingdom and the United States,
among other countries, claiming that a senior employee, Osamu
Sayo, had defrauded the company out of $100 million.\228\ The
legal suits sought worldwide injunctions against Sayo and other
individuals and corporate entities associated with the fraud,
including Theoddor Tsuru, who had apparently been hired by Sayo
to help hide and invest a portion of the stolen funds.
---------------------------------------------------------------------------
\228\ See, for example, Casio Computer Co. v. Sayo (CH 1998-C No.
3241) before the High Court of Justice Chancery Division in London,
including 6/10/98 ``Injunction Prohibiting Disposal of Assets
Worldwide'' naming Tsuru, among other defendants; and Casio Computer
Co. v. Sayo (U.S. District Court for the Southern District of New York,
Civil Case No. 98-Civ-3772-WK), including 6/18/98 ``Second Amended
Complaint'' naming Tsuru, among other defendants.
---------------------------------------------------------------------------
Casio alleged in its U.S. complaint that ``the various
conspirators lied to, and cheated, Casio and each other,
generated fraudulent records to conceal the frauds, and engaged
in an elaborate series of wire transfers in an effort to
launder the stolen funds and conceal their racketeering
activities.'' \229\ Tsuru is described as a key conspirator
who, beginning in February 1997, helped transfer Casio funds
through numerous bank accounts and place them in various high
yield investment schemes. The U.S. complaint alleged, among
other misconduct, that Tsuru personally misappropriated a
portion of the missing money, stating: ``All told, it appears
that Tsuru stole at least $8,000,000 of the Casio funds.''
\230\
---------------------------------------------------------------------------
\229\ Casio Computer Co. v. Sayo (U.S. District Court for the
Southern District of New York, Civil Case No. 98-Civ-3772-WK), Second
Amended Complaint at 2.
\230\ Id. at 15.
---------------------------------------------------------------------------
In June 1998, the London court issued a worldwide Mareva
injunction freezing Tsuru's assets, including a $2 million
house in Japan, a $2 million house in Florida, a $1.8 million
apartment in New York, and a $4 million yacht. It later issued
a judgment against him and ordered him to repay $3.3 million to
Casio. Additional civil litigation in the United States
involving Tsuru and the Casio funds is ongoing in Florida,
Illinois and New York.
Based upon the Minority Staff investigation's analysis of
bank records and other evidence, it appears that three 1998
Hanover Bank deposits totaling about $12.6 million are likely
associated with the Casio fraud. The deposits were made on
three occasions in 1998, using Standard Bank's U.S.
correspondent account at Harris Bank International.\231\ The
evidence linking the deposits to the Casio fraud includes the
following:
---------------------------------------------------------------------------
\231\ The three deposits were:
--$2.475 million deposited on 3/31/98, which Hanover Bank
credited to the Doi account;
--$190,000 deposited on 4/22/98, which Hanover Bank apparently
credited to the Tsuru-Abe joint account; and
--$10 million deposited on 5/29/98, which Hanover Bank
apparently credited to the Morgan Steepleton account.
--Both Fitzpatrick \232\ and Wingrove \233\ indicated
during their interviews that they thought the deposits were
likely related to the Casio fraud.
---------------------------------------------------------------------------
\232\ When asked whether he thought Tsuru was using Hanover Bank in
connection with the Casio fraud, Fitzpatrick said that he did not know,
but ``it looks like that.'' He said he first found out about the Casio
fraud through an article in The Observer that ``had Tsuru's name all
over it.'' He said he immediately wrote to Poulden expressing concern
and the need to remove Tsuru from the bank's board, and later rescinded
Tsuru's appointment. Fitzpatrick said that he also wrote to Doi asking
him whether his account was associated with the Casio fraud, and
received a letter denying any connection. He agreed to provide copies
of that letter exchange, but did not do so. He noted, however, that Doi
was from Japan, the source of funds in his account was unclear, and Doi
allegedly allowed his funds to be used for various investments at the
direction of Tsuru, Abe and Poulden. Fitzpatrick also noted that when
$400,000 was mistakenly withdrawn from the Doi account due to the
Wingrove overdraft, Doi never complained or demanded return of the
funds, which he found unlikely conduct with respect to legitimate
funds.
\233\ Wingrove indicated that he also believed the funds deposited
in Hanover Bank were associated with the Casio fraud. He indicated that
he was first introduced to Tsuru and Poulden by Fitzpatrick in March of
1998, when Tsuru was attempting to recover funds from another
individual associated with the Casio fraud, Joseph R. Kelso. (Kelso's
role in the Casio fraud is described, for example, in ``Wanted--over
there, but not over here,'' The Observer (4/12/98); and ``Casio admits
to $100m loss as executive goes into hiding,'' The Observer (6/21/98).)
Wingrove said that he met with Kelso on Tsuru's behalf while Kelso was
detained in England on alleged immigration violations and obtained some
promising information. Wingrove indicated that, because he spoke fluent
Japanese and was promised 10% of any funds he recovered, he also
traveled to Japan on behalf of Tsuru and Poulden. He declined to
provide specific information about the trip, other than to say he met
with Doi among others, and when he returned in May 1998, warned
Fitzpatrick about what he had found out. He said that, in the end, he
never recovered any funds for Tsuru.
--The funds were deposited into accounts opened at the
direction of Poulden, who was then an associate and
representative of Tsuru, a key figure in the Casio fraud.\234\
---------------------------------------------------------------------------
\234\ Poulden had introduced Tsuru and convinced Fitzpatrick to
appoint Tsuru to Hanover Bank's board in March 1998. Tsuru stated in
pleadings before the London High Court that, from September 1997 until
well into 1998, he had employed Poulden as a ``barrister'' to represent
him in matters relating to unsuccessful investments made with the Casio
funds. See Casio Computer Co. v. Sayo (CH 1998-C No. 3241), ``Third
Affirmation of Theoddor Tsuru'' (1/12/99) at 63. Since, by Tsuru's own
admission, Poulden was representing him in 1997 and 1998, in matters
involving investments made with Casio funds, it is logical to assume
Poulden was continuing to do so in connection with their dealings with
Hanover Bank.
--The deposits were made in 1998, when Tsuru was still
handling Casio funds, and were deposited to accounts associated
with Tsuru, including a joint Tsuru-Abe account, the Doi
account and a corporate account for Morgan Steepleton, a
---------------------------------------------------------------------------
company Fitzpatrick said was associated with Tsuru.
--The bulk of the funds were withdrawn through wire
transfers authorized by Poulden during the period he was
associated with Tsuru.
While the evidence linking the $12.6 million to the Casio
fraud is far from conclusive, it is more than sufficient to
raise concern. U.S. legal counsel for Casio indicated that they
were spending considerable time trying to track down funds and
assets related to the Casio fraud, had been wholly unaware of
the Tsuru-related accounts at Hanover Bank, and were interested
to learn of the deposits and withdrawals.
The fate of the Casio funds that were still on deposit with
Hanover Bank when the bank became inactive in 1998 is also of
interest. Fitzpatrick indicated that all remaining funds in its
account at Standard Bank were transferred in December 1998 or
January 1999, to an attorney trust account belonging to the
bank's London solicitor, Finers. No documents were produced,
however, showing exactly how much was transferred to the Finers
account. Evidence obtained by the investigation indicates that,
at the time, a dispute arose between Fitzpatrick and Poulden
over where the funds should be transferred, with each man
insisting on a different attorney trust account. Fitzpatrick
resolved the dispute by terminating Poulden's relationship with
Hanover Bank and instructing Standard Bank to transfer the
funds to Finers. There is also some evidence that Tsuru may
have asserted ownership of the funds, which Fitzpatrick
declined to acknowledge in light of the Casio fraud and
uncertainty over the funds' status.
Fitzpatrick indicated during his June 2000 interview, that
the funds sent to Finers remain in the attorney trust account,
although somewhat reduced by legal fees. The bank's 1998
financial statement shows that Hanover Bank also paid
Fitzpatrick a 1998 ``dividend'' of $1.9 million. The source of
the funds used to pay the $1.9 million dividend is unclear; if
the funds were drawn from the Hanover Bank correspondent
account at Standard Bank, they may have included illicit
proceeds from the Casio fraud.
(7) Correspondent Account at Harris Bank International
In 1998, over a 3-month period, Hanover Bank accumulated
deposits of more than $17 million. Nearly $5 million of these
deposits came from the self-confessed Koop fraud; the remainder
appears likely to have been associated with the Casio fraud.
All $17 million was deposited into and later transferred from
Standard Bank's U.S. correspondent account at Harris Bank
International in New York. The evidence indicates this U.S.
account was the account Hanover Bank used most often during
1998, although Harris Bank International had no knowledge it
was providing correspondent services to this offshore shell
bank.
Information about Hanover Bank's use of the Harris Bank
International account was obtained, in part, through interviews
with Harris Bank International personnel involved in the
administration of the Standard Bank account. Standard Bank
declined to provide either an interview or written response to
a letter requesting information. Documentation in Harris Bank
International files, account statements, and other materials
and information were collected and reviewed.
Harris Bank International. Harris Bank International Corp.
(``Harris Bank International'') is a wholly owned subsidiary of
Harris Trust and Savings Bank, a major Midwestern bank with
over 6,500 employees and over $26 billion in assets.\235\
Harris Bank International, an Edge Act corporation with about
40 employees, is headquartered in New York City, with a
representative office in London. Both banks are members of the
Bank of Montreal Group of companies.
---------------------------------------------------------------------------
\235\ See Harris Bank website at www.harrisbank.com/facts.html; and
6/15/00 letter from Harris Bank International to the Subcommittee.
---------------------------------------------------------------------------
According to Harris Bank International personnel, its core
business is international correspondent banking, particularly
handling U.S. dollar ``electronic funds transfers of
international origin.'' \236\ In the Bankers Almanac, about 40
foreign banks identify Harris Bank International as their U.S.
correspondent. These 40 banks include a few large banks and
many smaller banks, including banks in jurisdictions known for
bank secrecy, weak anti-money laundering controls or high money
laundering risks, such as Austria, Bosnia-Hercegovina, Costa
Rica, Latvia, Luxembourg, and Turkey. One of the 40 is Standard
Bank Jersey Ltd.
---------------------------------------------------------------------------
\236\ Letter dated 6/15/00 from Harris Bank International to
Subcommittee.
---------------------------------------------------------------------------
Standard Bank and Hanover Bank. Harris Bank International
indicated that Standard Bank Jersey Ltd. was one of its larger
clients. Harris Bank International account statements for
Standard Bank Jersey Ltd. show numerous transactions involving
millions of dollars each day, including large bank-to-bank and
bank-to-broker transfers and smaller transfers involving
individual clients. The transactions included significant sums
transferred to or from foreign banks in the Standard Bank
group. In 1998 and 1999, the Standard Bank account saw so many
transactions each day that Harris Bank International issued
daily account statements. Daily account totals during April
1998, for example, ranged from a low of $3.4 million on April
10th to a high of $134 million on April 28th. In just 3 months,
from April to June 1998, when the Hanover Bank account was
active, more than $1.5 billion was deposited into the Standard
Bank account at Harris Bank International, primarily through
inter-bank transfers and the sale of large blocks of
securities. Of that $1.5 billion, only about $17 million, or
about 1% of the total, were deposits to Hanover Bank.
Harris Bank International stated in its letter to the
Subcommittee that it has ``never maintained an account
relationship for Hanover Bank Ltd., Antigua and has acted only
as an intermediary to transactions on behalf of Standard Bank,
Jersey.'' Harris Bank personnel indicated that the bank did not
even know that it had been providing correspondent services to
Hanover Bank in 1998. Fitzpatrick and Harris Bank personnel
agreed that the two banks had never communicated directly with
each other.\237\ Harris Bank International indicated that it
had not known that Hanover Bank was an offshore shell bank, or
that it was owned by a single individual and licensed by a
secrecy jurisdiction. It indicated that, if Hanover Bank had
applied directly for a correspondent relationship, Harris Bank
International would likely have rejected the application.
---------------------------------------------------------------------------
\237\ Wingrove said in his interview that he frequently spoke with
Harris Bank International customer service personnel in 1998, to find
out whether certain wire transfers had been deposited into the Hanover
Bank account, but the bank indicated that its customer service
representatives had no recollection of Wingrove.
---------------------------------------------------------------------------
Harris Bank International's lack of awareness of Hanover
Bank is attributable, in part, to the relatively small number
and dollar volume of transactions involving Hanover Bank, when
compared to the other activity in the Standard Bank account. But it is
also attributable to Harris Bank International's practice of
not asking its respondent banks about their bank clients.
Harris Bank International indicated, for example, that
despite having a longstanding correspondent relationship with
Standard Bank of Jersey, it had no information on Standard
Bank's own correspondent practices. Harris Bank International
did not know how many accounts Standard Bank had opened for
foreign banks, nor did it know whether Standard Bank would
readily accept offshore shell banks or banks in secrecy
jurisdictions with weak anti-money laundering controls. Harris
Bank International indicated that, even after the Hanover Bank
incident, it had not collected information on what foreign
banks may be utilizing Standard Bank's account, and had no
immediate plans to find out.
Harris Bank International stated in its letter to the
Subcommittee that it did conduct ongoing due diligence reviews
of Standard Bank and its correspondent account. It indicated,
for example, that it took steps to ensure that Standard Bank
had an active anti-money laundering program in place, and
provided a copy of Standard Bank's November 1999 ``Anti-Money
Laundering Handbook.'' Standard Bank's Handbook provides
general information and specific bank procedures for combating
money laundering. It specifies a Money Laundering Reporting
Officer for the bank, emphasizes the bank's need to ``know its
customers,'' and provides useful guidance on how to recognize
and respond to signs of possible money laundering. The Handbook
provides employee instruction on account opening and monitoring
procedures, conducting due diligence, and reporting suspicious
activity. It does not provide any specific guidance or
instruction on correspondent banking. Because Standard Bank did
not respond to requests for information, it is not clear if the
same due diligence procedures were in place in 1998, or how the
bank applies its anti-money laundering policies and procedures
to correspondent bank clients.
Harris Bank International said that it has correspondent
relationship managers in New York and London who oversee the
Standard Bank account. It indicated that it monitors all of its
accounts, including the Standard Bank account, by ``regularly
review[ing] transaction volumes, value and payment content.''
Harris Bank International indicated that its monitoring efforts
have relied on manual reviews of this information, but after a
recent Federal Reserve audit recommended strengthening its
monitoring program, it has allocated funds and is in the
process of selecting an electronic monitoring system. It
indicated that its manual monitoring program did not and could
not have identified the Hanover Bank transactions as a problem,
because the total dollar volume involved represented such a
small portion of the Standard Bank account activity. As it
stated in its letter to the Subcommittee, the Hanover
transactions ``were not and would not be considered suspicious
from our intermediary bank perspective. These transaction types
are typical of Standard Bank.''
Harris Bank International said that it had relied on
Standard Bank to comply with its Anti-Money Laundering Handbook
and exercise due diligence in opening and monitoring all of its
accounts, including the Hanover Bank account. Harris Bank
International indicated that, it was only after the Minority
Staff inquiry about the account, that it learned Jersey
regulators had censured Standard Bank for failing to conduct
adequate due diligence in initiating a correspondent
relationship with Hanover Bank.
As described earlier, in July 2000, the Jersey Financial
Services Commission issued a statement finding that senior
officials at Standard Bank had ``failed to follow proper
procedures,'' and the bank had fallen ``well short of the
standards expected'' with respect to due diligence. The
statement commended the bank for making changes in its senior
management, including dismissing the chairman of the bank,
Berkeley. Because Jersey officials declined to provide copies
of their investigative report or the supporting bank
documentation, it is unclear whether they made assessments or
issued findings regarding Standard Bank's overall anti-money
laundering efforts in correspondent banking.
B. THE ISSUES
Hanover Bank is a little known, offshore shell bank,
licensed by a small bank secrecy jurisdiction. It is
essentially a one-man operation, taking deposits, wiring funds
and dabbling in credit transactions, with virtually no controls
and minimal outside oversight. On two occasions it opened a
correspondent account at Standard Bank in Jersey and conducted
transactions through Standard Bank's U.S. correspondent account
at Harris Bank International in New York, unbeknownst to Harris
Bank International. In 3 months in 1998, Hanover Bank moved
over $17 million through the New York account, virtually all of
which were likely illicit proceeds from the Koop and Casio
frauds. The U.S. bank responsible for accepting and wire
transferring the $17 million had no idea it was providing
correspondent services to an offshore shell bank with no
office, no trained staff, few operational controls, and past
associations with fraud and criminal money laundering.
Offshore Shell Bank Operations
Because Hanover Bank's owner, GOAB authorities, and Harris
Bank International cooperated with the investigation, and
supporting documents and interviews were obtained from several
sources, the Hanover Bank case history provides a rare
opportunity to take a close look at how one offshore shell bank
operated on a day-to-day basis. The view is not an inspiring
one.
Hanover Bank operated well outside the parameters of normal
banking practice, without the most basic administrative
controls that U.S. banks expect in a regulated financial
institution. It did not have a single trained banker or
accountant on staff. It had no full time staff at all. It had
no electronic ledger, and stored its records at the bank
owner's personal residence. It opened accounts with little or
no account opening documentation. It drew up a one-page set of
due diligence requirements for new accounts and then ignored
them. It accepted incoming funds for persons who were not
accountholders at the bank. It kept all of its funds in its
correspondent accounts and tracked client deposits by reviewing
monthly correspondent account bank statements. It authorized
outgoing wire transfers, without documenting who had authority
to withdraw funds from particular client accounts. It operated
without compiling or issuing regular client account statements.
It certified one client account as having $16.5 million, when
the account balance never exceeded $2.4 million. It incurred an
$800,000 overdraft after failing to check a client's account
balance before approving a requested wire transfer. It watched
$17 million move through its accounts without asking any hard
questions about the source of the funds. It operated for 8
years without a single on-site visit from its primary
government regulator.
Hanover Bank was able to avoid regulatory oversight in part
because it was a shell operation without a permanent office or
staff. GOAB authorities could not simply walk in the bank's
doors, ask questions and inspect documents. The bank owner was
literally thousands of miles away from routine oversight. At
the same time, due to its low profile, the bank never drew the
attention of bank regulators in Ireland. Even after learning of
its existence in the jurisdiction, Irish regulators were
hesitant to exercise oversight of a bank that was licensed in
the Caribbean, accepted deposits in the Channel Islands, and
limited its day-to-day activities in Ireland to making
telephone calls and faxing wire instructions.
The result was a bank that experienced minimal oversight
and accumulated a track record of operational problems and
suspect conduct, including handling funds associated with money
laundering and frauds that are the subject of ongoing criminal
prosecutions and civil litigation in New Jersey, New York,
South Carolina, Florida, and Illinois in the United States, as
well as other countries around the world.
Interviews conducted with bankers and bank regulators in
the United States and elsewhere indicate that the international
banking community has little awareness and no specific
information on how offshore shell banks conduct business. Many
expressed surprise when told of the weak recordkeeping
practices and loose operating procedures at Hanover Bank. Some
expressed surprise that a small, offshore shell operation
gained access to a U.S. bank. Some expressed surprise at the
amount of trouble that this one-man bank caused in the United
States alone, apparently becoming a magnet for financial fraud
and suspect funds.
Lack of Due Diligence by U.S. Bank
Although Hanover Bank never opened its own U.S.
correspondent account, it managed in 3 months to use Standard
Bank's U.S. account to move millions of dollars associated with
financial fraud and money laundering. The Hanover Bank case
history demonstrates the money laundering vulnerability of U.S.
banks that fail to ask questions about the correspondent
practices of their foreign bank clients.
Harris Bank International's core business is international
correspondent banking and its primary activity is providing
international wire transfer services to foreign banks. Yet
Harris Bank International did not ask its respondent banks
about their correspondent banking activities. It did not ask
its foreign bank client whether they provided correspondent
banking services to other banks. It did not ask how many banks
might be using the foreign bank's U.S. correspondent account,
what types of banks might be using it, or the names of those
banks.
The practical result is that Harris Bank International
never knew it was providing correspondent services to an
offshore shell bank licensed by a bank secrecy jurisdiction.
Because Hanover Bank's transactions comprised just 1% of
Standard Bank's total account activity, Harris Bank
International's monitoring systems could not reasonably be
expected to isolate and evaluate these transactions. The result
is that Hanover Bank got a free pass into the U.S. banking
system and carried out its transactions without triggering any
anti-money laundering oversight in the United States.
That free pass would not have been issued if Harris Bank
International had required its respondent banks to identify
their bank clients and to refuse to give offshore shell banks
access to their U.S. correspondent accounts.
In December 2000, Harris Bank International personnel
indicated that, in light of the Bank of New York scandal, the
Minority Staff investigation, and a recent Federal Reserve Bank
audit, the bank had decided to strengthen its anti-money
laundering controls in the correspondent banking field. Harris
Bank International personnel indicated that, among other
measures, funds had been allocated to develop better risk
assessments of its existing correspondent bank clients, better
client profiles, and better monitoring systems, including the
bank's first electronic monitoring software. Harris Bank
International personnel also indicated that the bank had
decided to ask new applicants to identify their bank clients
and correspondent banking practices, although it had not yet
been decided whether the bank would ask the same questions of
its existing clients.
Harris Bank International's recent commitment to improving
its anti-money laundering controls is welcome. But the bank's
hesitancy to ask its existing bank clients about their
correspondent practices--including whether they allow offshore
shell banks to use their U.S. accounts--continues a limited due
diligence approach that is easy to administer, but hard to
justify in light of the money laundering risks illustrated by
the Hanover Bank case history.
HANOVER BANK TRANSACTIONS
USING STANDARD BANK'S U.S. CORRESPONDENT ACCOUNT
AT HARRIS BANK INTERNATIONAL
April-July 1998
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
APRIL $0 $6,781,409 $3,265,545 $3,515,864
----------------------------------------------------------------------------------------------------------------
MAY $3,515,864 $431,800 $525,000 $3,422,664
----------------------------------------------------------------------------------------------------------------
JUNE $3,422,664 $10,180,635 $10,099,985 $3,503,314
----------------------------------------------------------------------------------------------------------------
JULY $3,503,314 $30,925 $0 $3,534,239
----------------------------------------------------------------------------------------------------------------
TOTAL $17,424,769 $13,890,530
----------------------------------------------------------------------------------------------------------------
Data based upon information provided by Standard Bank Jersey Ltd. and attached to 6/14/00 letter to Harris Bank
International Corporation from Jonathan Speck of Mourant de Feu & Jeune.
Prepared by U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, November 2000.
Case History No. 6
BRITISH BANK OF LATIN AMERICA
British Bank of Latin America, Ltd. (BBLA) is a small
offshore bank that obtained a license in the Bahamas, sought
clients in Colombia, kept its money in the United States, and
closed its doors in 2000 after being named in two separate U.S.
money laundering stings. This case history examines the failure
of BBLA and its major U.S. correspondent bank, the Bank of New
York, to guard against money laundering through the Colombian
black market peso exchange, the largest money laundering system
in the Western Hemisphere.
The following information was obtained from court
pleadings; documents provided by BBLA, Lloyds TSB Bank
(``Lloyds''), and the Bank of New York (``BNY''); interviews;
and other materials. Key sources of information included a
March 9, 2000 written submission by BBLA to the Subcommittee; a
March 31, 2000 interview of BBLA and Lloyds personnel; and an
August 17, 2000 interview of BNY personnel. All three banks
voluntarily cooperated with the investigation.
A. THE FACTS
The British Bank of Latin America, Ltd. (``BBLA'') began
operations in 1981. From its inception to its closure in 2000,
BBLA maintained an administrative office in the Bahamas and a
representative office in Colombia. In the Bahamas, the bank
held an official offshore banking license; in Colombia, it held
an official certificate, first issued in 1983, authorizing it
to operate a representative office. All of BBLA's clients were
Colombian. At its height, BBLA had 8 employees, about 200
clients, and about $135 million in assets. Throughout its
existence, BBLA was affiliated with a large Colombian bank,
Banco Anglo, and a major international bank based in London,
Lloyds TSB Bank.
(1) BBLA Ownership
BBLA is a longtime Lloyds affiliate. Lloyds TSB Bank is a
decades-old financial conglomerate with, according to the
Bankers Almanac, about 77,000 employees and $280 billion in
assets worldwide. The Lloyds TSB Group includes not only Lloyds
TSB Bank in London, with its 1,800 branches and numerous
affiliated banks, securities firms and other companies, but it
is also associated with one of the world's most prominent
insurance companies, Lloyd's of London.
BBLA was first established and licensed in the Bahamas in
1981, under the name Banco Anglo Colombiano (Nassau) Ltd. It
began its existence and continued for more than a decade, from
1981 until 1993, as a wholly owned subsidiary of a Colombian
bank, originally called Banco Anglo Colombiano S.A., then
renamed Banco Anglo S.A. (``Banco Anglo''). Banco Anglo is a
well established Colombian bank with over 1,000 employees and
50 branches throughout the country. It, too, is a longtime
Lloyds affiliate.\238\
---------------------------------------------------------------------------
\238\ Banco Anglo operated as a wholly owned subsidiary of Lloyds
until 1976, when Colombian law changed to require local ownership of
Colombian banks, and Lloyds sold 51% of Banco Anglo's shares to local
Colombian investors. In 1991, after Colombian law reversed course to
again permit foreign ownership of Colombian banks, Lloyds re-purchased
Banco Anglo stock and eventually regained its position as the bank's
majority shareholder.
---------------------------------------------------------------------------
In 1993, Colombian law was changed to prohibit Colombian
banks from owning foreign bank subsidiaries, and Banco Anglo
was required to sell its bank in the Bahamas. On June 29, 1993,
it sold the bank to a newly-formed holding company, Sociedad
Inversionista Anglo Colombiano S.A. (``SIAC''), which was
incorporated in Colombia. SIAC's largest stockholder was a
company in the Lloyds group, Lloyds Bank (BLSA) Ltd., which
owned 49% of the shares.\239\ Because a Lloyds company was the
largest stockholder of both Banco Anglo and SIAC, the transfer
of BBLA from one to the other in 1993 essentially kept the bank
within the Lloyds group. In 1994, SIAC changed the bank's name
from Banco Anglo Colombiano (Nassau) Ltd. to British Bank of
Latin America, presumably to stress the bank's affiliation with
Lloyds, a leading British bank.\240\
---------------------------------------------------------------------------
\239\ The remaining 51% of SIAC shares were held by a number of
local Colombian investors.
\240\ From 1993 to 2000, Lloyds steadily increased its ownership of
the shares of both Banco Anglo and SIAC. By December 1999, Lloyds owned
about 97% of Banco Anglo and about 98% of SIAC. Lloyds did not become a
100% owner of BBLA, because Bahamian law had long required its banks to
have more than one shareholder. For example, when Bahamian law required
its banks to have a minimum of five shareholders, BBLA's shareholders
included SIAC and four Lloyds employees in the Bahamas, each of whom
owned one share of BBLA. In 1997, when Bahamian law changed to permit a
minimum of two bank shareholders, BBLA's shareholders became SIAC and
Lloyds TSB Nominees Ltd., another company in the Lloyds group.
---------------------------------------------------------------------------
Throughout its 19 years, despite multiple technical
ownership changes to comply with changes in Colombian and
Bahamian laws, BBLA remained a Lloyds affiliate, through either
Banco Anglo or SIAC. BBLA continually advertised its Lloyds
affiliation as a key aspect of its ownership, organization and
operation.
(2) BBLA Principal Lines of Business
When asked about BBLA's major business activities, BBLA and
Lloyds personnel explained that, because Colombian law used to
severely restrict the ability of Colombian banks to offer U.S.
dollar loans to their clients, many Colombian banks established
offshore subsidiaries to provide the U.S. dollar loans they
could not. According to them, BBLA was established by Banco
Anglo for that purpose. As one BNY analysis put it, ``BBLA
exist[ed] to book dollar loans for [Banco Anglo] customers.''
\241\
---------------------------------------------------------------------------
\241\ Internal credit analysis of BBLA by BNY Credit Division (10/
17/95) at 4, BNYSEN 676.
---------------------------------------------------------------------------
Over time, BBLA took on additional lines of business, but
continued to work closely with Banco Anglo. In simplest terms,
Banco Anglo provided banking services to its clients in
Colombian pesos, and referred them to BBLA if they needed
banking services in U.S. dollars.
BBLA stated, and the documentation substantiated, that the
bank eventually had two basic groups of clients. The first
consisted of Colombian companies that needed U.S. dollars to
engage in foreign trade or other business transactions. BBLA
provided these clients with U.S. dollar loans and trade
financing, BNY stated in one memorandum, ``[BBLA] takes dollar
funds and makes dollar loans to Colombian borrowers to finance
imports, working capital, and equipment.'' \242\ BBLA explained
that it financed its U.S. dollar loans primarily through credit
lines granted to the bank by its U.S. correspondents or Lloyds
affiliates. BBLA indicated that its company clients were not
shell investment vehicles, but manufacturers, coffee growers
and other Colombian businesses with tangible assets and active
import and export sales.
---------------------------------------------------------------------------
\242\ Internal BNY document by ``BNY Credit Division'' (10/18/95),
BNYSEN 351.
---------------------------------------------------------------------------
BBLA's second category of clients consisted of wealthy
Colombian individuals seeking private banking services in U.S.
dollars. Among other services, BBLA accepted deposits from
these clients and placed them in U.S. dollar investment funds
and higher interest bearing accounts, primarily through
accounts made available to BBLA by its U.S. correspondents or
Lloyds affiliates. BBLA earned revenue from these placements,
not only by assessing fees for its services, but also by
sharing in the higher interest earnings paid on the deposits.
BNY stated that BBLA was also used as a vehicle to allow its
individual shareholders to ``receive dividends offshore.''
\243\
---------------------------------------------------------------------------
\243\ Internal BNY ``Call Report'' on BBLA (3/24/00) at 1, BNYSEN
333.
---------------------------------------------------------------------------
During its interview, BBLA stated that, at its height, it
had about 140 depositing clients and about 60 borrowing
clients. The borrowing clients were all companies. Of the 140
depositors, BBLA estimated that 90% were individuals holding
accounts in their own names, and about 10% were corporations.
At its height, BBLA indicated that it had about $50 million in
client deposits, all of which were held in its correspondent
accounts. Part of BBLA's attraction for Banco Anglo clients
seeking private banking services included BBLA's location in a
bank secrecy jurisdiction with no personal or corporate taxes,
and its ready access through its correspondents to U.S. dollar
time deposits, investment accounts and wire transfer
capabilities.
In addition to serving its two groups of clients, BBLA's
account statements show a constant stream of large money
transfers among BBLA and a handful of Lloyds affiliates,
including Lloyds banks in Belgium, Colombia, Panama, the United
Kingdom and the United States. These transfers, involving
millions of dollars moving on almost a daily basis among the
Lloyds group, were the most significant category of
transactions on BBLA's account statements. They depict an
offshore affiliate well-integrated into the Lloyds banking
network.
BBLA stated that it did not act as a correspondent for
other banks or allow other foreign banks to transact business
through its U.S. account. It indicated that it did not offer
its clients foreign exchange services, instead offering them
banking services solely in U.S. dollars. BBLA stated that it
did not engage in high yield investment programs, Internet
gambling, or other high risk activities described in some of
the other case histories. BBLA also indicated that it did not
establish shell corporations for its clients, although any
clients needing such services would be able to obtain them
through other Lloyds banks.
BBLA's financial statements were audited by KPMG Chartered
Accountants in the Bahamas. The 1998 audited statement
indicated that the bank was thinly capitalized but profitable,
primarily due to an active lending portfolio exceeding $120
million, and earnings from about $70 million in client and bank
deposits. BBLA indicated that it was highly reliant on Banco
Anglo for virtually all of its client referrals. BNY apparently
agreed, stating in one credit analysis, ``[BBLA] exists as a
going concern only by virtue of its tie to [Banco Anglo].''
\244\
---------------------------------------------------------------------------
\244\ BNY Credit Division's internal credit analysis of BBLA (10/
17/95) at 2, BNYSEN 674.
---------------------------------------------------------------------------
(3) BBLA Correspondents
BBLA indicated that, because it specialized in offering
U.S. dollar services to its clients, it kept virtually 100% of
its funds in U.S. correspondent accounts and carried out almost
all of its transactions in that currency. BBLA stated that its
primary U.S. correspondent had long been the Bank of New York,
where it opened an account in 1985, in part because Banco
Anglo, already had a correspondent relationship there. BBLA
indicated that it also had correspondent relationships with a
number of other banks, including Bank of America, Bankers
Trust, Barclays Bank, Chemical Bank, Citibank and Lloyds banks
in Panama and the United States.
BBLA indicated that it had not encountered difficulty in
obtaining U.S. correspondent accounts, because it had a good
reputation, sound financial statements, and a close association
with Lloyds. It said that, when applying to open a new account
or to obtain a new credit line, it usually cited its Lloyds
affiliation and indicated that it had the ``backing of the
Lloyds balance sheets.'' It said that the correspondent
services it used most often were deposits made to higher
interest bearing accounts and wire transfer capabilities, while
also using to a lesser extent checking clearing and trade
financing or other credit arrangements.
(4) BBLA Management and Operations
BBLA Management. During the 1990s, BBLA's senior officers
were all employees of other Lloyds affiliated banks in the
Bahamas and Colombia. BBLA also shared personnel, office space,
and administrative operations with Lloyds affiliates.
In 1998 and 1999, the years focused on in the Minority
Staff investigation, BBLA did not have a single senior
executive who worked solely for BBLA; all of its senior
management personnel also worked for other Lloyds banks. In the
Bahamas, BBLA's most senior executive was David Nicoll, who was
the ``managing director'' and head of the bank. At the same
time, Nicoll was the head of Lloyds' flagship bank in the
Caribbean, Lloyds TSB Bank & Trust (Bahamas) Ltd. (``Lloyds
Bahamas'') and an ``international executive'' with the Lloyds
TSB Group. Three other senior managers who provided services to
BBLA also worked for Lloyds Bahamas.\245\ BBLA's board of
directors was also dominated by Lloyds employees.\246\ In
Colombia, BBLA's most senior executive was J. Scott Donald, who
also worked for Lloyds TSB Bank and served as the president of
Banco Anglo.
---------------------------------------------------------------------------
\245\ These senior bank officials were Abraham Butler, Peter Snell
and Peter Bridgewater.
\246\ BBLA's board members were Nicoll, Butler and Bridgewater.
---------------------------------------------------------------------------
At its height, BBLA employed eight individuals who worked
solely for BBLA. Four were clerical staff in the Bahamas, who
performed back office and administrative operations for the
bank. The other four worked in Colombia, serving as the bank's
sales representative, an account manager, secretary and
assistant. All eight BBLA employees worked closely with staff
from other Lloyds affiliates, including Banco Anglo and Lloyds
Bahamas.
BBLA also shared office space and equipment with Lloyds
affiliates. In the Bahamas, BBLA occupied a single room on the
second floor of Lloyds Bahamas. As Lloyds' flagship bank in the
Caribbean, Lloyds Bahamas maintained a sizeable facility in
Nassau, the Bahamas' capital city, with three floors of
offices, bank teller services in a lobby open to the public,
about 70 employees, and a large sign on the building announcing
the presence of the bank. BBLA's name did not appear on the
outside of the building. In Colombia, in compliance with
requirements for separate office space, BBLA rented an office
in the same building in Bogota as Banco Anglo, but on a
different floor. BNY documents suggest that the Colombian
office may have closed in October 1998, even though BBLA
continued to offer client services in Colombia.
BBLA Operations. With respect to day-to-day operations,
BBLA explained that its Colombian representative office acted
as the bank's front office responsible for developing new
business and servicing existing clients, while its Bahamas
office acted as the bank's back office responsible for
technical and administrative matters. BBLA said that the
Colombian office received virtually all of its client referrals
from Banco Anglo and worked closely with Banco Anglo to open
new accounts, evaluate client needs, approve loans, provide
investment advice, and resolve client problems. The Colombian
office did not take deposits or handle cash transactions, since
it was not licensed to conduct banking activities in Colombia.
It would accept client requests for wire transfers, which the
Colombian staff would then communicate to the appropriate
banking personnel for completion.
BBLA said that its Bahamas office handled specific bank
transactions and the bank's administrative needs, utilizing
Lloyds Bahamas' equipment, electronic data systems, and staff
under a management agreement that paid Lloyds Bahamas a large
annual fee to manage the bank. For example, among other
services, Lloyds Bahamas helped keep BBLA's books, track client
account activity, maintain the bank's records, handle its
correspondent accounts, file required forms in the Bahamas and
Colombia, and pay BBLA's bills. BBLA said that it typically
handled about 20 to 30 transactions per day, including
deposits, loan payments and wire transfers.
BBLA was not the only Lloyds affiliate operating out of the
Bahamas under a management agreement with Lloyds Bahamas.
Another was Lloyds TSB Bank & Trust (Cayman) Ltd. (``Lloyds
Cayman''). For many years, Lloyds Cayman had a physical
presence in the Cayman Islands and held a banking license that
permitted it to conduct onshore as well as offshore business.
In 1995, however, Lloyds closed the Cayman office, surrendered
the bank's onshore license, and obtained a less expensive
offshore license that permitted the Cayman bank to conduct its
banking operations outside the jurisdiction. Lloyds then moved
the Cayman bank's operations to the Bahamas. Like BBLA, Lloyds
Cayman operated under a management agreement with Lloyds
Bahamas, utilizing Lloyds Bahamas equipment, electronic data
systems and staff. Unlike BBLA, the Caymans bank did not have a
single employee of its own. Still another Lloyds affiliate
operating out of the Bahamas location was Lloyds TSB Bank &
Trust (British Virgin Islands) Ltd., a bank that Lloyds
indicated was dormant but could be revived at a later time. In
short, then, four Lloyds affiliated banks--two licensed by the
Bahamas, one licensed by the Cayman Islands, and one licensed
by the British Virgin Islands--were co-located at the same
Bahamas location.
BBLA's Anti-Money Laundering Efforts. When asked about its
anti-money laundering efforts, BBLA disclosed that it did not
have one set of written procedures or one person responsible
for overseeing anti-money laundering efforts at both its
Colombian and Bahamian offices. Instead, each BBLA office had
its own anti-money laundering approach.
BBLA's Colombian office produced a copy of written anti-
money laundering procedures for that office which conformed
with Colombian requirements, and said that its account manager
and sales representative in Colombia were well versed in the
due diligence requirements for opening new accounts. BBLA's
Bahamian office, on the other hand, did not have any written
anti-money laundering procedures, despite Bahamian requirements
for them, but later produced a copy of the anti-money
laundering procedures used by Lloyds Bahamas. A December 1997
anti-money laundering audit checklist provided by BBLA also
indicated that BBLA was ``going to'' appoint a ``money
laundering reporting officer,'' another requirement under
Bahamas law, but it apparently never did. Instead, BBLA
indicated that in the Bahamas, under its management agreement,
Lloyds Bahamas staff was responsible for managing its anti-
money laundering efforts and provided the services of its own
money laundering reporting officer.\247\ BBLA said it also used
the services of Lloyds' ``money laundering prevention
officer,'' Peter Snell.\248\ Snell, a senior vice president of
Lloyds Bahamas, was not assigned exclusively to anti-money
laundering duties, but had many other responsibilities. The end
result was that BBLA's Bahamas office had neither written
procedures nor a particular person charged with reporting
suspicious activity, as required by Bahamian law, but relied on
Lloyds Bahamas procedures and personnel instead.
---------------------------------------------------------------------------
\247\ Under Bahamian law, every bank is required to have money
laundering reporting officer whose duty is to report any suspicious
activity to the Bahamas Government.
\248\ This position, which is recommended but not required under
Bahamian law, is supposed to have overall responsibility for a bank's
money laundering program.
---------------------------------------------------------------------------
BBLA's anti-money laundering efforts were further
disjointed by the geographical separation of its front and back
office operations, which operated without the benefit of a
bank-wide policy or an overall manager. BBLA's Colombian staff
conducted the initial due diligence reviews for new customers
and handled client requests for existing accounts, but did not
otherwise monitor account activity, since all account paperwork
and activity reports were generated in the Bahamas. In
contrast, BBLA's Bahamian staff were not involved in the
account opening process and were not familiar with BBLA's
clients, but were expected to monitor day-to-day account
transactions and overall account activity. It is unclear who,
if anyone was reviewing client accounts statements or wire
transactions for suspicious activity. It is also unclear how
BBLA's staff coordinated their efforts with Lloyds Bahamas.
BBLA was asked, due to its provision of U.S. dollar
services to its Colombian clientele, what steps the bank had
taken to ensure that it was not a recipient of laundered funds
from the black market peso exchange.\249\ BBLA and Lloyds
personnel expressed unfamiliarity with both the term and the
money laundering risks posed by that method of foreign currency
exchange. BBLA said that it had no specific policies,
procedures or systems in place to detect or deter money
laundering through the black market peso exchange.
---------------------------------------------------------------------------
\249\ For a description of the black market peso exchange, see
below.
---------------------------------------------------------------------------
BBLA Oversight by Banking Regulators. Despite operating in
two countries at high risk for money laundering, BBLA never
underwent a bank examination or on-site visit by bank
regulators in either jurisdiction and there is no evidence that
any regulatory body ever took a close look at the bank's
operations in 19 years of operation.
Both the Bahamas and Colombia have been identified as
presenting higher than average money laundering risks. In June
2000, the Bahamas was one of 15 countries named by FATF for
weak anti-money laundering controls and inadequate cooperation
with international anti-money laundering efforts. The U.S.
State Department's most recent International Narcotics Control
Strategy Report (``INCSR 2000'') describes the Bahamas as a
country of ``primary'' money laundering concern, due to bank
secrecy laws and [a] liberal international business company
(IBC) regime [which] make[s] it vulnerable to money laundering
and other financial crimes.'' \250\ While banking and money
laundering experts interviewed by the Minority Staff described
the Bahamas as having good intentions and making important
improvements, during the 1990's, it provided weak oversight and
inadequate resources to regulate its more than 400 offshore
banks.
---------------------------------------------------------------------------
\250\ International Narcotics Control Strategy Report (March
2000)(``INCSR 2000'') at 637.
---------------------------------------------------------------------------
Colombia is considered an even greater money laundering
risk than the Bahamas due to ongoing problems with narcotics
trafficking. The INCSR 2000 report, which identifies Colombia
as another country of ``primary'' money laundering concern,
provides the following information:
Colombia produces and distributes more cocaine than any
other country in the world and is also an important supplier of
heroin. . . . Columbia is the center of the international
cocaine trade, with drugs flowing out of the country at a
stable and constant rate. . . . Recent statistics indicate that
approximately 85 percent of the heroin seized by federal
authorities in the northeastern United States is of Colombian
origin. . . . Colombia has financial institutions which engage
in currency transactions involving international narcotics
proceeds that include significant amounts of U.S. dollars. . .
. Colombia criminalized the laundering of the proceeds of all
illegal activities in 1995 . . . but there still has not been a
single money laundering conviction. . . . Even though progress
has been made with respect to fighting money laundering,
Colombia has fallen short in its implementation of the money
laundering and asset forfeiture laws.\251\
---------------------------------------------------------------------------
\251\ INCSR 2000 at 115-16; 657-58.
One of the key money laundering systems in Colombian drug
trafficking, the black market peso exchange, has been targeted
by the United States as a top law enforcement priority for the
last 2 years. The 1999 U.S. National Money Laundering Strategy
---------------------------------------------------------------------------
stated:
The Black Market Peso Exchange is the largest known
money laundering system for drug money in the Western
Hemisphere. It may be responsible for the laundering of as much
as $5 billion of narcotics proceeds each year. . . . The Black
Market Peso Exchange lets Colombian narcotics traffickers
transform large quantities of drug dollars from the streets of
American cities into pesos in their Colombian bank
accounts.\252\
---------------------------------------------------------------------------
\252\ The National Money Laundering Strategy for 1999 (September
1999) at 21-22.
The 2000 U.S. National Money Laundering Strategy explains
---------------------------------------------------------------------------
how the system launders funds:
First, a Colombian drug cartel arranges the shipment of
drugs to the United States. The drugs are sold in the U.S. for
U.S. currency which is then sold to a Colombian black market
peso broker's agent in the United States. The U.S. currency is
sold at a discount because the broker and his agent must assume
the risk of . . . placing the U.S. dollars into the U.S.
financial system. Once the dollars are delivered to the U.S.-
based agent of the peso broker, the peso broker in Colombia
deposits the agreed upon equivalent in Colombian pesos into the
cartel's account in Colombia. At this point, the cartel has
laundered its money because it has successfully converted its
drug dollars into pesos, and the Colombian broker and his agent
now assume the risk for integrating the laundered drug dollars
into the U.S. banking system. . . . [T]he Colombian black
market peso broker now has access to a pool of laundered U.S.
dollars to sell to Colombian importers [who] use the dollars to
purchase goods. . . .\253\
---------------------------------------------------------------------------
\253\ The National Money Laundering Strategy for 2000 (March 2000)
at 24-25.
U.S. and Colombian law enforcement and banking authorities
have spent significant resources tracking the black market peso
exchange, educating U.S. and Colombian banks about it, and
seizing laundered funds. Despite their joint efforts, the black
market peso exchange continues to be the most prolific money
laundering system in the United States, successfully using U.S.
and Colombian banks to launder billions of dollars each year in
cocaine and heroin drug proceeds.
Banking and money laundering experts indicated to Minority
Staff investigators that, despite the magnitude of the money
laundering problem in Colombia, Colombia's banking regulation
is sound, with some of the better money laundering controls in
Latin America. They indicated that Colombian authorities are
actively engaged in bank oversight, including enforcing
requirements for detecting and reporting suspicious
transactions. The INCSR 2000 report noted: ``Colombia's banks
continue to comply with the reporting requirements designed to
flag suspicious transactions and have been very cooperative
with U.S. efforts to curtail financial transactions by
individuals and entities designated as involved with narcotics
trafficking.'' \254\ This bright spot in Colombian anti-money
laundering efforts, however, did not apply to BBLA, which
remained outside Colombian banking oversight and unfamiliar
with Colombian and U.S. efforts to stop money laundering
through the black market peso exchange.
---------------------------------------------------------------------------
\254\ INCSR 2000 at 657.
---------------------------------------------------------------------------
No Bank Examination in 19 Years. In 1995, Banco Anglo sent
a memorandum on behalf of BBLA to Barclays Bank which stated
that, ``BBLA is subject to the supervision in varying degrees
of Bahamas, Colombia and the Bank of England.'' \255\ A copy of
this memorandum was provided to BNY which began to incorporate
variations of that sentence in internal reports to indicate
that BBLA was a well regulated bank.\256\ In 1997, a BNY
memorandum indicated that BBLA had agreed in writing to
``conform to all significant prudential regulations mandated by
the Colombian Superintendent of Banks'' and had given the
Superintendent ``full supervisory power'' over the bank.\257\
In fact, however, BBLA disclosed to the Minority Staff
investigation that it had never undergone a bank examination or
even a site visit by bank regulators in Colombia or any other
country.
---------------------------------------------------------------------------
\255\ This memorandum has a bates designation of BNYSEN 648.
\256\ See, for example, internal BNY memorandum to the
International Credit Committee (12/1/95) at 2, BNYSEN 657; internal BNY
credit proposal for BBLA to International Credit Committee (4/21/97) at
1, BNYSEN 691.
\257\ Internal BNY credit proposal for BBLA to International Credit
Committee (4/21/97) at 1-2, BNYSEN 691-92.
---------------------------------------------------------------------------
BBLA explained that its primary regulator, the Central Bank
of the Bahamas, did not conduct examinations of licensed banks,
instead reviewing annual reports submitted by each bank.\258\
BBLA stated that it had submitted all required filings and had
no history of problems with Bahamian bank regulators. BBLA
noted that it was also not subject to examination in Colombia,
since that country did not conduct bank examinations of
representative offices that did not transact banking activities
within the jurisdiction. BBLA noted that it had never taken
deposits or handled cash transactions for its clients in
Colombia, instead working with Banco Anglo, its Bahamas office,
Lloyds Bahamas and its correspondent banks, to meet its
clients' banking needs. When asked if it had ever been examined
by regulators from the Bank of England or the United Kingdom's
Financial Services Authority, BBLA indicated that it had not.
---------------------------------------------------------------------------
\258\ The INCSR 2000 report noted, at page 637, that offshore banks
in the Bahamas ``must submit annual statements that do not have to
include financial statements,'' and their ``records can be maintained
anywhere,'' which makes regular bank oversight more difficult. in 2001,
the Bahamas plans, for the first time, to begin conducting its own bank
examinations.
---------------------------------------------------------------------------
(5) Money Laundering Involving BBLA
In 1998 and 1999, U.S. civil forfeiture actions arising
from two separate money laundering undercover operations,
Operation Casablanca and Operation Juno, cited BBLA as a
repository of illegal drug proceeds. In two separate court
actions, the United States sought forfeiture of a total of
about $2.7 million in illegal drug proceeds deposited into
BBLA's correspondent account at BNY. A subsequent BBLA audit
identified about 85 additional account transactions in 1998 and
1999, that appeared to involved suspicious activity, and also
fired an employee suspected of being involved in money
laundering and other wrongdoing.
(a) Operation Casablanca
Operation Casablanca was a 3-year money laundering sting
conducted from 1995 until 1998 by the U.S. Customs
Service.\259\ A related money laundering undercover operation
was code named Operation Check Mark. These undercover
operations traced the laundering of more than $84 million in
illegal narcotics proceeds under the control of professional
money launderers for the Cali drug cartel in Colombia, and the
Juarez drug cartel in Mexico. A significant portion of the $84
million consisted of illegal drug proceeds picked up in cash
from various U.S. city locations by U.S. undercover agents
acting at the direction of the alleged money launderers,
deposited at a U.S. bank cooperating with U.S. law enforcement,
and then transferred as part of the money laundering sting
operation to still other bank accounts. Other funds identified
or provided by the alleged money launderers were, at their
direction, wire transferred by the U.S. undercover agents to
other bank accounts in an attempt to launder the funds.
---------------------------------------------------------------------------
\259\ See United States v. Proceeds of Drug Trafficking Transferred
to Certain Foreign Bank Accounts (U.S. District Court for the District
of Columbia Case No. 1:98-CV-0434 (NHJ)) (hereinafter ``Casablanca
forfeiture action''), memorandum order by the court (4/11/00), and
first amended complaint for forfeiture (5/18/98).
---------------------------------------------------------------------------
In February 1998, the U.S. Department of Justice seized and
sought civil forfeiture under seal of funds in various bank
accounts in the United States and foreign countries related to
the money laundering stings. In May 1998, criminal indictments
were unsealed against individuals and banks involved in the
money laundering operations. Also in May, the United States
filed an amended complaint in the civil forfeiture actions to
correct errors and seek forfeiture of additional funds. A
second amended complaint was filed in March 1999. Altogether,
the United States sought forfeiture of funds from almost 100
bank accounts in the United States and 16 foreign countries.
The United States did not indict BBLA or allege that BBLA
or its employees were directly engaged in narcotics trafficking
or money laundering. However, the United States did name BBLA
in the first and second amended forfeiture complaints as the
recipient of about $1.57 million in illegal drug proceeds that,
during the sting operations, on the instruction of drug
traffickers, had been wire transferred by U.S. undercover
agents to BBLA's correspondent account at the Bank of New York
(BNY).\260\ The wire transfers had directed the funds to be
credited to specific clients or accounts at BBLA.\261\
---------------------------------------------------------------------------
\260\ See Casablanca forfeiture action, motion to file second
amended complaint (3/30/99).
\261\ The wire transfer instructions named the following clients
and accounts at BBLA:
--$800,000 transferred on 12/3/97 and 12/15/97 to BBLA's
correspondent account for two related companies, Proenfar S.A. and
Parowan Group, Inc.;
--$350,000 transferred on 12/3/97 and 3/12/98 to BBLA's
correspondent account for Jaime Trujillo;
--$190,000 transferred on 12/4/95 to BBLA's correspondent
account for a BBLA account numbered 0019107928;
--$150,000 transferred on 12/3/97 to BBLA's correspondent
account for Piedad de Hoyos; and
--$80,000 transferred on 12/15/97 to BBLA's correspondent
account for two related companies, Amarey Ltd. and Nova Medical.
---------------------------------------------------------------------------
When asked for more information by the Minority Staff
investigation, BBLA indicated that Bahamian bank secrecy laws
and the pending litigation prevented it from discussing either
the transfers, the bank's conduct, or the named accountholders.
Pleadings filed by three of the accountholders provided the
minimal additional information that Proenfar S.A. was a
manufacturing company established in Colombia, Parowan Group
was a Panamanian investment company, and Piedad de Hoyos was a
wealthy woman who had placed $130,000 in a certificate of
deposit at BBLA.\262\ BBLA accounts statements, subpoenaed from
BNY, indicate that several of the wire transfer recipients
conducted numerous transactions through BBLA's correspondent
account in New York.
---------------------------------------------------------------------------
\262\ See Casablanca forfeiture action, claim filed by Proenfar
S.A. and Parowan Group, Inc. (7/29/99) and claim filed by Piedad de
Hoyos (7/21/99).
---------------------------------------------------------------------------
In 1999, BBLA filed legal pleadings opposing forfeiture of
the $1.57 million in drug proceeds to the United States.\263\
When asked why, among other reasons, BBLA stated that the bank
``could be subject to double liability'' because the suspect
funds had been frozen in both the United States and the Bahamas
and, if the courts ruled inconsistently, it could be required
to pay the $1.57 million twice--once to the U.S. Government and
once to the accountholders.\264\ In its pleadings in the United
States, the bank also seemed to be contending that, because the
bank itself was innocent of any wrongdoing, funds could not be
seized under U.S. law from its correspondent account, even in
the event of misconduct by a BBLA client or by a third party.
---------------------------------------------------------------------------
\263\ See Casablanca forfeiture action, claim filed by BBLA (7/1/
99).
\264\ See BBLA letter to the Subcommittee (3/9/00) at 8-9.
---------------------------------------------------------------------------
In explaining its decision to accept the illegal drug
proceeds in the first instance, BBLA stated: BBLA assumed that
the U.S. institutions transferring the dollars would have
conducted adequate investigations to ensure the legitimacy of
the source of the funds that they held and transferred to BBLA.
Thus, the deposits did not raise any suspicions at the time
they were made.'' \265\ This explanation seems to suggest that
BBLA considered any funds transferred by a U.S. bank to be
beyond suspicion and in no need of anti-money laundering
oversight, but when asked, BBLA stated that its anti-money
laundering controls also applied to funds transferred from U.S.
banks. In light of the pending litigation, however, BBLA
declined to provide additional information about the actions it
took with respect to the $1.57 million.
---------------------------------------------------------------------------
\265\ Id. at 8.
---------------------------------------------------------------------------
The United States' position, in contrast, was that BBLA was
not an innocent bank, should not have accepted the drug
proceeds as deposits, and was not entitled to protection from
forfeiture under U.S. law. When asked by the Minority Staff
investigation to elaborate, the U.S. Department of Justice
declined to provide further information. The Casablanca civil
forfeiture proceedings are ongoing.
(b) Operation Juno
Operation Juno was a 3-year money laundering sting
conducted from 1996 until 1999 by the U.S. Drug Enforcement
Administration and Internal Revenue Service Criminal
Investigation Division.\266\ The undercover operation laundered
over $26 million in drug proceeds, in part using a stock
brokerage firm established by U.S. undercover agents. In
December 1999, the United States indicted five Colombian
nationals for narcotics trafficking and money laundering in
connection with the sting operation, accusing them of being
major players in the Colombian drug trade. The United States
also seized and filed civil forfeiture actions involving $26
million in over 340 bank accounts at 34 U.S. banks and 52
foreign banks.
---------------------------------------------------------------------------
\266\ See `` `Operation Juno' Indictment Targets Five Major
Traffickers and $26 Million worth of Laundered Drug Proceeds,'' press
release issued by the office of the U.S. Attorney for the Northern
District of Georgia (12/9/99)(hereinafter ``Juno press release'').
---------------------------------------------------------------------------
Again, the United States indicted neither BBLA nor its
employees for narcotics trafficking or money laundering.
However, several of the Operation Juno indictments referred to
drug proceeds being sent to BBLA.\267\ The United States also
named BBLA in the related civil forfeiture action, this time
seeking forfeiture of $1.1 million in drug proceeds that,
during the sting operation, at the direction of the alleged
money launderers, had been wire transferred to BBLA's
correspondent account at the Bank of New York (BNY).\268\ The
$1.1 million had been deposited over a 2-year period, from July
1997 until July 1999, in nine wire transfers. All were
transfers to BBLA's U.S. account for further credit to Andes
Trading, a BBLA client.\269\ BBLA account statements show
numerous transactions through its BNY account on behalf of
Andes Trading. When asked, BBLA declined to provide any
additional information about these transfers, the bank's
conduct, or Andes Trading.
---------------------------------------------------------------------------
\267\ See, for example, United States v. Monto (U.S. District Court
for the Northern District of Georgia Case No. 1:99-CR-438), criminal
indictment (8/25/99); and United States v. Botero (U.S. District Court
for the Northern District of Georgia Case No. 1:99-CR-439), criminal
indictment (8/25/99).
\268\ See United States v. All Funds in Certain Foreign Bank
Accounts Representing Proceeds of Narcotics Trafficking and Money
Laundering (USDC DC Case No. 1:99-CV-03112), verified complaint for
forfeiture in rem (11/23/99). The complaint also seeks forfeiture of
about $295,000 in drug proceeds sent to Lloyds TSB Bank & Trust
(Panama) Ltd.
\269\ The transfers took place, as follows:
--$250,000 transferred to BBLA's correspondent account on 7/18/97.
--$250,000 transferred to BBLA's correspondent account on 9/18/97;
--$126,127 transferred to BBLA's correspondent account on 1/22/98;
--$100,000 transferred to BBLA's correspondent account on 5/28/98;
--$100,000 transferred to BBLA's correspondent account on 10/7/98;
--$89,795 transferred to BBLA's correspondent account on 3/18/99;
--$17,185 transferred to BBLA's correspondent account on 4/13/99;
--$100,000 transferred to BBLA's correspondent account on 4/29/99; and
--$143,245 transferred to BBLA's correspondent account on 7/7/99.
---------------------------------------------------------------------------
BBLA opposes forfeiture of the $1.1 million in drug
proceeds to the United States, for many of the same reasons
given in the Operation Casablanca matter. Although BBLA ceased
to conduct business by mid 2000, its attorneys are continuing
to press its claim to the $1.1 million. The United States has
taken the same position as it has in the Operation Casablanca
matter, that BBLA is not an innocent bank, should not have
accepted the drug proceeds, and should forfeit the funds to law
enforcement. Like the Casablanca forfeiture action, the Juno
forfeiture action is ongoing.
Together, the Casablanca and Juno civil forfeiture
proceedings indicate that, over a 3-year period, BBLA became a
repository for about $2.7 million in drug proceeds. Both cases
indicate that the funds were the product of money laundering
through the Colombian black market peso exchange. For example,
when asked about the Operation Casablanca deposits, BBLA
described them as U.S. dollars transferred from a U.S. bank,
and noted that Colombian law ``permitted Colombian nationals to
make those investments with foreign currency that had not been
obtained through the country's foreign exchange markets.''
\270\ The Operation Juno deposits are explicitly linked to the
black market peso exchange, and the indictments are
characterized by the Drug Enforcement Agency as ``a significant
first step in striking out against the black market peso system
that launders billions of drug dollars every year.'' \271\ The
implied fact pattern in both instances seems to be that, in
order to take advantage of a better exchange rate or perhaps to
avoid Colombian legal restrictions, tariffs or taxes, BBLA
clients provided Colombian pesos to a Colombian money broker
who exchanged them for U.S. dollars that were, in fact, the
illegal drug proceeds sent to BBLA's U.S. account for the
specified clients.
---------------------------------------------------------------------------
\270\ BBLA letter to the Subcommittee (3/9/00) at 8.
\271\ See Operation Juno press release at pp. 3-4, citing
involvement of ``money exchanger in Colombia, who typically would sell
the U.S. dollars for pesos on the Colombian Black Market [P]eso
Exchange.'' The press release also quotes James T. Martin, Chief of the
Drug Division of the U.S. Attorney's Office stating that, in the Juno
case, ``the defendants took millions of dollars in drug money in the
U.S., and millions in pesos in Colombia, and laundered them both with
the money physically leaving either country.''
---------------------------------------------------------------------------
(c) Other Suspicious Activity
During the interview with Minority staff investigators,
BBLA and Lloyds indicated that after the bank was named in the
two U.S. forfeiture actions, Lloyds decided to have BBLA's
accounts and transactions audited to determine if there were
other suspicious transactions. Although it declined to provide
a copy of the audit report, BBLA and Lloyds indicated that
approximately 85 additional suspicious transactions were
identified during 1998 and 1999, which led the bank to file
about a dozen additional reports with law enforcement. BBLA and
Lloyds declined to provide additional information about the
nature of these transactions, their reports, or other aspects
of the BBLA audit.
A January 2000 memorandum produced under subpoena by the
Bank of New York describes a BBLA employee who was allegedly
engaged in money laundering and other misconduct from 1997
until her employment was terminated by the bank in 1999.\272\
The BNY memorandum, prepared after a telephone conversation
with BBLA personnel, stated in part:
---------------------------------------------------------------------------
\272\ Internal BNY ``Call Report'' on Banco Anglo (1/27/00), BNYSEN
335.
It turns out that beginning in 1997, a BBLA employee
began to experience personal financial difficulties. This led
to her involvement in criminal activity for personal financial
gain, including skimming profits and laundering money. Her
activities were finally discovered in 1999 and she was
immediately terminated.
BNY did not have any additional information about this
matter, and BBLA declined to discuss it, so it is unclear how
this employee's misconduct related to the Casablanca and Juno
deposits or the 85 suspicious transactions identified in the
BBLA audit. The evidence suggests, however, that BBLA's
involvement with money laundering was not limited to the $2.7
million identified in the two U.S. money laundering stings.
(6) Closure of BBLA
In late 1999 or early 2000, Lloyds made the decision to
close BBLA, and most BBLA transactions ceased at the end of
March 2000. Lloyds explained that, during 1998 and 1999, it had
been able to buy out SIAC's other shareholders and evaluate
whether the bank should be continued or folded into Lloyds'
other banking operations. Lloyds decided to terminate BBLA as a
going concern and re-distribute its clients, assets and loans
to other Lloyds banks in the Bahamas, Colombia, Panama, and
United States. Lloyds denied that the two money laundering
forfeiture actions were the primary reason behind closing the
bank, but indicated the litigation did not encourage the bank's
continuation. Lloyds indicated that legal counsel would
continue to press BBLA's claims in both the Casablanca and Juno
forfeiture actions. Because Lloyds is not surrendering BBLA's
license, but merely discontinuing its operations, it is
possible the bank could be revived at a later time.
(7) Correspondent Account at Bank of New York
The Bank of New York (BNY) began its correspondent
relationship with BBLA in 1985. While the Minority Staff
investigation did not examine the bank's initial decision to
open the BBLA correspondent account, it did examine BNY's due
diligence efforts during the latter half of the 1990s with
respect to the BBLA relationship. The evidence indicates that,
while BNY was diligent in its efforts to monitor the BBLA
account, its anti-money laundering efforts suffered several
serious deficiencies. Perhaps the most significant deficiency
was BNY's failure to exercise any anti-money laundering
controls related to the Colombian black market peso exchange.
Bank of New York. The Bank of New York is a major financial
institution in the United States with, according to the Bankers
Almanac, over 17,000 employees and $60 billion in assets. BNY
has a substantial international correspondent banking
portfolio, with over 2,000 international correspondent accounts
and 150 correspondent banking relationship managers around the
world. Its international correspondent accounts are handled
primarily by its International Banking Sector which is
organized into five geographic regions, including a Latin
American Division that also handles banks in the Caribbean. BNY
has a long history of correspondent banking in Latin America
and the Caribbean, including more than a dozen relationships in
Colombia and almost as many in the Bahamas.
In responding to the Minority Staff's survey of
correspondent banking practices, BNY initially stated that, as
a policy matter, it did not open correspondent accounts for
offshore banks. When asked about its longstanding correspondent
relationships with offshore banks like BBLA and Swiss American
Bank, however, BNY submitted a revised form of its policy
indicating that the bank did sometimes open correspondent
accounts for offshore banks.\273\ The Minority Staff
investigation indicated that BNY has, in fact, had numerous
correspondent relationships with offshore banks. In deciding
whether to initiate such relationships, BNY indicated that its
policy was to ``evaluate the ownership, management, and
reputation of the bank in question, as well as the regulatory
environment of the licensing country.''
---------------------------------------------------------------------------
\273\ See BNY letter to the Subcommittee (10/13/00) at 4, response
to question (7).
---------------------------------------------------------------------------
When asked about its correspondent banking practices in
Colombia, BNY indicated that while it was cognizant of the
money laundering risks in Colombia and designated Colombia as a
high risk area, the Latin American Division's experience had
been generally positive. As stated in several BNY memorandum on
BBLA, ``We are very comfortable with the country risk of
Colombia due to very sound government management and the
continuing positive trends in this country.'' \274\ Another BNY
memorandum states, ``Colombia has one of the strictest and
[most] vigilant bank regulatory systems in the developing
world.'' \275\
---------------------------------------------------------------------------
\274\ Internal BNY memorandum from Latin American Division to
International Credit Committee (10/25/94) at 2; (5/5/95) at 2; (6/20/
95) at 2.
\275\ Internal BNY credit proposal for Banco Anglo to International
Credit Committee (12/8/95) at 2, BNYSEN 697.
---------------------------------------------------------------------------
BNY also indicated, in response to questions, that it was
not unusual for Colombian banks to have offshore subsidiaries
and stated that BNY had correspondent relationships with
several of them. BNY later identified six respondent
relationships with offshore banks that were subsidiaries of
Colombian banks, in addition to BBLA. BNY indicated that all
six were licensed in Panama. It said that BBLA was the only
Colombian offshore affiliate in BNY's portfolio that was
licensed in the Bahamas, rather than Panama.
When asked about the black market peso exchange, the head
of BNY's Latin American Division indicated that she had
recently heard the term in an advanced money laundering
training course, but was unfamiliar with the issue and had been
unaware of its importance in U.S. law enforcement's anti-money
laundering efforts. BNY indicated that it had no specific
policies, procedures or systems of any kind related to the
Colombian black market peso exchange, even for its Colombian
respondent banks or their offshore affiliates.
BBLA. BNY documentation indicates that BNY viewed BBLA as
part of its correspondent relationships with Lloyds and Banco
Anglo, two important BNY clients. BNY stated in a letter to the
Subcommittee that, ``The Bank viewed BBLA as part of its
overall relationship with the Lloyds Bank group.'' \276\ The
documentation indicates that BNY took on BBLA when it was a
subsidiary of Banco Anglo, one of BNY's oldest and most
profitable clients in Colombia; and BNY had considered the two
banks in tandem ever since. BNY stated that it had often paid
``[j]oint visits'' to the two banks,\277\ and most of BNY's
internal memoranda discuss both banks jointly.
---------------------------------------------------------------------------
\276\ BNY letter to the Subcommittee (10/13/00) at 5, in answer to
question (9).
\277\ Id. at 5, in answer to question (12).
---------------------------------------------------------------------------
BNY provided a range of credit and non-credit correspondent
services to BBLA, all in U.S. dollars. They included wire
transfers, check clearing, placements of funds in higher
interest bearing accounts, trade financing, and several lines
of credit. BBLA made full use of these services and, despite
its small size, moved tens of millions of dollars through its
BNY account each month. BBLA's dollar volume, in fact, far
exceeds any other case history in the Minority Staff
investigation. In 1998 and 1999 alone, BBLA's deposits and
withdrawals from its U.S. correspondent account at BNY totaled
more than $1.5 billion.\278\
---------------------------------------------------------------------------
\278\ See chart, ``British Bank of Latin America Monthly Account
Activity at Bank of New York; January 1998-December 1999.''
---------------------------------------------------------------------------
BNY said that, although BBLA held a Bahamian banking
license, BNY classified it as a Colombian bank because it
worked closely with Banco Anglo, had Colombian clients, and
BNY's rating systems assigned Colombian banks a higher risk
rating than Bahamian banks, which ensured a more conservative
and careful approach to BBLA's monitoring.
The documentation indicates that BNY regularly monitored
BBLA and, at times, compiled detailed credit analyses of BBLA's
finances and business activities. For example, among other
measures, BNY took the following steps:
--BNY correspondent bankers regularly traveled to Bogota
to visit BBLA's offices and meet with the bank's senior
management; these trips were combined with BNY visits to Banco
Anglo. BNY staff also spoke regularly with BBLA staff in
Bahamas and visited the Bahamas office occasionally.
--BNY staff regularly prepared memoranda summarizing
contacts with the bank and information about its staff and
operations.
--BNY obtained copies of BBLA's audited financial
statements and other key bank documentation. It inquired about
and analyzed BBLA's finances and primary lines of business, and
developed detailed credit analyses of the bank. It also
inquired about and analyzed BBLA's client base.
--BNY inquired about BBLA's reputation and operations
with Banco Anglo and Lloyds, and placed great weight on
representations that Lloyds and Banco Anglo controlled BBLA's
management, exerted ``quality control'' over its procedures,
and approved its extensions of credit to clients.\279\ BNY also
inquired about BBLA's reputation in Colombian banking circles.
---------------------------------------------------------------------------
\279\ See, for example, BNY internal memorandum to International
Credit Committee (12/1/95), BNYSEN 657-60.
--LOn at least two occasions, BNY studied BBLA's
transactions and clearing activities to identify suspicious
transactions, and found nothing of concern. There was no
evidence, however, that BNY regularly monitored BBLA's account
activity for possible money laundering.
BNY's due diligence efforts, while significant, also had
several serious deficiencies. For example, BNY apparently did
not request a copy of BBLA's anti-money laundering procedures
and never realized that the Bahamas office had none and there
was no BBLA employee assigned to anti-money laundering duties.
BNY also never realized that BBLA had never undergone a bank
examination or site visit by any government bank regulator. BNY
indicated, to the contrary, that it had believed BBLA was
subject to more oversight than was usual for an offshore bank,
with supervision provided by the Bahamas, Colombia and the
United Kingdom. BNY's Latin American Division head indicated
that she thought BBLA was, in fact, examined by Colombian bank
regulators and was surprised and disturbed to learn that no
such examination had ever actually taken place.
BNY indicated that a major factor in its analysis of BBLA
was its affiliation with Lloyds and Banco Anglo, two
established banks with good reputations, sophisticated banking
operations, and a history of involvement with the offshore
bank. Lloyds, in fact, exercised significant BBLA oversight,
through its control of BBLA's board and senior management and
day-to-day involvement with the bank's operations under the
agreement assigning Lloyds Bahamas responsibility for managing
BBLA's affairs. BNY indicated that it had assumed Lloyds would
ensure that BBLA had adequate anti-money laundering policies
and procedures in place, but there was no evidence that BNY had
ever actually questioned either BBLA or Lloyds about BBLA's
specific anti-money laundering efforts.
When asked about the Casablanca and Juno forfeiture
actions, BNY indicated that it did not learn of the Casablanca
forfeiture action, filed in May 1998, until more than a year
later when, on June 25, 1999, U.S. law enforcement seized the
disputed funds from BBLA's account in New York. BNY indicated
that, until informed by Minority staff investigators, it had
not known that the forfeiture action was filed in 1998. BNY was
also unaware, until informed by Minority staff investigators,
of the audit of BBLA's 1998 and 1999 transactions that
identified 85 additional suspicious transactions. Nor did it
have details about the BBLA employee who was fired in 1999 for
2 years of misconduct including possible money laundering.
After BNY learned of the Casablanca forfeiture action in
June 1999, and the Juno forfeiture action 6 months later, BNY
personnel met and spoke with BBLA, Lloyds and Banco Anglo
personnel and completed several additional memoranda. But the
written materials do not mention either of the U.S. law
enforcement actions nor do they discuss any of the issues
raised by the two seizures of illegal drug proceeds. When asked
why not a single BNY analysis of BBLA ever mentions either
matter or any money laundering concerns, the Latin American
Division head stated that was ``a good question'' to which she
did not have an answer.
B. THE ISSUES
Black Market Peso Exchange
The BBLA case history demonstrates how an offshore bank can
increase the vulnerability of a U.S. correspondent bank to
money laundering through the black market peso exchange, when
neither takes any steps to minimize this money laundering risk.
The black market peso exchange risks posed by BBLA were
clear. BBLA had $50 million in client deposits, all in U.S.
dollars, and regularly accepted U.S. dollar deposits from its
clients. It did not provide foreign exchange services itself,
but accepted U.S. dollars sent by its clients to its U.S.
account. Its clients were all from Colombia. As an offshore
bank subject to strict secrecy laws and weak bank oversight,
BBLA was attractive to money launderers. It took no steps to
detect when a Colombian money broker might be exchanging a BBLA
client's pesos for U.S. dollars obtained from drug trafficking.
The result was that BBLA's U.S. account became a conduit for
illegal drug money.
Despite a long history in Colombia and relationships with
seven offshore banks affiliated with Colombian banks, BNY's
most senior Latin American correspondent banker had received
little training about the Colombian black market peso exchange.
BNY used none of the strategies developed to combat this form
of money laundering and had failed even to initiate discussions
with its Colombian respondent banks about the need to identify
and refuse U.S. dollars coming from the Colombian black market.
Like most correspondent accounts for foreign banks, the
majority of deposits to BBLA's U.S. account were made by wire
transfer, which meant that electronic software had
automatically accepted the funds and directed them to BBLA's
account. No human intervention or anti-money laundering
oversight took place until later. BNY was necessarily dependent
upon BBLA to ensure the legitimacy of the funds sent to its
U.S. account, yet BNY failed to acquire an accurate
understanding of BBLA's anti-money laundering efforts.
BNY's experience is unlikely to be unique. The Minority
Staff survey of just 20 U.S. banks found over 200 correspondent
relationships with Colombian banks; these banks have additional
relationships with Colombian offshore affiliates. The BBLA case
history illustrates the money laundering risks associated with
these relationships and the need for U.S. correspondent banks
active in Colombia to focus on the black market peso exchange.
Offshore Affiliate Issues
A second set of issues in the BBLA case history involves
how a U.S. correspondent bank should view an offshore bank that
is affiliated with an established bank in another jurisdiction.
BNY began the BBLA relationship in part as a courtesy to an
existing customer and in part on the expectation that it could
rely on the established bank to oversee its offshore affiliate.
BBLA's affiliates, Lloyds and Banco Anglo, did exercise
oversight of BBLA; and the evidence reviewed by the
investigation suggests that an affiliated offshore bank often
poses less of a money laundering risk than an unaffiliated
offshore bank. At the same time, the BBLA case history suggests
that an affiliated status is no guaranty against anti-money
laundering deficiencies.
One issue involves the effectiveness of the oversight
exercised by Lloyds. Lloyds was intimately involved with BBLA,
through its control of BBLA's board, senior management, client
referrals and management agreement. But BBLA was not an easy
bank to oversee. It operated in two jurisdictions, with offices
that had completely different functions, employees and
regulatory environments. BBLA did not have a single employee
overseeing both offices, and the senior Lloyds managers
assigned to the bank had many other responsibilities. BBLA was,
in fact, one of four offshore banks that Lloyds was operating
from the same Bahamas location, and it is far from clear how
much attention Lloyds Bahamas actually paid to BBLA. For
example, Lloyds never ensured that BBLA had a fully functioning
anti-money laundering program that met the requirements of
Bahamian law.
A second issue is whether BBLA's affiliated status lulled
BNY's into paying less attention to the bank. The evidence
indicates that BNY did actively monitor the BBLA account and
evaluated both its operations and interactions with Lloyds and
Banco Anglo. However, because it viewed the banks as working in
tandem, BNY treated BBLA in the same way that it treated its
affiliates, with little sensitivity to the fact that BBLA, as
an offshore operation, posed increased anti-money laundering
risks. For example, BNY failed to realize that BBLA's primary
regulator remained the Bahamas, and the tougher oversight
theoretically available in Colombia and the United Kingdom
never actually took place. In the end, BNY failed to obtain an
accurate understanding of BBLA's regulatory oversight.
A third issue is that, while BBLA's affiliation with Lloyds
provided added oversight, the banks' close association may have
also made Lloyds reluctant to disclose BBLA's deficiencies and
problems. The evidence indicates, for example, that Lloyds
failed to alert BNY to BBLA's involvement in the Operation
Casablanca forfeiture or the Lloyds-ordered audit which found
85 additional suspicious transactions. No one wants to be
associated with money laundering, and Lloyds' self-interest
apparently dictated against its reporting BBLA's failings to
BNY. The BBLA case history shows a U.S. correspondent bank
cannot always rely on an affiliated bank for negative
information about its offshore affiliate.
One lesson of the BBLA case history, then, is that while
BBLA's affiliation with Lloyds and Banco Anglo was a positive
factor which the Bank of New York reasonably relied on, it also
had hidden drawbacks that contributed to BNY's missing
important anti-money laundering deficiencies in BBLA's
policies, procedures, personnel and regulatory oversight.
Difficulties in Seizing Illegal Drug Proceeds
Finally, the BBLA case history demonstrates the
difficulties faced by U.S. law enforcement in confiscating
known drug proceeds from a U.S. correspondent account belonging
to an offshore bank.
Due to the Operation Casablanca and Operation Juno money
laundering stings, it is undisputed that $2.7 million in
illegal drug proceeds were sent by wire transfer to BBLA's
account in New York. Yet BBLA is opposing forfeiture of the
funds, citing a variety of defenses. The ongoing litigation
continues to consume U.S. law enforcement and prosecution
resources, with the Casablanca forfeiture action exceeding 2\1/
2\ years so far, and the Juno forfeiture action hitting the 1-
year mark.
BBLA's argument that it was an innocent bystander to the
drug deposits cannot be evaluated here, since neither BBLA nor
the United States provided information about BBLA's role in
accepting the $2.7 million. On the other hand, BBLA's argument
that it should not be forced to bear any loss in the event of
inconsistent court decisions in the Bahamas and United States
focuses attention on the legal issue of who, under U.S. law,
bears the risk of loss in this situation. BBLA was an offshore
bank that, by design, operated in multiple jurisdictions. It
chose to get its license in the Bahamas, obtain its clients in
Colombia and keep its dollars in the United States. It profited
from that arrangement. Yet it claims that it should be
protected from any risk of loss when faced with forfeiture
proceedings in two jurisdictions over the same illegal funds.
But BBLA accepted the risk of inconsistent rulings when it
chose to operate in both jurisdictions at once. Even more, as a
policy matter, forcing an offshore bank like BBLA to bear some
risk of loss would provide an incentive for it to screen its
U.S. deposits more carefully in the future. At the moment,
however, how U.S. courts will treat BBLA's legal argument
remains unclear.
If BBLA were to prevail in court, the $2.7 million in drug
proceeds would be returned to the bank, which would presumably
release the funds to the relevant accountholders. The
accountholders would then be made whole and suffer no legal
consequences for having exchanged currency on the black market
peso exchange. Such a conclusion to the BBLA forfeiture actions
would make it that much more difficult for U.S. and Colombian
law enforcement to discourage use of a black market that is
financing much of the illegal drug trade plaguing both our
countries.
BRITISH BANK OF LATIN AMERICA MONTHLY ACCOUNT ACTIVITY AT BANK OF NEW YORK
January 1998-December 1999
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1998 $213,454 $40,133,745 $43,583,173 $283,057
----------------------------------------------------------------------------------------------------------------
February 1998 $283,057 $78,285,586 $81,851,437 $223,083
----------------------------------------------------------------------------------------------------------------
March 1998 $223,083 $67,867,385 $69,162,634 $330,289
----------------------------------------------------------------------------------------------------------------
April 1998 $330,289 $87,244,132 $85,318,591 $263,158
----------------------------------------------------------------------------------------------------------------
May 1998 $263,158 $59,968,296 $62,207,011 $428,085
----------------------------------------------------------------------------------------------------------------
June 1998 $428,085 $61,986,395 $57,747,511 $467,901
----------------------------------------------------------------------------------------------------------------
July 1998 $467,901 $24,912,043 $25,147,687 $636,209
----------------------------------------------------------------------------------------------------------------
August 1998 $636,206 $57,963,111 $56,101,057 $501,208
----------------------------------------------------------------------------------------------------------------
September 1998 $501,208 $109,213,034 $115,092,113 $222,904
----------------------------------------------------------------------------------------------------------------
October 1998 $222,904 $93,251,230 $91,634,632 $340,490
----------------------------------------------------------------------------------------------------------------
November 1998 $340,490 $66,367,458 $67,654,369 $355,848
----------------------------------------------------------------------------------------------------------------
December 1998 $355,848 $52,557,413 $51,912,424 $201,892
----------------------------------------------------------------------------------------------------------------
January 1999 $201,892 $25,841,407 $26,426,143 $417,358
----------------------------------------------------------------------------------------------------------------
February 1999 $417,358 $21,556,062 $22,400,269 $783,988
----------------------------------------------------------------------------------------------------------------
March 1999 $783,988 $77,097,833 $83,362,990 $270,128
----------------------------------------------------------------------------------------------------------------
April 1999 $270,128 $48,230,657 $47,260,612 $243,138
----------------------------------------------------------------------------------------------------------------
May 1999 $243,138 $42,193,127 $42,107,758 $128,750
----------------------------------------------------------------------------------------------------------------
June 1999 $128,750 $101,889,005 $104,288,218 $234,941
----------------------------------------------------------------------------------------------------------------
July 1999 $234,941 $48,646,448 $53,890,943 $190,446
----------------------------------------------------------------------------------------------------------------
August 1999 $190,446 $20,524,495 $18,958,590 $356,352
----------------------------------------------------------------------------------------------------------------
September 1999 $356,352 $71,930,300 $70,778,186 $209,060
----------------------------------------------------------------------------------------------------------------
October 1999 $209,060 $61,404,775 $65,395,808 $219,542
----------------------------------------------------------------------------------------------------------------
November 1999 $219,542 $151,528,274 $150,150,064 $204,778
----------------------------------------------------------------------------------------------------------------
December 1999 $204,778 $41,043,494 $42,785,700 $265,607
----------------------------------------------------------------------------------------------------------------
TOTAL $1,511,635,705 $1,535,217,920
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, January 2001.
Case History No. 7
EUROPEAN BANK
European Bank is a small onshore bank licensed by the
Government of Vanuatu, an island nation in the South Pacific.
In 1999, European Bank opened an account and accepted $7.5
million in deposits that turned out to be the proceeds of a
massive credit card fraud in the United States. This case
history looks at how this bank deposited the $7.5 million in a
U.S. correspondent account at Citibank and fought for over 1
year to prevent U.S. seizure of the funds. It also looks at the
practical difficulties of Citibank's monitoring a correspondent
account in a remote jurisdiction with a tradition of bank
secrecy and weak banking and anti-money laundering controls.
The following information was obtained from documents
provided by European Bank and Citibank; court pleadings;
interviews of persons in Australia, the Cayman Islands, the
United States and Vanuatu; and other materials. Key information
came from interviews with two bank officials, an August 7, 2000
interview of Thomas Montgomery Bayer, chairman and part owner
of European Bank; and a June 22, 2000 interview of Christopher
Schofield Moore, a financial institutions group vice president
at Citibank in Sydney, Australia. Both European Bank and
Citibank voluntarily cooperated with the investigation. The
investigation also benefited from assistance provided by the
Australian, Cayman and Vanuatu Governments.
A. THE FACTS
(1) European Bank Ownership and Management
European Bank is the only indigenous bank in Vanuatu that
is privately owned. It is licensed to do business with both
Vanuatu citizens and foreign clients. Its offices are located
in Port Vila, Vanuatu's capital city. In 1999, European Bank
had about $29 million in total assets, handled about 90 clients
with 250 accounts, and managed about $62 million in client
funds.
European Bank Formation. European Bank Ltd. was first
established in 1972. By 1986, it was owned by a consortium of
banks that included Bank of America, Union Bank of Switzerland,
and others. In 1986, the consortium sold the bank to a Delaware
corporation called European Capital Corporation, a holding
company which is, in turn, owned by a trust beneficially owned
by members of the Bayer family. The bank's name was changed in
1986 to European Bank because, according to Thomas Bayer, the
bank hoped to attract European clients doing business in the
South Pacific. Thomas Bayer became the bank's chairman. In his
interview, Bayer said that, after changing hands, the bank went
essentially dormant for 10 years, handling only a few
investments. He indicated that, in 1995, a decision was made to
revive the bank. The bank obtained its current license to
service domestic and international clients in April 1995, hired
experienced bankers, and in the last 5 years has become an
active financial institution.
European Bank Management. European Bank's top executive is
Bayer, who has held the title of executive chairman since 1986.
Documentation and interviews indicate he is actively involved
in the management of the bank and serves as its most senior
decisionmaker.\280\ European Bank began hiring management
personnel when the bank came out of its dormancy in 1995.
European Bank's current president and chief executive officer
is Robert Murray Bohn. The senior vice president in charge of
operations is Brenton Terry whose predecessor, Douglas P.M.
Peters, was instrumental in reviving the bank in 1995. The
current operations manager is Kely Ihrig. The senior vice
president in charge of the bank's data systems is Susan Phelps,
who is also an officer of an affiliated company, European Trust
Co. Ltd. The senior manager of the bank's corporate and trust
services is David L. Outhred. Most of the bank's senior
officers appear to have had solid banking credentials and
experience.
---------------------------------------------------------------------------
\280\ Bayer is a former U.S. citizen who worked for the U.S.
Department of Defense, moved to Australia in 1967, lived in Singapore,
and eventually settled in Vanuatu in 1974. After leaving the U.S.
military, Bayer worked in international banking, trust activities and
investments, including at offshore financial centers. When Vanuatu
declared independence in 1980, and asked its leading citizens to take
Vanuatu citizenship, Bayer became a citizen of Vanuatu in 1982, giving
up his U.S. citizenship. Bayer indicated that he has a business degree
from the Wharton School of Business in Pennsylvania, took law courses
at a university in Singapore, and is a member of the International Bar
Association.
---------------------------------------------------------------------------
(2) European Bank Financial Information and Primary Activities
European Bank Financial Statements. Vanuatu law requires
its banks to submit annual audited financial statements. In
response to a request by the investigation, European Bank
voluntarily provided the Subcommittee with a copy of its 1999
financial statement, which had been audited by the Vanuatu
office of KPMG Chartered Accountants.
The 1999 financial statement presented a mixed picture of
the bank's finances. It indicated that, overall, European
Bank's 1999 income of $1.7 million was exceeded by operating
expenses of $1.8 million, resulting in an overall loss of about
$77,000 for the year. It valued European Bank's total assets at
almost $29 million. Customer deposits, which totaled $112
million in 1998, had dropped by almost half to $62 million.
Note 15 stated that a ``director related party has placed a
deposit of US$984,238 with the bank . . . as security to cover
the overdrawn accounts of three clients.'' ``Issued share
capital'' was $750,000. Despite the overall loss on the year,
the bank issued a dividend payment of $116,000, double the 1998
dividend of $83,000, which was paid on profits of more than
$291,000.
The financial statement suggests a small, thinly
capitalized bank that, in 1999, suffered some unexpected
overdrawn accounts, operating losses and a large drop in
customer deposits, but nevertheless paid a sizeable dividend.
European Bank Affiliations. European Bank is part of a
complex group of companies beneficially owned by the Bayer
family. These companies are incorporated in Vanuatu, Canada,
the United Kingdom, and the United States, with offices in
other countries as well.\281\ European Bank records reflect
ongoing transactions with a number of these related parties.
These companies are also a source of new clients for the bank.
---------------------------------------------------------------------------
\281\ Key companies in the Bayer group include the following:
--European Investment Corp. Ltd., a Vanuatu company which is
100% owned by European Bank, functions as an investment holding
company, and owns one subsidiary, European Trust Co. Ltd.;
--European Trust Co. Ltd. (``European Trust''), a Vanuatu
company which is licensed to engage in company and trust formation
activities in Vanuatu; is 100% owned by European Investment Corp.;
shares employees and office facilities with European Bank; and operates
in close cooperation with European Bank;
--Pacific International Trust Company Ltd. (``PITCO''), a
Vanuatu company which is the only other trust company in Vanuatu aside
from European Trust; is owned by PITCO Corp., a Delaware company; has
offices in Hong Kong, Kuala Lumpur, London, New York and Port Vila;
shares employees and office facilities with European Bank; and uses
European Bank as one of its bankers;
--Pacific Capital Growth Fund Ltd. (PCGF), a Canadian company
which is wholly owned by PITCO; operates several award-winning mutual
funds; requires its clients to establish Vanuatu entities; and uses
European Bank as one of its bankers;
--Fidelity Pacific Life Insurance Co. Ltd., a Canadian company
which is one of only two registered life insurance companies in
Vanuatu; holds preferred shares in European Bank; and uses European
Bank as one of its bankers;
--Asian Pacific Finance Ltd., a U.K. company which provides
financial services and, like European Bank, is owned by European
Capital Corporation; and
--Vanuatu Maritime Services Ltd., a Vanuatu company which
operates Vanuatu's extensive international shipping register, which is
one of the largest in the world; has registered over 500 vessels;
maintains ship registration offices in Greece, Hong Kong, Japan,
Singapore, the United Kingdom, the United States, and Vanuatu; and uses
European Bank as one of its bankers.
---------------------------------------------------------------------------
European Bank Primary Lines of Business. When asked to
identify its major lines of business, European Bank described a
number of different types of clients and banking activities,
none of which appear to dominate the bank. Its activities
included: (1) domestic banking for Vanuatu residents; (2)
private banking primarily for foreign clients, involving funds
management and investment activities for wealthy individuals;
(3) banking activities for companies and trusts formed by the
bank's affiliated trust companies, European Trust and PITCO;
(4) banking activities for the bank's affiliates or their
clients, including the PCGF mutual funds, Fidelity Pacific
Insurance, and Vanuatu Maritime Services; (5) offshore banking
activities for Asian clients, such as Hong Kong citizens
seeking escape from estate duties; (6) merchant credit card
accounts; and (7) niche banking services for mail order
companies, telemarketers and lotteries. European Bank indicated
that it did not engage in regular lending activities, although
it had a small trade finance portfolio.
Bayer indicated that, when European Bank first came out of
its 10-year dormancy in 1995, it concentrated on a banking
specialty involving services to mail order companies,
telemarketers and lotteries. These banking services consisted
primarily of clearing thousands of small checks in various
currencies from persons buying merchandise or lottery tickets,
and issuing numerous small checks in various currencies to
lottery winners or persons returning merchandise or seeking
refunds. European Bank performed the labor-intensive work of
gathering and batching the consumer checks, while using
correspondent banks with international check clearing
capabilities, such as Citibank, to help it process payments and
issue checks as needed. Bayer indicated that, at its peak,
European Bank was clearing about 100,000 checks per month. Both
Bayer and Moore indicated that it was this check clearing
business that led to the establishment of European Bank's
correspondent relationship with Citibank in 1996.
Another key activity at European Bank involving
correspondent banks has been the bank's fiduciary placement of
client funds in various money market or investment accounts at
other banks to maximize interest earnings. European Bank
typically makes these placements after a competitive bidding
process in which its personnel contact the treasury departments
at several of its correspondent banks and obtain interest rate
quotations for depositing a specified amount of funds for a
specified period of time. For example, European Bank might call
Citibank, ANZ Bank, and Westpac Banking Corp. to find the best
interest rate offered for a 30-day deposit of $1 million. Once
the placement terms are settled, European Bank would direct the
wire transfer of the funds to the appropriate bank and, at the
end of the agreed upon placement period, collect the promised
interest payments.
According to Bayer, these placements are a good source of
revenue for the bank, which shares in the higher interest rates
paid on the deposits. For example, if European Bank was able to
place $1 million for 30 days at a 7% interest rate, it might
pay its client 5% in interest and keep the remaining 2%.
Documentation and interviews indicate that European Bank took a
conservative approach to the placement of client funds, using
major banks and low-risk investments such as money market
accounts or U.S. treasury notes. The documentation also
indicates that European Bank often made these placements in
U.S. dollars. Documentation and interviews indicate that
European Bank often made a fiduciary placement soon after
receiving a substantial deposit from an individual client.
Bayer indicated that European Bank typically tried to move any
large deposit exceeding, for example, $1 million, into a higher
interest-bearing placement by the end of the day. Citibank
account statements show repeated instances in which European
Bank withdrew large client deposits later the same day for
placement into a higher interest-bearing money market account
either at Citibank or another bank.\282\
---------------------------------------------------------------------------
\282\ According to Bayer, on some occasions, European Bank would
combine funds from several client accounts into a single placement in
order to take advantage of the higher interest rates paid on interbank
deposits.
---------------------------------------------------------------------------
(3) European Bank Correspondents
European Bank told the Minority Staff investigation that
correspondent banks play a critical role in the bank's
operations:
The role that correspondent banks play in our bank's
operation is . . . a critical one. All banks place deposits
denominated in foreign currency either directly or indirectly
with a correspondent that operates in the country of that
currency. . . . As the Vatu [Vanuatu's domestic currency] is
not an internationally used currency, virtually all of our
bank's assets are on deposit with our correspondent banks. Even
within Vanuatu, residents generally do not hold their
investments in Vatu, so deposits we received from locally based
depositors will invariably be denominated in a currency other
than Vatu. For us to pay interest on that deposit, we must in
turn deposit it through the interbank system with one of our
correspondent banks.\283\
---------------------------------------------------------------------------
\283\ Letter dated 5/22/00 from European Bank to the Subcommittee
responding to requests for information (``European Bank letter'') at 6.
In response to requests for information, European Bank
provided a list of about a dozen banks with which it has had a
correspondent relationship since 1998. These correspondent
banks were licensed in Australia, Italy, the Netherlands, the
United Kingdom, Vanuatu, and elsewhere.
Bayer indicated that, for 4 years beginning in 1996,
European Bank's primary correspondent relationship was with
Citibank. That correspondent relationship was managed by
Citibank offices in Australia, but European Bank maintained
seven Citibank accounts, each in a different currency, allowing
it to transact business in Australia, Canada, Hong Kong, New
Zealand, the United Kingdom and the United States, among other
jurisdictions. Bayer indicated that European Bank's preferred
currency was U.S. dollars and it carried out the bulk of its
transactions through its U.S. dollar account at Citibank.
European Bank also completed transactions in such currencies as
Australian dollars, Canadian dollars, sterling and yen.
European Bank routinely transacts business in the United
States, using a variety of U.S. correspondent accounts. While
its most frequently used U.S. dollar account was at Citibank,
European Bank also used U.S. dollar accounts belonging to its
other correspondent banks, such as ANZ Bank (Vanuatu) Ltd. and
Bank of Hawaii (Vanuatu), both of which have U.S. affiliates.
ANZ Bank (Vanuatu) Ltd., for example, has a correspondent
relationship and U.S. dollar account with ANZ Bank (United
States) which maintains a small office in New York, and
European Bank routinely transacted business through this U.S.
account.\284\
---------------------------------------------------------------------------
\284\ Both ANZ Bank (Vanuatu) Ltd. and ANZ Bank (United States) are
affiliated with the Australia and New Zealand Banking Group Ltd., a
large financial services conglomerate with, according to the Bankers
Almanac, over 30,000 employees and $95 billion in assets worldwide.
---------------------------------------------------------------------------
While the Minority Staff investigation did not examine all
of European Bank's U.S. correspondent activities, it did
conduct an in-depth examination of the bank's primary
correspondent relationship with Citibank. This correspondent
relationship lasted 4 years, from May 1996 until May 2000, and
ended only when Citibank made a decision to reduce its
correspondent activity involving certain South Pacific island
nations. Although European Bank's Citibank accounts are now
closed, it continues to transact business in the United States
through a variety of other U.S. correspondent accounts.
(4) European Bank Operations and Anti-Money Laundering Controls
European Bank operates out of offices in the capital city
of Vanuatu, Port Vila. Its offices are open to the public,
since the bank is authorized to take deposits from Vanuatu
citizens as well as international clients. The bank shares its
office space and staff with two affiliated companies, European
Trust and PITCO. According to Bayer, the companies have a
combined staff of about 60, of which only about 8 persons work
solely for the bank.
From 1996 through mid 2000, the bank maintained an
electronic ledger and had its own wire transfer capability
using software provided by Citibank. Documentation indicates a
well developed set of standard internal forms to track client
accounts and bank transactions. Bank records are kept on site
in Vanuatu.
The bank does not have a high volume of daily transactions
nor does it routinely deal in million-dollar transactions,
although it occasionally facilitates large transfers of funds.
In his interview, Bayer estimated that the bank handles only
about 5 to 10 transactions per day and an even smaller number
of fiduciary placements. Citibank documentation indicates that
over a 2-year period, 1998 and 1999, only a small number of
European Bank's transactions exceeded $2 million. During those
2 years, for example, only one transaction exceeded $10
million; two transactions involved amounts between $5 and $10
million; and less than a dozen involved $2 million or more.
Nevertheless, European Bank moved significant amounts of funds
through its Citibank accounts. For example, in 2 years, the
least active month, at its Citibank U.S. dollar account
experienced more than $1 million in account activity, while the
most active month saw $50 million move into and out of the
account. Overall, European Bank's deposits and withdrawals from
its U.S. dollar account at Citibank in 1998 and 1999 totaled
almost $192 million.\285\
---------------------------------------------------------------------------
\285\ See chart entitled, ``European Bank Monthly Account Activity
at Citibank.''
---------------------------------------------------------------------------
European Bank's Anti-Money Laundering Controls. European
Bank provided the investigation with a copy of its July 1999
``Money Laundering Prevention Policy.'' In an interview, Bayer
stated that it was the bank's first formal, written anti-money
laundering policy statement, although the bank has long worked
to prevent money laundering by getting to know its customers,
monitoring accounts and reporting suspicious activities.
European Bank's policy statement includes sections on the
definition of money laundering, how to prevent money
laundering, ``client acceptance criteria,'' and anti-money
laundering procedures instructing bank employees to ``know your
customer,'' monitor transactions, and report suspicious
transactions.\286\ The policy statement also provides standard
forms for reporting cash transactions and suspicious activity.
---------------------------------------------------------------------------
\286\ Excerpts include the following:
--``The purpose of this policy is to ensure that . . . European
Bank . . . has adequate policies, practices and procedures in place,
including strict `know your customer' rules that will encourage all
staff of the Bank to promote high ethical and professional standards in
the financial and banking sector and prevent the Bank being used,
intentionally or otherwise, by criminal elements.''
--``Transactions will only be undertaken for customers of the
Bank, properly identified individuals or with authorized introductions
from group associated entities.''
--``It is mandatory that before an account is opened, the Bank
Officer is satisfied that he/she `knows the customer', and is satisfied
with their bona fides. . . . The Bank requires to know . . . where
appropriate, the `beneficial owner' of the account.''
--``[T]he following bank documentation must be obtained/
completed: Signature Card. Account Opening Questionnaire[.] Money
Laundering Prevention Questionnaire[.] Acknowledgment and Agreement
form. Statutory Declaration. Beneficial Ownership form. . . .''
---------------------------------------------------------------------------
The person charged with implementing the anti-money
laundering policy is the bank's operations manager, who also
serves as European Bank's compliance officer. Bayer indicated
during his interview that, prior to July 1999, European Bank
had not assigned anti-money laundering duties to a particular
bank employee. He said that the policy also led to the
appointment of the bank's first official compliance officer.
European Bank's 1999 adoption of a written anti-money
laundering policy is an overdue, but important advance in its
anti-money laundering efforts. While the policy has many
positive features, it has at least two drawbacks. First, it
assigns all anti-money laundering and compliance duties to the
bank's operations manager, who already has substantial duties
in the day-to-day operation of the bank. Bayer indicated in his
interview that he thought Kely Ihrig, the current operations
manager, spent a very small percentage of her time on anti-
money laundering responsibilities. Second, while the policy
statement requires ``ongoing monitoring of transactions,'' it
appears to limit this monitoring to cash transactions. The
policy statement does not require, for example, any monitoring
of wire transfer activity, even though the vast majority of
European Bank transactions take place through wire transfers.
The statement also fails to specify any monitoring procedures,
whether manual or electronic, to be used in analyzing ongoing
transactions and identifying suspicious activity.
(5) Regulatory Oversight of European Bank
Vanuatu has separate regulatory regimes for its onshore and
offshore banks, with different statutory requirements and
different regulatory agencies. Onshore, domestic banks are
regulated by the Reserve Bank of Vanuatu, while offshore banks
are regulated by the Vanuatu Financial Services Commission.
European Bank is regulated by the Reserve Bank. Bayer is a
long-serving member of the Vanuatu Financial Services
Commission.
Vanuatu has a mixed reputation with respect to its banking
and anti-money laundering controls. For example, the State
Department's International Narcotics Control Strategy Repo
(``INCSR 2000'') identifies Vanuatu as a country of ``concern''
in terms of money laundering, and describes a number of
deficiencies in its anti-money laundering laws. However, the
United States has not issued a formal advisory on Vanuatu nor
is Vanuatu named in FATF's June 2000 list of 15 countries found
non-cooperative with international anti-money laundering
efforts. On the other hand, Vanuatu is named in the June 2000
list of 35 unfair tax havens published by the Organization for
the Economic Cooperation and Development's Forum on Harmful Tax
Practices, and in the March 2000 list of offshore jurisdictions
with relatively weak financial regulation issued by the
Financial Stability Forum. In late 1999, several major banks,
including the Bank of New York, Deutsche Bank and Republic
National Bank of New York, stopped processing wire transfers
involving certain South Pacific island nations, such as Nauru,
Palau Niue and Vanuatu. However, in early 2000, Vanuatu was
able to convince the banks to modify their wire transfer ban as
applied to Vanuatu so that it was limited, essentially, to
Vanuatu's offshore banks, while allowing wire transfers
involving Vanuatu's domestic onshore banks. Later in 2000, when
Vanuatu underwent its first evaluation by the Asia/Pacific
Group on Money Laundering (APG), a FATF regional affiliate, the
evaluation identified both positive and negative features of
Vanuatu's anti-money laundering controls.
Vanuatu has five locally licensed, domestic banks which
together make up the Bankers Association of Vanuatu.\287\ These
banks are authorized to do business with Vanuatu's residents
and any foreign citizen, and to complete transactions using the
local currency, the Vatu, as well as any foreign currency.
---------------------------------------------------------------------------
\287\ Vanuatu's five onshore banks are: (1) European Bank, the
island's only privately-owned, indigenous bank, not licensed in any
other jurisdiction; (2) National Bank of Vanuatu, which is an
indigenous bank owned by the Vanuatu Government; (3) ANZ Bank (Vanuatu)
Ltd., which is part of the Australia, and New Zealand Banking Group
Ltd., a large regional conglomerate; (4) Banque d'Hawaii (Vanuatu)
Ltd., a wholly owned subsidiary of an established U.S. bank, Bank of
Hawaii which operates throughout the South Pacific; and (5) Westpac
Banking Corp., which is part of a large Australian financial
conglomerate.
---------------------------------------------------------------------------
Beginning in 1999, the Reserve Bank of Vanuatu was assigned
responsibility for regulating these onshore banks. This
regulation is carried out by the Reserve Bank's Bank
Supervision Department. Bayer indicated in his interview that,
to date, the Reserve Bank has not issued any bank regulations,
because the industry has historically been self-regulated under
rules issued by the Bankers Association of Vanuatu. Each
onshore bank is required, however, to file monthly reports and
an annual audited financial statement with the Reserve Bank.
These filings contain information about the bank's capital,
balances, major depositors, operations and other information.
The Reserve Bank is charged with reviewing these reports as
well as conducting bank examinations. Bayer indicated in his
interview that European Bank had undergone a number of bank
examinations over the years.
In addition to five onshore banks, Vanuatu has licensed
over 60 ``exempted'' or offshore banks. Apparently, all are
shell operations run by persons or companies outside of the
jurisdiction. Bayer indicated during his interview that about
six were affiliated with banks licensed elsewhere, while the
remaining--more than 55--were offshore banks licensed only in
Vanuatu. He indicated that most of the offshore banks operated
under restricted banking licenses which permit the bank to
accept deposits only from persons or entities specified on an
approved list.
All of Vanuatu's offshore banks are regulated by the
Vanuatu Financial Services Commission. The current chairman of
the Commission is Bayer, who serves in an advisory
capacity.\288\ The Commission participates in both the
licensing and monitoring of these banks. The Commission also
oversees much of the rest of Vanuatu's commercial sector,
including the island's international business corporations,
trust companies, insurance firms, realtors and other commercial
enterprises. It used to oversee the island's domestic banks as
well, until that responsibility was switched in 1999 to the
Reserve Bank.
---------------------------------------------------------------------------
\288\ According to Bayer, the Commission operates with three
members, one of whom is a government employee and serves as the
official ``Commissioner,'' while the other two serve as commission
``advisors.'' Bayer indicated in his interview that he has been a
member of the Commission since its inception in the 1980s and is the
only member who has continuously served on the agency since it began.
Bayer indicated in his interview that he perceived his role to be, in
part, to represent the interests of the private sector. The official
Commissioner for a number of years was Julian Ala, followed recently by
Dudley Aru.
---------------------------------------------------------------------------
According to Bayer, compared to its other duties, the
Commission has spent only a small fraction of its time on
matters related to offshore banks. He indicated that, of the
time spent on offshore bank matters, most of the Commission's
efforts have involved obtaining required fees and reports from
the offshore banks, and reviewing submitted filings. He said
the Commission carried out its offshore banking duties through
an ``Offshore Banking Supervision Unit.'' He said the
Commission did not, as a rule, conduct bank examinations. He
indicated that offshore banks are not required to keep records
in Vanuatu, and most do not, which means offshore bank
examiners would have to travel to where the shell bank was
operating or, alternatively, be limited to reviewing paperwork
sent to Vanuatu. Bayer said that, due to requests made by the
international banking community, the Commission recently agreed
to examine six of its offshore banks suspected of having ties
to Russian nationals and moving questionable funds. He
indicated that those examinations were being conducted by a
retired bank auditor from the U.K.'s Financial Services
Authority, hired by Vanuatu to examine the six banks. He said
that Vanuatu had made no commitment to examine its other
offshore banks, which currently number more than 50. He
indicated that there was an ongoing debate in Vanuatu about
whether offshore bank examinations were needed and whether the
cost of compliance would discourage bank applications in
Vanuatu.
Bayer also said in his interview that, even though he is
chairman of the Vanuatu Financial Services Commission, he plays
only a limited role in the licensing process because he is not
permitted to see bank ownership information. He said that,
under Vanuatu law, only the official Commissioner, a government
employee, has access to bank ownership information. He said
that, because of this situation, he could not say with any
certainty who owned Vanuatu's offshore banks--even though he is
a key regulator of them. He said that it was his impression
that most of the 60 offshore banks are ``ego banks'' owned by
wealthy individuals or subsidiaries of private companies
seeking to operate a bank on behalf of a related group of
companies.
Bayer said that it is his impression from his Commission
duties that Vanuatu's offshore banks are generally not very
active. He thought that they are also generally small
operations with few formal procedures. For example, he thought
that few would have formal anti-money laundering procedures. He
said that it was up to U.S. banks to investigate these banks
prior to accepting funds or opening accounts for them. When
told that U.S. banks thought that they should be able to rely
on Vanuatu banking authorities to ensure the legitimacy of
their licensed banks, Bayer disagreed and said U.S. banks have
their own due diligence obligations they need to perform.
Although Bayer claimed there was no conflict of interest in
his serving on a Commission that oversees only offshore banks,
evidence indicates that European Bank operates a correspondent
account for at least one Vanuatu offshore bank called Nest
Bank. Nest Bank is one of the six Vanuatu offshore banks under
examination for possible ties to Russian nationals. Citibank
documents indicate that, beginning in January 1999 and
continuing throughout the year, European Bank allowed Nest Bank
to move more than $6 million through European Bank's U.S.
dollar correspondent account at Citibank. These funds suggest
Nest Bank may be a sizeable client at European Bank. The 1999
transactions involved such entities as a fertilizer plant in
Uzbekistan; a London company that trades in oil, chemicals, and
agricultural commodities in Russia; a company called Societe
Generale S.A. in the Ukraine; a company called Rusomax Ltd.;
and International Bank Astana, Ltd. which the investigation was
unable to locate but appears to have ties to Moscow. While the
investigation did not attempt to analyze European Bank's
relationship with Nest Bank, the existence of this
correspondent account raises possible conflict of interest
issues, since it calls for a private banker, Bayer, to oversee
an offshore bank that is also his bank's client. The potential
for conflict is made even more clear by the Commission's
ongoing examination of Nest Bank for alleged ties to Russia and
possible money laundering, since Nest Bank moved over $6
million in 1 year through European Bank's correspondent account
at Citibank.
(6) Money Laundering and Fraud Involving European Bank
The Minority Staff investigation did not conduct an
exhaustive review of European Bank's activities, but did
conduct a detailed examination of two major accounts opened in
1999, which moved millions of dollars through European Bank's
U.S. correspondent accounts. Both accounts raise serious
questions about European Bank's client oversight and due
diligence.
(a) Taves Fraud and the Benford Account
In 1999, European Bank opened a bank account and accepted
$7.5 million on behalf of a Vanuatu corporation, Benford Ltd.,
that was established by its affiliated trust company and about
which the bank had virtually no due diligence information.
After learning that the $7.5 million consisted of proceeds from
a credit card fraud, European Bank nevertheless fought for more
than 1 year to prevent U.S. seizure of the funds from its
correspondent account at Citibank.
In April 2000, in civil proceedings filed by the U.S.
Federal Trade Commission to halt unfair and deceptive trade
practices, a U.S. district court found that Kenneth H. Taves
and his wife Teresa Callei Taves, both U.S. citizens, had
committed a massive credit card fraud involving over $49
million.\289\ Imprisoned on civil contempt charges for refusing
to surrender certain assets related to the fraud, Taves was
indicted in February 2000 in separate court proceedings in two
countries. In the United States, Taves was charged with making
false statements; in the Cayman Islands he was charged with
money laundering.
---------------------------------------------------------------------------
\289\ For more information, see the description of the Taves fraud
in the appendix.
---------------------------------------------------------------------------
The U.S. court also authorized an FTC-appointed receiver to
track down and recover the fraud proceeds. The receiver found
over $25 million had been transferred to Taves-controlled
accounts at Euro Bank, a small bank in the Cayman Islands.\290\
The Cayman Government charged three senior Euro Bank officials
with laundering money from the Taves fraud and later ordered
the bank closed. In July 1999, in exchange for releasing the
bank from damage claims, Euro Bank's liquidators provided the
FTC receiver with ``information and documents in the Bank's
possession'' related to the Taves fraud. Using this
information, the FTC receiver traced $7.5 million in Taves
fraud proceeds to a European Bank account opened in the name of
a Vanuatu corporation, Benford Ltd.
---------------------------------------------------------------------------
\290\ Euro Bank is completely unrelated to European Bank in
Vanuatu.
---------------------------------------------------------------------------
Benford Ltd. was incorporated by European Trust, and its
bank account was opened by European Bank. The company was
established at the request of one of the Euro Bank employees
later charged with money laundering, who said he was acting on
behalf of an unnamed client. The incorporation and account
paperwork was handled by a shared senior employee, Susan
Phelps, who was working for both European Trust and European
Bank. Phelps has stated in a sworn affidavit that, throughout
the incorporation and account opening process, she never spoke
with either the Euro Bank employee or Benford's beneficial
owner, but relied entirely upon faxed information to establish
the corporation and open the account.
Phelps incorporated Benford Ltd. within 24 hours of
receiving an application form faxed from Euro Bank with minimal
information about the company's beneficial owner. The
application provided no more than the beneficial owner's name,
Vanessa Phyllis Ann Clyde, a London address, a copy of her
passport photograph, and a one-word description of her
occupation as ``business.'' On the same day Euro Bank wire
transferred $100,000 to European Bank's account at Citibank in
New York, for deposit into the Benford account. European Bank
opened the Benford bank account, without any additional due
diligence research into Clyde, the source of her wealth, or the
origin of the $100,000. Bayer indicated that all of the forms
were filled out in the usual way for bank accounts opened for
companies formed by its affiliate, European Trust. In other
words, it was typical practice for European Trust to
incorporate a new company within 24 hours of a request and then
for European Bank to open a bank account in the company's name.
It was only after the Benford account was opened, that the
Euro, Bank employee and the company's beneficial owner, Clyde
who had an American accent, actually telephoned Phelps to
discuss the account. Clyde apparently indicated that she wished
to keep the Benford funds in U.S. dollars in a secure but
liquid investment. Over the next 2 months, the Benford account
received additional millions of dollars in deposits. The first
transfer, for $2.8 million on March 17, 1999, prompted European
Bank to ask some questions about their new client. After Euro
Bank did not volunteer any additional information, European
Bank's senior vice president asked someone he knew in the
Cayman Islands about Euro Bank itself. He received the
following negative information about Euro Bank:
LSmall locally incorporated bank, with a local banking
licence, 20/30 people on the staff, corporate activities too,
not a good reputation locally, has its door open to business
when other doors are closed to it, very much lower end of the
local banking business, dubious, 3 months ago there were rumors
that they might fail, not well respected, advise caution when
dealing with them. Barclays would not accept a reference from
them and would certainly not do business with them.
Despite this negative portrayal of the sole reference for
the Benford account, European Bank left open the account,
accepted additional funds, and chose not to try to verify any
information about Clyde or her assets.
By April 1999, the Benford account held about $7.5 million.
Bayer said that, by then, Benford was a ``huge client,'' whose
deposits represented about 15% of the bank's total deposit base
of $50 to $60 million. In May, however, two incidents suddenly
cast suspicion on the Benford funds. The first, on May 25,
1999, was a telephone call about the account from a Clyde who
had an English accent, instead of an American accent. Bayer
said it was the first time European Bank appeared to have two
different persons claiming to be the beneficial owner of an
account at the bank. Later the same week, European Bank
received a fax stating that Euro Bank had been placed into
receivership and the $7.5 million previously sent to the
Benford account were proceeds of the Taves credit card fraud.
In response, European Bank immediately froze the Benford
account, transferred the funds internally into a new, non-
interest bearing account from which client withdrawals were
prohibited, and filed a report with the Vanuatu police. Despite
moving the Benford deposits into a non-interest bearing account
within the bank, European Bank decided to continue placing the
$7.5 million with the correspondent bank paying the highest
interest rate on the funds, so that it could continue to earn
revenue from this large deposit. European Bank did not,
however, alert the correspondent bank holding the funds to
their suspicious origin.
At the same time, European Bank made another attempt to
learn more about the funds. In June 1999, Phelps asked the
English-accented Clyde in a telephone conversation about the
origin of the funds. She wrote this summary of the
conversation:
[Clyde] said I should have got this info from [the Euro,
Bank employee]. I said the funds had just arrived without
supporting documentation. . . . English was asked to open the
a/c. Doesn't know when. . . . Doesn't know how much. Wasn't
responsible for putting funds in. Not her personal funds.
Extremely uncomfortable. . . . If somebody had taken funds she
doesn't want to be tarred.\291\
---------------------------------------------------------------------------
\291\ See Phelps affidavit and notes, CG 6509-11.
The evidence indicates that, within months of the $7.5
million being deposited, European Bank had notice and evidence
of their suspect origin. Yet European Bank steadfastly opposed
releasing the funds to the FTC receiver seeking recovery of the
money on behalf of the Taves fraud victims.
Litigation over the funds began in the summer of 1999, when
European Bank and the FTC receiver filed separate suits in
Vanuatu to freeze the $7.5 million. In September, Clyde asked
the Vanuatu court to allow her to remit the Benford funds to
the FTC receiver, but European Bank's nominee companies
contested her control of Benford Ltd. and opposed releasing the
funds. The Vanuatu police launched a criminal investigation
and, in November, charged Benford Ltd. with possession of
property ``suspected of being proceeds of crime.'' The police
also obtained a criminal freeze order preventing the funds'
release to the FTC or anyone else.
On December 10, 1999, after locating a document notifying
Benford Ltd. that its funds had been placed in an interest
bearing account at Citibank in Sydney, the FTC receiver filed
suit in Australia, asking the Australian court to freeze the
$7.5 million on deposit with Citibank. Unknown to the FTC
receiver at the time of its filing, European Bank had taken
steps that same day to transfer the funds from Citibank to one
of its correspondent banks in Vanuatu. Before any transfer took
place, however, the Australian court froze the funds.
Additional pleadings were filed by the Vanuatu Government,
European Bank and FTC receiver, each seeking control over the
$7.5 million. European Bank, which had not told Citibank
previously about the suspect origin of the Benford funds, sent
a fax to Citibank explaining the situation and complaining that
the FTC receiver was trying ``every trick in the book'' to
``force the monies to be sent to the USA.'' The Vanuatu and
Australian litigation continued throughout 2000.
Almost 1 year later, on November 29, 2000, a third set of
legal proceedings began in the United States. Acting at the
request of the FTC, the U.S. Department of Justice filed a
seizure warrant and took possession of the Benford funds from
Citibank in New York. It was able to seize the funds in the
United States because Citibank Sydney had always kept the
Benford funds in U.S. dollars in a U.S. dollar account in New
York. In December 2000, the Justice Department filed a civil
forfeiture action seeking to eliminate any other claim to the
funds. The complaint alleged that the funds were the proceeds
of the Taves credit card fraud, and the FTC receiver had
``tried to obtain the funds from European Bank through a
Vanuatuan court proceeding, but failed to obtain relief in
Vanuatu.'' It is unclear whether European Bank will assert a
claim to the funds.
During more than a year of litigation battles in three
countries, Clyde has supported sending the Benford funds to the
FTC, but European Bank has vigorously opposed it. When asked
why, Bayer gave three reasons during his interview: (1) the
ownership of the funds remained unclear, since Clyde had
admitted in court that they were not her funds and she did not
know their origin; (2) the allegation that the funds came from
the Taves fraud should be established in Vanuatu court and, if
true, the Vanuatu Attorney General could reimburse the fraud
victims, rather than pay the monies to the FTC receiver who
might exhaust the entire sum through fees and expenses; \292\
and (3) European Bank had to defend itself from the risk of
inconsistent court decisions which might order it to pay the
$7.5 million twice, once to the Vanuatu Government in
connection with the Benford money laundering prosecution and
once to the FTC receiver seeking funds for the Taves fraud
victims. At times, Bayer also argued that the $7.5 million
deposit at Citibank represented European Bank's own funds,
unrelated to the Benford matter, although at other times he
acknowledged the Benford deposits made up the bulk of the
Citibank placement.
---------------------------------------------------------------------------
\292\ However, the INCSR 2000 report warns: ``Case law in Vanuatu
has shown that proving the criminal origins of proceeds, especially of
offenses committed abroad, is extremely difficult. Linking criminal
proceeds seized in Vanuatu with the offense committed abroad through a
complex series of financial transactions conducted by related
corporations operating in several offshore jurisdictions is all but
impossible.'' INCSR Report 2000 at 751.
---------------------------------------------------------------------------
The $7.5 million, now swelled with interest earnings to
$8.1 million, is in the custody of the United States, while the
litigation in Vanuatu, Australia and the United States
continues.
(b) IPC Fraud
In February 1999, the same month it opened the Benford
account, European Bank opened another ill-fated account under a
credit card merchant agreement with a Florida corporation
called Internet Processing Corporation (``IPC'').\293\ As in
the Benford matter, European Bank opened the account without a
due diligence review of the prospective client. IPC used
unauthorized credit card charges to obtain $2 million in
payments from European Bank and then absconded with the funds.
By the time it learned of the fraud, European Bank was unable
to locate IPC, the company's owner, or the missing $2 million.
It ultimately suffered a $1.3 million loss which threatened the
solvency of the bank.
---------------------------------------------------------------------------
\293\ For more information, see the description of the IPC fraud in
the appendix.
---------------------------------------------------------------------------
According to Bayer, the IPC account was one of about a half
a dozen new accounts that European Bank opened in 1999 in an
effort to expand the bank's business into credit card clearing.
It opened the IPC bank account within 1 week of being contacted
for the first time by the company. As with the Benford account,
the IPC account was opened based upon written materials and
correspondence, without any telephone conversation or direct
client contact.
Despite the credit risk involved in a merchant account,
European Bank failed to conduct virtually any due diligence
review of either IPC or Mosaddeo Hossain, the company's sole
incorporator, registered agent, director and officer. IPC is a
Florida corporation that had been created 2 weeks prior to the
opening of the account. It claimed to sell travel packages on
the Internet. Hossain was a Bangladeshi national allegedly
living in Florida. European Bank did not inquire into the
company's ownership, double check its references, ascertain its
capital or bank account balances, or verify its physical
address. With respect to Hossain, it did not inquire into his
business background, obtain any personal or professional
references, check his credit history, or verify any personal or
professional information about him. The bank also failed to
notice that the Bangladeshi passport he submitted as
identification had expired 7 years earlier.
As soon as the account became operational in late March
1999, Hossain claimed that IPC needed to process a number of
pre-sold travel packages and filed credit card charges totaling
about $13 million. About 85% of these charges would later be
disputed by the cardholders who would refuse to pay them. In
April 1999, European Bank processed about $3.5 million of the
filed charges and paid IPC over $2 million in four separate
payments. Each payment was made through European Bank's U.S.
dollar account at Citibank and sent to IPC's U.S. dollar
account at a Florida bank, called BankAtlantic.
On April 21, 1999, European Bank received an email from its
credit card processing company about ``a possible fraud of
cardholders of your merchant: Internet Processing Corp.''
European Bank immediately stopped all credit card processing
and attempted unsuccessfully to recall its latest payment to
IPC of $728,000. It later learned that, each time IPC had
received a payment from European Bank, IPC had promptly
directed BankAtlantic to wire transfer the funds across
international lines to a bank in either Israel or Jordan. An
accountholder would then withdraw the funds from the bank,
sometimes in cash. Despite urgent requests from European Bank
and Citibank, BankAtlantic failed to return the $728,000,
failed to promptly alert the banks in Israel and Jordan to the
IPC fraud, and failed to provide effective assistance in
locating Hossain or IPC.
European Bank directly contacted the Israeli and Jordanian
banks, but neither returned any funds or provided investigative
leads. European Bank also alerted U.S. law enforcement,
including the Secret Service. To date, it has been unable to
find any trace of IPC, Hossain or the missing $2 million. After
taking into account IPCs security deposit and the limited
credit card payments it received, European Bank determined that
it actually lost about $1.3 million from the IPC fraud.
Citibank's relationship manager for the European Bank
account, Christopher Moore, determined that the loss was
substantial given European Bank's thin capitalization and
required the bank to keep $1 million on deposit at Citibank
until the IPC matter was fully resolved. Bayer described the
loss as a ``very serious matter'' which could have resulted in
bank failure, if the exposure had been greater. He said,
however, that European Bank appears to have weathered the
damage to its solvency.
(7) Correspondent Account at Citibank
Citibank's due diligence efforts with respect to opening
and monitoring the European Bank account were among the most
careful and conscientious witnessed during the investigation,
but suffered from the practical difficulties inherent in
overseeing a small foreign bank in a remote jurisdiction with
weak banking and anti-money laundering controls and a tradition
of bank secrecy.
Citibank. Citibank is one of the largest banks in the
United States with over $700 billion in assets and operations
in more than 100 countries. According to Christopher Moore, the
Citibank Sydney vice president interviewed by the
investigation, Citibank holds two banking licenses in
Australia, one for Citibank N.A. and one for Citibank Ltd., a
Citibank N.A. subsidiary. Both make up what is referred to
informally as ``Citibank Sydney.'' Citibank Sydney also
includes an entity variously called the ``Citibank N.A. Sydney
Branch Offshore,'' ``Sydney Offshore Banking Unit,'' which
transacts business with persons residing outside Australia.
Citibank Sydney has an active correspondent banking
business. Most of its correspondent banking operations are
handled by its ``Financial Institutions Group,'' which operates
out of Citibank's Global Corporate and Investment Bank.''
According to Moore, the Financial Institutions Group manages
about 50 correspondent relationships with financial
institutions in Australia, New Zealand and the South Pacific
region. The group also oversees Australian dollar accounts for
another 200 financial institutions transacting business in that
currency. Despite this large customer base, Moore said that the
Financial Institutions Group operates with about four
relationship managers. The relationship managers are supervised
by Moore, who is a vice president and longstanding employee in
the group, and its senior credit officer. Moore's direct
supervisors are Citibank's Australia country head and country
credit officer.
Moore indicated in his interview that most of the financial
institutions that Citibank Sydney works with also have U.S.
dollar accounts. He indicated that, because of the frequency of
U.S. dollar transactions, the Financial Institutions Group was
in regular contact with Citibank offices in New York. He
indicated that all U.S. dollar transactions take place in the
United States, through Citibank New York; U.S. dollars are not
kept in Australia by Citibank Sydney.
Initiating European Bank Relationship. Citibank Sydney
managed the correspondent relationship with European Bank.
Moore explained that, although he did not normally become
involved in the details of a correspondent relationship, he
took it upon himself to act as the relationship manager for the
European Bank account. He said it was Citibank's only account
in Vanuatu, which is seen in Australia as a questionable
jurisdiction, and he wanted to ensure that the initial due
diligence and subsequent monitoring efforts for the account
were adequate.
In deciding whether to commit Citibank to a correspondent
relationship with European Bank, Moore conducted a thorough and
painstaking due diligence effort.\294\ Among other measures,
Citibank Sydney took the following steps:
---------------------------------------------------------------------------
\294\ See, for example, Citibank's first Basic Information Report
on European Bank, CG 3852-61; first site visit report, CG 6155-57; and
first credit analysis of the bank, CG 4203-07.
--Citibank officials traveled to Vanuatu, visited
European Bank's offices, inspected its operating systems,
talked to the staff, and met with the bank's senior officers,
---------------------------------------------------------------------------
including Bayer.
--Citibank obtained copies of the bank's incorporation
papers, banking license, audited financial statements and other
key documentation.
--Citibank asked Vanuatu banking regulators for their
opinion of European Bank. It also analyzed Vanuatu's banking
regulation and government.
--Citibank required European Bank to submit three
written bank references and followed up with personal calls to
each bank that provided a written reference. Citibank also
spoke with European Bank's outside auditor
--Citibank inquired about and analyzed European Bank's
finances and primary lines of business, and developed a
detailed credit analysis of the bank.
--Citibank inquired about and analyzed European Bank's
client base. Citibank made independent inquiries into several
clients that raised due diligence concerns, such as an
Australian lottery and certain mail order companies. In the
case of the Australian lottery, Citibank checked with
Australian officials who apparently provided the company with a
clean bill of health, even though the company was then under
criminal investigation in the United States and later pleaded
guilty to illegal lottery solicitations.\295\ With respect to
five clients, including the Australian lottery, Citibank
required European Bank to submit a written declaration
attesting to the client's reputation, competence and
suitability.\296\ Moore indicated during his interview that
Citibank eventually realized that it did not have the resources
to evaluate all of European Bank's clients, and it would have
to determine whether it could rely on European Bank to conduct
its own client due diligence.
---------------------------------------------------------------------------
\295\ See United States v. C-W Agencies Inc. (U.S. District Court
for the Western District of Washington Criminal Case No. CR99-454C),
information (8/9/99) and plea agreement (8/24/99).
\296\ See ``European Bank Ltd. Customers Information,'' (5/27/96),
CG 3869-73.
--Citibank directly and repeatedly discussed anti-money
laundering issues with European Bank, including providing the
bank with a 90-minute video on the topic and inquiring about
the bank's due diligence procedures.\297\ In one memorandum,
Moore expressed concern about the bank due diligence procedures
stating, ``It's clear to me that [European Bank] [doesn't] have
a disciplined internal call file process. The customer
acceptance testing is done by Tom [Bayer] and Robert [Bohn] and
its apparently filed in their heads! I'm sure they know what
they are doing, but is that good enough for us.'' \298\ In his
interview, Moore could not recall whether European Bank then
had written anti-money laundering procedures, but said he was
``confident'' the bank was aware of and sensitive to its due
diligence and anti-money laundering obligations. European
Bank's first written anti-money laundering procedures came, in
fact, 3 years later in 1999.
---------------------------------------------------------------------------
\297\ See ``Call Report European Bank'' (5/2/96), CG 6155; and 11/
26/96 letter from Citibank to European Bank, CG 6095.
\298\ The bates designation for this document is CG 6138.
Despite some deficiencies, the initial due diligence
performed by Citibank was much more extensive than due
diligence inquiries observed in the other correspondent bank
case histories. The thoroughness of the effort may have been
due, in part, to reservations about the relationship expressed
by the person who was then head of Citibank Sydney and Moore's
immediate supervisor. He wrote:
I have been thinking a lot about this proposed
relationship and while I appreciate your diligence in
developing indepth information . . . I continue to have
reservations about entertaining this business. I am
particularly concerned about the lack of institutional
stability of the bank, the difficulty in monitoring events from
Sydney and the overall image of Vanuatu. . . . [Y]ou should
know that it will not be an easy sell.\299\
---------------------------------------------------------------------------
\299\ 5/9/96 memorandum from William Ferguson to Moore, CG 6149.
The memorandum's reference to the bank's ``lack of institutional
stability,'' according to Moore, was a reference to the bank's small
size and thin capitalization. The reference to Vanuatu's ``overall
image,'' he said, was a reference to its image as a tax haven and an
area that drew the attention of bank regulators.
In his interview, Moore said that he overcame these
concerns by gathering detailed information about the bank and
forming a consensus with his Citibank Sydney colleagues that
the account was worth trying. Moore said that his meetings with
the bank's management and staff impressed him with the bank's
openness and willingness to provide information, Citibank's
efforts to verify the bank's information were successful, and
the regulators and other references all seemed to depict a
solid bank under credible management. In an internal
memorandum, Moore wrote, ``[A]s we have step by step advanced
this prospect with greatest caution and initial scepticism, we
have been very impressed by the integrity and process we have
seen in European Bank and its people.'' \300\
---------------------------------------------------------------------------
\300\ 5/9/96 memorandum from Moore to Ferguson, CG 6150.
---------------------------------------------------------------------------
Monitoring the Account. Citibank Sydney began its
correspondent relationship with European Bank on May 22, 1996.
Over the next 4 years, Citibank provided European Bank with
seven deposit accounts, each in a different currency; an
electronic ledger and wire transfer software; check clearing
services; check issuance capabilities allowing European Bank to
issue checks in multiple currencies; foreign exchange services;
limited credit lines for overdrafts and foreign currency
transactions; access to Citibank's money market and other
higher interest bearing accounts; and access to Citibank's bond
and stock trading capabilities. The relationship expanded
slowly, but steadily. Although Citibank indicated that it
considered European Bank one of its smallest clients, the
account statements show that, in 1998 and 1999 alone, European
Bank moved $192 million through its Citibank U.S. dollar
account.
Moore personally supervised the monitoring of the European
Bank account. In the first 6 months the account was open, he
reviewed the bank's monthly account statements and cash letter
reports. The documentation indicates that, while the account
was open, Citibank personnel made regular site visits to the
bank. Moore reviewed, and at times contributed to, Citibank
``call reports'' summarizing contacts with European Bank, and
various annual reviews of the relationship. In addition, when
problems arose over the Benford and IPC matters, Moore
personally requested explanations and performed an independent
analysis of the facts.
Citibank's documentation of the correspondent relationship
contains numerous reports and analysis. Citibank Sydney's
Financial Information Group uses a standard form for each
correspondent relationship, entitled ``Basic Information
Reports'' (BIRs), to present due diligence information, a risk
analysis, transaction profile, overview of Citibank services
and credit arrangements, account highlights, and an annual
analysis for each relationship. The BIRs for European Bank were
completed for 1997, 1998 and 1999, and approved by Moore.\301\
While these reports failed to mention the Benford or IPC
matters or other specific account problems, they provided a
significant amount of information and evidence of Citibank's
active, ongoing monitoring of the account. Citibank Sydney also
prepared several call reports and credit analyses.\302\
---------------------------------------------------------------------------
\301\ The bates designation for these documents are CG 3852-61.
\302\ See, for example, 4/30/97 memorandum by Moore, CG 6052-53.
---------------------------------------------------------------------------
In May 1999, Citibank Sydney prepared a detailed analysis
of the entire correspondent relationship.\303\ Among other
issues, the analysis looked at European Bank's ``compliance
risk,'' ``country risk'' and ``financial risk.'' It identified
risks in all three categories, but found them mitigated by the
bank's strong management. The analysis stated, for example:
---------------------------------------------------------------------------
\303\ See ``FI--Commercial Bank Individual Analysis'' for European
Bank (5/7/99), CG 4038-43 and 6063.
In light of Vanuatu's tax haven status, there is the
risk that EB might be dealing with clients/funds involved in
money laundering/other abnormal activity. . . . Vanuatu's no-
exchange control and no-income tax environment makes it
attractive to dubious individuals and businesses. . . . EB has
a small asset . . . and capital . . . base, making it
vulnerable to unexpected losses. . . . The relationship with EB
is not critical to Citibank's franchise. However it has
provided growing revenues for the minimal risk of the credit
facilities. . . . [O]ur dealings with EB are based on our
assessment of the integrity of the group and professionalism of
---------------------------------------------------------------------------
its owners and management.
During his interview, based upon his personal experience,
Moore expressed the view that European Bank was both reputable
and competent. He also acknowledged that it had not produced
the expected revenue for Citibank, and had experienced some
unexpected losses and troubling incidents.
With respect to the Benford account, Moore indicated that
he had never conducted a detailed review of the account opening
documentation or process. After being shown the account opening
documents and European Bank affidavits, he expressed surprise
that the bank had opened the Benford account prior to speaking
to the accountholder; he said that was ``not the way Citibank
would do it.'' He also expressed surprise at the bank's failure
to obtain more due diligence information prior to opening the
account; he said that did not comport with his understanding of
European Bank's due diligence practices. When asked how
Citibank would have reacted to the negative information
provided about Euro Bank in March 1999, Moore said they
probably would have placed the Benford account ``in suspense''
at that time and performed additional research into the origin
of the funds. He also indicated that he had not been aware of
the ongoing litigation in Vanuatu over whether Clyde was the
true beneficial owner of Benford Ltd. Asked for his overall
reaction to the Benford account opening process, Moore
characterized it as ``sloppy'' and expressed surprise that the
bank had handled it in the manner it did. He said it did not
match his understanding of how European Bank operated.
Closing the Account. At the end of its May 1999 review of
the European Bank account, Citibank had decided to continue the
correspondent relationship. One year later, Citibank reversed
course and closed the account.
Citibank's decision to close the European Bank account was
not based on profitability concerns or bank misconduct, but on
a broader policy decision to join an effort by other
multinational banks to restrict correspondent banking
activities in certain South Pacific island nations, including
Nauru, Palau and Vanuatu. This effort, which began in November
1999, was partly in response to the Bank of New York scandal
which raised awareness of money laundering concerns in
correspondent banking and partly in response to media reports
of $70 billion in Russian funds moving through shell banks
licensed in Nauru.\304\ Among the banks restricting
correspondent banking in the South Pacific were the Bank of New
York, Deutsche Bank, and the Republic National Bank of New
York. In a November 25, 1999 email, Moore notified European
Bank that Citibank was considering adopting the same policy. On
December 13, 1999, the Bank of New York rejected a European
Bank wire transfer due to its association with Vanuatu. On
December 17, 1999, Citibank sent a letter to European Bank
announcing its decision to close the account.\305\ The account
actually closed 5 months later in May 2000.
---------------------------------------------------------------------------
\304\ For more information, see the Bank of New York description in
the appendix.
\305\ The bates designation for this document is CG 3945.
---------------------------------------------------------------------------
When asked about closing the European Bank account, Moore
sent an email to other Citibank colleagues explaining the basis
for the decision. He wrote:
We are exiting European Bank . . . a bank licensed and
domiciled in Vanuatu, and owned by Vanuatu citizens, not
because of any concerns about European Bank directly.
Unfortunately, because of Australian Tax Office suspicions that
Australian individuals use Vanuatu to evade taxes, Vanuatu
attracts a lot of attention from here. On top of that, the BONY
action has raised the profile of Vanuatu. . . . We just feel
that the environmental risk, that something totally unexpected
does bob up, is more than we wish to take. The icing on this
decision was that our customer found itself with a deposit
(from another bank) that was subject to action in the USA as
possible proceeds of crime. They did all the right things,
including obtaining a Vanuatu court injunction to freeze the
funds with them. They also redeposited the USD with us, in the
normal course of banking, and the US receivers found this out
and obtained a freeze order on us. . . . [W]e are satisfied our
customer is innocent of any complicity. . . . I have the
highest regard for the individuals who own and operate European
Bank, and we are exiting in [a] manner that causes least harm
to their franchise.\306\
---------------------------------------------------------------------------
\306\ Moore email dated 1/24/00, CG 1053; see also Moore email
dated 1/11/00, CG 1051.
---------------------------------------------------------------------------
B. THE ISSUES
The European Bank case history raises at least two sets of
issues. First, it raises fundamental questions about how a
correspondent bank oversees a respondent bank in a remote,
jurisdiction with a tradition of bank secrecy and weak banking
and anti-money laundering controls. Second, it provides a vivid
demonstration of how a foreign bank can delay seizure of funds
from its U.S. correspondent account, even when the funds are
clearly the product of attempted fraud and money laundering.
Correspondent Bank Oversight
Citibank Sydney went the extra mile in its due diligence
efforts with respect to European Bank. It assigned a senior
bank official to oversee the relationship. It conducted site
visits, meetings with management, financial analyses, and
client evaluations. It monitored account activity and made
inquiries into specific problems like the Benford and IPC
matters. It maintained a high level of oversight for 4 years.
But in the end, it is far from clear that Citibank really
knew how European Bank was operating on a day-to-day basis. The
evidence is overwhelming that European Bank opened the Benford
and IPC accounts with little or no due diligence, contrary to
Citibank's understanding of the bank's procedures. In both
instances, European Bank opened the account knowing little more
than the name of the accountholder. It made no inquiries into
the accountholder's background, source of wealth or origin of
funds. When confronted, in one instance, by negative
information concerning the party who referred the Benford
account,, European Bank simply averted its eyes, left the
account open, and hoped for the best. A more cynical
interpretation is that European Bank deliberately accepted the
large deposits without caring where they came from or about
their association with a disreputable bank. In neither case,
did European Bank undertake reasonable steps to know its
customer.
The consequences for the bank have been serious. In the
Benford matter, European Bank is battling legal proceedings in
three countries. The collateral damage from this litigation
includes negative media reports, diversion of bank resources,
and ongoing legal expense. One case is litigating the basic
issue of who is the true owner of Benford Ltd.--a fact that
European Bank should have established with clarity when it
created the corporation, opened a bank account for it, and
accepted $7.5 million in deposits. Benford Ltd. has itself been
charged with possession of crime proceeds, and European Bank's
reputation has been tarnished by its role in incorporating and
managing this company. In the IPC matter, European Bank lost
$1.3 million. The bank's chairman and part owner, Bayer, had to
cover the losses to prevent a bank failure. Citibank's
confidence in the bank's management was badly shaken, and it
required the bank to post $1 million in deposits to secure
Citibank against possible future losses. European Bank decided
to abandon the credit card clearing business at least in the
short term.
Yet there is no reason to believe that the Benford and IPC
accounts were handled in anything but a routine manner. Both
accounts were opened prior to any direct contact with the
prospective client, a situation which Bayer said was typical
given Vanuatu's remote location and time difference. Bayer
indicated that the Benford account opening forms were completed
in the same way the forms are completed for all clients
referred by European Trust--providing minimal client
information, signatures from European Trust employees, and no
disclosure of the true owner of the Vanuatu corporation opening
the account. European Trust has indicated that it routinely
establishes new Vanuatu corporations within 24 hours of a
request, a time period which necessarily restricts how much due
diligence it can accomplish. The investigation found no
evidence to indicate that the Benford and IPC accounts
represented anything but business as usual at European Bank.
Moreover, although the Minority Staff investigation did not
conduct an extensive analysis of other accounts opened by
European Bank, documentation and interviews contain warning
signs of lax due diligence practices in other accounts as well.
For example, for years, European Bank maintained an account for
the Australian Lottery Federation International Ltd.\307\ At
the same time the account was open, this company, its owner
Randall Thiemer, and related companies were under criminal
investigation in the United States and Canada, which resulted
in a 1999 guilty plea to conspiracy to conduct illegal lottery
solicitations.\308\ Both Bayer and Moore indicated they had
been unaware of the U.S. proceedings. Another instance involves
the correspondent account that European Bank opened for Nest
Bank in 1999. Nest Bank is an offshore Vanuatu bank that,
because of international concerns over suspect Russian funds
moving through South Pacific shell banks, is now under review
by Vanuatu authorities. Nest Bank moved more than $6 million
through its European Bank account in 1 year, most of it with
ties to Russia or countries formerly part of the Soviet Union.
Bayer indicated that he could not discuss the account due to
Vanuatu's confidentiality requirements and the lack of publicly
available court filings disclosing Nest Bank's ownership and
activities. Moore indicated he had been unaware of the account.
---------------------------------------------------------------------------
\307\ See ``European Bank Ltd. Customers Information'' (5/27/96),
CG 3869.
\308\ See United States v. C-W Agencies Inc. (U.S. District Court
for the Western District of Washington Criminal Case No. CR99-454C),
information (8/9/99) and plea agreement (8/24/99).
---------------------------------------------------------------------------
In 1996, the head of Citibank's operations in Australia
expressed concern about the European Bank account, in part due
to ``the difficulty in monitoring events from Sydney.''
Vanuatu's banks operate under a tradition of bank secrecy and
weak banking regulation. European Bank is Vanuatu's only
indigenous bank; no parent bank audits its operations. It is
owned and directed by an individual who is a powerful player in
Vanuatu's economy and government. It works closely with trust
companies that have their own culture of nondisclosure. For the
two accounts examined in detail, Citibank was given no negative
information about the Benford account until a third party filed
suit in Australia, and it had no warning of the IPC loss, even
though Benford Ltd. and IPC were among European Bank's largest
accounts.
The European Bank case history provides a powerful
illustration of the money laundering risks inherent in
international correspondent banking. It demonstrates that, when
dealing with a small bank operating in a remote jurisdiction
with weak bank oversight and uneven anti-money laundering
controls, even a diligent correspondent bank may be left in the
dark about missteps leading to money laundering charges,
beneficial owner disputes, fraud, and substantial losses.
Seizing Suspect Funds
The European Bank case history raises a second set of
issues as well. Through the twists and turns of litigation
battles in three countries, it demonstrates how a small foreign
bank can delay seizure of funds from a U.S. correspondent
account, even when the funds are the product of fraud and money
laundering.
Ample evidence links the $7.5 million in the Benford
account at European Bank to the Taves fraud. The players
involved, the timing, the amounts, the wire transfers--all are
consistent with the money coming from the unauthorized credit
card billing scheme described in the U.S. court decision in the
Taves case. Ample evidence also links the Benford account to
Clyde, including her signature on the form asking to establish
Benford Ltd., her passport photograph and London address which
match the materials in European Trust's files, her possession
of the Benford incorporation papers, and her past association
with one of the individuals charged with participating in the
Taves money laundering effort.
For more than a year, in her capacity as the beneficial
owner of Benford Ltd., Clyde has supported remitting the
Benford funds to the FTC receiver. Citibank has repeatedly
expressed its willingness to transfer the funds in accordance
with court order. But European Bank has not been willing to
transfer the funds to the FTC receiver. It has fought legal
battle after legal battle to try to keep control of the funds
and ensure they were not ``forced'' to the United States, but
sent instead to Vanuatu authorities. The reasons for the bank's
actions are unclear.
Perhaps European Bank felt committed to defending Vanuatu
sovereignty. Perhaps it hoped to ensure that Vanuatu received a
portion of the seized funds, even though the Taves
investigative work was performed elsewhere and the monies were
intended for fraud victims. Perhaps European Bank wanted a
portion of the seized funds to reimburse its legal fees, even
though much of the legal wrangling followed its refusal to
allow the transfer of the funds to the United States in 1999.
Perhaps European Bank wanted the interest earnings on the $7.5
million--exceeding $600,000 at last count even though the bank
would be profiting from illicit proceeds that it chose to move
into a non-interest bearing account in May 1999. Perhaps
European Bank worried about having to pay the $7.5 million
twice, although it is hard to believe Vanuatu authorities would
force one of its leading citizens to pay a sum that, if already
paid to the FTC receiver, would break the bank. Perhaps
European Bank wanted simply to best the FTC receiver, which
tried so many legal maneuvers to obtain the funds and, in the
bank's eyes, would pay its own fees and expenses before
reimbursing any fraud victims.
Whatever its motivations, European Bank mounted a
resourceful campaign to stop the transfer of the Benford funds.
In Vanuatu, it argued that no one really knew who owned the
Benford money, since Clyde had admitted they were not her
personal funds and the FTC had not proven in court they were
from the Taves fraud. In Australia, it contended that the $7.5
million on deposit with Citibank was not Benford's funds at
all, but European Bank's own funds, placed in an investment
account to earn higher interest. In making this argument,
European Bank drew on the legal status of funds in a
correspondent account. It claimed that the funds in the
Citibank account were the property of the accountholder--
European Bank--and not the property of the bank's clients, even
if client funds were used to make the deposits.
The FTC receiver was equally resourceful in its litigation
strategy. It began by filing suit in Vanuatu. When it found
European Bank reluctant to release the $7.5 million from the
Benford account, it persuaded Clyde to file suit in Vanuatu
seeking court approval to authorize her own company to remit
the funds to the FTC receiver. When the Vanuatu police appeared
to be as reluctant as European Bank to surrender custody of the
$7.5 million, the FTC receiver filed suit in Australia to try
to obtain the funds directly from Citibank. While European Bank
argued the funds were not actually in Australia, but remained
in the Benford account at European Bank in Vanuatu, the fact
is, when faced with the Australian court's freeze order,
Citibank refused to transfer the funds at European Bank's
instruction. Clearly, the $7.5 million was under Citibank's
control.
The FTC receiver's next legal effort came when it convinced
the U.S. Department of Justice to seize the funds at Citibank
in New York as money laundering proceeds. After all, the $7.5
million had always been in U.S. dollars in a U.S. dollar
account. Despite appearing to travel from California to the
Cayman Islands to Vanuatu, the funds never actually left the
United States--they just moved from one U.S. bank account to
another. The proof is that, when confronted with the U.S.
seizure warrant, Citibank delivered the funds to the U.S.
Government.
The U.S. Government's seizure of the funds is not, however,
equivalent to forfeiture of the funds. The U.S. Justice
Department's civil forfeiture action provides all interested
parties with an opportunity to assert a contrary claim to the
funds. If European Bank were to assert ownership of some or all
of the $8.1 million, the United States might have to prove,
under statutory provisions affording correspondent accounts
special forfeiture protections,\309\ that European Bank
``knowingly engaged'' in the laundering of the funds or in
other criminal misconduct justifying seizure of the bank's own
money. One recent U.S. district court has interpreted this
standard to mean that the United States has to demonstrate a
bank's ``knowing involvement'' in or ``willful blindness'' to
the criminal misconduct giving rise to the seizure action.\310\
The questions in this matter would include what European Bank
knew and when, and whether it was willfully blind to criminal
misconduct associated with the Benford funds.
---------------------------------------------------------------------------
\309\ See 18 U.S.C. Sec. 984(d). See also Chapter V(G) of this
report.
\310\ United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602,
2000 WL 1234593 SDNY 2000).
---------------------------------------------------------------------------
The larger policy issues come into view with the
realization that European Bank keeps virtually 100% of its
clients' funds in correspondent accounts and conducts 100% of
its U.S. dollar transactions through U.S. correspondent
accounts. That means that 100% of European Bank's funds in the
United States benefit from greater forfeiture protections than
suspect funds in other types of U.S. bank accounts. The same is
true for all foreign banks choosing to deposit funds in U.S.
correspondent accounts. And it is not just foreign banks who
benefit, but also wrongdoers who ask the foreign banks to keep
their deposits in U.S. dollars. Taves, for example, originally
deposited his illicit proceeds in U.S. bank accounts in
California. He then sent the funds from the United States,
through two bank secrecy jurisdictions, the Cayman Islands and
Vanuatu, only to have the funds end up back in the United
States, but in a Citibank account which requires U.S. law
enforcement to surmount additional legal hurdles to sustain
forfeiture.
The European Bank case history is a cautionary tale about
how a small, determined foreign bank in a remote jurisdiction
can delay and perhaps ultimately frustrate U.S. law enforcement
efforts to seize illicit proceeds sent to the foreign bank as
part of a money laundering effort, so long as the laundered
funds are deposited into a U.S. correspondent account.
EUROPEAN BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1998-December 1999
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1998 $51,600 $3,665,819 $3,696,455 $34,664
----------------------------------------------------------------------------------------------------------------
February 1998 $31,664 $1,821,760 $1,711,361 $145,064
----------------------------------------------------------------------------------------------------------------
March 1998 $145,064 $2,437,018 $2,415,062 $167,020
----------------------------------------------------------------------------------------------------------------
April 1998 $167,020 $1,622,284 $1,568,763 $220,541
----------------------------------------------------------------------------------------------------------------
May 1998 $220,541 $2,210,457 $2,102,815 $328,183
----------------------------------------------------------------------------------------------------------------
June 1998 $328,183 $1,722,647 $1,678,084 $372,746
----------------------------------------------------------------------------------------------------------------
July 19T8 $372,746 $2,714,000 $1,412,137 $1,134,609
----------------------------------------------------------------------------------------------------------------
August 1998 $1,134,609 $3,188,179 $3,888,629 $434,158
----------------------------------------------------------------------------------------------------------------
September 1998 $434,158 $5,572,689 $5,069,024 $937,823
----------------------------------------------------------------------------------------------------------------
October 1998 $937,823 $11,415,104 $11,938,224 $414,704
----------------------------------------------------------------------------------------------------------------
November 1998 $414,704 $5,033,054 $5,305,670 $142,088
----------------------------------------------------------------------------------------------------------------
December 1998 $142,088 $4,359,456 $3,987,909 $513,634
----------------------------------------------------------------------------------------------------------------
January 1999 $513,634 $3,588,709 $3,916,399 $185,944
----------------------------------------------------------------------------------------------------------------
February 1999 $185,944 $2,237,332 $2,320,974 $102,303
----------------------------------------------------------------------------------------------------------------
March 1999 $102,303 $8,505,525 $7,117,827 $1,490,002
----------------------------------------------------------------------------------------------------------------
April 1999 $1,490,002 $15,506,331 $10,170,361 $6,825,971
----------------------------------------------------------------------------------------------------------------
May 1999 $6,825,971 $3,284,932 $9,904,192 $1,016,711
----------------------------------------------------------------------------------------------------------------
June 1999 $1,016,711 $8,725,235 $7,472,331 $2,269,615
----------------------------------------------------------------------------------------------------------------
July 1999 $2,269,615 $51,826,202 $53,009,742 $1,086,075
----------------------------------------------------------------------------------------------------------------
August 1999 $1,086,075 $6,796,758 $6,937,332 $945,511
----------------------------------------------------------------------------------------------------------------
September 1999 $945,511 $18,641,703 $17,862,655 $1,724,559
----------------------------------------------------------------------------------------------------------------
October 1999 $1,724,559 $10,481,608 $11,783,867 $422,300
----------------------------------------------------------------------------------------------------------------
November 1999 $422,300 $5,159,706 $5,474,264 $107,742
----------------------------------------------------------------------------------------------------------------
December 1999 $107,742 $11,376,490 $10,907,139 $577,093
----------------------------------------------------------------------------------------------------------------
TOTAL $191,892,998 $191,651,216
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000
Case History No. 8
SWISS AMERICAN BANK
SWISS AMERICAN NATIONAL BANK
Swiss American Bank Ltd. (``SAB'') and Swiss American
National Bank Ltd. (``SANB'') are two banks with the same
ownership that were licensed in Antigua and Barbuda in the
early 1980's. Throughout their history, these banks have been
troubled by controversial leadership, questionable practices by
bank officials, and accounts that were repositories of funds
from major financial frauds and other illegal activities. This
case study shows how major U.S. banks that served as
correspondents to these institutions were at times unaware of
even high profile frauds and controversies associated with the
banks and were slow to take action on the accounts, at times
maintaining the accounts for years after they knew and were
concerned about suspicious account activities and management
problems that afflicted the SAB and SANB.
The following information was obtained from documents
provided by the Government of Antigua and Barbuda, Bank of
America, Bank of New York, Chase Manhattan Bank, court
pleadings, interviews of government officials and other persons
in Antigua and Barbuda, the United Kingdom, and the United
States, and other materials. Key sources of information were
interviews with John Greaves, former General Manager of Swiss
American Banking Group (1988-1995), conducted on July 24 and
25, 2000; Brian Stuart-Young, Chairman and Managing Director of
Swiss American Bank, conducted on October 11, 2000;
relationship managers and other officials from Bank of America
(conducted July 10, 11, 31, and October 24, 2000), Bank of New
York (conducted August 10 and 30, 2000), and Chase Manhattan
Bank (conducted August 2, 3, and 4, 2000). The investigation
greatly benefitted from the cooperation and assistance provided
by a number of officials of the Government of Antigua and
Barbuda, particularly the Executive Director of the
International Financial Sector Regulatory Authority and the
Director of the Office of Drugs and Narcotics Control Policy.
A. THE FACTS
(1) Ownership and Management
SAB and SANB were part of a financial group in Antigua and
Barbuda called the Swiss American Banking Group. It included
the two banks and a trust company, Antigua International Trust.
SAB is an offshore bank with a physical presence in Antigua and
Barbuda. It was licensed to do business as an offshore bank in
April 1983; as an offshore bank it is prohibited from doing
business with citizens of Antigua and Barbuda. SANB is a
domestic Antiguan bank, licensed in May 1981 to do business
with citizens of Antigua. All three entities had the same
ownership, the same board, a common General Manager and for
many years both banks shared the same facilities and the same
staff.
When they were licensed, the owner of both SAB and SANB was
listed as Swiss American Holding Company, a Panamanian company.
The license application for SAB noted that Swiss American
Holding Company was wholly owned by Inter Maritime Bank of
Geneva, Switzerland, and Home State Financial Services, Inc. of
Cincinnati, Ohio. Each entity is listed as controlling a 50%
share of the holding company and the banks.
Inter Maritime Bank in Geneva, founded in 1966, was part of
a group of companies active in banking, shipping and the
petroleum industry. It was initially created to serve as the
in-house bank for shipping and other financial activities
undertaken by its affiliates. The founder and owner of Inter
Maritime Bank is Baruch (``Bruce'') Rappaport.\1\ Rappaport is
an Israeli citizen who became very active in the economic and
political life of Antigua. He also owned 50% of the West Indies
Oil Company which owned a refinery in Antigua. In December
1997, Rappaport was named as Antiguan Ambassador to the Soviet
Union. In 1989, the Bank of New York purchased 19.9% of Inter
Maritime Bank. At that time, Inter Maritime's name was changed
to Bank of New York-Inter Maritime Bank. In July 1996 Bank of
New York increased its ownership of Inter Maritime to 27.9%.
Bank of New York reported in February 2000 that Rappaport
continued to hold the remaining shares Inter Maritime.\2\ The
remainder of this report, except when quoting material, will
refer to Inter Maritime Bank by its current name, Bank of New
York-Inter Maritime Bank (``BYN-IMB'').
---------------------------------------------------------------------------
\1\ It is uncertain whether Rappaport was the sole owner of Inter
Maritime when SAB and SANB were formed. In 1978, two internal memoranda
of the Bank of New York, which established a relationship with Inter
Maritime in 1969, reported that Inter Maritime officials stated that
the Gokal brothers, Pakistani businessmen who later became heavily
involved in the BCCI scandal, invested between $6 million and $8
million Swiss Francs in Inter Maritime for 20% of the bank. Subsequent
memos about Inter Maritime and the Swiss American banks do not mention
the Gokal brothers, and a memo in 1983 states that ``almost all shares
[of Inter Maritime] are owned or controlled by Bruce Rappaport.''
\2\ According to a 1983 internal Bank of New York memorandum,
Rappaport held 7.5% of Bank of New York stock and increased that
percentage of ownership through the purchase of additional shares in
1983.
---------------------------------------------------------------------------
Home State Financial Services, Inc. was owned by Marvin
Warner, who served as U.S. Ambassador to Switzerland in the
mid-late 1970's. In 1986, Home State Financial Services, Inc.
was placed in bankruptcy due to financial problems encountered
by one of its subsidiaries, Home State Savings Bank. Warner
pleaded guilty to misapplication of funds and securities
violations for the role he played in the financial downfall of
Home State Savings Bank. As part of the bankruptcy proceedings,
the State of Ohio assumed control of Home State Financial
Services, Inc. and, as a result, its holdings in the Swiss
American entities. BYN-IMB subsequently purchased Home State's
holdings in the Swiss American entities from the State of Ohio.
Documents made available to the Subcommittee suggest that
BYN-IMB owned Swiss American Holding Company and controlled SAB
and SANB at least until 1993.\3\ The current ownership of the
Swiss American entities is structured through a series of
International Business Corporations (IBCs) and trusts. Swiss
American Holding Company is currently owned by Carlsberg (or
Carlsburg), S.A, a Bermuda corporation, which in turn is owned
by a charitable trust controlled by Rappaport. Two of the U.S.
correspondents of SAB and SANB that were interviewed by the
Minority Staff did not know the name of the charitable trust,
and the Bank of New York thought the name of the charitable
trust is the Inter Maritime Foundation, but it was not certain.
The Chairman and Managing Director of SAB was not able to tell
the Minority Staff the name of the charitable trust, either.
The lack of information by the correspondent U.S. banks with
respect to the details of the ownership of SAB and SANB is
troubling.
---------------------------------------------------------------------------
\3\ BYN-IMB's ownership interest in Swiss American Holding Company
remains uncertain. Recently BYN-IMB was dismissed from a case brought
against it, SAB, and SANB by the U.S. Government to recover drug/
terrorist related assets that had been forfeited to the U.S.
Government. BYN-IMB was dismissed due to lack of jurisdiction. BYN-IMB
claimed it had divested itself of Swiss American Holdings in 1988:
``On December 28, 1987, BYN-IMB sold all of its shares of SAHC to
an unrelated entity in which BYN-IMB had no interest or control, in a
transaction in which all of the obligations of the parties were
completed by December 15, 1988. . . . Since the end of 1988, BYN-IMB
has not owned any shares or held any interest in SAHC.'' USA v. Swiss
American Bank, L., Swiss American Holding Company S.A. of Panama, and
Inter Maritime Bank, Geneva (U.S. District Court for the District of
Massachusetts, C.A. No. 97-CV-12811 (RWZ)), Motion of Bank of New York-
Inter Maritime Bank, Geneva to Dismiss or, in the Alternative, for
Summary Judgment, April 1, 1998.
Yet, in correspondence submitted to both Bank of America and
Nations Bank in March of 1993, David McManus, the Deputy General
Manager of the Swiss American Banking Group wrote that BYN-IMB
controlled the Swiss American Banking Group, which directly contradicts
what was reported in the BYN-IMB filing in April 1998: ``Swiss American
Banking Group consists of Swiss American Holdings, SA, a Panamanian
company which owns 100% of Swiss American Bank Ltd., Swiss American
National Bank of Antigua Ltd. and Antigua International Trust Ltd.
Swiss American Holdings SA is wholly owned by the Inter Maritime Group
in Geneva.''
---------------------------------------------------------------------------
(2) Financial Information and Primary Activities
SAB has about 4,000 clients with 5,000 accounts and total
assets of $111 million (of which $103 million are deposits).
The bank's main function is private banking, providing wealth
management services to its clients. According to SAB officials,
approximately 4,500 of its 5,000 accounts currently have less
than $50,000 in value. Its customers are largely from Europe,
and bank officials estimate that less than 15% of their
customers are from the United States. Bank officials have told
Minority Staff that they are attempting to phase out their
business in the United States. Bank records indicate that in
recent years a significant portion of SAB's business has been
generated by Internet gambling companies or entities that
provided cash transfer services for Internet gambling
facilities. This issue is discussed in more detail later in the
report.
SANB provides retail banking services to individuals and
companies in Antigua and Barbuda and other Eastern Caribbean
nations. It also provides international banking services such
as foreign currency exchange and letters of credit. It was
recently sold to Antigua Barbuda Investment Bank (``ABIB''),
and will soon become part of ABIB. ABIB, another domestic bank
licensed to do business in Antigua and Barbuda, is affiliated
with Antigua Overseas Bank, an offshore bank.
(3) Correspondents
Correspondent banks of SAB in the United States have
included Nations Bank, Bank of America and Chase Manhattan
Bank. Correspondent banks of SANB in the United States have
included Citizens Bank and Southern International Bank (which
later merged with Sovran Corporation and then with NCNB
National Bank to become Nations Bank), NCNB National Bank
(which later merged with C&S/Sovran Corporation to become
Nations Bank), Bank of America (which later took over Nations
Bank), Irving Trust Company (which was later taken over by Bank
of New York), Bank of New York (which inherited the account
from Irving Trust), and Chase Manhattan Bank.
SAB and SANB currently have no correspondent relationships
with U.S. banks; SAB has correspondent banking relationships
with United Kingdom, Dutch and Canadian banks which presumably
have correspondent relationships with U.S. banks. Through these
nested correspondent relationships, SAB still maintains access
to U.S. banks. As noted above, SANB has been sold to Antigua
Barbuda Investment Bank.
(4) Operations and Anti-Money Laundering Controls
SAB officials told the Minority Staff that they have been
making efforts to improve the bank's anti-money laundering
controls. According to SAB materials provided the Minority
Staff, the bank has established a series of account opening
requirements for personal and corporate accounts. To open
personal accounts, according to the materials, clients are
required to provide verified signatures, proof of residence,
proof of identity, a current bank reference, proposed average
monthly deposit value and information on the anticipated source
of funds. According to the SAB materials, applicants for
corporate accounts are required to provide verified signatures,
certificate of incorporation, memorandum and articles of
association and a current certificate of good standing if the
entity is more than a year old, proof of identity and at least
one current bank reference on each shareholder/director and
authorized signatory. Proof of the corporation's registered
office, proposed account activity including anticipated average
monthly deposit and anticipated source of funds is also
required, according to the materials. In the case of bearer
share companies, SAB says it requires an attestation by the
directors to identify true beneficial ownership. SAB officials
told the Minority Staff that in keeping with statutes enacted
in Antigua in early 1999, the bank has not accepted deposits in
cash or in bearer negotiable instruments since April 1999.
SAB officials told the Minority Staff that as part of its
ongoing monitoring program, all staff receives anti-money
laundering training and management attends anti-money
laundering conferences in the United States. SAB officials said
that the bank has invested in computer monitoring software to
track transactional activity. According to officials, the
program is designed to monitor for suspicious activity in a way
that would be compliant with U.S. Government anti-money
laundering controls.
The Chairman and Managing Director told the Minority Staff
that they know the beneficial owners of 90% of the accounts and
that they have not received enough information on the
beneficial ownership of about 3% of the accounts.
(5) Regulatory Oversight
SAB is regulated by the Government of Antigua and Barbuda's
International Financial Sector Regulatory Authority which was
created in 1998. To date, no examination of the bank has been
conducted. The bank is required to submit an annual audited
financial statement to the International Financial Sector
Regulatory Authority.
SANB is regulated by the Eastern Caribbean Central Bank,
which includes an annual bank examination.
(6) Money Laundering and Fraud Involving SAB/SANB
SAB and SANB have been identified as repositories of
illicit funds from several illegal operations. Such incidents
were not isolated events. They have occurred on a continual
basis throughout the life of the institutions. In addition,
bank officials engaged in misdeeds and questionable activities.
With respect to some frauds and questionable activities that
occurred through the accounts at the banks, top officers knew
or should have known what was occurring; yet they were slow to
act to halt the activity or failed to act. This succession of
problems and questionable leadership (in addition to SAB's
offshore license and lack of any examination by regulatory
authorities) qualifies SAB and SANB as high risk institutions.
The following items illustrate these points.
(a) Controversial Leadership
The leadership of Swiss American Banking Group (the group
that includes SAB and SANB) has a history of involvement in
controversial and questionable financial dealings and banking
activities.
First, the history of controversial dealings involving
Baruch Rappaport, the beneficial owner of SAB and SANB, has
been well chronicled. It includes a series of oil tanker deals
with Indonesia's government-owned oil company, Pertimina, which
contributed to the nation's economic problems in the mid-
1970's; an oil deal with Gabon (completed after one of
Rappaport's banks loaned money to the President of Gabon, Omar
Bongo, and the Oil Minister) that had such highly favorable
terms for Rappaport's company that the government won a
subsequent arbitration award of $25 million; his role as
middleman in an effort to build an oil pipeline through Iraq;
and business associations with some key figures associated with
BCCI.\4\
---------------------------------------------------------------------------
\4\ ``Seeking Testimony in Pipeline Case: Immunity Given to a
Secretive Swiss'' New York Times (March 6, 1988) Jeff Gerth and Stephen
Engelberg; ``Untangling what Pertamina owes--and to whom'' Business
Week (February 7, 1977); ``Key Player in BCCI fraud loses appeal''
Guardian (March 12, 1999) Dan Atkinson; ``Pak millionaire appeals
verdict in BCCI case'' Hindustan Times (March 10, 1999).
---------------------------------------------------------------------------
Two members of the Board of Directors for SAB, Marvin
Warner and Burton Bongard, were connected with Home State
Financial Services, Inc. which initially was a 50% owner of
SAB. Warner owned Home State Financial Services, Inc.; Bongard
was President of Home State Savings Bank, a Cincinnati savings
and loan that was owned by Home State Financial Services. In
1986, Home State Financial Services Inc. was placed in
bankruptcy due to financial problems encountered by Home State
Savings Bank. In March 1987, Warner was convicted of six State
criminal charges of misapplication of funds and three
securities violations for illegal activities that caused the
collapse of Home State Savings Bank. He was sentenced to 3\1/2\
years in prison and ordered to pay $22 million in restitution.
Bongard was convicted of 41 counts of willful misapplication of
funds and 41 counts of unauthorized acts. He was sentenced to
10 years in prison and ordered to pay $114 million in
restitution costs. In addition, he subsequently pleaded guilty
to four Federal felony counts of misapplication of funds and
was sentenced to 6 years in Federal prison.\5\
---------------------------------------------------------------------------
\5\ In 1985, the SEC closed ESM Government Securities Inc., of Fort
Lauderdale, Florida, because it had an undisclosed debt of over $300
million. The closure of ESM caused problems for Home State Savings Bank
and American Savings and Loan Association of Miami, Florida. (Warner
owned 28% of American Savings and Loan and served as its Chairman).
Both Home State and American funneled millions of dollars worth of
government securities into EMS, ostensibly as collateral for loans from
ESM. However, the government securities were worth far more than what
had been borrowed. ESM then raised cash by borrowing against the
securities. At the time of ESM collapse, Home State Savings Bank had
over-collateralized its loans by about $144 million and American had
over-collateralized its loans by approximately $50 million. Those
institutions lost money when ESM was closed, and that caused a run on
Home State that led the Governor of Ohio to shut down the bank. The
collapse of the bank also exhausted all of the funds in a thrift-owned
insurance fund, causing a statewide crisis that resulted in a 3-day
closure of all State-chartered savings and loans.
The owners of ESM pleaded guilty or were convicted in State and
Federal courts on fraud charges. Warner was charged and pleaded guilty
to misapplication of funds and securities violations for the role he
played in the financial downfall of Home State Savings Bank.
As a result of these events, Warner declared bankruptcy. As part of
the liquidation of Home State Financial's assets to repay the State of
Ohio for bailing it out, the bank's 50% share in Swiss American Bank
was sold back to BYN-IMB. See ``Michigan Jury Clears Home State's
Warner of 18 Federal Charges'' National Thrift News Inc. (June 29,
1987) Sharon Moloney; ``Early Warnings About Home State Pushed Aside''
Business First of Columbus Inc. (August 5, 1985) Dick Kimmins; ``Risky
Business: The Story of Home State'' Business First of Columbus Inc.
(May 27, 1985) Mark Heschmeyer; ``Final Suit Brings First Loss in ESM
Fraud Case'' South Florida Business Journal, Inc. (January 22, 1990)
Melinda Sisser; ``Warner, Two Guilty on ESM'' National Thrift News Inc.
(March 9, 1987) Sharon Moloney; ``Jury Returns Verdict in Case Stemming
from Ohio's Thrift Crisis'' Associated Press (March 2, 1987) Bill Vale;
``Securities Firm Boss Gets 30 Years in Fraud'' Chicago Tribune
(October 18, 1986) Associated Press.
---------------------------------------------------------------------------
Another SAB board member, Steven Arky was a son-in-law of
Warner, and counsel to ESM Government Securities. Clients of
his law firm, Arky, Freed, Stearns, Watson, Greer, Weaver &
Harris, lost millions of dollars that they had invested in ESM.
They subsequently sued the firm, contending that the firm knew
that ESM was insolvent and that the clients' investment could
be lost and yet failed to advise the clients of that fact.
William Cooper, discussed previously in this report, signed
SAB's license application as the organizer of the corporation
and as Vice-President of Swiss American Holding Company. Cooper
was also listed as a member of the Board of Directors. Cooper
served as General Manager of Swiss American Banking Group from
approximately 1981 to 1984. In 1992, Cooper became owner of
American International Bank which is discussed in another
chapter of this report. Cooper is now under U.S. indictment for
money laundering activities associated with the operations of
Caribbean American Bank, a rogue bank that operated through
American International Bank.
Another long time member of SAB's Board of Directors is
Burton Kanter, a controversial tax attorney from Chicago. The
current Chairman and Managing Director of Swiss American Bank
estimated that Kanter has been a member of the Board for
approximately 12 years. For the past 25 years, Kanter or his
clients have been the subject of numerous criminal and civil
investigations and complaints alleging tax evasion, money
laundering, and securities fraud.\6\ All of these matters
generally involved offshore banks and offshore trusts
structured to ``avoid'' U.S. taxes. Yet, as of 2000, SAB, in a
communication to another bank, still designated Kanter as one
of the ``[i]ndividuals responsible for the bank.'' \7\
---------------------------------------------------------------------------
\6\ In December 1999, a special trial judge for the U.S. Tax Court
determined that Kanter and a number of his clients had engaged in a
scheme to hide kickback payments that the clients had received (some of
which were paid to Kanter) and underpaid their taxes as a result. The
court's 300 plus page decision contains a section entitled ``Kanter's
Fraud,'' which includes the following:
. . . Kanter was the architect who planned and executed the
elaborate scheme with respect to the kickback income payments received
. . . In our view, what we have here, purely and simply, is a concerted
effort by an experienced tax lawyer and two corporate executives to
defeat and evade the payment of taxes and to cover up their illegal
acts so that the corporations, Prudential and Travelers, and the
Federal Government would be unable to discover them.
. . . Kanter created a complex money laundering mechanism made up
of sham corporations and entities . . . to receive, distribute, and
conceal his income, as well as [the other defendants'] income . . .
Kanter's use of the various sham entities made it difficult and
sometimes impossible to trace the flow of the money and is substantial
evidence of his intent to evade tax.
In addition, a number of trust arrangements structured by Kanter
for his clients have been challenged by the IRS and have resulted in
settlements, with the defendants paying millions of dollars to the IRS.
Kanter was also associated with an entity called Castle Bank and
Trust Company, Inc., a Bahamian Bank that was the subject of a
concentrated IRS investigation in the mid-70's as one of the early
Caribbean-based offshore banks for criminal accounts and tax evasion
activities. Castle Bank served as the trustee and repository for many
of the entities established by Kanter for his clients.
\7\ However, the Chairman and Managing Director of SAB told the
Minority Staff that Kanter was a non-executive director, and that he
didn't have any role in the day to day management of the bank.
---------------------------------------------------------------------------
The General Manager of the Swiss American Banking Group
from 1984 to 1987 was Peter Herrington. Herrington established
and personally serviced the accounts of John Fitzgerald
(discussed below in this report). These accounts were seized by
both the U.S. and Antiguan Governments because the accounts
contained funds related to drug sales and the Irish Republican
Army.
John Greaves, General Manger of Swiss American Banking
Group from 1988 to 1995, was involved in a number of
controversial matters during his tenure at Swiss American
Banking Group and was in the leadership of two other banks and
a management firm that were engaged in a number of
controversial activities, described in other parts of this
report.
(b) The Fitzgerald Case--Drugs and Terrorist Money
From 1985 to 1997, SAB and SANB were significantly involved
in a money laundering case involving a man named John
Fitzgerald. The involvement began when Fitzgerald, a money
launderer acting on behalf of the Murray brothers, leaders of a
drug organization in Boston, deposited, between 1985 and 1987,
approximately $7 million into accounts that had been
established at SAB and SANB.\8\ Four of the accounts were in
the name of bearer share IBCs, that is, corporations whose
ownership was vested in the individuals who controlled the
certificates of the shares of the corporation. Two of the
accounts (one at SAB and the other at SANB) were in the name of
Guardian Bank, a bank licensed in Anguilla in 1986. Those two
Guardian Bank accounts eventually became the repository for
most of the funds deposited by Fitzgerald and other members of
the drug organization. Three bearer share IBCs were listed as
the owners of that bank.
---------------------------------------------------------------------------
\8\ It has been reported to the Subcommittee staff that the Murray
brothers and Fitzgerald were also involved in the sale of weapons to
IRA terrorists and that some, or even all, of the funds deposited into
the accounts at SAB and SANB were associated with the IRA.
---------------------------------------------------------------------------
The General Manager of the Swiss American Banking Group at
the time was Peter Herrington who assisted Fitzgerald with the
formation of all of the IBCs and the management of the accounts
at SAB and SANB. The formation of the accounts was handled by
Antigua International Trust. Herrington served as Director of
all of the IBCs and Guardian Bank and performed transactions in
the SAB and SANB accounts.
Most of the funds were initially deposited into accounts at
SAB and then transferred into other accounts at SAB and SANB.
By mid-1987, the $7 million Fitzgerald accounts in the name of
Guardian Bank constituted approximately one third of all
deposits at SAB. SAB owner Rappaport, concerned that an unknown
party controlled one-third of Swiss American Banking Group's
deposits, asked Herrington to identify the beneficial owner(s)
of Guardian Bank. When Herrington refused to do so, he was
immediately suspended and was dismissed from his position 1
month later (June 1987). Between the time of Herrington's
suspension and his termination, he notified Fitzgerald of
Rappaport's concerns.
At that time, Herrington resigned as the director of
Guardian and the IBC. When efforts to resolve the matter
failed, the attorney who claimed to be the new director of
Guardian Bank filed a lawsuit in Antigua and Barbuda requesting
the court to recognize him as the director of Guardian and to
authorize the withdrawal of funds in the Guardian Bank accounts
at SAB and SANB which held Fitzgerald's money. At that same
time, Swiss American Banking Group officials began to
investigate the accounts opened by Herrington and hired an
auditor to review the accounts. The review identified a number
of irregularities. In addition, the Group learned from law
enforcement officials that the funds may be tied to drug and
arms trafficking. They contacted the Antiguan Government, and
in June 1990, the Minister of Finance for the Government of
Antigua and Barbuda instructed Swiss American Banking Group to
freeze the funds. In December 1990, the High Court of Antigua
ruled that Guardian Bank's director did not have the proper
corporate authority to file the suit, and the funds remained
frozen at SAB/SANB.\9\
---------------------------------------------------------------------------
\9\ This description is drawn from pleadings filed by the
Department of Justice in association with USA v. Swiss American Bank,
LTD, et al. (op. cit.) and documents and correspondence related to that
matter.
An October 1989 report by the Special Branch of the Royal Bermuda
Police Force and the U.S. grand jury indictment issued against
Fitzgerald provide a description of the trail of the funds that is
instructive as to how the international banking system is used to move
and launder illicit funds. In early 1985, Fitzgerald established a St.
Lucian corporation by the name of ``Halcyon Days Investments, Ltd.''
and opened an account in that corporation's name at the Canadian
Imperial Bank of Commerce in St. Lucia. Between January and March 1985,
Fitzgerald and other members of the drug organization deposited $3
million into the account. In May 1985, the account was closed and all
of the funds (in excess of $3 million), were transferred to the
Guinness Marn and Company Bank in the Cayman Islands through a bank
check issued to the Guinness Bank. The total in the account
subsequently grew to $5 million. In the Fall of 1985, the $5 million in
funds were wire transferred from the Guinness Bank account to
Philadelphia to Manufacturers Hanover Bank in New York to the Bank of
Bermuda and on to SAB. The wire transfer of $5 million was divided
equally between two accounts at SAB (Rosebud Investments and White Rose
Investments). The funds were subsequently transferred into the accounts
of Guardian Bank (one at SAB and one at SANB). According to the police
report, ``not only is this path murky, but subsequently Guinness Marn
sold their subsidiary in Cayman because of their embarrassment at the
management. Regrettably Guinness Marn have chosen not to reveal why
they were embarrassed or the source of the money.''
The Special Branch report also detailed the irregularities and lack
of controls attendant to the accounts and the operations of SAB/SANB
during Herrington's tenure:
One of the accounts (Rosebud Investments) received $450,000 in
cash from the Bank of Bermuda. The funds appear to have come from a
safety deposit box at the Bank of Butterfield. In October 1985,
Herrington used Swiss American's relationship with the Bank of Bermuda
to influence the staff there to accept the cash deposit. When the funds
were transferred to the account at Swiss American, they were ``held''
until Herrington made the book entries.
Another account (Jones Enterprises) was used as a ``feeder''
account for some of the other Fitzgerald accounts. According to the
police report, ``[l]arge cash deposits were made into the account and
later diverted to others but as the clients' statements are missing it
is not possible at this stage to say where the cash originated.''
Banks slips were written up as ``cash'' and ``deposit'' when money
was being transferred from one account to another as a way to disguise
its destination. Only by checking other banking records can the
accountants identify whether true cash was handed over and frequently
it was not.
Many of the loans made by the banks are to companies c/o AIT and
no other details are available.
Documents related to the companies associated with the accounts
were missing.
The source of many deposits was unknown, as was the ownership of
the companies.
Over $500,000 in cash was deposited directly into the accounts at
Swiss American Bank. Another $500,000 came through a cash deposit at
the Bank of Bermuda.
The police report also captures what appears to have been a general
lack of concern about illicit activities on the part of bank officials.
The report notes that the Assistant Manager of the Swiss American
Banking Group, MacAllister Abbott, who with Peter Herrington was a
signator on the corporate accounts set up for Fitzgerald ``thought
Guardian was established to hide the profits skimmed from casino
operations. He thought Jack Fitzgerald had a controlling interest and
also thought that Herrington maintained a second set of books on behalf
of the company. Abbott has been described as a person who would turn a
blind eye to tax evasion but appears to have no knowledge of drug
involvement.'' Mr. Abbott is currently General Manager of Antigua
Overseas Bank.
---------------------------------------------------------------------------
In May 1993, Fitzgerald was indicted for racketeering
conspiracy and money laundering, and in August 1993, he pleaded
guilty to the charges. As part of the agreement, he forfeited
all of the proceeds of those illicit activities that had been
deposited in the accounts at SAB and SANB. A final order of
forfeiture was issued in May 1994. In early 1994, U.S.
authorities approached Antiguan officials to seek their
assistance in freezing the funds, providing public notice of
the forfeiture action and to facilitate the return of the funds
once the forfeiture notice was final. Negotiations lasted for
nearly 2 years.\10\ Finally, in November 1995, Washington, D.C.
counsel for the Antiguan Government informed U.S. authorities
that nearly 1 year before--sometime between December 1994 and
January 1995--approximately $5 million of the Fitzgerald funds
were transferred to the Antiguan Government by officials from
the Swiss American Banking Group. Counsel informed the U.S.
officials that the funds in the Fitzgerald accounts had been
transferred to the Antiguan Government, which had spent the
funds to pay pending debts and therefore the money was no
longer available. At first, Antiguan officials maintained that
the Swiss American Banking Group had unilaterally transferred
the funds. In January 1998, Antigua wrote:
---------------------------------------------------------------------------
\10\ Although the U.S. had been asking Antigua to freeze the funds
since early 1994, it wasn't until November 1996 that Antigua informed
the U.S. that the funds had been frozen on its (Antigua and Barbuda)
order in June of 1990.
In 1994, prior to the payment, but after the U.S. Court
order, the Banks and the Government discussed the appropriate
disposition of these funds. While the Banks initiated these
discussions, the Government understood all of the facts and
circumstances regarding this account and acting in the public
interest of Antigua and Barbuda released the freeze order on
the funds and approved the disposition of the funds in a manner
---------------------------------------------------------------------------
agreed by the Banks and approved by the Government.
Swiss American Banking Group officials claim the $5 million
were transferred on January 23, 1995. The Antiguan Government
claimed the transfer occurred on December 28, 1994. The U.S.
Government was later informed that the remaining $2 million of
Fitzgerald funds had been retained by the bank. It is unclear
whether the funds were retained as a set off against
outstanding Antiguan loans or whether they were retained to
cover expenses incurred by the bank.
Moreover, the Minority Staff received a copy of a letter
written in early 2000 that alleged that $880,000 of the
Fitzgerald funds were ``transferred between January 22-25,
1995, to Inter Continental Bulk Traders S.A. account #4763751
at Bank of Bermuda, Hamilton.'' The Minority Staff confirmed
that the account does exist at Bank of Bermuda and that a
transfer of $880,000 did occur in the January 22-25, 1995 time
period. It has been reported to the Minority Staff that those
funds were paid upon a resolution of the Swiss American Banking
Group board as payment against a series of invoices submitted
by a number of people who, at the request of Rappaport, had
engaged in a review of SAB. One explanation offered to the
Minority Staff regarding the transfer was that Inter
Continental Bulk Traders was an account controlled by Rappaport
and the funds were transferred to that account rather than
directly paying those who submitted the invoices, because
Rappaport engaged the services of those people to provide an
independent review of the accounts at Swiss American Banking
Group, which he controls. However, the ownership of the Inter
Continental Bulk Traders account has not been confirmed, and
that does not explain why the payments would be made through
the Inter Continental Bulk Traders account rather than directly
to those who performed the services. Moreover, it has been
reported to the Minority Staff that the funds were transferred
out of the account at the Bank of Bermuda in two tranches,
which seems inconsistent with the contention that payments were
made to a number of individuals. Without confirmation from the
Bank of Bermuda on the ownership of the account and what
happened to the funds in question, the fate of the $880,000
remains unclear.
For the next 2 years--November 1995 to December 1997--the
U.S. Government continued to press for a detailed explanation
and accounting of the transfer of the funds, and records
relating to each of the Fitzgerald accounts. Although the
Antiguan Government identified the source of the funds that
were transferred from SAB and SANB, it informed the United
States that the records of the accounts were not available
because they had been destroyed in a hurricane.\11\
---------------------------------------------------------------------------
\11\ It has been alleged that the funds transferred to the Antiguan
Government were returned to the Swiss American Banking Group as
repayment for outstanding debts that the Government of Antigua and
Barbuda owed to SANB. This included millions of dollars of promissory
notes that the Antiguan Government had issued to an enterprise called
Roydan Ltd. Roydan Ltd. was the company that owned and operated a melon
farm in Antigua called Roydan Farms, that used a high-technology
tropical irrigation system. The operation was owned by an Israeli named
Maurice Sarfati, and is discussed at length in a report, ``Guns for
Antigua'' by the Commission of Inquiry established by the Governor-
General of Antigua and Barbuda to look into the circumstances
surrounding the shipment of arms from Israel to Antigua. The report was
issued in 1990 by Louis Blom-Cooper QC, the appointed Commissioner.
According to the report, Sarfati received governmental approval for his
agricultural project in August 1984, and operation on the farm
commenced in 1985. Throughout its inception and operation, the
enterprise borrowed heavily for startup and operation costs. Sources of
funds included the U.S. Overseas Private Investment Corporation and
SANB and SAB. The Government of Antigua and Barbuda issued a series of
promissory notes to Roydan Farms. In addition, SANB had extended an
overdraft facility to Roydan Ltd., and has allowed it to escalate to
over $1 million without any board resolution or any collateral
agreement. In March 1988, a receiver was placed in control of the
venture at the insistence of OPIC and the two Swiss American banks. By
July 1988, Roydan Ltd. was $8 million in debt. At the request of the
Antiguan cabinet, the banks agreed to conditionally revoke the
receivership for 90 days. By February 1989, Roydan Ltd. was no longer
in existence.
However, its owner, Sarfati, was at the same time in the midst of
brokering a deal for the shipment of Israeli arms through Antigua to
the Medellin drug cartel. The linkage was discovered after a raid on
the Columbian farm of Medellin Cartel leader Jose Ganzalo Rodriguez
Gacha in December 1989. It was also discovered that one of the weapons
included in the shipment was used to assassinate Colombian Presidential
candidate Luis Carlos Galin.
The Commission of Inquiry was critical of Roydan's management and
the influence Sarfati was able to exert within the Antiguan Government:
. . . [A] lucrative market around the world was quickly
jeopardized by the management structure of Roydan to enable it to
service its loans, especially from an agency of the U.S. Government,
the Overseas Private Investment Corporation (OPIC).
. . . Throughout 1986 Roydan experienced continuous cash flow
crises due to lack of management cost control systems and the use of
antiquated accounting procedures. Financial statements were tardily
produced and reflected a superficial financial picture.
. . . [A] report in 1987 to a U.S. Congressman stated that
``because of its demonstrated helter-skelter system of spending,
without any type of fixed controls, Roydan's credit history is
devastating, both in the USA and in Antigua.'' (p. 51)
. . . The story of the melon farm trail, and other incidental
events, discloses a tale of insinuation and influence of a man with a
remarkable talent for getting from a vulnerable administration in
Antigua almost anything he desired. (p. 121)
One of Commissioner Blom-Cooper's recommendations was:
``A judicial inquiry should be set up to investigate the
dealings in 1985-1987 between Maurice Sarfati and the Government of
Antigua. The enquiries currently being undertaken by a firm of U.S.
Attorneys are welcome but do not meet the justifiable demands of an
inquiring public in Antigua and abroad. This should include the
administration of Roydan Ltd and the issue of promissory notes.'' (p.
132)
---------------------------------------------------------------------------
In December 1997, the U.S. Department of Justice filed a
civil complaint alleging that SAB, SANB, Swiss American
Holdings S.A. and BNY-IMB intentionally seized and converted
the $7 million in illicit proceeds located in accounts at SAB
and SANB that had been forfeited to the U.S. Government.
In September 2000, the Federal District Court judge
presiding over the case dismissed the U.S. Government's claim
for lack of personal jurisdiction over the defendants. The
government is going to appeal the matter.
(c) The Gherman Fraud
Henry Gherman served as a financial adviser to individuals
and medical practice pension funds in the Miami area. Between
1982 and 1988, while claiming to make purchases of Certificates
of Deposit for his clients, Gherman transferred client funds to
his corporate accounts which he controlled. The funds were
wired to other accounts or used for the benefit of Gherman and
his family members.\12\
---------------------------------------------------------------------------
\12\ On August 8, 1988, Gherman left the country leaving notes to
his clients apologizing for his actions. Shortly before his departure,
Gherman withdrew $4.4 million in cash from his corporate accounts at
Commerce bank in Miami. On August 10, 1988, 25 creditors (some of
Gherman's victims) petitioned the Dade County Circuit Court and secured
the appointment of a receiver and a freeze of Gherman's corporate
assets and the assets of his family. On August 28, 1988, the Federal
Government filed a criminal complaint against Gherman, charging him
with wire fraud and the embezzlement of $9.8 million. A warrant for
Gherman's arrest was issued on August 29, 1988. In October 1988,
Gherman was arrested in Japan after having been expelled from Taiwan.
---------------------------------------------------------------------------
In February 1989, he pleaded guilty to the charges and
received a 30 year sentence and was required to make payments
of $12.9 million in restitution to the victims of his fraud.
Authorities testified that Gherman never accounted for
approximately $1 million of the funds he embezzled.
A private investigator hired by some of Gherman's victims
discovered that Gherman had established an account at SAB. On
August 31, 1988, two of Gherman's victims petitioned the High
Court of Antigua and Barbuda and secured a freeze of all assets
in any accounts controlled by Gherman. The court-appointed
receiver for Gherman's assets also filed an action before the
High Court on November 4, 1988, requesting that he be
recognized by the Court as the receiver for Gherman and to
enjoin and require the turnover of all funds, related documents
and other assets in the possession of SAB or its affiliates.
However, because of Antigua's bank secrecy laws, when the
victims filed with the High Court, they were unable to confirm
how many accounts Gherman held, how much was in any account or
even whether Gherman did hold accounts at the bank. At that
time, SAB neither confirmed nor denied the existence of any
accounts that belonged to Gherman. Cordell Sheppard, the
counsel for SAB stated:
We are willing to do anything we can, if we can do it
without breaking the law. If we do have any documents, and that
is not to say we do, we are prohibited by law from disclosing
them.
After his arrest in Japan, Gherman wrote to SAB on December
6, 1988, and requested that the bank release all records of all
of the accounts at the bank that he controlled. He also
requested that all funds in the bank that he controlled be
forwarded to the court-appointed receiver in the United States.
The efforts by law enforcement officials, Gherman's victims
and the receiver resulted in a review of Gherman's account at
SAB. As part of his fraud, Gherman had established an Antiguan
IBC called Chaska Trading and opened an account for the IBC at
SAB, which was used to launder the funds that Gherman had
stolen from his clients. Records and court testimony indicate
that in a period of approximately 1 month--between July and
August 1988--$3.2 million in embezzled funds were deposited
into the Chaska account at SAB. Gherman told law enforcement
officials that all of the deposits into the Chaska account at
SAB were made with cash that he or his brother personally
carried to Antigua. Apparently, SAB had no concern that a
client would deposit $3.2 million into an account within a 1
month time period. About $2.2 million of those funds were
subsequently transferred into an account established in the
name of Chaska Trading at Prudential Bache Securities.
At Gherman's sentencing hearing his brother, Warren Gherman
testified that he (Warren Gherman) deposited funds into Henry
Gherman's SAB account shortly before Henry Gherman left the
country by delivering the funds to a bank officer at SAB:
Q. Now, Mr. Gherman, on August 5th of 1988 you made a trip
to Antigua, did you not?
A. Yes, sir.
* * *
Q. Now, you didn't walk down there--I am sorry--you didn't
travel down there with a cashier's check, did you?
A. No, sir.
Q. In fact, you had a suitcase full of money, is that
correct?
A. I said this, yes.
Q. Could you describe how you made the deposit, who you met
with down there?
A. A bank officer. I don't believe--I believe his name was
Reeves (phonetic).
* * *
Q. Did you declare the money when you left?
A. No, sir.
Q. Why didn't you declare the money?
A. I didn't put any thing down. I just signed--I travel
around the country and outside the country, and I just normally
sign the document that I--where they ask you to sign on the
paper.
Q. I am sorry. When you left the United States you didn't
declare any Customs form that you were transporting $500,000 in
cash?
A. No, sir.
Q. Did you read the Customs form?
A. I said I didn't.
At the time of Gherman's deposit, John Greaves was General
Manager of the Swiss American Banking Group. He informed
Minority Staff that he did not recall any employee at SAB who
had a name like ``Reeves'' or a name that sounded like
``Reeves.'' And, although Greaves' name sounds like ``Reeves,''
Greaves told the staff that he had no recollection of receiving
$500,000 in cash from Warren Gherman, noting that he would have
remembered if he received such an amount. Greaves noted that at
the time the deposit took place--August 5, 1988--it was legal
to accept cash deposits in Antigua.
On April 28, 1989, the trustee received $787,271.84 from
SAB, representing the balance of unrecovered funds that Gherman
had deposited in the bank, less amounts withheld by SAB as
attorney fees and handling charges. The trustee recalled that
SAB charged a rather large amount ($50,000-$100,000) as its
costs.
(d) The DeBella Fraud
Between September 1986, and May 1990, Michael Anthony
DeBella was President and Chairman of the Board of Directors of
United Bank International (``UBI'') and owner of 45,000 out of
50,000 shares of UBI stock. UBI was an offshore ``Class B''
bank located in The Valley, Anguilla. Its ``Class B'' license
was an offshore license that allowed it to conduct banking
business with customers other than citizens or temporary
residents of Anguilla.
UBI was not a real bank. According to an attorney who
investigated the bank on behalf of a client, it was nothing but
a storefront office with one or two employees and a fax
machine. The true purpose of UBI was to serve as a front for
financial frauds. Through UBI, DeBella and his accomplices
defrauded prospective borrowers by issuing fraudulent letters
of credit, lines of credit and loans in return for the payment
of advance fees. These advance fees ranged from 1 to 12 percent
of the face value of the amount sought by the particular
borrower. DeBella represented to various victims that UBI had
assets of $12,000,000 and deposits totaling $16,000,000.
Although pieces of paper purporting to be banking instruments
were issued, UBI never produced any actual financing. Between
1986 and 1990, DeBella and his accomplices defrauded victims of
approximately $2 million. At the sentencing hearing for one of
DeBella's accomplices, an IRS investigator stated that he was
not aware of any legitimate business whatsoever conducted by
UBI. ``I believe it was a front for a fraudulent enterprise,''
he stated. ``I am not aware of any successful transaction.''
The presiding judge stated, in accordance with the
investigator's statements, ``This is not an example of a
legitimate business that had one or two fraudulent acts, but
the whole business from beginning to end is permeated with
fraud. The business itself was the mechanism to perpetuate the
fraud.'' \13\
---------------------------------------------------------------------------
\13\ U.S. v. Michael A. DeBella, Jr., et al. (U.S. District Court
for the Southern District of Florida, Case No. 93-6081-CR-Hurley),
Superceding Indictment and Transcript of Sentencing Hearing, 12/18/95.
---------------------------------------------------------------------------
To add to the legitimacy of UBI, DeBella and his
accomplices claimed that UBI had correspondent relationships
with other major banks. UBI had an account at SANB which had a
correspondent account at Irving Trust Company. DeBella and his
accomplices directed victims to wire transfer advance fees to
the SANB correspondent account at Irving Trust Company (which
was subsequently taken over by Bank of New York). These funds
were then credited to UBI's account at SANB.
Testimony by the U.S. IRS agent who investigated the fraud
provided a description of how criminals used offshore banks in
secrecy jurisdictions to hide the trail of the funds they had
stolen. According to the agent, the money ``would be wired from
the victim's bank account to the Bank of New York where Swiss
American National Bank had an account. From there, the funds
would be wired down to Swiss American National Bank and placed
in the account of United Bank International.'' After the funds
reached the UBI account in SANB, ``within a short period, the
funds would be wired back from Swiss American Bank up to the
Bank of New York, and placed into one of the accounts
controlled by Mr. DeBella.''
DeBella established companies in the United States and
elsewhere and held accounts in the names of those corporations
in banks in Florida and Connecticut. Those accounts were used
to move funds acquired through the frauds in and out of the
United States and further hide the trail of those funds.\14\
---------------------------------------------------------------------------
\14\ For example DeBella was the president and director of Atlantic
Capital Corporation, a corporation chartered in the State of Florida,
and was also the director of Atlantic Capital Corporation, Ltd., a
corporation chartered in St. Johns, Antigua, British West Indies.
DeBella held an account at Commonwealth Savings and Loan Association of
Florida under the name of ``Atlantic Capital.'' DeBella also operated
an unincorporated business known as Marlborough Village, a mobile home
park located in Marlborough, Connecticut, and held an account People's
Savings Bank, West Hartford, Connecticut, under the name of Marlborough
Village.
---------------------------------------------------------------------------
In addition to the advance fee for loan frauds, DeBella
also used UBI to commit a theft involving approximately
$800,000 worth of shrimp. DeBella represented that UBI would
finance the shipment of shrimp from a company in China (China
Foreign Trade, a company that was, at least in part, owned by
the Chinese Government) to a company in the United States
(Imported Meats, Inc.). As a result of this agreement, China
Foreign Trade shipped the shrimp to the United States and
Imported Meats, Inc. made seven wire transfers totaling
$873,762.54 to SANB's correspondent account at the Bank of New
York for further credit to UBI between December 18, 1989, and
February 23, 1990. DeBella sent only $77,000 to China Foreign
Trade.\15\
---------------------------------------------------------------------------
\15\ The wire transfers totaled $873,762.54. On November 21, 1989,
DeBella prepared a UBI cashier's check in the amount of $935,225.61,
payable to China Foreign trade. However, on December 18, 1989, UBI
stopped payment on the cashier's check. On December 22, 1989, UBI wired
only $77,014.08 from the account of Swiss American National Bank at the
Bank of New York to the account of China Foreign Trade at Citibank,
Shenzen, China. On December 27, 1989, China Foreign Trade transmitted a
copy of a telex from Shenzen, China to UBI refusing UBI's payment.
After this date, UBI made no further payments to China Foreign Trade.
However it continued to receive wire transfer payments from Imported
Meats, Inc. through SANB's correspondent account at the Bank of New
York. U.S. v. Michael A. DeBella, Jr., et al., (U.S. District Court for
the Southern District of Florida, Case No. 93-6081-CR-Hurley),
Superceding Indictment.
---------------------------------------------------------------------------
An attorney was retained by China Foreign Trade to recover
the $800,000 in funds owed to it by UBI. He discovered that UBI
was nothing more than a storefront operation, as described
above. He also discovered that UBI's banking license was
revoked by Anguillan Ministry of Finance on May 29, 1990. In
the Notice of Intended Revocation, issued on April 4, 1990, the
Minister of Finance declared that the license was being revoked
because UBI was ``carrying on business in a manner detrimental
to the public interest.'' The revocation notice identified nine
separate frauds that had been perpetrated through UBI by its
owners between 1987 and 1989.
After his discovery, the attorney contacted the General
Manager of the SAB, John Greaves. The attorney told Greaves
about the fraud that had been perpetrated against his client by
UBI and DeBella. The attorney also informed Greaves that UBI's
license had been revoked by the Government of Anguilla. The
attorney followed up the phone conversation with a letter to
Greaves at SAB and a letter to Rappaport at the headquarters of
his Swiss Bank, BNY-IMB in Switzerland.
On June 25, 1990, Greaves responded to the attorney's
letters. He wrote:
``In reply to your letter 22nd June, addressed to Mr.
Bruce Rappaport, could you please take note that neither Mr.
Bruce Rappaport nor the Inter Maritime Bank in Geneva has any
connection with the Swiss American group, either as
shareholders or directors and that future enquiries or
correspondence should be addressed directly to the undersigned
at the address below.
To now refer to your enquiry, the bank in question did
have a small banking relationship with us, and during the
course of this relationship, we, on occasions, effected
transfers out through our correspondent banking network on
their behalf and received payments in. The turn over on the
accounts has never exceeded a low five-figure.''
There were a number of misstatements and misleading
information contained in the portions of Greaves' letter cited
above. As noted in an earlier portion of this report, Rappaport
was the owner of Swiss American Banking Group. However, the
ownership chain was hidden through a series of offshore
corporations and trusts. In addition, he was directly involved
in the operations of the banks.\16\ The paragraph left the
impression that Rappaport had no ownership or control of the
Swiss American Banking Group when, in fact, he clearly did.
Greaves told Minority Staff that Rappaport had directed that
similar language be included in all letters addressing the
issue of his relationship to the Swiss American Banking Group
because Rappaport did not want his association with the group
to be known.
---------------------------------------------------------------------------
\16\ Rappaport personally hired Greaves as Herrington's
replacement. Greaves told Minority Staff that he would regularly fly to
Geneva to meet with Rappaport and discuss the operations of the Swiss
American Banking Group.
---------------------------------------------------------------------------
In addition, records obtained by the U.S. Government show
that Greaves' characterization of UBI's account at SANB was
incorrect. The letter stated that UBI ``did have a small
banking relationship'' with SANB. In fact, although the letter
referred to the account in the past tense, the account was
still active during and after the date of Greaves' letter.
Greaves also told the attorney that ``the turnover on the
accounts has never exceeded a low five-figure.'' The records
obtained by the Subcommittee related to UBI's activity that
took place through its account at SANB shows that between early
1987 and late 1990, UBI received deposits totaling over $1.1
million, including some transfers that were greater than
$100,000. The record of UBI's activity through SANB's
correspondent account at Irving Trust and Bank of New York
shows that between April 1989 and September 1990 UBI had 25
outgoing wire transfers totaling over $400,000, with 4
transactions of $50,000 or more. These figures are more than
the ``low five figure'' amount cited in Greaves' letter.
Even after Greaves and SANB had been advised of the fraud
against China Trade and that UBI's license had been revoked by
the Government of Anguilla, SANB allowed the UBI account to
remain open, and processed transactions--including
withdrawals--through it. Records show that SANB processed 11
transactions worth over $160,000 involving UBI after June 22,
1990.
Moreover, officials at the Swiss American Bank Group
allowed DeBella and one of his accomplices to open three
additional accounts at SAB after receiving notification of the
China Foreign Trade fraud and the revocation of UBI's license.
One of the accounts was in the name of Commonwealth Investment
Corporation. This account served a conduit through which
DeBella defrauded additional victims after he abandoned the UBI
scheme.
In one of the frauds run through the Commonwealth
Investment Corporation account, DeBella defrauded one victim of
$600,000. In February 1993, a criminal complaint was sworn out
against DeBella and his accomplices for their activities
related to the frauds committed through UBI in the late 1980's
and 1990. DeBella was taken into custody in February 1993. In
April 1993, DeBella falsely represented to an English engineer
by the name of Anthony Craddock that DeBella's company,
Atlantic Capital Corporation, Ltd., had received, in its
capacity as a fiduciary, $120,000,000 from the Nigerian
Government, which had been deposited into the Commonwealth
Investment Corporation account at SAB. DeBella represented to
Craddock that he could release the funds after a payment of
$600,000 in disbursement fees. On April 13, 1993 Craddock wire
transferred $600,000 into the Commonwealth Investment account
at SAB.\17\ However, no funds were ever disbursed to Craddock,
nor were the ``fees'' repaid to him. Between April 15 and April
20, 1993, DeBella withdrew most of the $600,000.
---------------------------------------------------------------------------
\17\ On April 13, 1993, the funds were incorrectly wired to SANB
for credit to the account of Commonwealth Investments Corporation. Bank
officials realized the account was actually at SAB and credited the
account at that bank on April 14, 1993. Another $50,000 from another
fraud was wired into the SAB account in March 1993. Anthony J.
Craddock, Craddock (UK) Limited v. Michael A. DeBella, Jr., Atlantic
Corporation Limited, Commonwealth Investment Corporation and Swiss
American Bank Ltd. (In the High Court of Justice, Antigua and Barbuda,
Suit No. 213/1996), Affidavit of Brian Stuart Young, and Exhibits,
March 18, 1997. U.S. v. Michael A. DeBella, Jr., et al., (U.S. District
Court for the Southern District of Florida, Case No. 93-6081-CR-
Hurley), Superceding Indictment.
---------------------------------------------------------------------------
On May 6, 1993, DeBella and two accomplices (Sandra Ann
Siegel, also known as ``Sandy DeBella,'' and Joseph Macaluso)
were indicted on a range of offenses related to the advance fee
for loan fraud, including conspiracy, mail fraud, wire fraud,
money laundering, bank fraud, and tax evasion. A superseding
indictment was filed on January 6, 1994, to incorporate the
Craddock fraud.
The Atlantic Capital and Commonwealth Investment accounts
at SAB were closed between the months of July and September,
1993. DeBella was convicted of the charges in May 1995. In
December 1995, he was sentenced to 51 months in prison and
ordered to pay $600,000 in restitution to Craddock and $69,500
to the IRS.
In his continuing efforts to recover the $600,000 he paid
to DeBella, Craddock wrote to SAB seeking return of his funds
and filed a claim against the bank in the Antigua High Court of
Justice in 1996. Craddock also wrote to SAB's correspondent
bank, the Bank of New York, about the fraud. When the Bank of
New York inquired about the matter in 1996, SAB provided the
following response:
Michael DeBella, a U.S. citizen, has been jailed in the
U.S. for, among other things, defrauding Craddock of $600,000.
It would appear that in a Nigerian-type scam, DeBella promised
Craddock a handsome share of $120 million from the Nigerian
Ministry of Finance if he participated in whatever the deal
was. This in itself does not speak well for Craddock.
In any event, Mr. Craddock has been bombarding our board
members and management with numerous letters requesting the
return of his funds (which we do not have) and, only yesterday,
we sent copies of his correspondence to an attorney in the USA
for him to examine and determine whether there is sufficient
cause for a cease and desist order.
Unfortunately, because of local offshore banking
legislation, we are not in a position to advise Mr. Craddock
whether or not any part of the funds he is trying to trace is
on deposit with us as that would probably put an end to the
matter.
SANB's reply to the Bank of New York did not mention the
fact that SAB opened accounts and processed transactions for
DeBella long after its General Manager, Greaves, had been made
aware of frauds that DeBella perpetrated through UBI and that
the license of DeBella's bank, UBI, had been revoked for
activity detrimental to the public interest.
Minority Staff asked Greaves about the inconsistencies in
his June 1990 letter and why SAB would open and service
additional accounts for DeBella after learning of the frauds
DeBella perpetrated through UBI and that UBI's license had been
revoked for activity detrimental to the public interest.
Greaves informed the staff that ``mistakes had been made'' at
Swiss American, including mistakes at the senior management
level and including mistakes by himself. He would not elaborate
further on the case of DeBella and Swiss American's role in it.
(e) The Fortuna Alliance Fraud
The Fortuna Alliance was a Ponzi scheme that attracted its
victims by marketing over the Internet.\18\ Labeled as a multi-
level marketing plan, the scheme promised investors large
returns on their initial investment as new members were
recruited into the program. For example, promoters told
investors that they would receive $5,200 for a one-time
investment of $250. Higher investments would earn even higher
monthly returns according to the promoters. The program
operated between November 1995 and May 1996, when the Federal
Trade Commission secured a court order halting the program. The
FTC estimated that during its operation, the Fortuna Alliance
scheme collected over $7.5 million from victims. The FTC
documented that the perpetrators of the fraud had established
two accounts at SAB in Antigua in the name of two trusts--the
Fortuna Alliance Trust and the Prosper Trust \19\--and had
forwarded at least $5.5 million of victims' funds into those
accounts between March and May 1996, utilizing SAB's
correspondent account at Chase Manhattan Bank.\20\ The
perpetrators of the fraud also used credit cards issued by SAB
that drew from the Fortuna Alliance Trust account.
---------------------------------------------------------------------------
\18\ This fraud was examined as part of the Subcommittee's
investigation into Internet fraud. See ``Fraud on the Internet: Scams
Affecting Consumers,'' Hearing before the Permanent Subcommittee on
Investigations, February 10, 1998 (S. Hrg. 105-453).
\19\ According to U.S. enforcement personnel, the Prosper Trust was
a holding account for a number of clients that were trusts. Presumably
the assets of each trust was held in a separate sub-account. In June
2000, the Minority Staff discovered a Web site for an entity called the
Prosper International League Ltd. (``PILL''), a Bahamian entity
offering Belize offshore trusts called Prosper Trusts, stressing the
secrecy and the tax evasion potential of the trusts. The organization
also markets a Ponzi investment scheme similar to that offered by the
Fortuna Alliance. It is owned by individuals operating out of Florida.
Material included on its web site indicates the organization has been
in existence at least since 1994. The web site for PILL states that the
trust funds are held by Swiss American Bank in Antigua. It may be the
case that PILL controlled a large account at SAB, and the Prosper Trust
account beneficially owned by the principles of the Fortuna Alliance
was actually a sub-account of the larger Prosper Trust account.
\20\ The FTC's estimate was based on records obtained from wire
transfer requests originating from Whatcom State Bank in Washington,
where the Fortuna Alliance held an account. The Minority Staff reviewed
the monthly statements of SAB and SANB's account at Chase Manhattan
Bank. The staff identified $5.3 million [This figure is a correction by
Subcommittee staff of the figure that appears in the original
publication of this report in February 2001.] that had been sent from
the Whatcom State Bank, by order of the Fortuna Alliance, to Fortuna's
two accounts at SAB during the March-May time period. Another $1.65
million had been sent from the Whatcom State Bank, by order of the
Fortuna Alliance, to a Prosper Trust account at SANB. During that same
period, an additional $24,000 [This figure is a correction by
Subcommittee staff of the figure that appears in the original
publication of this report in February 2001.] was wired into the SAB
accounts at Chase for further credit to the Prosper Trust from other
U.S. and foreign banks. SAB officials told Minority Staff that they
eventually secured a cease and desist order against PILL.
---------------------------------------------------------------------------
The FTC filed its complaint against the Fortuna Alliance
and four perpetrators of the scheme--Augustine Delgado, Libby
Gustine Welch, Donald R. Grant and Gail Oliver--in the U.S.
District Court for the Western District of Washington on May
23, 1996. The court issued a temporary restraining order on May
24 and a preliminary injunction on June 12. Both orders
prohibited further marketing of the scheme or any related
program, froze Fortuna's assets, appointed a receiver for
Fortuna and ordered the defendants to ``direct that Swiss
American Bank of Antigua transfer to Fortuna Alliances's bank
account at Whatcom State Bank all funds previously transferred
by or from Fortuna Alliance, Augustine Delgado or Libby Gustine
Welch to that bank.''
At the same time that the FTC sought to obtain a
restraining order in Washington, the Department of Justice
filed a claim in the High Court of Antigua to freeze the funds
in the accounts controlled by the Fortuna Alliance and its
principles. On May 29, 1996, the High Court issued an order
freezing the two Fortuna Alliance accounts and all other
related accounts.
The principals of the Fortuna Alliance failed to return the
funds that they had forwarded to the two SAB accounts. On June
12, 1996, the U.S. District Court for the Western District of
Washington issued a contempt citation against the defendants
for failing to return the funds from SAB and refusing to
provide an accounting of the funds. When they continued to defy
the court's initial order in the preliminary injunction, the
court issued civil arrest warrants against three of the
defendants on June 27, 1996.
Although SAB officials told Minority Staff that they
cooperated with the U.S. efforts to secure the return of the
funds, the bank appears to have been less than cooperative. The
U.S. Government had named SAB as a neutral party in the freeze
petition. This is a normal occurrence in seizure actions in the
United States, and the banks that are named in such suits
generally cooperate with the court order. SAB, however,
actively fought the United States in the recovery process.
According to U.S. Government officials negotiating a return of
the funds in the SAB accounts, SAB officials were initially
uncooperative in negotiations. SAB officials would not tell
U.S. representatives how much money was in the accounts, citing
Antigua's bank secrecy laws. This made it difficult for the
government to know the exact amount of money in the accounts
because additional funds may have been wired into the account
from different banks, and principals of the Fortuna Alliance
had been drawing down against one of the accounts to pay credit
card bills. SAB officials also demanded that the U.S.
Government pay the bank $1 million of the funds in compensation
for the costs the bank had absorbed in dealing with the issue,
the damage to its reputation caused by the suit, and the
interest lost from the account because it was frozen.
On September 10, 1996, SAB joined with some of the
principals of the Fortuna Alliance and asked the court to
remove the freeze. In its filing, SAB claimed that it was an
innocent third party; that if the freeze continued, it would
affect SAB's normal course of business; that the U.S.
Government had failed to provide any evidence that any of the
funds in the Fortuna Alliance accounts were in fact those of
the principals, that the principals were signatories of the
account, or that the assets were at the disposal of the
principals.
On October 22, 1996, Delgado, the owner of Fortuna
Alliance, wrote to the manager of SAB and expressed his deep
frustration with the continued freeze of his funds. In the
letter, Delgado admitted that he was a beneficiary of the
accounts that had been frozen and claimed that SAB had accepted
additional funds for the Fortuna Alliance accounts after the
freeze was imposed by the High Court of Antigua and SAB was on
notice of questionable activities by the beneficiaries of the
account:
As you are aware I am a beneficial party for certain
funds held in Fortuna Alliance Trust. . . . In addition to
these there are other funds held in suspense that have come to
your bank after the injunction (August 9th from the
Netherlands).
I am formally requesting that you arrange a loan to me
collateralized by these funds held by you that does not violate
your banks policies or the injunctions.
The SAB manager's response included the following:
Management has given serious review to the circumstances
related to your request, and guided by fiduciary
responsibilities and relevant legalities, we are unable to
register as security for a credit facility the funds held
either in the Trust account or for the Trust account.
We appreciate the grave concerns raised in your letter
to us, and have sought to identify legal means by which we
could respond to your request. On the one part, we are bound by
order of the Court and, on the other part, the fact that funds
are held for a trust account carry further responsibility for
the bank to ensure that there is no breach of trust. The only
authority for the custody of the funds is the stated trust, and
a Trustee has no implied power to borrow.
At this time we have no means to respond to your
request, we will however continue to press for the legal
resolution of this matter. We share your concerns over the
length of time taken to address the matter and the adverse
impact it has on your business. We are powerless to influence
these events of the court, and can only act in compliance with
its orders.
Please contact us if you wish to meet further on these
matters.
Finally on February 24, 1997, the FTC and the Fortuna
principals entered into a settlement agreement providing for
the return of $2.8 million from SAB and requiring the Fortuna
principals to make additional funds available to pay all
claims. According to U.S. officials, even after the principals
of the Fortuna Alliance agreed to the settlement, SAB officials
balked at sending the funds back to the United States,
insisting that they be paid part of the funds. SAB eventually
settled for $50,000.
By May 1, 1998, the FTC had refunded approximately $5.5
million to over 15,000 victims in 70 countries throughout the
world.\21\ However there were still $2.2 million in additional
claims that were outstanding. Under the terms of the February
1997 settlement, Fortuna was obliged to pay those additional
funds. However, the defendants refused to fulfill their
obligations and did not supply additional funds. Instead,
Delgado and other members of the original Fortuna Alliance
opened another Ponzi operation similar to the first scheme,
called Fortuna Alliance II. On June 5, 1998, the U.S. District
Court for the Western District of Washington issued a civil
contempt order against Fortuna Alliance and its owner, Delgado,
for failure to make the payments as required under the
settlement agreement and for failure to abide by the agreement
not to engage in similar activities.
---------------------------------------------------------------------------
\21\ The sources of the $5.5 million are as follows: $2.2 million
in uncashed checks returned to investors; $2.8 million returned from
accounts at SAB; $350,000 in assets frozen in U.S. banks.
---------------------------------------------------------------------------
Bank records reviewed by the Minority Staff indicate the
Fortuna Alliance wired at least $6.9 million [This figure is a
correction by Subcommittee staff of the figure that appears in
the original publication of this report in February 2001.] into
its SAB and SANB accounts, but the settlement agreement called
for only $2.8 million to be returned from SAB and SANB. After
the $2.8 million had been returned to the U.S Government, it is
likely that substantial sums still remained in the accounts and
presumably were available to the principals of Fortuna
Alliance, perhaps to perpetrate their second Ponzi scheme.
(f) Other Frauds/Questionable Accounts
In 1997 or 1998, Robert Burr, an accomplice in the Cook
fraud (described in the appendix to this report), opened two
accounts in the name of two foreign trusts (Right Hand
Investments and Silver Search International) at SAB. Burr
instructed SAB that all funds transferred into the Right Hand
Investments account should be immediately transferred into the
Silver Search International account. Given the bank secrecy
laws of Antigua and Barbuda, the mechanism employed by Burr
would effectively hide the trail of his funds. An investigator
working with the SEC appointed receiver attempting to recover
the funds stolen by Cook told the Minority Staff that it has
been established that Burr attempted to use these trusts to
prevent law enforcement officials from seizing assets he
acquired through the fraud.
Peter Berney, a U.S. citizen who has been indicted in both
New York and Nevada for stock fraud and money laundering
apparently ran millions of dollars through an account at SAB
during 1999.
The issues discussed above raise serious questions about
the adequacy of the initial due diligence and ongoing
monitoring conducted by both Swiss American banks. In some
instances, these frauds evidence possible complicity of SAB and
SANB bank employees or officials. SAB officials have told
Minority Staff that they have recognized past problems and have
made a concerted effort to improve their management and anti-
money laundering policies. One law enforcement official also
reported improved performance. However, over the past few years
SAB has taken on accounts from entities involved with Internet
gambling activities, which raise additional money laundering
and legal concerns for correspondent banks.
(g) Internet Gambling/Sports Betting
Antigua is one of a number of countries that have legalized
Internet gambling, and it has become one of the most popular
locations for such enterprises. For a licensing fee between
$100,000 and $75,000, an Internet gambling operation can
purchase a license in Antigua and Barbuda. Approximately 100
Internet gambling licenses have been issued by Antigua and
Barbuda. As noted in another section of this report, Internet
gambling is vulnerable to money laundering, and it is illegal
in the United States. This has caused some U.S. banks to refuse
accounts from Internet gambling clients and correspondent
relationships with foreign banks that accept such clients. When
offshore banks with Internet gambling clients open
correspondent accounts with U.S. based banks, the money
laundering vulnerability of the correspondent bank is
increased, because it is not just dealing with unknown
customers of the client bank, it is also handling the customers
of the Internet gambling establishments who have access at the
client bank. Moreover, the correspondent bank is in the
position of facilitating a possible crime by accepting funds
for activities that are illegal when carried out within the
United States.
SAB services a large number of Internet gambling accounts.
A brief search of the Internet disclosed hundreds of Internet
gambling entities that advertised SAB as their bank and
directed clients to wire funds to their SAB accounts through
one of SAB's U.S. correspondent banks. In 1998 and 1999, wire
transfers directed to Internet gambling entities flowing
through SAB correspondent accounts grew to millions of dollars
each month. The Internet gambling clients of SAB included World
Sports Exchange, whose co-owner Jay Cohen was recently
convicted and sentenced to 21 months in prison in the United
States for violation of the Federal Wire Act, which prohibits
interstate or foreign gambling via telephone or telegraph.
In addition to SAB's U.S. based correspondent accounts,
SAB's correspondent accounts at non-U.S. based banks, such as
Toronto Dominion in Canada and BNY-IMB in Geneva were also
advertised as places where gamblers could send funds for SAB's
gambling clients.
Moreover, the money laundering vulnerabilities of
correspondent accounts that are compounded by the combination
of correspondent banking and Internet gambling clients are
further magnified through the proliferation of E-cash
operations such as Totalnet, InterSafe Global, Ecashworld,
Electronic Financial Services. E-cash operations are
intermediaries for the transfer of funds between consumers and
merchants. Many Internet gambling operations are using such
services. Individual bettors are instructed to open accounts
at, and send their funds to, the E-cash intermediary, which
then deals with the gambling company. This further hides the
origin of funds.
The Web sites of a number of on line casinos contained the
exact same description of one of the E-cash companies,
``InterSafe Global,'' and described how the casinos utilized
its services:
LInterSafe Global LLC is a Nevada based company that
operates the E-cash service for Casino on Net. InterSafe
specializes in secure Internet transaction processing. They
provide a vital link between Internet customers and merchants.
When our clients want to make a deposit to their casino
bankroll, this is done through InterSafe. The credit card is
charged to InterSafe Global LLC, and this is the name that will
appear on your credit card statement.
The Internet casinos using InterSafe instruct clients who
wish to make wire transfers into their casino account to
forward the transfers to ``InterSafe Global LLC, Account number
1641101, Swiss American Bank.''
These intermediaries further obscure the source and extent
of Internet gaming that may be taking place through a bank that
services such accounts, and makes it even more difficult for
correspondent banks to know which and how many gambling
entities may be using one of their client banks. The gambling
entities are nested within the E-cash company account.
SAB recently announced it would no longer use its U.S.-
based correspondent accounts for Internet gambling clients.
However, it is not clear whether SAB will continue to service
the accounts of, and accept wire transfers for, the E-cash
companies that accept deposits for Internet gambling companies.
(7) Correspondent Accounts at U.S. Banks
(a) Bank of New York
SANB established a correspondent relationship with Irving
Trust Company in December 1981. The relationship was continued
by Bank of New York (``BNY'') when it acquired Irving Trust
Company in 1988-1989 and was terminated in June 1999. Little
information is available about the structure and operating
procedures of Irving Trust's correspondent banking department
at that time. A December 1981 memo by the relationship manager
indicates that Irving Trust was introduced to SANB through its
courier in Antigua and Barbuda, who was the brother-in-law of
SANB's Assistant Manager, McAllister Abbott.
Minority Staff interviewed the BNY relationship manager who
was responsible for the account from October 1993 through its
termination in April 1999, and the head of the Latin American
Division who has held that position since 1990.
The Correspondent Banking Department is located within the
International Sector Division, headed by the Vice-Chairman of
the bank. The International Sector is divided into four
geographical regions--Europe, Asia, Middle East/Africa and
Latin America. The Latin American Division is headed by a
Division Head, a Senior Vice President of the bank. The
Division is divided into two Districts. The Caribbean Region is
located in District Two. District Two has two relationship
managers and a District Manager. The Latin American Division
has four representative offices in the region. The duty of the
relationship managers is to sell products and services to
clients. However, relationship managers are also responsible
for following the activities of their clients and events in the
countries in which they operate. The administrative, back
office activities are handled by a group called deposit
services. The Latin America Division has 200-225 correspondent
banking relationships, with a total of 480 accounts. The
relationship manager who handled the SANB account had 30-35
clients with 40-45 accounts.
Representatives of BNY told Minority Staff that to open a
correspondent account at BNY, a bank must submit a request in
writing; provide a letter from its regulatory authority that it
is licensed to do business; three letters of reference
including a letter from the Central Bank of the country and if
possible two from U.S. banks, and a list of all of the owners,
directors and management; identify the type of products and
services it would like to use; and indicate the expected volume
of activity. Relationship managers are required to visit the
site of the bank. The relationship manager, the District
Manager and the Division Head review the application and make
the decision whether to accept the account. If a potential
client plans to conduct business with, or utilize services of,
some other division of the bank, representatives of that
division will also be in on the review process. The Compliance
Division for the bank is a separate unit, but a compliance
officer is assigned to the International Services Sector.
BNY representatives told Minority Staff that as part of
BNY's ongoing monitoring program, relationship managers in the
Caribbean Division have a goal of visiting clients at least
once a year and in highly sensitive areas the District Manager
is required to meet with the clients. After returning from a
site visit, relationship managers are required to write a
country report and a client visit report. Client banks are
required to supply audited financials annually. Monthly
statements are not reviewed. However, BNY has a monitoring
system that can follow trends in account activity and produce
monthly reports on unusual activity. Relationship managers are
required to review the reports and provide a written
explanation of the activity in question.
According to the client contact memos produced by BNY,
which include Irving Trust memos from the beginning of the
account, the relationship managers did not identify any serious
problems or concerns with the SANB account until about 1995.
Significant frauds that utilized SANB were not addressed by the
relationship managers. For example, when Peter Herrington was
dismissed in 1987 as General Manager of the Swiss American
Banking Group for involvement in the Fitzgerald matter noted
above, the reports from the relationship manager stated:
``Peter Herrington has left and Andrew Barnes is the new G.M.
(Apparently Herrington did not leave on very amiable terms).''
The relationship manager apparently did not obtain any
information regarding the Fitzgerald case. Similarly, although
the SANB account at Irving Trust Company and then BNY were the
conduit for the flow of funds involving the DeBella fraud in
1989 and 1990, there is no mention of the matter in any of the
files provided to the Subcommittee. IRS agents had subpoenaed
account records from BNY during its investigation, discussed
the account with BNY representatives and addressed the matter
in the trial and sentencing of DeBella, which lasted through
1995. There is no indication that BNY relationship managers
were advised of this issue by other divisions within BNY, or
that relationship managers made any inquiries of SANB to
understand SANB's role in the matter. As noted in the review of
the DeBella fraud contained above, documents and information
made available to the Subcommittee indicate that the General
Manager of the Swiss American Banking Group, John Greaves,
continued to allow DeBella to utilize SANB accounts after he
had been provided with information and documentation alleging
DeBella's involvement in fraudulent activity. The Division Head
and the Relationship manager interviewed by Minority Staff
indicated that the account was quiet until about 1995.
In 1995, BNY memos indicate that personnel began to notice
questionable transactions occurring in the account. In 1993,
SANB issued and BNY confirmed two standby letters of credit to
Banco de la Union in Costa Rica.\22\ Ostensibly, the letters of
credit guaranteed the capital reserves the bank was required to
maintain. In April 1994, Banco de la Union authorized another
bank to collect on the letters of credit. However, SANB
instructed BNY not to pay. In late 1994, attorneys for Banco de
la Union threatened to sue BNY. Yet, for a long period of time,
SANB failed to respond to numerous requests by BNY for SANB to
explain its position on the matter, and to provide the name of
its legal counsel in New York.
---------------------------------------------------------------------------
\22\ A standby letter of credit is a financial guarantee against
non-performance. It is similar to a surety bond. Generally when such an
instrument issued by a offshore bank or a bank that is not
internationally known, the party who is relying on the standby letter
will demand that a larger, better known financial institution ``commit
to,'' or back, the letter. Often, the small bank will ask its
correspondent bank to commit to the standby letter of credit.
Committing to the letter places the bank at risk if the small bank does
not honor the letter. Generally, to eliminate its exposure, the
correspondent bank will require the respondent bank requesting the
commitment to provide collateral equal to the value of the pledge that
the correspondent bank is making. Thus, the correspondent bank has no
risk of loss. This is what BNY did with its standby letter of credit
arrangements with SANB.
---------------------------------------------------------------------------
Around the same time as BNY confirmed the letter of credit
in 1993, Bank of America (BOA) (at that time, a correspondent
for SAB) received a similar request to confirm a standby letter
of credit that SAB wanted to issue to Banco de la Union. The
stated purpose of the standby letter was the same as the letter
of credit backed by BNY: To serve as a guarantee for the
capital requirements that bank was required to possess in order
to meet Costa Rican licensing requirements. Although BNY backed
the standby letter, BOA refused. In an internal memo, the BOA
credit manager expressed his concerns:
I am not in favor of our issuing this SBLC in support of
a client establishing a bank in Costa Rica for the following
reasons:
--We don't know the client or the type of bank we are
guaranteeing.
--This is not trade related.
--This is not a specific transaction in the sense that
client is going to have this SBLC as long as it continues
business in Costa Rica and we are going to be asked to
continually renew.
--The pricing of 50 BPS is not attractive.
The principle reason of those above is that we would be
guaranteeing and support liquidity needs of a bank we don't
even know and don't know that we would want our name associated
with that entity or its principals. Therefore, from a policy
perspective this is turned down.
Documents associated with SANB's correspondent account at
Nations Bank also raise questions about Banco de la Union and
the wisdom of approving a letter of credit for Banco de la
Union.\23\
---------------------------------------------------------------------------
\23\ Material obtained from the SANB correspondent account at
Nations Bank indicate that in 1993 Nations Bank became involved in a
controversy with the Deputy General Manager of the Swiss American
Banking Group, David McManus, that revealed more information about
Banco de la Union and raised questions about the bank and the
individuals associated with it. A letter and memorandum from a Nations
Bank Vice President described the matter. Two foreign insurance
companies that were clients of SANB were attempting to expand their
businesses into the United States and were looking for a U.S. Trustee
to hold funds to pay insurance claims filed by U.S. citizens. McManus
recommended the companies to Nations Bank. Before Nations Bank ever
made a decision about accepting the trust fund, McManus sent Nations
Bank 2 million shares of a Nevada corporation to be used to fund one of
the insurance companies. In performing due diligence on that company,
Nations Bank discovered that the owner/recordholder of the stock was
Banco de la Union; the company whose stock was sent to Nations Bank had
its charter terminated nearly 6 months earlier; the stock was a
restricted offering that under U.S. securities laws was required to be
held outside the United States, and a Ronald Seale, who identified
himself as a financial advisor to the insurance company, told Nations
Bank that he was a shareholder of Banco de la Union and in that
capacity had allowed the insurance company to use the name of the bank
to hold title to the stock. Seale had eight separate complaints filed
against him in Florida for selling discounted letters of credit related
to oil business ventures. It turns out that the BNY documents on the
Banco de la Union issue reveal that Seale had been a minority
shareholder in Banco de la Union; became its President in August 1993;
and was involved in the letter of credit controversy that involved BNY
and the SANB correspondent account.
---------------------------------------------------------------------------
Additionally, SANB reported to BNY that a number of forged
checks totaling $53,000 had been written against SANB's account
at BNY. Nine months after the checks had been cleared, SANB
informed BNY of the forgeries and asked that its account be
credited $53,000. The relationship manager discussed these
matters with John Greaves, the General Manager of Swiss
American Banking Group during a visit to SANB in April 1995.
According to the relationship manager, SANB officials refused
to tell him who it was that issued the checks and the
circumstances surrounding their issuance. BNY did not press
SANB on the matter. The relationship manager and the Division
Head stated that these incidents raised concerns about the
account.
By 1996, Swiss American Banking Group had replaced Greaves
with a new General Manager and the SANB account was of such
concern to the BNY Division Head that she discussed the matter
with other BNY officials, including the head of credit policy.
A decision was made to have a set of meetings with SANB to
pursue the issues more aggressively. There was some discussion
of closing the account, but the new Swiss American Banking
Group General Manager made the representation that he had a
mandate to improve operations at the bank and requested the
help of BNY to do so. BNY made a decision to give him the
opportunity to improve the condition of SANB.
In February 1996, the relationship manager addressed a
number of frauds and suspicious transactions (including those
addressed in the April 1995 meeting) with the new General
Manager. These included $90,000 in forged checks in 1993; a
fraud involving the Bank of Scotland and a SANB client; efforts
to wire cash deposits made at BNY to SANB; and the $600,000
stolen by DeBella in 1993. The issues were discussed at the
meeting and the Swiss American General Manager followed up with
a letter to BNY addressing the matters.
Once again, the answers from SANB were incomplete and some,
as the relationship manager described, were ``total
contradictions.'' For example, SANB acknowledged that the
$53,000 in forged checks involved the SANB employee who was
responsible for reconciling the checks (i.e., confirming that
the checks debited to the SANB account matched the record of
disbursements in the SANB ledger), but would provide no
additional information to BNY. SANB told BNY that the
individual who controlled the account involved in the attempted
fraud against the Bank of Scotland had been incarcerated and
the account number had been re-issued to another party. The re-
issuance of the account number was described as ``unusual'' and
``something I didn't like'' by the relationship manager. In
discussing the DeBella fraud, SANB acknowledged that DeBella
had been defrauding a number of people, but SANB made no
mention of the long and extensive use that DeBella made of
accounts at SANB to perpetrate his frauds even after SANB was
on notice that DeBella was involved in questionable
activities.\24\ Regarding the attempt to wire transfer cash
deposits to SANB, BNY asked SANB to confirm that the account no
longer existed and provide the closure date. SANB officials
refused to provide BNY with any details of the entity whose
account was in question except to write that ``we have no
account, nor have we ever had an account in the name [of the
account in question].'' The General Manager of Swiss American
Banking Group then proceeded to suggest that the matter
involved an account at SAB, and was being handled by Bank of
America, which was a correspondent for SAB. No additional
information was provided. The relationship manager described
this response as ``total contradictions,'' adding that it was
one more factor in the process that led to the decision to
eventually close the account.
---------------------------------------------------------------------------
\24\ In 1995, after DeBella was convicted in Federal Court,
Craddock, the victim of a $600,000 swindle perpetrated by DeBella in
1993, wrote to BNY, advised the bank of the conviction and asked for
assistance in securing the return of his money. BNY wrote back to
Craddock and informed him that the funds had been deposited though
Barclays Bank and did not involve SANB's relationship with BNY.
However, there is no indication that BNY made any connection between
this matter and the DeBella frauds that earlier used the SANB account
at Irving Trust and BNY. Although BNY questioned SANB about the
Craddock funds, it made no inquiries about the SANB relationship with
DeBella.
---------------------------------------------------------------------------
When asked by Minority Staff why BNY did not press to
receive more complete answers to these matters, the
relationship manager noted that in the early 1990's banks were
more concerned with credit risk than anything else. There was
not much of that type of business in the Caribbean. Security
and money laundering were not the high priority because BNY was
not involved with a lot of offshore banks. He noted that when
banks talked of exposure and risk, they were more concerned
with losing money. The relationship manager noted that the
nature of banking is changing and the international efforts to
battle money laundering has shifted the focus of the banks.
Meanwhile, however, BNY's relationship with SANB continued.
During this period of time, SANB had been BNY's largest
revenue producer in Antigua for a number of years. However,
both the relationship manager and the Division Head stated that
SANB was a relatively small account, and that its revenue
position would not influence any decision whether to close the
account. The relationship manager noted that BNY officials told
him they would support a decision to close the account if that
was his decision. He noted that in 1996, he wrote a memo
recommending that BNY not accept additional accounts in some
areas because of weak regulatory controls and it was approved
by his superiors. The relationship manager reiterated that he
wanted to give the new Swiss American General Manager an
opportunity to improve operations at the bank.
In May 1996, the Division Head again met with senior
officers of the bank to alert them to activities and issues
related to SANB. She recognized the matter could be a sensitive
issue because of the position of Rappaport as a major
shareholder of BNY and the sole owner of Swiss American.
According to the Division Head, upper management supported her
approach and the relationship with Rappaport did not factor
into the decisions affecting SANB. Rather, the decision was
made to treat the SANB relationship at arms length and not give
it any special treatment.
The Division Head asked the relationship manager to provide
a summary of all of the cases involving SANB. The memo noted
that ``all the subpoenas and check forgeries are really
concentrated between 1993 and 1995.'' After reviewing the
cases, the relationship manager concluded by writing:
Clearly, all these cases at Swiss American occurred
during the administration of Mr. John Greaves the former
General Manager, who resigned last summer September and still
resided on the island. . . . [T]he new GM, has been brought by
the Board of Directors to clean the record of the institution.
Even though this relationship has been very frustrating
during the past 3 years we should try to extend a grace period
to Mr. Fisher and his new team.
He informed Minority Staff that he believed the new General
Manager was making an effort to improve the situation at SANB.
At that point, the Division Head instructed the relationship
manager to continue to follow the situation and keep her
informed.
In November 1996, the Division Head and the relationship
manager again met with the General Manager of Swiss American
Banking Group. The Division Head informed Minority Staff that
she had a lot of issues she wanted to discuss and hear from the
General Manager in detail on each of the items. The Division
Head wanted to stress to the General Manager that these matters
were receiving the attention of senior management at BNY and
that ``we have to get to the bottom of this.'' The Division
Head also wanted to size up the General Manager and estimate
the prospects of his ability to improve matters at SANB.
The report of the meeting prepared by the relationship
manager underscored the serious tone of the meeting:
Taking in consideration all the problems the Bank of New
York has been experiencing with this relationship, ``our
meeting went very well.''
Ken told us that his priority was to review and clear
the institution of all of its problems and finally bring back
Swiss American to profitability. He mentioned that most of the
problems were due to the mismanagement of the previous
administration. Problems ranged from, as he said to [sic]
``under-reported or mis-reported'' non performing assets to the
Board of Directors and the Eastern Caribbean Central Bank to
suspicious offshore accounts at Swiss American National Bank.
. . . [The Division Head] strongly restated to Mr.
Fisher that we would close the account if there was no
improvement in the way Swiss American conducts its businesses.
The Bank of New York received five subpoenas regarding Swiss
American from various U.S. agencies, during the past 16 months.
The memo concluded by noting, ``We will keep
monitor[ing] the account very closely.''
When asked by Minority Staff why BNY continued to maintain
the relationship in light of the concerns it had, the Division
Head said it was due to a number of factors: The new General
Manager appeared to be trying to turn things around and she
felt BNY was having some success with him and that he was
making progress; as a professional courtesy, BNY wanted to help
him succeed; no one likes to terminate a client; and BNY faced
some potential losses if the account was terminated and BNY
wanted his help to mitigate those.
The Division Head informed the Minority Staff that around
the same time as the November meeting, the SANB account was put
on the ``refer'' list, meaning the wire transfer and cash
letter transactions of the SANB received more monitoring and
manual intervention, and credit activity (such as clearing
large checks or wire transactions when funds may not be
immediately available to cover the amount of the transaction)
had to receive the approval of the relationship manager.
BNY was unable to locate any documents (other than monthly
statements) that addressed the relationship during 1997. There
are no documents to indicate any knowledge or inquiries by BNY
of the Fortuna Alliance fraud that affected both SAB and SANB,
despite the wide attention it received. However, in February
1998, BNY was notified that the U.S Government had sued SAB,
SANB and BNY-IMB for recovery of funds related to the
Fitzgerald case. Both the Division Head and the relationship
manager were surprised by the news of the civil action and
concerned. The Division Head was upset that SANB had not
advised BNY of what was a long term controversy. As the
Division Head noted, it became a major topic during BNY's visit
to SANB a few weeks later. According to the relationship
manager, the BNY representatives received another surprise when
they arrived at SANB. They learned that the General Manager of
Swiss American Banking Group had left and SANB had a new
General Manager. BNY had not been advised of the change.
According to the relationship manager, the new General Manager
``sounded the same'' as the previous GM as he laid out his
mandate for the BNY officials.
Regarding the lawsuit filed against the banks, the new
General Manager told the BNY representatives that SAB was not
at fault. He provided the history of the funds and noted that
SAB and SANB were caught between conflicting demands of the
Antiguan and the U.S. Government. According to the report of
the meeting written by the relationship manager, the General
Manager concluded his presentation of the Fitzgerald funds by
saying ``currently nobody knows where these funds are!! The
Antiguan Government claims they do not have them anymore!!!''
[emphasis included in original]
The Division Head offered a similar account to the Minority
Staff and characterized the claim as ``highly improbable.'' The
Division Head was upset that SANB did not notify BNY of the
lawsuit, but noted that the General Manager explained that he
thought BNY would have known of the suit because of its part
ownership of BNY-IMB. Clearly, the BNY Correspondent Banking
Department had not been notified by its own bank, either. The
Division Head indicated that as a result of the matter and the
way it was handled by SANB, she was seriously considering
terminating the relationship.
Other information presented by the General Manager at the
meeting raised additional concerns for the BNY representatives.
The relationship manager's meeting report describes another
controversial matter raised by the SANB General Manager:
10.) [The General Manager] see [sic] future growth in
Antigua is in Internet Gambling. This new industry in Antigua
works as follows:
1. When there is a sport event--boxing, football,
soccer, etc. especially in the U.S.
2. People will place their bet through the Internet to
an offshore company in Antigua.
3. Wire funds to Antigua via remittance company,
Western Union, for example.
4. The company will mail checks to the winner--these
checks issued by local banks are usually drawn on U.S. banks
(BNY, Nations Bank, etc.).
Another offshore activity which will generate a lot of
questions on the part of the U.S.\25\
---------------------------------------------------------------------------
\25\ Another issue raised by the General Manager also raised
concerns. According to the relationship manager's report:
SANB is still lending to the Antiguan Government, financing its
deficit. However, [the general manager] told us confidentially, all of
these loans to the government are guaranteed by the West Indies Oil
Company, the local company owned 50% by the government and the rest by
SANB's principal shareholder. A percentage of the taxes paid by the
consumers on each gallon is allocated to SANB [confidential].
According to the Division Head, this raised another question about
Rappaport's involvement with the bank and the Antiguan Government.
Although BNY officials had been told that Rappaport was distancing
himself from Antigua, the information supplied by the SANB General
Manager contradicted that. The information also raised concerns that
Rappaport may be using financial institutions under his control to
further his own interests.
---------------------------------------------------------------------------
The Division Head told the Subcommittee staff that BNY had
already been hearing a lot about Internet gambling, she wanted
no involvement with Internet gambling proceeds being processed
through the BNY account, and she made that very clear to the
General Manager. Although the General Manager responded that
the activities were being conducted through the offshore banks
and not the domestic banks in Antigua and Barbuda, she was
concerned that it would be difficult for the Swiss American
Banking Group to limit the activity to its offshore bank
because of the tie in ownership between SAB and SANB.
The relationship manager told the Minority Staff that when
the General Manager spoke about Internet gambling, he made up
his mind to recommend that the account be closed. Before he
could process his recommendation, Swiss American Banking Group
installed another General Manager, and then BNY identified a
series of suspicious checks that had been written against the
SANB account.
When the Division Head returned from the February 1998 trip
to SANB, she wrote up a memo and had a discussion with the Head
of the International Banking sector and an Executive Vice
President of the Bank. The Division Head's intention was to
bring her concerns--including the lawsuit--to the attention of
the Executive Vice President. Her inclination was to close the
account. She wanted the Executive Vice President to discuss the
matter with more senior members of the bank and the BNY Board
members who also sat on the BNY-IMB Board. The Division Head
and the relationship manager then waited for some response for
senior management. In October 1998, the Swiss American Group
hired another General Manager, the third in a 1-year period.
In December 1998, nearly 10 months after the meeting in
Antigua at which the U.S. lawsuit and Internet gambling were
discussed, the relationship manager reported to the BNY
compliance department that SANB had issued six checks in
series, two for $9,900 and four for $9,000 each. All of the
checks were drawn on SANB's account with BNY. The relationship
manager wrote:
Even though Swiss American authorized the payment, we
believe, like California Bank and Trust, that these drafts are
highly suspicious and must be reported to the proper
authorities. We are almost sure the negotiating bank will do
the same soon.
According to both the Division Head and the relationship
manager, this was the event that triggered the closure of the
account. In addition, SANB had again failed to notify BNY that
a new General Manager had been hired. According to the Division
Head, she discovered the change when SANB submitted a notice to
the administrative office that it wanted to add the signature
of the new General Manager to the authorized signature card for
its account. At that point, the Division Head notified the
Executive Vice President of her intention to close the account
and also, as a courtesy, told the BNY Board member who sat on
the BNY-IMB Board of her intentions.
In reviewing the account to determine how long the
termination period should last, the relationship manager wrote
the following:
I conducted a preliminary survey of SANB relationship
with The Bank of New York, and I have to admit to you the
relationship has been more extensive than we thought. BNY is
subject's primary clearing bank in the U.S. It is going to take
more than 60 days to close it down, especially SANB has
currently two stand by letters for $500,000 and $300,000
assigned to Visa and Mastercard.
These slc's [standby letters of credit] guaranteed
SANB's credit cards in the Caribbean Region. In addition, SANB
has an average of 300 checks issued and drawn on BNY floating
around the market, a monthly average of 250 payments going
through the account and finally they send 3,000 cash letters
every month.
On January 9, 1999, the relationship manager wrote the new
General Manager and informed him that BNY would close SANB's
correspondent account effective March 31, 1999. SANB did not
transfer out the balance of its account by the closing date of
March 31. On April 8, the Division Head wrote the General
Manager:
Even though a 3-month deadline to March 31, 1999, was
extended for an orderly transition to another U.S. Commercial
Bank, to date no actions have been taken by your staff to
reduce the number of payments and checks in your account and
the transfer of the Visa and Master Card standby letters of
credit.
The Division Head told the General Manager that within 10
days BNY would cease clearing any checks; would not process any
payment instructions; and would notify Master and Visa Cards
that BNY would not renew the stand by letters of credit when
they expire.
The Division Head instructed the General Manager to ``Take
all appropriate measures to transfer the balance of your
account by Friday, April 23, 1999.''
The account was closed on June 1, 1999. The memo closing
out the account stated:
Latin America and The Caribbean Division closed the
accounts of Swiss American National Bank as a result of a
series of suspicious transactions and payments during 1997,
1998 and 1999. The division actually received five subpoenas
during this period from the U.S. Government concerning
different cases of money laundering and other illegal
activities.
The Caribbean Desk decided to close the account at the
end of 1998, when 50 [sic] checks were issued for $9,900 each
in favor of one individual.
Both the Division Head and the relationship manager told
the Minority Staff that they should have closed the account
sooner. When asked why no decision was made until December
1999, nearly a year after the meeting in Antigua, the
relationship manager told the Staff that he didn't know what to
say, that it was a lapse on his part. He said closure of the
account was definitely something he should have done in 1998.
The Division Head said that in hindsight, the account should
have been closed down sooner, right after she returned from the
February trip to SANB.
There were other aspects of the SANB operation that BNY did
not pursue. In two of the meeting reports, the relationship
manager wrote that the General Manager noted that Swiss
American Banking Group board members were from New York and
Chicago. When asked if they knew who the board members were,
the relationship manager and the Division Head told the
Minority Staff that the general managers never gave the names
of the board members. Eventually, BNY learned the name of the
board member in New York. When asked if they ever learned the
name of the board member in Chicago, the Division Head told the
Minority Staff that she and the relationship manager were never
given the name of that board member. The relationship manager
asked for the name a number of times and the Division Head kept
telling the relationship manager to go back to SANB and get the
name. She said that the situation was frustrating and that BNY
should have known the name of the board member and SANB should
have told BNY when asked. The board member from Chicago is the
controversial tax attorney Burton Kanter.
In addition, BNY was not sure of all of the entities in the
ownership chain of SANB. Internal memos describe the ownership
of SAB and SANB as: ``Swiss American Holdings (Panama), which
is owned by Carlsberg (Bahamas), which is owned by a private
Trust controlled by Rappaport.'' BNY informed the Subcommittee
that it believes the name of the private trust is the Inter
Maritime Foundation, but it is not sure. Although BNY knew the
true owner of the bank, it did not have a complete
understanding of the entities that comprise the ownership
chain.
BNY records related to the SANB correspondent relationship
reveal a number of visits and exchanges, starting in mid-1995
and continuing through 1998, in which BNY representatives
questioned SANB management about a number of specific
suspicious transactions and other controversial incidents
involving the bank. In some cases, SANB officials failed to
share all of the information they had on a matter with the BNY
representatives. In some instances, SANB did not provide an
accurate description of the transactions. Both the relationship
manager and the Division Head told Minority Staff that these
events and SANB's response raised concerns about the bank and
its management. Yet, for a prolonged period of time, even
though BNY closely monitored the account and its problems, and
was concerned about the relationship, it allowed SANB to
continue to maintain a correspondent relationship.
(b) Bank of America
SANB established a correspondent relationship with Bank of
America in April 1987. The account was terminated in June 1991
when it was replaced by an account in the name of SAB. The SAB
account was closed in June 1999. This section focuses on SAB's
correspondent relationship with BOA.
The structure of BOA's International Banking Department and
its Caribbean division, and its due diligence policies and
ongoing monitoring programs are detailed in the case study on
American International Bank. Minority Staff interviewed the BOA
relationship manager who was responsible for the SANB and the
SAB accounts from 1990 through the termination of the SAB
account in July 1999, and senior officials from the
correspondent banking and compliance departments of BOA.
Prior to establishing a relationship with SAB, BOA records
show that it had concerns about its correspondent relationship
with SANB as far back as 1990. In August 1990, the relationship
manager for the account wrote a call memo (a report on a visit
with or call to the client bank) which stated: ``This is a
privately owned bank with poor financials and obvious operating
problems. . . . Follow-up: . . . Nothing more until financials
improve measurably.'' When asked why BOA kept the account if it
had the problems described, the relationship manager stated
that BOA only performed transactional business for SANB, and
the memo only meant that BOA needed to keep an eye on the
account, not that SANB had violated any laws.
In 1991, BOA established an automatic investment account
for SANB, which allowed SANB to receive more interest on assets
on deposit in its account. In the memo establishing the
account, the administrative officer who handled the account
noted, ``As per Tom Wulff watch this bank very carefully.'' The
relationship manager explained that he was notifying the
administrative officer that the bank was not well managed and
should be watched, but that he did not believe that the bank
was engaged in anything illegal. He believed that SANB was not
sharp operationally and wanted the administrative officer to
watch the account to make sure SANB did not do anything to hurt
BOA.
A few months later, in June 1991, SANB wrote to the
account's administrative officer in New York:
Confirming our recent conversation, we wish to close out
the account of Swiss American National Bank of Antigua and
initiate a new account in the name of Swiss American Bank Ltd.
. . .
We are making this change because the time has come to
better divide the activities of the two entities and as the
transactions that have been handled through Bank of America
traditionally have been more oriented towards Swiss American
Bank Ltd., we feel that we should have the account in that
name.
SANB included Articles of Association, financial statements
and approved signatory lists for itself and SAB. No additional
account opening material accompanied the letter and the
relationship manager observed that it appears as if the SAB
account was opened without anyone at BOA first making a
determination if they wanted SAB to open an account. Yet, as an
offshore bank, SAB potentially had a much different clientele
and engaged in different banking activities than SANB, which
was a domestic, commercial bank and it was regulated by a
different authority. Domestic banks (such as SANB) are
regulated by the Eastern Caribbean Central Bank. Offshore banks
(such as SAB) are regulated by the jurisdiction licensing the
bank. To the extent that the two institutions shared anything
in common, it was the management and administration, about
which BOA had already expressed concerns.
The 1989 audited financial statements for SAB contained the
following auditor's comment:
A number of the Bank's depositors have given written
instructions that correspondence should not be sent by the
Bank. Consequently, we did not attempt to obtain confirmation
of customer accounts totalling [sic] $1,931,627 credit and
$71,972 debit.
A similar disclaimer was included in SAB's audited
financial statement for 1990. A BOA senior official agreed
those disclaimers should have raised questions, noting that the
amount cited in the 1989 financial statements ($1,931,627)
represented approximately 20% of all deposits. There was no
indication in the documents provided to the Subcommittee that
the BOA relationship manager at the time noted or followed up
on this matter.
Another cautionary call memo was written in July 1991:
The private ownership of this bank is known to be
legitimate although General Manager David McManus was recently
linked to a minor bank scandal in Anguilla when he made calls
there with clients of the bank later found to be of
questionable reputation.
. . . [T]here is an ongoing investigation by the Gov.
General's office in Anguilla concerning alleged questionable
banking practices by their client. Reportedly, the issue
relates to the unauthorized solicitation of funds. David
understood and agreed that until these issues are officially
resolved, it would not be prudent to explore further business
opportunities between our banks.
The next day, the relationship manager sent a message to
the account officer in New York, stating: ``I am sending you a
separate copy of my 7-18-91 call memo on this bank. We need to
keep an eye on the activity in this account.''
When asked by Minority Staff if he was concerned that BOA
was getting involved in a banking relationship that it did not
want to be in, the relationship manager noted that it was a
long standing relationship, that it was not obvious that SAB
was a different bank from SANB, and that the change in bank
accounts was just a bookkeeping matter.
Again in 1992, the relationship manager commented on the
problems of SAB:
This remains an outwardly unimpressive, disorganized and
cluttered operation, plagued by turnover and seemingly weak
management.
The bank is nevertheless liquid, and frequently keeps
very good CD balances with BINY [Bank of America International
New York].
It remains to be seen, however, if they can generate
sufficient volumes to attain profitability on what must have
been an extremely expensive start-up operation.
When asked why BOA kept the account after recognizing
ongoing problems at the bank for a number of years, the
relationship manager replied: ``Why not? It was not a problem
for me. They needed someone to clear for them. We were set up
to do that. We had been doing that since 1987. Those [problems
addressed in the call reports] weren't aspects of the bank that
we were concerned with.'' When asked if the problems identified
in the memos could lead to other kinds of problems, the manager
noted that is why he asked the administrative officer to keep
an eye on the account--that the problems were not illegal
activities, but operational difficulties.
In 1993, the relationship manager sought approval to
establish a small revolving line of credit for SAB that would
be used to issue commercial letters of credit and standby
letters of credit on behalf of private banking customers. The
credit line would be collateralized by certificate of deposits
placed with BOA. The credit manager denied the request, noting:
--We know little about the parentage of this bank. The
structure appears designed to isolate the real owners and to
take advantage of tax and regulatory havens in Panama and
Antigua.
--Our borrower is designed to serve an offshore market
of private banking clientele.
--Who controls or monitors activities?
--We are being asked to issue SBLCs guaranteeing
activities of their private banking clients. We don't know
these clients. We don't know the beneficiaries. We don't even
know at this point what kinds of loans or non payments we would
be guaranteeing. Our standby's could be all over the place. . . .
The potential for being blind-sided is quite pronounced
and I am not in favor of the presentation. If we knew more
about the parentage, respectability, integrity of the bank I
would be willing to consider trade finance but I would continue
to believe we should not extend credit to service their private
banking clients.
The relationship manager stated that although he disagreed
with some of the comments made by the credit officer he did not
file a reply because the issue was not worth fighting. He did
confirm that BOA knew that the bank was owned by Rappaport.
In 1993 and 1994, the relationship manager's call memos
indicate that SAB appeared to turn the corner financially
(although not operationally) and maintained good balances with
BOA. At the same time, BOA began to receive reports of
questionable activities involving accounts at SAB. BOA records
show that between 1993 and 1995, SAB accounts were associated
with fraudulent bills of exchange, sports betting activities,
and suspicious wire transfer activity. Then in March 1995, a
member of BOA's control and compliance department sent the
relationship manager a fax with the message: ``This afternoon
additional evidence of another scam where Swiss American Bank
name is used in conjunction with their account at BINY.'' The
information included in the fax related to a pyramid scheme
operating through accounts established at SAB that encouraged
victims to send funds to SAB's correspondent account at BOA. A
notation on the fax cover sheet signed by the relationship
manager states: ``Discussed closure of account with John
Greaves, i.e. ceasing of ck writing and cash letters. He
agreeable will give progress ck tomorrow.'' In May 1995 the
relationship manager reported to the Vice President of BOA's
International Deposit Services that major services provided to
the SAB account were being terminated:
I met with this bank [Swiss American] last week. They
are well underway to replacing all of our facilities with
Chase, and agreed that May 31 would be the deadline for the
discontinuance of drafts drawn on us, cash letters to us, and
Microwire and telex transfers outgoing.
Other than the documentation cited above, there was no
documentation on the reasons for, or the processes that led to,
the decision to terminate the services or close the account.
The relationship manager told the Minority Staff that he
believed that the basis for the action was the discovery of the
pyramid scheme. A senior BOA official told the Minority Staff
he believed that the decision was less related to money
laundering and more related to sloppy banking, which, in his
opinion, may explain why BOA moved more slowly on completely
closing the account. As a result of the actions taken, the
account services offered to SAB were significantly reduced, as
was the flow of funds through the account.
Less than 2 weeks later, the relationship manager authored
another negative memo about SAB:
Since our decision a month ago to ask Swiss American to
find another correspondent bank, their operation appears, if
anything, to have worsened.
. . . This poorly managed bank which seemed to be
especially lacking in controls on new relationships, was
constantly preyed upon by con artists and during the visit, it
was noted that their account balance was inflated by approx
$250M in checks apparently being returned unpaid, and this was
rectified with BINY.
At the same time, another issue presented itself when
representatives of an entity called European Union Bank, an
Internet bank licensed in Antigua that subsequently defrauded
depositors of millions of dollars, approached BOA about opening
a correspondent account. The relationship manager's call memo
reported:
This bank had written asking for an account relationship
and during the visit, provided extensive documentation
attesting to their status as a duly authorized offshore bank in
Antigua. Ownership, however, was referred to as a group in the
Bahamas on which they had no readily available information,
quarters were new, unfinished and occupied mostly by computers
and their customers are mostly ``European investors'' who they
reach thru ``International publications'' and the Internet.
This appears to be an example of what we do not want to get
near.
The material presented to BOA by European Union Bank
representatives indicated that it had a correspondent account
with SAB. This apparently did not result in any further
inquiries or cause any further reevaluation of BOA's
relationship with SAB.\26\ The account manager doesn't recall
if it caused additional concerns, noting that he already had
enough reason to terminate the relationship with SAB. A senior
BOA official commented that BOA simply failed to make the
connection between European Union Bank, its relationship with
SAB and, as a result, its connection with BOA.
---------------------------------------------------------------------------
\26\ The current Chairman and Managing Director of SAB told the
Minority Staff that while European Union Bank had a corporate account
at SAB, it never had a correspondent account at SAB.
---------------------------------------------------------------------------
Approximately 1 year later, in July 1996, the SAB account
was still with BOA and still the object of negative assessments
by the relationship manager:
It has been a year since we requested Swiss American to
find another correspondent as the result of their continued
operational problems, and they have at least finally managed to
redirect their cash letter and payments business, although they
still maintain a sizeable demand balance and are the recipients
of a considerable volume of in-transfers. We agreed to 90 days
for them to notify remitters and close the account totally as
we clearly did the right thing in getting rid of this
relationship although again, we cannot move too abruptly lest
we be accused of damaging their business without apparent
cause.
. . . [T]hey also admitted to problems with their ECCB
[Eastern Caribbean Central Bank] audit which resulted in their
petitioning that bank for some relief, citing their previous
management problems and steps to clean up in the meantime.
Problems apparently included mis-classification and hidden
loans, complicated by inadequate followup.
The relationship manager noted the situation showed that
with banks that have a high volume of activity, it is difficult
to stop the flow of funds from clients. He noted that the
termination of check clearing and wire transfer services
stopped the potentially most harmful activities and that the
volume of funds through the account was very low. However, the
account remained open.
In August 1997, more than 2 years after BOA had asked SAB
to find another correspondent, the relationship manager wrote a
more favorable memorandum about the client:
Swiss American seems to have made great strides in
getting their house in order with this, their offshore bank,
now physically separated from the local bank and the previous
management now long departed.
. . . At our insistence as a result of some past dubious
transactions which passed through their account, they also long
ago discontinued their cash letter and electronic payments
business with us and have since maintained just a deposit
account through which they receive approximately 50 incoming
payments monthly, and for which they are very appreciative.
This seems to be a reasonable compromise as I had been hesitant
to force them to totally close their account as we really had
no defensible grounds.
There is no evidence in the documentation related to the
SAB account that BOA was aware of the major frauds involving
accounts at Swiss American Bank, such as the Fortuna Alliance
fraud, which was receiving a great deal of public attention at
the time. The relationship manager told Minority Staff that in
retrospect he had to admit some bad judgment at the time he
wrote the memorandum cited above. He said he should not have
been so easy on SAB and that it was not a sharp operation, but
he never thought the bank had done anything that was illegal.
In February 1998, BOA learned of the complaint filed
against SAB by the U.S. Government regarding the Fitzgerald
account. At first, the relationship manager once again agreed
to continue the relationship with SAB:
This is an old issue going back to the 1980's, also
includes the Antiguan Government. As we have done in other
cases, it was my intention to tell him to go find another
correspondent bank, explaining that it would be in our mutual
interest to avoid the possibility of later embarrassments
should compliance issues, etc. arise. Also as before, it is
difficult to be more forceful as no guilt has been proven, etc.
Stewart Young [the Manager of Swiss American Bank] was
totally cooperative while describing this situation as
something which occurred long ago before the bank purged its
management, includes heavy involvement of the local government
which largely initiated the problem and is an issue in which
the current bank is cooperating fully and hopeful will be
shortly resolved.
The bank has totally changed management and has managed
its DF account with us in an entirely satisfactory manner for
the past 2-3 years. It uses us only for limited transactions
not including cash letter or funds transfers and has been
totally cooperative with respect to the clean up of earlier
processing problems. I therefore agreed to table this issue for
now, while making it a matter of record.
The relationship manager said that it was the first
illegality involving SAB that he encountered and sympathized
with the position of SAB, seemingly caught between conflicting
orders of two governments. A senior BOA official pointed out
that at that time it was BOA practice to rely heavily on the
judgment of the relationship manager. With an account for a
small bank, such as SAB, BOA gave great discretion to the
relationship manager, and there would not be a lot of other
people looking at, or asking questions about, the account. He
told the Minority Staff that is one reason why BOA was
revamping its policies and practices.
In March 1998, the relationship manager received a memo
from the BOA legal department detailing a number of inquiries
that BOA had received about SAB and its clients. According to
the relationship manager it was then that he realized that ``we
had a mess beyond operational problems.'' At that point, he
reported that he had asked SAB to close its account with BOA:
``I had long ago required Swiss American to discontinue
their cashletter (clearings) and wire transfer (Microwire)
activities with us as some transactions appeared suspect,
although seemingly as the result of poor management. With a
complete change of management and cessation of those
activities, their DF account had remained open to facilitate
in-transfers. We now have the 1/98 issue of Money Laundering
Alert describing a possible precedent settling civil lawsuit by
the U.S. authorities against Swiss American Bank and others,
involving the Antiguan Government, and accusing collaboration
with money launderers. As above, Mr. Stewart Young has today
been asked to close their BA New York branch DF account.
The same day, the relationship manager sent a memo to the
administrative officer in New York:
I have copied you on call memos noting that I today
asked each of the banks above to close their accounts with us
at their earliest convenience. Please monitor these balances
accordingly and let me know if they do not close within 30
days. As per the memos, this is the result of continued money
laundering related inquiries.
Yet, in July 1998 the relationship manager reported that
the account was still open:
The last of our overseas bank relationships in Antigua,
Swiss American will now be transferring the remainder of their
deposit balances with us to their existing Chase account, as
per my earlier request. Although a very bland US $73MM balance
sheet reflecting little more than the arbitrage of local
deposits to offshore and a relationship otherwise satisfactory,
the bank had been involved in some litigation between the U.S.
Government and the local authorities concerning the ownership
of funds in a situation which although not necessarily wrong,
was typical of the offshore industry in Antigua and we had
elected to terminate this account relationship. Stewart Young
was understanding and admitted he had been slow to move as he
had enjoyed the benefits of reciprocity.
In June 1999, the account was still open. The relationship
manager, meanwhile had retired from BOA. He told Minority Staff
that when he retired he thought the account had been closed.
However, it had not been closed and the merger with Nations
Bank brought in an account that SAB had with Nations Bank, so
the size of the account had grown, although the limitations on
account services remained in place.
Throughout the 1990's BOA appears to have been unaware of
the frauds and controversies (such as those described at the
beginning of this case study) that plagued the Swiss American
Banking Group. The relationship manager noted that the history
of the account does show that when he became aware of problems,
he did try to stop them. A senior BOA official noted that the
decision to completely terminate the relationship with SAB in
1999 did not involve the relationship manager and was more of a
business decision and was not based on the problems previously
discussed. According to the official, the account had little
activity, was not generating much income for BOA and there was
no reason to bear the time and expense of keeping it open. He
indicated that it should have been closed a long time ago, and
was not the type of account that BOA wanted.
On June 16, 1999, the account was finally terminated.
This is another example of a bank that was slow to
terminate a correspondent relationship even when it had
questions about the client. The records of BOA's relationship
with SAB show that over many years, BOA representatives had
ongoing concerns about the management and organization of the
bank. Serious questions about the ownership and purpose of SAB
were raised by the credit department early in the relationship.
Yet even after being confronted with questionable account
activity and other controversial incidents, BOA curtailed but
did not terminate the relationship; instead, it was allowed to
continue for another 4 years.
(c) Chase Manhattan Bank
SANB established a correspondent relationship with Chase
Manhattan Bank (``Chase'') in October 1981; however, BNY was
the main correspondent for SANB. SAB established a
correspondent relationship with Chase in April 1995. Chase was
a major correspondent for SAB. This section focuses on Chase's
correspondent relationship with SAB. Both accounts were
terminated in 2000, during the Minority Staff's inquiry into
the account.
The structure of Chase's International Banking Department
and its Caribbean Division, and its due diligence policies and
ongoing monitoring programs are detailed in the case study on
American International Bank. Since the debt crisis that
affected Latin America in the early 1980's, Chase did not
pursue credit relationships in many Latin American and
Caribbean nations. In those areas Chase often did not assign
relationship managers to serve as point of contact for the
financial institutions in those areas. Instead, the countries
were served by sales teams that marketed non-credit, cash
management products. Between 1994 and 1996, the unit assigned
to cover Antigua as well as some other Caribbean and Latin
American countries was headed by a credit risk management
official who supervised one and then a second account officer.
Two of the accounts handled by the unit were SAB and SANB.
After 1996, the credit official left the unit and the account
officers worked under the direction of a sales team leader.
Sale representatives sell services and products to clients but
do not act as a relationship manager for an account. As a
result, there was no main contact who was responsible for
coordinating all of the responsibilities associated with the
SAB account. The credit risk manager continued to monitor the
account and, for nearly 4 years, raised questions about the
relationship. However, the vacuum created by the lack of a
single relationship manager for the SAB account delayed a
coordinated and informed assessment of the SAB relationship.
The account opening documentation for SAB contained little
information on the institution other than the annual report
supplied by SAB. Even though SAB was designed to be a
completely different type of bank than SANB, with different
clientele and a different regulatory authority (local Caribbean
banks are regulated by the Eastern Caribbean Central Bank and
offshore banks are regulated by the jurisdiction that licensed
the bank), the sales representative relied on Chase's existing
relationship with SANB to justify establishing a relationship
with SAB. He wrote: ``Given that there is a DDA already opened
in our books in n/o Swiss American National Bank of Antigua
(DDA #001-1-87985), no further account justification comments
are included.'' \27\
---------------------------------------------------------------------------
\27\ The sales representative told the Minority Staff that the
reason for so little justification in the memo may have been the fact
that Chase had an existing relationship with SANB. He also speculated
that there may be a missing call memo because SAB was an offshore bank
and he usually would have questions on financials and fund flows and
would have put the information in a memo. However his memo cited above
indicates that he relied on the existing relationship.
---------------------------------------------------------------------------
In September 1995, the credit risk manager asked one of the
account administrators to initiate a daily item-by-item review
of all debits and credits to the accounts of SAB and SANB,
including all cash letters. By October, the review identified
what the credit manager described as deposits that did not seem
consistent with the business of a private offshore bank--
deposits more appropriately deposited into SANB, the onshore
bank. In October, the credit manager issued a memo that the
Legal Department was considering filing a criminal referral
with the U.S. Government on the matter.
As a result, the sales representative informed the Minority
Staff that on his next visit to SAB in January 1996, he asked
about the banks' anti-money laundering policies. He wrote:
LDuring our meeting, I raised the subject of money
laundering and asked what procedures SAB had in place to deter
it. They said this matter was of utmost concern to them, and
cited requirements embedded in account conditions delivered to
every new customer (in fact, they provided me with a copy).
They also said this subject is covered in internal guidelines
to marketing officers. In general, I found that the threat of
money laundering is explicitly recognized and guarded against
by Antiguan bankers. They tend to put it in the context that it
is not worth risking the legitimate offshore business; tax
avoidance and asset protection, for the huge downside of taking
on the illegitimate offshore business; drug-related.
The sales representative who managed the SAB and SANB
accounts from 1995 through September 1996 and again from
February 1999 through their closure in 2000, stated that issue
was the only questionable activity he had heard of regarding
the SAB accounts during the 1995-1996 period.
The sales representative told the Minority Staff that to
him money laundering always had the connotation of money from
drug trafficking. He viewed offshore activity as a means for
individuals to set up entities (IBCs, trusts) and accounts that
would enable them to deposit funds so that they would be immune
to foreign exchange violations.
In March 1996, the credit officer wrote a memo to the sales
representative regarding the owner of SAB:
My sources tell me that ``international financier''
Bruce Rappaport, the alleged owner of Swiss American, is an
Israeli shipowner who established Maritime Bank in Switzerland,
now BONY-Maritime with Rappaport still the Chairman. We once
had credit lines to Maritime, but we became ``uncomfortable''
and canceled them (this all happened before BNY bought into the
operation).
Rappaport is a controversial figure--his supporters
would probably characterize him as aggressive, innovative and
entrepreneurial. His detractors would probably choose far less
kind words to describe him. As best as I can tell, however, he
could be called a ``Donald Trump type'', but not a ``Robert
Vesco type'', i.e. he's a wheeler-dealer but has no known
involvement with any truly nefarious activities (e.g., drugs).
Obviously, our colleagues at BNY seem to consider him a
respectable partner.
The sales representative stated that he probably knew that
Rappaport was the owner of SAB when he called on the bank in
1995, but he would not have known the significance of the name.
He stated that he probably noted in a call report who the owner
was, but if no one reading the memo knew anything about
Rappaport, it would have had no bearing on the decision to open
the account. The sales representative who was responsible for
the account from September 1996 through February 1999 said she
learned of Rappaport's ownership of SAB during a meeting with
Business Development Manager of Swiss American Banking Group in
October 1997.
In June 1997, Chase received a subpoena for documents and
statements related to the SAB and SANB accounts. When the
credit risk manager learned of the subpoenas in October of that
year, he again raised questions about the client to the
compliance officer and operation risk manager for cash
management services:
You may remember that we recently closed the DDA of
American International Bank, Antigua, and I was surprised that
there was no concurrent government investigation of Swiss
American (which was the inspiration for American Int'l).
Looks like somebody is interested.
Do you know if Swiss American ever comes up in your
meetings with Legal re suspicious transactions?
The credit risk manager told the Minority Staff that he
recalled that AIB was closed because of the general nature of
its activities. He understood that AIB was started by former
SAB people trying to replicate SAB and he thought SAB would
also be investigated because of its size and similarity of
marketing strategy. He noted that although he had no specific
responsibility for the SAB accounts at that time, in addition
to the subpoena, he had heard of some incidents over a period
of years where SAB was mentioned as having been involved in
situations where their customers were alleged to have been
involved in questionable activities, and used SAB accounts as
repositories for illicit funds. He said the incidents involved
a fraud, an investment scheme, a theft of funds from a U.S.
bank, and an incident involving German customs. The credit risk
manager observed that he could not state whether the incidents
were significant given SAB's size, but he was trying to be pro-
active.
The sales representative who took over the SAB and SANB
accounts in September 1996 was copied on the internal e-mail
regarding the subpoenas, but did not recall the matter and did
not perform any follow up on the issue. Other than the credit
risk manager's memo cited above, there is no indication that
the subpoenas occasioned any review of the SAB accounts or any
follow up with the client.
In 1996 and 1997, the Fortuna Alliance fraud received
national attention. Millions of dollars taken in the fraud
moved through SAB's account at Chase. In fact, in the months of
April and May 1996, the amount of funds wired by the Fortuna
Alliance into the SAB account at Chase represented 31% and 18%,
respectively, of all deposits into the SAB account ($3.4
million of $10.7 million in April and $1.6 million of $8.8
million in May). Yet, there is no indication in any of the
documents provided to the Subcommittee by Chase that indicate
that those responsible for the account were aware of the fraud
or that anyone in Chase followed up with SAB on the matter.
In August 1998, a member of Chase's fraud prevention unit
wrote to the sales representative to report that he was
informed by another U.S. bank that a client of SAB had
fraudulently transferred money out of the U.S. bank and into
its account at SAB. The U.S. bank contacted Chase to see if
Chase could assist in obtaining a return of the funds from SAB.
He concluded his message with the following:
Our records show that Swiss American has been suspected
of money laundering. Can you tell me whether this is an account
that Chase will continue to maintain.
The sales representative told Minority Staff that she was
not aware of any records that showed that SAB had been
suspected of money laundering and said there was no specific
proof that SAB was involved in money laundering with respect to
the funds that were transferred out of the U.S. bank and into
SAB. The sales representative reported that SAB claimed the
funds were already gone and had liability concerns about
returning the funds to the U.S. bank. She also wrote to the
credit risk manager:
I explained to [the member of the Fraud Prevention Unit]
that SAB may not necessarily be consciously money laundering
but was used as a conduit by their customer just as some
Mexican banks recently involved in money laundering had used
Chase as a conduit. In addition, I explained that the revenue
from this account was at least $100k per annum and we are not
going to make a rush to judgment to close the account
immediately.
The credit risk manager noted that revenue of $100,000 is
moderately attractive but not huge and that if someone had
truly challenged and substantiated shortcomings in the
integrity of a customer, he could not imagine that any of his
colleagues would use revenue as a reason to keep the client if
trust had been broken.
In October 1998, Chase officials initiated a follow up on
the U.S. Government's legal action against SAB regarding the
Fitzgerald case. The U.S. Government filed a complaint against
SAB and some of its related entities in December 1997. By
February 1998, the news of the case had been widely circulated
and, as described above, BNY and BOA, began to follow up with
SAB on the matter. Chase did not respond until later. The sales
representative told the Minority Staff that SAB's business
manager notified her of the matter in June 1998. She told the
Subcommittee staff that she decided to wait for the outcome of
the case and see what needed to be done at that time. She noted
that the matter did not really involve Chase. As a result, she
did not pass the matter on to legal investigations. The August
8 memo by a Fraud Prevention official alluding to allegations
of money laundering (cited above) may reflect an awareness of
SAB's connection to the Fitzgerald case, but it is not certain.
However, there are no indications in the documents supplied to
the Subcommittee that Chase had pursued the issue with SAB
until October 1998, about 10 months after the legal action was
initiated.
According to the sales representative, the credit risk
manager called her in October, after a Wall Street Journal
article announced the case had been dismissed. At that point,
the credit risk manager began to look at the matter, and called
the sales representative.
The credit risk manager recalled that he first became aware
of the matter when he learned that the case against SAB had
been dismissed.\28\ It also drew the attention of his
superiors. He noted it was not clear whether SAB was unjustly
accused or still under suspicion, and he asked the sales
representative for some underlying information. According to
the sales representative, this request coincided with one of
her periodic trips to SAB and she questioned the Managing
Director about the incident when she visited the bank in
November 1998. She reported that the Managing Director told her
that the United States tried to collect the funds from SAB
after it had unsuccessfully tried to collect the money from the
Antiguan Government. However, SAB turned the funds over to the
Antiguan Government at the request of the government.\29\ The
sales representative reported that the Managing Director
provided documentation to her and she forwarded it to risk
management. According to the sales representative, there was no
additional action taken by Chase after the information was
received from the Managing Director.
---------------------------------------------------------------------------
\28\ The credit risk manager told the Subcommittee staff that he
believed that the date when he first learned of the issue was in July
1998, when the case had been dismissed. However, the case was not
dismissed until October, and this is when the sales representative
recalls being contacted by the credit risk manager. So it may be that
the credit risk manager did not learn of the issue until October 1998.
\29\ This account is not accurate. As described above, SAB
initiated the transfer to the Government of Antigua and Barbuda. It was
not ordered to do so.
---------------------------------------------------------------------------
Notes from the sales team leader, written in November 1998,
state:
``Call 11/15/98 Ken Brown . . . his boss is furious
about the news published in the Wall Street J. on the U.S.
Gov't losing the case against SAB for lack of merit . . . He
wants to close the account. I tell him no unless we have a
universal policy in the region, but it is up to them. . . . A
couple of days later the boss reluctantly relented. For the
time, at least, they are ok. . . . The pressure from the U.S.
Gov't is likely to keep increasing, so these kind of accounts
are very likely to die anytime soon, anyway, because of the
cost of complying with rules, if nothing else.''
The credit risk manager stated that he received SAB's
explanation from the sales representative, and it appeared to
him as if SAB had stepped in and saved the funds and that the
situation was another case of a fraud perpetrated by customers
but nothing to suggest any complicity on the part of the SAB.
When he conveyed that information to his superior, the account
was allowed to remain open.
When asked if Chase should have known about this incident
earlier than it did, the credit manager told the Minority Staff
that if the relationship with SAB had been a credit
relationship, or there was a relationship manager for the
account, the information would have conveyed earlier and Chase
would have expected SAB to pass the information on earlier.
Since it was a non-credit relationship and there was no
relationship manager, it was not a situation where Chase would
expect SAB to give it news. Since there was no relationship
manager, the sales representative was the logical contact point
but it was not her job to be the focal point for the
relationship.
In November 1998, the credit risk manager made a series of
internal inquiries about the SAB account. He told Minority
Staff that because there was no relationship manager for the
account and he was the credit risk manager, he was receiving a
lot of piecemeal information about the SAB account, some of
which identified incidents involving SAB. He told the Minority
Staff that concern about the relationship was growing because
it had to be viewed from a big picture. The account had been
solicited under circumstances and a marketing strategy that no
longer existed at Chase. Chase solicited the client and SAB had
terminated or reduced relationships with other U.S. banks
because of the interest that the Chase sales force showed to
it. According to the credit risk manager, because of that Chase
could not in good conscience just terminate the account because
of unease with the relationship if SAB was making reasonable
efforts to make sure its clients were appropriate. The credit
risk manager stated that when the account was opened, Chase
knew that SAB would have to take extra precautions because of
the nature of its business and the potential clients it would
attract. Chase had been led to believe that SAB was extra
cautious, but the growing number of incidents led him to
question if SAB was taking the precautions. He decided to take
the responsibility to coordinate the collection of information
on SAB to pull together a more complete picture of the client
and the relationship.
The credit risk manager made inquiries in a number of Chase
departments about the account. One hand written note of a
conversation with the fraud prevention and investigations unit
reads:
``Generally bad rep. But not on anybody's hit list.''
He also asked the fraud department to identify instances
where the SAB account had caused some concern. The official in
the fraud department who followed up on the credit risk
manager's request wrote the following memo:
Inquiry initiated upon request of [credit risk manager],
Treasury Solutions, who was undertaking a review of our
relationship with captioned bank in light of recent publicity
regarding laundered money being turned over to the Government
of Antigua and Barbuda by Swiss American. Inquiry revealed that
captioned bank has come to official attention as a suspected
repository of proceeds of con games; however, there is no
present indication that the bank is currently considered a
money laundering institution. We are aware that in several
instances, phony wire transactions have designated customers of
Swiss American as beneficiaries, and in at least one such
instance, the beneficiary was suspected of operating a scam in
the past. Considering the difficulties in determining actual
ownership of the bank, its location, the operating environment
of these offshore banks, and the questions raised above,
recommend that we exercise especial caution dealing with this
entity if a decision is made to continue our relationship at
all. [Credit risk manager] advised.
According to the credit risk manager, the response he
received identified incidents that were small relative to other
frauds, and not in the major league swindle category, that
Chase has seen. According to the credit risk manager there was
nothing to indicate that SAB had been anything but an innocent
victim. He noted it did not have a perfect system to screen
account holders, but no one did. Chase was aware that SAB was
soliciting business broadly and that it had accepted a lot of
clients who were not from Antigua and it was difficult to
obtain references on such clients. The issue was whether SAB
had been less than prudent in accepting clients. He concluded
that nothing he saw suggested the bank had been less than
honorable.
He stated that at the time he considered sending the
results of his research to the sales representative with
instructions to get all of the information on the relationship
collected and out in the open so that an informed and
coordinated decision could be made on the account. However, he
said at the time it did not seem illogical to conclude that SAB
met Chase's standards, so he did not go to the sales
representative. Eventually, he did take that step.
However, the reports provided to the credit risk manager
did not address some of the major controversies involving SAB,
such as the involvement of SAB officers in money laundering and
frauds such as the DeBella case. Nor did it mention the Fortuna
Alliance fraud which did involve the Chase correspondent
account.
Other issues began to arise with respect to SAB. During a
site visit to SAB in November 1998 (when the U.S. legal action
against SAB was discussed), the sales representative learned
that SAB was serving Internet gambling accounts. She told
Minority Staff that she had noticed that there was an increase
in the volume of checks issued by SAB each month and when she
inquired about the matter she learned of the gambling accounts.
In her call memo, this issue was discussed as part of a
proposal to supply SAB with a new service to speed the issuance
of checks:
--CPS--Check Print--Proposal was sent prior to the
visit. . . . Check issue is now close to 2,000 per month and
likely to double in 1999. Part of the volume is coming from
checks issued to winners of the virtual casino players on the
Internet; their customers instruct payee to be paid via fax and
an indemnification is provided. Virtual casino is licensed in
Antigua. An article from the Interactive Gaming Council titled
``Congress Strips Internet Gaming Prohibition From Final Budget
Bill'' dated October 21, 1998 was given to us (dated October
21, 1998).
The sales team leader who accompanied the sale
representative on the visit also noted SAB's Internet gambling
accounts:
The reason behind the increase in transactions with us,
mainly paper checks, is because they are conducting the
payments for casinos in the island, especially those that use
the Internet. They are very careful to send winners' checks
immediately, via mail, directly from the island to the
beneficiary, as soon as they are so requested, to avoid
damaging the casino's image. The way this works is that the
gaming occurs by debiting a credit card, and winners get a
refund of winnings the same day as the original debt; any
positive balance, or wins over current account, are sent via
check.
As noted in a previous section that discusses Internet
gambling, it is illegal in the United States to place wagers by
the Internet. In addition to the questions of legality, there
is an increased risk of money laundering. The sales
representatives who handled the SAB accounts were not aware of
these issues. The sales representatives who learned of SAB
gambling-related accounts in 1998 told the Minority Staff that
she did not know the activity was illegal, that it was based on
licensed Antiguan entities, and she never received any feedback
from her superiors that gambling-related accounts were a
problem or a concern. She noted that the General Manager of SAB
had provided her with notice that Congress had defeated
attempts to make Internet gambling illegal. When asked if it
raised concerns from a money laundering perspective, the sales
representative said no because it was legal in Antigua and not
illegal under U.S. law.
The sales representative who took over the SAB account in
February 1999 learned that SAB was servicing gambling-related
accounts when he took over the account and read the memo of the
sales team leader. He told Minority Staff that he did not
discuss the issue with SAB because he believed that everything
Chase needed to know about the matter was already on record and
he did not think Internet gambling was illicit. The sales
representative said it did not cause any concerns for him, the
information had been recorded by his boss (the sales team
leader), and if it didn't cause his boss any concern he didn't
see why it should raise a concern for him.
He also did not recall anyone raising a concern about Chase
being a correspondent for a bank that serviced gambling-related
accounts. He was unaware that Internet gambling companies were
instructing their clients to forward their funds through SAB's
correspondent account at Chase. However, he said that even if
he was aware of that activity, it would not have caused a
concern for him unless he had prior knowledge that the activity
was illegal, and he did not know that.
The credit risk manager believed that he became aware that
SAB was servicing gambling-related accounts in early 2000, when
he assisted in answering an inquiry about why SAB was
projecting that it would use 10,000 checks per month and it was
determined that the increased volume was related to issuing
checks to customers of gambling institutions.\30\ He didn't
receive or read the sales representative's November 1998 memo
on the matter. He noted that he is still unaware if anything
SAB did with respect to Internet gambling is illegal, and he
presumed it to be legal. He did not recall discussing with
anyone whether it was legal or not and doesn't know if anyone
had made an inquiry on that matter. He did not recall
discussing the issues of reputational risk or money laundering
because so many of the checks were small and there didn't seem
to be any substantial movement of money.
---------------------------------------------------------------------------
\30\ It is possible that the credit risk manager first learned of
the gambling connection in late 1999. In November 1999, Chase noticed a
series of payments going to several Antiguan concerns that appeared to
be gambling establishments. It was subsequently confirmed that the
entities were gambling institutions. The credit risk manager was
involved in the effort to identify the institutions. In March 2000,
there was an inquiry regarding SAB's projections that it would need
10,000 checks per month. It was determined that the volume was due to
gambling-related payments. The credit risk manager was also involved in
that inquiry.
---------------------------------------------------------------------------
He noted that one of the duties of a relationship manager
would have been to follow all customer activities and put all
of the pieces of the puzzle together. Because the SAB account
did not have a relationship manager, this did not happen.
From the responses of the Chase personnel and the lack of
any attention to this matter in the account documents provided
to the Subcommittee by Chase, it appears that the legal and
money laundering issues associated with Internet gambling
received little, if any attention. Yet, there was clear
evidence that this activity represented a significant part of
SAB's business and the SAB correspondent account at Chase was a
major vehicle for the flow of those funds. As noted above, both
the sales representative and the sales team leader identified
Internet gambling as the reason behind SAB's increased
transactions through the Chase account; inquiries about
payments made through the SAB account identified Internet
gambling activity and accounts at SAB in 1998; and in 1999,
Chase was advised that SAB's monthly use of checks would expand
significantly due to Internet gambling-related payments.
Beyond those items already noted, the size of the monthly
statement for the SAB account at Chase suddenly expanded from
approximately 50 pages per month to about 150 pages per month.
By late 1998 the size of the monthly statements had grown to
approximately 400-450 pages and over 500 pages long by the end
of 1999. A significant portion of the increase appears due to
the increased number of transactions related to collection and
payments of funds related to Internet gambling activities. The
Subcommittee staff reviewed five monthly account statements
from 1998 and 1999. The amount of funds deposited into the SAB
account for further credit to entities that were clearly
identified as Internet gambling enterprises were $1.5 million
(January 1998); $938,000 (May 1998); $3.1 million (November
1998); $6.3 million (May 1999); and $6.9 million (September
1999).\31\ These figures represent 10%, 5%, 20%, 30% and 22%,
respectively, of the total deposits into the SAB correspondent
account at Chase during those months. In March 1998, the U.S.
Attorney for the Southern District of New York indicted 21
owners, managers and employees of 11 Internet sports betting
firms for collecting wagers from U.S. citizens over the
Internet. One of those indicted was Jay Cohen, one of the
owners of World Sports Exchange (``WSE''), an Internet sports
betting operation. Cohen was tried and convicted in Federal
District Court in New York in 1999 for criminal violation of
the Federal wire act for engaging in gambling over the
Internet. WSE was a client of SAB. Many transactions processed
through the SAB account at Chase were for the WSE. Chase
records were subpoenaed for the trial and a Chase employee
provided testimony at the trial about check and wire transfer
activity in the SAB account at Chase that involved WSE. In July
and August 2000, the Minority Staff searched the Internet and
identified hundreds of Internet gambling sites that instructed
clients to wire funds to the SAB account at Chase Manhattan
Bank.
---------------------------------------------------------------------------
\31\ The credits totaled for each month were only the credits that
were registered for, the benefit of entities that the Subcommittee
could clearly identify as being related to Internet gambling. There may
have been additional gambling-related deposits not included in these
totals because the name of the beneficiary of the funds was not clearly
identifiable as an Internet gambling entity. Monthly debits were more
difficult to total because many of the pay outs were to the individual
bettors, not to the gambling firms.
---------------------------------------------------------------------------
Yet, there is no evidence that any of these incidents
caused any concerns or raised any questions within Chase or
resulted in any question of SAB activity or clients until the
account was finally terminated in August 2000.
In early August 2000, the Minority Staff informed Chase
personnel of recent U.S. Federal and State court determinations
that betting over the Internet is a violation of U.S. law, and
that the staff had identified hundreds of Internet gambling web
sites that instructed customers to forward funds through the
SAB account at Chase. On August 18, 2000, the sales team leader
wrote to the General Manager of the Swiss American Banking
Group to reaffirm that the Swiss American accounts at Chase
would be closed on September 14. In that letter he also wrote:
Moreover, it has come to our attention that customers of
yours have created websites on the Internet, numbering in the
hundreds, in which they advertise Internet gambling services,
and in some instances plainly link these sites to sites
offering pornographic materials, and include Chase's name and
at times incorrectly identify Chase as your affiliate. This
unauthorized use of Chase's name on public websites is
unacceptable, and we insist that you inform your customers who
operate such sites to remove Chase's name from them. More
importantly, Chase has learned that at least one U.S. Federal
court has recently determined that conducting Internet gambling
operations within the United States is a criminal violation of
U.S. law. I am sure that in light of this you agree with me
that it would be inappropriate for your accounts with us to
continue to be used by your customers who operate Internet
gambling sites to either receive funds from or send funds to
persons within the United States, and we expect that you will
immediately advise your customers who conduct Internet gambling
operations of that fact and that such transmissions will cease.
In September 1999, the credit risk manager learned that the
Chase compliance department had been using the flow of the
Fitzgerald funds through SAB and SANB as an illustration of a
money laundering scheme in its training materials. The
illustration involved SAB and SANB and noted the relationships
between the two banks as well as Rappaport. When asked, if the
fact that the banks were used as examples in Chase's anti-money
laundering training raised additional concerns about the bank's
correspondent relationship with Chase, the credit risk manager
noted that the SAB had been cleared of the case used in the
training illustration and no one in compliance had told him
that SAB was doing something wrong and should not be a client.
In the Fall of 1999, two events occurred that caused the
credit risk manager to conduct another review of the SAB and
SANB relationships. SAB asked Chase to open foreign currency
accounts for SAB and SANB in London.\32\ Because the accounts
allowed withdrawals in different currencies, there was a
possibility that the account could be overdrawn. This type of
account required a credit rating and approval by a separate
credit risk group. In an attempt to avoid writing up a new
memo, the sales representative asked the credit risk manager to
vouch for the account. The sales representative told Minority
Staff that he realized that Chase was reaching a new juncture
with the account and would have to make a decision whether to
move ahead with it. He believed that if the credit risk manager
signed off on the new account, the credit risk group would also
approve it. He also believed that the credit risk manager
wanted a strong recommendation from the sales team. If that was
provided, the sales representative believed that the credit
risk manager would sign off on the expansion of the account. He
wrote to his sales team manager seeking advice:
---------------------------------------------------------------------------
\32\ In addition to the request by SAB and SANB to open foreign
exchange accounts in London, the credit risk manager saw newspaper
accounts that reported on possible ties that Rappaport and his bank,
BNY-IMB, had with some of the individuals and companies associated with
the flow of billions of dollars of Russian money through BNY, some of
which may have passed through Rappaport's bank, BNY-IMB. The press
attention also focused on past controversies involving Rappaport. As a
result of such reports, the credit risk manager sent a memo to a Chase
employee in Europe who followed the BNY-IMB correspondent account at
Chase. He wrote asking what actions, if any, Chase might be taking with
respect to the BNY-IMB account. He noted that Chase was reviewing the
relationship with SAB/SANB:
It is rather crucial as Swiss American is seeking to open
additional DDA's and expand business with CMB. We would obviously be
``influenced'' by CMB-Switzerland's perspective.
The credit risk manager later reported to colleagues that the
employee in Switzerland reported that she expected the account to be
closed. At the same time, the credit risk manager asked the sales
representative to ask SAB about its ownership and relationship with
BNY-IMB. When asked why Chase did not already possess such information
about a client, the credit risk manager told Minority Staff that the
information is something Chase would ask for when opening a
relationship, but it is not something it would ask for during a
relationship because there is no annual review of a non-credit
relationship.
The sales representative reported back that SAB and SANB were owned
by Swiss America Holdings Company and that Swiss America Holdings
Company was owned by Carlsberg. However there was no mention of the
charitable trust that owned Carlsberg.
The sales representative also reported some information on the
relationship of Rappaport to BNY-IMB, but some of the information he
reported was incorrect. He concluded his memo to the credit risk
manager by writing:
My conclusion is that we MAY have some indirect, common
ownership by Rappaport in Swiss American and Intermaritime. However,
whereas his ownership of Swiss American is full and unquestionable, it
is unclear whether he even has principal or controlling interest in
Intermaritime Bank of New York. Brian Stuart Young can address the
Swiss American ownership details, but it would be unreasonable for me
to press him for details on the Intermaritime side of the ledger.
Thus, basic information about the ownership structure of its
correspondents SAB and SANB, and important information about other
banking interests of the owner of SAB/SANB were not fully known to
Chase years after it established relationships with SAB and SANB, and
the sales representative was reluctant to inquire about them.
Also in the Fall of 1999, the credit risk manager notified his
colleagues that there were ``numerous accounts of Caribbean and other
non-U.S. banks'' that had been established by Chase divisions, other
than the division that normally handled correspondent banking
relationships. He noted that two Antiguan banks--Antigua Overseas Bank
and Worldwide International Bank--had been opened by the United Nations
Branch of Chase. In a follow up memo, he noted:
Just wanted everyone to be aware that there are DDA's residing
elsewhere in CMB which are outside my Team's ``jurisdiction'' and thus
not subject to our screening or monitoring. [emphasis in original]
One colleague replied:
Obviously, ``know your customer'' policies, presumably have been
covered off and someone looks after them. Also, I believe that the
SCO's [senior credit officers] should be aware of corporate and
institutional names in their respective countries.
Another colleague wrote:
My own unscientific rating of certain geographic locations
includes the presumption (biased, obviously) that anything from Antigua
or Tortola is probably diseased and contagious and should be avoided
like mosquitos in Queens. I hope that KYC criteria have been followed
here--as the UN branch has dealt with int'l accounts for a long time,
hopefully they were on the ball in these cases. Meanwhile, my head is
going back into the sand on this one.
Chase officials told the Minority Staff that the individual who
wrote the memo meant that because Antigua Overseas Bank and Worldwide
International Bank were not in his department, they were not his
responsibility and he didn't know anything about them.
LI spoke with the on-shore affiliate [SANB] [in the]
morning, and they asked me to open FX accounts in London. Then,
now in the afternoon, . . . the offshore [SAB] also asked me to
---------------------------------------------------------------------------
open up the same. . . .
What I see coming at Chase is a situation similar to
[another account], where we operate with no eventuality with
what exists, but when it comes to open a new account[s], there
are complications, since they require that Risk Management
approve, etc. I don't know what the [credit risk manager in
London] will ask, but he will certainly want something from the
client manager (???), and whom will we ask to guarantee the
name?
What should we do? [A Swiss American official] is going
to be in Miami. . . . Is it time to tell him frankly that
opening a new account would give us a lot of problems? . . .
[W]hich makes me think . . . I just sent them a proposal [for a
check disbursement account]. Now I'm asking myself if [the
credit risk manager] will authorize that account? What do you
recommend?
(Just recently [the credit risk manager and someone from
compliance] have been asking about the nature of a client at
SAB, because of a series of MO's [money orders] that had passed
through the account and whose name they did not recognize).
The sales team manager responded:
Talk with [the credit manager] and suggest the theory
that as long as Chase doesn't decide otherwise, they are a
``client in good standing'' and there's no reason to deny them
service. I will speak with [another Chase official] on Tuesday
if it's not going well. If [the credit risk manager] says no (I
don't see why he would be more papist than the people) you and
I will talk to him together on Tuesday, what do you think?
The sales representative told the Minority Staff that he
realized that the account was at that time ``wounded.'' It had
been tainted because of some of the previous incidents and
attention given to it. When asked if he wanted to keep the
account open, the sales representative told the Minority Staff
that the account was important to him ``revenue wise''. It was
important for him to get clear direction from his boss to close
it, and he said that he was getting the opposite--SAB was a
citizen in good standing, so why close it. He then pressed the
credit risk manager for a memo vouching for the account. In
late December 1999, the credit risk manager responded:
PRIVATE/CONFIDENTIAL/OFF THE RECORD
SAB is getting too much bad press--it's even used as a
Case Study in our Money Laundering Training. It must be
rigorously examined without further delay. If Credit raises the
issue, they're ``under attack'' from the outset. If you raise
the issue (``the best defense is a good offense''), you may
still have a shot. [And if we all do nothing, we will all look
like idiots, plus any request for new accounts/services will
most probably be denied.]
Here's what I suggest:
A) Lay out the background on SAB
B) Describe what you want to do, and
C) Describe how you propose to ``police'' them.
D) Get Skea's support (since Ken Lay is lame duck at
this point)
E) Seek concurrence of John Stevens and Chris Carlin
By ``background'', I mean a succinct but honest listing
of the pluses and minuses, such as (not necessarily complete):
PLUSES:
We solicited them, not them/us.
DDA has been conducted properly--no issue whatsoever.
Good revenue generator.
I've reviewed their Cash Letters--nothing suspicious.
To best of our knowledge, their strategy (soliciting PBI
types via Frequent Flyer magazines and Website) is completely
legal--probably no different from our own PBI activities.
Per their statement, customer base is about 80% US/
Canadian; 20% European; only 2% Latin American (i.e., not the
Medellin Cartel).
Only 15 customers have accounts > $500M; only 4-5 > $1MM
(again, not exactly major drug dealer profile).
Management completely open with us.
They themselves have been quick to pull the plug on
suspicious customers.
MINUSES:
Not a ``strategic'' customer.
Their domicile (Antigua) lax.
They've been drawn into several frauds/money laundering
incidents but were cleared.
Their strategy undoubtedly attracts individuals evading
taxes in their home countries.
Ownership (Bruce Rappaport) is controversial.
By ``what you want to do'' I mean:
Absolutely no credit facilities (I presume)
Maintain existing business plus accept new accounts (I
presume)
By ``how do you police them'' I mean:
CMB visits
Other conditions, controls, informational requirements,
etc. (for example, continuing to review Cash Letters, getting
info on customer base, etc. on a periodic basis)
The credit risk manager told the Minority staff that there
were individuals throughout the organization who were
expressing concern about the relationship (and he would even
include himself in that group). He told the sales
representative that without a relationship manager to handle
the account, the sales representative should assume the
responsibility to pull all of the information about the account
together have a comprehensive analysis of the relationship. The
credit risk manager felt if Chase officials could satisfy
themselves that SAB was an innocent victim, then they might be
convinced that it was still an acceptable client. The credit
risk manager felt that it was necessary to achieve some
consensus on the account.
The sales representative told the Minority Staff that after
the credit risk manager's memo was issued, there was no need
for the sales team manager to speak with the credit risk
manager. Instead, he needed to speak to more senior officials
in sales. It was clear that the credit risk manager wanted the
sales team to sign off. The sales manager said he encouraged
the sales team leader to speak to more senior sales officials,
but the sales team never signed off.
In early January 2000, the sales representative spoke with
an official of SAB and noted that he told the SAB official
that,
``[W]e will not move to open FX accounts for them in
London until we are able to re-position SAB internally as
regards risk management.''
The sales representative told the Minority Staff that
opening new accounts would require introducing a whole new set
of people at Chase to SAB and the history of the account and
would require a whole new initiative and the support to do that
did not exist at the current time. He told the SAB official
that they could revisit the issue in 6 months.
In March 2000, a new check disbursement account was opened
for SAB. The sales representative told the Subcommittee staff
that, unlike the new accounts discussed in December and
January, the checking disbursement account was an offshoot of
the existing DDA account that SAB held in New York. He told
Subcommittee staff that he was not required to go through a new
account opening process for that service (as he was with the
foreign exchange accounts discussed above) and he was not sure
that he was required to go through risk management. He noted
that it appeared that the credit risk manager was not sure
either. He said that the fact that news of the new service
never got to the credit risk manager until after it was opened
is a function of how custom service felt it had to route the
program to get it into the system.
He said the credit risk manager never spoke to him about
the issue, nor did he ever hear that the credit risk manager
was concerned or frustrated that the account had been opened
up.
The credit risk manager agreed that additional accounts for
U.S. corporate names can be opened by the sales representatives
without additional sign off from the risk management
department. He noted that the sales representative had
mentioned the new service a few months earlier and advised it
would provide Chase with greater control over the disbursement
of checks. The credit risk manager believed it was a logical
explanation, but had advised the sales representative to
complete the analysis he outlined in his December 21 memo
before any new accounts were opened. When he learned that a new
account had been opened, the credit risk manager told the
Minority Staff that he felt he had asked that the future of the
SAB account be discussed before any new accounts were opened.
However, he did not feel that the sales representative was
trying to go around him, since he would inevitably receive
notice that the new account was being established.
As noted above, however, the opening of the account did
draw the attention of Chase officials when it was noted on the
account form that SAB was projecting a monthly volume of 10,000
checks.\33\
---------------------------------------------------------------------------
\33\ The sales representative told the Minority Staff that he is
not sure where the projected monthly volume of 10,000 checks
originated. He was not sure that was the number he gave to the
administrator. He said that based on earlier conversations with SAB,
the number 10,000 would be a lot less and he questioned the validity of
the 10,000 figure.
---------------------------------------------------------------------------
The credit risk manager told the Minority Staff that it was
during 2000 that Chase officials from the credit, sales and
compliance/risk divisions discussed the SAB and SANB accounts.
The concern was that given the publicity around the account and
the man hours that Chase had devoted to the relationship, it
was no longer a good fit for Chase. The officials decided to
terminate the relationship.
On April 28, 2000, the sales representative wrote to Swiss
American Banking Group and informed it that Chase was going to
terminate its accounts due to a ``lack of strategic fit.'' The
sales representative told the Minority Staff that he did not
participate in any conversations that presumably led to the
decision to terminate the accounts. He was asked to communicate
the decision to the client and wrote the letter. He noted that
he had a general conversation with the sales team leader about
the terminations of the accounts and the leader noted that they
could not defend the account any longer, the pressure was
building.
Initially, Chase asked SAB to close the account within 30
days. According to the credit risk manager, SAB retained
counsel who approached Chase and informed Chase that SAB was
trying hard to find a new correspondent, but could not meet the
30-day deadline. The counsel suggested that if Chase shut down
the account before SAB could locate elsewhere, SAB might sue
Chase. The sales team leader told Chase officials that SAB was
working to find a new correspondent and should be able to close
the account within a matter of weeks. Chase told SAB that if it
ceased all activity in the account, it would extend the account
to clear outstanding checks.
In August 2000, the account was still open. On August 14,
the sales team leader wrote to SAB and told bank officials that
Chase would close the accounts by September 14 unless they were
closed sooner by SAB. SAB requested a 30 day extension of the
September 14 date. Chase refused and the accounts were closed
on October 5, 2000.
Efforts were made by the credit risk manager to monitor the
relationship with SAB. However, his efforts were hampered by a
number of factors. Because of the non-credit nature of the
relationship, there was not a single individual who served as
the relationship manager or central point of contact for the
account. SAB was slow to convey information to Chase. Sales
representatives did not closely monitor the relationship and at
times did not act on important information that they received.
The bank was unaware of controversial activities that were
associated with the account, and was slow to respond to the
proliferating account activity related to Internet gambling.
These factors precluded a complete and coordinated review of
the relationship. As a result, the relationship was maintained
until late in the summer of 2000.
B. THE ISSUES
SAB and SANB have had a long history of controversial
leadership, questionable activity by corporate officers,
accounts that served as repositories for funds from frauds and
other illicit activities, and a reluctance to fully cooperate
with efforts of enforcement officials to seize the proceeds of
illicit activities that were in the bank. More recently, SAB
has serviced accounts that are related to Internet gambling, an
activity that is vulnerable to money laundering and illegal in
the United States.
Despite this history, until recently SAB and SANB have been
able to maintain correspondent accounts at some of the largest
and most prestigious U.S. banks, including Bank of New York,
Bank of America, and Chase Manhattan Bank. These relationships
can be characterized by failure of the U.S. correspondents to
respond more quickly and decisively to patterns of problems and
questionable activities in the relationship and inadequate due
diligence and ongoing monitoring.
Throughout their relationship with SAB and SANB, the U.S.
banks were continually confronted with, or making inquiries
about, problems and questionable activities associated with the
SAB/SANB accounts. Yet, the relationships were allowed to
continue for long periods of time--even years--after the
problems began to surface. One bank--BNY--even experienced
occasions when SANB was slow, or simply refused, to provide
information relevant to important issues related to the
correspondent banking relationship. The relationship managers
for BOA and BNY stated that they should have terminated the
relationships earlier than they did.
The banks' failure to act more quickly and decisively
stemmed in part from what appears to have been a general
convention throughout the correspondent banking field--a
reluctance to sever a relationship once it is established. This
reluctance stems from both a sense of customer loyalty and a
concern about liability for damages that may result from
severing a relationship. When a correspondent account is also a
significant revenue generator, there is even more incentive to
give the client an opportunity to correct its problems before
terminating a relationship. While there is no indication that
the banks in these relationships knowingly ignored illegal
behavior, these factors will often cause correspondent banks to
repeatedly give their client the benefit of the doubt and to
continue relationships in the hope that clients will correct
problems, or repeatedly extend termination dates to allow
clients time to find new correspondents. While this practice
may be changing as the nature of international finance and the
business strategies of major banks shift, it was certainly a
factor in the SAB and SANB relationships.
Chase was slow to address SAB about the large amount of
Internet gambling proceeds that were flowing through SAB's
correspondent account at its New York branch, even when
numerous Internet gambling firms were indicted by U.S.
Government officials and a Chase employee was called to testify
at a criminal prosecution involving one of the Internet
gambling establishments that used the SAB correspondent
account.
BNY apparently did little or no follow up on illegal
activities through the SANB correspondent accounts at its New
York branch, even though their personnel were directly
contacted by prosecutors involved in the DeBella case.
BOA made a determination to terminate its correspondent
relationship with SAB in 1995. While it significantly reduced
the services it offered to the bank at that time, the
relationship continued for an additional 4 years after that
decision was made.
BNY-IMB, a foreign affiliate of BNY, has been serving as
a conduit for SAB's Internet gambling clients, even though BNY
does not want to service Internet gambling business.
All three U.S. banks accepted SAB and SANB's account of
their dispute with the U.S. Government regarding the Fitzgerald
affair, with little or no effort to independently verify the
facts.
The history of the relationships with SAB and SANB also
reveal weaknesses in the due diligence and ongoing monitoring
practices of the U.S. correspondents. Fundamental issues
regarding the management and structure of the banks appear to
have been unknown to the relationship managers. While all three
banks reviewed in this case study followed up on matters that
came to their attention and one bank attempted to be pro-active
in reviewing the relationship, initial due diligence and
ongoing monitoring failed to identify key issues and major
problems and controversies that involving SAB and SANB,
resulting in an incomplete information base from which to
assess the relationship.
Chase and BOA initiated a correspondent relationship
with SAB with little or no due diligence, relying on their
previous connections with SANB. The banks failed to recognize
the fact that SAB was an entirely different type of bank than
SANB, with different clientele, different purposes and a
different regulator. It presented a potentially different type
of correspondent relationship from SANB and a different set of
money laundering vulnerabilities.
Although the banks knew that Rappaport was the
beneficial owner of SAB and SANB, they did not know the
identity of all of the entities in the ownership chain, nor did
any inquire why the ownership of the bank was structured
through a series of trusts and IBCs that were formed in secrecy
jurisdictions.
The banks apparently were unaware of the controversial
history and activities of a number of board members of SAB and
SANB, and made no inquiries about them.
Banks appear to have been unaware of many of the major
frauds and other illegal activities that used SAB or SANB as
repositories for illicit funds, even when their own
institutions had been used as the conduit for the flow of funds
from a particular fraud to SAB or SANB.
Chase was unaware that hundreds of web sites of Internet
gambling clients of SAB were instructing customers to send
wagers through the correspondent account at its bank, even
though Internet gambling in the United States is illegal under
U.S. law.
Interviews with the correspondent banks related to the SAB
and SANB relationships once again highlighted a pattern present
in many of the case studies included in this report: non-credit
foreign bank relationships do not receive the same level of
attention and scrutiny as credit relationships, contributing to
lapses and oversights in the due diligence and ongoing
monitoring process.
For example, the credit risk manager at Chase stated
that the monitoring of non-credit relationships is generally
reactive. Even when an attempt was made to be pro-active in the
monitoring of the SAB account, because of the non-credit nature
of the relationship there was not a single person who served as
the focal point for the relationship. The result was that Chase
did not receive timely information from its client,
questionable activities and frauds associated with the account
were not identified and the effort to conduct a coordinated and
fully informed review of the relationship was hindered.
The relationship manager at BNY explained that the bank
did not press SANB to get more information about questionable
account activity because in the early 1990's banks were more
concerned with credit risk than vulnerability to money
laundering.
The discrepancy in the level of scrutiny given to the
different types of relationships is underscored by the memo
written by a BOA credit manager in response to a request to
extend a fully collateralized revolving line of credit to SAB.
His memo raised questions about the ownership, structure and
purpose of the bank and who controls and monitors its
activities. This reflected a level of scrutiny and evaluation
that was often missing in the non-credit relationships that
existed between SAB and SANB and their U.S. correspondent
banks.
Case Histories Nos. 9 and 10
M.A. BANK
FEDERAL BANK
M.A. Bank of the Cayman Islands and Federal Bank of the
Bahamas are two offshore banks affiliated with larger
commercial operations in Argentina. Federal Bank's license was
suspended on February 13, 2001, by the Bahamian Government
after 9 years of operation; M.A. Bank remains open for business
after nearly 10 years of operation. Both banks were shell
banks: they had no physical office for conducting banking
business with customers, and they existed through their
correspondent relationships. Neither bank had an Argentinian
banking license despite cultivating an Argentinian clientele
and Argentinian banking activities and neither ever underwent
an examination by any banking regulator. Yet both offshore
shell banks were able to open U.S. dollar accounts at Citibank
New York, obtain Citibank automated systems for sending
international U.S. dollar wire transfers, and move more than a
billion dollars through their U.S. accounts. $7.7 million of
that was illegal drug money in the case of M.A. Bank and $1
million was bribe money in the case of Federal Bank.
This case history examines the due diligence and monitoring
failures of their U.S. correspondent bank, Citibank, which
enabled these two high risk foreign banks to gain entry to the
U.S. banking system. They include Citibank's failure to realize
that both banks were essentially operating in Argentina without
a license, its failure to realize that a $7.7 million seizure
order for M.A. Bank targeted illegal drug proceeds from a
Mexican drug cartel, its failure to realize that M.A. Bank
operated without basic fiscal controls and far outside the
parameters of normal banking practice, its failure to learn
that Federal Bank had no anti-money laundering program, and its
failure to provide accurate and complete answers to Argentinian
bank regulators' questions about the ownership and activities
of Federal Bank.
Information pertaining to M.A. Bank was obtained from
documents provided by the Government of the United States and
Citibank, court pleadings, interviews of government officials
and other persons in Argentina, Mexico, the United States and
the Cayman Islands, and other materials. Key sources of
information were interviews with an official from the U.S.
Federal Reserve Board of Governors (March and November 2000),
relationship managers and other officials from Citibank (May
and October 2000), and copies of interviews of the principals
of M.A. Bank conducted by agents of the U.S. Customs Service in
June 1999. The U.S. Customs Service conducted an investigation
of MAB and M.A. Casa de Cambio as a follow up to an undercover
drug operation. The investigation included interviews, in June
1999, with the principals of MAB and regulators in Argentina.
Much of the Minority Staff's understanding of the operations of
MAB was gained from the records of those interviews. The
investigation also sent written questions to MAB officials, but
they declined to provide any information.
Information pertaining to Federal Bank was obtained from
the bank records of Banco Republica, Federal Bank, and American
Exchange Company, provided by Citibank pursuant to subpoena;
interviews with Citibank officials; interviews with two Members
of the National Congress of the Argentine Republic, Elisa
Carrio and Gustavo Gutierrez, and their staffs; and copies of
audits of Banco Republica conducted by the Central Bank of
Argentina, one commenced in 1996, concluded in 1997, and
reported on in July 1998 and the other commenced in July 1998
and dated August 1998. The Minority Staff invited the owners of
Federal Bank, both directly (by letter on September 15, 2000,
to Jorge Maschwitz, attorney for the bank in Uruguay) and
through their agents (by letter on January 8, 2001, to the
bank's registered agent, Winterbotham Trust Company Ltd., of
Nassau, Bahamas) to provide any information with respect to the
bank and to answer Subcommittee questions. There has been no
response. The Bahamas Central Bank revoked the license of
Federal Bank Ltd. on February 13, 2001.
A. THE FACTS
M.A. BANK
M.A. Bank is a shell bank licensed by the Cayman Islands
with no physical office anywhere. M.A. Bank has never been
examined by a regulatory body of any jurisdiction. The owners
and officers of M.A. Bank (``MAB'') exploited the gaps in the
regulation of offshore banks to structure a banking operation
with poor controls and operating procedures that are an
invitation for money laundering and tax evasion. This case
study shows how inadequate due diligence and ongoing monitoring
by M.A. Bank's correspondent bank enabled M.A. Bank to utilize
its correspondent relationship to access the U.S. financial
network and engage in highly suspicious financial transactions
for more than 1\1/2\ years after assets in its account were
seized for illegal activity.
(1) M.A. Bank Ownership and Management
M.A. Bank is part of a group of Argentine finance,
investment and currency exchange entities, collectively known
as Mercado Abierto Group (``the M.A. Group'' ).\34\ The M.A.
Group is owned and managed by three individuals: Miguel
Iribarne, Aldo Luis Ducler and Hector Scasserra. These
individuals also hold positions as officers in other entities
of the M.A. Group, including M.A. Bank. All three are former
government officials. Iribarne worked in the Ministry of
Economy for 14 years, attaining the position of Undersecretary
for the Economy. Scasserra was the Director of the National
Development Bank, Minister of the Interior and also worked in
the Ministry of Economy. Ducler is a former Secretary of
Finance.
---------------------------------------------------------------------------
\34\ Entities that are part of the M.A. Group include: Mercado
Abierto S.A., an over-the-counter securities broker-dealer that
functions primarily as an asset management company, which is the major
owner of all of the other entities in the M.A. Group; M.A. Casa de
Cambio, a currency exchange house; M.A. Valores Sociedad de Bolsa, an
entity that operates within the Buenos Aires stock market; M.A. Capital
Markets, a merchant bank that deals with mergers and acquisitions.
Mercado Abierto, S.A. owns the entities in the following proportions:
MAB (60%); M.A. Casa de Cambio (97%); M.A. Valores Sociedad de Bolsa
(97%); M.A. Capital Markets. [In the original publication of this
report in February 2001, footnote read ``M.A. Capital Markets (97%).
This percentage reported was an error. No percentage of ownership was
reported in the documents cited.] Source: ``Basic Information Report,''
supplied by Citibank, translated from Spanish by CRS; M.A. Bank Limited
Financial Statements and Independent Auditors' Report for 1998; and
Mercado Abierto, S.A., Annual Report and Financial Statements as of
June 30, 1998.
---------------------------------------------------------------------------
According to its financial statements, MAB was registered
in the Cayman Islands on September 23, 1991 as Petra
Investments Bank, but one day later it changed its name to M.A.
Bank. It was issued a Category ``B'' banking license (an
offshore banking license) on October 22, 1991. M.A. Bank's main
activities are listed as those related to securities trading
and the administration of investment portfolios for its own
accounts and its customers' accounts.
In its financial statements, M.A. Bank reports that it is
owned by Mercado Abierto, S.A., one of the entities that is
part of the Mercado Abierto group, and Sigma Financial
Corporation. During interviews of Ducler, Scassera and Iribarne
conducted by agents of the U.S. Customs Service in June 1999, a
review of MAB's articles of incorporation showed that 60% of
MAB is owned by Mercado Abierto, S.A. and the remaining 40% is
owned by Sigma Financial Corporation. Upon questioning by a
Customs agent, Iribarne revealed that Sigma Financial
Corporation, a Cayman Islands company, was owned by Iribarne,
Scasserra and Ducler. According to the Customs interview,
Iribarne said that this structure was created for ``tax
purposes.'' Customs agent notes from the interview state:
Miguel Iribarne explained that the Cayman Islands have
rules about the amount of capital M.A. Bank must have in
relation to deposits. Over the years M.A. Bank has increased
their amount of capital. This makes the profits subject to
taxation in Argentina. So, they received authorization from the
Cayman authorities to establish another corporation that owns
40% of M.A. Bank. This reduces their taxes in Argentina by 40%.
Miguel Iribarne stated that Sigma Financial is only in the
Caymans, so they do not have to pay the taxes in Argentina.
Minutes of a Sigma Board of Director's meeting lists a
former Mercado Abierto employee as the sole director of Sigma.
According to the Customs interviews, Iribarne told the Customs
agent, ``They did this for `tax purposes' so none of their
names would appear on the documents for Sigma Financial.''
MAB's administrative agent in the Caymans is Coutts and
Company; MAB has no physical presence and conducts no business
from the Cayman Islands. MAB also has a representative in
Uruguay, Elenberg-Guttfraind & Associates.
(2) Financial Information and Primary Activities
The stated primary purpose of MAB is to provide offshore
banking and investment services to clients of Mercado Abierto.
As described above, the main activities of MAB are trading
securities and the management of investment portfolios. MAB
offers clients access to international markets for the
acquisition of bonds or other investments that they could not
acquire through Argentine-regulated investment firms and
provides a vehicle for depositing funds outside of Argentina.
According to Citibank officials, because of Argentine financial
regulations, financial institutions that are licensed in
Argentina are limited in the securities and bonds they can
offer to clients. Therefore, most financial institutions, in
order to provide their clients with a full range of
international investment opportunities, establish foreign
banking entities that are licensed in a jurisdiction other than
Argentina and are therefore able to offer clients a broader
range of investment opportunities. The MAB's 1998 financial
statement reported that it had $37 million in assets and $26
million in deposits at the end of 1998. The bank did not
respond to a request for information about its primary
activities and the number of clients and accounts it
serviced.\35\
---------------------------------------------------------------------------
\35\ In March 2000, Senator Levin wrote to the counsel for MAB and
requested that the bank provide a general description of its activities
and information on, among other things, its assets and the number of
its clients and accounts. He asked that the bank provide answers to his
inquiries by April 26. MAB never provided any information or answers to
Senator Levin. In April, Senator Levin received a copy of a letter sent
to Chairman Collins by MAB's new attorney in the United States. The
attorney referred to Senator Levin's letter to MAB and stated:
I am not in a position to address your inquiries at this time. I
have just been retained on this case, which has been going on for
several years. Obviously I am just now learning about the facts, and as
I am sure you are aware this is a complex case which cannot be mastered
in a moment's time. I will be meeting with my clients face to face in
the very near future and I will continue in my efforts to review the
extensive materials. I will write you again when I learn the facts of
this case. Obviously I cannot comply with your April 26, 2000 deadline.
To date, MAB has not supplied any information to the Subcommittee.
---------------------------------------------------------------------------
(3) M.A. Bank's Correspondents
MAB had U.S. correspondent accounts with Swiss Bank
Corporation (now Union Bank of Switzerland) from January 1992
to May 1995, and with Citibank from September 1994 to March
2000. MAB also had additional correspondent accounts in Europe
and South America for payments, transfers and settlements
involving foreign currencies and securities.
(4) M.A. Bank Operations and Anti-Money Laundering Controls
An MAB official told a U.S. Customs agent that MAB does not
accept unknown clients. To open an account at MAB, MAB said an
individual must be referred by an existing client, already have
an investment with Mercado Abierto or be someone who is known
to the officers of MAB. According to an MAB official, the bank
has know-your-customer (``KYC'') rules similar to those
employed in banks in the U.S. The Minority Staff obtained a
copy of a three-page MAB document titled ``Policies and
procedures to prevent money laundering activities.'' The
document identifies the policies and procedures for
establishing new relationships and servicing accounts. They are
organized under four topics: ``Know the Customer,'' ``Forbidden
Transactions,'' ``Transactions to be closely monitored and
reported to the management,'' and ``Considerations to be taken
when analyzing suspicious transactions.'' The policies and
procedures included the following: the customer's true identity
must be known; all suspicious transactions must be immediately
reported to the management; cash deposits and withdrawals are
forbidden. However, as revealed through the interviews of MAB
officials by the U.S. Customs Service, top officials at MAB
were aware that these policies and procedures were not followed
at MAB.
(5) Regulatory Oversight
MAB is licensed as a Class B (offshore) bank in the Cayman
Islands. Other than its registered agent, it has no physical
presence in the Cayman Islands, and it is prohibited from doing
business with residents of the Cayman Islands.\36\ Offshore
banks are required to submit annual audited financial
statements to the Cayman Islands Monetary Authority (``CIMA''),
the governmental entity that regulates banks in the country,
but offshore banks are not required to keep their records in
the Cayman Islands.
---------------------------------------------------------------------------
\36\ M.A. Bank's representative in Uruguay, Elenberg-Gotfraind &
Assoc., informed the Minority Staff that MAB has a ``physical and legal
presence and address in Georgetown, Grand Cayman (Coutts & Co. Cayman
Ltd).'' However, this is nothing more than an agent's office. M.A. Bank
has no office or staff in the Cayman Islands, and in interviews with
the Customs Service, one of the owners of M.A. Bank stated that MAB had
no offices in the Caymans.
---------------------------------------------------------------------------
In 1991, when M.A. Bank first received its offshore banking
license, the Cayman Islands still permitted the licensing of a
bank which was not a branch or subsidiary of another bank,
which planned to keep its employees and banking records outside
of the Cayman Islands, and which planned to have no physical
presence on the island other than a mailing address at a local
registered agent. The Cayman Islands has since discontinued
issuing such bank licenses, but has allowed its existing
offshore shell banks to retain their Cayman licenses. In 2000,
for the first time, Cayman banking authorities began a bank
examination process which requires bank examiners, acting on
behalf of the government, to conduct an independent inspection
of the bank records and operations of Cayman licensed banks.
Prior to this program, Cayman banking authorities oversaw
Cayman banks primarily by analyzing information submitted by
those licensed banks or their auditors. The new Cayman
examination program requires an independent review of records
and includes sending Cayman examiners to conduct on-site visits
of Cayman banks that keep employees and records outside of the
Cayman Islands.\37\ However, M.A. Bank, despite nearly 10 years
of operation, has yet to undergo any bank examination or site
visit by any bank regulator, whether from the Cayman Islands,
Argentina or any other country.
---------------------------------------------------------------------------
\37\ For a general description of the status of anti-money
laundering efforts in Argentina, see the Regulatory Oversight section
in the Federal Bank discussion.
---------------------------------------------------------------------------
MAB is required to have an agent that represents it in the
Cayman Islands, and is responsible for accepting notices from
CIMA and providing information required or requested by the
regulatory authorities. MAB is represented by Coutts and
Company. The Coutts official who handles the MAB account told
the Minority Staff that Coutts' only function is to serve as a
point of contact for government officials. Coutts does not
maintain any records, nor does it perform any activities with
respect to MAB's banking activities.
Although the M.A. Group operates out of Argentina, MAB is
not licensed to operate in Argentina and is not regulated by
the Central Bank of Argentina. According to the Customs
interviews, one of the principals told the U.S. Customs agent
that:
. . . they [MAB] do not need a license [in Argentina]
because [MAB] is an offshore bank. Miguel Iribarne told [the
Customs agent] that the administrative offices for M.A. Bank
are located in Montevideo, Uruguay . . . When [the Customs
agent] asked, why do they do this? Miguel Iribarne responded
that M.A. Bank is an offshore bank, if they had offices in
Argentina they would be subject to regulation by the Central
Bank.
MAB has an administrative office in Uruguay at an auditing/
consulting firm called Elenberg-Gutfraind & Associates.
According to the principals of Elenberg-Gutfraind, the firm is
registered with the Central Bank of Uruguay as a representative
of MAB. However, it does not appear that any type of
administrative activities related to banking or customer
services takes place at that office. In a letter to the
Minority Staff, the principals of Elenberg-Gutfraind explained
that their relationship with the M.A. Group (including MAB),
included consulting advice and technical assistance related to
audits of the bank. Essentially, the firm ``received and sent
documents and correspondence which are essential for the
fulfillment of the audit.'' From the information provided, it
appears as if MAB's administrative office in Uruguay is a
representative or agent office that may maintain documents or
records. Neither the principals of MAB nor the principals of
Elenberg-Gutfraind made any suggestion or offered any
information that MAB was licensed in, or regulated by, Uruguay.
A Special Examiner from the U.S. Federal Reserve Board of
Governors who accompanied a U.S. Customs agent during their
interviews of MAB owners and officials in June 1999 told the
Minority Staff that the investigation established that MAB did
not have a physical presence anywhere other than Argentina.
According to the Special Examiner, ``M.A. Bank is nothing more
than an account holder at Citibank.'' The examiner noted that
through that account, MAB can receive and make wire transfers,
deposits and withdrawals. According to the examiner, its
account is no different from any checking or savings account an
individual would set up, and through that account MAB could
process transactions for all of its customers.
(6) Money Laundering and Fraud Involving M.A. Bank
(a) Laundering of Drug Proceeds through M.A. Bank
In May 1998, the Department of Justice announced the
conclusion of a 3-year undercover drug operation called
``Casablanca.'' In the undercover operation, U.S. Customs
agents infiltrated the Amado Carillo Fuentes drug organization
(``the Juarez cartel''), posing as money launderers. As part of
the operation, the agents laundered money for the cartel
through a number of Mexican and Venezuelan banks. As an
outgrowth of the original operation, the agents also collected
cash from cartel drug operations in the region of Chicago and
laundered the money back to foreign banks and money houses
through correspondent accounts maintained at banks operating in
the United States. Over a period of one year (May 1997-May
1998), $43 million was wire transferred to specific accounts
identified to the undercover agents by members of the Juarez
cartel.\38\
---------------------------------------------------------------------------
\38\ Records obtained from the Customs Department indicate that
Jose Alvarez Tostado, a lieutenant in the Juarez cartel, had telefaxed
the undercover agents a list of banks and accounts that had been
established to receive the transfer of the funds. The fax identified 10
different accounts, including two accounts at Citibank.
---------------------------------------------------------------------------
The U.S. Government filed seizure warrants for the drug-
related funds in those accounts in May 1998. Among the affected
accounts were two accounts in the New York branch office of
Citibank, One belonged to M.A. Bank; the other belonged to M.A.
Casa de Cambio. According to a government undercover agent,
$7.7 million in drug proceeds had been deposited in the account
of M.A. Bank and $3.9 million had been transferred into the
account of M.A. Casa de Cambio.
Between August 12, 1997, and January 7, 1998, a total of
$3.983 million was transferred into the M.A. Casa de Cambio
account at Citibank New York in eight separate transactions by
U.S. Customs undercover agents acting under instructions from
representatives of the Juarez cartel. Between August 12, 1997,
and April 1, 1998 a total of $7.768 million was transferred
into the M.A. Bank account at Citibank New York in 18 separate
transactions by U.S. Customs undercover agents acting under
instructions from representatives of the Juarez cartel. In
seven of the eight transfers to the Citibank M.A. Casa de
Cambio account and in nine of the 18 transfers to the Citibank
M.A. Bank account, the wire instructed that the funds were for
the benefit of Nicholas DiTullio. DiTullio is a real estate
agent in Argentina and an account holder at M.A. Bank. His
account was opened on July 10, 1997, approximately one month
before the drug-related transfers started.\39\
---------------------------------------------------------------------------
\39\ According to the Complaint for Forfeiture filed by the U.S.
Government, the account was opened up after DiTullio was approached by
two individuals, named Jorge Iniguez and Jaime Martinez-Aryon, who
wanted assistance in acquiring real estate in Argentina. Iniguez is a
former Group Supervisor of the Mexican Federal Judicial Police. While
in that position, he became involved in the distribution of marijuana
in Mexico. In 1991 he was arrested in California and eventually
convicted on Federal charges of conspiracy to import 800 pounds of
marijuana into the United States. In order to facilitate the transfer
of funds for the purchase of properties, DiTullio offered to open an
account through which Mr. Iniguez could transfer funds from the U.S. to
Argentina. DiTullio recommended that an account be opened with MAB and/
or M.A. Casa de Cambio and arranged a meeting between himself, Ducler
and Iniguez. The account was opened in Mr. DiTullio's name because
Ducler would not open an account in Mr. Iniguez' name because of the
source of the funds to be laundered through the account. Instead,
Ducler suggested that one or more accounts be opened in DiTullio's
name, and that those accounts be used to transfer the funds to
Argentina. Complaint for Forfeiture (U.S. District Court for the
Central District of California, Western Division, No. cv 00-01493), 2/
10/00.
---------------------------------------------------------------------------
When the U.S. Government presented seizure warrants for the
accounts in question, only $1.569 million remained in the MAB
account and $234,000 remained in the M.A. Casa De Cambio
account. The remainder of the drug deposits had been wired
transferred out of the accounts to Argentina. After the seizure
of the $1.8 million remaining in the accounts on May 18, 1998,
MAB sought return of this money, based on the defense that it
was an innocent bank.\40\
---------------------------------------------------------------------------
\40\ Under current law, the funds deposited into a correspondent
bank account do not belong to the depositor but to the bank. Therefore,
the government cannot seize the funds based on the wrongdoing of the
depositor. In order to seize the money from the bank's correspondent
account, the government must show that the bank was facilitating the
laundering of illicit gains. Otherwise the bank has an ``innocent
bank'' defense. The only way for the government to seize the illicit
funds, without proving culpability by the bank, is to file a complaint
in the jurisdiction where the depositor has his account, and this is
often a foreign jurisdiction.
---------------------------------------------------------------------------
The U.S. Customs Service carried out an investigation of
MAB and M.A. Casa de Cambio which included interviews, in June
1999, with the principals of MAB and regulators in Argentina.
As a result of the investigation, on February 10, 2000, the
U.S. Government filed a complaint to seize the funds in the
accounts of MAB and M.A. Casa de Cambio on the grounds that the
officials of the bank and the Casa de Cambio were aiding the
laundering of funds. The complaint alleged in part:
. . . Dueler caused to be opened one or more accounts at
M.A. Bank, M.A. Casa de Cambio and/or Mercado Abierto in the
name of DiTullio. It was understood by Dueler, DiTullio and
Iniguez that said accounts would be used to transfer drug
proceeds from the United States to Argentina, and that said
proceeds would then be paid out of the account(s) to DiTullio
for delivery to Iniguez. The government is informed and
believes and thereon alleges that the opening of the account(s)
in DiTullio's name was designed to disguise the nature, source
and ownership of the drug proceeds that were to be filtered
through the account(s), and that Dueler was aware of the true
nature and source of the funds, i.e., drugs. In opening the
account(s), Dueler intentionally dispensed with virtually all
of the standard internal controls and processes generally
required to open accounts with M.A. Bank and/or M.A. Casa de
Cambio.
. . . Drug proceeds belonging to the Juarez Cartel would
be picked up in Chicago, as set forth in paragraph 16 above,
and then wire transferred to the Citibank accounts of M.A. Casa
de Cambio and M.A. Bank, as set forth in paragraphs 17 (a) and
(b) above. The monies would then be credited and paid by M.A.
Casa de Cambio and M.A. Bank to DiTullio.
. . . Despite the various names given as the
beneficiaries of the money transfers listed above, all of the
transferred funds were in fact paid by M.A. Bank and M.A. Casa
de Cambio to Nicolas DiTullio (``DiTullio''), either in U.S.
currency or by cashier's check. The government alleges that
DiTullio, Dueler, Iniguez and Martinez-Ayon, among others, were
participants in a money laundering conspiracy, the object of
which was to convert drug proceeds from the Chicago pickups
into currency and checks issued by M.A. Bank and M.A. Casa de
Cambio in Argentina.
. . . Based upon the above facts, there is probable
cause to believe that M.A. Bank and M.A. Casa de Cambio
knowingly used the Citibank accounts referred to in paragraphs
17 (a) and (b) to launder money in violation of 18 U.S.C.
Sec. Sec. 1956 (a)(1), 1956 (b) and 1957. Accordingly, there is
further probable cause to believe that funds contained in the
above-referenced accounts are subject to seizure and forfeiture
to the United States pursuant to 18 U.S.C. Sec. 981(a) (1).
Additionally, to the extent that the specific funds contained
in the accounts are not the same monies that were involved in
the money laundering transactions, there is probable cause to
believe that those funds have merely replaced identical
property previously on deposit in the accounts (which identical
property was in fact involved in money laundering) and are
therefore subject to seizure and forfeiture to the United
States pursuant to 18 U.S.C. Sec. 984.
On June 9, 2000, the U.S. Government and the owners of the
M.A. Group reached a settlement on the disposition of $1.8
million in seized funds. The U.S. Government retained $1.2
million and the owners of the M.A. Group received $600,000.
Subsequent to the settlement, Aldo Ducler, one of the owners of
the M.A. Group and MAB, placed a full page advertisement in the
Argentine newspaper, La Nacion. The advertisement, entitled,
``The Truth of the Facts'' portrayed the settlement agreement
with the United States as a vindication of the actions of MAB
and its owners.\41\
---------------------------------------------------------------------------
\41\ It, in part, stated:
The conclusions of this exhaustive investigation (by the U.S.
Government) resulted in the signing of a bilateral agreement between
the United States, the Department of Justice, and the Department of
Treasury of the United States, and our entities and directors, signed
June 9, 2000 and stamped (registered) in the judicial district of
California June 18 by Judge Spencer. Under this agreement the
Government of the United States desists of any judicial action, and
expressly clarified that there was no culpability or fault by any side.
More specifically it eliminates the possibility of any new legal claim
in this case. In addition it implies the recognition and acceptance by
the United States that:
--The director of M.A. at all times acted within compliance of all
legal applicable laws and with absolute good faith.
--The lack of existence at all times of any knowledge or suspicion
on our side about the alleged illicit origin of the funds, which came
in all cases from first rate U.S. banking institutions operating within
the territories of the United States.
--The collaboration we gave with our lawyers since the beginning
of the investigations, collaboration that has been underscored and duly
appreciated by the United States. This was shown in a letter that
[Assistant U.S. Attorney] Steven Welk sent our lawyer, in which (naming
us explicitly) he transmitted to us his appreciation for the attention
received in Buenos Aires and our cooperation in the investigation. This
language in a letter that has a letterhead of the U.S. Justice
Department and with a signature of who is acting in the name of the
[U.S. Attorney for the Central District of California] (Alejandro
Mayorkas) would be unthinkable if the government of the United States
did not have the conviction that it had been dealing with honorable
people that don't have anything to do with money laundering.
---------------------------------------------------------------------------
On December 26, 2000, the Acting Director of the Office of
International Affairs of the U.S. Department of Justice sent a
letter to Dr. Jose Nicasio Dibur of the Ministry of Justice in
Argentina concerning the resolution of the action taken by the
United States against MAB and its owners and refuting the claim
of vindication by Ducler. In the letter, the Acting Director
wrote:
It was agreed that the consent judgment did not
constitute an admission of liability or wrongdoing on the part
of the claimants. Id. At lines 3-6. At the same time, however,
the consent judgment did not constitute an agreement by the
United States that the claimants committed no illegal acts, or
that the claimants lacked guilty knowledge of the illegal acts
described in the complaint.
. . . The essential purpose of the consent judgment was
to divide the seized funds while leaving open the question of
whether the claimants committed or, were knowledgeable of, the
illegal acts described in the complaint. This is not
particularly unusual.
. . . In essence, the parties ``agreed to disagree''
concerning that question. That being said, it should be noted
that this office would not have entered into the consent
judgment unless it believed that there was a valid factual
basis for the forfeiture of the funds.
. . . The consent judgment applied only to the civil
forfeiture case in which it was entered. It did not provide for
immunity for any party (corporate or individual) with respect
to potential criminal conduct. The United States made no
representations whatsoever about the further investigation or
prosecution concerning the criminal conduct described in the
complaint.
. . . However, the consent judgment is not evidence that
the United States exonerated the M.A. entities or their
principals or that the government believed that the allegations
or the complaint were not true.
(b) Unsound and Illegal Banking Practices
In June 1999, representatives of the U.S. Customs Service
and the U.S. Federal Reserve Board of Governors traveled to
Argentina and interviewed officials of the Argentine Central
Bank (``BCRA''), MAB, and Nicolas DiTullio. MAB officials
described to the Customs agent how MAB serviced its clients'
accounts and, in particular, how it handled transactions of
DiTullio. The explanations offered by the MAB owners reveal
banking practices that were highly vulnerable to money
laundering and far outside the parameters of normal banking
practice.
M.A. Group officials said that M.A. Bank had KYC procedures
similar to those at U.S. banks and that individuals can only
open accounts at MAB if they are referred from an existing
client, are already an investment client of M.A. Group, or are
known to the officers of MAB. DiTullio was not required to
provide references or undergo a credit check because his name
was well known in the real estate field, and he was a long-time
acquaintance of Ducler, Iribarne and Scasserra.
Operation in violation of Argentine banking law. According
to the Customs agent's interviews, officials of the BCRA stated
MAB is not licensed to operate as a bank in Argentina. They
said it can operate as a client of another bank (an account
holder like anyone else), but it is not allowed to conduct
banking business in Argentina: It cannot take in deposits or
dispense withdrawals. Yet, it appears that MAB did accept
deposits and dispense withdrawals to its customers in Buenos
Aires at the offices of the M.A. Group.
During a tour of the Mercado Abierto offices, a Customs
agent asked Iribarne, one of the owners and the President of
MAB, if the teller window and the vault in the M.A. Casa de
Cambio section of the offices was the place he, as a customer
of MAB, would bring funds and have MAB wire the money somewhere
else. According to the Customs interviews:
Iribarne said yes that is correct. They, M.A. Bank,
would keep the money in the vault until they could transport it
to the bank, after which they would transport the money.
. . . [The Customs agent] also asked if he received
money from the United States as a customer of M.A. Bank, would
someone from Mercado Abierto pick up the cash at the bank in
Argentina, bring it to Mercado Abierto and place the money in
the vault, and would he receive the money at the windows right
here. Iribarne said that is correct.
During the interviews, the Special Examiner from the
Federal Reserve Board of Governors asked MAB officials how a
customer could receive money in Argentina if MAB did not have a
branch or an account in Argentina. According to the Customs
record of the interview, Iribarne explained how the process
worked:
1) For example, Nicolas DiTullio sends the M.A. Bank
account at Citibank in the United States $100,000.
2) If Mercado Abierto has the cash in their vault in
Argentina, Nicolas DiTullio comes into the Mercado Abierto
offices and they would give him the $100,000 in cash at the
teller window. Nicolas DiTullio signs the receipt and leaves.
3) If Mercado Abierto does not have the cash, they
contact a licensed bank or Cambio in Argentina that has a
branch in the U.S. (For example purposes, Bank Boston). They
tell Bank Boston that they (M.A. Bank) are going to wire
$100,000 to the Bank Boston Branch in the U.S. Bank Boston
receives the wire in the U.S. and holds the funds in a
temporary account for M.A. Group Bank. Then someone from M.A.
Bank officer [sic] goes into Bank Boston in Argentina. Bank
Boston, Argentina, checks to make sure they have received the
wire in the U.S. and then releases the $100,000 in cash to the
M.A. Bank officer. The officer takes the cash back to Mercado
Abierto and places the money in the vault until Nicolas
DuTullio arrives to receive the $100,000.
An MAB officer and accountant told the Customs agent that
there is no account for MAB in Argentina, so they always use
other institutions. When a Customs agent asked if records are
kept for all MAB transactions of $10,000 or more, as required
by the BCRA, Iribarne, according to the interview records,
responded that:
They do not have to report any of the M.A. Bank
transactions to the Central Bank or keep a record . . . because
the money does not come into Argentina . . . if a bank is
licensed in Argentina they would have to report the transaction
and keep the log, but an offshore bank like M.A. Bank does not.
This is because the wire transfer activity takes place offshore
using ``undeclared'' funds. The report would be the
responsibility of Bank Boston, if and when they transferred the
$100,000 to Argentina to cover the withdrawal.
The account officer told the U.S. Customs agent that the
financial transactions of all of M.A. Group's subsidiaries were
run through a central treasurer's office. All transactions for
all of the entities in the M.A. Group are conducted in bulk
during the day and one company can lend money to another
company as needed to help it meet commitments. At the end of
the day the treasurer records the transactions in the proper
set of books.
The U.S. Government also obtained documentary evidence that
M.A. Bank was conducting banking operations in Argentina.
According to the Special Examiner from the Federal Reserve
Board of Governors, the U.S. Government received material from
MAB that included deposit and withdrawal tickets all signed by
DiTullio. According to the examiner, when the examiner asked
the MAB principals if they had a license to operate MAB in
Argentina, they told the examiner that performing the
transactions was a service they provided to their clients.
Pseudonym accounts. Many of the wire transfers made to
DiTullio's account at MAB were sent to MAB's correspondent
account at Citibank. The affidavit of a Custom's agent,
submitted in support of the seizure warrant for funds in MAB's
account at Citibank New York, disclosed that many of the wire
transfers that were credited to DiTullio's account at MAB
identified entities other than MAB as the beneficiary of the
transfer, and the entity identified in the ``for the benefit
of'' column often was someone other than DiTullio. Oftentimes,
the only correct information on the wire transfer documentation
was MAB's correspondent account number. Despite these
inaccuracies, Citibank did not reject the transfers or return
the money to the originator but credited the funds to MAB's
account. MAB then credited them to DiTullio's account.
When the Customs agent asked the owners of MAB how they
knew to credit the transfers to DiTullio's account and not to
someone else's, Iribarne said that DiTullio had advised them in
advance of the amounts that would be sent. When asked again by
the Customs agent how the bank knew to credit DiTullio's
account when the name of the party to be credited on the wire
was a different name from DiTullio's, Iribarne said they were
able to match the date and time of the transfers with letters
DiTullio sent to M.A. Bank notifying the bank of incoming
funds. Yet, the report of the Customs agent noted that the
letters notifying MAB of forthcoming wire transfers to be sent
by DiTullio were provided several days before the undercover
operation wired the funds, and the letters did not list a date
when the transfers would occur. These omissions raise a
question of how the M.A. Bank officials knew to credit the
DiTullio account.
Moreover, MAB owners indicated that such transactions were
regular occurrences at the bank. According to the Customs
interviews, the owners of MAB stated that they regularly
received ``fantasy names'' on wire transfers and used the
amount and date to match them to client deposit notices:
Iribarne went on to explain that they (M.A. Bank)
normally receive many ``fantasy names'' on the wire transfers
they receive, so they just use the amount and date to match
them to the proper client. When [the Customs agent] asked about
these ``fantasy names,'' Miguel Iribarne said clients do this
so the funds are not ``regulated.'' Miguel Iribarne also
explained that it is also normal for clients to wire transfer
money to M.A. Bank and leave the beneficiary information
completely off the wire transfer instruction, and M.A. Bank
still matches the money to the client.
According to the Special Examiner from the Federal Reserve
Board of Governors, the practice described by the MAB owner
violates normal banking practice. The examiner noted that if a
bank received a wire transfer on which the name of the party to
be credited was a different name from the name of the account
holder who told the bank a wire transfer would be made to their
account, the bank would generally call the account holder to
confirm where the funds are to be credited. The bank would also
ask the account holder why a third party would have money
transferred into their account.
Servicing illicit funds. In discussing how they handled
accounts of DiTullio and others when the wire transfer
contained incorrect or no beneficiary information, the bank
owners were very clear that they believed that the clients were
doing this to avoid taxes. According to the Customs interviews:
[The Customs agent] asked, what if two clients claim the
same amount of money, or some client claims that money had been
sent and M.A. Bank could not find the transfer amid all the
similar transfers? Miguel Iribarne said they have never had
this problem. Miguel Iribarne stressed that their clients trust
the bank, ``especially the non-declared funds.'' [The Customs
agent] inquired if the funds were non-declared for tax
purposes, and Miguel Iribarne said yes.
At one point, Iribarne told the Customs agent that he
believed that all offshore accounts belonged to people avoiding
taxes and that the money may sometimes come from other illegal
sources as well:
[The Customs agent] mentioned the offshore, unregulated
funds. Miguel Iribarne told [the Customs agent] that he
believes that all offshore accounts belonged to people avoiding
taxes. Miguel Iribarne said maybe the money sometimes comes
from other illegal activities as well. [The Customs agent]
asked him if he thought M.A. Bank's clients were hiding money
to avoid taxes? Miguel Iribarne said sure, most of the
customers have overseas account [sic] so they do not have to
report income. Miguel Iribarne said he does not care. The
customers are the ones not reporting, not him.
Falsification of withdrawal records. One of the ways
DiTullio withdrew money from M.A. Bank was in cash. According
to Iribarne, DiTullio would call and tell M.A. Bank he would be
coming in to withdraw money, and then he would show up and sign
a withdrawal receipt when he withdrew the money. The owners of
MAB provided the Customs agent with copies of the withdrawal
slips that had been completed and signed by DiTullio. The
Minority Staff received a copy of one of those slips. The form
appeared as follows:
[GRAPHIC] [TIFF OMITTED] T1166.137
As can be seen from the form, while MAB's name and address
is included in the typewritten statement on the form, it is not
imprinted on the form itself. The withdrawal slip is not a
preprinted slip that banks generally produce and make available
to all customers. Rather, it is a form that appears to have
been produced on a typewriter or printer with places to insert
the amount received and the name and account number of the
client.
In reviewing the withdrawal receipts signed by DiTullio,
the Customs agent asked why the receipts looked different from
the M.A. Casa de Cambio receipts, which appeared more official.
According to the Customs interviews:
Iribarne said that the M.A. Bank receipts are a private
receipt. The transactions are not reportable to the government,
so they can generate them any way they want. [The Customs
agent] asked, why is Euro-American Finance printed on the
receipts (it looks like a receipt Nicolas DiTullio generated)?
Miguel Iribarne said the form is in the computer; Nicolas
DiTullio can ask to have anything put on the receipt and they
would do it, they did not care. [The Customs agent] asked about
Euro-American Finance. Hector Scassera [one of the other owners
of MAB] said Nicolas DiTullio did not want the local tax
authorities to know about, and tax him on, the money coming
from the United States. Euro-American is a company name Nicolas
DiTullio uses to avoid the tax authorities.
According to the Special Examiner from the Federal Reserve
Board of Governors, several aspects of the withdrawal process
described by the owner of MAB were not in accordance with
standard banking practices. According to the examiner,
typically the institution's name, address and other information
about the bank would be preprinted on a withdrawal form. No
such information was on the withdrawal forms signed by
DiTullio. The form was simply a typewritten note. Apparently,
MAB had no withdrawal slips. The Minority Staff learned that
the examiner asked someone at the teller window at M.A. Group's
offices for some deposit/withdrawal tickets and was told that
they did not have any. The examiner also noted that in the case
of DiTullio, the form was printed in English, even though
DiTullio spoke only Spanish.
The Special Examiner also noted that the forms were signed
by DiTullio as if he were an individual authorized by the
company, Euro-American Finance, to make withdrawals. This
leaves the impression it is Euro-American Finance that has the
account at MAB and is the entity making the withdrawal.
However, the examiner pointed out and the owners of MAB
acknowledged, that the funds were being withdrawn by DiTullio
from his own account. The examiner stated that this was not
typical banking practice, noting that in the United States,
individuals do not sign withdrawal slips on behalf of an
organization that does not have an account at the bank. The
examiner said: ``it just isn't done.'' The examiner said that
DiTullio told the Customs agent that he had signed a number of
the withdrawal forms in advance of any withdrawal.
(7) Correspondent Account at Citibank
MAB maintained an account with Citibank from September 1994
through March 2000. During that time period, $1.8 billion moved
through its account. Citibank had maintained a relationship
with the M.A. Group since 1989. Over the years, various
subsidiaries of the M.A. Group had established accounts at
Citibank. In addition to MAB, other M.A. subsidiaries,
including Mercado Abierto, M.A. Casa de Cambio and M.A.
Valores, had accounts at Citibank New York. All of the accounts
with the M.A. Group and its subsidiaries were terminated in
March 2000. The MAB account with Citibank in New York was
limited to non-credit, electronic banking services.
Citibank Organization for Correspondent Accounts in
Argentina. Correspondent banking activities at Citibank are
located in the Financial Institutions Group. Correspondent
accounts in Argentina are located in the division covering
Central and Eastern Europe, the Middle East, Africa, the Indian
subcontinent and Latin America (``CEEMEA'') which is
responsible for overseeing and administering correspondent
banking relationships including support services in connection
with wire transfer operations. According to the marketing head
for the Latin American Unit in the Financial Institutions Group
in New York, in the 1980s Citibank instituted the Troika system
for account management to improve coordination and
communication. Under that approach, responsibility for an
account opened in the United States by a financial institution
in a foreign country was shared between (1) an account officer
in the country where the client institution is located, (2) an
account officer in the New York office and (3) a service
account officer in New York.
The lead for the account is the country account officer in
the country where the client is located. That officer is
responsible for account opening, including due diligence and
KYC information, and maintaining contact with the customer to
ensure that the relationship is operating smoothly and to
market new products and services. According to the marketing
head, the New York officers focused on customer service,
product information, and administration of account activities.
In addition, it was the responsibility of the New York office
to look at overdrafts and credit issues associated with the
account. Such issues were supposed to be reported to the
country account officer, who had the authority to approve
overdrafts and credit. According to the marketing head, it was
not the responsibility of the New York office to check monthly
statements or verify transactions.
Monitoring for money laundering and suspicious activity was
the responsibility of the anti-money laundering unit in Tampa.
As with overdraft and credit issues, any money laundering or
suspicious activity issues are communicated to the country
account officer, and the Financial Institutions compliance
officer in New York might be notified and brought into the
matter; the New York service officers may not hear of such
matters. The anti-money laundering unit in Tampa had systems to
identify high risk countries and generic high risk
institutions, but not specific clients. According to the
marketing head, until about one year ago, Citibank did not have
a system in place to determine if correspondent clients should
be classified as high risk. Citibank is now developing account
profiles to identify high risk customers, who will be subjected
to tighter monitoring and controls.
According to an investigator assigned to Citibank's anti-
money laundering unit in Tampa, the unit reviews U.S. dollar
based fund transfers that fall within parameters that Citibank
establishes regarding dollar amounts, high risk countries and
institutions that may be indicative of money laundering. All
wire transfer activities falling within the parameters are sent
to Tampa for review. The transactions are then sorted by
different categories and reviewed for anomalous behavior. Tampa
receives records of approximately 400,000 wire transfers per
month that fall within the general parameters. They are then
reviewed by two people for certain characteristics that would
indicate anomalous behavior. When such behavior is identified
and it is determined that further investigation is warranted,
the unit will develop an investigative file. Investigative
files may also be created if other events or activities cause
the unit to decide to conduct a review of a client account.
The unit head for Financial Institutions in Argentina told
the Minority Staff that the bank in Argentina is divided into
products and relationships. The relationship manager team is
responsible for the coordination of the sale of products and
has the primary responsibility for marketing products. The
relationship managers also have responsibility for credit and
KYC issues. The relationship managers report to the unit head
for Financial Institutions. The unit manages approximately 70
relationships with financial institutions whose main offices
are located in Argentina. It also covers relationships with
another 30 institutions located in Argentina whose main offices
are in other foreign countries. (In those cases, the Citibank
office in the country where the client's main office is located
has the lead on the relationship). The largest number of
relationships is with insurance companies and the second
category of relationships is with banks.
Daily operations of the client correspondent accounts are
handled by the cash management and customer service units in
Argentina, with assistance from Citibank in New York. Marketing
and decisions on accepting and expanding relationships are the
responsibility of the Argentine relationship managers, with
approval from the unit head and the compliance department.
According to the Financial Institutions unit head, the
primary document reflecting the due diligence information for a
client is the Basic Information Report (``BIR''), which
contains information on the history and nature of the
institution, its ownership and its financial condition. In
addition, a client folder will contain a checklist of items or
information that must be obtained. The Financial Institutions
unit head said that Citibank also takes into consideration
other, more qualitative factors that do not appear on any
checklist and are not firm requirements, such as the
institution's reputation, and expectation of a minimum of 5
years of operating history in the market, audited balance
sheets, certain minimum amounts of equity and whether the
institution is known to some senior Citibank officials.
Ongoing monitoring consists of annual updates of the BIR
and visits with the client both over the telephone and in
person. However, the Financial Institutions unit head told
Minority Staff that Citibank Argentina does not review monthly
account statements of the clients, that Citibank New York
monitored the accounts. The market head in Citibank New York
disagreed with that observation. He told Minority Staff that
Citibank New York only monitored the account for overdrafts and
credit issues, and Citibank New York did not monitor the
monthly accounts. He said the Citibank office in Tampa was
responsible for money laundering oversight. The head of the
Financial Institutions unit in Citibank Argentina told the
Minority Staff that he estimated that the relationship manager
for MAB may have met personally with MAB officials four times
per year and spoken with them over the telephone many other
times. He noted that the amount of attention given to a client
was related to the size of the relationship. He indicated MAB
was a rather small client because it had only one product,
electronic banking services.
Citibank Policy on Shell and Offshore Correspondent
Accounts. When Citibank was asked in the Minority Staff survey
of correspondent banking whether Citibank would ``as a policy
matter, establish a correspondent relationship with a bank (a)
that does not have a fixed physical presence in any location,
such as a shell bank,'' Citibank's response was:
The GCIB [Global Corporate and Investment Bank] does not
establish relationships with customer banks that have no fixed
physical presence in a particular location or with banks whose
licenses require them to operate exclusively outside the
jurisdiction in which they are licensed.
When Citibank was asked in the survey whether Citibank
would ``establish a correspondent relationship with a bank (b)
whose only license requires the bank to operate outside the
licensing jurisdiction,'' Citibank's response was:
The GCIB does not open bank accounts for banks that have
no fixed physical presence in a particular location or with
banks whose licenses require them to operate exclusively
outside the jurisdiction in which they are licensed. However
the GCIB may open a bank account for an existing customer
bank's off-shore subsidiaries or affiliates.
When asked how Citibank Argentina could have accepted the
correspondent account of MAB (which is not an affiliate or
subsidiary of a bank but of a securities firm) in light of
Citibank's policies as expressed in its survey response
prepared by its Vice President and Director of Compliance for
the Global Corporate and Investment Bank, the Financial
Institutions unit head said he did not know if what the Vice
President reported as Citibank policy was correct. He noted
that the opening of the MAB account was approved by the
Citibank Compliance Department. Citibank representatives at the
meeting also noted that as a subsidiary of M.A, MAB activities
were included as part of M.A. Group's report to its Argentine
regulators. However, the Minority Staff pointed out that the
regulatory agency for a securities firm is different from a
regulatory agency for a bank, and such reporting cannot
guarantee an examination of the critical and potentially
vulnerable areas of a banking operations.\42\
---------------------------------------------------------------------------
\42\ Approximately one month after this interview with the head of
the Financial Institutions unit, an employee at Citibank in Argentina
wrote the Vice President of Financial Institutions in New York that the
Argentina office was implementing a strategy for all of its Financial
Institution customers. The letter stated that Citibank Argentina was
beginning to close all accounts for offshore vehicles that were not
consolidated under a local bank, and consequently not regulated by the
Central Bank of Argentina.
---------------------------------------------------------------------------
Four months after this issue was discussed and Minority
Staff had asked for a clarification of the policy, legal
counsel for Citibank wrote to the Minority Staff on September
29, 2000, to re-state Citibank's policy. Legal counsel informed
Minority Staff that the policy presented in Citibank's survey
response was ``incomplete and had created a misunderstanding
about the circumstances under which Citibank has account
relationships with offshore banks.'' Citibank's counsel went on
to describe a modified policy with respect to offshore banks
that have no physical presence in the offshore
jurisdiction:\43\
---------------------------------------------------------------------------
\42\ The concern expressed by the Minority Staff was with respect
to banks that have no physical presence anywhere and are not branches
or subsidiaries of another bank with a physical presence in another
jurisdiction.
I indicated that our response to question 11 (as well as
question 10) should have made clear that Citibank would and
does open accounts for off-shore subsidiaries or affiliates of
existing customer financial institutions, not just existing
customer banks as our response indicated, and that these off-
shore relationships could be established without regard to
whether the offshore entity had a fixed physical presence in
the off-shore location. M.A. Bank fits this scenario, as
Mercado Abierto, S.A., an Argentine financial institution that
has had an account with Citibank since 1989, is the parent of
---------------------------------------------------------------------------
M.A. Bank . . .
. . . We remain uncertain about whether attaching
significance to physical presence is meaningful when one
considers the nature of offshore banks.
. . . Offshore affiliates typically service the existing
customers of the parent institution; they do not do business
with residents of the offshore jurisdiction or transact
business in the local offshore currency, or seek to establish
an independent customer base. Their function is to serve as
registries or booking vehicles for transactions arranged and
managed from onshore jurisdictions. Accordingly, there is
little need for a staff or physical facility and there is
nothing inherently suspicious about the failure of an offshore
affiliate to have a physical presence in the offshore
jurisdiction.
Of course these vehicles are to be distinguished from
banks with offshore licenses that are not affiliated with an
onshore financial institution. For such banks, physical
presence may be an indicator of a legitimate operation (and the
absence of a physical presence may suggest that further inquiry
into the legitimacy of such a bank's operations is warranted).
In Citibank's view, the key to ensuring the viability
and reputability of an offshore bank that is an affiliate of a
financial institution is fulsome Know Your Customer due
diligence with regard to the financial institution group.
Regulatory oversight by offshore jurisdictions is uneven and
cannot be relied on uniformly. Further, although financial
institutions generally report the activities of their
affiliates, including offshore affiliates, in consolidated
financials that typically are presented to regulators, in cases
where the parent financial institution is not a bank the
oversight by the banking regulator in the onshore jurisdiction
may not occur in these circumstances, although non-banking
regulators may provide some limited oversight. For these
reasons, careful review of the reputation and management of the
parent or affiliated institution is likely to be the most
important indicator of a legitimate offshore operation. And for
these reasons it is Citibank's policy to avoid account
relationships with offshore entities that are incorporated by
an individual or entity that is unaffiliated with a larger,
reputable bank or financial institution.
Offshore entities that are primarily booking entities
requiring minimal personnel or physical operations often are
managed from a location that is closer to the jurisdiction of
the parent institution than the offshore jurisdiction. Your
staff have indicated skepticism about the legitimacy of such
``back offices'' and inquired about the kinds of activity in
which one might expect them to engage. Indeed, there seems to
be some sense that a test of legitimacy might be whether a back
office has the capacity to print and mail statements. The need
to print and mail statements will depend on the customer base
of the offshore and the nature of the business, and may defeat
the purposes of offshore banking--confidentiality and tax
planning. Mailing statements for activity in the private bank
account of a customer, for example, risks breaches in the
confidentiality as well as triggering a taxable event. Private
bank customers often do not receive regular statements but
rather rely on the personal relationship with the private
banker for information about the status of their account.
In sum, local banks and financial institutions establish
offshore affiliates for a number of legitimate purposes. Where
the affiliate is a booking vehicle, the transactions may be
managed from an onshore jurisdiction and there may be no need
for a physical presence in the offshore jurisdiction. Thus, in
Citibank's view, instead of looking to the existence or non-
existence of a physical presence to determine the legitimacy of
the offshore entity, it is more useful to look to the character
and conduct of the larger institution with which it is
affiliated.
Opening the M.A. Bank account. When the MAB account was
opened in 1994, Citibank had an existing relationship with
MAB's parent, M.A. Group, since 1989. The Financial
Institutions unit head told the Minority Staff that because of
the existing relationship with M.A. Group, Citibank had relied
on the due diligence and existing knowledge of the parent
company to substitute for some of the due diligence it would
normally perform on a new account. For example, Citibank did
not ask MAB for references for its previous correspondent bank.
It did not enforce the 5 year operating requirement because, as
the head of the Financial Institutions unit explained, the
requirement is designed to ensure the potential client has
experience in the market place, and since MAB's parent had been
in operation since 1983, that was fulfilled. The Financial
Institutions unit head was not sure if Citibank received a copy
of MAB's license. He explained that Citibank had received an
audited financial statement that contained a note stating that
MAB was incorporated in, and had a license from, the Cayman
Islands.
It is unclear whether Citibank fully understood the nature
of MAB's operations. The July 1994 Basic Information Report
filled out for MAB contains the statement: ``The entity appears
in Mercado Abierto balance sheet as a subsidiary so it is
regulated by Argentine Central Bank.'' However, an official of
the Argentine Central Bank (``BCRA'') told U.S. Customs agents
that MAB was not licensed in Argentina, it was not regulated by
the BCRA, and it was not authorized to operate in Argentina.
MAB's President, Iribarne, told Customs agents the same thing.
Moreover, as the unit head had explained to the Minority Staff,
MAB was specifically created as an entity that was not
regulated by the Argentine authorities so that it could sell
international securities and bonds that it would be precluded
from purchasing and selling if it were subject to Argentine
regulations.
In light of Mr. Iribarne's statements to the Customs agents
that indicated that MAB was operating out of M.A.'s
headquarters in Buenos Aires, the Minority Staff asked the head
of the Financial Institutions unit if Citibank believed that
MAB had authority to operate in Argentina. The Financial
Institutions unit head told the Minority Staff that he was not
sure, that it was a legal matter. However he said he did not
think that anyone at Citibank ever believed that MAB operated
as a bank in Argentina.
When asked if he knew or believed that MAB operated as a
bank somewhere else, the Financial Institutions unit head
stated that MAB operated with Argentine clients, but not in
Argentina. He said that since he was not involved in the
detailed matters of accounts he really did not know, but he
believed MAB had a back office operation in Uruguay. He noted
that most Argentine financial institutions have back office
operations in Uruguay for their Cayman Island facilities. He
said the main reason for banks selecting Uruguay is that it
would be too expensive to license a bank in Argentina if
banking was not the principle purpose of the financial
institution, and operating out of the Cayman Islands would be
too far from the customers. He said it was a matter of cost and
proximity that attracted banks to Uruguay.
The Financial Institutions unit head said he was not sure
if anyone at Citibank had confirmed that MAB had a real
operation in Uruguay. When asked, the Financial Institutions
unit head stated that no one visited an MAB office in Uruguay
as part of the initial due diligence on the bank. He said the
decision makers of MAB were in Buenos Aires, so he did not
think it made sense to look at a back office. Instead, Citibank
had contact with the decision makers of the parent company.
When asked if anyone from Citibank had ever gone to Uruguay
to confirm that MAB had a back office operation in that
country, the Financial Institutions unit head said ``no.'' The
Minority Staff asked that Citibank try to confirm the existence
of such an office, but Citibank never did so.\44\
---------------------------------------------------------------------------
\44\ The market head from New York told the Minority Staff that
when Citibank installed computer equipment for MAB to enable MAB to use
certain Citibank banking services, the equipment was installed in
Argentina. This could be a further sign that there was no back office
operation in Uruguay.
---------------------------------------------------------------------------
Citibank's Response to Seizure Warrants. As noted above, in
May 1998 the U.S. Customs Service presented Citibank New York
with seizure warrants for funds in the accounts of MAB and M.A.
Casa de Cambio. $1.8 million was seized on May 18, 1998. The
order was for the seizure of funds existing in the accounts at
the time. There was no requirement or request for Citibank to
freeze or close the accounts.
Citibank documents show that at the time of the seizure,
Citibank New York informed Citibank Argentina of the seizure,
and Citibank Argentina asked MAB about the matter. According to
the Financial Institutions unit head in Argentina, Citibank did
not connect the seizure warrant with illegal activity. When
Citibank representatives in Argentina spoke to MAB officials at
the time, the MAB officials indicated that they were surprised
by the action and did not know why the funds were seized.\45\
---------------------------------------------------------------------------
\45\ The marketing head in New York told the Minority Staff that
although records indicate that he, along with personnel in Argentina,
were informed of the seizure shortly after it occurred in 1998, he did
not recall being advised of the seizure at that time.
---------------------------------------------------------------------------
According to the marketing head in New York and the
Financial Institutions unit head in Argentina, neither Citibank
New York nor Citibank Argentina learned that illegal funds were
the basis for the seizure until November 1999, nearly 1\1/2\
years after the seizure took place.
In August 1999, the Subcommittee subpoenaed Citibank
records and statements of the MAB and M.A. Casa de Cambio
accounts. As a result of the subpoena, the market head in New
York called the Financial Institutions unit head in Argentina
and reported that Citibank lawyers in New York were asking
about the possibility of closing the MAB account because of the
seizure in 1998. The market head in New York called Argentina
to inquire about the account and why the Subcommittee would be
subpoenaing its records. The Financial Institutions unit head
in Argentina told the Minority Staff that as a result of the
call from New York, he instructed the relationship manager of
the MAB account to find out more about the seizure action. At
that point both the market head in New York and the unit head
in Buenos Aires were still unaware that the seizure was related
to an undercover drug operation.
In late October, MAB presented Citibank Argentina with a
two page letter report on activities associated with the
seizure. In the letter, MAB stated: ``Customs is investigating
financial transactions within the United States which are
thought to be related with illegal activities.'' MAB identified
DiTullio as the client responsible for the transfers of the
funds that were seized, but did not specifically mention that
the activity was related to drug trafficking. MAB noted that it
had met with and was cooperating with the U.S. Customs Service.
Subsequent to the receipt of the report from MAB, Citibank
Argentina sent an e-mail to the market head in New York. The e-
mail recounted the details of the seizure and passed on
information that apparently had been received from MAB--that it
had cooperated with the Customs Service, the matter was at that
time an administrative not a judicial proceeding, and that a
resolution was expected soon. The memo concluded with an offer
to close the account:
Notwithstanding this and even knowing that the
shareholders are very well known in the market and the company
has strict anti-money laundering control, we would be prepared
to close the DDAs if you consider it necessary.
A decision was made not to close the accounts. According to
the Financial Institutions unit head in Argentina, Citibank had
a long relationship with M.A. Group and there were never any
problems with the account or the entities involved, M.A. Group
had a good reputation in Argentina, and Citibank did not
believe that the organization or its officials would knowingly
be involved in illegal activities.
The head of Financial Institutions in Argentina told the
Subcommittee staff that he subsequently discussed the matter
with two of his superiors in Argentina who instructed him to
further investigate the matter and find out what the illegal
activity was and what banks were involved. In November 1999, 18
months after the seizure warrant was served on Citibank,
Citibank Argentina asked MAB for a copy of the wire transfers
that were under investigation and asked MAB to prepare a copy
of all of their documents relating to the entire matter. The
head of the Financial Institutions unit in Argentina informed
the Minority Staff that when Citibank Argentina received the
copies of the transactions, he reviewed them and noticed that
the names of the parties involved in the transactions seemed to
him to be strange names for investors in Argentina. He told the
Minority Staff that combined with the information he already
had that illegal activity had been involved, he decided to
inform the client that Citibank was going to close the MA
accounts in mid-November. At that time, he still did not know
that the transfers in question were related to drug
trafficking.
Upon hearing that news, MAB and its attorneys asked to meet
with Citibank officials. On the day of the meeting, Citibank
Argentina finally received the information on the case from
MAB, which revealed that the transactions in question were
related to drug trafficking. At the meeting MAB requested
Citibank to keep the account open and to keep the information
confidential because closing the account or releasing the
information to the public would harm their reputation and
business. MAB officials also said that they were negotiating
the sale of MAB to a European bank and any news on the closing
of the correspondent account or the Customs investigation would
damage the prospects for the sale. The Financial Institutions
unit head asked for the name of the European bank, but MA
officials would not provide it. MAB requested a meeting with
Citibank New York. Citibank held off on closing the account.
The Financial Institutions unit head responded that the issue
was a compliance matter for the bank and he could not make a
decision. Although initial efforts were made to arrange the
meeting with Citibank New York, it never took place.
On December 2, 1999, a few days after Citibank received the
materials from MAB and held the meeting with its principals,
newspaper articles revealed that MAB accounts were frozen
because of drug trafficking. According to the head of the
Financial Institutions unit the action taken by Citibank
Argentina at that time was to send the material to New York and
place the matter in the hands of compliance in New York.
Although the Financial Institutions unit head told the Minority
Staff that he had previously made the decision to close the
account, that action was not taken.
On December 2, 1999, the Financial Institutions unit head
sent a memorandum to the head of compliance for Argentina. The
memorandum recounted the history of the MAB case and the steps
that had been taken by Citibank Argentina; it suggested that
the closing of the account was delayed to allow public
attention to dissipate. The memo included the following:
From the standpoint of process Citibank Buenos Aires
cannot exercise control over accounts at Citi New York. The
follow-up of that is the task of AML [anti-money laundering]
and we have never received any communication in that regard.
The amounts involved are not very significant because these are
individual transfers of US 500,000, insignificant in the
movements of the client.
The closing of the account is already decided but the
present situation obliges us to wait a few days until the issue
ceases to be public. The subject is being aired publicly
because letters rotatory have come from the Mexican authorities
seeking to recover properties purchased with these funds, since
the funds apparently come from Mexican Banks.
This case can be used politically to pressure the
Congress for prompt passage of laws on money laundering.
We still believe that MA acted in good faith in this
case, but the public character it has taken on will mean
hardship for that entity to the extent of having to close its
operations.
On December 3, Citibank formally blocked the MA accounts
and its legal staff conducted an investigation of all of the MA
accounts. Also, on December 3, 1999, the MAB relationship
manager in Argentina e-mailed the New York marketing officer
who handled the MAB account. Her communication included the
following:
As I anticipated yesterday, this issue has become
public. We are in the middle of an ARR which will ask us about
the following points:
1) What AML [anti-money laundering] control procedures
does Citibank New York have? Do we know that there is an AML
unit that controls the transactions, among others those sent
under PUPID. At the appropriate time the BIR of the client in
which the average movements of each of the accounts is shown
was sent. Are there such controls? Is the AML unit in Tampa the
one in charge of doing it or each division in New York?
The next day, Citibank New York responded:
I have placed a call to [the investigator], AML Unit,
Florida for confirmation of what aspects of AML they monitor.
Citibank NY is currently in the process of establishing
an AML procedure for your FI [Financial Institution] accounts
located in New York. I will forward correspondence separately
to you today to initiate this process.
According to the head of the Financial Institutions unit,
Citibank Argentina was told to close the accounts in February
2000, nearly 21 months after the seizure took place. Between
the time the seizure warrant was served on Citibank in 1998 and
September 1999, MAB moved $304 million through its
correspondent banking account at Citibank.
Between the service of the seizure warrant in May 1998 and
October 1999, Citibank did not follow up on information and
communications available to it that would have revealed that
the activities being investigated were related to drug
trafficking. The seizure warrant served on Citibank in May 1998
indicated the seizure was related to money laundering. Citibank
informed the Minority Staff that it did not notice that
information when the warrant was served. The press gave
widespread attention to the indictments and warrants served on
numerous U.S. and foreign banks as a result of Operation
Casablanca. Citibank was identified as a recipient of some
warrants. Apparently, those reports did not result in any
review or investigation inside of Citibank, otherwise the
connection with the MAB seizure warrant would have been
discovered. In June 1998, MAB wrote to Citibank and asked that
Citibank:
Furnish us a report on the origin, cause [and] authority
acting on the attachment order received, as well as all actions
taken by you whose objective was to make disposition of Lloyds
in our current account No. 361111386, as far as possible,
providing us an exact copy of the documentary evidence
attesting to the existence of such judicial order and of the
transfers or other actions taken by you as a consequence
thereof.
Citibank can find no communications that responded to MAB's
inquiry. The preparation of a response to MAB would likely have
informed Citibank that the seizure warrant was related to money
laundering associated with drug trafficking.
In 1998 and early 1999, MAB raised the issue of the seizure
several times in communications and meetings with Citibank. In
May 1998, Scassera and Iribarne told the relationship manager
that they did not know who ordered the transfers and were
hiring an attorney in the United States to represent them in
the investigations. In June Citibank received notice from MAB
that the U.S. Customs Service would be requesting monthly
statements and all related documentation from the MAB account.
On four subsequent occasions (August, September and October
1998 and March 1999) MAB informed Citibank of its
communications and contacts with the Customs Service. None of
these contacts caused Citibank to make additional inquiries or
learn what the nature of the action was and why the Customs
Service was so interested in the account.
According to the Financial Institutions unit head, Citibank
never made a connection that the involvement of the Customs
Service suggested that there might be illegal activity
involved. Moreover, he told the Minority Staff that he had
asked the relationship manager to find out what was involved in
the situation, but the client never told her what was really
going on. He noted that in March MAB officials informed the
relationship manager that they expected the money to be
returned soon.
When asked by the Minority Staff why Citibank did not
threaten to close the account if MAB was not being responsive
to its inquiries, the unit head remarked that the client was
someone Citibank totally trusted and therefore never thought
the seizure was related to anything illegal. Also, he told the
Minority Staff that MAB told Citibank that the investigation
involved one of it clients. He said under such circumstances he
would have thought the warrant was related to a commercial
matter.
After MAB told Citibank in October 1999 that the Customs
investigation involved financial transactions related to
illegal activities, it took Citibank nearly one additional
month to get the information that provided details on the
matter.
Additionally, Minority Staff informed Citibank counsel in
late September or early October 1999 that the basis for the
Minority Staff's interest in the matter was because the funds
seized were the result of drug transactions related to
Operation Casablanca. Apparently this information was not
passed on to the market head in New York and the head of the
Financial Institutions unit in Argentina, because in late
October Citibank personnel in New York and Argentina still did
not know the reason for the seizure.
In September 2000, legal counsel for Citibank wrote a
letter to Minority Staff to explain the bank's response to the
seizure warrant. In the letter Citibank informed the Minority
Staff that:
Although there was nothing on the face of the warrants
that linked the seizures to narcotics proceeds, the warrants
did contain statutory references to 18 U.S.C. Secs. 981 and 984
and to 18 U.S.C. Secs. 1956 and 1957.
. . . The legal personnel who received the warrants
apparently did not recognize that they were related to money
laundering allegations and simply processed them without
pursuing further inquiries.
. . . Neither did the business people in New York
recognize the statutory citations in the warrants as related to
money laundering. Without the benefit of the affidavit, they
assumed these seizure warrants, like the vast majority of those
received by Citibank, were related to a civil dispute, which
would not trigger an in-depth account review.
. . . Citibank did not appreciate until late September
1999 that the seizure warrants were linked to narcotics
trafficking.
. . . in response to this letter, members of the
Minority Staff shared with Citibank counsel either a summary of
the information contained in Agent Perino's affidavit or the
affidavit itself.
. . . Citibank lawyers made inquiries to the business
people about the status of the M.A. Bank account.
. . . However, . . . neither Mr. Norena or Mr. Lopez was
informed that the inquiry related to allegations that the M.A.
Bank account had been used to launder proceeds of narcotics
trafficking. Mr. Lopez, who thought the seizure warrant was
routine, did not understand the basis for the renewed interest
in the seizure or the implication that the seizure should have
triggered an account review.
. . . Mr. Lopez . . . initiated an inquiry with the
principals of Mercado Abierto who informed him of the
allegations that M.A. Bank had been used to launder drug money
and, on November 19, 1999, provided him with Agent Perino's
affidavit. Thereafter, Mr. Lopez recommended that Citibank
terminate all of its relationships with the Mercado Abierto
group, even though the Mercado Abierto principals appeared to
be cooperating with the Customs Service investigation and
believed that the allegations that had led to the seizure of
the accounts would be quickly resolved in their favor.
. . . Citibank itself was not in a position to confirm
that any suspicious account activity or pattern was in fact
related to the laundering of drug money. The Mercado Abierto
accounts were blocked on December 3, 1999, and were formally
closed as of February 21, 2000.
. . . In deciding to open the correspondent banking
accounts that were the subject of May 18, 1998 seizure warrant,
Citibank was dealing with an established customer who enjoyed
an excellent reputation as a long-established and significant
member of the Argentine financial community.
. . . Mercado Abierto today manages an investment
portfolio worth $400 million and in April of this year ranked
seventh among brokers in the Buenos Aires stock exchange.
Further, in the course of performing its Know Your Customer due
diligence, Citibank reviewed anti-money laundering policies
that had been adopted by Mercado Abierto.
. . . But what may have happened here, as the Customs
Service's Forfeiture Complaint speculates is that one of the
principals ``intentionally dispensed with virtually all of the
standard internal controls and processes generally required to
open accounts with M.A. Bank and/or M.A. Casa de Cambio.''
. . . In circumstances like these, in which a principal
is alleged to have subverted his own institutions internal
controls the most careful scrutiny by Citibank may not be
enough to prevent an unscrupulous principal from attempting to
abuse the correspondent banking system once a correspondent
account has been established.
. . . Although we believe that the opening of the M.A.
Bank account was appropriate, Citibank's failure to undertake a
complete account review in May 1998, when the seizure warrant
was first received was not. As a result of the lessons learned
from this episode, Citibank has adopted new procedures to
process those seizure warrants that affect its relationships
with correspondent banks in emerging markets, like the seizure
warrants that Citibank received for M.A. Bank and M.A. Casa de
Cambio.
In March 2000, after the MA accounts had been closed, an
investigator in Citibank's anti-money laundering unit conducted
a self-initiated review of all of the MA Group accounts. The
investigation was undertaken after the investigator saw an
article about MAB in a local newspaper. In June he produced a
report which included the following:
According to an article taken from The Miami Herald
dated March 1, 2000, ``Alejandro Ducler, [sic] a former vice
minister of finance for Argentina, allegedly transferred $1.8
million in drug cartel proceeds. Dulcer [sic] is one of the
owners of the Argentine financial holding firm known as Mercado
Abierto, which owns M.A. Casa de Cambio, M.A. Valores S.A. and
M.A. Bank Limited. All four held accounts with Citibank. . . .
After reviewing the funds transfer activity of the
aforementioned from April 1997 through March 2000, a total of
$84,357,473.21 was transferred to the entities mentioned below.
The consecutive whole dollar amounts transferred and the nature
of the business contributed to the rise in suspicious activity
and ongoing monitoring.''
The entities identified in that report include some that
were engaged in a significant amount of transactions with MAB.
Citibank representatives informed Minority Staff that it was
not accurate to conclude that the $84 million in transactions
identified in the AML review were suspicious. According to
Citibank representatives, the review identified those
transactions that involved dollar amounts and institutions that
fell within parameters established by the anti-money laundering
unit. Those parameters are based on information obtained
through U.S. Government advisories and other expert opinion on
where the bulk of money laundering occurs. According to
Citibank representatives, the determination of whether the $84
million worth of transactions falling within those parameters
were anomalous or suspicious would require more investigation
and analysis. That was not performed. The Minority Staff has
since learned that Citibank did file a Suspicious Activity
Report on the $84 million in transactions.
FEDERAL BANK
(1) Grupo Moneta and Banco Republica
Grupo Moneta, an economic group in Argentina, was,
according to Citibank records, established in December 20,
1977. According to Citibank documents,\46\ Grupo Moneta was
owned equally (33% each) by Argentinians Raul Moneta, Benito
Lucini, and Monfina, S.A., an entity owned by the members \47\
of the Moneta family. In October 1983, the Central Bank of
Argentina approved the establishment of a wholesale bank in the
group, Banco Republica. In March 1992, the Bahamas approved the
establishment of an offshore bank in the group, Federal Bank
Ltd. Federal Bank was understood by Citibank officials to be an
offshore vehicle for customers of Banco Republica, and its
correspondent relationship was handled by Citibank in that
context.
---------------------------------------------------------------------------
\46\ See organizational charts from 1997 and 1999 at the end of
this chapter.
\47\ Monfina S.A. according to Citibank records is owned equally by
Raul Moneta, Fernando Moneta, Alejandra Moneta de Moim, and Alicia
Moneta de French. Jorge Rivarola held a 1% interest in Grupo Moneta as
well.
---------------------------------------------------------------------------
Grupo Moneta was described in a Citibank memorandum in
November 1996 as ``one of the most important groups in the
country [of Argentina] with consolidated assets of
approximately $500 million.'' According to Citibank documents,
it owned at various times a number of financial entities in
addition to Banco Republica and Federal Bank. These entities
which were owned either directly or through other companies
included Adamson Inc.; Republica Holdings,\48\ which, along
with Citibank, owned stock in CEI Citicorp Holdings, a company
which owns stock in various telecommunications and media
companies in Argentina; Citiconstrucciones, a construction
company unrelated to Citibank; and International Investments
Union, Ltd. Banco Republica also owned a percentage of CEI
Citicorp Holdings and several other entities, including a
controlling percentage in two consumer banks, Banco Mendoza and
Banco de Prevision Social.
---------------------------------------------------------------------------
\48\ The name of Republica Holdings prior to January 28, 1998, was
United Finance Company, or UFCO.
---------------------------------------------------------------------------
Citibank had a long-term relationship with Grupo Moneta and
the families of its owners, Raul Moneta and Benito Lucini. This
relationship had two primary components: Citibank's
correspondent relationship with Banco Republica, which included
both cash management and credit services; and Citibank's
ownership interest, together with Grupo Moneta, in CEI Citicorp
Holdings. Citibank also maintained accounts for other Grupo
Moneta entities, including its correspondent account with
Federal Bank. The financial institutions division of Citibank
Argentina, which had responsibility for correspondent
relationships in Argentina, treated its relationship with Banco
Republica and its relationship with Grupo Moneta in tandem and
almost interchangeably, often including an assessment of the
Grupo Moneta relationship as a whole when addressing the status
of Banco Republica. Federal Bank was analyzed by Citibank as a
subset of the Grupo Moneta and Banco Republica relationship.
(2) Federal Bank Ownership
According to the Central Bank of the Bahamas, Federal Bank
was licensed in July 1992 ``to conduct unrestricted banking
business from within The Commonwealth of the Bahamas.'' \49\
However the 1999 annual statement of Federal Bank says its
license is restricted to ``conduct banking and trust business
with non-residents,'' making it an offshore bank. This
discrepancy was not explained, but the evidence is clear that
Federal Bank did not act as a domestic bank in the Bahamas but
confined itself to offshore banking activities. The Bahamas
Central Bank said the registered office of the bank and the
managing agents of the bank are the Winterbotham Trust Company,
Limited, of Nassau.
---------------------------------------------------------------------------
\49\ Letter dated September 7, 2000, from the Manager of the Bank
Supervision Department of the Central Bank of the Bahamas to the
Subcommittee.
---------------------------------------------------------------------------
The Central Bank of the Bahamas provided the Subcommittee
with a document claiming to show the ownership of Federal Bank.
The owners on the document were identified as Abraham Butler,
George Knowles, and Philip Beneby, each listed as a banker in
Nassau, Bahamas. Butler is shown as holding 50,000 shares;
Knowles as holding 1,650,000 shares; and Beneby as holding
3,300,000 shares. When the Minority Staff inquired as to the
identity of these three persons, the Central Bank said that
each of the individuals is an employee of Lloyds TSP Bank in
the Bahamas, which acted as Federal Bank's managing agent prior
to the Winterbotham Trust Company. The Central Bank explained
that Bahamas law used to allow individual officers of the
registered agent to serve as nominee owners of the bank being
managed. The Central Bank said that there was no good reason
for this practice, it effectively disguised bank ownership, and
the Bahamas no longer allows it. The Central Bank told the
Minority Staff they expect that by the end of the year, the law
will require bank records to reflect the names of the actual
beneficial owners of all banks licensed in the Bahamas that
conduct business with the public.\50\
---------------------------------------------------------------------------
\50\ When asked why Federal Bank's nominee owners had such a wide
disparity in the number of shares each is recorded as owning, the
Central Bank said it did not understand the reason for the records
reflecting the differences in shares.
---------------------------------------------------------------------------
In a telephone conversation with the head of the Central
Bank of the Bahamas, the Central Bank confirmed to the Minority
Staff that the actual ownership of Federal Bank is similar to
that reported by Citibank for Grupo Moneta, with 33% of the
shares owned by Raul Moneta; 33% owned by the members of the
Moneta family; 30% owned by Benito Jaime Lucini; 3% owned by
Paulo Juan Lucini; and 1% owned by Jorge Rivarola. But for the
3% ownership by Paulo Lucini, this information comports with
the ownership information contained in the Citibank documents
for Grupo Moneta.\51\
---------------------------------------------------------------------------
\51\ Banco Republica did not itself have any direct ownership
interest in Federal Bank. Both banks were entities owned by Grupo
Moneta.
---------------------------------------------------------------------------
In a claim directly contradicted by the information
provided by Citibank and the Central Bank of the Bahamas to the
Minority Staff, Raul Moneta is reported as having recently
denied any ownership in Federal Bank in an interview with The
Miami Herald.\52\
---------------------------------------------------------------------------
\52\ ``Miami Banks Used for International Money Laundering,
Investigation Reveals,'' by Andres Oppenheimer, February 5, 2001.
---------------------------------------------------------------------------
(3) Financial Information and Primary Activities
In a December 1998 analysis of Banco Republica by Citibank,
in a document entitled a ``Commercial Bank Individual
Analysis,'' the Resident Vice President of Citibank Argentina
described the sources of Banco Republica's funding as follows:
The principal source of funding for BR is its base of
deposits, which represents 55% of its funding. Within the
composition of its deposits, we find that the principal type of
BR deposit is CD's of individuals with substantial assets who
trust Raul Moneta [one of the owners of Banco Republica]. This
represents a change with respect to the past, since the number
of deposits of institutional investors has decreased.
LSecond, 45%, is the lines of credit with foreign banks,
which BR uses frequently for foreign trade transactions. In
addition, BR has lines of credit with local banks such as
Galicia, Deutsche, and Sudameris.\53\
---------------------------------------------------------------------------
\53\ Translated from Spanish by the Congressional Research Service.
Martin Lopez, Citibank's relationship manager for Grupo
Moneta entities from 1995 to 2000, told the Subcommittee that
his understanding of Banco Republica was that it was a
wholesale bank in Argentina that dealt with corporate customers
and private bank customers in Argentina. He described Federal
Bank as an offshore vehicle ``to help private banking
customers'' of Banco Republica.\54\ He added that Federal Bank
was created to replace American Exchange Company, another
offshore vehicle of Grupo Moneta incorporated in Panama with an
office in Uruguay. American Exchange Company is discussed later
in this chapter.
---------------------------------------------------------------------------
\54\ By private banking customers, Lopez meant wealthy individual
seeking wealth management services from the bank.
---------------------------------------------------------------------------
Lopez explained that the purpose of Federal Bank was to
help private banking customers of Banco Republica who wanted to
keep their deposits out of Argentina for fear of the country's
economic instability. He said domestic banks like Banco
Republica, in order to compete with international banks, set up
these kind of offshore banks. Lopez described Federal Bank as a
small offshore bank with not more than 200 or 250 customers. He
said the deposits in Federal Bank belong to customers of Banco
Republica and that Grupo Moneta used these deposits to provide
loans through Federal Bank to another Grupo Moneta entity,
Republica Holdings.\55\
---------------------------------------------------------------------------
\55\ Republica Holdings, according to Lopez, has three holdings
itself. Grupo Moneta's CEI shares, Telephonica Argentina shares, and
Telecom shares. He added that sometimes when Republica Holdings has to
pay interest on its money, it gives its shares in these entities to
Federal Bank as collateral and Federal Bank loans Republica Holdings
the money it requires.
---------------------------------------------------------------------------
In a memo dated February 6, 1997, Lopez described the
elements of the Federal Bank role in Grupo Moneta:
The existence of this vehicle is justified in the
group's strategy because of the purpose it serves:
(a) To channel the private banking customers of Banco
Republica to which they provide back-to-backs and a vehicle
outside Argentina where they can channel their savings, which
are then replaced in Banco Republica by Federal Bank,
constituting one of the bank's most stable sources of funding
(approximately US $34 MM). (b) To channel the cash flow of the
partners of Banco Republica and serve, with these deposits and
the assets of Federal Bank, as a bridge, financing loans aimed
at companies associated with CEI. (c) To finance UFCO \56\
through swaps of their share positions giving it financing
against the most liquid shares (Telefonica, Telecom) for US $20
MM which, in turn, Federal matches with banks abroad.\57\
---------------------------------------------------------------------------
\56\ UFCO changed its name to Republica Holdings in January 1998.
\57\ Translation from Spanish provided by the Congressional
Research Service.
The financial statement for Federal Bank for the year
ending 1999 shows total assets in 1998 of almost $252 million
and in 1999 of almost $133 million. The main liabilities
included about $50 million in deposits and $40 million due to
banks each year; $64 million in 1998 and $8 million in 1999
owed to creditors for purchases of securities; and $66 million
in 1998 and $4 million in 1999 as ``forward sales of
securities.'' The 1999 financial statement describes Federal
Bank's ``line of business'' as ``placing short-term deposits
with members of the international banking community and making
loans to customers either in currencies or securities and
trading in securities.''
The Minority Staff reviewed the monthly statements of
Federal Bank for its correspondent account at Citibank and
determined that during the course of Federal Bank's
correspondent account at Citibank New York, from November 1992
through May 2000, over $4.5 billion \58\ moved through the
account. This figure exceeds any other offshore bank examined
by the Minority Staff for that period.
---------------------------------------------------------------------------
\58\ The Minority Staff calculated that the total amount of money
deposited in the Federal Bank correspondent account at Citibank New
York from November 1992 through May 2000 was $4,317,646,934, excluding
5 months for which the monthly statements are missing. When estimated
amounts for the missing 5 months are added to the total, the result
exceeds $4.5 billion.
---------------------------------------------------------------------------
(4) CEI
Citibank was not only the correspondent bank for Banco
Republica and Federal Bank, Citibank was also a partner with
Grupo Moneta and Banco Republica, and--for a brief time--with
Federal Bank, in a holding company called CEI Citicorp
Holdings, S.A. (originally named Citicorp Equity Investments,
S.A.), referred to hereafter as CEI. To understand the
correspondent banking relationships, it is necessary to also be
familiar with this business collaboration.\59\
---------------------------------------------------------------------------
\59\ See ``Remarks Grupo Republica,'' dated 2/6/97, by Citibank,
PS018310. ``This association (CEI) means, both for Grupo Moneta and
Citibank, a long-term strategic alliance which requires, because of the
amount of the investment and the relative weight of Grupo Moneta
therein, a very strong interrelationship between both and a commitment
by both to maintain that relationship.'' (Translated from Spanish by
the Congressional Research Service.) The Minority Staff's account of
the ownership and operation of CEI is based on a briefing provided by
Citibank attorneys.
---------------------------------------------------------------------------
Citibank started CEI as a company to hold and manage the
stock of companies in Argentina which Citibank came to own as a
result of defaults on loans and conversion of its Argentinian
bonds, using debt for equity swaps. Citibank owned its interest
in CEI through a Delaware corporation Citibank established
called International Equity Investments (IEI). Citibank's
purchase of equity in Argentinian companies through its
ownership of IEI and, in turn, CEI, was approved by the Office
of the Comptroller of the Currency (OCC) in 1992,\60\ with the
condition that Citibank reduce its ownership of CEI over time.
For example, the OCC said Citibank could hold no more than 40%
of CEI's shares by the end of 1997, at which time CEI was to be
managed by a third party, and Citibank would, by a certain
time, have to completely divest itself of any ownership
interest in the company. The OCC also imposed a number of other
relevant conditions on Citicorp's activities relative to CEI.
---------------------------------------------------------------------------
\60\ Interpretive Letter No. 643, July 1, 1992, Frank Maguire,
Acting Senior Deputy Comptroller.
---------------------------------------------------------------------------
In 1992, when Citibank was in need of capital and pursuant
to its agreement with the OCC, it looked for a purchaser of
some of its CEI stock. It found that purchaser in Raul Moneta
and his financial organization Grupo Moneta. While it is
difficult to piece together exactly how the Grupo Moneta's
shares in CEI were purchased and distributed, it appears that
in July 1992 Citibank sold approximately 10% of its CEI stock
to Grupo Moneta through United Finance Company Limited (UFCO);
UFCO purchased an additional percentage of CEI in December
1992.\61\ Out of its shares of CEI stock, UFCO sold a 4.27%
interest in CEI to Banco Republica. Citibank loaned UFCO a
substantial percentage of the funds it needed to purchase the
CEI stock.
---------------------------------------------------------------------------
\61\ Citibank's attorney wrote to the Subcommittee on February 25,
2001, after reviewing a draft of this report and said that the sale to
UFCO in December 1992 was an additional 10% of CEI. Documents in
Citibank files, however, suggest that the 1992 sale was larger than
10%.
---------------------------------------------------------------------------
In 1998 Citibank sold additional shares of CEI stock to
Grupo Moneta, and Grupo Moneta increased its overall ownership
to 39.9%.\62\ Over time the ownership of CEI changed, and as of
May 31, 2000, according to the June 30, 2000, annual report
filed with U.S. Securities and Exchange Commission, the
principal shareholders of CEI were Ami Tesa Holdings Ltd. (ATH)
(67.7%) and Citibank New York (23%). Hicks, Muse, Tate and
Furst, Inc. held approximately 40% of the ATH stock, and
approximately 27% of the ATH stock was held in escrow by
Citibank for Republica Holdings and ITC, both owned by Grupo
Moneta.
---------------------------------------------------------------------------
\62\ This increase in CEI shares for Grupo Moneta was accomplished
through the purchase of the shares by Republica Holdings, formerly
UFCO. It is uncertain when the Central Bank of Argentina became aware
of the fact that UFCO or Republica Holdings was owned by Grupo Moneta.
---------------------------------------------------------------------------
In its June 2000 report, CEI described itself to the
Securities and Exchange Commission as ``a holding company
primarily engaged through controlled companies and joint
venture companies in the telecommunications business, the cable
television business, and the media business in Argentina.''
(5) Correspondent Account at Citibank
Citibank opened its correspondent account for Banco
Republica in 1989.\63\ It opened a correspondent account for
Federal Bank in 1992. The Banco Republica account stayed open
until 1999, and the Federal Bank account stayed open until
2000, when both accounts were closed due to the collapse of
Banco Republica because of a ``run'' on the bank in 1999. The
``run,'' according to Lopez was due to the publication in the
Argentine press of information that Banco Republica had
received a CAMEL rating of 4 from the Central Bank of
Argentina. CAMEL ratings are used to grade the financial
stability, safety and soundness of a banking institution. The
ratings range from 1 to 5, with 5 being the worst. A CAMEL
rating of 4 is considered very poor, and both Lopez and Carlos
Fedrigotti, President of Citibank Argentina, told the
Subcommittee they would not open an account for a bank with a
CAMEL rating of 4.
---------------------------------------------------------------------------
\63\ It also opened an account for American Exchange Company at the
same time. It appears Citibank used a common account opening document
for both institutions.
---------------------------------------------------------------------------
The account opening documentation produced by Citibank for
the Banco Republica account is limited. It consists of a Legal
Agreement dated August 30, 1989, regarding use of Citibank's
Global Electronic Financial Network, the list of account
numbers (there appear to be two), an account opening checklist
that appears to be a reminder for sending information to
various departments within Citibank, several apparently minor
messages, an information sheet creating the accounts, and what
appears to be a letter of request to Citibank Argentina to open
an account signed by Jorge Maldera and Pablo Lucini, both
directors of Banco Republica. The account opening documentation
produced for the Federal Bank account is even less; it consists
of a single signature card signed by Jorge Maschwitz as
Director of Federal Bank. There is no documentation in the
Citibank account opening records for either bank with respect
to: Ownership, an audited financial statement, references from
regulators or others about the bank's reputation, or a copy or
discussion of anti-money laundering procedures.
Although Federal Bank is a shell bank with an offshore
license, Citibank told the Subcommittee that it had a
correspondent relationship with Federal Bank because Federal
Bank was part of the larger financial enterprise of Grupo
Moneta and was the offshore vehicle for Banco Republica, the
owners of which Citibank said they knew very well. For example,
one Citibank document written in March 1997 states: ``There is
a close relationship between our Senior Management and R.
Moneta. This, added to the association that exists between this
group and CEI, means that Citibank has profound knowledge of
the corporate structure, details of its organization, and the
operation of Grupo Moneta and Banco Republica.'' Another
Citibank document states that Raul Moneta ``has easy access to
our Senior Management (John Reed, Bill Rhodes, Paul Collins,
etc.).'' \64\
---------------------------------------------------------------------------
\64\ Several Citibank reports on Grupo Moneta and Banco Republica
note specifically the close relationship Citibank Argentina has with
the owners of Grupo Moneta. A credit report from August 1997 states:
``We have excellent contacts at the Senior level. . . . This close
relationship gives us access to confidential internal Bank
information.'' And a Commercial Bank Analysis of Banco Republica dated
December 1998 states: ``The bank's Senior Management has a strong
relationship with Raul Moneta, who is No. 1 in this group. The
relationship came about as a result of the `shareholder' relationship
Citibank has with Grupo Republica in CEI (Citicorp Equity Investment).
Raul Moneta has easy access to our Senior Management (John Reed, Bill
Rhodes, Paul Collins, etc.).'' John Reed is the former Chairman of
Citibank; Bill Rhodes is a Vice Chairman, and Paul Collins is a retired
Vice Chairman.
---------------------------------------------------------------------------
Although Federal Bank was an offshore shell bank licensed
in a country known for weak banking and money laundering
controls, Citibank documentation does not indicate any steps
taken to ensure enhanced scrutiny of this bank. To the
contrary, Citibank appeared to ignore even basic due diligence
requirements it had in place for correspondent accounts. For
example, although Citibank normally requires an on-site annual
visit to its bank clients, Lopez said that as the relationship
manager for Federal Bank, he never visited it and doesn't know
anyone from Citibank who has. When asked where the bank is
located, Lopez said he ``has a feeling'' it is in Uruguay in
the offices of ``some representative or attorney.'' When asked
about the absence of a physical location for its customers,
Lopez said it is like M.A. Bank; ``they only need a booking
unit that receives deposits and could make loans.''
Lopez said that he knew Federal Bank was not permitted to
conduct banking business in Argentina and that it did not have
any other correspondent accounts other than Citibank, apart
from its correspondent relationship with Banco Republica. Since
Federal Bank is a shell bank and thus totally dependent upon
its correspondent relationships, it appears that all of Federal
Bank's transactions were conducted either through its
correspondent account at Citibank or its correspondent account
at Banco Republica.
(6) Regulatory Oversight
The regulatory authority for Banco Republica is the Central
Bank of Argentina, also known as BCRA. According to Carlos
Fedrigotti, the President of Citibank Argentina, the BCRA
``gets good reviews'' from both the banking industry in
Argentina and outside parties such as the World Bank and the
International Monetary Fund. Fedrigotti said the BCRA has
``done a good job in cleaning up'' the banking industry in
Argentina and that the industry is far safer than it was 6 or 7
years ago. Fedrigotti said Citibank Argentina gets audited on
an annual basis; and the Minority Staff learned that Banco
Republica was subject to two audits that took place from 1996
through 1999.
The Financial Action Task Force on Money Laundering
(``FATF'') and the U.S. State Department's most recent
International Narcotics Control Strategy Report (``NCSR 2000'')
report indicate that Argentina's anti-money laundering efforts
are mixed. Argentina did not have a comprehensive anti-money
laundering law until the year 2000.\65\ Based upon passage of
this new law, FATF recognized Argentina as a full member for
the first time in 2000. However, FATF's latest annual report
(2000) states:
---------------------------------------------------------------------------
\65\ The Minority Staff has been advised that the effective date of
the new anti-money laundering law (law 25.246) was actually February 7,
2001, because it was awaiting the approval of the President of
Argentina before it could be implemented.
Recent high-profile investigations have shown evidence
that drug cartels are active in Argentina, and underlined fears
that it could become a growing international money laundering
center. While there was no indication of other sources of
illegal proceeds, it is believed that bribery and contraband
could also contribute to the money laundering which occurs in
---------------------------------------------------------------------------
Argentina.
The regulatory authority for Federal Bank is the Central
Bank of the Bahamas. In June 2000, the Bahamas was one of 15
countries named by FATF for weak anti-money laundering controls
and inadequate cooperation with international anti-money
laundering efforts. The INCSR 2000 report describes the Bahamas
as a country of ``primary'' money laundering concern due to
``bank secrecy laws and [a] liberal international business
company (IBC) regime [which] make[s] it vulnerable to money
laundering and other financial crimes.'' While banking and
money laundering experts interviewed by the Minority Staff
described the Bahamas as having good intentions and making
important improvements, during the 1990's it provided weak
oversight and inadequate resources to regulate its more than
400 offshore banks.
Because Federal Bank and Banco Republica were both owned by
Grupo Moneta, Federal Bank might also be expected to be subject
to oversight by the Central Bank of Argentina as an affiliate
of Banco Republica. As Citibank Argentina President Fedrigotti
told the Subcommittee, if Federal Bank had been linked to Banco
Republica, it would have been reviewed by BCRA. But that link
was not made, however, because Banco Republica did not directly
own Federal Bank, and, although Citibank knew that Federal Bank
was owned by the same persons who owned Banco Republica (Grupo
Moneta), the Central Bank of Argentina did not.
Ironically, in fact, Citibank officials expressed concern
internally about the weak regulatory oversight of Federal Bank,
because they knew the Central Bank of Argentina was not aware
of the common ownership of Federal Bank and Banco Republica. In
an internal memo,\66\ Lopez, the relationship manager for Grupo
Moneta entities, wrote, ``Its [Federal Bank's] existence is not
reported as linked to BCRA despite being a banking vehicle
(offshore category D in our policy), which makes it a risky
vehicle per se because of having only the control of the
Central Bank of the Bahamas.'' Yet, as discussed later, when
the Central Bank asked Citibank about Federal Bank's ownership,
Citibank chose to keep silent about the offshore bank's links
to Banco Republica and Grupo Moneta. In addition, Citibank
failed to give any heightened scrutiny to what its own
relationship manager characterized as ``a risky vehicle per
se.''
---------------------------------------------------------------------------
\66\ See ``Remarks on Grupo Republica'' dated 2/6/97, PS018309.
``Federal Bank Ltd.: Located in the Bahamas with US $25 MM in capital.
Its existence is not reported as linked to BCRA [Central Bank] despite
being a banking vehicle (offshore category D in our policy), which
makes it a risky vehicle per se because of having only the control of
the Central Bank of the Bahamas.''
---------------------------------------------------------------------------
(7) Central Bank of Argentina Concerns
Resolution No. 395/96. The Central Bank of Argentina has
established limits with respect to the amount of stock a bank
can hold in a company to which it is related and the amount of
loans a bank can make to related companies. In 1996 the Central
Bank became concerned about the extent of Banco Republica's
ownership (4.27%) in CEI. That amount represented more than 15%
of Banco Republica's computable equity, which is the limit
previously established by the Central Bank. Banco Republica
asked the Central Bank for a waiver of the 15% limit for 3
years. The Central Bank granted that waiver on the condition
that Banco Republica ``refrain from carrying out any
transaction that involves, even temporarily, directly or
indirectly increasing the financing of CEI or assuming any risk
connected with said company.'' It went on to require that Banco
Republica not ``increase its stake in other companies, except
those that may eventually be associated with Banco de Mendoza
S.A.,'' a retail bank Banco Republica was in the process of
purchasing.\67\
---------------------------------------------------------------------------
\67\ See Resolution No. 395, Buenos Aires, August 28, 1996, Central
Bank of Argentina.
---------------------------------------------------------------------------
During the 1996/7 audit, the Central Bank expressed concern
that Banco Republica had increased its shares of CEI. The
auditors referred to a conflict between what it was being told
by Banco Republica, that the bank owned 4.27% of CEI, and what
it had learned from the media and another inspection, that
Banco Republica owned 33-35% of CEI. The references in the news
media to a larger share of CEI are likely the ownership
interest of UFCO (discussed above), also owned by Grupo Moneta.
It is uncertain whether the Central Bank at the time of the
1996/7 audit knew that UFCO was owned by Grupo Moneta. The
Central Bank appears to suggest that another entity linked to
Banco Republica may hold the CEI shares, but it does not
mention UFCO in that context. The Central Bank apparently tried
to resolve the discrepancy by asking CEI for the ownership
information directly, but it appears that at the time of the
audit, it did not have a response from CEI. The Central Bank
put as its first item for its next inspection, ``Fulfillment of
Resolution No. 395/96''.
In August 1998, according to Citibank documents,\68\ Grupo
Moneta ``increased its stake in CEI to 39.9% . . . and at the
same time Raul Moneta was named president of CEI. . . .'' The
1998 increase in shares in CEI was, it appears, in the name of
Republica Holdings (formerly UFCO). If the Central Bank were to
treat affiliated ownership as subject to the restrictions of
Resolution 395/96, then, this increase in CEI ownership by
Grupo Moneta would be a violation of the Central Bank's
Resolution 395/96.
---------------------------------------------------------------------------
\68\ See FITS Argentina memo dated April 1997.
---------------------------------------------------------------------------
In addition, under the Resolution it appears Banco
Republica was prohibited from lending money to CEI related
entities. Yet in the Citibank internal documents assessing the
activities of Federal Bank, Citibank notes that one of the
purposes of Federal Bank is ``(t)o channel the cash flow of the
partners of Banco Republica and serve, with these deposits and
the assets of Federal Bank, as a bridge, financing loans aimed
at companies associated with CEI.'' This activity appears to be
an end-run around the conditions imposed on Banco Republica by
the Central Bank Resolution. Since Banco Republica is
apparently prohibited from loaning money to companies
associated with CEI, it appears Grupo Moneta was using Federal
Bank to do what Banco Republica could not do. But because the
Resolution prohibits Banco Republica loans ``directly or
indirectly'' to CEI related companies, it may reach the
activity of Federal Bank, as an affiliated entity, as well.
Audits. In 1996/7 and 1998, the Central Bank of Argentina
conducted audits of Banco Republica, and copies of these audits
were made available to the Subcommittee. These audits identify
numerous concerns by the Central Bank about the management and
operations of Banco Republica, and both resulted in a CAMEL
rating of 4 for the bank. Although Citibank had, according to
its records, ``access to confidential internal bank
information'' about Banco Republica and had ``profound
knowledge'' of its structure, organization and operation,
Citibank said it was unaware until 1999 that Banco Republica
had been given a CAMEL 4 rating by the Argentine Central Bank.
A comparison of the information obtained by the Central Bank
during these audits with the information Citibank Argentina had
as a result of its correspondent relationship raises additional
serious discrepancies and questions about the effectiveness of
Citibank's due diligence and ongoing monitoring.
a. Operations and Anti-Money Laundering Controls. Citibank
Argentina repeatedly notes in its analyses of Banco Republica
that the bank has an anti-money laundering program. In a FITS
memo (a brief financial analysis of a bank with which Citibank
Argentina has a credit relationship) of April 1997, Citibank
notes: ``BR has internal procedures to prevent money
laundering, including KYC policies. This matter is overseen by
Banco Central de la Republica Argentina. We have no evidence or
information from third parties that BR was or is carrying out
illicit money laundering transactions with the knowledge of its
management or shareholders.'' But in the BCRA audit of 1998,
the BCRA notes with concern: ``The entity under examination
[Banco Republica] does not have a manual containing the
programs against laundering money from illicit activities,''
despite early requirements that it do so and ``despite the fact
that the internal Auditor, in his report on the work performed
between July 1997 and June 1998, pointed out that `It is
necessary to set up a manual of rules and procedures regarding
precautionary measures with respect to laundering. . .' ''
The Subcommittee asked Lopez whether he had obtained from
Banco Republica a copy or documentation of Banco Republica's
anti-money laundering program. Lopez said he discussed the
anti-money laundering program with Banco Republica management
during his annual reviews and was told by the management that
Banco Republica had such a program. He said he was satisfied
with that response and assumed the same program would apply to
Federal Bank. Lopez said he had not seen the BCRA report prior
to his preparation for the Subcommittee interview, that it
``was disturbing'' and `` shocking'' to see the BCRA finding
that no written procedures existed and that Banco Republica
``never disclosed'' to Citibank Argentina that they had a
problem with the BCRA. Lopez said that sometimes his office
asks to see a bank's anti-money laundering manual and sometimes
they ``trust the customer.'' He noted Citibank had a 20 year
relationship with Grupo Moneta, and that ``now I see a customer
of 20 years can lie to you.''
When asked about the extent to which Citibank Argentina
reviewed the anti-money laundering policies of Federal Bank,
Lopez said that because Federal Bank had the same management as
Banco Republica, Citibank assumed they had the same procedures.
When asked whether Citibank had ever asked Federal Bank about
its anti-money laundering procedures, Lopez said he did and
that is reflected, he said, in the comments in the annual
reviews when discussing Grupo Moneta as a whole. The
Subcommittee was not able to find any reference in the Citibank
documents to the anti-money laundering program or procedures of
Federal Bank.
b. Federal Bank Transactions with CEI Related Companies.
Resolution 395/96 appears to prohibit Banco Republica not only
from increasing its ownership in CEI, but also from loaning
money to CEI related entities. From Citibank documents,
however, it appears that Banco Republica used Federal Bank as a
way to get around that limitation and that Citibank was aware
of this effort. An October 23, 1995, call memorandum from Lopez
describes the utility of Federal Bank to Banco Republica. It
says, ``Strategically, the group needs a vehicle to which to
channel its private banking and to create for it a nexus
between its investment in CEI booked in UFCO and Banco
Republica's financial activity.'' In describing the assets of
Federal Bank, Lopez writes that $30 million of Federal Bank's
assets are ``deposits of the Banco Republica members
themselves, which are lent to target-name customers of Banco
Republica and to businesses linked to CEI whose loans cannot be
processed through Banco Republica.''
In a September 1996 memo on Banco Republica Lopez writes
that the significance of Federal Bank to Banco Republica is to,
``[c]hannel the liquidity of the shareholders of Banco
Republica and, with these deposits and the assets of Federal
Bank, support the acquisitions or grant loans to CEI companies.
. .''
The Minority Staff was not able to determine whether the
BCRA regulations prohibit a bank from using an entity with
common ownership as a vehicle to do what BCRA has prohibited
the regulated bank from doing, but such an activity appears to
be at odds with the import of BCRA's restrictions on Banco
Republica in Resolution 395/96.
c. Withholding Information from the Central Bank. The
Central Bank also made several observations in the 1998 audit
that information requested of Banco Republica about certain
issues regarding Federal Bank was not provided despite repeated
requests. The Central Bank said in the 1998 audit: ``. . .
everything related to the Federal Bank Limited, Republica
Propiedades S.A., CEI Citicorp holdings S.A., among others, had
to be claimed several times via memos or directly to the
officers in several meetings held during the inspection and
afterwards. It must be stated that the information given in
those cases was contradictory or kept back and had to be
requested over again.'' \69\
---------------------------------------------------------------------------
\69\ Annex I of 1996 Audit, Folio 28.
---------------------------------------------------------------------------
d. Misleading the Central Bank as to the Ownership of
Federal Bank. The 1998 audit suggests that the Central Bank was
not aware at the time that Federal Bank was actually owned by
Grupo Moneta, which also owned Banco Republica. The Central
Bank's discussion of Banco Republica's operations with Federal
Bank does not mention the common ownership, and in fact in its
closing paragraph \70\ of that discussion it seems to indicate
that it was told by Banco Republica officials that ``Federal
Bank Limited had discontinued its operations with Banco
Republica S.A.''
---------------------------------------------------------------------------
\70\ 1996 Audit. Folio 133.
---------------------------------------------------------------------------
In 1997 and 1998 according to the audit documents, Federal
Bank applied to the Central Bank for the opportunity to open an
office in Argentina. The Central Bank appeared to be very
concerned about the fact that Federal Bank was licensed in the
Bahamas and was without any consolidated banking supervision
system. Again, the Minority Staff could find no mention of the
bank's common ownership with Banco Republica. The Central Bank,
in the end, denied the request by Federal Bank.
In the 1998 audit, the Central Bank investigators reported,
``At a meeting on November 17, 1998, with Pablo Lucini, [one of
Citibank's principal contacts at Banco Republica] he denied any
`economic group' relationship between BR [Banco Republica] and
Federal B.L. [Bank Limited].''
This apparent misinformation by Pablo Lucini to the Central
Bank of Argentina was compounded when the Central Bank
specifically asked Citibank Argentina in April 1999 to provide
the Central Bank with any information Citibank Argentina had
with respect to the ownership of Federal Bank.\71\ Despite
repeated references in their own documents and records to the
fact that Federal Bank was 100% owned by Grupo Moneta,\72\ and
that it knew Grupo Moneta so well, Citibank Argentina responded
to the Central Bank that their ``records contain no information
that would enable us to determine the identity of the
shareholders of the referenced bank.'' \73\
---------------------------------------------------------------------------
\71\ See the exchange of letters on this subject at the back of
this chapter.
\72\ See, for example, Citibank Basic Information Reports for
November 1996, August 1997, and May 1999, report Federal Bank as owned
100% by Grupo Moneta.
\73\ May 1999 letter from Carlos Fedrigotti, CEO of Citibank
Argentina to the Central Bank.
---------------------------------------------------------------------------
The Subcommittee asked relationship manager Martin Lopez to
explain Citibank's response to the Central Bank. Lopez said he
did not see the letter before it went out, but he knew the
Central Bank was looking for information about Federal Bank. He
said he had the impression that the Central Bank ``was trying
to play some kind of game,'' that it was ``trying to get some
legal proof of ownership.'' When the Subcommittee asked why he
thought the request for information about Federal Bank's owners
from the Central Bank was a ``game,'' Lopez said because one of
the signers of the letter had previously been a relationship
manager or unit head of financial institutions in Bank of
Boston, and he must have known the owners of Federal Bank.
Lopez said he thought maybe the Central Bank was put in an
``awkward position'' and was ``looking for legal proof.'' At
one point he said, ``We [Citibank Argentina] don't have
information in Argentina; it's in New York.'' However, the
Subcommittee was later told that the annual reports on Banco
Republica containing the organizational structure and ownership
were, in fact, maintained in Citibank Argentina. Lopez also
said he had a conversation with the counsel for Citibank
Argentina and with the Chief of Staff to Fedrigotti about how
to respond to the letter. Lopez said he told them he did not
think Citibank should respond. He said following the
conversation, Fedrigotti wrote the letter and sent it. He said
Fedrigotti definitely knew at the time that Federal Bank was
owned by Grupo Moneta. At the same time, Lopez argued that the
letter is ``technically true,'' because Citibank Argentina did
not have any ``legal'' documents showing the ownership of
Federal Bank and that any such information would have been kept
in Citibank New York. When asked whether he called Citibank New
York to ask them or let them know of the request, he said he
did not and he did not know if anyone else did.
The Minority Staff also asked Citibank Argentina President
Carlos Fedrigotti about Citibank's response. Fedrigotti said he
got the letter from the Central Bank in April 1999 and that the
letter was ``within the context of what I knew was going on out
in the market,'' referring to the restructuring of Banco
Republica and Grupo Moneta at that point in time. He said he
read it, understood the gist of what was being requested, and
handed it to his deputy. He said he told his deputy to consult
with Citibank Argentina General Counsel and to prepare a
response. He said a few days later a response was prepared for
his signature; he said he looked at it quickly, and he did not
consult the original letter. He said he saw the first
paragraph, asked if it was accurate, and was told it was. He
said he looked at the second paragraph that referred BCRA to
Citibank in New York because that ``is where the Federal Bank
account was domiciled.'' He said he was satisfied with the
content, approved it, and spent no more than 15 seconds on it.
Apparently nothing occurred with respect to the BCRA
request and Citibank Argentina's response for more than a year,
according to Fedrigotti. Then in July 2000, when the
Subcommittee requested information with respect to Federal Bank
from Citibank, ``another review of the documents and papers was
made.'' Fedrigotti said the question was asked, ``how is this
letter (Citibank's response to BCRA) consistent with
information in Citibank files.'' He said it was brought to his
attention, and he got involved. He said he was told the
response to BCRA was in keeping with the policy at the bank
that if information is requested for an account in another
jurisdiction, the person making the request should be referred
to that jurisdiction. In this case, Fedrigotti said, although
Citibank Argentina handled all of the due diligence and day-to-
day relationships with Federal Bank, the actual account was
held at Citibank New York. Fedrigotti said that it was also
true that the ownership information sought by the BCRA that
Citibank Argentina had was ``rebuttable''--that is, it ``wasn't
information that could legally demonstrate the ownership'' of
Federal Bank and so the ``letter was legally correct.''
Lopez said that he now knows Citibank should have answered
the letter ``in a different way,'' that Citibank ``should have
done more.'' He said in July 2000 when Citibank New York
learned about the letter as a result of the Subcommittee's
investigation, the ``compliance people were very upset'' with
the answer provided in the letter. Once Citibank New York
decided the first response was ``a mistake,'' Lopez said, then
a second letter was drafted and sent telling the Central Bank
that Citibank has ``information prepared internally by our
[Citibank] institution regarding Federal Bank Limited [that]
includes references to the identify of its [Federal Bank's]
shareholders.'' The second letter is dated July 27, 2000.
Fedrigotti said that during his review of the matter in
July 2000, ``having myself been exposed more deeply to the type
of information that was contained and nature of informal
working papers that reflected our understanding of the
connection between these entities, and keeping with our policy
with being fully open with our regulators, I took the step to
give information to the regulators.'' Fedrigotti added that he
wanted to make clear that in doing so, he was not
``invalidating the legality'' of the first letter. He said,
``We were supplementing the [earlier] information.'' But even
in this second letter, Citibank Argentina does not provide
complete and accurate information. For example, the Citibank
letter does not acknowledge to the Central Bank that Citibank
New York has a correspondent account with Federal Bank that was
initiated and managed by Citibank Argentina, and it tells the
Central Bank that Citibank Argentina has no account with
Federal Bank.
When asked whether he remembered any conversation with
Citibank officials with respect to the BCRA request about
``playing games,'' Fedrigotti said he did not. He added that it
was ``not a fair assumption'' to say the BCRA was ``playing
games.''
After receiving information about Federal Bank's ownership
from Citibank Argentina, Fedrigotti said that BCRA recently
(February 7, 2001) asked Citibank Argentina to ``justify the
apparent discrepancy'' between Citibank Argentina's first
letter and its second letter, and Fedrigotti did so.
e. Other Central Bank Concerns. The Central Bank audits
identify other concerns about the operation and management of
Banco Republica. The Central Bank claimed that Banco Republica
was providing financing with preferential conditions for
``their linked clients'' both with respect to interest rates
and terms. The Central Bank was concerned that there was no
organization manual for Banco Republica and that the procedure
manuals for the bank had not been approved by the Board of
Directors. It questioned a 10-year rental contract with
Citibank for office property that it said was possibly
prohibited by Argentine law. It said the work done by the
external auditors of Delloite & Touche for Banco Republica was
`` `insufficient' regarding both the depth of the developed
procedures and the level of the conclusions which do not accord
with the observations and verifications determine in the
inspection.'' It said the controls put in place from the bank's
internal audit ``are not totally appropriate'' because ``the
procedures implemented lack the necessary depth.'' In the 1998
audit, the Central Bank said, ``To sum up, the present
structure of the business is impossible.'' As a result of its
audits, the Central Bank in the 1996/7 audit and in the 1998
audit assigned a CAMEL rating to Banco Republica of 4.
During this same time, Citibank Argentina analyzed Banco
Republica quite differently. Citibank gave Banco Republic an
internal rating of ``IA.'' ``I'' is the highest rating a bank
in a credit relationship can get from Citibank and ``IV'' is
the worst. ``IA,'' according to Lopez, means Citibank
recognizes some potential risk in the customer which requires
more frequent follow ups. But Lopez and the Citibank Argentina
team saw Banco Republica as a normal banking operation with
apparently limited matters of concern. In a 1996 Basic
Information Report, Lopez noted that Banco Republic was a
``leading wholesale bank,'' that it had ``shareholders'
financial soundness,'' and that it was ``managed with
recognized record and experience.''
Citibank New York closed its correspondent account with
Banco Republica on September 27, 1999, after Banco Republica's
collapse. Citibank closed its correspondent account with
Federal Bank in June 2000. When asked why there was a lengthy
delay between the closing of the two accounts, Lopez told the
Subcommittee that Federal Bank had requested the extended
opening in order to clear out its account.
(8) American Exchange Company
American Exchange Company, according to Martin Lopez and
Citibank documents, was created by Grupo Moneta prior to
Federal Bank and was the first offshore vehicle of Grupo
Moneta. Its account with Citibank was opened at the same time
the correspondent accounts with Banco Republica were opened. At
that time, Lopez said, Grupo Moneta did not need an offshore
bank, because the intended activity was only to trade
securities and conduct foreign exchange for customers; the
offshore entity, according to Lopez did not need to hold
deposits. Most of the activities of American Exchange, Lopez
told the Subcommittee, were absorbed by Federal Bank over the
years. He said it was his understanding that American Exchange
continued after Federal Bank came into existence but with
little activity.
American Exchange Company, although referred to in Citibank
documents several times as an offshore bank, is not a bank,
according to Lopez, but ``more like an asset management and
brokerage house.'' It is, according to Lopez, incorporated in
Panama, with a representative in Uruguay and owned by Grupo
Moneta. Citibank's monthly statements for American Exchange
show its address to be in Punta Del Este, Uruguay. Lopez said
he does not know how many employees American Exchange has but
that maybe the company needs ``one person to administer the
book entries.'' He said the same people he worked with from
Grupo Moneta represented American Exchange to Citibank
Argentina. Lopez did not know whether American Exchange is
licensed to do business in Argentina.
When asked who regulates American Exchange, Lopez said no
one does, because American Exchange does not hold deposits. He
said the money placed with the company does not stay in
American Exchange for more than 1 or 2 days.
With respect to the extent of an anti-money laundering
program at American Exchange, Lopez said Citibank Argentina
believed American Exchange had the same program and procedures
as the other entities in the Moneta Group. The Subcommittee has
learned from reviewing the Central Bank audits, however, that
Banco Republica, and other entities owned by Grupo Moneta, did
not have any anti-money laundering program.
The Subcommittee subpoenaed Citibank for its documents with
respect to American Exchange. The results were limited. One
account opening document appears to be a signature card with
the name Jorge Videla. Lopez said he did not know the identity
of Videla and there was no due diligence information on him in
the file. A second document appears to assign an account number
to American Exchange. A third document appears to provide basic
data on American Exchange, such as country of location and
provides several codes apparently internal to Citibank. The
investigation was unable to locate any customer profile or
substantive information on American Exchange in the Citibank
records.
The American Exchange account was closed on June 30, 2000.
The closing appears to be part of a policy established by
Citibank in the Spring of 2000 to close all demand deposit
accounts for offshore vehicles of Argentinian financial
entities ``that are not consolidating under a local bank, and
consequently regulated by the Local Central Bank.'' \74\
---------------------------------------------------------------------------
\74\ E-mail dated 6/16/2000 from Martin Ubiema to James A. Forde,
et al. CA001371.
---------------------------------------------------------------------------
(9) Suspicious Activity at Federal Bank
Money Laundering and the IBM Scandal. In January 1994, IBM
Argentina made a successful bid on a contract in Argentina to
install software and provide training for Banco Nacion, a
government owned bank. The amount of the bid was $300 million.
It turned out that $37 million of that amount was for a
nonexistent subcontractor, Computacion y Capacitacion Rural
S.A. or CCR, for the purpose of providing kickbacks to
Argentine public officials involved in the contract. To date it
appears IBM paid approximately $21 million of the $37 million,
half of which has been traced to Swiss bank accounts of
Argentine officials. The scandal has been called ``one of the
biggest political-financial scandals'' in Argentina's
history.\75\ Part of that bribe money moved through Federal
Bank. On May 10, 1994, Compania General De Negocios, a bank in
Uruguay, ordered $1 million to be taken from its Credit Suisse
account and deposited in Federal Bank's correspondent account
at Citibank. The $1 million proved to be part of the $21
million payoff from the IBM kickback scandal.
---------------------------------------------------------------------------
\75\ ``IBM Scandal That Rocked Argentina Far From Resolved,'' The
Miami Herald, May 16, 1999, by Andres Oppenheimer.
---------------------------------------------------------------------------
Movement of Money. In its 1998 audit, the Central Bank
expressed concern about the volume of the transactions taking
place between Banco Republica and Federal Bank. In the 1998
audit, the Central Bank noted that ``the operation carried out
by [Banco Republica] with the Federal Bank Ltd. presents
peculiar characteristics due to its close relationship to the
companies linked to the bank. . . .'' The 1996/7 audit noted
that ``during November and December 1996, 8.88% and 13.53%
respectively'' of the money moving through Banco Republica's
correspondent account in Citibank New York ``were accredited by
the Federal Bank Limited.'' The Central Bank said that while
the amounts were not significant, it was worth noting that the
majority of such money was ``related to operations with
companies linked with Banco Republica. . . .'' The 1998 audit
concluded with the suggestion that the next inspection do an
``analysis of the operations with Federal Bank Limited.''
The Central Bank also noted transactions through Banco
Republic and Federal Bank with respect to four offshore
companies created in the Bahamas on the same date, March 18,
1997. The Central Bank noted that these companies have the same
representative, and they have the same address in Uruguay as
Federal Bank. These four companies are: Ludgate Investments
Ltd., South Wark Asset Management Ltd., Lolland Stocks Ltd.,
and Scott & Chandler Ltd. The Banco Republica monthly
statements from the Citibank New York correspondent account
show the movement of millions of dollars each month between the
accounts of these entities at Federal Bank and the accounts at
Banco Republica. Out of its concern for the transactions
involving these four companies, the Central Bank auditors
apparently recommended obtaining more information about them
from the Central Banks of the Bahamas and Uruguay.
The Minority Staff reviewed the monthly statements of Banco
Republica, Federal Bank and American Exchange Company. In many
instances large sums of money moved on the same day from Banco
Republica's correspondent account at Citibank New York to
American Exchange's correspondent account at Citibank New York,
and then to Federal Bank's correspondent account at Citibank
New York. Other amounts moved in the reverse direction, from
Federal Bank to American Exchange to Banco Republica. All of
the accounts through which the money moved were U.S. dollar
accounts in Citibank New York. The first chart, below, shows
just a few of the many instances of the movement of such sums
in these accounts. It summarizes some of the activity in 1995
and in January and February 1996. The second chart shows a
similar movement of money in 2000 after Banco Republica had
collapsed. In lieu of Banco Republica it appears the money
began moving to or through Eurobanco.
MOVEMENT OF MONEY THROUGH BANCO REPUBLICA, AMERICAN EXCHANGE, AND
FEDERAL BANK
1995 and 1996
------------------------------------------------------------------------
DATE AMOUNT FROM TO TO
------------------------------------------------------------------------
January 31, $3,000,000 Banco American Federal Bank
1995 Republica Exchange
------------------------------------------------------------------------
October 12, $5,000,000 Banco American Federal Bank
1995 Republica Exchange
------------------------------------------------------------------------
December 14, $500,000 Banco American Federal Bank
1995 Republica Exchange
------------------------------------------------------------------------
December 18, $1,000,000 Banco American Federal Bank
1995 Republica Exchange
------------------------------------------------------------------------
December 20, $700,000 Banco American Federal Bank
1995 Republica Exchange
------------------------------------------------------------------------
January 23, $500,000 Banco American Federal Bank
1996 Republica Exchange
------------------------------------------------------------------------
January 25, $300,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
January 31, $600,000 Banco American Federal Bank
1996 Republica Exchange
------------------------------------------------------------------------
February 1, $200,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
February 6, $200,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
February 7, $200,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
February 26, $549,778 Verwaltungs American Key West
1996 Exchange Ltd.
------------------------------------------------------------------------
February 28, $600,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
February 29, $200,000 Federal Bank American Banco
1996 Exchange Republica
------------------------------------------------------------------------
Prepared by the Minority Staff of the Permanent Subcommittee on
Investigations, February 2001.
MOVEMENT OF MONEY THROUGH FEDERAL BANK, AMERICAN EXCHANGE, AND EUROBANCO
2000
------------------------------------------------------------------------
DATE AMOUNT FROM TO TO
------------------------------------------------------------------------
January 27, $300,000 Federal Bank American Eurobanco
2000 Exchange
------------------------------------------------------------------------
February 9, $300,000 Federal Bank American Eurobanco
2000 Exchange
------------------------------------------------------------------------
February 29, $300,000 Federal Bank American Eurobanco
2000 Exchange
------------------------------------------------------------------------
March 3, 2000 $300,000 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
March 15, 2000 $200,000 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
March 27, 2000 $200,000 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
April 3, 2000 $200,000 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
May 23, 2000 $292,343 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
May 23, 2000 $50,250 Federal Bank American Eurobanco
Exchange
------------------------------------------------------------------------
Prepared by the Minority Staff of the Permanent Subcommittee on
Investigations, February 2001.
As the 1995/1996 chart shows, for example, on January 31,
1995, $3 million was wired from Banco Republica's correspondent
account in Citibank New York to the account in Citibank New
York of American Exchange Company. It was then, on that same
day, wired from the Citibank New York account of American
Exchange to the Citibank New York correspondent account of
Federal Bank. On October 12, 1995, $5 million was wired
following the same route.
These same-day transactions appeared to be at their height
in 1996. For example, it happened some 17 times in the first 2
months of 1996. The Minority Staff consulted several experts
with respect to wire transfers and money laundering and not one
of the five persons consulted could explain a reasonable
business justification for this pattern of transfers. All five
suggested that the only reason for the transactions going
through American Exchange was to layer the transactions, since
all of the accounts involved were dollar accounts in the United
States.
Contrary to Lopez' description of Federal Bank taking the
place or business of American Exchange Company for Grupo
Moneta, the monthly statements of Federal Bank and American
Exchange Company show years of activity involving tens of
millions of dollars going back and forth between the two
entities.
Lopez told the Subcommittee that Citibank Argentina in
general, and he as relationship manager in particular, never
saw the monthly statements of Federal Bank or Banco Republica.
He said the monthly statements were handled by Citibank New
York which held the correspondent account. Lopez said it would
be Citibank New York's responsibility to monitor the movement
of money through the Banco Republica and Federal Bank accounts.
Yet Citibank New York told the Subcommittee it did not have
that responsibility. The market head in New York told Minority
Staff that Citibank New York only monitored the account for
overdrafts and credit issues, and New York did not monitor the
monthly accounts. He said the Citibank office in Tampa was
responsible for money laundering oversight.
While the Central Bank of Argentina was concerned about the
movement of money between Federal Bank and Banco Republica, and
the movement of money involving the four Bahamanian companies
established in 1997, the Subcommittee found no written evidence
in the materials subpoenaed from Citibank that Citibank New
York or any Citibank office noticed or expressed any concern
with respect to either issue. Nor was there any documentation
expressing any concern about or observation of the same-day
movement of money through the three accounts of Banco
Republica, American Exchange, and Federal Bank.
Citibank's failure to question the transactions and unusual
movements of money through the Federal Bank, American Exchange,
and Banco Republica accounts is even more troubling in light of
the large sums involved. Movements of $200,000, $500,000, even
$3 million in even sums were routine. In one exceptional
transaction occurring on April 29, 1994, one transfer of $28
million occurred. This was four to five times the size of even
the larger transactions among these accounts.
In the 9 years of monthly statements reviewed by the
Minority Staff, deposits of hundreds of thousands of dollars
were common; the largest month saw total deposits of over $173
million. The magnitude of these monthly statements far exceeds
any other offshore bank reviewed by the Minority Staff
investigation. Yet Citibank asked few questions why a shell
offshore bank in the Bahamas would have access to such sums and
chose to move its funds in the patterns it did.
B. THE ISSUES
M.A. Bank and Federal Bank are shell offshore banks,
licensed in jurisdictions that have had weak anti-money
laundering controls. Citibank accepted both banks as
correspondent clients because they were affiliated with large
commercial operations in Argentina. In the case of M.A. Bank,
Mercado Abierto was a large financial institution that was a
customer of Citibank; with Federal Bank, the relationship was
even stronger. Citibank was a business partner with Grupo
Moneta and had been doing business with Grupo Moneta entities
for a number of years. Citibank reported in its internal
analysis of these entities that the principals of both groups
were persons with excellent reputations.
What Citibank overlooked or failed to see was that no past
or current relationship with, and no level of confidence in the
reputations of, these financial groups can replace the need for
independent regulatory oversight. And as shell offshore banks,
neither of these banks was subject to that oversight. With
respect to M.A. Bank, Citibank failed to address the fact that
the financial entity of which M.A. Bank was a part was not
subject to any bank regulatory authority. Mercado Abierto,
because it was a securities firm and not a bank, was not
subject to oversight by the Central Bank of Argentina, and
hence, M.A. Bank, as an affiliate, was never brought within the
Central Bank's purview. In the case of Federal Bank, Citibank's
conduct is more disturbing, because it was both aware of and
concerned about the fact that the Central Bank of Argentina did
not know Federal Bank was owned by Grupo Moneta, and yet it
misled the Central Bank about Federal Bank's ownership when it
was asked for information. Had the Central Bank known that
Federal Bank was also owned by Grupo Moneta, Federal Bank, as
an affiliate, might have come under the purview of the Central
Bank.
These shell offshore banks appear to have achieved exactly
what they set out to do--avoid independent regulatory
oversight, and the structure they used to do so should have set
off alarm bells at Citibank. In fact, M.A. Bank's owners
acknowledged as much when they said that M.A. Bank set up
administrative operations in Uruguay to avoid regulation. At
least two banking experts have indicated to Minority Staff that
any institution set up in a manner similar to M.A. Bank would
raise red flags, and they would expect that the bank would be
reviewed very closely before a correspondent relationship was
established.
M.A. Bank. MAB employed banking practices that were
characterized by a Special Examiner for the Federal Reserve
Board of Governors as inconsistent with typical banking
operations and not indicative of safe and sound banking
practice. These practices were highly vulnerable to money
laundering and, as revealed by the investigation by the U.S.
Customs Service, facilitated the concealment and movement of
illicit funds. These practices included accepting deposits and
dispensing withdrawals in Argentina, in violation of Argentine
banking law; accepting deposits from unidentified sources for
unknown destinations; and using withdrawal forms that did not
contain the name of the bank.
The practices implemented by MAB--with the full knowledge
of the owners of the bank--appear to have violated Argentine
banking law, violated anti-money laundering principles and
created an environment that facilitated money laundering and
tax evasion. In restating its policy regarding opening accounts
for shell banks, Citibank noted that ``the character of the
institution'' is ``key.'' The description of MAB's structure
and banking practices that Iribarne provided to the U.S.
Customs agent shows the questionable character and conduct of
both MAB and the larger financial institution with which it is
affiliated. Yet, there were no examinations and reviews of
MAB's practices and policies, and the due diligence and ongoing
monitoring by Citibank in the case of MAB was poor.
*There was confusion at Citibank over the appropriate
roles of the account managers that created a lack of
coordination with respect to ongoing monitoring and lack of
attention to activities in the MAB account. The Financial
Institutions unit head in Argentina told the Minority Staff
that New York was responsible for monitoring the account. The
market head in New York said that the New York office only
monitored for credit and overdraft issues. As of December 1999,
the account officers in both New York and Argentina were
uncertain about what, if any, review of the account was being
conducted by the anti-money laundering unit in Florida. It
appears that Citibank did not have in place account profiles to
identify high risk customers that should be subjected to
tighter monitoring. One was established for the Argentina
financial institution accounts only after the bank learned that
the assets seized in the MAB account were related to drug
trafficking. The anti-money laundering unit in Tampa did not
initiate a review of the M.A. entities until late 1999 or early
2000, more than 1\1/2\ years after the assets in the account
were seized. At that point, it discovered a series of possible
suspicious transactions that spanned nearly 3 years of account
activity.
* Citibank was slow to follow up on the seizure warrant
and did not firmly press its client for answers to obvious
issues related to the seizure of the accounts' assets. Customs
issued a seizure warrant on the M.A. Bank correspondent account
at Citibank for the Casablanca drug money in August 1998.
Citibank, however, never took any action to review the account
in light of the seizure, nor did it require its client to
explain the reason for the seizure. Consequently, it was nearly
16 months before Citibank learned the reason for the seizure
and began to take action. During that time period--June 1998
through September 1999--over $300 million moved through the
M.A. Bank correspondent account at Citibank.
Federal Bank. With respect to Federal Bank, Citibank
remained acutely aware throughout the correspondent
relationship of the fact that Grupo Moneta was a partner with
Citibank in CEI. The extent to which this colored Citibank's
judgment in opening and monitoring the three correspondent
accounts discussed in this case history cannot be isolated, but
it clearly had some effect. Citibank Argentina, which had
responsibility for the due diligence in opening correspondent
accounts in Argentina and in maintaining the correspondent
relationships, accepted Grupo Moneta's oral assurances that it
had an anti-money laundering program in place. It did not
attempt to confirm that by requesting a copy of the program or
the anti-money laundering requirements. No one at Citibank
apparently identified any of the activity in the accounts or
among the accounts as suspicious or worthy of further review,
despite the many same-day transaction among Federal Bank, Banco
Republica, and American Exchange Company.
But most troubling is Citibank's participation in keeping
from the Central Bank information on the ownership of Federal
Bank. Citibank's files are replete with references to Grupo
Moneta's ownership of Federal Bank. In fact, Citibank's stated
rationale for opening the account with Federal Bank, which is
an offshore shell bank, and therefore an exception to
Citibank's policy, is specifically because Federal Bank was
part of a larger financial group with what Citibank thought was
a good reputation. Citibank has told the Subcommittee that it
would avoid any correspondent account with an offshore shell
bank not connected with a larger financial institution with
which Citibank already had a relationship. So, Federal Bank's
ownership was not only something with which Citibank was
totally familiar; it was central to Citibank's relationship
with Federal Bank.
At the time Citibank received the request from the Central
Bank for ``all information'' Citibank Argentina ``may have
about Federal Bank Limited, especially the identify of its
shareholders,'' Citibank knew the Central Bank did not know
Federal Bank was connected to Grupo Moneta and Banco Republica.
If it had known, the Central Bank might have included the
Federal Bank in its audits, perhaps due to its common ownership
with Banco Republica. The fact that such audits were not taking
place was noted by Martin Lopez, the relationship manager, in
1996 as making Federal Bank ``a risky vehicle per se because it
is controlled only by the Central Bank of the Bahamas.'' Yet in
1999 when the Central Bank of Argentina specifically asked the
President of Citibank Argentina, Carlos Fedrigotti, for ``all
information'' about Federal Bank, Fedrigotti said ``our records
contain no information that would enable us to determine'' who
owns Federal Bank.
Because of this unusual response, the question arises as to
why Citibank would be less than forthright in answering the
Central Bank's inquiry. One answer may be it was responding to
a request from Grupo Moneta to maintain confidentiality about
its activities. Another answer may be that since, according to
Citibank internal documents Federal Bank was being used by
Grupo Moneta to loan money to CEI related entities, it was
helping Grupo Moneta avoid sanction from the Central Bank for
violating the Central Bank's limitations on lending to related
entities. A third answer may be that Citibank did not want to
trigger Central Bank oversight of Federal Bank. The reason for
Citibank's misleading response to the Central Bank of Argentina
remains a troubling mystery.
For both of these banks, perhaps the biggest failing for
Citibank was that Citibank did not believe the nature of these
banks--an offshore bank with no physical presence and no
regulation--was an important factor. Therefore it did not give
the banks heightened scrutiny or attention, where more timely
and thorough reviews of their operations and transactions may
have identified the unsound practices and suspicious
transactions that occurred in the accounts, much earlier than
when they were finally discovered.
M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
February 1995-December 1996
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
February 1995 ($681) $162,283 $148,296 $13,304
----------------------------------------------------------------------------------------------------------------
March 1995 $13,304 $4,187,984 $4,151,288 $50,000
----------------------------------------------------------------------------------------------------------------
April 1995 $50,000 $5,080,782 $5,001,453 $129,328
----------------------------------------------------------------------------------------------------------------
May 1995 $129,328 $4,387,155 $4,466,484 $50,000
----------------------------------------------------------------------------------------------------------------
June 1995 $50,000 $8,113,597 $8,113,597 $50,000
----------------------------------------------------------------------------------------------------------------
July 1995 $50,000 $11,998,916 $11,998,016 $50,000
----------------------------------------------------------------------------------------------------------------
August 1995 $50,000 $17,161,739 $17,132,380 $79,359
----------------------------------------------------------------------------------------------------------------
September 1995
----------------------------------------------------------------------------------------------------------------
October 1995 $50,000 $10,536,298 $10,536,298 $50,000
----------------------------------------------------------------------------------------------------------------
November 1995 $50,000 $12,374,605 $12,324,187 $100,418
----------------------------------------------------------------------------------------------------------------
December 1995 $100,418 $31,905,451 $31,955,869 $50,000
----------------------------------------------------------------------------------------------------------------
Total 1995 $105,908,810 $105,828,768
================================================================================================================
January 1996 $50,000 $15,435,676 $15,435,676 $50,000
----------------------------------------------------------------------------------------------------------------
February 1996 $50,000 $18,288,394 $18,244,033 $94,361
----------------------------------------------------------------------------------------------------------------
March 1996 $94,361 $29,737,386 $29,781,747 $50,000
----------------------------------------------------------------------------------------------------------------
April 1996 $50,000 $27,652,732 $27,652,732 $50,000
----------------------------------------------------------------------------------------------------------------
May 1996 $50,000 $70,351,181 $70,351,181 $50,000
----------------------------------------------------------------------------------------------------------------
June 1996 $50,000 $113,705,149 $113,690,140 $65,008
----------------------------------------------------------------------------------------------------------------
July 1996 $65,008 $56,838,539 $56,861,922 $41,625
----------------------------------------------------------------------------------------------------------------
August 1996 $41,625 $77,623,351 $77,804,976 ($140,000)
----------------------------------------------------------------------------------------------------------------
September 1996 ($140,000) $67,787,876 $67,597,876 $50,000
----------------------------------------------------------------------------------------------------------------
October 1996 $50,000 $74,085,484 $74,085,484 $50,000
----------------------------------------------------------------------------------------------------------------
November 1996
----------------------------------------------------------------------------------------------------------------
December 1996 $50,000 $59,039,012 $59,059,759 $29,252
----------------------------------------------------------------------------------------------------------------
Total 1996 $610,544,780 $610,565,526
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.
Blanks indicate missing or illegible statements.
M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1997-December 1998
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1997 $29,252 $53,303,323 $53,282,576 $50,000
----------------------------------------------------------------------------------------------------------------
February 1997 $50,000 $52,151,036 $52,151,036 $50,000
----------------------------------------------------------------------------------------------------------------
March 1997 $50,000 $61,535,040 $61,441,073 $143,967
----------------------------------------------------------------------------------------------------------------
April 1997 $143,967 $51,890,047 $51,969,615 $64,400
----------------------------------------------------------------------------------------------------------------
May 1997 $64,400 $65,409,697 $65,424,097 $50,000
----------------------------------------------------------------------------------------------------------------
June 1997 $50,000 $123,432,889 $123,432,889 $50,000
----------------------------------------------------------------------------------------------------------------
July 1997 $50,000 $77,893,843 $77,893,843 $50,000
----------------------------------------------------------------------------------------------------------------
August 1997 $50,000 $69,659,609 $69,648,709 $60,900
----------------------------------------------------------------------------------------------------------------
September 1997 $60,900 $34,261,446 $34,272,346 $50,000
----------------------------------------------------------------------------------------------------------------
October 1997 $50,000 $63,395,384 $63,395,384 $50,000
----------------------------------------------------------------------------------------------------------------
November 1997 $50,000 $29,626,805 $29,547,543 $129,262
----------------------------------------------------------------------------------------------------------------
December 1997 $129,262 $32,116,655 $32,195,917 $50,000
----------------------------------------------------------------------------------------------------------------
Total 1997 $714,675,774 $714,655,028
================================================================================================================
January 1998 $50,000 $22,477,997 $22,477,997 $50,000
----------------------------------------------------------------------------------------------------------------
February 1998 $50,000 $21,638,729 $21,656,626 $32,102
----------------------------------------------------------------------------------------------------------------
March 1998 $32,102 $52,967,821 $52,898,526 $101,397
----------------------------------------------------------------------------------------------------------------
April 1998 $101,397 $36,678,415 $36,729,813 $50,000
----------------------------------------------------------------------------------------------------------------
May 1998 $50,000 $14,723,277 $14,772,243 $1,033
----------------------------------------------------------------------------------------------------------------
June 1998 $1,033 $88,437 $83,915 $5,555
----------------------------------------------------------------------------------------------------------------
July 1998 $5,555 $809,708 $803,435 $11,828
----------------------------------------------------------------------------------------------------------------
August 1998 $11,828 $477,493 $487,567 $1,754
----------------------------------------------------------------------------------------------------------------
September 1998 $1,754 $13,864,214 $13,851,106 $14,862
----------------------------------------------------------------------------------------------------------------
October 1998 $14,862 $17,297,364 $17,271,129 $41,098
----------------------------------------------------------------------------------------------------------------
November 1998 $41,098 $25,007,496 $25,041,389 $7,205
----------------------------------------------------------------------------------------------------------------
December 1998 $7,205 $22,307,275 $22,285,826 $28,654
----------------------------------------------------------------------------------------------------------------
Total 1998 $228,338,226 $228,359,572
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.
M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1999-September 1999
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1999 $28,654 $15,456,337 $15,465,042 $19,949
----------------------------------------------------------------------------------------------------------------
February 1999 $19,949 $12,091,326 $12,022,305 $88,971
----------------------------------------------------------------------------------------------------------------
March 1999 $88,971 $24,896,503 $24,878,009 $107,465
----------------------------------------------------------------------------------------------------------------
April 1999 $107,465 $30,695,291 $30,752,757 $50,000
----------------------------------------------------------------------------------------------------------------
May 1999 $50,000 $17,330,081 $17,344,307 $35,773
----------------------------------------------------------------------------------------------------------------
June 1999 $35,773 $37,675,161 $37,672,550 $38,384
----------------------------------------------------------------------------------------------------------------
July 1999 $38,384 $13,204,280 $13,227,554 $15,109
----------------------------------------------------------------------------------------------------------------
August 1999 $15,109 $32,415,839 $32,380,949 $50,000
----------------------------------------------------------------------------------------------------------------
September 1999 $50,000 $40,784,536 $40,809,836 $24,699
----------------------------------------------------------------------------------------------------------------
Total 1999 $224,549,354 $224,553,309
----------------------------------------------------------------------------------------------------------------
Total 1995-1999 $1,884,016,944 $1,883,962,203
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.
M.A. BANK ACCOUNT ACTIVITY AT CITIBANK
AFTER SERVICE OF THE SEIZURE WARRANT
June 1998-September 1999
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
June 1998 $1,033 $88,437 $83,915 $5,555
----------------------------------------------------------------------------------------------------------------
July 1998 $5,555 $809,708 $803,435 $11,828
----------------------------------------------------------------------------------------------------------------
August 1998 $11,828 $477,493 $487,567 $1,754
----------------------------------------------------------------------------------------------------------------
September 1998 $1,754 $13,864,214 $13,851,106 $14,862
----------------------------------------------------------------------------------------------------------------
October 1998 $14,862 $17,297,364 $17,271,129 $41,098
----------------------------------------------------------------------------------------------------------------
November 1998 $41,098 $25,007,496 $25,041,389 $7,205
----------------------------------------------------------------------------------------------------------------
December 1998 $7,205 $22,307,275 $22,285,826 $28,654
----------------------------------------------------------------------------------------------------------------
January 1999 $28,654 $15,456,337 $15,465,042 $19,949
----------------------------------------------------------------------------------------------------------------
February 1999 $19,949 $12,091,326 $12,022,305 $88,971
----------------------------------------------------------------------------------------------------------------
March 1999 $88,971 $24,896,503 $24,878,009 $107,465
----------------------------------------------------------------------------------------------------------------
April 1999 $107,465 $30,695,291 $30,752,757 $50,000
----------------------------------------------------------------------------------------------------------------
May 1999 $50,000 $17,330,081 $17,344,307 $35,773
----------------------------------------------------------------------------------------------------------------
June 1999 $35,773 $37,675,161 $37,672,550 $38,384
----------------------------------------------------------------------------------------------------------------
July 1999 $38,384 $13,204,280 $13,227,554 $15,109
----------------------------------------------------------------------------------------------------------------
August 1999 $15,109 $32,415,839 $32,380,949 $50,000
----------------------------------------------------------------------------------------------------------------
September 1999 $50,000 $40,784,536 $40,809,836 $24,699
----------------------------------------------------------------------------------------------------------------
TOTAL $304,401,341 $304,377,676
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.
FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
November 1992-December 1994
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
November 1992 $0 $5,330,633 $5,328,982 $1,650
----------------------------------------------------------------------------------------------------------------
December 1992 $1,650 $14,368,856 $14,285,770 $84,736
----------------------------------------------------------------------------------------------------------------
January 1993 $84,736 $19,293,049 $19,376,530 $1,255
----------------------------------------------------------------------------------------------------------------
February 1993 $1,255 $11,915,523 $11,917,691 ($912)
----------------------------------------------------------------------------------------------------------------
March 1993 ($912) $41,857,850 $41,851,575 $5,362
----------------------------------------------------------------------------------------------------------------
April 1993 $5,362 $12,360,188 $12,329,939 $35,611
----------------------------------------------------------------------------------------------------------------
May 1993 $35,611 $36,299,282 $36,339,371 ($4,477)
----------------------------------------------------------------------------------------------------------------
June 1993 ($4,477) $37,703,801 $37,699,349 ($25)
----------------------------------------------------------------------------------------------------------------
July 1993 ($25) $88,234,741 $88,251,972 ($17,256)
----------------------------------------------------------------------------------------------------------------
August 1993 ($17,256) $52,691,342 $52,682,873 ($8,787)
----------------------------------------------------------------------------------------------------------------
September 1993 ($8,787) $73,444,093 $73,438,767 ($3,461)
----------------------------------------------------------------------------------------------------------------
October 1993 ($3,461) $51,118,708 $51,126,460 ($11,213)
----------------------------------------------------------------------------------------------------------------
November 1993 ($11,213) $149,155,112 $149,143,898 $0
----------------------------------------------------------------------------------------------------------------
December 1993 . $0 $79,902,823 $79,917,429 ($14,605)
----------------------------------------------------------------------------------------------------------------
January 1994 ($14,605) $119,180,140 $119,170,186 ($4,652)
----------------------------------------------------------------------------------------------------------------
February 1994
----------------------------------------------------------------------------------------------------------------
March 1994 ($1,079) $128,860,126 $128,874,553 ($15,506)
----------------------------------------------------------------------------------------------------------------
April 1994 ($15,506) $173,589,317 $173,582,384 ($8,573)
----------------------------------------------------------------------------------------------------------------
May 1994
----------------------------------------------------------------------------------------------------------------
June 1994
----------------------------------------------------------------------------------------------------------------
July 1994 ($2,376) $75,126,638 $75,154,291 ($30,029)
----------------------------------------------------------------------------------------------------------------
August 1994 ($30,029) $104,071,925 $104,095,369 ($53,474)
----------------------------------------------------------------------------------------------------------------
September 1994 ($53,474) $104,015,463 $103,973,061 ($13,130)
----------------------------------------------------------------------------------------------------------------
October 1994
----------------------------------------------------------------------------------------------------------------
November 1994
----------------------------------------------------------------------------------------------------------------
December 1994 ($24,173) $131,987,104 $131,953,077 $9,853
----------------------------------------------------------------------------------------------------------------
TOTAL $1,510,506,794 $1,510,493,527
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.
Blanks indicate missing or illegible statements.
FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1995-December 1996
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1995 $9,853 $77,902,327 $77,812,083 $100,097
----------------------------------------------------------------------------------------------------------------
February 1995 $100,097 $37,320,409 $37,420,510 ($2)
----------------------------------------------------------------------------------------------------------------
March 1995 ($2) $40,146,626 $40,128,623 $18,000
----------------------------------------------------------------------------------------------------------------
April 1995 $18,000 $64,907,222 $64,925,222 $0
----------------------------------------------------------------------------------------------------------------
May 1995 $0 $66,135,773 $66,135,773 $0
----------------------------------------------------------------------------------------------------------------
June 1995 $0 $53,132,809 $53,132,809 $0
----------------------------------------------------------------------------------------------------------------
July 1995 $0 $38,592,158 $38,498,750 $93,407
----------------------------------------------------------------------------------------------------------------
August 1995 $93,407 $35,547,949 $35,535,402 $105,954
----------------------------------------------------------------------------------------------------------------
September 1995 $105,954 $36,033,726 $36,056,731 $82,950
----------------------------------------------------------------------------------------------------------------
October 1995 $82,950 $24,221,051 $24,304,001 $0
----------------------------------------------------------------------------------------------------------------
November 1995 $0 $36,479,258 $36,479,258 $0
----------------------------------------------------------------------------------------------------------------
December 1995 $0 $113,992,702 $113,992,702 $0
----------------------------------------------------------------------------------------------------------------
January 1996 $0 $54,200,617 $54,129,753 $70,864
----------------------------------------------------------------------------------------------------------------
February 1996 $70,864 $62,305,676 $61,707,140 $669,400
----------------------------------------------------------------------------------------------------------------
March 1996 $669,400 $75,194,172 $75,778,277 $85,295
----------------------------------------------------------------------------------------------------------------
April 1996 $85,295 $48,112,851 $48,125,529 $72,617
----------------------------------------------------------------------------------------------------------------
May 1996 $72,617 $56,509,422 $56,555,268 $26,771
----------------------------------------------------------------------------------------------------------------
June 1996 $26,771 $55,312,054 $55,314,825 $24,000
----------------------------------------------------------------------------------------------------------------
July 1996 $24,000 $53,429,086 $53,436,486 $16,600
----------------------------------------------------------------------------------------------------------------
August 1996 $16,600 $63,314,748 $63,331,348 $0
----------------------------------------------------------------------------------------------------------------
September 1996 $0 $39,876,070 $39,876,070 $0
----------------------------------------------------------------------------------------------------------------
October 1996 $0 $46,031,435 $45,979,735 $51,700
----------------------------------------------------------------------------------------------------------------
November 1996 $51,700 $58,088,719 $58,140,419 $0
----------------------------------------------------------------------------------------------------------------
December 1996 $0 $81,790,876 $81,741,676 $49,200
----------------------------------------------------------------------------------------------------------------
TOTAL $1,318,577,736 $1,318,538,390
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.
FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1997-December 1998
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1997 $49,200 $43,274,452 $43,323,652 $0
----------------------------------------------------------------------------------------------------------------
February 1997 $0 $52,501,155 $52,501,155 $0
----------------------------------------------------------------------------------------------------------------
March 1997 $0 $61,630,109 $61,630,109 $0
----------------------------------------------------------------------------------------------------------------
April 1997 $0 $72,857,583 $72,853,383 $4,200
----------------------------------------------------------------------------------------------------------------
May 1997 $4,200 $62,792,675 $62,796,875 $0
----------------------------------------------------------------------------------------------------------------
June 1997 $0 $75,546,117 $75,546,117 $0
----------------------------------------------------------------------------------------------------------------
July 1997 $0 $97,272,324 $97,272,324 $0
----------------------------------------------------------------------------------------------------------------
August 1997 $0 $85,765,292 $85,765,292 $0
----------------------------------------------------------------------------------------------------------------
September 1997 $0 $74,203,479 $74,203,479 $0
----------------------------------------------------------------------------------------------------------------
October 1997 $0 $51,146,255 $51,008,730 $137,525
----------------------------------------------------------------------------------------------------------------
November 1997 $137,525 $70,438,211 $70,575,736 $0
----------------------------------------------------------------------------------------------------------------
December 1997 $0 $80,512,574 $80,512,574 $0
----------------------------------------------------------------------------------------------------------------
January 1998 $0 $31,683,853 $31,683,853 $0
----------------------------------------------------------------------------------------------------------------
February 1998 $0 $57,012,817 $57,012,817 $0
----------------------------------------------------------------------------------------------------------------
March 1998 $0 $69,827,366 $69,827,366 $0
----------------------------------------------------------------------------------------------------------------
April 1998 $0 $22,084,470 $22,084,470 $0
----------------------------------------------------------------------------------------------------------------
May 1998 $0 $61,855,635 $61,841,635 $14,000
----------------------------------------------------------------------------------------------------------------
June 1998 $14,000 $58,670,711 $58,663,711 $21,000
----------------------------------------------------------------------------------------------------------------
July 1998 $21,000 $43,087,986 $42,220,686 $888,300
----------------------------------------------------------------------------------------------------------------
August 1998 $888,300 $71,361,949 $71,873,449 $376,800
----------------------------------------------------------------------------------------------------------------
September 1998 $376,800 $55,974,848 $56,334,848 $16,800
----------------------------------------------------------------------------------------------------------------
October 1998 $16,800 $25,500,166 $25,489,966 $27,000
----------------------------------------------------------------------------------------------------------------
November 1998 $27,000 $8,989,479 $9,014,979 $1,500
----------------------------------------------------------------------------------------------------------------
December 1998 $1,500 $22,857,608 $22,859,108 $0
----------------------------------------------------------------------------------------------------------------
Total $1,356,847,114 $1,356,896,314
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.
FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
January 1999-May 2000
----------------------------------------------------------------------------------------------------------------
OPENING CLOSING
MONTH BALANCE DEPOSITS WITHDRAWALS BALANCE
----------------------------------------------------------------------------------------------------------------
January 1999 $0 $35,205,145 $35,205,145 $0
----------------------------------------------------------------------------------------------------------------
February 1999 $0 $19,695,910 $19,695,910 $0
----------------------------------------------------------------------------------------------------------------
March 1999 $0 $22,251,472 $22,251,472 $0
----------------------------------------------------------------------------------------------------------------
April 1999 $0 $8,226,070 $8,226,070 $0
----------------------------------------------------------------------------------------------------------------
May 1999 $0 $12,425,893 $12,424,393 $1,500
----------------------------------------------------------------------------------------------------------------
June 1999 $1,500 $3,045,581 $3,047,081 $0
----------------------------------------------------------------------------------------------------------------
July 1999 $0 $2,905,798 $2,905,798 $0
----------------------------------------------------------------------------------------------------------------
August 1999 $0 $7,559,454 $7,559,454 $0
----------------------------------------------------------------------------------------------------------------
September 1999 $0 $813,164 $813,164 $0
----------------------------------------------------------------------------------------------------------------
October 1999 $0 $1,902,299 $1,902,299 $0
----------------------------------------------------------------------------------------------------------------
November 1999 $0 $3,780,819 $3,779,819 $1,000
----------------------------------------------------------------------------------------------------------------
December 1999 $1,000 $1,313,588 $1,314,588 $0
----------------------------------------------------------------------------------------------------------------
January 2000 $0 $344,609 $344,609 $0
----------------------------------------------------------------------------------------------------------------
February 2000 $0 $797,156 $797,156 $0
----------------------------------------------------------------------------------------------------------------
March 2000 $0 $1,372,541 $1,372,541 $0
----------------------------------------------------------------------------------------------------------------
April 2000 $0 $6,386,905 $6,386,905 $0
----------------------------------------------------------------------------------------------------------------
May 2000 $0 $3,688,886 $3,660,165 $28,721
----------------------------------------------------------------------------------------------------------------
TOTAL $131,715,290 $131,686,569
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.
[GRAPHIC] [TIFF OMITTED] T1166.138
[GRAPHIC] [TIFF OMITTED] T1166.139
[GRAPHIC] [TIFF OMITTED] T1166.140
[GRAPHIC] [TIFF OMITTED] T1166.141
[GRAPHIC] [TIFF OMITTED] T1166.142
[GRAPHIC] [TIFF OMITTED] T1166.143
[GRAPHIC] [TIFF OMITTED] T1166.144
[GRAPHIC] [TIFF OMITTED] T1166.145
APPENDIX
This appendix summarizes a number of money laundering
scandals and financial frauds referenced in the report,
concentrating on how each utilized U.S. correspondent bank
accounts. Included are:
L(1) Bank of New York scandal;
L(2) Koop fraud;
L(3) Cook fraud;
L(4) Gold Chance fraud;
L(5) $10 million CD interpleader;
L(6) other suspect transactions at the British Trade and
Commerce Bank;
L(7) Taves fraud and the Benford account; and
L(8) IPC fraud.
(1) Bank of New York Scandal
The Bank of New York scandal became public news during the
summer of 1999, with media reports of $7 billion in suspect
funds moving from two Russian banks through a U.S. bank to
thousands of bank accounts throughout the world.
Pleadings from subsequent criminal cases describe what
happened.\311\ They indicate that, during a 4-year period from
1995-1999, two Russian banks, Depositamo-Kliringovy Bank
(``DKB'') and Commercial Bank Flamingo, deposited over $7
billion into correspondent bank accounts at the Bank of New
York (``BNY'') in the United States. After successfully gaining
entry for these funds into the U.S. banking system, on multiple
occasions, the Russian banks transferred amounts from their BNY
correspondent accounts to commercial accounts at BNY that had
been opened for three shell corporations, Benex International
Co. Inc. (``Benex''), Becs International L.L.C. (``Becs''), and
Lowland, Inc. These three corporations, in turn, transferred
the funds to thousands of other bank accounts around the world,
using electronic wire transfer software provided by BNY. In
aggregate, from February 1996 through August 1999, the three
corporations completed more than 160,000 wire transfers.
---------------------------------------------------------------------------
\311\ United States v. Berlin (U.S. District Court for the Southern
District of New York Criminal Case No. S1-99-CR-914 (SWK)), information
filed 2/16/00; United States v. Kudryavtsev (U.S. District Court for
the Southern District of New York Criminal Case No. S1-00-CR-75 (JSR)),
information filed 3/29/00.
---------------------------------------------------------------------------
In February 2000, guilty pleas were submitted by Lucy
Edwards, former vice president of BNY's Eastern European
Division, her husband Peter Berlin, and the three corporations
to conspiracy to commit money laundering, operating an unlawful
banking and money transmitting business in the United States,
and aiding and abetting Russian banks in conducting unlawful
and unlicensed banking activities in the United States. The
defendants admitted that their money laundering scheme had been
designed in part to help Russian individuals and businesses
transfer funds in violation of Russian currency controls,
customs duties and taxes. The three corporations agreed to
forfeit more than $6 million in their BNY bank accounts.
In August 2000, a Federal court held that the United States
had alleged sufficient facts to establish probable cause to
seize an additional $27 million from two BNY correspondent
accounts belonging to DKB and its part owner, another Russian
bank called Sobinbank.\312\ The judge expressed skepticism
regarding Sobinbank's claim to be protected from seizure of its
funds due to its status as an innocent bank, observing in a
footnote:
---------------------------------------------------------------------------
\312\ United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602,
2000 WL 1234593 SDNY 2000).
The Court cannot fathom how billions of Sobinbank's
dollars could have been transferred out of its constantly
replenished BONY Account, to accounts in the United States,
without Sobinbank's knowledge or willful blindness to the
scheme.\313\
---------------------------------------------------------------------------
\313\ Id. at footnote 11.
While denying criminal liability for its own actions, BNY
committed itself in a February 2000 agreement with the Federal
Reserve Bank of New York and the New York State Banking
Department to revamping its correspondent banking practices and
anti-money laundering controls. In particular, BNY agreed to
strengthen its due diligence reviews and its systems for
reporting suspicious activity. BNY subsequently ended
correspondent relationships with about 180 Russian banks.
The BNY scandal caused other U.S. banks to review their
correspondent accounts with Russian banks as well. Information
provided in response to the Subcommittee's correspondent
banking survey indicates that, from 1998 to 2000, Deutsche
Bank's U.S. operations reduced the number of its correspondent
relationships with Russian banks from 149 to 57, while HSBC
Bank USA ended almost 230 relationships with Russian banks,
going from 283 to 57.
The BNY scandal also led to a wider review of Russian money
laundering activities utilizing international payment systems
to move funds.\314\ The State Department's 1999 International
Narcotics Control Strategy Report, a leading analysis of
international anti-money laundering efforts, reported that
according to the Central Bank of Russia, $78 billion was sent
by Russians to offshore accounts in 1998 alone, and $70 billion
of that amount went through banks chartered in Nauru, a small
island in the Pacific. In response, several U.S. banks
determined in 1999 that they would no longer open correspondent
accounts or process wire transfers for banks licensed by Nauru
or certain other small South Pacific islands. Nauru is reported
to have licensed 400 banks in recent years, including Sinex
Bank which, according to the court order in the BNY civil
forfeiture case, was the ordering party ``responsible for over
$3 billion in transfers to the Benex and Becs Accounts'' at the
Bank of New York.
---------------------------------------------------------------------------
\314\ See, e.g., 1999 hearings on Russian Money Laundering before
House Banking Committee.
---------------------------------------------------------------------------
The BNY money laundering scandal, the revelations regarding
Russian correspondent banking practices, and the $7 billion and
$78 billion figures reflecting possibly illegal Russian funds
moving through the U.S. and international correspondent banking
systems, drive home the money laundering vulnerabilities
present in the correspondent banking field.
(2) Koop Fraud
In February 2000, William H. Koop, a U.S. citizen from New
Jersey, pleaded guilty to conspiracy to commit money laundering
in violation of 18 U.S.C. 1957.\315\ Koop was the key figure in
a financial fraud which, over 2 years, bilked hundreds of U.S.
investors out of millions of dollars. As part of this fraud,
Koop made frequent use of U.S. correspondent accounts utilized
by three offshore banks, Overseas Development Bank and Trust
(ODBT), Hanover Bank and British Trade and Commerce Bank
(BTCB). He moved about $13 million in illicit proceeds through
U.S. accounts associated with these banks,\316\ and used their
services to launder these funds and otherwise advance his
fraudulent activity.
---------------------------------------------------------------------------
\315\ United States v. Koop (U.S. District Court for the District
of New Jersey Criminal Case No. 00-CR-68), criminal information dated
2/4/00.
\316\ As set out in the case histories for each bank, Koop moved
about $4.3 million through ODBT, nearly $5 million through Hanover
Bank, and about $4 million through BTCB. He moved additional millions
through other banks in the United States and elsewhere.
---------------------------------------------------------------------------
Nature of Koop Fraud. Court pleadings, documents,
videotapes, and interviews \317\ provide the following
information about Koop's illicit activities.\318\ In or around
the summer of 1997, Koop, a retired swimming pool contractor
with no financial credentials or education beyond high school,
began to represent himself as an experienced investment
advisor. Koop claimed he had a high yield investment program
that could produce returns as high as 489% over a 15-month
period, allegedly with little or no risk. He also admitted in
his criminal proceedings that he had represented himself as
specializing in ``prime bank notes,'' which he acknowledged are
fictitious financial instruments. On a number of occasions,
Koop appeared before groups of small investors urging them to
pool their funds into amounts of $1 million to $5 million, for
placement into his investment program. Over 200 U.S. investors
appear to have placed funds with Koop. With rare exceptions,
none has recovered any of their principal or promised returns.
---------------------------------------------------------------------------
\317\ Key interviews included a March 30, 2000 interview of Koop; a
June 26, 2000 interview of Hanover Bank's sole owner, Michael Anthony
(``Tony'') Fitzpatrick, an Irish citizen who voluntarily cooperated
with the investigation; a October 13, 2000 interview of ODBT's sole
owner L. Malcolm West, a British citizen who also voluntarily
cooperated; and a July 23, 2000 interview of Terrence S. Wingrove, a
British citizen fighting extradition to the United States to stand
trial on criminal charges related to the Koop fraud. Wingrove also
voluntarily cooperated with the investigation and was interviewed at
Wormwood Scrubs prison in London.
\318\ Many of the documents in this matter were provided by a
defrauded investor who filed suit against Koop, Schmidt v. Koop (U.S.
District Court for the District of New Jersey Civil Case No. 978-CIV-
4305), in an attempt to recover a $2.5 million investment.
---------------------------------------------------------------------------
Koop called his investment program the ``I.F.S. Monthly
`Prime' Program.'' Koop operated this program through several
entities he controlled, all of which he referred to as ``IFS.''
These entities included: (1) International Financial Solutions,
Ltd., which was incorporated in Dominica by OBD, and changed
its name on 11/28/97, to Info-Seek Ltd.; (2) Info-Seek Asset
Management Trust, which was established by BTCB in Dominica on
4/20/98; and (3) Info-Seek Asset Management S.A., which was
established by BTCB in Dominica on the same day, 4/20/98.
Koop prepared and distributed a large packet of information
about the IFS investment program to potential investors. His
promotional materials explained the IFS investment program as
follows:
This program will pay you up to 489% plus principal on
your investment, and your initial investment is guaranteed. . .
. Receive a check for 5% of your initial investment each month
while your balance grows to the rate chosen in any one of the
following listed programs. Your first check starts after the
first 90 days. . . . If you are worried about whether IFS will
really pay what is promised, please be advised that IFS has
never failed to payout on any program that it has ever entered
into with any and all clients. [Emphasis in original text.]
In a section entitled, ``Frequently asked questions,'' the
IFS materials explained how IFS could offer such large returns:
Your investment in the form of money will be held in a
trust offshore. There is a very large demand offshore for large
blocks of money that are certified and cleared as clean funds.
By joining group funds together and committing large blocks of
funds, we are able to command the returns that are normal for
these transactions.
In response to a question about the safety of the funds,
the IFS materials stated:
All of the monies go into the trust where they are
disbursed through lines of credit and promissory notes. This is
done through a credit line that IFS has been able to establish
with many of the prime banks of the world. The money never
leaves the trust. The truth of the matter is that these funds
are safer than mutual funds, real estate and the stock market.
When asked about taxes, the materials stated, ``It is up to
you to report your income to Uncle Sam as you see fit to do so.
Due to the fact that IFS is setup as a pure private trust, we
do not report it to anyone.''
Koop worked with a number of other persons who served as
intermediaries in organizing individuals into investment groups
and soliciting investment funds. Koop worked, for example, with
a minister in South Carolina, Johnny Cabe, who formed his own
company called Hisway International Ministries, and solicited
investments primarily from church members.\319\ He worked with
Hank A. Renovato Jr. who formed a Nevada corporation, Capital
Fortress, Inc., and solicited investors in Alabama and
Colorado. He worked with Glenn Cruzen who formed a company
called Effortless Prosperity and solicited investments in Texas
and California; Richard Olit who solicited investors in
California; Leighton L.K.L. Suganuma who formed a Nevada
corporation called Aloha ``The Breath of Life'' Foundation,
Inc.; and Mark A. Meyerdirk in Kansas. Koop also worked with
two individuals living in England, Terrence Wingrove and
Winston Allen. Koop has indicated that he typically paid an
intermediary 10% of the funds they were responsible for
directing into the IFS investment program.\320\
---------------------------------------------------------------------------
\319\ See United States v. Johnny William Cabe and Shelton Joel
Shirley (U.S. District Court for the District of South Carolina
Criminal Case No. 0:00-301) and United States v. Terrence Stanley
Victor Wingrove (U.S. District Court for the District of South Carolina
Criminal Case No. 0:00-91).
\320\ Schmidt v. Koop, Koop deposition (12/10/98) at 121.
---------------------------------------------------------------------------
Koop's Use of Offshore Banks. Koop utilized numerous bank
accounts in the commission of his illicit activities. At first,
he directed fraud victims to send money to his personal bank
account at Interchange State Bank in Saddle Brook, New Jersey.
Later he directed funds to banks in other States such as
Illinois, Missouri, and Oregon. In 1997, he began using
offshore banks. Koop used the offshore banks examined in this
investigation to further his fraudulent activities in four
ways: (1) to establish offshore companies to conduct business
transactions; (2) to open offshore accounts where co-
conspirators and investors could send funds and he could start
to launder them; (3) to generate revenue and perpetrate his
fraud by offering investors the opportunity, for a fee, to open
their own offshore bank accounts where promised investment
returns could be deposited; and (4) to increase his wealth by
earning interest on deposits or using the offshore banks'
investment programs.
Overseas Development Bank and Trust. ODBT was the first
offshore bank Koop used in his fraud. ODBT established Koop's
initial offshore corporation, International Financial
Solutions, Ltd., which would become one of Koop's primary
corporate vehicles for the fraud. ODBT opened five accounts for
Koop and allowed millions of dollars in illicit proceeds to
move through them. It allowed Koop to open at least 60 more
accounts for third parties--who turned out to be the defrauded
investors, before ODBT liquidity problems caused Koop to switch
his offshore banking to Hanover Bank and BTCB.
According to Koop, he first became involved in offshore
banking when, in 1997, he saw a fax advertising offshore
services at American International Bank (AIB) in Antigua and
Barbuda. Koop said that he quickly and easily established his
first offshore corporation and opened his first offshore
account at AIB, without ever actually speaking to anyone at the
bank. He said he simply exchanged faxed materials with the
bank, including an application form requesting minimal due
diligence information, and his corporation and account were
established.
Koop said in his interview that he later learned that AIB
had been taken over by ODBT and so began dealing with ODBT.
However, account documentation indicates that he dealt with
directly with ODBT from the beginning, and that ODBT appears to
have handled his accounts from their inception.\321\ The
documentation indicates that Koop had accounts at ODBT for
almost 2 years, from August 1997 until April 1999, which was
also the key time period for his fraudulent activity.\322\
---------------------------------------------------------------------------
\321\ For example, the investigation obtained copies of faxes dated
8/12/97, which were written by Koop, were addressed specifically to
ODBT, and referred to the initial opening of Koop-related accounts at
the bank. A key account statement covering an 18-month period from 8/97
until 3/99, was also issued by ODBT. The investigation found no similar
documentation addressed to AIB. Because, from its inception in 1996
until late 1997, ODBT had a correspondent account at AIB, Koop may have
mistakenly thought that he was dealing with AIB. Much of the
documentation related to the Koop accounts at ODBT was collected in
discovery proceedings related to Schmidt v. Koop, after Koop provided
written authorization for ODBT to produce all documentation related to
his accounts at the bank. Some of the documents refer to Overseas
Development Bank, or Overseas Development Banking Group, rather than
Overseas Development Bank and Trust. But because the vast majority
refers to ODBT, this discussion refers to ODBT throughout the text.
\322\ ODBT also appears to have kept the Koop-related accounts
after it terminated its association with AIB in the spring of 1998,
possibly because Koop was one of the few AIB depositors with
substantial assets.
---------------------------------------------------------------------------
ODBT documentation indicates that the bank established at
least the following five Dominican corporations for Koop and
opened bank accounts in their names:
(a) account numbered 010-001-988 for International
Financial Solutions, Ltd.; \323\
---------------------------------------------------------------------------
\323\ The incorporation papers for Koop's key offshore company,
International Financial Solutions, Ltd., indicate it was incorporated
in Dominica on 10/21/94, although later documents claim the
incorporation date was 10/21/97. Since the ODBT account documentation
shows transactions as early as August 1997, however, the 1994
incorporation date appears more likely to be authentic. On November 28,
1997, Koop changed the name of his company from International Financial
Solutions, Ltd. to Info-Seek Ltd. He referred to both companies as
``IFS.''
---------------------------------------------------------------------------
(b) account numbered 010-002-285 for International
Financial Solutions, Ltd.; \324\
---------------------------------------------------------------------------
\324\ This account was associated with a Visa credit card that ODBT
had provided to Koop's company and was apparently used to pay the
company's substantial Visa charges.
---------------------------------------------------------------------------
(c) account numbered 010-003-844 for Info-Seek Ltd.;
(d) account numbered 010-003-753 for Charity-Seek
International Ltd.; \325\ and
---------------------------------------------------------------------------
\325\ Charity-Seek International Ltd. was incorporated as a
Dominican bearer-share company by ODBT at Koop's request in December
1997. Koop told the bank that the company would be owned by Charity-
Seek International Trust, which Koop described as a trust he had
previously established in Belize and which was controlled by him and
his associates, Hank Renovato, Leighton Suganuma and Mark Meyerdirk.
Professional Fund Raisers International Ltd. was incorporated by ODBT
on the same day as a bearer-share company that Koop said would be owned
by a Belizian trust, Professional Fund Raisers International Trust,
controlled by the same individuals. Koop requested the establishment of
both companies and their accounts in a 12/2/97 memorandum he sent to
West at ODBT. He asked ODBT to establish the companies and accounts
within 24 hours of his request. Koop also made the unusual request that
ODBT serve as the account signatory for both accounts, apparently to
avoid identification of the accounts if a subpoena were to request all
accounts for which Koop were a signatory. In response, ODBT established
both accounts within 24 hours, although it is unclear whether ODBT
agreed to act as the signatory for them. West indicated in his
interview that he did not recall either account and did not believe
that ODBT would have agreed to act as the signatory since that would
have been ``very unusual.'' He said that his normal course of action
would have been to forward the Koop requests to AIMS for processing. He
promised to research the matter and provide copies of the account
opening documentation if they could be located, but no such documents
were provided to the Minority Staff investigation.
---------------------------------------------------------------------------
(e) account numbered 010-003-754 for Professional Fund
Raisers International Ltd.
The investigation obtained only one, fairly complete
account statement for these five accounts. It lists all
transactions for IFS account numbered 010-001-988, from August
1997 when it opened, until March 17, 1999, about a month before
the account closed. Most of the deposits and withdrawals were
in large round numbers, such as $10,000, $50,000 or $100,000.
Many of the deposits were made by Koop, his fraud victims or
co-conspirators.\326\ Over a dozen transactions, mostly
withdrawals, exceeded $100,000.\327\ Altogether over almost 18
months, the account statement shows deposits totaling more than
$4.3 million and withdrawals of nearly the same amount.
---------------------------------------------------------------------------
\326\ ODBT also opened accounts for some of the persons working
with Koop, in particular account numbered 010-003-026 for Effortless
Prosperity, a company associated with Glenn Cruzen.
\327\ The largest transactions were:
--$1.2 million withdrawal on 9/8/97 to Bank of America for
George Bevre;
--$800,000 transfer on 11/5/97 to the second IFS account
numbered 010-002-285;
--$800,000 withdrawal on 12/3/97 to Arab Bank in Dubai, U.A.E.;
and
--$500,000 withdrawal on 3/6/98 to Measures Frank & Co.
---------------------------------------------------------------------------
The investigation also obtained a single page from an
account statement for the IFS account numbered 010-002-285,
covering the first month this account was opened. It shows an
initial deposit of $800,000, all of which was transferred from
the original IFS account; two withdrawals totaling $700,000,
which were wire transferred on December 3, 1997 to Arab Bank in
Dubai, and a closing balance of about $100,000. On November 26,
1997, Overseas Development Banking Group issued a letter ``To
Whom It May Concern'' stating that Koop was the sole signatory
for the IFS account and the account balance was in excess of
$1.5 million.\328\ All of this money was related to Koop's
self-confessed financial fraud and money laundering.
---------------------------------------------------------------------------
\328\ This balance apparently reflects both IFS accounts open at
the time, account 101-001-988 with about $783,000, and account 010-002-
285 with about $800,000.
---------------------------------------------------------------------------
The IFS account statement also includes four entries
showing that Koop paid $300 per account to open 60 additional
accounts at ODBT, apparently for fraud victims who wished to
open their own offshore accounts.\329\ Koop apparently was
charging his investors a much higher fee than $300 for each
account he opened. The investigation obtained copies of faxes
sent by 16 individuals in nine States in the United States to
ODBT, inquiring about the status of their ODBT accounts and
whether Koop or IFS had deposited any funds into them. When
asked, West indicated during his interview that he had been
unaware of the 60 accounts opened by Koop for third parties. He
said that, in 1999, ODBT had closed numerous accounts with
small balances due to a lack of information about the
beneficial owners of the funds, and guessed that the 60
accounts were among the closed accounts. While he promised to
research the 60 accounts, he did not provide any additional
information about them.
---------------------------------------------------------------------------
\329\ These account entries were:
--$7,500 on 11/7/97 for 25 accounts;
--$4,500 on 11/12/97 for 15 accounts;
--$4,500 on 1/16/98 for 15 accounts;
--$1,800 on 2/13/98 for 6 accounts.
---------------------------------------------------------------------------
Because the Minority Staff investigation was unable to
obtain account statements for the 60 accounts, the other four
accounts opened for Koop, and the accounts opened for other
persons involved in the IFS investment scheme, the total
deposited into ODBT accounts in connection with the Koop fraud
is unknown. The facts indicate, however, that it is certain to
collectively involve millions of dollars.
Koop directed his co-conspirators and fraud victims to send
funds to his ODBT accounts through various U.S. correspondent
accounts. For example, account statements for Jamaica Citizens
Bank Ltd. (now Union Bank of Jamaica, Miami Agency) show
numerous Koop-related transactions from October 1997 into early
1998. Wire transfer documentation shows repeated transfers
through Barnett Bank in Jacksonville. In both cases, the funds
went through a U.S. account belonging to AIB, and from there
were credited to ODBT and then to Koop. In January 1998, Koop
also issued wire transfer instructions directing funds to be
sent to Bank of America in New York, for credit to Antigua
Overseas Bank, for further credit to Overseas Development Bank,
and then to one of his five accounts at ODBT.
In the spring of 1998, ODBT began experiencing liquidity
problems and failing to complete Koop's wire transfer requests.
Koop materials from this time period state:
We are currently transacting our banking business with
the Overseas Development Bank and Trust Company, which is
domiciled in the island of Dominic[a] in the West Indies. We
have witnessed a slowness in doing business with this bank as
far as deposit transfers and wire transfers are concerned.
Because of these delays, we have made arrangements with the
Hanover Bank to open accounts for each of our clients that are
currently with ODB, without any charge to you. If you are
interested in doing so, please send a duplicate copy of your
bank reference letter . . . passport picture . . . [and]
drivers license. . . . IFS will then open an account for you in
the Hanover Bank, in the name of your trust.
By April 1998, Koop began directing his co-conspirators,
and fraud victims to deposit funds in U.S. correspondent
accounts being used by Hanover Bank or BTCB, and generally
stopped using his ODBT accounts. In a document sent to Koop
investors entitled, ``A Personal Letter from the Desk of
William H. Koop,'' dated June 22, 1998, Koop stated that, due
to the problems encountered at ODBT, IFS had made the
``changeover'' to Hanover Bank. Koop finally closed his ODBT
accounts in April 1999.
Hanover Bank. Koop's subsequent use of Hanover Bank is
detailed in that bank's case history, earlier in this report.
Koop and BTCB. Koop stated that he began his relationship
with BTCB in mid-1998, after a chance meeting in Washington,
D.C. with Charles Brazie, a BTCB vice president, who told him
about the bank's high yield investment program and faxed him
account opening forms.\330\ BTCB documentation indicates that
Koop opened his first BTCB bank account on April 20, 1998.
---------------------------------------------------------------------------
\330\ See account opening documentation, 4/9/98 document signed by
Brazie on how to structure BTCB relationship. See also Schmidt v. Koop,
Koop deposition (12/10/98) at 130.
---------------------------------------------------------------------------
Over the course of 1998, BTCB documentation indicates that
the bank established the following five Dominican corporations
for Koop and opened bank accounts in their names:
(a) account numbered 101-011089-0 for Info-Seek Asset
Management S.A.;
(b) account numbered 101-011079-2 for Hanover B Ltd.;
(c) account numbered 101-011117-3 for Cadogan Asset
Management Ltd.;
(d) account numbered 101-011107-5 for Atlantic Marine
Bancorp Ltd.; and
(e) an account for Starfire Asset Management S.A.
The Info-Seek Asset Management S.A. account was the
successor to Koop's three IFS accounts at ODBT. Hanover B Ltd.
was incorporated on May 21, 1998. The Hanover B account was
opened in an apparent attempt by Koop to mimic a correspondent
account for Hanover Bank. Koop has stated in a sworn deposition
that the name ``Hanover B Ltd.'' was chosen ``to correspond to
Hanover Bank.'' \331\ Another person indicted in the Koop
fraud, Terrence Wingrove has said that he understood the
Hanover B account was opened to ``mirror'' the real Hanover
Bank account and make fraud victims think they were sending
funds to either IFS or to their own Hanover Bank offshore
accounts that Koop, for a fee, had pretended to open for them.
In a letter dated 12/10/98, BTCBs own legal counsel referred to
the Hanover B account as the ``Hanover Bank'' account.\332\
---------------------------------------------------------------------------
\331\ Schmidt v. Koop, Koop deposition (3/2/99) at 431.
\332\ Both BTCB and Hanover Bank have told the investigation that
they never dealt directly with each other, and Hanover Bank never
opened a correspondent account at BTCB. While the documentation
supports that representation, the documentation also makes it clear
that Hanover B Ltd. was confused on more than one occasion with Hanover
Bank.
---------------------------------------------------------------------------
BTCB account statements covering most of 1998,\333\ show
that in a 6-month period from April to October 1998, over $2.6
million was transferred into and out of the IFS account, while
about $1.3 million passed through the Hanover B account in the
same period.\334\ These funds, which were deposited into BTCB's
U.S. accounts at BIV and Security Bank, total almost $4
million. All of this money is related to Koop's self-confessed
financial frauds and money laundering.
---------------------------------------------------------------------------
\333\ These statements were produced by BTCB in response to Schmidt
v. Koop discovery requests.
\334\ BTCB account statements for the Cadogan and Atlantic Marine
Bancorp accounts show they were opened in July 1998, with the $6,500
minimum in deposits allowed, and experienced no further activity
through December 9, 1998. No account statement was produced for the
Starfire account. The deposits into the IFS and Hanover B accounts came
from co-conspirators in the Koop fraud and from defrauded investors.
BTCB records show, for example, that Koop's co-conspirator, Cabe, sent
payments of $450,000, $150,000 and $499,990 to the Hanover B account.
Several IFS investors wired funds to the IFS account.
---------------------------------------------------------------------------
Most IFS investors, when sending money to IFS directly,
transferred amounts in the range of $5,000 to $50,000. The
largest single IFS investor appears to have been Glenn Schmidt,
of California, who sent $2.5 million. This money was sent by
wire transfer on 4/22/98, 2 days after Koop opened his first
account at BTCB. Schmidt transferred the funds from his bank in
California to BTCBs correspondent account at BIV in Miami, for
further credit to IFS. It was the largest single deposit into
BTCB's account at BIV. Koop admitted in his criminal case that
he had convinced Schmidt to invest these funds, failed to
invest the money as promised, and failed to repay any funds to
Schmidt despite repeated assurances. Instead, he used the $2.5
million to provide funds to his co-conspirators, establish four
more accounts at BTCB, and make Ponzi payments to a few IFS
investors awaiting returns. He also transferred $1 million to a
Bank of America account in Oregon for ``CPA Services,'' a
company run by the Christian Patriot Association, an
organization which is associated with militia groups and which
Koop said he sometimes used to make cash payments to third
parties.\335\
---------------------------------------------------------------------------
\335\ Schmidt v. Koop, Koop deposition (12/10/98) at 66, 73.
---------------------------------------------------------------------------
In September 1998, Schmidt filed a civil suit in federal
court in New Jersey to recover his $2.5 million.\336\ That suit
named as defendants Koop, several of his companies, BTCB, BIV
and Hanover Bank. BTCB sought to be dismissed from the suit,
claiming among other arguments that the suit had failed to
state a claim against the bank and the U.S. court lacked
jurisdiction over it. BTCB also, at first, seemed to deny any
relationship with Koop. A 10/29/98 ``certification'' filed by
BTCB president Requena stated in part: ``[T]here is not, nor
has there been an account opened in BTCB . . . for `William H.
Koop' or for `International Financial Solutions Ltd.' '' \337\
Despite this certification, plaintiffs counsel sent BTCB a
written authorization by Koop to provide documentation related
to ``any BTCB account'' controlled by or related to him. In
response, on 12/10/98, BTCB disclosed that Koop had, in fact,
five accounts at the bank and provided account statements and
other information. In return, plaintiff's counsel voluntarily
dismissed BTCB from the civil suit ``without prejudice,''
meaning that it could petition to rejoin the bank again, if
appropriate.
---------------------------------------------------------------------------
\336\ This is the Schmidt v. Koop case.
\337\ Schmidt v. Koop ``Certification of Rudolfo Requena,'' dated
10/29/98.
---------------------------------------------------------------------------
Koop has pleaded guilty to conspiracy to launder the fraud
proceeds. BTCB records show that virtually all of the $4
million deposited into the IFS and Hanover B accounts in 1998
was withdrawn within about 6 months. Much of the money was
transferred to bank accounts controlled by Koop or his
accomplices, including in Mississippi, the United Kingdom, and
at CPA Services. In two instances in June 1998, a total of over
$30,000 was paid to third parties to help purchase and furnish
a New York apartment. In another instance, on 7/21/98, BTCB
issued a certified check for $294,000 to Bergen County in New
Jersey, enabling Koop to purchase a house there.\338\ According
to Koop, what is omitted from the records provided by BTCB in
the civil suit is another $1.3 million in illicit proceeds that
he placed in BTCB's high yield investment program.
---------------------------------------------------------------------------
\338\ Schmidt v. Koop, Koop deposition (3/2/99) at 433.
---------------------------------------------------------------------------
Koop Investment in BTCB High Yield Program. Koop told the
investigation that, on June 29, 1998, he transferred $1,325,000
to a BTCB subsidiary, Global Investment Fund, for investment in
BTCB's high yield program.\339\ He said that BTCB had contacted
him repeatedly about investment opportunities. He provided a
copy, for example, of a BTCB document promising annual returns
on certificates of deposit as high as 79%. He also provided
copies of BTCB documents setting out specific terms for an
investment in its high yield program, including a letter of
intent, corporate resolution for a private placement of funds,
and cooperative venture agreement. Koop said that he pursued
only one of the offered BTCB investments, in which BTCB's
subsidiary, Global Investment Fund, promised to pay him a 100%
return on the $1.3 million each week for 40 weeks, for a total
of more than $50 million.
---------------------------------------------------------------------------
\339\ See also Schmidt v. Koop, Koop deposition (12/10/98) at 58-
59, 143-46, 149-57; and (3/2/99) at 406; and evidence of $1 million
transfers from the BTCB account at Security Bank to a Global Investment
Fund on 7/3 and 7/6/00.
---------------------------------------------------------------------------
U.S. bank records for BTCB's account at Security Bank show
transfers of millions of dollars in July and August 1998 to
accounts associated with Global Investment Fund, any one of
which could have included Koop's investment funds. These
transactions included:
--7/3/98 wire transfer of $1 million from BTCB's account
at Security Bank to Bank One in Columbus, Ohio, for further
credit to Bank One in Houston, Texas, for further credit to
``Global Investment Fund S.A.''--these funds were initially
rejected and successfully re-transmitted on 7/6/98;
--8/14/98 wire transfer of $170,000 from BTCB's account
at Security Bank to Banque National de Paris in New York for
Sundland States ``Ref. Global Investment Fund/Outlast'';
--8/14/98 wire transfer of $830,000 from BTCB's account
at Security Bank to the Royal Bank of Scotland in the Bahamas
for Highland Financial Corp. ``Ref. Global Investment Fund'';
--8/26/98 wire transfer of $1,006,918.31 from Bank One
Trust Company N.A. in Columbus, Ohio, to BTCB's account at
Security Bank for further credit to ``Global Investment Fd
SA''; and
--8/31/98 wire transfer of $1 million from BTCB's
account at Security Bank to U.S. Bank in Aurora, Colorado, for
Global Investment Fund S.A.
These transactions alone establish transfers of $3 million
to Global Investment Fund during the summer of 1998, which was
when Koop alleged he made his investment into BTCB's high yield
program. Koop noted in his interview that, as of March 2000,
BTCB had yet to make a single payment or to return any of his
principal. He stated that BTCB still had $1,325,000 of his
proceeds, together with any interest or profits accumulated
over the last 2 years. If true, BTCB would still have
possession of over $1.3 million in fraud proceeds that ought to
be returned to Koop's defrauded investors.
The Koop fraud provides a detailed illustration of how
criminals can use offshore banks and their U.S. accounts to
launder funds and perpetuate financial frauds. It also
demonstrates how inadequate bank controls and money laundering
oversight contribute to the ability of criminals to carry out
their activities. The impact on the United States includes
hundreds of defrauded investors, prosecutions in New Jersey and
South Carolina, extradition proceedings in the United Kingdom,
civil litigation, and the ongoing depletion of law enforcement
and court resources.
(3) Cook Fraud
In March 1999, Benjamin Franklin Cook III was named in
civil pleadings filed by the Securities and Exchange Commission
(SEC) in Texas as a key figure in a fraudulent high yield
investment program which, in the course of less than 1 year,
bilked over three hundred investors out of more than $40
million. In August 2000, a criminal indictment in Arizona
charged Cook with 37 counts of racketeering, fraud and theft.
U.S. bank records indicate that at least $4 million associated
with this fraud passed through U.S. correspondent accounts
belonging to BTCB, and BTCB was directly involved in investment
activities undertaken by persons and companies associated with
the Cook fraud.
Nature of Cook Fraud. On March 16, 1999, the SEC filed a
complaint and other pleadings before a Federal court in Texas
requesting emergency relief against Cook, his company Dennel
Finance Ltd. (``Dennel''), International Business Consultants
Ltd. (``IBCL''), and a number of other individuals and
entities, for engaging in a ``fraudulent scheme to offer and
sell unregistered `prime bank' securities throughout the United
States.''\340\ The complaint alleged that the defendants raised
funds primarily by ``target[ing] religious and charitable
groups and persons investing retirement funds.'' It alleged
``numerous misrepresentations and omissions of material fact''
by defendants, including that investor funds would be ``secured
by a bank guarantee,'' would serve as ``collateral to trade
financial instruments with top 50 European Banks,'' and would
earn ``annual returns of 24 to 60 percent.'' The complaint
alleged that, ``[i]n reality, the prime bank program . . .
[did] not exist,'' and defendants had ``misappropriated
investment funds for personal and unauthorized uses, including
making Ponzi payments to existing investors with funds provided
by new investors.''
---------------------------------------------------------------------------
\340\ SEC v. Cook (U.S. District Court for the Northern District of
Texas Civil Case No. 399-CV-0571), complaint and other pleadings dated
3/16/99. See also legal pleadings compiled at www.dennelfinancial.com.
---------------------------------------------------------------------------
The U.S. district court in Texas issued orders in March and
April 1999, prohibiting Cook from making false statements to
investors, freezing his assets, appointing a receiver,
requiring expedited discovery, and affording other emergency
relief requested by the SEC. To recover investor funds, the SEC
appointed Lawrence J. Warfield as its official receiver charged
with locating and taking control of assets belonging to Cook
and others involved in the fraud. The receiver quickly froze
about $11 million in assets, began reconstructing business and
financial records, and began subpoenaing records from 142 U.S.
bank accounts used in the Cook fraud.
Cook and his associates refused to cooperate with the
investigation. In September, the court issued an order
requiring Cook to show cause why he should not be held in
contempt, and on October 8, 1999, ordered him imprisoned for
contempt of court. On October 20, Cook was arrested and
confined to a Texas detention facility.
On August 20, 2000, the Arizona Attorney General indicted
Cook on 37 counts of racketeering, fraud and theft. The
indictment, which was sealed pending Cook's extradition from
Texas, was described by the Arizona Attorney General as
alleging that Cook defrauded 300 investors out of more than $41
million through a fraudulent investment program. The indictment
allegedly asserted that only $635,000 of the $41 million had
ever been invested, and most of these funds were lost. The
complaint also allegedly stated that Cook used much of the $41
million on personal expenses, including a luxury home,
automobiles, airplanes and jewelry, and to purchase real
estate.
Cook and BTCB. After reviewing U.S. bank records and other
information, the investigation determined that at least $4
million in illicit proceeds from the Cook fraud moved through
accounts at BTCB, and that BTCB itself was directly involved in
investment activities undertaken by persons and entities
associated with the Cook fraud.
An analysis of BTCB's U.S. correspondent bank records by
Minority Staff investigators uncovered documentary evidence
linking 100 wire transfers to defrauded investors or entities
associated with the Cook fraud, including Dennel and IBCL.\341\
These transactions moved funds totaling $4,086,152 over a 2-
year period from 1998 until 2000, suggesting BTCB accounts were
an active conduit for funds associated with the Cook fraud. The
100 wire transfers included the following:
---------------------------------------------------------------------------
\341\ See chart entitled, ``BTCB Transactions Related to Cook
Fraud,'' in BTCB case history.
--BIV records disclosed 34 deposits totaling over $1.4
million from April 6 until May 28, 1998, when BIV closed the
BTCB account. All were wire transfers directed to BTCB for
further credit to IBCL. The first deposit, on 4/6/98, was for
$634,982, which increased the bank's total deposits at the time
---------------------------------------------------------------------------
by 23%.
--Security Bank records disclosed 34 deposits totaling
over $2.3 million, and 24 withdrawals totaling over $2 million
from June 22, 1998 until February 14, 2000. These transactions
involved wire transfers to or from Security Bank's U.S.
correspondent account for BTCB, accompanied by directions to
credit or debit an entity associated with the Cook fraud. The
transactions involved primarily IBCL or Dennel, but also Global
Investments Network Ltd., Trans Global Investments, Wealth &
Freedom Network LLC, and Premier Gold Fund Ltd. The transfers
included 14 deposits in 1998 with directions to credit the
funds to Dennel, suggesting the existence of a Dennel account
at BTCB at least during that year.
--First Union records disclosed eight withdrawals
totaling over $2 million from April 26 to October 6, 1999. All
were wire transfers from BTCB to accounts associated with IBCL
and, in one instance, with Desert Enterprises Ltd., also
associated with the Cook fraud.
More than 20 of the 100 wire transfers equaled or exceeded
$100,000. Two of the largest transactions, on 4/6/98 and 9/16/
98, together deposited more than $1 million into the IBCL
account at BTCB. The largest withdrawal, on 5/7/99, sent
$900,000 to an IBCL account in California.
The transactions included in this data analysis were
selected because of bank account or wire transfer documentation
which, on its face, directly linked the funds to a defrauded
investor or to an entity associated with the Cook fraud, as
indicated in court filings and other materials provided by the
SEC receivers' office. It is likely that additional Cook-
related transactions escaped detection due to the limited
documentation available to the Minority Staff investigation and
limited public information regarding how the Cook fraud
operated. In light of the $40 million scope of the Cook fraud,
the $4 million that passed through BTCB accounts shows BTCB was
an active conduit for the fraud.
IBCL Investment in BTCB High Yield Program. In addition to
opening accounts and moving funds, the investigation obtained
evidence indicating that BTCB actively participated in some of
the investment activities undertaken by persons and companies
associated with the Cook fraud. BTCB's investment role appears
to have begun in 1998 and continued throughout 1999, despite
the March 1999 SEC complaint naming Dennel and IBCL, among
others, as participants in a massive investment fraud.
The investigation first learned of BTCB's investment role
after speaking with a person who had complained about BTCB to
the Dominican Government. Wayne Brown, a Canadian citizen,
voluntarily answered questions and provided documents related
to his ongoing efforts to recover $30,000 he sent to BTCB in
1998 for placement in a high yield investment program. Brown
characterized his lost investment as due, in part, to the Cook
fraud.
Brown explained that he made the $30,000 investment because
an old friend, Tony Rodriguez, allegedly an experienced
investor, had recommended that he try the BTCB high yield
program. Brown said that, on the advice of Rodriguez, he
solicited additional investments from family members and other
persons, pooled the funds, and provided a total of about
$250,000 to Rodriguez for investment. He said the funds were
wire transferred to BTCB's correspondent account at Security
Bank in several installments, and Rodriguez was supposed to
ensure their placement in the BTCB program. He said that it was
his understanding that, in order to gain access to the BTCB
investment program, Rodriguez had worked with Peter Shifman, an
accountant with ties to both Cook and IBCL. He said that it was
his understanding that Shifman, who was familiar with Dominica
and BTCB, was able to get Rodriguez' investors into the BTCB
program. He said the investment program never produced any
returns, and he and his associates have been unable to recover
any of their funds.
Documents obtained by the investigation establish that
Rodriguez was associated with at least three entities that,
according to the SEC receiver, were involved in the Cook fraud:
Global Investment Network Ltd., Coopman Ltd., and Wealth &
Freedom Network, LLC. The documents establish that, in 1998,
BTCB not only maintained accounts for Global Investment Network
Ltd., Coopman Ltd. and IBCL, but also dealt directly with
Rodriguez and Shifman, and eventually placed IBCL funds into
BTCB's own high yield investment program.
In a memorandum dated 7/20/98, on IBCL letterhead, for
example, Shifman reported the following to ``All Investors,''
including Brown:
I have just returned from Roseau, Dominica. . . . [A]ll
pooled funds are now invested. I have received a letter from
Dr. Charles Brazie, Vice President of Managed Accounts of
British Trade and Commerce Bank indicating that our funds have
been allocated for participation. . . . Please note that the
Company mentioned on the letter head (Global Investment Funds
S.A.) is the Investment Company of British Trade and Commerce
Bank. . . . Dr. Brazie has indicated that the first
disbursement will now be sometime next week.
This document indicates that BTCB was directly involved in
handling investments for IBCL and IBCL's investors.
A later memorandum from Shifman to ``All Investors,'' dated
4/1/99, suggests that the BTCB investment program was not going
well and investment returns were not being paid as promised.
All of you are aware that . . . disbursements have not
been issued since the beginning of December, 1998 . . . due to
the lack of performance by the Bank that IBCL is contracted
with. . . . I am able to offer these options to each individual
investor. . . . Continue our current contract and wait until
the end of April to see if that contact performs. Request the
return of your investment. . . . Terminate the current contract
and issue a new contract with the following terms: 1. The
investment contract will be for twelve (12) months. 2. A
Certificate of Deposit will be purchased through the Bank and
its Florida-based Securities Firm for the total amount of the
investment. 3. A guaranteed rate of return of two percent (2%)
per month, paid monthly will be paid to investors.
This memorandum is dated less than 1 month after the SEC
complaint alleging IBCL involvement with investment fraud.
Brown indicated that, despite the Shifman promise of a 2%
monthly return, he requested the return of his $30,000.\342\
Brown indicated that, in response, he received conflicting
stories about whether his $30,000 was actually with Global
Investment Network Ltd. under the control of Rodriguez, or with
IBCL under the control of Shifman. On 10/8/99, Brown received a
fax on IBCL letterhead stating that, while the records
indicated his $30,000 had been ``transferred directly to the
IBCL account'' at BTCB:
---------------------------------------------------------------------------
\342\ See document signed by Brown, dated 4/6/00, requesting return
of his $30,000 investment.
[h]owever, the funds were placed in that account under
contract with Global Investments Network Ltd., leaving them
outside of our control. In order to place them into the
Certificate of Deposit Program, and realize further profits
from the BTCB, we would have to enter a new [agreement] issued
to you from this office. I am expecting a call from Betts [at
BTCB] sometime in the next hour or so, and he and I will
address your situation, as well as others, and figure out the
---------------------------------------------------------------------------
best and most efficient means of handling your investment.
A few days later, Brown received a letter from BTCB dated
10/11/99, signed by Betts and addressed, ``To all depositors in
Global Investment Network Ltd. [a]nd certain depositors in
International Business Consultants Ltd.'' After observing that
the Global Investment Network account had been largely
depleted, the letter indicated a solution had been found to
help individual investors. The letter announced that BTCB had
``come to an arrangement with Tony Rodriguez with respect to
handling your deposits with Global and IBCL.'' The letter
continued:
As I have explained to many of you on the telephone the
remaining balance in Global will only return 17% of your
original principal. However, of the approximately $300,000 of
your deposits that went into Global, $252,615 was transferred
into IBCL and is presently invested in their managed account
with the Bank. . . . The bottom line is that if you agree to
let your funds be placed under the management of IBCL and Peter
Shifman then the Bank can assure you that your funds are safe
and in an account that is intact and will stay that way until
the investment program is over.
Despite BTCB's strong encouragement to leave all funds with
IBCL in the BTCB investment program, Brown continued to ask for
the return of his funds, without success.
The investigation obtained a second BTCB letter dated 10/
11/99, which was also signed by Betts. This letter was
addressed to Tony Rodriguez at Global Investment Network Ltd.
It discussed a ``proposed settlement'' in which BTCB would
``take over the management'' of Global Investment Network funds
``in conjunction with Peter Shifman,'' provided that Rodriguez
made up a funding shortfall by transferring additional funds
from his Coopman Ltd. account at BTCB to the IBCL account. This
letter provides still more evidence of BTCB's deep involvement
in the investment activities of these entities at a time when,
in 1999, each was under investigation in the ongoing SEC fraud
proceedings.
Brown said that, after many attempts to recover his funds
from the BTCB high yield investment program, he requested the
assistance of Dominica's banking regulators. On August 1, 2000,
he received a letter from Dominica's banking supervisor stating
that records produced by BTCB indicated that his $30,000 had
been transferred by Rodriguez out of BTCB to one of Rodriguez's
``other accounts in the United States.'' The banking supervisor
wrote: ``It now appears that you have to pressure Rodriguez for
the return of the funds. It was a mistake not to have invested
directly with [BTCB].''
Brown indicated that he felt as if he were in a shell game
where his funds were being moved from account to account,
always beyond his reach, from Global Investment Network to IBCL
to BTCB to another bank in the United States. He noted that, at
each step, the persons involved had simply blamed someone else
for not producing promised returns and not returning his funds.
When Minority Staff investigators contacted the SEC
receiver and his staff to obtain their perspective on BTCB, the
receiver's staff expressed surprise at the number, dollar
amount and timing of BTCB transactions tied to persons and
entities associated with the Cook fraud. The staff provided a
copy of a letter sent by the SEC receiver to BTCB on May 8,
2000, asking the bank to freeze all funds in the IBCL account.
The staff said it was their understanding that BTCB had, in
fact, frozen the IBCL account, but few funds were captured.
They indicated they had been unaware that $4 million in suspect
funds had passed through BTCB; unaware of the Dennel, Global
Investment Network and Coopman accounts at BTCB; and unaware
that IBCL investor funds had been lodged with BTCB.
The Cook fraud provides another illustration of how
criminals use offshore banks and their U.S. accounts to launder
funds and facilitate financial fraud. The impact on the United
States includes, again, hundreds of defrauded investors, SEC
proceedings prosecutions in New Jersey and South Carolina,
extradition proceedings in the United Kingdom, civil
litigation, and the ongoing depletion of law enforcement and
court resources.
(4) Gold Chance Fraud
In April 2000, two brothers filed a civil suit in Canada
alleging, in essence, that their company, Gold Chance
International Ltd. (``Gold Chance''), was the victim of a loan
fraud involving $3 million.\343\ They alleged that Gold Chance
had been fraudulently induced to deposit $3 million as supposed
loan collateral into an attorney trust account in Canada,
waited months for a loan that never materialized, and then
learned that the company's funds had been secretly transferred
to an offshore account at BTCB.
---------------------------------------------------------------------------
\343\ Gold Chance International Ltd. v. Daigle & Hancock (Ontario
Superior Court of Justice, Case No. 00-CV-188866)(hereinafter ``Gold
Chance'').
---------------------------------------------------------------------------
In response to plaintiffs' efforts to recover the funds, an
Ontario court granted immediate emergency relief, including
freezing assets under a Mareva injunction, appointing a
receiver for the law firm's trust account, and ordering BTCB
and others to cooperate with discovery. Although the civil
proceedings have yet to reach a conclusion, a preliminary court
decision, pleadings in the civil case, and other information
show that the $3 million was deposited into BTCB's U.S.
correspondent account at First Union National Bank on December
15, 1999, and within a week, the funds were divided up and
wired to multiple bank accounts around the world. In an order
dated June 12, 2000, the court expressed skepticism regarding
BTCB's claim that the $3 million was still safely on deposit
with the bank, invested at the request of a client into a 1-
year BTCB high yield program maturing in December 2000.
Nature of Gold Chance Fraud. On April 16, 2000, Canadian
citizens Brent and Greg Binions filed a civil suit in the
Ontario Superior Court of Justice, on behalf of Gold Chance and
two other companies they own, seeking recovery of the $3
million from two individuals, Sayse Chatterpaul and Paul
Zhernakov, several companies controlled by these individuals,
and the law firm and banks involved in moving the funds out of
Canada, including BTCB.
The plaintiffs' statement of claim, related pleadings and
an opinion issued by the court in June 2000, indicate the
following facts.\344\ In the fall of 1999, Gold Chance was
introduced to and entered into negotiations with Chatterpaul to
obtain a loan to develop certain automobile fuel technology. In
December 1999, Gold Chance executed a borrowing agreement with
Chatterpaul's alleged company, Triglobe International Funding
Inc. The agreement provided that Triglobe would issue a loan to
Gold Chance, on the condition that Gold Chance first posted 25%
of the loan amount in cash collateral to be kept in a fiduciary
account under the control of legal counsel. On December 3,
1999, having borrowed the required sum from Toronto Dominion
Bank, Gold Chance delivered a $3 million bank draft to Daigle &
Hancock, a Canadian law firm, for deposit into the firm's
fiduciary account at the Bank of Montreal.
---------------------------------------------------------------------------
\344\ See Gold Chance statement of claim (4/16/00), amended
statement of claim (5/17/00), and ``Reasons for Decision'' by Judge
Campbell (6/12/00).
---------------------------------------------------------------------------
The promised loan was not, however, issued to Gold Chance.
After 2 months, on February 17, 2000, Chatterpaul and Gold
Chance replaced the original agreement with a second borrowing
agreement which, among other changes, replaced Triglobe with a
company called Free Trade Bureau S.A. (``Free Trade''). The
agreement provided that Free Trade would issue a $12 million
loan to Gold Chance, collateralized by the $3 million in the
fiduciary account. Chatterpaul signed the contract on behalf of
Free Trade. When no loan materialized, on March 13, 2000, Gold
Chance demanded return of the $3 million.
The pleadings allege plaintiffs learned in March 2000 that,
without their consent, the $3 million had been transferred in
December 1999, to a BTCB account for Free Trade. The pleadings
allege that the $3 million was quickly depleted through
multiple wire transfers initiated by BTCB to bank accounts
around the world. The pleadings also state that plaintiffs
learned Free Trade was owned, not by Chatterpaul, but by
Zhernakov, an individual with whom they had had no prior
dealings. The pleadings accuse the defendants of a variety of
fraudulent acts, contractual and fiduciary breaches, wrongful
conversion and other misconduct, and demand compensatory and
punitive damages.
Free Trade and BTCB. BTCB admits that it has not only
handled accounts and funds for persons and entities associated
with the Gold Chance fraud, but also retains possession of the
disputed $3 million, which it claimed was placed in a 1-year
BTCB investment program.
In its September 2000 submission to the Subcommittee, BTCB
acknowledged its involvement in the Gold Chance dispute,
without using specific client names. BTCB provided the
following description of the civil litigation:
A longstanding Canadian client had an existing account
with BTCB, and his background fully checked out. He
subsequently placed an additional $3 million into this BTCB
account . . . [and] committed these funds under a year long
investment contract with BTCB to place the funds; which the
bank in turn committed for a year. The first sign of trouble
BTCB had was when a company completely unknown to us surfaced,
and alleged that the $3 million was actually its money given to
the lawyer in Trust.
Unfortunately, it turned out later that the Canadian
lawyer had obtained the $3 million from a client company under
the false pretense, that the $3 million would be used as
collateral for a loan from BTCB of $12 million, a situation
completely unknown to us and contradicted by all paperwork
between BTCB and this Canadian client and lawyer regarding the
placement of $3 million with us in December 1999. . . .
BTCB has the $3 million invested under the signed
contract, and will return the funds when the contracted 1-year
period expires in December 2000.''
BTCB also stated that it had ``filed an affidavit [with the
Canadian court] explaining our lack of knowledge and
documenting the Canadian client and lawyer's signed documents
submitted to our bank; thus requesting a complete dismissal
from the action.'' Although BTCB did not provide a copy of the
affidavit or the attached documents, the investigation obtained
them from the publicly available pleadings in the Canadian
lawsuit. The affidavit was signed by BTCB president Requena and
filed on September 7, 2000, less than 2 weeks before BTCB made
its submission to the Subcommittee.
In explaining BTCB's role to the court, the Requena
affidavit attempted to draw a stark contrast between Zhernakov
and Chatterpaul, stating that while BTCB had done business with
Zhernakov for 2 years, BTCB ``does not have any knowledge or
information . . . and has never had any business or other
relationship or affiliation with'' Chatterpaul or any of his
companies.\345\ With respect to Zhernakov, the Requena
affidavit stated that Free Trade had been ``incorporated on 2
January 1998 . . . for the Defendant, Paul Zhernakov pursuant
to his instructions [and] . . . has been a customer of BTCB
since January 1998.'' \346\ Exhibit L to the affidavit provides
copies of BTCB's standard agreements for its high yield
investment program, signed by Zhernakov on behalf of his
company Free Trade, establishing that the company became a
participant in the program in January 1998.
---------------------------------------------------------------------------
\345\ Requena affidavit at 6.
\346\ Id.
---------------------------------------------------------------------------
U.S. bank records substantiate Zhernakov's status as a BTCB
client, including records showing the Zhernakov name in BTCB
account transactions as early as April 1998. U.S. bank records
also show one transaction involving Chatterpaul--a wire
transfer dated June 21, 1999, originated by Sayse Chatterpaul,
sending $680,000 from the Canada Trustee Mortgage Company in
Ontario to the BTCB account at Security Bank for further credit
to Free Trade. This deposit, for more than half a million
dollars, should have attracted BTCB's notice. At a minimum, it
provides evidence of a connection between Chatterpaul and Free
Trade and contradicts BTCB's claim to the court that it had
never had any business dealings with Chatterpaul.
Plaintiffs' pleadings raise questions about Zhernakov's
background, business dealings, and source of funds.\347\
Plaintiffs' information appears to be based primarily on a
sworn deposition provided by Zhernakov on June 5, 2000, in
connection with the lawsuit. Citing pages in a Zhernakov
transcript, plaintiffs allege that Zhernakov was born in Russia
in 1954, and is currently a citizen of Grenada. They allege he
was employed by the Russian Navy for 17 years, then worked for
an airline and had a business consulting firm, but currently
``does not work or have a business.'' \348\ They state that
Zhernakov testified at his deposition that he arranged loans
through BTCB for commissions, spoke regularly with Betts during
1999, and worked on occasion with Chatterpaul. Plaintiffs state
that Zhernakov testified that both he and Chatterpaul were
``authorized'' to act on behalf of Free Trade.\349\ This
information raises questions about what due diligence research
BTCB did prior to accepting Zhernakov as a client and what
information BTCB had about the source of his funds. It also
casts doubt on BTCB's assertion to the court that it had no
prior dealings with or information about Chatterpaul since,
according to Zhernakov, Chatterpaul had signing authority for
Free Trade, a BTCB-established Dominican corporation.
---------------------------------------------------------------------------
\347\ See Gold Chance, ``Factum of the Plaintiffs'' (6/8/00).
\348\ Id. at 7.
\341\ Id. at 8-9.
---------------------------------------------------------------------------
With respect to the Gold Chance funds, U.S. bank records
show the deposit of the $3 million into BTCB's account at First
Union on 12/15/99. The wire transfer documentation states that
the funds originated from Daigle & Hancock at the Bank of
Montreal and the intended beneficiary was Free Trade Bureau
S.A. at BTCB. On the day the funds were deposited, BTCB's
account balance at First Union was only $14,308. Over the next
2 weeks, only three other small deposits, totaling about
$25,000, came into the BTCB account. That means that, for the
month of December 1999, the $3 million in Gold Chance funds
were the primary source of funds in the BTCB account.
The wire transfers that depleted the $3 million deposit do
not, on their face, substantiate BTCB's claim that it placed
the $3 million into a year-long investment program. Instead,
the bank records show that the $3 million deposit on 12/15/99
was followed by a flurry of outgoing wire transfers in widely
varying amounts to multiple bank accounts around the world.
Most of the payments using the Gold Chance funds appear to have
been made to BTCB creditors or clients, with about $355,000
transferred to other BTCB correspondent accounts. Altogether,
in the span of 1 week ending December 23, 1999, about $2.3
million left the BTCB account.\350\ By December 29, 1999, only
about $734,000 remained in the BTCB account, of which all but
$40,000 was attributable to the Gold Chance funds. On 12/30/99,
BTCB deposited another $275,000, taken from its Security Bank
correspondent account, and on 1/3/00, it transferred $1 million
from the BTCB account to a Bank of America branch in Idaho for
``Orphan Advocates LLC.'' \351\ After the $1 million transfer,
the BTCB account at First Union held only about $11,000. No
significant activity took place in the account afterward, and
in February 2000, First Union closed the BTCB account.
---------------------------------------------------------------------------
\350\ The wire transfers included the following:
--$93,000 on 12/16/99 to Bank of Nevis International for
Universal Marketing Consultants;
--$15,339.95 on 12/16/99 to First National Bank of Antlers,
Oklahoma for Republic Products Corp., a company controlled by BTCB's
major stockholder John Long;
--$240,000 on 12/17/99 to Barclays Bank in the Bahamas for BSI
Corporation;
--$50,000 on 12/20/99 and $50,000 on 12/23/99 to National
Commercial Bank in Dominica for BTCB's correspondent account;
--$200,000 and $55,000 in two separate wire transfers on 12/21/
99, both to Pacific National Bank in Miami for BTCB's correspondent
account;
--$205,000 on 12/21/99 to Mashreq Bank in Dubai for Graham
Farrell;
--$612,000 on 12/21/99 to Banque Cantonale de Geneve for Laurent
Finance;
--$200,000 on 12/23/99 to HSBC Bank in Hong Kong for Wanvijit
Chauatong;
--$140,000 on 12/23/99 to ANZ Grindlay Bank in India for Asset
Management India;
--$40,000 on 12/23/99 to a Union Planters Bank account for the
credit of BTCB's president Rodolfo Requena; and
--$14,625 on 12/23/99 to the Bank of Montreal for Zhernakov, one
of the defendants in the civil lawsuit.
\351\ Orphan Advocates LLC is an Idaho corporation and another BTCB
client. The Ontario court reviewing the Gold Chance case has authorized
the plaintiffs to inquire about whether this Idaho corporation is
somehow associated with Betts or his wife, Mavis Betts, who still
resides in Idaho. See Gold Chance, court orders dated 5/15/00 and 6/2/
00. The court has also authorized inquiries into the corporation's
relationship with entities called Orphan Advocates Trust, Orphan
Advocates Foundation, China Fund for the Handicapped, and a company
which has changed its name four times in 4 years, from Children's Aid
of Idaho, Inc. in 1994, to Children's Adoption Service International,
Inc. in 1995, to Children's Adoption Services Inc. in 1996, to CASI
Foundation for Children, Inc. in 1998.
Plaintiffs have alleged that the $1 million payment to Orphan
Advocates LLC on January 3rd was actually paid into an account held by
Orphans Advocates Trust which, in turn, transferred the funds on the
same day to the China Fund for the Handicapped. See Gold Chance,
``Factum of the Plaintiffs'' (6/8/00) at 6. China Fund for the
Handicapped appears to be another investor in BTCB's high yield
program. Documentation at First Union shows that, on 6/21/99, the Fund
transferred $3 million from its bank account at Chiyu Banking Corp. in
Hong Kong to BTCB's account at First Union. Ted Johnson, a member of
the Board of CASI Foundation for Children, Inc., told a Minority
Subcommittee investigator on November 3, 2000, that it was his
understanding that the China Fund for the Handicapped had invested a
significant amount in BTCB's high yield investment program. Johnson
said that the Fund was ``not satisfied with the timing or amount'' of
the returns on their BTCB investment, although he understood the Fund
had not filed any legal action. He also said that the China Fund for
the Handicapped with BTCB investments was associated with the China
Fund for the Handicapped that is a quasi-governmental organization in
China, headed by Deng Xiaoping's son, Deng Pufang. He also stated that
the China Fund for the Handicapped is associated with Orphan Advocates
LLC.
Wire transfer documentation indicates additional links between
BTCB, the China Fund for the Handicapped, and Orphan Advocates LLC. The
wire transfers include the following:
--7/8/99 transfer of $1 million from BTCB account at First Union
to a bank in Milwaukee, Wisconsin, called Marshall & Isley Bank, for
further credit to an attorney trust account, belonging to John P.
Savage;
--8/11/99 transfer of $2,500 from BTCB account at BIV to the
same Milwaukee bank and the same attorney trust account, with the
following notation: ``Ref: Orphans Advocates Ltd.''; and
--11/30/99 transfer of $150,000 from BTCB account at First Union
to the Bank of Communication in Beijing for the ``Corporation Project
of the Rehabilitation of Disable Children,'' which allegedly is a
member of the same Federation for the Disabled, in China, as is the
China Fund for the Handicapped.
---------------------------------------------------------------------------
The Ontario court appeared to have reached the conclusion
in June 2000, that Gold Chance's $3 million was no longer at
BTCB. After reviewing bank and wire transfer documentation
showing disbursement of the Gold Chance funds and recounting
BTCB's failure to return the $3 million to Zhernakov upon his
request, the Ontario court wrote, ``The prepared statement of
Betts that the funds are in BTCB is not to be believed, against
either the tracing evidence or Betts' failure to deliver the
funds.'' \352\
---------------------------------------------------------------------------
\352\ See Gold Chance ``Reasons for Decision'' (6/12/00) at 9.
---------------------------------------------------------------------------
Despite this statement by the court in June, BTCB
nevertheless claimed, in the Requena affidavit submitted to the
court in September, that the $3 million was ``invested on 15
December 1999.'' \353\ The affidavit contended that the First
Union account was a ``general account used for business and
investment purposes by BTCB[,] [t]he money from Free Trade was
not trust money as far as BTCB was aware and so it was co-
mingled with the general funds in this account.'' The affidavit
maintained that the $3 million was credited to the Free Trade
account and ``deposited by the Defendant Free Trade . . . into
a managed investment account for a locked-in period of 1
year.'' \354\ BTCB further claimed that any dispute over the $3
million investment must be resolved by arbitration in London,
as provided in the investment agreement.
---------------------------------------------------------------------------
\353\ See Gold Chance, Requena affidavit (9/7/00) at 14.
\354\ Id. at 2.
---------------------------------------------------------------------------
Free Trade Investment in BTCB High Yield Program. The
evidence suggests that BTCB's high yield investment program may
be contributing to the Gold Chance fraud. First, the documents
provided by BTCB to the court, attached as Exhibit L to the
Requena affidavit, establish that Free Trade enrolled in BTCB's
investment program in January 1998--2 full years before the
Gold Chance deposit. Although BTCB maintains that the $3
million was intended for and immediately placed into its
investment program pursuant to Free Trade's managed account
agreement, the documentation provided by the bank does not
support that assertion. To the contrary, Exhibits M through U
discuss opening a ``new account'' with the money, under dual
signatory authority that differed from Free Trade's managed
account agreement. Not one of these documents mentions the word
``investment'' in connection with the $3 million; not one
references the BTCB investment program. The first document to
claim that the $3 million was placed into a BTCB investment
program is a BTCB letter dated April 12, 2000, a month after
Gold Chance demanded return of its funds. The unavoidable
implication is that BTCB may itself be defrauding Gold Chance--
delaying return of the $3 million by falsely claiming the
money's enrollment in the BTCB investment program.
Additional concerns arise from BTCB's admission in the
Requena, affidavit at page 19 that, although transactions
involving the $3 million required two signatures--from
Zhernakov and Daigle--the bank had already advanced $240,000 to
Zhernakov on his signature alone. BTCB has admitted that
releasing the $240,000 violated the account instructions.
Whether this violation was deliberate or inadvertent, it
demonstrates a lack of proper account controls. And it raises,
again, the spectre of BTCB misconduct--paying funds upon
request to Zhernakov, while refusing to pay funds to the
plaintiffs with the excuse that the entire $3 million is
``locked'' into a year-long investment.
BTCB later posted with the Ontario court a $3 million
letter of credit with a maturity date of December 15, 2000.
However, when that date arrived, BTCB failed to pay the
required amount to the court. Gold Chance is still seeking
recovery of its funds.
The Gold Chance fraud provides a third illustration of a
financial fraud carried out in part through an offshore bank
with a U.S. account. While the major impact in this instance is
in Canada, where the defrauded investors reside and the key
civil suit has been filed, there is also a collateral impact on
the United States in which BTCB's U.S. correspondent bank is
being asked to produce documents and explain what happened to
the. $3 million sent to BTCB's U.S. account.
(5) $10 Million CD Interpleader
In August 1999, PaineWebber's clearing firm, Correspondent
Services Corporation (CSC), filed an interpleader complaint in
Federal court in New York to resolve a dispute over the
ownership of a $10 million certificate of deposit (``CD'')
issued by BTCB.\355\ The parties asserting conflicting claims
to it included J. Virgil Waggoner, a wealthy U.S. citizen from
Texas; Donal Kelleher, an Irish citizen living in England who
served, for a time, as an investment advisor to Waggoner;
J.V.W. Investment Ltd., a Dominican corporation established by
BTCB for Waggoner and administered for a time by Kelleher; and
First Equity Corporation of Florida, the securities firm that,
in 1998, was owned by BTCB. In August 2000, the U.S. district
court issued a decision \356\ which resolved the CD ownership
issue in favor of Waggoner, but also identifies troubling
information about BTCB's investment activities and operations.
---------------------------------------------------------------------------
\355\ Correspondent Services Corp. v. J.V.W. Investment Ltd. (U.S.
District Court for the Southern District of New York Civil Case No. 99-
CIV-8934 (RWS)), complaint (8/16/99).
\356\ Correspondent Services Corp. v. J.V.W. Investment Ltd., 2000
U.S. Dist. LEXIS 11881 (U.S. District Court for the Southern District
of New York 2000)(hereinafter ``CSC v. JVW'').
---------------------------------------------------------------------------
BTCB's Issuance of the $10 Million Bearer CD. The August
2000 court decision, documents associated with the interpleader
action, discussions with bank officials, and other information
produced the following facts: Waggoner is a retired chief
executive officer of a large chemical company in Texas, and the
current chief executive and owner of a U.S. company called
J.V.W. Investments, Ltd.\357\ In November 1997, Waggoner
entered into an arrangement with Kelleher under which Kelleher
agreed to locate a high-yield investment program for a $10
million investment by Waggoner, in exchange for receiving a
percentage of any profits on such investment.\358\ In mid-1998,
Kelleher told Waggoner about the BTCB high yield program, and
Waggoner agreed to invest in it.
---------------------------------------------------------------------------
\357\ See SEC filing by Sterling Chemicals Holdings, Inc., Schedule
14A (12/27/97), proxy statement at 5.
\358\ CSC v. JVW at 4.
---------------------------------------------------------------------------
On June 12, 1998, BTCB requested their completion of
various forms to establish an international business
corporation and open an account.\359\ On June 19th, BTCB
incorporated J.V.W. Investment Ltd. as a bearer share Dominican
corporation.\360\ The name of this company mirrored the name of
Waggoner's existing U.S. corporation, J.V.W. Investments Ltd.,
but omitted the letter ``s'' from ``Investments.'' BTCB has
advocated taking this approach to naming a new Dominican
corporation ``to allow an orderly and mostly invisible
transition'' from an existing corporation somewhere else.
---------------------------------------------------------------------------
\359\ Id. at 11.
\360\ Id. at 14.
---------------------------------------------------------------------------
On June 25, 1998, J.V.W. Investment Ltd. (``JVW'') entered
into a cooperative venture agreement with BTCB to place an
investment in BTCB's high yield program. As explained in the
court's decision, this agreement provided:
(a) JVW would deposit $1.0 million into a ``Custody/
Transaction Account at BTCB''; (b) BTCB would issue a
certificate of deposit (``CD'') in JVW's name; (c) the CD would
have a term of 1 year and bear interest at 6% per annum; and
(d) BTCB would place the $10 million into investments to
provide a ``significant yield'' on a best efforts basis over
the course of a year.\361\
---------------------------------------------------------------------------
\361\ Id. at 19.
On 6/28/98, $10 million belonging to Waggoner was
transferred into a Citibank correspondent account in New York.
This correspondent account belonged to Suisse Security Bank and
Trust (``SSBT''), a small offshore bank licensed in the
Bahamas. Although Citibank was unaware of it, beginning in 1997
or 1998, SSBT had begun providing correspondent services to
BTCB and allowing BTCB to use the SSBT account at Citibank.
The court notes a factual dispute over whether the $10
million paid into the correspondent account was supposed to be
deposited into the BTCB account at SSBT, or into a freestanding
account at SSBT. The court decision states:
According to Waggoner's pleadings, BTCB instructed
Kelleher to place the $10 million into a BTCB sub-account in
the name of JVW at SSBT. . . . BTCB would then place the $10
million into the Investment Program and issue the CD to JVW.
Kelleher, however, transferred Waggoner's $10 million into a
freestanding account at SSBT, not the designated BTCB sub-
account. . . . SSBT [then] refused to transfer the $10 million
from the freestanding account to the BTCB sub-account. As a
result, Waggoner did not gain entry into the Investment
Program. SSBT, when asked why it refused to effect the
transfer, first stated that it was concerned that the $10
million might have an illegal origin. When a formal inquiry
showed that to be wholly without basis, SSBT stated that it had
placed the $10 million into ACM mutual funds . . . at
Kelleher's direction. . . . Kelleher claims, by contrast, that
he instructed SSBT to place the $10 million in the BTCB sub-
account.\362\
---------------------------------------------------------------------------
\362\ Id. at 22-24.
The court notes that Kelleher claimed the $10 million CD
issued in JVW's name was replaced by BTCB with another $10
million CD ``with the identical certificate number, but issued
in bearer form.'' \363\ This bearer CD, dated 6/28/98, is the
CD that was placed into Correspondent Services Corporation
custody, to be held until the CD's 1-year maturity date.
---------------------------------------------------------------------------
\363\ Id. at 24.
---------------------------------------------------------------------------
After vigorous complaints about the bank to Bahamian bank
regulators, SSBT agreed to release the funds deposited by
Waggoner. SSBT chose to do so by transferring the ACM mutual
funds it had purchased with the $10 million. SSBT transferred
the mutual funds to CSC, for further credit to BTCB, to benefit
JVW.\364\ When liquidated, the mutual funds produced about $7.7
million.\365\ The court found that, by investing the $10
million in ACM mutual funds, SSBT was responsible for a
shortfall of about $2.2 million from the $10 million originally
deposited.\366\ The court noted that Waggoner considered taking
legal action against SSBT to recover the $2.2 million, but did
not do so.\367\ When a Minority Staff investigator asked why no
legal action had been taken against SSBT, Waggoner and JVWs
legal counsel, Kenneth Caruso, declined to discuss his clients'
legal strategy. Bahamian bank regulators provided a September
15, 2000 letter stating that an external audit of SSBT had
``ruled out any possibility of irregularity on the part of
[SSBT].'' However, neither the government nor SSBT would
produce a copy of the audit report.
---------------------------------------------------------------------------
\364\ See 9/21/98 letter from Betts to Tucker Anthony; and undated
letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM
mutual funds for SSBT.
\365\ Id.
\366\ Id.
\367\ Id. at 24, 27.
---------------------------------------------------------------------------
In any event, once his funds were lodged with BTCB,
Waggoner took action to eliminate Kelleher's role in overseeing
the BTCB investment. On November 10, 1998, Waggoner sent a
letter to Kelleher terminating his services for allegedly
breaching their agreement to locate a high yield investment
program.\368\ On the same date, Waggoner transferred all JVW
shares to Wagonwheel Trust, a new Dominican trust formed for
him by BTCB and controlled by BTCB as the appointed trustee.
The next day, November 11th, Wagonwheel Trust removed Kelleher
from his position as sole director of JVW, and replaced him
with a BTCB subsidiary, International Corporate Services, Ltd.
After that date, BTCB refused to provide Kelleher with any
information about JVW's investments in the BTCB high yield
program or to pay him any portion of alleged profits.\369\
---------------------------------------------------------------------------
\368\ Id. at 26.
\369\ Id. at 27.
---------------------------------------------------------------------------
In June 1999, the $10 million CD matured, and Kelleher
claimed a portion of the funds, leading to the interpleader
action. On August 16, 2000, the U.S. district court held that
Kelleher had no ownership interest in the CD, but refused to
dismiss, on summary judgment, his claim for damages against
Waggoner for failing to act in good faith in their joint
business dealings.\370\ The civil proceedings are ongoing.
---------------------------------------------------------------------------
\370\ Id. at 64.
---------------------------------------------------------------------------
JVW and BTCB. The interpleader action over the $10 million
CD opens a window on BTCB's dealings with one of its clients
and, in so doing, raises three sets of concerns about the
bank's internal controls and investment activities. First, the
proceedings expose operational deficiencies and aggressive
tactics at BTCB. Second, they disclose troubling information
about BTCB's dealings with SSBT, a small Bahamian bank with a
poor reputation and limited assets. Third, they illustrate
problems with BTCB's high yield investment program, including
possibly fraudulent promises to pay extravagant returns and
possibly fraudulent misuse of investor funds.
The civil litigation discloses, first, operational and
internal control deficiencies at BTCB. The court found a number
of inconsistencies and ambiguities in the documentation used to
establish the beneficial owner of the $10 million CD and JVW,
requiring pages of legal analysis to recite and resolve. The
CD, for example, was issued by BTCB in bearer form, despite a
provision in the cooperative venture agreement calling for the
CD to name JVW so that its ownership would be clear. With
respect to JVW, the court noted that the ``IBC order form''
containing instructions for forming JVW, including naming the
company's beneficial owner, was signed on June 22, 1998--3 days
after the company had been incorporated on June 19th.\371\
JVW's incorporation documents were signed by BTCB's subsidiary,
ICS, again without indicating the corporation's beneficial
owner.\372\ A letter sending ``account opening forms'' for a
JVW bank account at BTCB is dated June 23, 1998--5 days after
the $10 million had been sent to SSBT and an account opened.
---------------------------------------------------------------------------
\371\ Id. at 11-12.
\372\ Id. at 14-15.
---------------------------------------------------------------------------
The civil litigation also exposes BTCB's willingness to
engage in aggressive tactics when intervening in a dispute over
client funds, even when the dispute is due, at least in part,
to BTCB's own missteps. To resolve the dispute between Waggoner
and Kelleher over the $10 million CD, BTCB established and
became the trustee of a new Dominican trust, Wagonwheel Trust,
in November 1999, set up to benefit Waggoner. BTCB caused the
trust to take possession of JVW's bearer shares, and remove
Kelleher as JVW's sole director. In taking these actions, BTCB
did not act as a neutral or passive financial institution. To
the contrary, it took an active stance in favor of Waggoner and
used the bank's fiduciary powers and subsidiary to help
Waggoner wrest control of JVW away from Kelleher. BTCB also
took possession of Waggoner's funds for placement in its high
yield program, and refused Kelleher's requests for information
about the investment or its alleged returns.
Second, the civil litigation exposes troubling information
about BTCB's dealings with SSBT. The documentation in the civil
proceeding makes it clear that BTCB actively assisted JVW in
opening an account and transferring funds to SSBT. For example,
a fax dated June 29, 1998, from Betts to Kelleher, provided
BTCB's account number at SSBT, approved a JVW letter to SSBT,
and offered to forward the $10 million CD to SSBT on JVW's
behalf. SSBT then refused for 3 months to release the $10
million. In an 8/27/98 letter to SSBT, Kelleher stated that an
audited balance sheet obtained from public records in the
Bahamas showed that SSBT was ``extremely small with very little
cash or assets and . . . is indeed far smaller than the size of
[JVW's $10 million] deposit.'' The letter expressed ``doubt''
about SSBT's ``stability and liquidity.'' Bahamian Government
officials told the investigation that SSBT had a long history
of regulatory problems requiring oversight. Yet BTCB chose to
do business with SSBT, despite its lack of assets and poor
regulatory history. In addition, neither BTCB nor SSBT ever
informed Citibank that BTCB was using SSBT's Citibank account
to transact business. Citibank told the investigation that it
had been completely unaware it was providing services to BTCB.
Even more troubling is information released in the course
of the civil litigation regarding BTCB's high yield investment
program. Several of the documents indicate that Waggoner and
Kelleher had been told by BTCB that the $10 million investment
would produce $50 million or more in profits in less than 6
months. A 9/15/98 letter from Brazie, for example, suggested
that the funds released by SSBT be invested into ``ongoing
HYIPs'' or high yield investment programs at Global Investment
Fund S.A. Brazie explained that Global Investment Fund S.A. was
``wholly owned by ICS/BTCB and serve[d] as a `pooling' and
`masking' entity for funds from other IBC clients.''
Handwritten notes by Kelleher on the letter, following a
telephone conversation with Brazie, stated: ``Return min 25%/
wk.'' One week later, a 9/23/98 letter from Waggoner to
Kelleher stated, ``I want this project expedited and the
delays/excuses ended. As my trustee, you must hurry to get my
$50 million in profits to me this year.'' A letter to BTCB from
Kelleher, dated 4/13/99, stated, ``The sum over due and payable
[to his company alone] . . . by [BTCB] is we repeat: USD--
58,660,200.'' [Emphasis in original text.] Dominican Government
officials and U.S. bankers interviewed during the investigation
uniformly expressed disbelief that such returns were possible.
U.S. bank records also raise questions about what BTCB
actually did with the funds once they were in the bank's
possession. Waggoner's $10 million is the largest single
investment in BTCB's high yield program uncovered by the
investigation. The court pleadings indicate that the ACM mutual
funds purchased with the $10 million were apparently
transferred by SSBT in several stages in September and October
1998, to CSC for liquidation.\373\
---------------------------------------------------------------------------
\373\ See 9/21/98 letter from Betts to Tucker Anthony; and undated
letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM
mutual funds for SSBT.
---------------------------------------------------------------------------
On 10/26/98, at BTCB's request, CSC transferred $6.5
million to BTCB's account at Security Bank. The origination,
timing and size of this transfer suggests that the $6.5 million
came from the JVW funds; the investigation found no other
transaction that could account for the source of funds used in
this wire transfer. The next day, on 10/27/98, BTCB transferred
the $6.5 million to an attorney trust account at First Union
National Bank belonging to Robert Garner. Garner is an attorney
who has worked for both BTCB and First Equity Corporation of
Florida. Within a week of receiving the funds, Garner
transferred the $6.5 million, on 11/3/98, to an attorney trust
account at Union Bank of Switzerland (``UBS'') in Zurich
belonging to Robert McKellar.
The $6.5 million was not the first time that U.S. bank
records showed funds moving among accounts belonging to
McKellar, Garner and BTCB. Less than 2 weeks earlier, on 10/19/
98, BTCB, had wire transferred $3.5 million from its account at
Security Bank to ``McKellar's Solicitors Unit.'' The source of
this $3.5 million is unclear, as is its relationship, if any,
to the JVW proceedings. The fact that the $3.5 million and $6.5
million sent to McKellar in October 1998 together add up to the
$10 million at issue in the JVW proceedings may be just
coincidence.
Two 1998 BTCB financial statements further document the
movement of these funds. A BTCB financial statement as of 6/30/
98, which BTCB submitted to First Union when applying for a
correspondent account, states in Note 3 that the bank had $10
million in deposits at SSBT. There is no mention of deposits at
UBS. BTCB's audited financial statement 6 months later, as of
12/31/98, which was submitted to the Dominican Government,
states in Note 4 that the bank had ``10M in Union Bank of
Switzerland.'' The December 1998 financial statement made no
reference to deposits at SSBT. The logical inference, then, is
that BTCB moved $10 million from SSBT to UBS during the latter
half of 1998. The timing, dollar amount and banks involved all
suggest that the BTCB funds in Switzerland came, in whole or in
part, from the JVW funds.
Once the funds were placed in a Swiss bank account, little
is known about them, and it is unclear whether the funds were
ever placed in an investment. What is clear is that, 6 months
later, on 4/26/99, U.S. bank records show McKellar wire
transferring $6 million from the UBS account in Zurich to
Garner's account at First Union. On the same day, Garner
transferred the $6 million to BTCB's account at First Union. On
the day before, 4/25/99, BTCB's First Union account balance was
only about $77,000. The $6 million was a huge addition to an
account that otherwise had few funds. From 4/26/99 to the end
of May, only six other deposits were made into the BTCB account
totaling about $217,000. The bank records establish, then, that
the majority of funds in the BTCB account at First Union, from
April 26 until May 31, 1999, was attributable to the $6 million
deposit.
The bank records also show that the $6 million deposit on
4/26/99 was followed by a flurry of outgoing wire transfers, 43
in April and 58 in May, in widely varying amounts to bank
accounts around the world. In the span of 1 month ending May
31, 1999, BTCB transferred about $5.7 million out of its First
Union account. The three largest sets of wire transfers were
the following:
--$1 million on 4/26/99 to BTCB's account at
Correspondent Services Corporation;
--$1 million on 4/26/99 to BTCB's account at Security
Bank; and
--1.4 million in four wire transfers on 4/26/99 and 5/7/
99 to four accounts, each of which referenced International
Business Consultants Ltd., a participant in the Cook fraud
described earlier.
U.S. bank records show another, possibly related set of
transactions 6 months later. On 10/15/99, $999,976 was
transferred from an unidentified account at UBS in Zurich to
Garner's account at First Union. Given earlier wire transfers,
it is possible that these funds came from the UBS account
belonging to McKellar. Four days later, on 10/19/99, Garner
transferred the $1 million to BTCB's account at First Union.
When the deposit was made, BTCB's account balance was only
about $27,600. BTCB then disbursed the $1 million in the same
way it had disbursed the $6 million, using multiple wire
transfers to multiple bank accounts.
BTCB's treatment of the JVW funds, once lodged with the
bank, raise unavoidable questions about whether the bank was
misusing investor funds. First, there is no clear evidence that
the JVW funds were ever invested, especially if the $6.5
million sent to Switzerland was, in fact, taken from the JVW
investment. Second, the $6.5 million transferred from CSC to
BTCB, was quickly transferred out of the bank through two
attorney trust accounts in the United States and Switzerland.
The reasons BTCB used two attorney trust accounts to move the
$6.5 million to Switzerland are unclear; possibly it was
devised to conceal the movement of the funds or impede tracing
them.
Third, when the $6 million came back from the Swiss
account, through Garner's account, to BTCB in April 1999, the
funds arrived at a time when BTCB's primary U.S. correspondent
account was almost empty. The quick disbursement of the $6
million in varying amounts to various bank accounts suggests
that JVW investment funds were being used, in whole or in part,
to pay BTCB's creditors and clients and to replenish BTCB's
coffers. The $1 million transfer from Switzerland in October
1999, seems to have followed the same pattern. When a Minority
Staff investigator asked legal counsel for Waggoner and JVW
about how the JVW funds were invested and whether Waggoner had
any concerns about the status of the funds, he declined to
respond, other than to indicate that his clients did not wish
to discuss their financial affairs.
(6) Other Suspect Transactions At BTCB: KPJ Trust, Michael Gendreau,
Scott Brett, Global/Vector Medical Technologies
In reviewing U.S. bank records and other information
associated with BTCB, the investigation came across additional
evidence of possible misconduct and ongoing civil and criminal
investigations involving funds at BTCB. This evidence included
the following:
--KPJ Trust. U.S. bank records show that, on 9/21/98,
Tiong Tung Ming of Malaysia transferred $1 million to BTCB's
account at Security Bank. Tiong has since complained to
Dominican, U.K. and U.S. Government officials, the Eastern
Caribbean Central Bank, and Security Bank about his continuing
inability to recover his funds. Tiong invested these funds with
a BTCB client, K.P.J. Trust S.A. (``KPJ Trust''), through
Michael Dibble and Rosemarie Roeters-Van Lennep, based upon a
9/15/98 joint venture agreement promising ``[t]rading profits .
. . [of] ONE HUNDRED FIFTY PERCENT (150%) during the duration
of the program (40 weeks), which will be distributed on a
monthly basis.'' [Emphasis in original text.]
A 9/17/98 letter on BTCB letterhead, signed by Betts,
acknowledged receipt of the funds ``from Ming Tung Tion [sic]
in favor of KPJ S.A.'' However, after Tiong complained to
Security Bank and others, Betts sent a 2/25/99, letter denying
any knowledge of Tiong. After additional correspondence, Betts
sent a 3/15/99 letter stating that Tiong's funds had been
placed, through KPJ Trust, into a BTCB ``Managed Accounts
Contract'' for 1 year, and could not be returned to him until
9/21/99. When Tiong continued to demand his funds and the KPJ
Trust later joined in those demands, a 5/11/99 letter from
Brazie stated that Tiong's funds could be released earlier if
``we receive additional funds from other entities and those are
committed to Global Investment Fund S.A. to replace your
funds.'' BTCB did not, however, release any funds, even at the
end of the 1-year period on 9/21/99.
Documents supplied by Tiong recite repeated broken
promises by BTCB to return the funds. Yet, at the same time,
U.S. bank records show that BTCB made $315,000 in payments to
several persons associated with the KPJ Trust:
--9/22/98 wire transfer of $200,000 from BTCB's account
at Security Bank to United Bank in Rustenburg, South Africa,
for ``W.H. Keyser . . . Ref. K.P.J. Trust S.A.,'' returned on
9/29/98 because United Bank could not locate the account;
--1/15/99 wire transfer of $5,000 from BTCB's account at
Security Bank to the Royal Bank of Scotland in London, for Ms.
Van Lennep and KPJ Trust SA, using the account of Stuart Moss,
a London resident who regularly works with BTCB;
--8/5/99 wire transfer of $25,000 from BTCB's account at
Security Bank to Wells Fargo Bank in Denver, Colorado, for Ms.
Van Lennep, ``Ref. K.P.J. Trust S.A.'';
--11/1/99 wire transfer of $110,000 from BTCBs account
at First Union to Wells Fargo Bank in San Francisco,
California, for Ms. Van Lennep; and
--11/26/99 wire transfer of $175,000 from BTCB's account
at First Union to Wells Fargo Bank in California for Ms. Van
Lennep.
The KPJ Trust allegations have clear parallels to other
BTCB matters examined by the investigation, including the
references to BTCB's high yield investment program and Global
Investment Fund subsidiary; BTCB's insistence that the
investor's funds were unavailable for 1 year; and BTCB's
nonpayment of the funds to the investor, despite making
payments to the BTCB client who arranged for the funds to be
deposited at the bank in the first place.
--Brett Investors. Investors in Texas, California and
Canada have made complaints that funds invested with Scott
Brett and, on his instructions, wired to BTCB, have not been
returned. Brett is a part owner of BTCB through Bailett
International Ltd., according to documents supplied by BTCB to
U.S. banks, and other information linking Brett to John Long,
BTCB's majority owner. Despite the limited information
available about this matter, the investigation located U.S.
bank records showing over $763,000 in wire transfers involving
investors who have complained of being defrauded or persons or
entities associated with Brett, including the following:
--2/10/98 wire transfer of $25,000 from unknown
originator to BTCB's account at BIV for ``Aurora Investments'';
--2/25/98 wire transfer of $2,010 from unknown
originator to BTCB's account at BIV for ``Aurora Investments'';
--3/11/98 wire transfer of $29,994 from A. Kotelr to
BTCB's account at BIV for ``Bailett I'';
--4/22/98 wire transfer of $15,000 from unknown
originator to BTCB's account at BIV for ``Aurora Investments'';
--10/22/98 wire transfer of $10,500 from Arthur W.
Hogan, an investor claiming to have been defrauded by Brett, to
BTCB's account at Security Bank;
--10/27/98 wire transfer of $110,500 from Denver and
Arlene Hopkins in Louisiana to BTCB's account at Security Bank
``per Scott Brett'';
--12/9/98 wire transfer of $250,000 from ``Newcastle
Enterprises Scott Brett'' to BTCB's account at Security Bank
for ``Aurora Investments'';
--1/14/99 wire transfer of $100,000 from BTCB's account
at Security Bank to Washington Trust Bank in Spokane,
Washington, for ``Bailett International . . . Ref: Aurora
Investments S.A.''; and
--4/28/99 wire transfer of $220,000 from BTCB's account
at First Union to Canadian Imperial Bank of Commerce in
Kelowna, British Columbia, for ``Bearisto & Co. Trust'' for
``Aurora Investments S.A.''
Civil and criminal investigations may be underway into
these complaints.
--Gendreau Investment. Plaintiffs' filings in the Gold
Chance case provide information about a BTCB client in
Minnesota, Michael Gendreau, who allegedly invested $390,000
with BTCB in 1998, and has been ``unable to get his money
back.''\374\ The U.S. Treasury Department and the FBI in
Seattle have allegedly been informed and may be investigating
his claims against BTCB.
---------------------------------------------------------------------------
\374\ Gold Chance, ``Affidavit of Brent Binions'' (4/20/00) at 2.
--Global/Vector Medical Technology Accounts. U.S. bank
records show BTCB's involvement with a company headed by an
individual suspected of past securities fraud. The company is
Global Medical Technologies, Inc., a Florida corporation which,
on January 29, 1999, changed its name to Vector Medical
Technologies, Inc. (``Vector''). Vector's chairman and chief
executive is Dr. Michael H. Salit, a Florida resident who
apparently received a medical degree in Israel, but has not
been licensed to practice medicine in any U.S. State including
Florida. Salit was the subject of a 1996 SEC enforcement action
for securities fraud \375\ which resulted in a March 2000 final
judgment that required him, without admitting or denying SEC
allegations, to pay $600,000 to the government and accept a
court order permanently enjoining him from engaging in
securities fraud. The court excused Salit from paying all but
$25,000 of the required sum in light of a financial statement
showing him to be without assets. The court warned, however,
that the full $600,000 would become due if the SEC ``obtain[ed]
information indicating that Defendants' representations to the
[SEC] concerning their assets, income, liabilities, or net
worth were fraudulent, misleading, inaccurate or incomplete.''
\376\
---------------------------------------------------------------------------
\375\ SEC v. The Appletree Companies Inc. f/k/a Modami Services,
Inc., Michael H. Salit, David B. Lobel, Paul B. Kravitz, and W. Scott
Long III (U.S. District Court for the Southern District of Florida
Civil Case No. 96-8675-Civ-Seitz).
\376\ Id., ``Final Judgment of Permanent Injunction and Other
Relief as to Defendants Salit and Lobel'' (3/3/00) at 5.
Salit is a signatory on at least seven Vector accounts
at First Union, and U.S. bank records show a number of
transactions between BTCB and Vector.\377\ The bank records
indicate that Vector's initial account was opened at First
Union on 9/30/98, well after the SEC enforcement action was
underway. The bank records indicate that, during 1999 and 2000,
hundreds of investors across the United States paid over $16
million into Vector's CAP account to purchase Vector shares.
The bank records show that BTCB paid $500,000 into Vector's
initial account soon after it opened, and subsequently received
$1 million in payments from Vector over a 12-month period,
several installments of which were pass-through payments
involving BTC Financial.
---------------------------------------------------------------------------
\377\ Vector has at least seven accounts at First Union, numbered
209-000-294-6659 (opened 9/30/98 until 11/1/99, and referred to as the
``initial account''); 998-324-6063 (opened 1/5/99 to present, and
referred to as the ``CAP account''); 200-000-276-0469 (opened 8/30/99
to present); 200-000-276-0375 (opened 9/8/99 to present); 200-000-748-
1837 (opened 5/12/00 to present); 24021271 (brokerage account); and
4063000997 (money manager account, possibly opened in 8/00). Vector may
have additional accounts in First Union's private bank.
---------------------------------------------------------------------------
The key transactions include the following:
--12/14/98 wire transfer of $300,000 with the notation
``[promissory] note & investment,'' and a 3/15/99 wire transfer
of $200,000, from BTCB's account at Security Bank into Vector's
initial account at First Union, which provided virtually all of
the funds in the Vector account;
--1/6/99 wire transfer of $145,000 from Vector's initial
account to its newly-opened CAP account, utilizing the funds
provided by BTCB;
--8/26/99 check for $300,000 written by Vector on its
CAP account for BTCB, which BTCB deposited on 9/2/99 into its
Security Bank account, presumably in repayment of the funds
provided by BTCB in December;
--10/4/99 check for $200,000 written by Vector on its
CAP account for BTCB, which BTCB deposited on 10/5/99 into its
First Union account, presumably in repayment of the funds
provided by BTCB in March;
--11/12/99 check for $100,000 written by Vector on its
CAP account for BTC Financial Services which deposited the
check on the same day, waited for it to clear, and then wrote a
$100,000 check to BTCB, signed by Betts and dated 11/18/99,
which BTCB deposited into its First Union account on 11/19/99;
--12/14/99 check for $100,000 written by Vector on its
CAP account for BTC Financial Services which deposited the
check on the same day, and immediately wrote a $100,000 check
to BTCB, signed by Requena. and dated 12/14/99, which BTCB
deposited into its Security Bank account on 12/15/99;
--1/10/00 check for $100,000 written by Vector on its
CAP account for BTC Financial Services which deposited the
check on 1/11/00, and immediately wrote a $100,000 check to
BTCB, signed by David Cooper and dated 1/11/99, which BTCB
deposited into its Security Bank account on 1/12/00;
--2/2/00 check for $100,000 written by Vector on its CAP
account for BTCB, which BTCB deposited into an unknown account
on 2/9/00; and
--2/29/00 check for $100,000 written by Vector on its
CAP account for BTCB, with the notation ``Final Payment,''
which BTCB deposited into its Security Bank account on 3/1/00.
A 1999 Vector financial statement indicates, in Note 8,
that the $500,000 provided by BTCB was a loan and, on October
4, 1999, apparently in connection with repaying the $500,000
principal, Vector agreed to pay BTCB a second $500,000 ``as
payment in full of principal and interest as well as for the
surrender and release by BTCB of all its right, title and
interest in Vector, including its stock ownership. BTCB had the
right to approximately 1,400,000 unissued shares of the
Company's common stock.''
BTCB either failed to conduct sufficient due diligence
to discover Salit's recent involvement with securities fraud
allegations or decided to do business with Salit despite his
past. BTCB not only lent Vector significant funds--one of the
few business loans issued by this bank--but then allegedly
acquired rights to 1.4 million in unissued Vector shares. BTCB
then supposedly surrendered these rights in exchange for a
portion of the $16 million the company was raising from new
investors. SEC and criminal investigations may now be underway
to determine whether Vector Medical Technology venture has any
indications of securities fraud.
(7) Taves Fraud and the Benford Account
In April 2000, U.S. citizens Kenneth H. Taves and his wife
Teresa Callei Taves were found liable by a U.S. district court
for defrauding hundreds of thousands of credit card holders by
billing their credit cards for unauthorized charges totaling
more than $49 million. About $7.5 million in fraud proceeds was
traced to a European Bank account opened in the name of a
Vanuatu corporation, Benford Ltd. Benford Ltd. had been
established by European Trust and its bank account opened by
European Bank, without any due diligence research into the
company's beneficial owner or source of funds. Even after
learning that the $7.5 million came from the Taves fraud
victims, European Bank fought for more than 1 year to prevent
U.S. seizure of the $7.5 million from its correspondent account
at Citibank.
Taves Fraud. The Taves fraud first became public in January
1999, when the U.S. Federal Trade Commission (FTC) filed a
civil complaint in California charging the Taves and associated
companies and individuals with unfair and deceptive business
practices arising from fraudulent credit card billing.\378\ In
response, the court issued a temporary restraining order
freezing the Taves' assets, requiring the defendants to provide
an accounting of their activities and assets, and appointing an
FTC receiver to locate and return fraudulently obtained
monies.\379\
---------------------------------------------------------------------------
\378\ See FTC v. J.K. Publications, Inc. (U.S. District Court for
the Central District of California Civil Case Number CV 99-0044 ABC
(AJWx)), complaint (1/5/99) and amended complaint (1/20/99).
\379\ See FTC v. J.K. Publications, Inc., temporary restraining
order (1/6/99).
---------------------------------------------------------------------------
In May 1999, the court held Taves in criminal contempt for
hiding assets from the FTC, including a $2 million house in
Malibu transferred to a corporation and $6.2 million deposited
into a bank account at Euro Bank in the Cayman Islands.\380\
Euro Bank is a longstanding, Cayman licensed bank that has no
affiliation with European Bank or the Bayer family. The U.S.
district court ordered Taves imprisoned until he turned over
the $2 million from the house transfer to the FTC receiver.
Imprisoned on May 4, 1999, Taves was still in custody when he
was indicted in February 2000, in both the United States and
Cayman Islands.\381\
---------------------------------------------------------------------------
\380\ See FTC v. J.K. Publications, Inc., order holding Taves in
contempt for not disclosing Malibu realty (5/4/99); order requiring Mr.
and Mrs. Taves to produce documentation related to Euro Bank account
(5/5/99); and order granting summary judgment (4/7/00) at 3.
\381\ See United States v. Taves (U.S. District Court for the
Central District of California Criminal Case No. 00-CR-187-ALL),
indictment (2/29/00); money laundering charges filed in the Cayman
Islands (2/9/00). A trial is scheduled on the U.S. charges in January
2001.
---------------------------------------------------------------------------
In April 2000, the U.S. court issued findings of fact and
conclusions of law holding the Taves and other defendants
liable for fraudulent credit card billing.\382\ The court ruled
that ``the uncontroverted evidence overwhelmingly
demonstrate[d] that the defendants participated in a billing
scheme by submitting unauthorized [credit card] charges for
processing.'' \383\ The court determined that, in November
1997, the Taves' companies paid a fee to Charter Pacific Bank
in California to gain access to a credit card database
containing over 3 million credit card numbers.\384\ The Taves
then opened merchant bank accounts--accounts used to accept
credit card payments--at Charter Pacific Bank and Heartland
Bank and began billing small amounts, often $19.95, to
thousands of credit card numbers in the database.\385\ Although
the defendants apparently alleged that the $19.95 was a monthly
fee that the credit card holders paid to access adult-content
Internet web sites operated by Taves-related companies, the
court found that the defendants had ``stole[n]'' the credit
card numbers from the database and ``charged card numbers
without the cardholders' authorization.'' \386\ The court found
that, in 1998 alone, over $49.6 million was deposited into the
Taves' merchant accounts \387\ from unauthorized charges billed
to over 783,000 credit card numbers in the Charter Pacific
database.\388\ The funds were then used for various purposes,
including paying Mr. and Mrs. Taves a ``salary'' of $1.8
million each.\389\ The court found that $25.3 million of the
$49.6 million had been transferred to offshore bank accounts at
Euro Bank.\390\
---------------------------------------------------------------------------
\382\ See FTC v. J.K. Publications, Inc., order granting summary
judgment (4/7/00).
\383\ Id., at 51.
\384\ Id. at 17, 21, 51.
\385\ Id. at 12, 16-17, 20, 51.
\386\ Id. at 53. See also id. at 6, 16-18, 34-35, 51-52.
\387\ Id. at 25.
\388\ Id. at 33-34.
\389\ Id. at 13.
\390\ Id. at 36-37.
---------------------------------------------------------------------------
In February 2000, the Cayman Government charged three
senior Euro Bank officials with money laundering, citing the
$25.3 million transferred to the bank from the Taves fraud.
These charges, brought against Ivan Richard Wykeham Burges,
Brian Leslie Peter Culma, and Judith Mary Donegan, are the
first money laundering prosecutions brought against Cayman bank
officials in the country's history. Criminal charges were also
brought against six other individuals, including Taves for
money laundering.\391\
---------------------------------------------------------------------------
\391\ Documents attached to public court filings in the FTC case in
the United States, includes, for example, documents showing Taves'
paying Donegan, one of the Euro Bank employees, $4,000 per month for
her efforts on his behalf and authorizing her to use his Cayman beach
house ``for the purposes of spending a few leisurely hours there from
time to time.'' Another document shows Taves' transferring one of his
companies to her ``free of charge'' in February 1999, apparently in a
continuing effort to hide assets from the FTC and evade the January
1999 court order imposing an asset freeze.
---------------------------------------------------------------------------
In May 1999, due to money laundering concerns arising not
only from the Taves fraud but other matters as well, the Cayman
Government closed Euro Bank.\392\ In June 1999, Euro Bank's
shareholders placed the bank in voluntary liquidation, and the
bank began winding up its affairs. On July 26, 1999, Euro
Bank's liquidators agreed to provide the FTC with ``information
and documents in the Bank's possession'' relating to the Taves
fraud in exchange for releasing the Bank from damage claims
related to the bank's actions in that matter.\393\ After the
agreement was approved by the Cayman Grand Court, the FTC
receiver reviewed Euro Bank information and found the $7.5
million transfer from Taves-related accounts at Euro Bank to
the Benford account at European Bank in Vanuatu.
---------------------------------------------------------------------------
\392\ FTC v. J.K. Publications, Inc., ``Report of Receiver's
Activities Dated August 4, 1999,'' (8/6/99) at 1; interviews of Cayman
Government officials in April 2000.
\393\ See ``Deed of Compromise, Release, Accord and Satisfaction''
(7/26/99) at 2.
---------------------------------------------------------------------------
Establishing Benford Ltd. The Benford account was opened in
February 1999, at the request of Euro Bank employee Ivan
Burges, later charged with money laundering on behalf of Taves.
The account was opened by Susan Phelps, who is both a European
Bank director and employee, and a European Trust officer.\394\
On 2/3/99, Burges sent a fax to European Bank inquiring about
establishing a Vanuatu corporation and opening a corporate bank
account for an unnamed client. Phelps faxed Burges the
requested information. On 2/8/99, Burges requested
incorporation and account opening forms and, the next day,
faxed an ``urgent'' request to establish a Vanuatu corporation
called Benford Ltd., still without naming the client on whose
behalf he was acting. Phelps supplied him with the requested
forms as well as wire transfer instructions for sending funds
to European Bank's correspondent account at Citibank in New
York.
---------------------------------------------------------------------------
\394\ This information is based upon affidavits filed by Phelps in
various court proceedings, as well as account documentation and other
information. See, for example, Evans v. European Bank (Civil Case No.
85 of 1999 before the Supreme Court of Vanuatu), Phelps affidavit (11/
22/99); Evans v. Citibank (Case No. 4999 of 1999 before the Supreme
Court of New South Wales, Sydney Registry, Equity Division), Phelps
affidavit (12/17/99).
---------------------------------------------------------------------------
On 2/17/99, Burges faxed an application to incorporate
Benford Ltd. providing minimal information about the person who
would be the corporation's beneficial owner. Burges provided
nothing more than her name, Vanessa Phyllis Ann Clyde, a London
address, a copy of her passport photograph, and a one-word
description of her occupation as ``business.'' On the same day
Burges wire transferred $100,000 from Euro Bank to Citibank in
New York, for European Bank. Without asking any questions or
obtaining any additional information, 24 hours later on 2/18/
99, European Trust Incorporated Benford Ltd. Phelps faxed a
copy of the incorporation papers to Burges on 2/19/99, and
asked where to send the originals. He instructed her to send
them to Clyde in London.
The documents created by European Trust to establish
Benford Ltd. never identify the company's beneficial owner by
name nor refer to Clyde.\395\ Instead they reference a series
of shell corporations which Bayer said in his interview are
controlled by ``the Bayer group'' of companies.\396\ Only one
European Trust document--not part of the company's official
incorporation papers--actually named Clyde. Entitled ``Nominee
Declaration'' and bearing the same date, 2/18/99, as the
official incorporation papers, it declared that European
Trust's nominee company, Meldrew Ltd,. was holding Benford's
shares as a nominee for Clyde.\397\ Bayer explained that this
nominee declaration was typically the key document European
Trust used to establish the beneficial ownership of a Vanuatu
company it formed. He said that typically European Trust would
maintain a copy in its files, but would not supply a copy to
European Bank.
---------------------------------------------------------------------------
\395\ The State Department's INCSR 2000 report states that one of
the key deficiencies in Vanuatu's anti-money laundering laws is its
corporate secrecy laws which ``shield the identity and assets of
beneficial owners of business entities. . . . The anonymity and secrecy
provisions available through ownership of Vanuatuan [corporations],
along with the ease and low cost of incorporation, make them ideal
mechanisms for tax evasion and money laundering schemes.'' INCSR (March
2000) Money Laundering and Financial Crimes Country Reports, Vanuatu.
\396\ For example, the ``constitution'' used to establish Benford
Ltd. names only one ``incorporator,'' Atlas Corp. Ltd., a Bayer group
company. The constitution is signed on 2/17/99, by Phelps, on behalf of
Atlas Corp. Ltd. A Benford corporate resolution, signed by Phelps on 2/
18/99 on behalf of Atlas Corp. Ltd., appoints Benford's sole director,
Diract Ltd., and its sole corporate officer, Lotim Ltd., which are two
more Bayer group companies. A ``share certificate'' purporting to issue
100 Benford shares to a company called Meldrew Ltd., is signed by
Phelps on behalf of Diract Ltd. and by another European Bank employee,
David Outhred, who signed the certificate on behalf of Lotim Ltd. Bayer
said during his interview that Meldrew Ltd. is owned by European Trust.
Together, Benford Ltd.'s official incorporation documents, corporate
resolutions and share certificate never mention Clyde, the company's
true owner.
\397\ The document states that Meldrew Ltd. ``hereby admits that
the above mentioned shares are your absolute property and that they
only stand registered in our name at your request as your nominee in
Trust for you absolutely and that we have no beneficial interest
therein whatsoever.'' [Emphasis in original text omitted.] It is signed
by Phelps and Outhred on behalf of still two more European Trust
companies, Zenith Inc. and Orion Inc., which are apparently Meldrew's
officers.
---------------------------------------------------------------------------
Opening the Benford Account. After incorporating Benford
Ltd. through European Trust, Phelps put on her European Bank
hat and opened a bank account for corporation. Phelps admitted
in court pleadings that, throughout the bank account opening
process, she never spoke with either Burges or Clyde.\398\ The
documentation also makes it clear that European Bank opened the
Benford account without conducting any due diligence research
into Clyde, the source of her wealth, or the origin of the
initial deposit of $100,000.
---------------------------------------------------------------------------
\398\ See Evans v. European Bank (Civil Case No. 85 of 1999 before
the Supreme Court of Vanuatu), Phelps affidavit (11/22/99), paragraph
(3), ``I did not speak to Mr. Burges during the course of the
correspondence . . . and verily believe nobody else from [European Bank
or European Trust] spoke to Burges.'' CG 6439-43.
---------------------------------------------------------------------------
The European Bank forms used to open the Benford bank
account provide even less due diligence information than the
European Trust forms used to establish the corporation. The
account opening questionnaire, as well as a Benford corporate
resolution and mandate to open the bank account, are all signed
by Phelps. None mentions Clyde.\399\ None provides additional
due diligence information about Benford Ltd. Bayer indicated
that these forms were filled out in the usual way for bank
accounts opened for companies formed by its affiliate, European
Trust.
---------------------------------------------------------------------------
\399\ One European Bank form, entitled ``Declaration of the
Beneficial Owner's Identity,'' appeared to require disclosure of a bank
account's beneficial owner but was completed without doing so. The copy
of this form provided by European Bank to the Subcommittee was signed
by Phelps, dated 2/25/99, and identified ``the beneficial owner of the
assets deposited with the bank'' as ``Benford Limited.'' Bayer
indicated this was a common way for European Trust to complete the form
for companies they managed. He explained that the purpose of the form
was not to reveal a company's true owner, but to establish that the
accountholder is also the owner of the deposits placed into the
account.
The Minority staff investigation later discovered a second
version of this form, also signed by Phelps on 2/25/99, which was
attached to an affidavit filed by Bayer in a Vanuatu court proceeding.
See In re European Bank (Company Case No. 8 of 1999 before the Supreme
Court of Vanuatu), Bayer affidavit (7/28/99), Exhibit L. The form
stated that the ``beneficial owner of the assets deposited with the
bank'' in the Benford account was ``Vanessa P A Clyde.'' During his
interview, Bayer was unable to explain why there were two versions of
this document or why he had failed to supply the investigation with the
same version he filed in court.
---------------------------------------------------------------------------
One of the European Bank forms, entitled a ``Statutory
Declaration of Account Holder In Relation to the Operation of
the Account,'' was apparently intended, in part, to protect the
bank against money laundering. European Bank provided a copy of
this completed form for the Benford account. It stated that the
``beneficial owner'' of the Benford account was ``Benford
Limited,'' again without making any reference to Clyde, and
essentially declared that the funds deposited into the Benford
account were not derived from criminal activities.\400\ But the
declaration was not signed by Clyde or Burges. The form was
instead signed by Phelps, on 2/25/99, prior to her making any
inquiry into the origin of the Benford funds or conducting any
substantive due diligence. Her signature was witnessed by
Bayer, who also signed the form without having any knowledge of
the account funds or Clyde. When asked how this document
protected European Bank from money laundering, when it was
signed by its own employee and not based on any factual
knowledge, Bayer said that the Benford form had been completed
in a routine manner similar to other accounts at the bank.
---------------------------------------------------------------------------
\400\ The document states: ``The deposits to be credited to the
above mentioned account holder are not derived from, nor proceeds of,
any forms of unlawful activity whatsoever nor were these assets
(including the funds to be deposited) obtained in any manner contrary
to the laws of the country whence they came or any other relevant
country.''
---------------------------------------------------------------------------
Bayer explained that, although Clyde's name never appeared
on a bank document connected with the Benford account, European
Bank had access to her identity through European Trust.
Although Vanuatu law generally prohibits trust companies from
disclosing a Vanuatu corporation's ownership, he explained that
this prohibition could be waived by the company owner to open a
bank account. Bayer said that European Bank could have simply
asked European Trust at any time for the identity of the
corporate beneficial owner. He noted that, in the case of
Benford Ltd., that step was unnecessary since Phelps worked for
both the bank and the trust company and had the knowledge on
hand for both entities.
Increasing Deposits and Increasing Concerns About the
Benford Account. The Benford bank account application and
related documents were dated 2/24/99 and 2/25/99. The Benford
account was apparently opened on 2/26/00, when $97,900 out of
the $100,000 transferred from Euro Bank on 2/17/99, was
credited by European Bank to the newly opened Benford account,
and the other $2,100 was kept by European Trust to pay for
Benford's incorporation expenses.
About 2 weeks after the Benford bank account was opened, on
March 17, 1999, Burges telephoned European Bank and spoke with
Phelps for the first time. He included in the telephone
conversation a woman whom he alleged to be his client Clyde,
who spoke with an American accent, despite her British
passport. According to Phelps' sworn affidavit, this was the
first of several telephone conversations she had in March and
April discussing how Clyde wished to invest her funds.\401\
---------------------------------------------------------------------------
\401\ Clyde indicated on several occasions her preference for
keeping the funds in U.S. dollars in a secure but liquid investment.
For example, on 2/23/99, Clyde sent Phelps a fax asking whether the
bank could ``place Benford client funds in a market account . . .
[i.e.,] a New York brokerage fund and keep privacy.'' European Bank
ultimately placed the funds in U.S. dollar, interest-bearing accounts
at its correspondent banks.
---------------------------------------------------------------------------
During these 2 months, Burges also wired more than $7
million to the Benford account.\402\ All of the funds came from
Taves-related accounts at Euro Bank. All were made after the 1/
6/99 court order freezing Taves' assets. All were wire
transferred to European Bank's U.S. dollar correspondent
account at Citibank in New York.
---------------------------------------------------------------------------
\402\ Citibank records show that the $7 million was deposited in
three wire transfers: $2.8 million on 3/17/99; $750,000 on 4/9/99; and
$3.88 million on 4/9/99.
---------------------------------------------------------------------------
Bayer indicated in a letter to the Subcommittee that these
funds were unexpected \403\ and prompted additional due
diligence efforts. After the March deposit of $2.8 million,
according to Bayer, European Bank contacted Euro Bank to ask
about the nature of the funds, and Euro Bank promised to ``get
back to us with the answers.'' \404\ Phelps then asked European
Bank's senior vice president, Douglas Peters, if he could find
out more about Euro Bank.
---------------------------------------------------------------------------
\403\ Letter dated 5/22/00 from Bayer to Senator Levin at 8.
\404\ Id.
---------------------------------------------------------------------------
On 3/29/99, Peters sent a fax to persons he knew in the
Cayman Islands asking about Euro Bank. One of the persons
responded by fax the same day stating that she would like to
speak to him by telephone. Peters' handwritten notes of the
telephone conversation on 3/30/99 state the following about
Euro Bank:
Small locally incorporated bank, with a local banking
license, 20/30 people on the staff, corporate activities too,
not a good reputation locally, has its door open to business
when other doors are closed to it, very much lower end of the
local banking business, dubious, 3 months ago there were rumors
that they might fail, not well respected, advise caution when
dealing with them. Barclays would not accept a reference from
them and would certainly not do business with them.
According to Bayer, Peters communicated this information to
both Phelps and to Bayer himself.
Despite this negative portrayal of Euro Bank--the sole
reference for the Benford account--European Bank left open the
account, accepted additional funds, and chose not to try to
verify any information about Clyde or her assets. Bayer
explained the bank's actions by saying that Euro Bank had
referred other clients with no negative consequences, the
client was not asking to withdraw the funds, and Clyde had
reassured Phelps by explaining that Clyde was retired and
diversifying her holdings as part of an estate planning
process. When asked how that information fit with Clyde's
passport information indicating she was 61, and her
incorporation application describing her as still in business,
Bayer said that the bank had been satisfied with her
explanation and did not feel any concern at the time. He
acknowledged that the bank did not undertake any effort to
independently verify Clyde's background or assets, or to obtain
additional references for her.
By April 1999, the Benford deposits totaled about $7.5
million. Bayer said in his interview that Benford Ltd. had
become a ``huge client'' for the bank, and agreed that its $7.5
million represented about 15% of the bank's total deposit base
of $50 to $60 million at the time.
In May 1999, two incidents suddenly cast new suspicion on
the Benford funds. The first was on 5/25/99, when Phelps
received a telephone call about the account from a Clyde with
an English accent, instead of an American accent. Phelps
reported the call and a fax received the next day to Bayer who
said during his interview that it was the first time European
Bank appeared to have two different persons claiming to be the
beneficial owner of an account at the bank. On 5/29/99, a
Friday, European Bank received another fax, a letter dated 5/
27/99, from a firm representing Euro Bank.\405\ It stated that
Euro Bank had been placed into receivership and the $7.5
million previously transferred to the Benford account appeared
to be associated with the Taves fraud. Bayer indicated that, in
response to these two events, the bank immediately froze the
Benford account internally and, on Monday, 5/31/99, filed a
report with the Vanuatu police.\406\
---------------------------------------------------------------------------
\405\ See letter dated 5/27/99 from Maples and Calder to European
Bank.
\406\ See also Evans v. Citibank (Case No. 4999 of 1999 before the
Supreme Court of New South Wales, Sydney Registry, Equity Division),
affidavit of Susan Phelps (12/17/99), CG 6519-22.
---------------------------------------------------------------------------
Bayer indicated, and bank documentation substantiates that,
prior to May 1999, European Bank had followed its usual
practice of directing the Benford funds into a series of
``placements'' at its correspondent banks, in order to maximize
the interest earned on the funds. After freezing the funds,
Bayer indicated that European Bank transferred them internally
into a new, non-interest bearing account from which client
withdrawals were prohibited.\407\ However, even after moving
the Benford deposits into a non-interest bearing account within
the bank, European Bank continued to place the $7.5 million
with the correspondent bank paying the highest interest rate on
the funds.\408\ A series of placements by European Bank with
its correspondents for $7.5 million plus interest appear to
have been paid for with the Benford funds.\409\ In his
interview, Bayer said that while he was ``not denying'' that
these placements included the Benford deposits, he maintained
that they also included non-Benford funds, such as European
Bank's own interest earnings from the deposits and possibly
$20,000 to $40,000 belonging to one or two other clients.
Despite a request, Bayer did not identify these other clients
or provide documentation showing how or when other client funds
may have been combined with the frozen $7.5 million in Benford
funds and included in these placements.
---------------------------------------------------------------------------
\407\ Id. Phelps affidavit at paragraph (7).
\408\ Documentation and interviews indicate the following U.S.
dollar placements involving the $7.5 million:
--30 day placement from 7/20/99 until 8/20/99 at Westpac Bank;
--30 day placement from 8/20/99 until 9/20/99 at Citibank;
--30 day placement from 9/20/99 until 10/20/99 at ANZ Bank;
--placement from 10/20/99 until November 2000 at Citibank, after
which the funds were seized and taken into custody by the United
States.
\409\ A review of European Bank's U.S. dollar correspondent account
records at Citibank and ANZ Bank show no other deposit, transaction or
placement, in 1998 or 1999, which could have given rise to these $7.5
million placements, other than the Benford deposits.
---------------------------------------------------------------------------
In June 1999, after freezing the Benford funds internally,
European Bank attempted to find out more about their origin.
Bayer indicated and documentation suggests that inquiries
directed to Euro Bank and Burges were unanswered. Phelps had
already attempted, without success, to verify Clyde's London
address and telephone number.\410\ She also asked Clyde to send
a notarized copy of her passport photograph, which Clyde did
and which matched the one the bank had on file for the Benford
account. On 6/15/99, Phelps asked Clyde in a telephone
conversation about the origin of the funds. She wrote this
summary of the conversation:
---------------------------------------------------------------------------
\410\ See Phelps email dated 5/26/99, CG 6497.
L[Clyde] said I should have got this info from Burges. I
said the funds had just arrived without supporting
documentation. . . . English was asked to open the a/c. Doesn't
know when. . . . Doesn't know how much. Wasn't responsible. for
putting funds in. Not her personal funds. Extremely
uncomfortable. . . . If somebody had taken funds she doesn't
want to be tarred.\411\
---------------------------------------------------------------------------
\411\ See Phelps affidavit and notes, CG 6509-11.
Vanuatu and Australia Court Proceedings. Within months of
the $7.5 million being deposited, European Bank had notice and
evidence of their suspect origin. Yet when legal proceedings
ensued in Vanuatu and then Australia, European Bank steadfastly
opposed releasing the funds or remitting them to the FTC
receiver representing the Taves fraud victims.
The litigation began in the summer of 1999. On July 2,
1999, someone claiming to be Clyde attempted to withdraw
$700,000 from the Benford account. Because the account was
frozen, European Bank refused the request but, according to
Bayer, also realized that it had no statutory basis or court
order supporting its refusal. On 7/28/99, European Bank filed a
lawsuit in Vanuatu court asking for a court order freezing the
Benford account, which the court issued on the same day.\412\
On 8/25/99, the FTC receiver filed a civil suit in the Vanuatu
court seeking information about the account and restraining
Benford Ltd. from transferring any funds.\413\ The court
consolidated the two cases and granted the FTC receiver access
to the information in the first suit.
---------------------------------------------------------------------------
\412\ In re European Bank (Company Case No. 8 of 1999 before the
Supreme Court of Vanuatu).
\413\ Evans v. European Bank (Civil Case No. 85 of 1999 before the
Supreme Court of Vanuatu).
---------------------------------------------------------------------------
On 9/22/99, Clyde filed a pleading in the Vanuatu case
stating that, ``subject to the Order of this Honorable Court,''
she would like to remit all of the Benford funds to the FTC
receiver.\414\ Her sworn affidavit stated:
---------------------------------------------------------------------------
\414\ Evans v. European Bank, Clyde affidavit (9/22/99).
I knew nothing of the founding of Benford Limited, nor
of the opening of an account with European Bank Limited, until
I received, unsolicited, a copy of the Benford's Articles of
Incorporation and a summary of charges from European Bank. . .
. In late January of 1999, I was living in . . . Malibu,
California . . . [and] an old and close friend of my family,
Gretchen Buck . . . told me that . . . I would earn a helpers
fee of at least $10,000 if I would assist her in opening an
offshore account for ``a friend.'' I was assured that the
purposes of the account were totally aboveboard and the
``friend'' was of unimpeachable integrity with a few legitimate
business problems but a person who craved anonymity. I agreed
to assist, and at Buck's request, signed 40 pieces of blank
paper. I have not seen these papers since. . . . I became
suspicious thereafter when Buck was not forthcoming . . . [and]
---------------------------------------------------------------------------
would say . . . ``Its best you don't know.''
Gretchen Buck is an associate of Taves, a former Euro Bank
accountholder, and one of the individuals indicted in the
Cayman Islands for money laundering. She apparently directed
the transfer of more than $3 million to the Benford
account.\415\
---------------------------------------------------------------------------
\415\ See FTC v. J.K. Publications, ``Report of Receiver's
Activities dated August 4, 1999,'' at 5-6.
---------------------------------------------------------------------------
Attached to Clyde's pleading were documents indicating that
she intended to transfer control over Benford Ltd. from
European Trust's nominee companies to the FTC receiver's legal
counsel in Vanuatu, so that the $7.5 million could be paid to
the FTC. European Trust's nominee companies, however, opposed
this change in control over Benford Ltd. and opposed remitting
the $7.5 million to the FTC receiver.\416\
---------------------------------------------------------------------------
\416\ See Evans v. Citibank (Case No. 4999 of 1999 before the
Supreme Court of New South Wales, Sydney Registry, Equity Division),
affidavit of Douglas Edmund Raftesath, Australian counsel for the FTC
receiver (12/17/99) at 3.
---------------------------------------------------------------------------
More litigation in Vanuatu followed, including a criminal
investigation of Benford Ltd. by the Vanuatu police for money
laundering.\417\ On 11/30/99, the Vanuatu police charged
Benford Ltd. with possession of property ``suspected of being
proceeds of crime.'' \418\
---------------------------------------------------------------------------
\417\ On 9/23/99, the Vanuatu police asked the court to impose a
freeze under criminal law on the $7.5 million, pending an investigation
of Benford Ltd. for money laundering. Despite requests by Benford Ltd.
and the FTC receiver to attend the hearing on this request, the court
heard from the police on an ex parte basis, issued the requested order,
declined to allow release of the $7.5 million to the FTC receiver, and
ordered additional proceedings. On 10/29/99 and 11/22/99, Phelps filed
two affidavits in the case providing additional information and stating
that, despite the bank's role in establishing the corporation, opening
its bank account and managing the $7.5 million, European Bank did not
know the true identity of Benford Ltd.'s beneficial owner.
\418\ Information filed before the Supreme Court of Vanuatu
(Criminal Case No. 754 of 1999). On 12/2/99, pursuant to the request of
the police, the Vanuatu court issued still another order freezing the
Benford funds. On 12/3/99, Clyde filed a new civil suit in Vanuatu
court requesting an order declaring her the sole beneficial owner of
Benford Ltd. and requiring Meldrew Ltd., the European Trust nominee
company, to transfer all Benford shares to the Vanuatu counsel working
with the FTC receiver. In re Benford Ltd. (Company Case No. 14 of 1999
before the Supreme Court of Vanuatu). The intent of her lawsuit was,
again, to facilitate the transfer of the $7.5 million to the FTC
receiver.
---------------------------------------------------------------------------
Legal proceedings began in Australia after the FTC located
a document notifying Benford Ltd. that its funds had been
transferred to ``Citibank Limited, [Offshore Bank Unit]
Sydney.'' \419\ On 11/30/99, the FTC receiver sent a letter to
Citibank offices in Sydney, Australia (``Citibank Sydney''),
alerting it to the Taves fraud and its relation to the Benford
funds deposited by European Bank.\420\ On 12/10/99, the FTC
receiver filed suit in Australia to freeze the $7.5 million on
deposit with Citibank.\421\
---------------------------------------------------------------------------
\419\ See ``Interest Bearing Deposit Confirmation,'' dated 10/12/
99, issued by European Bank to Benford Ltd., CG 4625.
\420\ The letter placed Citibank ``on notice that [the FTC
receiver] assert[s] priority claims over any funds originating from
this fraud, including the funds on deposit with you.'' According to
Citibank, this letter was the first notice they had of any problem with
the $7.5 million deposit made by European Bank. See Evans v. Citibank
(Case No. 4999 of 1999 before the Supreme Court of New South Wales,
Sydney Registry, Equity Division), affidavit of Christopher Schofield
Moore (12/16/99).
\421\ Evans v. Citibank summons (12/10/99). The pleadings stated,
in part, that while the FTC receiver had obtained freeze orders for the
funds in Vanuatu, the funds ``had already been transferred before the
orders could be carried out . . . [and] there is a real risk that any
moneys held by Citibank . . . may be transferred out of Citibank's
accounts.'' Affidavit of Douglas Edmund Raftesath, Australian counsel
for the FTC receiver (12/10/99) at 3.
---------------------------------------------------------------------------
Unknown to the FTC receiver at the time of its filing,
European Bank had, in fact, taken steps that same day to
transfer the funds from Citibank to one of its correspondent
banks in Vanuatu.\422\ Before any transfer took place, however,
the Australian court issued an order freezing the funds.
---------------------------------------------------------------------------
\422\ In a 12/10/99 fax to Citibank Sydney, CG 4810, Bayer informed
Moore for the first time about the suspicious activity surrounding the
Benford account beginning 6 months earlier, in May 1999, the ongoing
money laundering investigation by the Vanuatu police, and the Vanuatu
court orders freezing the funds. Bayer wrote:
``We of course will not be distributing the [Benford] funds to
anyone without the direction of the Vanuatu Supreme Court.
Unfortunately for your bank, it has not been the high bidder for this
deposit upon rollover and I confirm our request that you follow our
instruction to transfer the funds to Westpac Banking Corporation for
the credit of their Port Vila branch, for the further credit of
ourselves (copy enclosed). I assure you that the decision to move the
funds has been purely a commercial one and not one driven by any hidden
agenda. We will continue to favor Citibank whenever possible in support
of our relationship with your bank which we value greatly.''
---------------------------------------------------------------------------
Additional pleadings followed in Australia from the Vanuatu
Government, European Bank and FTC receiver, all seeking control
of the $7.5 million. At first, European Bank alleged that the
frozen $7.5 million was unrelated to the Benford funds and
Taves fraud,\423\ and the FTC receiver's Australian legal
counsel agreed to drop the suit. That was on a Friday.
According to Moore, European Bank asked Citibank to transfer
the funds to Westpac Banking Corp. in Vanuatu on the following
Monday. However, on Sunday, the Australian federal police filed
an emergency request to freeze the funds pending further
investigation, and the Australian court reinstated the freeze.
---------------------------------------------------------------------------
\423\ European Bank contended that the freeze order was
inappropriate because the funds on deposit with Citibank ``are not
funds belonging to Benford but are funds belonging to European Bank.''
Evans v. Citibank, affidavit of Susan Phelps (12/17/99) at paragraph
(14).
---------------------------------------------------------------------------
On 12/15/99, European Bank sent a fax to Citibank
complaining that the FTC receiver was trying ``every trick in
the book'' to ``force the monies to be sent to the USA.'' \424\
Bayer concluded the fax with these observations:
---------------------------------------------------------------------------
\424\ 12/15/99 fax from European Bank to Citibank Sydney, CG 4686-
87. He stated further, ``The monies have never `fled the jurisdiction.'
They have always been on deposit in US$ with European Bank and nowhere
else. European Bank . . . placed the funds in various banks to get the
best return.''
Locally [European Bank] has been perceived as being the
bank that uncovered the suspicious transactions and took all
the right steps to assist the authorities. Now in Australia we
are being cast as money launderers and probable accomplices. I
---------------------------------------------------------------------------
fear the Australian authorities would like to believe that.
In December 1999, a local Vanuatu newspaper gave this
summary of the Benford matter:
The Vanuatu Government could find themselves with a
US$7.5 million (v982 million) windfall cash gift if the Public
Prosecutors office are successful in convicting . . . Benford
Ltd. of laundering money here from the illicit proceeds of one
of the biggest credit card frauds in history. . . . [The FTC
receiver] has been travelling the world tracking down the
missing money. He advised, ``There are a couple of countries in
the Caribbean, . . . Channel islands, . . . Europe and Vanuatu
where stolen money was sent. . . . [U]nfortunately, Vanuatu is
the only country that is trying not to return the funds to the
rightful owners. . . .'' [M]embers of the Finance Centre
believe that if the government do confiscate it, a clear
message will be sent to the outside world not to launder the
proceeds of crime through Vanuatu's Finance Centre. This case
is however a sensitive one. Vanuatu may have a fight on its
hands if it tries to confiscate the funds owing to ordinary
people around the world that the court in California USA has
ordered to be returned.\425\
---------------------------------------------------------------------------
\425\ ``Vanuatu Goes After $US7.5m of Laundered Money,'' Trading
Post Vanuatu (12/4/99).
The Vanuatu and Australian litigation continued throughout
2000.
U.S. Court Proceedings. Almost 1 year later, on November
29, 2000, at the request of the FTC, the U.S. Department of
Justice filed legal proceedings to seize the Benford funds from
Citibank in New York. It was able to file the pleadings in the
United States, because Citibank Sydney had always kept the
Benford funds in U.S. dollars in a U.S. account at Citibank in
New York. When presented with the seizure warrant, issued by a
U.S. magistrate, Citibank New York, delivered the funds to the
United States. On December 21, 2000, the United States filed a
civil forfeiture action seeking to eliminate any other claim to
the Benford funds.\426\ The complaint alleged that the funds
were the proceeds of the Taves credit card fraud, and the FTC
receiver had ``tried to obtain the funds from European Bank
through a Vanuatuan court proceeding, but failed to obtain
relief in Vanuatu.''
---------------------------------------------------------------------------
\426\ United States v. $8,110,073.30 in U.S. Currency, Representing
$7,593,532.48 Deposited by European Bank at Citibank NA (Sydney Branch)
on or about October 20, 1999, Plus Accrued Interest Since the Date of
Deposit (U.S. District Court for the Central District of California
Civil Case No. CV-00-13328 (CBM)), complaint (12/21/00).
---------------------------------------------------------------------------
During more than a year of litigation in three countries,
Clyde has supported sending the Benford funds to the FTC, but
European Bank has vigorously opposed it. When asked why, Bayer
gave three reasons during his interview: (1) the ownership of
the funds remained unclear, since Clyde had admitted that they
were not her funds and she did not know their origin; (2) the
allegation that the funds came from the Taves fraud should be
established in Vanuatu court and, if true, the Vanuatu Attorney
General could reimburse the fraud victims, rather than pay the
monies to the FTC receiver who might exhaust the entire sum
through fees and expenses; \427\ and (3) European Bank had to
defend itself from the risk of inconsistent court decisions
which might order it to pay the $7.5 million twice, once to the
Vanuatu Government in connection with the Benford money
laundering prosecution and once to the FTC receiver seeking
funds for the Taves fraud victims. At times, Bayer also argued
that the $7.5 million deposit at Citibank represented European
Bank's own funds, unrelated to the Benford matter, although at
other times he acknowledged the Benford deposits made up the
bulk of the Citibank placement.
---------------------------------------------------------------------------
\427\ However, the State Department's INCSR 2000 report warns:
``Case law in Vanuatu has shown that proving the criminal origins of
proceeds, especially of offenses committed abroad, is extremely
difficult. Linking criminal proceeds seized in Vanuatu with the offense
committed abroad through a complex series of financial transactions
conducted by related corporations operating in several offshore
jurisdictions is all but impossible.'' INCSR Report 2000 at 751.
---------------------------------------------------------------------------
The $7.5 million, now swelled with interest earnings to
$8.1 million, remains in the custody of the United States,
while the litigation in Vanuatu, Australia and the United
States continues.
(8) IPC Fraud
In February 1999, the same month it opened the Benford
account, European Bank opened another ill-fated account under a
credit card merchant agreement with a Florida corporation
called Internet Processing Corporation (``IPC''). As in the
Benford matter, European Bank opened the account without a due
diligence review of the prospective client. IPC used
unauthorized credit card charges to obtain $2 million in
payments from European Bank and then absconded with the funds.
By the time it learned of the fraud, European Bank was unable
to locate IPC, the company's owner, or the missing $2 million.
It ultimately suffered a $1.3 million loss which threatened the
solvency of the bank.
IPC Merchant Account. According to Bayer, the IPC account
was one of about a half a dozen new accounts that European Bank
opened in 1999 in an effort to expand the bank's check clearing
business into credit card clearing. Bayer said that the bank
had not then understood the financial exposure involved in
credit card clearing, and its negative experience with IPC and
two other companies has since led to its getting out of that
line of business for at least the short term.
Bayer explained that the credit card clearing business
essentially involved European Bank's earning fees for providing
advance payments at a discounted rate to merchants seeking the
quick processing of credit card charges. He said that, in 1999,
European Bank worked with a Netherlands credit-card processing
company called TNT International Mail (``TNT'') to make advance
credit card payments. Essentially, a company with a European
Bank merchant account would send its credit card slips to
European Bank; European Bank would forward the data to TNT; TNT
would advance the total amount of credit card charges,
discounted at a certain rate, to European Bank; and European
Bank would, in turn, advance certain payments to the merchant
by depositing the funds into the company's merchant account.
European Bank would then wait for the credit card charges to
clear, earning its profits from the payments ultimately made by
the cardholders.
Bayer explained that European Bank had undertaken a variety
of steps to protect the bank from the credit risk associated
with advancing credit card payments to merchants, including:
(1) requiring its merchants to make a large security deposit;
(2) charging its merchants a 6% discount rate instead of the
usual 2.5% to 3.5%; (3) retaining 10% of incoming payments from
TNT until the merchant's credit card charges cleared; and (4)
performing random reviews of credit card orders to detect fraud
or misconduct. According to Bayer, what the bank had not taken
into account was the possibility of a massive credit card fraud
by a merchant who would abscond with the payments made by
European Bank for unauthorized credit card charges that would
never clear.
Bayer said that the IPC account was first referred to
European Bank by a company called Media World which worked with
telemarketers and, among other services, earned a fee for
bringing them together with banks willing to provide merchant
accounts.\428\ Bayer said that Media World was owned by Michael
Okun, a U.S. citizen living in Florida who had referred two
other merchants to European Bank as well. Bayer said that he
thought Media World had investigated IPC and was recommending
the company, but later learned that Media World had simply
referred IPC, without any prior investigation into the
company's reputation or reliability.
---------------------------------------------------------------------------
\428\ For example, Bayer said that, for every $100 in credit card
charges posted by a merchant referred by Media World, European Bank
would have kept $6 and, from that $6, paid Media World perhaps $1 for
referring the merchant.
---------------------------------------------------------------------------
The documentation indicates that Media World first
contacted European Bank about the IPC account around 2/15/99,
when Okun sent an email to Kely Ihrig alerting her to expect
account opening documentation from IPC. Ihrig had recently been
hired by European Bank as its operations manager. The next day,
IPC letters and materials arrived by fax, with 49 pages of
account opening information.
Ihrig actually opened the IPC account 1 week later on 2/23/
99. As with the Benford account, the IPC account was opened
based upon written materials and correspondence, without any
telephone conversation or direct client contact. Further,
despite the credit risk involved, the documentation indicates
that the bank performed virtually no due diligence prior to
opening the IPC merchant account.
The IPC account opening questionnaire, dated 2/12/99, was
signed by Mosaddeo Hossain. It indicated that IPC had been
incorporated just 10 days earlier, on 2/2/99. Questions asking
about IPC's assets and liabilities were left blank. The company
address in Florida, which European Bank did not attempt to
verify, was actually the address of a ``Kwik Serve Food Store''
in a questionable area of town. IPC's business activities were
described as ``Outbound Telemarketing of Tours & Time Shares,''
which Bayer said referred to selling vacation and travel
packages on the Internet. Bayer said that while European Bank
generally considered telemarketers a credit risk, it had been
reassured by IPC's providing numerous pages of information
about the travel packages it was marketing. Bayer indicated
that, later, the bank was unable to find any evidence that IPC
had actually marketed any products on the Internet, although it
may have made some telephone sales.
The questionnaire listed two references for IPC. The first
was Mike Okun of Media World. According to Bayer, Okun later
indicated that he was unaware that IPC had listed him as a
reference, and knew little about either the company or Hossain.
The second reference was ``Bank Atlantic Hillsboro Office,''
which turned out to be BankAtlantic, a Federal savings bank in
Florida. The questionnaire states that IPC had ``banked with
them for 1 years/months,'' without indicating whether the
correct time period was 1 year or 1 month. As part of the
account opening process, European Bank asked IPC for a written
reference letter from BankAtlantic. In response, BankAtlantic
provided a very brief letter, dated 2/19/99, addressed to
``whom it may concern,'' stating that IPC ``has maintained an
account with BankAtlantic, and has handled [the] account as
agreed.'' Bayer said during his interview that this letter had
caused European Bank to assume IPC had a mature association
with BankAtlantic. However, the bank learned later that the
Florida bank account had been opened on 2/5/99, 2 weeks prior
to the date of the reference letter; it held only $1,500 at the
time of the letter; and it represented the first time Hossain
had done business with BankAtlantic.
No inquiry was made by European Bank and no information was
provided by IPC about any aspect of the company's finances,
such as its initial capitalization or account balances. Nor was
any information provided about the company's ownership.\429\
The file did include copies of IPC's incorporation papers, but
the documents contained primarily boiler plate language and
virtually no due diligence information other than listing
Hossain as the company's sole incorporator, sole director, sole
officer and sole registered agent.
---------------------------------------------------------------------------
\429\ A form entitled, ``Verification of the Beneficial Owner's
Identity,'' listed IPC as the beneficial owner of the assets deposited
with European Bank, but did not provide the ``identity'' of IPC's
owner. Bayer said this was not a mistake, because the beneficial
ownership form was not intended to identify a company's true owner, but
merely to verify that the entity opening the account was the true owner
of any funds deposited into its account. When asked whether the bank
had noticed the lack of information about IPC's ownership, Bayer
indicated that had not been noticed at the time, but the bank had later
determined that Hossain was the sole company shareholder.
---------------------------------------------------------------------------
Hossain was, in fact, the only individual named in any of
the IPC account opening documentation. Despite his key role,
the account opening questionnaire provided minimal information
about him--nothing more than his name, a Florida address, his
Bangladeshi nationality, and his passport photograph--
essentially the same skeletal information provided in the
Benford account opening documentation.\430\ Hossain did list
himself on the questionnaire as IPC's accountant, but Bayer
indicated that the bank did not know whether Hossain was
actually a member of the accounting profession. He admitted
that the bank had not obtained any information about Hossain's
business background, past employment or finances.\431\
---------------------------------------------------------------------------
\430\ In this instance, the Bangladeshi passport was marked as
having expired 7 years earlier, in 1992, a fact that Bayer said was not
noticed at the time.
\431\ When asked whether European Bank had any concern about the
geographic logic of a Bangladeshi doing business in the United States
and using a bank in Vanuatu, Bayer indicated that had not been a
concern. He said that the United States was a nation of immigrants, and
Hossain had listed a U.S. telephone number, a U.S. address, and a U.S.
bank account, so the bank reasonably believed he was a U.S. resident.
Bayer said they had assumed IPC was using a Vanuatu bank because the
company was so new that it had been unable to convince a U.S. bank to
open a merchant account and so began looking abroad. He acknowledged
that the bank had subsequently been unable to locate Hossain's personal
residence, either in the United States or elsewhere, and that the
company address provided also proved false.
---------------------------------------------------------------------------
European Bank opened the IPC bank account within 1 week of
being contacted for the first time by the company. Despite
opening a merchant account involving credit risk and services
beyond that of a run-of-the-mill corporate bank account,
European Bank conducted virtually no due diligence
investigation of IPC or Hossain. It did not inquire into the
company's ownership, double check its references, ascertain its
capital or bank account balances, or verify its physical
address. With respect to Hossain, it did not inquire into his
business or employment background, obtain any personal or
professional references, check his credit history, or verify
any personal or professional information about him. The only
facts that the bank had were that IPC was a brand new company
with a new Florida bank account, and Hossain was willing to pay
unusually high charges to open a merchant account at a Vanuatu
bank.
When asked whether he thought the bank's due diligence
effort was adequate, Bayer said that, at the time, European
Bank had not understood its exposure and had thought it was
dealing with a U.S. corporation that had sufficient bona fides
to open a U.S. bank account. He indicated that the bank later
learned to its detriment that its due diligence efforts had
been insufficient to protect it from loss.
IPC Fraud. European Bank approved opening the IPC merchant
account in February, but the account did not become operational
until late March 1999, after European Bank had obtained a
merchant identification number for IPC from several credit card
companies. During the 1-month waiting period, emails from Okun
and Hossain inquired into the status of the account. Hossain
indicated that he had already sold numerous travel packages and
had credit card charges piling up that needed processing.
The Bayer interview and other documentation indicate that
as soon as its merchant account became operational, IPC filed
numerous credit card charges which, in less than 3 months,
totaled about $13 million. Bayer indicated in his interview
that the vast majority of these charges, about 85%, would later
be disputed by cardholders who refused to pay the billed
amounts. He said there were also indications, never proven,
that IPC may have illegally obtained the credit card numbers
from a database and simply fabricated the unauthorized charges.
In April 1999, the first month the IPC account was
operational, European Bank processed about $3.5 million in
charges and paid IPC over $2 million. The documentation shows
that European Bank sent the $2 million in four payments through
its U.S. dollar account at Citibank to the IPC account at
BankAtlantic. The payments were:
--$705,775.41 wire transferred by European Bank on 4/1/99;
--$333,641.68 wire transferred by European Bank on 4/9/99;
--$358,333.59 wire transferred by European Bank on 4/15/99;
and
--$728,098.90 wire transferred by European Bank on 4/22/99.
On 4/21/99, European Bank received an email from TNT, its
credit card processing company, describing a phone call
reporting ``a possible fraud of cardholders of your merchant:
Internet Processing Corp.'' European Bank attempted to find out
more, but was unable to obtain any new information for several
days. On 4/23/99, it asked Citibank to recall its latest
payment to IPC of $728,000, and Citibank sent a 4/23/99 telex
to BankAtlantic asking it to return the funds. Although
BankAtlantic apparently acknowledged on 4/26 receiving the
Citibank telex, BankAtlantic failed to return the $728,000.
Instead, on the same day, 4/26/99, at IPC's request, it wire
transferred all but about $11,000 from the IPC account to a
small bank in Jordan.
The documentation indicates that the 4/26 transfer was just
the latest in a series of transfers by IPC within days of
receiving a payment from European Bank. In each instance, IPC
transferred the funds across international lines to a bank in
either Israel or Jordan.\432\
---------------------------------------------------------------------------
\432\ Bank documentation indicates the following four transfers:
--Following European Bank's payment of about $705,000 on 4/1/99,
IPC transferred $700,000 on 4/5/99 to Bank Leumi in Tel Aviv, Israel,
and an unspecified accountholder withdrew the funds on 4/9/99.
--Following European Bank's payment of about $333,000 on 4/9/99,
IPC transferred $330,000 on 4/12/99 to Union Bank for Savings and
Investment in Amman, Jordan, and Paul Al Marjai, the accountholder,
withdrew the funds on 4/15/99.
--Following European Bank's payment of about $358,000 on 4/15/
99, IPC transferred $342,000 on 4/21/99 to the same Union Bank in
Jordan, and Marjai withdrew the funds on 4/26/99.
--Following European Bank's payment of about $728,000 on 4/26/
99, IPC transferred $734,000 on 4/22/99 to Union Bank in Jordan, and
Marjai withdrew the funds on 4/29/99.
---------------------------------------------------------------------------
When asked to describe BankAtlantic's response to the
possible IPC fraud, Bayer characterized it as ``abysmal.'' He
noted that BankAtlantic never returned the $728,000; failed to
promptly alert the banks in Israel and Jordan to the possible
IPC fraud; and failed to provide effective assistance in
locating Hossain, IPC or the missing $2 million. The Minority
Staff investigation contacted BankAtlantic directly about the
IPC account. BankAtlantic neither confirmed nor denied that it
had opened the IPC account based upon an expired Florida
drivers license, expired passport, and an unverified company
address. BankAtlantic indicated that it did not normally issue
a bank letter of reference for a 2-week old account with
minimal funds, and speculated that the BankAtlantic letter
provided to European Bank might have been a forgery. When asked
whether the bank had any concerns in April 1999 when IPC began
moving large sums from Vanuatu to banks in the Middle East,
BankAtlantic indicated that the events had taken place so
quickly, within the space of a month, that it had no
documentation indicating concerns prior to being contacted by
European Bank. Despite a request, BankAtlantic did not provide
an explanation of why it transferred the $728,000 payment to a
Jordan bank on 4/26/99, instead of returning the funds to
European Bank as requested.
European Bank alerted U.S. law enforcement, including the
Secret Service, to the IPC fraud. On 5/7/99, European Bank
faxed urgent messages to Bank Leumi in Israel and Union Bank in
Jordan about the IPC fraud, but neither bank returned any funds
or provided investigative leads. Bank Leumi stated in a 6/10/99
fax that ``under Israeli law, banks owe a strict duty of
confidentiality to their customers, which prevents us from
providing any additional information other than by compulsion
of law.'' European Bank asked Media World for assistance in
locating IPC and Hossain; Okun agreed and stated in an email
that, ``to avoid this absolute mess in the future, my
investigating team will investigate any and all people we bring
to you.''\433\ European Bank was unable to find any trace of
IPC, Hossain or the missing $2 million.
---------------------------------------------------------------------------
\433\ Email dated 7/13/99 from Okun of Media World to Ihrig at
European Bank.
---------------------------------------------------------------------------
European Bank calculated that, after taking into account
IPC's security deposit, the bank's discount rate and holdbacks,
it actually lost about $1.3 million from the IPC fraud. On 5/
17/99, Citibank sent a letter asking about the fraud:
``Citibank feels it would like to have an understanding of what
. . . happened, and what will be done to avoid a repeat, given
that we have placed very considerable weight on European Bank's
management.'' In an internal Citibank memorandum dated 5/18/99,
the relationship manager for the European Bank account,
Christopher Moore, indicated that the loss appeared to be a
substantial one, given European Bank's thin capitalization. He
wrote:
The real risk for us in the future is that some
transactions that cause loss finish up in accounts with us . .
. and they don't have the resources to cover us. . . . [W]e
have to decide if this event is terminal for us.
In the end he recommended requiring European Bank to keep
$1 million on deposit at Citibank until the IPC matter was
fully resolved. European Bank eventually sent Citibank a more
detailed explanation of the IPC fraud.\434\ The memorandum by
bank president Robert Bohn stated in part:
---------------------------------------------------------------------------
\434\ See 7/1/99 memorandum from European Bank to Moore at
Citibank, CG 3966-67.
The fraud occurred in the business of credit card
clearing for a U.S. merchant that had been recommended . . . by
an existing client and which very quickly turned out to be bad.
Our normal due diligence . . . on that merchant, including a
trade reference and a reference from his USA bank, as well as a
---------------------------------------------------------------------------
financial assessment, revealed no obvious warning signals.
When asked about this memorandum, Bayer explained that the
``existing client'' and ``trade reference'' both referred to
Okun at Media World, and the ``financial assessment'' was the
bank's determination that, because IPC was so new, the bank
would use its most cautious merchant account terms, requiring a
6% discount rate and 10% holdbacks on incoming credit card
payments. Bayer said that, even with those precautions, the
loss had been a ``very serious matter'' for the bank, had
required him to deposit $1 million to cover the lost funds, and
could have resulted in a bank failure, if the exposure had been
greater. He said, however, that European Bank appears to have
weathered the damage to its solvency.
[GRAPHIC] [TIFF OMITTED] T1166.146
[GRAPHIC] [TIFF OMITTED] T1166.147
[GRAPHIC] [TIFF OMITTED] T1166.148
[GRAPHIC] [TIFF OMITTED] T1166.149
[GRAPHIC] [TIFF OMITTED] T1166.150
[GRAPHIC] [TIFF OMITTED] T1166.151
[GRAPHIC] [TIFF OMITTED] T1166.152
[GRAPHIC] [TIFF OMITTED] T1166.153
[GRAPHIC] [TIFF OMITTED] T1166.154
[GRAPHIC] [TIFF OMITTED] T1166.155
[GRAPHIC] [TIFF OMITTED] T1166.156
[GRAPHIC] [TIFF OMITTED] T1166.157
[GRAPHIC] [TIFF OMITTED] T1166.158
[GRAPHIC] [TIFF OMITTED] T1166.159
[GRAPHIC] [TIFF OMITTED] T1166.160
[GRAPHIC] [TIFF OMITTED] T1166.161
[GRAPHIC] [TIFF OMITTED] T1166.162
[GRAPHIC] [TIFF OMITTED] T1166.163
[GRAPHIC] [TIFF OMITTED] T1166.164
[GRAPHIC] [TIFF OMITTED] T1166.165
[GRAPHIC] [TIFF OMITTED] T1166.166
[GRAPHIC] [TIFF OMITTED] T1166.167
[GRAPHIC] [TIFF OMITTED] T1166.168
[GRAPHIC] [TIFF OMITTED] T1166.169
[GRAPHIC] [TIFF OMITTED] T1166.170
[GRAPHIC] [TIFF OMITTED] T1166.171
[GRAPHIC] [TIFF OMITTED] T1166.172
[GRAPHIC] [TIFF OMITTED] T1166.173
[GRAPHIC] [TIFF OMITTED] T1166.174
[GRAPHIC] [TIFF OMITTED] T1166.175
[GRAPHIC] [TIFF OMITTED] T1166.176
[GRAPHIC] [TIFF OMITTED] T1166.177
[GRAPHIC] [TIFF OMITTED] T1166.178
[GRAPHIC] [TIFF OMITTED] T1166.179
[GRAPHIC] [TIFF OMITTED] T1166.180
[GRAPHIC] [TIFF OMITTED] T1166.181
[GRAPHIC] [TIFF OMITTED] T1166.182
[GRAPHIC] [TIFF OMITTED] T1166.183
[GRAPHIC] [TIFF OMITTED] T1166.184
[GRAPHIC] [TIFF OMITTED] T1166.185
[GRAPHIC] [TIFF OMITTED] T1166.186
[GRAPHIC] [TIFF OMITTED] T1166.187
[GRAPHIC] [TIFF OMITTED] T1166.188
[GRAPHIC] [TIFF OMITTED] T1166.189
[GRAPHIC] [TIFF OMITTED] T1166.190
[GRAPHIC] [TIFF OMITTED] T1166.191
[GRAPHIC] [TIFF OMITTED] T1166.192
[GRAPHIC] [TIFF OMITTED] T1166.193
[GRAPHIC] [TIFF OMITTED] T1166.194
[GRAPHIC] [TIFF OMITTED] T1166.195
[GRAPHIC] [TIFF OMITTED] T1166.196
[GRAPHIC] [TIFF OMITTED] T1166.197
[GRAPHIC] [TIFF OMITTED] T1166.198
[GRAPHIC] [TIFF OMITTED] T1166.199
[GRAPHIC] [TIFF OMITTED] T1166.200
[GRAPHIC] [TIFF OMITTED] T1166.201
[GRAPHIC] [TIFF OMITTED] T1166.202
[GRAPHIC] [TIFF OMITTED] T1166.203
[GRAPHIC] [TIFF OMITTED] T1166.204
[GRAPHIC] [TIFF OMITTED] T1166.205
[GRAPHIC] [TIFF OMITTED] T1166.206
[GRAPHIC] [TIFF OMITTED] T1166.207
[GRAPHIC] [TIFF OMITTED] T1166.208
[GRAPHIC] [TIFF OMITTED] T1166.209
[GRAPHIC] [TIFF OMITTED] T1166.210
[GRAPHIC] [TIFF OMITTED] T1166.211
[GRAPHIC] [TIFF OMITTED] T1166.212
[GRAPHIC] [TIFF OMITTED] T1166.213
[GRAPHIC] [TIFF OMITTED] T1166.214
[GRAPHIC] [TIFF OMITTED] T1166.215
[GRAPHIC] [TIFF OMITTED] T1166.216
[GRAPHIC] [TIFF OMITTED] T1166.217
[GRAPHIC] [TIFF OMITTED] T1166.218
[GRAPHIC] [TIFF OMITTED] T1166.219
[GRAPHIC] [TIFF OMITTED] T1166.220
[GRAPHIC] [TIFF OMITTED] T1166.221
[GRAPHIC] [TIFF OMITTED] T1166.222
[GRAPHIC] [TIFF OMITTED] T1166.223
[GRAPHIC] [TIFF OMITTED] T1166.224
[GRAPHIC] [TIFF OMITTED] T1166.225
[GRAPHIC] [TIFF OMITTED] T1166.226
[GRAPHIC] [TIFF OMITTED] T1166.227
[GRAPHIC] [TIFF OMITTED] T1166.228
[GRAPHIC] [TIFF OMITTED] T1166.229
[GRAPHIC] [TIFF OMITTED] T1166.230
[GRAPHIC] [TIFF OMITTED] T1166.231
[GRAPHIC] [TIFF OMITTED] T1166.232
[GRAPHIC] [TIFF OMITTED] T1166.233
[GRAPHIC] [TIFF OMITTED] T1166.234
[GRAPHIC] [TIFF OMITTED] T1166.235
[GRAPHIC] [TIFF OMITTED] T1166.236
[GRAPHIC] [TIFF OMITTED] T1166.237
[GRAPHIC] [TIFF OMITTED] T1166.238
[GRAPHIC] [TIFF OMITTED] T1166.239
[GRAPHIC] [TIFF OMITTED] T1166.240
[GRAPHIC] [TIFF OMITTED] T1166.241
[GRAPHIC] [TIFF OMITTED] T1166.242
[GRAPHIC] [TIFF OMITTED] T1166.243
[GRAPHIC] [TIFF OMITTED] T1166.244
[GRAPHIC] [TIFF OMITTED] T1166.245
[GRAPHIC] [TIFF OMITTED] T1166.246
[GRAPHIC] [TIFF OMITTED] T1166.247
[GRAPHIC] [TIFF OMITTED] T1166.248
[GRAPHIC] [TIFF OMITTED] T1166.249
[GRAPHIC] [TIFF OMITTED] T1166.250
[GRAPHIC] [TIFF OMITTED] T1166.251
[GRAPHIC] [TIFF OMITTED] T1166.252
[GRAPHIC] [TIFF OMITTED] T1166.253
[GRAPHIC] [TIFF OMITTED] T1166.254
[GRAPHIC] [TIFF OMITTED] T1166.255
[GRAPHIC] [TIFF OMITTED] T1166.256
[GRAPHIC] [TIFF OMITTED] T1166.257
[GRAPHIC] [TIFF OMITTED] T1166.258
[GRAPHIC] [TIFF OMITTED] T1166.259
[GRAPHIC] [TIFF OMITTED] T1166.260
[GRAPHIC] [TIFF OMITTED] T1166.261
[GRAPHIC] [TIFF OMITTED] T1166.262
[GRAPHIC] [TIFF OMITTED] T1166.263
[GRAPHIC] [TIFF OMITTED] T1166.264
[GRAPHIC] [TIFF OMITTED] T1166.265
[GRAPHIC] [TIFF OMITTED] T1166.266
[GRAPHIC] [TIFF OMITTED] T1166.267
[GRAPHIC] [TIFF OMITTED] T1166.268
[GRAPHIC] [TIFF OMITTED] T1166.269
[GRAPHIC] [TIFF OMITTED] T1166.270
[GRAPHIC] [TIFF OMITTED] T1166.271
[GRAPHIC] [TIFF OMITTED] T1166.272
[GRAPHIC] [TIFF OMITTED] T1166.273
[GRAPHIC] [TIFF OMITTED] T1166.274
[GRAPHIC] [TIFF OMITTED] T1166.275
[GRAPHIC] [TIFF OMITTED] T1166.276
[GRAPHIC] [TIFF OMITTED] T1166.277
[GRAPHIC] [TIFF OMITTED] T1166.278
[GRAPHIC] [TIFF OMITTED] T1166.279
[GRAPHIC] [TIFF OMITTED] T1166.280
[GRAPHIC] [TIFF OMITTED] T1166.281
[GRAPHIC] [TIFF OMITTED] T1166.282
[GRAPHIC] [TIFF OMITTED] T1166.283
[GRAPHIC] [TIFF OMITTED] T1166.284
[GRAPHIC] [TIFF OMITTED] T1166.285
[GRAPHIC] [TIFF OMITTED] T1166.286
[GRAPHIC] [TIFF OMITTED] T1166.287
[GRAPHIC] [TIFF OMITTED] T1166.288
[GRAPHIC] [TIFF OMITTED] T1166.289
[GRAPHIC] [TIFF OMITTED] T1166.290
[GRAPHIC] [TIFF OMITTED] T1166.291
[GRAPHIC] [TIFF OMITTED] T1166.292
[GRAPHIC] [TIFF OMITTED] T1166.293
[GRAPHIC] [TIFF OMITTED] T1166.294
[GRAPHIC] [TIFF OMITTED] T1166.295
[GRAPHIC] [TIFF OMITTED] T1166.296
[GRAPHIC] [TIFF OMITTED] T1166.297
[GRAPHIC] [TIFF OMITTED] T1166.298
[GRAPHIC] [TIFF OMITTED] T1166.299
[GRAPHIC] [TIFF OMITTED] T1166.300
[GRAPHIC] [TIFF OMITTED] T1166.301
[GRAPHIC] [TIFF OMITTED] T1166.302
[GRAPHIC] [TIFF OMITTED] T1166.303
[GRAPHIC] [TIFF OMITTED] T1166.304
[GRAPHIC] [TIFF OMITTED] T1166.305
[GRAPHIC] [TIFF OMITTED] T1166.306
[GRAPHIC] [TIFF OMITTED] T1166.307
[GRAPHIC] [TIFF OMITTED] T1166.308
[GRAPHIC] [TIFF OMITTED] T1166.309
[GRAPHIC] [TIFF OMITTED] T1166.310
[GRAPHIC] [TIFF OMITTED] T1166.311
[GRAPHIC] [TIFF OMITTED] T1166.312
[GRAPHIC] [TIFF OMITTED] T1166.313
[GRAPHIC] [TIFF OMITTED] T1166.314
[GRAPHIC] [TIFF OMITTED] T1166.315
[GRAPHIC] [TIFF OMITTED] T1166.316
[GRAPHIC] [TIFF OMITTED] T1166.317
[GRAPHIC] [TIFF OMITTED] T1166.318
[GRAPHIC] [TIFF OMITTED] T1166.319
[GRAPHIC] [TIFF OMITTED] T1166.320
[GRAPHIC] [TIFF OMITTED] T1166.321
[GRAPHIC] [TIFF OMITTED] T1166.322
[GRAPHIC] [TIFF OMITTED] T1166.323
[GRAPHIC] [TIFF OMITTED] T1166.324
[GRAPHIC] [TIFF OMITTED] T1166.325
[GRAPHIC] [TIFF OMITTED] T1166.326
[GRAPHIC] [TIFF OMITTED] T1166.327
[GRAPHIC] [TIFF OMITTED] T1166.328
[GRAPHIC] [TIFF OMITTED] T1166.329
[GRAPHIC] [TIFF OMITTED] T1166.330
[GRAPHIC] [TIFF OMITTED] T1166.331
[GRAPHIC] [TIFF OMITTED] T1166.332
[GRAPHIC] [TIFF OMITTED] T1166.333
[GRAPHIC] [TIFF OMITTED] T1166.334
[GRAPHIC] [TIFF OMITTED] T1166.335
[GRAPHIC] [TIFF OMITTED] T1166.336
[GRAPHIC] [TIFF OMITTED] T1166.337
[GRAPHIC] [TIFF OMITTED] T1166.338