[Senate Hearing 107-84]
[From the U.S. Government Printing 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.
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    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\
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    \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.
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    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.
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    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.
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    \1\ See Exhibit No. 41 that appears in the Appendix on page 812.
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    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.
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    \1\ See Exhibit No. 40 that appears in the Appendix on page 810.
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    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.
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    \1\ See Exhibit No. 4 that appears in the Appendix on page 698.
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    ``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.
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    \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.
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    \1\ See Exhibit No. 13 that appears in the Appendix on page 710.
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    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.
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    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.
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    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.
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    \1\ See page 2 of Exhibit No. 32 that appears in the Appendix on 
page 760.
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    ``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.
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    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.
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    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?
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    \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.
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    \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

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                         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.
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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.
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    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.
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    \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.''
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    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\
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    \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.
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    \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.
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    \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.
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    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\
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    \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\
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    \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.
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  (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\
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    \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.
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    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.
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    \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.''
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    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\
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    \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.
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    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.
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    \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.''
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  (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.
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    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.
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    \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.
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    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\
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    \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.
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    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\
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    \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.''
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    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.
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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  (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\
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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    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.
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    \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.
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    \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.
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    \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.
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    \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.
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  (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\
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    \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.
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    \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\
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    \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.
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    \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.
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    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.
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    \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.
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    \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\
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    \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.
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  (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.
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    \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.
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    \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\
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    \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:
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    \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 
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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:
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    \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 
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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\
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    \135\ For more information on the many complaints associated with 
the BTCB high yield investment program, see the appendix.
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    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.
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    \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.
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    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\
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    \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\
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    \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.
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    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.
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  (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.
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    \153\ For more information, see the description of the Cook fraud 
in the appendix.
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    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.
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    \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.''
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    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.
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    \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.
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    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.
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    \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.
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    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.
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    \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\
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    \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\
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    \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         BA